Thym, Daniel

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The Missing Link: Direct Effect,CETA/TIIP and Investor-State-DisputeSettlementDaniel Thym 2015-01-04T10:28:44International treaties have rarely received more attention than the proposed freetrade deals with the US and Canada. This entails that many law students andpractitioners are confronted with a theme that does not feature prominently inlegal education. In debates with students, I realise that preconceptions about thefunctioning of domestic legal systems are regularly projected upon the internationalsphere. One example are demands that companies should challenge state actionbefore domestic courts instead of dispute settlement bodies under TTIP and CETA.These claims often assume that national courts hold the competence to enforcecorresponding rules. For lawyers working on domestic issues it seems self-evidentthat courts can apply the law.Against this background, this blogpost focuses on a provision in the Draft CETAwith Canada, whose relevance has not been acknowledged so far, including bythe stimulating contributions to the Verfassungsblog Symposium on InvestmentProtection. On page 470 of the roughly 1600 pages of the consolidated CETADraft Agreement, which the Commission regards as a template for free tradenegotiations with the United States, we come across a final provision of seeminglyminor relevance on ‘private rights’, which rejects the applicability of the agreementen passant. This reaffirms that the implications of the free trade deals would be lessdramatic than some suggest.Background: CETA and TTIP as International EUAgreementsIn order to understand the relevance of Article 14.14 on private rights, we shouldapprehend that most segments of the free trade agreements would be bindingupon Member States as an integral part of EU law. Axel Flessner may try to arguethat the arrangements would constitute an ultra-vires-act (thereby initiating moretweets than any other contribution to the said symposium), but the plain Treaty textdemonstrates that the legal picture is fairly evident. Article 207 TFEU declares thatthe Common Commercial Policy allows for the conclusion of trade agreements ongoods and services and embraces, among others, ‘foreign direct investment’, whileArticle 3 TEU maintains that the conclusion of corresponding agreements shall be anexclusive Union competence.These provisions were a deliberate policy choice after decades of wrangles aboutthe precise scope of the Common Commercial Policy (CCP). The Treaty of Lisbon- 1 -was meant to replace earlier and ambiguous formulations with an overarchingcompetence for the European Union. In its Lisbon Judgment, the German FederalConstitutional Court recognised the pertinence of this change: ‘With the exclusivecompetence as set out above, the Union acquires the sole power of disposition overinternational trade agreements which may result in an essential reorganisation ofthe internal order of the Member States.’ Judges in Karlsruhe gave the green lightto the changes nonetheless, albeit with a minor caveat that ‘much argues in favourof assuming that the term “foreign direct investment” only encompasses investmentwhich serves to obtain a controlling interest in an enterprise’ and excluded so-calledportfolio investments as a result.This reference to the limits of the CCP is relevant, since it indicates, in generalterms, that there remain uncertainties about the precise delimitation of competencesfor corollary aspects of international trade. For that reason, most nationalgovernments maintain that CETA and TTIP should be concluded as so-called ‘mixedagreements’, with the EU and all 28 EU Member States as signatories. If that viewprevailed, national parliaments would have to give their consent as well. However,this would not modify the internal allocation of powers; the EU institutions are in thedriving seat in the vast field of Union competence – both during the negotiationsand with regard to legal effects. It is established case law that the legal effects ofmixed agreements follow the rules of Union law for all matters that are covered bythe Common Commercial Policy.Domestic Application of Agreements concluded bythe EUThe predominance of Union law in legal practice can obscure our awareness for thespecificities of the international legal system. Law students across Europe learn intheir undergraduate courses about the direct and supreme effect of supranationalrules, but are not always familiar with public international law. Domestic courts haveto apply Union law in pretty much the same was as national law, but this assumptioncannot be extended to public international law without modification, including insituations in which the EU concludes international agreements with third states.It is true that the ECJ maintains that international agreements can have directeffect as an integral part of the Union legal order – and an example demonstratesthat this can have critical implications: judges in Luxembourg decided in July thatMember States cannot automatically require the spouses of Turkish nationals toacquire basic language skills of the host country. Legally, this conclusion restsupon an interpretation of the so-called standstill provision for the self-employedin the Additional Protocol of 1970 to the Association Agreement between Turkeyand today’s European Union. In the terminology of international trade law, the caseconcerned a so-called non-tariff barrier to the freedom of establishment. It is thesenon-tariff barriers that take centre stage in both CETA and TTIP negotiations (bothwill not affect migration, though).