EU/Canada free trade and the Irish constitution: Costello v The Government of Ireland and Ors [2022] IESC 44 - Case Comment

 

 

Dr John Cotter, Lecturer in Law, Keele University, UK

Photo credit: Guiseppe Milo, via wikicommons media

 

Background

 

The EU-Canada Comprehensive Economic and Trade Agreement (CETA), signed on 30 October 2016 following five years of negotiations, was in retrospect concluded at a pivotal moment in the history of EU trade policy. Though trade policy might not have been the most salient issue in the Brexit referendum earlier that year, prominent Brexiters nevertheless sought to make hay from the EU’s torpid progress in concluding trade deals with third countries, arguing that a nimbler post-Brexit UK would be free to conclude and ratify trade agreements at a faster pace. Less than a month later, in November, Donald Trump won the US Presidential election, which would ultimately put paid to the prospect of completion of the Transatlantic Trade and Investment Partnership (TTIP). Of course, those with a reasonable grasp of EU trade law and policy knew that the signature of CETA marked only the end of the beginning; as a mixed agreement (ie both the EU and its Member States were parties), CETA would require ratification by not only Canada and the EU, but also by all EU Member States. Political opposition, as well as anticipated constitutional and other legal challenges, meant that ratification by all Member States might be a drawn-out affair and was by no means certain.

 

CETA was approved by the European Parliament on 15 February 2017 and ratified by Canada on 16 May 2017. To date, sixteen current EU Member States have notified the European Council of ratification. On 21 September 2017, in accordance with Council Decision 2017/38, most of the agreement was afforded provisional application. However, several key provisions of the agreement were excluded from provisional application. Of relevance to this blogpost, key provisions of Chapter 8 (investment) were excluded; in particular, those relating to the new Investment Court System (ICS). This ICS comprises a permanent arbitration tribunal (the Tribunal) and an Appellate Tribunal. The Tribunal, which will consist of fifteen members appointed by the EU-Canada Joint Committee established to oversee the application of CETA, will hear and determine claims by investors that a party to CETA has breached certain obligations under the agreement which has resulted in financial loss to the investor. Where a claimant investor is successful, the Tribunal may award compensation, with the parties, including of course EU Member States, being required to recognise and comply with any award without delay. However, execution of any award domestically will be governed by the laws concerning execution of judgments or awards in the state in which execution is sought. It is worth mentioning that an application for execution of a Tribunal award would not have to be brought before courts or tribunals of the defendant state; enforcement could be sought in any state which is a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID).

 

As expected, CETA attracted legal challenges, with the ICS being an especial bone of contention. The most notable of these was in Opinion 1/17, in which the Court of Justice, sitting as a full Court, upheld the compatibility of CETA with EU law in the face of concerns expressed by Belgium that, among other things, the ICS might be incompatible with the autonomy of the EU legal order. In March 2022, the German Bundesverfassungsgericht upheld the constitutionality of the provisional application of CETA, though the constitutionality of the ICS in Germany remains an open question. On 11 November 2022, a majority of the Supreme Court of Ireland ruled that ratification by Ireland of CETA as matters stand would be unconstitutional.

 

Facts, arguments, and the Irish constitutional context

The constitutional challenge to CETA in Ireland was brought by Patrick Costello TD, a Green Party member of the Dáil (the lower house of Ireland’s parliament, the Oireachtas). Pursuant to Article 29.5.2˚ of Bunreacht na hÉireann (the Constitution of Ireland), any international agreement which involves a charge on public funds must be approved by the Dáil in order for that agreement to be binding on the State. Mr Costello argued, however, that CETA could not be ratified by the State without an amendment to the Constitution, which would require a referendum. It was submitted on behalf of Mr Costello that CETA involved the otherwise unconstitutional transfer of legislative and juridical power of the State over to institutions established by CETA. As regards legislative power, it was argued that CETA provided rule-making powers to the CETA Joint Committee which amounted to a power to make laws which would be binding in Ireland in contravention of Article 15.2 of the Constitution, which vests sole and exclusive law-making powers for the State in the Oireachtas.

With respect to juridical power, it was contended that the ICS established under Chapter 8 of CETA would be contrary to Article 34.1 of the Constitution, which provides that “[j]ustice shall be administered in courts established by law by judges appointed in the manner provided by this Constitution”. This juridical power within Ireland held exclusively by Irish courts would be infringed because CETA in conjunction with domestic legislative provisions in the Arbitration Act 2010 would require Irish courts to give virtually automatic effect domestically to awards made by CETA Tribunals. Mr Costello was unsuccessful before the High Court, where Butler J took the view that CETA would bind the State as a matter of international law only and that any decisions of the CETA Joint Committee could not be characterised as laws made for the State within the meaning of Article 15.2. Butler J also held that the disputes to be determined by the CETA Tribunals did not constitute the “administration of justice” within the meaning of the Constitution and therefore would not interfere with the powers of the Irish courts in that regard.

