The UK's policy as to the inclusion (or not) of investor-State dispute settlement ("ISDS") in its post-Brexit investment treaties has until recently been somewhat unclear, with a House of Commons International Trade Committee hearing evidence on this issue as recently as January. However, last week saw two important announcements from the UK Government in this regard.
First, on 29 March, Kemi Badenoch, the Secretary of State for the Department for Business and Trade, announced that the UK will shortly commence negotiations with Singapore for a "new, modern investment treaty […] guaranteeing clear standards of fair treatment to investors". Two days later, on 31 March, it was announced that negotiations have been substantially concluded for the UK’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership ("CPTPP"), which includes a range of investment protection standards and – in the words of the UK Government - a "modern and transparent" ISDS mechanism. The agreement will enter into force for the UK once it has been signed and ratified and once the CPTPP Parties have completed their own domestic processes to ratify the UK's accession.
The inclusion of ISDS in investment treaties has been the subject of some controversy over recent years, with concerns being raised as to various issues including the cost and duration of ISDS proceedings, inconsistent decision making, a lack of transparency and a perceived "regulatory chill" – i.e. a concern that States may be deterred from making regulatory changes for fear of being sued by investors whose interests those changes do not suit. However, data suggests that many investors continue to regard ISDS as a valuable tool. ISDS can offer protection from some of the key risks faced by foreign investors - the ability to enforce investment protections directly against the host State may serve as a deterrent against State action that is harmful to investors, as well as providing valuable leverage in investor-State negotiations.
Nevertheless, in recognition of the criticisms mentioned above, it is widely acknowledged even among proponents of ISDS that reform of certain aspects of 'traditional' ISDS is to be welcomed, and a number of steps have been taken over recent years to modernise it. These include reforms introduced by arbitral institutions and organisations, such as the ICC's efforts to improve transparency by introducing a presumption that awards made after 1 January 2019 will be published in full, as well as new approaches taken by States to the drafting of investment treaties providing for ISDS. Several examples of the modern approach to treaty drafting can be found in the CPTPP.
Unlike certain other investment treaties concluded in the last few years (including all such treaties entered into by the EU, which has officially denounced ISDS), the CPTPP does include ISDS, but with several noteworthy modernisations, clarifications and exclusions. For example:
- Certain State Parties have reached side agreements with other State Parties to exclude the application of the ISDS provisions as between them – the UK has reached such agreements with Australia and New Zealand. As such, UK investors will not have a right to bring claims under the CPTPP against Australia or New Zealand, and vice versa.
- The CPTPP contemplates the potential future application of an appellate mechanism, although none currently exists. Some commentators view the introduction of an appellate mechanism into the arbitration process as a means of ensuring greater consistency in arbitral decision making, while others express concerns about the impact such a mechanism would have on the (already significant) cost and duration of proceedings.
- In response to concerns around so-called regulatory chill, the CPTPP's Investment Chapter expressly preserves Parties' right to regulate in key areas: "Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives". This is also addressed in certain of the provisions on specific treaty standards – for example, Annex 9-B on expropriation states that non-discriminatory regulatory actions that are designed and applied to protect legitimate public welfare objectives will not constitute indirect expropriation, except in rare circumstances.
- Express directions are given in the CPTPP as to the agreed scope and meaning of certain substantive protections. For example, in the provisions on the most-favoured nation ("MFN") standard, it is expressly confirmed that MFN will not apply to dispute resolution mechanisms, presumably in response to the varying approaches tribunals have taken to the application of MFN provisions to procedural rights and obligations in ISDS jurisprudence.
Any specific provisions negotiated by the UK in relation to investment protection will be set out in a Protocol of Accession that will be published at signature, but last week's announcement indicates that by and large the Treaty's protections for investors and its ISDS mechanism will apply.
It is not yet confirmed whether the UK-Singapore investment treaty will include ISDS, although Ms Badenoch's statement suggests that a modernised form of ISDS similar to that under the CPTPP (to which Singapore is also a Party) is likely: "[I]n addition to guaranteeing clear standards of fair treatment to investors, any deal we sign will be in the best interests of the British people and the United Kingdom economy. We will not compromise on our high environmental, public health, animal welfare and food standards, and we will maintain our right to regulate in the public interest".
The UK's accession to the CPTPP and (save in relation to Australia and New Zealand) acceptance of its modernised form of ISDS will be positive news for both UK investors and overseas investors investing in the UK. It will be interesting to see what is provided for in this respect in the UK‑Singapore investment treaty and whether the UK's approach to investment protection – which now stands in stark contrast to that of its EU neighbours – will impact levels of trade with and investment in the UK.
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