In its last week’s decision[1], the German Federal Constitutional Court gave green light for the Comprehensive Economic and Trade Agreement (‘CETA’)[2] between the European Union (‘EU’) and Canada. CETA is one of the three free trade agreements hotly debated in politics and industry (the other two being ‘TTIP’[3] and ‘TPP’[4]). On 18 October 2016 the Council of the EU plans to adopt a package of decisions on CETA[5], explicitly decisions which fall under the exclusive competence of the EU. Once adopted and consented to by the European Parliament, these parts of CETA will quickly take effect on a preliminary basis, pending ratification of the remaining CETA chapters by all EU Member States.

Notably, the investment (protection) chapter of CETA[6] including the investor-state dispute resolution provisions of the agreement will not take preliminary effect. This is because this chapter of CETA does not fall under the exclusive competence of the EU but rather remains subject to the competence of the Member States.

1. The decision of the German Federal Constitutional Court

The complaint against CETA was brought by more than 200,000 joint applicants, the largest number of applicants in the history of the Court. The applicants argued that the German representative in the Council of the EU should be prohibited from signing CETA on 18 October 2016, because signing CETA would violate German constitutional law.[7] The joint applicants asked the Court for a preliminary injunction under section 32 subsection 1 of the Federal Constitutional Court Act.[8] In such cases, the Court weighs the possible results of its action (i.e. issuing a preliminary injunction) against the results of its inaction (i.e. refusing to issue a preliminary injunction). In doing so, the Court applies a strict approach.

The German Federal Constitutional Court decided to refrain from issuing a preliminary injunction. The Court reasoned that “if the preliminary injunction were issued yet the Federal Government’s participation in passing the decision of the Council on the provisional application of CETA is later found to have been constitutionally permissible, the probability is high that the general public would suffer severe disadvantages”. The Court identified such severe disadvantages in the risk that a (preliminary) failure of CETA would have far-reaching effects on the negotiation and conclusion of future external trade agreements. Furthermore, the Court voiced its concern that “it seems evident that the issuance of a preliminary injunction would have a negative effect on European external trade policy and the international status of the European Union in general”.

The result of the Court’s decision is that the German representative in the Council of the EU (i.e. the German Federal Minister for Economic Affairs and Energy) is allowed to sign CETA on behalf of Germany during the meeting on 18 October 2016. Following this Council meeting, many parts of CETA will take preliminary effect.

2. Implications for the dispute resolution provisions of CETA

However, while the German Federal Constitutional Court gave green light for CETA in general, the Court stressed that the investor-state dispute resolution provisions still have to wait at a red light. The complex investor-state dispute resolution mechanism under CETA, in essence, offers an investor the following possibility to pursue its claim:

First, an investor can file its claim with a tribunal constituted under Article 8.27 CETA, which particularly prohibits the parties from choosing the members of their tribunal. Rather, Article 8.27 CETA sets out detailed rules for the constitution of the tribunal, most notably that “The CETA Joint Committee shall, upon the entry into force of this Agreement, appoint fifteen Members of the Tribunal (i.e. a panel of CETA judges). Five of the Members of the Tribunal shall be nationals of a Member State of the European Union, five shall be nationals of Canada and five shall be nationals of third countries.”[9] Out of this panel of judges, “within 90 days of the submission of a claim pursuant to Article 8.23, the President of the Tribunal shall appoint the Members of the Tribunal composing the division of the Tribunal hearing the case on a rotation basis, ensuring that the composition of the divisions is random and unpredictable, while giving equal opportunity to all Members of the Tribunal to serve.”[10]

Second, ICSID or UNCITRAL Arbitration Rules will generally be the procedural rules governing proceedings. In this regard, Article 8.23 subsection (2) CETA stipulates: “A claim may be submitted under the following rules:

(a) the ICSID Convention and Rules of Procedure for Arbitration Proceedings;

(b) the ICSID Additional Facility Rules if the conditions for proceedings pursuant to paragraph (a) do not apply;

(c) the UNCITRAL Arbitration Rules; or

(d) any other rules on agreement of the disputing parties.”[11]

Third, the UNCITRAL Transparency Rules[12] will apply to proceedings under CETA as Article 8.36 sets out. This particularly includes that “hearings shall be open to the public”.[13]

The German Federal Constitutional Court stressed in its decision that it is able to deny the application for a preliminary injunction because “the provisions on investment protection, including the dispute settlement system (Chapters 8 and 13 CETA)” do not fall under the exclusive competence of the EU. This means that these areas, in particular the dispute resolution provisions in chapter 8, remain subject to the competence of the Federal Republic of Germany. In consequence, the dispute resolution provisions of CETA will not take preliminary effect following the Council meeting on 18 October 2016 but rather face a political uphill battle in order to be ratified in Germany (and all other EU Member States). Only if ratified in all EU Member States, the dispute resolution provisions in CETA will take effect. This ratification process is expected to take up to five years, so the dispute resolution provisions will most likely only take effect in 2021.

3. Conclusion

Both the CETA supporters and critics, portray the decision as a victory in the press. From a dispute resolutions lawyer’s point of view, the decision leads in the right direction. The Court, in general, gave green light for CETA and while CETA’s dispute resolution provisions are still waiting to take effect, it is hard to image that these provisions could still fail ratification. If the dispute resolution provisions would fail, most likely, CETA would fail. And in the words of German Federal Constitutional Court: The political consequences of a failure of CETA would be a “loss in reliability on the part of the Federal Republic of Germany (…) and on the part of the European Union overall which could have lasting negative effects for the scope of action and decision-making of all European players in the shaping of global trade relations”. Hopefully, such a scenario can be avoided.