Central to this case in every sense is the concept of sovereignty. Ireland’s history and the anxieties of the framers of Bunreacht na hÉireann leap forth from the constitutional text. The preamble refers to “heroic and unremitting struggle [of our fathers] to regain the rightful independence of our Nation”. The very first article asserts the “inalienable, indefeasible, and sovereign right [of the Irish Nation] to choose its own form of Government, to determine its relations with other nations, and to develop its life, political, economic and cultural, in accordance with its own genius and traditions.” Article 5, with reference to the State, declares that Ireland is a “sovereign, independent, democratic state.” These assertions are given mechanical form in various provisions throughout the Constitution which confer the sole and exclusive law-making power for the State on the Oireachtas (Article 15.2) and the administration of justice in courts established by law (Article 34.1). Consistent with this protectionist approach to sovereignty, Article 29 also establishes that Ireland adopts a dualist approach to international law obligations. Those with pre-existing knowledge of Ireland’s history in the EU will be aware of these facts. In order for Ireland to join the then EEC in 1973, which involved the ceding of some sovereignty, and of legislative and judicial power in the State to European institutions, a referendum had to be held in 1972 to approve the requisite amendment to Article 29. In 1986, when the Irish government sought to ratify the Single European Act sans a constitutional amendment, lawyers on behalf of Raymond Crotty in Crotty v An Taoiseach were successful in convincing the Supreme Court that an international agreement involving the cession of external sovereignty would require a further amendment to the Constitution and, therefore, a referendum. Europe has had to hold its breath while awaiting the results of a number of Irish constitutional referendums since. Mr Costello was evidently hoping to add another chapter to that story.

 

Supreme Court judgments

Hogan J in his judgment opined that the appeal before the Supreme Court “may yet be regarded among the most important which this Court has been required to hear and determine in its almost 100-year history” (para. 9). The appeal also resulted in a deeply divided court, with each of the seven judges authoring substantial (and in some cases lengthy) judgments which require close examination to reveal the ratio of the case. Mercifully, the judges were able to whittle the appeal down to six issues, set out in the judgment of Dunne J (para. 13):

i)                    Whether ratification of CETA was necessitated by the obligations of membership of the EU.

This had been an argument advanced on behalf of the State in the alternative to the assertion that CETA could be ratified utilising normal processes under Article 29. All seven judges (O’Donnell CJ, Dunne, Hogan, Charleton, McMenamin, Power, and Baker JJ) rejected what one suspects was a rather half-hearted argument, ruling that EU membership did not necessitate ratification of CETA.

ii)                   Whether CETA amounted to a breach of Article 15.2 of the Constitution (sole and exclusive law-making power of the Oireachtas).

It had been submitted on behalf of Mr Costello that CETA would involve interference with the law-making powers of the Oireachtas for the State. In this regard, Mr Costello’s lawyers pointed to the jurisdiction of the CETA Tribunals to make awards against the State for losses suffered by an investor as a result of the operation of a provision of Irish law, arguing that the threat of such awards would create a ‘regulatory chill’ which might prey on the minds of Irish law and policy makers. The Supreme Court was divided on this question, with the majority (O’Donnell CJ, Dunne, McMenamin, Power, and Baker JJ) ruling that CETA would not amount to an interference with the law-making powers of the Oireachtas. Hogan and Charleton JJ, dissented on this point, with the former pointing in particular to the fact that CETA provides for a “form of strict liability on the part of the State in respect of legislation which is found to be contrary to CETA and insofar as it does not contain a good faith defence” (para. 14).

iii)                 Whether the creation of a CETA Tribunal amounted to the creation of a parallel jurisdiction or a subtraction from the jurisdiction of the courts in Ireland contrary to Article 34 of the Constitution (conferral of ‘administration of justice’ in courts established under the Constitution).

In essence, the issue amounted to whether one viewed the CETA Tribunal as a body which would hear and determine disputes which were purely matters of international law (not constitutionally problematic) or whether it amounted to a body which would (or could) become involved in disputes that might otherwise have been heard and determined in Irish courts (possibly constitutionally problematic). Again, the Supreme Court was divided on this issue, with the majority (O’Donnell CJ, McMenamin, Power, and Baker JJ) of the view that CETA did not involve the impermissible withdrawal of disputes from the jurisdiction of Irish courts. Dunne, Hogan, and Charleton JJ differed on this point, though the former two judges pointed to the fact that their chief constitutional objection in this regard arose from the fact that the judgment of a CETA Tribunal would be, in Hogan J’s words, “virtually automatically enforceable” in Ireland (para. 15).

iv)                 Whether the ‘automatic enforcement’ of a CETA Tribunal award by virtue of the enforcement provisions of CETA in conjunction with the provisions of the Arbitration Act 2010 is contrary to Article 34 of the Constitution.

As Ireland is a dualist state, an award granted by an international tribunal will not enjoy automatic enforcement in Irish courts unless such enforcement is provided for specifically under Irish law. In the absence of such a domestic law, therefore (unless one takes the view that the primacy of EU law or the principle of sincere cooperation under Article 4(3) TEU would require enforcement of CETA awards domestically), CETA awards would not be enforceable in Ireland. However, sections 24(1) and 25(3) of the Arbitration Act 2010 give force of law in Ireland to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) and ICSID respectively. CETA in turn provides that awards made by the CETA Tribunals are awards for the purposes of the aforementioned international law instruments, meaning that following ratification, CETA Tribunal awards would, save in very limited circumstances, be automatically enforceable in Ireland. Automatic enforcement of CETA Tribunal awards would raise a constitutional difficulty in that it would effectively confer the final decision in a dispute concerning the ‘administration of justice’ within the meaning of Article 34.1 to an international tribunal rather than the Irish courts. On this point, a majority of the Supreme Court (Dunne, Hogan, Charleton, and Baker JJ) held that the virtual automatic enforcement of CETA Tribunal awards in the State would be a violation of Article 34. The reasoning of Hogan J was particularly interesting in this regard; borrowing apparently from the jurisprudence of the German Bundesverfassungsgericht, Hogan J found that the combination of CETA and the 2010 Act would mean that the Irish courts “would have no power to refuse enforcement even where the award compromised Irish constitutional identity or constitutional values in a fundamental way or where it was inconsistent with the requirements of EU law” (my emphases).

