Philipp Kurek published in Law360

On 18 July 2024, the Government introduced the Passenger Railway Services (Public Ownership) Bill to Parliament, taking the first step in its widely reported plans to bring British railways back into public ownership.

The Government’s plans to renationalise the British railway network on terms that do not entail payment of any compensation to affected investors must be scrutinised carefully, not only under applicable contracts and national law, but also in the context of the UK’s more than 100 investment treaties which provide substantial protections to qualifying investors – including protections against unlawful expropriation/nationalisation – and give investors the right to bring direct arbitration proceedings against the UK for breaches of relevant treaty obligations.

However, as further explained below, not all investors and investments benefit from such treaty protections.

This article considers which investors and investments may qualify for protection under the UK’s network of international investment treaties, what investors who currently do not benefit from treaty protection can (and should) do in order to protect their investments, and whether the Government’s nationalisation plans could give rise to claims for compensation by affected investors under applicable treaties.

Government’s railway nationalisation plans

In the run-up to the 2024 election, the Labour Party announced plans – if elected – not to renew private train operators’ contracts, and to replace the current privatised system with a new system that places train operators under public ownership and control. Labour’s proposal, which studiously avoided using the term nationalisation, moreover emphasised that its plans would be implemented without payment of any compensation to outgoing private operators.

After winning the election, Labour announced a wide-ranging programme of reforms as part of the King’s Speech on 17 July, with its plans to renationalise Britain’s railways making headlines around the world.

On 18 July, the Government introduced the Passenger Railway Services (Public Ownership) Bill (the “Bill”) to Parliament. The Bill, if and when enacted, is aimed to enable the delivery of the Government’s rail policy as quickly as possible.

In particular, the Bill would make the award of railway contracts to public-sector operators the default, rather than the last resort, thus allowing operations to be transferred from private to public operators once current contracts expire or are terminated. Importantly, the Bill would also remove the requirement to give at least 12 months’ notice before awarding contracts to public-sector companies, and allow the appointment of public-sector operators without an invitation to tender.

In the circumstances, industry bosses are reportedly preparing for ministers to exercise break clauses in relevant contracts in order to bring operations under public control as soon as possible. Franchise contracts with two private operators are reported to have break clauses due to expire in September 2024 – likely before the Bill is enacted. However, five other private operators are reported to have break clauses coming up in the first half of 2025. Moreover, Transport Secretary Louise Haigh has stated that contracts that do not have an imminent break clause could be terminated early if the Government considers them to be in breach of contract for poor performance, with the Government reportedly seeking legal advice and exploring all options.

Protections available to stakeholders

It is clear that the Government’s plans have been devised carefully to minimise the risk of potential claims by private operators, in particular contractual claims that may be brought if the Government were to terminate contracts unlawfully.

However, another layer of protection that must be considered – and is often overlooked – can be found in the network of international investment treaties concluded by the UK with other countries. In particular, the UK is party to more than 100 investment treaties which provide qualifying investors and their investment with substantive protections beyond any contractual rights they may have or other rights and remedies that may be available to them under national law.

Importantly, most of these treaties also give investors the right to bring direct claims against the UK in international arbitration proceedings with respect to any breaches by the UK of the investor’s rights under applicable treaties (including with respect to actions or omissions by Government ministries, regulatory bodies, and other organs of the State).

Who qualifies for treaty protection?

Whether or not a particular investor can avail themselves of relevant treaty protections depends on the terms of each relevant treaty.

However, in most cases, whether an investor qualifies for treaty protection depends on their nationality or jurisdiction of incorporation, and whether the UK has concluded an investment treaty with the investor’s country of origin. In some cases, having a qualifying holding company in the corporate structure is enough for an investor to avail themselves of treaty protections. In other cases, investors must have substantial business activities in their treaty “home state” in order to qualify for protection (thus effectively excluding pure holding/post-box companies from the treaty’s scope).

In this respect, it is important to note that to the extent an investor does not currently benefit from applicable treaty protections, it is perfectly acceptable – and common – for investors proactively to structure, and restructure, their investments in order to gain and maximise applicable treaty protections, provided any such restructuring takes place before a relevant dispute has arisen or become reasonably foreseeable.

Similarly, whilst the scope of protected investments varies from treaty to treaty, most treaties contain very broad definitions of protected investments, including direct and indirect shareholdings, as well as other tangible and intangible rights and assets such as concessions, contractual rights, claims to money, and other interests having financial value.

