Investment Court System in CETA to be judged by the ECJ

By Laurens Ankersmit

Last Thursday, the leaders of the Belgian federal government and the regional and community governments reached a compromise deal  over the EU-Canada Comprehensive Economic and Trade Agreement (CETA). One of the key outcomes is that the Belgian federal government will seek the Opinion of the European Court of Justice on the compatibility of the Investment Court System (ICS) in Chapter Eight of CETA with the Treaties. As soon as the Belgian federal government makes the request for an Opinion, the Court will be able to express itself on this contentious legal issue. In this post, I will provide some background on the origins of the Walloon request before explaining why ICS could potentially pose a legal problem for the EU.


Wallonia’s longstanding resistance against CETA and the resolution of 25 April of 2016

To insiders, the resistance put up by Wallonia in particular should have been no surprise. Over the past few years, the Walloon and Brussels parliaments have had extensive debates on the merits of CETA and have been increasingly critical of the deal. One of the main and more principled sources of opposition was the inclusion of ICS in CETA, a judicial mechanism that allows foreign investors to sue governments over a breach of investor rights contained in the agreement.

In the Walloon parliament this resulted in the adoption of a resolution on the 25th of April of this year (6 months ago) listing the key problems Wallonia has in relation to CETA. In that resolution the very first request by the Walloon parliament was to ask the Belgian federal government:

de solliciter l’avis de la Cour de justice européenne (CJE) sur la compatibilité de l’accord avec les Traités  européens  sur  la  base  de  l’article  218  (11)  du TFUE  pour  éviter  qu’un  accord  incompatible  avec  les Traités européens soit conclu et de ne pas procéder à la ratification de cet accord tant que la CJE ne s’est pas prononcée.”

In other words, the Walloon parliament wanted to know whether ICS is compatible with the EU Treaties, and asked the Belgian federal government to make use of the procedure of Article 218 (11) TFEU to request the CJEU’s opinion on the issue. In the words of the Court, that procedure ‘has the aim of forestalling complications which would result from legal disputes concerning the compatibility with the Treaties of international agreements binding upon the European Union’. In particular, the advantage of the procedure was to avoid ‘serious difficulties’ for both the EU internally and for third parties that would result from a successful challenge of the agreement after its entery into force (paras. 47-48 Opinion 1/09).

Wallonia could not make this request itself, as this power is reserved to the federal level of the Belgian government. However, Belgium is in many ways a ‘little Europe’ as its regional governments need to authorize federal action at the international level in a number of fields, including trade. As a result, Wallonia had to broker a deal with the federal government of Belgium in exchange for authorising Belgium’s signature to CETA.

 


Is ICS compatible with the Treaties?

The Walloon request did not come out of the blue. The issue of the compatibility of Investor-State Dispute Settlement (ISDS) and ICS (a form of ISDS) with the Treaties has been a contentious issue among EU law insiders for a while. Recently 101 law professors objected to ICS in an open letter because ICS is

“in strong tension with the rule of law and  democratic  principles  enshrined  in  national  constitutions  and  European  law.  Additionally, [ICS is] likely to affect the autonomy of the European Union’s legal order, as the investment tribunals’ binding and enforceable decisions on state liability threaten the effective and uniform application of EU law.

An increasing number of academic contributions have also raised this issue (see here, here, here, here and here for instance). Even ISDS’s staunchest supporters have recognized that there is a serious legal issue when it comes to the compatibility of ISDS with EU law. The European Association of Judges (representing 44 national associations of judges) and the German Association of Judges (representing 16 0000 German judges and public prosecutors) have opposed ICS inter alia on the ground that the system might not be compatible with EU law.

Within the EU institutions and bodies, the compatibility of ISDS/ICS has clearly also been an issue. The European Parliament in its TTIP resolution of 8 July of last year called upon the Commission to ensure that the “jurisdiction of courts of the EU and of the Member States is respected.” In a praiseworthy feat of transparency, the opinion of the Legal Service of the European Parliament on the issue of compatibility was published this summer (see for a critical assessment of that opinion here).

