Investment protection

Investment protection treaties are used by states to afford their investors protection under international law in the respective host state. Worldwide, there are around 3,000 bilateral and multilateral treaties to promote and protect investment (investment protection treaties).
These treaties are concluded in order to ensure a common understanding of investment protection and its practical implementation in the relevant countries. This is necessary because the legal and actual situation regarding the protection of investment does not always correspond to our concepts of the rule of law. If there were no investment protection treaty in place, the foreign investor might have to rely on uncertain appeals to national courts in the host country or on diplomatic intervention by its government with the foreign government in order to protect its investment against arbitrary administrative acts like expropriation without compensation. As a rule, investment protection treaties contain the following standards of protection:

• protection against expropriation without compensation,
• fair and equitable treatment (FET),
• full protection and security,
• most favoured nation treatment (MFN),
• national treatment (protection against discrimination),
• protection against breach of promise by the state, the “umbrella clause”,
• unrestricted transfer of capital and yields.

Some investment protection treaties provide for investor-state arbitration procedures to settle investment protection disputes. These enable the investor to enforce its rights, irrespective of national courts and diplomatic interventions. The investment protection treaties regulate when the investor can launch arbitration proceedings and the rules of procedure which govern the composition and work of the arbitral tribunal.

Development towards modernised investment protection and free trade agreements via investment protection and investment protection treaties of the EU and the EU Member States with third countries

The Federal Ministry for Economic Affairs and Climate Action is working to establish more modern and transparent rules on investment protection and the settlement of investment protection disputes. Back in February 2015, the Federal Minister for Economic Affairs and Climate Action presented a joint proposal for modern investment protection together with other EU trade ministers. The European Commission took up many of these ideas and tabled its own proposal in autumn 2015 for modern investment protection in the agreement on the planned Transatlantic Trade and Investment Partnership (TTIP), which was fed into the negotiations as an EU proposal in November 2015. The negotiations with these reformed rules on investment protection and the settlement of investment disputes have already been concluded in five agreements: the free trade agreement of the European Union and the EU Member States with Canada (CETA) the investment protection agreements of the EU and the EU Member States with Singapore and Viet Nam, the free trade agreements with Mexico (as of April 2021) and the framework agreement with Chile already contain the EU’s proposals for reformed dispute settlement procedures with a modern, transparent investment court (overview of agreements including investment protection).

In accordance with the goals of the coalition agreement, the Federal Government has, in parallel to the ratification of CETA in Germany, advocated “together with the partners of the agreement to effectively limit an abusive application of the investment protection standards in CETA by means of a binding interpretation of material investment protection standards in CETA”. At the initiative of Germany, the European Commission and Canada have since November 2022 been negotiating the text of an internationally binding decision by the CETA Joint Committee. The aim is to improve the investment protection chapter of CETA. The decision clarifies the details of the standards of protection in investment protection legislation. This strengthens the state’s right to regulate in order to attain legitimate goals in the public interest. The decision is expected to be adopted in early 2024.

Further to this, in line with the “Federal Government trade policy” key points paper, the Federal Government is working towards a further strengthening of the state’s right to regulate and a concentration on national treatment and protection against direct expropriation in all agreements containing investment protection.

Bilateral investment treaties between Germany and other countries

Since 1959, Germany has concluded more than 130 bilateral investment protection treaties . In many cases, third countries asked Germany to conclude an investment protection treaty with them in order to make their country more attractive for German investors. Foreign investment by German firms generally helps to safeguard and expand employment in Germany. In many cases, such projects primarily aim to improve the development of the local market and sales prospects. The investment protection treaties also help small and medium-sized enterprises to develop foreign markets.

Investment protection treaties generally form the basic precondition for the Federal Government to issue guarantees to cover German foreign direct investment against political risks. They ensure sufficient legal protection in the host country. According to German budget law, this is a precondition for an assessment that the risk is reasonable when an investment guarantee is provided.

Situation after the Lisbon Treaty

The Lisbon Treaty transferred the competence for foreign direct investment to the EU in 2009. This means that the European Commission has the right to negotiate treaties for investment protection for the EU and its 27 Member States. These are to replace the bilateral treaties concluded by individual Member States.

