Court of Justice of the EU approves CETA investment court system

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On 30 April 2019, the Court of Justice of the EU (CJEU) issued its long-awaited Opinion 1/17 regarding the question raised by Belgium of whether the investment court system (ICS), which encompasses a tribunal and appellate tribunal, is compatible with EU law. The approval of the CJEU not only removes the remaining obstacle for the entering into force of the whole Comprehensive Economic and Trade Agreement (CETA), but, moreover, gives the European Commission a green light for its efforts to create a permanent multilateral investment court (MIC), which is currently being negotiated within UNCITRAL working group III.

Several months before, Advocate General Bot also came to the conclusion that the CETA ICS is compatible with EU law. However, he had to employ considerable legal gymnastics in order to come to this conclusion. This is so because, previously, the CJEU had held in its Achmea judgment that international arbitration under bilateral investment treaties (BITs) between EU member states (so-called intra-EU BITs) is not compatible with EU law. Nonetheless, AG Bot distinguished the CETA ICS from the arbitration system in intra-EU BITs and thus considered that Achmea is not applicable to the CETA ICS, which applies to a treaty with a third state.

The CJEU started off its analysis by reiterating its previously taken position regarding the EEA/EFTA Court in the early 1990s, namely, that the EU is competent to create an international court or tribunal on the basis of an agreement which can render decisions that are binding on the EU organs, including the CJEU itself.

Achmea judgment does not apply to CETA

However, in subsequent opinions regarding the Patent Court and the European Court of Human Rights, the CJEU limited that power to the extent that such an international court or tribunal may not have an “adverse effect on the autonomy of the EU legal order”. The CJEU further explained that the autonomy of the EU legal order can only be preserved by ensuring the consistency and uniformity of EU law. This is the task of the domestic courts of the EU member states and the CJEU acting together through the preliminary ruling system.

In its Achmea judgment regarding international arbitration on the basis of intra-EU BITs, the CJEU found that since international tribunals operate “outside” the EU’s preliminary ruling system, they cannot be controlled by the CJEU, and therefore could undermine the consistency and uniformity of EU law when they render awards that touch upon EU law.

The envisaged CETA tribunal and appellate tribunal would also operate outside the preliminary ruling system. This could potentially adversely affect the autonomy of the EU legal order when interpreting the CETA provisions, or acts and omissions of the EU and its member states adopted within the context of CETA.

So, prima facie, there is no difference between an international arbitral tribunal established under an intra-EU BIT and the CETA tribunals. Consequently, in order to be able to consider the CETA tribunals to be compatible with EU law, the CJEU determined, in very strong language, that the jurisdiction of the CETA tribunals is strictly limited to the interpretation and application of CETA provisions.

The CJEU added that CETA tribunals cannot have the power to interpret or apply EU law provisions, or render decisions that prevent EU institutions from operating in the way that the EU constitutional framework requires.

On top of that, the CJEU stated (again in very sweeping terms) that the CETA tribunals are deprived of “any powers to call into question” the choices that have been democratically made by the CETA parties in relation to the protection of public goods, such as the protection of the environment, workers and fundamental rights. In sum, the CJEU concluded that the CETA ICS operates wholly outside the EU legal framework and therefore does not adversely affect the autonomy of the EU legal order.

Subsequently and without much difficulty, the CJEU rather easily disposed of the other concerns raised by Belgium. Thus, the CJEU distinguished Canadian investors from EU investors who invest in EU member states. Therefore, the CJEU found that there is no unequal treatment by giving Canadian investors access to the CETA tribunals but not to EU investors who invest in EU member states.

The CJEU also concluded rather easily that CETA contains sufficient safeguards to ensure the independence of the judges of the CETA tribunals.

Supplemental rules for SMEs to access CETA ICS are needed

Regarding access to CETA tribunals and the significant costs associated with such legal proceedings, the CJEU admitted that the CETA ICS might (in practice) be more difficult to access for small to medium enterprises (SMEs) and natural persons. However, the CJEU was eventually satisfied with the vague commitments contained in CETA that “supplemental rules” will be adopted, which aim at ensuring the accessibility of the CETA tribunals for SMEs and natural persons. The CJEU emphasised this point by adding that the approval of CETA is dependent on implementing those commitments.

No retroactive joint binding interpretations

Of particular note are the remarks made by the CJEU regarding the possibility of the CETA parties to adopt interpretations that are binding on CETA tribunals, even with potentially retroactive effect.

On this point, the CJEU emphasised that, while CETA does not expressly prohibit the retroactive effect of such binding interpretations, EU law prohibits the EU from giving consent to binding interpretations with retroactive effect. Consequently, the EU cannot give consent to binding interpretations regarding disputes that have been resolved or brought to the CETA tribunals prior to the adoption of such interpretations.

Outlook

The opinion of the CJEU is an important victory for the European Commission and its push to reform the currently existing investor-state dispute settlement (ISDS) system. Since the CETA ICS has served as a blueprint for the other recently concluded EU trade and investment agreements with Singapore, Vietnam and Mexico, the ICS included in those agreements must also be considered to be compatible with EU law and thus can enter into force in due course.

Moreover, and probably even more importantly, is the fact that the CJEU on several occasions referred also to the envisaged MIC, which is currently being negotiated within UNCITRAL Working Group III.

Effectively, the CJEU gave the European Commission a green light to continue to develop a MIC as long as it is based on the CETA blueprint and this opinion. In other words, if the final MIC follows the CETA blueprint and this opinion, it can be considered to be in conformity with EU law.

More generally, the CJEU clearly distinguished the Achmea judgment from CETA, thereby stressing the point that CETA is an agreement concluded by the EU and its member states with a third state. Therefore, the conclusions of Achmea cannot be applied to CETA.

The question, however, that arises, is what are the implications of this opinion for the Energy Charter Treaty (ECT). The ECT is also an international agreement concluded by the EU and its member states with third states and provides for international arbitration.

As is well known, several member states, in particular Spain, Czech Republic, Slovakia and Italy, but also Germany, are currently involved in dozens of ECT disputes brought by EU investors. These states have (so far unsuccessfully) raised the Achmea judgment as an objection to the jurisdiction of ECT arbitral tribunals. The extensive analysis of the Vattenfall and most recently Ekosol tribunals contain particularly convincing reasons why the Achmea judgment is not relevant and applicable in intra-EU ECT disputes.

Meanwhile, in January 2019, a majority of member states adopted a political declaration claiming that Achmea is applicable to the ECT and that, effectively, the ECT has become inapplicable for EU investors.

In addition, the European Commission recently asked EU member states for a mandate to negotiate the modernisation of the ECT. It is not difficult to see that the European Commission and the member states will use this occasion to make sure that intra-EU ECT disputes will no longer be possible.

In sum, this opinion gives the European Commission a boost for its investment policy. It paves the way for future developments that are already on the horizon. In this sense, the CJEU rendered its support to the European Commission without imposing too many restrictions on it. This will free the hands of the European Commission and allow it to continue to play a very proactive role, together with NGOs and academics, to dismantle the currently existing ISDS system, despite the obvious significant rule of law deficiencies in many EU member states.

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