A recent judgment by the Court of Justice of the European Union (CJEU) sent shockwaves through the investment treaty community and is likely to have far-reaching consequences for European investments.
Investors have long relied on investment protections contained in international investment agreements such as the more than 2,000 bilateral investment treaties (BITs) between countries across the world, or multilateral agreements such as the Energy Charter Treaty (ECT). Investors increasingly structure their commitments so as to avail themselves of these treaties which provide protection against illegal nationalisation and expropriation and other governmental actions that may undermine the economic interest of protected investments. These agreements are particularly attractive to investors because they allow investors to sue states directly in international arbitration rather than requiring them to submit their disputes to local courts – a system commonly referred to as Investor-State Dispute Resolution (ISDS).
However, in recent years the European Commission has made it its mission to reshape the landscape of international investment protection by, among other things, seeking to replace the current ISDS system with a permanent investment court, and by eradicating so-called intra-EU BITs (ie, BITs concluded among two EU member states).
With respect to the latter objective, the European Commission moved a big step closer to achieving its goal when the CJEU issued a decision in the Achmea case in March this year, holding that the ISDS provisions in the BIT between the Netherlands and Slovakia are incompatible with EU law. While the CJEU cannot invalidate the Netherlands-Slovakia BIT (or any of the other 190 intra-EU BITs that are currently in force), the European Commission has reaffirmed its position that EU investors can no longer rely on intra-EU BITs (as well as the ECT as between EU member states), and intensified its dialogue with member states to take action to terminate all existing intra-EU BITs. The Netherlands has since announced plans to terminate its intra-EU BITs in a move impacting a substantial number of European investments that have been structured via commonly used tax-efficient Dutch entities.
However, the effects of the Achmea judgment go far beyond the issue of European investment (re)structuring, raising questions as to the fate of ongoing intra-EU BIT and ECT disputes, the validity and enforcement of any awards already rendered in such disputes, and potential claims for repayment of any such awards that have already been paid.
With all those questions still to be answered, the CJEU is also expected to rule shortly on the legality of the EU’s proposed investment court system, which could potentially have far-reaching consequences for ISDS provisions even in extra-EU BITs (ie, BITs between EU member states and third states).
Financial sanctions
The UK has seen a number of developments in recent years in relation to financial sanctions, the cornerstone of which was the creation in March 2016 of the Office of Financial Sanctions Implementation (OFSI). OFSI, a division of HM Treasury, was established with a wide remit, including to work closely with law enforcement to ensure that ‘financial sanctions are properly understood, implemented and enforced’. Since then, a host of further measures have been introduced including a new EU asset freeze reporting regime pursuant to the European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017 (the Regulations).
EU sanctions regulations typically contain a broad requirement to provide information which may facilitate compliance and enforcement of the applicable sanctions regime. The UK historically implemented into domestic law specific reporting obligations for ‘relevant institutions’, effectively regulated financial organisations. Such institutions are required to inform OFSI if they know or have reasonable cause to suspect that a person has committed an offence under an EU financial sanctions regime or is a person who is the subject of EU asset freeze sanctions.
The Regulations have significantly extended the scope of the reporting obligations such that a number of additional businesses and professions including auditors, external accountants and independent legal professionals are now caught by them. By way of example, these obligations would potentially extend to include information obtained in the course of routine audit activities and non-privileged counterparty information obtained in the context of M&A due diligence.
This extension in scope appears also to be reflected in the number of reports made: it is understood that in 2017 a total of £1.4bn of potential breaches were reported to OFSI compared to only £75m in 2016. This trend seems likely to continue as further businesses and professions become aware of their obligations. Whether or not this will result in greater enforcement by OFSI does remain to be seen. However, given the recent extension of the deferred prosecution agreement regime to include sanctions breaches, it seems likely that sanctions breaches may soon see an increase in enforcement similar to that seen in recent years in relation to anti-bribery and corruption. It remains to be seen whether OFSI is able to utilise the new changes described above as effectively as the SFO has done in recent years.
Litigation
Over the past few years, the English courts have heard a steady stream of banking and finance cases following the financial crisis. While a significant number of these cases remain on foot, it is widely expected that the numbers will drop over the coming years. However, while banks are likely to see fewer contractual/tortious claims arising out of pre-crisis historical practices, the compliance regime is becoming increasingly stringent and the various regulators are casting their nets wider than ever before. We therefore consider that corporations and financial institutions of all shapes and sizes should plan for increased spend in dealing with compliance issues and subsequent litigation if and when adverse findings are made.
The English litigation market has for some time anticipated the rise of class actions. In 2015 the Consumer Rights Act introduced changes to make it easier for parties to bring competition claims on a collective basis (including allowing some claims to proceed on an ‘opt-out’ basis if certain conditions are met). Claimants have been slow to take advantage of these new rules, but that looks set to change in the coming years. After a few false starts (see Gibson v Pride Mobility Products Ltd and Merricks v Mastercard), the Competition Appeals Tribunal is currently considering whether to allow claimants to bring a collective action against a number of manufacturers accused of rigging the prices of trucks between 1997 and 2011. If this claim is allowed to proceed, it will mark a significant development for collective actions in England – albeit the English regime will remain significantly less attractive for claimants than those in other jurisdictions such as the US.
In addition to the types of claims set out above, we are seeing a significant increase in restructuring activity despite interest rates being at historically low levels (notwithstanding the Bank of England’s recent increase). As and when interest rates rise further, and the benign credit conditions that have prevailed for some time turn, more restructuring activity seems inevitable. We consider that this will have a profound effect on the types of claims coming before the English Courts, whether from investors in, or creditors or suppliers of, companies facing financial pressures.
It would be remiss for any forward-looking analysis of litigation trends to fail to consider the effect of Brexit. While the details of the UK’s future relationship with the EU remain sketchy at best, it now seems probable that companies will face at least some level of disruption to their supply chains, ability to hire employees from across the EU and the regulatory regime with which they must comply. This is likely to give rise to renewed consideration of the scope of MAE/MAC clauses and could potentially increase the attractiveness of the UK as a jurisdiction in which to structure a transaction to avoid the types of intra-EU BIT concerns outlined above.