International Investment Agreements and Investor-State Dispute Settlement by Bundesverband der Deutschen Industrie e.V.

International Investment Agreements and Investor-State Dispute Settlement: Fears, Facts, Faultlines

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Table of Contents Introduction ............................................................................................................................................................................... 4 Ten Concerns ............................................................................................................................................................................ 5 The Most Important Data at a Glance ............................................................................................................................. 20 Ten ISDS Cases in the Public Debate: Worth a Closer Look .. ................................................................................... 30 Conclusion, Perspective, and Recommendations ....................................................................................................... 43 Annex I: Germanyâ&#x20AC;&#x2122;s IIAs (129 Agreements in Effect) .................................................................................................. 51 Annex II: Members of the Energy Charter Conference .............................................................................................. 52 Annex III: ISDS Cases of German Investors .. ................................................................................................................. 53 Further Sources ..................................................................................................................................................................... 57 Imprint . . ..................................................................................................................................................................................... 60

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Introduction For companies, international investment agreements (IIAs) as well as investment chapters in free trade agreements are an important instrument for safeguarding foreign direct investment (FDI) against political risks such as expropriation, expropriation-like measures (indirect expropriation), and discrimination. For States, they are a central tool for promoting foreign investments. With these international agreements, they signal to foreign investors that they will protect their investments against arbitrary sovereign infringements. Most of these agreements give investors the possibility to assert their rights before a neutral tribunal – beyond the host State’s range of influence (investor-state dispute settlement, ISDS). Existing IIAs and dispute settlement procedures exhibit some weaknesses that should be avoided in new agreements. For instance, transparency needs to be improved, legal concepts need to be more precisely formulated, and frivolous claims need to be prevented. An appellate mechanism would also be desirable. German industry has outlined reform recommendations in the BDI position papers “Protecting European Investment Abroad” and “The ‘I’ in TTIP”.1 However, under no circumstances should the essence of IIAs and investor-state dispute settlement be brought into question. Critics in political circles and among the wider public are calling for this instrument to be scrapped. Yet, as we show in this paper, many points of their arguments do not withstand a clear-eyed analysis. On the following pages, we look closely at the criticisms most frequently voiced against investment protection agreements and investorstate dispute settlement, and set out why IIAs are indispensable for industry.

Both position papers can be found at <http://bdi.eu/BDI_english/TTIP_investment_protection.htm>.

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BDI-Background Paper ISDS: Fears, Facts, Faultlines

Ten Concerns Concern 1: Investor-state dispute settlement enables companies to file claims against governments whenever their profits fall as a result of new legislation or regulation. They can also force governments to repeal laws.

An international investment agreement (IIA) is an international agreement between two or more States. When an IIA is signed, the contracting parties undertake not to discriminate against foreign investors – neither vis-à-vis domestic investors (principle of national treatment) nor vis-à-vis other foreign investors (principle of most-favored nation). Furthermore, the contracting parties guarantee investors fair and equitable treatment (FET). For example, treatment is not fair and equitable if the investor is denied access to national legal remedies, is placed under political pressure, or also if government decisions are arbitrary, opaque, and contradictory. In addition, the requirement of fair and equitable treatment protects the legitimate expectations of the foreign investor. These can arise from explicit or implicit statements and assurances by States to investors. If a host State retracts an assurance or a promise that has led to a legitimate expectation on the part of the investor, this also breaches the requirement of fair and equitable treatment. Lastly, the investor is protected against direct and indirect expropriation without compensation. Expropriations are allowed if they are a proportionate response to the public interest, if they are implemented transparently and without discrimination, and if the investor receives appropriate compensation. Moreover, IIAs usually guarantee the free transfer of capital. In an investor-state dispute settlement (ISDS) case carried out on the basis of an IIA, it is clarified whether a host country has infringed the terms of the IIA. If the State loses, the government cannot be obliged to change its behavior – this means, for instance, that a government cannot be required to repeal a law. The tribunal’s sanction options are restricted to the possibility of awarding the investor damages. IIAs do not fundamentally protect investors against declines in the profitability of their investments. Hence, investors must always bear in mind that laws can change and that profit expectations will not always

be realized. Accordingly, laws or regulatory measures by States do not automatically constitute indirect expropriation. This has been confirmed, inter alia, by the rulings in LG&E v. Argentine Republic (see also “Ten ISDS Cases in the Public Debate: Worth a Closer Look” of this publication) and in Saluka Investments v. Czech Republic. In LG&E v. Argentine Republic, the tribunal identified two criteria for testing whether the conditions for expropriation were met: first, the economic effects (i.e. an effective change of control over the investment or ownership; infringement of the investor’s legitimate expectations) and second, the duration of the measure. The tribunal found that this was not a case of expropriation in the absence of a permanent and substantial loss to the investment or of its value due to a state intervention.2 In addition, the tribunal formulated the principle of fair and equitable treatment more concretely. It specified that the “fair and equitable standard consists of the host State’s consistent and transparent behavior, free of ambiguity that involves the obligation to grant and maintain a stable and predictable legal framework necessary to fulfill the justified expectations of the foreign investor”.3 Like LG&E v. Argentine Republic, Saluka Investments v. Czech Republic shows that not every state intervention is indirect expropriation. At the core of the case was the treatment of domestic and foreign banks during the privatization of the Czech banking sector at the end of the 1990s. Nomura Europe plc, a company owned by the Japanese financial conglomerate Nomura incorporated in Great Britain, had acquired shares in the Czech Investicni a postovni banka a.s. (IPB) during the privatization. In 1998 and 2000 it sold these shares in two steps to Saluka Investments B.V., a wholly owned subsidiary. In 1999, the government provided state support to three large Czech

LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v The Argentine Republic, Case Summary Prepared in the Course of Research for S Ripinsky with K Williams, Damages in International Investment Law (BIICL, 2008), p. 2, 5, <http://www.biicl.org/ files/3908_2007_lg&e_v_argentina.pdf>. 3 Quoted in: UNCTAD, Latest Developments in Investor-State Dispute Settlement, IIA Monitor No. 4, 2006, <http://unctad.org/sections/ dite_pcbb/docs/webiteiia200611_en.pdf>. 2

