by Ioana Petculescu*
Following an arduous negotiation process which started in 2009, Canada and the European Union eventually signed the Comprehensive Economic and Trade Agreement (hereinafter “CETA” or the “Agreement”) on October 30, 2016. As recent events demonstrate, the Agreement remains, however, controversial and as contested as the already (in)famous Transatlantic Trade and Investment Partnership with the United States (“TTIP”). Furthermore, similar to TTIP, it concentrates much of the criticism on the investment protection provisions set out in Chapter 8 of the text now formally proposed for conclusion by the European Commission.
Among those provisions, one of the most decried is the fair and equitable treatment (“FET”) clause. Referred to as “the most relied on clause in investor-state dispute settlement cases”, it would be “dangerously abused as a gateway for dubious claims against regulations and procedures that were established democratically in the public interest”, thus threatening to undermine basic human rights. In contrast, the European Commission considers that its proposal for a Council decision on the CETA conclusion “does not affect the protection of fundamental rights in the EU”. This controversy raises the issue of the true meaning of the FET standard, as set out in CETA, and of its actual relationship with human rights law, in general, and with fundamental rights standards in the EU, in particular. Is this relationship contradictory, as at least some of the Agreement’s adversaries contend?
Answering this question requires a two-step analysis. First, one must determine the content and nature of the FET standard as expressed in the Agreement and draw a parallel with the fundamental rights proclaimed in the EU Charter for Fundamental Rights (“Charter”) and other related instruments, notably the European Convention on Human Rights (“ECHR”). Second, it is useful to examine briefly how CETA and the Charter interact and what the consequences of this interaction are on investor-State dispute settlement under the Agreement. The result of this quick exercise is important to address common misperceptions regarding CETA and other free trade agreements with investment chapters.
A tale of two regimes with overlapping spheres
From the outset, CETA appears as the result of a concerted effort on both sides of the Atlantic to arrive at a publicly acceptable text, including by expressly preserving the Parties’ authority to comply with their human rights – negative and positive – obligations. As the Commission has emphasized, the Agreement “contains all the guarantees to make sure that the economic gains do not come at the expense of fundamental rights, social standards, governments’ right to regulate, environment protection or consumers’ health and safety.” A landmark provision is, therefore, Article 8.9.1 CETA, which unambiguously reaffirms the States’ “right to 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.”
At the same time, the Agreement’s Chapter 8 includes the traditional standards guaranteeing the protection of investors and their investments, paramount among which is the fair and equitable treatment obligation. According to the relevant paragraphs of Article 8.10 CETA:
“1. Each Party shall accord in its territory to covered investments of the other Party and to investors with respect to their covered investments fair and equitable treatment ….
- A Party breaches the obligation of fair and equitable treatment referenced in paragraph 1 if a measure or series of measures constitutes:
(a) denial of justice in criminal, civil or administrative proceedings;
(b) fundamental breach of due process, including a fundamental breach of transparency, in judicial and administrative proceedings;
(c) manifest arbitrariness;
(d) targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief;
(e) abusive treatment of investors, such as coercion, duress and harassment; or
(f) a breach of any further elements of the fair and equitable treatment obligation adopted by the Parties in accordance with paragraph 3 of this Article.”
This text reflects a novel approach, which is meant to answer repeated complaints that “fair and equitable treatment” is a “catch-all” expression, voluntarily left undefined and vague in order to grant virtually unfettered discretion to arbitrators and a far-reaching protection to foreign investors. Consequently, unlike similar provisions in other agreements, the standard of fair and equitable treatment in CETA is “neither a floor or a minimum standard based on customary international law nor an evolving concept”, as the Commission has explained. On the contrary, Article 8.10.2 CETA provides for a closed list and aims to define precisely what the standard is. This being said, one must admit that the list is no novelty, but the result of an approach deeply embedded in the practice of international tribunals. In addition, paragraph 3 of Article 8.10 indicates that a Committee on Services and Investment shall review the content of the obligation to provide fair and equitable treatment and may develop recommendations in this regard and submit them to the CETA Joint Committee for decision, thus leaving room to the evolution of the existing list.
One additional observation comes to mind, which is more relevant for the present discussion. When examined carefully, the substantive content of the list in Article 8.10.2 resembles what one would find in a human rights treaty. An attempt to draw a comparison between this list and the rights and freedoms enshrined in the Charter confirms this impression.
