Is the EU-Canada Free Trade Agreement setting a new standard in investor-state arbitration or eroding investor rights?

The free trade agreement between the EU and Canada signed in Ottawa on 26 September 2014 – the so-called "comprehensive economic trade agreement" (CETA) – represents a turning point in the history of Europe's approach to investment policy, and arguable sets the standard for other investment agreements currently being (re)negotiated. The European Commission also holds it out as the "most progressive system to date" for investor-to-state dispute settlements (ISDS).

The provision of CETA, the first agreement signed by the EU within its exclusive competence over member states' investment policy following the Lisbon Treaty, may shed light on the likely tone of future agreements, including the anticipated trade and investment partnership (TTIP) and trans-Pacific partnership agreement (TPP) that are set to reshape global trade and investment. Similar changes are also found in the Investment Protection Chapter of the EU-Singapore Free Trade Agreement (EUSFTA) initialled in September 2013 and which is set to replace 12 bilateral investment agreements (BITs) in place between Singapore and EU member states.

Importantly, in light of the backlash in recent years against investor-state arbitration, CETA introduces certain innovations to investment protection while at the same time maintaining a state's rights to regulate and pursue legitimate public policy objectives. So for instance, it spells out that measures "to protect legitimate public welfare objectives, such as health, safety and environment, do not constitute indirect expropriations". The preamble to CETA also points out that it is the responsibility of businesses to respect "internationally recognised standards of corporate social responsibility". While this may limit certain challenges by investors (for example, Philip Morris's demand for compensation from Australia for its decision to require pictures of lung-cancer victims to be displayed on cigarette packets), it does at least address one of the main concerns voiced by opponents of ISDS.

The investor-state arbitration landscape is clearly changing, but thankfully, for investors of the EU and Canada, the changes leave them broadly protected. Time will tell what the uptake will be and how many disputes will be referred to arbitration under the auspices of CETA. An interesting jurisdictional point also remains as to the applicability of individual member state Bilateral Investment Treaties (BITs) with Canada for a particular grace period and whether investors might seek to challenge the provisions of CETA by invoking BIT provisions. Before considering such questions, the section below summarises CETA's key ISDS provisions.

CETA provisions on investment protection and ISDS (Chapter X)

Qualifying investment and investor

While "Investment" is broadly defined, "Investor" has the narrower formulation seen in some BITs in that CETA does not protect "shelf" companies. To qualify as an investor, it is necessary to have real business activities in the territory of one of the Parties (Article X.3)

National Treatment and Most Favoured Nation – no import of procedural rights

CETA does not allow investors to "import" and use more favourable dispute settlement procedures provided for in other treaties (Article X.7 – Most Favoured Nation)

Fair and equitable treatment (FET) is reined in

FET - currently the most commonly invoked protection in BITs - is a more precisely defined standard in CETA, reducing the discretion of arbitrators in the application of this standard. It will apply in one of five specified situations:

  • denial of justice in criminal, civil or administrative proceedings
  • fundamental breach of due process, including a breach of transparency, in judicial and administrative proceedings
  • manifest arbitrariness
  • targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief
  • abusive treatment of investors, such as coercion, duress and harassment

Legitimate expectations of an investor are also limited to where a State party makes a specific promise or representation to the investor (Article X.9.4).

CETA clarifies that "full protection and security" refers to the Party's obligations relating to physical security of investors (Article X.9.5)

Indirect expropriation is clarified and limited

While investors remain protected in the sense that prompt adequate and effective compensation is payable in the event of direct or indirect expropriation, CETA clarifies what constitutes indirect expropriation in order to prevent claims against legitimate public policy measures (Article X.11):

  • Legitimate public policy measures to protect public health, safety or the environment do not constitute indirect expropriation, except where manifestly excessive in light of their objective
  • The investor must be substantially deprived of the fundamental attributes of property such as the right to use, enjoy or dispose of the investment

Procedural innovations introduced

CETA provides an investor with a choice of several procedural routes to redress: ICSID; ICSID Additional Facility Rules; UNCITRAL Arbitration Rules or any other rules agreed by the parties (Article X.22).

Before an arbitration can be commenced, there is a six-month mandatory consultation phase, similar to the "cooling off" period common to many investment treaties.

A further step is required (of a Canadian investor) to determine the respondent – i.e. whether it is the EU or a particular Member State. A notice is served by the Canadian investor and the EU then decides whether the measures complained of shall be answered by the EU or by the Member State in question (Article X.20).

The following procedural innovations are also noteworthy:

  • CETA contains a binding code of conduct for arbitrators based on the International Bar Association's ethical rules (Article X.25)
  • CETA provides for a list of arbitrators pre-agreed by the EU and Canada so that they have their say on the standards expected of arbitrators hearing such cases (Article X.25)
  • CETA ensures transparency of the process by requiring that all documents will be available to the public online and that all hearings will be held in public (Article X.33)
  • CETA prohibits parallel proceedings, e.g. through other international tribunals or domestic courts) (Article X.21, X.23)
  • CETA introduces statutory limits (usually 3 years) to bring a claim. Of all the BITs and MITs in existence, only NAFTA currently has such a provision (Article X.18.5)
  • CETA contains detailed provisions on the consolidation of two or more claims which have a question of law or fact in common and arise out of the same events or circumstances (Article X.41)
  • CETA has a fast track for throwing out frivolous claims (Article X.20)
  • CETA provides that the losing party pays the costs – this is a first - in all other agreements, the matter is left to the discretion of the tribunal (Article X.36)

An erosion of investors' rights?

Given the backlash against investor-state arbitration in recent years, and the heavy lobbying against ISDS in the context of this agreement, CETA appears well-balanced and should not be seen by investors as a serious erosion of their rights. On the contrary, when CETA comes into force (expected early 2016), those investors from states other than the eight with BITs with Canada will be much better protected than before, as will Canadian investors.

However, those individual member state BITs that were already in place with Canada (Croatia, Czech Republic; Hungary; Latvia; Malta; Poland; Romania, Slovakia) will be overridden by the terms of CETA. Article X.07 of CETA "Relationship with Other Agreements" sets out that CETA "replaces the agreements between Member States of the European Union and Canada listed in Annex (Y). The provisions of such agreements shall cease to apply from the date of entry into force of this Agreement". Article X.07.3 of CETA goes on to state that a claim may nevertheless be submitted pursuant to the provisions of an agreement listed in Annex Y (which lists those BITs between EU member states and Canada), for a period of up to three years from the entry into force of CETA.

This raises the interesting question of the compatibility of CETA with a BIT's surviving provisions – for example the Canada – Poland BIT to take one example states at Article XIV that its provisions shall remain in force for 20 years after termination of the BIT, in respect of investments made prior to the notice of termination. Arguably then in this example, a Polish investor in Canada could argue that it has a legitimate expectation to be able to rely on the BIT between Poland and Canada for such period of time, and not only for a three-year period. This could be important to certain investors who might not satisfy the definition of "Investor" under CETA, but do under the BIT, and/ or who seek to avail themselves of broader substantive protections than provided for in CETA. If an investor could challenge the provisions of CETA by invoking BIT provisions, this would undermine the overall balance of the former, and upset the goal of creating a level investment playing field across all member states of the EU. . It remains to be seen whether such issues of compatibility will be raised in practice.

Originally published in New Law Journal.

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