The Council also generally authorises the European Commission to negotiate the protection of portfolio investments and investor-state dispute procedures with the involvement of the Member States, for which according to the opinion of the European Court of Justice on this issue (case 2/15 in the context of the free trade agreement with Singapore) the EU does not have exclusive competence, and for which the Member States have competence. For this reason, the new agreements are generally concluded as mixed agreements between the EU, the 27 EU Member States and the respective third country. “Mixed” means that parts of the agreements fall within the competence of the EU Member States – in this case, the national parliaments also need to approve the agreements. On 5 July 2016, the European Commission had proposed to the European Council that the free trade agreement with Canada (CETA) should be concluded as a mixed agreement, making the EU Member States contracting parties alongside Canada and the EU.

The bilateral investment protection agreements of the EU Member States remain in force until treaties of the EU and the EU Member States on investment protection are concluded with third countries. This is stipulated in the “Grandfathering Regulation” (PDF, 754 KB) No. 1219/2012 on the introduction of a transitional arrangement for bilateral investment protection agreements between EU Member States and third countries. According to this, the EU Member States are only allowed to negotiate and sign new bilateral investment protection treaties with third countries if they have been authorised to do so by the European Commission.

Investment protection treaties between individual EU Member States

In the past, EU Member States have concluded investment protection treaties with countries which subsequently became EU Member States themselves. All of the countries with which Germany negotiated such treaties were not yet EU accession candidates at the time. On the basis of the agreement of 5 May 2020 terminating intra-EU bilateral investment treaties, all these treaties have now been terminated.

The EU Member States discussed the future of investment protection treaties between EU Member States with the European Commission. France, Germany, Austria, Finland and the Netherlands produced a non-paper  (PDF, 349 KB) in 2016 proposing a mechanism based on the rule of law which could replace the dispute settlement arrangements under the existing bilateral intra-EU investment protection treaties and could apply to all EU Member States. Under the proposal, tthe existing investment protection treaties between EU Member States would be terminated as soon as possible, and arbitral tribunals with privately appointed arbitrators within the EU would be abolished.

Following prior approval by the federal cabinet, the Federal Government and 21 other EU Member States signed a Declaration on the legal consequences of the judgment of the Court of Justice in Achmea and on investment protection in the European Union on 15 January 2019. In the declaration, the signatory EU Member States announce their willingness to revoke intra-EU investment protection treaties. They also declare their understanding that the ban imposed by the Court on intra-EU investment arbitration proceedings also applies to intra-EU arbitration based on the Energy Charter Treaty (ECT).

On the basis of this declaration, the negotiations on an agreement to terminate intra-EU investment protection treaties were successfully concluded. The agreement for the termination of intra-EU bilateral investment treaties (the “termination agreement”) was signed by 23 EU Member States including Germany on 5 May 2020. The act expressing parliamentary approval of the agreement was promulgated in the Federal Law Gazette Part II on 21 January 2021.

Following the deposition of the ratification document, the termination agreement entered into force for Germany on 9 June 2021 in line with its Article 16(2).

At the same time, according to Article 4(2) of the agreement,

• the German bilateral investment treaties cited in Annex A of the agreement and
• the grandfathering clause of the German investment protection treaty cited in Annex B of the agreement

are terminated with relation to the contracting parties for whom the termination agreement has also already entered into force.

This means that Germany’s investment protection treaties with Bulgaria, Estonia, Croatia Latvia, Malta, Slovakia, Slovenia and Hungary, the grandfathering clause of the German investment protection treaty with Poland, and the German investment protection treaties with Lithuania, Greece, Czechia, Romania and Portugal are no longer in force.

The day of the entry into force of the termination agreement and the expiry of the investment protection treaties was announced in the Federal Law Gazette.

Settlement of “intra-European” investment disputes in the context of the Energy Charter Treaty

The CJEU (Grand Chamber) issued a ruling on 2 September 2021 in the Komstroy case (C-741/19) that intra-European arbitration on the basis of the ECT is incompatible with Union law. Through it, the CJEU confirmed and deepened the position it formed on arbitral tribunals in the Achmea judgment (case C-284/16) of 6 March 2018. Germany and the vast majority of Member States confirmed the Achmea ruling through the Declaration on the legal consequences of the judgment of the Court of Justice in Achmea and on investment protection in the European Union of 15 January 2019.

