Taking Investors’ Rights Seriously: The Achmea and CETA Rulings of the European Court of Justice do Not Bar Intra-EU Investment Arbitration

Prof. Dr. Alexander Reuter *

The ECJ’s Achmea and CETA rulings [1]; as well as the entire debate conducted on the issue so far, disregard one legal factor, that is, the binding legal effect of investors’ rights under investment treaties. That factor is, however, at the heart of the matter and decisive. Under EU procedural law that factor can be raised at any time as a “fresh issue of law”. Thus, the Achmea and CETA rulings of the European Court of Justice do not bar intra-EU investment arbitration.

This proposition is not to contribute to the voluminous debate on Achmea and on the compatibility of intra-EU investment arbitration with TFEU art. 344, 267 and 18 or other EU governance principles such as the “principle of mutual trust”. In contrast, that proposition is based on investors’ rights under public international law as third parties, and the binding effect on the EU, its institutions and its member states of such rights. In addition, under the criteria developed by said ECJ rulings, intra-EU ISDS under the ECT fares better than the CETA.

The above propositions are set out in more detail by the author in the Heidelberg Journal of International Law (HJIL) (Zeitschrift für ausländisches öffentliches Recht und Völkerrecht; ZaöRV). [2]

A)   Third party rights under public international law

In Achmea the European Court of Justice (”ECJ“) found intra-EU investment arbitration under the bilateral investment treatybetween Slovakia and the Netherlands to violate the principles of mutual trust and sincere cooperation amongst EU member states, the supremacy of EU law and the protection of the ECJ’s own competence to ensure the uniform application of EU law. All of these principles concern the internal governance of the EU, its member states and its institutions, not investors’ rights. On the other hand, in the last years a great many arbitral tribunals dealt with intra-EU investment arbitrations, most of them under the Energy Charter Treaty (“ECT”), a multilateral investment treaty to which the EU has acceded. None of these tribunals found the proceedings to be incompatible with EU law. [3] The tribunals refer to the general interpretation rules of the Vienna Convention on the Law of Treaties (VCLT) and, as one tribunal has worded it, a carve-out for intra-EU conflicts would be “incoherent, anomalous and inconsistent with the object and purpose of the ECT”, the rules of international law on treaty interpretation, in particular the universal recognition of “the principles of free consent and of good faith and the pacta sunt servanda rule”. [4]

This is in line with the intent of the EU institutions involved with the accession by the EU to the ECT. The internal documents preparing the accession demonstrate that the EU did not intend the ECT to distinguish between intra-EU and extra-EU disputes. In line therewith, the ECT, as adopted not only by all EU member states, but by both the European Commission and the European Council, does not contain any indication that differing rules should apply “intra-EU” on the one hand and in respect of non-EU parties on the other hand. In contrast, by a declaration made when acceding to the ECT (see Annex ID to the ECT) [5] , the European Communities did not only set forth that the “European Communities and their Member States” are “internationally responsible” for the fulfillment of the ECT, it also expressly mentions the “right of the investor to initiate proceedings against both the Communities and their Member States”. Additionally, the declaration expressly deals with the role of the ECJ and documents that the EU acceded to the ECT in full cognizance of the fact that the ECJ can be involved in such proceedings only (1) “under certain conditions” and in particular only (2) “in accordance with art. 177 of the Treaty” [now TFEU art. 267]. Hence, the declaration expresses the acceptance by the EU of the curtailment to the competences of the ECJ resulting from investment arbitration under the ECT.

B)   Taking investors’ rights seriously: Their binding effect within the EU

The reason for this discrepancy between the findings of the ECJ and those of the arbitral tribunals can already gleaned from the above: While the tribunals deal with investors’ rights under the relevant investment treaties, the ECJ is concerned with intra-EU governance issues. [6] However, governance issues do not do away with the fact that investment treaties form part of public international law and bestow private investors with the rights (1) that the host state comply with the treaty’s protection standards and (2) to take the host state to arbitration. Such private enforcement is even one of the essential features of investment treaties. [7] Which consequences does this have within the EU?

Even the ECJ concedes that public international law treaties must be interpreted in accordance with the VCLT, notably “in good faith in accordance with the ordinary meaning to be given to its terms in their context and in the light of its object and purpose”. Thus, for purposes of public international law, the ECJ must be taken to recognize (1) that investment treaty rights vest with the investors and (2) the fact that all arbitral tribunals involved have affirmed the ECT, under public international law, to cover intra-EU investments. There is no indication that such a long, uniform and unequivocal line of arbitral holdings does not constitute an interpretation of the ECT “in good faith in accordance with the ordinary meaning to be given to its terms in their context and in the light of its object and purpose”.

In turn, under TFEU art. 216(2) “Agreements concluded by the Union are binding upon the institutions of the Union and on its Member States”. Admittedly, the ECJ makes an internal exception to TFEU art. 216 (2), that is, an exception as regards the parties to the EU Treaties, the EU and its institutions: Vis-a-vis these parties the ECJ confines the binding effect of treaties under art. 216 to supremacy over secondary EU law, and carves out primary EU law. [8] However, this internal limit to the effect of public international law treaties does not apply to third parties. Vis-à-vis third parties, under public international law the EU is bound by the treaties it has concluded. [9] The ECJ has held „that the Community cannot rely on its own law as justification for not fulfilling [the international treaty at bar].“ [10] As private investors are third parties, this holds true for them as well, and all the more so as their means to analyse the internal governance rules of the EU (or a host state) for potential infringements which may impact the validity of the treaty or of obligations contained therein, are substantially lower than the means of the other state parties which negotiated, concluded, and agreed on the ratification process for, the relevant treaty. In short: Pacta sunt servanda, in particular where investors have made investments which they cannot undo. [11]

In this connection it is irrelevant that intra-EU investment arbitration is typically directed against the relevant host state, not against the EU. As a party to the ECT, the EU is bound not to obstruct the due implementation of the rights and obligations of investors and the relevant host states. In contrast, the obstruction by the EU of the due implementation of the ECT would constitute a treaty violation in itself. [12]

C)   Consequences for Intra-EU bilateral investment treaties

The above considerations do not directly apply to bilateral investment treaties (“BITs”) between EU member states, to which the EU has not acceded. However, rights vesting under a BIT are not without protection under EU law either: First, where a host state has acceded to the EU after it has entered into a BIT, TFEU art. 351 grandfathers rights of investors as third parties. Second, there may have been acts or omissions of the EU in connection with the relevant treaty. Third, while, in general, determining EU law with retroactive effect, under its case-law the ECJ may be “moved” to carve-out “existing relationships” from such effect. [13]

D)   No precedent character of Achmea and CETA

Invoking investors’ rights is not precluded by a “precedent” character of Achmea or CETA: Preliminary rulings under TFEU art. 267 only bind the national court, and thus the parties, to the main proceedings in question [14] . Nevertheless, referral procedures under TFEU art. 267 have the purpose to have EU law interpreted for the EU as a whole and thus have a factual precedent effect. [15] However, the ECJ has confirmed the right to make a (further) reference on a “fresh question of law” or “new considerations which might lead the ECJ to give a different answer to a question submitted earlier”. [16] As a result, Achmea and CETA have no binding or precedent effect beyond the considerations they have dealt with.

These considerations do not include investors’ rights: Achmea, as already mentioned, is confined to EU governance issues. CETA, in contrast, did not fail to consider the position of investors. However, these were ex ante considerations, not the protection of investors who have already made investments in reliance on a treaty. It did thus not deal with a treaty which had already been concluded, had come into force, had bestowed rights on investors, and in reliance on which investors had made investments. [17]

In contrast, the ECT is a concluded treaty which has been in force for many years and under which investors have already made a great many intra-EU investments. Thus, when making their investments, investors were entitled to have the expectation that the ECT would be respected by its parties, including the EU.

