Top Court Throws Out Corporate Sovereignty For All Trade Deals Within EU; Those Involving Other Nations Likely To Suffer Same Fate

from the ISDS-is-dying dept

Techdirt has been writing about what the world calls investor-state dispute settlement (ISDS) for over five years. But early on, we decided that the harmless-sounding initials "ISDS" didn't really convey the seriousness of what was going on here. Instead, we've been using the phrase "corporate sovereignty", because that is what ISDS is: an assertion that the rights of corporates can trump those of entire countries. That's achieved by means of special tribunals that exist outside national legal systems, and which can effectively over-rule them. Many people think this is a really bad idea, and in an important new ruling, the EU's top court has just agreed (pdf):

the Court concludes that the arbitration clause in the BIT [bilateral investment treaty] has an adverse effect on the autonomy of EU law, and is therefore incompatible with EU law.

The specifics of the case concern a dispute between a Dutch insurance company and the Slovak government:

In 2004 Slovakia opened its sickness insurance market to private investors. Achmea, an undertaking belonging to a Netherlands insurance group, set up a subsidiary in Slovakia with a view to offering private sickness insurance services there. However, in 2006 Slovakia partly reversed the liberalisation of its sickness insurance market, and prohibited in particular the distribution of profits generated by sickness insurance activities. In 2008 Achmea brought arbitration proceedings against Slovakia under the BIT, on the ground that the prohibition was contrary to the agreement and had caused it financial damage. In 2012 the arbitral tribunal found that Slovakia had indeed infringed the BIT, and ordered it to pay Achmea damages in the amount of approximately €22.1 million.

This is a classic case of a government changing its policy, as governments often do, and a company demanding compensation as a result. What this -- and the general theory behind ISDS -- overlooks is that business is by its nature risky; profits are the reward for taking on risks successfully. Corporate sovereignty demands free insurance for foreign investors, guaranteeing that they will not lose out, whatever happens, without actually needing to pay for a formal insurance policy (which is in any case available for those that want such protection). That kind of guarantee is not something that members of the public ever get for free, so it's not clear why corporates should either.

In this case, the Slovak government brought an action in a German court asking for the ISDS award to be set aside. The German court recognized that the case raised important general issues, and referred it to the EU's highest court, the Court of Justice of the European Union (CJEU), for a ruling on the underlying law. The CJEU confirmed something that Techdirt and many others have pointed out for years -- that the arbitration tribunal was outside the entire EU system of law:

by concluding the BIT, Slovakia and the Netherlands established a mechanism for settling disputes which is not capable of ensuring that those disputes will be decided by a court within the judicial system of the EU, only such a court being able to ensure the full effectiveness of EU law.

As such, it was incompatible with EU law, and therefore not valid. That's great news for the Slovak government, and for other Member States that have been hit or threatened with huge corporate sovereignty penalties because of similar intra-EU BITs. But much more significant than the specific result is the general reasoning of the court. Given that the ISDS tribunal in the dispute between the Slovak government and the Dutch insurance company was outside the EU system of law, and therefore deemed illegal, it would seem that any similar arbitration tribunal considering corporate sovereignty cases would also be illegal under EU law. That would apply not just to those adjudicating disputes between EU countries and EU companies, but also to any trade deal that included ISDS. Potentially, then, the CJEU's ruling means that every corporate sovereignty chapter in every EU trade deal is illegal, and unenforceable.

We should find out soon enough. In December last year, Belgium submitted a request to the CJEU asking it to rule on whether the European Union's updated version of ISDS, the Investment Court System (ICS), was compatible with the EU's core treaties. Since the ICS too is outside the EU's main legal system, it's hard to see how the CJEU could rule that it is compatible, assuming it applies the logic of the case discussed above. If the ICS falls, then ISDS will be effectively dead in the EU, and probably dying everywhere else.

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Filed Under: cjeu, corporate sovereignty, eu, isds, trade agreements