1
The Comprehensive Economic Trade Agreement:
Treat or Threat?
Bachelor’s Thesis – 17 July 2020
Jasper Linck
2
Table of Contents
1: INTRODUCTION ... 3
2: THE CETA’S INVESTMENT PROTECTIONS AND INVESTMENT DISPUTES’ PROCEDURAL FRAMEWORK ... 5
2.1SUBSTANTIVE RIGHTS ... 5
2.1.1NATIONAL AND MOST-FAVOURED-NATION TREATMENT ... 5
2.1.2.FAIR AND EQUITABLE TREATMENT ... 6
2.1.3PROTECTION AGAINST EXPROPRIATION ... 7
2.2THE CETA’S PROCEDURAL FRAMEWORK ... 9
2.2.1ACCESS TO THE INVESTMENT COURT SYSTEM ... 9
2.2.2OPTION OF THIRD-PARTY FUNDING? ... 12
2.3INTERIM CONCLUSIONS ... 13
3: LIMITATIONS TO INVESTMENT PROTECTION AND SAFEGUARDS FOR STATE PARTIES .. 13
3.1THE RIGHT TO REGULATE ... 13
3.2DENIAL OF BENEFITS ... 14
3.3MECHANISM FOR FRIVOLOUS AND UNFOUNDED CLAIMS ... 15
3.4CODE OF CONDUCT AND APPOINTING THE ARBITRATORS ... 15
3.5LIMITATIONS ON CLAIMS AND A LOSING PARTY PAYS PRINCIPLE ... 17
3.6JOINT INTERPRETATIONS ... 17
3.7TRANSPARENCY ... 18
4: GENERAL CONCLUSIONS ... 18
3
1: Introduction
The negotiations between the European Union (EU) and Canada on the so-called Comprehensive Economic Trade Agreement (CETA) started more than a decade ago.1 With this treaty with investment provisions (TIP), the EU and Canada hope to increase mutual trade and investment. Following approval by the European Council, Canada and the EU signed the CETA in October 2016.2Canada ratified the Agreement in 2017; the European Parliament
consented in February 2017. The Agreement has been applied provisionally since September 2017, however with the following important caveat: until all the European Member States have completed ratification, the CETA does not cover (i) protections of investments not qualifying as ‘foreign direct investments’, (ii) investment market access for portfolio investment and (iii) the Investment Court System (ICS).3
The requirement of separate consent by European Member States stems from the ruling by the Court of Justice of the EU (CJEU) that treaties which include such provisions must be regarded as ‘mixed’, as the areas they regulate fall under the ‘shared competences of the EU and its Member States.4 At the same time, it is the provisions granting certain substantive and procedural rights to foreign investors that have been subject to criticism and scrutiny by various segments of society, including NGOs, academics and politicians.5 It is certainly a controversial topic considering Greenpeace’s assessment, for instance, that the CETA was a “missed opportunity” because it does not truly constitute a break with the past.6
1 Government of Canada, ‘Trade and investment agreements: European Union: Chronology of events and key
milestones’ <https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/ceta-aecg/chronology-chronologie.aspx?lang=eng>. See also European Commission, ‘EU-Canada trade agreement enters into force.’ (20 September 2017)
<https://trade.ec.europa.eu/doclib/press/index.cfm?id=1723&title=EU-Canada-trade-agreement-enters-into-force>.
2 Comprehensive Economic Trade Agreement, Brussels (adopted 30 October 2016, entered into force 21
September 2017) (CETA); Government of Canada (n 1).
3 Notice concerning the provisional application of the Comprehensive Economic and Trade
Agreement (CETA) between Canada, of the one part, and the European Union and its Member States, of the other part L 238/9. See also European Commission, ‘CETA explained’
<https://ec.europa.eu/trade/policy/in-focus/ceta/ceta-explained/>.
4 Case C-2/15 Free Trade Agreement between the European Union and the Republic of Singapore [2017]
ECLI:EU:C:2017:376, paras 285-305.
5 Marija Bartl, ‘Voor internationale samenwerking, tegen handelsakkoorden’ (2018) 72(2) Socialisme en
Democratie 89<https://pure.uva.nl/ws/files/37741094/Voor_internationale_samenwerking.pdf >; Nils Meyer-Ohlendorf, ‘Comments on Investment Protection under CETA: good or bad, new or old?’ (Ecologic Institute 2014) <https://www.ecologic.eu/11582>.
6 Ciran Cross, Investor protection in CETA: Gold standard or missed opportunity? Analysis commissioned by
Greenpeace, produced by Ciaran Cross International Centre for Trade Union Rights (ICTUR) (2016) (Greenpeace EU Unit 2016) <https://www.greenpeace.org/eu-unit/issues/democracy-europe/1229/investor-protection-in-ceta/>.
