The Uncertain Future of the European Investment Court System

By Erin Biel and Mattie Wheeler

On October 30, 2016, the European Union (EU) and Canada signed the Comprehensive Economic and Trade Agreement (CETA), following seven years of trade talks[1] and ongoing resistance from regional parliaments in Belgium. Amidst a flurry of last-minute negotiations,[2] the Belgian federal government reached a four-page compromise deal, deemed an “addendum,” addressing many of the concerns raised by Belgium’s French-speaking region of Wallonia and other regional governments. The addendum requires, inter alia, that the Belgian government request an Opinion from the European Court of Justice (ECJ) on whether CETA’s Investment Court System (ICS) is compatible with the EU Treaties,[3] which give exclusive jurisdiction to EU Member State courts and, above all, the ECJ to decide challenges that concern EU law.[4] The ICS, a permanent and institutionalized double-instance tribunal, was meant to replace the traditional ad hoc investor-state dispute settlement (ISDS) model[5] that has received criticism for allegedly being too deferential to corporate interests. However, in the addendum, Wallonia, Brussels, and other aggrieved local governments aver that they will still not ratify the trade agreement if the ICS remains in its present form under Chapter 8 of CETA, the relevant investment chapter. While the addendum does not appear to have any legal effect, CETA has been put forward as a “mixed” agreement, meaning that the trade agreement will fully enter into force only after the European Council issues a decision with the consent of the European Parliament and once all 28 EU Member States ratify the agreement through their relevant national ratification procedures. While only the European Parliament’s approval is necessary for CETA to be provisionally applied, which would immediately eliminate most of the 99% of customs duties that the agreement removes overall, the ICS is not part of the provisional application of CETA.[6] Therefore, the fate of the investment chapter remains uncertain.

The Belgian compromise is only the latest chapter in a multi-year dispute between certain Belgian regional parliaments and the federal government over the merits of CETA. Earlier this year, the regional parliament of Wallonia adopted a resolution identifying its main grievances with the trade deal. Its very first demand was that the government “seek the opinion of the European Court of Justice (ECJ) on the compatibility of the agreement with the European Treaties on the basis of Article 218 (11) TFEU . . . .”[7] and not to ratify unless if the ECJ finds the agreement to be in accordance with the EU Treaties. Nor has Wallonia been the only pronounced skeptic of ISDS during CETA’s negotiations. Back in June 2011, the European Parliament issued a resolution on EU-Canada trade relations, stating that “given the highly developed legal systems of Canada and the EU, a state-to-state dispute settlement mechanism and the use of local judicial remedies are the most appropriate tools to address investment disputes.”[8] Then, in September 2015, the Commission presented a plan for a new Investment Court System to replace the traditional ISDS model “in all ongoing and future EU investment negotiations.” The EU quickly went on to present the United States with a proposal for such an investment court in the Transatlantic Trade and Investment Partnership (TTIP),[9] incorporated a similar model into its free trade agreement with Vietnam, and shortly thereafter announced that Canada had also agreed to “a clear break from the old [ISDS] approach,” demonstrating “the shared determination . . . to replace the current ISDS system with a new dispute settlement mechanism and move towards establishing a permanent multilateral investment court.”[10] On the same day that the Commission announced its agreement with Canada, it released the “legally scrubbed” CETA text, including the new provisions on the ICS.

Relevant CETA Provisions on the ICS

While CETA has now been signed (but not ratified) and the EU appears intent upon introducing the ICS into other trade agreements, a negative Opinion from the ECJ on the ICS’s legality could send the European Commission back to the drawing board. Most relevant for the ECJ’s evaluation will likely be Article 8.31 of CETA, which concerns the “Applicable Law and Interpretation” of the ICS. An ICS tribunal is to “apply [the] Agreement as interpreted in accordance with the Vienna Convention on the Law of Treaties, and other rules and principles of international law applicable between the Parties.” The text then explicitly states: “The Tribunal shall not have jurisdiction to determine the legality of a measure, alleged to constitute a breach of this Agreement, under the domestic law of the disputing Party.” Doubling down on an attempt at clarity, the text explains:

For greater certainty, in determining the consistency of a measure with this Agreement, the Tribunal may consider, as appropriate, the domestic law of the disputing Party as a matter of fact. In doing so, the Tribunal shall follow the prevailing interpretation given to the domestic law by the courts or authorities of that Party and any meaning given to domestic law by the Tribunal shall not be binding upon the courts or the authorities of that Party (emphasis added).[11]

CETA’s treatment of domestic law as fact is reiterated in Article 8.28 (2), which grants the Appellate Tribunal power to review an award based on, inter alia, “errors in the application or interpretation of applicable law” and “manifest errors in the appreciation of the facts, including the appreciation of relevant domestic law.”

