CETA UPDATE: CETA IS SIGNED; PROVISIONAL APPLICATION OF CETA AND BREXIT; FIRST GOVERNMENT-TO-GOVERNMENT MEETING TO DISCUSS ESTABLISHING THE MULTI-LATERAL INVESTMENT COURT SYSTEM

The post below was first published on our Arbitration blog

On 30 October 2016, the EU and Canada signed the Comprehensive Economic and Trade Agreement (the CETA).  As explained in our blog post here, the text of the CETA, which was originally agreed in 2014, was subjected to "legal scrubbing" in February 2016 which led to the inclusion, at the instigation of the EU, of an Investment Court System (an ICS) in place of the ad hoc investor-State arbitration provisions which had originally been included in CETA, and are included in roughly 3200 international investment agreements and other treaties.

On 13 and 14 December 2016, the European Commission (the Commission) and the Canadian Government met in Geneva to engage in "exploratory discussions" with government representatives from around the world on the establishment of the multilateral ICS. It will have been the first meeting at government-to-government level on this initiative since the ICS was first proposed by the Commission in its Concept Paper of May 2015. For the multilateral ICS to succeed in the way envisioned by the Commission, broad global support will be required.

The CETA will be provisionally applied in advance of its ratification. However, as discussed below, provisional application will not extend to certain of the substantive investor protections, nor to the ICS. The exclusion of certain provisions from provisional application raises a number of questions as to how the agreement will operate in practice.

Interestingly, whilst the UK has indicated that it intends to provisionally apply the CETA, the exclusion of the ICS from the provisional application has been described by the UK Government as its "main ask" of the EU in this context. The UK Government has also concluded that, even though CETA is being put forward as a "mixed agreement" and ratified by all the Member States, the UK will not automatically benefit from CETA's provisions after the UK leaves the EU.

1.What next for the CETA?

1.1 Implications of CETA being put forward as a "mixed agreement"

The CETA has been put forward by the Commission as being a "mixed agreement". It therefore requires ratification by all the EU Member States through their national legislative processes, as well as ratification by the EU itself through a Council decision with the consent of the European Parliament. Whilst the European Parliament (EP) did not support a separate proposal tabled by a group of 89 law-makers to refer CETA to the Court of Justice of the European Union (CJEU), there remain pockets of opposition to the whole or parts of the agreement in many EU countries which have led to speculation about likely delays to ratification.

Notably, the UK Government has concluded that "[o]n leaving the EU, the UK will no longer retain access to the trade preferences contained within CETA unless arrangements to do so are put in place as part of our negotiations with the EU", confirming that this position is "not impacted by whether or not the existing trade deal was signed as a mixed agreement[1].  (See, for example, Letter from the Minister of State for the Department for International Trade to the House of Commons European Scrutiny Committee on CETA).

1.2 Possible provisional application: when and which provisions

The Council has already adopted a Decision on the provisional application of the CETA in advance of its ratification.  Provisional application requires the consent of the EP. At the recent meeting of the EP's INTA (International Trade) Committee, it clarified issues related to the provisional application of the CETA and the legal status of the joint interpretative instrument and 38 declarations and statements issued ahead of its signature.  It is anticipated that the INTA will vote on the agreement in plenary session in early 2017. The CETA will thereafter be returned to the Council for final approval, before provisional application which is expected to take place in the second quarter of 2017.

The discussions as to which parts of the CETA will be subject to provisional application are continuing in the Council. It is already clear that this will not include many of the substantive protections in Chapter 8 (Investment), or the provisions relating to the ICS. The Council's Decision restricts provisional application of Chapter 8 (Investment) in various ways, including the provisions on market access, national treatment and the (limited) Most-Favoured Nation clause, but excluding the provisions guaranteeing Fair and Equitable Treatment and Full Protection and Security and the protections against Expropriation.

1.3 Future challenges for the ICS

Despite being included in the final text of the CETA, the long-term future of the ICS may remain in question. When the Belgian regional parliament of Wallonia opposed the CETA and threatened its signature, one of the concessions made was that the ICS may be considered by the CJEU. The rejection of the current form of the text was made in very strong terms, although later reported statements by Belgian politicians sought to balance the criticism.  It was suggested that there was not a whole-hearted rejection of the ICS but what was required by the Wallonians was reassurance that certain aspects of the system – such as insisting on equivalent process guarantees as contained in domestic courts – would be put into place.

The "Belgian concession" was agreed by all 28 Member States.

2. Provisional application and the UK position

2.1 No support for provisional application of the ICS

The UK Government has confirmed that it wants "to proceed with provisional application" of CETA, citing the anticipated benefit to UK firms and consumers whilst the UK remains in the EU and the positive impact on the UK's relationship with Canada.

However, the UK Government has also confirmed that "[t]he Commission has provided guarantees that the investment court system of arbitration (ICS) that was included in CETA following the completion legal review in February 2016, will not be provisionally applied ahead of ratification in the Member States".  Further, it was confirmed that "removal of ICS from provisional application is the main ask of the UK Government".[2]

The UK Government has previously expressed general support for the EU's reform in the area of ISDS, as proposed in the TTIP negotiations. However, this support has largely focused on substantive matters such as balancing investor protections with the right of governments to regulate, and ensuring transparency in ISDS, but not the establishment of the ICS (see here and here).

The Government's position with regard to provisional application of the ICS provisions may be explained by the circumstances. The ICS has not yet received any public support from other states (notably, the US with whom the EU is negotiating the TTIP). Further, given the UK will not be a party to the CETA after Brexit, the UK may be disinclined to engage in setting up the foundations of a (potentially costly) new system or to expose the UK to a requirement that future claims be resolved by the ICS.

2.2 If CETA enters into force before Brexit, will the sunset provisions in the Investment Chapter still apply to the UK?

With the timelines for Brexit and individual ratifications of the CETA both uncertain, it is not impossible that the CETA will be ratified by all parties before the UK leaves the EU. Such ratification would bring the CETA into full force and effect. The UK would then be bound by Chapter 8 (Investment), not only including its provisions relating to the ICS, but also the investment protection provisions which protect EU investors in Canada and vice versa.  The protections are discussed in our earlier blog post.

Of course, this seems unlikely given the length of time that full ratification usually takes with mixed agreements (requiring ratification by all Member States of the EU individually), and also given that the UK itself would be required to ratify, so would have some control over the process.  Nevertheless, the question would then arise of whetherI the UK would remain bound by Chapter 8 (Investment) after Brexit, in accordance with the sunset clause in Article 30.9, which retains the investment protections in effect for a period of 20 years after the date of termination by any party in respect of investments made before that date.  Sunset clauses are regularly included in investment treaties and other international agreements containing investment protection provisions to ensure that an investor who has made an investment with the expectation of benefitting from these protections, is not prejudiced by the decision of the host state to withdraw from or terminate its international obligations.    There may also be some limited scope for investor-state claims arising from actions during the period of provisional application which allegedly violate the protections which the Council has decided will provisionally apply.  Article 30.8 provides that "…if the provisional application of this Agreement is terminated and this Agreement does not enter into force, a claim may be submitted under Section F of Chapter Eight (Investment) within a period no longer than three years following the date of termination of provisional application, regarding any matter arising during the provisional application of this Agreement". The exclusion of the ICS from provisional application also raises the question as to how any investor-state disputes arising in this period will be resolved.