Opinion 1:17 – the Investment Court System receives green light from the ECJ. But does it protect countries’ right to regulate mining projects?
Photo by Sebastian Grochowicz on Unsplash.
Introduction
In May 2019, the European Court of Justice (ECJ) issued Opinion 1/17 concerning the relationship between EU law and the so called investment protection rules of the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada. CETA’s investment protection rules seek to protect private investments made by Canadian and EU investors in the territory of the other party. Their central aspect is investor-state dispute settlement (ISDS), which allows investors to bring claims against, and seek compensation from, the state where they have invested. In addition to the CETA, ISDS has been included in more than 2 000 investment treaties, and it has been used in a number of high-profile cases by investors to challenge what many have perceived as legitimate public interest measures, such as Germany’s decision to phase-out nuclear power.[1] During CETA negotiations, a public campaign was led by NGOs, describing ISDS as putting ‘corporate profit before human rights and the environment’ and as being undemocratic and biased towards business interests.[2] Similarly, it was argued that the mere threat of ISDS risks compelling states to abstain from public interest regulation – a phenomenon known as ‘regulatory chill’.
The campaign succeeded in that the EU Commission amended its position, and rejected the inclusion of ISDS rules in CETA. The Commission replaced the much-criticized ad hoc arbitral tribunals and private arbitrators with a permanent investment court consisting of tenured judges. The Commission also introduced new investment protection rules, and, taken together, these changes were meant to ensure that investors are no longer able to challenge legitimate public interest measures.
Opinion 1/17 by the ECJ dealt, inter alia, with the question of whether CETA’s reformed investment rules comply with certain fundamental principles of EU law, such as its autonomy. In a nutshell, the Court held that CETA’s investment chapter is fully compatible with EU law. The purpose of this blog post is to challenge the contention that CETA’s investment chapter fully guarantees the protection of public interest measures from challenges by investors.
CETA and the Right to Regulate
According to CETA Article 8.9, the parties have a “right to regulate within their territories to achieve legitimate policy objectives.” CETA’s investment protection rules are also less investor-friendly than the standard ISDS rules in that they define more stringently the types of treatment that constitute a breach of the substantive investment protection rules. For example, CETA Article 8.10.2 provides that a treatment breaches the fair and equitable treatment standard only if it constitutes “denial of justice” or “fundamental breach of due process” or “manifest arbitrariness”. The “right to regulate” clause and the new protection rules were at the heart of Opinion 1/17, as the ECJ held that they guarantee that CETA “tribunals have no jurisdiction” to question democratically made decisions concerning the level of protection of public interests such as protection of the environment and public health. This would imply that when the EU member states and Canada adopt measures protecting these and other public interests, investors could not seek compensation under the CETA. This, however, most certainly is not the case.
Firstly, investment treaties have never prohibited states from regulating in the public interest, and in practice ISDS tribunals have acknowledged that states enjoy wide discretion in this regard. In most cases, the real question has been whether a measure genuinely served the purported public interest or whether it was adopted e.g. for political reasons and whether the measure was proportionate in relation to the protected interest or whether less intrusive regulation could have achieved the same goal. While CETA’s references to the “right to regulate” will undoubtedly guide the interpretation of the treaty’s investment protection rules, it seems obvious that there will nevertheless be situations where an investor will consider that a public interest measure constitutes “manifest arbitrariness” or that the process through which the measure was adopted entails a “fundamental breach of due process.” Indeed, most investment disputes are based on contested factual circumstances that are open to varied and opposing interpretations. What is a “fundamental breach” can only be assessed against some factual record, and many times reasonable people (including competent lawyers) will disagree whether the required threshold is reached. The point is not to say that CETA’s reformed rules are useless in protecting the public interest – they do diminish the tribunals’ interpretative leeway. At the same time, however, the CJEU’s take on the relationship between public interests and CETA’s investment chapter is unrealistic in assuming that ‘public interests’ are clearly definable and universally shared by domestic constituencies, rather than contested notions competing with other public and private interests in legislative and regulatory processes. In sum, CETA tribunals will not decline jurisdiction on the ground that a measure has been adopted with the objective of protecting a public interest, even if that public interest will be at the heart of the investment dispute and legal analysis. Indeed, most, if not all, EU and domestic regulations serve some public interest, and it is the task of CETA tribunals to assess whether the arguments about the measure’s purpose hold water and whether the measure complies with the CETA’s investment protection rules.
CETA and Mining in Finland
One question that has received attention in the context of CETA and Finland is whether Canadian mining companies could use CETA’s investment protection rules to seek compensation with respect to a mining-related regulation that affects their investments. Large-scale mining entails various ecological risks, so situations may well arise where regulators need to interfere with a mine’s operation when something unexpected happens or when assumptions concerning the mine’s environmental impact turn out to be too optimistic. While the permitting process for mining in Finland is governed by a number of laws, those laws do not dictate, for example, what should be done and who should bear the costs when a mine’s waste management fails to function as anticipated. These are difficult questions to which the applicable legal standards provide no clear answers. Should the mine’s operations be stopped? Who should pay for cleaning up the pollution and compensate the attendant damages?
When such questions are addressed in negotiations between the mining company and public authorities, the bargaining will effectively take place in the shadow of law. The possibility of bringing a claim against the state under an investment treaty adds leverage to the investor’s negotiating position for at least three reasons. First, investor-state disputes may carry a high price tag and the costs are paid from state budgets,[3] a picture that most politicians dislike, which increases the likelihood of settlement. Second, the uncertainties that relate to an underdeveloped area of law such as international investment law also create an incentive to settle, as the outcome of cases is often entirely uncertain. Even if the CETA seeks to rein in investor claims, it leaves much room for non-frivolous claims whose outcome is difficult to predict in the absence of relevant case law. Third, there is a widely shared perception among the political class that investor-state disputes damage a country’s reputation in the eyes of potential investors, and this may again tempt states to settle the dispute.
Conclusion
There is an ongoing discussion in Finland on the ways in which the Mining Act 621/2011 (and other laws relevant to mining projects) should be reformed so as to ensure that the impact of mining remains at an ecologically tolerable level. Whether or not such reforms are adopted, they cannot fully eliminate the possibility of mining-related disputes under CETA. While claims related to general, non-discriminatory legislative changes have little chance of success under CETA’s investment protection rules, the many uncertainties that relate to industrial mining may well create situations where regulators struggle to find a balance between the diverging economic and environmental interests, with the affected investors relying on CETA’s rules so as to take the dispute to an institutional context where investment protection remains a central premise despite the references to the right to regulate.
[1] Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12.
[2] See Pia Eberhardt and Cecilia Olivet, Profiting from Injustice (CEO, 2012), p. 7
[3] Under CETA’s investment chapter, the main rule is that the costs of the proceedings are borne by the losing party (see Art. 8.39.5). A 2014 study found that in ISDS cases where information on costs was available, the average amount for claimants was around US$ 4,437,000 and for respondents US$ 4,559,000, excluding arbitrator and administrative fees. The same study also found that average amount claimed in cases where the investor was succesful was around US$ 166 million and the median amount of damages awarded to investors around US$ 10.5 million. See Matthew Hodgson, ‘Counting the Costs of Investment Treaty Arbitration’, Global Arbitration Review (24 March, 2014),