Prof. Dr. Nikos Lavranos, LLM (Secretary General of EFILA)
In recent weeks, the UK has published several papers explaining its aims of leaving the EU and how it intends to shape its future trade relationship with the EU.
One of the aims repeatedly publicly stated by the UK will be “to end the direct jurisdiction of the Court of Justice of the EU (CJEU)” as declared in the UK’s paper on ‘Enforcement and dispute resolution’.
Moreover, in another UK paper on the ‘Future customs arrangements’, the UK stated that the “exit from the EU will provide considerable additional opportunities for UK business through ambitious new trade arrangements and comprehensive trade deals that play to the strengths of the UK economy”. In order to achieve that, the paper argues that “the UK will need an independent trade policy, with the freedom to set for ourselves the terms of our trade with the world”.
In other words, the UK is hoping that by leaving the EU it can escape the impact of EU law and of the Court of Justice of the EU (CJEU).
But is this really possible and realistic?
From the outset, the UK already admitted that EU law and the jurisprudence of the CJEU will continue to play an important role in the domestic legal order of the UK. Indeed, in the ‘Enforcement and dispute resolution’ paper, the UK explicitly admits that the “Repeal Bill will give pre-exit CJEU case law the same binding, or precedent, status in UK courts as decisions of our own Supreme Court to ensure a smooth and orderly exit”.
If that is taken as a starting point and one examines what will happen in the field of trade and investment law before the CJEU until March 2019 when Brexit is envisaged, it becomes crystal clear that the room for manoeuvre for the UK is highly limited.
The CJEU will shape the EU’s future trade and investment law
- Achmea case
The first case in line, is the Achmea (formerly known Eureko) case. This case concerns the preliminary ruling questions of the German Supreme Court (Bundesgerichtshof) in which it essentially asks the CJEU to rule whether investor-state dispute settlement (ISDS) proceedings based on an intra-EU BIT are compatible with EU law. Achmea had won an arbitration award of about 20 million EUR against the Slovak Republic, which the Slovak Republic is trying to set aside before German courts. Although, the German courts so far have rejected the efforts of the Slovak Republic, the Bundesgerichtshof decided to put this matter before the CJEU.
On 19 September 2017, Advocate General Wathelet delivered his Opinion in the Achmea case. Interestingly, he opined that intra-EU BITs and ISDS under these BITs are in full conformity with EU law. At the same time, he argued that international arbitral tribunals are to equalized with domestic courts/tribunals of EU Member States. Consequently, arbitral tribunals established on the bases of intra-EU BITs should be allowed to ask preliminary questions to the CJEU, while at the same time they are fully bound by EU law and CJEU jurisprudence.
It remains to be seen whether the CJEU will follow this rather innovative approach. However, if the CJEU were to decide in mid-2018 that arbitration on the basis of intra-EU BITs is incompatible with EU law, this would be the end of the ca. 190 intra-BITs. This would also affect the 10 intra-EU BITs, which the UK currently has with other EU Member States (i.e., with Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia). In this context, it is interesting to note that a UK investor has just brought a case against Poland based on their intra-EU BIT. That may soon not be possible anymore, if this and the other intra-EU BITs are judged by the CJEU to be incompatible with EU law. On the other hand, if the UK is able to maintain its intra-EU BITs after Brexit, it could become an interesting location for foreign investors to structure investments through the UK in order to benefit from them. The additional advantage would be that these BITs are based on the “Dutch gold standard” model BIT and thus provide a significantly higher level of protection that the so-called new general investment treaties such as CETA.
- Micula case
The other case, which will be of significant importance is the Micula case. This case concerns the enforcement of a 250 million USD ICSID award by Swedish investors against Romania. While Romania was ready to pay out the award, the European Commission has prohibited Romania to do so because the payment of the award would – according to the Commission – constitute illegal state aid to the Micula brothers. Romania – being forced to give priority to EU law – has thus stopped paying the award. The Micula’s have brought an annulment case before the CJEU. If the CJEU were to follow the European Commission, this could mean that ICSID awards may not be so easily and automatically enforceable within the EU as they are supposed to be in accordance with the ICSID Convention. In order to avoid such insecurity, which is caused by the Commission for its own policy interests, the UK post-Brexit may become the preferred place to enforce awards against other EU Member States.
