Investor-State Dispute Settlement and the European Union: Dawn or Dusk?

Recent jurisprudential developments cast doubt on the future of Investor-State Dispute Settlement in the European Union: what do we know so far, and what should we expect?

Joris Bertrand is a graduate from Sciences Po Law School focusing on international arbitration.

In 2014 the negotiations of the Transatlantic Trade and Investment Partnership (TTIP) between the European Union (EU) and the United States triggered one of the most significant public debate over the negotiation of a free trade agreement (FTA). The debate was centered on the TTIP’s investment chapter and its Investor-State Dispute Settlement mechanism (ISDS).

ISDS allows investors from a State party to the treaty to seek redress against the host State before an arbitral tribunal. The tribunal, constituted of arbitrators ordinarily appointed by the disputing parties, will examine whether the State violated its treaty obligations and may award damages in case of a violation.

This system has attracted strong criticism, ranging from the lack of jurisprudential foreseeability, the quantum awarded, the distortions created between the rights of foreign investors and the rights of European investors investing in the EU (as they would not benefit of ISDS), and the risks of a regulatory chill. The European Commission conducted a vast public enquiry, with results demonstrating what Commissioner Malmström remarked as a “huge scepticism against the ISDS instrument”.

Against this background, and with the TTIP’s negotiations having been halted by President Donald Trump, the Comprehensive Economic and Trade Agreement (CETA) with Canada has become the European Commission’s laboratory for the creation of a new and unique ISDS system, with the aim of correcting the most criticised features of the old system. This led to the creation of the Investment Court System (ICS), integrated into CETA.

On 7 September 2017, Belgium requested the Court of Justice of the European Union’s (CJEU) opinion on the compatibility of ICS with EU law. In an Opinion rendered on 29 January 2019[i], Advocate General Bot advised the CJEU that the new ICS contained in CETA is compatible with EU law.

However on 6 March 2018 the Grand Chamber of the CJEU ruled in Achmea[ii] that the Investor‑State arbitration clause contained in a Bilateral Investment Treaty (BIT) between Slovakia and the Netherlands was incompatible with EU law.

These seemingly divergent conclusions call for an examination of the current state of affairs: where do we stand with ISDS in the EU?

    I. End of an era for ISDS in intra-EU BITs

The decision in Achmea had long been apprehended by the arbitration community in the EU. The guillotine fell on 6 March 2018. Asked to rule on the compatibility with EU law of an arbitration clause contained in a BIT, the CJEU found that such a clause was incompatible with Articles 267 and 344 of the Treaty on the functioning of the EU (TFEU).

The facts of the case are as follows; Achmea, a subsidiary of an insurance group, invested in Slovakia when the country liberalised its health insurance market in 2004. When the liberalisation was reversed in 2006 and insurance companies were prohibited from distributing profits, Achmea relied on a 1991 BIT between the then Czechoslovakia and the Netherlands, to bring arbitral proceedings against Slovakia (the succeeding State to Czechoslovakia). A violation of the BIT was found and Slovakia sought to set aside the arbitral award. As the arbitration was seated in Germany, the German courts had jurisdiction to hear the annulment proceedings. Slovakia lost before Frankfurt’s Oberlandesgericht. On appeal before the Bundesgerichtshof, the Federal Court of Justice decided to refer the question of the validity of the arbitration clause to the CJEU.

In its judgment, the CJEU found that the dispute settlement mechanism contained in the BIT had an adverse effect on the autonomy of EU law.

The Court first recalled the requirement of Article 344 TFEU that Member States “undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein”. It also stressed that principles of mutual trust and sincere cooperation command Member States to ensure the respect and application of EU law in their territories.

It then noted that due to the wording of the BIT, the arbitral tribunal was called to take into account “the law in force of the Contracting Party concerned”[iii]. EU law being part of the Member States’ national law, the CJEU observed that the arbitral tribunal was in a position to interpret and apply EU law, despite not being bound by the preliminary reference system enshrined in Article 267 TFEU (it is settled case law that arbitral tribunals are excluded of Article 267’ system and cannot refer questions to the CJEU). Article 267 TFEU aims at ensuring the CJEU’s monopoly over the definitive interpretation of EU law.

The Court also emphasized that the limited judicial review of arbitral awards and the impact of the seat chosen on the remedies available may prove insufficient to satisfy the requirement of Article 19 of the Treaty on the EU (TEU) that Member States “provide remedies sufficient to ensure effective legal protection in the fields covered by Union law”.

