CJEU Advocate General approves Investment Court System in EU-Canada free trade agreement

Europe

On 29 January 2019, Advocate General Yves Bot of the EU Court of Justice (CJEU) published his opinion that the investor-state dispute settlement mechanism of the EU-Canada Comprehensive Economic and Trade Agreement (CETA) is compatible with EU law. The CJEU is expected to issue its opinion on the question within the coming months.

Background: CETA provides for Investment Court System

With the increasing public criticism voiced against investor-state arbitration in recent years, the EU Commission has put itself at the forefront of reforming the investor-state dispute settlement system. These reform efforts have centered on the Commission’s suggestion to replace investor-state arbitration with a public Investment Court System (ICS).

First presented in 2015 during the currently-stalled negotiations of the EU-US Transatlantic Trade and Investment Partnership (TTIP), the ICS was added to the final CETA text at the last minute in February 2016, after there had already been agreement on a draft investment chapter, which included “traditional” investor-state arbitration. By replacing arbitrators appointed by the parties of the individual dispute with judges who are appointed upfront for a five-year term by the CETA state parties and the EU and by introducing a two-tiered court system, the ICS marks a significant departure from investor-state arbitration. Apart from the appointment of permanent judges and the right to appeal, the most salient points include strict rules on incompatibility with other professional functions, assignment of judges on a rotation basis and the public nature of proceedings and submissions.

In October 2016, CETA negotiations were deadlocked right before the scheduled signing ceremony because the hands of the Belgium’s federal government were tied due to the Wallonia region’s refusal to give its approval. Under Belgian constitutional law, all six regional parliaments are required to approve international agreements that concern their constitutional rights. The last-minute compromise brokered by Belgium’s federal government stipulated that Belgium would seek an opinion from the CJEU regarding the compatibility of the ICS provisions with the EU Treaties. On 30 October 2016, Canada and the EU as well as its member states were able to sign CETA.

On 7 September 2017, Belgium requested the CJEU’s opinion pursuant to Article 218(11) TFEU. Under this provision, each member state may seek the opinion of the CJEU whether an envisaged agreement between the EU and a third country is compatible with the EU Treaties. Crucially, if the CJEU issues an adverse opinion, the agreement may not enter into force unless it is amended, or the EU Treaties are revised.

Advocate General: Investment Court System is compatible with EU law

Upon Belgium’s request, Advocate General Bot examined the compatibility of the ICS with the EU Treaties from four different angles.

First, he found the ICS to be compatible with the principle of autonomy of EU law and the CJEU’s exclusive jurisdiction over the definitive interpretation of EU law. The Advocate General emphasized that reciprocity is one of the guiding principles of EU external relations. While a distinct dispute settlement procedure for foreign investors might appear redundant from the EU’s perspective (given the high level of protection accorded by EU law), the Advocate General reasoned that the EU would also need to take into account a potential asymmetry of investment protection in third countries. This may necessitate the negotiation of a reciprocal standard of substantive and procedural protection.

Regarding the CJEU’s exclusive jurisdiction, the Advocate General found that the CETA Tribunal may consider EU law only as a matter of fact when ruling on its consistency with substantive rights under CETA, and that it would be bound by the CJEU's interpretation of EU law. Further safeguards ensuring the CJEU’s exclusive jurisdiction include the narrowly circumscribed jurisdiction of CETA Tribunals that does not allow for the annulment or rectification of measures, the binding interpretations of the CETA Joint Committee regarding specific provisions of the agreement, and the ICS appeal procedure.

The Advocate General stated that there was a distinction between the present request for an opinion and the CJEU’s ruling in the Achmea case. He argued that while the CJEU found that bilateral investment treaties between EU member states jeopardize the EU legal principle of mutual trust, this principle does not apply in the EU’s relations with third countries.

Second, the Advocate General held that granting Canadian investors preferential access to the ICS did not violate the principle of equal treatment under EU law. According to the Advocate General, Canadian investors investing in a member state cannot be compared to Europeans investing in their own economic area.