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banks – Komercni banka, a.s. (KB), Ceska sporitelna, a.s. (CS), and Ceskoslovenska obchodni banka, a.s. (CSOB) – in which the Czech government still held a stake, in order to facilitate their privatization. At the same time, the economic situation of IPB deteriorated; in June 2000 it was placed in receivership by government decree. IPB’s operational business was sold to CSOB. In this context, the finance ministry gave state aid to CSOB. IPB’s receivership ended on 16 June 2002, when Nomura once more assumed control of IPB. In July 2001, Saluka Investments filed a claim against the Czech Republic and demanded damages. The basis for the case was the IIA that the Netherlands had signed with Czechoslovakia in 1991. Saluka Investments argued that the government had discriminated between IPB and the above-mentioned three large Czech banks. Furthermore, Saluka Investments had been expropriated illegally and without appropriate compensation.4 The case was dealt with according to the rules of the United Nations Commission on International Trade Law (UNCITRAL). On 17 March 2006, the tribunal found that the Czech Republic had not expropriated Saluka Investments without compensation within the meaning of Article 5 of the IIA. The tribunal specified that international law prescribes that States are not obliged to pay compensation to foreign investors if they adopt, in good faith, non-discriminatory legislative provisions that serve the general good in the normal execution of their regulatory powers.5 Nevertheless, the tribunal also found that the Czech Republic had not treated the company fairly and equitably.6 Two further cases based on the North American Free Trade Agreement (NAFTA) show that lost profits are not automatically indirect expropriation: Methanex v. United States of America and Glamis Gold Ltd. v. United States of America. In the 1990s, the Canadian company Methanex produced the fuel additive MTBE (methyl tert-butyl ether) for the U.S. market. After California had banned the use of MTBE due to ecological considerations, Methanex filed a complaint in 1999 on the basis of the NAFTA investment protection chapter (using UNCITRAL rules). According to the company’s argument, this would diminish the company’s future profits, which would be an indirect expropriation. The tribunal ruled against Methanex. California was found to have acted for legitimate reasons and without discrimination. There-

BDI-Background Paper ISDS: Fears, Facts, Faultlines

fore, it had treated the company fairly and equitably. The ban had not been an indirect expropriation.7 In 2003 the Canadian company Glamis Gold sued the United States on the basis of the NAFTA investment protection chapter (using UNCITRAL rules). Glamis Gold planned to mine gold and silver in an area close to cultural and religious sites of the local Quechan Tribe. The company wanted to excavate two of the three planned open-cast mine shafts completely; a third shaft would be kept open for later use. The U.S. Bureau of Land Management (BLM) denied approval of the project. It argued that the mining project could significantly damage the religious sites of the indigenous population. At the same time, the State of California adopted a law that increased standards to be met by mine operators. Companies would, in the future, be obliged to excavate all mine shafts. In addition, the law included a duty to recreate the original landscape. As a result, the company faced falling profits. However, the tribunal ruled in favor of California because the loss of profit was not high enough to constitute an instance of indirect expropriation. In addition, the tribunal found that Glamis Gold had been treated fairly and equitably.8

Bundesgericht (Switzerland), Urteil vom 7. September 2006,1. Zivilabteilung, <italaw.com/documents/Saluka-SwissChallenge.pdf>. 5 Cited in: European Commission, Kurzdarstellung: Investitionsschutz und Beilegung von Investor-Staat-Streitigkeiten in EU-Abkommen, November 2013, p. 7, <http://trade.ec.europa.eu/doclib/ docs/2013/december/tradoc_151995.pdf>. 6 The Matter of Arbitration under the UNCITRAL Rules 1976 Saluka Investments BV (The Netherlands), Claimant, v The Czech Republic, Respondent, Partial Award 2006, p. 103, <www.pca-cpa.org/showfile.asp?fil_id=105>. 7 Investment Treaty Arbitration, Methanex Corporation v. United States of America, UNCITRAL, <http://www.italaw.com/cases/683> (accessed 7 July 2015). 8 Investment Treaty Arbitration, Glamis Gold, Ltd. v. The United States of America, UNCITRAL, <http://www.italaw.com/cases/487> (accessed 7 July 2015); Tillman Michael Dralle, “Der Fair and Equitable Treatment-Standard im Investitionsschutzrecht am Beispiel des Schiedsspruchs Glamis Gold v. United States“, in: Beiträge zum Transnationalen Wirtschaftsrecht, Book 115, 2011, <http:// telc.jura.uni-halle.de/sites/default/files/BeitraegeTWR/Heft115. pdf>. 4

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More recent IIAs and investment chapters in free trade agreements contain clauses that expressly underline the right of States to take regulatory action in the public interest (for example to protect health, the environment, and cultural diversity as well as in the interest of public security and order). This also applies for the recently signed free trade agreement between the EU and Canada (Comprehensive Economic and Trade Agreement, CETA). The preamble to the agreement stipulates that the right of States to take regulatory action in the public interest (“right to regulate”) is not impaired by CETA, including its investment chapter. Furthermore, CETA’s investment chapter includes a series of exemption provisions. These also protect the State’s discretion to legislate.9 International investment agreements protect investors against discrimination, unfair and unequitable treatment, as well as direct and indirect expropriation without compensation in the host country. However, IIAs do not fundamentally protect investors against any decrease in the profitability of their investments. Investors must always bear in mind that laws can be amended and that profit expectations may not always be realized. The State’s regulatory sovereignty is maintained. The State cannot be required to repeal legislation or regulation.

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Concern 2: International investment agreements favor foreign investors vis-à-vis domestic companies. As a result, foreign companies have more rights than domestic companies.

IIAs are always based on reciprocity. For instance, the right to file a complaint granted to foreign investors in Germany are also available to German companies in the country of the contracting partner. In other words, domestic companies are not discriminated against, but they in turn enjoy investment protection in the country of the contracting partner. Moreover, domestic companies are not unprotected against action by the State. Just like foreign companies, they can turn to domestic courts. It is true that foreign investors also have the option of appealing to an international tribunal in the case of investment disputes, insofar as the investor’s host State has concluded an IIA with the government of the country of origin. However, in contrast to investor-state dispute settlement, the national judicial route does offer the possibility to overturn domestic court rulings and even national laws. Neither does the possibility of dispute settlement necessarily place the foreign investor in a better position, as a report on CETA’s investment protection chapter commissioned by the German Federal Ministry for Economic Affairs and Energy (BMWi) has established. Thus, Canadian investors are not placed in a better position legally than investors from Germany.10 According to the report, the international legal protection conferred by CETA on Canadian investments even falls short of the protection of German investors guaranteed by German constitutional and Union law in some areas. Accordingly, there is no positive discrimination of foreign investors through the material rights they are granted under the

Stefan Schill, Auswirkungen der Bestimmungen zum Investitionsschutz und zu den Investor-Staat-Schiedsverfahren im Entwurf des Freihandelsabkommens zwischen der EU und Kanada (CETA) auf den Handlungsspielraum des Gesetzgebers (Kurzgutachten), 22 September 2014, p.19, <http://www.bmwi.de/BMWi/Redaktion/ PDF/C-D/ceta-gutachten-investitionsschutz,property=pdf,bereich =bmwi2012,sprache=de,rwb=true.pdf>. 10 Schill (2014), p.i. 9

