Brexit and business: what do the EU-Japan negotiations mean for post-Brexit dispute resolution?

Earlier this year, we highlighted the politically controversial nature of certain of the dispute resolution options set out in UK Government’s White Paper on Brexit. In particular, we noted that some forms of Investor-State Dispute Settlement (ISDS) provisions set out in the White Paper have recently come under severe criticism in Europe.

Two recent EU developments appear to offer some clues as to how the Brexit negotiations on dispute resolution might play out.

Arbitration provisions require Member State ratification

On 16 May 2017, in a decision concerning the proposed EU-Singapore trade deal, the European Court of Justice (ECJ) held that the European Commission did not have the competence to conclude ISDS provisions which provide for investment treaty arbitration (ITA). Any agreement concluded by the EU which includes ITA provisions will therefore need to be ratified by national (and in some cases, regional) parliaments.

This, in effect, gives every EU Member State a veto over the entirety of any proposed trade deal which contains ITA provisions. The ability of the Walloon regional parliament in Belgium to hold up signature of the EU-Canada trade deal (CETA) highlights how, across a diverse union of Member States, just one relatively small Member State or region could potentially derail a major international agreement.

EU’s preference is to establish a permanent investment court system

On 6 July 2017, the EU and Japan reached ‘Agreement in Principle’ on an economic partnership agreement (EPA). The EPA Agreement in Principle suggests that dispute resolution is the single issue to remain in contention with respect to investment: “there is still no agreement on the whole [investment] chapter, as the issue of investment dispute resolution remains fully open” (emphasis added).

Consistent with its stated desire to move away from traditional ISDS mechanisms, such as ITA, the EU has insisted, in the EPA negotiations, “that there can be no return to old-style ISDS. Under no conditions can old-style ISDS provisions be included in the agreement.”

The EU has, instead, tabled an “investment court system” for the EPA. This would involve a permanently constituted international court (as opposed to ad-hoc tribunals), with arbitrators drawn from a fixed roster comprising nominees from each contracting state, and neutral third parties. Proceedings in the court would be transparent and, unlike current ITA mechanisms, would provide for a right of appeal to a separately constituted appellate tribunal.

The ECJ’s ruling on the EU-Singapore trade deal had led some to question how the EU’s willingness to include any investment court or ITA provisions in trade deals might be affected. However, it appears from the EU’s statements on the EPA that it is standing by its previous statements (made during the CETA negotiations) that its “ultimate aim is to establish a single permanent body to decide investment disputes, thus moving away from the ad hoc system” of ITA.

What will this mean for Brexit?

Given the developments above, it now appears likely that the EU will:

• proceed with its attempts to establish a permanent court for the determination of investor-state disputes; and
• require the UK to sign up to such permanent court system for investor-state disputes.

Whilst the UK government White Paper stated that its aim was to agree arrangements “that respect UK sovereignty, protect the role of our courts and maximise legal certainty,” government cabinet ministers have more recently appeared open to the idea of some form of arbitration with David Davis, Secretary of the Department for Exiting the EU, stating that:

“When we are doing all these deals on trade and other areas, there will be arbitration arrangements.

There won’t be the ECJ, there will be a mutually agreed chairman and somebody nominated from both sides, that’s the normal way, but there may be other ways too, and it may well be we have an arbitration arrangement over this, but it’s not going to be the European Court of Justice.”

This could well open the door for the UK and the EU to sign up either to a general international investment court, or to a bespoke UK-EU court to decide disputes relating to a future UK-EU trade deal.

The UK may even be pushing to expand the remit of such an institution, given that its main resistance is to jurisdiction falling to the ECJ – for example, in relation to questions regarding EU citizens’ rights, as outlined in its recent paper on the subject. The EU’s negotiating position is that the ECJ should continue to have jurisdiction over issues relating to EU law. However, it may be that establishing a new, independent, international court, which could have jurisdiction over both issues relating to the withdrawal agreement and any future trade deal, would be a compromise that could meet both parties’ aims.

For international companies and investors, the EU’s insistence on establishing a new permanent body means that even companies already familiar with arbitral bodies and processes will need to get to grips with new dispute resolution procedures. Whether this becomes a feature of the UK-EU withdrawal and trade agreements will be a crucial part of the on-going negotiations.