(International) Investment law

– questions
 International Financing of foreign investments

 Main questions of (investment) law / investment regime:

 Requirements for foreign investment, treatment of foreign investors,

protection of investments (i.a. against expropriation), incl. dispute
resolution mechanism

 Responsibilities of investors
 Forms of Investment
 Form of FDI:
- « new » activity («greenfield»)
- v. merger or acquisition of existing activity
- 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…
 Top 10 in FDI (2013-2014)
(Billions of Dollars - Source: UNCTAD World Investment report 2015)
Top 10 Host economies Top 10 Investor
Economies

3
 Top 10 in FDI (2016-2017)
(Billions of Dollars - Source: UNCTAD World Investment report 2018)
Top 10 Host economies Top 10 Investor Economies

4
 Foreign investment – financing
institutions
 « 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
 MIGA (Multilateral Investment Guarantee Agency) 1985: mainly covers non-
commercial risks of investors from MIGA-member countries in other MIGA-
countries; 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
 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
 Investment law
- sources
 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, )

 International investment contracts, i.e. contracts between investor and host

country, s. next slide
 Problems of applicable law
 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 , …
- 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’)

 Sometimes also reverse discrimination of nationals, privileges for foreign

investors
 Rules on freedom to invest
 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’

 National law:
- 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 2007 =
FINSA, 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.
- EU institutions have agreed (Nov 2018) on a « foreign investment
screening framework »
 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:

- 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’)
 Protection ag. expropriation
 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)
 Protection ag. expropriation
 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)
 Investment treaties
 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)
 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 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 co,flict 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 …
BIT’s & other IIA’s
 Multilateral Investm. Treaties
 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

 Multilateral Investm. Treaties
 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
 Energy Charter Treaty
 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
- (cont.)
 Energy Charter Treaty
 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).
Energy Charter Treaty
 Bilateral Inv. Treaties (BIT)
 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 »)
 Bilateral Inv. Treaties (BIT)
 Typical content (1)
 Freedom to invest ? (free inflow and outflow of capital)
- Usually not fully liberalised. In CETA art. 8.4.
- 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.
 Bilateral Inv. Treaties (BIT)
 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
 Bilateral Inv. Treaties (BIT)
 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

 Survival clauses after termination of the treaty: usually still applicable for a
long period (10/20 years) to investments already made before termination
 BIT’s and EU law
 Content of BITs’: see infra

 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 EU-BIT’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.

 Fate of intra-EU BIT’s: next slide

 BIT’s and EU law
 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.
- 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 uphold 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)
 Bilateral Inv. Treaties (BIT)
 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 ». In recent treaties, the right to regulate is stronger (and investment protection thus
weaker), eg CETA art. 8.9
 Responsibilities of investors
 Some elements in investment treaties, Free Trade Agreements etc.

- 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
 Dispute resolution (in BITs)
 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)
ICSID
 Investment treaty arbitration
 ICSID – Convention 1965: dispute resolution procedure for investment
disputes
 now 154 ratifications (+ 8 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 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
ICSID & other ISDS cases
 Investment treaty arbitration
 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.
 Investment treaty arbitration
 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 to comply with it an as ‘illegal state aid’ (contested in T-694/15,
pending). Micula sued for conversion into an enforcable judgment in the US (which
can only be done in accordance with the FSIA)

 See idem in the case Eiser won c. Spain on the basis of the ECT (solar panels).
 Investment treaty arbitration
 Criticism:
- asymmetric: no jurisdiction (or only very limited) over counterclaims by states against
investors
- 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. A
draft mandate for multilateral negotiations was published by the EU Commission in
Sep 2017. ECJ will have to further clarify compatibility with fair trial requirements
(Belgium requested an Opinion of the ECJ in 2017)