CJEU CONFIRMS THAT CETA DISPUTE RESOLUTION PROVISION IS COMPATIBLE WITH EU LAW

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.

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Advocate General finds that CETA’s “Investment Court System” is compatible with EU law

One of the Advocates General to the Court of Justice of the European Union, Advocate General Bot, has issued an opinion confirming that the mechanism for the settlement of disputes between investors and states provided for in the Comprehensive Economic and Trade Agreement  between the EU and Canada (the CETA) is compatible with European Union law.

We discuss the content of the Advocate General’s opinion on our new blog piece, published on our Public International Law blog here.

For further information please contact Andrew Cannon, Partner, Hannah Ambrose, Senior Associate, Vanessa Naish, Professional Support Consultant, Rebecca Warder, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852
Hannah Ambrose
Hannah Ambrose
Senior Associate
+44 20 7466 7585
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112
Rebecca Warder
Rebecca Warder
Professional Support Lawyer
+44 20 7466 3418

CETA UPDATE: CETA is signed; Provisional application of CETA and Brexit; First government-to-government meeting to discuss establishing the multi-lateral investment court system

On 30 October 2016, the EU and Canada signed the Comprehensive Economic and Trade Agreement (the CETA).  As explained in our blog post here, the text of the CETA, which was originally agreed in 2014, was subjected to "legal scrubbing" in February 2016 which led to the inclusion, at the instigation of the EU, of an Investment Court System (an ICS) in place of the ad hoc investor-State arbitration provisions which had originally been included in CETA, and are included in roughly 3200 international investment agreements and other treaties. 

On 13 and 14 December 2016, the European Commission (the Commission) and the Canadian Government met in Geneva to engage in "exploratory discussions" with government representatives from around the world on the establishment of the multilateral ICS. It will have been the first meeting at government-to-government level on this initiative since the ICS was first proposed by the Commission in its Concept Paper of May 2015. For the multilateral ICS to succeed in the way envisioned by the Commission, broad global support will be required.

The CETA will be provisionally applied in advance of its ratification. However, as discussed below, provisional application will not extend to certain of the substantive investor protections, nor to the ICS. The exclusion of certain provisions from provisional application raises a number of questions as to how the agreement will operate in practice. 

Interestingly, whilst the UK has indicated that it intends to provisionally apply the CETA, the exclusion of the ICS from the provisional application has been described by the UK Government as its "main ask" of the EU in this context. The UK Government has also concluded that, even though CETA is being put forward as a "mixed agreement" and ratified by all the Member States, the UK will not automatically benefit from CETA's provisions after the UK leaves the EU.

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“Legal scrubbing” of the CETA results in adoption of an Investment Court System for resolving Investor-State disputes: a clear signal to the US for the TTIP negotiations?

On Friday 26 September 2014, after five years of negotiations, the EU and Canada released the agreed text for the Comprehensive Economic Trade Agreement (CETA). The content of that "agreed text" is commented upon in some detail in our earlier blog post here. It included enshrining the principle of "government autonomy" and further defining the standards of protection offered to investors. Notably, it retained investment arbitration as the method for resolving Investor-State disputes, but with additional procedural features such as full transparency of proceedings, a future code of conduct for arbitrators, costs assumptions and the ability to dismiss unfounded claims. It also stated that consideration would be given in future to the introduction of an appeal mechanism.

Consideration of an appeal mechanism has come about rather sooner than might have been expected. Since its agreement in principle in 2014, the CETA text has been undergoing legal review (also referred to by the Commission in its Press Release of 29 February 2016 as "legal scrubbing").

It became apparent during 2015 that, following the Commission's further work on the investment chapter for the TTIP (including a public consultation), the EU would be seeking some substantial changes during this legal review, aiming to bring the CETA in line with the Investment Court System (ICS) proposed in the EU-Vietnam FTA and the TTIP chapter (as formally presented to the US in November 2015). The process for agreeing these changes has not, however, been smooth. On 9 December 2015, Canada's Chief Negotiator for CETA, Steve Verheul, apparently ruled out the full inclusion in the CETA of the ICS proposed by the EU stating that "We have reached the balanced agreement that was supported by our leaders and I think that we have to be very cautious about revisiting things that have been agreed and endorsed".