E)   Applying the criteria of the CETA Opinion

In the alternative: If one (contrary to the above) were to disregard investors’ rights under public international law, the question arises how the ECT would fare under the criteria selected by Achmea and CETA to assess the compatibility of intra-EU investment arbitration with EU law. A detailed analysis shows that the ECT does not run aful of, but meets, those criteria. [18]

F)   A matter of justice

The conclusion is: Investors are entitled to rely on their investment treaty rights. Under public international law, the EU position regarding intra-EU ISDS is, as the Vattenfall tribunal has expressed it, “unacceptable”, “incoherent”, “anomalous and inconsistent”. [19] This is corroborated by the described conduct of the EU when negotiating and acceding to the ECT. Hence, that investors should not be bereaved of their vested rights is a matter of material justice. This holds all the more true where the EU was instrumental in soliciting the investments and changed its position only at a point in time when such investments had been made. [20]


* Rechtsanwalt and Attorney-at-Law (New York)
Partner, GÖRG Partnerschat von Rechtsanwälten
Cologne

[1] ECJ, 6 March 2018, Case C‑284/16, Achmea; ECJ, ECJ, Opinion 1/17 of 30 April 2019, CETA.

[2] Issue 80 (2/2020), pp. 379 – 427.

[3] Cf. Foresight v. Spain, SCC Arbitration V 2015/150, Award, 14 November 2018, para. 221, with a list of awards affirming intra-EU arbitration; Reuter, note 2, Part B IV.

[4] Vattenfall et al. v. Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue, 17 August 2018, paras. 154/155; Reuter, note 2, Part B

[5] https://energycharter.org/fileadmin/DocumentsMedia/Legal/Transparency_Annex_ID.pdf

[6] The reasons for that stance may be institutional rather than legal: Organizations innately tend to attach high priority to their own competences and inter-institutional governance.

[7] MacLachlan/Shore/Weiniger, International Investment Arbitration, 2007, paras. 1.06, 2.20, 7.01; Reuter, note 2, Part B.

[8] ECJ, 10 January 2006, C-344/04, IATA and ELFAA, para. 35.

[9] For more details Reuter, note 2, Part D.

[10] ECJ, 30 May 2006, Joined Cases C-317/04 and C-318/04, European Parliament v Council, para. 73.

[11] For more details Reuter, note 2, Part D.

[12] As for the liability of the EU on the one hand and member states on the other hand in connection with mixed investment agreements in general Armin Steinbach, EU Liability and International Economic Law, Hart Publishing 2017, pp. 133 et seq., pp. 141 et seq.

[13] For more details Reuter, note 2, Part D; as regards the carve-out ECJ, 13 May 1981, Case 66/80, International Chemical Corporation, paras. 13/14; see also ECJ, 8 April 1976, Case 43/75, Defrenne v Sabena, paras. 71/72.

[14] ECJ, 29 June 1969, Case 29/68, Milch-, Fett- und Eierkontor GmbH v Hauptzollamt Saarbrücken, para. 3.Wegener in Calliess/Ruffert, EUV/AEUV, 5th ed. 2016, art. 267, para. 49.

[15]     ECJ, 24 May 1977, Case 107/76, Hoffmann-LaRoche/Centrafarm, para. 5; Reuter, note 2, C III.

[16] ECJ, 5 March 1986, Case 69/85, Wünsche Handelsgesellschaft GmbH & Co. v. Germany, para. 15; For more details Reuter, note 2, Part B III.

[17] For more details Reuter, note 2, Part B III 3.

[18] For more details Reuter, note 2, Part D.

[19] See note 4.

[20] Reuter, note 2, Part E.

A New And Improved Investment Protection Regime: Truth Or Myth!

Shilpa Singh Jaswant, LLM (Hamburg)

The proposed investment court system by the European Commission aims to limit criticism revolved around Investor-State Dispute Settlement due to its lack of legitimacy, transparency and appellate mechanism. The investment regime under Comprehensive Economic and Trade Agreement with Canada (hereinafter “CETA”) and European Union-Viet Nam Free Trade Agreement (hereinafter “EUVFTA”) could be a solution by bringing transparency, consistency and institutionalisation in investment protection. The blog addresses the compatibility of the new system with EU law as any violation to autonomy of EU law as laid down in the previous judgments would not be optimistic to its future and followed by other blog in future would address the features of the Tribunal system and its difference from arbitration. Meanwhile Member states of the EU seek opinion from the Court of Justice (hereinafter “the CJEU”) though it is promising and would lay down stepping stones of an improved investment protection.

Achmea ruling and its effect to jurisdiction of the Tribunal under CETA and EUVFTA

Achmea ruling confirms that intra-EU BITs are incompatible with EU law while its effects reverberate to agreements entered by the EU with third countries. As per the CJEU in Achmea in para 58 (also in Opinion 1/09 of 08.03.201, para 89), arbitral tribunals under investment agreements, when entered between Member states, are outside the judicial system of the EU and incompatible with autonomy of EU law since arbitral tribunals were empowered under the principle of lex loci arbitri to include and interpret EU law (the Community treaties and secondary laws). However, the ruling may not be applicable in full since investment protection in CETA and EUVFTA are concluded as mixed agreements meaning the EU and its Member states are parties to them.

A logical conclusion is that the Tribunal established under CETA and EUVFTA would not fall within judicial framework of the EU since its jurisdiction is limited to claims related to breaches of investment agreements and to determine if a measure of a Member state and/ or of the EU is in violation of the standards set in the agreements. It can only resolve a dispute under the applicable law i.e., the provisions of investment agreement.

The CJEU places responsibility on arbitral tribunal to protect autonomy of EU law by not giving inconsistent interpretation to it. In the past the CJEU in Opinion 2/13 of 18.12.2014 and Opinion 1/09 in para 65 has protected autonomy of EU in many cases and call it as the “essential” characteristics originating from an independent source of law, i.e., the Treaties. Further saying that standard of review to protect autonomy of EU law is a matter of these tribunals and Member states too. Since the CJEU has never been eager to open doors of interpretation to a tribunal which is out of the EU judicial framework and Member states are obligated to bring issues related to EU law to the CJEU.

On the contrary, if the CJEU finds that the Tribunal under CETA and EUVFTA is part of judicial framework of the EU and that it could send for preliminary ruling under Article 267 TFEU departing from its previous judgments, even then it has responsibility to protect autonomy of EU law along with uniform and consistent interpretation and application of EU law. In both situations, an interpretation of EU law done by the tribunals may affect the consistency. However, by looking at the features (as discussed below) of the Tribunal assure that autonomy of EU law is protected, at least in theory.

Ensure jurisdiction of domestic courts and CJEU

CETA in Article 8.22(1)(f) & (g) and EUVFTA in Article 3.34 (1) preclude parallel proceedings at a domestic or international court or tribunal so as to not to undermine the authority of tribunals which could mean taking away exclusive jurisdiction of the CJEU.  Even when the agreements do not allow parallel proceedings for disputes related to an alleged measure which is inconsistent with agreements, the Tribunal is under obligation by Article 8.24 CETA and Article 3.34(8) EUVFTA to stay its proceedings or take into account proceedings under international agreement which may affect the findings of the Tribunal or the compensation awarded due to the use of “shall”. Article 8.28 CETA and Article 3.42 (1) EUVFTA assure that in case the Tribunal fail to do so, appellate body has authority to modify or reverse award on “manifest errors in the appreciation of facts, including….. relevant domestic law”. It is important that the tribunals under agreements take into consideration decisions of the CJEU and domestic courts effectively and importantly, ensure supremacy of EU law and full respect to decisions of the CJEU.

Perhaps the limited scope of disputes of the Tribunal done by the drafters of the agreements, especially interpretation and application of EU law is a solution to it. The tribunals under Article 8.31 CETA and Article 3.42(3) EUVFTA are not allowed to interpret and apply the provision of EU Treaties including prevailing domestic laws and shall follow the prevailing interpretation given to the domestic law. While determining consistency of measures, it has to consider the domestic law as matter of fact which also includes EU law.

Issue of competence and international responsibility

After the opinion of the CJEU on EU-Singapore FTA, it is important to look at nature of agreement concluded: CETA and EUVFTA are concluded as mixed. It is clear that the question of competence would not affect the interpretation of the investment agreements done by the tribunals. The question of determining obligation arising from the agreements whether it would be responsibility of the EU or Member states requires interpretation of the agreements and due to their drafting it would be within the jurisdiction of the CJEU. The agreements have placed obligation of international responsibility on the EU to determine respondent.

In other words, the right to access tribunal as per the rules to determine respondent by the EU in both agreements would allow foreign investors to initiate proceedings without affecting the autonomy of EU law, supremacy of EU law and would promote legal certainty. This conclusion would also put away any future doubts on competences, inter alia on law making and concluding the agreement between Member states and the EU which would be mutually exclusive of the determination of respondent done to fix international responsibility. The issue of competence would however justify the reason to conclude the agreements as mixed agreements since some areas are shared between the EU and its Member states.