v)                  Whether the effect of the interpretative role of the CETA Joint Committee and its role are a breach of Article 15.2 of the Constitution.

Article 25 of CETA allows the CETA Joint Committee to make interpretative decisions which are binding upon the CETA Tribunals. A question arose as to whether these interpretative decisions would constitute an interference with the sole and exclusive law-making function for the State of the Oireachtas under Article 15.2. On this issue, the majority of the Supreme Court (O’Donnell CJ, Dunne, McMenamin, and Power JJ) held that that interpretative role of the CETA Joint Committee was constitutionally permissible. Again, the dissents (Hogan, Charleton, and Baker JJ) were noteworthy. Hogan J, in particular, opined that CETA Joint Committee interpretative decisions amount to “a form of quasi-legislation” which in practice would involve a de facto amendment of CETA without the constitutionally mandated prior consent of the Dáil under Article 29.5.2˚ (para. 17).

 

vi)                 Whether an amendment to the Arbitration Act 2010 to alter the ‘automatic enforcement’ of a CETA Tribunal award would allow ratification of CETA without an amendment to the Constitution and attendant referendum.

The majority of the Supreme Court had held that ratification of CETA would be unconstitutional owing to the fact that CETA Tribunal awards would be virtually automatically enforceable arising from the interaction of CETA and the Arbitration Act 2010, which would constitute an interference with the constitutionally defined jurisdiction of the Irish courts. One might be forgiven therefore for concluding that ratification of CETA would require a constitutional amendment and a referendum. The Supreme Court, however, took it upon itself to signpost a less complicated way out of the quandary. Hogan J suggested that amendments to the Arbitration Act 2010, which would empower the Irish courts to refuse to give effect to a CETA Tribunal award (on the grounds of Irish constitutional identity or obligations under EU law), would cure the unconstitutionality identified by the majority of the Court (paras 228-237). All of the judges of the Court, save for Charleton J agreed that Hogan J’s prescription would cure the unconstitutionality (or be constitutionally permissible, in the case of those judges who saw no unconstitutionality in the first place). Charleton J’s “ultimate dissent” posited the view that the suggested amendments to the 2010 Act would be ineffectual since the primacy of EU law flowing from Ireland’s obligations to the EU under Article 29 of the Constitution would render it impossible to refuse to enforce a CETA Tribunal award on grounds such as Irish constitutional tradition (para. 62).

 

Observations

 

Viewed formalistically, the Costello case is purely about the Constitution of Ireland, not CETA itself or indeed, in a direct sense anyway, EU law. There is certainly more than enough in the Supreme Court judgments to engage Irish constitutional scholars for another century. However, the judgments of the Supreme Court have much of interest to say to trade and investment lawyers, as well as EU lawyers, and it is on these points that I will focus my observations.

 

In order to assess constitutionality, the judges had to analyse the CETA agreement and in many cases make assumptions about its likely operation. In examining the possible effects of CETA on Irish legislative and juridical sovereignty, Hogan J, for instance, took what might be described as a precautionary approach in entertaining (perhaps remote) hypotheticals in which CETA Tribunal awards might result in inhibiting the formulation of legislative policy by the Oireachtas. Hogan J also identified the interpretative role of the CETA Joint Committee as potentially quasi-legislative in nature, with the possibility that this role could be used to effect de facto amendments to the text of CETA. Ironically, it may be the historic expansive interpretation of the EU Treaties by the CJEU, some of which have arguably amounted to de facto textual amendments, that have led to some fear about international or supranational institutions using interpretative powers to change the nature of an international agreement beyond what was ratified at national level. O’Donnell CJ, in contrast, seemed to take a much more sanguine approach to how international agreements like CETA operate in practice and to show concern for what an overly cautious and sovereigntist approach might have on the ability of the executive to conclude international agreements. On a related note, while Hogan J’s suggested constitutional cure was accepted by a majority, Charleton J maintained forcefully that the primacy of EU law would nullify the effect of any such amendments. In the perhaps unlikely scenario that it transpires that Charleton J is correct on this point, it could result in a situation where CETA was ratified by Ireland based on a misapprehension on the part of the majority of the Supreme Court on the nature of the CETA enforcement obligations. This is a conceivable prospective mess that might have been avoided by a preliminary reference to Luxembourg.

