Comprehensive Economic Trade and Investment Agreement: A need to balance the competing interests

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KEYWORDS: MTA - Multilateral Trade Agreements, FTA- Free Trade Agreements, CEJU, CETA, ICS, EU-US TTIP, Investor-state arbitration, TFEU, TEU


CETA is the latest trade agreement between the EU and Canada. It is the result of long and protracted deliberations between the parties. It brings great benefits to the public by lifting barriers to trade like the elimination of custom duties, open and non-discriminatory access to the market, enhanced mobility for the employees, and a large variety of geographical indications for high–quality food products. There are. however, concerns regarding the new dispute resolution mechanism the CETA introduces. This article explores the extent to which these concerns are likely to materialise in light of existing EU norms and cases decided under the new dispute resolution mechanism. This article will first discuss the development of CETA and the route to its development, followed by an analysis of the European Perspective and conclude with the discussion of the Irish perspective on CETA.

Development of CETA

Economic growth and development, both necessary for fostering peace and cooperation, are induced and spurred by the conclusion of Bilateral Trade Agreements, MTAs and FTAs. These agreements contain dispute resolution clauses to deal with conflict that might arise with respect to their interpretation and application that might arise from the provisions of these agreements. IIAs and Investment contracts have evolved considerably from the inception of Calvo doctrine, which gave prominence to the interests of the hist state to protect its regulatory autonomy, with the modern form of regional agreements superseding the judicial, legislative and administrative interests of the Member States.

CETA is the latest wing in the feather, a largely successful regional cooperation agreement designed to advance economic prosperity, induce investment and spur employment, reduce barriers in trade, and enhance living standards in the participating states. Nonetheless, it is not directly applicable to Member States[1].

The Comprehensive Economic and Trade Agreement was signed in Brussels on 30th October 2016[2]. The negotiations between the EU and Canada that were undertaken prior to it were lengthy. It’s a mixed agreement with only some of its provisionally applied in the EU, with most of the agreement applicable and which also requires signature and ratification of not only the EU, but also that of its 28 members and regional parliaments. It hasn’t, however, fully entered into force yet given the politically and legally complex, and a time consuming process still to complete. Some Member States have not even begun the deliberation about CETA and others have also announced that they would not ratify the Agreement.[3]

CETA was first proposed back in 2009 and it was later dubbed as a sibling of the EU-US TTIP. Investment Court System provisions, as proposed by the European Commission in its TTIP Agreement, have been incorporated in the investment chapter of the CETA also referred to as legal scrubbing in February 2016. It has also been alleged that even after legal review of the investment chapter of the CETA there is very little evidence that a significant number of its widespread and legitimate concerns have been addressed. ICS Provisions only deal with reforms connected with judicial standards and most of the EPs reforms connected to the right to regulate have been largely ignored by the EU Commission.

On another note, Trade and Investment has been further deepened and broadened with the conclusion of the Comprehensive Economic and Trade Agreement (CETA). Because of its multifarious implications for companies in EU and Canada, it has been labelled as a progressive and the most ambitious agreement, thereby providing EU Exporters with enhanced access to the world’s most enhanced market.

From the perspective of contracting, it can be described as an agreement with enormous benefits for the public in the form of elimination of custom duties, open and non-discriminatory access to market, an enhanced mobility for the employees, and a large variety of geographical indications for high–quality food products. It put focus on the development of good standards, such as investment in a healthy environment, inducement of economic stability and social development.

It has been labelled as a gold standard of trade agreements and has been touted as the top priority of the EU Commission and Canada who is seeking its ratification since 2017. But it is not without its own faults.

Chapter 8 Section C and D of the Agreement concern dispute resolution mechanism. Investor-state dispute resolution has always been a point of controversy and Finbury argues in his work that the growth in these government mechanisms advances the interests of the economically powerful, while adversely affecting the regulatory functioning of the host state.

