CETA's new dispute settlement court: Q&A with Greg Tereposky

Par CBA/ABC National Web Only

CETA's new dispute settlement court: Q&A with Greg Tereposky

The European Union and Canada announced this week their agreement to rely on a new permanent investment court system under the EU-Canada Comprehensive Economic and Trade Agreement (CETA), replacing investor-state dispute settlement (ISDS), the prevailing ad hoc arbitration system that was initially part of the deal. CBA National caught up with Greg Tereposky, a partner at the Ottawa office of Borden Ladner Gervais LLP to ask what the changes mean for investors and Canadian businesses.

CBA National: How does this change the old dispute resolution mechanism envisaged under CETA?

Greg Tereposky: The change relates to investor-state dispute settlement (ISDS) under Chapter Eight (Investment) of the CETA. It does not change the general dispute settlement procedures set out in Chapter Twenty-Nine of the Agreement (which apply to the interpretation and application of the CETA as a whole).  

The draft CETA incorporated the traditional ISDS system whereby three arbitrators sit on the tribunal one of which is appointed by the investor, another by the defending government, and the third by agreement of the two disputing parties, or by agreement of the two appointed arbitrators, or by an appointing authority; and there is a high level of deference to the decision of the arbitral tribunal (so, the tribunal can get the law wrong, but its decision cannot be successfully challenged unless it acted in manifest excess of its powers). With the exception of having three arbitrators sit on the tribunal, all of this is changed in the final text.

The changes in the final CETA text are significant. It is notable that these changes took place during the “legal scrubbing” phase of the treaty, which generally does not contemplate substantive changes to the text, but rather focuses on technical wording issues.  The changes relating to the ISDS system under Chapter Eight go far beyond technical wording changes.

N: What about the composition of tribunals?

GT: Under the final text, an arbitral tribunal is still comprised of three arbitrators. However, those arbitrators are chosen from a roster of fifteen people that is created by Canada and the European Union. This roster will be populated as follows: five members who are Canadian nationals, five members who are EU nationals, and five members who are nationals of non-Party third countries.  A three-person division hearing a dispute will be composed of one person from each pool: i.e., one Canadian national, one EU national, and one national from a third country.  The third country national will chair the division. When a division is formed to hear a dispute, the President of the Tribunal will appoint the members on a rotation basis, ensuring that the composition of each division is random and unpredictable, while giving equal opportunity to all Members of the Tribunal to serve. A person appointed to the roster will serve as a member for a term of five years. These changes are important for the following reasons:

  • The roster is controlled by the CETA member countries, who can ensure that the individuals on the roster are sensitive to government issues and have desirable qualifications (e.g., a strong approach to treaty interpretation that is based on the Vienna Convention on the Law of Treaties;
  • The five-year terms will provide stability in the arbitrator pool, which might contribute in turn to consistency and predictability in tribunal rulings (considering that a recognized flaw in the traditional ISDS system was the lack of such consistency or predictability); and
  • The actual people sitting on the three-person division that hears a particular dispute are selected at random, and not by the disputing parties.

Another notable change involves the addition of a new recital to the CETA preamble that reflects the rationale underlying the changes to the ISDS procedure. This new recital provides that the provisions protecting investors are intended to stimulate business, without undermining the right of the parties “to regulate in the public interest within their territories”. This could lead to interpretations that provide greater “regulatory space” to governments, which could, in turn, reduce the risk of challenges to regulatory measures that impact on investors or investments.

These changes could result in increased consistency and predictability in tribunal rulings, as well as recognition in those rulings of a government’s regulatory space. To date, these issues have been at the foundation of many criticisms aimed at ISDS rulings.

N: What are the new appeal procedures?

GT:  The final text establishes a permanent “Appellate Tribunal”. While this is something new in ISDS procedure, it appears similar in concept to the World Trade Organization (WTO) Appellate Body. The European Union, which included the establishment of a similar body in the draft text of the EU-Viet Nam free trade agreement, was clearly the originator of this change.

The introduction of an Appellate Tribunal is a fundamental change. Under the traditional ISDS system, it was extremely difficult, if not impossible, to challenge an award on the basis of a legal error. Under the CETA, legal errors can now be challenged.  It is reasonable to expect that the new Appellate Tribunal will act similarly to the WTO Appellate Body, which carefully applies the rules of interpretation in the VCLT (see the discussion above regarding the consideration of a government’s “regulatory space” under the new tribunal procedures). Also, like its WTO counterpart, the Appellate Tribunal can be expected to increase the consistency and predictability of the jurisprudence.

N: Why did the ISDS features of the trade agreement need to be renegotiated?

GT: Paired with the small substantive addition to the wording of the preamble, the changes are a procedural solution to the principal criticisms against the traditional ISDS system that might have otherwise delayed or halted ratification of the CETA in the European Union.

N: Is it an improvement on the old system?

GT: From the perspective of improving the consistency and predictability of the dispute resolution mechanism under the investment chapter of the CETA, and the consideration of regulatory space issues, the changes discussed above represent an improvement over the old system.  Although both governments and investors will benefit from improved consistency and predictability with respect to the meaning of the CETA’s investment protection provisions, investors bringing marginal claims (i.e., “Hail Mary” claims) against legitimate regulatory actions might face a lower likelihood of success.

As was the case in the WTO, these changes will also likely increase the level of legal precision required in the preparation and presentation of cases in ISDS disputes that are litigated under the CETA’s investment chapter, as well as the legal precision of the decisions that are issued. This will contribute to transparency in the interpretation and application of the investment protection provisions.

N: What does it mean for Canadian business?

GT: Most Canadian business would not encounter ISDS issues, even under the traditional system. These changes will only impact EU investments and investors in Canada and Canadian investments and investors in the European Union who invoke the ISDS procedures under the CETA. When measured against the entire trade and investment flows between Canada and the European Union, the impact will likely be negligible.

N: How will this impact the settlement of investor-state disputes in other trade agreements?

GT: At this time, the impact of the ISDS reform is limited to the CETA. It should be noted, however, that the European Union appears to be on its way to securing a similar ISDS model in the EU-Viet Nam FTA.  The CETA itself contemplates in Article 8.29 that the “Parties shall pursue with other trading partners the establishment of a multilateral investment tribunal and appellate mechanism for the resolution of investment disputes”. Thus, this model could become more widespread in the future.

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