‘We *aren’t* the world’: the CJEU reconciles EU law with international (investment) law

Professor Steve Peers, University of Essex

Background

In recent years, investor-state dispute settlement (ISDS) has become a political minefield. Its critics argue that ISDS is a secret court system designed to allow multinational corporations to thwart any progressive legislation approved by democratically elected governments. Its defenders argue that these claims are exaggerated, and that ISDS performs a useful function attracting investment and securing property rights.

The arguments about ISDS are worldwide, but they have increasingly arisen within the particular framework of EU law. From 2009, the Treaty of Lisbon gave the EU exclusive competence over foreign direct investment as part of its common commercial (trade) policy, alongside goods, services and trade-related aspects of intellectual property. EU trade policy developed to include negotiations for ISDS as part of trade negotiations (although pre-existing investment treaties between EU Member States and non-EU countries were grandfathered, with a process in place to regulate negotiation of such treaties in future).

However, this led to political and legal difficulties in negotiating trade agreements: the former because of public concern about ISDS in both the EU and the non-EU countries, and the latter because of uncertainty about whether the EU had sole competence to negotiate treaties with ISDS provisions, or shared it with the Member States. Shared competence means that Member States have to become parties to the treaties concerned, meaning unanimity is required to agree them and there is a process of national ratification, although in practice the EU and the non-EU countries concerned often agree to provisional application of the trade-related parts of the treaty pending such national ratification.

The legal position was clarified when the CJEU ruled in 2017 that ISDS, like 'portfolio' investment (ie non-controlling shares in companies) did not fully form part of the common commercial policy (CCP), but was rather a shared competence between the EU and its Member States. (There’s EU legislation dividing up responsibility between the EU and its Member States in the event of successful investor claims.) Otherwise the Court took a broad view of the scope of the CCP. Coupled with the political concerns about ISDS, this was an opportunity to rethink the role of ISDS in trade policy, either leaving it out of talks completely (Australia and New Zealand, along with the mandate for stripped back trade negotiations with the USA), concluding a trade agreement without insisting on an investment agreement (Japan), or separating the issues into two distinct treaties (Singapore and Vietnam). This revised approach, splitting up trade and investment on a case by case basis, was confirmed more broadly by a Commission communication of 2017 and subsequent Council conclusions in 2018.

In parallel to these developments, the EU responded to concerns about the legitimacy of ISDS by seeking to reform it into a system more palatable to Main Street, rather than Bay Street, as a centre-left Canadian politician might say. A discussion paper of 2015 sums up the Commission’s approach, in particular securing greater transparency, limiting the scope of controversial provisions of investment law, confirming the ‘right to regulate’, and transforming investment tribunals into a quasi-judicial system, with the longer-term intention of establishing a multilateral investment court. Subsequently, the Commission tabled a proposal for such court, and the Council approved a negotiation mandate to that end. (For further details of the negotiations, see here).

Many EU trade and investment policy disputes came to a head early in 2017, when there was a delay in approving the Canada-EU Free Trade Agreement (CETA) because of concerns about ISDS and other issues in one Belgian region. (There were also national constitutional court proceedings challenging CETA in France and Germany, as well as an EU General Court judgment on whether a European Citizens’ Initiative could be launched to stop its ratification). This kerfuffle, coming shortly before the CJEU ruling clarifying the scope of the EU’s common commercial policy, partly prompted the move to downgrade investment objectives in EU trade policy, as discussed above. And part of the overall settlement of the dispute over CETA was the Belgian government asking the CJEU whether the CETA ISDS rules – renegotiated in light of the reformed approach to ISDS – were compatible with EU law. 

The Belgian government’s request – submitted on the basis of Article 218 TFEU, which allows the CJEU to rule on proposed international treaties – was answered by the Court of Justice this week (Opinion 1/17).  In the meantime, in its judgment in Achmea (discussed here) the CJEU had found that investment treaties between Member States were potentially incompatible with EU law.  Those treaties were duly wound up, but it remained to be seen if the Court would have the same concerns about investment treaties with non-EU countries. More generally, the Court has always had concerns about protecting the autonomy of EU law from international courts (see, for instance, Opinion 2/13 on accession to the ECHR, discussed here). Could these concerns about autonomy possibly be reconciled with the nature of ISDS tribunals?

The judgment

First of all, the CJEU ruled that the case was admissible. Although the Court only has jurisdiction to rule under Article 218 as long as a treaty has not yet entered into force, the provisional application of the trade provisions of CETA did not stand in the way of the Court’s jurisdiction. (Indeed, it appears that the Court would have found the case admissible even if the whole of CETA, including the investment disputes section, was in force provisionally).

The Court then examined the compatibility of the CETA investment provisions with EU law from three angles: the autonomy of the EU legal order; equal treatment and effectiveness; and the right of access to an independent tribunal. In each case, the Court set out the principles and then applied them to CETA.

On the the autonomy of the EU legal order, the Court first recalled its case law that in principle, the EU could sign up to an international treaty which created an international court which could give rulings binding the EU. However, the Court also recalled that any such planned international court cannot infringe the autonomy of EU law. (In practice, the Court has usually been quick to complain that such courts do raise an autonomy problem). This autonomy is, in particular, guaranteed by the EU’s judicial system, which provides for ‘national courts and tribunals and the Court to ensure the full application of that law in all the Member States and to ensure effective judicial protection, the Court having exclusive jurisdiction to give the definitive interpretation of that law’.

