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Home EJIL Analysis CETA Opinion – Setting Conditions for the Future of ISDS

CETA Opinion – Setting Conditions for the Future of ISDS

Published on June 5, 2019        Author:  and
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The April 2019 New York UNCITRAL Meeting of Working Group III did not discuss the then forthcoming Opinion 1/17 (CETA Opinion) on the compatibility of CETA’s investment court system with EU law. For some the dangers this Opinion could pose to ISDS were altogether non-existent – the Court of Justice of the European Union (CJEU) might as well have considered ISDS in CETA as incompatible with EU law. To others ISDS reform negotiations without the EU, and probably without its Member States, might have seemed a more appealing prospect. The CETA Opinion was rendered on 30 April 2019 and confirmed that the treaty’s investment court system is compatible with EU law. Reaction to it has been immediate, but the real consequences of this (probably explosive or even implosive) opinion will take time to absorb, and a lot of in-depth analysis will certainly follow.

In the past years the CJEU was seemingly headed down a narrow one-way street: its Opinions on a Patent Court, the EU accession to the ECHR or even the Achmea Judgement questioned the participation of the EU and its Member States in international dispute settlement placed outside the control of the EU judicial system. With the CETA Opinion the Court took a U-turn out of the one-way street, back into the path of international dispute settlement. But as the Court managed to turn – and immense pressure was brought to bear – it drafted the conditions for the new multilateral court system that the EU is currently pursuing in international fora. In the remainder of this short contribution we will not canvass the possible contradictions between the Opinion and previous CJEU decisions – although there might be some. We focus on the future instead. In light of the EU’s role as a major investment treaty negotiator and its push for the creation of an MIC, we ask two questions: what this Opinion might mean for the future of ISDS and what open questions remain.

  1. Conditions for the Future of ISDS

Although the CJEU only dealt with the narrow question of whether CETA’s investment court system is compatible with EU primary law, its Opinion will likely have consequences well beyond this context, including notably in relation to a future Multilateral Investment Court (MIC). When the CJEU was deciding, the MIC was the invisible elephant in the room: first, because in CETA the EU commits to pursuing the establishment of an MIC; second, because the European Commission in its contributions to UNCITRAL’s WGIII promotes this option as at least at this time the only possible future for ISDS involving the EU.

From an EU law perspective, the CETA Opinion is remarkable in at least two respects: its discussion of the constitutional principles and framework that guide the EU in its external action, such as when the Union concludes international agreements, and the Charter of Fundamental Rights, and notably Article 47 of the Charter. What the Kadi Judgment did for outside acts “entering” the internal EU legal order, the CETA Opinion will now do for the EU’s participation in international dispute settlement. It is possible as long as a set of conditions are met. Obligations then derive from the above constitutional framework, including the Charter, and some of these are as follows:

The CETA Opinion takes up the debate about the “level of protection of the public interest”, or in other words the right to regulate. The starting point for the discussion is Article 2 of the TEU. Systems of institutionalized dispute settlement to which the EU wants to adhere must be in conformity with the EU’s “constitutional framework” and “principles”. In relation to the discussion about the legitimacy of investment law and of ISDS in particular, the CJEU underlines that the CETA standards of protection respect state sovereignty and the right to regulate. It is important to highlight that respect for sovereignty is not a CETA-specific invention, but reflects EU investment treaty practice: regulatory space is part of all negotiated EU IIAs. In addition, even in arbitration, tribunals are increasingly mindful of the States’ right to regulate. It is also significant that they may impose a compensation but they do not enjoin States to “amend or withdraw legislation”. Thus, they do not undermine States’ capacity to “operate autonomously” (as per the CJEU’s dicta). If this cannot be made clear, the discussion on the reform of substantive standards will spring up again in no time. For the avoidance of any doubt, the Statute of an MIC could require adjudicators to take into account the “level of protection of the public interest” when applying existing IIAs. The latter will remain the basis for ISDS in any future form; a multilateral investment agreement on substantial standards is not in sight at this moment.

The CETA Opinion has further made it clear that the applicable law in IIAs must be only international law. If domestic law comes into play, it could present a direct threat to the autonomy of EU law. This will lead to the further internationalization of the applicable law in investment disputes. Tribunals set up under international agreements with a binding effect on the EU cannot be entrusted to interpret EU law – only the agreement itself. But they can apply EU law as a fact. Moreover, these tribunals cannot have the competence to decide on the legality of an EU measure. This begs the question: will those investment agreements that include domestic law in the applicable law have to be amended? A future MIC Statute could include a provision for the applicable law to be only international law, at least to the extent that the EU or a Member State are a party to a dispute.