In the Court’s view, the full effectiveness of EU law would be at risk with arbitral tribunals constituted under intra-EU BITs being able to interpret and apply EU law, without being subject to the preliminary reference system. In addition, due to the limited power of review in annulment or enforcement proceedings, judicial review in national courts may also prove insufficient to ensure compliance with EU law. This would call into question the principles of mutual trust and sincere cooperation. The Investor-State arbitration clause of the BIT was therefore ruled as incompatible with EU law.

This decision has been widely commented and analysed in order to determine the scope of the prohibition established by the Court. Was the decision limited to the Slovakia-Netherlands BIT due to its specific wording? Or were all intra-EU BITs at threat? And what of intra-EU arbitration under the Energy Charter Treaty (ECT)?

Member States may have partially resolved this debate. In a declaration issued 15 January 2019, some Member States have announced that in light of the CJEU’s ruling in Achmea, they will aim to terminate all BITs concluded between them by 6 December 2019. They also committed themselves to inform relevant arbitral tribunals that intra-EU BIT and intra-EU ECT claims are not arbitrable, and to request national courts to set-aside or to refuse the enforcement of such intra‑EU awards on the basis of lack of valid consent. It is worth noting that Finland, Luxembourg, Malta, Slovenia and Sweden on one hand, Hungary on the other, have issued their own declarations. They depart from the main declaration in so far as the ECT is concerned[iv].

It would appear the end is near for ISDS in intra-EU BITs.

    II. A new hope: ICS as a new generation of ISDS

Having been chastised in intra-EU BITs, ISDS may receive a new impetus through the EU’s new FTAs. In order to improve the ISDS mechanism, the EU employed several techniques in its FTAs.

First, in the CETA, the key concepts of investment protection (most favoured nation[v], fair and equitable treatment, full protection and security[vi], expropriation[vii]) have been precisely defined to limit discretion and to exclude the most problematic interpretations previously adopted by arbitral tribunals. Carve out and limitations on the scope of covered investments, a clause allowing for rejection of claims brought through an abuse of process[viii], as well as a clause of denial of benefits[ix] have also been included. Finally, the Treaty states the right of the States to regulate in the public interest[x].

Secondly, and this may be where the most notable innovation lies, the EU has set up an unprecedented ICS. The main features of this system include the creation of a permanent Investment Tribunal of First Instance (the Tribunal) and of an Appellate Tribunal. In lieu of the classic private arbitral tribunal appointed by the parties, permanent members of the Tribunal will be appointed by the President on a rotating basis and will abide by strict rules of conduct.[xi]

This new generation ISDS with an investment court is included in the CETA but also – with some variations – in the EU-Singapore Trade and Investment agreement[xii], the EU-Vietnam Trade Agreement, or in the EU-Mexico Global Agreement. Recent agreements also leave the door opened to further adoption (EU-Japan Economic Partnership Agreement), and ongoing FTAs negotiations are being conducted on the basis of ICS being the dispute settlement mechanism (this is the case with Asian States particularly: China, Indonesia, Malaysia, the Philippines and Myanmar).

It is worth noting that ICS has not yet come into play. While adoption processes are ongoing, provisional application will not be possible as ISDS does not fall within the EU’s exclusive competence[xiii]. This means that Member States’ national parliaments will need to ratify the measure before any entry into force of ICS[xiv].

It is in this context that Belgium asked the CJEU (on the basis of article 218(11) TFEU) to give its opinion on the compatibility with EU law of CETA’s investment dispute resolution mechanism.

    III. ICS saved from the waters?

In his Opinion, Advocate General Bot considers that ICS is compatible with EU law. The Opinion addresses a number of important issues, ranging from equal treatment between investors, to the right of access to an independent and impartial tribunal for small and medium size investors. For the purposes of this article, I will focus on some of the elements concerning the underlying reasoning in Achmea, that is to say, the issue about the autonomy of EU law and the exclusive jurisdiction of the CJEU over its definitive interpretation.

Advocate General Bot considers that the approach adopted by the CJEU in Achmea cannot be transposed to the examination of ICS. He develops several reasons as to why the autonomy of EU law, affected by intra-EU BITs, would not be affected by ICS in CETA.

Primarily the general context is no longer set within an intra-EU BIT, but in an FTA concluded by the EU with a third State. This is of significance in light of the CJEU’s declaration in Achmea that “an international agreement providing for the establishment of a court responsible for the interpretation of its provisions and whose decisions are binding on the institutions, including the Court of Justice, is not in principle incompatible with EU law. The competence of the EU in the field of international relations and its capacity to conclude international agreements necessarily entail the power to submit to the decisions of a court which is created or designated by such agreements as regards the interpretation and application of their provisions, provided that the autonomy of the EU and its legal order is respected”[xv]. Opinion 2/15 clarifies that the possibility is not limited to a court but also opened to bodies that “whilst not formally a court, essentially perform[s] judicial functions”[xvi].

