How to Practice Trading Without Investing

Investment protection

With investment protection agreements, states guarantee their investors protection under international law in the respective host state. There are around 3,000 bilateral and multilateral investment promotion and protection agreements (investment protection agreements) around the world.

Such contracts are necessary to ensure a uniform understanding of investment protection and its practical implementation in the participating states. Because the legal and factual conditions for protecting investments in some countries do not always correspond to our constitutional ideas. Without an investment protection agreement, the foreign investor would have to rely on unsafe legal channels before national courts in the host country or on diplomatic interventions by his government against the foreign government in order to protect his investment against arbitrary administrative action such as expropriation without compensation. As a rule, investment protection contracts contain the following protection standards:

  • Protection against expropriation without compensation,
  • Fair and equitable treatment (FET),
  • full protection and security,
  • Most Favored Nation Treatment (MFN),
  • National treatment = protection against discrimination,
  • Protection against the breach of state commitments, so-called "umbrella" clause,
  • unrestricted transfer of capital and income.

Some investment protection agreements provide for so-called investor-state arbitration proceedings for the settlement of investment protection disputes. They enable the investor to enforce his rights independently of national courts and diplomatic interventions. The investment protection agreements regulate when the investor can initiate arbitration and according to which arbitration rules the arbitral tribunal should be composed and operated.

Development of the modern investment protection free trade agreement with investment protection and investment protection agreements of the EU and the EU member states with third countries

The Federal Ministry for Economic Affairs and Energy advocates more modern and transparent rules for investment protection and for the settlement of investment protection disputes. In February 2015, the Federal Ministry of Economics and other EU trade ministers presented a proposal for modern investment protection. The EU Commission took up the approaches on a broad front and presented its own proposal for modern investment protection for the agreement on the planned transatlantic trade and investment partnership (TTIP) in autumn 2015, which was introduced into these negotiations as an EU proposal in November 2015 . There have already been four practical successes: the free trade agreement of the European Union (EU) and the EU member states with Canada (CETA) as well as the investment protection agreements of the EU and the EU member states with Singapore and Vietnam, as well as the free trade agreement with Mexico (as of April 2021 ) already contain the EU's proposals for a reformed dispute settlement procedure with a modern, transparent investment court (overview of agreements with investment protection).

Bilateral investment promotion and protection agreements between Germany and other countries

Germany has concluded more than 130 bilateral investment protection treaties since 1959. In many cases, third countries have asked Germany to conclude an investment protection agreement in order to make their country more attractive to German investors. Foreign investments by German companies regularly help secure and expand jobs in Germany. Often, such projects are primarily about better local market development and greater sales opportunities. The investment protection agreements also make it easier for small and medium-sized companies to open up foreign markets.

Investment protection agreements also form the prerequisite for the assumption of federal guarantees for German direct investments abroad to protect against political risks. They guarantee adequate legal protection in the host state. According to budget law, this is a prerequisite for the risk-related acceptability of assuming an investment guarantee.

Situation after the Lisbon Treaty

With the Lisbon Treaty in 2009, responsibility for foreign direct investment was transferred to the EU. This gives the EU Commission the opportunity to negotiate investment protection agreements for the EU and the 27 EU member states. These should take the place of the bilateral agreements of the individual member states.

As a rule, the Council also authorizes the EU Commission to negotiate on the protection of portfolio investments and investor-state arbitration proceedings with the participation of the member states, which according to the opinion of the European Court of Justice (ECJ) on this question (Case 2/15 in context of the free trade agreement with Singapore) do not fall under the exclusive competence of the EU, but continue to fall under that of the EU member states. Therefore, the newly negotiated agreements are regularly concluded as so-called mixed agreements between the EU, the 27 EU member states and the respective third country. "Mixed" means that parts of the agreement fall within the competence of the EU member states - in this case the national parliaments must also approve the agreement. As early as July 5, 2016, the EU Commission proposed to the European Council that the free trade agreement with Canada (CETA) be concluded as a mixed agreement, which is why the EU member states are contracting parties alongside Canada and the EU.

The bilateral investment protection treaties of the EU member states continue to apply as long as no investment protection treaties between the EU and the EU member states have been concluded with third countries. This is regulated in Regulation No. 1219/2012, the so-called "Grandfathering" Regulation (PDF: 754 KB), to introduce a transitional regulation for bilateral investment protection agreements between EU member states and third countries.