For the Court, the crucial factor was that ‘the envisaged ISDS mechanism stands outside the EU judicial system’. The CETA investment court system created by CETA is not part of the domestic court system of Canada, the EU or its Member States. This did not necessarily mean that the ISDS system ‘adversely affects the autonomy of the EU legal order’, because as regards international treaties, the EU judicial system ‘does not take precedence over either the jurisdiction of the courts and tribunals of the non-Member States with which those agreements were concluded or that of the international courts or tribunals that are established by such agreements’. While those treaties form part of EU law and ‘may therefore be the subject of references for a preliminary ruling’ to the CJEU, they ‘concern no less those non-Member States and may therefore also be interpreted by the courts and tribunals of those States’. The ‘reciprocal nature’ of international treaties means that the EU can sign up to treaties creating an international court that is not bound by the interpretations of that treaty given by the courts of any of its parties.

But while EU law did not prevent the creation of such courts, it did place limits on what they could do: ‘they cannot have the power to interpret or apply provisions of EU law other than those of the CETA or to make awards that might have the effect of preventing the EU institutions from operating in accordance with the EU constitutional framework’. It was therefore necessary to address two points: (a) no power for the CETA bodies ‘to interpret or apply EU law other than the power to interpret and apply the provisions of that agreement having regard to the rules and principles of international law applicable between the Parties’; and (b) no power to impact EU law indirectly, by issuing ‘awards which have the effect of preventing the EU institutions from operating in accordance with the EU constitutional framework’.

On the first point, CETA explicitly specifies that its bodies will not have jurisdiction ‘to determine the legality of a measure, alleged to constitute a breach of this Agreement, under the domestic law of a Party’. This was different from treaties which the CJEU had criticised in the past, which would have given an international court the power to interpret EU law. In particular, it was different from an investment treaty between Member States only (which the Court criticised in Achmea), because the EU law ‘principle of mutual trust’…. ‘is not applicable in relations between the Union and a non-Member State’.

Furthermore, the Court was pleased that the CETA investment bodies could not determine the division of powers between the EU and its Member States, unlike the treaty on accession of the EU to the ECHR (on the Court’s ruling in the latter case, see my discussion here).  This distinction between the international and domestic systems was consistent with the lack of a prior role for the CJEU, or any power of the CETA bodies to send a reference for a preliminary ruling to the CJEU. It was also consistent with the lack of any national court review of an investment body decision.

On the indirect impact point, several Member States were concerned that a CETA tribunal might rely on the EU Charter ‘freedom to conduct business’ to rule on whether an EU measure is ‘fair and equitable’ under investment law, or ‘whether it constitutes indirect expropriation’, or it is ‘an unjustified restriction on the freedom to make payments and transfers of capital’ as defined in CETA. The CJEU noted that the provisions of CETA were broad and the EU could not block a decision being made against it or an obligation to pay damages, and that a challenger under the CETA investment rules could concern an EU measure ‘of general application’. There was a risk that a series of damages awards might mean that the EU decides to give up the level of protection concerned. Such an indirect impact could, in principle, be incompatible with EU law:

150    If the Union were to enter into an international agreement capable of having the consequence that the Union — or a Member State in the course of implementing EU law — has to amend or withdraw legislation because of an assessment made by a tribunal standing outside the EU judicial system of the level of protection of a public interest established, in accordance with the EU constitutional framework, by the EU institutions, it would have to be concluded that such an agreement undermines the capacity of the Union to operate autonomously within its unique constitutional framework.

In this context, the Court asserted that ‘EU legislation is adopted by the EU legislature following the democratic process defined in the…Treaties’, subject to EU ‘principles of conferral of powers, subsidiarity and proportionality’, and subject to judicial review by the CJEU ‘to ensure review of the compatibility of the level of protection of public interests established by such legislation with, inter alia, the…Treaties, the Charter and the general principles of EU law’.

However, the Court was satisfied that there were enough safeguards against this indirect impact upon EU law. One provision of CETA states that the investment rules:

…cannot be interpreted in such a way as to prevent a Party from adopting and applying measures necessary to protect public security or public morals or to maintain public order or to protect human, animal or plant life or health, subject only to the requirement that such measures are not applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination between the Parties where like conditions prevail, or a disguised restriction on trade between the Parties.

So the CETA Tribunal ‘has no jurisdiction to declare incompatible with the CETA the level of protection of a public interest established by the EU’ in such cases. Therefore it could not ‘order the Union to pay damages’. The Court was also reassured by provisions that state that parties can ‘regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals, social or consumer protection or the promotion and protection of cultural diversity’, and that regulation which ‘negatively affects an investment or interferes with an investor's expectations, including its expectations of profits, does not amount to a breach of an obligation under this Section’. It also relied upon the Joint Interpretative Instrument to CETA, which states that CETA ‘will … not lower [the standards and regulations of each Party] related to food safety, product safety, consumer protection, health, environment or labour protection’, that ‘imported goods, service suppliers and investors must continue to respect domestic requirements, including rules and regulations’, and that the CETA ‘preserves the ability of the European Union and its Member States and Canada to adopt and apply their own laws and regulations that regulate economic activity in the public interest’.

The Court summed up its view that the CETA bodies’ powers: ‘do not extend to permitting them to call into question the level of protection of public interest determined by the Union following a democratic process’. This was also confirmed by another provision confirming that ‘except in the rare circumstances when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations’.

While the CETA Tribunal has jurisdiction to apply the broad ‘fair and equitable treatment’ test of investment law, the CJEU was satisfied that this power was limited, only applying to ‘inter alia, situations where there is abusive treatment, manifest arbitrariness and targeted discrimination’. So again, in the Court’s view ‘the required level of protection of a public interest, as established following a democratic process, is not subject to the jurisdiction conferred on the envisaged tribunals to determine whether treatment accorded by a Party to an investor or a covered investment is ‘fair and equitable’.’

