CJEU's Opinion 2/15: Consequences on ISDS and Investment Court System - international litigation blog
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CJEU’s Opinion 2/15: Consequences on ISDS and Investment Court System

CJEU’s Opinion 2/15: Consequences on ISDS and Investment Court System

On 16 May 2017, the Court of Justice of the European Union (the CJEU) delivered its long-awaited opinion (the Opinion 2/15) on the allocation of competences between the European Union (the EU) and its Member States for the conclusion of the EU-Singapore Free Trade Agreement (the EUSFTA).

As you may know, the core issue in this Opinion was whether the EU had an exclusive competence to conclude the EUSFTA and similar free trade agreements (FTAs) (meaning that the EU could act unilaterally on this issue) or whether the EU shared this competence with the European Member States.

Although the objective of this article is not to provide an in-depth analysis of Opinion 2/15 (for those interested, Van Bael & Bellis recently published a detailed memorandum on this topic), I wanted to share with you some thoughts on the impact of Opinion 2/15 on investor-State dispute resolution and on the Investment Court System (ICS).

Preliminary remark – The distinction between “exclusive” and “shared” competence and the CJEU’s Opinion 2/15

The issue put before CJEU requires an understanding of some of the basic principles of EU law. As a general rule, the EU Treaties make a distinction between the competences of the EU. According to the EU treaties, the most significant competences enjoyed by the EU fall into two categories: (i) exclusive competences (for which only the EU may legislate and adopt legally binding acts, the Member States being able to do so themselves only if so empowered by the EU (e.g. customs union, competition rules, etc…)); and (ii) shared competences (for which both the EU and the Member States may legislate and adopt legally binding acts. The Member States can exercise their competence to the extent that the EU has not already exercised its competence (e.g. internal market, environment, consumer protection, etc…)).

As explained in my previous post (where I examined the potential implications of Advocate General Sharpston’s Opinion in this case), the EUSFTA was negotiated by the EU and Singapore on a bilateral basis without the intervention of the Member States. However, after the agreement was initialed, the EU Commission sought the opinion of the CJEU on the question of whether the EU had indeed an exclusive competence to conclude the EUSFTA or whether the EU shared this competence with the European Member States.

In its Opinion 2/15, the CJEU concluded essentially that the EU enjoyed exclusive competences over almost all matters covered by the EUSFTA (market access, intellectual property rights, foreign direct investment, competition, sustainable development, etc…). On this basis, the EU enjoyed broad powers and competences in negotiating and concluding FTAs with third countries without requiring the approval of the 28 Member States.

This general rule, however, was subject to two exceptions: (i) non-direct foreign investment matters (such as portfolio investments made without any intention to influence the management and control of an undertaking); and (ii) investor-State dispute resolution. For those two matters, the CJEU concluded that the EU was not entitled to conclude the agreement by itself but required the assistance of the Member States.

The impact of Opinion 2/15 on the development of investor-State dispute resolution mechanisms and their promotion in EU trade agreements

As mentioned above, Opinion 2/15 makes it now clear that although direct foreign investments constitute one of the EU’s exclusive competences, the issues regarding non-direct foreign investments and investor-State dispute resolution fall within the shared competences and must consequently be dealt only by the EU and the Member States acting together.

Such limitation to the exclusive power of the EU can potentially strike a fatal blow to the possibility for the EU to continue to combine trade and investments in a single treaty (which was one of the objectives of the “new generation” trade agreements). Opinion 2/15 will indeed, most likely, force the EU to redesign its trade and investment policies as it is unlikely that the EU will be able to conclude FTAs containing provisions on investments (although it enjoys an exclusive competence for issues relating to direct investments) on a solo basis with third countries without a proper investor-State dispute settlement mechanism which forms the necessary ancillary to such provision.

It is therefore possible that Opinion 2/15 will lead to one of two potential scenarios.

In the first scenario, FTAs and investment treaties would be put on two separate tracks. In this case, the EU will conduct FTA negotiations on a solo basis on all matters for which it enjoys exclusive competence and will work in collaboration with the Member States in concluding investment treaties with third countries.

In the second scenario, trade and investment policies would be negotiated as distinctive issues in the course of negotiations of a same treaty. In this case, the EU alone would negotiate FTAs in the matters for which it enjoys an exclusive competences but would ask the Member States (or at least those interested) to join the negotiations relating to investor-State dispute settlement mechanisms and non-direct foreign investments. In this scenario, the investor-State dispute settlement mechanism and/or the provisions relating to non-direct foreign investments, eventually agreed on by the parties, would only be binding on those Member States which would have expressly consented to those matters.

In any event and whatever scenario prevails, it is clear that, after the CETA-Wallonia saga (which saw the opposition of one of Belgium’s sub-regions to the trade agreement between the EU and Canada, in particular on investor-State dispute provisions), Opinion 2/15 casts more uncertainties on the development of investor-State dispute resolution mechanisms by the EU and its Member States.

Indeed, since Opinion 2/15 has recognised that the competence in the EU to agree on investor-State dispute resolution mechanisms is split between the EU and its Member States, it will become more laborious and difficult to adopt a coherent and specific position in investment negotiations with third countries. The confusion that may result from such negotiations can potentially prejudice the development of the classical investor-State dispute resolution mechanisms and can also jeopardise (see below) the development of the ICS.

The impact of Opinion 2/15 on the ICS

Although the question which was put before the CJEU was not directly related to material compatibility of the ICS with respect to EU law (this is the question that Belgium is expected to put before the CJEU in the near future), Opinion 2/15 already allows to make some conclusive statements regarding the ICS (in particular on the question of who (either the EU alone or in collaboration with the Member States) should have the competence to establish the ICS).

Since Opinion 2/15 makes it clear that investor-State dispute settlement regimes constitute a shared competence because they remove “disputes from the jurisdiction of the courts of the Member States” and therefore cannot “be established without the Member States’ consent” (para. 292) it is clear that the EU will have to work closely with the Member States in order to establish and develop the ICS.

In particular, the Member States’ consent is likely to be required if the EU wishes to add a clause providing for ICS jurisdiction in a bilateral investment treaty between the EU and its Member States, on the one hand, and a third country, on the other hand. Will such required consent be a brake on the development of ICS? Only future will tell…

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