Investment protection in the EU-Canada Comprehensive Economic and Trade Agreement (CETA)

Investment protection in the EU-Canada Comprehensive Economic and
Trade Agreement (CETA)
Marc Maes, 11.11.11 for the Seattle to Brussels Network
5 March 2014
Main conclusions
1. Background
2. How CETA deals with investment protection
2.1. The Investment chapter
2.2. The Investor-State Dispute Settlement (ISDS) section
2.3. The Understanding on the prudential carve out for financial services from ISDS
Main conclusions
Notwithstanding the agreement reached 18 October 2014 between the Canadian Prime Minister
Harper and EU Commission President Barroso, negotiations for the investment chapter of CETA
are still ongoing today.
Member states and the Commission still disagree on many features of the investment chapter and
are divided on the measure of reform that the agreement should bring. They also still disagree on
the division of competence between themselves and the Commission and on the division of legal
and financial responsibility. The Commission is negotiating with Canada and the Member States at
the same time
What the leaked negotiating texts reveal is
a broadening of the scope of investment protection and ISDS through its application
between two OECD countries, a very broad definition of investments, the inclusion of
financial services and probably an umbrella clause, combined with a negative market
access list (all investments are liberalized unless stated otherwise).
In comparison with the Bilateral Investment Treaties of the EU Member States policy space
seems to be better protected through a more specified Fair and Equitable Treatment
Standard, a well formulated safeguard regarding indirect expropriation, the exclusion of
post box companies, parallel claims, etc.
However much of this can be undermined by an ill formulated MFN-clause which allows
investors to import investor rights from other investment agreements.
Also, the formulation of the key investment protection standard, the so-called “Fair and
Equitable Treatment” (or FET-) standard leaves much to be desired and leaves much room
for interpretation by arbitrators. Compared to the Canadian practice it is a step back.
The text does not contain a general clause affirming the “right to regulate”. This clause has
moved to the preamble of CETA, but in the way it is formulated the clause actually subjects
the obvious right of states to regulate to the provisions of CETA instead of the other way
The ISDS procedure becomes more open and transparent (than in the EU Member States
BITs) without however changing its basic flaws: ISDS arbitrators remain private lawyers;
presiding over cases that only investors can initial; making broad interpretations of the
scope and meaning of the investment agreement; issuing awards against which no appeal
is possible. At the same time ISDS becomes more accessible by the introduction of a sole
arbitrator tribunal for small and medium enterprises and for cases where the damages
claimed are relatively low. This will lead to more ISDS litigation.
ISDS remains a system that is inferior to the domestic legal system of Canada and the EU,
that creates a discrimination between foreign and domestic investors and that is completely
superfluous given the access that foreign investors have to the domestic courts of the host
Investment protection is a new EU competence and it is still under construction. The EU
Commission, Council and Parliament are not yet in agreement about its content and direction, yet
investment protection negotiations are being launched at an increasing rate.
Until the free trade negotiations between the EU and the USA were launched in July 2013 the
CETA negotiations with Canada were regarded as standard setting for the EU’s investment
protection approach.
In spite of the announcement on 18 October 2013 that the EU and Canada had reached an
agreement on CETA, negotiations on investment protection have continued.
Today the investment protection negotiations between the EU and Canada are still the most
advanced. Therefore a closer look at the CETA texts also helps to understand the EU approach to
investment protection in TTIP.
The CETA chapter on investment as it currently stands may constitute an improvement compared
to the existing Bilateral Investment Treaties (BITs) of the EU Member States, but not when
compared with recent Canadian practice.
The improvements are in the investor-state dispute settlement (ISDS) procedures and the
safeguarding of public interests but they fall short of effectively protecting public interests and they
come at the expense of generalising and broadening the scope of the unaccountable arbitration
system which remains inferior to the domestic court system.
Still the CETA text is under attack from hardliner EU Member States which want to back track on
certain parts. And even if EU Member States have approved negotiating mandates for the
Commission, they still insist that the Union does not have exclusive competence when it comes to
foreign investments and they want to see this reflected in the CETA text.
