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.

 

 

 

CJEU jurisdiction over the Energy Charter Treaty and its compatibility with the Treaties: Opinion of AG Szpunar in Case C-741/19

 

 

 

Hannes Lenk, Assistant Professor in Law, Aarhus University

 

 

On 24 September 2019 the French Cour d’appel de Paris requested a preliminary reference from the Court of Justice of the European Union (CJEU) on the interpretation of the concept of ‘investment’ in Article 1.6 of the Energy Charter Treaty (ECT). The relationship of the ECT with the EU legal order has long been in question, but came under criticism particularly following the Achmea judgment that sent shockwaves around the arbitration community as it declared investor-state dispute settlement (ISDS) provisions in bilateral investment treaties (BITs) concluded between EU Member States inter se as incompatible with the EU Treaties (discussed here). Scholars and practitioners have since tried to ascertain the broader effects of the Achmea judgment for investment arbitration, including its impact on the intra-EU application of the ECT, i.e. in disputes brought by an investor from an EU Member State against another Member State.

 

In light of yesterday’s Opinion of Advocate General Szpunar in the case referred from the French court (Case C-741/19), this post focuses on the jurisdictional issues, ie the jurisdiction of the CJEU over the ECT, and the intra-EU application of the ECT.

 

Jurisdiction of the CJEU over the ECT

 

Case C-741/19 is peculiar because the underlying dispute involves two non-EU parties. It is only for the seat of arbitration in Paris, that the dispute ultimately developed an EU law dimension. In April of 2016, the French Cour d’appel set aside the award, ruling that the tribunal had no jurisdiction having erred in considering the payment of a debt linked to a contract for the sale of electricity as an ’investment’ under Art 1.6 ECT. Upon appeal the Cour de cassation disagreed with this narrow interpretation and reverted the case back to the Cour d’appel.

 

Article 267 TFEU furnishes national courts with an option—and in some cases an obligation — to refer to the CJEU questions over the interpretation of a legal act that falls within the Court’s jurisdiction. This includes so-called ‘mixed’ agreements, that is international agreements concluded by the Member States alongside the EU with third countries. Indeed, the EU as well as its Member States (with the exception of Italy that withdrew from the ECT in 2016) are all signatories to the ECT. As ‘an integral part’ of the EU legal order (Case 181/73 Haegeman) the ECT is binding on the Union and its Member States by virtue of Article 216(2) TFEU. Strictly speaking, the ECT is only to be viewed as a Union agreement in as far as its provisions fall under exclusive competence of the Union (Case C-239/03 Commission v France).

 

Following Opinion 2/15 on the EU-Singapore FTA, this exclusive competence extends in the field of investment to all matters concerning foreign direct investment (with the exclusion of investor-state dispute settlement provisions). Non-direct forms of investment, as well as provisions on liberalization and protection of these investments, fall outside of the EU’s exclusive competence. ISDS provisions are likewise excluded (discussed here). This delimitation of competence carries certain ramifications for the CJEU’s jurisdiction over mixed agreements.

The CJEU has nonetheless interpreted its own jurisdiction broadly, covering provisions of a mixed agreement that are liable to find application in both national law and EU law (Case C-53/96 Hermès). In these cases, the argument for CJEU jurisdiction lies with the Union’s interest in the uniform interpretation of an international agreement. This is certainly the case for an interpretation of ‘investment’ within the context of the ECT, considering that certain forms of investments fall within, while others fall outside, of the exclusive competence of the EU. The classification of an economic transaction as one or the other type of investment, or falling outside of the scope of the ECT altogether is furthermore liable to have ramifications for the application of national as well as EU law. It would not be unreasonable, therefore, for the CJEU to assume general jurisdiction over the ECT.

 

The Advocate General confirms the broad jurisdiction of the CJEU over the ECT as an agreement concluded by the EU (paras. 28-29). However, the AG is quick to acknowledge that Case C-741/19 concerns a dispute between a Ukrainian investor and the Republic of Moldavia, and that this factor might have implications on the Court’s jurisdiction (para. 30).

 

Indeed, there may be legitimate reasons for the uniform interpretation of the ECT in disputes with an EU dimension. It is not immediately clear, however, why this reasoning should be extended to the application of the ECT in disputes that have no substantive link with the Union legal order. Indeed, in the context of the EEA agreement the CJEU recognized that it had no jurisdiction to interpret the provisions of a mixed agreement in as far as its application in third countries is concerned (Case C‑321/97 Wåkerås-Andersson); Case C‑300/01 Salzmann). Although the concept of ‘investment’ under the ECT is liable to be applied in situations that fall under both Member State as well as EU law, in the present case it is being applied to neither.

