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Agreeing how to disagree: Brexit, future EU-UK agreements and the need for an umpire

7 March 2017

Jurisdictions: United Kingdom
Services: Administrative and Public Law, Government Relations and Policy Advocacy, International Arbitration

By Charles Brasted, Andrew Eaton and Telha Arshad 

What good is a cricket game without an umpire? While both teams might be applying the same rules, situations often crop up in which a definitive interpretation must be given, and the rules of the game enforced. The same applies to bilateral agreements: they inevitably require a mechanism that will ensure consistent interpretation and, if necessary, enforcement of the agreement between the parties.

Our recent blog post alluded to a potential role by consent for the Court of Justice of the European Union ("CJEU") to interpret and settle disputes arising from a post-Brexit bilateral agreement. But is this really an option?

The UK Government has made ending the "direct legal authority" of the CJEU a priority for Brexit, as confirmed by Theresa May in her Lancaster House speech.  The UK Government's Brexit White Paper confirmed that it would "bring an end to the jurisdiction of the CJEU in the UK" and that any solution would have to "respect UK sovereignty, protect the role of our courts and maximise legal certainty". Indeed, the UK Government appears to have gone further in a recent response to a House of Lords report, rejecting the option of becoming a non-EU member of the EEA because (among other things) it would mean "accepting a role for the [CJEU]".

That said, the UK Government has also recognised the need for some form of dispute resolution mechanism to ensure a fair and equitable implementation of the UK's future relationship with the EU and to ensure that all parties share a single understanding of the agreement, both in terms of interpretation and application.  The White Paper sets out examples of common dispute settlement mechanisms ("DSMs") in international agreements, without expressing a preference for inclusion in a future UK-EU agreement.

The question therefore remains: what dispute resolution mechanism would the UK Government be willing to accept in place of the CJEU?  In this blog, we consider some potential options.

The umpire's new clothes

The CJEU is unique among the international dispute resolution mechanisms to which the UK is subject in the sense that its rulings are directly applicable in the UK and have primacy over other UK law.  This means that, at present, all UK law must be consistent with the CJEU's binding interpretations of EU law and the UK can be sanctioned by the CJEU for failing to comply with them.  In addition, because of the direct applicability of EU law in the domestic law of the UK, private parties can also bring claims against the UK Government in the UK courts for breach of CJEU rulings.  The UK Government describes this in its White Paper as making the CJEU "amongst the most powerful of supranational courts". 

However, DSMs come in many shapes and sizes. They can generally be placed on a spectrum.  The central tension, which must be resolved through the negotiations between the UK and the EU in due course, is the need for an effective dispute resolution mechanism that sufficiently protects the sovereignty of the UK.

The political/diplomatic model: high sovereignty, low efficiency

On one end of the spectrum is the political/diplomatic model. Under this model, contracting states can choose to settle disputes amongst themselves through diplomatic means. If the states cannot resolve the dispute, the situation might escalate and ultimately lead to one or both states terminating the agreement for material breach.

For example, while EU-Swiss bilateral agreements have been in place for decades and cover many areas, there is no legal mechanism for adjudicating disputes between them. Under the Swiss model, each bilateral agreement provides for an accompanying DSM. For the vast majority of agreements, a Joint Committee (made up of Swiss and EU officials) resolves disputes on a purely diplomatic level.

Could such a mechanism work for the UK?  While on paper it provides a high level of sovereignty for Switzerland, experience suggests that it may come at the expense of efficiency and influence. The Swiss model does not provide efficient mechanisms for adopting secondary law, a court system and surveillance of implementation. According to one expert cited in a report presented by the House of Lords in December 2016, the practice over the last ten years has shown that it was almost impossible for Swiss officials to talk their EU counterparts into changing their position, because the EU officials felt legally bound by the definitive judgment of the CJEU.  This can create long-running political deadlock. 

Even if the UK did seek to agree a political/diplomatic DSM, the EU itself doesn't seem to be keen on repeating the Swiss experience.  The Council of the EU has described the model of EU-Swiss relations as "complex", "unwieldy to manage" and "having clearly reached its limits".

In a March 2016 report exploring alternatives to EU membership, the UK Government itself noted that both the EU and Switzerland have called the viability of this model into question and that such arrangements were unlikely to be appropriate or desirable for the UK. 

The judicial model: loss of sovereignty, high integration

At the other end of the spectrum lies the judicial model of DSMs, which gives contracting states the automatic right to refer a dispute to a third-party adjudicator, whose function is to resolve disputes by application of a body of law relating to the agreement and whose rulings generally have a degree of direct enforceability in the domestic law of the contracting parties.  This model tends to be associated with a greater degree of institutional independence and permanence.