Moreover, according to Article 8.39, Tribunal awards cannot result in the repeal of a measure in the EU, a Member State, or Canada; rather, only monetary damages are allowed, and they cannot be punitive. CETA’s investment chapter also prohibits parallel proceedings, with the consequence that investors pursuing a case before the ICS cannot at the same time seek remedies in domestic courts (Article 8.22) or other international tribunals (Article 8.24).

If Belgium requests an opinion from the ECJ, the ICS’s treatment of domestic law and its interaction with other jurisdictions will factor importantly into a decision on its compatibility with the EU Treaties. The following section explores the relevant EU law and precedent that may factor into the ECJ’s evaluation of the ICS’s legality.

Potential Legality of the ICS under EU Law

Under EU law, any international agreement into which the EU enters must be compatible with the EU constitutional framework: the Treaty on the European Union (TEU), the Treaty on the Functioning of the European Union (TFEU), and the Charter of Fundamental Rights.[12] Article 218 (11) TFEU provides a mechanism by which Member States may seek an opinion from the ECJ as to whether an envisaged international agreement would be compatible with EU law prior to its entry into force in order to avoid future complications.[13] In the past, the ECJ has clarified that “an international agreement providing for the creation of a court responsible for the interpretation of its provisions and whose decisions are binding on the institutions, including the Court of Justice, is not, in principle, incompatible with EU law.”[14] Indeed, the EU is a party to the WTO dispute settlement system, and the ECJ found the Court of Justice of the European Free Trade Association States (EFTA Court) to be compatible with EU law.[15] However, these judicial bodies differ crucially from the ICS. The WTO is a vehicle for state-to-state dispute settlement between the EU and third-party states; the EFTA Court hears individual claims, but operates outside the EU legal framework. Neither body has jurisdiction to rule on claims by individuals concerning the law of the EU and Member States.

 

The ECJ has previously found other international courts to be incompatible with the EU Treaties when those courts would have heard claims by individuals involving EU law.[16] The ECJ has focused on two areas of its exclusive jurisdiction upon which parallel judicial bodies may not infringe: the jurisdiction to definitively interpret EU law, and the jurisdiction to determine the division of competences between the EU and Member States. The Court notably emphasized these areas of exclusive jurisdiction in two important opinions sought via the Article 218 (11) process. The ECJ’s reasoning in both opinions raises significant concerns about the compatibility of ISDS—and in particular, CETA’s Investment Court System—with EU law.[17]

In Opinion 2/13, the ECJ held that the draft agreement providing for the accession of the EU to the European Convention on Human Rights (ECHR) was incompatible with the EU Treaties.  The Court determined that the European Court of Human Rights (ECtHR)—a court that hears claims by individuals and would be able to declare an EU measure in conflict with the ECHR—would unacceptably interfere with the ECJ’s exclusive jurisdiction to definitively interpret EU law.[18] The Opinion clarified, importantly, that the Court’s exclusive final jurisdiction applies not only to the determination of the validity of EU law but also to the interpretation of EU law.[19] The Court explained,  “If the Court of Justice were not allowed to provide the definitive interpretation of secondary law, and if the ECtHR, in considering whether that law is consistent with the ECHR, had itself to provide a particular interpretation from among the plausible options, there would most certainly be a breach of the principle that the Court of Justice has exclusive jurisdiction over the definitive interpretation of EU law.”[20] At present, the Treaty of Lisbon requires the EU to accede to the ECHR, but no final agreement on accession has yet been approved by the ECJ.