Third, the Advocate General concluded that the ICS did not infringe on the principle of effectiveness of EU law by allowing a CETA Tribunal to nullify the effects of a fine imposed by the Commission or by a member state's competition authority. According to the Advocate General, CETA’s detailed provisions on the right to regulate sufficiently minimize the risk of a CETA Tribunal being called to rule on such a fine without exceeding its jurisdiction.

Fourth, the ICS does not impede the right to an independent and impartial tribunal guaranteed by the EU's Charter of Fundamental Rights. Addressing Belgium’s observation that CETA may make access to the ICS excessively difficult for small and medium-sized enterprises, the Advocate General argued that the ICS only provides an additional remedy that complements but does not replace access to state courts. Moreover, the Advocate General held that the dual remuneration system for ICS judges, consisting of a fixed and a variable component, does not affect their independence and impartiality. Finally, ethic rules as well as appointment and removal procedures for ICS judges guarantee an adequate level of protection.

CJEU opinion on CETA Investment Court System will also affect other EU free trade agreements

General Advocate Bot’s opinion that CETA's dispute resolution mechanism is compatible with EU law supports the EU Commission’s efforts to reform investor-state dispute settlement. But how will the CJEU decide?

The CJEU often follows the recommendations of its Advocate General – the Achmea ruling being a prominent exception. Yet in that decision, the CJEU stated that it is not in principle incompatible with EU law for the EU to conclude an international agreement that establishes a court whose decisions are binding on its institutions, including the CJEU itself. With this obiter dictum (or passing statement), the CJEU may have alluded to the ICS.

In the unlikely event that the CJEU were to find CETA’s dispute settlement provisions to be in violation of EU law, the Commission’s reform efforts would suffer a heavy setback. Such a ruling would further raise the question: would the CJEU also consider existing bilateral investment treaties concluded between EU member states and third countries, which do not contain CETA’s additional safeguards to ensure the CJEU’s exclusive jurisdiction, a violation of EU law and therefore invalid?

With the fate of the ICS in the hands of the CJEU, the Court’s decision is being eagerly awaited. It will have consequences far beyond CETA's dispute settlement mechanism, given that the EU-Singapore, the EU-Vietnam and a draft of the EU-Mexico free trade agreements incorporate the ICS in equal or similar terms.

Future of CETA Investment Court System remains uncertain

Irrespective of the CJEU’s ruling, the future of the CETA Investment Court System appears uncertain for two more reasons. Firstly, even a positive ruling by the CJEU will not immediately render the ICS operational under CETA since, as of this date, only twelve member states have ratified the agreement and the ICS provisions are not provisionally applicable.

Secondly, open questions remain regarding the practical viability of the ICS. With regard to judicial qualifications, CETA requires that judges possess the qualifications required in their respective countries for appointment to judicial office, or be jurists of recognized competence, and that they have demonstrated expertise in public international law. Furthermore, it is desirable that they have expertise in international investment law, in international trade law and the resolution of disputes arising under international investment or international trade agreements. Only a small number of jurists will fulfil these requirements. At the same time, judges are required to abstain from acting as counsel or expert in investment disputes. It appears doubtful whether the CETA state parties will succeed in recruiting a sufficient number of judges with this required and desired expertise who are willing to give up on counsel and expert work within reasonable time. Another open issue pertains to the enforcement of awards rendered by CETA Tribunals in cases where the claimant opts for proceedings under the ICSID Convention. By introducing an appeal instance, CETA deviates from key provisions of the ICSID Convention. This raises the question whether an award rendered by a CETA Tribunal may benefit from the ICSID Convention's simplified enforcement mechanism.

EU Commission aims at establishing multilateral investment court

In the long term, the EU Commission will continue to work towards establishing a multilateral investment court. On 18 January 2019, the EU Commission submitted two working papers to the UN Commission on International Trade Law (UNCITRAL) setting out its plans in more detail. On the road to a multilateral investment court, the EU Commission will likely have to overcome more obstacles. Its success will depend on whether the EU Commission succeeds in getting a sufficient number of states behind its plans. In light of recent developments, changes to the current system of investor-state arbitration are almost certain. It remains to be seen, however, where exactly that journey will take us.

For more information on foreign investment protection and investor-state dispute settlement, please contact one of our CMS experts.