1. Background
The Treaty of Lisbon, in force since 1 December 2009 added “foreign direct investment” to the
exclusive common trade policy competence of the European Union. Since then the EU is
developing its own investment protection policy.
Before, this was a competence of the EU Member States (MS) that used it to negotiate about 1400
Bilateral Investment Treaties (BITS) which more or less followed a standardised approach of
concise treaties, with broad unspecified protection standards, leaving much room for interpretation
to a whole plethora of international arbitration tribunals.
The 1400 Member State BITS in general do not deal with market access, only with protection. The
European Commission on the other hand already included market access for investments in its
free trade agreements for some time. At first this came solely as “Mode 3” of the services chapter
(note that 60% of investments are in services) until market access for non-services investment was
added in 2006.
Since then a chapter (or “title”) on “services, establishment and e-commerce” became a standard
feature in the EU FTAs. Investment liberalisation under this title followed the GATS-way of
scheduling market access and national treatment in a table that listed all (services and nonservices) economic sectors.
Thus the EU had investment liberalisation agreements without investment protection provisions
and the member states had investment protection agreements without investment liberalisation
provisions This situation was increasingly regarded by the Commission as a handicap vis-à-vis for
instance the US that could negotiate agreements that combined both aspects
From the first months after the coming into force of the Lisbon Treaty the European Commission
indicated its intention to introduce some reforms to the traditional approach to investment
protection of the member states .This was met with great suspicion by many EU Member States.
The Netherlands, Germany, Finland and Spain in particular vehemently took up the defence of the
“golden standard” set in their BITS. The same hardliner countries have contested the
exclusiveness of the competence of the EU/the Commission and maintained that some aspects
related to investments like portfolio investment, property and expropriation aspects have still
remained within their competence.
The rational for the reformist approach of the EU Commission is unclear: is it genuinely concerned
with the threat to public policies; or does it seek to fix certain flaws in the system in order to ensure
its survival; or is it mainly seeking convergence with the reforms introduced by Canada and the US
after bad NAFTA experiences, in order to be able to generalise investment protection and investorstate-dispute settlement and foster a global investment protection regime?
The first mandate for negotiations on investment protection given by the EU Council to the EU
Commission dates from July 2011 and concerned Canada, India and Singapore. It was very
concise and reflected the practice of the EU Member States (MS) calling for unspecified protection
standards. Only new element was the inclusion of a “right to regulate” clause, proposed and
strongly defended by Belgium.
The mandate came as an amendment adding investment protection to earlier mandates for free
trade negotiations that were already on-going.
Since this first mandate negotiating mandates for investment protection chapters in EU free trade
agreements have been adopted by the Council for negotiations with
- Morocco, Tunisia, Egypt and Jordan at the end of 2011
- Japan on 29 November 2012.
- the USA on 14 June 2013
- China and ASEAN on 18 October 2013.
The EU institutions also adopted an EU Regulation (bill) that confirmed the validity of the 1200 EU
member states BITs that are in force and allows the member states to continue to negotiate BITS
in the future (if this does not stand in the way of the EU plans for EU investment protection
negotiations and provided that the EU Commission authorises these bilateral BIT negotiations)1
“Regulation (EU) No 1219/2012 of the European Parliament and of the Council establishing transitional
arrangements for bilateral investment agreements between Member States and third countries” was officially
adopted on 12 December 2012 (Official Journal L351/40 of 20 December 2012) and is in force since 9
January 2013 (
The EU institutions are still discussing a draft EU Regulation on the division of the legal and
financial responsibility between the Union and the Member States in case of an investor claim
based on an EU investment treaty: will the Commission or the hosting member state act as the
defendant and who will pay the awards and the costs2? These discussions have been dragging on
for three years and have seriously soured the relations between the Commission and the member
states on investment protection matters.
2. Investment protection in CETA
Among the investment negotiations conducted by the EU Commission, the CETA negotiations
have long been the most important and were expected to set a precedent for the other EU
investment negotiations.
In spite of the concise mandate, emphasising the need to follow the Member States’ experience,
the negotiating texts proposed by the Commission in the CETA negotiations with Canada, were
quite elaborate and specified. The Commission tabled texts for an investment protection chapter
and for a chapter on the investor-state dispute settlement (ISDS) along with three annexes: on
mediation, transparency and a code of conduct for arbitrators.
