CETA Ratification In Ireland: Which Way To Go?

This opinion is kindly offered by Raphael Ng'etich, a Kenyan property lawyer and PhD Candidate working with the European Research Council funded project, PROPERTY [IN]JUSTICE at the UCD Sutherland School of Law.

The Comprehensive Economic Trade Agreement, popularly known as CETA, is a trade deal between the European Union (EU) and Canada. Its negotiation started in May 2019 and concluded on 26 September 2014. It was signed by Canada on 30 October 2016 and approved by the European Parliament on 15 February 2017. And being that CETA is a ‘mixed’ agreement, provisional application took effect on 21 September 2017 after a decision by the European Council on 28 October 2016. Majority of the provisions apply except those on investment, the major one being the settlement of disputes through a new investment court system. Based on the subject, the EU can enter into ‘EU only’ agreements or ‘mixed’ agreements. Article 3 of the Treaty on the Functioning of the European Union lists the areas of EU’s exclusive competence while Article 4 identifies the competence shared with member states. According to Article 47 of the Treaty on European Union, the EU has legal personality, and can therefore enter into international agreements. This enables it to enter into ‘EU only’ agreements. Such agreements need to be within the exclusive competence of the EU. However, where they exceed the exclusive competence of EU and touch on areas of shared competence between the EU and the member states, the member states must give their consent – through ratification of the agreement in question. This is how CETA has found its way into the National Parliament (the Oireachtas) of the Republic of Ireland.

CETA and Ireland

In Ireland, CETA has generated a lot of debate, both within and outside the the Oireachtas (the National Parliament). In December 2020, the government introduced a motion in the Dáil (House of Representatives) to ratify CETA. Following this, concerns were raised mainly on the potential impact on the state’s ability to regulate the environment, public health, consumer and labour practices, and other areas. The vote did not take place and CETA was referred to two Oireachtas committees: the Joint Oireachtas Committee on European Affairs; and the Joint Committee on Enterprise, Trade and Employment, to examine it before the decision to ratify is reconsidered.

While the committees were considering it, Mr. Patrick Costello TD (Teachta Dála), a member of Dáil Éireann and the Green Party, instituted a case in the High Court against the government. His main argument was that the ratification of CETA would limit the state’s willingness to introduce desirable regulatory measures because of the possibility of being held liable to pay for loss suffered by a Canadian investor due to the measures. He further argued that CETA would need to be subjected to a referendum due to the provisions on the creation of an investor court system. According to him, the envisaged investor court system would transfer aspects of judicial power, hence affect the State’s sovereignty. The government argued that the CETA only creates obligations as a matter of international law, and does not affect the constitutional allocation of the State’s sovereignty under the Constitution.

In a decision issued on 16 September 2021, the Court dismissed Mr. Costello’s case. It held that CETA is an international agreement and binds the state only as a matter of international law; it does not have direct effect in Ireland and cannot be applied before Irish courts. It further held that the tribunals under CETA will not have the power to rule on the validity of Irish laws or actions taken by Irish authorities. Additionally, the Court found that a referendum would not be necessary for ratification on the account that CETA does not unconstitutionally transfer the State’s sovereignty. The Court relied on the decision of the Court of Justice of the European Union (CJEU) on a request by Belgium for an opinion on the compatibility of the envisaged investor court system with the autonomy of EU’s legal order. The CJEU stated that the creation of the court system would be compatible with EU law as long as such courts would not have the power to interpret and apply EU law other than CETA, and that they be structured in a way that does not result in awards which prevent EU institutions from operating in line with the EU constitutional framework. It also noted that the courts would be outside the EU and member state judicial system.

Investment Treaties – Origins

While the case was dismissed, the issues it raised are worth considering both in the decision to ratify investment treaties, and within the larger system of international investment and trade law. A balanced view is required in examining the potential impact of investment treaties, the investment court system, and the domestic regulatory environment. There is usually polarisation with either uncritical embracing or rejection. The rejection is based on the track record of investor-state dispute cases and the general direction of historical development of the law suits and remedies in international investment. Those who embrace it look at ratification as indicating total commitment, and the fact that arbitral decisions are not binding on later arbitrations, and there is, therefore, room for different outcomes.

