the CJEU reconciles EU law with international (investment) law


Professor
Steve Peers, University of Essex
In
recent years, investor-state dispute settlement (ISDS) has become a political
minefield. Its critics argue that ISDS is a secret court system designed to
allow multinational corporations to thwart any progressive legislation approved
by democratically elected governments. Its defenders argue that these claims
are exaggerated, and that ISDS performs a useful function attracting investment
and securing property rights.
The
arguments about ISDS are worldwide, but they have increasingly arisen within
the particular framework of EU law. From 2009, the Treaty of Lisbon gave the EU
exclusive competence over foreign direct investment as part of its common
commercial (trade) policy, alongside goods, services and trade-related aspects
of intellectual property. EU trade policy developed to include negotiations for
ISDS as part of trade negotiations (although pre-existing investment treaties
between EU Member States and non-EU countries were
grandfathered, with a process in place to regulate negotiation of such treaties in
future).
However,
this led to political and legal difficulties in negotiating trade agreements:
the former because of public concern about ISDS in both the EU and the non-EU
countries, and the latter because of uncertainty about whether the EU had sole
competence to negotiate treaties with ISDS provisions, or shared it with the
Member States. Shared competence means that Member States have to become
parties to the treaties concerned, meaning unanimity is required to agree them
and there is a process of national ratification, although in practice the EU
and the non-EU countries concerned often agree to provisional application of
the trade-related parts of the treaty pending such national ratification.
The
legal position was clarified when the CJEU
ruled in 2017 that ISDS, like ‘portfolio’ investment (ie non-controlling shares in companies) did not fully
form part of the common commercial policy (CCP), but was rather a shared
competence between the EU and its Member States. (There’s EU legislation
dividing up responsibility between the EU and its Member States in the
event of successful investor claims.) Otherwise the Court took a broad view of
the scope of the CCP. Coupled with the political concerns about ISDS, this was
an opportunity to rethink the role of ISDS in trade policy, either leaving it
out of talks completely (
Australia and New Zealand, along with the mandate for stripped back trade negotiations
with the
USA), concluding a trade agreement without insisting
on an investment agreement (
Japan), or separating the issues into two distinct
treaties (
Singapore and Vietnam). This revised approach, splitting up trade and
investment on a case by case basis, was confirmed more broadly by a
Commission communication
of 2017 and subsequent
Council conclusions in 2018.
In
parallel to these developments, the EU responded to concerns about the
legitimacy of ISDS by seeking to reform it into a system more palatable to Main Street, rather than Bay Street, as a centre-left Canadian politician might say. A
discussion paper of 2015 sums up the Commission’s approach, in
particular securing greater transparency, limiting the scope of controversial
provisions of investment law, confirming the ‘right to regulate’, and
transforming investment tribunals into a quasi-judicial system, with the
longer-term intention of establishing a multilateral investment court.
Subsequently, the Commission tabled a
proposal for such court, and the Council approved a negotiation mandate to that end. (For further details of the
negotiations, see
here).
Many
EU trade and investment policy disputes came to a head early in 2017, when
there was a delay in approving the
Canada-EU Free Trade Agreement
(CETA) because of concerns about ISDS and other issues in one Belgian region.
(There were also national constitutional court proceedings challenging CETA in
France and Germany, as well as an EU General Court judgment on whether a European Citizens’ Initiative could
be launched to stop its ratification). This kerfuffle, coming shortly before
the CJEU ruling clarifying the scope of the EU’s common commercial policy,
partly prompted the move to downgrade investment objectives in EU trade policy,
as discussed above. And part of the overall settlement of the dispute over CETA
was the Belgian government asking the CJEU whether the CETA ISDS rules –
renegotiated in light of the reformed approach to ISDS – were compatible with EU
law. 