Nearly four months later an agreement has now been reached, and Canada appears to have overcome its concerns regarding the EU's proposed ICS. The Press Release states that the revised CETA Investment Chapter "represents a clear break from the old Investor to State Dispute Settlement (ISDS) approach and demonstrates the shared determination of the EU and Canada to replace the current ISDS system with a new dispute settlement mechanism and move towards establishing a permanent multilateral investment court."  From a US perspective and the ongoing TTIP negotiations, it is also interesting to note the strong language of the Press Release that "this revised CETA text is also a clear signal of the EU’s intent to include this new proposal on investment in its negotiations with all partners".

So what does the revised text include? Drawing very strongly on the EU's proposal for the TTIP investment chapter, the CETA now envisages the establishment of a permanent Tribunal of 15 members (5 from the EU, 5 from Canada and 5 from other countries) to hear claims by investors for breach of investment protections standards. Under Article 8.30, as with the TTIP proposal, those Tribunal members "shall refrain from acting as counsel or as party-appointed expert or witness in any pending or new investment dispute" under the CETA or any other international agreement.

Unlike the TTIP proposal, the CETA does not yet annex a Code of Conduct for Tribunal members, although Article 8.44.2 provides for the Committee on Services and Investment to adopt such a code in future. In the meantime, the CETA relies upon the IBA Guidelines on Conflicts of Interest in International Arbitration to fulfil that function.

Clearly some elements of the Investment Court System, particularly surrounding the Appellate Tribunal, could not be agreed during the negotiations, and the EU and Canada have agreed to allow the CETA Joint Committee to resolve those outstanding issues (Article 8.28.7). These issues include:

  • The procedure for the initiation and conduct of appeals, including referring issues back to the Tribunal;
  • The procedure for filling Appellate Tribunal vacancies and constituting that Appellate Tribunal;
  • The number of Members of the Appellate Tribunal and their remuneration; and
  • The cost of appeals.

While these details have yet to be ironed out, it is certainly of note that the EU and Canada were able to reach agreement that some form of appellate structure was desirable, and that appeals would be allowed for errors in the application or interpretation of law as well as "manifest errors of fact" (Article 8.28.2). Also of note (particularly in the context of the TTIP negotiation) is Article 8.29 in which both the EU and Canada agree to pursue with other trading partners the establishment of a multilateral investment tribunal and appellate mechanism for the resolution of investment disputes and to amend the CETA to allow investment disputes to be decided under such multilateral mechanism once established. The Joint Statement confirms that working with other trading partners to pursue the establishment of a multilateral investment tribunal is "a project to which the EU and Canada are firmly committed".

We also see the impact of the development of the EU's position on the relationship between international law, ISDS and EU law, as seen throughout its amicus curiae submissions in intra-EU BIT cases. The text now "clarifies" that CETA will not prevent the EU from enforcing its laws on state aid and that a tribunal cannot decide on matters of EU or Member State law, nor can it interpret EU or Member State law in a way that could be binding on EU courts or EU governments.

Comment

We have been expecting some changes to the CETA. It has been apparent for some time that the Commission considered it very important to attempt to bring the CETA in line with the recently agreed text of the EU-Vietnam FTA and its TTIP proposal. Given the position of Canada back in December, however, the extent of changes to the ISDS provisions in the CETA are somewhat surprising, as is Canada's agreement to pursue the establishment of a multilateral investment tribunal and appellate mechanism with other trading partners. The fact that there are some important points still to be agreed, particularly on the Appellate Tribunal might suggest that that reaching that agreement has not been easy. The scope and breadth of the substantive changes reached through such a "legal review" process is perhaps also surprising.

What does this mean for the EU's negotiations on the TTIP with the US? As discussed in our earlier blog piece, the EU's Chief Negotiator has confirmed that the negotiators have been "working on the basis of textual proposals from both sides" during the 12th round of TTIP negotiations, and that ISDS has been a key area of discussion. The strength with which the EU is pursuing the ICS as the method of resolving investor-state disputes with other states may pose difficulties for its negotiations with the US.  The Commission has suggested that the changes introduced in the CETA "ensure that citizens can trust it to deliver fair and objective judgements", and that it offers a "fairer, more transparent, system". Given these statements, it may well be hard for the EU to justify a retreat to the more traditional ISDS arbitration favoured by the US and many other commentators, who have questioned both the fundamental need for, as well as some of the key features of, the proposed ICS.  Whether it will need to do so remains to be seen.