4 The most controversial feature is probably the creation of an alternative dispute settlement mechanism where in case of an alleged breach of the CETA by either Canada on the one hand, or the EU or an EU Member State on the other hand, European or Canadian investors can seek a remedy through a binding dispute settlement mechanism that operates independently from the regular domestic courts of the various state parties. For this reason, former Dutch Member of Parliament Isabelle Diks, expected “numerous lawsuits with batteries of lawyers”.7 The Netherlands has yet to ratify the CETA.8 The EU is seemingly of the opinion that the CETA actually constitutes an improvement vis-à-vis these criticisms.9 According to the responsible European Commissioner of Trade and the Canadian minister of that time:
This thesis aims to answer the following research question: to what extent has the level of investment protection been successfully reformed in the CETA? For the purpose of examining its investment provisions, I will assess a selection of its most important provisions and make a comparison with the level of investment protection provided in another TIP which has already entered into force and to which Canada is party: the new United States-Mexico-Canada Agreement (USMCA), although those investment provisions do not apply to Canada.10 I will do so in light of general criticisms of international investment law and arbitration. The United Nations Conference on Trade and Development (UNCTAD) has signalled 4 four criticisms.11 First, legitimacy and transparency; questions have emerged as to whether three arbitrators
7 Editorial, ‘Groot twistpunt in het Ceta-Debat: het arbitragehof’, Trouw (Amsterdam 12 February 2020)
<https://www.trouw.nl/politiek/groot-twistpunt-in-het-ceta-debat-het-arbitragehof~bfc73aba/>.
8 Wetsvoorstel 35154, Brede Economische en Handelsovereenkomst (CETA) tussen Canada, enerzijds, en de
Europese Unie en haar lidstaten, anderzijds (Trb. 2017, 13),
https://www.eerstekamer.nl/wetsvoorstel/35154_goedkeuring_brede>; Vincent Sondemeijer, ‘Tweede kamer
stemt in met CETA, meerderheid senaat onzeker’, NRC Handelsblad (Amsterdam 18 February 2020). < https://www.nrc.nl/nieuws/2020/02/18/tweede-kamer-stemt-in-met-handelsakkoord-ceta-a3990795>.
9 Cecilia Malmström and Chrystia Freeland, CETA: Joint statement by EU (Brussels, 29 February 2016)
<http://trade.ec.europa.eu/doclib/press/index.cfm?id=1468>.
10 The United States-Mexico-Canada Agreement, Mexico City (adopted 10 December 2019, entered into force 1
July 2020) <https://ustr.gov/usmca> (USMCA); see also <https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cusma-aceum/index.aspx?lang=eng>.
11 UNCTAD, Investor-State Dispute Settlement: A Sequel, II UNCTAD Series on Issues in International
Investment Agreements (UNCTAD 2014) 23
<https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=958>.
“Canada and the EU will strengthen the provisions on governments’ right to regulate; move to a permanent, transparent, and institutionalised dispute settlement tribunal; revise the process for the selection of tribunal members, who will adjudicate investor claims; set out more detailed commitments on ethics for all tribunal members; and agree to an appeal system”.
5 have the legitimacy to invalidate States’ acts and the investor-state dispute settlement (ISDS) procedures can be kept confidential.12 Second, problems of consistency and erroneous decisions in arbitral decisions have risen; a wide array of different legal interpretations of similar provisions have been given.13 Third, concerns about party appointments and undue incentives; it is perceived that arbitrators are biased, predisposed and that they would have an interest in being reappointed. Fourth, the costand time intensity of arbitrations; concerns have been raised about the length and costs of these arbitrations.14 In terms of research methodology, I will employ an internal perspective, zooming in on the applicable law as well as academic and legal literature, and the thesis is structured as follows: I will start by discussing the key substantive rights under the CETA in Section 2.1. Subsequently, I will discuss its procedural framework in Section 2.2. In Section 3, I will examine the limitations on the investment protections and the safeguards for the State parties. The final Section 4 summarizes the comparison between the CETA and the USMCA, on the basis of which general conclusions are reached. This includes my finding that the CETA is an ambitious and innovating TIP, yet I fear that it will not become popular.
2: The CETA’s investment protections and investment disputes’ procedural framework
In this section I will examine the main investment protections and the CETA’s procedural framework and compare these with the USMCA’s provisions, where relevant.
2.1 Substantive rights
2.1.1 National and Most-favoured-nation treatment
Investors are entitled to treatment no less favourable than those of national investors in like situations, and no less favourable than the treatment to investors of a third country.15 This rule
originates in the World Trade Organization’s (WTO) rules and serves to prevent States from discriminating between different WTO members’ investors.16 In the past, this rule has been
used by investors to try to invoke other, more favourable or wider terms of investment
protection originating in other investment agreements to which the host State is party.17
12 ibid. 25. 13 ibid. 26. 14 ibid. 28.
15 CETA (n 2) art 8.6-8.7.
16 General Agreement on Tariffs and Trade, Geneva (adopted 30 October 1947, entered into force 1 January
1948) art 1; General Agreement on Trade in Services, Marrakesh 1 January 1994 (adopted 15 April 1994, entered into force January 1995) art 2.
