European Court clears CETA arbitration tribunals

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3 May 2019   |   By Michael Thaidigsmann

Investor protection

EU high court clears CETA arbitration tribunals

The Court of the European Union in Luxembourg has handed a victory to the proponents of the EU’s free trade agreement with Canada. The judges said in an opinion that the CETA Investment Court System was consistent with EU law.

The decision was made by the court despite the vocal opposition

The supreme court of the European Union has confirmed that the Investment Court System (ICS) agreed between the EU and Canada is in line with European law. In an opinion requested by the government of Belgium, the Court of Justice of the European Union (ECJ) said that the arbitration tribunals to be set up to settle disputes between investors and states under the CETA agreement did not infringe the principle of equal treatment.

No discrimination

Critics alleged that the special courts undermined the supremacy of the ECJ itself and discriminated against EU companies by only allowing foreign investors, not domestic ones, to bring cases. In 2016, the Belgian region of Wallonia threatened to block CETA, after the agreement had already received the backing of all other EU governments. In the end, Belgium’s federal government persuaded the Walloons not to to veto the deal in return for certain concessions, including the request for the ECJ to give its view.

Although CETA has already been in force provisionally since September 2017, several measures – including the ICS-related provisions – were not brought into effect pending resolution of legal questions and ratification by parliaments of member states. To date, only 12 of the 28 EU countries have ratified the agreement.

The court in Luxembourg now ruled that an international agreement such as CETA could lead to the creation of a special tribunal to rule on matters related to it and was, in principle, compatible with EU law. The indispensable conditions for safeguarding the constitutional powers granted to EU institutions were satisfied by CETA, the judges held, and no adverse effect on the autonomy of the EU legal order was caused by the trade agreement.

The equal treatment principle enshrined in the EU treaties was also not infringed: Canadian investors with interests in the EU were not comparable to EU investors, the court ruled, and the new tribunals could not interpret or influence EU law, but only the provisions contained in the CETA agreement itself.

A model for future trade deals?

European Commission President Jean-Claude Juncker welcomed the court’s opinion, saying that the findings of the Court of Justice were “important in paving the way for the full application of the trade agreement with Canada.” EU Trade Commissioner Cecilia Malmström said that Europeans could have “full confidence” in the ICS. “Today’s opinion not only shows that it is legally sound, but also reinforces the EU’s leadership role in the ongoing wider discussions to reform the multilateral investment dispute settlement system.” The Commission had been pushing to use the CETA arbitration mechanism as a model for other trade agreements.

Jim Carr, Canada’s Minister of International Trade Diversification, was also upbeat. “There were a number of European nation states waiting for this judgment before they moved to the ratification process,” Carr told CBC News. “They will now be able to move more speedily with ratification, and that is good for Canada,” he said.

Critics of CETA, however, allege that the ICS gives larger corporations undue power to sue states and force a change of policies, laws and standards.

CETA is the first agreement concluded by Brussels that offers certain benefits to European companies investing outside the EU. The agreement removes trade barriers, ensures all European investors in Canada are treated equally and fairly, and vice versa. It also stipulates that there must be no discrimination between domestic and foreign investors and no new restrictions on foreign shareholdings.

The scope in which a state can be challenged is however rather narrow

Independent tribunals

Eight EU countries have existing agreements that include a mechanism for resolving disputes between governments and investors known as investor-state dispute settlement (ISDS). The ICS will supersede these and be a permanent structure, including professional judges appointed jointly by the EU and Canada who will have to adhere to a strict code of conduct.

Under the agreement, ICS decisions will be have to be transparent, hearings must be public and documents submitted during cases will be put into the public domain. Tribunal judges will have to be fully independent and impartial and will not be allowed to work in parallel as legal counsel and as experts in other investment-related disputes. A tribunal member who breaches of the Code of Conduct can be dismissed.

When a complaint is received, three judges selected randomly from a pre-appointed pool will hear the case – one from the EU, one from Canada and a presiding member from a third country. An appeals tribunal will also be established.

Clearly defined scope

The grounds on which an investor can challenge a decision made by a state will be limited, and public bodies cannot be forced to change legislation or pay damages through the ICS. A tribunal will be able to dismiss frivolous claims and force the investor to pay all legal costs, and it will also be able to issue fast-track rulings.

Interested parties such as NGOs or trade unions will be able to make submissions to the tribunals. Companies may not sue governments merely on the grounds that profits might be affected. A claim can be brought in a limited number of cases that breach CETA and discriminate against an investor on the grounds of nationality.

According to the European Commission, a fair and equitable treatment obligation can only arise when there is a denial of justice in criminal, civil or administrative proceedings, a fundamental breach of due process (including transparency) in judicial and administrative proceedings, manifest arbitrariness, targeted discrimination on wrongful grounds such as gender, race or religious belief, or abusive treatment of investors, such as coercion, duress and harassment.

The concept of “legitimate expectations” is limited to situations where a specific promise or representation was made by the state concerned.

What constitutes indirect expropriation

CETA is the first EU trade agreement which includes language on what constitutes indirect expropriation. This was added to avoid claims against legitimate public policy measures. CETA rules out challenging public policy measures taken to protect health, safety or the environment, and only measures that are “manifestly excessive” in light of their objective can be attacked before an ICS tribunal.

Under the CETA rules, indirect expropriation can only occur when an investor is substantially deprived of the fundamental attributes of property such as the right to use, enjoy and dispose of its investment. A detailed case-by-case analysis is introduced to determine whether an indirect expropriation has taken place. The sole fact that a measure increases costs for investors cannot give rise in itself to a finding of expropriation. Moreover, the issuance of compulsory licenses in accordance with WTO provisions guaranteeing access to medicines cannot be considered an expropriation.

To be qualified for investor protection, it will be necessary to have real business operations in either Canada or an EU member country; mailbox companies will be excluded. Moreover, CETA does not allow investors to “import” and use in the dispute settlement procedures the provisions from other agreements (e.g. from Treaties of EU Member States) that they might consider as being more advantageous to them.

Only specific concerns can be brought to ICS, and only claims relating to non-discriminatory treatment and investment protection will be heard by the tribunals. Other provisions of CETA cannot, e.g. a refusal to admit a foreign investor, can only be challenged by the EU and Canada and not by the investors themselves.

The ICS will only enter into force once all EU countries have ratified CETA. However, the European Commission announced that it would already start working with Canada on selecting judges for the tribunals and on ensuring that small and medium-sized firms will be able to use the new system and appeals mechanism.

Proponents of CETA hope that the ECJ ruling will allow for the ratification process to be completed faster.

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