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CETA investment chapter. The report also comes to the conclusion that the discretion to legislate to protect public interests such as national security, the environment, and public health is maintained.11 Thus, whereas domestic companies are not disadvantaged by IIAs, this additional judicial route for investors abroad is often indispensable. In many developing countries, the national legal system does not guarantee foreign investors fair and equitable treatment. Corruption and discrimination are not uncommon, and the national legal system often does not function satisfactorily. But likewise between industrialized countries – the EU and Canada, or the EU and the United States – it is a good idea to conclude investment protection agreements. This is due to the fact that, in every country, investments are associated with greater political risks for foreigners than for domestic companies. As a rule, foreigners are less familiar with the informal political framework in their host country and are less well connected there. They are not as good at assessing political developments as their domestic competitors and they find it more difficult to take part in societal debates. Furthermore, there are cases in which the legal framework does not offer foreign investors sufficient protection against discrimination and expropriation, even in industrialized countries. Hitherto, international minimum standards have been taken into account only inconsistently and incompletely. Investor-state dispute settlement is therefore an important instrument for arbitrating between foreign investors and governments. It offers a neutral forum, which is not financed or politically influenced by the State. The fact that courts in industrialized countries do not always treat foreign investors fairly and equitably is shown, for example, by Loewen Group v. Mississippi. The state court of Mississippi had sentenced the Canadian funeral business Loewen Group to pay disproportionately high damages of USD 500 million to a funeral business established in Mississippi. This was the highest damages payment in the court’s history and exceeded the actual value of the disputed transaction by a factor of ten. In addition, Loewen Group was initially prevented from opening an appeal procedure by a prohibitive rule requiring the deposit of 125 percent of the amount of the damages.12 The company therefore filed an ISDS complaint. The tribunal ultimately rejected the case because, following a corporate reorganization, Loewen Group no longer met the

BDI-Background Paper ISDS: Fears, Facts, Faultlines

attributes necessary of a claimant to be defined as a foreign company under U.S. competition law. However, the tribunal had earlier found that the national court procedure was unfair and was shaped by prejudices against Loewen Group linked to its nationality. Lastly, investment disputes are often settled more rapidly via ISDS procedures than when the entire national judicial route has to be exhausted. This makes ISDS procedures interesting for small and mediumsized enterprises as well, whose financial resources often do not allow delays in decision-making IIAs do not constitute a positive discrimination of foreign companies in a country. The same rights granted to a foreign investor by a country such as Germany are available to German companies in the country of the contracting partner. IIAs protect foreign investors against instances of discrimination which can also occur in industrialized countries.

Bundesministerium für Wirtschaft und Energie (BMWi), Bundeswirtschaftsministerium veröffentlicht Gutachten zu CETA, Pressemitteilung, 22 September 2014, <http://www.bmwi.de/DE/Presse/ pressemitteilungen,did=655700.html> (accessed 7 July 2015). 12 U.S. Department of State, The Loewen Group, Inc. and Raymond L. Loewen v United States of America, Decision on Hearing of the Respondent’s Objection to Competence and Jurisdiction, ICSID Case No. ARB(AF)/98/3), 2001, <http://www.state.gov/documents/ organization/3921.pdf>. 11

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Concern 3: The number of investor-state dispute settlement cases worldwide has increased in recent years. Behind this development stands a “litigation industry” which files ever more new cases with a view to maximizing gains.

The last decade in particular has seen a marked increase in investor-state dispute settlement cases. A total of 608 cases worldwide are known through the end of 2014. In 2014, 42 new dispute settlement procedures were initiated, as compared with 59 cases in 2013 (see diagram 2).13 Not only have there always been fluctuations in the number of new cases from year to year, but it also cannot be deduced from the overall trend that investors are using this instrument ever more aggressively or even that a “litigation industry” is developing. The upward trend is in proportion to the rapid increase in worldwide investment flows in the wake of globalization and the growing number of IIAs. Early forerunners of modern investment protection agreements were friendship, trade, and shipping agreements between individual States. Whereas some of these agreements already contained rules on protection of investments, they did not yet offer any mechanism for settling disputes. The first modern IIA in the world was concluded in 1959 between Germany and Pakistan. Yet the first generation of IIAs from the 1950s to the 1980s did not contain any ISDS procedure as we now know it. In the late 1980s and early 1990s, the number of IIAs exploded, and these new IIAs contained provisions on investor-state dispute settlement alongside the essential protection standards. The reason for this was partly the debt crisis in Latin America, which underlined the political risks to which investors are exposed, and partly the end of the East-West conflict and the opening of markets in transition countries.14 For instance, more than 200 IIAs were concluded in each of the years 1995 and 1996 – many of them with transition countries of the former Soviet Union. The number of IIAs around the globe was 3,271 at the end of 2014. 2,926 of these agreements were bilateral treaties and 345 “other investment agreements”. In 2014, 31 new international investment agreements were concluded worldwide (see diagram 1).15

BDI-Background Paper ISDS: Fears, Facts, Faultlines

The worldwide stock of FDI has increased by a factor of almost 12 since 1990 (2014: inward stock USD 26.0 trillion, outward stock USD 25.9 trillion).16 Not only the larger volume of foreign direct investment poses greater risks, but increasing investments in developing countries in particular also go hand in hand with higher risks.17 The practical significance of effective investment protection has therefore also grown with the global increase in FDI. Companies do not litigate against a State lightly. ISDS procedures entail considerable costs and possibly also political implications, which may have deleterious consequences for the company’s future business activity in the country. The decision to proceed usually depends on many factors. The damage that a company has suffered must be measured against the high costs of litigation. In addition, a necessary condition for filing a claim is that the legal situation offers a justified prospect of success. The worldwide increase in ISDS cases is a consequence of rapidly growing foreign investments. Moreover, companies do not litigate lightly via IIAs. All other means are usually exhausted first.

UNCTAD, IIA Issue Note: Investor-State Dispute Settlement: Review of Developments in 2014, May 2015, p. 2, <http://investmentpolicyhub.unctad.org/Upload/Documents/UNCTAD_WEB_ DIAE_PCB_2015_%202%20IIA%20ISSUES%20NOTES%20 13MAY%20.pdf>. 14 Stormy-Annika Mildner, Christoph Sprich, Elizabeth Johnson, „Investitionsschutz im Kreuzfeuer der Kritik. Warum die USA und die EU trotzdem nicht auf das „I“ in TTIP verzichten sollten“, in: Ifo Schnelldienst 67 (12), 2014. 15 UNCTAD, World Investment Report 2015, June 2015, p. 106, A7, <http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf>. 16 UNCTAD (2015), p. 106, A7, <http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf>. 17 Roderick Abbott, Fredrik Erixon and Martina Francesca Ferracane, Demystifying Investor-State Dispute Settlement, ECIPE Occasional Paper, No 5/2014, p. 7 f., <http://www.ecipe.org/app/uploads/2014/12/OCC52014__1.pdf>. 13

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Concern 4: Investor-state tribunals are secret courts. There is little or no information about ISDS procedures.

