Jersey and the UAE to sign a Bilateral Investment Treaty

After months of negotiations, Jersey is set to sign its first ever Bilateral Investment Treaty (BIT), having reached an agreement with the United Arab Emirates (UAE). This development offers investors the opportunity to structure their UAE investments through Jersey, and it is of particular interest because of Jersey’s ambiguous relationship with the UK under international and domestic constitutional law.

Jersey’s relationship with the UK

Jersey, like Guernsey and the Isle of Man, is a self-governing ‘crown dependency’. Under international law, it is recognised as neither part of the UK nor a separate sovereign state, but as ‘territory for which the UK is responsible’ by virtue of the UK monarch’s status as the Duke (not Duchess) of Normandy following the 1259 Treaty of Paris. Jersey has its own Government (led by Chief Minister John Le Fondré Jr) and its Parliament (the States Assembly) is older than the pre-1707 English Parliament. However, Jersey can also be subject to UK domestic legislation, albeit conventionally only made with the consent of the Jersey government.

In particular, Jersey’s international relations and defence are constitutionally the responsibility of the UK government. This has meant that, traditionally, Jersey would not enter into treaties on its own behalf. Rather, the UK would enter into the treaty, and then decide whether to apply it to Jersey in the treaty’s text or through a territorial application declaration. Under article 29 of the 1969 Vienna Convention on the Law of Treaties (VCLT), by default, a treaty binds a state with respect to its entire territory unless the treaty specifies otherwise; but it is not clear whether Jersey constitutes the UK’s territory, and the 1950 Bevin Declaration (Foreign Office Circular No 0118) expressly reversed this presumption for the crown dependencies. The result is that a number of treaties to which the UK is party do not apply to Jersey (which included the European Union Treaties), although Jersey is currently in a customs union with the EU. Until recently, Jersey’s relations with the UK were not governed by treaties, but rather through ‘arrangements’ of varying degrees of formality, including the 1952 Double Taxation Arrangement.

Jersey asserts its independence

Relations between Jersey and the UK have sometimes been complicated. Since the 1970s, Jersey has operated as an offshore financial centre, and UK taxpayers have been eager to shift their income and assets to Jersey to benefit from its lower tax rates and lighter regulatory frameworks. A low point in relations came in 2005, when European Union regulations required Jersey to equalise tax rates between domestic and foreign businesses. Rather than raise taxes on foreign businesses and see capital flight to tax havens, Jersey chose to abolish corporation tax for most businesses altogether, resulting in significant budget deficits.

Since the 2005 reforms, Jersey has increasingly asserted its independence and power to conduct its own international relations. In 2005, it established a Constitution Reform Group to prepare contingency plans for independence. In 2007, the Chief Minister and the UK Constitutional Affairs Secretary entered into a Framework for Developing the International Identity of Jersey which recognised Jersey’s distinct international identity and committed the UK to representing Jersey’s interests (even when they differed from the UK’s) and only act on Jersey’s behalf after consulting with its Government. In 2018, Jersey and the UK entered into a Double Taxation Agreement as parties on equal footing. In 2019, a constitutional confrontation between Jersey and the UK was narrowly averted when the UK Parliament pulled the Financial Services Bill from its agenda, which would have required the crown dependencies to make their registers of beneficial ownership public despite opposition from Jersey’s Chief Minister.

The Jersey-UAE treaty

Jersey is now planning to enter into international investment treaties, including its first BIT with the UAE. The UK and UAE are already party to a 1992 BIT, which included an option to extend its application to the crown dependencies by an exchange of notes. However, Jersey has instead chosen to negotiate an entirely new treaty, and received ‘Letters of Entrustment’ from the UK government to do so in April 2018.

Jersey is not the only subnational unit eager to take advantage of BITs. Hong Kong has entered into twenty BITs, some while it was a UK crown colony, and others while it was a Special Administrative Region (SAR) of the People’s Republic of China (PRC). The PRC’s position is that its SARs are able to enter into BITs under the terms of their own Basic Laws, and not bound by BITs entered into by the PRC unless the PRC expressly decides otherwise. However, Sanum Investments Ltd v Laos [2016] SGCA 57 held that the Laos-PRC BIT’s general wording and the law of state responsibility meant that the treaty also applied to Macau SAR. Sanum is a decision of the Singapore Court of Appeal as the court supervising an arbitration under the BIT, although the PRC has stated that it considers the decision is wrong.

While the text of the Jersey-UAE BIT has not yet been published, the fact of its existence raises a number of interesting questions of law.

First, it brings Jersey closer to meeting the legal requirements of statehood in its own right, as set out in the 1933 Montevideo Convention on the Rights and Duties of States. Jersey already has a permanent population, a defined territory, and a government, although many obviously subnational units also satisfy these requirements. The Letters of Entrustment bring it closer to achieving the crucial fourth requirement, namely the capacity to enter into relations with other states, which is a proxy for a state’s independence from other countries. However, in this case the entrustment remains subject to the UK government’s supervision and revocation, meaning Jersey statehood remains an aspiration rather than a reality.

Secondly, insofar as Jersey is not a state, the Jersey-UAE BIT is not a ‘treaty’ to which the 1969 Vienna Convention on the Law of Treaties applies. This does not make much difference however, as many VCLT provisions (including on the interpretation of international agreements and their termination) form part of customary international law, and would almost certainly also apply to an agreement of this type.

Thirdly – and most interestingly for investment arbitration practitioners – if the UAE or its investors bring claims under the BIT, they may seek to enforce their claims against the UK as well as Jersey, on two bases.

The first basis is that the BIT may impose obligations on the UK as well as Jersey itself. As the PRC discovered in Sanum, a broadly worded BIT may unexpectedly be held to apply to SARs as well as the national government. Conversely, a BIT may be unexpectedly held to impose obligations on the national government as well as subnational units such as Jersey. By the Bevin Declaration, the UK has declared that treaties it enters into will not bind Jersey or other crown dependencies unless the dependencies are expressly included in the text of the treaty or territorial application declarations. However, it has not clarified the converse position (Jersey’s treaties imposing obligations on the UK) in the same way.

The second basis is that the UK may be liable for Jersey’s breaches of its own obligations. The International Law Commission’s 2001 Articles on the Responsibility of States for Internationally Wrongful Acts (ARSIWA) provide that a state is internationally liable for the conduct of its territorial units; its internal law or constitutional arrangements are no defence. Therefore, if Jersey breaches its obligations under the BIT, the UK may be liable for compensating investors for the breach. It remains to be seen whether the Jersey-UAE BIT will include language limiting the UK’s obligations and liability for Jersey’s breaches, and which institutional rules will be applied to arbitration under the treaty.

The Jersey-UAE BIT represents an interesting development as a matter of international law, and an interesting opportunity for international investors who may wish to structure their investments through Jersey to benefit from its low taxes and more relaxed regulatory environment.

The author would like to thank Harry Stratton for his research assistance in preparing this article.