The CJEU holds CETA's dispute resolution mechanism to be compatible with EU law

Hogan Lovells

Hogan Lovells

The European Court of Justice's decision: On 30 April 2019, the European Court of Justice (CJEU) issued its much-anticipated Opinion 1/17 finding that the investor-state dispute settlement mechanism provided in the Canada-EU Comprehensive Economic and Trade Agreement (CETA) is compatible with EU law, in keeping with the conclusions of Advocate General Bot.

This opinion, issued further to a request by Belgium, represents an important development as it paves the way for the acceleration of the ratification process of CETA by national parliaments in EU countries and validates the European Commission's new approach to investor-state dispute settlement. 

The proposed CETA dispute resolution mechanism

CETA provides for a novel investor-state dispute settlement mechanism, a hybrid between a court and an arbitral tribunal. In particular, under this framework, parties to a dispute will not be able to select arbitrators. Instead, CETA provides for the creation of a CETA Tribunal, the members of which will be appointed by an EU-Canada Joint Committee and hold five year terms.

Moreover, this new system provides for a CETA Appellate Tribunal, with the power to review first instance decisions on wide grounds, including "errors in the application or interpretation of applicable law" and "manifest errors in the appreciation of the facts."

Parties to a dispute, however, will have the option of selecting their chosen rules of procedure before the first instance tribunal. They will, for example, be able to submit a claim under the ICSID Convention and Rules of Procedure for Arbitration Proceedings, the ICSID Additional Facility Rules (as the case may be), the UNCITRAL Arbitration Rules, or any other rules on which they agree.

Furthermore, in line with the long-standing policy objective of the European Commission, CETA contemplates the establishment of a future multilateral investment tribunal, which would not only hear CETA disputes but investment disputes arising out of a wide range of treaties in the long term.

The Opinion

The Court addressed three main topics: first, compatibility with EU Law; second, compatibility with the general principle of equal treatment and the requirement of effectiveness; and third, compatibility with the right of access to an independent tribunal.    

  • On compatibility with the autonomy of the EU legal order

One of the main issues at stake was whether this new system violated the exclusive jurisdiction of the CJEU to provide a definitive interpretation of EU law, in light of the Achmea Judgment where the CJEU had held that investor-state dispute settlement "is not in principle incompatible with EU law" provided that "the autonomy of the EU and its legal order is respected."

The Court considered that in order to be compatible with EU law, the CETA Tribunal should accordingly not have an "adverse effect on the autonomy of the EU legal order" by either (i) interpreting and applying EU law beyond the provisions of CETA itself, or by (ii) "preventing the EU institutions from operating in accordance with the EU constitutional framework."

As to the first requirement, the CJEU stressed that CETA Tribunal and Appellate Tribunal would not interpret or apply EU law, as the CETA applicable law clause only refers to the treaty itself construed in accordance with the Vienna Convention and other applicable rules and principles of international law. This should be distinguished, wrote the Court, from the Achmea case, where the "agreement established a tribunal that would be called upon to give rulings on disputes that might concern the interpretation or application of EU law." The CJEU went on to note that pursuant to the treaty, domestic and EU law may only be taken into account as a fact, and that the CETA Tribunal is bound to "follow the prevailing interpretation" given by domestic or EU courts (while these courts would not be bound by the meaning given to their domestic law by the CETA Tribunal).

As regards the second requirement, Belgium had expressed concern that in assessing whether an EU measure complied with the substantive protections of CETA, the CETA Tribunal might be called upon to weigh the "level of protection of a public interest established by the EU institutions", leading to a situation where "in order to avoid being repeatedly compelled by the CETA Tribunal to pay damages to the claimant investor, the achievement of that level of protection needs to be abandoned by the Union."

While the Court held that such a situation would be unacceptable and undermine the capacity of the EU to "operate autonomously within its unique constitutional framework", it noted that CETA provided for sufficient safeguards in the form of clauses and interpretative instruments guaranteeing the right of the parties to regulate for a public purpose. Accordingly, the CJEU found that the discretionary powers of the CETA Tribunal "do not extend to permitting [it] to call into question the level of protection of public interest determined by the Union following a democratic process."                                                                                      

  • On compatibility with the principles of equal treatment and effectiveness

In relation to the principle of equal treatment, Belgium first questioned whether the difference in the situation of intra-EU and Canadian investors, with only the latter having access to the CETA dispute resolution mechanism, was compatible with EU law. The CJEU however concluded that the situations at hand were not comparable, as Canadian investors are foreign investors within the EU, while intra-EU investors are not.

The Court then turned to the concern that the CETA dispute resolution mechanism may impair the principles of effectiveness and equal treatment in relation to EU Competition law, as the CETA Tribunal may issue an award considering a fine imposed by the European Commission or a national competition authority to constitute a breach of the substantive protections of CETA. However, the Court considered that such an award would be conceivable only where the impugned decision was profoundly flawed, and that "EU law itself permits annulment of a fine when that fine is vitiated by a defect corresponding to that which could be identified by the CETA Tribunal." 

  • On compatibility with the right of access to an independent tribunal

While the Court emphasized that the CETA dispute resolution mechanism should be "financially accessible to natural persons and small and medium-sized enterprises" and not only to "investors who have available to them significant financial resources" in order to comply with the requirement of accessibility, it went on to note that that the European Commission and the Council had made sufficient commitments to this effect (see here, Statement No. 36).

Moreover, the Court found that the CETA dispute resolution mechanism guarantees the independence and impartiality of members of the CETA Tribunal and Appellate Tribunal, ruling out Belgium's doubts as to the remuneration of the members of these bodies and approving the reference to the IBA Guidelines on Conflict of Interests. The Court further considered that the power of CETA parties to adopt joint interpretative statements was "neither illegitimate nor unusual, under international law", provided that such interpretations would not have retroactive effect.

Further thoughts

The key takeaway of Opinion 1/17 is undoubtedly that the CJEU approves the new model of investor-state dispute settlement with third States. This system was designed and negotiated by the European Commission, which ultimately advocates for the creation of a Multilateral Investment Court, in order to be implemented in all future trade and investment protection agreements concluded by the European Union. Indeed, a similar, if not identical, dispute resolution mechanism has been included in several treaties: EU-Singapore, EU-Vietnam, and EU-Mexico. However, it should be underlined that neither CETA nor these three other treaties are yet in force, as CETA is currently undergoing ratification by national parliaments in EU countries, with 16 Member States yet to ratify it.

It is also noteworthy that the Court carefully differentiates CETA from the situation at hand in the Achmea case by stressing that while a principle of mutual trust applies between EU Member States, this is not the case for relations between the EU and non-member States. Nevertheless, questions may arise as to how to bridge this Opinion with the Achmea Judgment. While in the Achmea Judgment the Court affirmed its interpretative monopoly over EU law, the present opinion differentiates  CETA from the applicable treaty in Achmea on the ground that the interpretative power of the CETA Tribunal is limited to the provisions of CETA itself, EU law being treated as a fact.

Similarly, the Court stressed the principle that public policy decisions in the EU and levels of protection of public interests set democratically should not be put in question by the CETA Tribunal, relying heavily on the general exceptions clause and the interpretative instruments provided by CETA.  

Practice will determine the impact of the CJEU's findings on arbitral tribunals constituted under the aegis of existing investment treaties between EU Member States and third States.

Finally, the practical application of the CETA dispute resolution mechanism may be limited as, to date, there have only been a handful of disputes under the aegis of ICSID between nationals of Canada and Member States of the European Union.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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