Unique features of the Investment court system

The institutionalization would ensure legitimacy and consistency to decisions after introducing an appellate body. While allowing participation of non-disputing third parties and interpretations of provisions to the agreements from scholars and person of interest, having compulsory resolution through amicable mechanism like conciliation and mediation and transparency are front runners. The members of tribunals are appointed by a committee as per the agreement while cases are allotted on random basis to a roster of judges much like done in WTO panel. After the award, the Tribunal would be dissolved and question of sending back to the same tribunal after appellate body’s decision is still unanswered. Moreover, it does not contribute to ‘permanent structure’ since members are paid retainer fees and not salary, and are allowed to take up other occupation unless otherwise decided. It can still be said that the system is not balanced out and independent, instead it seems semi-permanent or hybrid.

Due to proliferation of investment agreements, the tribunals organized may give arise to different conclusions relating to similar commercial situation and similar investment rights to the similar in the provisions of these agreements questioning procedural fairness. None of the agreements deal with correlation of the tribunals. Also another procedural flaw observed that both the agreements do not directly deal with a question on jurisdiction and thus the parties have to wait until the final award is issued to appeal a positive or mixed jurisdiction award.

In sum, the investment protection in the agreement has room for improvement and that can be done by creating a new regime of investment protection with a multilateral investment court which would be permanent in nature with full tenured and impartial judges for the problem of coherence and determinacy. The consistency would be ensured with a permanent appellate mechanism and the treaties would be considered at par with one another. As concluding remarks, the present system in the agreements are a way forward to institutionalise investment protection but this optimism should not be taken blindly and hinder improvement and develop a better system.

The ‘Mixed’ Future of the EU’s Investment Law and Arbitration Policy

by Nikos Lavranos, Secretary General of EFILA*

The year 2016 must be considered a real “annus horribilis” for the EU’s investment law and arbitration policy. The following list is just an incomplete overview of the failures of the European Commission to deliver any positive results:

  • TTIP was not concluded within the presidency of the Obama Administration and seems to be put in the freezer by President-elect Trump;
  • Even after Wallonia has been appeased, CETA is still not certain of being actually ratified by all Member States and enter fully into force, since the Court of Justice of the EU (CJEU) is going to opine on the compatibility of the investment court system (ICS) with EU law;
  • AG Sharpston recently delivered her opinion on the EU-Singapore FTA, arguing that this FTA must be concluded as a “mixed” agreement, i.e., signed and ratified by all Member States and the EU. Consequently, also this FTA will most likely face similar difficulties as CETA, in particular since it still contains the ostracized “old school” ISDS provisions.
  • The European Commission intensified its efforts of destroying the intra-EU BITs by mounting infringement proceedings against 5 Member States and by prohibiting Romania to pay out the $ 250 million Micula award and thereby fulfilling its international.
  • Similarly, the European Commission continues to intervene in all intra-EU BITs and intra-ECT disputes, trying to prevent European investors to rely on the rights granted to them by these treaties, which are still valid and in force.

In short, after 7 years since the EU obtained exclusive competence for “foreign direct investments”, the EU’s investment policy is not only practically absent but has – more importantly – created legal uncertainty and cast doubt as to the investment climate and the rule of law within the EU. This is even more disappointing in light of the unprecedented financial and economic crisis, which has hit most of the EU Member States and continues to smoulder beneath the surface. Instead of attracting new foreign direct investments, which would create jobs, the European Commission has been financing anti-ISDS, anti-investment and anti-globalization groups to scare the general public and media about something that has been in place for more than 50 years.

Looking ahead, the year 2017 should be used for pause and reflection, and ultimately, change of the chosen path.

After the CETA-drama and the Opinion of the CJEU on the EU-Singapore FTA, which will most likely follow AG Sharpeston’s analysis, the European Commission should – for a start –

accept and embrace “mixity” as the new reality. This would be a very important move by the European Commission because it could allow her to stop fighting with the Member States about competences, thereby enabling it to spend her resources on more relevant issues.

As the CETA-drama has aptly demonstrated, involving the Member States – including their regional parliaments – is a necessity in order to create any sufficient level of support for FTAs. In other words, “mixity” is a tool for increasing democratic involvement and control by the Member States and their voters. In light of the rising populism in Europe – and in light of the upcoming elections in France, Germany and Netherlands which all will take place in 2017 – this point should not to be underestimated.

In this connection, it may be advisable if the European Commission would apply the motto “less is more”. Currently, the European Commission is negotiating more than a dozen FTAs ranging from China to Tunisia. Considering the efforts, time and resources necessary for negotiating and concluding just one FTA, a prioritization of all these FTA-negotiations is essential.

In the second place, the European Commission and the European Parliament should stop stirring up the hysteria again investors, investment protection and arbitration. Investment protection and arbitration have been important and necessary elements for the promotion and protection of European investments and investors investing abroad and thereby creating jobs in Europe as well as improving the economic development in the countries of their investment destinations. Moreover, investment treaties continue to have an important role as a tool for improving the rule of law situation in many countries in the world.

Therefore, in the third place, the discourse has to change towards how investment treaties can be used as a tool for improving the functioning, efficiency and transparency of state organs across the board, in particular with the aim of eradicating corruption. This would not only benefit foreign investors but – more importantly – domestic investors and the general public.

In sum, 2017 should be the year in which the demonization of investment treaties, investment protection and arbitration has to end. Instead of spreading myths and hysteria, all relevant stakeholders should calm down and return to a fact- and merit based discourse.

As in the past years, EFILA will continue to exactly do that.

Starting with our 3rd Annual Conference on 23 February in Vienna.

At the same time calling for submissions of papers for the European Investment Law and Arbitration Review.

By requesting blogpost submssions for the EFILAblog.

By submitting its views to the public consultation on the investment court system.

Finally, by hosting the next Annual Lecture, which will be delivered by a well-known arbitration expert, sometime in the fall of 2017.

With this hopeful outlook, I wish you all a very peaceful new year.


* Nikos Lavranos, Secretary General of EFILA, visiting professor Verona University, Fellow at the WTI.

 

Legitimate expectations in the TTIP proposal, in CETA, in EU law and in international investment law: a paradigm of Heraclitean hidden harmony?

by Artemis Malliaropoulou*

The problems are solved, not by giving new information, but by arranging what we have known since long.” ― Ludwig Wittgenstein, Philosophical Investigations, 1953

The wording of the European Commission Public Consultation Paper on modalities for investment protection and ISDS in TTIP signals, among other questions, the necessity to conduct further research and elaborate on the ambit of legitimate expectations in international investment law as well as in EU law and compare the standard of protection provided so far with potential differences in interpretation arising out of the Public Consultation Paper’s clarification. It is stated that: “The “legitimate expectations” of the investor may be taken into account in the interpretation of the [FET] standard. However, this is possible only where clear, specific representations have been made by a Party to the agreement in order to convince the investor to make or maintain the investment and upon which the investor relied, and that were subsequently not respected by that Party. The intention is to make it clear that an investor cannot legitimately expect that the general regulatory and legal regime will not change. Thus the EU intends to ensure that the standard is not understood to be a “stabilisation obligation”, in other words a guarantee that the legislation of the host state will not change in a way that might negatively affect investors.[i]”.

CETA, as a point of comparison, makes clear from the outset that the EU and Canada preserve their right to regulate and to achieve legitimate policy objectives, such as public health, safety, environment, public morals, social or consumer protection and the promotion and protection of cultural diversity. This is a clear instruction to the tribunal for the interpretation of the investment provisions. It is also explicitly foreseen that Governments can change their laws, including in a way that affects investors’ expectations of profit and that the application of EU’s state aid law does not constitute a breach of investment protection standards[ii]. Paragraph 2 of the Article 8.9 states that: “For greater certainty, the mere fact that a Party regulates, including through a modification to its laws, in a manner 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.”

Unlike many agreements encompassing investment protection, CETA expressly deals with the issue of the role that legitimate expectations play in finding a breach of the FET standard. It limits their applicability to situations where a State party made a specific representation to the investor and subsequently frustrated it. Paragraph 4 of the Article 8.10 states that: “When applying the above fair and equitable treatment obligation, a 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.”.

