REUTERS | Mike Blake

On the edge of your CETA: new developments in ISDS reform

On 29 February 2016, Canada and the European Commission (EC) announced that the legal review of the Comprehensive Economic and Trade Agreement (CETA) was complete.

Although the EC had portrayed this review as a “fine tuning” aimed at verifying the agreement’s “internal consistency” and to ensure formulations were “legally-sound”, the resulting text deviates substantially from the version released after conclusion of the negotiations in September 2014.

These deviations are most evident in CETA’s Chapter 8, concerning investor-state dispute settlement (ISDS). Researchers from The Graduate Institute in Geneva have reported that these two versions diverge by 19%, based on a text-as-data analysis. This is the same amount by which the investment chapters in the recently concluded Trans-Pacific Partnership (TPP) and the 2006 US-Colombia Free Trade Agreement diverge; two different treaties, concerning different parties.

In particular, six entirely new articles have been introduced into the CETA text. These articles:

  • Alter the way members of the tribunal are appointed.
  • Open up the possibility for appeals of first-instance decisions.
  • Strengthen the ethical safeguards applicable to decision-makers.
  • Expand the contracting parties’ regulatory discretion.
  • Increase investors’ disclosure obligations.
  • Commit the contracting parties to work towards the establishment of a permanent, multilateral investment court.

Roster-based decision making

In line with the EC’s recent concept paper, and consistent with the provisions that the EC negotiated in Articles 12 and 13 of the EU–Vietnam Free Trade Agreement’s investment chapter, the revised CETA text has eliminated the right of disputing parties to choose their own tribunal members.

The Commission’s view on this issue seems to be that decision-makers should be structurally walled off from disputing parties to ensure their independence. Following this logic, party-influenced appointments should be avoided.

In this vein, CETA Article 8.27 provides for the creation of a fifteen-person roster composed of an equal number of Canadian, EU, and third-state nationals (the Tribunal). In case a dispute arises under CETA between an investor and a contracting party, a group of three decision makers (a division of the Tribunal) is to be selected by the President of the Tribunal to decide the case at first-instance.

Possibility for broad-ranging appeals

Interestingly, CETA Article 8.28 sets out a second and separate roster of Tribunal members to hear appeals of first-instance decisions (the Appellate Tribunal). Although the exact procedure for these is to be specified by a joint EU-Canadian committee at a later time, the CETA text provides that groups of three members chosen at random from the Appellate Tribunal for each case (constituting divisions of the Appellate Tribunal) will decide these appeals.

The powers granted to divisions of the Appellate Tribunal under CETA are broader than those granted to ICSID ad hoc annulment committees under Article 52 of the Washington Convention. In particular, divisions of the Appellate Tribunal have the power to modify or reverse first-instance decisions (rather than (only) to annul them, as is the case of an ICSID annulment committee).

Significantly, the scope of discretion accorded to divisions of the Appellate Tribunal is also broader. They are empowered to consider appeals on the basis of:

  • An error in the application or interpretation of applicable law.
  • Manifest error in the appreciation of the facts, including the appreciation of relevant domestic law.
  • Any ground for annulment under Article 52 of the Washington Convention.

Ethical obligations of decision makers

Critics of the ISDS system have at times lamented that anyone could be an arbitrator, and that anyone could be both an arbitrator in one case and a party representative in another. It is true that existing treaties or arbitration rules set out few restrictions concerning the qualifications to sit as an arbitrator, or the possibility for arbitrators to also engage in counsel work.

CETA Article 8.30 seems to have been borne out of a desire to address the perceived conflict of interest which may arise from wearing two hats. To do so, it imposes both positive and negative obligations on decision-makers; namely, that they must:

  • Respect the IBA Guidelines on Conflict of Interest in International Arbitration.
  • Refrain from acting as counsel, or party-appointed expert/witness in any treaty-based investment dispute. (CETA Article 8.30(1) provides that “[…] In addition, upon appointment, they shall refrain from acting as counsel or as party-appointed expert or witness in any pending or new investment dispute under this or any other international agreement.”)

Broadening of the contracting parties’ regulatory discretion

Both the September 2014 and revised CETA texts include a recital in their preamble:

“RECOGNISING that the provisions of this Agreement protect investments and investors with respect to their investments, and are intended to stimulate mutually-beneficial business activity, without undermining the right of the Parties to regulate in the public interest within their territories.”

Nevertheless, additional and specific guidance to members of the Tribunal and Appellate Tribunal has been provided in the new text.

CETA Article 8.9 now provides that regulatory activity “which [merely] negatively affects an investment or interferes with an investor’s expectations” is not constitutive of a treaty breach.

In the same way, CETA Article 8.9 also includes provisions targeted at the situation the EC is facing in Micula v Romania. The Article establishes that contracting parties can validly modify subsidies/state aid accorded to investors, especially when ordered to do so by competent authorities.

Increasing investors’ disclosure requirements

Riding on the coat tails of recent case law ordering identification of third-party funders (for example in Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd Sti. v Turkmenistan), CETA Article 8.26 imposes a new positive obligation on disputing parties: they must disclose any third-party funding agreement they have entered into, both at the time of a claim, as well as throughout the duration of the dispute.

The disclosure requirement is, however, quite limited because it only requires the disputing parties to inform members of the Tribunal of the name and address of any funder.

Forward-looking commitment to the establishment of a multi-lateral investment court

CETA Article 8.29 memorializes a commitment by the contracting parties to look towards setting up a permanent and multilateral investment court mechanism which would hear both first-instance and appeal cases, ostensibly from various treaties.

Taken together with the analogous provision in Article 15 (Chapter II, Section 3) of the EU-Vietnam Free Trade Agreement, it would appear there are now two states committed in principle to the EC’s plan for an international investment court.


With 1598 pages, CETA has been called “more than a blessing for insomniacs”.

Whatever the view of commentators on its substantive provisions, the fast-paced evolution of this treaty and of its ISDS mechanism is certainly far from sleep-inducing.

Crucially, the revised CETA text will have immediate policy implications around the world. All eyes are now on the US State Department to see what position it will adopt in the ongoing Transatlantic Trade and Investment Partnership (TTIP) negotiations, and how it will view the EC’s November 2015 investment chapter proposal.

White & Case Michael Polkinghorne Matthew Morantz

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