Protection of investment

Question 1

Forms of Investment

Answer 1

• Form of FDI:

• « new » activity («greenfield»)
• or merger or acquisition of existing activity (> relevance of competition law, in the EU esp. Reg. 139/2004 (Merger or Concentration Control Regulation))
• or shifting existing activities to a foreign country

• Alternatives:

• exporting goods produced at home (direct sales or via distribution channels)
• licensing technology in return for royalties

• (see International Business Strategy course)

This Ch. deals with some aspects of investments only, not with the basic private law rules on e.g. setting up a local company, mergers or acquisitions of existing companies, buying land, buying goods domestically (through a local establishment), concluding contracts etc. Some aspects are dealt with in the chapters on general contract law, financing & security, etc…

Question 2

Foreign investment – financing institutions

Answer 2

• « Project financing » through international institutions
• International lenders (financing institutions)
• An important player is the World bank: comprises 5 institutions:
- IBRD (1944) (188 members): loans for projects (usually in cooperation with banks) to states, with funds from member states or capital markets, short term and on interest; no flow-back to funding states: neutral assessment – annual reports
- IDA (1960): advantageous loans for least developed countries: long term, no or very low interest
- IFC (International Finance Corporation, 1956): loans or capital investment in private sector; technical assistance and advice
- MIGA (Multilateral Investment Guarantee Agency 1985): see infra
- ICSID (1965): mediation and arbitration institution, infra.

Question 3

MIGA

Answer 3

• MIGA (Multilateral Investment Guarantee Agency) 1985: mainly covers noncommercial risks of investors from MIGA-member countries in other MIGAcountries; succesful (168 members)
• Coverage can be granted by MIGA after assessment of risks if:
- An investment is made (interpreted widely)
- By an investor from a MIGA-country
- After the granting of the guarantee (only new investments)
- In a developing country, member of MIGA - Contributing to development

• Approval by the host country is required; usually MIGA will contract with the country to limit the risks
• Risks that can be covered: mainly 4 types: currency transfer restrictions; expropriation and similar measures; breach of contract without domestic remedy; sometimes war and civil disturbance. Not: eg devaluation
• Conditions will be specified in a contract MIGA-investor: premium to be paid; uninsured percentage (usually 10 %), arbitration clause
• Disputes between MIGA-states on the Convention: submitted to Board of MIGA
• Disputes MIGA - host country: negotiation; if necessary arbitration

Question 4

Other financing institutions

Answer 4

• Other international lenders (financing institutions)
• Regional development banks - often on condition of flow-back to funding countries:
- African DB
- Asian DB (67 members, strong Japanese influence)
- Inter-American DB
- new AIIB (Asian Infrastructure Investment Bank, 2014, strong Chinese influence, 52 effective members)
- EBRD (European Bank for reconstruction and Development) – for Eastern Europe; 65 members, capital mainly from EU countries, US, Canada, Japan

• Investment Funds of the EU:

• ACP countries (Cotonou agreement): investment facilities
• EU-internal: European Investment Bank (projects for regional development)
• European Social Fund

• UN-organisations, esp. UNDP

Question 5

Investment law - sources

Answer 5

• Sources for rules on foreign investment:

• National law
• International Investment Agreements (IIAs), either (mostly) Bilateral Investment Treaties (BIT) (s. infra) or Multilateral treaties (regional, sectorial, TRIMS, world bank treaties) (s. infra)
• Customary international law, esp. concerning protection in case of expropriation (s. infra)
• To some extent OECD Codes and Recommendations (e.g. OECD National treatment for foreign-controlled enterprises, )

Question 6

Problems of applicable law

Answer 6

• Basically on 2 levels: freedom to invest; protection of investments made
• Why may domestic law (of the host state) be problematic ?
• protectionism: obligation to buy in the guest country (performance obligations, infra); restrictions on import / export, restrictions on transferring (expatriating) profit , forced tehcnology transfer, …
• using sovereignty, eg limited protection against expropriation
• lack of legal security because of frequent changes in law and regulations, or the possibility of change without transitional rules protecting investments already made (such protective rules may be called ‘grandfathering’)
• See also infra disadvantages of domestic jurisdiction
• Sometimes also reverse discrimination of nationals, privileges for foreign investors