 

The stinging criticism by Hogan J (a former Advocate General at the Court of Justice) to the CJEU’s approach to CETA in Opinion 1/17 is also notable. Although keen to point out the differing constitutional contexts, Hogan J identified what he saw as weaknesses in the CJEU’s reasoning. Taking a position more defensive of legislative and juridical sovereignty (or autonomy) Hogan J rejected, for instance, the CJEU’s notion that only repeated awards of damages by the CETA Tribunals could impact EU or national regulatory legislation and policy making. Hogan J pointed also to the fact that the CETA Tribunals could in practice disregard CJEU jurisprudence and that there would be no remedy in EU or national law for such disregard, a matter the judge believed to be a “significant structural weakness” in the drafting of CETA.

 

Likewise of note in the judgment of Hogan J is the appearance of the idea of Irish constitutional identity and constitutional values. Seemingly drawn from the terminology of Karlsruhe, this is the first time that such phraseology has appeared in an Irish court judgment. It should be noted, however, that the use of the terms is limited to the enforceability of CETA Tribunal awards in the State. There is no suggestion that such concepts could be utilised to justify non-compliance with obligations flowing from EU membership; indeed, Hogan J made it abundantly clear that if ratification of CETA were required by obligations arising from EU membership that would have overridden any other possible constitutional objection.

 

As a final remark, the Supreme Court judgments were received with some fanfare by opponents of CETA on the day of their publication. While they are of major legal significance, they – in reality – place little in the way of legal obstacles to the ratification of CETA in Ireland.

 

 

 

‘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

The CJEU ruling in Achmea: Death Sentence for Autonomous Investment Protection Tribunals

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

*See the German language version of this post on Verfassungsblog

Public debates are short-lived: the international media was thrilled by the regional parliament of Wallonia threatening to block the CETA Agreement with Canada. At the moment, free trade is more popular as a result of Donald Trump’s opposition, since few Europeans feel comfortable promoting a similar approach as the US president. We should be careful, however, not to be forget underlying structural issues besides the headline news about punitive tariffs on European steel or American orange juice. One such structural challenge is independent investment protection tribunals, which are a bone of contention during the CETA and TTIP debate. In that respect, the recent Achmea judgment by the ECJ may have more far-reaching repercussions as the public debate has recognised so far.

This judgment concerned a Slovak-Dutch Agreement on investment protection, invoked to request a tribunal to rule on compensation for a Slovakian government decision to change health insurance law. The ECJ found that the bilateral investment treaty was in violation of EU law because the tribunal could be called upon to interpet EU law in a dispute between investors and States, but its interpretation could not be effectively challenged via the court process, meaning that the ECJ’s role as the final arbiter of EU law was infringed.

While the (German) media initially focused on implications for intra-European investment protection, such as the Slovak-Dutch Agreement, it is too simple to assume, as the Frankfurter Allgemeine did, that agreements concluded by the EU with a third state follow a different script, since the EU institutions gave their consent to the investment protection regime. Such an interpretation ignores the level of abstraction of the ECJ’s argument, which appears to be a position of principle, thereby closing a gap in its argument on the EU-Singapore Free Trade Agreement when judges in Luxembourg deemed it ‘not (yet) appropriate to examine whether the dispute settlement regime … of the envisaged agreement fulfils the criteria set out (in previous case law), in particular the criterion relating to the autonomy of EU law” (para 301). They now provide an answer to the question and it is, not for the first time, a celebration of autonomy.

Luxembourg as a Serial Offender: Control of Third State Agreements

For the European Union, the law is more than an instrument to realise political objectives; it is the foundation of its existence and a precondition for its continued success. That is why deficits in the respect for the rule of law are so sensitive for the EU, with regard to monetary union and the asylum system not differently than regarding Poland. When integration through law stutters, European integration is in trouble – and it does not come as a surprise, therefore, that the ECJ defends the effective application of supranational rules vigorously. To do so may promote its institutional self-interest, if judicial ‘competitors’ are being constrained, but the defence of autonomy is more than judicial egotism: it protects the legal foundations of a supranational community based on the rule of law.

Indeed, the Achmea judgment is not the first occasion on which the ECJ cut down (quasi-)judicial competitors based on international treaties. In 2014, it infamously rejected the first attempt by the EU institutions to accede to the ECHR, although the EU Treaties sponsored that move explicitly (albeit with safeguards for autonomy). The opinion was all about the protection of the autonomy of EU law and there are plenty of references to opinion 2/13 in the general principles of the Achmea judgment (paras 32-37). Other international courts the ECJ prevented include the initial draft of the European Economic Area Agreement and the project of a pan-European patent court involving several third states.

From a doctrinal perspective, the judicial control of third country agreements is based on the assumption, confirmed by Article 218(11) TFEU, that primary EU law has a higher rank than international agreements from the perspective of the supranational EU legal order. That conclusion extends to the UN Security Council in relation to which the ECJ famously found that ‘international agreement cannot have the effect of prejudicing the constitutional principles of the (EU) Treaty’ (para 285). Ideally, such incompatibility is identified on the occasion of an opinion before an agreement is being ratified, but judges in Luxembourg do not hesitate to enforce the primacy of the EU Treaties after an agreement entered into force.

