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EU court adviser endorses ISDS in CETA

Sebastian Perry

29 January 2019

EU court adviser endorses ISDS in CETA

The Grand Chamber of the CJEU (Credit: CJEU website)

An advocate general of the Court of Justice of the European Union has advised that the investor-state dispute settlement provisions in the EU-Canada free trade agreement known as CETA are compatible with EU law.

In an opinion issued today, Advocate General Yves Bot said that the trade agreement’s ISDS mechanism – which provides for an investment court system rather than arbitration – does not adversely affect the autonomy of EU law or the principle that the CJEU has exclusive jurisdiction over the definitive interpretation of EU law.

Bot also said the CJEU’s ruling last year in the Achmea case on the incompatibility of intra-EU investment arbitration with EU law did not apply to the EU-Canada trade agreement.

The judges are now to begin their deliberations in the CETA case, with a ruling to come at a later date. Opinions of the CJEU’s advocates general are not binding on the court but are followed in a majority of cases.

The CJEU is considering the ISDS mechanism in the EU-Canada Comprehensive and Economic Trade Agreement (CETA) signed in October 2016, which provides for a standing tribunal of judges to hear claims by investors from the EU and Canada, along with an appeals tribunal. The provisions are a first step towards a permanent multilateral investment court, which the European Commission has been proposing since 2015 as a replacement for investor-state arbitration.

Belgium asked the CJEU in September 2017 to examine the CETA ISDS mechanism’s compliance with EU law as part of a deal to overcome opposition to the trade agreement’s ratification from the government of Wallonia, a French-speaking region of the country.

The court was asked to consider whether the provisions are compatible with the CJEU’s exclusive jurisdiction over the definitive interpretation of EU law, the general principle of equal treatment, the requirement that EU law is effective and the right of access to an independent and impartial tribunal.

Interest in the case has increased following the CJEU’s March 2018 ruling in Achmea that investor-state arbitration provisions in a bilateral investment treaty between EU member states violated the autonomy of EU law. Some commentators had suggested the reasoning in Achmea could be applied by extension to ISDS provisions in treaties between EU member states and third countries.  

Achmea doesn’t apply

In today’s opinion, Bot argues that the approach adopted by the CJEU to Achmea “cannot be transposed” to the examination of the investment court system in CETA because the underlying premises are different.

He notes that the CJEU found in Achmea that relations between EU member states are “governed by the principle of mutual trust in the observance of EU law”. By contrast, he says relations between Canada on the EU are not based on mutual trust – which is why the CETA parties sought in the trade agreement to define a standard of protections for their investors on a reciprocal basis.

Whereas the BIT at issue in the Achmea case appeared to give arbitral tribunals jurisdiction to determine disputes over the interpretation and application of EU law, Bot says the applicable law for CETA tribunals is exclusively that of the trade agreement as interpreted in accordance with international law. The domestic law of each CETA party can be taken into account by the CETA tribunal only as a matter of fact, and the meaning ascribed to domestic law is not binding on the courts or authorities of the defendant party.

The advocate general observes that the CJEU took care in the Achmea ruling to recall that an international agreement providing for the establishment of a court responsible for the interpretation of its provisions is “not in principle incompatible with EU law” – provided that the autonomy of the EU and its legal order is respected.  

Bot also considers there are sufficient safeguards to preserve the CJEU’s exclusive jurisdiction. He notes that the CETA tribunal has a “narrowly circumscribed” remit, in the event of a breach of the relevant provisions of the trade agreement, to grant compensation to investors suffering loss. The CETA tribunal cannot order the annulment of a measure that it deems contrary to CETA or require that the measure be brought into line with that agreement.

Further, he observes that the CETA tribunal is bound by the interpretation of EU law given by the CJEU and cannot impose a binding interpretation of that law within the EU legal order. In addition, CETA provides for a joint committee of the contracting states to adopt binding interpretations of the trade agreement; and provides an appeal mechanism.

Bot also notes that the bodies established by CETA’s ISDS provisions are not authorised to rule on the division of powers between the EU and its member states.

Further, the advocate general says the ISDS provisions do not affect the role of national courts of ensuring the application of EU law. National courts are not deprived of their status as “general law” courts within the EU legal order, including making references to the CJEU for a preliminary ruling; while the CJEU is not deprived of its power to reply to those courts.

