Brexit (1): Can Arbitration be Used to Fix Unresolved U.K.-EU Matters? - international litigation blog
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Brexit (1): Can Arbitration be Used to Fix Unresolved U.K.-EU Matters?

Brexit (1): Can Arbitration be Used to Fix Unresolved U.K.-EU Matters?

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Brexit is definitely a source of political, legal, financial and diplomatic uncertainties. It is also a source of discussions in arbitration and international litigation circles. Indeed, Brexit will certainly have an impact of London has a hub for arbitration (something that we discussed earlier with Professor Bermann), but it will also have a strong impact on the litigation practice in the United Kingdom (the U.K.).

In this context, I have decided to devote a series of blog posts on those issues. The first of those blog posts has kindly been drafted and prepared by my colleague, Benedict Blunnie (intern at Van Bael & Bellis) on the possibility, for the European Union (the EU) and the U.K., to have recourse to arbitration as a means to solve their unfinished business.

Happy reading!

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With less than eighteen months until the U.K. is expected to leave the EU, the British government is keen to discuss its future trade relationship with the EU. The rest of the EU member States (the EU27), however, have made their priorities clear: no talk of a future relationship before sufficient progress is made on the three key issues of (i) EU citizens’ rights; (ii) the Irish-Northern Irish border; and (iii) the so-called ‘divorce bill’ of outstanding debts and budget contributions*.

Recent efforts by Prime Minister Theresa May to advance negotiations – a speech in Florence, a dinner in Brussels, various visits to other European capitals – have largely failed to move the EU27 from their initial position.

The ‘divorce bill’ includes existing obligations and commitments already made in the 2014-2020 EU budget, as well as long-term liabilities (such as pensions) and ‘contingent liabilities’ (possible future obligations such as loan guarantees). At the European Council of 19-20 October 2017, Mrs May said that negotiators were going through the bill ‘line by line’. So far, the EU has refused to talk in terms of figures, preferring to agree a methodology first. Estimates of the final bill range from EUR 20 billion to upwards of EUR 60 billion.

But what if the U.K. and EU took a more imaginative approach? In a blogpost for the Brussels-based thinktank Bruegel, the Belgian economist André Sapir suggests that the parties could create space in the negotiations by submitting the ‘divorce bill’ to arbitration. The post dates from May 2017 and seems to have garnered little discussion – but perhaps now the negotiations could benefit from some creative thinking and novel solutions.

The key issue is that both the U.K. and the EU have very different ideas about how to resolve their differences. The U.K. has stated, in its Future Partnership paper that it seeks to end the ‘direct jurisdiction’ of the Court of Justice of the European Union (the CJEU) over the U.K.; the EU, by contrast, has prioritised the autonomy of the Union legal order**.

In the case of the divorce bill the lines are clearly drawn. It is, essentially, a zero sum game: what one party loses, the other gains. As Sapir points out, this leads to both sides taking increasingly entrenched positions. With time in short supply, the negotiations could benefit from a fresh breath of objectivity. An external adjudicator could provide this objective perspective, as well as freeing up negotiators to focus on more political concerns such as the recognition of citizens’ rights and the future of the Irish border.

Three neutral parties are suggested – the CJEU, the International Court of Justice (the ICJ) and the Permanent Court of Arbitration (the PCA). Of these, the PCA seems to be the most promising model, though not without flaws.

Submitting the question of the divorce bill to the CJEU would, legally speaking, be the most obvious course of action, as the outstanding financial obligations of the U.K. are a matter of EU law. Politically, however, it would be impossible for the U.K. to be seen to submit to the CJEU’s ruling in such a sensitive matter.

Next, Sapir suggests the ICJ as a ‘more suitable choice’. It is not explained why this is the case, and it seems to be a novel argument. In any case, one concern regarding an application to the ICJ to solve the issue is that the ICJ has no jurisdiction unless the litigants are states party to the UN Charter, which incorporates the Statute of the ICJ. As the EU is not a party to the UN Charter, it would not appear to have standing before the ICJ***.

The third adjudication body is the PCA. As it is ‘not a court in the traditional sense, but a permanent framework for arbitral tribunals constituted to resolve specific disputes’, it could offer both respectability and flexibility. The EU has, moreover, already appeared before the PCA, in Case No 2013-30 In the matter of the Atlanto-Scando Herring Arbitration (Denmark v European Union)****. In that case, however, jurisdiction flowed from the fact that both Denmark and the EU were parties to UNCLOS, which provided for PCA jurisdiction in the absence of an agreed alternative. In the present case, the EU-U.K. relationship is derived from the EU Treaties, which already provide for a dispute resolution mechanism in Article 344 of the Treaty on the Functioning of the European Union (the TFEU). Given the jealousy with which the CJEU guards its position as interpreter of the Treaties, as seen in Opinion 2/13, it is difficult to see it permitting an erosion of the integrity and autonomy of the EU legal order by allowing the EU and the U.K. to submit their dispute to the PCA. If an advisory opinion were to be requested of the CJEU, it is possible that concerns similar to those raised in Opinion 2/13 would feature in the CJEU’s reasoning.

As such, Sapir raises an interesting and timely question – whether an arbitral tribunal could take the heat out of negotiations, or at least provide space for other, less technical, matters to be discussed. The existing models of international dispute resolution suggest that this is unlikely, given the unique characteristics of the EU and its legal system. Nonetheless, there is an argument to be made for including an element of arbitration in the negotiations, so long as this is not in breach of Article 344 TFEU and both the EU and the U.K. agree. This is a high bar – the CJEU, especially, would be slow to countenance such a development without some form of appeal mechanism or judicial control. That said, creative and imaginative solutions will be required in many issues raised by the prospect of Brexit – arbitration could yet play an important role in this regard.

* See also the European Council’s Guidelines for Brexit Negotiations and the European Parliament’s analysis of the three first-phase priorities.

** The autonomy of the EU legal order (and, by extension, the CJEU’s monopoly on interpreting EU law) was one of the reasons the CJEU held – in Opinion 2/13 – that the EU was unable to accede to the European Convention on Human Rights. In Opinion 2/13, the CJEU noted that the terms of the accession agreement opened up a number of situations in which the integrity of the autonomous EU legal order could be affected, including the possibility of the European Court of Human Rights being asked to interpret provisions of EU primary law. According to the CJEU in Opinion 2/13, this would be contrary to Article 344 TFEU, which prohibits Member States from submitting disputes concerning the interpretation or application of EU law to any dispute resolution mechanism other than that provided for by the Treaties themselves – namely, the CJEU.

*** It remains to be seen, however, whether the U.K. could potentially take an action before the ICJ against the individual Member States of the EU (this would also need to be reconciled with Article 344 TFEU).

**** Note that no award was made, the parties having jointly requested a termination order eight months after the Tribunal was constituted.

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