This means that both arbitral procedures based on bilateral investment protection treaties between EU Member States (Achmea ruling) and those based on the multilateral ECT (Komstroy ruling) are contrary to European law.

The case law in the Komstroy judgment has been confirmed in the cases PL Holdings (of 26 October, C-109/20) and European Food SA and Others (C-638/19 P - Micula case) of 25 January 2022, During the proceedings, the Federal Government emphasised in written and oral statements that the ECT cannot be used to bring investment arbitration claims in intra-European constellations, as such arbitration proceedings are incompatible with Union law.

In the Komstroy ruling, the CJEU clarifies that Article 26(2)(c) ECT “must be interpreted as not being applicable to disputes between a Member State and an investor of another Member State concerning an investment made by the latter in the first Member State” (cf. Komstroy (C-741/19) para. 66).

The arbitral tribunal in Green Power K/S and Obton A/S v. Spain also adopted the CJEU case law and dismissed the claim based on the ECT due to a lack of jurisdiction (SCC Case No. V 2016/135, Award 16 June 2022, para. 477).

In this context, the Federal Ministry for Economic Affairs and Climate Action points out to German investors operating on the internal market and European investors operating in Germany that investor-state dispute settlement procedures that are brought against an EU Member State on the basis of bilateral investment treaties or the ECT are incompatible with EU law.

It is clear from the CJEU case law that such arbitral tribunals act without a legal basis.

Building on the CJEU case law, the Federal Court of Justice ruled in three decisions on 27 July 2023 (I ZB 43/22, I ZB 74/22 and I ZB 75/22) that it is possible to seek legal protection in German courts against intra-EU arbitration proceedings under the ICSID agreement. Accordingly, German civil courts must on application declare intra-EU arbitration procedures that violate EU law to be inadmissible in accordance with section 1032(2) of the Code of Civil Procedure. As a consequence, an award made in such arbitration cannot be enforced in Germany.

The enforcement of any arbitral awards will most likely become impossible not only in Germany, but also in other EU Member States.

In its ruling on Romatsa (C-333/19) of 21 September 2022, the CJEU found that these ICSID arbitral awards that are incompatible with Union law cannot be enforced. Enforcement is made more difficult outside the EU, as shown in the current interventions of the EU Member States affected, which are supported by the European Commission, not least those before national courts in the United States and Australia.

Together with the European Commission, the EU Member States are taking the necessary measures to ensure the effective implementation of the CJEU case law.

The Federal Government has declared Germany’s withdrawal from the Energy Charter Treaty. The withdrawal is effective as of 21 December 2023.

As stated previously, the CJEU’s Achmea ruling led to the conclusion of the Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union, which entered into force in Germany on 9 June 2021. All of the bilateral investment treaties between the contracting parties have now been terminated.

Settlement of investment disputes: system of arbitration and investment courts

In older investment protection treaties, the intention was to settle disputes via state-to-state arbitration. This meant that, in a dispute on the application of and compliance with an investment protection treaty, the investor’s home state had itself to launch the state-to-state dispute-settlement procedure against the host state. In order to depoliticise investment disputes, investor-state dispute settlement procedures were introduced in the 1980s. This enabled the investor to assert violations of the respective investment protection treaty at an arbitral tribunal.

Under the modernised EU approach, which has been implemented in the free trade agreement with Canada and the investment protection agreements with Singapore and Viet Nam, dispute settlement has been modernised, and a publicly legitimised investment court introduced. The judges are nominated by the parties to the agreement, not by the parties to the specific dispute. The hearings are public, and all the written documents and judgments are published. Also, an appellate body is envisaged in order to ensure consistent and correct decisions. Canada, Singapore and Viet Nam, the EU and the EU Member States are thus taking up the proposed improvements which were drawn up following the public consultation on investment protection and investor-state dispute settlement in TTIP. Following this, the European Commission first proposed that an investment court be set up when it was negotiating TTIP. In the free trade agreement with Canada and the investment protection agreements with Singapore and Viet Nam, the contracting parties have committed to replacing the investment courts under the agreements in the medium term with a permanent multilateral investment court.

The European Commission and the EU Member States are advocating the establishment of this multilateral investment court in the context of the negotiations in the United Nations Commission on International Trade Law (UNCITRAL), Working Group III (Investor-State Dispute Settlement Reform).