Protection of the Autonomy of Union Law

The concept of ‘autonomy’ is a catch-all phrase intended to summarise core features of the supranational EU legal order relating ‘to the constitutional structure of the EU and the very nature of that law’ and including basic features, such as direct effect, primacy and a judicial system intended to ensure consistency and uniformity in the interpretation of EU law via the ECJ and national courts (paras 33-37). That may sound abstract, but it should be read against the background of the cardinal significance of the law for the process of EU integration mentioned before. When speaking of ‘autonomy’, judges in Luxembourg are not concerned with the doctrinal small print: autonomy is a question of principle that leaves little room for compromise.

Closer inspection demonstrates that not only the general principles of the Achmea judgment are based on the rigorous defence of autonomy. The position of the ECJ on the bilateral Slovak-Dutch investment treaty (BIT) are similarly general in nature (paras 39-59), thereby indicating that the ruling is more than a decision on intra-European investment protection schemes. Its reasoning can be extended to agreements with third states as a matter of principle, also considering that the ECJ refers to several previous rulings that had considered such treaties to be in violation of the EU Treaties. Indeed, it seems to me that the arguments put forward in Achmea can be extended to extra-European investment protection regimes, such as the one foreseen in the CETA Agreement with Canada. We cannot exclude, of course, that the ECJ will distinguish the latter agreement from intra-European BITs, but the level of abstraction of the Grand Chamber’s position in Achmea indicates that we should expect the CETA rules to fall foul of the autonomy of EU law for at least four legal considerations.

Firstly, it won’t save the CETA Tribunal that its jurisdiction will be limited to the interpretation of the agreement and other international law and that it will have to interpret domestic law in line with domestic courts (Article 8.31, CETA treaty). The Achmea judgment maintained explicitly that a similar interpretation of the corresponding provision in Article 8 BIT would not remedy the Court’s concern about the indirect evaluation of domestic law (para 40-42). Indeed, it is in the nature of investment protection that a company complains with an international tribunal about domestic laws and practices, which are to be evaluated in light of international law.

Secondly, the recent ruling may have concerned a classic single market case about the access of a Dutch company to the privatised Slovak health insurance market, thereby affecting two core guarantees of Union law: the free movement of capital and the freedom of establishment. There is, however, nothing in the reasoning of the ECJ indicating that its reasoning is limited to the intra-European fundamental freedoms. The concern about the autonomy is universal (para 41, 33), covering all aspects of primary and secondary Union law as a matter of principle, including all those directives and regulations regulating economic activities which might possibly be judged in light of the investment protection provisions in CETA.

Thirdly, the CETA Tribunal won’t have the competence to send a preliminary reference to Luxembourg. Thus, it will be confronted with the same criticism the Achmea judgment put forward against the Slovak-Dutch Tribunal, which the ECJ could possibly have qualified as a court within the meaning of Article 267 TFEU (para 43-49). Yet, it did not follow down this road. Instead of integrating investment tribunals into the EU system of judicial protection, it excluded them from it, thereby laying the basis for their prohibition.

Fourthly, a final award of the CETA Tribunal (called ‘Urteilsspruch’ in the German translation) does not remain an inter-state affair, which – like in the case of the WTO – has to be settled by diplomatic means. Instead, final CETA awards are binding on all parties and can be enforced via domestic courts (Article 8.39, 8.41). The latter are not authorised to check the compatibility of the award with Union law, something the ECJ considered insufficient in its recent ruling (paras 50-53).

Consequences for Investment Tribunals

It is the primary motivation of the ECJ to ensure the continued jurisdiction of European courts over investment protection. It objects to a specialised court system based for companies at the international level, while highlighting, at the same time, that inter- and intra-state arbitration remains an option. It is permissible, within certain limits, for freely expressed wishes of individual companies to settle a dispute via private arbitration channels (para 54-55). The ECJ reaffirmed, moreover, that Union law does not generally prohibit international courts and tribunals under the condition that their structure respects the characteristics of the supranational legal order.

Dispute settlement within the WTO is such a mechanism that is unproblematic from the perspective of Union law, precisely because world trade law does not generally establish directly applicable rights and obligations for individual companies. If Donald Trump finally installs punitive tariffs against European aluminium and the EU counteracts, the dispute remains intergovernmental. Even if the WTO Appellate Body finds subsidies for Airbus to be incompatible with world trade law, Boeing will not be able to enforce the award via domestic courts. Dispute settlement within the WTO does not call into question the autonomy of Union law.

One option to save investment protection tribunals might be to allow domestic courts to control their findings in light of Union law, including the option of a reference to the ECJ – instead of limiting the judicial review at the enforcement stage on the internal coherence of the arbitral award and on compliance with the narrow public policy exception (see, for the domestic dispute which led to the Achmea case, Paragraph 1059(2) of the German Code of Civil Procedure). Such comprehensive control in light of primary and secondary Union law could possibly avoid the verdict of illegality on the part of the ECJ against investment tribunals such as the CETA model. It would, however, contravene the (controversial) raison d’être of international investment protection regimes, whose rationale is to provide independent oversight of domestic laws by an institution outside the national court structure in light of international law alone.

It is important to understand that the ECJ’s reasoning does not remain limited to agreements the Member States have concluded with third parties. A similar argument applies to treaties between the EU and third states, such as CETA or the Energy Charter Treaty, on the basis of which the Swedish company Vattenfall currently sues Germany for its decision to terminate nuclear power production. According to settled ECJ case law, the conflict between a directive and an international treaty need not be resolved to the benefit of investment protection rules. International treaties prevail over secondary legislation only if the treaty in question is capable of being directly applicable – a condition the ECJ rarely considers to be fulfilled with regard to international trade agreements.