More generally, the CETA tribunals ‘have no jurisdiction to call into question the choices democratically made within a Party relating to, inter alia, the level of protection of public order or public safety, the protection of public morals, the protection of health and life of humans and animals, the preservation of food safety, protection of plants and the environment, welfare at work, product safety, consumer protection or, equally, fundamental rights.’ So they did not ‘adversely affect the autonomy of the EU legal order’.

The Court then moved on to the principle of equal treatment and effectiveness. Here, the issue was whether CETA had to be compatible with Article 20 of the Charter (‘equality before the law’) and Article 21(2) of the Charter (non-discrimination on grounds of nationality). On this point, the Court first confirmed long-standing case law that treaties which the EU signed up to had to be compatible with fundamental rights. This issue could also be examined in an Article 218 proceeding, and extended to the Charter. (Indeed, see a 2017 CJEU ruling on another treaty with Canada, concerning the exchange of passenger data, discussed here).

In the Court’s view, Article 21(2) of the Charter did not apply, since it banned discrimination on grounds of nationality only as between EU citizens. However, Article 20 could apply, as its personal scope was not limited. While Article 20 does not oblige the EU to treat all non-EU countries the same (ie, the EU has no internal equivalent to the WTO’s Most Favoured Nation rule), it could apply if there is a difference of treatment within the EU of non-EU citizens on the one hand and EU citizens on the other. As for the principle of effectiveness, it only arose where a CETA Tribunal might find that a fine implementing EU competition law was a breach of the investment guarantees.

Applying these principles, the equal treatment issue was that EU citizens and companies could not invoke the investment provisions in the EU, whereas Canadian citizens and companies could. However, the Court ruled that these two groups were not comparable. The principle of effectiveness was not breached because if the EU or national competition authorities overstepped the limits of EU competition law, their decision could be struck down by the courts anyway.

Finally, as for the right of access to an independent tribunal, the principles were that Article 47 of the Charter bound the EU when entering into international treaties. In the Court’s view, the CETA bodies were very similar to courts, and bound by similar principles of independence. Although the Court was concerned about the accessibility of ISDS for small and medium-sized businesses, it was ultimately satisfied by a statement by the Commission and Council that the issue would be addressed, given that approval of CETA by the EU depended upon that commitment. On the independence of CETA bodies, the Court was satisfied that there was sufficient protection against removal of members, and the rules on payment of members would not preclude their independence. It was unproblematic that the parties could issue a binding interpretation of CETA, since this was a usual feature of international law. In any event, the EU could only agree to interpretations that were compatible with the principles set out in the Court’s opinion, and such interpretations could not have retroactive effects.

Comments

First, the Court’s confirmation that the case was admissible is useful. This means that the EU and non-EU countries can decide to apply a treaty provisionally while an Article 218 case is pending before the CJEU. However, this does risk legal complications in the event that the CJEU ultimately finds that the treaty concerned is incompatible with EU law – by analogy with the Council’s statement (no. 20 in the list of statements for the Council minutes) that if a national constitutional court or parliament objects to ratification of CETA, provisional application must be terminated.

As for the substance of the Court’s ruling, its analysis of the equal treatment and effectiveness rules was rather brief. Like the French constitutional court ruling on CETA, there was no clear explanation of why Canadian investors in the EU were in a different position than EU investors. (Possible answers are that the ISDS offers equivalent protection for EU investors in Canada, and that EU investors in the EU can rely on EU internal market law). The assessment of effectiveness takes it for granted that an ISDS body and the EU or Member States’ national courts will reach the same conclusions about the correct application of EU competition law, which is hardly a foregone conclusion. As for the independence of the ISDS system, the Court largely follows its usual approach to defining judicial independence.

The heart of the Court’s judgment is its reconciliation of the autonomy of EU law with the ISDS system. There’s an unusually strong acceptance by the Court of the EU legal system’s co-existence with international law – rather than supremacy over it. But that acceptance is conditional upon the safeguards which the Court then sets out. Here, there is a fundamental tension between the procedural aspect of the ruling (separate court system) and the substantive aspect of preserving the ‘right to regulate’. What if an ISDS body does issue a ruling that arguably infringes the capacity of the EU to decide on the appropriate level of regulation? Given that it’s essential that the ISDS system stands outside the national and EU court systems, how can the boundaries – also essential – which the Court insists must be set upon that system be enforced? The division between ISDS and national courts systems is simultaneously part of the solution and part of the problem.

In short, in British English, the key question for the Court was whether it was willing to throw a spanner into the works of the international investment system. The Court’s answer, in Canadian English, is like having a black fly in your chardonnay.

Is there a way to square this circle? The power of the CETA Joint Committee to issue interpretative rulings would arguably not go far enough to ‘fix’ the problem of an ISDS body ‘running wild’, as such rulings cannot be retroactive and Canada might not agree to them anyway. So let’s return to the courts. The Court rules out a national court review of an ISDS decision. However, it also refers to the possibility of national courts asking the CJEU questions about CETA.  Arguably, then, it’s possible to enforce the limits on ISDS bodies by a Member State or the EU refusing to pay a damages award ordered by an ISDS body, leading to a court challenge of that refusal to pay by the winning party – which is technically not a court review of the ISDS body’s decision as such. It would be similar to the well-known case of Kadi, in which the CJEU did not rule on the validity of a UN Security Council measure as such, but on the legality of its application in the EU legal order.

