– An Effective Instrument of Investment Protection*
von Claus-Peter Knöller (Ruprecht-Karls-Universität Heidelberg), in Iurratio 2009, Heft 3, S. 150 ff.

Bilateral Investment Treaties (BITs) empower private investors to sue directly before international arbitral tribunals for damages in case of breaches of con­tract. Therefore, the extent of protection offered by these treaties and the ef­fectiveness of the judicial process are worth being analysed.

A. THE IMPORT OF FOREIGN INVESTMENTS
Foreign direct investments have grown in 2007 to a total amount of 1.83 trillion dollar worldwide1. This is the highest level of foreign direct investments, even higher than 2006 and the previous record year 2000 with a total amount of 1.3 trillion dollar – which accounts for 20 % of the world gross national product2. However, foreign direct investments were severelly affected by the financial crisis and fell to 1.69 trillion dollar in 20083. In the 1990s, the world saw a tremendous expansion of cross-border investments4. These facts un­derscore the economic significance of foreign investments. They stimulate the economic growth in both developed and developing countries, effectively transferring assets and technology. This can be seen as the primary reason for developing countries to open their markets for cross-border investments, but with the investment comes the desire to protect them. In response, the num­ber of BITs has grown from a mere 385 in 1990 to about 2700 treaties today5.

B. THE NEED FOR LEGAL CERTAINTY
Cross-border investments face increased risks compared to domestic invest­ments. Not only are investors exposed to general business risks, but they also face difficult systemic issues, e.g., factors immanent to the distinct political and socio-cultural setting in the host country. The investor’s anxiety can be reduced to the threat of a promising business opportunity being ruined by po­litically motivated measures. To put it in a nutshell, the possibility of confis-cations without compensation or expropriations without loss compensation are on the radar screen of current and potential investors6. Recently, cases have gained importance in which investors’ expectations had been disappoin­ted by adverse regulatory interventions (e.g., modifications of the tax regime)7. For these (and other) reasons, cross-border investments always cause the need for legal relief and call for the host country to provide a legal framework attractive, i.e., protective to foreign investors.

C. REMEDIES AT HAND FOR INVESTORS: AN OVERVIEW
Based on the foregoing observations, numerous protective measures have been put in place, mostly using BITs. Their footprint on the legal framework, which will be elaborated upon in this section, has been mostly appreciative of investors’ interests and highly visible in recent years. Investments are, in principle, subject to the law of the host country, so inves­tors are firstly protected by means of the legal system of the host country. This kind of protection is not, however, sufficient in the majority of cases because of the unilateral possibility to change the legal regulations by the host country8.
Under customary international law, investment protection is limited to regu­lations for already existing investments and international minimum stan­dards9. Thus, in general, public international law provides a certain level of property protection against illegal confiscations without compensation10. What exactly this level of protection is has been a focal point of the discussion. For instance, the questions of the necessity and the amount of compensation to be paid to the frustrated investor illustrate the conceptual vagueness of the unwritten rule of international law. To remedy the shortcomings, states began to conclude bilateral treaties. Despite several efforts to conclude an extensive multilateral investment treaty, such attempts failed grandiosely11.
Some progress has been made, however, and notable examples of treaties af­fording covering at least some investment-related issues are the Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR), the EC Treaty, the Energy Charter Treaty (ECT), several WTO agreements like GATS, GATT, TRIMs and TRIPs, as well as different regional agreements (e.g., NAFTA Chapter 11, APEC, MERCOSUR, ASEAN and CAFTA), the ICSID Convention and several World Bank rules. Double taxation agree­ments are also suitable as they avoid double taxation and therefore secure the investment profitability without containing concrete investment protection regulations12.
Efforts were successful, however, on a bilateral level. The bilateral treaties are the core of today’s investment protection system. Building upon its predeces­sors, so-called friendship, commerce and navigation (FCN) Treaties13, BITs offer the highest level of protection seen so far.

D. BILATERAL INVESTMENT TREATIES (BITs)
BITs are international treaties between two sovereign states on the mutual promotion and legal protection of investments by private persons or compa­nies from one country in the other country14. BITs are concluded by a multi­tude of states, many of which have developed their own model treaty as a starting point for further negotiations. The structure and protection provided are, in general, quite similar. Using the German Model Treaty developed by the Federal Ministry of Economics and Technology in 2005 as a representa­tive example, I will now analyse the details of the protection regime.

I. GERMANY: TREND-SETTER IN CONCLUDING BILATERAL INVESTMENT TREATIES
Germany is one of the key actors in the field of BITs. Not only did Germany conclude the very first BIT – with Pakistan in 1959 –15, it is also a party to more such treaties, namely 139, than any other country in the world. The Ger­many-Pakistan BIT is a classic example in several respects since, traditionally, industrialised countries have concluded BITs with developing countries. Meanwhile many BITs have been concluded among two developing countries as well16. Thus far, there are practically no BITs between leading capital-ex­porting countries for their respective domestic legal orders offer protection far beyond what is afforded to investors under most BITs17.