ISDS has been labelled as private justice, unfit for redressing public grievances as the arbitrators chosen would not be neutral with vested interests. There are concerns that a lack of knowledge of public international law and national law could lead to prejudicial outcomes of these arbitral cases, and consequently adversely impact on regulatory autonomy of the states. This argument is, again, limited and does not fully take into consideration the success of arbitration in ensuring that host states do not overregulate, guaranteeing transparency and providing equitable access to domestic remedies.

The European Perspective on CETA

The Court of Justice of the EU (CJEU) has opined that the arbitral institutions or courts external to the EU, in relation to the Agreements between EU, its member States and third countries can adjudge on aspects of EU law, provided the decision making complies with the following conditions as laid down in Opinion 1/17:

- The decision making shall not affect the primacy and direct effect of EU Law

The decision rendered by such a tribunal or a court should not affect the direct effect of EU law which is based on treaties, charters and other sources of primary and secondary law. It should not interfere with the uniform and effective application of the EU Law [4] and its implementation in varying legal systems of member states.

- Should not have a binding effect on the EU institutions and Member States

This requirement entails that the decision so rendered by such a judicial institution, and such an agreement establishing the institution should not vary the nature of the EU and the institutions’ powers, and the process for ensuring uniform interpretation of international treaties engaging an external judicial institution would not bind EU institutions, to the extent, in the exercise of internal powers, to the specific interpretation of EU Law, and as such both of these powers are essentially connected to the preservation of judicial powers of the CJEU.[5]

- Should not affect the final authority of the CJEU to interpret and apply EU Law[6]

Such an external judicial body can have a jurisdiction which may collide with the jurisdiction of the CJEU, but should not impede on the exclusive competences of the CJEU, which can be questioned by the CJEU - such as the right to provide definitive interpretation[7] and right to rule on the division of competencies within the EU[8],

- Should not affect the principle of mutual trust and cooperation.

Uniformity in interpretation and application would be ensured by the national courts of the EU Member States, which are responsible for its implementation. As a consequence, the principle of mutual trust and cooperation is established between CJEU and the national courts. Accordingly, the national courts are advised to, and sometimes indeed obliged to, refer their rulings to the CJEU for interpretation of EU law. It protects both the independence of CJEU and its dominance over interpretation of EU law and ensures that there is consistency and uniformity in the interpretation and application of the law.

- Should not affect the division of powers between EU, and its member states[9].

Decisions rendered by a tribunal or a court established by an international agreement should cover the subject matters falling within the ambit of the EU and its institutions. The exclusive power to determine when Canadian investors seek to challenge measures adopted by the Member States or/ by the Union resides with the CJEU and it is necessary that the framework established by that international agreement should not affect this structure.

The CETA, as opined by the CJEU, complies with the stated requirements as it forms a parallel forum for dispute resolution, it does not impinge on the final authority of the CJEU to render interpretation and application of EU Law, and applies EU law to the extent they concern the provisions contained in CETA. Even if the necessity of interpreting EU law arises, the CJEU will make use of ‘prevailing interpretation- referring to applicable or relevant case law’ of the respective norms and the CETA Tribunal does not have the authority to examine the ‘legality of EU measures’. Moreover, according to Article 8.31 (2) CETA, EU law and the domestic law of the member states have been excluded from its interpretation by the tribunals. Although Article 8.31(1) CETA provides that tribunals can interpret its provisions and those applicable under international law, the CJEU has not yet ruled whether arbitral tribunals can interpret and apply EU law’. It is thus worth the wait to see what the domestic approach of its member states might be or what course of action the CJEU will undertake to consolidate a position on this issue in the future[10]. At the same time, the court has taken a rather contradictory stance in determining if examining an effect of an EU measure amounts to interpretation and application of EU Law. CETA does not adversely affect the division of powers between the EU and its member states as it provides an automatic procedure for determining the respondent party if the proceedings are commenced by Canadian investors. In that procedure, the EU still retains the right to ascertain which EU Member State should be the respondent state[11]. From that perspective, it seems that CJEU considers that its jurisdiction to apply rules to division of powers coupled with limited interpretation by CETA is sufficient to sustain its dominance over the interpretation and application of EU Law.

