A COMMENT ON OPINION 2/15 AND INVESTOR STATE DISPUTE RESOLUTION. THE PRICE OF PRESERVING THE DIVISION OF POWERS

Giorgia Sangiuolo, Lawyer, PhD Researcher King’s College London

Opinion 2/15 on the Free Trade Agreement between the European Union (EU) and Singapore (EUSFTA) constitutes another significant chapter in the relationship between the EU and its Member States, and is destined to shape the EU’s role on the international plane for years to come. The European Court of Justice was called once again to arbiter on the dynamics of the renegotiation of powers between the EU and its Member States, as it had done in cases surrounding fundamental rights[1] and internal competences.[2]  This time, the ‘battleground’ regarded EU’s external relations.

In the opinion, the ECJ decided not to intervene judicially on certain sensitive issues, which seemingly were held to belong more appropriately in the political sphere. Thus, the final result of the first skirmish between the EU and its Member States in the area of external relations seems to have resulted in a draw.

The recognition of the EU’s all-round exclusive competence in horizontal trade issues (such as environment or labour provisions), could be considered a ‘gift’[3] for its Members, destined to simplify the ratification procedure for its new generation of Free Trade Agreements (FTAs). In line with both the “constitutionalisation” of the principles of integration[4] and sustainable development,[5] and the inclusion of the Common Commercial Policy (CCP) under the aims and values of the EU[6] carried out by the Lisbon Treaty, the Court confirmed the Union’s global role as a promoter of horizontal policies, not only as an economic superpower.

However, the Court’s decision to class some chapters of the EUSFTA as mandatory, mixed competences of the EU and its Member States has cooled down expectations of potential full deployment of ‘new, comprehensive, bold and ambitious’ FTAs on the international plane. As is well known, the EU’s “mixed agreements” – agreements the scope of which falls under the shared competences of the EU and its Member States[7] – can, in principle, be ratified by the EU alone[8] or by both the EU and its Member States[9]. Imposition of the mandatory ratification of FTAs by the national Parliaments exposes the FTAsto threats of delays and failure to ratify, which then induce the narrowing of the  FTA’s subject matter in attempts to avoid such issues.[10]

Even if Opinion 2/15 could be praised for upholding the principle of the division of powers – with the Court leaving very sensitive issues, such as ISDS (Investor State Dispute Settlement), to political negotiations – it remains constitutionally problematic under a number of standpoints.

Following an overview of the difference between mandatory and facultative mixity, this post will analyse the ECJ’s reasoning behind qualifying the chapter on ISDS (Investor State Dispute Settlement) as a mandatory mixed competence of the EU and its Member States. It will conclude by identifying the constitutional issues in the Treaties’ principles of competence, supremacy and loyal cooperation raised by the Court’s decision.

 1. Mandatory and facultative mixity.

Opinion 2/15 qualifies some chapters of the EUSFTA (non-direct investments, ISDS, mediation and transparency) as mandatory mixed competences of the EU and its Member States. In doing so, the Court contradicts the doctrinal[11] and case-law[12] distinction between mandatory and facultative mixity in international agreements.

“Mixity”, defined above, has been qualified as “mandatory” when both the EU and its Member States are bound to become contracting parties to an international agreement negotiated by the EU, in accordance with their respective constitutional requirements. Mandatory mixity  exists when one or more parts of an international agreement negotiated by the EU fall under the EU’s exclusive competence[13], while other parts pertain to the exclusive competence of the Member States[14]. Furthermore, should one or more Member States not ratify the mandatory mixed international agreement, such an agreement will not enter into force for neither the EU nor its Member States.

“Facultative” mixity regards international agreements negotiated by the EU falling within the scope of either the shared competences of the EU and its Member States (eg. environmental policies) or partly between the latter and the exclusive competences of the EU.[15] “Facultative mixed” agreements never involve areas of competences reserved for Member States. Thus, facultative mixed agreements can be concluded either by the EU alone or jointly by the EU and its Member States. Until the EUSFTA decision it was generally maintained that, analogous to what happens in the field of internal shared competences, Member States could autonomously exercise their powers in areas of shared competences as long as the Union had not done so.[16] However, when the EU did exercise its powers, Member States were “pre-empted” from taking action.[17]

The method in which the EU concludes international agreements shows that decisions on the form of ratification often disregard the aforementioned distinctions between “mandatory” and “facultative” mixity. As proven by the case of CETA, it instead remains entrenched in “political” motivations.[18]

2. An assessment of the Court’s reasoning on dispute settlement mechanisms under the standpoints of discretion and loyal cooperation.

