In an ‘unfortunate’ ruling, the Court of justice of the EU (CJEU) has decided to continue excluding members of the public from the debate on investment courts, despite the threat this arbitration system represents for the rule of law and the environment.
In 2016, ClientEarth lawyers challenged the Commission before the CJEU for refusing to disclose its opinion regarding the legality of arbitration courts in the trade agreement between the EU and Canada (CETA). Following a first disappointing decision, lawyers appealed the Court judgment in 2018.
In its appeal judgment of 19 March 2020, the CJEU confirmed that the Commission is not obliged to publicly disclose the opinion of its legal service on whether investor-state dispute settlement (ISDS) and the investment court system (ICS) are compatible with the EU Treaties.
The judgment is problematic on a number of different levels. It allows the Commission to continue to block public scrutiny of and participation in its decision-making in the field of international relations. This is particularly worrying when it comes to the important decisions that not only affect the lives of EU citizens and the environment, but which shape the very foundations of our democracy.
In this regard, the question of whether ISDS/ICS should be the primary tool used to govern relationships with foreign investors is of crucial importance. And the exclusion of EU citizens from this decision only causes more problems down the line when Member State parliaments are asked to ratify EU international agreements.
As citizens begin to understand and debate the impacts of ISDS/ICS on their lives and democratic institutions, national parliamentarians must make the “take it or leave it” decision to ratify the entire agreement or not. As we can see from recent events in France, the Netherlands and Germany in relation to the ratification of the EU-Canada Comprehensive Economic and Trade Agreement (CETA), the EU institutions would do well to learn this lesson before its treaty-making competence is derailed completely.
ISDS/ICS – what’s the big problem?
The original version of ISDS is still part of existing bilateral agreements between Member States and third countries, as well as in the Energy Charter Treaty, a multilateral agreement between the EU, its Member States and third parties. The Commission designed the ICS to respond to certain concerns regarding ISDS, notably by providing for an Appeal Tribunal and for a more objective method of selecting and appointing tribunal. However, these changes did not provide solutions to the main problems posed by ISDS described below. The Commission has included the ICS in a number of EU new generation free trade agreements, including with Canada but also with Singapore, Vietnam and Mexico.
ClientEarth has spent several years campaigning against the inclusion of ISDS and ICS in those agreements. First, because ISDS enables big corporations to sideline domestic and EU courts and sue governments directly before specialised arbitration tribunals when environmental or social measures threaten to affect their investments.
The uncertainty of arbitral tribunals ordering massive compensation pay-outs (often hundreds of millions of euros) produces a demonstrable chill effect on environmental and social regulation in Europe. Even if a state wins, the sole cost of participating in arbitral proceedings can be high for governments. Because of the risk that investors may initiate legal action before an ISDS, governments may be discouraged from introducing new standards or may be encouraged to revoke or dilute existing regulations. It is impossible to quantify how many regulations have been affected by the threat of arbitration.
However, it is unquestionable that ISDS system has given rise to an alarming number of claims against a wide range of environmental measures, which are now the fastest-growing trigger for disputes. Because of an ISDS case, the city of Hamburg backed off from applying European and German regulations aimed at tackling climate change and water pollution caused by coal plants. Recently, energy companies started using ISDS to delay climate action and seek compensation for their stranded assets. In September 2019, German company Uniper threatened to sue the Dutch government for phasing out coal, in accordance with the Paris agreement, before an arbitration tribunal.
Second, apart from this regulatory chill effect, the use of special dispute settlement systems undermines the rule of law in the EU. ClientEarth is particularly concerned that ISDS mechanisms remove disputes from the jurisdiction of the courts of the Member States and of the Court of Justice of the European Union, which are the appropriate arbiters in cases that involve questions of interpretation of national and EU environmental law. For this reason, questions have been raised as to whether ISDS and ICS are even compatible with EU law.
Initially, in the landmark ruling Achmea, the CJEU found an intra-EU Bilateral Investment Treaty (BIT) incompatible with EU law because the ISDS provisions it contains sideline and undermine the powers of domestic courts. Although the Achmea ruling applies only to bilateral investment agreements between Member States of the EU, the case’s reasoning may also be applied to agreements between the EU or EU Member States and third countries.
Following the request of the Belgian government, the CJEU ruled in its recent Opinion 1/17 that the ICS in CETA contains sufficient safeguards to protect the autonomy of the EU legal order, and is thus compatible with EU law. However, it remains to be seen whether the CETA Tribunal will respect the Court’s redline that the ICS cannot interpret and apply EU rules other than the provisions of the CETA. This will prove to be difficult because investment disputes are more linked to regulatory measures than the behaviour or individual acts of governments.
The assessment of a breach of investors’ rights by a regulatory measure leads automatically to an assessment of the scope of the measure and to a decision about its compatibility with EU law. The interpretation of EU law will thus occur de facto, even with the new ICS model of the EU.
The CJEU also clarified that the EU can enter into international agreements that provide for ICS as long as they do not lead to the EU abandoning existing levels of protection of the public interest. However, the CJEU seems to think that this would only be the case if the EU would be “repeatedly compelled by the CETA Tribunal to pay damages”.
The CJEU thus did not factor into its equation the risk that a simple threat of an ISDS claim, or just the costs involved in participating in such arbitral proceedings, may be sufficient for governments to lower environmental standards, delay or abandon public policy action.