Importantly, therefore, treaty protections are not limited to investors who are party to the relevant Government contracts, but are equally relevant to other stakeholders whose financial interests may be affected indirectly by the Government’s plans.

What protections are afforded by the UK’s investment treaties?

Whilst the protections afforded by a treaty also depend on the specific terms of each treaty, most treaties provide for some key protections that would be highly relevant to investors affected by the Government’s nationalisation plans.

Most importantly, investment treaties generally contain protections against unlawful expropriation, including with respect to intangible investments such as contractual rights. These protections apply both in situations where investors are deprived of their investments by direct Government action, but also where investors are deprived of such rights (or their value) through more subtle, indirect, actions. Crucially for present purposes, an expropriation will generally be unlawful unless the investor is compensated for the fair market value of the investment which has been expropriated.

In addition, most investment treaties also impose an obligation on the UK to accord protected investments “fair and equitable treatment” – a very broad standard which, amongst other things, has been held to require states to protect investors’ legitimate expectations, maintain a stable and predictable legal and business framework for investments, act proportionately in relation to measures affecting protected investors, act with procedural fairness, due process, and transparency, and refrain from arbitrary and discriminatory conduct.

Finally, a number of the UK’s investment treaties also contain so called “umbrella clauses”, which in broad terms require the UK to observe any obligations it may have entered into with regard to protected investments. In other words, contractual breaches by the UK, or breaches of other undertakings given by the UK to the investor, could equally give rise to claims for compensation under applicable treaties.

Claims for compensation

To date, there has only been one known investment arbitration against the UK in the early 2000s – coincidentally also in the rail sector – brought by two entities of the Eurotunnel group concerning alleged breaches of a concession agreement. On that occasion, the UK was held liable for its breaches of the relevant treaty.

However, claims against states under investment treaties based on government action that results in the nationalisation of individual investments or even entire industry sectors is by no means uncommon, and have resulted in very substantial damages awards. Similarly, states that previously had no or only very limited exposure to investment treaty claims have found themselves at the receiving end of countless claims brought by investors affected by the implementation of specific government policies which were found to violate applicable international obligations. As such, the fact that the UK has, thus far, avoided being the subject of many treaty claims does not mean that the implementation of government policies that violate investor rights would not lead to investors seeking to protect and enforce their rights under the UK’s investment treaties.

Having said that, it appears that the Government’s plans to bring Britain’s railways back into public ownership have been crafted carefully to minimise the risk of potential claims, both under relevant contracts, but also under applicable investment treaties. Based on what is currently known about the Government’s plans, it appears that the Government does not intend to deprive investors of any contractual rights, nor is the Government seeking to nationalise any tangible assets. In this respect, it is notable that the Government does not propose nationalising rolling stock (i.e., railway vehicles), with the Government set to continuing leasing rolling stock from private companies. Importantly, the Government’s decision not to nationalise rolling stock has been made specifically on the basis that to do so would be too expensive, thus recognising that nationalisation of rolling stock would require the payment of substantial compensation by the Government.

However, it should also be noted that, in certain circumstances, the Government’s decision not to renew existing contracts may still give rise to potential claims – as was the case in Tecmed v. Mexico, in which Mexico was held liable for its refusal to renew an operational permit in connection with the investor’s investment. Whether or not there is a basis for such a claim would need to be determined on a case-by-case basis, including by reference to whether the investor had a legitimate expectation that its contract would be renewed. Similarly, if the Government were to terminate existing contracts that do not have a break clause coming up in the near future, in circumstances where there was no legal basis for such termination (e.g., based on unfounded allegations of wrongdoing against affected investors), this could equally give rise to claims by affected investors.

What does this mean for affected investors?

Whilst the Government’s proposed plans do not raise any immediate alarm bells from an investment treaty perspective, it is nevertheless important for investors to be aware of this additional lawyer of protection, and consider potential claims on a case-by-case basis.

In any event, investors affected by the Government’s plans would be well-advised to consider whether their current investment structure affords them relevant treaty protections – and if not – should consider whether investments and holding structures should be restructured in order to gain (and maximise) treaty protections.

Given the pace at which the Government is seeking to implement its plans, any potential restructuring should be considered without delay, and in any event in good time before a potential dispute arises – at which point it would be too late to restructure, and affected investors may be left without any protection and recourse whatsoever.