Potential Implications of AG Sharpston's Opinion 2/15 on Investment Court System - international litigation blog
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Potential Implications of AG Sharpston’s Opinion 2/15 on Investment Court System

Potential Implications of AG Sharpston’s Opinion 2/15 on Investment Court System


As mentioned in one of my previous post, the European Union (the EU) has proposed the establishment of a permanent Investment Court System (ICS) as a means to respond to the criticisms against the traditional Investor-State Dispute Settlement (ISDS) mechanisms. The main elements of the reform suggested by the EU Commission are the following: (i) a permanent court composed of a first instance Tribunal and an Appeal Tribunal; (ii) publicly appointed judges; and (iii) publicly-held proceedings and a right to intervene for parties with an interest in the dispute.

On 21 December 2016, Advocate General Sharpston (AG Sharpston)* handed down a reasoned opinion (the Opinion) on the allocation of competences between the EU and its Member States for the conclusion of the EU-Singapore Free Trade Agreement (the EUSFTA). Although the Opinion is not directly related to the issue of the ICS, it can potentially have implications on the establishment and development of this new multilateral international court (in particular the question of “who may establish the ICS“).

AG Sharpston’s Opinion

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 Court of Justice of the European Union (the CJEU) on the question of whether the EU had indeed an exclusive competence to conclude the EUSFTA and similar free trade agreements (meaning that the EU could act unilaterally on this issue) or whether the EU shared this competence with the European Member States.

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…)).

In her Opinion, AG Sharpston found that free trade agreements (such as the EUSFTA) were “mixed” agreements because they cover matters for which the EU has exclusive competences (such as trade in goods, foreign direct investment, competition or trade and sustainable development) but also matters for which the EU shares the competences with the EU Member States (such as labour and social policy).

Consequently, AG Sharpston concluded that the EU did not have the exclusive competence to conclude and sign the EUSFTA. According to AG Sharpston, such an agreement could, in principle, only be concluded by the EU and the Member States acting jointly.

This Opinion, if followed by the CJEU, will have crucial consequences for the European external trade policy but may also very well have consequences for the establishment of the ICS.

Potential implications of the Opinion on the establishment of the ICS

The creation of the ICS is one of the most debated questions currently on the EU agenda (together with Brexit). The ICS is currently contemplated as a means of settling investor-State disputes in a handful of free trade agreements currently being adopted or negotiated by the EU (however, it is not included in the EUSFTA).

Among those trade agreements, the EU-Canada Comprehensive Economic and Trade Agreement (the CETA) (which has just been backed by the European Parliament yesterday and must now be ratified by the 38 national and regional European parliaments) is the first agreement to envisage the new ICS for the settlement of investor-State disputes.

The CETA, however, has faced a troublesome adoption process after the Walloon parliament (one of Belgium’s sub-parliaments) threated (in October 2016) to block the signature of this important trade deal between the EU and Canada for various reasons, some of them directly related to the issue of the ICS (in particular the question of whether the ICS was compliant with EU law). In order to appease the fears of the Walloon Region, a compromise was reached and Belgium agreed to seek – in a similar manner as the EU Commission did for the EUSFTA – the view of the CJEU on the compatibility of the ICS with EU law.

In her Opinion on the EUSFTA, AG Sharpston made sure not to exceed the scope of the question put before her by the EU Commission (i.e. whether the EU had the exclusive competence to negotiate and sign a free trade agreement with third countries). AG Sharpston therefore made abundantly clear that her Opinion did not address the material compatibility of the EUSFTA provisions with the EU Treaties (in particular the compatibility of an ISDS mechanism with EU law (see para. 85 of the Opinion) – which would be the question put before the CJEU by Belgium in the coming weeks/months in the context of the CETA and the ICS.

Nevertheless, the Opinion sheds light on who – according to AG Sharpston – should have the competence to establish the ICS. Indeed, two elements in the Opinion allow one to consider that the establishment of the ICS is a shared competence which cannot be dealt by the EU unilaterally.

First, in her Opinion, AG Sharpston concluded that the allocation of competences with respect to the EUSFTA’s ISDS mechanism followed the allocation of competences with respect to the substantive provisions to which the mechanism refers (see paras 523-525 of the Opinion). Therefore, as competence over the EUSFTA’s substantive investment measures are mixed to the extent that they concern both foreign direct investments (for which the EU has exclusive competence) and non-foreign direct investments (e.g. portfolio investments) for which the EU shares its competence with the Member States, competence over the ISDS provisions in the EUSFTA is mixed as well.

This conclusion, if adopted by the CJEU, would likely apply to the ICS contemplated in the CETA as well. Indeed, if the CJEU follows the Opinion, we can expect that, because the substantive provisions of the investment Chapter in the CETA also appear to relate to both foreign direct investments and non-foreign direct investments, only the EU and the Member States acting jointly have the competence to establish the ICS.

Secondly, the Opinion also expresses the view that Member States enjoy an exclusive competence to terminate bilateral investment agreements which they previously concluded with third States (see paras 371-398 of the Opinion). This therefore means that if the EU wishes (as it has made abundantly clear) to expand the jurisdiction of the ICS to replace all investment dispute resolution mechanisms provided in EU agreements and EU Member States’ agreements with third countries, it will need to seek the green light from all the Member States concerned.

Those two elements allow one to conclude that if the CJEU decides to follow AG Sharpston’s Opinion, the EU will need to work closely with the Member States in order to establish and develop the ICS.

In such case, the fact that the CETA and the provisions on the ICS contained in it are already – contrary to the EUSFTA – being adopted as a “mixed” agreement (meaning that they have to be adopted and ratified by the EU and all the Member States acting jointly), has definitely dodged the potential landmine of the CJEU denying exclusive competence to establish the ICS. However, the potential lessons taught by the CJEU’s ruling will need to be followed during the development process of the ICS (in particular when including this mechanism as a means of resolving investor disputes in future free trade agreements).

The Opinion of AG Sharpston does not bind the CJEU (which is expected to render its own opinion on the allocation of competences for the conclusion of the EUSFTA in the coming weeks). Given the potential implications that this ruling might have on the EU’s external trade policy and on the establishment of the ICS, we will definitely keep you posted.

In addition, it seems that the true test for the CETA and the ICS is still yet to come: Belgium is expected to put a question before the CJEU on the compatibility of the ICS with EU law.

Stay posted…

* In the European judicial landscape, Advocate Generals act in complete impartiality and independence and are requested to submit reasoned opinions on cases before the CJEU. Their opinions, however, are not binding on the CJEU, which can freely decide not to follow the opinions expressed by the Advocate Generals.

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