European Union: Permanent Investment Courts – The Future Of The Investor-State Dispute System?

Last Updated: 26 February 2019
Article by Julia Gontarska

At the moment, most investors with a dispute against a state party can bring those disputes before arbitral tribunals comprised (usually) of party-appointed international law experts. A recent opinion by an advocate general of the Court of Justice of the European Union ("CJEU") indicates that in future these types of disputes might be resolved by permanent investment courts instead.

On 29 January 2019, Advocate General ("AG") Yves Bot of the CJEU delivered his opinion confirming compatibility of investor protections provided for under the Comprehensive Economic and Trade Agreement ("CETA") – a free trade agreement between the European Union ("EU") and Canada – with EU law.  For those unfamiliar with the EU court system, an AG is a legal advisor to the CJEU who assists with each case that raises a new point of law by delivering an impartial opinion containing a detailed analysis of the legal problem at hand as well as indicating the solution to be adopted.

Investment court system vs investor state dispute settlement

The investment court system ("ISC") provided under CETA involves a permanent tribunal, whose members would be appointed in advance by treaty signatories, and an appeal tribunal competent to review its decisions. This new regime, advocated in recent years by the EU and also incorporated into the EU-Vietnam Free Trade Agreement, significantly differs from the investor state dispute settlement ("ISDS") system traditionally adopted to resolve disputes between host states and investors. The latter involves ad hoc tribunals whose members are appointed on a case-by-case basis by the investor and the state involved in the dispute.

The exclusive jurisdiction of the CJEU regarding the interpretation of EU law

In the AG's view, the new investment court system envisaged under CETA is compatible with the principle of the exclusive jurisdiction of the CJEU over the definitive interpretation of EU law.

The AG noted that in the Achmea decision the CJEU found that ISDS under intra-EU bilateral investment treaties ("BITs") is incompatible with EU law since an arbitral tribunal constituted under a BIT will inevitably have to apply and interpret EU law whilst at the same time not being able to make a reference to the CJEU for a preliminary ruling on EU law questions. It considered that such a tribunal cannot ensure the full effectiveness of EU law, which in turn adversely affects EU law autonomy. However, the approach adopted in the Achmea decision with respect to ISDS mechanism under a BIT i.e. an intra-EU agreement cannot be transposed to an examination of ISC under CETA i.e. an extra-EU agreement concluded by the EU itself.

In the AG's view, CETA offers sufficient guarantees to safeguard the role of the CJEU as the ultimate interpreter of EU law. To begin with, a CETA tribunal does not have jurisdiction to apply rules of EU law but may only consider EU law as a matter of fact. Consequently it has to interpret EU law as little as possible and take it as it stands. Moreover, a CETA tribunal is bound to follow the prevailing interpretation of EU law adopted by Member State's domestic courts and it cannot issue binding interpretations of EU law. Further, even if a CETA tribunal were called upon to interpret EU law to a certain extent, for instance to define the scope of conduct complained of, its interpretation would not bind the EU institutions. Accordingly, jurisdiction over the definitive interpretation of EU law would remain with the CJEU which could adopt its own interpretation and disregard the one advanced by a CETA tribunal.

When discussing the above safeguards AG Bot also emphasised the limited jurisdiction of a CETA tribunal which can rule solely on the breach of investment protection and non-discriminatory treatment obligations under that agreement. Such a tribunal may thus only review whether acts of a disputing party comply with CETA and grant monetary compensation to an investor. It is not entitled to order the annulment of a measure which it considers contrary to CETA, or to require that it be brought into line with its provisions. This effectively means that it is not entitled to decide on the legality of an act adopted by a Member State or by the EU in the light of the EU law, or to annul such acts.

Consequently, in the AG's view the investment court system envisaged under CETA guarantees a balance between acceptance of the external review of the actions of the EU and of its Member States in the light of investment protection and the preservation of the autonomy of EU law.

The general principle of equal treatment and the requirement that EU law is effective

In the AG's opinion, CETA complies both with the general principle of equal treatment in respect of access to the dispute settlement mechanism and the requirement for EU law to be effective.

AG Bot dismissed the argument presented by Belgium that Canadian investors in the EU will have a choice of bringing their claims before an internal court in a Member State or before a CETA tribunal, whilst EU investors in the EU will not have such a choice, thus resulting in a preferential judicial process available to Canadian investors. According to AG Bot, the situation of Canadian investors who invest in the EU is not comparable with the situation of EU investors who invest within their own economic area and therefore these two categories do not have to be treated in an equal manner. Only EU investors in Canada and Canadian investors in the EU are in comparable situations since they are both international investors.

The right of access to an independent and impartial tribunal

A number of procedural safeguards can be distinguished under CETA which ensure the right of access to an independent and impartial tribunal. The access for small and medium sized enterprises is guaranteed by a CETA tribunal's general discretion over costs as opposed to a strict rule that costs of proceedings and other reasonable costs are to be borne by the unsuccessful party, the ability of the disputing parties to agree for a sole adjudicator to hear the case in order to keep costs down and the non-exclusive jurisdiction of a CETA tribunal over actions brought by investors which can be also decided before domestic courts where domestic law provides an adequate standard of protection.

Moreover, the system of adjudicators' remuneration which is partially fixed and partially dependent on the volume and complexity of a dispute is consistent with the hybrid nature of ICS, which is neither an arbitration nor the court, and with the fact that, at least initially, those adjudicators will not be working on a full-time basis.

Finally, conditions governing the appointment and possible removal of adjudicators offer sufficient safeguards to guarantee their independence and impartiality, by requiring the committee selecting adjudicators to consider only candidates who comply with a set of qualifications and can present a sufficient level of expertise as well as by requiring already appointed adjudicators to adhere to a set of provisions entitled 'Ethics'.

Next steps

It remains to be seen whether the CJEU will reach the same conclusions as AG Bot when delivering its opinion on the compatibility of the investment court system under CETA with EU law. Although the CJEU would usually follow its AGs' opinions that was not the case in Achmea where it significantly departed from AG Wathelet's opinion. Regardless of the final outcome, the gravity of and the controversy surrounding the question at hand is illustrated by the fact that it will be decided by the CJEU sitting as a full court, which it does when it considers issues of exceptional importance. The method by which disputes between investors and states will be decided in future is unquestionably an important issue, and the CJEU's judgment is keenly awaited by parties and lawyers alike.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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