Question 7

Rules on freedom to invest

Answer 7

• TRIMS 1994: only trade related aspects of investments:

• Prohibition of quantitative measures and measures with similar effect
• Principle of national treatment of foreign investment legally ‘entered’

Question 8

Rules on freedom to invest - National (and EU) law

Answer 8

• apart from TRIMS, national law will determine whether foreign investment is allowed, e.g. whether foreigners can buy important business assets;
• rules often found in Foreign Trade Acts (eg German Außenwirtschaftsgesetz (AWG), Japanese Foreign Exchange and Foreign Trade Act 1949, American Trade Act 1974 + Foreign Investment and National Security Act (FINSA° 2007 (further strengthened in FIRRMA 2018) etc.,
• and administered by national administrations (in the US the CFIUS: Committee on Foreign Investment in the US, since 1975, based on the 1950 Defense Production Act)
• mainly to protect national defense, critical infrastructure, etc. For « geoeconomic » reasons, the scope of national security is expanding in recent years. Further, there is the problem of « forced technology transfer » to get access in esp. China
• The EU adopted a ‘foreign investment screening framework’ in Reg. 2019/451 to protect security and public order (esp. v. China) and maintain domestic technology and capacity against subsidized foreign companies.

Question 9

Problems of applicable law & jurisdiction

Answer 9

• Can international investment contracts help ? (i.e. contracts between investor and host country)
• Contain eg stabilisation clauses (compare infra in BIT)
• Effectiveness against host country depends on applicable law and competent jurisdiction:
- Applicable law: domestic law or international public law ? quasi-international law ?
- Dispute resolution mechanism ? most effective is application of international public law and international arbitration
- But jurisdiction in the investors’ country may also help – e.g. the US Foreign Sovereign Immunities Act 1976 has an exception to immunity of foreign states for expropriation in violation of international law
- Disadvantages of domestic jurisdiction may include 1°general shortcomings of the judiciary, 2°possible bias, 3°in e.g. the US international public law is not part of the domestic law applied by the courts (no ‘direct effect’)

Question 10

Protection ag. expropriation

Answer 10

• Esp. protection against expropriation
• Types of expropriation:
- individual expropriation s.s. (public interest + compensation);
- collective nationalisation;
- confiscation;
- Indirect expropriation: regulatory expropriation, creeping expropriation or quasi-expropriation (disproportionate burdens or restrictions)
- lot of disputes as to what amounts to expropriation: does it only depend on the effects (Sole Effects Doctrine) or does the protection not apply in case of a proportional measure for a genuine public purpose if investor is treated fair and equitable (no abuse of power)?

• Expropriation and international law ?

• in European countries: 1st Protocol to the ECHR
• rules of customary public international law ? Next 2 slides

Question 11

Protection ag. expropriation - Traditional customary public international law has as rules & conditions for expropriation:

Answer 11

• No general prohibition
• Allowed only in the public interest (but interpreted thus that poliical purposes are not excluded)
• No discrimination of foreigners (unless required for national security)
• Effective Prompt Appropriate Compensation (Hull-formula) (i.e. quick, in convertable and exportable currency, full value)
• Due process of law (procedural protection)

Question 12

Protection ag. expropriation

Answer 12

• Traditional customary public international law questioned: by the USSR 1917, Latin Am. (Calvo doctrine), developing countries, ….
• UN-Resolution no. 1803 from 1962: stresses permanent sovereignty over natural resources of every state (host state for investments)
• A more radical « Charter of economic rights and duties of States » in 1974 (« new economic order »):
- NEO-Charter proposed to extend the sovereignty to include all economic activities, does not require « public interest », grants only « reasonable » compensation, refuses international procedural control, etc.
- Such expropriations will however not be recognised by other countries
- Thus not accepted as customary law, meanwhile slipped into oblivion (Reaction after 1974’s: BIT’s)

Question 13

Investment treaties

Answer 13

• Uncertainty about the customary international public law created need for treaties
• ‘Political’ v. ’Legal’ solutions: in the past decades, most states turned toward legal solutions (also developing countries wanted legal solutions because they judged that political agency was weak) recently, some turn back to political solutions, at least for certain questions (see infra the Brazilian model)
• Next slides: multilateral treaties; bilateral treaties
• Foundation of 2 new institutions under the world bank:
- ICSID 1965 (infra)
- MIGA 1985 (supra)