The texts negotiated between the Commission and Canada deviate in many ways from the EU
Member States BITs. Texts have been leaked and some have been analysed by IISD and the
Seattle to Brussels Network3. There are three parts: a chapter on investment; a separate section
on ISDS and an understanding on the prudential carve out for financial services.
The latest leak of the investment chapter still dates from 21 November 2013 (but there is
confirmation that there is not a more recent version); the leaked ISDS chapter dates from 2
February 2014 and the Understanding on the prudential carve out for financial services from ISDS
dates from 15 October 2013. The first two still contain many brackets.
In spite of the much publicised conclusion of an agreement in principle between the EU and
Canada on 18 October 2013, CETA negotiations are still continuing in 2014.
2.1. The CETA investment chapter (of 21 November 2013)
The chapter on investment covers both services and non-services investments; and both
market access and protection (originally the Commission wanted to keep investment
protection separate from its standard (market access) chapter on “services, establishment
and E-commerce”).
The chapter uses a negative list approach to liberalization, meaning that there is free
market access for all investments and investors except when explicitly stated otherwise.
These exceptions are listed in an annex..
The Commission did table a general, very weak and in-effective “right to regulate” clause
which was to be placed in the section on scope and definitions, but this was not maintained.
However a shortened version was put in the general preamble of the agreement. It reads :
“RECOGNIZING the right to regulate within their territories, in a manner consistent with this
Agreement, to achieve their public policy objectives”. This formulation is very weak, it
actually submits the right to regulate to the terms of the agreement instead of the other way
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The chapter contains a very broad (too broad) definition of investments, covering any kind
of assets.
The definition of investor includes investors that “seek to make” investments, thus
introducing pre-establishment rights.
An EU proposal to exclude pre-establishment from ISDS is still bracketed
Both parties agreed that the definition of investor does not include branches and
enterprises that have “no substantial business” in the party where they are constituted (this
would exclude so-called “post-office box companies” from making use of ISDS)
There is bracketed text that introduces limitations on the market access standards to allow
for zoning and planning regulations, separation of ownership of infrastructure from the
ownership of goods and services; measures to ensure sustainability of resources, etc.
A whole series of prohibitions on performance requirements is included, it is not sure
whether ISDS would also apply to these.
The text introduces relative establishment rights through national treatment and mostfavoured nations (MFN).
The way the MFN clause is formulated does not limit the possibility for investors to import
provisions from other investment treaties; these could nullify any modernization or rebalancing that has been introduced in the chapter.
The EU has added a reservation to the application of MFN to “establishment, acquisition,
and expansion of an investment”, but no text to that effect has been formulated.
A reservation proposed by the EU to exclude ISDS procedures form the application of the
MFN clause has been accepted.
The “fair and equitable treatment” (FET) provision has some new approaches limiting its
scope, to specified serious breaches of arbitrariness, discrimination, harassment, but adds
the possibility for the parties to add more breaches later. It also makes reference to “the
general practices of States accepted as law” which leaves too much room for interpretation
for the arbitrators.
A paragraph by the EU introducing an umbrella clause is still bracketed. An umbrella clause
makes it possible for investors to claim a breach of contract as a violation of the treaty itself,
in other words it allows investors to directly challenge a government in an international
tribunal for non-compliance with the terms of a private contract between them.
The expropriation clause contains an annex that defines direct and indirect expropriation
and that contains a reasonably strong safeguard4 for public interest policy measures.
The general exceptions clause is weak and the EU wants to limit it to market access. This
clause contains a list of policy measures that would not have to comply with the provisions
of the chapter, for instance the protection of human, animal and plant live. By limiting the
clause to market access the Parties are allowed to reduce market access to safe lives, but
they cannot invoke the exception clause to reduce post-establishment treatment including
investment protection.
The 21 November 2013 text is virtually the same as the previous version of 31 May 2013
except for some additional definitions for Airport operation and ground handling; the definition for
branches in the 31 May text on the other hand has been deleted in the 21 November version.
