ECJ Decision Looms Large on the Future of Trade Agreements and Investor-State Arbitration with the EU

May 26, 2017

The Court of Justice of the European Union decided last week that free trade agreements concluded with the EU must receive prior approval by each Member State if they provide for investor-State arbitration. The ruling, given in the context of the EU-Singapore Free Trade Agreement, is likely to interfere with the conclusion of all future EU agreements containing such provisions. 

The ECJ Decision 

In a much-anticipated decision, the Court of Justice of the European Union (“ECJ”) ruled that the EU Commission and Parliament have exclusive competence to enter into all aspects of the EU-Singapore Free Trade Agreement, except for two chapters of the agreement where this competence is shared with the Member States. The first exception has been described as both “predictable” and “non-controversial”, and concerns the protection of non-direct or “portfolio” investment, i.e. investments which do not aim for management or control of the target company. 

Much more notable is the second exception, which concerns Chapter 9 of the agreement which provides for a mechanism of investor-State dispute settlement via arbitration (“ISDS”). According to the ECJ ruling, which is binding and cannot be appealed, such chapter must thus be approved not only by the EU Commission and Parliament but also by each individual Member State according to its own internal procedures. 

The rationale given by the ECJ is that ISDS “removes disputes from the jurisdiction of the courts of the Member States … and cannot, therefore, be established without the Member States’ consent”. Importantly, the decision does not rule on the conformity of ISDS with EU law, which will be subject to a later ECJ decision. 

Future Trade Agreements in Jeopardy? 

Even though the ruling was given in the context of the EU-Singapore Free Trade Agreement, the decision entails that any future EU trade agreement providing for investor-State arbitration must be approved individually by each Member State. The consequences of the ruling are thus wide-reaching, as dozens of such treaties are currently under negotiation, for example with Japan and Indonesia. The EU Commission had recently committed to increase its efforts on this matter, in order to take advantage of the momentum caused by the protectionist turn of the Trump administration. 

Such agreements will thus have to follow the same route as the much-discussed Comprehensive Economic and Trade Agreement between the EU and Canada (“CETA”), going through the internal approval procedure of each Member State. While said procedure can be straightforward and done at the governmental level in most Member States, it is not necessarily the case: CETA was famously blocked by the single objection of the Belgian regional parliament of Wallonia. After days of negotiation, Wallonia agreed to break the deadlock on the condition that the ECJ rule on the conformity of ISDS with EU law, which – as mentioned above – will be decided in a later opinion. 

As such, last week’s ruling by the ECJ was warmly welcomed by the Minister-President of Wallonia, who championed the fight against CETA and said the ruling “proves [him] right”. As ISDS has become the lightning rod of the political fight against free-trade agreements, the ECJ ruling could be perceived as a strong bargaining chip to opponents of such agreements. 

Nevertheless, the EU-Singapore Free Trade Agreement and future similar agreements are not necessarily doomed. During the CETA saga, the EU took into account the growing citizen discontent against ISDS and designed an alternative called the Investment Court System (“ICS”), which allegedly mitigates some of the most common criticisms of ISDS. Though the merits of the ICS remain controversial – it has yet to be tested in practice, although it can already be found in the EU-Vietnam Free Trade Agreement (see our previous OnPoint on the matter) – it is likely that it helped CETA become more acceptable for some of its opponents. In addition, the protests against CETA were, justifiably or not, linked to those against its US-EU equivalent (the probably-defunct Transatlantic Trade and Investment Partnership, or “TTIP”, see our previous OnPoint on the matter). 

The Way Forward 

The EU might thus be tempted to carry on with negotiating free trade agreements, including agreements providing for ISDS, regardless of the burdensome procedure imposed by the ECJ’s decision. Reacting to the ruling on the EU-Singapore Free Trade Agreement, Singapore's Ministry of Trade and Industry has stated that Singapore is committed to working with the EU Commission to ratify the agreement expeditiously and have it provisionally applied. 

In spite of the legal setback inflicted by the ruling, the supporters of such agreements have not been entirely cast aside. The decision still grants exclusive jurisdiction to the EU on almost all aspects of free-trade agreements, which can thus be concluded by the EU Parliament and Commission without the individual approval of each Member State. Consequently, an alternative solution proposed by certain government officials and academics is to bisect future agreements to separate the ISDS provisions from the main body of the text, the latter being exclusively concluded by the EU, leaving only the former to take the longer and riskier route of individual approval by each Member State. In all events, the Commission and Member States will no doubt seek to come up with a viable and effective solution to this legal limbo as quickly as possible, in order to ensure that the EU remains attractive to foreign investment. 

Lastly, the ECJ ruling might have two sets of consequences for the post-Brexit United Kingdom. On the one hand, the split of competences decided by the ECJ will fully apply to the future EU-UK trade agreement: if the agreement includes ISDS – which UK investors will no doubt strongly demand – then the deal will (at least arguably) have to go through the lengthy and risky process of individual Member State approval. On the other hand, in its trade negotiations with other countries, the UK will be free from this approval process and may take advantage of this to quickly multiply trade deals including ISDS – thus potentially making the UK a more attractive jurisdiction through which to route investments to gain ISDS protections (see our previous OnPoint on the matter).

This article was reprinted by Law360 on June 2.

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