6 The CETA tries to counter this “treaty shopping” by stating that more favourable procedures in other agreements do notin themselves constitute a breach of these standards.18
2.1.2. Fair and equitable treatment
Investors are also granted the right to “fair and equitable treatment”.19 This is an insurance to foreign investors that their investments are protected.20 A State breaches this standard if it takes a measure which constitutes: a denial of justice; fundamental breach of due process; manifest arbitrariness; targeted discrimination on manifestly wrongful grounds; abusive treatment of investors.21 This standard is a fundamental part of many investment treaties and the most relied upon basis in investment law cases to protect investors against misconduct by host States.22 The opinions about this clause vary, because it could be argued that it is somewhat broad and might offer overly wide protection to investors.23 But it could also be
argued that the wording means that a State’s measure will not easily be considered as
misconduct in breach of fair and equitable treatment and that the definition is, in fact, innovating because of the possibility of the CETA Joint Committee to adopt binding interpretations in this regard, which will be discussed further in section 3.24
The CETA also allows the Tribunal to take into account “specific representations” made by states to investors to induce covered investments which create legitimate expectations and upon which the investor relied in deciding whether to make or maintain the investment, but which has been subsequently hindered by the State.25 This can become problematic because such a representation is broader than a promise or written obligation, and might offer the Tribunal broad discretion in assessing what state action has hindered investors their legitimate expectations.26 Under the USMCA, investors are also entitled to fair and equitable treatment,
but the standard of treatment is prescribed as being the international law minimum standard of treatment of aliens.27 It is emphasized that the mere breach of one of the provisions of this
18 CETA (n 2) art 8.7(4). 19 ibid. 8.10(1).
20 Final Act of the United Nations Conference on Trade and Employment, Havana (signed 24 March 1948) , art
11(2).
21 CETA (n 2) art 8.10(2).
22 UNCTAD, Fair and Equitable Treatment: A Sequel, II UNCTAD Series on Issues in International Investment
Agreements (UNCTAD 2012) <https://unctad.org/en/Docs/unctaddiaeia2011d5_en.pdf>.
23 Cross (n 6) 7, 9.
24 Damien Nyer, 'The Investment Chapter of the EU-Canada Comprehensive Economic and Trade Agreement',
(2015) 32(2) Journal of International Arbitration, 701, 703
<http://www.kluwerarbitration.com.proxy.uba.uva.nl:2048/document/kli-ka-joia-320605?q=ceta>.
25 CETA (n 2) art 8.10(4). 26 Cross (n 6) 8.
7 TIP does not constitute a breach of that standard, and the mere action or failure to act inconsistently with investors’ expectations does not establish a breach of this standard, even if there is loss or damage to the covered investment.28 This seems more concrete and detailed than the CETA’s FET clause and this standard might serve as an inspiration.
2.1.3 Protection against expropriation
Article 8(1) CETA has been designed to protect investors against government measures which have an effect amounting to nationalization or expropriation which affect the worth of investments.29 This is only allowed for a public purpose; under due process of law; in a non-discriminatory manner; and on payment of prompt adequate and effective compensation.30 These terms have been further specified in the annexes, which require a case-by-case fact-based inquiry that considers several factors, such as the duration, the amount of interference with the investment-backed expectations and the economic impact of the measure, although the sole adverse effect on the value of an investment is not sufficient.31 According to the
European Commission, the CETA “makes clear what constitutes ‘indirect expropriation’ ”.32 However, the clauses that provide for protection against expropriation have been interpreted
broadly in the past. In Metalclad v. Mexico, the Tribunal held:33
28 ibid. art 14.6(3-4). 29 CETA (n 2) art 8.12(1). 30 ibid. art 8.12(2-3). 31 ibid. Annex 8-A, arts 1-2.
32 European Commission, ‘Investment provisions in the EU-Canada free trade agreement (CETA)’ (1 February
2016) <https://trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151918.pdf>.
33 Metalclad Corp. v. Mexico, ICSID Case No. ARB(AF)/97/1, Award (30 August 2000) paras 102-103;
Raymond Doak Bishop and William W. Russell, ‘Survey of Arbitration awards Under Chapter 11 of the North American Free Trade Agreement’ (2002) 19(2) Journal of International Arbitration, 559
<http://www.kluwerarbitration.com.proxy.uba.uva.nl:2048/document/ipn24514?q=survey%20of%20arbitration %20awards>.
“expropriation under NAFTA includes not only open, deliberate acknowledged takings of property…, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host state”.
8 The CETA article states that “the mere fact that a Party regulates in a manner which is negatively affecting an investment or interfering with investors’ expectations, including their expectations of profits, does not amount to a breach of non-discriminatory treatment”.34 An important clarification has been made:35
This seems to be a positive limitation of the scope of indirect expropriation.36 The problem in
this respect is that although it provides a more detailed framework for indirect expropriations, some questions remain. For example, the compensation shall amount to the fair market value of the investment, and valuation criteria include going concern value, asset value and other appropriate criteria.37 The indirect expropriation clause does not specify completely which factors are also allowed for the calculation of the fair market value. Indeed, the fair market value has been interpreted in many different ways in the past, and as observed by the Tribunal in Tenaris:38
The fair market value can also be understood to be more restrictive such as “only limited to future lost profits”.39 The USMCA has a similar clause, and points out that
“[n]on-discriminatory regulatory actions by a party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute
34 CETA (n 2) art 8.9(2). 35 Ibid. Annex 8-A, art 3. 36 Nyer (n 24) 704, 705. 37 CETA (n 2) art 8.12(2).
38 Tenaris S.A. and Talta - Trading e Marketing Sociedade Unipessoal Lda. v. Bolivarian Republic of Venezuela
I, ICSID Case No. ARB/11/26, Award (29 January 2016) paras 557-566.
