Investor – state dispute settlement not compatible with EU Treaties

In this blog post I will argue that investor – state dispute settlement (ISDS) is not compatible with the EU Treaties.

Summary: EU laws have to be compatible with the EU Treaties (including human rights). International agreements do not change this, EU laws implementing international agreements have to be compatible with the EU Treaties as well. The EU Treaties establish a complete system of legal remedies and procedures, the EU Court of Justice (ECJ) has exclusive competence to review the lawfulness of EU acts. Investor – state dispute settlement creates a parallel track. It falls outside the complete system of legal remedies established by the EU Treaties and conflicts with the ECJ’s exclusive competence. Investor – state dispute settlement is not compatible with the EU Treaties, it undermines the very foundations of the Union.

Investor – state dispute settlement

Investor – state dispute settlement clauses in international agreements give multinationals the right to sue states for international arbitration tribunals and demand high damages. In recent years, arbitration tribunals increasingly stretched the concept of expropriation. Multinationals can now sue states if legislative changes may make their profits lower than expected, even if the legislative changes are needed for the public interest, like protecting health. This puts pressure on the democratic process and the public interest.

International tribunals above high courts

Tobacco company Philip Morris sued Australia over the Tobacco Plain Packaging Bill, which introduced restrictions on the use of cigarette company’s logos on cigarette packets and allow for more space for health warnings. After Australia’s High Court dismissed the legal challenge, Philip Morris launched an investor-state case, bypassing Australia’s High Court. As a result, Australia decided not to sign treaties with investor-state arbitration clauses any more.

Using investor – state dispute settlement to bypass local courts, including the highest court, raises the question whether the EU Treaties allow arbitration to bypass the European Court of Justice when it comes to the interpretation of the EU Treaties.

ECJ case law: Kadi et al

The Treaties establish a complete system of legal remedies and procedures, the lawfulness of EU acts is for the Court to review. Some quotes from Joint Cases C-402/05 P, Kadi et al, and C-415/05 P (emphasis added).

In paragraph 281 the Court considers that “it is to be borne in mind that the Community is based on the rule of law, inasmuch as neither its Member States nor its institutions can avoid review of the conformity of their acts with the basic constitutional charter, the EC Treaty, which established a complete system of legal remedies and procedures designed to enable the Court of Justice to review the legality of acts of the institutions (Case 294/83 Les Verts v Parliament [1986] ECR 1339, paragraph 23).”

In paragraph 282 the Court recalls “that an international agreement cannot affect the allocation of powers fixed by the Treaties or, consequently, the autonomy of the Community legal system, observance of which is ensured by the Court by virtue of the exclusive jurisdiction conferred on it by Article 220 EC, jurisdiction that the Court has, moreover, already held to form part of the very foundations of the Community (see, to that effect, Opinion 1/91 [1991] ECR I‑6079, paragraphs 35 and 71, and Case C-459/03 Commission v Ireland [2006] ECR I‑4635, paragraph 123 and case-law cited).”

In paragraphs 283 and 284 the Court considers that fundamental rights form an integral part of the general principles of law and that respect for human rights is a condition of the lawfulness of Community acts.

In paragraph 285 the Court considers: “It follows from all those considerations that the obligations imposed by an international agreement cannot have the effect of prejudicing the constitutional principles of the EC Treaty, which include the principle that all Community acts must respect fundamental rights, that respect constituting a condition of their lawfulness which it is for the Court to review in the framework of the complete system of legal remedies established by the Treaty.”

ISDS outside the complete system of legal remedies and procedures

Investor – state dispute settlement falls outside the complete system of legal remedies and procedures established by the EU Treaties. Arbitration tribunals will not request the ECJ preliminary rulings on the interpretation of Union law or on the validity of acts adopted by the institutions. They will decide themselves on the validity of acts adopted by the institutions. The ECJ and arbitration tribunals may reach different conclusions.

An investor may dislike EU legislation safeguarding a human right, say access to medicine, and state that it is not compatible with an international agreement ratified by the EU. The ECJ may consider that the international agreement can not take away the Union’s legislative space to safeguard human rights and dismiss the legal challenge.

The investor may then launch an investor – EU case. The tribunals may assume jurisdiction without taking into consideration the compatibility of investor-state arbitration with EU law. (Compare: Olivet, C, 2013) International arbitrators are not ordinarily well versed in human rights. (Kelsey and Wallach, 2012). The arbitration tribunal may find the EU law safeguarding a human right not compatible with the trade agreement. The decisions conflict.

Investor – state dispute settlement undermines the autonomy of the Union’s legal system, the ECJ’s exclusive jurisdiction – a very foundation of the Union (compare paragraph 282 ECJ case Kadi et al, quoted above).

ECJ, Joint Cases C-402/05 P, Kadi et al, and C-415/05 P, 2008,
http://curia.europa.eu/juris/document/document.jsf?text=&docid=67611&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=1560491

Kelsey and Wallach, 2012, “Investor-State” Disputes in Trade Pacts Threaten Fundamental Principles of National Judicial Systems,
http://tpplegal.files.wordpress.com/2012/05/isds-domestic-legal-process-background-brief.pdf

Olivet, C, Transnational Institute, 2013, A test for European solidarity – The case of intra-EU Bilateral Investment Treaties http://www.tni.org/briefing/intra-eu-bilateral-investment-treaties-test-european-solidarity?context=70931