The European Economic and Social Committee in an Opinion adopted on 27 May 2015 also stated that:

“[There] are considerable EU treaty-related and constitutional law concerns regarding the relations of ISDS ruling with the EU legal order. Private arbitration courts have the capacity to make rulings which do not comply with EU law or infringe the CFR [Charter of Fundamental Rights]. For this reason, the EESC feels that it is absolutely vital for compliance of ISDS with EU law to be checked by the ECJ in a formal procedure for requesting an opinion, before the competent institutions reach a decision and before the provisional entry into force of any IIAs, negotiated by the EC.”

The legal service of the European Commission has itself been busy fighting intra-EU bilateral investment treaties containing ISDS. In addition to a number of ongoing infringement proceedings, the legal service also wrote several amicus curiae briefs contesting the jurisdiction of the investment tribunals. In the Achmea case, for instance, the Commission wrote:

There are some provisions of the Dutch-Slovak BIT that raise fundamental questions regarding compatibility with EU law. Most prominent among these are the provisions of the BIT providing for an investor-State arbitral mechanism (set out in Art. 8), and the provisions of the BIT providing for an inter-State arbitral mechanism (set out in Art. 10). These provisions conflict with EU law on the exclusive competence of the EU court[s] for claims which involve EU law, even for claims where EU law would only partially be affected. The European Commission must therefore […] express its reservation with respect to the Arbitral Tribunal’s competence to arbitrate the claim brought before it by Eureko B.V.’ (see para. 193 of the award)


The autonomy of the EU legal order and the preliminary reference procedure as the keystone of Europe’s judicial system

 So what are the main legal issues underlying ICS and EU law? It is clear that the Treaties in principle permit international agreements providing for state-to-state dispute settlement between the EU and third countries (such as the WTO’s dispute settlement body). Such state-to-state dispute settlement mechanisms do not encroach on the powers of the ECJ, because TFEU Part Six, title 1, chapter 1, section 5 does not grant the EU courts the power to hear such disputes.

However, when it comes to claims by individuals involving questions of EU law, the situation is radically different. The preliminary reference procedure in article 267 TFEU gives the courts of the Member States and the European Court of Justice important powers to resolve such cases. In fact, the ECJ itself refers to this procedure as the ‘keystone’ of the EU’s judicial system. It is perhaps important to recall that Article 267 TFEU was central to the ECJ’s reasoning when it found that the Treaties constituted ‘a new legal order’ that gives individuals, not just the Member States, rights and obligations whose uniform interpretation the European Court of Justice oversees.

The ECJ has made clear in no uncertain terms that it has the exclusive power to give definitive interpretations of EU law and therefore ensure the uniform interpretation of EU law across Europe (See Opinion 2/13, paras. 244-248). However, as a fundamental purpose of ICS in CETA is to enable investors to challenge not only EU acts and decisions based on these acts, but also national acts which might involve EU law somehow, an ICS tribunal would have to interpret and give meaning to EU law. Similarly to the context of human rights law, ICS will therefore encroach on the powers of the EU courts to rule on questions of EU law. Furthermore, ICS in CETA does not require the exhaustion of domestic remedies, which would soften the risk of divergent interpretation as well as respect the powers of the courts of the Member States to hear claims by individuals involving questions of EU law. ICS in CETA also does not require prior involvement of the ECJ for questions of EU law faced by these ICS tribunals.


CETA’s safeguards

 To be sure, the Commission has implicitly admitted and sought to address this problem in CETA. In contrast to the EU – Singapore FTA, article 8.31 (2) CETA states that tribunals ‘may consider’ domestic law ‘as a matter of fact’. The provision continues by stating  that in ‘doing so, the Tribunal shall follow the prevailing interpretation given to the domestic law by the courts or authorities of that Party and any meaning given to domestic law by the Tribunal shall not be binding upon the courts or the authorities of that Party.’

 The question is whether these provisions are sufficient. For one, it is hard to see how law can be considered ‘as a matter of fact’ since law is a social construction. This approach likely derives from international law circles to make international law more acceptable to domestic legal systems. However, as CETA will become an integral part of the EU legal order this concept will find its way into EU law with potentially problematic consequences. What if the highest courts in the Member States no longer feel required to make preliminary references because they can consider EU law as a matter of fact, as these tribunals are allowed to do?