Background to the judgment
This case arose back in 2016, when ClientEarth requested access to “all documents containing legal advice by the Commission’s legal services on the compatibility of [Investor-State Dispute Settlement] … and Investment Court System… in [European Union] trade agreements with the EU Treaties”. It is important to note that the request preceded the CJEU’s judgment on this question in Opinion 1/17 by two years.
Despite the best efforts of civil society, the final text of the CETA included an ICS mechanism, allowing investors to sue national governments and/or the EU institutions in a specialised court. Knowing that the Commission would shortly recommend that the Council of the EU and the European Parliament ratify the agreement, ClientEarth sought to encourage and inform public debate on the desirability of ISDS mechanisms, including the ICS, as a means to govern our relationship with third country investors.
One aspect of this debate was the compatibility of ISDS mechanisms with EU law, a question that had engaged the legal world for some time. At the heart of this issue is the question of whether the Commission was competent to negotiate an ISDS mechanism that is incompatible with EU law and what the consequences would be if the Court of Justice of the EU subsequently ruled it to be unlawful. For the public to engage in this debate, it was crucial to understand the position of the EU’s negotiating body, the European Commission, on this question.
The Commission refused to disclose its legal opinion on the basis that it would undermine the public interest in the field of international relations. It argued that the documents were “specifically prepared in relation to the ongoing TTIP negotiations, but are also in connection with other ongoing trade and investment negotiations with third countries.” Therefore, their disclosure would weaken the Commission’s negotiating position by giving third countries an insider look into the Commission’s negotiation strategy and margin of manoeuvre.
ClientEarth challenged the Commission’s refusal before the General Court of the EU, arguing that the Commission is bound by the rule of law during trade negotiations and, as such, documents setting out what is legally possible for the Commission to negotiate cannot weaken its negotiation position. Moreover, as reflected by the titles of some of the retained documents, most of them were clearly not connected to any specific negotiation but discussed the Commission’s general legal approach on ISDS, and could thus not reveal negotiation tactics or concrete negotiation proposals.
In September 2018, the General Court dismissed the case on the basis that the legal opinion might reveal aspects of the strategic objectives pursued by the European Union in the ongoing negotiations. As such, the judgment afforded the Commission huge discretion to withhold any information connected to a topic under international negotiation.
On 19 March 2020, the Court of Justice dismissed ClientEarth’s appeal against the General Court’s judgment. It agreed that the Commission was entitled to withhold the legal opinion on the basis that it was drawn up specifically in the context of ongoing negotiations and that disclosure “would have negatively affected the Commission’s effectiveness in the negotiations, in a realistic and non-hypothetical way”. It found that the Commission’s decision had demonstrated this risk to the requisite legal standard.
Although the Court of Justice ultimately upheld the General Court’s ruling, it is significant that the Court criticised the General Court’s reasoning for having relied on general considerations that were unconnected to the content of the legal opinion or the Commission’s refusal decision and because it did not address ClientEarth’s arguments.
This is an important reminder that the General Court’s role is not to provide its own view as to whether the documents should be publicly available or not. It must review the actual content of the Commission’s decision and decide whether it met the legal standard for invoking the exception to transparency. This review should be supplemented by the fact that the General Court has seen the withheld documents, and can therefore verify if the Commission’s reasoning is appropriate.
The Court of Justice’s ruling is a marked improvement on the General Court decision of 2018, which allowed the Commission too much discretion to withhold information related to ongoing negotiations with third countries. The Court of Justice has at least reminded the General Court that its job is to review whether the Commission has demonstrated that disclosure poses a risk to its negotiation strategy that is real and not hypothetical.
Nevertheless, it is striking that both the Commission and the Court of Justice judge that documents setting out the legal possibilities open to the Commission in negotiating ISDS/ICS clauses should be secret. And it is worrying that such secrecy is justified by the need to protect the Commission’s “effectiveness in negotiations”. Many documents can therefore be withheld if there is some general connection to a negotiation.
The question of whether the Commission was competent to negotiate ISDS/ICS clauses in the first place is of enormous importance to the very fabric of EU democracy. It should not be treated as a technical legal question that the Commission can unilaterally answer in order to enhance its negotiating position.
By denying access to the legal opinion on the constitutional limits of ISDS, the Commission missed the opportunity to create, at the negotiation stage, an informed and open debate about the desirability of such mechanisms. The lack of public scrutiny and participation in the decision as to whether ISDS/ICS should be included in our relations with third countries has huge impacts, particularly when it comes to the national ratification process.
The ratification of CETA by national parliaments has not gone smoothly. It faced heated debates and civil society mobilisation in France last summer. The Dutch lower house recently voted in favour of CETA, but they could only secure a majority of one vote and it seems there is a majority in the senate willing to vote it down. In Germany, three constitutional review proceedings of CETA, including on the ICS compatibility with the German Constitution, are pending.
Moreover, following the Achmea ruling and the Opinion 1/17, there remains uncertainty as to the legality of ISDS clauses in Member States’ agreements with third countries. The Energy Charter Treaty (ECT), a plurilateral investment treaty with third countries to which both the EU and its Member States are parties, is currently under revision. The European Commission obtained a mandate from the Council to negotiate the modernisation of the ECT,. The documents in question would thus be very relevant to debate the EU proposal for the modernisation of the ISDS provisions in the ECT.