Thus, secondary EU legislation has a higher rank than WTO law within the supranational legal order and in the case of CETA direct effect is being excluded explicitly in Article 30.6. That may sound abstract, but it has tangible consequences: primary and secondary Union law would prevail in cases of conflict between EU legislation and an arbitral award under the CETA agreement, which is based on international law alone. Within the EU legal order, democratic treaty override is a realistic option, at least for international treaties, such as the WTO or the CETA Agreements, which are not directly applicable within the supranational legal order.

My prediction for CETA and TTIP is that an opinion under Article 218(11) TFEU, which any EU institution or Member State can initiate, would be a death sentence for the investment protection provisions, since they are capable of being applied to various aspects of EU law. (Note that Opinion 1/17, quering whether the investment dispute provisions of CETA are compatible with EU law, is already pending before the CJEU). With regard to existing bilateral agreements of the Member States with third states, the finding may be more ambiguous. If, for instance, a German company complains against expropriation by Pakistan or Algeria, such a case would not usually have on EU law dimension, thus avoiding a direct conflict with the autonomy of EU law. The result may be neo-imperial: within the EU legal order, democratic legislation prevails in cases of conflict, while European companies could rely on pre-existing agreements abroad. It will be difficult, however, to convince third states to sign up to such one-sided agreements in the future. Thus, the end result of the Achmea judgment might be nothing less than a restart in international investment protection law.

Barnard & Peers: chapter 24

Photo credit: Pensionen Pro

Preliminary references and investment tribunals: is the Luxembourg Court extending a helping hand?

Hannes Lenk, PhD Candidate at the University of Gothenburg

The relationship of arbitral tribunals with the Court of Justice of the European Union (CJEU) has been the subject of a long-lasting juridical struggle. The current position is as simple and pragmatic as it is controversial. Commercial arbitration tribunals are not considered to be a ‘court and tribunal of a Member State’ within the meaning of the Article 267 TFEU and, thus, unable to refer questions to the CJEU on matters of interpretation of EU law.  At the same time, it is an open secret that questions of EU law do arise during arbitration proceedings, and there is an inherent risk that tribunals get it wrong—at least sometimes. In commercial arbitration these shortcomings might be addressed through the indirect involvement of domestic courts and the CJEU at the recognition and enforcement stage of arbitral awards. A similar possibility might not exist in investment arbitration and for some time now the question of whether or not investment tribunals are entitled to request preliminary references from the CJEU has been simmering under the surface of a deeply politicised debate on investor-state dispute settlement provisions in currently ongoing negotiations for deep and comprehensive trade and investment agreements with, inter alia, Canada and the US. A recent opinion of Advocate General Wathelet might break new ground in this debate and prepare the field for future judicial dialogue.

Commercial arbitration: from Nordsee to Eco Swiss

'Article 267 TFEU is an important instrument for cohesion and coherence in the judicial system of the European Union (EU), including domestic courts as ‘ordinary courts of the EU legal order’ (Opinion 1/09, para. 80). By way of establishing a judicial dialogue, the preliminary reference mechanism guarantees that individuals have their rights under EU law enforced in domestic courts, and assures a uniform interpretation and application of EU law in all Member States. Notably, the decision to request a preliminary reference is generally within the discretion of domestic courts, which are obligated to refer questions only in limited circumstances, i.e. in instances where the case is pending before a domestic court of last instance.

Article 267

1. The Court of Justice of the European Union shall have jurisdiction to give preliminary rulings concerning:

(a) the interpretation of the Treaties;

(b) the validity and interpretation of acts of the institutions, bodies, offices or agencies of the Union;

2. Where such a question is raised before any court or tribunal of a Member State, that court or tribunal may, if it considers that a decision on the question is necessary to enable it to give judgment, request the Court to give a ruling thereon.

3. Where any such question is raised in a case pending before a court or tribunal of a Member State against whose decisions there is no judicial remedy under national law, that court or tribunal shall bring the matter before the Court.

4. If such a question is raised in a case pending before a court or tribunal of a Member State with regard to a person in custody, the Court of Justice of the European Union shall act with the minimum of delay.'

However, Article 267 TFEU includes a significant procedural limitation. In order to to request a reference from the CJEU the judicial body must be covered by the concept of ‘any court or tribunal of a Member State’. The CJEU has historically interpreted this concept restrictively. In Dorsch Consult the CJEU clarified the characteristics that need to be taken into account. Accordingly, a ‘court of tribunal’ is any judicial body that exercises judicial functions, i.e. that is (a) established by law, (b) a permanent institution, (c) with compulsory jurisdiction, (d) whose procedure is inter partes, (e) applying rules of law, and (f) acts independent of other branches of government. Applying these criteria to a commercial arbitration tribunal, the CJEU subsequently declared in Nordsee that despite “certain similarities between the activities of the arbitration tribunal … and those of an ordinary court”, the tribunal in question was not a ‘court or tribunal’ within the meaning of the preliminary reference procedure.