Is the judgment relevant to Brexit? At first sight the judgment is encouraging for those who would like to avoid any role for the CJEU as regards the UK after Brexit, given the Court’s willingness to reconcile the EU legal order with international law. However, that was not the sole factor in the Court’s reasoning, which distinguishes (rather than overturns) prior case law on the autonomy of EU law. A key part of the Court’s reasoning is that the ISDS body, unlike previous international courts which the Court objected to, does not have power to interpret EU law. The position is quite different under the Brexit withdrawal agreement (as I discuss here), and it remains to be seen if it might also be different as regards EU/UK future relationship treaties.

Finally, given that the new ruling concerns a reformed ISDS, how can it be enforced as regards unreformed bilateral investment treaties between EU Member States and non-EU countries (see the most recent list of such treaties here), to the extent that they do not comply with the standards set out by the Court and may apply to issues falling within the scope of EU law? Here the 2012 Regulation grandfathering pre-existing treaties, which also puts in place a process to regulate negotiation of such treaties in future, may be relevant. The review of pre-existing treaties, and control of future treaties, which that Regulation provides for may be applied taking account of the criteria in the Court’s judgment, so as to coordinate updating such treaties to ensure that they are compatible with EU law. This could be similar to the earlier process of updating bilateral aviation treaties between EU Member States and non-EU countries, in light of a series of CJEU judgments on their EU law compatibility.

It's too soon to say whether the reforms of the ISDS, as endorsed by the CJEU in its ruling, will satisfy a sufficient number of critics of the system to reduce the political opposition which ISDS has attracted in the past. Maybe the Court's judgment will turn out to be a death row pardon, two minutes too late. But it's striking that unlike many prior rulings, the CJEU does not appear intrinsically hostile to an international court, but willing in principle to find a way to accommodate it. Furthermore, the constraints the Court insists upon are not justified (as is usually the case) in terms of the Court's own institutional interests in the autonomy of EU law, but in terms of the EU's political institutions' accountability to the democratic process. To adapt the Canadian term, this is a judgment for Main Street, rather than the Kirchberg plateau. 

Barnard & Peers: chapter 24

Photo credit: cbc.ca

Putting the cart before the horse: a doomed constitutional strategy for negotiating the T-TIP

Emanuela Matei*

* Associate Researcher at the Centre of European Legal Studies, Bucharest. Juris Master in European Business Law (Lund University, June 2012), Magister legum (Lund University, June 2010), BSc in Economics & Business Administration (Lund University, June 2009).

Introduction

On 18 June 2015 the European Commission requested the termination of the intra-EU bilateral investment treaties (BITs) concluded by Austria, Romania, Slovakia, Netherlands and Sweden. The Commission argued that due to their accession to the EU, Member States accepted that relations between them as to matters within the scope of conferred powers are, as the CJEU said in Opinion 2/13 (on EU accession to the ECHR) “governed by EU law to the exclusion, if EU law so requires, of any other law”.

A common feature of the European BITs and free trade agreements (FTAs) is the presence of a clause on investor-state dispute settlement (ISDS), which may involve concerns of inequality before the law in the context of a limited access of individuals to the judicial system of the EU. Moreover, issues of substantive discrimination are prompted by a frequently reaffirmed superior level of protection of investment under the BIT compared with EU law.

In 2003, the Commission, the U.S. government and the acceding states from Central and Eastern Europe – apart from Hungary and Slovenia – signed a memorandum of understanding, which aimed to eliminate the possibility that American investors would use the BITs in order to challenge regulatory or administrative measures adopted by the Member States with the aim of complying with EU law. By doing that the Commission has shown awareness concerning the imminent clash displayed by cases like Micula, Eureko or Eastern Sugar.

In Micula v Romania, ICSID Case No. ARB/05/20, the relevant law is the Romania-Sweden BIT ratified in 2003, four years before the accession of Romania to the EU. The award issued in this case ordered Romania to pay damages of approx. EUR 83 million (RON 367.4 million). The facts of the case depict the pre-accession situation and the promotion of investments in specific disfavoured regions. Together with several other cases – Electrabel, AES, and EDF – Micula reflects a specific type of incompatibility: the clash between the state aid prohibition in EU law and the maintenance of a preferential regime ordered by the international investment law regime instituted by the BIT network. (For more on Electrabel, see the analysis of Matei and Ciurtin here).

The incompatibility with EU law of the fiscal advantages offered to investors was established first by the Romanian Competition Council and later by the Commission and the fiscal regime was abolished before the accession. This act of abolition triggered the dispute before ICSID (the International Centre for the Settlement of Investment Disputes).

The European Commission participated as amicus curiae in the ICSID-proceedings, though the arguments brought by it were not admitted. A different conceptual understanding of the principle of legitimate expectations is the main source of conflict. In EU law, a state aid measure must be notified and approved and only afterwards the beneficiary may enjoy the protection derived from the principle of legitimate expectations.

In the interpretation of the arbitral tribunal, on the other hand, no matter that a state measure is implemented in breach of EU law, the investor is entitled to protection. In March 2015 a Commission Decision ordered the recovery of state aid. Romania had already paid a part of the damages awarded by the arbitral tribunal. The payment constitutes illegal state aid and it must be recovered. By complying with the ICSID-award, Romania would fail to defer to the Commission Decision.

In Eastern Sugar Netherlands v CzechRepublic, SCC Case No. 088/2004, the relevant law was the Agreement on encouragement and reciprocal protection of investments between Kingdom of the Netherlands and the Czech and Slovak Federal Republic, which was ratified in 1992. This case presents a typical example of incompatibility: the clash between quotas imposed by EU on agriculture products and the requirement to maintain a preferential regime for the foreign investor.

