The long-awaited opinion of the Court of Justice of the EU (ECJ) on the question of whether or not the EU has exclusive competence over all aspects of the EU-Singapore Free Trade Agreement (FTA) left the most disputed issue unanswered, namely, whether or not investor-state dispute settlement (ISDS) is compatible with EU law.
To be fair, that was not one of the questions which the ECJ was asked to answer.
Foreign direct investment
Nonetheless, the ECJ provided some guidance on the distribution of the competence on foreign direct investment. It opined that all types of foreign direct investment would fall within the EU’s exclusive competence, a view that is not shared by the European Commission and European Parliament. According to the ECJ, non-direct foreign investments are mixed competence.
This conclusion, however, does not solve the problem of where exactly the difference lies between direct and non-direct foreign investment. This lack of clarity will certainly be the source for future court cases.
ISDS and SSDS
The ECJ also rejected the European Commission’s argument that ISDS is directly connected with foreign direct investment and therefore falls squarely within its exclusive competence.
In its answer, the ECJ focused on the position of the national courts of the member states. It considered that arbitration:
“… removes disputes from the jurisdiction of the courts of the Member States, [which] cannot be of a purely ancillary nature and therefore cannot be established without the Member States’ consent”.
Accordingly, the ISDS provisions remain within the mixed competence.
Notwithstanding the fact that this is a massive simplification of the arbitration process since domestic courts remain involved in the recognition, enforcement and annulment of arbitral awards, this argument echoes the main reason for rejecting international tribunals in previous opinions on the EU’s accession to the European Convention on Human Rights (ECHR) and the Unified Patent Court, namely, the fact that such international courts operate outside the preliminary ruling mechanism between the ECJ and national courts. This could already hint at how the ECJ would judge the ISDS, or rather the reformed investment court system (ICS), provisions in the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada.
In addition to ISDS, the EU-Singapore FTA also contains state-state dispute settlement (SSDS) provisions.
The ECJ recalled that the EU has the power to submit itself to SSDS provisions when concluding an international agreement, as was the case with the World Trade Organisation (WTO). However, it avoided expressing a view on whether SSDS is (in)compatible with EU law. It simply referred to its arguments made with regard to ISDS in order to conclude that SSDS is also of mixed nature.
The fate of member states’ BITs
Whereas the previous conclusions of the ECJ are relatively straightforward and, in my view, correct, its conclusion regarding the fate of the dozen or so member states’ bilateral investment treaties (BITs) with Singapore is rather surprising and troubling. According to Article 9.10 of the EU-Singapore FTA:
“… upon the entry into force of the EU-SING FTA, all BITs between the Member States and Singapore, including the rights and obligations derived therefrom, shall cease to have effect and shall be replaced and superseded by this agreement.”
The question was therefore whether – as the European Commission argued – the EU’s exclusive competence would go so far as to enable the EU to replace and thereby terminate those BITs through the conclusion of the EU-Singapore FTA, even without the consent of the member states concerned.
The ECJ opined that, by virtue of obtaining exclusive competence, the EU can replace and subsequently (in effect) terminate all member states’ BITs with Singapore, at least as far as foreign direct investment is concerned (even though the EU itself is not a contracting party).
In other words, the ECJ equated the EU’s obtainment of exclusive competence with the replacement of the member states in their treaties. The ECJ cited the example of the old General Agreement on Tariffs and Trade (GATT) 1947, in which the European Economic Community (EEC), later the European Community (EC), de facto replaced the member states, though they had never been a contracting party to the GATT 1947. However, de jure the member states always remained contracting parties to the GATT 1947 and remained legally bound by it. Clearly, the GATT 1947 constituted a different situation; the analogy is therefore misleading.
In any case, this very far-reaching and surprising conclusion is difficult to reconcile with public international law and the law of treaties. In fact, this line of argument was explicitly rejected by the Advocate General in her opinion (and for the right reasons).
In any event, the ECJ’s approach creates legal uncertainty for all third states which have concluded BITs with EU member states. They can never be sure anymore whether or not the EU may have “replaced” the member states as a contracting party simply by virtue of an internal shift of competence within the EU.
The ECJ’s approach also creates new problems of delineation. Does this mean that the BITs with Singapore, as far as they concern non-direct foreign investment, are not replaced by the EU or that member states retain the competence to modify or terminate them? Are we talking about a mixed competence to modify or terminate member states’ BITs? What happens if a member state, for example the UK, refuses to terminate its BIT with Singapore?
Finally, the ECJ did not discuss the issue of what happens with the so-called “sunset clauses“, which are contained in the member states’ BITs with Singapore. These sunset clauses provide for continued protection and access to ISDS for all investments made before the termination of the BITs. Typically, sunset clauses endure for between 10-20 years. But what does this “partial replacement” by the EU of the member states’ BITs mean for the application of those sunset clauses? Will they continue to be applicable to non-direct foreign investment? The ECJ did not provide any guidance on the issues.
Waiting for the next opinion of the ECJ
The main take-away from this opinion is that the ECJ did not give the European Commission the full exclusive competence for which it was hoping. As a result, the Council and the member states maintain their control over the future EU trade and investment agreements.
As far as ISDS and ICS and their (in)compatibility with EU law is concerned, that is still an open question. The ECJ may provide an answer, if and when CETA is referred to it for an opinion (as was promised by the federal Belgian government to Wallonia).
Until such time, the elephant is still in the room and the EU’s investment policy remains in a state of uncertainty.