39 Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No.
ARB/97/3, Award, (20 August 2007) para. 8.3.3.
“For greater certainty, except in the rare circumstance when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations“.
“assessing the value of an expropriated asset in light of the fair market value approach requires an assessment of transactions from the point of view of whether it was freely entered into by the buyers and seller, at arm's length, in a reasonably open market, with both the seller and the buyers having reasonable knowledge of the relevant facts and other market circumstances”.
9 indirect expropriation, except in rare cases.”40 In my opinion, the expropriation clause is restrictive in nature, yet could use some more clarification on certain criteria. Both the fair and equitable treatment clause and expropriation clause are likely to increase the consistency of Canadian-European Union investment law, but in the absence of the Multilateral Investment Court System, it remains unsure how many of these interpretations will become a basis for other investor-state arbitrations and to what extent they will address the problems of inconsistency.41
2.2 The CETA’s procedural framework 2.2.1 Access to the Investment Court System
According to article 30.6 CETA, the TIPs provisions are not meant to have direct effect. Therefore, investors cannot directly invoke the CETA within their domestic legal systems and investors are only entitled to seek remedy before the ICS if their home State authorises them to do so by ratifying the agreement. Unlike the procedure under the USMCA, it is not required to exhaust local remedies, which will be discussed further below. If investors are of the opinion that the other party has breached its obligation in the CETA to ensure national treatment, fair and equitable treatment or protection against expropriation, they may submit a claim to the Tribunal.42
First, the parties must try to settle disputes amicably through consultations and possibly mediation.43 If this does not work, investors must comply with certain procedural requirements before pursuing arbitration: they must withdraw or discontinue existing legal procedures and waive their right to initiate any claim or proceeding before other tribunals or courts.44 Investors may submit their claim under any of the following rules: the (ICSID) Convention on the Settlement of Investment Disputes between States and Nationals of other States and Rules of Procedure for Arbitration Proceedings; the ICSID Additional Facility
40 USMCA (n 10) Annex 14-b-1, art 14.3(B).
41 CETA (n 2) art 8.29; Piero Bernardini, ‘The European Union’s Investment Court System – A Critical
Analysis’ (2017) in Matthias Scherer (ed), 35(4) ASA Bulletin (Association Suisse de l’Arbitrage) 822, 825.
<http://www.kluwerarbitration.com.proxy.uba.uva.nl:2048/document/kli-ka-asab-3504004-n?q=%22a%20critical%20analysis%22>.
42 CETA (n 2) art 8.18(1).
43 ibid. art 8.19-8.20; Elsa Sardinha, ‘The New EU-Led Approach to Investor-State Arbitration: The Investment
Tribunal System in the Comprehensive Economic Trade Agreement (CETA) and the EU–Vietnam Free Trade Agreement’, (2017) 32(3) ICSID Review - Foreign Investment Law Journal, Fall 2017, 651, 655 <https://academic.oup.com/icsidreview/article-abstract/32/3/625/4718104>.
44 CETA (n 2) art 8.22.1 (f)(g); Stefanie Schacherer, ‘TPP, CETA and TTIP Between Innovation and
Consolidation—Resolving Investor–State Disputes under Mega-regionals’, (2016) 7(3) Journal of International Dispute Settlement, November 2016, 645, 646
10 Rules; the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules or any other rules on agreement of both parties.45 Once a claim has been submitted, the Tribunal will hear the case in divisions made up of three Members, one of whom shall be
from a European Member State, one from Canada and one from a third country.46 A
procedure has been established as well for small- and medium-sized investors or for claims involving a relatively low amount of claimed damages and compensations. In such cases the disputing parties may agree and that request that a case will be heard by a sole Member of the Tribunal.47 If two or more claims have a question of law or fact in common which arise out of the same events or circumstances, the disputing party or parties jointly may request the establishment of a separate division of the Tribunal and request for consolidation.48
If the investor or responding State does not agree with the award rendered, it is also possible to appeal against this award before the Appellate Tribunal.49 This Appellate Tribunal may
uphold, modify or reverse awards based on errors in the application or interpretation of applicable law; manifest errors in the appreciation of the facts, including relevant domestic law; the grounds in Article 52(1) ICSID Convention, which are (a) that the Tribunal was not properly constituted; (b) that the Tribunal has manifestly exceeded its powers; (c) that there was corruption on the part of a member of the Tribunal; (d) that there has been a serious departure from a fundamental rule of procedure; or (e) that the award has failed to state the reasons on which it is based.50
If the Tribunal makes a final award, it may only award separately or in combination: monetary damages and any applicable interest; restitution of property, in which case the award has to provide that the responding state may pay monetary damages representing the fair market value of the property.51 The question then is how the monetary damages are calculated, just as in the case of indirect expropriation. The award has to be issued within two years from the filing date, and the Tribunal has to inform the disputing parties in case of delay.52 Once an award has been issued under the ICSID Convention, it can be enforced after 120 days from the date of rendering, or enforcement has been stayed and revision or annulments proceedings are completed.53
45 CETA (n 2) art 8.23(2); Sardinha (n 44) 660, 662. 46 CETA (n 2) art 8.27(6); Sardinha (n 44) 632, 635.
47 CETA (n 2) arts 8.23(5) and 8.27(9); Sardinha. (n 44) 638. 48 CETA (n 2) art 8.43; Sardinha (n 44) 663, 664.
49 CETA (n 2) art 8.28(1) CETA; Sardinha. (n 44) 641, 647.
50 CETA (n 2) art 8.28(2); Article 51 ICSID Convention; Sardinha (n 44) 641, 643. 51 CETA (n 2) art 8.39(1).
52 ibid. 8.39(7) CETA; Sardinha (n 44) 664, 666. 53 ibid. 8.41(3)(a).