The
Belgian government’s request – submitted on the basis of
Article 218 TFEU, which allows the CJEU to rule on proposed
international treaties – was answered by the Court of Justice this week (
Opinion
1/17
).  In the meantime, in its judgment in Achmea (discussed here)
the CJEU had found that investment treaties between
Member States
were potentially incompatible with EU law.  Those treaties were
duly wound up, but it remained to
be seen if the Court would have the same concerns about investment treaties
with non-EU countries. More generally, the Court has always had concerns about
protecting the autonomy of EU law from international courts (see, for instance,
Opinion 2/13 on accession to the
ECHR, discussed
here). Could these concerns about autonomy possibly
be reconciled with the nature of ISDS tribunals?
First
of all, the CJEU ruled that the case was admissible. Although the Court only
has jurisdiction to rule under Article 218 as long as a treaty has not yet
entered into force, the provisional application of the trade provisions of CETA
did not stand in the way of the Court’s jurisdiction. (Indeed, it appears that
the Court would have found the case admissible even if the whole of CETA, including the investment disputes section, was in
force provisionally).
The
Court then examined the compatibility of the CETA investment provisions with EU
law from three angles: the autonomy of the EU legal order; equal treatment and
effectiveness; and the right of access to an independent tribunal. In each
case, the Court set out the principles and then applied them to CETA.
On
the the autonomy of the EU legal order, the Court first recalled its
case law that in principle, the EU could sign up to an international treaty
which created an international court which could give rulings binding the EU.
However, the Court also recalled that any such planned international court cannot
infringe the autonomy of EU law. (In practice, the Court has usually been quick
to complain that such courts do raise
an autonomy problem). This autonomy is, in particular, guaranteed by the EU’s
judicial system, which
provides for ‘national courts and tribunals and
the Court to ensure the full application of that law in all the Member States
and to ensure effective judicial protection, the Court having exclusive
jurisdiction to give the definitive interpretation of that law’.
For the Court,
the crucial factor was that ‘the envisaged ISDS mechanism stands outside
the EU judicial system’. The CETA investment court system created by CETA is not
part of the domestic court system of Canada, the EU or its Member States. This
did not necessarily mean that the ISDS system ‘adversely affects the autonomy
of the EU legal order’, because as regards international treaties, the EU
judicial system ‘does not take precedence over either the jurisdiction of the
courts and tribunals of the non-Member States with which those agreements were
concluded or that of the international courts or tribunals that are established
by such agreements’. While those treaties form part of EU law
and ‘may therefore be the subject of references for a preliminary ruling’
to the CJEU, they ‘concern no less those non-Member States and may therefore
also be interpreted by the courts and tribunals of those States’. The
‘reciprocal nature’ of international treaties means that the EU can sign up to
treaties creating an international court that is not bound by the
interpretations of that treaty given by the courts of any of its parties.
But while EU law did not prevent
the creation of such courts, it did place limits on what they could do: ‘they
cannot have the power to interpret or apply provisions of EU law other than
those of the CETA or to make awards that might have the effect of preventing
the EU institutions from operating in accordance with the EU constitutional framework’.
It was therefore necessary to address two points: (a) no power for the CETA
bodies ‘to interpret or apply EU law other than the power to interpret and
apply the provisions of that agreement having regard to the rules and
principles of international law applicable between the Parties’; and (b) no
power to impact EU law indirectly, by
issuing ‘awards which have the effect of preventing the EU institutions from
operating in accordance with the EU constitutional framework’.
On the first point, CETA explicitly
specifies that its bodies will not have jurisdiction ‘to determine the legality
of a measure, alleged to constitute a breach of this Agreement, under the
domestic law of a Party’. This was different from treaties which the CJEU had
criticised in the past, which would have given an international court the power
to interpret EU law. In particular, it was different from an investment treaty
between Member States only (which the Court criticised in Achmea), because the EU law ‘principle of mutual trust’…. ‘is not
applicable in relations between the Union and a non-Member State’.