Traditionally, cases in investment disputes were based on expropriation; that is, the taking of property belonging to a foreign investor. And the taking needed to be outright – physical dispossession. However, this has since changed. The taking of property or expropriation is today understood in two senses: direct; and indirect taking. Direct taking relates to physical dispossession. Indirect taking relates to instances where there is interference with the investment due to governmental action to the extent that the economic value strongly depreciates, without physical dispossession. The challenge then is clearly identifying which governmental action amounts to indirect taking. As a result of the difficulty in identifying all the possible instances which a tribunal/court might say amount to indirect taking, a chilling effect may be imposed on governmental decisions. And while some arbitral tribunals have defined what constitutes indirect taking, future arbitral tribunals/court could give their own definitions since arbitral decisions are not binding on later arbitrations. The future definitions may depart from or conform to those in place now. The concern is that it’s a waiting game, and a lot therefore hangs in the balance.

Investment Treaties and CETA – Implications for the Future

Under CETA, expropriation is covered under Article 8.12. The provision covers direct and indirect expropriation, and provides that whenever expropriation occurs, there has to be ‘payment of prompt, adequate and effective compensation’. Compensation is a contentious issue especially on the guiding principles and the method of calculation of the compensation. There are various approaches adopted today.

One approach is that ‘prompt, adequate and effective’ compensation must be paid. This is the approach adopted by CETA. The approach is supported mostly by developed countries since they are the capital-exporting states. They need to ensure that their nationals can get as much as possible for their property. It was first used by Secretary of State Cordell Hull during the Mexican expropriations, where the expropriations were aimed at achieving land reform. This is why it is referred to as the ‘Hull formula’. Most calculations seek to award the value of the property and the future profits. Developing states have objected to this approach as did Mexico when it was proposed. It is premised on principles of unjust enrichment and acquired rights. Unjust enrichment is an equitable principle which requires the state to pay since it has benefited from taking the property. However, being that it is an equitable principle, a strict application may not always give full compensation. This is because equitable principles also look at the conduct of the other party and may imply reduction if the other party was in the wrong. Acquired rights call for the investor to be paid for the rights acquired in the investment. And being that it is also an equitable doctrine, a strict application necessitates an examination of the relationship between the parties in determining the compensation.

Another approach calls for payment of appropriate compensation. This was unanimously supported in Resolution 1803 of the United Nations General Assembly. It is a flexible standard which allows for payment of compensation in consideration of the circumstances at hand. For example, no payment of compensation where the investor had been earning inordinate profits while the host state had derived no benefit from the investment.

The point of concern for CETA is that it adopts an approach which enables investors to get as much as possible for their property, instead of the approach which calls for appropriateness and consideration of the circumstances at hand.

Another cause of action that has since emerged in international investment is the breach of standard of treatment. Standards of treatment define the manner in which the country hosting the investor is required to deal with the investor. Violation of such rules gives rise to a cause of action by the investor against the host state. As noted above, the traditional cause of action in international investment is the taking of property. The cause of action based on standard of treatment came into being with the assistance of developed countries as they sought to protect the investments of their nationals in developing countries. Standards of treatment were therefore largely framed with developing countries being the target in mind. The developed countries did not foresee being on the receiving end. This is why it has come as a surprise that these standards have been invoked under the North American Free Trade Agreement (NAFTA) against Canada and the United States.

Today, all countries, developed and the developing, are concerned about what standards of treatment under agreements will imply for government decisions, for example, the decision to regulate the use of environmental resources. This is primarily what informs the current debate on CETA in Ireland. Those opposing the ratification are worried that there is likely to have a chilling effect on government regulation and that violation of the standards would be met with huge arbitral awards in favour of investors. The main standards of treatment in investment law are national treatment standard, and fair and equitable standard. The national treatment standard requires the state to ensure that there is no discrimination between a foreign investor and a local investor conducing similar business. This is regardless of size and other contextual factors. The national treatment standard is set out in Article 8.6(1) of CETA which requires that each party to CETA:

‘accord to an investor of the other Party and to a covered investment, treatment no less favourable than the treatment it accords, in like situations to its own investors and to their investments with respect to the establishment, acquisition, expansion, conduct, operation, management, maintenance, use, enjoyment and sale or disposal of their investments in its territory.’

This implies that Ireland will have to ensure there is no discrimination of foreign investments under CETA with regard to the listed aspects of business operation.

 A fair and equitable standard

 The meaning and content of the fair and equitable standard has not been clearly settled. There is an expansive view which takes the position that this standard allows for a tribunal to come up with new standards to ensure that justice is done when a foreign investor suffers unfair treatment from the host state. Any discriminatory measure is therefore bound to violate this standard. The other is the narrow view which states that the fair and equitable standard does not add anything but merely affirms the international minimum standard of treatment the violation of which results in state responsibility. 

