The Comprehensive Economic and Trade Agreement (“CETA”) concluded between Canada and the European Union (“EU”) celebrated its first birthday in September last year. While both Canada and the EU have reported that the benefits of CETA have already become visible in boosting the business climate on both sides of the Atlantic, one area of uncertainty has persisted: the resolution of disputes arising under CETA between investors and the states where they invest.

Many free trade agreements concluded to date have foreseen a mechanism of investor-state dispute settlement via arbitration (“ISDS”). As we previously reported, Europe’s highest court, the Court of Justice of the European Union (“CJEU”), decided that ISDS provisions in EU free trade agreements must be approved by each Member State individually, forcing a change to the previous orthodoxy that the European Commission and European Parliament had exclusive competence to enter into and approve all aspects of such agreements.

In the case of CETA, the fate of ISDS provisions in EU trade agreements took an epic turn when Belgium famously blocked the agreement’s approval by the single objection of the regional parliament of Wallonia, ultimately only agreeing to CETA’s provisional and partial entry into force on the condition that the CJEU rule on the conformity of ISDS with EU law. This question has come one step closer to resolution last week with the issuance of the Advocate General’s opinion to the CJEU on the matter.

What is the Investment Court System?

As we previously reported, ISDS has, over the past years, come under scrutiny by certain stakeholders in Europe. When negotiating CETA, the EU took into account growing citizen discontent against ISDS and designed an alternative called the Investment Court System (“ICS”), which attempts to mitigate some of the most common criticisms of ISDS. Though the merits of the ICS remain controversial – it has yet to be tested in practice, although it can already be found in the EU-Vietnam Free Trade Agreement – it is likely that it helped CETA become more acceptable for some of its opponents. 

The ICS has been described as a hybrid between an arbitral tribunal and an international court. In the case of CETA, the ICS consists of a permanent tribunal composed of fifteen members appointed by the CETA Joint Committee for a five-year term, renewable once. The function entrusted to that body by the treaty is the handling of claims submitted by investors against a party (Canada, the EU or one of the Member States, as the case may be). The tribunal is to hear cases in divisions generally consisting of three of its members, all of whom are to be appointed by the President of the Tribunal on a rotation basis, ensuring that the composition of the divisions is random and unpredictable.

An appeal against the tribunal’s awards may be brought before a permanent appellate tribunal. The appeals may be based inter alia on errors of law or manifest errors in the appreciation of facts, including the appreciation of relevant domestic law. The members of the appellate tribunal are to be appointed by the CETA Joint Committee.

Both the members of the permanent tribunal and the appellate tribunal must possess the qualifications required in their respective countries for appointment to judicial office or be jurists of recognized competence, and must have demonstrated expertise in public international law. They must also be independent and comply with rules of ethics so as to avoid conflicts of interest. 

All awards rendered by the ICS shall be binding on the disputing parties. 

A Favorable Opinion

The Advocate General – the CJEU’s highest advisor – specifically left the political and economic questions associated with ISDS and the ICS aside in his opinion, focusing solely on whether the ICS is compatible with EU law. The Advocate General issued a positive opinion based on three main grounds.

First, the Advocate General stated that the ICS did not call into question the exclusive jurisdiction of the CJEU over the definitive interpretation of EU law because: (i) the dispute settlement mechanism established by CETA is not intended to review the legality of acts of the EU; (ii) the CETA Tribunal remains bound by the interpretation of EU law given by the CJEU and can only interpret EU law where there is otherwise no guidance within the EU legal order; and (iii) when the CETA Tribunal makes such an interpretation, it is made solely for purposes of the dispute before it, without that interpretation being binding on the authorities or the courts of the EU.

Second, the Advocate General did not find any potential violation of the principles underpinning EU law in the protection afforded to investors on each side of the Atlantic, specifically, those of mutual trust and reciprocity. To the contrary, the Advocate General considered that, being EU law principles, the relations between the EU and Canada are not based on reciprocity or mutual trust, which is precisely why the parties intended to define, on a reciprocal basis, a standard of substantive and procedural protection in CETA. Accordingly, the Advocate General stated that the line of reasoning developed by the CJEU in its recent Achmea judgment (in which the CJEU found that ISDS provisions in bilateral investment treaties between Member States are contrary to EU law) can therefore not apply to the ICS, as EU law principles were in fact relevant in that judgment. 

Lastly, and more notably, the Advocate General did not find the ICS mechanism provided in CETA to infringe the right of access to an independent and impartial tribunal. The Advocate General considered that the procedural safeguards outlined above – in particular, the establishment of an appellate tribunal – provide a guarantee that EU law will not be misinterpreted and that any error on the part of the CETA tribunal may still be corrected by the appellate tribunal. 

What's Ahead

Although not binding, the Advocate General’s opinion often gives an indication of the direction the CJEU will take. While we are waiting for the CJEU’s final say on the matter, the EU is moving forward with its plans to build on the ICS to create a multilateral investment court. On March 20, 2018, the Council of the EU adopted the negotiating directives authorizing the European Commission to negotiate, on behalf of the EU, a convention establishing a multilateral court for the settlement of investment disputes. 

More than 400 delegates representing more than 90 countries gathered last November in Vienna to discuss systemic reform as it is, in the eyes of the EU, the only way to address the current ISDS system’s purported shortcomings. The overall objective is to set up a permanent body entrusted with the settlement of investment disputes. This court would adjudicate disputes under future and existing investment treaties with the aim of eventually replacing the bilateral investment court system.