Opinion 2/15 confirms that the distinction between mandatory and facultative mixity is not of a legal nature. The reasoning of the Court is particularly interesting in relation to the ESFTA chapter on ISDS.

The Court firstly refers to the rule, established in its previous case law,[19] that the creation of dispute resolution mechanisms (DRMs) in the Union’s international agreements is, in principle, “ancillary” to – and therefore follows – the competence to conclude the related substantive provisions.[20] The reasoning behind the ancillary rule is explained by Advocate General (AG) Sharpston, who points out how DRMs merely regard the ‘manner’ in which external competence is exercised rather than its existence and nature. Interestingly enough, despite having based its reasoning on the ancillary rule, the Court only clearly recalls said rule in the following paragraph[21] on Government to Government DRMs. This signals that the Court’s decision on ISDS was highly debated among the members of the Court and included in the opinion at the last minute.

Unlike AG Sharpston, the Court concludes that ISDS constitute an exception to the concept of ancillary link. This is because, unlike government-to-government DRMs, ISDS risk diverting litigation procedures from national courts and allow private investors to sue Member States.[22] The Court hereby enacted a new rule and its rationale seems to be based on the question of whether DRMs encroach upon Member States’ interests.

As it will be shown below, the Court’s reasoning is rather shaky, although the effort to strike a balance between the competing interests of the EU and its Member States is commendable.

One may wonder how much encroachment is necessary to cut the ancillary link between the exercise of the Union’s competence and the creation of DRMs. The Court formulates its argument in purely hypothetical terms. On one hand, it acknowledges that the EUSFTA’s provisions on ISDS do not rule out that disputes may be brought before national courts. On the other, unlike the AG, the Court does not mention that, under the regulation on financial responsibility,[23] it is the EU that will be, in principle, responsible under international law for any breach of the EUSFTA provisions.[24] Member States will only be directly financially responsible for a breach of the FTA in cases of improper performance of their obligations[25] under their agreements and, therefore, under EU law.

The conclusion reached by the Court also sits uncomfortably with the functioning of international DRMs. It is difficult to see how, in distinguishing between ISDS and government-to-government mechanisms, the Court did not consider that the latter could have an even bigger impact than ISDS on national systems of governance. Indeed, while ISDS only provide for the financial redress of investors, the aim of Government-to-Government litigation is the abolition of allegedly illegal national measures or the adoption of equally important retaliating measures. Thus, in contrast to ISDS, Government-to-Government DRMs do not allow respondent States to simply “pay off” the claimants and keep their legislation in place. On the contrary, either the respondent State withdraws its legislation or its trade partners will retaliate against it by adopting burdening economic measures.

3. Opinion 2/15 and constitutional EU law. The issues with leaving ISDS to politics.

Opinion 2/15 does not necessarily entail, as some have argued,[26] the end of “facultative mixity” in EU law. Arguably, given both the unclear regulation of EU mixed agreements in the Treaties and the widespread criticism regarding the “democratic deficit” in the EU,[27] the Court’s aim in Opinion 2/15 is that of leaving the resolution of sensitive issues like ISDS to political negotiations between the EU and its Member States. In doing so, the ECJ hands back the role of the EU on the international plane to political negotiations, where, arguably, it belongs.

Opinion 2/15, however, remains constitutionally problematic in terms of competence, loyal cooperation and unity of the external action of the EU, for a number of reasons.

Firstly, the Court’s political decision to leave ISDS to political negotiations to avoid criticism regarding its democratic mandate and the division of powers ironically disregards the democratically elected European Parliament’s position, which supported the exclusive competence of the Union to conclude the EUSFTA.[28]

Secondly, the Court’s reasoning causes considerable issues from a competence and loyal cooperation standpoint. Indeed, numerous studies show that the effective regulation of FDIs is inseparable from a well-functioning ISDS system.[29] Therefore, depriving the EU of the competence to autonomously negotiate the configuration of such systems brings a high risk of curtailing its exclusive competence to regulate FDIs.

Thirdly, as the EUSFTA was negotiated as a single agreement, its rejection by National Parliaments as a single piece of legislation would substantially impede the EU from exercising its own exclusive competences on most parts of the agreement.

