Dispute Settlement Mechanisms after Brexit: a Crucial Element in the Forthcoming Negotiations with the EU

29 Mar 2017

In his speech last week, Michel Barnier, the European Commission’s Brexit negotiator, warned that the Withdrawal Agreement which is to be negotiated pursuant to Article 50 TEU will have to be subject to the law and judicial system of the EU. Of course, that agreement will be an act of the EU institutions and so cannot escape the jurisdiction of the Court of Justice of the EU. It follows that the CJEU will be able to rule on the legality and interpretation of all the provisions of the Withdrawal Agreement and any implementing measures which may be adopted.

Does that mean that all disputes arising out of Brexit will be subject to the jurisdiction of the CJEU?

Not necessarily. That is crucial because – sadly – following Brexit a host of disputes can be expected to arise in relation to the Withdrawal Agreement (if there is one) and to wider Brexit issues. It is scarcely conceivable that a Withdrawal Agreement could be concluded at all without an effective dispute settlement mechanism involving a court or arbitration. At the same time, the Government stated in its White Paper that ending the CJEU’s jurisdiction over the UK was to be an essential element of Brexit, while acknowledging that it must continue to abide by international law.

Amongst the ideas floated in the White Paper is that the Withdrawal Agreement might only provide for a Joint Committee of the Parties for the settlement of disputes – a purely political mechanism under which, if attempts to reach a diplomatic solution fail, a Party can only adopt political sanctions or denounce the agreement.

Precedents for this “model” include many of the bilateral agreements between the EU and Switzerland (of which there are said to be about 130!). But, while the Withdrawal Agreement can be expected to establish a Joint Committee, the EU is unlikely to be satisfied with that alone, given the depth and complexity of the relationship between the UK and the EU. Indeed, negotiations are currently under way between the EU and Switzerland in which the EU is seeking to persuade Switzerland to accept a judicial dispute settlement mechanism.

In the White Paper, the Government referred to a number of arbitration mechanisms enshrined in existing trade agreements (e.g. that between New Zealand and South Korea) as well as CETA, the agreement between the EU and Canada which has been signed but not yet ratified. Disputes between the Contracting Parties and (in the case of CETA) investors are decided by arbitration. No suggestion can be found in the White Paper that it might be appropriate to submit post-Brexit disputes to any type of court.

The potential disputes fall into two categories: those between the UK and the EU and/ or its Member States (let us call them “interstate disputes” even though one of the parties is likely to be an international organisation); and disputes to which individuals and companies are party.

As to interstate disputes, the CJEU does not have jurisdiction under the EU Treaties over disputes involving a State outside the EU (a “third country”), unless the latter agrees to that jurisdiction beforehand. The only exception is that, where the EU institutions adopt an act with adverse consequences for a third country (e.g. a decision by the Commission to set off a sum due to the UK against an amount due from the UK after Brexit day), the latter would be able to challenge it before the CJEU. What is more, it is usual for State disputes to be decided by international courts or tribunals. So the UK might have a good case for resisting attempts by the EU to grant the CJEU jurisdiction over such disputes.

Having said that, Article 20 of the Agreement between the EU and Switzerland provides: “All questions concerning the validity of decisions of the institutions of the Community taken on the basis of their competences under this Agreement, shall be of the exclusive competence of the Court of Justice of the European Communities.” (see here and here)

Nevertheless, a more conventional forum would be a body such as the Permanent Court of Arbitration. Furthermore, disputes relating to the World Trade Organization (WTO) would be decided by arbitration in accordance with that treaty, while the International Tribunal for the Law of the Sea (ITLOS) has jurisdiction over those concerning the United Nations Convention on the Law of the Sea (UNCLOS); the UK is already party to both treaties.

In contrast, the UK might face more of an uphill struggle trying to prevent disputes involving private parties (companies or individuals) from being heard by domestic courts.

Admittedly, Article 30.6.1 of CETA specifically provides that its provisions may not be “directly invoked in the domestic legal systems of the parties”. Article 17.15 of the EU-Singapore Agreement is to the same effect. However, having been a member of the EU for over 40 years and sharing a land border with a Member State, the UK’s links with the EU run far deeper and are far broader than those of distant countries such as Canada and Singapore. Accordingly, it is questionable whether such a provision would be appropriate in the Withdrawal Agreement, as least as regards non-commercial issues.

In 2014, the draft agreement for the accession of the EU to the European Convention on Human Rights was rejected by the CJEU because some EU law issues would have been decided outside the normal mechanisms, thereby circumventing the Court’s role in interpreting and applying EU law. How broad this rule is remains a matter for speculation.

Debate is still ongoing as to whether the dispute settlement mechanisms in CETA are in line with EU law, as the establishment of arbitral tribunals of a radically new type laying the basis for a Multilateral Investment Court (see here) to hear disputes involving investors would bypass the Court in Luxembourg.

Belgium is set to request an opinion from the Court of Justice on the legality of these mechanisms, which should be delivered shortly before the UK leaves the EU in March 2019.

Unless the Court gives its blessing to the CETA mechanisms, the EU presumably will insist on British companies bringing their disputes involving EU law before the courts of the Member States or the Court of Justice, as the case may be. To ensure reciprocity, the EU will presumably want all or part of the Withdrawal Agreement to be introduced into UK law, to ensure that EU nationals and companies can litigate in the UK courts.

Even if the CJEU were to give its blessing to CETA, it should be recalled that, if there is to be any Withdrawal Agreement at all, it will cover the acquired rights of EU nationals resident in the UK and those of British expats living in the EU. It is hard to imagine any appropriate forum for determining disputes over these matters other than the domestic courts of the UK and the Member States of the EU, as the case may be: the proverbial Polish plumber could hardly be expected to go to international arbitration, and exactly the same applies to the British pensioner on the Costa del Sol.

Any mechanism requiring the UK courts applying provisions of the Withdrawal Agreement would probably encounter strong opposition from hardline Brexiters. No doubt, they would see it as introducing the case law of the CJEU into UK law by the back door.

On the other hand, this morning’s Financial Times suggests that the Government may take a more moderate line, speaking of “signs that Mrs May’s promise ‘to end the jurisdiction of the European Court of Justice in Britain’ is being recalibrated to provide room for manoeuvre in one of the most contentious areas of the negotiation”; and it quotes the Brexit department as saying that this means “bringing to an end the direct jurisdiction” of the Court in the UK (with the emphasis being on the word “direct”).

At any rate, given the massive uncertainties surrounding the forthcoming negotiations, other scenarios cannot be excluded. But the EU is likely to reveal its hand sooner than might have been expected, if Mr Barnier’s new bid to ensure the maximum possible transparency of the EU’s negotiating position gains the day.

Acknowledgements Many thanks to my colleagues Professor Panos Koutrakos and Conor McCarthy for their helpful comments on an earlier draft of this post. Responsibility for this post is mine alone, however.