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 (“CJEU“), 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 (“EU“) law.

If the opinion is adhered to by the CJEU, it confirms the viability of the EU’s mooted Investment Court System (“ICS“) in terms of its co-existence with the EU legal order, and permits the EU to continue to pursue adoption of the ICS on a wider scale across all of the EU’s trade agreements.

Background

On 30 October 2016, Canada and the EU signed the CETA containing detailed provisions on trade and investment. One of CETA’s innovations is the creation of a Tribunal and an Appellate Tribunal and, in the longer term, a commitment to the establishment of a multilateral ICS which, in line with the Commission’s objectives to transform investment treaty arbitration into a court-like system, departs from several long-standing features of investment arbitration, including party appointed arbitrators and the absence of an appeal mechanism.

On 6 September 2017, before ratifying CETA, Belgium asked the CJEU to assess the compatibility of this ICS with EU law (although it took no official position on the merits of its questions). Specifically, it asked questions covering three broad issues:

  1. The compatibility of the ICS with the principle that the CJEU has exclusive competence to provide the definitive interpretation of EU law

Belgium observed that the ICS allows the CETA Tribunal to examine the compatibility of the provisions of secondary EU law with the relevant provisions of CETA. Given that the CETA Tribunal can interpret EU law, and that there is no express mechanism in CETA for a preliminary reference on a question of EU law being made to the CJEU, this could result in the CETA Tribunal making final awards of a binding nature on EU law, potentially undermining the exclusive jurisdiction of the CJEU to provide the definitive interpretation of EU law.

  1. The compatibility of the ICS with the principle of equal treatment and the effective application of EU law

Belgium observed that the ICS under CETA could be seen as providing for a preferential judicial process for Canadian investors. Canadian undertakings investing in the EU will be able to bring a dispute either before an internal court of the EU (relying on domestic law) or before the CETA Tribunal, whereas EU undertakings investing in the EU will not have that choice.

  1. The compatibility of the ICS with the right of access to an independent and impartial tribunal

Belgium observed that the ICS arguably makes access to the CETA Tribunal excessively difficult for small and medium-sized enterprises (because costs and fees are born by the parties and legal aid is not available); that the remuneration of tribunal members is partially dependent on the number of disputes brought by investors, thus encouraging the development of case law favourable to investors; and that the rules relating to the appointment and removal of members of the CETA Tribunal may not be consistent with the principles of independence and impartiality.

The Advocate General’s Opinion

  1. The compatibility of the ICS with the principle that the CJEU has exclusive competence to provide the definitive interpretation of EU law

Advocate General Bot opined that the ICS provisions of CETA did not undermine the principle that the CJEU has exclusive competence to provide the definitive interpretation of EU law.

The Advocate General distinguished the CJEU’s recent judgment in Achmea v Slovak Republic, in which the CJEU concluded that international arbitration under an intra-EU bilateral investment treaty was incompatible with EU law. The reasoning in Achmea was inapplicable to this case, according to the Advocate General, because:

  • underlying the reasoning in Achmea was the fact that two Member States had agreed to remove EU law from their own domestic courts’ jurisdiction to the detriment of the autonomy of the EU legal order which was contrary to the principles of mutual trust and sincere co-operation between Member States to ensure in their respective territories the application of EU law: the relationship between the Member States and Canada is not based on mutual trust and this is why the parties agree to reciprocal substantive and procedural protections;
  • the applicable law clause in the BIT in Achmea apparently gave the tribunal jurisdiction to hear and determine disputes relating to the “interpretation and application” of EU law, whereas the CETA Tribunal is restricted to application of the relevant provisions of CETA, as interpreted in accordance with international law. EU law can be taken into account by the CETA Tribunal only as a matter of fact.

The Advocate General opined that CETA’s negotiators had deliberately ensured that the treaty’s provisions interfered as little as possible with EU law, and provided sufficient guarantees to safeguard the role of the CJEU as the ultimate interpreter of EU law.

In particular, the Advocate General noted that whilst the CETA Tribunal can interpret EU law, it must follow the prevailing interpretation of domestic law of a Party by the courts or authorities of that Party, and the meaning it places on domestic law (including EU law) cannot bind the courts or authorities of a Party. He concluded, accordingly, that “the CETA Tribunal cannot therefore issue binding interpretations of EU law“. The award therefore is “binding between the disputing parties in respect of that particular case” and the CJEU will retain jurisdiction to give a definitive interpretation of EU law.