11 If the award is issued under the ICSID Additional Rules or under the UNCITRAL Arbitration Rules, it can only be enforced 90 days after the date of the award and no disputing party has commenced proceedings to revise, set aside or annul the award; or enforcement has been stayed by a court which has dismissed or allowed such an application.54The CETA does not require investors to exhaust local remedies, whereas the USMCA requires American and Mexican investors to pursue relief before the administrative tribunals or courts and either a final decision has been obtained or 30 months have passed from the date the domestic procedure was started.55 This is an interesting feature. On the one hand, I think that having to exhaust local remedies is a good point of departure and one could argue that local institutions are better positioned to correct State misconduct and have more legitimacy to do so than an ad-hoc tribunal or a supranational investment arbitration court. In addition, a State should be given the chance to correct its wrongdoing.
On the other hand, I have practical objections to such a requirement because in many European Union Member states, including the Netherlands, the judiciary has for years been under the pressure of a huge workload, which has obviously increased as a result of COVID-19. If a State adds these complex international investment law disputes to their regular courts, this will almost inevitably impact the right to access to court of both natural and legal persons with Dutch or foreign nationality. Moreover, many EU Member States do not always have a functional, independent and impartial judiciary, so from the Canadian point of view such an obligation might not result in achieving neutral investment dispute settlement, or obtaining such settlement within in a reasonable time period.56 Canada scores quite well in terms of rule of law, so from a European perspective this would be less problematic.57 Personally, I would prefer a specialised court like the ICS, because it would probably be less expensive, more efficient, consistent and predictable than having many different domestic courts each giving
54 ibid. art 8.43(3)(b).
55 USMCA (n 10) art 14.D.5(1)(a-b); Graham Coop and Gunjan Sharma, ‘Chapter IV: Investment Arbitration,
Procedural Innovations to ISDS in Recent Trade and Investment Treaties: A Comparison of the USMCA and CETA', in Christian Klausegger , Peter Klein , et al. (eds), Austrian Yearbook on International Arbitration 2019, Austrian Yearbook on International Arbitration, Volume 2019 (Manz’sche Verlags- und
Universitätsbuchhandlung 2019) 483, 484
<http://www.kluwerarbitration.com.proxy.uba.uva.nl:2048/document/kli-ka-austrian-yb-2019-026-n?q=gunjan%20sharma>; Daniel Garcia-Barragan, Alexandra Mitretodis, et al., 'The New NAFTA: Scaled Back Arbitration in the USMCA', (2019) in Maxi Scherer (ed), 36(6) Journal of International Arbitration, 743,744
<http://www.kluwerarbitration.com.proxy.uba.uva.nl:2048/document/kli-joia-360605?q=%27The%20New20NAFTA%3A%20Scaled%20Back%20Arbitration%20in%20the%20USMCA>.
56 European Commission, The 2020 EU Justice Scoreboard, Communication from the Commission to the
European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions, 8, 63
<https://ec.europa.eu/info/policies/justice-and-fundamental-rights/upholding-rule-law/eu-justice-scoreboard_en>.
57 World Justice Project, World Justice Project Rule of Law Index Report 2020, 56
12 their own interpretations. The procedure under the CETA seems to have addressed the problem of time intensity, having reduced the procedure to less than three years, whereas having to pursue local remedies or waiting 30 months before filing for investor-state arbitration is likely to increase the period of time required for the dispute to be settled.
2.2.2 Option of third-party funding?
Investors may seek third-party funding for their procedure at the ICS, and this might lead to an increase in claims brought before the Tribunal.58 Third-party funding means that investors do not fund their claims themselves (entirely), but team up with a third party in order to pay the costs of such claims.59 The CETA requires that this funding is disclosed to the other disputing party and to the Tribunal.60 Still, concerns remain about this practice. One of the problems of third-party funding is that claims that initially might not have been initiated, are going to be initiated because investors do not have to fund the claim completely themselves, which might change or increase the stimulants to bringing claims.61 Moreover, if a law firm is the third party and there has been made some sort of contingency fee agreement, there is an interest in filing these claims because of the contingency of a successful claim.62 The result is that a new industry has emerged, which acts in its own interest looking for a financial award of investment claims.63 The financial rewards for investors and their funders can be quite considerable if they manage to bring their claim successfully, especially because of the impossibility in the CETA for States to bring counterclaims.64 The average amount claimed is almost US$ 300 million and the average amount awarded more than US$ 100 million.65 In one extreme case, a third-party funder made a return of over 700%, with a profit of over US $80 million when it sold its share in a successful claim in Teinver v. Argentina, where almost US $ 320,800,000 was awarded.66
58 CETA (n 2) art 8.26.
59 Brooke Güven & Lise Johnson, ‘The Policy Implications of Third-Party Funding in Investor-State Dispute
Settlement’ (2019) CCSI Working Paper May 2019, 3 <http://ccsi.columbia.edu/2019/05/09/the-policy-implications-of-third-party-funding-in-investor-state-dispute-settlement/>.
