Investment treaty practice

Model BIT

Does the state have a model BIT?

Germany has a model BIT. The latest version of the model BIT, which is from 2008, can be accessed at: http://investmentpolicyhub.unctad.org/Download/TreatyFile/2865. The model BIT’s provisions are broadly consistent with general treaty practice and the BITs of other nations (with the exception of newer model BITs, such as that of India, which contain numerous unique provisions).

Article 1 sets out the definitions of ‘investment’ and ‘investor’ that are relatively broad and inclusive. Articles 2 to 5 provide the substantive protections to be afforded to investors and investments, in particular:

  • the standards of fair and equitable treatment;
  • full protection and security;
  • national as well as most-favoured-nation treatment;
  • protection against discrimination and expropriation without prompt, adequate and effective compensation; and
  • the right to a free transfer of payments.

Article 7(2) contains an umbrella clause (ie, a clause obliging the state to fulfil obligations it has entered into with an investor). Regarding investor-state dispute settlement, article 10 provides for a variety of options, including:

  • conciliation and arbitration under the ICSID Convention;
  • arbitration under the ICSID Additional Facility Rules;
  • arbitration under the Rules of Arbitration of the United Nations Commission on International Trade Law (UNCITRAL);
  • arbitration under the Rules of Arbitration of the International Chamber of Commerce;
  • arbitration under the Rules of Arbitration of the London Court of International Arbitration; and
  • arbitration under the Rules of Arbitration of the Stockholm Chamber of Commerce.

To date, no BITs based on the 2008 model BIT have entered into force (see question 12). Therefore, the German BITs in force are based on earlier versions of the model BIT (eg, that of 1998 (http://investmentpolicyhub.unctad.org/Download/TreatyFile/2863) or 1991 (http://investmentpolicyhub.unctad.org/Download/TreatyFile/2864)). The different versions have remained broadly consistent over time, with one important caveat: under the 1991 and 1998 model BITs, the nationality of juridical persons, and the question of whether a juridical person is protected, is determined by reference to the seat of the juridical person, whereas, under the 2008 model BIT, the law under which the juridical person is founded and organised is decisive.

Preparatory materials

Does the state have a central repository of treaty preparatory materials? Are such materials publicly available?

There is no central repository specialised in treaty preparatory materials. However, materials from the federal ministries, including materials on treaty negotiations, are kept at the Federal Archive and are generally available to the public. Moreover, for some BITs, Germany and the other contracting state have agreed additional protocols upon signing. These protocols provide for definitions and interpretative guidelines that can be taken into account in the interpretation of the respective BIT’s provisions (see question 7).

Scope and coverage

What is the typical scope of coverage of investment treaties?

Coverage of German BITs is usually characterised by defining the terms ‘investment’ and ‘investor’. The standards of substantive protection and the investor-state dispute settlement mechanisms contained in the BITs expressly set out that they are only available to ‘investors’ and ‘investments’ as defined under the BIT. Specifically, it is necessary for the applicability of these provisions that an investor of one contracting state to the BIT makes an investment in the territory of the other contracting state.

German BITs typically contain a broad definition of the term ‘investment’, referring to ‘every kind of asset’ and then setting out a non-exclusive list of examples of qualifying investments, usually including items such as:

  • ‘movable and immovable property’;
  • ‘shares in companies’;
  • ‘claims to money’
  • ‘claims to any performance’;
  • ‘intellectual property rights’; and
  • ‘concessions’.

With regard to the definition of the term ‘investor’, German BITs differentiate between natural and juridical persons. For natural persons, German BITs refer to the domestic law of the states that are party to the BIT. Thus, in deciding whether a natural person qualifies as an investor of Germany, the German Law on Citizenship applies. In case of juridical persons, German BITs typically follow the ‘seat theory’, meaning that a juridical person is an ‘investor’ of one of the contracting states of the BIT if it has its seat in that state. The seat is typically understood as the place from where the juridical person is managed (ie, the place where day-to-day management decisions are being made).

Protections

What substantive protections are typically available?

German BITs offer a wide range of standards of protection for foreign investors. Most importantly, German BITs guarantee the fair and equitable treatment of investors. Various investment tribunals have held this guarantee to include:

  • protection against the frustration of legitimate expectations;
  • the obligation to provide a transparent and stable business environment;
  • the obligation not to apply arbitrary measures; and
  • a duty on the state to act in good faith.

