State-to-State dispute settlement under the EU's draft Withdrawal Agreement: CJEU jurisdiction not arbitration

We have known for some time now that the UK and EU have very different views regarding the state-to-state dispute resolution mechanism to be contained in the Withdrawal Agreement between the EU and the UK. The EU has never made any secret of its intention for the CJEU to adjudicate on disputes between the UK and the EU over the interpretation of, and compliance with, the Withdrawal Agreement. Yesterday the EU released a draft Withdrawal Agreement for the UK's consideration which contains a state-to-state dispute resolution provision which is consistent with that approach. This post provides an initial reaction to this draft provision.

The UK's position to date

The UK put forward a "future partnership" position paper on 23rd August 2017 looking at enforcement and dispute resolution in both the Withdrawal Agreement and any future relationship agreement (see our blog post here). The UK did not propose any particular model of state-to-state dispute settlement in that paper, instead offering illustrative examples from other international agreements. There was, however, one red line from the UK: that it was a common feature of state-to-state agreements that "the courts of one party are not given direct jurisdiction over the other in order to resolve disputes between them". However, even on this topic (and consistent with the stage of the negotiation), the position paper left the UK some degree for manoeuvre: while "direct" jurisdiction for the CJEU was ruled out, many of the other options considered in the position paper allowed for the indirect involvement of the CJEU on matters of EU law. This included a number of possible options, such as  "docking" with the existing judicial architecture of the EFTA Court, the Swiss system, or a CETA-style arbitration model, perhaps with a reference to the CJEU on issues of European law as provided for in the EU-Ukraine, EU-Moldova or EU-Georgia association agreements or an entirely new model.

The EU's draft Withdrawal Agreement

In the context of the EU's clear prior position on this issue, the EU's proposed state-to-state dispute resolution provision in the draft Withdrawal Agreement does not come as a surprise. Under Title III ("Dispute Settlement"), the Withdrawal Agreement proposes that a Joint Committee (co-chaired by representatives from each of the UK and the EU) be established to resolve disputes regarding the interpretation or application of the Withdrawal Agreement. In the event that the dispute cannot be resolved, then the Joint Committee itself, or either one of the UK or the EU, can refer the dispute to the CJEU. The ruling from the CJEU is binding, and non-compliance with that ruling may result in the CJEU issuing a "lump sum or penalty payment", or a possible suspension by the EU or UK of aspects of the Withdrawal Agreement "proportionate" to the gravity of the breach. There is no reference in the draft Withdrawal Agreement to any of the UK's alternative options considered in its position paper, and indeed the draft contains an exclusivity provision to the effect that no other dispute resolution method may be used.

Analysis

There are arguments to be made for both the EU and UK approaches. Seen through the EU's lens, the Withdrawal Agreement contains transitional arrangements for the dissolution of the existing relationship between the UK and the EU – a relationship that currently falls largely, although not entirely, within the CJEU's jurisdiction. It contains reference to many provisions of EU law, and extends the application of those provisions within the UK to allow for the transition to take place. Providing that disputes as to the interpretation and application of those provisions should be reserved to the final arbiter of the interpretation of EU law within the EU's legal order may not therefore seem unreasonable. Indeed, the CJEU has held two international agreements to be inconsistent with EU law because they granted jurisdiction over questions of EU law to bodies other than the CJEU itself (the principle of the autonomy of the EU legal order).

The UK's position, however, may be seen as more consistent with general public international law principles. State-to-state agreements do not generally provide for the courts of one party to have direct jurisdiction over the other.  And, as noted, the CJEU does not have jurisdiction over every aspect of the UK's relationship with the EU even in its current capacity as a Member State.

Having previously drawn a clear line in the sand on the CJEU's "direct" jurisdiction, it will be interesting to see how the UK responds to the draft on this issue. The jurisdiction of the CJEU was a significant feature of the Leave campaign and has continued to be a politically sensitive point in the ongoing negotiations.

It is important to recall, however, that the Withdrawal Agreement is, in theory, only the first part of the exit process. In due course there is likely to be a further international agreement between the EU and the UK setting out the shape of their future relationship. Depending on the nature of that future relationship, the EU may be more prepared to revert to a more "standard" international law approach of resolving disputes by reference to an independent arbitral mechanism or a judicial body that does not comprise the courts of one "side" to the agreement.

For more information, please contact Andrew Cannon, Partner, Christian Leathley, Partner, Iain Maxwell, Of Counsel, Eric White, Consultant, Hannah Ambrose, Professional Support Consultant, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.