In its Opinion 1/09, the ECJ similarly found a draft agreement to establish an EU-wide patent court incompatible with the EU Treaties. The proposed agreement would have bestowed exclusive jurisdiction upon a new EU-wide patent court to hear individual claims over European patents and future EU patents.[21]  The ECJ found that the proposed patent court would have to interpret and apply EU patent law and other EU law concerning intellectual property, the internal market, and competition law without the involvement of the ECJ.[22]

Consistent with Opinions 2/13 and 1/09, the ECJ may find that CETA’s ICS unacceptably infringes upon its exclusive jurisdiction to interpret EU law. As a general matter, ISDS confers upon individual investors the ability to challenge EU or Member State actions as a breach of investment protections guaranteed by a treaty, and the situation would be no different under the ICS. If the EU or Member State took such actions on the basis of EU measures, an ICS tribunal might be required to interpret and thus give meaning to EU law. Indeed, a number of arbitral tribunals have found jurisdiction to apply and interpret EU law when it is relevant to the arbitration.[23] The ICS also does not envision any mechanism to refer questions of interpretation of EU law to the ECJ for a definitive interpretation. Of course, such a referral requirement would defeat one perceived advantage of ISDS: the efficiency gained by resolving disputes outside of domestic courts. Furthermore, any requirement for referral to the ECJ would, as a matter of reciprocity, implicate the domestic courts of the counterparty to the treaty, again frustrating the purpose of ISDS.

As described above, CETA’s text does attempt to remedy this concern by clarifying that the Tribunal may not issue any independent binding interpretation of EU or domestic law, may only consider domestic law as a matter of fact, and shall follow the prevailing interpretation given to the domestic law by courts or authorities of the disputing Party. The EU’s press release on CETA ostensibly reasserted this: “The revised CETA text confirms that the Tribunal shall only apply the agreement, in accordance with the principles of international law, when adjudicating upon claims submitted by investors. It cannot decide on matters of EU or Member State law.” In other words, the Tribunal may interpret only the text of CETA itself. While the Tribunal may determine whether or not domestic or EU laws conflict with CETA, it cannot render an independent interpretation of those laws. This limitation is consistent with Opinion 1/09, in which the European Court clarified that the European Free Trade Association Court was compatible with EU treaties because it was designed “to resolve disputes on the interpretation or application of the actual provisions of the international agreement[] concerned.”[24] CETA Article 30.6 (1) provides further assurance on this front, stating that CETA may not be directly invoked in the domestic legal systems of the Parties.

These efforts at clarity nevertheless raise further questions: While the Tribunal is to follow the prevailing interpretation established domestically, what happens if an investor questions the interpretation of a host state’s courts or authorities?[25] Alternatively, what happens if there is no prevailing domestic interpretation off of which to base a decision, or if existing interpretations are ambiguous or conflicting? CETA does not speak directly to such a situation.  Would the Tribunal then be creating an interpretation and overstepping its bounds?

Although Article 8.31 states that any meaning given by the Tribunal shall not be binding, the Tribunal’s interpretation could become de facto binding in some cases because of certain features of ISDS that would seemingly continue under the ICS.  Final awards are binding upon the parties, often entail significant financial consequences, and are likely to serve as persuasive precedent for future claims involving interpretation of the same or similar laws.  If the Tribunal finds that a Member State’s compliance with EU legislation violates an investment guarantee, such as fair and equitable treatment, will Member States face significant financial pressure not to comply in order to avoid future claims?

Separately, the ECJ might find that the Tribunal’s responsibility to determine the proper respondent to a claim—a choice between a Member State or the EU—displaces the ECJ’s exclusive jurisdiction to determine the division of competences between the EU and Member States.  In Opinion 2/13, the ECJ raised the fact that the ECtHR would have to determine whether the EU or a Member State would be responsible under international law for a particular violation of the Convention. The ECJ equated this determination with the determination of whether the EU or a Member State had competence to take a specific measure, thereby “allowing [the ECtHR] to take the place of the Court of Justice in order to settle a question that falls within the latter’s exclusive jurisdiction.”[26] Similarly, under CETA a claim may be brought against either the EU or a Member State. Article 8.21 (3) of CETA provides that the European Union shall make a determination regarding who will be the respondent.  However, if the EU does not make the determination and notify the claimant within 50 days, then the Tribunal must make a determination of the respondent. CETA provides broad rules to guide the Tribunal in its determination. In sum, the Tribunal must decide whether the measures identified in the notice are “exclusively measures of a Member State” or include measures of the European Union. If the ECJ finds that CETA requires the Tribunal to “assess the rules of EU law governing the division of powers”[27] in order to make that determination of the respondent, the Court will likely find the agreement incompatible, consistent with Opinion 2/13.