II. THE STATED PURPOSE OF THE BIT
Two considerations are key to investors: (i) protecting existing business inte­rests, and (ii) market access for future investments18. This motivation of the contracting parties is regularly reflected in a preamble. Though not legally binding, the preamble frames the issues and serves as a good starting point for the construction of the treaty19. On its face, the language oscillates around mutual granting of rights and obligations. Regardless of this reciprocity from a legal perspective, the de facto purpose of these treaties is the protection of private investments from industrialised countries in developing countries20. It is a handy framework for the facilitation of cross-border business activities, improving the legal position of private investors who are, in a way, third-party beneficiaries with many substantial entitlements21.
Efforts were successful, however, on a bilateral level. The bilateral treaties are the core of today’s investment protection system. Building upon its predeces­sors, so-called friendship, commerce and navigation (FCN) Treaties13, BITs offer the highest level of protection seen so far.

D. BILATERAL INVESTMENT TREATIES (BITs)
BITs are international treaties between two sovereign states on the mutual promotion and legal protection of investments by private persons or compa­nies from one country in the other country14. BITs are concluded by a multi­tude of states, many of which have developed their own model treaty as a starting point for further negotiations. The structure and protection provided are, in general, quite similar. Using the German Model Treaty developed by the Federal Ministry of Economics and Technology in 2005 as a representa­tive example, I will now analyse the details of the protection regime.

I. GERMANY: TREND-SETTER IN CONCLUDING BILATERAL INVESTMENT TREATIES
Germany is one of the key actors in the field of BITs. Not only did Germany conclude the very first BIT – with Pakistan in 1959 –15, it is also a party to more such treaties, namely 139, than any other country in the world. The Ger­many-Pakistan BIT is a classic example in several respects since, traditionally, industrialised countries have concluded BITs with developing countries. Meanwhile many BITs have been concluded among two developing countries as well16. Thus far, there are practically no BITs between leading capital-ex­porting countries for their respective domestic legal orders offer protection far beyond what is afforded to investors under most BITs17.

II. THE STATED PURPOSE OF THE BIT
Two considerations are key to investors: (i) protecting existing business inte­rests, and (ii) market access for future investments18. This motivation of the contracting parties is regularly reflected in a preamble. Though not legally binding, the preamble frames the issues and serves as a good starting point for the construction of the treaty19. On its face, the language oscillates around mutual granting of rights and obligations. Regardless of this reciprocity from a legal perspective, the de facto purpose of these treaties is the protection of private investments from industrialised countries in developing countries20. It is a handy framework for the facilitation of cross-border business activities, improving the legal position of private investors who are, in a way, third-party beneficiaries with many substantial entitlements21.

III. THE BIT’S SCOPE OF APPLICATION
To be subject to the scope of application of a BIT, an investment which has ac­cess to the market of the host country by an investor from the other contrac­ting state is necessary. If no BIT was concluded between the contracting state of the investor and the host country, there are several possibilities of evasion, e.g., establishing a subsidiary in, or relocating the head office to, a third coun­try that has a BIT with the target country in place (so-called BIT- or Treaty Shopping)22. An investment is, in principle, defined very broadly to cover every kind of asset or interest, often going hand in hand with an illustrative, non-exhaustive enumeration of certain types of doing business considered in­vestments (cf. Art. 1 section 1 of the German Model Treaty). Aspects infor­ming the application of the general formula are, e.g., the duration of the business project, the amount of capital expenditures involved, the expectation of periodical profit, the risks involved as well as the relationship of the invest­ment and the host country’s desire to develop its economy23. An aspect not to be neglected is the retroactivity to already existing investments of BITs – so not only future investments are protected (cf. Art. 9 of the German Model Tre­aty). A lot of BITs, including the German model BIT, contain a general obliga­tion to admit foreign investments.
IV. THE STANDARD OF PROTECTION AFFORDED