60 CETA (n 2) art 8.26(1). 61 Güven and Johnson (n 59) 4. 62 ibid.
63 ibid.
64 Güven and Johnson (n 59) 6.
65 Malcolm Langford, Daniel Behn and Laura Létourneau-Tremblay 2019, ‘Empirical Perspectives on
Investment Arbitration: What do we Know? Does it Matter?’ (2019) ISDS Academic Forum Working Group 7 Paper 15 March 2019, 9 <https://www.jus.uio.no/pluricourts/english/projects/leginvest/publications/empirical-perspectives-investment-arbitration.html>.
66 Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. The Argentine Republic,
ICSID Case No. ARB/09/1, Award (21 July 2017) para. 1147; “Burford Capital announces successful conclusion to Teinver annulment applications, 30 May 2019” <
https://burfordcapital.com/media-room/media-room-13 While the CETA requires transparency regarding third-party funding, it does not prohibit its use. Hence, it remains uncertain how effective an obligation to disclose the third-party funder will be to discourage this practice.
2.3 Interim conclusions
The CETA grants investors several rights, which are national treatment, most-favoured-nation treatment, the right to fair and equitable treatment and protection against expropriation. The USMCA has similar protections, except for the fair and equitable treatment standard which is linked to the international minimum standard of treatment of aliens. In addition, investors may try to rely on third-party funding and are entitled to seek remedy to the ICS, if their home State has ratified the CETA. Contrary to the USMCA, investors under the CETA do not have to pursue relief before local courts first, but they have to waive their right to initiate other proceedings. Both reforms have their advantages and disadvantages. The exact scope of the protection is not entirely clear, but the level of investment protection in the CETA and the USMCA seems to be restrictive and forms a break with the past, compared to older less detailed investment agreements.
3: Limitations to investment protection and safeguards for State parties
In this section, I will discuss the limitations on the investment protection offered by the CETA and the possible safeguards for the State parties.
3.1 The right to regulate
The CETA explicitly confirms the right to regulate. Closely linked to fair and equitable treatment and expropriation, this is the right for States to be able to take bona fide regulatory measures, even if these negatively affect investments. According to article 8.9(1-2) CETA, the Parties
container/burford-capital-announces-successful-conclusion-to-teinver-annulment-applications/>; Güven and Johnson (n 59) 6.
“Reaffirm their right to regulate within their terroritories to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals, social or consumer protection or the promotion and protection of cultural diversity. The mere fact that a Party regulates in a manner which negatively effects an investment or interferes with investors’ expectations, including their expectations of profits, does not amount to a breach of non-discriminatory treatment”.
14 This seems to be a strengthening of the right to regulate, but we note with interest that the necessity of a “nexus” between the measure and objective, which was included in earlier drafts, has actually been dropped.67 More importantly, no mechanism regarding this article has been included which automatically refers questions of interpretation to the Committee, leaving this to the discretion of the Tribunal.68 At the same time, it could be questioned whether the right to regulate is all that much under pressure, because this right has also been acknowledged in investment law. In Continental Casualty, the Tribunal stated that:69
In Philip Morris and Abal Hermanos v. Uruguay the Tribunal held:70
In my opinion, the right to regulate might not be so much under pressure and is not strengthened by means of this article, but rather by the earlier discussed limitations on the scope of the FET and expropriation clause, and by the provisions which I will discuss in the following.71
3.2 Denial of Benefits
The CETA also allows for a denial of benefits of the investment protections.72 This means
that the State parties can deny the investment protection to a third-country investor which owns or controls the enterprise if the denying State adopts or maintains measures with respect to the third-country that relate to the maintenance of international peace and security and
67 Cross (n 6) 9.
68 CETA (n 2) arts 8.44 and 26.1; Cross (n 6).
69 Continental Casualty v. Argentine Republic, ICSID Case No. ARB/03/9 Award (5 September 2008) para 258;
Bernardini (n 41) 816, 818.
70 Philip Morris Brands Sàrl (Switzerland), Philip Morris Products S.A. (Switzerland) and Abal Hermanos S.A.
(Uruguay) v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7 Award (8 July 2016) para 295; Bernardini (n 41) 816, 818.
71 Nyer (n 24) 701-709. 72 CETA (n 2) art 8.16.
“It would be unconscionable for a country to promise not to change its legislation as time and needs change, or even more to tie its hands by such a kind of stipulation in case a crisis of any type or origin arose. Such an implication as to stability in the BIT’s Preamble would be contrary to an effective interpretation of the Treaty; reliance on such an implication by a foreign investor would be misplaced and, indeed, unreasonable”.
“a consistent trend in favour of differentiating the exercise of police powers from indirect expropriation emerged after 2000. During this latter period, a range of investment decisions have contributed to develop the scope, content and conditions of the State’s police powers doctrine, anchoring it in international law”.