Question 14

Bilateral Inv. Treaties (BIT)

Answer 14

• Bilateral investment treaties (BIT) (also known as Foreign Investment Promotion and Protection Agreements, FIPAs)
• BIT’s in response to the NEO-Charter
- First main promoter: Germany (German foreign investors having lost everything in 1918 and 1945) starting in 1959 with Germany-Pakistan ➢More than 3000 BIT’s (IIA’s included: 73 + 56 with Belgium, 128 + 56 with Germany, 95 +56with France, etc.,) Big countries have a model BIT ➢Sometimes followed by a larger FTA (China-Switzerland FTA 2014, supplementing the 2010 BIT); esp. the USA concluded many «TIFA»
➢Some countries are terminating their BIT’s, eg South Africa (BIT w. Benelux, Germany, Spain)(«Black Economic Empowerment»); Indonesia; India; Bolivia & Ecuador left ICSID ➢See further the conflict with EU-law ➢Others limit the scope of the dispute settlement, eg Australia (included in 2013 safeguards in areas as public health, welfare and environment) ➢Alternative ‘Brazilian’ model (cooperation and facilitation investment agreement). In force Brazil-Angola (2015), negotiating Brazil-India, etc…

Question 15

Multilateral Investm. Treaties

Answer 15

• OECD: OECD 1967 Draft Convention on the Protection of Foreign property failed as Convention (but has been affirmed as an OECD Recommendation on National treatment for foreign-controlled enterprises, now version 2017); OECD-MiA failed; negotiations on a GIT in WTO failed
• On the other hand, the OECD Code of Liberalisation of Capital Movements was accepted as binding (first version 1961, now 2016)
• Other Regional IT’s, such as:
- Investment agreement of the OIC (Bagdad 1981, 27 ratified)
- ASEAN Comprehensive Investment Agreement (ACIA) 2009
- Arab Investment Agreement 1980 (amended version 2013 with 5 ratifications includes an Arab Investment Court)

• Sectorial: Energy Charter Treaty 1994, infra
• Investment aspects in other treaties, next slide

Question 16

Multilateral Investm. Treaties

Answer 16

• FTAs (Free Trade Agreements) may also contain investment protection, as:
- NAFTA Ch. 11: non-discrimination; investor chooses dispute resolution
- Mercosur
- COMESA
- CETA (EU / Canada Partnership, 2016) with a permanent ‘investor Court System’ (ICS) (provisionally entered into force 2017)
- EU-Singapore FTA Oct 2014 (EUSFTA concluded, not signed yet, ongoing debate given the ECJ opinion of May 2017 that ISDS and portfolio investment are no exclusive competence of the Union and require agreement by the MS)
(But most free trade agreements of the EU with countries outside Europe* do not deal with investment protection) * in force: SADC (2018), Mexico (2000, renegotiations), Chili (2005), South Korea (2016) and 8 Mediterranean countries; some others signed and provisionally applied
- (EU: internal market as a more radical solution – but not necessarily providing the same protection to investors)

• Negotiations on other FTA’s with investment provisions, such as EU-Vietnam FTA (finalised 2016)
• Also investment aspects in Cotonou (EU / ACP), supra
• TRIMS, supra
• Codes of conduct of the World Bank, OECD, « UN Global Compact »,…
• World bank related treaties, infra

Question 17

Energy Charter Treaty

Answer 17

• Sectorial Multilateral investment treaties ?
• Sectorial Energy Charter Treaty 1994, in force 1998
- 45 countries from Europe (incl. EU itself), former Soviet U + Japan; (Russia withdrew in 2009; Norway and Australia did not ratify; Italy withdraws as from Jan 1, 2016 – existing investments covered for 20 years)
- Oil & electricity;
- Concerns investment / exploitation / transport;
- Principle of non-discrimination
- (cont.)

