After seven years of negotiations, the European Union (EU) and Canada signed the Comprehensive Economic and Trade Agreement (CETA) on 30 October 2016. One innovative yet controversial aspect of CETA is the establishment of an international court to resolve investor-State disputes under the Agreement. As a result of demands by Belgium’s regional Walloon government, which previously threatened to block the Agreement, the introduction of this court has been deferred until the Court of Justice of the EU determines its compatibility with EU law. Nevertheless, CETA marks the first time that the investment court proposed by the EU has been adopted in a final treaty, in response to various criticisms of the investor-State dispute settlement mechanism (ISDS).

Why is CETA moving away from “conventional” ISDS?

The current impetus can largely be attributed to the sovereign and public backlash against ISDS as it currently exists. The proliferation of investment treaty claims (with 250 such arbitrations currently pending) and proposed “mega-regional” trade deals such as CETA, the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnerships (TPP) have cast the spotlight on ISDS. Critics, including civil society groups and law makers, have argued:

  • ISDS is investor-friendly and there exists conflict of interest or bias on part of arbitrators, many of whom are also arbitration practitioners. While statistics from the UN Conference on Trade and Development tell a different story – namely, that most disputes are resolved in favour of States – the perception of bias is real.
  • ISDS has a chilling effect on new regulatory measures because the threat of investment claims – such as Vattenfall’s pending $4.6 billion claim against Germany arising out of the latter’s phase-out of nuclear power in the wake of the Fukushima nuclear disaster in Japan, and Philip Morris’ claims against Uruguay and Australia over plain tobacco packaging laws intended to reduce the rate of smoking – could discourage governments from adopting new regulations on health, environment, labour relations, etc.
  • States also object to the impact of investor claims on the public purse, as the average cost of defending an investor claim is estimated at $4.5 million – and may be much higher – with no guarantee of recovering costs even if successful.

In light of these concerns, several States, primarily in Latin America and Europe, have withdrawn from the ISDS system, either by renouncing the ICSID Convention or terminating investment treaties.

The European Commission sees an investment court as a compromise, addressing many of the criticisms while keeping States from turning away from ISDS entirely. Having first proposed the idea in May 2015 in a concept paper, which it later submitted as a final proposal in November 2015, the European Commission’s ultimate aim is a multilateral, multi-treaty court presiding over investment disputes.

How does the EU’s proposal of an investment court differ from “conventional” ISDS?

Building upon the WTO model and pro-transparency trends in arbitration, the investment court provides several notable features, including:

  • A two-tier system consisting of a first instance tribunal and an appellate tribunal, which is authorized to set aside awards based not only on grounds for annulment outlined in the ICSID Convention, but also additional grounds such as errors of law and manifest errors of fact.
  • A first instance tribunal composed of judges randomly selected from a roster of 15 members who are prohibited from acting as counsel, party-appointed expert, or witness in an investment dispute during their terms. An appellate body whose composition will be decided at a later stage by an inter-government committee; the European Commission’s 2015 proposal calls for six members, with three randomly selected to hear each appeal.
  • Full transparency with proceedings and key documents publicly available, in line with (and in some respects going beyond) the UNCITRAL Transparency Rules.
  • “Loser pays” system under which the losing party will bear the costs of arbitration, as well as authority of the tribunal to reject frivolous claims on a summary application.
  • Tribunals’ mandate to control the length of proceedings by requiring it to render an award within 24 months of the claim being submitted and explain any delay to this timeframe.

The EU and Canada hope that a permanent roster of pre-selected first instance tribunal members will strengthen the independence and impartiality of arbitrators, and that an appellate mechanism will lead to greater consistency in decisions. The provisions on costs and summary judgment aim to shift the balance in favour of States.

What are the next steps?

Though the ink may have dried on CETA, an investment court is still a long way from fruition. As a result of concessions to the Walloon government, the proposed investment court must pass two hurdles before ever holding court.

First, Belgium will request a ruling from the Court of Justice of the EU (CJEU) on the compatibility of an investment court with EU law. The extent to which the investment court can consider EU law – which is permitted under Article 8.31(2) of CETA, providing that the court “may consider, as appropriate, the domestic law of the disputing Party as a matter of fact” – may be particularly problematic, though any such consideration of EU law by the investment court would not be binding on the CJEU. The relationship between ISDS and EU law is a familiar theme for the CJEU, which has also been requested to give its opinion on the EU’s competence to enter the proposed EU-Singapore free trade deal, as well as the compatibility of intra-EU BITs with EU law (a point of contention not only for EU Member States, but also for the European Commission which has repeatedly called for the termination of existing intra-EU BITs on the basis that they are incompatible with EU law).

And second, the investment court will be excluded from the provisional application of CETA, meaning that it cannot come into effect until ratified by some 38 national parliaments and regional assemblies across the EU. Already, some political parties and pressure groups, which see the investment court as merely the status quo in disguise, are campaigning against it. Belgium’s regional governments have indicated that they will not ratify the ISDS provisions without further details on the code of conduct for tribunal members, the function of the appellate tribunal, and rules on easing the financial burden on small and medium enterprise investors.

Should the investment court overcome these obstacles, practitioners, investors and governments will be watching keenly to see how the new system operates in practice. The Commission intends to expand its proposal to TTIP and other treaties, with a multilateral court as the end goal.