It is worth mentioning four questions, as a minimum basis, arising out of the CETA text. First, the language of the provision leaves it up to the tribunal whether legitimate expectations must be considered or not[iii]. This uncertainty does not seem to be in line with the nature of legitimate expectations as seminal part of the FET standard and fundamental principle of EU law. Second, it remains unclear what a specific representation is and if the precedent in international investment law cases is going to be followed. A report[iv] of the International Institute of Sustainable Development points out the vagueness of this provision by a comparison with a previous draft for an umbrella clause. This clause specifically mentioned “any specific written obligation”. In comparison with the reference in paragraph 4 of the fair and equitable treatment provision to a “specific representation”, it shows clearly that “a specific representation is more open than a specific written obligation.”.

However, it should be pointed out that the requirement of a specific written obligation does not correspond to an existing precedent in EU law or in international investment law. Third, there is a lot of jurisprudence on the question of legitimate expectations based on objective criteria. Decisive is what a “reasonable investor is entitled to expect on the basis of the host State’s representations”[v], however, it is not clear if this “objective test” is going to be followed. Fourth, it seems that the expectation must be present at the time of the investment or maintenance of the investment[vi], which is in line with existing case-law. It is not clear whether it will be up to arbitral tribunals to interpret at what point investors’ expectations have been legitimate.

As arbitration scholars find the roots of legitimate expectations in investment law in the 2003 award “Tecmed v. Mexico”[vii], it could be rightfully supported that this principle is entering its adolescence in this field[viii], while in the EU law field it is in its forties.

In international investment law the concept of legitimate expectations has developed to be at the heart of the FET standard. In a nutshell, under a FET clause, a foreign investor can expect that the rules will not be changed without justification of an economic, social or other nature. Investors’ expectations can be based on governments’ written commitments to investors (e.g., contractual commitments beyond mere contractual expectations), governments’ representations vis-à-vis specific investments (e.g., direct and public endorsements), or host countries’ unilateral representations (e.g., favorable regulatory frameworks) as they existed at the time of an investment[ix].

Conversely, it is unthinkable that a State could make a general commitment to all foreign investors never to change its legislation whatever the circumstances, and it would be unreasonable for an investor to rely on such a freeze[x]. Given the State’s regulatory powers, in order to rely on legitimate expectations the investor should inquire in advance into the prospects of a change in the regulatory framework in light of the then prevailing or reasonably to be expected changes in the economic and social conditions of the host State[xi]. No reasonable investor can have an expectation of an unaltered regulatory framework, unless very specific commitments have been made towards it or unless the alteration of the legal framework is total[xii].

In EU law legitimate expectations is a concept derived from German law, where it is known as Vertrauensschutz which was originally translated in English as “protection of legitimate confidence”; a translation that corresponded more closely to the French concept of “protection de la confiance légitime”[xiii]. This was thought to be misleading in English and henceforth the term “legitimate expectations” has been used[xiv]. This term indicates that administrative acts lato sensu[xv], in the absence of overriding public interest, must not violate the legitimate expectations of those concerned and it presupposes a careful balancing of conflicting rights-principles. From its early case-law, the Court of Justice of the EU has recognized that legitimate expectations form part of the European legal order[xvi] and provided EU citizens with a subjective right that justified expectations, which have been raised by the administration will actually be realized[xvii]. The principle of legitimate expectations is considered to be an assurance that the administration achieves its objectives while protecting the individual’s expectations and it has been used as a rule of interpretation[xviii], a ground for annulment[xix] or a basis for an action for damages for non-contractual state or EU liability.

The right to rely on that principle requires that three conditions are satisfied. First, precise, unconditional and consistent assurances originating from authorized and reliable sources must have been given by the state’s authorities to the person concerned. Second, those assurances must be able to give rise to an expectation which is legitimate for the person to whom they are addressed. Third, the assurances given must be consistent with the applicable rules[xx]. However, it is highlighted that, despite its status as a fundamental principle, economic operators are not justified in having a legitimate expectation that an existing situation which is capable of being altered by the EU institutions in the exercise of their discretion will be maintained, particularly in fields whose subject matter involves constant adjustment to reflect changes in the economic situation. The Court has held that, even if the European Union were first to have created a situation capable of giving rise to legitimate expectations, an overriding public interest may preclude transitional measures from being adopted in respect of situations which arose before the new rules came into force but which are still subject to change[xxi].

Nevertheless, in particular situations, where the principles of legal certainty and of the protection of legitimate expectations so require, it may be necessary to introduce transitional arrangements appropriate to the circumstances. Thus, the Court has held that a national legislature may breach the principles of legal certainty and of the protection of legitimate expectations when it suddenly and unexpectedly adopts a new law which withdraws a right that a category of taxable persons enjoyed until then, without allowing them the time necessary to adjust, when the objective to be attained did not so require[xxii].

The adverb “may” that accompanies the phrasal verb “take into account” in the context of the European Commission’s Public Consultation Paper, which is similar to the CETA wording, followed by a one-sided or superficial elaboration of a fundamental principle of EU law and international investment law may generate ambiguous outcomes. As soon as investors’ expectations are examined and considered to be justified, it is not clear why then they must not be balanced with the conflicting public interest at stake (or with the legitimate expectations of the state[xxiii]), applying the proportionality test. Bearing in mind the need for any type of dispute resolution mechanism created to not only do justice, but to be seen to be doing justice, a thorough research of the area is required and any attempt by policy makers (and later by adjudicators) to formulate sensitive concepts without following the precedent developed in the respective fields of law should state expressis verbis the reasons why that precedent should not be followed.


* Artemis Malliaropoulou, Visiting lawyer at the ICC (International Criminal Court) and visiting scholar at the University of Vienna.


[i]      European Commission Public Consultation Paper on modalities for investment protection and ISDS in TTIP, Question on FET standard, p.6, http://trade.ec.europa.eu/doclib/docs/2014/march/tradoc_152280.pdf

[ii]     http://trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151918.pdf

Legitimate expectations are also mentioned in paragraph 2 of the Annex 8-A as one of the factors that should be taken into consideration in the context of the determination of whether a measure or series of measures of a party, in a specific fact situation, constitutes an indirect expropriation The extent to which the measure or series of measures interferes with distinct, reasonable investment-backed expectations.

[iii]    Ursula Kriebaum, FET and Expropriation in the (Invisible) EU Model BIT, 2014 (15) The Journal of World Investment & Trade, p. 476.

[iv]    Nathalie Bernasconi-Osterwalder, Howard Mann‚ A Response to the European Commission’s December 2013 Document “Investment Provisions in the EU-Canada Free Trade Agreement (CETA)”, International Institute of Sustainable Development 2014, 7, http://www.iisd.org/pdf/2014/reponse_eu_ceta.pdf

[v]     Ursula Kriebaum, op.cit., pp. 476-479.

[vi]    Ibid.

[vii]    Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award (29 May 2003).

[viii]   Lucy Reed and Simon Consedine, Chapter 20: Fair and Equitable Treatment: Legitimate Expectations and Transparency in Meg N. Kinnear, Geraldine R. Fischer, et al. (eds), Building International Investment Law: The First 50 Years of ICSID, Kluwer Law International 2015, p. 283.

[ix]    Christoph Schreuer and Ursula Kriebaum, At what time must legitimate expectations exist?, in Jacques Werner and Arif Hyder Ali, eds., Law Beyond Conventional Thought, London: Cameron May, 2009, pp. 265-276.

[x]     El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Award (31 October 2011), para. 372.

[xi]    Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award (8 July 2016), para 427.

[xii]    El Paso, op.cit., para. 374.

[xiii]   Trevor C. Hartley, The Foundations of European law, 2008 OUP, p.149.

[xiv]   John A. Usher, The influence of national concepts on decisions of the European Court, 1976, 1ELR p.363.

[xv]    There is no uniformity as far as the definition of an administrative act is concerned. The 2004 Recommendation of the Council of Europe provides the following one: “legal acts- both individual and normative- and physical acts of the administration taken in the exercise of public authority which may affect the rights or interests of natural or legal persons or situations of refusal to act or an omission to do so in cases where the administrative authority is under an obligation to implement a procedure following a request”. It is worth mentioning that this definition compared to others is much more concrete, and includes not only acts but also omissions and refusals in cases where the administration has no discretionary powers, while it refrains from including any obligation of an act to directly affect rights/ interests.

