European Union: Investment Court Clears Key Legal Hurdle With Court Of Justice Of The European Union (CJEU) Opinion 1/17

The Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union entered into provisional application on September 21, 2017. Certain provisions in the CETA on investment protection, and a proposed investment court to address investor-state disputes under CETA, were not provisionally applied pending several legal complications. This included two requests to the Court of Justice of the European Union (CJEU). The first of these (resulting in Opinion 1/15) clarified, among other things, the requirement of Member State ratification of treaties that include investment protection and dispute settlement. The second was a request by Belgium for an opinion from the CJEU on the compatibility of an investment court with European Union (EU) law.

On April 30, 2019, the CJEU released its much-anticipated Opinion 1/17. Opinion 1/17 cleared away a key legal hurdle for the investment court under CETA in the EU by concluding that there is no conflict between the investment court model contained in CETA and EU law. The Opinion was highly anticipated given the CJEU’s March 6, 2018, judgment in the Slovak Republic v. Achmea BV case, which deemed an arbitration clause included within an intra-EU bilateral investment treaty incompatible with EU law. The following provides a brief review of this investment court system, Opinion 1/17 and its implications, and what this means for the provisional entry into force of CETA.

The investment court model

In brief, the investment court model included in Chapter 8 of CETA is a two-tier system comprised of a Tribunal with 15 members or judges, appointed by the CETA Joint Committee, and an Appellate Tribunal, with a number of members also to be determined by the CETA Joint Committee, although likely six members, consistent with other EU agreements. The Tribunal would sit in benches of three members each and would decide the original complaint. The Appellate Tribunal would also sit in benches of three members. The members of each bench would be chosen by random lot by the President of the Tribunal (a position that rotates every two years and is chosen from amongst Tribunal members). Members of both Tribunals would be subject to codes of conduct, and decisions rendered by the Tribunal and Appellate Tribunal are to be deemed as “arbitral awards” for the purposes of enforcement under the New York Convention.

A shift to an investment court model by the CETA Parties would have an immediate impact on the current regime of investment treaty arbitration. In addition to CETA, versions of bilateral investment courts are already included within the EU-Vietnam Free Trade Agreement, as well as the agreement in principle made to precede a revised Association Agreement between the EU and Mexico. Further, the EU and several of its Member States are also pursuing a multilateral investment court through the United Nations Commission on International Trade Law (UNCITRAL) Working Group III, which commenced negotiations on investor-state reform in 2017. Within that process, and aligned with the strategy to eventually link its existing trade and investment agreements with a multilateral investment court, the EU has made concrete proposals on a multilateral investment court which have gained considerable support.

CJEU’s Opinion 1/17

The CJEU addressed three questions in concluding that the investment court is compatible with EU law:

  1. The compatibility of the envisaged Investor-State Dispute Settlement (ISDS) mechanism with the autonomy of the EU legal order;
  2. The compatibility of the ISDS mechanism with general principle of equal treatment and the requirement of effectiveness;
  3. The compatibility of the ISDS mechanism of the right of access to an independent tribunal.

Of these three questions, the CJEU’s most significant response was undoubtedly on the compatibility of the investment court with the EU legal order. The CJEU found that the investment court would be compatible with EU legal order if treaties that include the investment court do not:

i. Confer any power to Tribunals or Appellate Tribunal to interpret or apply EU law; and

ii. Provide the power to Tribunals or Appellate Tribunals to issue awards that would have the effect of preventing EU institutions from operating in accordance with the EU constitutional framework.

On this first point, the CJEU found that Article 8.31, which states an investment court is to apply “rules and principles of international law,” precludes an investment court from opining on matters of domestic law. The CJEU also took comfort in Article 8.31.2, which notes that the domestic law of a Party is to be considered solely as a matter of fact. These two provisions within the CETA’s investment chapter were viewed as highlighting the Parties intention to safeguard Party autonomy, satisfying the CJEU that an investment court would likely not encroach on the EU or a Member State’s ability to interpret or apply EU law or the division of competency within the EU. In the CJEU’s view, CETA Tribunals will be “obliged to follow the prevailing interpretation given to domestic law by the courts or authorities.”

On the second point, the CJEU relied on several provisions from the CETA investment chapter to ground its Opinion. This issue was notably centered on regulating in the public interest, and the possibility that successful challenges to such regulation would adversely affect EU institutions and the EU legal order. The CJEU found that CETA’s WTO style exception provision relating to public security, public morals, maintenance or public order, and the protection of human, animal, or planet life or health, and affirmation of the right to regulate in Article 28.3.2 provided sufficient safeguards for the EU legal order. The CJEU also noted that the additional criteria included in CETA’s provision on Fair and Equitable Treatment (FET) circumscribed how it could potentially be breached, presumably inferring that the articulation of FET may limit any successful challenge of what the EU or its Member States may claim as regulating in the public interest.

The CJEU quickly dismissed the remaining questions on equal treatment stemming from the Charter of Fundamental Rights of the European Union, and found that the investment court was compatible with the right of access to an independent court. In deciding the third and final question, the CJEU found that the investment court in the CETA contained the requisite guarantees of impartiality and independence. Notably, the CJEU did note that foreign investment dispute resolution under the investment court may not be accessible to small- and medium-sized enterprises, but stopped short of making any specific decision on the matter. Instead, the CJEU concluded that the Commission and Council, having committed to adopting a set of supplemental rules that would be “implement[ed], rapidly, and adequately” had ensured the accessibility of the investment court.

Implications of Opinion 1/17

Overall, Opinion 1/17 clarifies the question of the investment court’s compatibility with the EU legal order. Although the opinion was specific to CETA, it has a greater applicability to other trade and investment agreements with similar provisions, and provides specific guidance to the EU and its Member States on the elements required within a treaty to ensure its compatibility with EU law. The Opinion also makes several references to a multilateral investment court, reflecting the importance and pragmatism that the CJEU placed on the EU being able act globally and influence other states in the development of a multilateral investment court.

The decision raises several new questions that remain unclear. Notably, it remains unclear whether the CJEU may review future decisions from an investment court for compliance with EU law. This could arise in the context of enforcement where the investment court decision may interpret or apply EU law in situations where precedents or authority remain previously undetermined or contradictory, or where claimants are successful in challenging what may be defined as the “public interest.” Moreover, the effect of Opinion 1/17 on existing bilateral investment treaties in the EU that do not contain the specific provisions relating to applicable law, interpretation and application of domestic law, or exceptions or limitations aimed at public interest is also unclear. More specifically, the decision at least, even if unintended, questions the scope of Fair and Equitable Treatment provisions that contain different language from CETA. These questions will likely be addressed in future disputes.

What this means for an investment court

For any investment court to enter into force or begin to operate under CETA, Chapter 8 of the treaty needs to enter into application. This requires all EU Member States to ratify the treaty, with the investment court provisions, domestically. To date, only 12 of 28 EU Member States have provided notification to the EU that they have completed their domestic ratification procedures. If Chapter 8 of CETA enters into force, it will provide a unique system of ISDS for disputes under the treaty.

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