Furthermore, the Court was
pleased that the CETA investment bodies could not determine the division of
powers between the EU and its Member States, unlike the treaty on accession of
the EU to the ECHR (on the Court’s ruling in the latter case, see my discussion
here).  This distinction between the international
and domestic systems was consistent with the lack of a prior role for the CJEU,
or any power of the CETA bodies to send a reference for a preliminary ruling to
the CJEU. It was also consistent with the lack of any national court review of
an investment body decision.
On the indirect impact point, several Member States were concerned that a CETA tribunal might
rely on the EU Charter ‘freedom to conduct business’ to rule on whether an EU
measure is ‘fair and equitable’ under investment law, or ‘whether it
constitutes indirect expropriation’, or it is ‘an unjustified restriction on
the freedom to make payments and transfers of capital’ as defined in CETA. The
CJEU noted that the provisions of CETA were broad and the EU could not block a
decision being made against it or an obligation to pay damages, and that a
challenger under the CETA investment rules could concern an EU measure ‘of
general application’. There was a risk that a series of damages awards might
mean that the EU decides to give up the level of protection concerned. Such an
indirect impact could, in principle,
be incompatible with EU law:
150    If the Union were to enter into an
international agreement capable of having the consequence that the Union —
or a Member State in the course of implementing EU law — has to amend or
withdraw legislation because of an assessment made by a tribunal standing
outside the EU judicial system of the level of protection of a public interest
established, in accordance with the EU constitutional framework, by the EU
institutions, it would have to be concluded that such an agreement undermines
the capacity of the Union to operate autonomously within its unique
constitutional framework.
In this context,
the Court asserted that ‘EU legislation is adopted by the EU legislature
following the democratic process defined in the…Treaties’, subject to EU
‘principles of conferral of powers, subsidiarity and proportionality’, and
subject to judicial review by the CJEU ‘to ensure review of the compatibility
of the level of protection of public interests established by such legislation
with, inter alia, the…Treaties, the Charter and the general principles of EU
law’.
However, the Court was satisfied
that there were enough safeguards against this indirect impact upon EU law. One
provision of CETA states that the investment rules:
…cannot be
interpreted in such a way as to prevent a Party from adopting and applying
measures necessary to protect public security or public morals or to maintain
public order or to protect human, animal or plant life or health, subject only
to the requirement that such measures are not applied in a manner that would
constitute a means of arbitrary or unjustifiable discrimination between the
Parties where like conditions prevail, or a disguised restriction on trade
between the Parties.
So the CETA
Tribunal ‘has no jurisdiction to declare incompatible with the CETA the level
of protection of a public interest established by the EU’ in such cases.
Therefore it could not ‘order the Union to pay damages’. The Court was also
reassured by provisions that state that parties can ‘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’, and that
regulation 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’. It also relied upon the Joint
Interpretative Instrument
to CETA, which states that CETA ‘will … not
lower [the standards and regulations of each Party] related to food safety,
product safety, consumer protection, health, environment or labour protection’,
that ‘imported goods, service suppliers and investors must continue to respect
domestic requirements, including rules and regulations’, and that the CETA
‘preserves the ability of the European Union and its Member States and Canada
to adopt and apply their own laws and regulations that regulate economic
activity in the public interest’.
The Court summed
up its view that the CETA bodies’ powers: ‘do not extend to permitting them
to call into question the level of protection of public interest determined by
the Union following a democratic process’. This was also confirmed by another
provision confirming that ‘except in the rare circumstances when the impact of
a measure or series of measures is so severe in light of its purpose that it
appears manifestly excessive, non-discriminatory measures of a Party that are
designed and applied to protect legitimate public welfare objectives, such as
health, safety and the environment, do not constitute indirect expropriations’.
While the CETA
Tribunal has jurisdiction to apply the broad ‘fair and equitable treatment’ test
of investment law, the CJEU was satisfied that this power was limited, only
applying to ‘inter alia, situations where there is abusive treatment, manifest
arbitrariness and targeted discrimination’. So again, in the Court’s view ‘the
required level of protection of a public interest, as established following a
democratic process, is not subject to the jurisdiction conferred on the
envisaged tribunals to determine whether treatment accorded by a Party to an
investor or a covered investment is ‘fair and equitable’.’