First, by prohibiting “denial of justice in criminal, civil and administrative proceedings” and any “fundamental breach of due process”, Article 8.10.2(a) and (b) CETA globally reflects the requirements of the right to an effective remedy and to a fair trial provided for in Article 47 CFR. According to this article of the Charter, “[e]veryone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal previously established by law”. While “denial of justice” has been far more strictly construed in arbitral case law than the concept of “fair trial” in human rights jurisprudence, the two notions overlap. International tribunals have found a breach of the FET standard in circumstances of “a wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety” (Case concerning Elettronica Sicula S.p.A., United States of America v. Italy, ICJ Judgment of 20 July 1989). Citing this long-standing principle, the tribunal in the Dan Cake (Portugal) S.A. v. Hungary arbitration, for example, held that the decision of the Metropolitan Court of Budapest “did shock a sense of juridical propriety” and was unfair by failing to convene a composition hearing in a bankruptcy case, as required by the law.
Second, the prohibition of manifest arbitrariness in Article 8.10.2(c) is nothing more than a reminder of a fundamental principle of European – and constitutional – law. On June 21, 2016, in the case of Al‑Dulimi and Montana Management Inc. v. Switzerland, the Grand Chamber of the European Court of Human Rights (“ECtHR”) took the opportunity to reaffirm that one “of the fundamental components of European public order is the principle of the rule of law, and arbitrariness constitutes the negation of that principle.” In this respect, the Charter provides in Article 52.3 that in so far as it “contains rights which correspond to rights guaranteed by the Convention for the Protection of Human Rights and Fundamental Freedoms, the meaning and scope of those rights shall be the same as those laid down by the said Convention” and, implicitly, as interpreted by the ECtHR.
Third, any “targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief” would not only breach Article 8.10.2(d) CETA, but would also constitute a violation of Article 21.1 CFR which prohibits “discrimination based on any ground such as sex, race, colour, ethnic or social origin, genetic features, language, religion or belief, political or any other opinion, membership of a national minority, property, birth, disability, age or sexual orientation”.
Fourth, “abusive treatment of investors, such as coercion, duress and harassment” would run counter not just to Article 8.10.2(e) CETA, but also to many fundamental rights, including, for example, the right of defence and the presumption of innocence (Article 48 CFR). As pointed out by the tribunal in the Hesham al-Warraq v. Indonesia award, “[f]ailure to comply with the most basic elements of justice when conducting a criminal proceeding against an investor amounts to a breach of an investment treaty,” in particular of the FET standard, because it constitutes a violation of the International Covenant on Civil and Political Rights.
Fifth, the creation of legitimate expectations is equally recognized in international investment arbitration and human rights litigation as creating rights the violation of which may entail the obligation to pay compensation for the loss incurred. Under Article 8.10.4 CETA, when applying the FET obligation, the “Tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated.” Under Article 17 CFR and, indirectly, Article 1 of Protocol 1 to the ECHR, the protection extends to claims in respect of which a person can argue that he or she (or it, in the case of a corporate entity) had a legitimate expectation, which must, however, have “a sufficient basis in national law” (Kopecky v. Slovakia, no. 44912/98). Despite differences between arbitral tribunals and human rights courts regarding the scope of legitimate expectations, similarities exist, which confirm the close relationship between international investment law and the human rights law. Especially, in both settings “legitimate expectations” cannot be based on purely subjective motives.
Finally, it is important to observe that one of the fundamental freedoms recognized by the Charter in Article 16 is the “freedom to conduct a business in accordance with Community law and national laws and practices”. This provision applies to domestic and foreign entrepreneurs alike and is intimately linked to the freedom of investment.
In summary, the CETA clause on fair and equitable treatment and the Charter’s provisions intersect. The question is to what extent and with what consequences for dispute settlement.
A world of many courts and a need for dialogue
As a general rule, human rights instruments set a floor, not a ceiling as far as standards of protection are concerned. The Charter makes no exception to this rule as it “sets out the basic rights that must be respected by the EU and by its Member States when implementing EU law”. At the same time, Member States are always able to provide for higher standards of protection if they wish to do so. As per Article 53 CFR, nothing in the Charter “shall be interpreted as restricting or adversely affecting human rights and fundamental freedoms as recognised, in their respective fields of application, by Union law and international law and by international agreements to which the Union, the Community or all the Member States are party, including the European Convention for the Protection of Human Rights and Fundamental Freedoms, and by the Member States’ constitutions”.
Upon signature, CETA, as a mixed agreement, will become part of Union law. Consequently, the CETA guarantees pertaining to civil and economic rights recognized in the Charter shall be at least as strong as those provided in the Charter itself. For example, within the CETA framework, it will not be enough to protect foreign investors against denial of justice as traditionally interpreted in international arbitration case law. The obligation of due process in the FET clause shall have to be construed in light of the “principle of effective judicial protection” as “a general principle of Community law stemming from the constitutional traditions common to the Member States, which has been enshrined in Articles 6 and 13 of the European Convention on Human Rights, this principle having furthermore been reaffirmed by Article 47 of the Charter of fundamental rights of the European Union” (Kadi II, C-584/10 P, C‑593/10 P and C-595/10 P).