Moreover, concerns about errors, potentially arising from interpretation and engagement undertaken in the ICS system under CETA, can be dealt with by the involvement of the CJEU, which ensures that the ICS does not usurp the final binding authority of the EU institutions to render decisions. This prevents difficult situations, similar to, for instance, the Iron Rhine case[12], where the arbitral tribunal incorrectly chose not to interpret and apply EU law using CILFIT[13] criteria..

Ostensibly, the CJEU is open to fact-based application and interpretation of EU Law, but there exists contradictory practice, as evidenced by the Achmea case. There, it excluded inter-state arbitration from the scope of Articles 267 and 344[14] of TFEU, because investment arbitration was held incompatible with the autonomy of the EU legal order. As follows, it put forth two types of arguments – firstly, that the EU cannot formally accede to the present ISDS rules, as these rules do foresee the probability of an international organisations to accede[15]. Secondly, that it lacked legitimacy and safeguards, presence of inconsistency and unpredictability of the case law[16], absence of possibility of review, high costs which reduces its accessibility to small and medium enterprises, and apparent lack of transparency.[17]CETA, however, envisages a system consisting of an ICS, which forms a part of the reformatory proposal put forth by the EU Commission in 2009, and as suggested by a Concept paper published in 2015.

Such reformatory measures required the inclusion of ICS clauses in each EU-level investment agreement. It is the first of many currently in the process of negotiation. The EU Commission estimates that 20 ICSs should be created by EU’s investment agreements with third countries in the near foreseeable time. [18] It would be compliant as it would ensure a single recourse to dispute resolution without having to impinge on the principle of mutual trust and cooperation and autonomy of the EU legal system, which forms its foundations. As it’s a mixed agreement, it has advantages of both worlds - of states preserving their autonomy to regulate, its consent to dispute and impartiality afforded by such a two-tier mechanism.

Another issue arises with respect to the fact that consistency, predictability and consolidation of case law can only be ascertained by the CETA Appellate Tribunal[19], which would require the CETA Tribunal to either follow the jurisprudence formed by the Appellate Tribunal, or to deal with inconsistent decisions rendered at the lower level in the hierarchy. Additionally, it remains unclear which rulings of the system could be regarded as a prevailing interpretation, more so in the case of the EU Law; it is also uncertain which institution would declare if an interpretation in a ruling is a prevailing interpretation in respect of that common subject matter, and accordingly determine the criteria for the ruling to prevail. This would create a more precarious situation when the CJEU is yet to provide an interpretation or two or more conflicting positions exist.

The above discussion on the challenges faced by the arbitral tribunals in implementing CETA within EU could be summarised by illustrating the example of Opinion 1/17, which had limited the impact of the entrenched pessimist viewpoints that the ICS shall not pass the test of autonomy and had iterated that the ICS mechanism does not impact the regulatory autonomy of the EU legal system[20]. It is evident from the ratio decidendi and obiter dicta of previous decisions r that the CJEU has become comparatively liberal, open to accepting the jurisdiction of international tribunal to directly interpret EU Law.

Another development with potential impact on the case is the conclusion of the Agreement for the termination of Bilateral Investment Treaties between Member States and the EU. However, Austria, Finland, Sweden and Ireland have not yet signed the Agreement, and it is yet to be seen how the defect of lack of uniformity would be dealt with by the signatory countries If fully placed in force, the ISDS mechanism will cease to have any effect.

Tribunals constituted under ICSID rules, which are established for considering intra-EU disputes arising from Energy Charter, have followed a different approach than that adopted by the EU Commission, and have expressly rejected the Achmea judgment. The reasoning was that the judgment was only applicable to bilateral investment treaties, and not multilateral investment treaties such as the Energy Charter.[21] Similarly, in P. L Holdin