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24 March 2016
On February 29 2016 Canada and the European Union released the final legal text of the Canada-EU Comprehensive Economic and Trade Agreement (CETA). The most significant change in the final text compared to the text signed on September 26 2014 is the fundamental change to the conduct of investor-state arbitrations.
Investor-state arbitration is the most controversial aspect of modern trade and investment agreements. The arbitration provisions enable investors to bring monetary damages claims against governments for violations of investment protection provisions.
A main criticism of the existing system is the lack of certainty and predictability in the interpretation and application of investment protection provisions. Investment tribunals are composed of three arbitrators:
The ad hoc nature of the tribunals has led to wide variability in rulings, including instances of vastly different rulings on the same or similar facts, and controversial interpretations of investment protection provisions.
The final CETA text introduces a ground-breaking change to address this criticism that parallels the approach taken in the recently signed draft text of the EU-Vietnam free trade agreement.
Arbitrators will no longer be appointed by the disputing parties. Instead, they will be selected from a 15-person expert roster established by Canada and the European Union through the CETA Joint Committee. Five of the persons on the roster will be from Canada, five from the European Union and the remaining five from other countries. The three arbitrators sitting on a tribunal will be selected from the roster "on a rotation basis, ensuring that the composition of the divisions is random and unpredictable, while giving equal opportunity to all Members of the Tribunal to serve".
The roster will enable Canada and the European Union to control which experts sit on arbitrations to ensure that they are sensitive to government perspectives. Investors will no longer have a say in the appointment of arbitrators.
To date, the creation of an appellate tribunal akin to the World Trade Organisation Appellate Body has been discussed only academically. The CETA brings this discussion to life with the establishment of an appellate tribunal that can review awards issued by tribunals for errors in law and manifest errors in fact. This will undoubtedly improve the consistency and predictability of the interpretation and application of investment protection provisions.
The standard of review for legal errors appears to be very strict – namely, legal 'correctness'. This fundamentally departs from the prevailing standard in investor-state arbitrations which essentially entitles investment tribunals to be wrong on the law unless they act in manifest excess of powers. The new standard will significantly reduce the incentive to initiate 'hail Mary' claims that have a low probability of success.
Canada and the European Union have committed to pursue the extension of this new model to the multilateral stage.
For further information on this topic please contact Gregory Tereposky at Borden Ladner Gervais LLP by telephone (+1 613 237 5160) or email (firstname.lastname@example.org). The Borden Ladner Gervais LLP website can be accessed at www.blg.com.
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