For further information, please contact Laurence Shore, Partner, Andrew Cannon, Partner, Isabelle Michou, Partner, Vanessa Naish, Professional Support Consultant, Hannah Ambrose, Professional Support Consultant or your usual Herbert Smith Freehills contact.

Laurence Shore
Laurence Shore
Partner
+1 917 542 7807
Andrew Cannon
Andrew Cannon
Partner
+33 1 53 57 65 52
Isabelle Michou
Isabelle Michou
Partner
+33 1 53 57 74 04
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112
Hannah Ambrose
Hannah Ambrose
Professional Support Consultant
+44 20 7466 7585

NAFTA tribunal considers issues of res judicata and the customary international law minimum standard of treatment

In Apotex Holdings Inc. and Apotex Inc. v United States of America, (ICSID Case No. ARB(AF)/12/1), a NAFTA chapter eleven tribunal considered issues of res judicata and the customary international law minimum standard of treatment.

In a case notable for its discussion of res judicata and the customary international law minimum standard of treatment, a NAFTA Chapter Eleven tribunal has allowed jurisdictional objections over a significant part of the alleged claims. With respect to the claimants’ remaining claims, the tribunal concluded, on the merits, that the US had not breached any of its commitments under international law.

The tribunal analysed international jurisprudence on res judicata in detail, applying a flexible approach to the question of when claims will be precluded by a prior decision. Following previous NAFTA awards, the award explored the complex relationship between the customary international law minimum standard and the guarantee of fair and equitable treatment and full protection and security contained in NAFTA Article 1105(1).

It did so in the context of the claimants’ novel claims about the status of due process among the protections required by the customary international law minimum standard of treatment. However, the tribunal left for a future tribunal to decide whether NAFTA’s guarantee of most-favoured-nation (MFN) treatment can be used to expand the substantive protections under Article 1105 – a critical topic, in the light of all NAFTA states’ unanimous opposition to that interpretation. (Apotex Holdings Inc. and Apotex Inc. v United States of America, (ICSID Case No. ARB(AF)/12/1).)

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Long-awaited EU-Canada trade agreement agreed – a blueprint to set the standard for future investment protection?

On Friday 26 September, after five years of negotiations, the EU and Canada agreed in principle to a text for the Comprehensive Economic Trade Agreement (CETA). It is certainly comprehensive, running to 1,500 pages. It is the first such agreement signed by the EU as part of its policy (since the Lisbon Treaty) of assuming competence for trade and investment from the individual Member States. Its contents have therefore been keenly anticipated as an indication of the tone of future agreements, particularly as regards investment protection and investor-state dispute resolution (ISDS) contained in Chapter X.

CETA’s provisions are comprehensive as regards both of these areas, but with significant caveats, largely mirroring the drafts that have so far been made public in the EU-US forthcoming agreement in the Transatlantic Trade and Investment Partnership (TTIP) (see our earlier post on the TTIP consultation here).

As its Preamble sets out, the agreement expressly recognizes “that the protection of investments… stimulates mutually beneficial business activity“. At the same time, it stresses principles of governmental autonomy (including enforcement of labour and environmental laws) which can in some circumstances limit the rights of the investor. It also points out the responsibility of businesses to respect “internationally recognized standards of corporate social responsibility“, bringing these soft law norms into the ambit of the agreement.

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Europe consults on investment protection and ISDS in the TTIP

The European Commission has launched a public consultation on its proposed approach to investment protection and investor-state dispute settlement (ISDS) provisions in the Transatlantic Trade and Investment Partnership (the TTIP).  The TTIP is a free trade agreement currently in negotiation between the United States and the European Union. Negotiations for the TTIP began in July 2013.

The Commission has described its approach as containing “a series of innovative elements that the EU proposes using as the basis for the TTIP negotiations” and stated that the key issue on which it is consulting is “whether the EU’s proposed approach for TTIP achieves the right balance between protecting investors and safeguarding the EU’s right and ability to regulate in the public interest”.

Whilst the EU is not consulting on a draft text of the TTIP, it has included as a reference text the investment protection and ISDS provisions in the Comprehensive Economic and Trade Agreement (the CETA), between the EU and Canada.

Whilst we are currently a long way from a signed agreement including investment protection and ISDS provisions, stakeholders may nonetheless want to take this opportunity to consider the ways in which the EU’s approach and the negotiations could impact upon them.  The European Commission’s Consultation can be found here and closes on 6 July 2014.

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