EU Court CETA ruling shows failure of ISDS reform

Vrijschrift | 6 May 2019

EU Court CETA ruling shows failure of ISDS reform

by Ante Wessels

The EU Court of Justice finds the investor-to-state dispute settlement (ISDS) mechanism in the EU - Canada trade agreement CETA compatible with the EU treaties. With its ruling the Court creates a form of oversight over ISDS. It hopes to exert power over the enforcement of ISDS awards, and so to curtail the system. The Court does not trust ISDS, as reformed by the EU ; the Court trusts its own oversight.

However, as explained below, the Court’s interesting approach has serious drawbacks. That leaves one option on the table : get rid of the toxic ISDS system. The first step to take now is to reject ISDS in CETA.


The court finds CETA’s safeguards sufficient to protect the democratic process. This came as a surprise as many people had pointed out ISDS tribunals tend to disregard safeguards that limit their freedom.

Simon Lester, discussing the ruling, comes to an opposite conclusion :

“Putting these two factors together, CETA ISDS has a high degree of impact on democratically made choices in the EU.”

Naive ?

Was the Court naive ? Not necessarily. Rob Howse, Steve Peers and others show an other way to look at the ruling. By taking weak safeguards seriously the Court suggests that the EU and its member states can refuse to pay ISDS awards. The company that won the ISDS case then has to go to court, and core legal questions may end up at the EU court, which can then apply CETA’s safeguards in a serious way. 1 This approach, transformation of legal norms, is interesting and powerful, but comes with negative consequences in this case.

Giving supranational, disembedded rights to companies never was a good idea. By introducing oversight over ISDS the Court turns against this core feature of ISDS.

The EU Court suggests : well, just don’t pay. And let us block enforcement of unreasonable ISDS awards. But if the EU and its member states can refuse to pay ISDS awards, any country can. Don’t have too many assets abroad, and you can beat the system. This approach can be used to defend democratic processes, but equally to defend bad autocratic decisions. Belgium asked to check CETA against our fundamental values, and the Court came up with an approach that equally enables bad behavior.

The ruling doesn’t bode well for legal certainty for foreign investors, and with this, the rationale for ISDS falls away. 2

Regulatory chill

Furthermore, as companies can still harass states with high legal bills and legal uncertainty, this ruling may work for rich EU countries (not all of them are), but less so for developing countries. Also, not paying ISDS damages may come with consequences (again, probably pressing harder on poorer countries – the ruling may have an imperialistic effect ?). 3 The court’s “solution” may still come with considerable regulatory chill.

Beyond the CETA question, the ruling doesn’t any time soon work for older, very open, investment treaties with ISDS, and will then have the same drawbacks. The same is true for a eventual multilateral investment court. The need to add oversight shows that the EU reform attempt failed.

The Court takes down the ISDS mechanism’s core feature, and it’s rationale, but not it’s negative impact.

We face an existential crisis : climate change. EU’s ISDS reform plus the Court’s ruling enables bad behavior, does not sufficiently protect against regulatory chill, and fails a resolute action test. That leaves one option on the table. To save our civilisation we have to act fast, and we have to get rid of the toxic ISDS system, as it undermines our ability to act. The first step to take now is to reject ISDS in CETA.

Footnotes :

1. Steve Peers : “However, it also refers to the possibility of national courts asking the CJEU questions about CETA. Arguably, then, it’s possible to enforce the limits on ISDS bodies by a Member State or the EU refusing to pay a damages award ordered by an ISDS body, leading to a court challenge of that refusal to pay by the winning party – which is technically not a court review of the ISDS body’s decision as such. It would be similar to the well-known case of Kadi, in which the CJEU did not rule on the validity of a UN Security Council measure as such, but on the legality of its application in the EU legal order.”

2. The rationale was never convincing as alternatives are available : invest in countries with good legal systems, Multilateral Investment Guarantee Agency insurance, commercial political risk insurance, and state-state arbitration.

3. Note also that the Netherlands adopted a new model investment treaty text with a neo-colonialistic touch. Countries are well advised to not sign treaties with the Netherlands.

source: Vrijschrift