European Court of Justice Confirms the Validity of the CETA Dispute Resolution Mechanism

On 30 April 2019, the ECJ confirmed that the investment court system (ICS) created by the free trade agreement between the EU and Canada (CETA) is in line with EU law. This decision paves the way for further ratifications of CETA by EU member states.

What is the ICS?

The ICS is an innovative mechanism proposed by the EU as a response to increasing public criticism of the dispute resolution systems of foreign investment regimes. It combines elements of the traditional investor-state dispute settlement system with features of judicial systems. In this hybrid model there is a permanent tribunal of first instance with publicly appointed members, instead of a panel of arbitrators selected by the parties on an ad hoc basis. There is also an appellate tribunal, to enhance the consistency of decisions and legal certainty.

Canadian and EU investors will be able to file challenges before the CETA tribunal against certain measures, such as the imposition of a fine, adopted by the respective opposite state party.

The judicial-like configuration of the ICS raised doubts as to the effects of that mechanism on the ECJ's exclusive jurisdiction over the definitive interpretation of EU law and, thus, on the autonomy of the EU legal order. There were also doubts as to the mechanism's compatibility with the general principle of equal treatment and the requirement that EU law should be effective, and as to its compliance with the right of access to an independent and impartial tribunal.

These concerns led Belgium to apply to the ECJ in 2017 for an opinion under Article 218(11) of the Treaty on the Functioning of the European Union, which gives EU member states (among other parties) the right to obtain the ECJ's opinion on whether an envisaged agreement between the EU and a third country is compatible with EU primary law.

ECJ confirms compatibility with primary EU law

The ECJ stated that the power of the CETA tribunals to interpret and apply the provisions of that agreement is not incompatible with EU law, because those tribunals do not have the power to interpret and apply provisions of EU law other than those of CETA or to make decisions that could prevent EU institutions from operating in accordance with the EU constitutional framework.

In addition, the ECJ stated that CETA does not adversely affect the autonomy of the EU legal order. Furthermore, it does not undermine the effectiveness of EU law on the sole ground that an award made by the tribunal might have the effect, in exceptional circumstances, of nullifying a fine imposed by the Commission or by a competition authority of a member state for an infringement of EU competition law. Lastly, the ECJ expressed the opinion that CETA contains sufficient safeguards to ensure the independence of the members of the envisaged tribunals.

What next for CETA in the EU

Since CETA is a "mixed agreement", it requires ratification by all of the EU member states in order to fully enter into force. However, most of its provisions – but not those regarding the ICS – have applied on a provisional basis since 21 September 2017.

Thus far, CETA has been ratified by 12 member states. It is likely that more will follow now that the ECJ has ruled that the ICS is compatible with EU law. Austria and Belgium, for instance, have already expressed their intention to pursue the ratification process in light of the ECJ's decision.