[xvi]   C-78/74, op.cit.

[xvii]  T-199/99 Sgaravatti Mediterranea Srl v Commission of the European Communities [2002] E.C.R.II-03731.

[xviii]  C-78/74 Deuka, Deutsche Kraftfutter GmbH, B. J. Stolp v Einfuhr- und Vorratsstelle für Getreide und Futtermittel [1975] E.C.R.421.

[xix]   C-112/77 August Töpfer & Co. GmbH v Commission of the European Communities [1978] E.C.R.1019.

[xx]    C- 566/14 P,  Jean-Charles Marchiani v European Parliament, Judgment of the Court (Grand Chamber) of 14 June 2016, para. 77 and the case-law cited; Joined Cases T‑50/06 RENV II and T‑69/06 RENV II, Ireland and Aughinish Alumina Ltd vs. European Commission, Judgement of the General Court (First Chamber, Extended Composition) dated 22 April 2016, para. 213 and the case-law cited.

[xxi]   C- 526/14, Tadej Kotnik and Others v Državni zbor Republike Slovenije – Request for a preliminary ruling from the Ustavno sodišče Republike Slovenije, Judgment of the Court (Grand Chamber) of 19 July 2016, paras. 66, 68 and the case-law cited.

[xxii]  C-332/14, Wolfgang und Dr. Wilfried Rey Grundstücksgemeinschaft GbR v Finanzamt Krefeld – Request for a preliminary ruling from the Bundesfinanzhof, Judgment of the Court (Fourth Chamber) of 9 June 2016, paras. 56-58 and the case-law cited.

[xxiii]  Karl P. Sauvant and Güneş Ünüvar, Can host countries have legitimate expectations?, Columbia FDI Perspectives, No. 183, September 26, 2016.

CETA and Fundamental Rights in the European Union: Invitation to a Dialogue between Courts

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 ….

  1. 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

The love-hate story of arbitral jurisdiction over claims against states in the EU

by Emanuela Matei, Associate Researcher – CELS*

Staging the scene

In October 2013 the European Commission issued a note entitled ‘Platform for Good Tax Governance: Addressing the remaining cases of double taxation in the single market: means to foster arbitration’ in which it exposed the limitations of the EU Arbitration Convention 90/463/EEC. It affirmed that whenever a case covered a situation where no DTC was applicable, the domestic rules have been proven insufficient in regard of the pursuit to eliminate double taxation. The Commission recommended the renegotiation of the existent intra-EU DTCs in order to introduce an arbitration clause. Another option would be the adoption of a directive providing for an arbitration clause. On the other hand, the harmonisation of the rules applicable in the context of DTCs has been regarded as too invasive vis-à-vis the tax autonomy of the Member States.

In the meanwhile, the Commission has been fighting a whole different battle in the field of intra-EU BITs, where actually the elimination of the arbitration clause is one of the main issues. Since the Member States have not acted in order to displace the alleged incompatibilities, the Commission envisages a discussion with the Member States and all interested parties regarding the further improvement of investment protection within the EU.

In the OECD setting, the BEPS project that mainly addresses the risk of double non-taxation would have been incomplete if the elimination of double taxation had been left outside. The question of effective dispute resolution has been addressed in Action 14 of the BEPS. The main topic relates to supplementing the existing provisions of the tax treaties with a mandatory and binding arbitration provision. Exactly as the Commission, the OECD remarks that many DTCs do not contain such a clause and some other DTCs do not guarantee that the access to arbitration is actually recognised.

As it stands now, the EU law does not provide protection against double taxation beyond the scope of the principle of non-discrimination and the four economic freedoms. On the other hand, the issue of double non-taxation is caught under the scope of State aid prohibition[1]. Disfavouring investors is allowed under EU law, as long as the tax measure is not discriminatory. If the tax measure distorts competition, the Commission should react as mentioned above in accordance with the provisions of Article 116 TFEU.

The division of competences in taxation matters reminds you of a quantum system existing in a combination of multiple states that may lead to different outcomes. The multitude of states collapses into a state or another as soon as the system interacts with the external world. In a similar manner, the limits of the national tax autonomy are not predetermined, but only determinable through interpretation, so the matter of jurisdiction to resolve a question entangled with taxation will never be a definitely closed file.

The parallel universe of international investment law

External investment may fall either under the provisions of Articles 206-207 TFEU, if the investment comes from a third country or within the scope of internal market rules, if the investment comes from another Member State. Intra-EU investments fall within an area of shared legislative competence. Taxation measures may attract investments from abroad or put the investor off the idea to move to a different Member State.

The substantive protection derived by investors from the network of BITs is clearly superior, since it includes protection against measures which are not discriminatory in the meaning of Article 18, 49 or 63 TFEU. However, the remarkable difference in favour of the BIT regime can be noticed in the field of procedural rights. The fact that individuals do not have locus standi before the CJEU is the biggest impairment in this context.

The effectiveness of the protection granted by EU law to the intra-EU investor depends on the sincere cooperation of each Member State to take any action that might be necessary in order to achieve the expected results. In Cilfit, the CJEU affirmed that if the correct application of EU law is so obvious as to leave no scope for any reasonable doubt as to the way in which the question raised is to be resolved, the national court may refrain from submitting that question for a preliminary ruling and take upon itself the responsibility for resolving it. Furthermore, it must be established in detail that there is no such doubt[2].

[A] court against whose decisions there is no judicial remedy under national law is required, when a question of EU law is raised before it, to fulfil its obligation to bring the matter before the Court of Justice, unless it has established that the correct application of EU law is so obvious as to leave no scope for any reasonable doubt and that the existence of such a possibility must be assessed in the light of the specific characteristics of EU law, the particular difficulties to which its interpretation gives rise and the risk of divergences in judicial decisions within the European Union[3].

The obligation to refer for a preliminary ruling is strict in the case of courts of last resort, though in practice, national courts may still make use of Cilfit in order to avoid a request for a preliminary ruling. I would also dare to affirm that generally in any domain of science, less you know about a subject, clearer things appear to be. In case that certain national courts still do not dispose of human resources with sufficient knowledge of EU law, the intricacy of a certain question of EU law would not be easily accessible to them. It is very probable that in such a case, the plaintiff will not be able to obtain damages by making use of Köbler doctrine, since the infringement will not be manifest[4]. The Commission as well does not have an outstanding record of starting infringement proceedings in order to discourage the  practice of making use of a broader interpretation of the Cilfit-exception.

Since 2010 the overall number of infringement procedures has decreased, while the number preliminary rulings under Article 267 TFEU has significantly increased[5]. However, these numbers do not say anything about compliance with the duty to refer for a preliminary ruling and they do not provide any guarantee that the interpretation given by the CJEU has been applied correctly in practice by the national courts. The inability of EU law to effectively defend the implied right of an individual to have a question referred to the CJEU for a preliminary ruling invites the question whether international investment law should provide legal protection via its traditional means i.e. through investor-state arbitral proceedings.

As discussed above, the source of conflict is often the reverse coin of a certain competence. It is not the right to impose taxation, but the decision to abstain from it that may cause problems. It is not the right to allow free movement of capital from and to third countries, but the ability to impose restrictions on it that generated a number of infringement proceedings in EU law. It appears obvious that EU law allows Member States to restrict the protection of the foreign investor in cases where the IIA standard would not. In other cases, the EU law itself contains restrictions that the Member State must apply.

The judicial system of the European Union has nonetheless been created as a complete system of legal remedies and procedures designed to ensure review of the legality of acts of the EU institutions. The Member States are not allowed to confer the jurisdiction to adjudicate disputes between individuals on ‘a court created by an international agreement which would deprive those courts of their task, as ordinary courts within the European Union legal order, to implement European Union law and, thereby, of the power provided for in Article 267 TFEU, or, as the case may be, the obligation, to refer questions for a preliminary ruling in the field concerned[6].

