Canada: Dispute Resolution Under CETA: A New Investment Court For Canada And Europe

Last Updated: December 22 2016
Article by Roy Millen and Mark Klaver (Student-At-Law)

Canada and the European Union recently signed the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), which establishes a new tribunal, called the Investment Court System, to resolve investor-state disputes. CETA's rules on investor-state dispute settlement contain numerous innovations that distinguish the agreement from existing investment treaties. The new tribunal and rules could be a model for future international agreements and will impact Canadian businesses investing in the EU.


Investor-state dispute settlement regimes in investment treaties enable investors from signatory states to bring claims such as discrimination, nationalization or abusive treatment in neutral arbitration against governments of other treaty countries. Over 3,000 treaties covering 180 countries contain such provisions.

States commonly agree to investor-state dispute settlement to gain the benefits associated with foreign investment. Yet such provisions have attracted controversy. Critics contend they rely on panellists biased towards corporate interests; impede a government's ability to regulate in the public interest; and lack transparency. As noted in our November 2015 Blakes Bulletin: A Dispute about Disputes: The Gathering Storm over ISDS, some critics claim that investor-state dispute settlement constitutes an erosion of the democratic principle itself.

In February 2016, the EU and Canada revised the proposed version of CETA with an updated investor-state dispute settlement mechanism in order to address European concerns that the original investment provision constituted a threat to the state's "right to regulate." Nevertheless, the controversy over investor-state dispute settlement almost derailed CETA. In October 2016, the French-speaking region of Wallonia in Belgium declared it could not accept the agreement on the basis of various concerns, including that the investment provisions will restrict the government's authority to regulate. Yet Belgium's leadership ultimately gathered the required support for the EU to sign the deal.

CETA is described as a "second generation" trade agreement, in part because it allows governments more flexibility and freedom to pass legitimate measures that are in the public interest, without being subject to claims for damages caused to private investors. As noted in the Joint Interpretive Instrument on CETA between Canada and the EU, CETA is a "modern and progressive trade agreement" that "represents an important and radical change in investment rules and dispute resolution," because the deal moves decisively away from the traditional approach of investment dispute resolution. CETA does so through the new Investment Court System, updated substantive rules and novel dispute resolution procedures.


Roster of Tribunal Members

CETA creates a novel process for selecting members who serve on the Investment Court System. Under Chapter 11 of the North American Free Trade Agreement (NAFTA), investment disputes are arbitrated by a panel comprised of members mostly selected by the investor and state party to the dispute. Under CETA, Canada and the EU nominate a roster of 15 tribunal members; three members are then randomly-selected from the roster to serve on each tribunal. This selection process may enable CETA countries to nominate panellists who are sensitive to government priorities.

Appeal Mechanism

Another major innovation of the Investment Court System is the establishment of a permanent appellate tribunal to review tribunal decisions. Under CETA, legal errors and manifest errors of fact can be challenged, which is often extremely difficult under traditional investor-state dispute settlement provisions. The accountability offered by an appellate tribunal may reduce potential tribunal bias. Moreover, CETA's appellate tribunal may increase the consistency and predictability of investment jurisprudence, similar to international trade law under the World Trade Organization's (WTO) Appellate Body.

Code of Conduct

CETA introduces a binding code of conduct for tribunal members, based on the International Bar Association's ethical rules. Tribunal members are barred from working as lawyers or experts in any other investment dispute. These requirements address conflicts of interest and promote tribunal independence and impartiality.


Right to Regulate

CETA provides that Canada and the EU maintain their right to regulate and pursue legitimate policy objectives, such as public health, safety, the environment, public morals, social or consumer protection and the protection of cultural diversity. While numerous NAFTA tribunals have upheld governments' right to regulate, CETA's explicit recognition of this right may lead tribunals to provide greater "regulatory space" to governments when policymaking.

Fair and Equitable Treatment

Traditional fair and equitable treatment provisions enable investors to challenge government measures for denial of justice, breach of due process, manifest arbitrariness, targeted discrimination on wrongful grounds, or abusive treatment of investors. CETA clarifies and limits the protective scope of fair and equitable treatment in favour of state parties. It sets out an exhaustive list of categories that constitute a breach, and raises the standard to establish one. For instance, a state contravenes an investor's "legitimate expectations" only by breaking a specific promise made by the state to the investor.


CETA provides that indirect expropriation can only occur when the investor is substantially deprived of the fundamental attributes of property, such as the right to use an investment. Legitimate public policy measures taken to protect health, safety or the environment do not constitute indirect expropriation. Moreover, foreign investors cannot bring a claim of indirect expropriation solely on the basis of lost profits, which is not a cause of action but rather a measure of damages.


Dismissal of Frivolous Claims

Unlike NAFTA, CETA creates a fast-track system for expediently rejecting frivolous claims. Unfounded claims under CETA can be dismissed in weeks, similar to domestic courts.


CETA declares that the United Nations Commission on International Trade Law's transparency rules apply to all investment disputes under CETA. All documents — such as party submissions and tribunal decisions — will be publicly available on a United Nations website. All hearings will be open to the public. Interested parties including non-governmental organizations and trade unions can make amicus curiae submissions.


CETA prohibits punitive damages and awards that require repeal of a measure. Damages are limited to monetary damages and restitution of property at market value. The tribunal will order the losing party to pay the winner's full costs, unless in exceptional circumstances the tribunal considers it appropriate to apportion costs between the disputing parties.


Like CETA, the Trans-Pacific Partnership (TPP) contains innovative provisions on investor-state dispute settlement. Twelve countries including Canada and the United States signed the TPP in 2015. The TPP does not include CETA's Investment Court System. However, it contains many similarities to CETA's investment rules, including provisions on arbitrator ethics; states' right to regulate; fair and equitable treatment; indirect expropriation; dismissal of frivolous claims; transparency and public participation; limited damage awards; and costs.

Given President-elect Donald Trump's statements that he will withdraw the United States from the TPP, the TPP may never enter into force. However, the similarity in the new investment provisions in the TPP and CETA reveal how investment treaties are evolving. Large groups of nations across diverse regions of the world aim to maintain foreign investors' protection while also permitting states to pursue legitimate national regulatory and public policy goals. Moreover, the Canadian government may use the language of the TPP as the foundation to advance potential trade negotiations with China or other nations.


CETA is expected to be implemented in 2017. Parts of the agreement will apply provisionally once the European parliament ratifies it. The European parliament has recently sent mixed messages over its support of CETA. On December 8, 2016, a committee of the European parliament concluded that the deal should be rejected, citing concerns over jobs. Yet in late November 2016, it cleared a hurdle for CETA's implementation by rejecting a motion to ask the European Court of Justice to rule on the Investment Court System's compatibility with EU law. The Investment Court System will not take effect provisionally; it will take effect only once Canada and over 40 national and regional EU parliaments ratify CETA.

The Investment Court System may represent the template for future bilateral and multilateral investment treaties. Canada and the EU committed in CETA to work together toward the establishment of a multilateral investment court that would eventually replace CETA's bilateral investment-dispute mechanism. This week, Canada is co-hosting with the EU exploratory discussions in Geneva, Switzerland with government representatives from 45 economies to consider the establishment of a multilateral mechanism to adjudicate investment disputes — under both future and existing free trade agreements and investment treaties. This multilateral body would be open to all interested countries. It would reduce the complex multiplicity of existing dispute resolution mechanisms and may eventually resemble the WTO's multilateral system for resolving international trade disputes.

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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