More generally, the
CETA tribunals ‘have no jurisdiction to call into question the choices
democratically made within a Party relating to, inter alia, the level of
protection of public order or public safety, the protection of public morals,
the protection of health and life of humans and animals, the preservation of
food safety, protection of plants and the environment, welfare at work, product
safety, consumer protection or, equally, fundamental rights.’ So they did not ‘adversely
affect the autonomy of the EU legal order’.
The Court then moved on to the
principle of equal treatment and effectiveness. Here, the issue
was whether CETA had to be compatible with Article 20 of the Charter (‘equality
before the law’) and Article 21(2) of the Charter (non-discrimination on
grounds of nationality). On this point, the Court first confirmed long-standing
case law that treaties which the EU signed up to had to be compatible with
fundamental rights. This issue could also be examined in an Article 218
proceeding, and extended to the Charter. (Indeed, see a 2017 CJEU ruling on
another treaty with Canada, concerning the exchange of passenger data,
discussed here).
In the Court’s
view, Article 21(2) of the Charter did not apply, since it banned
discrimination on grounds of nationality only as between EU citizens. However,
Article 20 could apply, as its personal scope was not limited. While Article 20
does not oblige the EU to treat all non-EU countries the same (ie, the EU has
no internal equivalent to the WTO’s Most Favoured Nation rule), it could apply
if there is a difference of treatment within the EU of non-EU citizens on the
one hand and EU citizens on the other. As for the principle of effectiveness,
it only arose where a CETA Tribunal might find that a fine implementing EU
competition law was a breach of the investment guarantees.
Applying these
principles, the equal treatment issue was that EU citizens and companies
could not invoke the investment provisions in the EU, whereas Canadian citizens
and companies could. However, the Court ruled that these two groups were not
comparable. The principle of effectiveness was not breached because if the EU
or national competition authorities overstepped the limits of EU competition
law, their decision could be struck down by the courts anyway.
Finally, as for the right of
access to an independent tribunal
, the principles were that Article 47 of
the Charter bound the EU when entering into international treaties. In the
Court’s view, the CETA bodies were very similar to courts, and bound by similar
principles of independence. Although the Court was concerned about the
accessibility of ISDS for small and medium-sized businesses, it was ultimately
satisfied by a statement by the Commission and Council that the issue would be
addressed, given that approval of CETA by the EU depended upon that commitment.
On the independence of CETA bodies, the Court was satisfied that there was
sufficient protection against removal of members, and the rules on payment of
members would not preclude their independence. It was unproblematic that the
parties could issue a binding interpretation of CETA, since this was a usual
feature of international law. In any event, the EU could only agree to
interpretations that were compatible with the principles set out in the Court’s
opinion, and such interpretations could not have retroactive effects.
First, the Court’s confirmation
that the case was admissible is useful. This means that the EU and non-EU
countries can decide to apply a treaty provisionally while an Article 218 case
is pending before the CJEU. However, this does risk legal complications in the
event that the CJEU ultimately finds that the treaty concerned is incompatible
with EU law – by analogy with the Council’s statement (no. 20 in the list
of statements
for the Council minutes) that if a national constitutional
court or parliament objects to ratification of CETA, provisional application
must be terminated.
As for the substance of the Court’s
ruling, its analysis of the equal treatment and effectiveness rules was rather
brief. Like the French constitutional court ruling on CETA, there was no clear
explanation of why Canadian investors in the EU were in a different position than
EU investors. (Possible answers are that the ISDS offers equivalent protection
for EU investors in Canada, and that EU investors in the EU can rely on EU internal
market law). The assessment of effectiveness takes it for granted that an ISDS
body and the EU or Member States’ national courts will reach the same
conclusions about the correct application of EU competition law, which is
hardly a foregone conclusion. As for the independence of the ISDS system, the
Court largely follows its usual approach to defining judicial independence.