Other safeguards referenced by the Advocate General include his view that (1) the CETA Tribunal has a narrowly circumscribed jurisdiction, namely, to hear a claim where an investor has suffered loss (it cannot hear claims in the abstract); (2) the CETA Tribunal does not have the power to order the annulment of a measure which it deems contrary to the agreement or to require that it be brought into line with that agreement; (3) the CETA Tribunal is not authorised to rule on the division of powers between the EU and its Member States; (4) obvious errors by the CETA Tribunal regarding EU law can be corrected by the Appellate Tribunal as part of its review; and (5) the CETA Tribunal does not affect the role of EU national courts in ensuring the effective application of EU law, nor does it deprive them of their ability to make references for a preliminary ruling.

  1. The compatibility of the ICS with the principle of equal treatment

The Advocate General rejected the notion that the ICS infringes on the general principle of equal treatment in respect of access to the dispute settlement mechanism and dismissed the possibility that by virtue of that access a Canadian investor may evade the financial consequences of the application of EU law.

According to the Opinion, the comparison made by Belgium was ill-conceived: the situation of Canadian investors who invest in the EU (making an international investment) is not comparable with the situation of European investors who also invest in the EU (making an intra-EU investment). Canadian or European investors can be compared only in relation to the investments which they make in the territory of the other party, and in these circumstances both have access to the CETA Tribunal. On the basis of this comparison, all investors who are in a comparable situation under CETA are treated comparably and the principle of equal treatment is not undermined.

  1. The compatibility of the ICS with the right of access to an independent and impartial tribunal

The Advocate General also considered that the ICS did not undermine the right of access to an independent and impartial tribunal.

The Advocate General referred to the procedural safeguards in place to ensure access to the ICS by small and medium-sized enterprises, such as the ability to request that a sole Member of the Tribunal hear the case to keep costs down; the CETA Tribunal’s general discretion over costs; and the fact that the CETA Tribunal does not have exclusive jurisdiction over actions brought by investors – small and medium sized enterprises can still bring proceedings before domestic courts or tribunals where domestic law contains adequate standards of protection.

The Advocate General also dismissed concerns about the remuneration of CETA Tribunal members which Belgium had questioned as possibly undermining the right of access to an independent and impartial tribunal. There are two components to the remuneration of CETA Tribunal members, one of which is dependent on the volume and complexity of litigation brought, the other of which is fixed. The Advocate General considered that this system was appropriate for the hybrid nature of the ICS and the fact that CETA Tribunal members will initially not be working on a full-time basis.

Finally, the Advocate General stated that CETA has specific rules in place regarding the appointment and termination of CETA Tribunal members to guarantee their independence and impartiality, and that these rules are appropriate to the specific characteristics of the ICS’s hybrid nature.

Comment

Advocate General Bot’s opinion is the latest development in a rapidly changing investment treaty arbitration landscape. In terms of outcome, it is consistent with the Commission’s policy of reforming investor state treaty dispute resolution clauses to introduce permanent standing bodies (such as those also found in the EU trade agreements with Mexico and Vietnam). The Advocate General’s opinion is not determinative – the CJEU’s judgment is anticipated later this year. In practice the CJEU usually follows the opinions of the Advocates General, although it recently departed from the opinion of Advocate General Wathelet in Achmea.

The Advocate General’s opinion may be seen as generally supporting the EU’s move away from the ad hoc system of investment arbitration. However, whilst the opinion attempts to navigate the areas of tension in this particular area of EU law and policy, the reasoning raises a number of questions. In particular, the opinion does not address the question of enforcement, which is notable in the context of the Advocate General’s repeated emphasis that an award would not bind the EU or its institutions or Member State courts as to its findings on EU law and that the ICS would not preclude the courts of Member States from making a preliminary reference to the CJEU after an award has been made. It is not clear how this position can be reconciled with the EU’s position taken to date in UNCITRAL Working Group III that awards of a multilateral investment court should not be subject to domestic review. It will be interesting to observe how the EU pursues its multilateral ICS agenda in the light of the Advocate General’s pronouncements, as we await the CJEU’s ruling.

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
Email | Profile
+44 20 7466 2852
Hannah Ambrose
Hannah Ambrose
Senior Associate
Email | Profile
+44 20 7466 7585
Vanessa Naish
Vanessa Naish
Professional Support Consultant
Email | Profile
+44 20 7466 2112
Rebecca Warder
Rebecca Warder
Professional Support Lawyer
Email
+44 20 7466 3418

Leave a Comment

Filed under EU, EU Law, Europe, Investment Arbitration, ISDS, ISDS Reform, Public International Law, Structuring Investments, Treaty negotiation, interpretation and impact

Leave a Reply

Your email address will not be published. Required fields are marked *