For Advocate General Bot, the difference between intra-EU BITs and EU FTAs also bears an important consequence in relation to mutual trust and sincere cooperation. According to the Advocate General these principles do not apply in relations with third states which are only marked by the reciprocity principle. Advocate General Bot thus finds the CJEU’s reasoning relating to Articles 267 and 344 TFEU in Achmea, to be inapplicable to CETA’s ICS[xvii].

The Advocate General then proceeds to examine the specific guarantees aimed at preserving the autonomy of EU law and the exclusive jurisdiction of the CJEU over its definitive interpretation. As made clear by the CJEU in Achmea, preservation of the autonomy of the EU and its legal order is a sine qua non condition for the EU to be allowed to submit to the decisions of a court created or designated by one of its international agreements.

The EU’s failure to accede to the European Convention on Human Rights (ECHR) has taught us that this question is crucial for the survival of the international commitments of the Union when submitted to the CJEU’s review[xviii]. Advocate General’s Opinion thus addresses this issue in depth.

One of his first observations relates to the applicable law. While the BIT at stake in Achmea required the arbitral tribunal to take into account the “law in force of the Contracting Party concerned” and therefore, EU law, CETA explicitly limits the applicable law to the provisions of the Treaty, “interpreted in accordance with the Vienna Convention on the Law of Treaties and other rules and principles of international law”[xix]. Accordingly, EU law does not form part of the law applicable by the Tribunal.

In addition, the Tribunal cannot annul a measure and is only permitted to award damages when a measure violates the investment protection standards set out in the Treaty. It cannot review the legality of a measure under the domestic law of a party, which includes measures dictated by EU law[xx].

Domestic law, which encompasses EU law, can only be considered by the Tribunal as a “matter of fact”. Two limitations accompany this possibility. First, the Tribunal must follow “prevailing interpretation” of domestic law by the courts and authorities of the defendant Party. This means the Tribunal will be bound by the CJEU’s interpretation of EU law. Second, any interpretation of domestic law by the Tribunal is not binding on the courts or authorities of the defendant Party, including the CJEU[xxi].

Thus, where no interpretation of EU law is available to follow, should a CETA Tribunal adopt an incorrect interpretation of EU law, this interpretation would be limited to a case, and the CJEU would not be bound by it. In addition, the Treaty institutes a CETA Joint Committee that can adopt binding interpretations “where serious concerns arise as regards matters of interpretation”[xxii].

Finally, the appeal mechanism set up by the Treaty should allow for the correction of misinterpretation of EU law. Indeed, the Appellate Tribunal is entitled to modify or reverse an award where a tribunal has committed “manifest errors” in the appreciation of the facts “including the appreciation of relevant domestic law”[xxiii]. Though limited to “manifest errors”, misinterpretation of EU law by the Tribunal could therefore be reviewed on appeal.

These guarantees are deemed to ensure the autonomy of EU law and the monopoly of its definitive interpretation by the CJEU, leading Advocate General Bot to eventually conclude that ICS is compatible with EU law.

    IV. Great expectations: the forthcoming CJEU opinion

Following the Advocate General’s Opinion, the situation appears clearer: Achmea’s findings are not applicable to ICS, and while ISDS should be expunged from intra-EU BITs, ICS ought to flourish in the EU’s FTAs.

The pressure on the CJEU to rule in favour of ICS is high. ICS is a key feature of the European Commission’s new investment policy and an important component of its new FTAs.

From a broader point of view, ICS also strongly identifies the EU’s position on the future of ISDS. As Commissioner Malmström said “States all over the world have identified problems with the current system. The EU believes that systemic reform is how we can address these concerns, with the creation of a permanent body to resolve disputes – a multilateral investment court”[xxiv].

Hence, beyond the EU’s FTAs, the larger project to implement a Multilateral Investment Court system is also at stake in Opinion 1/17. On 18 January 2019 the EU presented its proposals for a standing Multilateral Investment Court to the United Nations Commission on International Trade Law (UNCITRAL). On 1 March 2018, the Council of the EU had given its negotiating directives for a Convention establishing a multilateral court for the settlement of investment disputes. A ruling against CETA’s ICS would cut short any hope to put this proposal forward.

Nevertheless, concerns remain regarding the respect of the equal treatment principle between foreign investors and European investors investing in the EU (as they will not benefit of ICS)[xxv], and the Advocate General’s arguments may not have all been compelling regarding the exclusive jurisdiction of the CJEU over the definitive interpretation of EU Law[xxvi].