 

The AG, however, differentiates the EEA context from the specific characteristics of the ECT in two respects. On the one hand, the ECT lacks a judicial institution that is capable of ensuring its uniform interpretation of the agreement. It is therefore liable to create differences in interpretation of core concepts such as ‘investment’ (para. 40). Second, considering the design of the ECT, which can be broken down in a number of bilateral commitments between the contracting parties, it cannot be excluded that the ECT finds application in relations between the Member States inter se (paras. 41 and 42). It is in the Union’s interest, so the AG concludes, to ensure the uniform interpretation of provisions of the ECT that find application within the Union legal order (para. 45). It is true, of course, that the Cour d’appel might be compelled to uphold its interpretation in future cases, including disputes involving measures adopted by the EU or an EU Member State. The argument in favour of uniform interpretation might therefore have merit in all circumstances where the ECT is interpreted by a Member State court ‘in order to forestall future differences in interpretation’ (Joined Cases C-300/98 and C-392/98 Perfums Dior, para. 35).

 

In the eyes of the AG the ECT would be applied within the EU legal order if an EU investor initiates a dispute against a Member State, be that before an ISDS tribunal established on the basis of Article 26 ECT, or the domestic courts of that Member State. Having indulged in some detail on the issue on intra-EU application of the ECT (discussed below), the AG returns towards the end of his opinion to the application of the ECT against an EU Member State before the domestic courts. Acknowledging that an exhaustive analysis as to the overlap of the ECT and EU law is nearly impossible to carry out in the abstract, the AG departs from the general proposition that the substantive provisions of the ECT were intended to be applied also within the EU legal order (para. 97). This finding alone would have justified CJEU jurisdiction over the ECT. And yet, the AG analyses in some detail the controversial issue of intra-EU application of the ECT.

 

The intra-EU application of the ECT

 

This has long been a contentious issue. However, with the Achmea judgment it has gained gravity, both politically as well as in EU and domestic courts. Politically, the Achmea judgment created a rift between EU Member States over the effect of the Court’s ruling. Whereas the majority of Member States declared in February 2019 that the Achmea judgement applies mutatis mutandis to the intra-EU application of the ECT, a group of five Member States rejected this proposition (see here and here). For this group of Member States, which included Sweden, the dissenting position was primarily based on the outcome of the set-aside proceedings in Novenergia II, which is currently pending before the Svea Court of Appeal. At the time these declarations were made there were strong reasons to believe that the Swedish court would follow Spain’s request to refer the question over the validity of intra-EU ECT arbitration to the CJEU. In May 2019, however, this request was denied, and the uncertainty over the relationship between the EU legal order and the ECT remained.

 

In the meantime, the Belgian government requested an Opinion from the Court of Justice on the compatibility of the modernization of the ECT with the EU Treaties. Opinion 1/20 thus directly concerns the institutional set-up under the ECT, and cannot ignore the issue of the intra-EU application of Article 26 of the ECT. Furthermore, the issue has already—somewhat unexpectedly—sprung up in other cases before the CJEU. Only recently, Advocate General Saugmandsgaard Øe commented on the issue, noting that ‘inasmuch as Article 26 of the Energy Charter, …, provides that such disputes may be resolved by arbitral tribunals, that provision is not applicable to intra-Community disputes’. The case, which concerned the application of the ECT by an Italian investor against Italy, turned on the central question as to whether investors can initiate ISDS proceedings against their home state under the ECT. On the contrary, the issue of intra-EU application of the ECT was entirely irrelevant to the dispute. Indeed the AG acknowledges as much (para. 93). The CJEU has yet to decide in this case but is unlikely to engage with the AG on this point.

 

More importantly, although the present case does no immediately concern the intra-EU application of the ECT, it has the potential to shed some light on the issue. During the written procedure, some Member States raised the incompatibility of intra-EU application of Article 26 of the ECT with the Treaties. In preparation for the hearing in November 2020, all intervening Member States were asked by the CJEU specifically to provide their views on this issue.

 

AG Szpunar elegantly connects this question logically with the Court’s jurisdiction, arguing that the CJEU only has jurisdiction over provisions of an international agreement that may also find application within the EU legal order (para. 46). Consequently, if in light of the Achmea judgment Article 26 of the ECT cannot be applied as between Member States, the Court cannot have jurisdiction (para. 47). Noting, the differences between the ECT and intra-EU BITs, which were at issue in Achmea, the AG then explicitly invites the Court to take this opportunity to address this controversial question in its judgment (para. 48). Going even further, the AG asks the CJEU to address the compatibility of substantive provisions in intra-EU investment agreements with the Treaties, an issue not addressed in Achmea.