Question 18

Energy Charter Treaty

Answer 18

• Energy Charter Treaty
• Dispute resolution mechanism (arbitration) for breaches of Part II ECT. Investor may choose arbitration according to ICSID, Uncitral or SCC (Stockholm)
- E.g. Procedures by Vattenfall v. Germany (i.a. decision to close nuclear plants)
- E.g. Arbitration Youkos v. Russia (initiated while Russia is still bound by the ISDS until 2029, 20 years after termination in 2009)
- E.g. renewable energy investors v. Spain; abolition of subsidies for solar panels; 32 cases, 6 decided. Spain won 2 cases (Isolux 2013, Charanne 2016) on the merits but lost 4 in 2017-2018 (i.a. Eiser).
- Electrabel /Hungary (2015 award) rejects claims for damages after termination of a power supply agreement by Hungary (termination in concormity with EU law)

Question 19

Bilateral Inv. Treaties (BIT)

Answer 19

• Scope of application (usually):
• Defines « investment »
- (inward) investment, usually broadly defined (FDI = foreign direct investment)
- Sometimes restricted to certain investments or under certain conditions
- Recent treaties narrow the definition (CETA definition in art. 8.1.). More restrictive BIT’s do not cover purely financial investment (FPI = Foreign Portfilio investment) or indirect investment, sovereign debt obligations, claims to money arising soelely from commercial contracts

• Defines the protected investors
• Defines expropriation (also indirect, regulatory, creeping ?)
• As it is often sufficient to invest via a company incorporated under the laws of a country with a BIT, investors from third countries may use this indirect way (« nationality planning »)

Question 20

Bilateral Inv. Treaties (BIT)

Answer 20

• Typical content (1)
• Freedom to invest ? (free inflow and outflow of capital)
- Usually not fully liberalised. In CETA art. 8.4. No liberalisation in BLEU-China BIT (only an obligation to « accept such investments in accordance with its legislation »
- Usually no full national treatment, but a MFN clause + minimum standard of «proper & equitable» treatment. See art. 3 BLEU-China BIT: national treatment + MFN; CETA art. 8.6 and 8.7.
- NB. The MFN clause leads to some harmonisation as if there was a multinational treaty
- Freedom and non-discrimination usually restricted by a «national security» exception (e.g. for control over so-called critical infrastructure) (usually also a ‘self-judging clause’)
- Incl. often prohibition of ‘performance requirements’ (such as requirement of « national » content of products …) (conflicts with EU quota rules). Eg art. 8.5 CETA

Comp. Art. 1 OECD Draft: ensure fair and equitable treatment to foreign property.

Question 21

Bilateral Inv. Treaties (BIT)

Answer 21

• Typical content (2) Protection of investments made:
- Stabilisation clauses (later regulation cannot negatively affect the investment); observance clauses (later regulations not applicable); also called ‘umbrella clause’ (giving an umbrella to certain obligations). Comp. Art.2 Draft OECD (‘Observance of undertakings’); art. 7 BLEU-China BIT.
Purpose: turn a contractual obligation (which can often be overruled by national public law or change in legislation) into an international obligation - validity (binding character) sometimes disputed
• > in recent treaties the umbrella clause is narrower (eg EU – Vietnam FTA art. 14: only if a written agreement that creates an exchange of rights and obligations in connection with an investment)
• > distinction between broad and narrow protection of legitimate expectations: stronger protection in case of a ground for specific trust (declaration by the government, ….); weak protection of general expectations (only in case of sudden, discriminatory, discretionary, …. change of regulation)
• But case law takes also int account the behaviour of the investor, whether the investor has been imprudently taking risks

Evaluation of legitimate expectations includes: - Taking into account the behaviour of the state (specific declarations ?) and the investor (risks taken ?) - + Judging the proportionality of the measure

Question 22

Bilateral Inv. Treaties (BIT)

Answer 22

• Typical content (3)

• Usually rules on protection in case of expropriation. Comp.
• Art.3 Draft OECD (protection against takings of property: must be in the public interest, under due process of law, non-discriminatory, just compensation (genuine value, quick, and transferable).
• Art. BLEU-China BIT: merely under domestic legal procedure, non-discriminatory, just compensation (genuine value, quick and transferable); no public interest requirement.
• Is protection also given to intellectual property rights ?
• Capital transfer guarantees (free movement of capital, ‘free transfer of payment’) (some conflicts with EU law). In the OECD Draft only a recommendation. Free transfer in art. 5 BLEU-China BIT.
• Legal certainty is low, because of vague standards; however legal certainty under property protection in EU law or MS law may be even lower.
• > a reason for vagueness is that investment is ‘cross-sectional’ (is not restricted to the specific categories of legal rules as qualified under domestic law);
• > some recent treaties are more specific on the scope of indirect expropriation and/or definition of fair and equitable treatment. E.g. CETA
• Dispute resolution mechanism (usually ISDS arbitration, infra)
• Survival clauses after termination of the treaty: usually still applicable for a long period (10/20 years) to investments already made before termination