In parallel to this, the Member States of the International Centre for Settlement of Investment Disputes (ICSID) have adopted the reform of the procedural rules for the settlement of disputes between investors and states.

The amended procedural rules entered into force on 1 July 2022 and have been applied since then. Measures to implement or ratify them at national level are not needed. The new rules bring improvements for new procedures (and, at the request of the parties, for ongoing procedures), especially with a view to transparency, the efficiency of the procedure, participation rights of non-parties to the dispute, and the handling of abusive complaints.

Further to this, Resolutions 1 to 4 (ICSID Convention Proceedings, ICSID Additional Facility Proceedings, ICSID Mediation Proceedings, ICSID Fact-Finding Proceedings) have been adopted by a large majority, resulting in changes to the administration of ICSID and other aspects of out-of-court dispute settlement:
ICSID Rules and Regulations Amendment.

Legal basis for arbitration proceedings

The various investment protection treaties stipulate the procedural rules to be applied to arbitration. For example, there are the procedural rules of the United Nations Commission on International Trade Law (UNCITRAL), of the International Centre for Settlement of Investment Disputes (ICSID), of the International Chamber of Commerce (ICC), and the Stockholm Chamber of Commerce (SCC).
ICSID is part of the World Bank group and has been based there since 1966 in line with the ICSID Convention. The ICSID Convention was signed on 18 March 1965, and has since been ratified by 155 states including Germany. ICSID is the leading institution for the settlement of investment disputes (around 300 cases are currently pending there). In its Articles 37 to 47 and the ICSID Arbitration Rules that also apply, the ICSID Convention imposes strict requirements on the establishment and the composition of the arbitral tribunal and the handling of the procedure. The ICSID procedure is similar to that of a court of law, and is of high quality. The ICSID website contains detailed and up-to-date information about the various pending procedures.

At present, 78 of the bilateral German investment protection treaties in force provide for investor-state arbitration.

Greater transparency in investor-state arbitration

The United Nations Commission on International Trade Law (UNCITRAL) adopted comprehensive new transparency rules for investor-state arbitration on 11 July 2013. As a full member of UNCITRAL, the Federal Government was actively involved in drafting the new transparency rules, and expressly welcomes them. The EU participated as an observer. Transparency in investor-state arbitration is a central interest of the Federal Government, since these procedures affect public interests, and not least the interests of taxpayers.

The transparency rules entered into force on 1 April 2014 and are far-reaching. In principle,

• all proceedings are to be publicly registered (Art. 2),
• all documents are to be published (Art. 3),
• the hearings of the tribunal are to be held in public (Art. 6),
• civil society is to be given the opportunity to take part (Art. 4),
• the rulings or judgments are to be published (Art. 3).

There are exceptions for operational and business secrets. Further information is available on UNCITRAL’s website.

However, the UNCITRAL transparency rules only apply to investor-state arbitration proceedings conducted on the basis of more recent investment protection treaties, i.e. treaties concluded by states after 31 March 2014 where the parties have agreed on their inclusion.

Transparency rules for older treaties: the Mauritius Convention

All the existing German bilateral investment treaties with investor-state arbitration were concluded before 2014. This means that the UNCITRAL transparency rules do not currently apply to investor-state arbitration under these treaties.

The Mauritius Convention was drawn up in order to make it possible to apply the UNCITRAL transparency rules to these older treaties. It extends the scope of the UNCITRAL transparency rules to existing investment treaties, provided that the case in question has been brought against a signatory to the Mauritius Convention, and that the investor is from a state that is also a signatory to the Convention.

The signing of the Mauritius Convention and the extension of the transparency rules to existing investment protection treaties sends out an important political signal for greater transparency. Investor-state arbitration under the Mauritius Convention – and in general under the UNCITRAL transparency rules – will be more transparent than procedures in German courts or WTO procedures.

The draft of the Mauritius Convention adopted by the UN General Assembly can be found here.

The federal cabinet approved the signing of the Mauritius Convention on 25 February 2015. The Federal Government thus establishes the preconditions for much greater transparency in future investor-state arbitration under existing investment protection treaties. The signing of the Mauritius Convention took place in Port Louis, Mauritius, on 17 March 2015. Ratification has yet to take place, as the European Commission is aiming at the simultaneous access of the EU and its Member States.