The general protection standards mainly consist of a rule against discrimina­tion (cf. Art. 2 section 3 of the German Model Treaty), the principle of natio­nal treatment, and the most-favoured-nation clause (e.g., Art. 3 section 1 and 2 of the German Model Treaty)24. National treatment means that foreigners must not be treated less favourable concerning their business activity than na­tionals of the host country. This does not necessarily require equal treatment as better protection for foreigners is always possible25. The most-favoured-na­tion clause prescribes that any treatment granted to a national of a third coun­try which is more favourable than national treatment or treatment under the BIT must also be accorded to an investor or an investment26. In general, BITs include regulations against direct and indirect expropriation as well as com­pensation for harm done to the investor (cf. Art. 4 section 2 of the German Model Treaty). Under the terms of the BIT, expropriations are not unlawful per se, but may be justified if they serve a public purpose and the investor is compensated. Almost every BIT contains, additionally, language mandating the fair and equitable treatment of investments but this standard’s implicati­ons remain vague and are subject to debate (cf. Art. 2 section 2 of the German Model Treaty). Most probably, it is to be regarded as a catch-all clause prohi­biting arbitrary treatment in general27. Arbitral tribunals interpret the fair and equitable treatment provisions mainly as an expression of the principles of good faith and fair dealing and of the protection of confidence28. More recent cases show that tribunals tend to base their decisions favouring investors more and more on this general standard since blatant expropriations are rare and more sophisticated ones are quite diffi cult to discern under the pure lan guage of the anti-expropriation provisions29.

V. DISPUTE SETTLEMENT
Th e high standard of protection aff orded by BITs is not only a consequence of their substantial provisions, but also very much due to the convenient and po werful enforcement procedures. Th ere are virtually no BITs without rule go verning disputes that may arise between the inbound state and the outbound state (i.e., inter-state dispute) or an investor considered a citizen of the out bound state (i.e., investor-state dispute)30. Th e BITs are embedded in an inter national framework established under the guidance of the World Bank, with its affi liate ICSID as a cornerstone. Inter-state disputes are handled in an orthodox manner: In case of disputes between the contracting states, negotiations between the governments are the fi rst step. Aft er negotiations between governments (cf. Art. 10 section 1 of the German Model Treaty) have failed, the issue is usually submitted to an ad hoc arbitral tribunal (Art. 10 section 2 of the German Model Treaty). Investor-state disputes are more highly visible, having gained prominence not only among lawyers but also other stakeholders and the general public. Th is is mainly due to the novelty of the idea of the private enforceability of claims vis à-vis a sovereign state. Th is option, which is extraordinarily attractive to pri vate investors, is available if the host state is an ICSID member31. Key to the ICSID concept is the investor’s right to bring a case before an international ar bitral panel even without the need to exhaust local remedies (see Art. 11 sec tion 2 of the German Model Treaty). But investor protection goes even further than that: Th e international arbitral proceedings do not require an arbitral agreement between the investor and the host country (“arbitration without privity“)32. Moreover, pursuant to Art. 26 section 1 of the ICSID Convention, the state party has eff ectively waived all other legal remedies. To put it diff erently, under this legal regime investors do not have to rely on diplomatic protection or other “toothless” traditional con cepts of international law. Rather, the awards rendered by ICSID tribunals have the same legal power as fi nal decisions; i.e., they may neither be appealed nor be overruled by domestic courts (see Art. 54 section 1 ICSID-Conven tion). An ICSID award may be put aside only by a special committee conve ned by ICSID-Convention, and only under very limited circumstances. ICSID awards create binding obligations on the contracting states and are enforce able to the fullest extent of domestic law (cf. Art. 11 section 3 of the German Model Treaty). In most cases, however, due to serious pressure by the out bound state, the investment community and the media, contracting states voluntarily and expediently fulfi l their obligations to compensate arising un der the award, so the question of sovereign immunity is of minor practical relevance33.
Against the background of these attractive features, the rapid increase of the number of investor-state arbitral proceedings over the past years is easily un derstandable34. Given these numbers, one might wonder about the rare use by German investors of ICSID proceedings, all the more considering the heft y investments made abroad by German companies and the almost “imperme able umbrella” of more than 130 German BITs in force. Possible explanations include general scepticism towards international law among German practiti oners, lack of knowledge in the business community about the protections under BITs34, the fear to weaken the traditional concept of diplomatic protec tion35, and the lack of actuarial incentives for German companies (as opposed to US companies)36.

VI. CONCLUSIONS
Bilateral Investment Treaties have become a powerful tool in making cross border business more effi cient and predictable. Th ey are benefi cial not only to the investors that are accorded market access, non-discrimination and equi table treatment, but also for the country where the investment is made and its citizens, fulfi lling developmental goals, since BITs facilitate the transfer of tangible and intangible wealth (i.e., assets and know-how), call for trans parency and fairness of public institutions, procedures and offi cials, and are strong enough to hold them accountable in case of non-compliance. States with inbound investments should pay close attention to their duties un der existing BITs which may signifi cantly limit their margin of manoeuvre as to the exercise of governmental power. Th e broad scope of application and the vagueness of a variety of legal concepts enshrined in these treaties make them prone to interfere with what has long be considered the “pouvoir souverain”.

Annotations:
* Eine deutsche Langfassung dieses Beitrages erscheint demnächst in Iurratio - das ePaper für stud. iur.

