Investment protection and arbitration proceedings are currently a matter of fierce public debate in Germany. Legal actions – such as those being brought by Swedish utility Vattenfall against Germany in the course of Germany’s Energiewende; or the case filed by the Philip Morris Tobacco Group against Australia in response to that government’s health legislation – are stoking fears that nation states could have their own decision-making freedom restricted as a result of agreements on investment protection. The issue under contention is the right of foreign investors to bring actions before an international tribunal asserting that their rights as investors have been breached by the host country.
The likelihood of an action of this nature being granted to investors has been anticipated for years. Investment protection was very much part of the mandate under which the European Commission took up negotiations with the United States in 2013 on a Transatlantic Trade and Investment Partnership (TTIP). But, a year and a half later, the future of transatlantic investment protection is still uncertain. The investment capital of the Free Trade Agreement is one of the largest stumbling blocks in the ongoing negotiations. Broad swathes of the public see investment arbitration tribunals as deeply suspect. A groundswell of political and popular opinion is gathering on the European side to the effect that investment arbitration tribunals between constitutional states are not just superfluous: they unduly restrict the legislative and regulatory freedom of action of nation states. For some, the tribunals represent a ‘shadow justice system’ in which investment protections become investors’ ‘super-rights’ or are decried as a ‘secret parallel law for major corporates’.
This hotly contested debate is leading to a distorted perception of investment protection. We look at the facts, at the case for and against, and do this by examining the history behind investment protection and the rationale for its existence.
The origins of modern investment protection
A glance at the legal environment and the resultant economic conflicts which dominated the first half of the 20th century illustrate the economic need for investment protection. At that time, if someone decided to make an investment overseas, they were exposed to the (sovereign) actions of the host country and, to a large extent, were completely without protection. At a national level, the host country was free (within certain limits) to create legal principles governing the actions which compromised the investment. Even at an international level, there was a lack of precise, enforceable rules providing for the individual protection of the investor. This legal uncertainty represented a serious business risk for investors and a major impediment to growth for host countries eager for foreign capital. This was the period when investment protection came into being: it was intended both to protect the individual investor and promote the flow of investment capital to foreign countries.
Treaties governed by international law
Investment protection treaties between states form the basis of this investment protection regime. These are regularly concluded between two states and are known as bilateral investment treaties, or BITs. About 3,000 BITs exist around the world. There is a growing tendency for several states to sign multilateral treaties on investment protection, as, for instance, the North American Free Trade Agreement (NAFTA).
From a content perspective, these treaties exhibit similar structures and strengthen the material and procedural protection of the investor’s individual rights in the host country. The signatory states mutually undertake to guarantee a certain material level of protection for investments made by investors from the other signatory state. As part of this, the host state guarantees investors ‘fair and equitable treatment’ and protection against confiscation without compensation, or the same treatment as nationals (‘national treatment’) or the same treatment as investors from other countries (‘most favoured nation treatment’). It is clearly noted that a simple collapse in sales or the prejudicial effects of changes in the law will not be sufficient in themselves for the investor to institute a successful litigation against the host country. A successful case would require additional circumstances revealing the conduct of the state as arbitrary, discriminatory or unfair.
Arbitration clauses as safeguards
The treaties generally include an arbitration clause as a means of protecting the procedural enforcement of these standards by the investor. The treaty contains an offer by the host state as part of its relationship with external investors to attend proceedings before an international arbitration tribunal (instead of its own courts); an investor can subsequently (it is thereby implied) take them up on their ‘standing offer’ by bringing arbitration proceedings. Contrary to popular sentiment of proceedings being held in strictest secrecy, investment disputes conducted through arbitration tribunals are subject to clear, transparent rules. Unlike commercial arbitration, many arbitral awards and even written submissions are published; specialist media also report in detail about ongoing investment arbitration proceedings. The arbitrators, some of whom can be appointed by the parties, are bound by general principles of international law and procedure during the proceedings; the consequences of disregarding these can lead to the rescission of the arbitration award.
There is widespread concern about the lowering of minimum standards in the area of health, consumer or employee protection where public interest is concerned, but these are all areas that can be incorporated in the treaty – for example, by clear codification of the host state’s legislative and regulatory powers. Given the due diligence in the drafting and practical application of investment treaties, ‘democracy’ and ‘the sovereignty of states’ are not seriously prejudiced by investment arbitration.
Advantages of investment arbitration
Investment arbitration offers distinct advantages. Arbitration enables the parties to tailor the proceedings to the relevant dispute. They can appoint arbitrators with particular expertise; they can influence the language of the proceedings; they can decide on the nature of taking evidence or the selection of an oral hearing. They can thus steer clear of the procedural pitfalls of national codes of civil procedure and avoid the resulting delays and costs. Unlike judgments of national courts, in most countries arbitral judgements are recognised and enforced according to standard rules (those of the New York Convention of 1958). This explains the enduring success of arbitration tribunals in cross-border disputes around major international projects. Arbitration is particularly attractive where national courts are felt to be too cumbersome, where there might otherwise be insurmountable language or procedural barriers or where national judges lack the specialist knowledge or personal or infrastructural capacities needed at this level.
Given the economic context, it seems imperative to restore public debate to a more objective, factual level. Will an agreement on investment protection be reached in the Transatlantic Trade and Investment Partnership? If it is, Europe and the US will have succeeded in setting new standards for investment protection which could have an impact far beyond the borders of the world’s two largest economic areas.