The transparency requirements associated with ISDS procedures vary from one IIA to the next. The IIA often specifies which institution is capable of settling investment disputes. For instance, these include the International Centre for Settlement of Investment Disputes (ICSID). ICSID is based in Washington, D.C. and is part of the World Bank Group. It supports dispute settlement above all for dispute in the framework of bilateral IIAs. The foundation for ICSID is the 1966 ICSID convention, which has now been signed by 159 and ratified by 151 States. Alternatives to ICSID are the Paris-based International Chamber of Commerce (ICC) and the Stockholm Chamber of Commerce (SCC). In addition, cases can also be settled using UNCITRAL rules. ICSID, ICC, and SCC do not themselves act as arbitrators or mediators. They merely support implementation of the judicial procedure and they impose various transparency requirements on the parties to the conflict. For example, ICSID systematically publishes information on the initiated cases, the claimant, and investments as well as on the outcome of arbitration proceedings or rulings. This information can be accessed in an online database.18 Whether ICSID publishes the complete reports on the settlement of disputes or the ruling partly depends on the consent of the parties to the dispute. But even if this consent is not given, the opinion of the tribunal must be published, at least partially.19 The website italaw also frequently publishes information on ISDS cases, including official documents such as requests for arbitration, statements, opinions, and awards. 20 The UNCITRAL transparency rules published in July 2013 are groundbreaking for more transparent ISDS procedures. They go beyond those of ICSID. The reform came into effect in April 2014.21 For cases dealt with using UNCITRAL rules, essential information and documents linked to the case have to be published.

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Hearings have to be made accessible to the public and statements by third parties must be allowed. Generally speaking, a series of documents must be made available to the public. This includes the application for the initiation of a proceeding. Both the names of the parties and the business sector have to be specified. In addition, the investment agreement on which the claim is being asserted must also be disclosed, as must the grounds for and response to the complaint as well as the ruling. At the request of the parties or at the discretion of the tribunal, expert reports can also be published. Proceedings are broadly public apart from the requirement to preserve trade secrets.22 The EU and Canada arranged in CETA that UNCITRAL transparency rules will apply.23 While the new UNCITRAL rules apply only in the framework of newly concluded IIAs, the â&#x20AC;&#x153;Mauritius Conventionâ&#x20AC;? extends the applicability of the new transparency rules also to all old agreements. This convention was voted on within the UN system, and in March 2015, was signed by multiple governments. With this, the UNCITRAL transparency rules apply for previously agreed upon IIAs, as long as both contract parties have signed the Mauritius Convention.24

The database can be found at <https://icsid.worldbank.org/apps/ ICSIDWEB/Pages/default.aspx> (accessed 7 July 2015). 19 ICSID, ICSID Cases, <https://icsid.worldbank.org/apps/ICSIDWEB/ cases/Pages/AdvancedSearch.aspx> (accessed 7 July 2015). 20 The website can be found at <http://www.italaw.com/> (accessed 12 August 2015). 21 UNCITRAL Rules on Transparency in Treaty-based InvestorState Arbitration, <http://www.uncitral.org/uncitral/uncitral_texts/ arbitration/2014Transparency.html> (accessed 7 July 2015). 22 UNCITRAL Rules on Transparency in Treaty-based InvestorState Arbitration, <http://www.uncitral.org/uncitral/uncitral_texts/ arbitration/2014Transparency.html> (accessed 7 July 2015). 23 European Commission, Investment Provisions in the EU-Canada Free Trade Agreement (CETA), 26 September 2014, p. 4, <http:// trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151918. pdf>. 24 United Nations, United Nations Convention on Transparency in Treaty-based Investor-State Arbitration, 2015, <http://www.uncitral. org/pdf/english/texts/arbitration/transparency-convention/Transparency-Convention-e.pdf>. 18

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BDI-Background Paper ISDS: Fears, Facts, Faultlines

Moreover, a series of international organizations contribute to the transparency of ISDS procedures. For example, these include UNCTAD with its annual World Investment Report. These reports summarize up-to-date data and present analyses on international investment policy and on investor-state dispute settlement cases.25 In addition, UNCTAD operates an online database with information on public ISDS cases.26 Further databases on the theme of ISDS are run by ICSID27 and UNCITRAL28 Improving transparency in ISDS procedures is an important concern. Nevertheless, a certain measure of discretion is also necessary in legal proceedings between companies and the State â&#x20AC;&#x201C; as it also is in national judicial procedures. Both parties and trade secrets need to be protected. Neither the security nor the competitiveness of companies may be jeopardized. Comparable disputes are not conducted completely in the public in the framework of national judicial routes either. ICSID, UNCTAD, and UNCITRAL operate databases with information on ISDS cases, and UNCTAD regularly publishes reports on recent developments in IIAs and ISDS. As in national judicial procedures, a certain measure of discretion is also necessary in ISDS cases. The new UNCITRAL rules, which CETA and TTIP align themselves to, ensure greater transparency. The UNCITRAL reform is paramount to more transparent ISDS procedures.

UNCTAD, World Investment Report 2014, 2014, <http://unctad.org/ en/PublicationsLibrary/wir2014_en.pdf>. 26 Currently (as of July 2015) the database is being updated. Therefore, only a reduced version is available, at <http://unctad.org/en/ Pages/DIAE/ISDS.aspx> (accessed 7 July 2015). 27 ICSID, Cases, <https://icsid.worldbank.org/apps/ICSIDWEB/cases/Pages/AdvancedSearch.aspx > (accessed 7 July 2015). 28 UNCITRAL, Transparency Registry (A Repository for the Publication of Information and Documents in Treaty-Based Investor-State Arbitration), <http://www.uncitral.org/transparency-registry/registry/ index.jspx> (accessed 7 July 2015). 25

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BDI-Background Paper ISDS: Fears, Facts, Faultlines

The practice of ISDS jurisprudence does not give any indications of systematic bias among arbitrators. Rather, most ISDS procedures are settled to the disadvantage of investors. The procedural rules provide that biased arbitrators can be ruled out.

Concern 5: Arbitrators are too favorably disposed towards investors and have a vested interest in preserving the system.

