New foreign investment dispute resolution mechanism sanctioned by the EU Court of Justice

Posted by: 14. 5. 2019
Update: 13/5/2024

On April 30.4.2019, XNUMX, the Court of Justice of the European Union ("CJEU" or "Court of Justice") issued an eagerly awaited opinion on the issue of compliance of the Comprehensive Economic and Trade Agreement between Canada and the European Union and its member states (hereinafter referred to as "CETA") with EU law , as regards the provisions of this agreement regarding the settlement of disputes between a foreign investor and a state (hereinafter referred to as the "CETA opinion")[1].

The dispute resolution mechanism between the investor and the state enshrined in CETA clearly deviates from the traditional approach (represented by ad hoc arbitrations) and establishes a permanent tribunal based on the principles of judicial systems. In the CETA opinion, the Court of Justice confirms the compatibility of this mechanism with the primary law of the Union. In contrast to the previous (for many shocking) judgment in the Achmea case, the CETA opinion is an expression of an effort to find a balance between the requirement to protect the autonomy of the EU legal order and, at the same time, the EU's ability to implement an effective foreign trade policy.

Autonomy of the EU legal order (comparison with the Achmea case)

In the CETA opinion, the CJEU therefore relies in principle on the opinion of Advocate General Pot and therefore does not adopt a dramatic scenario as in the case of Achmeo[2]. In the case of Achmeo, on the other hand, the CJEU significantly deviated from the position of Advocate General Wathelet and concluded that the provisions of the bilateral investment protection agreement (“BIT”) between the Netherlands and Slovakia, which establish an arbitral tribunal standing outside the institutional and legal framework of the Union with the authority to apply and interpret EU law, threaten the autonomy of the EU legal order and are thus incompatible with EU law.

In the Achmeo case, as well as in the opinion on CETA, the Court of Justice stated that an international agreement, which envisages the creation of a court entrusted with the interpretation of their provisions, whose decisions will be binding for the Union, is compatible with Union law only on the condition that it does not threaten the autonomy of the legal order EU.

How is it that, in one case, the CJEU confirms the compatibility of the dispute resolution mechanism outside the Union with EU law, and in the other, it threatens the autonomy of the EU legal order? The difference in both of these cases may not be obvious at first glance. However, when we think more closely about the basic principles of the functioning of the EU and the cooperation of its member states, this difference in the opinions of the CJEU is justified.

The Achmea case involved two EU member states that entrusted the power to apply and interpret EU law to an arbitral tribunal outside the EU legal system, in violation of the basic principle of mutual trust, which EU member states are obliged to respect and observe among themselves. The principle of mutual trust requires each EU member state to assume that all other member states comply with EU law. At the same time, this principle does not apply in relations between the EU and third countries, so it is logical that the EU and Canada have agreed on substantive and procedural rules for the protection of their investors investing in the territory of the other party. In addition, unlike the arbitral tribunal under the Dutch-Slovak BIT, the CETA Tribunal will not have the authority to apply or bindingly interpret EU law or the law of the Member States when deciding disputes, but will apply the CETA agreement as well as other norms of international law applicable between Canada and EU. The CETA tribunal will thus be able to assess EU law or the law of the member states only as a question of fact, while CETA ensures that even in this case the tribunal is obliged to follow the interpretation of the CJEU or the prevailing interpretation of the law in the member states. It is therefore clear that the CETA tribunal will not have the power to refer a preliminary question to the CJEU. The CJEU itself, other EU institutions or EU member states, on the other hand, will not be obliged to comply with such an assessment of EU law or member state law by the CETA tribunal. According to the CJEU, the autonomy of the EU legal order will not be threatened even in view of the fact that the CETA tribunal will not be able to cancel the contested state measure or demand that the state's law be brought into line with the CETA agreement, nor impose a sanction, it can "only" impose on the state the obligation to pay the foreign investor a certain amount as damage compensation. However, the CETA Tribunal will not have the authority to question (democratically made) state measures issued to protect public safety, health and life, the environment, the protection of fundamental rights, etc.

Principle of equal treatment (comparison with the Achmea case)

Following the judgment in the Achmeo case, concerns about unequal treatment were also pointed out during the discussion of the CETA opinion, where, according to Achmeo, investors from member states investing in the EU can no longer challenge EU measures before investment tribunals outside the EU's institutional and legal order, while Canadian investors investing they can do so in the EU. However, in this context, the CJEU logically noted that in this case the position of Canadian investors investing in the EU and EU investors investing in Canada should be compared, both groups being on an equal footing with regard to access to the CETA tribunal.

