On 30 April 2019, the Court of Justice of the European Union (“CJEU“) confirmed that the mechanism for the settlement of disputes between investors and states set out in the Comprehensive Economic and Trade Agreement between the EU and Canada (“CETA“) was compatible with EU law. This confirms the Attorney General’s opinion discussed here.

The CJEU’s opinion will lend support to the EU’s effort to develop the tribunals established under trade agreements like CETA into a permanent and multilateral Investment Court System (“ICS“) in future.

Background

On 30 October 2016, Canada and the EU signed CETA, which contains detailed provisions on trade and investment. CETA also establishes a Tribunal and Appellate Tribunal system (the “CETA Tribunals“) which constitutes a departure from traditional investment arbitration, characterised by party-appointed arbitrators and the absence of an appeal mechanism. CETA further contains a commitment, in the longer term, to develop the tribunal system into a multilateral ICS.

Before ratifying CETA, as discussed here, Belgium asked the CJEU to assess the compatibility of this new dispute resolution mechanism with EU law and, in particular, the compatibility of the CETA Tribunals with:

  • the autonomy of the EU legal order;
  • the principle of equal treatment and the effective application of EU law; and
  • the right of access to an independent and impartial tribunal.

On 29 January 2019, the Advocate General submitted its opinion, now confirmed by the CJEU, that CETA’s dispute resolution mechanism was compatible with the EU’s legal order in all three aspects.

The CJEU’s opinion

The compatibility of the CETA Tribunals with the autonomy of the EU legal order

First, the CJEU dismissed the concern that CETA might undermine the CJEU’s exclusive competence to interpret EU law. The CJEU concluded that CETA did not give the CETA Tribunals – institutions outside the EU judicial system – any jurisdiction to interpret and apply rules of EU law other than the provisions of CETA itself. The CETA Tribunals may be asked to examine EU law and take it into account; however, such an examination did not require the interpretation of EU law. The CJEU considered that this distinguished CETA’s dispute resolution procedure from the situation considered in the CJEU’s Achmea decision.

As it considered that the CETA Tribunals will not interpret EU law, the CJEU did not consider that CETA Tribunals required a mechanism to make preliminary references to the CJEU in order to ensure the uniform application of EU law.

The CJEU also considered that it retained another competence: where a Canadian investor brings a claim under CETA, the CJEU (rather than the CETA Tribunals) shall decide whether an EU member state or the EU itself should be the respondent in the claim.

Second, the CJEU concluded that the CETA Tribunals did not prevent the EU institutions from acting in accordance with the EU constitutional framework. Belgium had raised the concern that the autonomy of the EU’s democratic institutions might be threatened by CETA Tribunals weighing the freedom of investors to conduct business against public interests enshrined in the EU treaties. The CJEU considered that, as set out by the Advocate General, CETA ensured that the standards and protections adopted by the EU shall not be lowered. CETA Tribunals were not given any jurisdiction to call into question the democratic choices made in the EU relating to the level of protection of, for example, public order and safety, health and life of humans and animals, food safety, the environment and, equally, fundamental rights. Nor did the CETA Tribunals have the power to annul contested EU measures. The CJEU therefore considered that the EU institutions’ actions were unhindered.

The compatibility of the CETA Tribunals with the principle of equal treatment and the effective application of EU law

The CJEU was asked to consider whether CETA put Canadian investors at an advantage by offering them the choice to use the CETA dispute resolution mechanism; a choice that EU investors investing in other EU member states did not have.

The CJEU agreed with the Advocate General’s reasoning that the principle of equal treatment contained in the EU’s Charter of Fundamental Rights was not undermined by CETA. The equal treatment principle only applied by reference to comparable situations. Belgium’s request incorrectly sought to compare Canadian investors in the EU (foreign investors) and EU investors in other EU member states (intra-EU investors). The equal treatment standard should instead be applied to Canadian companies investing in the EU and EU investors in Canada (both of which would be foreign investors). From this perspective, both investors had equivalent rights and were treated equally.

In response to a specific scenario raised by Belgium, the CJEU found that it was possible that the CETA Tribunals could, in exceptional circumstances, cancel a fine imposed on a Canadian investor in response to an infringement of EU competition law. However, this would only occur where the fine was invalidly applied. Again this did not put Canadian investors in a better position than their EU counterparts, as EU investors also had access to equivalent remedies against any invalidly imposed competition fines.

As EU law itself permitted annulment of competition fines, the CJEU concluded that any concern that CETA adversely affects the effectiveness of EU competition law was equally unfounded.

The compatibility of the CETA Tribunals with the right of access to an independent and impartial tribunal

Tribunals established by the EU under agreements like CETA need to be both independent and accessible. The CJEU found that the CETA Tribunals satisfied both criteria.

With regard to the CETA Tribunals’ independence, the CJEU emphasised that CETA Tribunal members will be chosen at random from a pool of candidates, removing the influence parties traditionally have on the composition of the tribunal in investor-state dispute resolution. The fact that the CETA Tribunal members’ remuneration depended in part on the CETA Tribunals’ case load was not considered to be a threat to impartiality either. The International Bar Association Guidelines on Conflicts of Interest in International Arbitration applied to the CETA Tribunals and, in the CJEU’s view, this ensured the CETA Tribunal members’ impartiality and regulated their removal where impartiality was threatened.

The CETA Tribunals were also sufficiently autonomous: for example, the appointment and removal of tribunal members was regulated by CETA itself. The CETA Joint Committee (consisting of EU and Canadian representatives) had a power to amend the remuneration structure for the tribunal members and to interpret provisions of CETA itself which were binding on the CETA Tribunals. However, the CJEU found this did not allow the EU (or Canada, for that matter) to influence any pending disputes and therefore did not threaten the CETA Tribunal’s autonomy.

Access to the CETA Tribunals, lastly, was also ensured, including for small and medium-sized enterprises. Belgium had raised the concern that legal costs and fees, which are borne by the parties, might restrict access for smaller enterprises. But as the EU had made the conclusion of CETA dependent on a commitment to guarantee effective access to the tribunals, in the CJEU’s view, CETA was compatible with EU law in this respect as well.

Comment

The importance of the CJEU’s confirmation that the dispute resolution procedure under CETA is compatible with EU law extends beyond CETA itself. Similar dispute resolution provisions have been included in the EU’s trade agreements with Mexico and Vietnam and it is the EU Commission’s strategy to include ICS provisions in future trade agreements as well.

The present CJEU opinion can therefore be seen as supportive of the EU’s long-term strategy to move away from the traditional system of investment arbitration and towards a multilateral ICS in which disputes under all the EU’s trade agreements are resolved.

In order for this to succeed, the EU’s trade agreements will have to be compatible with the EU’s legal order. Against this background, the criteria set out in the CETA opinion can serve as a useful guideline for the EU’s future trade negotiations. Ensuring that other trade agreements satisfy the criteria specified by the CJEU is likely to be an important step towards establishing the ICS as an effective forum for all investor-state disputes involving the EU.

For further information, please contact Andrew Cannon, Partner, Iain Maxwell, Of Counsel, Vanessa Naish, Professional Support Consultant, Jerome Temme, Associate, or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852
Iain Maxwell
Iain Maxwell
Of Counsel
+44 20 7466 2646
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112
Jerome Temme
Jerome Temme
Associate
+44 20 7466 2607