The advocate general argues that the ISDS mechanism is entirely consistent with the EU’s action on the international stage by combining rules on the protection of investments and a specific dispute settlement mechanism with the express confirmation of the parties’ right to adopt legislation necessary to achieve legitimate objectives in the public interest, such as public health, safety, the environment and social protection.

Equal treatment and right of access not impaired

Bot also finds that the agreement does not infringe the general principle of equal treatment in respect of access to the ISDS mechanism, as the situation of Canadian investors who invest in the EU is not comparable with the situation of European investors who invest within their own economic area.

Procedural safeguards in CETA also ensure a sufficient level of protection of the right of access to an independent and impartial tribunal under the Charter of Fundamental Rights of the EU, he says. The trade agreement merely provides investors with an alternative method of dispute resolution that complements remedies offered by the contracting parties.  

Bot also points to provisions governing the remuneration scheme for the tribunal members – including a fixed component and a component dependent on the volume and complexity of investment disputes brought before them; and rules for their appointment and removal. He also noted CETA contains specific rules of ethics applicable to the judges.

Reactions

Former Liedekerke partner Nicolas Angelet in Brussels and Emilie Gonin of Doughty Street Chambers in London, who were part of the team that helped Wallonia draft the initial version of the CJEU request submitted by Belgium, say the advocate general’s “in-depth analysis demonstrates that the Walloon region and Belgium were justified in asking the CJEU to opine on these questions.” 

They add, “Whether or not the CJEU follows Bot’s analysis, the court’s opinion will reinforce legal certainty.”

Paschalis Paschalidis, a former référendaire at the CJEU, calls Bot’s opinion “a vote of confidence in international arbitration as an ISDS mechanism and a good omen for the establishment of an investment court system.”

“His approach is well balanced. He took into account not only the need to safeguard the autonomy of the EU legal system but also the interest of investors to have their disputes with states resolved in a neutral, independent and impartial forum. It can only be hoped that the CJEU will follow his approach.”

There have been less enthusiastic responses from some international arbitration practitioners, however.

K&L Gates partner Wojciech Sadowski in Warsaw says Bot’s legal analysis is “in many respects controversial, and it leaves unaddressed a number of key problems arising under EU law. The attempt to distinguish the CJEU’s reasoning in Achmea is unpersuasive.”

Julien Fouret, partner at Betto Seraglini in Paris, cautions that it “remains to be seen” what the final decision of the CJEU will be regarding CETA. He points out that in its Achmea ruling, the court diverged significantly from the advice of its advocate general Melchior Wathelet.

Nonetheless, Fouret says the opinion is “a clear indication that the EU wishes, even for treaties with third countries, to move closer to a judicial system. This appears to be the end of investment arbitration as we understand it today when involving an EU member state and imposes a potential nebula of permanent judicial bodies for each free trade agreement or bilateral investment treaty.”

While the EU has included similar investment court provisions in a agreements with Vietnam and Singapore, the Commission ultimately envisages that such bilateral mechanisms will be replaced by a permanent multilateral investment court.

To that end, the EU recently submitted a working paper on its multilateral court proposal to UNCITRAL Working Group III, which has been tasked with examining reform of ISDS. The EU argues its proposal is the only one that can effectively address concerns about ISDS that the working group has identified as requiring reform, such as lack of consistency in decision making and perceived conflicts of interest on the part of arbitrators

The working group has invited papers from all participating countries on concrete proposals for reform ahead of its next meeting in New York from 1 to 5 April.

EU member states agreed this month to terminate all their intra-EU BITs by 6 December to comply with the ruling in Achmea. A majority of the member states also signed a declaration that Achmea applies to intra-EU investment arbitration under the Energy Charter Treaty.

Before the Court of Justice of the European Union

Request for an opinion submitted by the Kingdom of Belgium pursuant to Article 218(11) TFEU (Opinion 1/17)

Representing Belgium

  • C Pochet, L Van den Broeck and M Jacobs, agents

Representing Wallonia (not a party to the proceedingss)

  • Liedekerke Wolters Waelbroeck Kirkpatrick

Nicolas Angelet (no longer with the firm) and Maria-Clara Van den Bossche

  •  Emilie Gonin of Doughty Street Chambers

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