Changes to arbitration mechanism will increase chances of CETA success, says expert

Out-Law Analysis | 10 Mar 2016 | 9:46 am | 2 min. read

FOCUS: Canada has agreed to changes in the way investment disputes will be settled under a proposed free trade agreement between Canada and Europe. The change is in response to heavy criticism of the previous text of the Comprehensive Economic and Trade Agreement (CETA), and may be the breakthrough that the agreement needs to finally be ratified.

There has been strenuous protest in Europe against the investor-state dispute settlement (ISDS) that was included in previous versions of the agreement. This arbitration method is used in many bilateral investment treaties, but many protestors believe it reduces the power of the state against large commercial organisations.

Under the new proposals for CETA an investment court system (ICS) will include a 15-member permanent tribunal to adjudicate in investment-related disputes. This will be made up of five EU nationals, five Canadian nationals, and five nationals of third countries.

The tribunal judges will no longer be appointed by the investor and the state involved in the dispute, but will instead be chosen in advance by Canada and the EU. Three people will judge on each case, with one from Canada, one from the EU, and one from elsewhere.

These judges will have to demonstrate experience and recognition in a national court system, in a move that will reduce the number of business lawyers being appointed as arbitrators.

An appeals tribunal will also be included from the moment the CETA deal is in place, in response to heavy criticism of traditional ISDS provisions. Under previous versions of the plan, a tribunal would be created once the deal had begun.

The appeal system will resemble domestic appeal systems, where the decisions of the permanent tribunal will be checked and reversed if the tribunal finds there have been errors in the application or interpretation of the law, as well as 'manifest errors of fact'. Some details have yet to be settled including staffing of the tribunal, and the procedures for initiating and running an appeal, but this is expected to be resolved before CETA is finalised. 

The new procedural rules for the ICS focus on transparency, with all documents made available publicly, all hearings open to the public and interested parties able to make submissions.

The changes are in line with similar moves in negotiations on the Transatlantic Trade and Investment Partnership (TTIP), based on European fears that litigious American multinationals will use arbitration to undermine European laws and regulations. However, this has still to be agreed for TTIP, and the EU's chief negotiator has said that negotiations are working "on the basis of textual proposals from both sides".

The CETA decision may tip the balance for TTIP, or at least help the EU in its talks with the US, but it may also be too late: the issue has become so controversial in Europe that the EU may find it difficult to retreat too far from its Investment Court System proposal for TTIP.

Much of the criticism of arbitration stems from misinformation and ignores its many benefits including flexibility and, increasingly, transparency. Indeed, the new ICS has its own issues, particularly regarding the independence and impartiality of the members of the tribunal. These will be national judges, appointed by governments, which inevitably politicises the situation. In comparison, one of the main benefits of ISDS was that it was apolitical.

In the case of CETA, or indeed TTIP, I believe we can expect judges to act independently, but that is not necessarily the case in all countries where the EU will now try to impose the ICS model. The EU's commissioner for Trade, Cecilia Malmstrom, has said that this mechanism should become part of all future EU trade agreements.

Ottowa's acceptance of the ICS changes has increased the chances of success for CETA. As a "mixed agreement" CETA will now go through the ratification path before the European Parliament and all Member State governments in June. Cecilia Malmstrom and the Minister of International Trade of Canada, Chrystia Freeland, are confident that CETA will be signed in 2016 and enter into force in 2017.

Paris-based Peter Rosher is an arbitration expert with Pinsent Masons, the law firm behind