There is no evidence of systematic bias among arbitrators in ISDS procedures in favor of investors. On the contrary: according to UNCTAD, 36 percent of all cases concluded worldwide to the end of 2014 are decided to the advantage of States. This includes cases that are dismissed at the jurisdictional stage as well as cases in which the tribunal finds that the respondent State did not commit a breach of the IIA. In only 27 percent of disputes has the investor won and 26 percent were settled amicably (see diagram 14). In its World Investment Report 2015, UNCTAD has furthermore introduced a new counting method: not counting the cases that were dismissed at the jurisdictional stage, and only looking at the results of the decisions on the merits, 40 percent of cases were decided in favor of the State and 60 percent in favor of the investor. 29 Many IIAs – in the United States for instance – set particularly high standards for fairness and the independence of arbitrators. A code of conduct for arbitrators of ISDS procedures has also been agreed upon in the consolidated text of the trade agreement between the EU and Canada, CETA. As is also customary in U.S. IIAs, the investor and the State both nominate an arbitrator. The third arbitrator is nominated jointly by both sides. The arbitrator must be independent and may not be affiliated with the government of either of the parties to the dispute. If a party believes that the arbitrator nominated by the other party does not meet these requirements, the party can prevent the nomination of this arbitrator.30 The EU plans to integrate comparable guidelines in agreements with other countries as well.31 A similar process exists for the nomination of arbitrators under UNCITRAL and ICSID rules. According to Article 11 of the UNCITRAL arbitration rules, a person appointed as an arbitrator must immediately make any legitimate doubts known that could influence his or her suitability as an arbitrator.32 According to the ICSID convention (article 57), a party can propose the disqualification of an arbitrator if he or she seems ineligible.33

UNCTAD (2015), p. 116. Foreign Affairs, Trade and Development Canada, Consolidated Ceta Text, 10. Investment, Article X.25: Constitution of the Tribunal, <http://www.international.gc.ca/trade-agreements-accordscommerciaux/agr-acc/ceta-aecg/text-texte/10.aspx?lang=eng> (accessed 7 July 2015). 31 Europäische Kommission, Fact Sheet: Investment Protection and Investor-to-State Dispute Settlement in EU Agreements, November 2013, <http://trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151916.pdf>. 32 United States Commission on International Trade Law, UNCITRAL Arbitration Rules (as revised in 2010), United Nations, New York, 2011, <http://www.uncitral.org/pdf/english/texts/arbitration/arbrules-revised/arb-rules-revised-2010-e.pdf>. 33 ICSID, ICSID Convention, Regulations, and Rules, Washington, DC, April 2006, <https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/CRR_English-final.pdf>. 29 30

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Concern 6: Investment protection agreements and investorstate dispute settlement cause a “regulatory chill”: States no longer have the confidence to adopt new laws or take regulatory action.

There is little empirical evidence that States refrain from taking regulatory action in the public interest because of an IIA and the threat of ISDS proceedings. Even the examples that do exist are far from clear-cut, since many different factors and motives have to be taken into account during legislative procedures. For instance, this can be seen in Ethyl Corp. v. Canada, which is often presented as proof of “regulatory chill”. At the heart of the dispute was the ban on fuel additives. The grounds for the complaint was the NAFTA investment chapter. The U.S. fuel additive manufacturer Ethyl Corp. took the Canadian government to court after the latter adopted a federal law that banned trade in, and imports of, the fuel additive methylcyclopentadienyl manganese tricarbonyl (MMT), deemed to generate health-harming emissions, across Canadian provincial frontiers. Conversely, production and distribution within the provinces were not banned. The de facto consequence of this law was said to be that MMT can be produced and distributed in the individual provinces – as long as state or provincial borders are not crossed. The dispute was settled by means of the Canadian government compensating Ethyl Corp. for losses incurred and withdrawing the MMT ban. However, the MMT ban had already been successfully challenged in the Canadian provinces prior to the ISDS proceedings. There were indications that the regulatory measure had been pursued less for environmental than for protectionist reasons.34 A study on ISDS procedures by the Vale Columbia Center on Sustainable International Investment shows that most disputes are directed not against new laws but against measures by the executive. The study’s authors analyzed all completed ICSID cases and found that 47 percent of disputes related to actions by ministries or authorities, while only 9 percent related to legislative acts.35 Upon further analysis of claims under NAFTA, Tietje and Baetens also come to the conclusion that the majority of cases are directed

BDI-Background Paper ISDS: Fears, Facts, Faultlines

against actions by the executive. In addition, the authors show that investors have not won in any case where legislative acts were challenged.36 Complaints are predominantly directed against permits that are issued and then subsequently withdrawn. An example of this is Metalclad Corp. v. Mexico. The U.S. Metalclad Corp. had been granted a license by the Mexican federal government for the construction of a special waste landfill in the municipality of Guadalcazar in the federal state of San Luis Potosi. In addition, the corporation had expressly and repeatedly been assured by the federal government that it did not require any further permits at the municipal level. After Metalclad had already started construction work with full confidence in this assurance, the municipality refused to grant a building permit – shortly before the installation was to come into operation. Metalclad then filed a complaint with ICSID under NAFTA. The tribunal came to the conclusion that Mexico had not treated Metalclad Corp. fairly and equitably. By granting the construction permit, the federal government had created legitimate expectations on the part of the investor. The municipality’s refusal to grant a building permit had breached these expectations. In addition,

Christian Tietje and Freya Baetens, The Impact of Investor-StateDispute Settlement in the Transatlantic Trade and Investment Partnership, Study prepared for the Minister of Foreign Trade and Development Cooperation, Ministry of Foreign Affairs, The Netherlands, Ecorys, Rotterdam 2014, p. 43, <http://media.leidenuniv. nl/legacy/the-impact-of-investor-state-dispute-settlement-isds-inthe-ttip.pdf>; Steffen Hindelang, “Study on Investor-State Dispute Settlement (ISDS) and Alternative Dispute Resolution in International Investment Law“, in: Directorate General for External Affairs of the EU (Hg.), Investor-State Dispute Settlement (ISDS) Provisions in the EU’s International Investment Agreements, 2014, p. 39-130, here: 115 ff.; Foreign Affairs Trade and Development Canada, Cases Filed Against the Government of Canada. Ethyl Corporation v. the Government of Canada, <http://www.international.gc.ca/tradeagreements-accords-commerciaux/topics-domaines/disp-diff/ ethyl.aspx?lang=eng> (accessed 7 July 2015). 35 Jeremy Caddel and Nathan M. Jensen, Columbia FDI Perspectives: Perspectives on Topical Foreign Direct Investment Issues by the Vale Columbia Center on Sustainable International Development, No. 120, April 28, 2014 36 Tietje and Baetens, (2014), p. 46f. 34

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BDI-Background Paper ISDS: Fears, Facts, Faultlines

the government’s conduct had been neither transparent nor consistent and without contradictions. Lastly, refusal to allow the landfill to come into operation was equivalent to an indirect expropriation.37

There is scant empirical evidence of a “regulatory chill”. Despite having concluded IIAs, States adopt comprehensive laws in the public interest.

IIAs do not prevent States from adopting far-reaching laws in the public interest. This is clearly demonstrated by the empirical analysis. An example is the Toxic Substances Control Act (TSCA), a U.S. law regulating the authorization of chemicals. There has previously been no case relating to TSCA before an investorstate tribunal, for example by Canadian or Mexican investors in the framework of NAFTA. Similarly, introduction of the EU chemicals regulation REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals), designed to upgrade environmental standards Europe-wide, has not led to ISDS complaints on the basis of existing IIAs. Neither did the upgrading of legal standards in eastern EU States linked to their EU accession (introduction of the “acquis communautaire”) unleash a wave of complaints from U.S. investors.