 For another, following the prevailing interpretation given to EU law, begs the question what happens if no such interpretation exists. CILFIT makes clear that this is anything but an exceptional situation.

Lastly, one may wonder whether stipulating that interpretation of domestic law is not binding is sufficient, considering the considerable financial consequences of the awards that are themselves binding and the fact that ICS contains an appeal mechanism, in which the appeal tribunal can further solidify a particular interpretation of EU law.

 


Potential negative consequences for the EU’s Internal market

 ICS in CETA also poses challenges for the proper functioning of the EU’s internal market rules. CETA’s ICS provides for a discriminatory remedy contrary to articles 45, 54, and 56 TFEU, because Canadian investors can bring claims on behalf of their EU incorporated companies. For example, a Canadian-owned Slovak company could be privileged over a Dutch company operating in Slovakia, because the Canadian-owned Slovak company would have recourse to an alternative form of dispute settlement not available to the Dutch company. Moreover, ICS awards can counteract national and EU provisions imposing financial burdens on individuals and corporations (including provisions on fees, taxes, penalties, fines and environmental liability). While the Commission’s view seems to differ, the problem goes beyond mere questions of paying back unlawfully granted state-aid.

An undertaking such as Intel could opt to challenge the Commission’s 1 billion Euro fine for its abuse of a dominant position on the microprocessors market, because it considers the Commission to have violated the principle of presumption of innocence and therefore a breach of due process under the ‘fair and equitable treatment’ standard.

The reader is referred to the academic sources cited above for a more elaborate discussion on the legal pitfalls of ISDS and ICs under EU law.


Conclusion

To me, one of the most astounding aspects of this story is that it took the defiance of the Walloons to get a preliminary check by the ECJ on whether ICS is legal in the first place. The Commission could have easily added the question of compatibility of ISDS in the EU-Singapore Free Trade Agreement to its request for an Opinion in Opinion 2/15. That opinion was requested in July last year, after the ECJ delivered its Opinion 2/13. It was obvious to informed Court watchers at the time that Opinion 2/13 raised serious questions regarding the compatibility of ISDS and ICS with the Treaties. Indeed, it is quite clear from an access to documents request made that the Commission’s legal service was well aware of the potential negative implications.

Instead of going for a ‘better safe than sorry’ approach (the explicit purpose of the 218 (11) TFEU procedure), the Commission took the political risk of negotiating and concluding an agreement that could potentially be annulled afterwards. That would have not only embarrassed the EU internationally, it could have resulted in serious constitutional law issues, because the EU and its Member States might have faced ICS awards binding under international law that were in conflict with EU law (not least because of CETA article 30.9 (2) ’s so-called ‘sunset clause’ allowing for claims up to 20 years after termination of the agreement). In that sense, it appears that Wallonia did Europe and its trade partners a huge favour by seeking clarity over this issue before the EU enters into binding commitments in international agreements containing investor-state dispute settlement.

 

18 comments

  1. edecapitani

    Very well written: I share each word and regret that the EP did’nt follow its Legal Service Opinion… I have re-blogged it also on the page of the FREE-Group blog.

  2. Szilard Gaspar-Szilagyi

    I have recently published an article on this in the Journal of World Investment and Trade. I look at the compatibility of the TTIP ICS Proposal (same as CETA) with EU law and my conclusion is that even though some of the safeguards are met, the CJEU would decide that it is not compatible with EU law. Do we know when will the Belgian Government request the Opinion? My article can be found here http://booksandjournals.brillonline.com/content/journals/10.1163/22119000-12340010;jsessionid=FMI67oBpTzXUKFHmHD4lx-6x.x-brill-live-02

  3. Szilard Gaspar-Szilagyi

    So interesting years await us and two possible consequences might flow from the CJEU’s opinion:

    a) if the opinion is negative then CETA cannot be ratified in this form and this will cause a huge reputational blow to the EU’s common commercial policy and might block the EU’s investment policy

    b) if the opinion is positive then NGOs, civil society and human rights lawyers will attack the Court arguing that the ECHR accession was found to be incompatible with EU law but a system which gives private investors a right of action under international agreements is compatible with EU law.

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