The hot legal topic of 2017 is whether an investor feeling aggrieved by Britain’s decision to leave the EU could bring a claim in an investor state dispute settlement (ISDS) tribunal. Let us consider the case of foreign financial firms that established themselves in the City of London to take advantage of the UK’s much lauded position as the centre of European finance. The government’s decision to interpret the Referendum result as a mandate to leave the single market heralds a fundamental change to the regulatory environment under which firms were established in the UK. As I argue in my recently published paper, foreign owned financials could seek legal redress, arguing that the changes brought about by Brexit (from the point of exit onwards) will violate legitimate expectations protected by Bilateral Investment Treaties (BIT) the UK has signed with their country of origin. Considering the historical importance and magnitude of the UK’s departure, however, what is it that entitles lawyers to use ISDS as a potential spanner in the Brexit works? The answer is contained in a single word. That word is Spain.

The reason why Spain is central to the relation of investor claims to Brexit is the fact that the South European country is the closest example of a western, developed economy having faced an avalanche of ISDS claims due to a significant change in regulatory conditions. In the Spanish case, the change involved a reworking of the regulatory framework for clean energy generation. The cases generated by the reaction of investors -already 32 of them- are of particular importance to our understanding of the role investment treaty violations can play in the context of Britain disentangling itself from the EU.

In these Spanish cases investors claim that, amongst other violations, Spain did not afford them fair and equitable treatment as required to by its treaty obligations. The ECT, under which these claims are brought, demands that states shall encourage investment and create ‘stable conditions’ and ensure ‘fair and equitable treatment’ (FET) of investors. Investments ‘shall also enjoy the most constant protection and security’ while ‘unreasonable or discriminatory measures’ are strictly forbidden. In the first of the cases to conclude, a Dutch solar energy investor argued that fair and equitable treatment demands the maintenance of a stable and predictable legal framework for investments. Spain, they claimed, had frustrated their legitimate expectations through wholesale changes to the regulation of solar energy generation. Spain countered that legislative changes introduced in the energy sector were an expression of its sovereign right to regulate.  Meeting the FET standard under its treaty obligations, in its view, did not mean freezing a legal framework in place, as would happen under a stabilization clause (an explicit commitment to maintain regulatory environments for the duration of the investment).

In this case the Tribunal agreed that in the absence of specific commitments adopted by Spain, the threshold for a finding of FET violation was not reached. Specific commitments could have found expression in an express stabilization clause or by means of a declaration by Spain addressed to the investors, but this had not taken place. It is well established that the host State is entitled to maintain a reasonable degree of regulatory flexibility to respond to changing circumstances in the public interest. Consequently, the requirement of fairness must not be understood as the immutability of the legal framework. So far so good, but there is a catch. A state is deemed to be allowed to regulate so long as it does not fundamentally and abruptly alter the whole regulatory environment causing major losses to the investor. Spain won its first challenge, but celebrations did not last long.

The second important decision on these Spanish claims resulted in a win for the investor and goes to the core of what the protection of legitimate expectations is about. In a case brought by a British energy company, the Tribunal underlined that treaties protect investors from a fundamental regulatory change -total and unreasonable- in a manner that does not take into account the circumstances of existing investments made in reliance on the prior regime. Fundamentally, the Tribunal recognized that the regulatory power of the state has a limit that is established by the commitments assumed under investment treaties, one that cannot be ignored. Spain eliminated a favourable regulatory regime previously extended to the investors to encourage their investment in its territory, and replaced it with an unprecedented and wholly different regulatory approach, based on wholly different premises. This new system was profoundly unfair and inequitable as applied to the claimant’s existing operation, stripping them of virtually all of the value of their investment. The investor won a pay-out of 128 million Euros (plus interest).

How could a financial firm based in London, benefiting from the protection of a BIT between its home country and the UK, use all this? Brexit will most likely result in London becoming a very different business proposition. London can no longer be the gateway to European finance, as it is projected to lose its place in the single market. London can no longer guarantee access to one of the world’s biggest consumer markets. Companies headquartered in London are set to lose market share and leak talent. One could argue that leaving the single market, losing the financial passport, and losing market access, is an abrupt, wholesale upending of the entire regulatory background of an investment, rendering such investment practically worthless. The message for those thinking of pursuing claims against the British government for Brexit is clear: the more drastic the policy change, the better the chance of success. Call your lawyers.

Ioannis Glinavos is a Senior Lecturer at Westminster Law School.