In addition, German BITs also guarantee full protection and security of foreign investors and their investments. This means, in particular, that the state is obliged to exercise a certain level of diligence - and take necessary measures - to protect foreign investments from damage inflicted by third parties.

German BITs also protect foreign investors from discrimination. This includes a ‘national treatment’ obligation (ie, the obligation of the state to treat foreign investors no less favourably than it treats its own investors). Typically, the BITs also include ‘most favoured nation’ treatment (ie, the obligation of the state to treat the foreign investors protected under the BIT no less favourably than foreign investors of third states). Also, there is usually a general non-discrimination clause, prohibiting other forms of discrimination.

A further common feature of German BITs is a clause protecting against expropriation without compensation. Importantly, both direct and indirect expropriation is covered. This means that both the outright taking of the title to property (ie, ‘direct’ expropriation), and other state acts that have an effect comparable to that of an outright taking of the title (ie, ‘indirect’ expropriation), are only allowed if compensation is paid. The compensation has to be:

  • paid ‘promptly’ (ie, immediately upon the taking);
  • adequate (ie, reflecting the fair market value of the property that is expropriated); and
  • effective (ie, in a freely convertible currency).

German BITs typically also guarantee the free transfer of funds in and out of the state in which the investment is made. This includes, in particular, the returns generated by the investment.

Finally, German BITs also generally contain an umbrella clause. Tribunals have understood this to mean that a breach of contract entails a breach of the BIT, with it being possible that the latter breach is pursued before an investment arbitration tribunal.

Dispute resolution

What are the most commonly used dispute resolution options for investment disputes between foreign investors and your state?

Typically, German BITs refer to ICSID arbitration as a means of dispute resolution. Numerous German BITs also provide for ad hoc arbitration under the UNCITRAL Rules. Some German BITs also offer the investor the choice between the two.

Confidentiality

Does the state have an established practice of requiring confidentiality in investment arbitration?

German BITs are generally silent as regards confidentiality of pleadings and hearings, and awards or other decisions by tribunals in investment arbitration cases. However, the situation is different under EU FTAs with investment chapters that are currently being negotiated and are supposed to enter into force in the near future (see question 12). Under these FTAs, the publication of pleadings and procedural decisions by the tribunal, and the broadcasting of hearings, is envisaged.

In the investment arbitration cases Germany has been involved in so far (see question 24), the state has largely pursued a policy of maintaining confidentiality. Insofar as these cases have been under the auspices of ICSID, the minimum transparency requirements of ICSID have been observed. That generally means that the existence of the cases and the names of the arbitrators were publicised. In addition, in one case that has already been concluded, the award was published. However, the parties’ pleadings in cases involving Germany have not been made publicly available to date and hearings have generally not been publicised. Nonetheless, it is to be expected that future cases involving Germany will be subjected to greater transparency. This became clear in the recent case of Vattenfall v Germany whose live-stream broadcast appeared on the ICSID website.

Insurance

Does the state have an investment insurance agency or programme?

For decades, the German government has provided investment guarantees to German investors investing abroad. These investment guarantees typically cover losses resulting from a number of risks, including:

  • direct and indirect expropriation;
  • breach of contract by the state;
  • war and other armed conflict; and
  • revolution and civil disturbance.

Investments that may be covered are:

  • equity participation (including participation through holding companies);
  • investment-like loans (ie, shareholder or bank loans that resemble equity);
  • endowment capital for foreign branches or plant locations of German companies; and
  • rights qualifying as assets in the form of long-term investments (eg, concessions, production-sharing agreements for oil and gas, and bonds).

An BMWi-headed inter-ministerial committee decides whether or not to grant a guarantee to an investor. An investment must fulfil numerous requirements before an investment guarantee is granted. In particular, the investment has to be a new or a follow-up investment. Moreover, the investment has to be made by a company based in Germany on a long-term basis and an apparent German national interest must be present. The investment must also be viable from an entrepreneurial and economical perspective. Furthermore, the investment needs to have a positive effect on the host country and Germany alike, and it should intensify the relations between the countries.

Legal protection of the investment in the host country is also a necessary requirement for an investment guarantee to be granted. Sufficient legal protection generally requires that there is an investment treaty in place between Germany and the host country. Without an investment treaty in place, an investment guarantee will only be granted in exceptional cases in which the host country’s domestic legal system is considered sufficient. In all cases, the economic and political environment, and the development of the host country, are considered too.