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

by Giorgia Sangiuolo

 

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, destined to shape the EU’s role on the international plane for years to come. As was the case with fundamental rights[1] and internal competences[2], with Opinion 2/15 the European Court of Justice (ECJ) was called to arbiter on the dynamics of the renegotiation of powers between the EU and its Member States. This time, on the new ‘battleground’ of the EU’s external relations.

The final result of this quarrel between the EU and its Member States in the area of external relations seems to have resulted in a draw.

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

On one hand, the recognition of the EU’s all-round exclusive competence in, broadly speaking, horizontal trade issues (such as environment or labour provisions), can be considered a ‘gift’[3] for the EU, destined to simplify the ratification procedure of its new generation 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 and not only as an economic superpower.

On the other hand, 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” – these are, agreements the scope of which falls under the shared competences of the EU and its Member States[7] – that can, in principle, be ratified by the EU alone[8] or by both the EU and its Member States[9]. Imposing the mandatory ratification of FTAs by the national Parliaments exposes them to threats of delays and failure to ratify, so making the narrowing of the subject matter of the Union’s FTAs an attractive choice in order to avoid such issues.[10]

Even if Opinion 2/15 can be praised as it upholds 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 however constitutionally very problematic under a number of standpoints.

After offering an overview of the difference between mandatory and facultative mixity, in the next few lines, 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 raised by the Court’s decision in the Treaties’ principles of competence, supremacy and loyal cooperation.

 

  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 themselves contracting parties to an international agreement negotiated by the EU, in accordance with their respective constitutional requirements. Mandatory mixity is deemed existent when one or more parts of an international agreement negotiated by the EU fall under the latter’s exclusive competence,[13] while others pertain to the exclusive competence of the Member States[14]. As for the consequences of mandatory mixity, should one or more Member States not ratify the mandatory mixed international agreement, such an agreement will not enter into force for either the EU or its Member States.

“Facultative” mixity regards those international agreements negotiated by the EU falling within either the scope of 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 to 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, analogously to what happens in the fields of internal shared competences, Member States could autonomously exercise their powers in areas of shared competences as long as the Union has not done so.[16] However, when the EU does exercise its powers, Member States are “pre-empted” from taking action[17].

However, the practice of the EU concluding international agreements shows that the decision on the form of their ratification often disregards the abovementioned distinctions between “mandatory” and “facultative” mixity. Instead, it remains entrenched in “political” motivations as the case of CETA proves.

 

  1. 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, necessarily linked to (in the words of the Court, “ancillary”) – 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 such rule in the following paragraph[21] on Government to Government DRMs. This probably 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 enacts a new rule and its rationale seems to be based on the question 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 among 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 case of improper performance of their obligations[25] under the agreement 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 take into account that the latter can have even a 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 the allegedly illegal national measure 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. Contrarily, either the respondent State withdraws its legislation or its trade partners will retaliate against it by adopting burdening economic measures.

 

  1. 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 criticisms regarding the “democratic deficit” of 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 so doing, the ECJ hands back the definition of the role of the EU on the international plane to political negotiations, where, arguably, it belongs.

Opinion 2/15 remains however constitutionally highly 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 disregarded 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 down the scope of such agreements to avoid the complexities linked to joint ratification by the EU and its Member States attractive. Suffice here to recall that the recently concluded JEUFTA does not include a chapter on investment protection, let alone an ISDS mechanism.

Last, but not least, a 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, in so 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] 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


Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>