“For greater certainty, except in the rare circumstance where the impact of the measure or series of measures is so
severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures by a Party that are
designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not
constitute indirect expropriations.”
2.2. The ISDS section (of 4 February 2014)
The ISDS text has been negotiated separately but it will be incorporated as a section in the
investment chapter.
The text still contains many brackets and is still very much evolving.
The scope of the ISDS is not yet fully settled:
- it is clear that market access and performance requirements do not fall under ISDS, meaning
that investors cannot use ISDS to enforce the right to enter the market
- market access aspects of National Treatment and Most Favoured Nation also do not fall
under ISDS (meaning that the fact that other market access conditions apply to domestic or
other foreign investors cannot be disputed under ISDS)
- but there is still discussion to what extent “expansion” of an investment would be covered
The text does not offer more clarity on whether investors can invoke Most Favoured Nation
treatment to import investor rights from other investment agreements that Canada, the EU or
the EU Member States have entered into.
There is an extra set of definitions that would later be incorporated into the general definition
section of the Chapter on investment. A number of definitions are still under discussion an new
are added.
An important unsettled issue here is to what extent foreign owned but locally established
companies would fall under ISDS. At stake is how to prevent that investors from a third party
would take control of a locally established company just to be able to use the ISDS provisions.
The EU has come with new formulations for the definition of the respondent which have to do
with the internal discussion between the Commission and the Member States on the division of
competence and the legal and financial responsibility. This internal discussion is still not settled
and is spilling over into the negotiations. The Commission has tabled several new formulations
in several articles of the ISDS section that strengthen the rights of the Member States with
regard to their “exclusive competences”.
Related to this internal matter is a special article (X-6) which requires the investor to first seek a
“determination of the Respondent” (to find out whether the EU or a Member State will be the
respondent in a dispute). This articles has several brackets still and Canada has started to
propose its own language on the matter.
Equally related to the specific EU situation is an article that allows the exchange of confidential
information between the Commission and the Member States involved about an arbitration
case, on the condition that they maintain the confidentiality vis-à-vis others. As this article is
crafted in general terms it can also apply to expand confidentiality to other actors.(art.X-18 bis).
The ISDS section shows compromises on definitions, consultation, meditation, submission of
claims, consent to arbitration, constitution of the tribunal, claims without legal merit, claims
unfounded as a matter of law, discontinuance, the role of third parties and of the non-disputing
party to the agreement, the final award, transparency; etc. that are new or more elaborate
compared to EU member states BITs, but no to Canadian BITs
Mediation is voluntary (art.X-5), but consultation (art.X-4) is compulsory before an investor can
initial a claim (but the consultation does not have to lead to a result).
Procedures before other courts of arbitration panels must be closed before other procedures
on the same matter can be launched and the claimant must waive the right to take the same
matter to another court or panel (except when the claim is withdraw, rejected or dismissed)
(art.X-7). This is to prevent parallel claims, i.e. that the same case is handled by two courts or
panels at the same time, which could lead to contradictory awards)
There is nothing that obliges investors to bring cases to domestic courts first, let alone to
exhaust local remedies before launching an ISDS claim.
The investor can take its case to any arbitration panel of its choice, but the rules that apply
must be either the ICSID Convention, the ICSID Additional Facility or the UNCITRAL Arbitration
Rules, unless the respondent agrees to other rules (art.X-8)
On the proposal of the EU the text introduces a sole arbitrator tribunal for small and medium
enterprises and low claims, which would reduce the costs of ISDS and therefore the use that
will be made of it (art.X-8.3)
The text introduces a roster (a list of arbitrators proposed by the two Parties), but this will be
used only if the disputing parties do not manage to agree on third or sole arbitrator (art.X-9).
Canada and the EU will have two year after the conclusion of the agreement to establish the
roster, until then the Secretary –General of ICSID will nominate the sole or third arbitrator in
case of disagreement.
The text has an article on claims manifestly without legal merits and claims unfounded as a
matter of law, which build on existing ICSID rules (art.X-14 and X-15).
