Don’t Lead with Your Chin! If Member States continue with the ratification of CETA, they violate European Union law

By Christina Eckes

 After last week’s Achmea ruling of the Court of Justice (CJEU) Member States can no longer legally go ahead with ratifying CETA – the mixed Free Trade Agreement that the EU and its Member States agreed with Canada. Achmea casts serious doubts on the legality of CETA’s investment chapter, which allows investors from one Party to submit to an arbitral tribunal a claim that the other Party has breached an obligation under CETA. By simply going ahead with the ratification, they violate the principle of loyalty under European Union law.

On 6 March, the CJEU declared in its Achmea ruling that the investor-state-dispute-settlement (ISDS) mechanism in the bilateral investment treaty between the Netherlands and Slovakia (NL-SK-BIT) as incompatible with EU law. A request by Belgium is pending before the CJEU asking for clarification on the legality of the new Investor Court System in CETA (Opinion 1/17). Achmea is a clear indication that the CJEU in Opinion 1/17 is likely to find also the Investor Court System in CETA problematic for the autonomy of EU law.

No general obligation exists for Member States to halt national ratification of mixed agreements when their compatibility with EU is questioned before the CJEU. Yet, CETA is different. The clear indication of incompatibility in Achmea imposes an obligation on national Parliaments to halt the CETA ratification process and wait for Opinion 1/17.

Member States are obliged to protect the EU’s unity in international representation.

 EU loyalty requires that Member States amongst others ‘facilitate the achievement of the Union’s tasks and refrain from any measure which could jeopardise the attainment of the Union’s objectives.’ In external relations, they are obliged not to undermine the EU’s external actions and ensure unity in international representation.[1] Obligations flowing from EU loyalty also stretch to and are arguably all the more necessary where the power to conclude an international agreement lies (solely) with the Member States.[2] Furthermore, EU loyalty covers not just the present state of EU law but also ‘the foreseeable future development of EU law’ and should hence be interpreted as requiring certain actions or omissions in the present in order to avoid a potential future conflict between international legal obligations and EU law.[3] It is reflected not only in the general provision on sincere cooperation, but also in several specific Treaty provisions, such as Member States’ duty to re-negotiate or even denounce prior international agreements. Under specific and very limited circumstances, this duty can even require taking measures to re-negotiate an agreement in order to avoid potential future incompatibles.

The very procedure that Belgium used to address its questions about CETA to the CJEU is meant to allow the Court to review the compatibility of envisaged EU international agreements with EU law before they enter into force in order to avoid undesirable external consequences, such as international responsibility. CETA is a so-called mixed agreement, i.e. an agreement concluded by the EU and its Member States together. Mixed agreements require ratification by all Member States and conclusion by the EU. Requesting the CJEU to give an opinion does not halt the process of conclusion by the EU per se.[4] Hence, if all Member States ratify and the EU concludes CETA, the Court would no longer be able to give an opinion on its compatibility with EU law because CETA would no longer be an ‘envisaged agreement’, but already in force. In practice, Wallonia – if it does not change its position with the new government – and Slovenia have declared that they will wait for the Court’s Opinion. However, if Member States continue to ratify CETA despite the clear warning sign in Achmea and the CJEU then finds the Investor Court System to threaten the autonomy of EU law, this is an open display of disregard for the pending opinion request, as well as a display of a lack of unity in external representation. Achmea case is a timely and open indication of serious risk that the CJEU considers the Investor Court System in CETA as incompatible with EU law. An indication that Member States cannot ignore.

Can Achmea really be read as an indication that the Investor Court System in CETA is also problematic for the autonomy of the EU legal order?

Two arguments are presented to distinguish the Investment Court System in CETA from the ISDS in Achmea: First, CETA contains a new modernized form of ISDS possibility, an Investment Court System, which meets higher rule of law standards, in particular by improving the internal coherence of investment law and the independence of arbitrators, as well as by reducing the private autonomy bias in the system. This is true as such, but the reasons for which the CJEU declared the ISDS in Achmea incompatible with EU law also apply to CETA. The CJEU introduced its ruling with 8 paragraphs of principled considerations on the autonomy of the EU legal order before turning to the questions on the compatibility of the ISDS mechanism. The autonomy of the EU law, referred to by the CJEU as justified ‘by the essential characteristics of the EU and its law’ (Achmea, para 33), is what makes EU law a legal order. Only the autonomous character of EU law, i.e. self-referential nature, not depending for its validity and interpretation on national and international law, vests it with a constitutional character and the ability to ensure the effectiveness and uniform application of EU law.

The Court then found the ISDS in Achmea to go against that autonomy. This is in line with its settled case law that EU participation in international dispute settlement mechanisms, while it remains possible as a matter of principle, may threaten the very nature and existence of the EU as an autonomous legal order. Most well-known of this line of case law is the Court’s rejection of the draft agreement on EU accession to the European Convention on Human Rights in 2014. The autonomy of the EU legal order can only be preserved by a judicial system that is capable to ensure the consistency and interpretation of EU law (Achmea, para 35). The whole system is undermined if disputes could be removed from the EU judicial system by taking them to arbitral tribunals, which do not form part of the EU judicial system and consequently cannot ask preliminary questions to the CJEU (paras 50-52). In particular the arbitration mechanism specifically interprets EU law, as the arbitration tribunal in Achmea did when it dealt with Slovakia’s objection that Article 8 of the NL-SK BIT is incompatible with EU Law (see pp 68-72). These fundamental concerns of the CJEU seem to apply in the same way to the new Investment Court System under CETA.

Second, the Court has ruled in Achmea on a bilateral investment agreement between two EU Member States and CETA is a Free Trade Agreement between the EU and all 28 Member States as one party and a third country as the other. If anything, this makes the situation more problematic. The CJEU rejected in Achmea that an arbitral tribunal established under an international agreement between two Member States could be considered part of the judicial system of the EU (Achmea, para 45). The same conclusion applies even more obviously to an arbitral tribunal established in a multilateral agreement involving a third country.

Achmea made apparent the tangible probability that the Court finds fault with CETA in Opinion 1/17. The Court’s reasoning in Achmea confirms that the threat to the autonomy is not averted by the CETA provision that aligns the interpretation of EU law by the arbitral tribunal to the ‘prevailing interpretation’ of the CJEU and excludes that the CJEU is bound by the tribunal’s interpretations.[5]

In the light of the foreseeable risk that CJEU declares the CETA investment chapter to be capable of undermining the autonomy of the EU legal order, Member States are required by the principle of EU loyalty to halt ratification in order to demonstrate a uniform position as one Party, together with the EU and the other Member States, on the international plane in general and vis-à-vis Canada in particular.

[1] E.g.: Case C-266/03, Commission v Luxemburg [2005] EU:C:2005:341, para 60; Case C-433/03, Commission v Germany [2005] EU:C:2005:462, para 66.

[2] Opinion 1/13 [2014] EU:C:2014:2292, View of AG Jääskinen, para 99.

[3] Ibid, para 100.

[4] See Opinion 3/94, Bananas agreement, EU:C:1995:436, para 23.

[5] Article 8.31 CETA; nearly identical: Section 3, Article 16(2) of the EU-Vietnam Free Trade Agreement.