For example, the EFTA Court oversees and enforces the interpretation and application of the EEA Agreement, which establishes a Single Market between the EU, Norway, Iceland and Liechtenstein.  It represents a formal judicial model involving a standing tribunal to which other states and private bodies can have recourse.  Its judgments in direct infringement proceedings against an EEA state are final and binding as against that state, whereas an advisory opinion requested by a national court of an EEA state in relation to the proper interpretation of the EEA Agreement is not binding on the national court.

The UK Government's objectives (outlined above) in relation to sovereignty and protecting the role of national courts appear to suggest that it is unlikely the UK Government would be willing to submit to the jurisdiction of another supranational court whose rulings would require the UK to comply with a foreign body of law, such as the EFTA Court.

The quasi-judicial model: a third way?

The most common form of DSMs in trade agreements is quasi-judicial. These generally entail an automatic right to third-party adjudication via quasi-judicial adjudicating bodies that are usually established on an ad hoc basis (i.e. to resolve a particular dispute) and whose rulings are not binding in the domestic law of the contracting states. 

Quasi-judicial DSMs can be designed to resolve disputes between contracting states, such as the WTO dispute mechanism, or to allow private bodies to enforce their rights under the international agreement in question, for example via an investor-state dispute settlement ("ISDS") mechanism.

State-to-state quasi-judicial model

Many free trade agreements either incorporate the WTO dispute mechanism as a means of resolving disputes or provide for a similar bespoke mechanism for states to seek recourse for breaches by other signatory states.  Such mechanisms are not directly applicable in domestic law, but provide a mechanism in international law whereby a signatory state can be held to the terms of an international agreement.

Adopting such a mechanism in a future UK-EU agreement would be likely to provide a more desirable level of sovereignty for the UK than at present.  It would not result in directly applicable decisions from a supranational court, such decisions only being binding against the UK in international law.

Under WTO rules, the Dispute Settlement Body ("DSB") has the power to establish panels whose role is to hear disputes between WTO member states. Panels are constituted to adjudicate on specific complaints brought by a member and to make an award.  If a WTO member state is found in breach of its obligations by the panel, and fails to comply with an award within a reasonable time, two sanctions are available to the complainant state: compensation (with the losing state offering additional trade concessions) or retaliation (which is only available where compensation cannot be agreed).  

The effectiveness of such  mechanisms is ultimately subject to political considerations.  For example, President Trump's recent trade policy agenda warned that the US did not consider itself bound by WTO rulings.  If the US maintains this stance, this could weaken the authority of the WTO as an effective mechanism for resolving trade disputes multilaterally.  The effectiveness of bespoke bilateral quasi-judicial DSMs equally relies on the consent of the contracting states to be bound by their rulings.

Investment protection via quasi-judicial model

In addition, ISDS mechanisms are an important way of ensuring that private parties can enforce the terms of a free trade agreement, insofar as they derive rights from the agreement.  In contrast to proceedings brought by private bodies before the CJEU or the EFTA Court, ISDS rulings are binding only between the parties to the dispute, decided on an ad hoc basis and do not have direct applicability in the domestic law of the contracting state.

ISDS mechanisms included in free trade agreements are often separate from the state-state DSM and give  private parties the right, in certain circumstances, to bring a damages claim against the government of the ‘host’ state.  Such mechanisms are increasingly common and were proposed under the Comprehensive Economic and Trade Agreement ("CETA") between the EU and Canada.  While they can provide businesses with an effective mechanism for defending their economic interests, ISDS mechanisms have been criticised by some for allowing investors to sue a contracting state over changes to its domestic policy. As noted in a co-sponsored discussion paper presented by the EU and Canada at the World Economic Forum in Davos in January 2017, ISDS mechanisms have also been criticised for their perceived lack of legitimacy and transparency, and a potential lack of coherence and predictability due to their ad hoc nature.

In response to some of these criticisms, the European Commission has recently proposed the creation of a Multilateral Investment Court ("MIC") which would adjudicate investor-state disputes brought under the EU's trade agreements with third countries. This was advocated for in the EU-Canada discussion paper mentioned above, which calls for a multilateral framework for resolving investment disputes to be applied to a variety of existing investment treaties. This new "fully inclusive" MIC, the paper contends, would increase legitimacy, legal correctness, transparency, predictability and efficiency – and would aim to address the growing scrutiny and criticism of ISDS mechanisms. The final version of CETA contains a bilateral mechanism for investment disputes, but it also contains a provision to the effect that the EU and Canada "shall pursue with other trading partners the establishment of a multilateral investment tribunal and appellate mechanism for the resolution of investment disputes".

Adopting a similar approach to CETA in the future UK-EU agreement could allow the UK to ensure the consistent application of the terms of the agreement and effective recourse to enforcement mechanisms in the event of a potential breach, without requiring the UK to submit to the jurisdiction of a permanent supranational court.  The EU's recent proposed MIC could also represent an effective means for the UK to pursue its international trade agenda, by promoting the establishment of a new international institution for the resolution of international trade disputes.