CETA provides for the fair and equitable standard of treatment under Article 8.10. Article 8.10(2) provides in part that the obligation of fair and equitable treatment is breached:

‘if a measure or series of measures constitutes: (a) denial of justice in criminal, civil or administrative proceedings; (b) fundamental breach of due process, including a fundamental breach of transparency, in judicial and administrative proceedings; (c) manifest arbitrariness; (d) targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief; (e) abusive treatment of investors, such as coercion, duress and harassment’.

Article 8.10(2)(e) together with Article 8.10(3) provide for the regular review of the content of the obligation, with the possibility that further elements may be added to the above list. CETA’s approach of setting out a list of what constitutes the fair and equitable standard is an attempt to guide and constrain the interpretation by the tribunals. The parties have a reference point from the provisions on what would constitute violation of the fair and equitable standard. CETA has in effect formalized what investors had to establish before arbitral tribunals. The list provides more clarity than would be the case if the tribunal were left to itself determine what would constitute the standard. However, it is important to keep in mind that a tribunal would still have to give an interpretation of what the listed elements mean and imply in each case that comes before it. For example, it will have to define what ‘manifest arbitrariness’ means. This implies that many aspects of the fair and equitable standard are still fairly open-ended. 

Another aspect is that in applying the obligation, Article 8.10(4) empowers the Tribunal to:

‘take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated.’

This provision highlights the concerns of those who are of the opinion that the rights in the international investment system are focused on investors. The provision allows investors to benefit from representations made by states in the process of wooing investors to initiate or maintain an investment. This is despite the fact that individuals and companies who engage in foreign investment have the ability, financial, legal or otherwise, to know with certainty the law in a particular country and whether the representations made by government officials in wooing investors are indeed in line with the law or even whether the officials in question have the capacity to make such representations. Investors have corporate departments dealing with legal matters, and others in fact have large law firms on retainer for such purposes. Additionally, the agreement does not define what ‘specific representation’ means. It is therefore left for tribunals to give meaning to the phrase. The phrase ‘specific representation’ is wider in meaning than ‘promise’ or ‘written obligation’. This implies the possibility of more liability for states.

The interplay among the above issues is seen in the decisions of arbitral tribunals, the most recent being the case of Eco Oro Minerals Corp v. Colombia where an International Centre for Settlement of Investment (ICSID) arbitral tribunal found, by a majority, that Colombia breached Article 805 of the Free Trade Agreement between Canada and the Republic of Colombia (FTA) since its approach to the delimitation of the Santurbán Páramo was characterised by arbitrariness and inaction which caused damage to Eco Oro without achieving any legitimate purpose. The tribunal further found that the Colombia, and the government agencies, failed to address the widely disparate interests in relation to the mining and the protection of the environment in the Santurbán Páramo. It noted that:

“It has failed to act coherently, consistently or definitively in its management of the Santurbán Páramo and in so doing has infringed a sense of fairness, equity and reasonableness and indeed has shown a flagrant disregard for the basic principles of fairness. This is more than just inconsistency or inadequacy by Colombia and its officials.”

As a result, the tribunal concluded that Colombia had failed to treat the investment ‘in accordance with the customary international law minimum standard of treatment of aliens, including the obligation to provide fair and equitable treatment’.

Additionally, the tribunal found that the environmental exception in Article 2201(3) of the FTA did not prevent the award of compensation for the violation of Article 805. It interpreted the exception to mean that even where a state adopts measures which conform to the objectives of Article 2201(3) without breaching the FTA, that does not prevent an investor’s claim to payment of compensation under the investment provisions of the FTA. The tribunal is yet to determine the amount of damages for the violation.

Conclusion – Which way to go?

The above decision and others like it call for a balanced examination of the investment treaty regime and investment court systems, and their relation with the domestic regulatory environment. Ireland would benefit from a careful examination of the arguments on both sides of the ratification debate. The ratification of CETA will likely have an effect on aspects including land and other environmental resources, as seen in the case of Colombia above. Any future land reform or environmental protection initiatives touching land subject to investment would likely occur at a great cost (compensation to investors), or give those in power the political reason to shelve the initiatives. It is necessary to conduct a cost-benefit analysis of ratification, taking into account the outcomes of current arbitral tribunals on interpretation of other bilateral treaties, and the overall impact on the regulatory framework, especially as it relates to the use of land and associated environmental resources by investors as well as local communities.