Investment protection agreements between individual EU member states

In the past, EU member states have also concluded investment protection agreements with those states that later became EU member states. None of the countries with which Germany negotiated contracts at the time were not yet candidates for accession to the EU. The German bilateral investment protection agreements with EU member states will most likely expire at short notice on the basis of the agreement of May 5, 2020 to terminate the bilateral investment protection agreements between EU member states.

The EU member states have discussed the future of investment protection treaties between EU member states with the European Commission. In 2016, France, Germany, Austria, Finland and the Netherlands proposed a rule of law mechanism in a "non-paper" (PDF: 349 KB) that would replace dispute settlement under the existing bilateral intra-EU investment protection treaties and apply to all EU member states could. According to the proposal, the existing investment protection agreements between EU member states would be terminated as soon as possible and arbitration courts with privately appointed arbitrators within the EU would be abolished.

Following prior approval by the Federal Cabinet, on January 15, 2019, the Federal Government and 21 other EU member states issued a declaration to repeal the Intra-EU Investment Protection Treaties (Intra-EU-IFV) to implement the Achmea judgment of the European Court of Justice of 6 January 2019. Signed March 2018. In the declaration, the undersigned EU member states express their willingness to repeal their intra-EU IIAs. They also declare that the ECJ's ban on intra-EU investment arbitration proceedings also applies to intra-EU arbitration proceedings based on the Energy Charter Treaty (ECT).

On the basis of this declaration, the negotiations for an agreement to end the intra-EU IFV have been successfully concluded. The agreement on the termination of bilateral investment protection treaties between the member states of the European Union (hereinafter referred to as "the Agreement") was signed by 23 member states of the EU, including Germany, on May 5, 2020. The federal cabinet approved the signing of the agreement on April 2, 2020. On this basis, the Federal Cabinet passed a draft treaty law on the Convention on September 16, 2020. The parliamentary legislative process was successfully completed at the end of 2020. The law was drawn up by the Federal President on January 15, 2021 and promulgated in Part II of the Federal Law Gazette on January 21, 2021.

The Convention comes into force for the Federal Republic of Germany 30 days after the instrument of ratification has been deposited with the Secretary General of the Council of the European Union. The investment protection agreements concluded by Germany only expire after the agreement has been ratified by both contracting parties to the respective investment protection agreement and without a grace period.

Investment dispute settlement: arbitration and investment court system

In older investment protection treaties, disputes were settled through state-state arbitration. In the event of a dispute over the application of and compliance with an investment protection treaty, the home country of the investor therefore had to initiate state-to-state arbitration proceedings against the host state. In order to depoliticize investment disputes, investor-state arbitration procedures were introduced in the 1980s. This enabled the investor to assert violations of the respective investment protection contract before an arbitration tribunal.

With the new EU approach, which has already been implemented in the free trade agreement with Canada and in the investment protection agreements with Singapore and Vietnam, dispute resolution is being modernized and a publicly authorized investment court is being introduced. The judges are appointed by the parties to the agreement and no longer by the parties to the specific dispute. The trials are public and all pleadings and judgments are published. In addition, an appeal body is planned to ensure the consistency and correctness of the decisions. Canada, Singapore and Vietnam, the EU and the EU member states are taking up the suggestions for improvement that were developed - also at the initiative of the former Federal Minister of Economics, Sigmar Gabriel - following the public consultation on investment protection and investor-state arbitration in TTIP. The EU Commission then proposed the establishment of an investment court for the first time in the negotiations for TTIP. In the free trade agreements with Canada and the investment protection agreements with Singapore and Vietnam, the contracting parties have also undertaken to replace the investment courts under these agreements with a permanent multilateral investment court in the medium term.

The EU Commission and the EU member states advocate the establishment of this multilateral investment court within the framework of negotiations in the United Nations Commission on International Trade Law (UNCITRAL) Working Group III (reform of investor-state dispute participation ) a.

In parallel, the World Bank's International Center for Settlement of Investment Disputes (ICSID) is currently investigating how its procedural rules for settling disputes between investors and states can be improved. This process has largely been completed. The focus is on improving the time and cost efficiency of the procedures. More information can be found here (in English).