Concerning disputes between Member States in relation to the application of the ECHR within the scope ratione materiae of EU law, the CJEU held that only an explicit exclusion of the ECtHR’s jurisdiction would be compatible with EU law[7]. The tasks attributed to the national courts and the CJEU are deemed indispensable for the preservation of the very nature of the law established by the Treaties[8]. It must be underlined that the Commission has been in favour of establishing a system of external judicial control in many occasions including the adhesion to the ECHR, and agreed with the adoption of an arbitration clause in CETA, TTIP and FTAS[9]. The answer provided by the CJEU until now has been different from the opinion of the Commission.

In a recent request for preliminary ruling the Bundesgerichtshof asked the CJEU whether the application of an ISDS provision in an intra-EU bilateral investment protection agreement would be precluded by Article 344 TFEU or Article 267 TFEU or Article 18 TFEU[10].  Article 344 TFEU merely prohibits Member States from submitting a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for in the Treaties[11]. The theory projected by the Commission in Micula is that by abiding by the rules of the BIT, the Member State in question endorses the submission of disputes concerning the interpretation or application of the Treaties to the arbitral tribunal[12]. The Bundesgerichtshof in Achmea expresses the opposite opinion, namely that only if the plaintiff is a Member State, then the Article 344 TFEU would apply[13].

Article 267 TFEU aims to avoid divergences in the interpretation of European Union law which the national courts have to apply[14]. In Achmea, the arbitral decision has been adopted under the UNCITRAL rules and therefore it shall be enforced in accordance with the New York Convention that allows the domestic court to take into consideration the issue of public policy. The domestic court would have thus the opportunity to refer for a preliminary ruling in this context. The situation is different under the ICSID convention though. In any case, the Bundesgerichtshof finds in its referral no case of incompatibility with Article 267 TFEU.

The Bundesgerichtshof reasoned on the other hand that the application of the ISDS clause might be precluded by Article 18 TFEU. The Bundesgerichtshof proposed in this case to extend the higher level of protection to all investors in a similar position. Apparently, this solution seems to be elegant and certain, however in my view the issue of potential incompatibility is more intricate than it may look at first sight. A higher level of investor protection may potentially counteract the effective application of a provision of Union law protecting a specific interest of the EU[15]. Because the risk of such conflicts exists, the exercise of balancing effectiveness against investor protection must be performed by the competent court or tribunal. The role of the CJEU is to ascertain that the court that performs the assessment does not rely on an erroneous or divergent interpretation of EU law. As I mentioned before, the Cilfit doctrine does not provide a sufficient insurance that national courts apply Union law consistently with the interpretation adopted by CJEU, but at least Member States may be brought to Court for not complying with EU law obligations.

However, the investor has no means to bring a case against the Member State before the CJEU, even if an instance of unfair unequitable treatment under the BIT-rules also implied an infringement of EU law. It could be argued that the arbitral proceedings do not constitute alternative means in relation to proceedings established under EU law. The path paved by Köbler does not constitute a genuine alternative to the system of international arbitration, since it fully relies on domestic remedies and the general principle of state liability for breaches of international law obligations[16].

The protection offered by Köbler jurisprudence is limited to serious infringements of individual rights conferred by EU law, thus its scope is far narrower than under IIA law. The state liability established by CJEU in Köbler aims to fill the gap left behind by the authors of the Treaties and it employs the notion of common legal traditions of Member States that enshrines a set of rules regarding a minimum standard of protection[17]. Moving beyond this minimum standard would require an amendment of the Treaties in the sense of extending the locus standi of individuals under EU law.

The opinion of Bundesgerichtshof that the higher standard imposed by the arbitration clause should be extended to cover all similar situations may be attuned with the principle of equivalence imposed on the domestic system of remedies in matters where the protection of rights derived from EU law is at stake. The CJEU held that ‘in the absence of [EU] rules governing the matter, it is for the domestic legal system of each Member State to designate, with due observance of the requirements stemming from [Article 47 of the Charter] and the principles of effectiveness and equivalence, the courts and tribunals with jurisdiction and to lay down the detailed procedural rules governing actions brought to safeguard rights which individuals derive from [EU] law[18].

However, even if the unfair treatment would in certain instances amount to an infringement of EU law, it is doubtful that the access to arbitral proceedings would constitute the benchmark for determining the equivalent treatment in matters of judicial protection of EU rights. It all comes down to one thing. The scope of a BIT is per definition limited to the natural or legal persons referred to in it. The Commission views this limitation as a reason to conclude that the intra-EU BITs – all of them – are not compatible with EU law, since by acceding to the EU, a Member State is obliged to grant the same advantages related to individual rights comprised within the scope of internal market law to all the other Member States.

In relation to the substantive rights guaranteed by a BIT and their wider application ratione personae adopted in order to cover the investors who are nationals of other Member States than the signatories of the BIT, one can suppose that this extension is – in theory – possible. However, in consideration of the procedural rights and the assessment of compatibility with EU law of a certain obligation derived from the enhanced version of the BIT, the possibility to extend the scope in order to cover natural persons not covered by the BIT is doubtful.

It is doubtful not only for reasons very well-established by the CJEU in its Opinions pursuant to Article 218(11) TFEU, but also because the access to arbitral proceedings is provided under the premise that based on the principle of reciprocity, the counterparty will match this benefit by assuming an identical obligation. The extension of the benefit must be matched by the extension of the obligation to guarantee the access to arbitral proceedings on all other Member States. It would definitely require harmonisation measures.

Moving from reciprocity towards the unconditional duty to carry out tasks flowing from the supranational law entails a big psychological stride in regard of sensitive domains, such as taxation or judicial remedies. It requires that the governments of the Member States refrain from (ab)using blue pills – false impressions of intact autonomy – and start to realise that harmonisation may offer a better way to maintain control over an issue, since this method would allow them to actually define in more concrete terms the limits of their duties under EU law. If the Commission plans to adopt a directive replacing the Arbitration Convention in order to enhance the protection of taxpayers, I see no reason why it could not consider a similar step in order to improve the protection of economic freedoms in general.


[1] Mc Donald’s SA 38945, 2016/C 258/03 and GDF Suez SA 44888, not published yet.

[2] Case C‑379/15 Association France Nature Environnement EU:C:2016:603 paragraph 52.  Under ECHR law, the national courts must state the reasons why they consider it unnecessary to seek a preliminary ruling. A refusal to refer a question for a preliminary ruling may constitute in itself a violation of Article 6 § 1 of the ECHR. However, again if the decision of the national court not to refer is based on an erroneous application of Cilfit, the ECtHR does not have jurisdiction to examine this question. In practice, a simple reference to Cilfit  finding that there was no reasonable doubt may be sufficient in order to avoid a breach of the right to a fair hearing within the meaning of Article 6 § 1. See Ullens de Schooten and Rezabek v. Belgium, nos. 3989/07 and 38353/07, § 62, 20 September 2011, and Dhahbi v. Italy, no. 17120/09, §§ 31-34, 8 April 2014.

[3] Case C‑379/15 Association France Nature Environnement EU:C:2016:603 paragraph 50.

[4] Case C-224/01 Köbler EU:C:2003:513 paragraphs 53 and 124.

[5] Report from the Commission on the Monitoring the application of Union law, 2014 Annual Report. COM/2015/0329 final.

[6] Opinion 1/09 EU:C:2011:123 paragraph 80.

[7] Opinion 2/13 EU:C:2014:2454 paragraph 213.

[8] Opinion 1/09 EU:C:2011:123 paragraph 85.

[9] Opinion 2/15, still pending, date of hearing 13 September 2016.

[10] Case C-284/16, Achmea, pending.

[11] Opinion 1/09 paragraph 63.

[12] Commission Decision 2015/1470 Micula points 102, 104, 112, 114.

[13] Bundesgerichtshof I ZB 2/15 Achmea ECLI:DE:BGH:2016:030316BIZB2.15.0.

[14] Opinion 1/09 paragraph 83.

[15] By analogy Joined Cases C-402/05 P and C-415/05 P Kadi EU:C:2008:461 paragraphs 353, 371-3. Case C‑105/14 Tarrico EU:C:2015:555 paragraphs 54-55, Case C‑237/15 PPU Lanigan EU:C:2015:474 paragraph 63.

[16] Köbler, supra footnote 4, paragraph 48.

[17] Lenaerts and Gutiérrez-Fons, 2010. The Constitutional Allocation of Powers and General Principles of EU Law, Common Market Law Review 47, pp 1635-6.

