EU Court Thwarts Prompt Ratification of EU-Singapore Free Trade Agreement
In a legal Opinion handed down on 16 May 2017, the Court of Justice of the European Union (CJEU) declared that the free trade agreement signed between the EU and Singapore in June 2015 cannot be ratified without the approval of all 38 of the EU's national and regional parliaments. Given the broad subject-matter of the agreement, including potentially controversial provisions regarding investor-State dispute settlement, might this decision spell the end of the EU's fledgling project to promote a new generation of trade and investment agreements and an international investment court system?
The EU-Singapore free trade agreement (the FTA) began its life as an attempt by the European Commission to negotiate a free trade agreement with the countries of the Association of Southeast Asian Nations (ASEAN). Having determined that an agreement with ASEAN as a whole was not achievable in the short-term, the European Commission instead chose to focus on an agreement with Singapore. Negotiations began in March 2010 and concluded in October 2014, with the text of the FTA officially finalized on 26 June 2015.
The FTA covers a broad range of issues, including market access, trade barriers, services, public procurement, Intellectual Property rights, competition policy, sustainable development and investment protection.
The CJEU Opinion
The Opinion from the CJEU, the EU's highest court, was in response to a formal request from the European Commission, which had represented the EU in negotiations with Singapore. It sought confirmation from the court that the EU had the legal competence to sign and conclude the FTA on behalf of the EU's Member States, given that this is a question of internal EU law and requires interpretation of the EU's various constituent treaties and other governing instruments. The court was asked to opine on whether the provisions set out in the FTA were (i) within the EU's exclusive competence, (ii) within the shared competencies of the EU and its Member States, or (iii) within the exclusive competence of the Member States.
The court found that the FTA was a "mixed" agreement containing some provisions within the EU's exclusive competence and some within the shared competencies. As a result, the whole agreement requires the approval of the EU's individual Member States, which in turn means that a total of 38 national and regional parliaments must be consulted before the EU can officially ratify the FTA.
In the court's view, it was primarily the provisions of the FTA related to investment protection (Chapter 9) that fell outside the EU's exclusive competence. The court agreed that Article 3(1)(e) of the Treaty on the Functioning of the European Union (TFEU) granted the EU exclusive competence in the area of a "common commercial policy" and that Article 207(1) of the TFEU brought "foreign direct investments" within the scope of said policy. However, it considered the broad nature of the investment protections in Section A of Chapter 9, covering "every kind of asset which has the characteristics of an investment", to mean that the FTA included both "foreign direct investments" and "non-direct investments". The court interpreted the latter category to comprise any investments that do not enable the investor "effective participation in the management or control of a company carrying out economic activity" (eg, portfolio investments). In its view, the drafters of the TFEU deliberately chose the term "foreign direct investment" as an "unequivocal expression of their intention not to include other foreign investments in the common commercial policy". Accordingly, Section A of Chapter 9 fell outside the scope of the EU's exclusive competence.
Investor-State Dispute Settlement
Additionally, the court found that Section B of Chapter 9, which deals with the resolution of disputes between investors and States, was also outside the EU's exclusive competence. In its view, the fact that Section B of Chapter 9 includes a provision under which the host State irrevocably consents to international arbitration, rather than the jurisdiction of the domestic courts, means that Member States must provide their express approval. The fact that any such disputes would concern provisions that are within the exclusive competence of the EU did not mean that the dispute resolutions provisions were "purely ancillary". They had to be considered independently and the EU did not have exclusive competence to agree to such provisions.
Importantly, the court was careful to emphasize that it had not considered the compatibility with EU law of investor-State dispute mechanisms more generally. The request for an Opinion from the European Commission did not include this question and so it was not within the scope of the issues to be determined. This means that we will have to wait for the outcome of other pending cases before the CJEU, such as Achmea (formerly Eureko) v. Slovak Republic (Case C-284/16), before the legality of such provisions is determined.
Termination of Existing Investment Treaties
Another issue raised by some EU Member States during the proceedings concerned a provision under which all existing bilateral investment treaties between Singapore and EU Member States individually would be automatically terminated upon entry into force of the FTA. In its view, when the EU negotiates and concludes an agreement with a third State that falls within the its exclusive competence, the EU takes the place of its Member States and becomes their legal successor in relation to any existing treaties covering the same subject matter. As such, it also acquires the rights of those Member States set out in any such treaties. Accordingly, the CJEU concluded that the automatic termination provision in the FTA was within the exclusive competence of the EU.
Consequences of the Opinion
This is not the first time the European Commission has faced such a conundrum. The recently ratified Comprehensive Economic and Trade Agreement between the EU and Canada (CETA) hit a similar stumbling block when the European Commission conceded that it was a "mixed" agreement and therefore required approval from the Member States. This resulted in a political stand-off with the little-known parliament of Wallonia (a federal region of Belgium) and various concessions being made before approval was eventually obtained. Similar concessions may be possible for the FTA in due course.
The fact that the FTA's investment protection provisions featured so centrally in the court's Opinion has led some commentators to suggest that there will be considerable implications for the EU's future trade strategy. After all, the EU-Singapore FTA is one of the first in a "new generation" of agreements currently being negotiated by the EU that seek to combine trade, investment and other economic provisions into a single treaty. However, it is important to note that the CJEU did not consider investment protection per se to fall outside the EU's exclusive competence. Its legal justification focused on the inclusion of non-direct investments and investor-State dispute settlement provisions. In fact, the court rejected assertions by certain Member States that some of the substantive investment protection provisions (such as the prohibition on unlawful expropriation and the so-called "right to regulate") encroached upon the exclusive competencies of the individual Member States in relation to property ownership and the protection of public interests.
It is not uncommon for bilateral investment treaties expressly to exclude portfolio investments, for example, and so it is entirely conceivable that the European Commission will take the CJEU's comments on board and will be more careful when negotiating future agreements, to ensure that they fall within the scope of the EU's exclusive competence. However, the court's comments in relation to investor-State dispute settlement are more problematic. The EU has sought to champion its own proposals for a devoted international investment court system to replace the much maligned arbitral tribunals favoured in many international investment agreements. There has been significant resistance from Member States and the general public in Europe to the idea of any mechanism that appears to circumvent the existing domestic legal system when considering the actions of a sovereign government.
Whether the European Commission will be able to build a consensus among the various national and regional parliaments to include such provisions in any future treaties is anyone's guess. If it cannot, the EU may have to pass on the mantle of reforming the global investor-State dispute settlement system. The absence of investor-State dispute resolution provisions in the EU's future trade agreements may also have an impact on the deal that the UK is able to achieve post-Brexit, as well as the relative attractiveness of the UK as an investment destination for third countries, since the UK will not need to obtain the consent of all the other EU Member States to include such provisions in its own bilateral trade agreements.
If you would like to know more about the latest developments regarding trade and investment agreements in Asia, Baker McKenzie is holding its Investment Arbitration in Asia Roadshow on Thursday, 25 May 2017 from 09:00 to 12:30 at Baker McKenzie Wong & Leow, 8 Marina Boulevard #05-01, Marina Bay Financial Centre Tower 1 Singapore 018981.
The Roadshow comprises a seminar covering investment arbitration basics, and a panel discussion, with leading arbitration partners from across the region and globally, looking at regional trends, opportunities and challenges for foreign investment in Asia, particularly with respect to China, India and Indonesia.