Legal Basis for Arbitration

The individual investment protection agreements regulate the arbitration rules according to which arbitration proceedings can be conducted. Examples are the rules of procedure of the United Nations Commission on International Trade Law (UNCITRAL), the International Center for Settlement of Investment Disputes (ICSID), the International Chamber of Commerce, ICC), or the Stockholm Chamber of Commerce (SCC).

ICSID is part of the World Bank Group and has been based there since 1966 due to the ICSID Convention. The ICSID Convention was signed on March 18, 1965 and has since been ratified by 155 states, including Germany. ICSID is the most important institution for settling investment disputes (there are currently around 300 cases pending). The ICSID Convention contains in its articles 37 to 47 and in the supplementary applicable rules of arbitration (ICSID Arbitration Rules) strict requirements for the constitution and composition of the arbitral tribunal as well as for the course of the arbitration proceedings. The ICSID procedure is designed to resemble a court and is of high quality. Detailed and timely reports on the individual pending proceedings are provided on the ICSID website.

Currently, 86 of Germany's bilateral investment protection treaties provide for investor-state arbitration proceedings.

More transparency in investor-state arbitration

The United Nations Commission on International Trade Law, UNCITRAL, adopted comprehensive new transparency rules for investor-state arbitration on July 11, 2013. As a full member of UNCITRAL, the Federal Government took an active part in the development of the new transparency rules and expressly welcomes them. The EU participated as an observer. Transparency in investor-state arbitration proceedings is a central concern of the Federal Government, since public interests, not least the interests of taxpayers, are affected in these proceedings.

The transparency rules have been in effect since April 1, 2014 and are far-reaching. Basically:

  • all procedures are publicly registered (Art. 2),
  • all pleadings are published (Art. 3),
  • the proceedings of the arbitral tribunal are conducted publicly (Art. 6),
  • civil society is given the opportunity to participate (Art. 4),
  • the arbitral awards or judgments are published (Art. 3).

Exceptions apply to trade and business secrets. Further information can be found on the UNCITRAL Internet portal.

However, the UNCITRAL transparency rules only apply to investor-state arbitration proceedings based on more recent investment protection treaties, i.e. treaties that the states concluded after March 31, 2014 if the contracting parties agree to include them.

Transparency rules for old contracts: Mauritius Convention

All existing German bilateral investment promotion and protection agreements with investor-state arbitration proceedings were concluded before 2014. The UNCITRAL transparency rules therefore do not yet apply to investor-state arbitration proceedings under these agreements.

In order to enable the application of the UNCITRAL transparency rules for these old contracts as well, the so-called Mauritius Convention was drawn up. It extends the UNCITRAL transparency rules to existing investment protection agreements. The prerequisite is that the defendant state has ratified the Mauritius Convention and that the investor belongs to a state that is also bound by the Mauritius Convention.

The signing of the Mauritius Convention and the extension of the transparency rules to existing investment protection agreements is an important political signal for more transparency. Investor-state arbitration proceedings according to the Mauritius Convention - as well as generally according to the UNCITRAL transparency rules - will be more transparent than proceedings before German courts or WTO proceedings.

The draft Mauritius Convention approved by the UN General Assembly can be found here.

The federal cabinet approved the signing of the Mauritius Convention on February 25th. The Federal Government is thus creating the conditions for significantly more transparency in future investor-state arbitration proceedings under existing investment protection agreements. The Mauritius Convention was signed on March 17th, 2015 in Port Louis (Mauritius). The ratification is still pending, as the EU Commission is aiming for the simultaneous accession of the EU and its member states.

Significance for multilateral treaties

The new UNCITRAL transparency rules can in principle also be applied to multilateral agreements such as the Energy Charter Treaty, on the basis of which, inter alia, the Vattenfall arbitration is being conducted. The prerequisite for this, however, is that all 56 signatory states to the Energy Charter Treaty accede to the Mauritius Convention. This includes both the EU itself and the EU member states (with the exception of Italy), as well as third countries. The Federal Government is committed to the accession of the EU and all EU member states that are contracting states to the Energy Charter Treaty.

Further information on the subject of investment protection can be found in the FAQ.