 

If the Court does find ICS incompatible with the EU Treaties, it should provide clear guidance on how future international agreements that include an investment dispute mechanism—such as the EU-Singapore Free Trade Agreement—could be made compatible.[28] Ultimately, the ECJ has recognized that the EU’s “competence in the field of international relations and its capacity to conclude international agreements necessarily entails the power to submit to the decisions of a court which is created or designated by such agreements as regards the interpretation and application of its provisions.”[29] The ECJ’s decision on CETA should provide clarity and allow the EU to negotiate with greater certainty over future trade and investment agreements.

[1] The trade negotiations officially concluded in August 2014.

[2] The signing ceremony, which had originally been scheduled for October 27, was cancelled after Wallonia and other Belgian regional governments refused to acquiesce to the trade deal, preventing the Belgian federal government, which had always backed the deal, from giving its consent.

[3] The addendum particularly references the ECJ’s Opinion 1/94, which concerned the division of competences between the then-European Community (EC) and EC Members to conclude international agreements, namely the World Trade Organization (WTO) Agreement.

[4] Treaty on the Functioning of the European Union (TFEU) Article 267 provides:

The Court of Justice of the European Union shall have jurisdiction to give preliminary rulings concerning:

(a) the interpretation of the Treaties;

(b) the validity and interpretation of acts of the institutions, bodies, offices or agencies of the Union;

Where such a question is raised before any court or tribunal of a Member State, that court or tribunal may, if it considers that a decision on the question is necessary to enable it to give judgment, request the Court to give a ruling thereon.

Where any such question is raised in a case pending before a court or tribunal of a Member State against whose decisions there is no judicial remedy under national law, that court or tribunal shall bring the matter before the Court. . . .

See Consolidated Version of the Treaty on the Functioning of the European Union art. 267, May 9, 2008, 2008 O.J. (C 115) 164.

[5] Only one EU-wide agreement containing ISDS is currently in force: the Energy Charter Treaty.

However, CETA will also replace eight existing bilateral investment treaties between individual EU Member States and Canada.

[6] Since the ICS “is a new issue in trade agreements and the public debate on it is not finished in many countries,” it will only be implemented after all Member States ratify the agreement. See the Council of the European Union’s “Decision on the provisional application of the Comprehensive Economic and Trade Agreement (CETA) between Canada, of the one part, and the European Union and its Member States, of the other part” at http://data.consilium.europa.eu/doc/document/ST-10974-2016-INIT/en/pdf.

[7] Article 218 (11) of the TFEU provides: “A Member State, the European Parliament, the Council or the Commission may obtain the opinion of the Court of Justice as to whether an agreement envisaged is compatible with the Treaties. Where the opinion of the Court is adverse, the agreement envisaged may not enter into force unless it is amended or the Treaties are revised.”

[8] The European Commission later carried out an online public consultation regarding investment protection and ISDS. The consultation, which was intended for the purposes of the Transatlantic Trade and Investment Partnership (TTIP) negotiations, used the CETA draft text as a reference. Out of approximately 150,000 responses, “[a]lmost a half of the replies contain[ed] various negative statements also against CETA . . . or calls to exclude ISDS from it.” See Commission Staff Working Document Report: Online public consultation on investment protection and investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP), Eur. Comm’n 133 (Jan. 13, 2015), http://trade.ec.europa.eu/doclib/docs/2015/january/tradoc_153044.pdf.

[9] The United States has given no indication that it intends to accept this proposal.

[10] The EU and Canada have expressed greater aspirations for the ICS model. As elucidated in CETA’s Joint Interpretive Instrument:

[The ICS] lays the basis for a multilateral effort to develop further this new approach to investment dispute resolution into a Multilateral Investment Court. The EU and Canada will work expeditiously towards the creation of the Multilateral Investment Court. It should be set up once a minimum critical mass of participants is established, and immediately replace bilateral systems such as the one in CETA, and be fully open to accession by any country that subscribes to the principles underlying the Court.

