The protection of cross-border investments under the Canada-EU trade pact

Following negotiations first launched in May 2009, the Comprehensive Economic and Trade Agreement (“CETA”) was signed by Canada and the EU on 30 October 2016. CETA is a free trade agreement, which is subject to ratification by each EU member state and to the consent of the European Parliament.

The protection of cross-border investments in CETA

Chapter 8 of CETA sets out a legal framework for the protection of cross-border investments between EU member states and Canada and includes a related investor-State dispute settlement (“ISDS”) regime for addressing alleged breaches of an obligation under that chapter. Key provisions of note are:

• “Exercise of governmental authority” is specifically defined as meaning activities carried out neither on a commercial basis nor in competition with one or more economic operators.
• To qualify as an “enterprise of a Party”, an entity must have “substantial business activities” in that State Party, and a Party may deny the benefits of Chapter 8 to an investor of the other Party where the investor of a third country owns or controls the enterprise and the denying Party adopts or maintains certain prohibitive measures with respect to that third country (Article 8.16).
• Chapter 8 contains provisions with respect to national treatment and most-favoured-nation treatment (Section C) and fair and equitable treatment, full protection and security, expropriation and free transfers relating to a covered investment (Section D).
• The investment protection section (Section D) applies only to investments directly or indirectly owned or controlled by an investor of the other Party. The ownership or control requirement, along with the above-mentioned “substantial business activities” test restricts treaty-shopping for investment protection purposes.
• State parties are not entitled to impose or enforce performance requirements in connection with the establishment, acquisition, expansion, conduct, operation, and management of an investment of an investor; for example, a State may not require an investor to achieve a certain level of domestic content (Article 8.5(1)(b)).
• The most-favoured-nation treatment standard does not extend to procedures for the resolution of investment disputes between investors and States provided for in other international investment treaties and other trade agreements (Article 8.7(4)).
• A decision not to issue, renew or maintain a subsidy (in the absence of a specific commitment) does not constitute a breach of the provisions set out in Chapter 8 (Article 8.9(2)).
• The fair and equitable treatment standard is exhaustive in scope (although that scope is subject to review), and in its application the tribunal may take into account the notion of legitimate expectations. “Full protection and security” refers to a Party’s obligation relating to physical security only. (Article 8.10)
• The ISDS mechanism is not available with respect to the establishment of investments or with respect to claims arising from the national treatment and most-favoured-nation standards in relation to the establishment or acquisition of a covered investment.
• The CETA Joint Committee shall establish a 15-member tribunal (five members of which shall be nationals of Canada or other nationality as proposed by Canada, five members shall be nationals of a Member State of the EU or of other nationality as put forward by the EU and another five members shall be nationals of third countries, with each member to be appointed for a five-year term, renewable once) and an appellate tribunal of which the number of members remains to be determined by the CETA Joint Committee.
• Canada and the EU shall pursue with other trading partners the establishment of a multilateral investment tribunal and appellate mechanism upon the establishment of which the resolution of investment disputes will be transferred to it (Article 8.29).
• A claimant can only submit a claim to arbitration following the expiry of at least 180 days since the claimant’s submission of a request for consultations (Article 8.22(1)(b)). Consultations shall be held between the disputing investor and State party within 60 days of an investor’s request for consultations (Article 8.19).
• There is a limitation period, such that a request for consultations must be submitted within three years after the claimant first acquired knowledge of the relevant breach, or two years after a claimant ceases to pursue claims or proceedings before a tribunal or court under the law of a State party (but no later than 10 years after the date on which the claimant first acquired knowledge of the alleged breach) (Article 8.19(6)).
• The disputing parties may at any time agree to have recourse to mediation (Article 8.20).
• Claims can be subject to the World Bank’s ICSID Convention and Rules of Procedure for Arbitration Proceedings, the ICSID Additional Facility Rules, the UNCITRAL Arbitration Rules, or any other arbitration rules on agreement of the disputing parties (Article 8.23(2)).
• The claimant may suggest that a sole arbitrator hear the claim (Articles 8.23(5) and 8.27(9)).
• Where there is third party funding of claims, the disputing party benefiting from it shall disclose to the other disputing party and to the tribunal the name and address of the third party funder (Article 8.26(1)).
• An appellate tribunal will be established to review awards based on errors in the application or interpretation of applicable law, manifest errors in the appreciation of the facts (including an appreciation of relevant domestic law), and the grounds set out in Article 52(1) (a) to (e) of the ICSID Convention (Article 8.28(2)).
• Members of the tribunal shall refrain from acting as counsel or as party-appointed expert or witness in any pending or new investment dispute under this or any other international agreement (Article 8.30).
• The respondent may file an objection that a claim is manifestly without legal merit within 30 days after the constitution of the tribunal (Article 8.32(1)) or submit an objection that a claim is, as a matter of law, not a claim that can be made under Chapter 8 (Article 8.33).
• Transparency provisions incorporate, and expand on, the UNCITRAL Transparency Rules, including that hearings shall be open to the public (Article 8.36(5)).
• Other than in exceptional circumstances, tribunals shall order that the costs of the proceedings be borne by the unsuccessful disputing party (Article 8.39(5)).
• The tribunal shall issue its final award within 24 months of the date the claim is submitted pursuant to Article 8.23, and in the event of a delay the tribunal shall provide the disputing parties with reasons (Article 8.39(7)).
• Claims having the same question of law or fact in common and arising out of the same events or circumstances can be consolidated (Article 8.43).
• There will be a new Code of Conduct for members of the tribunal (Article 8.44(2)).

The full text of CETA is available here.

Addressing State concerns regarding ISDS

Chapter 8 takes account of current public concerns relating to ISDS, and particularly the concerns relating to the sovereign sphere of States. For example, Article 8.9 (as referred to above) appears to be a direct response to the high number of recent renewable energy claims resulting from States’ removal of subsidies in that sector. There is clear confirmation in Article 8.9 that the States have the “right to regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals, social or consumer protection or the promotion and protection of cultural diversity.”

Concerns regarding the transparency of ISDS are also addressed. The limitation period will also protect States from an open-ended risk of claims being brought under Chapter 8.

Addressing general concerns

Chapter 8 addresses current general concerns concerning the time and costs of dispute resolution proceedings. For example, the appointment of a sole arbitrator has the potential to reduce the parties’ costs of the arbitration substantially. The CETA Joint Committee shall consider rules aimed at reducing the financial burden on claimants who are natural persons or small and medium-sized enterprises.

Parties’ concerns regarding the often lengthy lapse of time from the submission of the claim to arbitration and the issue of a final award are addressed by the time-limit of 24 months (Article 8.39(7)), but it remains to be seen if this provision will reduce the overall duration of arbitration proceedings.

Conclusion

Chapter 8 of CETA reflects a carefully negotiated, balanced compromise between investor and State interests, while building on decades of investment arbitration jurisprudence and taking into account concerns relating to preserving public interest in sovereign decision-making. Chapter 8 also aims to improve the efficiency and accessibility of dispute resolution. Finally, CETA reflects the EU’s stated ambitions to establish a multilateral permanent investment court in lieu of the traditional ISDS mechanism found in existing bilateral investment treaties.