- The Belgium questions on the compatibility of the Investment Court System (ICS)
Another very recent development concerns the questions, which Belgium has put to the CJEU as regards the compatibility of the Investment Court System (ICS) with EU law. It will be recalled, that Belgium had promised Wallonia to request an Opinion of the CJEU on this matter in return for Wallonia’s agreement to agree on CETA. As is well known, the ICS is already included in CETA and the FTA between the EU and Vietnam. Indeed, the European Parliament has repeatedly stated that it will only accept EU FTAs with the ICS included. However, the EU-Singapore FTA does not yet include the ICS because the negotiations were concluded long before the ICS proposal came out. Due to the position by the European Parliament, the European Commission has no choice but to re-open the negotiations with Singapore. However, it remains to be seen whether Singapore will accept the ICS.
If that is the case and the EU-Singapore FTA, which the UK has signed, would enter into force, it would replace all the BITs between the EU Member States and Singapore. This would also include the UK-Singapore BIT, which dates from the 1970s.
Consequently, if the EU-Singapore FTA would enter into force before the UK leaves the EU, the UK would lose its BIT with Singapore and would also have to leave the EU-Singapore FTA. In other words, the UK would be left with no investment treaty, unless the UK is able to delay the entering into force of the EU-Singapore FTA until after Brexit. In that case, the UK could maintain its BIT with Singapore and would not be affected by the EU-Singapore FTA – whether or not it has to include the ICS.
Either way, the Opinion of the CJEU on the compatibility of the ICS with EU law will be important for the UK post-Brexit.
Firstly, because the UK Government has already publicly admitted that it does not have the capacities to negotiate many new trade agreements on its own. Instead, it will – as far as possible and as far as the third countries agree – copy and paste the EU’s FTA texts.
Secondly, if the CJEU were to conclude that the ICS is compatible with EU law and this Opinion comes out before March 2019, it will also be binding on the UK.
Consequently, the UK may be forced to accept the ICS proposal in CETA, EU-Vietnam FTA and EU-Singapore FTA – whether or not it agrees with it.
In fact, it may very well be that third states will push the UK to copy and paste as much as possible the EU FTAs texts in order to reduce the degree of potential inconsistencies.
In this context, it should also be mentioned that CETA will provisionally enter into force on 21 September 2017, which means it will also be binding on the UK as of that date. Even though the ICS provisions are excluded from the provisional application, once the CJEU gives its green light on the ICS question, the ICS provisions will be applicable also to the UK – if the UK is still member of the EU. But even if these provisions become applicable only post-Brexit, Canada, Vietnam, Singapore and other states such as Australia and New Zealand are very likely to demand the inclusion of the ICS provisions in their new investment treaties with the UK.
The new dispute settlement body for the post-Brexit UK-EU trade relations
Another important and unresolved issue regarding the future relationship between the post-Brexit UK and the EU concerns the issue of who should settle any disputes between the two and their respective citizens and companies?
For the EU the only acceptable and obvious solution would be the CJEU. However, for the UK that would be an unbearable solution because it would prevent it from achieving its stated aim of “ending the direct jurisdiction of the CJEU”.
Arbitration, which the UK had suggested, is probably an untenable solution in light of the recent backlash against arbitration within the EU.
Equally, the International Court of Justice (ICJ) would not be a practical option for the EU.
Consequently, the only possible option seems to be the EFTA court or a new court similar to it. Prima facie, this would be an acceptable compromise for both parties. The UK could argue that this is not an EU court anymore and that it would no longer be under the “direct” jurisdiction of the CJEU. The EU could agree to it because the CJEU has accepted the EFTA court as the only other international court that is allowed to interpret and apply EU law – all be it by being required to copy and paste the CJEU case-law, which means that the CJEU “indirectly” exercises jurisdiction over the EFTA countries. Accordingly, while the EFTA court could be a workable solution, it would at the end of the mean that the CJEU would continue to have an “indirect” but nonetheless significant impact on the domestic courts of the UK, which is not what the Brexiteers promised.
A reality check: The UK cannot escape the impact of EU law and the CJEU
The only realistic conclusion from the above is that the UK cannot escape the impact of EU law and of the CJEU – long after it has left the EU. In fact, the next 18 months will be of paramount importance for the UK’s future trade and investment policy.
However, so far it seems that this reality has not yet fully been accepted by the UK Government and its negotiators. But a precondition for successful negotiations is to have a full and realistic understanding of one own’s position and the position of the other party in order to achieve an optimal result. Ignoring the impact which the above-mentioned CJEU decisions will have on the EU’s and UK’s trade and investment policy would be a costly mistake.