[18] Case C-583/11 P Inuit Tapiriit Kanatami and Others v Parliament and Council EU:C:2013:625 paragraphs 100 and 102.


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

The Provisional Application of CETA is Coming Close

by Nikos Lavranos, Secretary General of EFILA

The anti-CETA/TTIP campaign is reaching its climax.

After the anti-ISDS NGOs have managed to bring the TTIP-negotiations to halt – at least it has now been officially admitted that the negotiations cannot be concluded in 2016 and it remains unclear whether, and if so, how long the negotiations under the new US President will be under way.

The attention has now turned to CETA, in particular the – finally – scheduled signature of it on 27 October 2016 between the EU and Canada, which would entail the immediate provisional application of most parts of CETA, i.e., the trade, services, customs, rules of origin chapters, which fall under the exclusive competence of the EU.

Since the European Commission accepted that CETA is to be ratified as a mixed agreement, the anti-CETA groups have been focusing their efforts to stop CETA in some of the Member States, in particular Germany, the Netherlands and Austria.

On 12 October 2016, the Dutch Parliament approved the provisional application of CETA. So, the anti-CETA groups lost in that Member States.

On 13 October 2016, the German Constitutional Court rejected their injunction in their entirety. Accordingly, the German Government is free to agree to the provisional application of those chapters, which clearly fall into the exclusive competence of the EU. Of course, it remains to be seen how the Court will decide on the merits. This decision will be interesting in the light of the CJEU’s Opinion on the EU-Singapore FTA, which revolves around the question whether, and if so, to what extent, this agreement is a mixed agreement.

At this point in time, Austria and Belgium, in particular the regional Parliament of Wallonia, are other potential candidates for blocking CETA.

But let us not forget the European Parliament (EP). Much to the dismay of many of the MEPs, the Legal Service of the MEP recently concluded that there are no legal obstacles for agreeing to CETA. It remains to be seen whether the necessary majority for a “yes” vote will be found in the EP, that is, Article 218 TFEU requires the “consent” of the EP.

In short, the final fate of CETA is still unclear and will remain so for some time. Nonetheless, the green lights by the Netherlands and in particular Germany for the provisional application of CETA are important signals, which should persuade the doubters in other Member States.

Of course, Canada is not the US, so if CETA finally would enter into force in its entirety (after it has been ratified by all Member States – maybe not by the UK anymore), this could help giving TTIP a positive boost it so desperately needs.

But that will depend on the outcome of a whole series of elections, not only in the US, but also in France, Germany and the Netherlands.

Meanwhile, the time should be used to remind policy makers and the general public of the overall huge benefits of trade and investment agreements for all.

NOTICE:

Register for the 2nd  EFILA Annual Lecture to be delivered by Johnny Veeder, QC, with the timely title:

“The Phoenix to emerge from the ashes of TTIP and CETA: an international appellate court for investment disputes in Europe …”

Click here for all information regarding registration:

http://efila.org/events/next-annual-lecture-2016/

SAVE the DATE:

23 February 2017 Vienna: 3rd EFILA Annual Conference!

Click here for the flyer: http://efila.org/events/next-annual-lecture-2016/

 

EFILA Annual Lecture 2016 – Johnny Veeder

On 9 November 2016 world renowned arbitrator Johnny Veeder QC will deliver the 2nd Annual EFILA Lecture.

The title of his Lecture is:

The Phoenix to emerge from the ashes of TTIP and CETA: an international appellate court for investment disputes in Europe

The topic is very timely and Johnny Veeder’s lecture will be thought-provoking. He continues the series of Annual Lectures organized by EFILA, which was successfully kicked off last year by Sophie Nappert’s Lecture that was awarded the GAR prize for best lecture.

The Lecture will take place on 9 November starting at 16.30 h at the Press Club in Brussels.

Registration is required. The fee is €40 (€51,78 incl. VAT). Payment has to be made online prior to the event.

Click here to download the flyer with all details:

http://efila.org/events/next-annual-lecture-2016/

Why the EU’s Foreign Direct Investment (FDI) Competence Should be Re-nationalized

by Nikos Lavranos, Secretary General of EFILA

At the last meeting of the Trade Policy Committee (TPC) at Full Members level, that is at Director General level, encompassing all MS and the European Commission, DG Demarty of the Commission is quoted as saying that the EU trade policy would have a “big credibility problem” if it could not ratify the CETA deal and added that it would be “close to death.”

He is definitely correct with this assessment, but he does not draw the necessary conclusions from this assessment, namely, that the Commission has spectacularly failed to provide the added value when the Member States rather unconsciously transferred the competence on foreign direct investment to the EU. This in turn leads to the conclusion that the trade and investment policy has been de facto re-nationalized.

In order to understand this conclusion, it is important to give a short historic overview of what has happened (or rather not) since the Lisbon Treaty entered into force in December 2009.

The unconscious transfer of the FDI competence

There seems to be no documented story on why, how and when exactly the FDI competence was transferred from the Member States to the EU. Anecdotal stories tell that in the very last minutes before the European Convention was concluded, which was tasked with drawing up a European Constitution, the European Commission rather secretly smuggled the three words “foreign direct investment” into the provision containing the exclusive trade competence of the EU.

At that time, since investment policy had been a purely national matter of the Member States, no investment policy or arbitration experts were present or involved in the drawing up of the European Constitution. Rather general EU law experts were doing the job, which were told since the EU’s internal capital market provisions already also apply to foreign investors, it makes sense as a sort of mirror provision to expand the EU’s competence to include foreign direct investment. In this context, it is interesting to note that nowhere was there any further definition or description of the scope of  FDI. As will be explained below, this lack of clarity is the root of the failure of the EU’s investment policy.

Whether or not the anecdotal stories are true, the fact is that after the European Constitution was re-labelled as Lisbon Treaty, FDI became part of Art.207 TFEU, which used to be the old Art.133 EC, covering the European Common Commercial Policy, in particular WTO law.

So, when the Lisbon Treaty entered into force in late 2009, neither the Member States nor the Commission really knew what this meant.

Mixity: the big elephant in the room

But from the very beginning, it was clear that there was one big elephant in the room, named “mixity”.

The mixity issue surfaced regularly at various levels and has created constant tensions between the Member States and the European Commission.

The first issue where mixity came up was regarding the scope of the FDI competence.

While most Member States understand FDI in a narrow sense, encompassing  only direct investments, the Commission naturally construed it broadly, covering also indirect investments.

These divergent views have been simmering in the background all the time with occasional burst outs. For example, when Member States or rather the Council issued negotiating mandates to the Commission for FTAs. The Member States always stressed that they assumed these FTAs should be mixed, whereas the Commission always claimed that they are in principle EU exclusive, and in any case this would depend on the final content of the FTAs.

In other words, this issue was never settled and it appeared that only the Court of Justice of the EU (CJEU) could settle this for good. Indeed, Karel de Gucht, the former Trade Commissioner, was so fed up about the mixity issue, that in his final day in office he brought the question to the CJEU. He asked the CJEU for an opinion as to whether the EU-Singapore FTA is mixed or EU exclusive. The Commission obviously being of the opinion that it is EU exclusive.

Mixity as a political appeasement instrument

 

While the general public has largely been unaware of the EU-Singapore FTA and the mixity issue before the CJEU, the widespread political hysteria against TTIP, and to lesser extent against CETA, has forced the Commission to adopt a selective U-turn on the mixity issue.

First, with regard to TTIP, Commissioner Malmstrom rather quickly understood that in order to save TTIP and obtain some minimum acceptance in several key Member States, such as Germany, France, Netherlands and Austria, a vote by the respective national parliaments is an absolute precondition for getting the TTIP deal done. Accordingly, Malmstrom has been touring most Member States assuring them that their parliaments will be voting on TTIP.

Second, and in contrast to the politically sensible U-turn regarding TTIP, which though is in clear conflict with the Commission’s longstanding view that it is exclusively competent for all investment issues, Malmstrom, and her adjutant Demarty, until very recently maintained their position that CETA should be ratified as an EU-exclusive agreement. After all, CETA and in particular the hated ISDS provisions have been drastically reformed, so all concerns have been addressed and a vote by the European Parliament on CETA should give sufficient comfort to the Member States and their citizens.

But the massive critique against any trade deal in the Member States has been gaining so much momentum that the Commission had to give in – also regarding CETA. Thus, CETA will be ratified as a mixed agreement, which may take several years before all parliaments (it appears that also several regional parliaments will vote on it as well) have ratified it.