 

Reviewing first the Achmea judgment, the AG provides some notable insight into the conceptual differentiation of commercial arbitration, which is generally accepted under EU law, and investment treaty arbitration. This aspect was at the heart of Achmea judgment but was insufficiently substantiated by the CJEU. The AG here confirms that it is precisely the systemic nature with which Member States have waived the jurisdiction of domestic courts over an abstractly defined class of cases, which undermines the principles of mutual trust and the specific character of the law established by the Treaties (including the judicial dialogue established under Article 267 TFEU) (para. 63), and thus the principle of autonomy.

 

Ultimately, the AG concludes that the inapplicability of intra-EU ISDS provisions has no temporal limitations and the jurisdiction of an arbitral tribunal on the basis of such a provision can simply not be recognized within the Union legal order (para. 69).

 

Applying this view to the ECT, the AG notes certain similarities. On the one hand, he observes that although the applicable law under the ECT does not include domestic law explicitly, an arbitral tribunal under the ECT might nonetheless face questions over the interpretation, if not application, of EU law (para. 75). On the other hand, the AG opines that the ECT investor-state tribunals are, like investment tribunals established under intra-EU BITs, outside of the EU legal order (para. 76). As a consequence, so the AG argues, Achmea can be directly transposed to the intra-EU application of Article 26 of the ECT (para. 79). This conclusion is not called into question by the multilateral nature of the ECT, nor the EU’s participation in the agreement (para. 83).

 

Challenge and opportunities for the CJEU in Case C-741/19

 

The case raises a number of novel questions in EU law that would undoubtedly benefit from greater clarity. This includes the Court’s jurisdiction over incomplete mixed agreements, ie mixed agreements to which not all Member States are signatories, as well as its jurisdiction over provisions of multilateral agreements in their application outside of the EU.

 

In as far as the Achmea judgment carries relevance, a more detailed explanation of the Court’s differentiation between commercial arbitration and investment arbitration would also be welcome. It should be remembered in this respect that Case C-109/20 PL Holding, which is currently pending before the CJEU, raises additional questions in light of AG Szpunar explanations in the present case. In 2019 the Svea Court in annulment proceedings concerning an investment award issued under the Poland-Belgium/Luxembourg Bilateral Investment Treaty, ruled that Poland’s failure to object to the jurisprudence of the investment tribunal led to a parallel arbitration agreement that existed between PL Holding and Poland independent of the underlying BIT. This, so the Svea Court concluded, results from the application of the Swedish Arbitration Act.

 

According to AG Szpunar, commercial arbitration presupposes the exercise of the disputing parties’ autonomy to submit to arbitration in respect of a particular dispute. Consequently, the commercial tribunal’s limited jurisdiction derives directly out of a specific arbitration agreement that defines the precise nature of the dispute (para. 60). This is juxtaposed by the systemic, permanent and unilateral nature with which an offer to arbitrate is extended under an international investment agreement (para. 61). If, however, domestic arbitration laws can have the effect of turning treaty arbitration into contractual arbitration, the differentiation underlying AG Szpunar’s reasoning would suddenly disappear.

 

Most controversial about Case C-741/19 is its instrumentalization by Member States as a venue for the settlement of political conflict. The issue of intra-EU application of the ECT was only raised in the written submissions of some of the intervening Member States. It’s now prominent role in the proceedings, shifted the focus of the substantive nature of the dispute, and deprived interested Member States’ from an opportunity to substantively engage with this issue in their written observations. Member States that have advocated the application of the Achmea judgment to the intra-EU dimension of the ECT already during the negotiation of the plurilateral agreement on the termination of intra-EU BITs, now effectively hijacked judicial proceedings where the material question over the intra-EU application is merely of latent relevance.

 

To be sure, there is nothing inherently wrong with the judicialization of political disputes. Indeed, the Treaties offer a plethora of procedural avenues to contest the validity of the ECT. It is doubtful, however, that the present case offers an appropriate venue to review this question. After all, Opinion 1/20 will allow the Court to thoroughly assess the institutional design of the ECT. Since potential incompatibilities of the ECT with the Treaties can only be resolved through political negotiation, Opinion 1/20, which addresses the ECT modernization process, offers an adequate forum to not only identify the shortcomings, but provide guidance for the Commission’s negotiations. More importantly, the Court can resolve the jurisdictional question without evaluating Article 26 of the ECT. AG Szpunar, in fact, provides for this possibility in his Opinion.

 

The Opinion of AG Szpunar is eloquently written and wittingly argued. And while its relevance for aficionados of EU law cannot be overstated, the Court should be wary to wander down this path and reserve its judgment to the essential elements that it needs to address in order to answer the question referred to it. This is not to diminish the importance of the substantive question at the heart of AG Szpunar’s reasoning, nor to challenge the correctness of his analysis. It rather goes to asserting the integrity of the judicial process and the jurisdiction of the Court of Justice.

 

Barnard & Peers: chapter 24

Photo credit: Erik Christensen, via Wikimedia commons

 

‘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