Abstract

The European Union and Canada have engaged in extensive and intensive negotiations to produce a Free Trade Agreement, CETA. That agreement, if it comes into force, will be of great importance to the economic progress and wellbeing of the inhabitants of both parties. It may also influence the terms of the trade agreement under negotiation between the European Union and the United States, as well as other agreements. CETA contains provisions on investor-state dispute settlement characterized by new restrictions that have attracted particular attention, positive and negative, as well as allegedly new and precise standards on investment that make clear that both the EU and Canada will preserve their unchallenged right to regulate and to achieve legitimate policy objectives, such as public health, safety, environment, and public morals. Whether all the 'reform' measures embodied in the draft of CETA are sound remains to be seen.

The European Union and Canada have engaged in extensive and intensive negotiations to produce a free trade agreement, 'CETA'. That agreement, if brought into force, will be of great importance to the economic progress and well-being of the inhabitants of both parties. It may also influence the terms of the trade agreement under negotiation between the European Union and the United States, as well as other agreements. CETA contains provisions on investor-state dispute settlement that have attracted particular attention, positive and negative.

The provisions on investor-state dispute settlement were foreshadowed by a European Commission paper of September 26, 2014, that maintains that CETA 'reflects a turning point in the European approach to investment policy. It is the first agreement that puts all EU investors on the same, equal footing ... ensuring a high level of protection while preserving the EU and Canada's right to regulate and pursue legitimate public policy objectives such as the protection of health, safety, or the environment. The most progressive system to date is also being established for Investor-to-State Dispute Settlement.' The European Commission's paper states that CETA represents 'a significant break with the past' in its 'clearer and more precise investment protection standards' and 'clearer rules' on investor-state dispute settlement (ISDS).

CETA's 'new, precise standards on investment' make clear that '[T]he EU and Canada preserve their right to regulate and to achieve legitimate policy objectives, such as public health, safety, environment, public morals'. Since the state's right to regulate has not been successfully challenged and, on the contrary, sustained, as by the arbitral award in Methanex v United States of America, this so-called 'new precise standard' appears designed not to reform the law but to mollify uninformed criticism of ISDS. The European Commission maintains that the standard of 'fair and equitable treatment in CETA is neither a floor or a minimum standard nor an evolving concept'. Rather, 'a clear, closed text defines precisely' the standard of treatment 'without leaving unwelcome discretion to arbitrators'. A breach of Fair and Equitable Treatment can only arise when there is 'a denial of justice', 'a fundamental breach of due process', 'manifest arbitrariness', 'targeted discrimination', or 'abusive treatment of investors'. The concept of 'legitimate expectations' is limited to situations where a specific promise or representation was made by the state.

The European Commission's paper declares that, what constitutes 'Indirect Expropriation' has, for the first time, been defined in an EU agreement in order 'to avoid claims against legitimate public policy measures'. CETA does not protect 'shell' or 'mailbox' companies; to be qualified as an investor, there must be real business operations in the territory of one of the parties. CETA does not allow investors to 'import' and use in dispute settlement procedures the substantive provisions of other treaties in reliance on Most Favoured Nation clauses.

Members of a panel will be appointed not by the claimant and the respondent state, but rather be drawn from a list composed solely by the EU and Canada. CETA 'introduces full transparency in ISDS disputes': all documents will be published on a website. All hearings will be open to the public.

CETA prohibits parallel proceedings. It prevents 'manipulative claims', such as the making of an investment for the purpose of bringing a case.

CETA specifies a time limit of three years for filing a claim. It provides for a fast-track system for rejecting unfounded or frivolous claims. It provides that the losing party pays the costs.

ISDS under CETA cannot lead to the repeal of a measure adopted by parliaments in the European Union, a Member State, or Canada; the most that can be required is compensation of the losses actually suffered.

ISDS under CETA is 'strictly limited to breaches of few investment protection provisions which enshrine fundamental principles such as non-discrimination, expropriation only for a public purpose and against adequate compensation and fair and equitable treatment'.

CETA, 'as an additional safeguard', provides that the EU and Canada have the right to adopt interpretations of CETA provisions binding on the investment tribunal.

There is much more, but these are some of the highlights of the final version of the treaty as legally 'scrubbed'-in fact, substantially revised. CETA in this form is an able, comprehensive treaty. Whether all the 'reform' measures embodied in the text of CETA are sound is debatable.

For example, should the fundamental provision for Fair and Equitable Treatment be so narrowly constricted as the draft requires, limiting its reach to a denial of justice, a fundamental breach of due process, manifest arbitrariness, targeted discrimination, or abusive treatment of investors? Why, for example, must arbitrariness of the respondent state be 'manifest'? Is it not enough that there be actual arbitrary action against the investor by the respondent state, even if arbitrariness is not manifest, that is, obvious? Why should the tribunal be limited to sanctioning the obvious? Should the legitimate expectations of investors be limited to instances where a specific promise or representation has been made by the state? Should ISDS under CETA be limited to breaches of fundamental principles such as nondiscrimination, expropriation for a public purpose against 'adequate' compensation, and Fair and Equitable Treatment (as that treatment has been narrowly defined)? Not in my view. Such definitions contribute not to the progressive development of international law but to its regressive development. So does stripping investors of the right to appoint arbitrators. These 'reforms' smack of appeasement of uninformed criticism of ISDS rather than sound judgment.

Judge Stephen M. Schwebel