German Federal Government clears the way for CETA ISDS

When the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada was concluded in October 2016, no one would have guessed that ratification of the Agreement would still not be completed in 2022. On 1 July 2022, however, an important hurdle from a German perspective was overcome: On that day, the Federal Cabinet passed a bill for the ratification of the Trade Agreement. The ratification bill is to be introduced into the Bundestag by the coalition parties' MPs before summer recess starts. The parliamentary process is to be completed as early as this autumn.

The CETA already entered into force provisionally in September 2017. This means that those parts of the Agreement for which the EU undoubtedly has exclusive competence already apply. These include, in particular, the provisions on customs facilitation, intellectual property protection and the link to the incorporation provisions under international corporate law. In contrast, other important parts of the Agreement are not yet applicable, including the chapter on investment protection. For CETA to enter into full force and effect, it must be ratified by the parliaments of all EU member states, the EU and Canada. To date, 15 member states have ratified it, but Germany, among other states, has not mustered the determination to do so yet. One particular reason for this hesitancy is the disputed investment protection provisions.

Important milestone on the way to a multilateral investment tribunal?

The CETA aims to modernise the investor-state arbitration mechanism introduced in the 1980s to align it with 21st century requirements. The investor-state dispute settlement mechanism (ISDS) provided for in the Agreement is a novel hybrid solution that combines elements from traditional investment arbitration with classic state court structures: Under the CETA, independent, impartial and permanent investment arbitration tribunals are to be established. These are to be staffed with 15 permanent arbitrators, five each from the EU, Canada and third countries, and decide in chambers with three arbitrators. The composition of the chambers is to be random. Further innovations include an appellate body and greater transparency through public oral hearings and the publication of pleadings. Moreover, the establishment of the ISDS mechanism is only the first step: Going forward, the CETA envisages the establishment of a multilateral investment tribunal, which is to have competence also to rule on further trade agreements and which is to be open to accession by any country without restrictions. Proposals for a correspondingly reformed dispute settlement mechanism already include investment protection agreements of the EU and EU member states with Singapore and Vietnam as well as the free trade agreements with Mexico and Chile. In addition, the EU recently successfully concluded negotiations, which had been ongoing since 2018, on a free trade agreement between the EU and New Zealand, which also provides for such a reformed dispute settlement mechanism.

The legal conformity of the structure contemplated by the CETA was and is by no means beyond doubt. In the past, the ECJ had shown restraint in cases where there was a possibility that another court could interpret European law and had always attached great importance to the autonomy of Union law and its primacy of interpretation. One need only think of the ECJ's negative decision on the EU's possible accession to the European Convention on Human Rights in 2014 and the ECJ's Achmea decision in 2018, which held that investment tribunals between EU member states were contrary to EU law. However, in a 2019 opinion, the ECJ – as a surprise to some – endorsed the approach to investment disputes provided for by the CETA, thus paving the way for implementation of the Agreement. One last legal hurdle that the CETA investment protection mechanism will still need to overcome in Germany could be the following: Although, in a March 2022 decision, the German Constitutional Court ruled that the provisional application of the CETA does not violate Germany's Basic Law (Grundgesetz), the.court did not specify whether this holds also true for the CETA court system.

Can the cabinet decision act as an impulse to other EU member states?

The German government has already announced that it does not want to demand any renegotiation of the Agreement. It stated that it intends to work towards an interpretative declaration on investor protection, however, through talks at the EU level and with the Canadian government. This is intended to ensure that certain CETA investment protection provisions are further specified and that an abusive application of the substantive protection provisions is prevented. In addition, the German government will advocate for improvements in parliamentary participation. It does not expect that this will interrupt the ratification process, however.

Ultimately, not only Germany, but also eleven other EU member states are yet to give their consent, so that the decision of the Federal cabinet will not lead to any changes for the time being. Nevertheless, the decision of the German government is a groundbreaking step towards a new EU investment protection system and the further legal protection of foreign direct investments – not only in relation to Canada. Especially companies operating across borders, and across the Atlantic, are likely to be monitoring developments with great attention.