(International) Investment law –
questions
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Main questions of (investment) law / investment regime:
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Requirements for foreign investment, treatment of foreign investors,
protection against expropriation incl. dispute resolution mechanism
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Financing of investments
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Responsibilities of investors
Investment law
- sources
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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)
International investment contracts, i.e. contracts between investor and host
country, s. next slide
Problems of applicable law
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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 , …
using sovereignty, eg limited protection against expropriation
sometimes also reverse discrimination of nationals, privileges for foreign
investors
TRIMS 1994: only trade related aspects of investments:
Prohibition of quantitative measures and measures with similar effect
Principle of national treatment of foreign investment legaly ‘entered’
Problems of applicable law &
jurisdiction
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:
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Applicable law: domestic law or international public law ? quasi-
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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 exceptio 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 eg the US
international public law is not part of the domestic law applied by the courts
(no ‘direct effect’)
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international law ?
Protection ag. expropriation
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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
Protection ag. expropriation
Traditional customary public international law has as rules &
conditions for expropriation:
- 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)
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Protection ag. expropriation
Traditional customary public international law questioned:
by the USSR 1917, Latin Am. (Calvo doctrine), developing countries, ….
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UN-Resolution no. 1803 from 1962: stresses permanent sovereignty over
natural resources of every state (host state for investments)
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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)
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Investment treaties
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Uncertainty about the customary international public law creates
need for treaties
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Next slides: multilateral treaties; bilateral treaties
Foundation of 2 new institutions under the world bank:
- ICSID 1965
- MIGA 1985
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Bilateral Inv. Treaties (BIT)
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 1981 and 1945) starting in 1959 with Germany-Pakistan
 almost 3000 BIT’s (IIA’s included: 157 with Belgium, 198 with Germany,
172 with France, etc.,) (more specifically end of 2013: 2857 BIT’s and 339
other agreements with an investment dimension)
 Big countries have a model BIT
 Sometimes followed by a larger FTA (China-Switzerland FTA 2014,
supplementing the 2010 BIT)
 Some countries are terminating their BIT’s, eg South Africa (BIT w.
Benelux, Germany, Spain)(«Black Economic Empowerment »); Indonesia;
Bolivia & Ecuador left ICSID
 Others limit the scope of the dispute settlement, eg Australia (included in
2013 safeguards in areas as public health, welfare and environment)
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BIT’s & other IIA’s
Bilateral Inv. Treaties (BIT)
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Fate of « Extra-EU-BIT’s » after Lisbon Treaty (making FDI an exclusive
Union competence): Reg. 1219/2012 - EU intends to replace national extraEU-Bits’ by common EU-BIT’s (eg negotating 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.
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As it is often sufficient to invest via a company incoporated under the laws
of a country with a BIT, investors form third countries may use this indirect
way.
Scope of application (usually):
 Defines « investment »
(inward) investment, usually broadly defined (FDI = foreign direct
investment)
Sometimes restricted to certain investments or under certain conditions
 Defines the protected investors
 Defines expropriation (also indirect, regulatory, creeping ?)
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Multilateral Investm. Treaties
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OECD: OECD 1967 Draft Convention on the Protection of Foreign property
failed; OECD-MiA failed; negotiations on a GIT in WTO failed
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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 (incl. an Arab Investment Court)
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Sectorial: Energy Charter Treaty 1994, infra
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Investment aspects in other treaties, next slide
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Multilateral Investm. Treaties
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FTAs (Free Trade Agreements) contain also investment protection, as in:
NAFTA Ch. 11: non-discrimination; investor chooses dispute resolution
Mercosur
COMESA
CETA (EU / Canada Partnership, 2013), EU-Singapore FTA Oct 2014
(EUSFTA concluded, not signed yet)
Negotiations on other FTA’s, such as TTIP and TPP (but no investment
chapter in the 2009 EU-Korea FTA)
(EU: internal market as a more radical solution)
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
Energy Charter Treaty
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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 – existign investments covered for
20 years)
Oil & electricity;
Concerns investment / exploitation / transport;
Principle of non-discrimination
Protection against expropriation and quasi-expropriation
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 was still bound by
the ISDS)
E.g. renewable enegry investors v. Spain
Energy Charter Treaty
Bilateral Inv. Treaties (BIT)
Typical content (1)
 Freedom to invest ? (free inflow and outflow of capital)
Usually not fully liberalised
Usually no full national treatment, but a MFN clause + minimum standard
of «proper & equitable» treatment
Incl. often prohibition of ‘performance requirements’ (such as requirement
of « national » content of products …) (conflicts with EU quota rules)
 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).
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
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Bilateral Inv. Treaties (BIT)
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Typical content (1)
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Usually rules on protection in case of expropriation
Is protection also given to intellectual property rights ?
Capital transfer guarantees (free movement of capital, ‘free transfer of
payment’) (some conflicts with EU law)
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In response to criticism against BIT’s and their dispute resolution:
the « Right to regulate »; in the 2015 Concept paper of the EU Commission
«the right of states to take measures to achieve legitimate public policy
objectives on the basis of the level of protection that they deem
appropriate »
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Foreign investment – financing
institutions
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« 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.
IBRD
MIGA
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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
Other financing institutions
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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)
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
Responsibilities of investors
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Some elements in investment treaties, Free Trade Agreements etc.
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Codes of conduct of the World Bank, OECD, « UN Global Compact »,…
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
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S. also the OECD guidelines for multinational enterprises
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Reporting obligations for big companies, eg in EU Non-financial reporting directive:
report annually on social matters, human rights, ani-corruption mesaures
Dispute resolution (in BITs)
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Renegotiation clauses
Arbitration clauses:
Arbitration may be under the ICSID rules (infra) or under UNCITRAL rules
(see Ch. 12).
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)
ICSID
Investment treaty arbitration
ICSID – Convention 1965: dispute resolution procedure for investment
disputes
 now 150 ratifications (+ 9 signatures); became much more important since
the 1990’s. Canada ratified Nov 2013 (after solving federalism problem).
Missing Russia (not ratified), i.a. 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 has 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»; annulment procedure organised by ICSID itself
* Dispute whether still possible under intra-EU BIT’s (according to EU
Commission, contrary to 344 TFEU; not according to Frankfurt Court)
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ICSID & other ISDS cases
Investment treaty arbitration
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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)
Arbitral award can be set aside only by ICSID itself, 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; nevertheless enforcing often remains difficult. See eg the EU
forbidding Romania to comply with an ICSID award granting compensation (Micula
case)
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« Additional facility »: ICSID assistance in cases out of the scope of application of the
Convention (eg investor not a national of an ICSID State) (but awards are then not
falling under the ICSID Convention bu unde rthe NY Convention or arbitration)
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Awards are published in annual Reports.
Claimants: mostly big business, but ca 22 % are SME’s.
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Investment treaty arbitration
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Criticism:
Insufficient guarantees for fair trial & impartiality,
no public character (unless Uncitral Transparency rules apply)*;
no guarantee of consistent interpretation by a single tribunal
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.