More recent IIAs as well as investment chapters in FTAs contain clauses which expressly protect the right of the State to take proportionate and appropriate regulatory action in the public interest (right to regulate).

More recent IIAs as well as investment chapters in FTAs, also including CETA, comprise clauses that expressly protect the right of the State to engage in proportionate and appropriate regulatory action in the public interest. Moreover, numerous ISDS cases show that governments can assume that ISDS cases will be decided in their favor as long as legislation and regulation are adopted in the public interest, are proportionate and are not discriminatory. This is demonstrated inter alia by the cases described above of Methanex v. United States of America and Glamis Gold Ltd. v. United States of America. Hence, fears that IIAs and ISDS lead to a “regulatory chill” are exaggerated.

Investment Treaty Arbitration, Metalclad Corporation Claimant and the United Mexican States Respondent, Award, August 2000, <http://www.italaw.com/sites/default/files/case-documents/ ita0510.pdf>; Nathalie Bernasconi-Osterwalder and Lise Johnson, International Investment Law and Sustainable Development: Key Cases from 2000-2010, International Institute for Sustainable Development, p. 72-74; Investment Treaty Arbitration, Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, <http://www.italaw.com/cases/671> (accessed 7 July 2015); Tillman Michael Dralle, “Der Fair and Equitable Treatment-Standard im Investitionsschutzrecht am Beispiel des Schiedsspruchs Glamis Gold v. United States“, in: Beiträge zum Transnationalen Wirtschaftsrecht, Book 115, 2011, p. 19, <http://telc.jura.uni-halle. de/sites/default/files/BeitraegeTWR/Heft115.pdf>.

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Concern 7: “Treaty shopping” is a widespread problem: companies use shell companies to file suits against a government that has not concluded an IIA with that of their home country. Investors can have recourse to the IIA which is most advantageous for them through most-favored nation clauses.

There are two ways in which companies can use “foreign” IIAs, meaning IIAs between countries to which their home country is not a party. As described, an IIA is an international treaty between two or more States. It protects foreign investments of companies from the contracting countries. A foreign company from a third country cannot have recourse to the IIA and complain against one of the contracting parties – unless it complains via an associated company that has its seat in one of the contracting countries. This becomes problematic when the associated company is no more than a mailbox. A second gateway for using a “foreign” IIA is the principle of most-favored nation (MFN): host countries may not discriminate between foreign investors from varying third countries. In this case, the government of the home country has concluded IIAs with several countries – with different standards of protection. With a reference to MFN, a foreign investor from one of these countries can now demand higher protection standards from a “foreign” IIA than in the investment agreement that its country has signed with the host country. Broadly speaking, MFN is an important protection standard for companies, but can become a problem if the contracting countries have deliberately restricted certain protection standards in their IIA or have made access to ISDS conditional. Do companies file claims via shell firms? There is little clear empirical evidence that “treaty shopping” is a widespread problem. Nevertheless, a few studies indicate that some IIAs are more prone to “treaty shopping” than others. For example, Van Os and Knottnerus conclude from their investigations that this is the case for Dutch IIAs. The Netherlands currently has 97 BITs of which 92 are in force.38 In 2011, Van Os and Knottnerus exam-

BDI-Background Paper ISDS: Fears, Facts, Faultlines

ined 41 ISDS cases under Dutch IIAs up to that date. This represented around 10 percent of known ISDS complaints worldwide at that time – a remarkable figure for a single country. 29 of these 41 claims were initiated by investors from third countries. In turn, 25 of these 29 investors were shell firms without employees or substantive business activities in the Netherlands, according to the authors of the study. The authors see the broad definitions of “investor” and “investment” in Dutch IIAs as one explanation.39 For instance, in 2006 the Rompetrol Group, a Romanian oil business whose headquarters are in the Netherlands, challenged its own home country of Romania via the IIA between the two countries. The office in Amsterdam was no more than a financial holding company whereas the firm’s central operations are in Bucharest, Van Os and Knottnerus underlined. Nevertheless, Rompetrol was able to file a claim against Romania via ICSID because it met the requirements to be an investor laid down in the IIA. Rompetrol is an incorporated company under Dutch law.40 In a similar case, TSA Spectrum de Argentina SA (TSA) v. Argentine Republic, the tribunal rejected the complaint. However, TSA was 100 percent owned by a Dutch-registered financial holding company which, once again, had no employees locally. The court ruled that the Dutch holding company did not exercise real control and TSA itself was ultimately the property of an Argentine national. Accordingly, there was no foreign ownership of the company as required by the ICSID convention.41

UNCTAD, Investment Policy Hub, International Investment Agreements Navigator, <http://investmentpolicyhub.unctad.org/IIA> (accessed 20 July 2015). 39 Roos van Os and Roeline Knottnerus, Dutch Bilateral Investment Treaties. A Gateway to ‘Treaty Shopping‘ for Investment Protection by Multinational Companies, October 2011, p. 29 f., 23, <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1974431>. 40 Investment Treaty Arbitration, The Rompetrol Group N.V. (Claimant) versus Romania (Respondent), ICSID Case No. ARB/06/3, 18 April 2008, <http://www.italaw.com/sites/default/files/case-documents/ ita0717.pdf>; van Os und Knottnerus, (2011), p. 33f. 41 van Os und Knottnerus, (2011), S. 33; Investment Treaty Arbitration, Award in the Matter of TSA Spectrum de Argentina S.A., Claimant, v. Argentine Republic, Respondent, ICSID Case No. ARB/05/5, 19 December 2008, p. 35, <http://italaw.com/sites/default/files/ case-documents/ita0874.pdf>. 38

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BDI-Background Paper ISDS: Fears, Facts, Faultlines

These two examples show that claims via shell firms can occur. However, it is also important to note that claims via associated companies or establishments are not always claims via shell firms. This can be seen, for example, in the dispute Philip Morris Asia (PMA) v. Australia – a case often quoted by critics as an example of claims via shell firms. PMA’s regional headquarters is in Hong Kong. The firm’s office there was founded in 1984 and is currently employing around 120 people.42

MFN clauses in IIAs are an important instrument for protecting companies against discrimination abroad. To prevent abuse of MFN, CETA rules out the “import” of procedural rights. In addition, CETA contains clauses to restrict the possibility of filing a suit via shell firms. This is an important development in modern investment protection agreements.

More recent investment agreements such as the investment chapter in CETA restrict the possibility of taking action via shell firms. CETA provides that a company must conduct “substantial business activities” in the territory of the country in question.43 Do companies have recourse to MFN in order to benefit from higher standards of protection? MFN clauses in IIAs enable the investor to have recourse to advantageous rules that the host country has concluded with other countries. Yet, this is not a widespread phenomenon. And it is far from certain whether a company is successful in securing a different judicial competence than originally provided for in the investment protection agreement with a reference to MFN. Nevertheless, one of the weaknesses in the arbitration system can be seen here: the MFN standard is not always interpreted in the same way. For future IIAs, the EU plans to restrict MFN. This can already be seen in CETA: investors from Canada or the EU cannot demand procedural rights granted in other IIAs with a reference to MFN.