Arbitral tribunals are, therefore, left without guidance on the interpretation of EU law where this becomes relevant during the arbitration proceedings. From an EU law perspective, the adverse effect of incorrect interpretation and application of EU law in commercial arbitration is mitigated by the indirect involvement of domestic courts, and by association the CJEU. Indeed, domestic courts play an important role in supporting the arbitral tribunal upon request, as well as in the recognition and enforcement of arbitral awards. In Eco Swiss the CJEU emphasized that domestic courts are generally required to assess the compatibility of arbitral awards with EU public policy and may request a preliminary reference from the CJEU to that end. The award in Eco Swiss was considered a violation of EU competition rules (now Article 101 TFEU), which, according to the CJEU, constitutes a ‘fundamental provision which is essential for the accomplishment of tasks entrusted to the [Union]’ (para. 36). The CJEU furthermore clarified that it is to be considered part of public policy in the meaning of Article V(1)(c) and (e), and II(b) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  Consequently, arbitral awards that are irreconcilable with EU public policy are unenforceable within the territory of the Member States under domestic and international law.

Investment arbitration: commercial arbitration in disguise or something else entirely?

This approach is open for much criticism, not least because the concept of EU public policy remains notoriously undefined. “In light of a constant referral of additional tasks upon the European Union over the last twenty years, it has become increasingly difficult to identify those provisions which may be regarded as fundamental for those tasks.” (Basedow, p. 373). Nonetheless, from an EU law perspective it appears to provide a pragmatic procedural solution that reserves the involvement of the CJEU and assures the application of EU law in domestic courts. Particularly in the area of investment arbitration it has been suggested that invoking EU public policy at the enforcement stage might prevent some of the most controversial awards from gaining legal effect within the EU legal order. But investment arbitration is in many ways different from commercial arbitration. The vast majority of proceedings is governed by the rules of the International Centre for Settlement of Investment Disputes (ICSID). Article 54 ICSID provides for the automatic recognition and enforcement of awards, excluding domestic courts from any involvement in the review of ICSID awards vis-à-vis public policy. To make matters worse, non-ICSID awards are not seldom enforced outside the territory of the respondent state. Enforcement of the controversial Micula award, for instance, is currently sought in the US.

Gaffney and Basedow have recently advocated the view that investment tribunals should be able to request references under Article 267 TFEU. It is in this context noteworthy that the CJEU in Nordsee conceded to the possibility that an arbitral tribunal might fall within the scope of Article 267 TFEU, provided that the tribunal derives its jurisdiction not exclusively from party autonomy of the disputing parties, but instead involves the exercise of state authority to the extent that it can be considered an institution of the state. This view was later confirmed in Ascendi, a request from the Tribunal Arbitral Tributário in Portugal. The CJEU observed that Portuguese law provides for the resolution of tax disputes through arbitration, which also regulates the functioning and constitution of the tribunal. “[The Tribunal’s] jurisdiction stems directly from the provisions of Decree-Law No 10/2011 and is not, as a result, subject to the prior expression of the parties’ will to submit their dispute to arbitration”, the CJEU concluded (para. 29). Not unlike the Tribunal Arbitral Tributário, investment tribunals are an alternative dispute settlement system provided for in law, i.e. the the underlying investment agreement, which constitute a “non-transient element of [the domestic] judicial system” (Basedow, p. 379-380).

The idea to construe investment tribunals as ‘court or tribunal’ for the purpose of Article 267 TFEU is not merely a scholarly endeavor to square the circle. There are signs from within the CJEU that this might present an acceptable solution to the problem of integrating investment tribunals in the EU legal order. In his recent Opinion in Genentech, a preliminary ruling from the Cour d’appel de Paris concerning the notion of EU public policy in the recognition and enforcement of arbitral awards, Advocate General Wathelet presented his well-balanced and carefully drafted view on the relationship of arbitral tribunals with the CJEU. On the outset the AG simply confirms well established case law along the lines of Nordsee and Eco Swiss.

'Referring to the system for reviewing the compatibility of international arbitral awards with EU law through the public policy reservation […] the Court has held that arbitral tribunals ‘constituted pursuant to an agreement’ are not courts of the Member States within the meaning of Article 267 TFEU. Consequently, they cannot refer questions for a preliminary ruling. It is therefore for the courts of the Member States, within the meaning of Article 267 TFEU, to examine, if necessary by referring a question for a preliminary ruling, the compatibility of (international or domestic) arbitral awards with EU law where an action is brought before them for annulment or enforcement, or where any other form of action or review is sought under the relevant national legislation.'

Much more powerful considerations are hidden in the footnotes. Here the AG addresses the situation of investment tribunals explicitly to which, in his view, different considerations should apply.

Footnote 34

'Based on this case-law, the arbitral tribunals hearing cases within the framework of the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID) could be regarded as being able to refer questions to the Court for a preliminary ruling. See, to that effect, [Basedow], p. 376 to 381. Since the number and size of investment arbitrations raising questions on the application of EU law are increasing, particularly in the field of State aid, the possibility for arbitral tribunals to refer questions for a preliminary ruling could help to ensure the correct and effective implementation of EU law.'

Indeed, these remarks are merely obiter dicta and the CJEU is unlikely to address any of this in the final judgment, other than—probably—following the AG on substance. The opinion, nonetheless, sends a strong signal to investment tribunals, i.e. an explicit invitation to request preliminary references from the CJEU on matters of interpretation of EU law.