The heart of the Court’s judgment
is its reconciliation of the autonomy of EU law with the ISDS system. There’s
an unusually strong acceptance by the Court of the EU legal system’s co-existence
with international law – rather than supremacy over it. But that acceptance is
conditional upon the safeguards which the Court then sets out. Here, there is a
fundamental tension between the procedural aspect of the ruling (separate court
system) and the substantive aspect of preserving the ‘right to regulate’. What
if an ISDS body does issue a ruling
that arguably infringes the capacity of the EU to decide on the appropriate
level of regulation? Given that it’s essential that the ISDS system stands
outside the national and EU court systems, how can the boundaries – also essential – which the Court insists
must be set upon that system be enforced? The division between ISDS and
national courts systems is simultaneously part of the solution and part of the
problem.
In short, in British English, the
key question for the Court was whether it was willing to throw a spanner into
the works of the international investment system. The Court’s answer, in Canadian
English, is like having a black fly in your chardonnay.
Is there a way to square this
circle? The power of the CETA Joint Committee to issue interpretative rulings
would arguably not go far enough to ‘fix’ the problem of an ISDS body ‘running
wild’, as such rulings cannot be retroactive and Canada might not agree to them
anyway. So let’s return to the courts. The Court rules out a national court
review of an ISDS decision. However,
it also refers to the possibility of national courts asking the CJEU questions
about CETA.  Arguably, then, it’s
possible to enforce the limits on ISDS bodies by a Member State or the EU
refusing to pay a damages award ordered by an ISDS body, leading to a court challenge
of that refusal to pay by the winning party – which is technically not a court review of the ISDS body’s decision as such.
It would be similar to the well-known case of Kadi,
in which the CJEU did not rule on the validity of a UN Security Council measure
as such, but on the legality of its application in the EU legal order.
Is the judgment relevant to Brexit?
At first sight the judgment is encouraging for those who would like to avoid
any role for the CJEU as regards the UK after Brexit, given the Court’s
willingness to reconcile the EU legal order with international law. However,
that was not the sole factor in the Court’s reasoning, which distinguishes (rather
than overturns) prior case law on the autonomy of EU law. A key part of the
Court’s reasoning is that the ISDS body, unlike previous international courts which
the Court objected to, does not have power to interpret EU law. The position is
quite different under the Brexit withdrawal agreement (as I discuss here),
and it remains to be seen if it might also be different as regards EU/UK future
relationship treaties.
Finally, given that the new
ruling concerns a reformed ISDS, how
can it be enforced as regards unreformed
bilateral investment treaties between EU Member States and non-EU countries
(see the most recent list of such treaties here),
to the extent that they do not comply with the standards set out by the Court
and may apply to issues falling within the scope of EU law? Here the 2012
Regulation grandfathering
pre-existing treaties, which also puts in place a process to regulate
negotiation of such treaties in future, may be relevant. The review of
pre-existing treaties, and control of future treaties, which that Regulation
provides for may be applied taking account of the criteria in the Court’s
judgment, so as to coordinate updating such treaties to ensure that they are
compatible with EU law. This could be similar to the earlier process of updating
bilateral aviation treaties
between EU Member States and non-EU countries, in
light of a series of CJEU judgments on their EU law compatibility.

It’s too soon to say whether the reforms of the ISDS, as endorsed by the CJEU in its ruling, will satisfy a sufficient number of critics of the system to reduce the political opposition which ISDS has attracted in the past. But it’s striking that unlike many prior rulings, the CJEU does not appear intrinsically hostile to an international court, but willing in principle to find a way to accommodate it. Furthermore, the constraints the Court insists upon are not justified (as is usually the case) in terms of the Court’s own institutional interests in the autonomy of EU law, but in terms of the EU’s political institutions’ accountability to the democratic process. To adapt the Canadian term, this is a judgment for Main Street, rather than the Kirchberg plateau. 

Barnard & Peers: chapter 24



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