40 McCabe Centre for Law & Cancer, Philip Morris Asia Challenge under Australia – Hong Kong Bilateral Investment Treaty, <http:// www.mccabecentre.org/focus-areas/tobacco/philip-morris-asiachallenge> (accessed 7 July 2015); Philip Morris International, Hong Kong: Country Overview, <http://www.pmi.com/marketpages/pages/market_en_hk.aspx> (accessed 7 July 2015). A detailed description of the case can be found in the chapter “Ten ISDS Cases in the Public Debate: Worth a Closer Look“ in this publication. 43 Foreign Affairs, Trade and Development Canada, Consolidated CETA Text, 10. Investment, Article X.3: Definitions, <http://www. international.gc.ca/trade-agreements-accords-commerciaux/agracc/ceta-aecg/text-texte/10.aspx?lang=eng> (accessed 7 July 2015). 42

Federation of German Industries Department for External Economic Policy

Concern 8: An investment protection chapter in TTIP will unleash a wave of investor-state dispute procedures against the EU. Americans are known for being litigious and U.S. investors will use this instrument to complain against EU governments at the expense of EU taxpayers.

The past shows that U.S. investors are not more litigious than investors from other countries. Looking at individual countries, it is correct that most claims originate in the United States: through the end of 2014, a total of 134 claims were initiated by U.S. investors. However, in the same period, EU investors opened more than twice as many (330) investor-state cases as U.S. investors (counting several claimaints who filed the same case as multiple cases; see diagram 5). And although the United States already has investment agreements with nine EU countries (Poland, Czech Republic, Slovakia, Romania, Estonia, Bulgaria, Latvia, Croatia, and Lithuania), there has been no flood of investor-state dispute cases against these countries. On the contrary, U.S. investors have filed just eleven complaints against EU Member States, four against Poland, three against Romania, one each against the Czech Republic and Estonia, one case against Estonia together with an investor from the Netherlands, and one case against Slovakia together with an investor from Canada. In the disputes between U.S. investors, the Czech Republic, Estonia, and Romania, which have already been closed, the States won. One case against Romania was discontinued and another one is still pending. Of the four cases against Poland, one was settled, one was decided in favor of the State, one in favor of the investor, and one is still pending. The dispute between U.S. and Dutch investors against Estonia was settled. The dispute between investors from the United States and Canada against Slovakia was initiated in 2014 and is still pending. U.S. investors have yet to file a suit against Bulgaria, Croatia, Latvia, and Lithuania, even though the United Statesâ&#x20AC;&#x2122; IIAs with these countries offer the possibility of ISDS.44

BDI-Background Paper ISDS: Fears, Facts, Faultlines

A further examination suggests that a wave of litigation is not to be expected under TTIP. In the framework of NAFTA, claims by U.S. investors have not increased from year to year, in contrast with the worldwide trend in recent years. Instead, the number of claims among the NAFTA countries varies between one and nine claims a year. In addition, the success rate of investors in ISDS cases under NAFTA is not higher than the global average, but lower. In proceedings under NAFTA, the investor has won only 25 percent of cases, while the State has won in 62.5 percent of cases (12.5 percent of cases were settled).46 According to UNCTAD, investors worldwide have won 27 percent of all ISDS cases concluded by the end of 2014, and the State has won 36 percent (see diagram 14).47 U.S. companies are not more litigious than European firms, which account for the majority of ISDS cases to date. Neither do claims to date by U.S. investors against EU countries give rise to any concern about a wave of litigation.

UNCTAD, Database of Investor-State Dispute Settlement (ISDS) (reduced version) <http://unctad.org/en/Pages/ DIAE/ISDS.aspx?View={FC8B9ABA-CF09-4491-89D199DE23534CA1}&FilterClear=1> (accessed 7 July 2015). 45 UNCTAD, Database of Investor-State Dispute Settlement (ISDS) (reduced version) (accessed 7 July 2015). 46 Tietje and Baetens, (2014), p. 77. 47 UNCTAD (2015), p. 116. 44

The majority of claims against EU Member States filed through the end of 2014 were not initiated by U.S. investors, but by investors from other EU Member States (116 of the 131 cases against EU Member States) (see figure 13).45

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Concern 9: IIAs have no influence on investment flows. Investments flow just as much without IIAs.

To what extent do IIAs promote foreign direct investment (FDI)? Econometric studies that analyze the interplay between IIA and FDI flows produce different results.48 Some of the studies have looked at a variety of periods, countries, and influence variables, and they used a range of econometric methods. For example, while a 2003 study by Hallward-Driemeier49 was unable to find any statistically significant effect of IIAs on FDI flows, in the same year Banga50 came to the conclusion that IIAs significantly stimulate flows of direct investments. According to Banga’s results, investment flows increase in those developing countries in particular that have concluded an IIA with an industrialized country. Whereas in 2006 Gallagher and Birch51 once again found no positive correlation between IIAs and FDI, other studies (e.g. Neumayer and Spess52, 2005, and Tobin and Rose-Ackermann, 2006) confirmed the finding that IIAs between developing and industrialized countries boost FDI flows into developing countries. Busse, Koeniger and Nunnenkamp also came to the same conclusion in 2008.53 As a recent UNCTAD analysis found, most of the more recent studies find a positive relationship between IIAs and FDI, such as Kerner (2009), Guerin (2010), Oh and Fratianni (2010), Tortian (2012) and Berger (2013).54 Some surveys among investors have also found that IIAs play a role in decisions about where the company should invest.55 In any event, IIAs have an important signaling effect. By concluding an IIA, countries show that they are prepared to subject themselves to rules in order to enable equitable conditions for foreign investors. However, the more IIAs a country signs, the smaller the incremental effect of a newly concluded IIA. The 2006 study by Tobin and Rose-Ackermann shows this. While this study found a positive effect of IIAs on FDI flows, the marginal benefit to a country of an additional IIA decreased as the number of IIAs signed increased.56 Investment decisions generally depend on many factors, also including the availability of investment guarantees. Alongside the political and legal framework conditions, aspects such as market size and economic growth play a large role. For small and medium-sized enterprises,

BDI-Background Paper ISDS: Fears, Facts, Faultlines

the greatest obstacle to direct investment abroad is the absence of legal certainty in the host country.57 Hence, IIAs are an important factor influencing investment decisions. IIAs enhance the security, transparency, stability, and predictability of a country’s investment framework. They increase confidence in the target country and reduce political risks. As a result, IIAs are an advantage, also for small and medium-sized enterprises. According to an OECD study, small companies filed a claim in 22 percent of the cases examined (the study looked at 50 ICSID and 45 UNCITRAL cases) (see diagram 18).58 Investment decisions generally depend on a large number of factors. Yet, especially for small and medium-sized enterprises, the absence of legal certainty in the host country is the greatest obstacle to direct investments abroad. IIAs have an important signaling effect for investors.