ICS is also up against an unfavourable background of case-law.

Observers of the CJEU’s case-law will not have forgotten that in Opinion 2/13, Advocate General Kokott had concluded in favour of the EU’s accession to the ECHR[xxvii]. They will not have forgotten that in Achmea, Advocate General Wathelet had concluded that intra-EU BITs were compatible with EU law[xxviii]. Both were not followed by the CJEU.

Older opinions such as Opinion 1/91 on the mechanism of judicial supervision in the European Economic Area[xxix], Opinion 1/00 on the system of legal supervision proposed by the Agreement on the establishment of a European Common Aviation Area[xxx], or Opinion 1/09 on the unified patent litigation system[xxxi], are further reminders that the integrity of the CJEU’s jurisdiction is not to be overlooked.

Achmea was an earthquake in the arbitration community. A similar outcome cannot be ruled out for Opinion 1/17.

[i] CJEU, Opinion 1/17, Opinion of Advocate General Bot, 29 January 2019, ECLI:EU:C:2019:72.

[ii] CJEU, Grand Chamber, Slowakische Republik v Achmea BV., 6 March 2018, C‑284/16, ECLI:EU:C:2018:158.

[iii] Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic, signed 29 April 1991, Article 8(6).

[iv] It is not certain whether intra-EU ECT arbitration is within Achmea’s prohibition scope. The ECT’s features are different from classic BITs and the EU is a party to this Treaty. Intra-EU ICSID arbitration may also be preserved. See Philippe Pinsolle and Isabelle Michou, Arbitrage : l’arrêt Achmea, la fin des traités d’investissements intra-UE ?, 7 March 2018, Dalloz, Le droit en débats.

[v] CETA, Chapter 8, Section C, Article 8.7.

[vi] CETA, Chapter 8, Section D, Article 8.10.

[vii] CETA, Chapter 8, Section D, Article 8.12, Annex 8-A.

[viii] CETA, Chapter 8, Section F, Article 8.18.

[ix] CETA, Chapter 8, Section E, Article 8.16.

[x] CETA, Chapter 8, Section D, Article 8.9.

[xi] See in particular CETA, Chapter 8, Section F, Articles 8.27, 8.28, 8.29, and 8.30.

[xii] On 13 February 2019, the European Parliament ratified the FTA with Singapore with the inclusion of the ICS.

[xiii] See CJEU, Full Court, Opinion 2/15, 16 May 2017, ECLI:EU:C:2017:376, at paras 285-293.

[xiv] As of 21 September 2017, a significant part of CETA has been provisionally applied because of its ratification by Canada and by the European Parliament.

[xv] Slowakische Republik v Achmea BV., precited, at para 57.

[xvi] Opinion 2/15, precited, at para 299.

[xvii] Opinion 1/17, Opinion of Advocate General Bot, precited, at paras 77 and 109.

[xviii] See CJEU, Full Court, Opinion 2/13, 18 December 2014, ECLI:EU:C:2014:2454.

[xix] CETA, Chapter 8, Section F, Article 8.31(1).

[xx] CETA, Chapter 8, Section F, Article 8.31(2).

[xxi] Idem.

[xxii] CETA, Chapter 8, Section F, Article 8.31(3).

[xxiii] CETA, Chapter 8, Section F, Article 8.28(2).

[xxiv] Speech by European Commissioner for Trade Cecilia Malmström, A Multilateral Investment Court: a contribution to the conversation about reform of investment dispute settlement, 22 November 2018.

[xxv] Harm Schepel, A Parallel Universe: Advocate General Bot in Opinion 1/17, European Law Blog, 7 February 2019.

[xxvi] Szilárd Gáspár-Szilágyi, AG Bot in Opinion 1/17. The autonomy of the EU legal order v. the reasons why the CETA ICS might be needed, European Law Blog, 6 February 2019.

[xxvii] CJEU, Opinion 2/13, View of Advocate General Kokott, 13 June 2014, ECLI:EU:C:2014:2475.

[xxviii] CJEU, Slowakische Republik v Achmea BV., Opinion of Advocate General Wathelet, 19 September 2017, ECLI:EU:C:2017:699.

[xxix] CJEC, Opinion 1/91, 14 December 1991, ECLI:EU:C:1991:490.

[xxx] CJEC, Opinion 1/00, 18 April 2002, ECLI:EU:C:2002:231.

[xxxi] CJEU, Full Court, Opinion 1/09, 8 March 2011, ECLI:EU:C:2011:123.