The arbitral tribunal interpreted the Vienna Convention on the Law of Treaties (VCLT) finding that the subject matters treated by the BIT and the EU law were dissimilar, the parties did not mean to terminate the BIT and the BIT and the EU Treaties were compatible. It awarded damages of EUR 25.4 million for loss of sugar quota attributable to the Czech Third Sugar Decree of March 19, 2003.

The defendant argued inter alia that post-accession damages should not be made subject to arbitration, since they fell within the exclusive jurisdiction of the CJEU according to Article 344 TFEU. The tribunal noticed that the European Commission did not start infringement proceedings against the Netherlands and the Czech Republic for failing to terminate their BITs as it would have been expected, if the BIT had been incompatible with Article 344 TFEU. The argument of the defendant that the BIT had been implicitly superseded by the acquis communautaire when the Czech Republic acceded to the European Union was rejected. It must be retained that the inaction of the Commission and the parties has been interpreted by the arbitral tribunals as a tacit endorsement of compatibility.

In Eureko Netherlands v Slovak Republic, UNCITRAL, PCA Case No. 2008-13, the applicable law is the same as in Eastern Sugar. Achmea, previously Eureko, is a Dutch insurer and the facts of the case refer to the liberalisation of the Health Insurance Sector in 2004. In late 2006, the newly elected Slovak government sought to reverse the liberalisation of 2004. Slovakia claimed that the arbitration clause was incompatible with EU law, while the arbitral tribunal reasoned that no provision of EU law actually prohibited investor-state arbitration. The arbitral tribunal awarded EUR 22.1 million damages.

The arbitral tribunal found in its decision of 7 December 2012 that the BIT was valid and compatible with EU law and the dispute was arbitrable despite the relevance of EU law. Investors were granted more extensive rights under the BIT compared with EU law and the arbitral tribunal found that this inequality stayed in line with law. Hence, the unequal treatment of EU investors seems to be contingent to the special character of protection, which a foreign investor is habitually entitled to claim in conformity with the BIT definitions.

As to the interpretative monopoly of the CJEU, the Frankfurt Court of Appeals (Oberlandesgericht) ruling on the matter of validity of the ISDS-clause in the Netherlands-Slovakia BIT found that the exclusivity enshrined by Article 344 TFEU did not cover investor-to-state disputes (see also my comments here). The German court did not refer the question for a preliminary ruling, even if the interpretation of Article 344 TFEU should reasonably have been submitted to an examination under Article 267 TFEU.

Intra-EU BITs

Firstly, the intra-EU BITs came into existence mostly as the result of the EU accessions of 2004, 2007 and 2013, only two intra-EU BITs being concluded between old (pre-2004) Member States. Even if the incompatibility manifests itself later – at the level of litigation – thus the conflict becomes more dramatic after the accession, in substance, the incompatibility between the EU conceptual framework and the BIT philosophy precedes these accessions. Hence, it would be reasonable to ask the question why the legal status of the intra-EU BITs has not been discussed during the pre-accession period in a more transparent and well-founded manner.

Moreover, most BITs contain sunset clauses that instruct an undisrupted protection in relation to investments already in effect. The termination would only have force for the future investments, since the investors may rely on the provisions of a BIT for periods of usually 15-20 years from the date of termination (see further my comments on Romania's termination of its BITs). The accession of the post-2004 Member States was not an unprepared sudden decision, but a process with a duration of 9-12 years. The incompatibility with EU law has been hanging over the heads of the new Member States as a veritable Sword of Damocles. Thus, the intra-EU BIT disputes should not be depicted as anomalies. They could have been prevented by a more pre-emptive approach.

External BITs

The Acts of Accession – for all thirteen newer Member States – provide that “with effect from the date of accession, [the state] shall withdraw from any free trade agreements with third countries”. According to Article 6(9) and Article 6(10) of the corresponding protocols, if an agreement signed previously cannot be brought in line with EU law, the Member State in question shall withdraw from it (see the Protocol on Romanian and Bulgarian accession). The Acts  concerning the conditions and arrangements for admission from 2003, 2005, and 2012 speak a clear language. The acceding states had to denounce any trade agreement they might have concluded and become part of the free trade agreements concluded by the EU. Would it not have been more appropriate to provide a similar obligation with regard to the extra-EU BITs?

Having in mind the sunset clause, mentioned above, the effect of termination cannot be direct and immediate, so an earlier handling of the incompatibility issue would have reduced the time horizon for potential disputes. It must be reminded that the previous wave of accession, when Sweden, Finland and Austria joined the EU, also generated an obligation to align the BITs signed by these countries with the obligations imposed by Article 351 TFEU and Article 4(3) TEU[11] (see the judgments in Commissionv Austria, Commission v Sweden and Commission v Finland). The potential conflict is no novelty.

The general incompatibility of the BITs with Union law – discussed below – poses moreover the question whether Regulation 1219/2012, which concerns the investment treaties between EU Member States and non-Member States, actually did clarify their legal status. My criticism refers to the fact that instead of giving highest priority to the problem of general incompatibility, the Commission dealt first with specific examples of incompatibility. Such concrete examples relate for instance to the exclusive prerogatives of the Council to regulate capital movements under Article 64(2) TFEU or Article 75 TFEU. The Commission’s diplomatic strategy has placed the cart before the horse i.e. the specific prerogatives of EU institutions before the protection of the foundation of the EU law.

Moreover, the incompatibility can damage the effort of establishing a level playing field for the outbound investments. The investors from the Member States having no BITs with countries like Chile, Japan, Korea, Canada or most recently, the U.S.A. will not enjoy the same level of protection not being able to escape certain restrictions imposed by the relevant FTA. The general incompatibility entails a high level of complexity, therefore it cannot be surprising that such intricate consequences have occurred.