On the other hand, the FET standard will have to be reconciled with the positive obligations of the European Union and its Member States regarding fundamental rights, such as, inter alia, the integration of persons with disabilities (Article 26 CFR), the right to fair and just working conditions (Article 31 CFR), the right to a high level of human health protection (Article 34) or obligations related to environmental (Article 37 CFR) and consumer protection (Article 38 CFR).
In light of the above, there appears to be no contradiction between CETA and the Charter. To the extent that the protection of foreign investors is a form of human rights protection, the CETA provisions may set higher standards in certain areas. Ultimately, what remains essential is to achieve the proper balance between the various rights and interests that come into play. This balancing act invites a dialogue between courts and the use of instruments and theories that one regime may borrow from the other in order to preserve not just the fair and equitable treatment of foreign investors, but also the fairness and legitimacy of the investment protection regime.
Concerning the resolution of disputes between investors and the EU or a Member State, Chapter 8 establishes an original mechanism relying on a permanent Tribunal constituted pursuant to Article 8.27 CETA. Composed of fifteen members appointed by the CETA Joint Committee for a five-year term, the Tribunal shall, in general, “hear cases in divisions consisting of three Members of the Tribunal, of whom one shall be a national of a Member State of the European Union, one a national of Canada and one a national of a third country. The division shall be chaired by the Member of the Tribunal who is a national of a third country”. By virtue of Article 8.28 CETA, an Appellate Tribunal is also established to review awards rendered in the first instance. In reality, the Appellate Tribunal has powers beyond those recognized to Annulment Committees constituted under the ICSID Convention and Arbitration Rules, in so far as it may “uphold, modify or reverse an award” on additional grounds, namely “errors in the application or interpretation of applicable law” and “manifest errors in the appreciation of the facts, including the appreciation of relevant domestic law”.
The creation of this independent investment court system is one of the key features of the Agreement and will impact the way the CETA Investment Protection Chapter will be interpreted. A permanent dispute resolution mechanism will not only ensure a more consistent case law, but its connection to the Union’s legal order will also hopefully stimulate a harmonious application of the various norms relevant in each case. Importantly, Article 8.31 CETA directs the Tribunal to “apply this Agreement as interpreted in accordance with the Vienna Convention on the Law of Treaties, and other rules and principles of international law applicable between the Parties”. Such “other rules and principles” obviously refer first and foremost to EU primary law, i.e., the fundamental treaties as instruments of public international law, of which the Charter is an integral part. Moreover, they also refer to the ECHR.
Yet, the harmonious application of the CETA and of the Charter’s provisions requires a dialogue with the European courts, primarily with the Court of Justice of the European Union (“CJEU”). Such dialogue is all the more important to the extent that the same facts may be brought between different courts on different legal grounds. Article 8.24 CETA concerning proceedings under another international agreement anticipates this possibility by inviting the Tribunal to avoid double compensation and “stay its proceedings or otherwise ensure that proceedings brought pursuant to another international agreement are taken into account in its decision, order or award”.
One cannot anticipate the reaction of the CJEU to CETA’s investment court system, especially in light of the reservations to any (perceived) concurrent judicial body, as expressed in its Opinion 2/2013 regarding the European Union’s accession to the ECHR. However, if and when the CETA Tribunal becomes operational, mutual coordination and cooperation should exist to the benefit of European and Canadian citizens and investors. Such cooperation may take various forms, from potential official requests for preliminary rulings to more informal mechanisms.
Most important among informal mechanisms should be for the Tribunal, both in first instance and, especially, at the appellate level, to draw inspiration from human rights jurisprudence, primarily of the CJEU and of the ECtHR. Both in Luxembourg and in Strasbourg, the European Courts have designed innovative tools in their effort to strike a fair balance between the competing interests of the community and of the individual. Thus, they have created the doctrine of proportionality and of the “margin of appreciation”, which have withstood the test of time and today resonate beyond European borders. Due to the similarities between investment law and human rights law, these concepts are well-suited for the settlement of disputes in relation to the protection of the individual rights of foreign investors. The future CETA Tribunal should, therefore, reject the position adopted in some arbitrations that the doctrines of proportionality and of the margin of appreciation should not be employed to balance the competing interests of the State and the individual investor (Bernhard von Pezold and Others v. Republic of Zimbabwe, ICSID Case No. ARB/10/15). This approach serves neither the investors’ protection nor the credibility of the CETA investment court.
* Ioana Petculescu is a lawyer specialized in international arbitration and human rights, member of the Paris Bar