Fair and Equitable Treatment in CETA from a German Perspective

By Simon Weber[1]

On 1 December 2022, the German Parliament (Bundestag) ratified the Comprehensive Economic and Trade Agreement (CETA; the Agreement) with Canada. The Agreement has been provisionally applied since 2017. Ever since, almost 100% of customs duties on goods traded between Member States of the European Union and Canada have been abolished. CETA must be ratified by all European Union Member States to apply with full force. The Canadian government has welcomed Germany’s ratification and called it a “major step”.

Meanwhile the Agreement’s chapter on investment protection is not yet applied. In its Article 8.10, the Agreement sets out rules on the treatment of investors and of covered investments. In particular, it states that “[e]ach 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 and full protection and security in accordance with paragraphs 2 through 6”. The interpretation of the term fair and equitable treatment (FET) and its scope has caused discussion among States, arbitral tribunals, and scholars. Whereas some argue that FET is a development of the minimum standard of treatment (MST), others consider it to constitute a separate concept. With this in mind, the terms “fair” and “equitable” will have to be interpreted in line with the very circumstances of each case. Consequently, a clarification of the scope of these terms through a CETA Joint Committee decision contributes to more clarity. The CETA Joint Committee as established by Article 26.1 CETA, is comprised of representatives of the European Union and Canada. It is responsible for all questions concerning trade and investment between the European Union and Canada and the implementation and application of CETA. In particular, pursuant to Article 26.3 CETA, it has the power to make binding decisions on any matters as set out by CETA. Article 8.10 paragraph 3 provides for such power. It states that the European Union and Canada “shall regularly, or upon request of a Party, review the content of the obligation to provide fair and equitable treatment. The Committee on Services and Investment, established under Article 26.2.1(b) (Specialised committees), may develop recommendations in this regard and submit them to the CETA Joint Committee for decision.”

In relation to the FET standard, the drafters of CETA further specified in paragraph 2 to Article 8.10 that:

“[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.”

Further, under paragraph 3, the scope of the FET obligation shall be reviewed regularly. Finally, paragraph 4 expressly refers to representations made by a contracting State, which might have created legitimate expectations for an investor.

On 26 September 2022, the German government, through the Ministry of Economics, published a non-paper proposing a draft decision of the CETA Joint Committee on the interpretation of the FET obligation and the content of indirect expropriation. For FET, it sets out the following interpretation:

a) The list of measures contained in paragraph 2 is exhaustive;

b) A mere rejection or dismissal of an investor’s challenge of a measure taken by a CETA member State does not constitute a denial of justice;

c) Blatant miscarriage of justice constitutes a fundamental breach of due process. In this regard, the non-paper refers to situations such as refusal of access to courts or legal assistance, infringements of the right to be heard, manifest and unjustifiable unequal treatment of the parties before a court, deadlines that are impossible to be met, clearly biased and corrupt judges, and a complete and unjustifiable lack of transparency;

d) Manifest arbitrariness is to be understood as a measure that is not motivated, not founded on reason or fact, based on unreasonable discretion, prejudice, or personal preference, or taken in wilful disregard of due process and proper procedure. Mere illegality or inconsistent or questionable application of a policy or procedure does not constitute manifest arbitrariness;

e) Targeted discrimination on manifestly wrongful grounds is to be understood as measures that are not founded on reason or fact or are founded on illegitimate grounds such as prejudice or bias, or if discrimination based on gender, race, or religious belief cannot be justified on the basis of objective and legitimate grounds. Such objective and legitimate grounds would be the protection of a legitimate public welfare objective such as health, the promotion of gender equality, environment (including climate protection), or safety;

f) As to whether a State measure constitutes a violation of Article 8.10 paragraph 2 lit. (a)-(c), an arbitral tribunal must take into account whether the measure involves gross misconduct that offends a sense of judicial propriety;

g) Further, the German proposal states that for an arbitral tribunal to find that a measure constitutes coercion, duress, and harassment, it must consider whether a State acted ultra vires or whether the episodes of alleged harassment or coercion were repeated and sustained;

h) Moreover, the proposal addresses the legitimate expectations provision. It specifies that an arbitral tribunal may only take into account written, specific, and unambiguous representations made to an investor by the competent authority of a State. Further, the investor must show that it reasonably relied on the representation when it decided to make or maintain a covered investment. It must also prove that the State frustrated the representation. Finally, the interpretation proposal states that the arbitral tribunal must consider whether a prudent and informed investor could have reasonably formed a legitimate and justifiable expectation on the basis of the representations made by the State; and

i) Finally, the German government sets out the proposed meaning of the terms a “breach of another provision of this Agreement” as stated in Article 8.10 paragraph 6. First, the term is to be understood as referring to all provisions of CETA’s Chapter 8. An arbitral tribunal must then also take into consideration:

i. The existence or absence of possible damage prevention and damage mitigation measures that were available to the investor;

ii. The existence of a national compensation scheme (excluding national insurance or guarantee schemes) in which the opportunity to participate existed and which were not pursued; and

iii. The voluntary acceptance of compensation by the investor under such compensation scheme, leading the State to reasonably believe that any damage suffered by the investor has been compensated.

In addition to the above interpretation of the FET provision, the German non-paper makes explicit reference to climate change. Referring to the Paris Agreement, the non-paper proposes that investors should expect that the Member States of the European Union and Canada will adopt measures that are designed and applied to combat climate change or address its present or future consequences. This can happen by mitigation, adaptation, reparation, compensation, or otherwise.

At the same time, according to the German non-paper, arbitral tribunals should also take due consideration of the commitments of the Member States of the European Union and Canada under the Paris Agreement and the climate neutrality objectives.

It remains to be seen if further interpretation proposals will be made by other States. The proposal the CETA Joint Committee will finally adopt will likely be a hot topic for academic debate, scrutiny, and research (which has already commenced see here).

  1. Dr. Simon Weber – Visiting Lecturer, King’s College London; Lawyer, Quinn Emanuel Urquhart & Sullivan (Schweiz GmbH); the views represented herein do not represent the views of Quinn Emanuel Urquhart & Sullivan or any organisation that the author is or has been associated with.

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