Article 8.29 of CETA’s investment chapter also reflects these aspirations.

[11] This language is nearly identical to language contained in the EU-Vietnam Free Trade Agreement (section 3, article 16(2)) and the proposed TTIP text (section 3, article 13(4)).

[12] Treaty on the Functioning of the European Union, art. 218 (11).

[13] Treaty on the Functioning of the European Union, art. 218 (11).

[14] Opinion 2/13 of the Court, 18 Dec. 2014, at ¶ 182 [hereinafter Opinion 2/13]; see also Opinion 1/91 ¶¶ 40, 70.

[15] Opinion 1/92 of the Court, 10 Apr. 1992.

[16] See Opinion 2/13; Opinion 1/09 of the Court, Mar. 8, 2011 [hereinafter Opinion 1/09].

[17] Given the uncertain precedent set by Opinions 2/13 and 1/09, a number of European law professors, judges, and interest groups have pressed for a definitive ECJ ruling on the general compatibility of ISDS with EU law.

[18] Opinion 2/13 at ¶¶ 194, 197.

[19] Opinion 2/13 at ¶ 247.

[20] Opinion 2/13 at ¶ 246.

[21] Opinion 1/09 at ¶¶ 3-8.

[22] Opinion 1/09 at ¶ 78.

[23] Euram v. Slovak Republic, UNCITRAL, PCA Case No. 2010-17, Award on Jurisdiction, (Oct. 22, 2012) at ¶¶ 248-253; Achmea B.V. v. Slovak Republic, UNCITRAL, PCA Case No. 2008-13, Award on Jurisdiction, Arbitrability and Suspension (Oct. 26, 2010) at ¶¶ 278-283; Maffezini v. Kingdom of Spain, ICSID Case. No. ARB/97/7, Award (Nov. 13, 2000) at ¶ 69. EU authorities have already raised pointed concerns about ISDS in intra-EU Member State bilateral investment treaties (BITs). European Commission President Jean-Claude Juncker, for example, has stated in his political guidelines that he will not allow “special regimes that limit parties’ access to national courts or that allow secret courts to have the final say in disputes between investors and states” to limit the jurisdiction of EU courts. The European Commission has also made several amicus submissions to arbitral tribunals, arguing against ISDS convened under existing intra-EU BITs. For example, in Achmea v. Slovak Republic, the EU Commission urged the Tribunal to decline jurisdiction because “an investor-State arbitral mechanism […] conflict[s] with EU law on the exclusive competence of the EU court for claims which involve EU law, even for claims where EU law would only partially be affected.” Achmea B.V. v. Slovak Republic, UNCITRAL, PCA Case No. 2008-13, Award on Jurisdiction, Arbitrability and Suspension (Oct. 26, 2010), at ¶ 193 (quoting the European Commission Observations submitted to the Tribunal). Similarly, in EURAM v. Slovak Republic, the Commission argued that “[t]he arbitral tribunal is not a court or tribunal of an EU Member State but a parallel dispute settlement mechanism entirely outside the institutional and judicial framework of the European Union. Such mechanism deprives courts of the Member States of their powers in relation to the interpretation and application of EU rules imposing obligations on EU Member States.” European American Investment Bank AG (EURAM) v. Slovak Republic, UNCITRAL, PCA Case No. 2010-17, Letter to the Tribunal from Luis Romero Requena, Director General, European Commission Legal Service (Oct. 13, 2011).

[24] Opinion 1/09 at ¶ 77.

[25] See Jarrod Hepburn, CETA’s New Domestic Law Clause, EJIL: Talk! (Mar. 17, 2016), http://www.ejiltalk.org/cetas-new-domestic-law-clause/ (“However, situations may exceptionally arise in which the investor might allege that the courts or authorities of the host state are not to be trusted.”).

[26] Opinion 2/13 at ¶ 234.

[27] Opinion 2/13 at ¶ 224.

[28] The Commission has requested an opinion from the CJEU to clarify the competence to sign and ratify the EU-Singapore Free Trade Agreement. However, at that time, the Commission did not seek an opinion on the compatibility of the standard ISDS provisions codified in the EU-Singapore agreement.

[29] Opinion 1/91 at ¶ 40.