Question 23

BIT’s and EU law

Answer 23

• Fate of « Extra-EU-BIT’s » after Lisbon Treaty (making FDI an exclusive Union competence): Reg. 1219/2012 - EU intends to replace national extra-EU-Bits’ by common EUBIT’s (eg negotiating a BIT with China since 2013 to replace the 27 existing BIT’s), often in a wider framework (of Partnership agreements or FTA’s covering not only Investment). Duty of MS’s to eliminate incompatibilities.

Question 24

BIT’s and EU law

Answer 24

• Fate of intra-EU BIT’s (still 196 early 2018):
• EU Commission requires member states to terminate them; Romania gave in in 2017 the Netherlands decided to follow in May 2018. ECJ 6 March 2018 in C-284/16 Achmea (place of arbitration in Germany, action by Slovakia to set aside award, question from the BGH about compatibility of compulsory arbitration in intra-EU-BIT with EU law): compatible according to advocate-general not according to ECJ. The arbitral tribunal is not a court of a member state or common to member states nor subject to review by a court of a MS differing from commercial arbitration thus no guarantee of full effectiveness of EU law.
• EU Commission has published (19 July 2018) its “Guidance on protection of cross-border EU investments” clarifying its position post-Achmea.
• On 24 October 2019 EU Member States reached agreement on a plurilateral treaty for the termination of intra-EU bilateral investment treaties (BITs).
• In the case of CETA the ECJ decided (2019) that the mechanism is not contrary to EU law.
• Investors may relocate outside the EU if they believe BIT protection is better than protection under EU law (eg non-contractual liability of the EU is extremely restrictive ….). German Const. Court upheld rather high protection in 6 Dec. 2016 in Vattenfall and others.
• Post-Achmea the ICSID panel nevertheless accepted jurisdiction in the Vattenfall-case (based on the multilateral Energy Charter Treaty) (decision 31 Aug 2018). As to substance it decides that art. 16 ECT prevails over 351 TFEU and uses 41 Vienna CLT to prevent the TFEU to override the ECT (which covers also non-EU countries)

Question 25

Responsibilities of investors

Answer 25

• Some elements in investment treaties, Free Trade Agreements etc., and in recent BIT’s or Model BIT’s (South Africa, India, …)

• Codes of conduct of the World Bank, OECD, « UN Global Compact », OECD guidelines for multinational enterprises, ‘Principles of responsible investment’ (drafted by some insitituional investors, integrating « environmental, social, and corporate governance (ESG) issues » into investment decision-making)

• Conditions imposed by financing institutions Esp. the performance standards of the IFC. They concern:

• Assessment of environmental and social risks
• Labor and working conditions
• Resource efficiency and pollution prevention
• Community health, safety and security
• Land acquisition and involuntary resettlement
• Biodiversity conservation and living natural resources
• Indigenous peoples
• Cultural heritage

• Reporting obligations for big companies, eg in EU Non-financial reporting directive: report annually on social matters, human rights, ani-corruption mesaures

Question 26

Dispute resolution (in BITs)

Answer 26

• Renegotiation clauses
• Arbitration clauses:
- Arbitration may be under the ICSID rules (infra) or under UNCITRAL rules (see Ch. 12).
- Arbitration gives the investor direct access (not only right to aks one’s government to act, as in eg dumping and trade defense cases)
- Sometimes subject to a national court requirement (eg UK-Argentina BIT: first go to the Argentinian court; if no decision within 18 months arbitration is open)
- The UNCITRAL rules impose a certain degree of ‘transparency’ (public access for third parties to hearings and documents except confidential or protected information), but this applies only a) to arbitration under BIT’s concluded after April 1, 2014 or b) when parties agree. Under ICSID, access is much more limited (discretionary decision of the tribunal)
- 2014 UNCITRAL Convention on Transparency in treaty-based investor-State arbitration (for existing BIT’s) (Mauritius Convention)
- Question whether an arbitration clause in a BIT displaces a forum clause in the investment contract itself: concurrent jurisdiction, or priority of one clause over the other ? (ICSID arb 97/3 Compania de Aguas del Aconquija)