15 prohibit transactions with the enterprise or would be violated or circumvented if the benefits of the CETA were accorded to the enterprise or to its investments. The purpose is to exclude third-country investors which seek to benefit from provisions which the States party to the CETA did not intend to give these investors. The USMCA also has a somewhat similar clause, except for the maintenance of international peace and security part.73 In my opinion, these could be regarded as yet another example of a more limited level of investment protection.
3.3 Mechanism for frivolous and unfounded claims
Furthermore, a mechanism has been designed to decrease the number of claims. The State parties are allowed to file objections that claims are manifestly without legal merit.74 Once an objection has been filed, the proceedings will be suspended until such an objection has been decided upon. Once it has been decided that the entire claim is without legal merit, the investor must withdraw its claim. Another mechanism has been included for states to raise objections concerning claims unfounded as a matter of law.75 Moreover, the CETA also introduces a requirement to have “substantial business activities” in the territory of the State parties, in order to prevent protecting shell or mailbox companies which do not really conduct business in that territory.76 It remains to be seen when the investors’ business activities are substantial enough to be able to benefit from the agreements’ investment provisions.
3.4 Code of conduct and appointing the arbitrators
Arbitrators have been accused of not being sufficiently independent and impartial. Although no conclusive evidence of this has been produced, I will nevertheless examine what has been provided in the CETA in this respect. Investors are no longer allowed to appoint one arbitrator. Instead, the Committee shall appoint 15 Members of the Tribunal, from which five Members shall be of a European Member State, five from Canada and five from third countries with the State parties’ consent.77 The president of Tribunal has to assign cases to Tribunal Members on a rotating basis to ensure random and unpredictable compositions.78 The traditional model of three arbitrators has not been abandoned, and the Tribunal differs in
73 USMCA (n 10) art 14.14.
74 CETA (n 2) art 8.32; Nyer (n 24) 707, 708. 75 CETA (n 2) art 8.33; Nyer (n 24) 707, 708.
76 CETA (n 2) art 8.1; European Commission (n 32) 3. 77 CETA (n 2) art 8.27(2); Sardinha (n 44) 633,635. 78 CETA (n 2) art 8.27(7); Sardinha (n 44) 634.
16 this respect from other international courts such as the International Court of Justice and the European Court of Human Rights.79 One might argue that decisions by larger chambers have more legitimacy. The Members of the Tribunal have to be qualified for judicial office or jurists of recognized competence; they must have demonstrated expertise in public international law; and it is desired that they are experts particularly in international investment or trade law and the resolution of investment or trade disputes.80 The Members of the Tribunal have to be independent, and shall not be affiliated with governments, even if they receive a remuneration from a government, for example the retainer fee.81 They are prohibited from taking instructions from any organization or government regarding matters related to the dispute and also have to comply with the International Bar Association Guidelines on Conflicts of Interest in International Arbitration.82
This means that the Members of the Tribunal are not allowed to “change hats” where persons act both as counsellor and arbitrator in different procedures.83 As for their terms, Members of the Tribunal are appointed for a five-year term by the Committee, with the option of a single renewing. The result of all these measures is that investors have lost all their influence on the selection of arbitrators, but a procedure has been established to ensure that a Member of the Tribunal can be challenged if one of the parties considers that the Member has a conflict of interest.84 Under the USMCA, once American and Mexican investors have exhausted local remedies or 30 months have passed, they can file for traditional investor-state arbitration, with one investor appointed, one host State appointed and one mutually appointed arbitrator.85 Admittedly, the Tribunal Members are (almost) fully independent from investors, but it is not certain that they are also independent towards the State parties. After all, the Tribunal Members are dependent on these States for their remuneration and the potential renewal of their terms, which might influence their independence. In addition, if an investor of the Tribunal Members’ home state is party to the dispute or their home state as responding State, concerns could be raised about possible partialities in favour of the home state or investor. The only possibility for investors then is to try to challenge the Tribunal Member. These permanent members probably have more legitimacy to adjudicate on States’ acts than ad-hoc arbitrators, and together with the increased transparency, this seems to address this point of
79 Schacherer (n 45) 638.
80 CETA (n 2) art 8.27(4); Sardinha (n 44) 63.
81 CETA (n 2) arts 8.27(12), 8.30(1); Sardinha (n 44) 647, 649. 82 CETA (n 2) art 8.30(1); Sardinha (n 44) 647.
83 Sardinha (n 44) 648.
84 CETA (n 2) art 8.30; Sardinha (n 44) 649.
17 criticism. It also seems to address the (perceived) problems of independence and impartiality towards investors, but I am not sure whether this applies towards the States. The criticism that arbitrators would have undue incentives towards investors has probably been solved, but it might result in undue incentives towards the States which appoint Tribunal Members. Perhaps an additional mechanism should be created to ensure that they are also impartial towards investors, maybe by making the term for the appointment longer than only five years, i.e. more in line with regular judges.