The reversed logic of the relation between intra- and extra EU BITs

Investment protection was the main tool for economic reconstruction during the post-WWII era, which constituted the dominant function of the Friendship, Commerce and Navigation treaties (see the Vandevelde paper in the notes). The next big event was the signing of the GATT in 1947, which marked the shift from bilateral to multilateral negotiations and an expanded scope of talks beyond tariffs. The GATT and the EEC (now-a-days, the EU) – founded in 1957 – contributed to deeper economic integration among Western countries, thus substituting and surpassing the Friendship, Commerce and Navigation treaties subsequently seen as less than ideal vehicles for trade promotion. The network of BITs emerged as means to ensure investment protection outside the ambit of the GATT and the EU. The overlapping between BIT protection and EU law has not been intentional.

As mentioned above, the Commission took the initiative of signing a MoU with the U.S. government being aware of the existence of incompatibilities between the European BITs and EU law. Areas of law, which have been specifically named in the MoU are: the economic freedoms, state aid rules and the obligations imposed by the EU treaties in relation to third countries.

Article 351 TFEU, which governs the relationship between EU law and the pre-existing treaties between Member States and non-EU States, gives expression to the obligation of the Member States to eliminate all incompatibilities with EU law resulting from extra-EU BITs. Then again, the Treaty of Lisbon does not overtly consider the status of the intra-EU BITs. Article 4(3) TEU may be nonetheless useful for this purpose. Some arbitral tribunals interpreted Article 351 TFEU as inferring paradoxically a more lenient regime for the intra-EU BITs.

By not opening earlier infringement proceedings or not explicitly placing the intra-EU network of BITs outside the law, the EU institutions did – according to the arbitral tribunals – tacitly endorse the intact validity of these BITs and the jurisdiction of the arbitral tribunals for that matter. The contrast between alter- and outer legality is of the essence, since the ISDS exists as an alternative to, not a substitute for, the domestic judicial system.

General incompatibility with EU law

From a purely legal perspective the situation of double standards covering areas of law defining the very foundation of the Union – the economic freedoms and the transjudicial dialogue based on sincere cooperation and mutual trust – are direct threats to its political integrity and the autonomy of the EU legal order. The risk of jeopardising the autonomy of the Union legal order is the consequence of an extant parallel international order that does not have to bring its rulings in line with the interpretation of EU law adopted by the CJEU.

It must be mentioned as well that usually the conceptual conflict between international law and EU law relates to the contradiction between reciprocity and the EU federal principles of autonomy, conferral and subsidiarity. However, the legal regime represented by the European BITs has been characterised by asymmetry being designed to protect the interests of investors from the capital exporting countries against the whims of the unstable governments in the capital importing countries. This is why, there are not many BITs signed between pre-2004 member states and the focus of the Commission has been initially set on the BITs signed by an acceding state with third countries.

The transition from the pure intergovernmental set of rules to a more federal agenda engendered legal discrepancies, negative interlegality and significant costs for the parties directly involved in these disputes. However, on the state-to-state level, it is obvious that the EU accession of the capital importing countries to the CEE provided a more substantial and comprehensive safeguard for the capital exporting countries in the North-western Europe than a BIT would ever be prone to afford. It is difficult to support the argument of practical significance of BITs in the constitutional framework of the European Union by using legal terms.

The only persuasive argument is the protection of legal certainty of the investment regime within the EU, though the strength of it has only been tested by the arbitral tribunals against the VCLT (Articles 59 and 30 of that Convention). The conflict of laws assessment has constantly reached the conclusion that each BIT has not been displaced by the EU treaties. The Vienna Convention does neither bind the Union nor all its Member States. It has relevance only as a reflection of the rules of customary international law, which are binding upon the Union institutions and form part of the Union legal order (see CJEU judgments in Racke, El-Yassini and Jany). From this point forward the matter becomes one of harmonious interpretation, a method which requires a deferential attitude towards the legal identity of the challenger. The ECtHR for instance follows the jurisprudence of the CJEU and the opposite is true, even if no binding agreement has been signed and no hierarchic structure has been crystallised between them.

In its Opinion 2/13, the CJEU did not agree to assign the power to interpret EU law provisions to the final adjudicator in matters of human rights – the ECtHR – affirming once again that the interpretation of EU law must remain the exclusive prerogative of the Union supranational judicial authority (see the discussions on this blog by Peers and Barnard). So, how could someone expect the CJEU to agree with a transfer of powers to a non-judicial and temporarily constituted entity, which is ineligible to refer to the CJEU for a preliminary ruling under EU law? (see the judgments in Pretore di Salo, Pardini and Corbiau) How could it be possible to do that without contradicting itself in the assessment of a fundamental matter?

As van Harten says: “The powers shifted to arbitrators are among the highest that any adjudicator can exercise. They involve the final determination of the legal boundaries of sovereign authority, as exercised by any legislative, executive, or judicial body, based on broad standards of foreign investor protection. They can lead to the assignment of potentially vast amounts of public funds to private actors, usually large companies. They are backed by an international enforcement system that is more powerful than that of domestic or international courts. They are subject to very limited judicial review or no judicial review at all, depending on the arbitration rules under which the foreign investor chooses to bring its claim”.

The possibility to obtain damages for state or supra-state non-contractual liability within the EU is narrowly defined, thus in a similar situation of (for example) expropriation without compensation, an investor under a BIT agreement would enjoy a higher degree of protection being able to obtain substantial damages as underlined by van Harten above. So should the same enhanced level of protection be granted to all investors no matter if their situation is covered by a BIT or not? In Eureko the claimant declared explicitly that it preferred to use the arbitration solution offered by the BIT instead of the judicial path offered by the EU system and the arbitral tribunal recognised that a higher level of protection is guaranteed under BIT-regime.