Question 27

Investment treaty arbitration

Answer 27

• ICSID – Convention 1965: dispute resolution procedure for investment disputes
• now 154 ratifications (+ 9 signatures); became much more important since the 1990’s. Canada ratified Nov 2013 (after solving federalism problem). Missing: Russia (not ratified), India, Brazil, South Africa (not signed); Withdrawal by Ecuador, Bolivia, Venezuela.
• Scope of application:
- only investment disputes
- between a party to the ICSID Convention and an investor from another contracting party (or a local daughter company)
- jurisdiction of the ICSID must have been accepted in an investment contract, domestic law, BIT or ad hoc
- ICSID organises the procedure, does not settle the dispute itself ‘
- conciliation procedure (not succesful)
- arbitration procedure
- no «seat» and national anullment; annulment procedure organised by ICSID itself

Question 28

Investment treaty arbitration

Answer 28

• Advantages of ICSID –Arbitration
• If a choice of law was made in the contract, the arbitrators must apply that law
• But national law can be set aside if contrary to public international law (art. 42 ICSID) (for a case where this setting aside was annulled by the ICSID Committee in 2017: case 07/27 Venezuela Holdings)
• Arbitral award can be set aside only by ICSID itself (ad hoc Committee), not by a national court; limited grounds for annulment
• Exclusive jurisdiction; national courts lose jurisdiction; no immunity of jurisdiction for ICSID states before ICSID
• Member states recognise the awards as binding and guarantee the enforcement within their territory; see next slide
• « Additional facility »: ICSID assistance in cases out of the scope of application of the Convention (eg investor not a natonal of an ICSID State) (but awards are then not falling under the ICSID Convention bu unde rthe NY Convention or arbitration)
• Awards are published in annual Reports.
• Claimants: mostly big business, but ca 22 % are SME’s.
• ICSID rules are under revision (2019)

Question 29

Investment treaty arbitration

Answer 29

• Member states recognise the awards as binding and guarantee the enforcement within their territory; nevertheless enforcing often remains difficult:
• See eg the ICSID award granting compensation on the basis of a Sweden-Romania BIT (EC 2015/1470, Micula case, repeal of tax incentives):
- with the EU commission forbidding Romania in 2015 to comply with it an as ‘illegal state aid’ (contested in T-694/15, pending), decision annulled by the GCEU (T-624/15, 18 june 2019) as the facts predated the EU accession of Romania;
- Micula sued for conversion into an enforcable judgment in the US (which can only be done in accordance with the FSIA) and obtained it on 11 Sep 2019 (Romania appealed)

• See idem in the case Eiser won v. Spain on the basis of the ECT (solar panels). Eiser seeks to enforce in the US

Question 30

Investment treaty arbitration

Answer 30

• Criticism:
- asymmetric: often no jurisdiction (or only very limited) over counterclaims by states against investors (see however Urbaser / Argentina, jurisdiction over counterclaim accepted under the Spain – Argentina BIT, but not granted on the merits)
- insufficient guarantees for fair trial & impartiality,
- no public character (unless Uncitral Transparency rules apply)*;
- no guarantee of consistent interpretation by a single tribuna
l - right of states to regulate not adequately upheld (bias)
- Etc.

• Responses

• Uncitral Transparency
• ICSID Tribunal requiring parties to disclose their funding by third parties (in Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan)
• EU Commission concept paper 2015 proposing i.a. a multilateral appellate body and/or an « Investment Court System » for the TTIP between the EU and the USA and other FTA’s. A draft mandate for multilateral negotiations was published by the EU Commission in Sep 2017. ECJ gave an Opinion in April 2019 that this system, as proposed in the CETA, is compatible with EU law (incl. fair trial requirements). The ICS with Canada is now set up (permanent courts of first instance and appeal)
• UNCITRAL discusses a multilateral Inverstment Court.