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  • Daniel Müller

The EU-UK Trade & Cooperation Agreement: A missed opportunity for investment protection? Maybe not!

Since 1 January 2021, the Trade and Cooperation Agreement (OJ L 444, 31 December 2020, p. 14) has determined, inter alia, the new rules and principles governing the trade and investment relations between the United Kingdom and European Union. The legal community, and in particular, investment arbitration practitioners expressed some concern or astonishment about the “limited” protections guaranteed to investments and investors under the Agreement for investments. Most of these criticisms overlook however the intrinsic limits of the Agreement and try to compare the legal rules agreed upon by the European Union and the United Kingdom to what is usually included in bilateral or multilateral investment protection instruments.


The scope of the Trade and Cooperation Agreement’s investment provisions

Although, as set out in the Preamble, the Union and the United Kingdom seek to “establish clear and mutually advantageous rules governing trade and investment”, the Agreement is far from aiming at the establishment of a comprehensive investment regime governing rights (and obligations) of investors and investments.

First, by its very nature, the scope of the Agreement encompasses only foreign direct investments, i.e. investments which serve to establish or maintain lasting and direct links between the persons providing the capital and the undertakings to which that capital is made available in order to carry out an economic activity (CJEU, Opinion 2/15, 16 May 2017, ECLI:EU:C:2017:376, § 80). Even in the absence of a conventional definition of the term “investment” in the text, other provisions of the Agreement and the relevant rules of the EU Treaties make this clear.

Article SERVIN.1.2 of Agreement defines “investor” as “a natural or legal person of a Party that seeks to establish, is establishing or has established an enterprise in accordance with point (h) in the territory of the other Party”. The same provision defines “establishment” in its point (h) as “the setting up or the acquisition of a legal person, including through capital participation, or the creation of a branch or representative office in the territory of a Party, with a view to creating or maintaining lasting economic links”. Therefore, mere portfolio investments are excluded from the guarantees established under the Agreement.

Indeed, the Agreement could not have included any kind of investment. In accordance with the relevant provision of the Treaties, and in particular Article 207(1) TFEU, the Union enjoys exclusive competence only in respect of “foreign direct investment” as part of the common commercial policy. As the Court of Justice has set out in its Opinion on the draft Singapore Free Trade Agreement in 2015, insofar as provisions of an international agreement relate to non-direct foreign investments, the European Union cannot approve or accede to such an instrument alone. If the United Kingdom and the European Union would have wished to define a comprehensive investment régime, the Agreement would necessarily have to been entered into by the Union and its Member States as a mixed agreement.

This conclusion is corroborated by the recent practice of the European Union in the field of investment protection agreements. Whereas the free trade agreements concluded by the European Union with Singapore or Vietnam contain remarkably similar provisions to those contained in the Trade and Cooperation Agreement with the United Kingdom, the European Union together with its Member States have concluded separate, mixed agreements on investment protection with Singapore and Vietnam, respectively. The CETA with Canada which includes comprehensive investment protection provisions has also been entered into by the European Union and its Member States as a mixed agreement.

Second, the limitation of the scope of the Agreement to foreign direct investments is also accompanied by rather specific guarantees that cannot be simply compared to those contained in more “traditional” investment protection instruments. Rather than being aimed at the protection of investments made, the Agreement provides for “Investment Liberalisation” by setting limits to measures affecting the establishment of foreign direct investments. It prohibits the adoption of measures that could potentially restrict of hamper access to the market (Article SERVIN.2.2), like requirements concerning the composition of the Senior management or the board of directors of an enterprise (Article SERVIN.2.5) or the imposition of Performance requirements (Article SERVIN.2.6), and guarantees National (Article SERVIN.2.3) and Most-Favoured Nation (Article SERVIN.2.4) Treatment for the establishment and operation of an enterprise. In other words, the Agreement aims at the elimination of barriers to the freedom of establishment in the European Union or the United Kingdom in a way similar to the fundament freedom of establishment provided for under Article 49 TFEU. The fact that the liberalisation of investments and services are treated together in the Agreement confirms this: the structure of the Agreement follows the close relationship of the interrelated, yet distinct, fundamental freedoms of establishment and of services under European Union law.

Comparing the guarantees of the Agreement with those of more traditional investment protection agreements is similar to comparing apples with oranges. Traditional investment protection instruments are normally silent on market access or freedom to invest. Even if they direct the parties to encourage investments in their respective territories, they do not oblige them to eliminate investment obstacles. In fact, more often than not, they only protect investments that were made “in accordance with the laws” of the host State, including those regulations that limit the possibility to make investments for foreign investors.