1 UNCTAD, World Investment Report 2008, 16 (http://www.unctad.org/en/docs/wir2008_en.pdf).

2 UNCTAD, World Investment Report 2001, 9 (http://www.unctad.org/en/docs/wir2001_en.pdf).

3 UNCTAD, World Investment Report 2009, 3 (http://wwwunctad.org/en/docs/wir2009_en.pdf).

4 Sacerdoti, 269 Recueil des Cours 251, 265 (1997); Sidhu, 2004 ZEuS 335, 337.

5 UNCTAD, World Investment Report 2009, 32 (http://www.unctad.org/en/docs/wir2009_en.pdf).

6 Schwartmann, Private im Wirtschaftsvölkerrecht, 2005, 85; Wegen/Ra­ible, 2006 SchiedsVZ 225, 227.

7 Happ, 2006 IStR 649.

8 Fischer, in: Festschrift für Seidl-Hohenveldern, 1988, 95, 102; Karl, 1994 RIW 809, 810.

9 Häde, 35 Archiv des Völkerrechts 181, 185 (1997); Krajewski, Wirt­schaftsvölkerrecht, 2006, § 3 para. 544.

10 Ohler, 2006 JZ 875, 878; Wegen/Raible, 2006 SchiedsVZ 225, 228.

11 Regarding the failure of the MAI, see Görs, Internationales Investiti­onsrecht, 2005, 139 et seq.; Karl, 99 ZVglRWiss 143 (2000).

12 Häde, 35 Archiv des Völkerrechts 181, 192 (1997); Schwartmann, Pri­vate im Wirtschaftsvölkerrecht, 2005, 90.

13 Füracker, 2006 SchiedsVZ 236; Sornarajah, The International Law on Foreign Investment, 2nd ed., 2004, 209.

14 See Knöller, 2008 IStR 453.

15 BIT between Germany and Pakistan, BGBl. II 1961, 793.

16 Lowenfeld, International Economic Law, 2002, 473; Rao, 26 Common­wealth Law Bulletin 623, 624 (2000); Salacuse, 24 International Lawyer 655, 658-659 (1990).

17 Görs, Internationales Investitionsrecht, 2005, 181; Xiao, 2006 ZEuS 441, 455.

18 Salacuse/Sullivan, 46 Harvard International Law Journal, 67, 75 (2005); Vandevelde, 36 Columbia Journal of Transnational Law 501, 514 (1998).

19 Dolzer/Bloch, in: Kronke/Melis/Schnyder, Handbuch Internationales Wirtschaftsrecht, 2005, 1066 para. 61.

20 Ohler, 2006 JZ 875,881.

21 Court of Appeals, OEPC v. Ecuador, EWCA Civ. 1116, para. 18-20; Happ, 2006 IStR 649, 650; Knöller, 2008 IStR 453.

22 Knöller, 2008 IStR 453, 454; Oschmann, 1996 RIW 494; Schäfer, 2004 BB 1069, 1070.

23 Fedax N.V. v. Venezuela, ICSID ARB/96/3, para. 43; Salini Construttori S.p.A. and Italstrade S.p.A. v. Morocco, ICSID ARB/00/4, para. 52.

24 Herrmann, in: Cordewener/Enchelmaier/Schindler, Meistbegünsti­gung im Steuerrecht der EU-Staaten, 2006, 29, 30.

25 UNCTAD, Trends in International Investment Agreements, 60. (http://www.unctad.org/en/docs/iteiit13_en.pdf).

26 OECD, Most-Favoured-Nation Treatment in International Investment Law, 2.

27 Sidhu, 2004 ZEuS 335, 345.

28 Tecmed v. Mexico, ICSID ARB(AF)/00/2, para. 154.

29 OEPC v. Ecuador, LCIA UN 3467; cf. Knöller, 2008 IStR 453, 460; Schill, 2005 SchiedsVZ 285, 291.

30 See Knöller, 2008 IStR 453, 454.

31 Regarding ICSID proceedings: Happ, 2005 SchiedsVZ 21, 25 et seq.; Lörcher, 2005 SchiedsVZ 11 et seq.

32 Schäfer, 2004 BB 1069.

33 Lörcher, 2005 SchiedsVZ 11, 20.

34 UNCTAD, World Investment Report 2009, 34 (http://www.unctad.org/ en/docs/wir2009_en.pdf); UNCTAD, International Investment Disputes on the Rise (http://www.unctad.org/sections/dite/iia/docs/webiteiit20042 _en.pdf).

35 Hauschka/Schramke, 2005 BauR 1550, 1551; Wegen/Raible, 2006 SchiedsVZ 225.

36 Dolzer/Bloch, in: Kronke/Melis/Schnyder, Handbuch Internationales Wirtschaftsrecht, 2005, 1083 para. 100.

36 Escher, 2006 SchiedsVZ 95, 97.