On November 12th, 2019, representatives from a number of civil society organizations met with officials from the European Commission and the Government of Canada in Ottawa for the next round of the Canada-EU CETA Civil Society Forum. While these talks centered on the sustainable development aspects of the CETA, a much buzzed-about aspect of the agreement, the controversial investment court system, may also have been discussed. The investment court system has stirred controversy in France, where the ratification process of the CETA is currently underway. Here, Professor Veronika Korom analyzes the potential influence of the investment court system and shares her expert take on what this means for the European economy.
In France, the political news circuit of summer 2019 was dominated by the painstaking ratification process of the Comprehensive Economic and Trade Agreement (CETA), concluded between Canada, the European Union (EU) and its Member States on October 30th, 2016. This “new-generation” agreement aims to stimulate European competitiveness and growth thanks to the quasi-total abolition of tariffs, the opening of markets and services for competition, the protection of investments and regulatory cooperation between the EU and Canada. While CETA has largely already been applied provisionally since September 2017, permitting an increase of European exports to Canada, its entry into force depends on its ratification by the EU Member States.
The ratification debates in the Assemblée nationale have stirred controversy. Representatives from French civil society and opposition groups have mobilized against the agreement, arguing that CETA is not only a threat to the environment, agriculture, and the health of European consumers, but that it is also poses an unprecedented risk to European democracy because of the investment courts that it will put in place. According to CETA’s opponents, these investment courts constitute a parallel system of justice that allows Canadian and multinational corporations to bypass the European courts and to sue the EU and its Member States if a State measure threatens their profit expectations. The critics see this as a threat to the implementation of public interest policies stemming from the democratic process and as hindering social, environmental or fiscal reforms, possibly resulting in a freeze or even a lowering of the regulatory standards in the EU.
On July 23rd, 2019, the Assemblée nationale adopted the draft CETA ratification bill, which will soon be submitted to the French Senate. Judging by the intensity of this summer’s debates, the Senate vote is likely to once again incite controversy, which begs the question: do we really need to worry about the investment courts proposed by CETA?
What are investment courts?
Investment courts are specialized tribunals outlined in international agreements for the protection of foreign investments (IIAs), designed to decide investment disputes between foreign investors and host States. Contrary to what the debate around CETA may lead one to think, the existence of such tribunals is not a new invention. A large number of IIAs have been concluded since the 1970s with the aim to reinforce economic cooperation between States and attract foreign investment. These IIAs, based on the principle of reciprocity, lay down a number of guarantees to protect foreign investments in the host States. They also allow investors to pursue international arbitration proceedings against the host States and to claim compensation for losses suffered as a result of the host States’ violations of the IIAs’ protection guarantees. IIAs thus represent an important legal tool for the protection of foreign investments, in addition to the courts of the host States, which are traditionally considered less neutral and less effective, and reduce the political and legal uncertainties that may complicate the making of foreign investments.
France itself has signed more than 100 bilateral IIAs as well as a multilateral IIA, the Energy Charter Treaty. Multiple French companies, including Total, EDF, Engie, Sodexo, Saint-Gobain, and Servier, have relied on these agreements to obtain large sums in compensation for losses suffered by their foreign subsidiaries as a result of undue interference from the host countries such as Argentina, Venezuela, Lebanon, Poland, and Hungary. At the same time, foreign investors investing in France have until recently not invoked these agreements to contest French State measures. All things considered, France’s IIAs have well served the interests of French investors without imposing undue control on public action in France.
Will the investment courts outlined by CETA be different from the investment tribunals of the IIAs?
The provisions of Chapter 8 of CETA dedicated to investment courts and the protection guarantees have evolved over time. Whereas the initial version of Chapter 8 was similar to traditional IIAs, given the public opinion controversy about the investment arbitration outlined in the free trade agreement with the United States (TTIP), the EU and Canada felt it was necessary to rethink the investment protection provisions of the CETA. A revised version of Chapter 8 introduced reservations and exceptions to better preserve the regulatory freedom of the contracting States and narrowed the scope of the protection guarantees provided to investors. In January 2017, Canada and the EU adopted a joint interpretative instrument to further reaffirm the right of States to regulate in the general interest. Additionally, a new approach toward dispute resolution was adopted, the so-called “Investment Court System” (ICS). The ICS is a permanent quasi-judicial system composed of a court of first instance, an appeals court, and permanent judges appointed by the contracting States. The final version of Chapter 8 thus differs from traditional IIAs both in terms of the protection guarantees offered and in terms of their enforcement by investors in the context of a new dispute resolution process before the investment courts.
Are the investment courts proposed by CETA a threat to European democracy?
An in-depth analysis of the final version of CETA’s Chapter 8 shows that the fears its investment courts have inspired are largely exaggerated. According to the statistics, investors typically tend to challenge individual measures adopted by State agencies (e.g. repudiation of contracts, withdrawal of licenses, etc.) in the context of investor-State dispute resolution Legislative measures adopted by democratically-elected national parliaments are much less frequently challenged. Further, the treatment guarantees offered by CETA and the numerous reservations and exceptions offer Canadian investors less protection than traditional IIAs or the national and the EU legal systems. Consequently, the level of control of European or French public action via the investment courts of the CETA is lower than via national law (including the European Convention on Human Rights) or EU law that ensure a very high level of protection for investors. It is also important to note that in the event of a breach of certain treatment guarantees, the CETA investment courts cannot compel States to change their laws or revoke the measures challenged. Their jurisdiction is limited to ordering damages in compensation for the losses suffered by the foreign investors. In this sense, the remedies offered by CETA are less intrusive than the remedies existing under national law and EU law that allow investors to obtain the annulment of illegal State measures in addition to monetary compensation. Fears about the threats posed by CETA to our democracies and to public interest are therefore largely exaggerated, as was also confirmed by the French Constitutional Council and the Court of Justice of the European Union when called upon by CETA’s opponents to block the agreement.
Will the investment courts planned by CETA serve the interests of French companies investing abroad?
Given that France has no IIA with Canada, the investment courts envisaged in CETA will serve the interests of French companies in that they will now benefit from protection in Canada that hereto did not exist.
That being said, given that Chapter 8 of CETA is to serve as an example for all new free trade and investment agreements negotiated by the EU with third States that have previously signed IIAs with EU Member States, including with France – such as, for example, Vietnam, Singapore and Mexico – and given that the EU wants to impose the ICS in the context of the large-scale reform efforts in the field of investor-State disputes of the United Nations Commission on International Trade Law, there is a risk that Chapter 8 of CETA may eventually lead to a lower level of protection than currently enjoyed by French investors abroad pursuant to existing IIAs.
Indeed, CETA’s treatment guarantees are less protective of investments than the existing IIAs and leave the door open for the host State to use the reservations and exceptions to exclude from the scope of the treaty certain national measures that are prejudicial to foreign investors. Further, enforcing these treatment guarantees by way of the investment courts of the ICS will likely be more difficult and less effective for investors than the current arbitration system under existing IIAs. It can therefore be concluded that the planned replacement of French IIAs with new CETA-type agreements will ultimately defeat the interests of French companies investing abroad.
It seems that the real problem of CETA’s investment courts isn’t that they are a menace to European democracies, but that they offer less effective protection for European investments abroad than the currently applicable IIAs. It is regrettable that public debate has focused on non-issues related to political perceptions of economic reality, without recognizing and dealing with the real challenges of investment protection for the future of the European economy in a period of increased uncertainty and international competition.