By Daniel Thym, Chair of Public, European and International Law, University of Konstanz*
*For the original German version of this article, see Verfassungsblog
Public interest in current events tends to be fleeting. Take, for example, the excitement generated in the international media by the regional parliament of Wallonia’s threat to block the Comprehensive Economic and Trade Agreement (CETA) with Canada. Currently, free trade is enjoying a surge in popularity thanks to Donald Trump’s opposition to it, as few Europeans are eager to be seen aligning with the US President on this issue. However, it’s crucial to avoid becoming so focused on headline-grabbing news about retaliatory tariffs on products like European steel and American orange juice that we lose sight of the fundamental, systemic issues at play. One such challenge, a major point of contention during the CETA and Transatlantic Trade and Investment Partnership (TTIP) discussions, involves the independent tribunals designed to protect foreign investments. In this context, the recent Achmea judgment issued by the European Court of Justice (ECJ) could have broader implications than publicly recognized thus far.
This judgment centered on an investment protection agreement between Slovakia and the Netherlands. The agreement was used to justify a request for a tribunal to determine compensation due following a Slovakian government decision to modify health insurance legislation. The ECJ determined that the bilateral investment treaty violated EU law. It argued that while the tribunal could be asked to interpret EU law in disputes between investors and states, its interpretation could not be effectively challenged through the legal system. This, it concluded, undermined the ECJ’s function as the ultimate interpreter of EU law.
While the (German) media first concentrated on the implications for intra-European investment protection mechanisms like the Slovak-Dutch agreement, it is overly simplistic to assume, as the Frankfurter Allgemeine did, that agreements enacted by the EU with a non-EU country would follow a different course due to the EU institutions’ consent to the investment protection system. This interpretation fails to grasp the abstract nature of the ECJ’s argument, which appears to be a matter of principle. Doing so closes a loophole in its argument concerning the EU-Singapore Free Trade Agreement. In that instance, judges in Luxembourg determined it was ’not (yet) appropriate to examine whether the dispute settlement regime … of the envisaged agreement fulfills the criteria set out (in previous case law), in particular the criterion relating to the autonomy of EU law” (para 301). Now, however, they have answered the question—and, not for the first time, the answer emphasizes autonomy.
Luxembourg as a Repeat Offender: Exerting Control Over Agreements with Non-EU Countries
For the European Union, the law is more than a means to achieve political goals; it underpins its existence and is essential to its continued success. This explains why breaches of the rule of law are such a sensitive issue for the EU, impacting everything from the monetary union and asylum system to its relationship with Poland. When integration through law falters, European integration as a whole is in jeopardy. It should come as no surprise, therefore, that the ECJ vigorously defends the effective application of supranational regulations. Although constraining judicial “competitors” may advance the ECJ’s institutional self-interest, defending autonomy transcends mere judicial self-preservation; it safeguards the legal underpinnings of a supranational community built on the rule of law.
The Achmea judgment is not the first instance in which the ECJ has curtailed international treaty-based (quasi-)judicial competitors. In a notorious 2014 case, the ECJ rejected the EU institutions’ initial attempt to join the European Convention on Human Rights (ECHR), despite the EU Treaties explicitly supporting this move (although with safeguards in place to protect autonomy). The opinion focused on safeguarding the autonomy of EU law, and the general principles articulated in the Achmea judgment (paras 32-37) include multiple references to opinion 2/13. Other international courts that the ECJ has blocked include the initial draft of the European Economic Area Agreement and the concept of a Europe-wide patent court involving various non-EU nations.
Doctrinally, judicial oversight of agreements with non-EU countries rests on the premise, affirmed by Article 218(11) of the Treaty on the Functioning of the European Union (TFEU), that primary EU law supersedes international agreements within the supranational EU legal framework. This principle extends to the UN Security Council, about which the ECJ famously asserted that ‘international agreements cannot impede the Treaty’s constitutional principles’ (para 285). Ideally, such inconsistencies would be identified during the opinion stage before an agreement is ratified, but judges in Luxembourg have shown no hesitation in upholding the primacy of the EU Treaties even after an agreement takes effect.
Safeguarding the Autonomy of EU Law
‘Autonomy’ is an umbrella term encompassing the core aspects of the supranational EU legal order. It relates ’to the EU’s constitutional framework and the very nature of that law,’ and includes such fundamental aspects as direct effect, primacy, and a judicial system (through the ECJ and national courts) intended to ensure the consistent, uniform interpretation of EU law (paras 33-37). While this might appear abstract, it should be considered in light of the paramount importance of the law to the EU integration process, as previously mentioned. When discussing ‘autonomy,’ Luxembourg’s judges are not preoccupied with doctrinal minutiae. For them, autonomy is a non-negotiable principle.
A closer look reveals that it is not just the Achmea judgment’s general principles that rely on this staunch defense of autonomy. The ECJ’s stance on the bilateral Slovak-Dutch investment treaty (BIT) is similarly broadly framed (paras 39-59), suggesting that the ruling goes beyond merely addressing intra-European investment protection systems. Its logic can be extended as a matter of principle to agreements with non-EU states, particularly as the ECJ cites several prior rulings that found such treaties violated the EU Treaties. It seems, then, that the arguments presented in Achmea can be extended to investment protection schemes outside Europe, such as the one outlined in the CETA Agreement with Canada. While it’s impossible to rule out the ECJ distinguishing the CETA Agreement from intra-European BITs, the abstract nature of the Grand Chamber’s position in Achmea suggests that we should anticipate CETA regulations clashing with EU law’s autonomy for at least four legal reasons.