A previous long part on transparency of the procedures has been dropped and replaced with a
reference to the new UNCITRAL transparency rules (it was a copy of these rules anyway),
except for the rights of the other Treaty Party for which the CETA texts still offers specific
language giving more transparency than UNCITRAL (meaning in case of a claim against
Canada, the EU can receive more information and vice-versa than under UNCITRAL rules)
(art.X-18 and X-19)
The text limits the possible damages that can be awarded to the loss suffered and says that in
general the costs of arbitration should be borne by the unsuccessful disputing party.
The EU proposed that a tribunal can order the repeal of a measure provided that the
respondent may pay monetary damages (plus interest) instead, has been dropped. A tribunal
can now only award monetary damages or in case of expropriation restitution or compensation
The EU and Canada will create a “Committee on Services and Investment” through which they
can consult each other on services and investment matters, including the implementation of the
ISDS chapter. The committee can propose improvements to the chapter and can make
interpretations of the provisions of the agreement that are binding on the arbitration tribunals.
The Joint CETA Trade Committee (a joint committee of higher officials that CETA will also
create) can adopt the interpretation and decide on the date from which the interpretation will be
Through the Committee on Services and Investments Canada and the EU can also consult
each other on the creation of an appellate mechanism, but there is no commitments
whatsoever to take this step.
IISD also remarked5:
The committee would be tasked with examining “under what conditions, an appellate
mechanism could be created.” This is a weak commitment to look into the possibility of an
appellate mechanism. Given the fact that there is no urgency to introduce investor-state
dispute settlement in the Canada-EU context, the negotiating parties are missing an
opportunity to introduce a truly new approach. A preferable option would be to make the
introduction of investor-state dispute settlement dependent on the creation of a proper
appellate or similar mechanism.
Further, there is some bracketed language regarding independence of arbitrators. It states
that arbitrators must comply with the International Bar Association (IBA) Guidelines on
Conflicts of Interest in International Arbitration or a Code of Conduct to be established under
the treaty. Introducing a special code of conduct for arbitrators in disputes arising under the
treaty is useful and necessary considering the current state of investment arbitration. It is
useful insofar as it will trump or complete less adequate standards set in other bodies such as
the World Bank’s International Center for Settlement of Investment Disputes (ICSID).
However, the parties are considering a formulation where the Code of Conduct will not
necessarily apply, as arbitrators have to comply with the Code or the IBA Guidelines on
Conflicts of Interest. While the IBA Guidelines are a very useful reference, they are general to
international arbitration. A code of conduct can be more readily tailored to address specific
concerns on arbitrator conflicts in investment arbitration. Therefore, the parties should not
have a choice between the IBA Rules or a special code but instead the Code should integrate
and build on the IBA Rules and bring in investment-specific elements. In particular, the Code
of Conduct should clearly state that arbitrators in an investment treaty case may not
concurrently act as counsel in other investment treaty arbitrations. Finally, the compromise
draft table indicates that the parties may agree to adopt a code of conduct only after the
adoption of the agreement. This type of postponement should be avoided.
2.3. Understanding on the prudential carve out for financial services from ISDS of 15
October 2014
Part of the deal reached on 18 October 2014 between the Canadian Prime Minister Harper and EU
Commission President Barroso was an agreement ISDS would apply to financial service, which is
a serious defeat for Canada and public interests at large.
The agreement came with an “Understanding on the prudential carve out for financial services from
ISDS” that would be annexed to the Financial Services chapter of CETA. The Understanding gives
guidance on the application on art.15 (Prudential Carve-out) and art.20 (investment disputes in
financial services). It was presented to the EU Member States on 22 October only (i.e. after the
Harper-Barroso deal was publically announced).
It mentions that art.17 of the Financial Services chapter creates a joint “financial services
committee” that will act as a filter in investment disputes in financial services.
The Committee will determine to what extent a prudential carve out can be a valid defence to a
claim by an investor. The decision of the committee is binding on an arbitration tribunal.
The document also contains the “high level principles” that should guide the interpretation of art.15
by the Parties and the tribunals such as: the right of the parties to set their own level of prudential
protection, consideration of the urgency of the situation, the prohibition of disguised restrictions on
foreign investment or arbitrary discrimination.
The Committee will review the understanding every two year and it can also amend it.