What the European Parliament legal service says about CETA’s investment chapter

EP Strasbourg

report by the European Parliament’s legal service released early September considers that the controversial chapter on investment protection in the Canada EU CETA trade agreement is compatible with EU law.


The question of legality of international arbitration tribunals and international courts has become a touchy topic with the controversy over investor-state dispute settlement (ISDS) in TTIP and CETA. It is also legally tricky, given that several Court of Justice rulings have curtailed EU’s attempts at joining or setting up international courts. Will the EU’s idea of a bilateral (in CETA) and perhaps in future an international investment court be nipped in the bud by EU law? There is a chance it won’t.


The legal opinion comes at a time when the Parliament is debating whether it will want to ratify CETA. The deal’s investment protection provisions are the most controversial part of the deal, dividing above all centre-left politicians in the legislative house. The opinion was requested by Bernd Lange (S&D, Germany), who chairs the Parliament’s trade committee.


Although it is ultimately the ECJ that has the last word on these matters, the legal service of the European Parliament thinks the EU’s CETA investment chapter is not at all incompatible with EU law.


“The EU’s constitutional framework is … based on the one hand on the principle of autonomy of the EU legal order and, on the other, the respect of international obligations, including those arising under concluded international agreements. The relationship between EU and international law is, as a consequence, complex”, the legal experts on Place du Luxembourg reckon.


The first argument brought forward by the lawyers is that the deal does not interfere with the EU’s legal order – something the CJEU has been very touchy on. The main reason for this is that CETA’s investment obligations may not be invoked in national courts, in other words, they have “no direct effect”. The tribunal foreseen by CETA also only rules on the investment treaty obligations, not with EU secondary or primary law. The only effect of a negative CETA tribunal ruling would be “financial in nature”, they stress. What  is more, the ECJ would always have the last word over the CETA provisions, so the law experts.


Special rights for foreign investors: not incompatible with EU and international law


Many critics of investment protection treaties also deem them incompatible with fundamental principles of the EU, notably non discrimination and equal treatment, because they offer foreign investors special privileges national investors do not enjoy.


Here the EP’s legal experts take a sophisticated line of argument.


Referring to existing Court of Justice case law, the legal assessment reads: “the principle of equal treatment does not mean that everyone must be treated in the same way but that comparable situations must not be treated differently and different situations must not be treated in the same way unless such treatment is objectively justified.”


Given that CETA guarantees reciprocity in the treatment of foreign investors of each party to the treaty, there is no breach in the equal treatment of their respective investors. Also, the experts argue, it is rather normal in international law that special rights are conferred on specific actors in the context of a treaty.


What is more, the parliament’s legal experts say, foreign investors are always disadvantaged in a foreign market, because they know the local conditions less than locals. “An investment in a foreign market is not entirely comparable to an investment in the domestic market. Risk aversion… must be overcome in order to promote investments mutually between the Parties to a trade agreement”, the notes authors believe. This means it is justifiable to offer foreign investors special rights in CETA: “the situation of foreign investors can accordingly be said to be compatible with the fundamental rights guaranteed by the Charter and the constitutional principles of the EU”.


A final argument made by the lawyers is that the fact that potentially hefty compensation packages might be imposed on host states does not constrain the EU’s policy space, as this is compensated by what they deem sufficient guarantees in CETA’s investment chapter on the spo-called ‘right to regulate’. Finally, the fact that state aid (subsidies) were carved out of the remit of CETA’s investment further guarantees that EU policies will not be constrained.


This opinion will prove controversial in left-of-centre circles. It has been contested by the NGO Client Earth.


It also comes ahead of a more weighty Court of Justice ruling on the extent of the EU’s exclusive competence in signing international commercial agreements based on the 2013 EU Singapore free trade agreement – including whether investment protection should be part of it or not. The ruling is expected in 2017.


Rob Howse, a professor at the New York University School of Law, told Borderlex “the [Parliament’s] analysis seems to me very careful. We still need to see what the court says in the upcoming case regarding Singapore”.


An earlier version of this article was made available to Borderlex PRO subscribers as soon as the opinion was released.

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