A similar question, including on the compatibility of ISDS in CETA with the German Constitution, is currently pending before the German Constitutional Court (BVerfG). Where the CJEU stressed the constitutional foundations of the EU, the BVerfG discusses the (German) constitutional identity. After the CETA Opinion it can be expected that the BVerfG will follow in the footsteps of the CJEU and reach a similar conclusion.

Another issue of a more general and systemic interest concerns the lessons to draw from the CJEU’s findings in relation to the Charter of Fundamental Rights. The CJEU underlines that the Charter is binding on the EU also in regard to its external relations and therefore any agreement that the EU wishes to ratify needs to comply with it. The analysis in the CETA Opinion concerned only the compatibility of the treaty’s ISDS provisions with Article 47 of the Charter. Article 47 on the Right to an effective remedy and to a fair trial provides among others for access to an independent and impartial tribunal and legal aid for those without sufficient resources to access justice. For the time being, the CJEU has made important points in relation to access to justice and the neutrality and independence of adjudicators. But in the future other questions of compatibility with the Charter may emerge. The issue of cost apportionment and funding possibilities especially for natural persons and small and medium-sized enterprises has to be kept in mind when designing the future MIC. In addition, it will be useful to review the Charter carefully in order to determine whether other fundamental rights, beyond those in Article 47 of the Charter, may become relevant.

  1. Open Questions

That much is true with respect to what has been discussed so far. But new questions abound. For instance, to what extent, if at all, the CETA Opinion means anything for investment arbitration, whether in new EU agreements or in existing Member State BITs? Is a court-like system the only option going forward? Could Article 47 of the Charter of Fundamental Rights also apply to investment arbitration? Will Member State BITs have to comply with the conditions set out by the CJEU for the EU’s common commercial policy too? In what other types of international dispute settlement fora can the EU participate? These open questions could become an argument for the EU to strengthen its efforts to obtain support for the MIC.

Conclusion

The CETA Opinion is a “domestic” decision that will doubtless impact negotiations on ISDS going forward well beyond Europe. At the bilateral level, CETA’s investment dispute settlement mechanism will most probably set the standard for future agreements to which the EU is party. This is already evident in the EU-Singapore and EU-Vietnam Investment Protection Agreements. Exceptionally, in EU-Japan relations, the implications of the EU’s support for institutionalized dispute settlement will likely mean – unless Japan changes its approach – that we will not see an ISDS mechanism in a prospective treaty at all. But developments in this field will be more interesting to follow at the multilateral level, notably in the context of prospective negotiations on an MIC Statute. Whether non-EU States and international organizations submit to the standards of the CETA Opinion, or whether the latter sets the threshold too high, will have to be seen. But the CETA Opinion will support the EU in its pursuit of an MIC and it will pave the way for a new ISDS landscape, in uniformity or diversity.

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3 Responses

  1. Marcin Menkes Marcin Menkes

    Great post, thank you! I wonder, though, whether the CETA Opinion will support the EU’s efforts to establish MIC? Or maybe, alongside recent approach to screening technologically sensitive investments, it will create an impression of European paternalism with regard to our partners and thus sabotage the UNCITRAL pitch.

  2. Robert Howse Rob Howse

    This is very helpful. However, the authors are not correct where they suggest “It is also significant that they [ISDS tribunals] may impose a compensation but they do not enjoin States to “amend or withdraw legislation”. Thus, they do not undermine States’ capacity to “operate autonomously” (as per the CJEU’s dicta). In fact, in paragraph 153, the CJEU makes crystal clear that the limits on the ICS imposed by the fundamental principle of maintaining the EU level of protection of the public interest extends to damages awards not just enjoing amendment or withdrawal of legislation. Thus, “153. the CETA Tribunal has no jurisdiction to declare incompatible with the CETA the level of protection of a public interest established by the EU measures specified in paragraph 152 of the present Opinion and, on that basis, to order the Union to pay damages.”

  3. Catharine Titi

    Thank you, Rob. This is very useful. Without aiming to respond to the issue you are raising, I would like to draw attention to paragraph 143, where the Court discusses a “situation where, in order to avoid being **repeatedly** compelled by the CETA Tribunal to pay damages” the EU has to abandon the desired level of protection of the public interest. One could argue that what is problematic is “repeatedly” losing in ISDS.