The fate of investment protection in the UK-EU relations

The specific scope of the Agreement in respect of the treatment reserved to (some) investments precludes any conclusion in respect of a future comprehensive investment protection agreement between the United Kingdom, on the one hand, and the European Union and its Member States, on the other hand. The recent developments concerning the termination of intra-EU bilateral investment treaties does certainly not in itself provide a fin de non-recevoir to a more comprehensive investment agreement, now that the United Kingdom is not with the Union anymore, provided, however, that such an agreement respects the provisions and principles of EU Law.

Of course, there are still eleven bilateral investment treaties between the United Kingdom and EU Member States (Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Romania, Slovak Republic, and Slovenia) in force today. The Bilateral Investment Treaty between the United Kingdom and Poland had been terminated at the initiative of Poland in November 2019, although its sunset clause (Article 15) arguably produces its effects until 2034. The Agreement does not mention these treaties: it neither confirms their continuing application (Article FINPROV.2 addresses only agreements between the United Kingdom and the European Union, but not those between the United Kingdom and EU Member States), nor terminates them. As explained elsewhere, the United Kingdom has not signed the Termination Agreement, and the European Commission has started an infringement procedure against the United Kingdom in respect of these intra-EU bilateral investment treaties. On 30 October 2020, the Commission sent a reasoned opinion to the United Kingdom for failing to effectively remove from its legal order these treaties. Under Article 87(1) of the Withdrawal Agreement, the Commission is entitled to submit the infringement case before the Court of Justice within a 4-year period after the end of the transition period (i.e., until 31 December 2024).

On the other hand, the United Kingdom had not entered into bilateral investment treaties with fifteen Member States of the Union. Maybe it considered that such additional protection was not necessary given the development of the legal systems of these European States (or those that are Members to EFTA). Maybe it considered that EU law constitutes a sufficient protection for its investors.

None of these considerations is however sufficient to exclude the negotiation and conclusion of a comprehensive investment protection instrument by the United Kingdom, on the one hand, and the European Union and its Member States, on the other hand. Such an instrument would most certainly contain similar provisions to the investment protection agreements entered into by the European Union and its Member States with Canada, Singapore, or Vietnam. Whether individual Member States will enter into negotiations with the United Kingdom on new bilateral investment treaties remains uncertain. In any case, such negotiations are subject to the authorisation by the European Commission in accordance with Regulation (EU) No 1219/2012.


The future investment protection in the relations between the United Kingdom and third States

In principle, Brexit did not affect any bilateral investment protection agreements entered into by the United Kingdom and a third State.

This is certainly different in respect of the relations with Canada, Singapore and Vietnam.

The CETA with Canada and the European Union established a number of rights and guarantees concerning investment protection where no bilateral investment instrument existed beforehand between Canada and the United Kingdom. It has been provisionally applied since 21 September 2017, including to the United Kingdom, with the notable exception of the provisions concerning investment protection. On 9 December 2020, Canada and the United Kingdom signed an Agreement on Trade Continuity. The Continuity Agreement incorporates CETA, including most of its provisions on investment protection. Thus, British investments in Canada and Canadian investments in the United Kingdom will continue to be protected under the provisions incorporated, subject to some minor adjustments, once the Continuity Agreement enters into force or is applied provisionally. However, the necessary domestic procedures required for the Continuity Agreement to enter into force or be provisionally applied at 1 January 2021 have not been completed. Although some trade related aspects of the Continuity Agreement/ CETA have been agreed to apply nevertheless, this is not the case for investment related provisions.

The situation in respect of the relations with Singapore and Vietnam seems less difficult. The United Kingdom has also secured international agreements that incorporate the provisions of the EU free trade agreements with Singapore and Vietnam, including the relevant establishment provisions concerning investments, once entered into force or provisionally applied. However, due to the fact that neither the EU-Singapore, nor the EU-Vietnam investment protection instruments had entered into force before the end of the transition period, neither the UK-Singapore, nor the UK-Vietnam bilateral investment treaties have been terminated (as provided for under these instruments). They therefore continue to apply. It is noteworthy that a joint declaration annexed to the Singapore-UK Free Trade Agreement of December 2020 envisages a review of the legal framework for investments with a view to updating the relationship with high standard and ambitious investment protection commitments and the conclusion of a new investment treaty within the next four years.



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