Further, Opinion 2/15 arguably represents a threat to the capacity of the Union to fully fulfil its mandate, conferred under Article 21 TEU, to act in its external relations as a unitary global regulatory power. Indeed, imposing mandatory mixity on crucial chapters of the EU’s FTAs, such as ISDS, makes the idea of narrowing the scope of such agreements to avoid the complexities linked to joint ratification by the EU and its Member States attractive. Suffice it to say that the recently concluded JEUFTA does not include a chapter on investment protection, let alone an ISDS mechanism.

Last, but not least, the potential rejection of the Agreement by even just one out of 28 National Parliaments could undo 5 years of commonly agreed negotiations[30] with Singapore, clearly violating the Treaty principle of sincere cooperation.

 

[1] Eg. BVerfGE Solange I, Beschluß [1974] 2 CMLR 55

[2] Eg. C-376/98, Federal Republic of Germany v European Parliament and Council of the European Union, ECR I-08419

[3] D Sarmiento, The Singapore Silver Bullet, Verfassungsblog, Blogpost May 17, 2017 at  <http://verfassungsblog.de/the-singapore-silver-bullet/>

[4] As of Lisbon, expressly included under art. 11 TFEU

[5] Art. 3(3) TEU

[6] Art. 3 TEU and 207 TFEU

[7] Ibid, para 45

[8] (on behalf of its Member States)

[9] Article 12(1) VCLT

[10] The European Court of Justice renders its opinion on the EU-Singapore free trade agreement: investment chapter is not within EU’s exclusive competence, HSF Arbitration Notes, Blogpost, May 23, 2017, at , http://hsfnotes.com/arbitration/2017/05/23/the-european-court-of-justice-renders-its-opinion-on-the-eu-singapore-free-trade-agreement-investment-chapter-is-not-within-eus-exclusive-competence/

[11] Eg G Van Der Loo, R Wessel, The Non-Ratification Of Mixed Agreements: Legal Consequences And Solutions [2017] 54 Common Market Law Review

[12] See Opinion AG Kokott in Case 13/07 Commission v Council, 26 March 2009, para 88

[13] See art. 3 TFEU

[14] Ibid 8

[15] M Klamert, The Principle of Loyalty in EU Law (Oxford Scholarship Online, 2014)

[16] Or cannot do so, eg. Adhesion to international conventions only open to the ratification of States (eg. ICSID Convention)

[17] M Klamert, N Maydell, Lost in Exclusivity: Implied Non-exclusive External Competences in Community Law [2008] 13 EFAR

[18]From a strict legal standpoint, the Commission considers this agreement to fall under exclusive EU competence. However, the political situation in the Council is clear, and we understand the need for proposing it as a ‘mixed’ agreement, in order to allow for a speedy signature”. See, European Commission – Press release European Commission proposes signature and conclusion of EU-Canada trade deal, 5 July 2016 at http://europa.eu/rapid/press-release_IP-16-2371_en.htm

[19] Eg Opinion 1/91 (First Opinion on the EEA Agreement), ECR I-06079, para 40, 70

[20] Opinion 2/15, para 298

[21] Ibid

[22] Ibid, para 292

[23] Regulation no. 912/2014, Regulation of the European Parliament and of the Council of 23 July 2014 establishing a framework for managing financial responsibility linked to investor-to-State dispute settlement tribunals established by international agreements to which the European Union is party (OJ 2014 L 257)

[24] Opinion 2/15, Conclusions of AG Sharpston, para 514

[25] Ibid, para 534

[26] D Kleimann, G Kübek, The Singapore Opinion or the End of Mixity as We Know It, Blogpost May, 23, 2017, Verfassungsblog, at <http://verfassungsblog.de/the-singapore-opinion-or-the-end-of-mixity-as-we-know-it/>

[27] “Democratic deficit” , Glossary of Summaries, Eur-Lex Access to European Union Law, at <http://eur-lex.europa.eu/summary/glossary/democratic_deficit.html

[28] Eg. See Opinion 2/15, para 18

[29] Eg. The investment chapters of the EU’s international trade and investment agreements in a comparative perspective, Study for the European Parliament, 2015 at < http://www.europarl.europa.eu/RegData/etudes/STUD/2015/534998/EXPO_STU(2015)534998_EN.pdf>

[30] 2010-2014


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