The requirement for the effectiveness of Union law

If we continue to abandon the comparison with the Achmea case, the next (again not very logical) question of the submitters of the opinion was whether the dispute resolution mechanism in CETA violates the requirement of effectiveness of EU law in the area of competition protection. Indeed, the CETA tribunal can award damages to a Canadian investor in the event that the Commission or the competent authority of an EU member state imposes a fine on him that is clearly unjustified. This compensation could thus remove the imposed fine from its effects. However, the CJEU (unsurprisingly) concluded that this fact does not threaten the effectiveness of EU law for the protection of economic competition, because if the decision on the fine was issued completely unjustified, it can be annulled even through the corrective institutes of EU law itself.

The right of access to an independent court

The CJEU finally confirmed that the dispute resolution mechanism in CETA does not even violate the right of access to an independent court guaranteed by the EU Charter of Fundamental Rights. According to the CJEU, this conclusion cannot be denied by the fact that the CETA tribunal is essentially a hybrid mechanism combining elements of a court as well as a traditional arbitral tribunal. The CJEU rests the independence of the CETA tribunal on the fact that it will be a permanent arbitral tribunal, where its members will be appointed for the relevant term of office and will decide in three-member panels (EU national, Canadian national and third-party national) appointed on a rotating basis , which is to ensure the randomness and unpredictability of their composition. The members of the tribunal cannot take decision-making instructions from anyone (in this context, CETA directly refers to the rules of the International Bar Association - IBA, which the members will have to follow), they are irrevocable (or only revocable in cases such as violation of the obligation not to take instructions from anyone to make decisions or prohibit conflicts of interest) and receive a salary proportional to the importance of the functions they perform. The proceedings are two-instance, where the appellate tribunal will ensure the coherence of the decision of the tribunal in the first instance. Jurisdiction of the tribunal will be mandatory for both the defendant state and the plaintiff foreign investor. In connection with the right of access to an independent court, the CJEU significantly emphasized and assessed in particular the possibility of access by natural persons and small and medium-sized enterprises to the CETA tribunal. It is notoriously common knowledge that investment arbitrations are among the most expensive legal disputes and only the "wealthiest" investors can de facto afford to conduct such a dispute against the host state. With the aim of partially reducing the financial burden, although CETA allows only one member of the tribunal to discuss the dispute, since the defendant state would have to agree to this, according to the CJEU, it is important that the declaration within CETA that additional rules aimed at to reduce this financial burden (regulating, for example, the possibility of public co-financing of lawsuits by small and medium-sized enterprises).

Reasons for introducing a new dispute resolution mechanism in CETA

The traditional system of resolving investment disputes between foreign investors and host states through ad-hoc arbitration has been under strong criticism for a long time, both from part of the public and the EU itself, for reasons of insufficient transparency, legitimacy, consistency in decision-making or absence of review mechanisms. Therefore, in recent years, the European Union has been fighting for the creation of a permanent international investment court, which would decide disputes between investors and states according to all currently existing BITs. Negotiations of states at the international level are already underway on this issue (within UNCITRAL and its Working Group III). However, since this multilateral path is naturally lengthy, in recent years the EU has been pushing for the establishment of at least bilateral permanent investment tribunals to decide disputes according to the free trade agreements concluded by the Union as a kind of hybrid intermediary in achieving the aforementioned goal. It is therefore a kind of compromise between ad hoc arbitration and an international court. A similar mechanism for solving investment disputes can also be found in the free trade agreements between the EU and Singapore or the EU and Vietnam, while the EU now has the green light from the CJEU to include them in the upcoming investment protection agreements with Japan and China.

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After the issuance of a positive opinion of the CJEU on the dispute resolution mechanism within the framework of CETA, many breathed a sigh of relief, especially the representatives of the EU Commission, which is intensively promoting the reform of the existing system of dispute resolution from foreign investments on a global scale. A negative opinion of the CJEU would have serious consequences for the EU's foreign and trade policy. Thus, the importance of the CETA opinion significantly exceeds the dispute resolution mechanism established within the framework of the CETA agreement. Its conclusions are an important step towards establishing a model which will be consistent with the structural principles of the EU legal order, but which can be applied in all trade agreements between the EU and third countries.

Source: epravo