T-TIP: Will the cart be placed on the spot?

While the Council believes that the new legal framework should contain the pre-existing investor guarantees in BITs, and the Commission also supports ISDS, the EP has moved towards opposing it in its present form, asserting in 2013 that future EU investment agreements should include an ISDS-clause, only if it were justifiable in the light of a case-by-case assessment. At the most recent EP consultations, Bernd Lange – rapporteur on TTIP for the EP’s international trade committee (INTA) – affirmed exultantly: “We have placed the extrajudicial arbitration in the dustbin of history. It is clear that private tribunals have no future in trade agreements. And we will work on a new system, which corresponds to a public court”.

Kleinheisterkamp and Poulsen proposed in their turn three distinct patterns for investor protection in the T-TIP. The first choice – no greater rights – corresponds to the American trade policy adopted by the 2012 US Model BIT.

The second pattern – the Australian ISDS model – matches the proposal of most Committees of the European Parliament being characterised by default reliance on domestic courts supplemented by state-to-state dispute settlement and institutionalised consultations concerning the domestic regimes of investor protection.

The third pattern would be in tune with the European Union constitutional structure as to the choice to allow primarily the domestic courts to decide on the legality of public acts, then it reflects the American philosophy with regard to binding state interpretations and filter of frivolous and obviously unmeritorious claims (see Tietje and Baetens, in the notes; compare to the Bipartisan Congressional Trade Priorities and Accountability Act 2015, p 14). The possibility to review the legality of state measures at the level of domestic courts would enable them to refer for preliminary ruling, which is key for the constitutional autonomy of the EU.

In this sphere, flexibility and consistency must go hand in hand and perhaps the Europeans could extract some relevant knowledge from the developments accumulated by the United States during the past three centuries. A comparative historical study could be a beneficial groundwork for achieving an improved insight into the matter of trade agreements authority. As the EU-BITs array of contradictions perfectly shows, despite its apparent political cleverness, the strategic move of putting the cart before the horse would be an unfortunate decision as regards the T-TIP negotiations.

Barnard & Peers: chapter 24

Art credit: www.euractiv.com

Notes 

Kenneth J. Vandevelde, ‘A Brief History of International Investment Agreements’ UC Davis Journal of International Law & Policy 12, no. 1 (2005): 157, 165-166.

Christian Tietje and Freya Baetens, ‘The Impact of Investor-State-Dispute Settlement (ISDS) in the Transatlantic Trade and Investment Partnership’, 26 June 2014, p. 127. Compare with the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA-2015), p. 14.

The Missing Link: Direct Effect, CETA/TTIP and Investor-State Dispute Settlement

 

 

By Daniel Thym, Chair of Public, European and International Law, University of Konstanz

International treaties have rarely received more attention than the proposed free trade deals between the EU and the US and Canada. This entails that many law students and practitioners are confronted with a theme that does not feature prominently in legal education. In debates with students, I realise that preconceptions about the functioning of domestic legal systems are regularly projected upon the international sphere. One example is a demand that companies should challenge state action before domestic courts instead of dispute settlement bodies under the planned EU/US agreement (TTIP) and the proposed EU/Canada trade agreement (CETA). These claims often assume that national courts hold the competence to enforce corresponding rules. For lawyers working on domestic issues it seems self-evident that courts can apply the law.

Against this background, this blogpost focuses on a provision in the Draft CETA with Canada (Article 14.14: see the text below), whose relevance has not been acknowledged so far, including by the stimulating contributions to the Verfassungsblog Symposium on Investment Protection. On page 470 of the roughly 1600 pages of the consolidated CETA Draft Agreement, which the Commission regards as a template for free trade negotiations with the United States, we come across a final provision of seemingly minor relevance on ‘private rights’, which rejects the applicability of the agreement en passant. This reaffirms that the implications of the free trade deals would be less dramatic than some suggest.

Background: CETA and TTIP as International EU Agreements

In order to understand the relevance of Article 14.14 on private rights, we should apprehend that most segments of the free trade agreements would be binding upon Member States as an integral part of EU law. Axel Flessner may try to argue that the arrangements would constitute an ultra-vires-act (thereby initiating more tweets than any other contribution to the said symposium), but the plain Treaty text demonstrates that the legal picture is fairly evident. Article 207 TFEU declares that the EU’s Common Commercial Policy (CCP) allows for the conclusion of trade agreements on goods and services and embraces, among others, ‘foreign direct investment’, while Article 3 TFEU maintains that the conclusion of agreements in this area shall be an exclusive Union competence.

These provisions were a deliberate policy choice after decades of wrangles about the precise scope of the CCP. The Treaty of Lisbon was meant to replace earlier and ambiguous formulations with an overarching competence for the European Union. In its Lisbon Judgment, the German Federal Constitutional Court recognised the pertinence of this change: ‘With the exclusive competence as set out above, the Union acquires the sole power of disposition over international trade agreements which may result in an essential reorganisation of the internal order of the Member States.’ Judges in Karlsruhe gave the green light to the changes nonetheless, albeit with a minor caveat that ‘much argues in favour of assuming that the term “foreign direct investment” only encompasses investment which serves to obtain a controlling interest in an enterprise’ and excluded so-called portfolio investments (ie, non-controlling interests in companies) as a result.