3.5 Limitations on claims and a losing party pays principle
The CETA also introduces many limitations on claims, and a “losing party pays” rule.86 The latter means that if an investor’s claims fails, they have to pay for the entire legal procedure including litigation costs for the responding State.87 Although this seems to be unique, cost allocation within ISDS is actually not all that new, and arbitration panels under the ICSID Convention have a certain margin of discretion to allocate costs.88 Other principles are for instance “pay your way” and allocation pro rata (partly success) which also can be read in this provision.89 Further, claims are not allowed with respect to measures not identified in the request for consultations, limiting the possibilities to alter claims.90 In addition, the award is expressly limited to “the actual loss”.91 Similar to the question as to what is allowed to be taken into account when calculating the “fair market value”, it is not entirely clear what may be taken into consideration when calculating the actual loss. In my opinion, this could use some clarification. The problem of cost-intensity does seem to have been largely addressed by these limitations.
3.6 Joint interpretations
The CETA also establishes a committee for Treaty questions.92 The Joint Committee is responsible for all questions concerning trade and investment and the implementation and application, and State parties can refer issues to this Committee.93 The USMCA has a similar
86 CETA (n 2) art 8.39(5). 87 Nyer (n 24) 709, 710.
88 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (opened
for signature 18 March 1965, entered into force 14 October 1966) arts 59-61; UNCITRAL, Arbitration Rules as revised in 2010 and amended in 2013, art 42
<https://uncitral.un.org/en/texts/arbitration/contractualtexts/transparency>; Bernardini (n 41) 831, 833.
89 Langford, Benn and Létourneau-Tremblay (n 65) 11; CETA (n 2) art 8.39(5). 90 CETA (n 2) art 8.22(E); Sardinha (n 44) 659.
91 CETA (n 2) art 8.39(5). 92 ibid. art 26.1(1). 93 ibid. art 26.1(3).
18 institution.94 The Committee has the power to adopt interpretations on the Treaty which are binding upon Tribunals established under the CETA.95 With this, the State parties have the ability to control the interpretation of the Treaty, as well as gaining more control over its application. This might increase the predictability of the provisions, but there is a risk of politicization of investor-state disputes if the State parties would disagree on a certain term.96 An interesting legal feature is that it is not prohibited to change and adopt a new binding interpretation of a certain Treaty term while a procedure is already pending, further enhancing the party States' control over this TIP.97 This is of course negative for the legal certainty from the investors’ point of view, possibly making the procedure quite unattractive, and I think that the responsible representatives should not too lightly adopt retroactively binding interpretations during pending procedures.
3.7 Transparency
Mandatory transparency has also been introduced in the proceedings, which cannot be waived by Tribunal Members and disputing parties.98 Several documents have to be made public: the request for consultations; the notice of requesting the respondent state; the notice of determination of the respondent; the agreement to mediate; the notice of intent to challenge a Member of the Tribunal; the decision on challenge to a Member of Tribunal and the request for consolidation.99 In addition, exhibits must be made public and disputing parties may not object to open hearings.100 These obligations seem to largely address the concerns about transparency.
4: General conclusions
To return to the research question: to what extent has the level of investment protection in the CETA been successfully reformed? It is my opinion that the level of investment protection in the CETA has been reformed quite successfully. It grants investors the right to national treatment, most-favoured-nation treatment, the right to fair and equitable treatment and
94 USMCA (n 10) Chapter 30. 95 CETA (n 2) art 26.1(4C)-(5E).
96 Christian Tietje and Freya Baetens, The Impact of Investor-State-Dispute Settlement (ISDS) in the
Transatlantic Trade and Investment Partnership. Study for Minister for Foreign Trade and Development Cooperation, Ministry of Foreign Affairs, The Netherlands, (Ministry of Foreign Affairs of the Netherlands 2014) 110
<https://www.eumonitor.eu/9353000/1/j4nvgs5kjg27kof_j9vvik7m1c3gyxp/vjn8exgvufya/f=/blg378683.pdf>.
97 Sardinha (n 44) 632. 98 CETA (n 2) art 8.36.
99 ibid. art 8.36(2); Sardinha (n 44) 666.
19 protection against expropriation, which are not unusual provisions. At the same time, the wording of the provisions suggests their relatively restrictive nature, although on some points the exact scope of the protections is not clear. The USMCA has similar protections, except for the FET standard which is linked to the international law minimum standard of treatment of aliens. With respect to procedure, European and Canadian investors may try to rely on third-party funding to finance their claims at the ICS if their home State has ratified CETA. It is also possible for investors to appeal against awards they disagree with. Further, the transparency in the CETA is quite substantive. Also, and unlike the USMCA, investors under the CETA do not have to exhaust local remedies, but they have to waive their rights to parallel procedures and have no influence on the adjucators, whereas under the USMCA investors can appoint one arbitrator themselves and one together with the disputing State. Both solutions to reform the level of investment protection have advantages and disadvantages, and it will be interesting to see which will prove more effective.
The CETA seems to have addressed the criticisms by the UNCTAD and strengthened the right to regulate, because of the restrictive nature of the FET and expropriation clause and the capability of State parties to let the Committee adopt binding interpretations, even during pending procedures. States also have the right to appeal against awards and have almost exclusive control over the persons adjudicating. To a lesser extent, the requirement that the losing party must pay the costs and the limitation of the award to the actual loss also suggests a limited level of investment protection and a strengthened right to regulate. Finally, I would like to thank dr. Hege Elisabeth Kjos for all her assistance and guidance, and also my former teacher, dr. Tim Staal, for his introduction to ISDS during the international law minor.
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