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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Event – The future of investment arbitration: have we reached a high water mark?

Herbert Smith Freehills and BIICL Investment Treaty Forum warmly invite you to attend ‘The Future of Investment Arbitration: Have We Reached a High Water Mark?’.

Date Wednesday 1 November 2017
Time 17:00: Registration
17:30: Panel discussion followed by drinks and networking
Venue Exchange House, Primrose Street, London, EC2A 2EG
Please click here to view map
Registration  Click here to register with the BIICL events team directly.
Please note there are a limited number of complimentary spaces.

 

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Belgium asks for the CJEU’s opinion on the compatibility of the Investment Court System with European Law

On 6 September 2017 the Belgian Deputy Prime Minister and Minister of Foreign Affairs Didier Reynders submitted a request from Belgium to the Court of Justice of the European Union for an opinion on the compatibility of the Investment Court System (ICS) with the European Treaties.  The Belgian government has made the request in recognition of the concerns raised by the regional assembly of Wallonia about the ICS when it was considering whether or not to sign the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada.

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Brexit—the future of state-to-state, investor-state and domestic dispute resolution

The Brexit White Paper

The much-anticipated Brexit White Paper, ‘The United Kingdom’s exit from and new partnership with the European Union’, was published on 2 February 2017. This post focuses on a subject that has to date received relatively little attention—what it has to say about the future of dispute resolution. In its Chapter 2 (‘Taking control of our own laws’), and Annex A, the White Paper contains perhaps a surprising amount on dispute resolution, in comparison to the text devoted to the other eleven of the UK government’s 12 stated principles.

In this blog post we review the White Paper with the aim of discerning so far as possible the potential future of dispute resolution for the UK. In particular, we consider how the UK government envisages, at this relatively early stage, that disputes will be resolved under new post-Brexit UK-EU agreements, and if and how UK businesses will be able to enforce their provisions. We also consider certain implications of the end to the Court of Justice of the European Union (CJEU)’s jurisdiction in the UK and the adoption of the acquis under the Great Repeal Bill.

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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

TTIP: 12th Round of Negotiations concludes, investment protection remains high on the agenda; plus newly published CETA text includes EU’s Investment Court System proposal

The 12th Round of Negotiation of the TTIP, which concluded last week in Brussels, provided the first opportunity for the negotiating parties to discuss the EU's proposed Investment Chapter. The EU's formal proposal for the Investment Chapter, which is discussed here, includes a two-tiered Investment Court System (ICS) for resolution of investor-state disputes.

As noted in our blog post here, it is no by means a foregone conclusion that the US will depart from the form of investor-state dispute settlement (ISDS) envisaged in its 2012 Model BIT and included in the recently concluded Trans-Pacific Partnership Agreement (the TPP).  The EU's Chief Negotiator has confirmed that the negotiators are "working on the basis of textual proposals from both sides", and identifying areas of convergence.  However, the method of resolving investor-state disputes has become such a controversial issue in Europe – including in the European Parliament – that the EU may find it difficult to retreat too far from its ICS proposal should the US decide to oppose it. 

Whilst the EU and US are likely to find some degree of common ground in terms of the desire on both sides to protect the right to regulate, ISDS may not be the only area of divergence.  For example, in the US Model BIT, it is confirmed that the concept of fair and equitable treatment does not require treatment in addition to or beyond that which is required by the customary international law minimum standard.  This language is replicated in the Investment Chapter of the TPP. In contrast, the EU's proposed text avoids linking the concept of Fair and Equitable Treatment to the customary international law minimum standard by limiting fair and equitable treatment to a closed list of types of behaviour.

The EU and US have stated that they aim to conclude negotiations by the end of 2016 and have planned two further negotiating rounds before the summer break.  Whilst the 12th Round has formally concluded, negotiators will reportedly remain in contact to progress matters with a view to producing a draft text by July in which only the most sensitive issues are subject to further negotiation.

In a further significant development published today, the EU and Canada have released the revised text of the Comprehensive Economic and Trade Agreement (CETA) – which was concluded in August 2014 – following the completion of a legal review process which has resulted in modification of the text of the Investment Chapter.  The revised CETA Investment Chapter will be continued in more detail in a later blog post. The most notable amendment is the removal of the previous text providing for investor-state arbitration. This has been replaced with the inclusion of a two-tier ICS, replicating the EU's TTIP proposal, and following the recent conclusion of similar provisions in the EU-Vietnam FTA.  The apparent acceptance by Canada of this new form of investor-state dispute resolution may assist the EU in its negotiations with the US on this point.

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

Isabelle Michou
Isabelle Michou
Partner
+33 1 53 57 74 04
Laurence Shore
Laurence Shore
Partner
+1 917 542 7807
Christian Leathley
Christian Leathley
Partner
+1 917 542 7812
Andrew Cannon
Andrew Cannon
Partner
+33 1 53 57 65 52
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112
Hannah Ambrose
Hannah Ambrose
Professional Support Consultant
+44 20 7466 7585

 

European Commission publishes draft investment chapter for the TTIP, including investment protection provisions and the establishment of an International Investment Court

On 16 September the European Commission published detailed draft proposals for the investment chapter in the proposed Transatlantic Trade and Investment Partnership treaty between the EU and the US (“TTIP”). The full text is available here. The chapter includes detailed investment protections and the establishment of an International Investment Court to resolve disputes under the TTIP. These proposals follow the Commission’s 5 May 2015 Concept Paper (discussed in our earlier blog here), which looked at reforming the ISDS system and proposed moving away from the current system of Investment Treaty arbitration.

The Commission has made it clear that this draft is for discussion and consideration within the EU before being put to the US as part of the TTIP text.

We explore and summarise below some of the key issues raised in the chapter.

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The future of investor-state arbitration

We live in interesting times for investment arbitration. There is wider public engagement with investment protection than there has ever been, prompted by the European Commission’s public consultation on the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US, and the agreement in principle of the text of the Comprehensive Economic Trade Agreement (CETA) between the EU and Canada.

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