This reference to the limits of the CCP is relevant, since it indicates, in general terms, that there remain uncertainties about the precise delimitation of competences for corollary aspects of international trade. For that reason, most national governments maintain that CETA and TTIP should be concluded as so-called ‘mixed agreements’, with the EU and all 28 EU Member States as signatories. If that view prevailed, national parliaments would have to give their consent as well. However, this would not modify the internal allocation of powers; the EU institutions are in the driving seat in the vast field of Union competence – both during the negotiations and with regard to legal effects. It is established case law that the legal effects of mixed agreements follow the rules of Union law for all matters that are covered by the Common Commercial Policy.

Domestic Application of Agreements concluded by the EU

The predominance of Union law in legal practice can obscure our awareness of the specificities of the international legal system. Law students across Europe learn in their undergraduate courses about the direct and supreme effect of supranational rules, but are not always familiar with public international law. Domestic courts have to apply Union law in pretty much the same was as national law, but this assumption cannot be extended to public international law without modification, including in situations in which the EU concludes international agreements with third states.

It is true that the ECJ maintains that international agreements can have direct effect as an integral part of the Union legal order – and an example demonstrates that this can have critical implications: for example, judges in Luxembourg decided in July that Member States cannot automatically require the spouses of Turkish nationals to acquire basic language skills of the host country. Legally, this conclusion rests upon an interpretation of the so-called standstill provision for the self-employed in the Additional Protocol of 1970 to the Association Agreement between Turkey and today’s European Union. In the terminology of international trade law, the case concerned a so-called non-tariff barrier to the freedom of establishment. It is these non-tariff barriers that take centre stage in both CETA and TTIP negotiations (neither of the latter treaties will affect migration, though).

If the underlying legal arguments about direct effect and court jurisdiction extended to free trade deals with Canada and the United States, the implications could be dramatic indeed. Both the ECJ and domestic courts would hold the power to correct domestic or supranational legislation, whenever it falls foul of CETA or TTIP. Yet, this outcome is no foregone conclusion, since the ECJ opts for a direct applicability of international agreements ‘only where the nature and the broad logic of the latter do not preclude this.’ In deciding whether this is the case, the Court considers, among other things, the purpose of the agreement, the will of the parties and the question of reciprocity, i.e. whether the Union would be alone in recognising direct effect. Luxembourg may have largely ignored the question of reciprocity with regard to Turkey and other neighbours of the EU, but it traditionally takes centre stage in the evaluation of trade liberalisation agreements.

Article 14.14 of the CETA Draft Treaty

Once we have understood the far-reaching implications of direct applicability, we may appreciate the bearing of the clause on private rights in the final provisions of the consolidated Draft CETA Agreement, which states: ‘Nothing in this Agreement shall be construed as conferring rights or imposing obligations on persons other than those created between the Parties under public international law, nor as permitting this Agreement to be directly invoked in the domestic legal systems of the Parties.’

That is nothing less than the official denial of direct effect in the operative treaty text; neither the ECJ nor domestic courts would hold the power to apply CETA rules in domestic proceedings or to annul legislation which contradicts trade law. CETA and TTIP would get the same treatment that the ECJ accords to WTO law, which also does not have direct effect in the EU legal order and the domestic legal systems of the Member States – not even in situations, in which the appellate body of the WTO Dispute Settlement Mechanism confirmed that EU legislation falls foul of WTO standards.

Denial of direct effect is an important stumbling block for the long-term success of any free trade agreement, especially when it comes to the elimination of non-tariff barriers to trade, since corresponding rules are often formulated in an open manner. The real-life implications of such vaguely formulated provisions depends decisively upon the continued will of the parties and the availability of control and enforcement mechanisms – as the experience with non-tariff barriers to trade in the EU single market and the example of language requirements for spouses of Turkish nationals demonstrate. Without institutional control mechanism, vague treaty formulations are often ineffective.

Implications for the Debate about Investor-State-Dispute Settlement

In the light of Article 14.14 of the CETA Draft Agreement, we may have to re-consider our perspective on the proposed investor-state-dispute settlement rules in both CETA and TTIP. Critics will use the absence of direct application as an argument to decry the special treatment for investors; supporters, by contrast, will argue with the Commission that the dispute settlement bodies are a compensation for domestic legal remedies, which would not be available for the substantive rules of CETA and TTIP. I personally share the opinion of Christian Tams that the debate should focus on the desirability of special rules for investors (and not the question of procedure). The latter may be superfluous in relations with the US and Canada, but to abandon them would render it difficult to insist upon similar provisions in negotiations with China, Russia or other states we trust less.

In any case, the absence of direct effect in domestic proceedings shows that the legal implications of CETA and TIIP would be less dramatic than some commentators in the public debate suggest. Courts in Europe would not hold the power to annul domestic or supranational legislation, which violates the agreements – a power that also the dispute settlement bodies would be denied explicitly, together with the option for the state parties to force their reading of the agreements upon the arbiters by means of an authoritative interpretation. This would orientate the dispute settlement rules in CETA and TTIP towards inter-state bargaining, pretty much like in the WTO context.

The denial of direct application demonstrates that both the CETA Draft Agreement and the TTIP negotiation position are far removed from resembling anything like EU-style integration through law – and I consider this to be a good thing given that any dynamic interpretation would lack much of the democratic legitimacy and procedural constraints, which we have, notwithstanding all the deficits, in the European context. It seems to me that it is the biggest benefit of the debate about CETA and TTIP to this date that the broader public has started discussing the governance of economic globalisation. That debate will stay with us, even if an seemingly unimpressive provision on page 470 of the CETA Draft Agreement excludes the domestic enforcement of the transatlantic trade rules.

This blogpost has been published previously on ‚Verfassungsblog – On Matters Constitutional‘

 

Barnard & Peers: chapter 25

Image credit: capreform.eu