- 2 -If the underlying legal arguments about direct effect and court jurisdiction extendedto free trade deals with Canada and the United States, the implications could bedramatic indeed. Both the ECJ and domestic courts would hold the power to correctdomestic or supranational legislation, whenever it falls foul of CETA or TTIP. Yet,this outcome is no foregone conclusion, since the ECJ opts for a direct applicabilityof international agreements ‘only where the nature and the broad logic of the latterdo not preclude this.’ In deciding whether this is the case, it considers, amongothers, the purpose of the agreement, the will of the parties and the question ofreciprocity, i.e. whether the Union would be alone in recognising direct effect.Luxembourg may have largely ignored the question of reciprocity with regard toTurkey and other neighbours, but it traditionally takes centre stage in the evaluationof trade liberalisation agreements.Article 14.14 of the CETA Draft TreatyOnce we have understood the far-reaching implications of direct applicability, wemay appreciate the bearing of the clause on private rights in the final provisions ofthe consolidated Draft CETA Agreement, which states: ‘Nothing in this Agreementshall be construed as conferring rights or imposing obligations on persons other thanthose created between the Parties under public international law, nor as permittingthis Agreement to be directly invoked in the domestic legal systems of the Parties.’That is nothing less than the official denial of direct effect in the operative treaty text;neither the ECJ nor domestic courts would hold the power to apply CETA rules indomestic proceedings or to annul legislation, which contradicts trade law. CETA andTTIP would get the same treatment that the ECJ accords to WTO law, which alsodoes not have direct effect in the EU legal order and the domestic legal systemsof the Member States – not even in situations, in which the appellate body of theWTO Dispute Settlement Mechanism confirmed that EU legislation falls foul of WTOstandards.Denial of direct effect is an important stumbling block for the long-term success ofany free trade agreement, especially when it comes to the elimination of non-tariffbarriers to trade, since corresponding rules are often formulated in an open manner.The real-life implications of such vaguely formulated provisions depends decisivelyupon the continued will of the parties and the availability of control and enforcementmechanisms – as the experience with non-tariff barriers to trade in the EU singlemarket and the example of language requirements for spouses of Turkish nationalsdemonstrate. Without institutional control mechanism, vague treaty formulations areoften ineffective.Implications for the Debate about Investor-State-Dispute SettlementIn the light of Article 14.14 of the CETA Draft Agreement, we may have to re-consider our perspective on the proposed investor-state-dispute settlement rulesin both CETA and TTIP. Critics will use the absence of direct application as an- 3 -argument to decry the special treatment for investors; supporters, by contrast, willargue with the Commission that the dispute settlement bodies are a compensationfor domestic legal remedies, which would not be available for the substantive rulesof CETA and TTIP. I personally share the opinion of Christian Tams that the debateshould focus on the desirability of special rules for investors (and not the questionof procedure). The latter may be superfluous in relations with the US and Canada,but to abandon them would render it difficult to insist upon similar provisions innegotiations with China, Russia or other states we trust less.In any case, the absence of direct effect in domestic proceedings shows thatthe legal implications of CETA and TIIP would be less dramatic than somecommentators in the public debate suggest. Courts in Europe would not hold thepower to annul domestic or supranational legislation, which violates the agreements– a power that also the dispute settlement bodies would be denied explicitly, togetherwith the option for the state parties to force their reading of the agreements upon thearbiters by means of an authoritative interpretation. This would orientate the disputesettlement rules in CETA and TTIP towards inter-state bargaining, pretty much like inthe WTO context.The denial of direct application demonstrates that both the CETA Draft Agreementand the TTIP negotiation position are far removed from resembling anything likeEU-style integration through law – and I consider this to be a good thing giventhat any dynamic interpretation would lack much of the democratic legitimacyand procedural constraints, which we have, notwithstanding all the deficits, inthe European context. It seems to me that it is the biggest benefit of the debateabout CETA and TTIP to this date that the broader public has started discussingthe governance of economic globalisation. That debate will stay with us, even ifan seemingly unimpressive provision on page 470 of the CETA Draft Agreementexcludes the domestic enforcement of the transatlantic trade rules.  - 4 -

The Missing Link: Direct Effect, CETA/TIIP and Investor-State-Dispute Settlement

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The Missing Link: Direct Effect, CETA/TIIP and Investor-State-Dispute Settlement

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