First, limiting the CETA Tribunal’s jurisdiction to interpreting the agreement and other aspects of international law—and requiring it to interpret domestic law in accordance with national courts (Article 8.31, CETA treaty)—will not protect it. The Achmea judgment explicitly stated that a comparable interpretation of the corresponding provision in Article 8 of the BIT would not address the Court’s concerns regarding the indirect evaluation of domestic law (paras 40-42). The very nature of investment protection involves companies lodging complaints with international tribunals about domestic regulations and practices, which are then evaluated through the lens of international law.
Second, although the recent ruling pertained to a classic single-market case involving a Dutch company’s access to the privatized Slovak health insurance market—thus impacting two central tenets of EU law, the free movement of capital and the freedom of establishment—there is nothing in the ECJ’s reasoning to suggest its logic is limited to fundamental intra-European freedoms. The concern regarding autonomy is universal (paras 41, 33), encompassing, in principle, all aspects of primary and secondary EU law. This includes any and all directives and regulations governing economic activities that could potentially be judged in light of the investment protection clauses in CETA.
Third, because the CETA Tribunal will lack the authority to request a preliminary ruling from Luxembourg, it will be subject to the same criticism the Achmea judgment leveled against the Slovak-Dutch Tribunal, which the ECJ could potentially have classified as a court under Article 267 TFEU (paras 43-49). It did not take this route. Instead of integrating investment tribunals into the EU’s judicial protection system, the ECJ excluded them, laying the groundwork for their prohibition.
Fourth, a CETA Tribunal’s final award (termed an ‘Urteilsspruch’ in the German translation) does not remain an inter-state matter to be resolved diplomatically, like those adjudicated by the World Trade Organization (WTO). Final CETA awards are binding on all parties and are enforceable through domestic courts (Article 8.39, 8.41). These courts are not permitted to review the award’s compatibility with EU law—an aspect the ECJ deemed insufficient in its latest ruling (paras 50-53).
Implications for Investment Tribunals
The ECJ’s main goal is to ensure the continued authority of European courts over investment protection. While it takes issue with a specialized court system for corporations at the international level, it simultaneously underscores that inter- and intra-state arbitration remains an option. Individuals and companies are permitted, within certain boundaries, to pursue dispute resolution through private arbitration channels if they choose (paras 54-55). Furthermore, the ECJ reaffirmed that EU law does not universally prohibit international courts and tribunals, provided their structure respects the characteristics of the supranational legal order.
One such mechanism, unproblematic from the perspective of EU law, is WTO dispute settlement, precisely because world trade law does not generally create directly applicable rights and obligations for individual companies. If, for instance, Donald Trump were to impose punitive tariffs on European aluminum and the EU were to retaliate, the dispute would remain one between governments. Even if the WTO Appellate Body were to find, say, subsidies for Airbus to be at odds with world trade law, Boeing would have no recourse to enforce the award through domestic courts. WTO dispute resolution does not threaten the autonomy of EU law.
One potential way to salvage investment protection tribunals might be to empower domestic courts to review their findings in light of EU law, including the option of referring cases to the ECJ. This would be in lieu of limiting judicial review at the enforcement phase to the arbitral award’s internal consistency and adherence to the narrow public policy exception (for the domestic dispute that led to the Achmea case, see Paragraph 1059(2) of the German Code of Civil Procedure). Subjecting investment tribunals, such as the CETA model, to such comprehensive scrutiny based on primary and secondary EU law might shield them from being deemed illegal by the ECJ. However, this would contradict the (debatable) raison d’être of international investment protection schemes, which aim to provide independent oversight of domestic laws by an institution outside the national court system, guided solely by international law.
It is vital to understand that the ECJ’s rationale applies beyond agreements between EU member states and non-EU nations. A similar argument can be made for treaties between the EU and non-EU states—such as CETA or the Energy Charter Treaty, under which the Swedish company Vattenfall is currently suing Germany over its decision to cease nuclear power generation. According to established ECJ case law, in instances of conflict between a directive and an international treaty, the conflict need not be resolved in favor of investment protection rules. International treaties supersede secondary legislation only if the treaty in question is directly applicable—a condition the ECJ rarely finds to be met by international trade agreements.
Thus, secondary EU legislation outranks WTO law within the supranational legal order, and the direct effect of CETA is explicitly ruled out in Article 30.6. While seemingly abstract, this has concrete consequences: in the event of a conflict between EU legislation and a CETA arbitral award—itself based solely on international law—primary and secondary Union law would take precedence. Within the EU legal order, overriding treaties through democratic processes is a real possibility, at least for international agreements like the WTO and CETA that are not directly applicable within the supranational legal system.
My prediction is that for CETA and TTIP, an opinion pursuant to Article 218(11) TFEU—which any EU institution or member state can initiate—would spell the end of the investment protection clauses, as these clauses could be applied to multiple aspects of EU law. (It should be noted that Opinion 1/17, which questions the compatibility of CETA’s investment dispute provisions with EU law, is already before the ECJ). Regarding existing bilateral agreements between member states and non-EU countries, the outcome may be less clear cut. If, for example, a German company were to object to expropriation by Pakistan or Algeria, this would not typically have an EU law dimension, thus avoiding a direct clash with the autonomy of EU law. This could result in a neo-imperial dynamic: within the EU legal order, conflicts would be resolved in favor of democratically established legislation, while European companies could still avail themselves of pre-existing agreements abroad. However, persuading non-EU states to agree to such one-sided agreements in the future will be difficult. Thus, the ultimate consequence of the Achmea judgment might be nothing less than a complete overhaul of international investment protection law.
Barnard & Peers: chapter 24
Photo credit: Pensionen Pro