Helping hand or last straw

In the best of cases AG Wathelet’s opinion would be construed as a helping hand from Luxembourg to find an amicable solution to the current conflict, based on judicial dialogue and mutual comity. However, investment tribunals have thus far refused to engage with the CJEU on questions of EU law. Or put differently, it does not appear as if investment tribunals consider EU law to be of actual relevance to arbitration. In Oostergetel and Laurentius, for instance, the tribunal acknowledged that there is “absence of any conclusive position of the [CJEU]” on the relevant issues of EU law, but subsequently rejected the respondent’s request to refer a question to the CJEU with the help of a domestic court (para. 109). The investment tribunal in Micula rejected concerns raised by the Commission to the effect that the award, if rendered, were unenforceable under EU state aid law; plainly ignoring the resulting conflict.

Gaffney suggested that a lack of guidance on questions of EU law would prompt a domestic court’s responsibility under Article 267 TFEU. However, even domestic courts might be cautious of involving requests for preliminary references in investment arbitration cases. When the award on jurisdiction in Achmea was challenged in May 2012 the Higher Regional Court of Frankfurt decided that, while EU law was raised during the arbitration, the dispute concerned in fact the interpretation of the arbitration clause in the investment agreement and as such fell outside the scope of interpretation of EU law. Ultimately, the final award was challenged before the same court in December 2014. The Frankfurt court recognized that the compatibility of arbitration clauses in intra-EU investment agreements with the Treaties is much debated but refused to refer the question to the CJEU. These cases reflect anything but excitement about the involvement of the CJEU in the arbitration process. Rather than jumping on the invitation from Luxembourg to refer questions, AG Wathelet’s opinion runs the risk of being perceived as a last straw for investment tribunals that are ultimately expected to accept the dominance of EU law and the jurisdiction of the CJEU.

Remaining challenges

However, even if investment tribunals refer questions to the CJEU in the future, a few questions still remain. First, courts or tribunals against whose decision there is no judicial remedy are not only entitled, but, in accordance with Article 267(3) TFEU, obligated to refer questions on the interpretation and the legality of EU law. Although domestic arbitration laws may provide for investment awards to be set aside, it does not prevent the award from being enforced under Article (1)(e) of the New York Convention in another state. Article 52 ICSID provides for an internal procedure for the annulment of ICSID awards on limited grounds, which effectively excludes the involvement of domestic courts. Considering, therefore, that an investment award cannot be appealed or permanently set aside on the basis of wrongful interpretation of EU law, investment tribunals might fit squarely into Article 267(3) TFEU.

The investment court, which was recently incorporated in the Comprehensive Economic and Trade Agreement with Canada (CETA) and the EU-Vietnam FTA, and which is proposed in Transatlantic Trade and Investment Partnership with the US (TTIP), raises similar concerns. Decisions of the Tribunal may be appealed before the Appeals Tribunal, inter alia, on grounds of the wrongful appreciation of domestic law (as a matter of fact). Albeit that the first instance Tribunal is relieved from any obligation under Article 267(3) TFEU, it ultimately shifts this burden onto the Appeals Tribunal. The more fundamental problem in this regard is that the EU Treaties cannot actually obligate investment tribunals to refer questions to the CJEU.

Secondly, decisions of the CJEU under the preliminary reference procedure are binding on the referring court. Without explicit safeguards in the investment agreement, however, investment tribunals are under no obligation to follow the interpretation of the CJEU (Gaffney, p. 13). There is no obvious reason why investment tribunals would refer a question to the CJEU just to subsequently ignore the answer provided. Be that as it may, these two above reservations are likely to affect the essential characteristics of Article 267 TFEU, and the powers conferred thereunder on the CJEU. According to well-established case law of the CJEU, this would adversely affect the autonomy of the EU legal order and consequently violate the Treaty (Opinion 1/09, para. 77-79). An interpretation of Article 267 TFEU that invites arbitral tribunals to refer questions but neither obligates them to do so under Article 267(3) TFEU nor renders answers of the CJEU binding on the referring investment tribunal would, thus, be incompatible with the Treaties.

Third, and perhaps most problematic, are denial of justice cases where the interpretation of domestic law might itself be the reason for an investment dispute. It would be bizarre scenario, indeed, for investment tribunals to request a preliminary ruling from the CJEU on a domestic court’s interpretation of EU law, particularly if the CJEU was involved during the domestic proceedings. Under the EU-Vietnam FTA and CETA, such a scenario could be captured by manifest arbitrariness (e.g. Article 8.10(2)(c) CETA). Gaffney points out a few other challenges such as the steadily growing influx of preliminary references that is already creating a backlog of cases, and which is likely to extend the arbitration process for several month, if not years (p. 14).

Conclusions

Although we are unlikely to see changes in the approach of the CJEU to commercial arbitration anytime soon, AG Wathelet’s opinion amounts to a strong endorsement of the view that investment tribunals are an entirely different story. Whether or not the preliminary reference procedure paves the way for much needed judicial comity between Luxembourg and investor-state tribunals is, however, still very much an open question. 

Barnard & Peers: chapter 10

Photo: ICSID headquarters, Washington DC

Photo credit: icsid.worldbank.org