This brings us to the third thorny issue, namely the so-called “provisional application” of CETA (or any other trade deal). It has become tradition in the past to apply trade deals provisionally as soon as the Council signs it off, while awaiting the conclusion of the whole ratification process. The obvious advantage of this is that the benefits of the trade deal can be reaped immediately, notwithstanding the non- fulfillment of the formal legal requirements. The question, which pops up in this context is, which parts of the trade deal can be immediately “applied provisionally”? That depends on which parts of the trade deal are considered to fall in the exclusive competence of the EU and which parts are still wholly or partly with the Member States’ competence.

Again, the Commission started off from its maximum position that the whole treaty should be provisionally applied. But the Member States – having realized how far the Commission is ready to go in order to save the CETA deal – came up with a whole list of policy areas (which most likely will be extended after the summer break), which are to be excluded from the provisional application of CETA. In addition to investment protection rules, Member States have flagged in particular transport, sustainability chapter in parts, culture subsidies, mediation and criminal sanctions to protect intellectual property, as areas to be excluded from provisional application.

The Commission already has accepted that investment rules should be excluded but continues to fight any further expansion of the list, arguing that this would undermine any meaningful provisional application.

This battle will go for some weeks ahead, but the intention is that CETA is finally signed at the EU-Canada summit on 27 October 2016. Accordingly, sometime in early October the Member States and the Commission must agree on the list of policy areas, which de facto are considered to be mixed.

The de facto re-nationalization of the trade and investment policy

Again, it can be expected that the Commission will be flexible in order to get the deal done, which only  enhances the position of the Member States.

That will be even more so in the case of TTIP, which is far more important (politically and economically speaking), but also far more contagious and politicized in the public debate. Member States have realized that they are in a much stronger position if they appear to be critical or outright against TTIP rather than in support of it. Consequently, citing domestic public outcry against TTIP, Member States can not only request that TTIP must be mixed, but can extract further demands from the Commission, such the exclusion of certain policy areas or further “improvements” of highly politicized areas such as regulatory cooperation, geographical indications, agricultural etc.

All this boils down to the conclusion that the Commission’s position that it has exclusive competence over all trade and investment aspects can simply not be maintained anymore by the Commission. Whereas the original idea might have been good to give the Commission a carte blanche because it presumably could negotiate better trade deals, it has become clear over the past 6 years that the Commission has failed to deliver. The main reason for that is that it “forgot” to take the Member States’ concerns serious and instead consistently opted to remind them that they have no say anymore on trade and investment issues. In other words, rather than working closely together with the Member States and carefully listen to them, the Commission did what it wanted. However, in the current political climate and with Brexit ahead of us, the support for the EU is rapidly dwindling. Instead, Member States are reasserting their powers again. Indeed, it is striking to see how easily and within months the Member States have been able to force the Commission to give up its almost sacred position of exclusive competence. The Commission has now seemingly adopted a more practical and realistic approach of accepting mixity for free trade deals. Although, it remains to be seen how it will handle the outcome of the Opinion of the CJEU regarding the EU-Singapore FTA.

In sum, it must be concluded that the transfer of the FDI competence to the EU has not yielded any results since the beginning. After 6 years no single trade deal has been fully signed, ratified and entered into force. In addition, the Commission is spreading doubts about the legal certainty of Member States’ BITs (both intra and extra) and is undermining the application of the ECT. Therefore, the Member States are only right in re-asserting control over trade and investment issues. Indeed, Brexit will offer an excellent opportunity to delete FDI from the exclusive EU competence, when the EU treaties have to be modified anyway.

Is ISDS Superior to Litigation before Domestic Courts? An EU View

by Prof. Marco Bronckers, VVGB Advocaten*

In my view, something important is missing in the current debate on an Investor-State Dispute Settlement Mechanism (ISDS) in the EU’s new and comprehensive trade agreements with Canada (CETA), Singapore, the United States (TTIP), and other countries. In a ‘concept paper’ published last May, the European Commission posits as a fact that domestic courts are not competent to deal with treaty-based claims of foreign investors. This would then explain the need for ISDS or, alternatively, an international investment court. The Commission published details on its plans for such an international court in mid-September.

First, the limited role domestic courts can play in resolving treaty-based claims is not a fact. This is largely the result of a surreptitious, and unfortunate policy choice of the EU institutions and Member States.  Second, even if one assumes that relying on domestic courts could be problematic where treaties are concerned, it makes little sense to allow only foreign investors a better shot at enforcing treaty provisions through some kind of international mechanism. The new generation of bilateral agreements cover multiple subjects, from trade to investment, from environment to labor rights. Accordingly, beyond foreign investors other private stakeholders also have an interest in the correct implementation of these agreements. By denying all these stakeholders the right to rely on treaties the governments are putting a firm brake on the benefits they were hoping to generate.  This contradicts the high expectations governments like to raise about the positive impact of the new bilateral trade agreements on economic growth, environmental protection etc.

In the overwhelming majority of cases referring private stakeholders to state-to-state dispute settlement is not promising. Few cases are taken up by governments for intergovernmental dispute resolution. Such disputes are politicized and governments do not have the resources anyway to deal with many, especially smaller cases.  In addition, intergovernmental dispute resolution by definition does not help private stakeholders who believe their own government is not complying with an international standard; their own government will not bring a case against itself. As a result, if one relies only state-to-state dispute settlement the impact of external benchmarks in bilateral agreements to check government conduct is considerably diluted.

In other words, the EU does not need a mechanism like ISDS in the agreements with the United States, Canada and so on for the same reasons that historically led to the inclusion of ISDS in agreements between developed and developing countries. In the old days, it was felt that foreign investors needed extra protection before committing their capital on a more permanent basis to a developing jurisdiction, which offered uncertain legal protection. Although foreign investors may still face some uncertainties in developed host countries, offering them protection in these more exceptional situations cannot be the driver for including an ISDS-type mechanism in the new comprehensive trade agreements amongst major developed countries.

The main reason to offer a private stakeholder a means to appeal to these bilateral agreements is to ensure that they will be effectively implemented. Yet effective implementation should not only be limited to the investment chapters, but to these agreements more broadly. This then is the principal reason in favour of allowing a broad class of private stakeholders, not just private investors, access to an international ISDS-type mechanism — or preferably access to domestic courts, who are empowered to deal with private treaty-based claims.

Domestic courts offer considerable advantages: access is broadly available, and is more affordable too compared to most international remedies. Furthermore, wherever the trias politica is recognized, domestic courts have a direct role to play in offering checks and balances, also to foreign parties, in respect of other government institutions.  Moreover, it would be rather surprising, in 2015, for anyone to have doubts about the capability of domestic courts to interpret international law.

This is not to say though that in the EU domestic courts can immediately replace ISDS or an international investment court. The EU institutions and the Member States would have to discontinue their campaign to prevent private parties from asserting rights based on bilateral trade agreements before domestic courts. Furthermore, the quality of the judiciary in a substantial number of EU Member States needs to be improved, in terms of independence and efficiency, before it is reasonable to expect that the treaty partners of the EU can have sufficient confidence in its domestic courts (see, e.g., World Economic Forum, Global Competitiveness Report 2014-2015).

Meanwhile, when designing an alternative mechanism for ISDS, the EU and its treaty partners must permit a much broader class of private stakeholders than foreign investors to invoke protection under the new bilateral trade agreements. Furthermore, in order to be effective and fair, such access needs to be affordable for smaller stakeholders too.  This will prove to be a challenging task for governments. Ultimately, domestic courts are best-placed to provide such a remedy. That is why it is advisable to put a time limit on any solution, which is now being considered as an alternative to ISDS.  Within a period of, say, ten years after the entry into force of an agreement like TTIP or CETA, the authorities should reconsider whether domestic courts cannot take over the role that was first assigned to an international tribunal of some kind.

I have developed these points in a longer study, just published: Marco Bronckers, Investor-State Dispute Settlement (ISDS) Superior to Litigation Before Domestic Courts? An EU View on Bilateral Trade Agreements, in 18 Journal of International Economic Law 655-677 (No. 3, 2015).


Prof. Marco Bronckers, VVGB Advocaten, Brussels; Professor of law at the University of Leiden.