EU’s Top Court Rules Investment Protections Under CETA are Compatible with EU Law

In Opinion 1/17 (CETA Ruling) on the Comprehensive Economic and Trade Agreement (CETA), the European Court of Justice (ECJ) ruled that the investment protections under CETA, signed by Canada and the European Union, are compatible with EU law. The decision marks a welcome departure from the landmark Achmea v. Slovak Republic decision, in which the ECJ effectively invalidated all 196 investment agreements with similar provisions in force between EU Member States. For an overview of that decision and its possible implications, please see our May 2018 article, EU Top Court Rules EU Investment Arbitration Tribunals Are Incompatible with EU Law: Implications for Investors.

The CETA Ruling clears the way for Canadian investors whose rights have been violated under CETA to rely on the investor-state dispute settlement (ISDS) mechanisms under Chapter 8-F of CETA, subject to broad categories of public interest legislation.

BACKGROUND

CETA is a comprehensive trade agreement between the EU and Canada that provides a suite of rights and protections to investors, such as fair and equitable treatment, full protection and security, and non-discriminatory market access. CETA also establishes an ISDS arbitration tribunal (Tribunal) by which an aggrieved investor may have recourse to an international arbitration tribunal if those rights are breached, rather than suing the EU or a host state before its own courts.

While much of CETA has been provisionally in force since September 21, 2017, the ISDS provisions of CETA have not. Until recently, the ECJ’s case law appeared extremely hostile to independent arbitration mechanisms such as that in CETA. As part of a political compromise to ensure Belgium’s ratification of CETA, the ECJ was asked to give a preliminary ruling on Chapter 8-F of CETA. In particular, the ECJ was asked whether CETA (a) infringes the “autonomy of the EU legal order” and (b) interferes with the “effectiveness of EU law.”

THE OPINION ON CETA

The Autonomy of the EU Legal Order

The autonomy of the EU legal order refers in this context to the supremacy of EU law and the interpretive monopoly of the ECJ. Under EU law, the ECJ has sole jurisdiction to ensure that the interpretation and application of EU law is observed. National courts have a duty to ensure the full implementation of EU law, and are required to submit references to the ECJ for a binding interpretation where the validity or effect of EU law is in dispute.

The ECJ has historically viewed arbitral tribunals as something of a challenge to this system for the simple reason that they are outside it; an independent arbitral tribunal, by definition, excludes disputes from judicial review in the courts of the EU.

In January 2019, Advocate General Bot’s preliminary opinion on CETA (Opinion of AG Bot) called for a new approach, stating that the autonomy of the EU legal order “is not a synonym for autarchy.” Following the Opinion of AG Bot, the ECJ held the mere fact that the Tribunal lies outside the EU’s judicial system does not, in itself, violate the principle of autonomy. The autonomy of the EU legal order would only be breached if the Tribunal could either (a) interpret and apply EU law, or (b) rule that the EU had violated CETA through laws establishing a level of protection of public interests determined by EU institutions.

With respect to the first test, the ECJ held that the Tribunal did not infringe the autonomy of EU law because the jurisdiction of the Tribunal is limited to the provisions of CETA and must follow the ECJ’s interpretations of EU law. The Tribunal may take EU law into account “as a matter of fact,” but it is “obliged to follow the prevailing interpretation given to that domestic law by the Courts or authorities of that party.”

With respect to the second test, the ECJ held that the Tribunal “has no jurisdiction to declare incompatible with the CETA the level of protection of a public interest established by the EU measures … and, on that basis, to order the Union to pay damages.”

The Effectiveness of EU Law

The principle of effectiveness refers to the obligation on all EU and EU Member State courts and institutions to ensure that EU law is fully applied within their territory. EU law, as interpreted by the ECJ, is supreme; national law—even constitutional law—and international treaties must be interpreted in conformity with EU law and, where they are in conflict, EU law must prevail.

In that respect, Belgium questioned the possibility that the Tribunal might issue financial compensation cancelling financial penalties issued under EU competition law or other laws of public interest. In particular, EU competition law and state aid law are of primary concern to investors, as both have been used to levy financial penalties on foreign companies in the EU. In Micula v. Romania, for example, the EU Commission prohibited Romania from paying out a US$250-million ISDS award for a breach of an investment treaty by an EU state aid decision, stating that payment of the award itself would violate EU state aid law. Belgium observed that awards contrary to EU state aid law are prohibited under CETA, but similar awards against EU competition law are not.

The ECJ confirmed that it would violate the effectiveness of EU law if the Tribunal could rule that the level of protection of public interests determined by EU institutions breached the substantive guarantees of CETA. However, it held that the Tribunal had no such jurisdiction, as “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.”

Furthermore, the ECJ stated that if, “in exceptional circumstances, an award by the Tribunal might have the consequence of cancelling out the effects of a [EU] fine,” this was permissible in so far as “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 Tribunal.

IMPLICATIONS FOR INVESTORS

The CETA Ruling is a welcome departure from the ECJ’s previous case law on international ISDS arbitration. However, the decision also places significant limits on the ability of the Tribunal to compensate investors for breach of CETA by measures deemed to establish a “level of public interests determined, in accordance with the EU constitutional framework, by the EU institutions.” This encompasses important categories of legislation (like EU state aid law, consumer law and competition law) not historically understood to fall within public policy under international law.

Further, it is not clear whether the ECJ accepts the Tribunal’s jurisdiction to rule that the EU has violated CETA in circumstances where no equivalent error has been recognised by the ECJ in its interpretation of an EU measure. The Opinion of AG Bot stated that the Tribunal would be deemed to have lost jurisdiction if it failed to implement the interpretation of EU institutions, and the ECJ appeared to endorse this view, stating:  “Such an award is, conversely, unimaginable where the competition rules have been correctly applied by the Commission or by a competition authority of a Member State.” This would appear to leave the door open for review of a CETA award on grounds of jurisdiction for failing to follow the prevailing interpretation of EU law.

For further information, please contact:

Brady Gordon                           604-631-5255
Joe McArthur                            604-631-3383

or any other member of our Arbitration group.

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