Labour nationalisation plans: investment treaties may provide compensation

Out-Law Analysis | 10 Dec 2019 | 2:28 pm | 4 min. read

Investment treaties may provide affected companies with a route to fair compensation should a future Labour government succeed in its plans to renationalise certain utilities.

In advance of this week's general election, the Labour Party announced in its manifesto its intention to bring certain utilities - in particular broadband, rail, the postal service, water, energy and potentially PFI companies - back into public ownership through a programme of renationalisation.

The protections afforded by investment treaties would not safeguard against the act of nationalisation itself. Nationalisation is generally allowed where it is for a public purpose; non-discriminatory; in exchange for fair and adequate compensation; and carried out in accordance with the terms of the national law. In the UK, this is most likely to consist of an Act of Parliament allowing the government to legislate for the nationalisation of certain companies or sectors.

In this context, the protections contained in bilateral investment treaties (BITs) and multilateral investment treaties (MITs) - such as the Energy Charter Treaty (ECT), which establishes a framework for cross-border cooperation in the energy industry - can be used to ensure that any nationalisation is carried out in compliance with certain conditions and that compensation is paid at fair market value.

What treaty protections are available?

BITs and MITs are agreements between two or more states to facilitate private foreign direct investment (FDI) by nationals and companies of one state into another. In particular, they contain substantive provisions for the promotion and protection of foreign investments such as a guarantee of fair and equitable treatment; full protection and security; and a prohibition against the expropriation or nationalisation of an asset other than where certain specific conditions are fulfilled.

BITs also commonly contain a dispute resolution clause which refers disputes arising under the treaty to be resolved through international arbitration.

Affected companies may look to restructure so that their investments are held in one of the countries with which the UK has a bilateral investment treaty in force, or one of the more than 50 countries that has signed the Energy Charter Treaty.

An investor must be able to demonstrate that it meets the definition of an "investor" for the purposes of the treaty and that it has made an investment in order to benefit from a treaty's substantive protections, or to rely on its dispute resolution procedure in the event that those protections are breached.

As of today's date, the UK has entered into 106 BITs - of which 94 are in force - and is also a signatory to the ECT. Both the model UK BIT and the relevant clause of the ECT stipulate that any nationalisation must be in exchange for fair market value. Any efforts by a Labour government to provide anything less than fair market value – for example, book value or the value at which the company was acquired – could then amount to a breach of these provisions and a claim in international arbitration, with a potentially public arbitral award rendered against the UK government for payment of damages in the amount of any compensation shortfall.

The ECT requires compensation in the amount of fair market value "at the time immediately before the nationalisation became known in such a way as to affect the value of the investment". The way in which this provision is drafted could lead to legal debates as to whether the valuation date for nationalised companies bringing an ECT claim for compensation should be immediately before to the announcement of the Labour manifesto policy, or immediately before the carrying out of any nationalisation.

What should affected companies do now?

Affected companies may look to restructure so that their investments are held in one of the countries with which the UK has a BIT in force, or one of the more than 50 countries that has signed the ECT. Before doing so, they should consider:

Timing: any restructuring must take place before a dispute regarding nationalisation arises. A dispute will be said to have arisen at the point that compensation at fair market value is not provided. Any restructuring that takes place after a dispute has arisen will not be eligible to take advantage of the provisions of a treaty or the ECT. There is also some debate as to whether restructuring at a time when a claim is foreseeable is an abuse of process, and therefore prohibits a party from relying on the protections of a treaty.

Choice of treaty: companies concerned about the implications of any potential programme of nationalisation will need to study the provisions of any treaty it seeks to rely on very carefully to make sure that they fully understand the nature and extent of the protections it provides. Not all treaties are drafted equally: some limit the type of disputes that may be submitted to arbitration and others may contain carve-outs from certain treaty protections for matters of taxation.

Moreover, companies seeking to restructure into another European jurisdiction that has a BIT with the UK should be wary of doing so for the purposes of relying on that treaty. EU member states recently agreed a treaty which will terminate any BITs between individual member states once ratified, in response to the decision by the Court of Justice of the EU (CJEU) in the 2017 Achmea case that all intra-EU BITs were a violation of EU law and thus unenforceable.

Practicalities: while the Labour manifesto does not set out in great detail how it plans to achieve its ambitions, the anticipated process would be the transfer of assets to be nationalised into public ownership through an Act of Parliament. Provision would then be likely to be made for compensating the former owners through a bond issuance by the Treasury. Depending on the makeup of any eventual Labour government, the timescales involved for an Act of Parliament to be passed could be lengthy.

Clea Bigelow-Nuttall and Rob Wilkins are international investment dispute resolution experts at Pinsent Masons, the law firm behind Out-Law.