UNCTAD, The Role of International Investment Agreements in Attracting Foreign Direct Investment to Developing Countries, New York und Genf, 2009, p. 125-129, <http://unctad.org/en/docs/diaeia20095_en.pdf>. 49 Mary Hallward-Driemeier, Do Bilateral Investment Treaties Attract Investment? Only a Bit and They Could Bite, World Bank Policy Research Paper, WPS 3121, 2003, Washington D.C.: World Bank. 50 Rashmi Banga, The Impact of Government Policies and Investment Agreements on FDI Inflows, Working Paper No. 116, November 2003, Indian Council for Research on International Economic Relations, New Delhi. 51 Kevin Gallagher and Melissa Birch, „Do Investment Agreements Attract Investments? Evidence from Latin America“, in: The Journal of World Investment and Trade, 2006, Vol. 7, No. 6, p. 961-974. 52 Eric Neumayer and Laura Spess, „Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?“, in: World Development, 2005, Vol. 33, No. 10, p. 1567–1585. 53 Busse et al., FDI Promotion through Bilateral Investment Treaties: More Than a BIT?, Kiel Working Papers No. 1403, 2008. 54 UNCTAD, IAA Issue Notes – Working Draft. The Impact of International Investment Agreements on Foreign Direct Investment: An Overview of Empirical Studies 1998-2014, September 2014, p. 5, <http://investmentpolicyhub.unctad.org/Upload/Documents/unctad-web-diae-pcb-2014-Sep%2024.pdf> (accessed 30 July 2015). 55 UNCTAD, (2009), p. 111. 56 Jennifer Tobin und Susan Rose-Ackermann, Bilateral Investment Treaties: Do They Stimulate Foreign Direct Investment?, mimeo., June 2006, Yale University. 57 KfW Economic Research/Creditreform, Internationalisierung im deutschen Mittelstand, 2012, p. 38. 58 David Gaukrodger and Kathryn Gordon, Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community, OECD Working Papers on International Investment, 2012/03, OECD Publishing, p.17, <http://www.oecd.org/investment/investment-policy/WP-2012_3.pdf>. 48

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Concern 10: IIAs are superfluous since foreign investments can also be secured via private and public insurances, joint ventures, and individual contracts with the host country.

Private and public investment insurances and guarantees are important instruments enabling companies to reduce their political risks. However, access to these instruments is not always guaranteed. The allocation of public investment guarantees often depends on a countryâ&#x20AC;&#x2122;s development policy goals. Private insurances frequently involve high costs, which small companies especially cannot afford. In addition, IIAs are often a condition for such insurances being available. The creation of joint ventures with companies in the country of investment is often not an alternative for companies that need innovative ideas. That is because this model usually means that sensitive business information and technologies have to be shared with companies and authorities in the host country. Individual contracts with the country of investment can indeed reduce investment risks, but they are also no substitute for IIAs and ISDS. Rather, IIAs are also an instrument for protection against arbitrary infringement of just such individually negotiated contracts. Hence, IIAs containing provisions on investor-state dispute settlement procedures close an important gap and safeguard security in investment protection that cannot be guaranteed by any other instrument. For hedging political risks of foreign investments, there is no alternative to IIAs and ISDS. Other instruments can complement international protection mechanisms, but in no way replace them.

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

The Most Important Data at a Glance59 Diagram 1 More investments require more legal protection Foreign direct investment (inward stock in bn US$) and cumulative number of international investment agreements (IIAs) worldwide 30.000

3.500

3.000

25.000

2.500

20.000

2.000 15.000 1.500 10.000 1.000 5.000

500

Foreign direct investment (FDI) in bn US$

2014

2012

2013

2011

2010

2009

2007

2008

2006

2005

2004

2003

2002

2000

2001

1999

1998

1996

1997

1995

1994

1993

1992

1991

1990

1989

1988

1987

Number of worldwide IIAs

Source: UNCTAD, UNCTADStat, <http://unctadstat.unctad.org/EN/> (accesssed 26 May 2015); UNCTAD, World Investment Report 2015, June 2015, p. 106, A7, <http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf>.

Diagram 2 More investments lead to more investment disputes Foreign direct investments stocks in bndisputes US$) and number of ISDS cases per year More investments lead to (inward more investment Foreign direct investments (inward stocks in bn US$) and number of ISDS cases per year 30.000

30.000

70 60

25.000

20.000

50 40

20.000 15.000

40 30

15.000

30 20

10.000 10.000

20 10

5.000 5.000

10 0

Foreign direct investments (FDI) in bn US$

Number of ISDS cases per year

Source: UNCTAD, UNCTADStat, <http://unctadstat.unctad.org/EN/> (accessed 26 May2015), UNCTAD, World Investment Report 2015, June 2015, p. 106, A7, <http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf> and Database of Investor-State Dispute Settlement (ISDS) (reduced version), Source: UNCTAD, UNCTADStat, <http://unctadstat.unctad.org/EN/> (accessed 26 May2015), UNCTAD, World Investment Report 2015, June 2015, p. 106, A7, <http://unctad.org/en/Pages/DIAE/ISDS.aspx> (accessed 26 May 2015). <http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf> and Database of Investor-State Dispute Settlement (ISDS) (reduced version), <http://unctad.org/en/Pages/DIAE/ISDS.aspx> (accessed 26 May 2015). 59

The available UNCTAD statistics include ISDS cases from 1987 through 2014

2014 2014

2013 2013

2012 2012

2011 2011

2010 2010

2009 2009

2008 2008

2007 2007

Number of ISDS cases per year

2006 2006

2005 2005

2004 2004

2003 2003

2002 2002

2001 2001

2000 2000

1999 1999

1997 1997

1998 1998

Foreign direct investments (FDI) in bn US$

1996 1996

1995 1995

1994 1994

1993 1993

1992 1992

1991 1991

1990 1990

1989 1989

1988 1988

1987 1987

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Diagram 3 Germany does not only have investment agreements with developing countries From a total of 129 German IIAs, many are concluded with economically and legally developed countries 16 14

14 12

OECD countries

EU countries

Advanced economies*

*Classification of developed countries by the IMF <http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/groups.htm#oem>.

Source: BMWi, Übersicht über die bilateralen Investitionsförderungs- und -schutzverträge (IFV) der Bundesrepublik Deutschland, as of 21 November 2014, <http://www.bmwi.de/BMWi/Redaktion/PDF/B/bilaterale-investitionsfoerderungs-und-schutzvertraege-IFV,property=pdf,bereich=bmwi,sprache=de,rwb=true.pdf>.

Diagram 4 Claimant companies worldwide: mostly from industrialized countries Country of origin of claimants (total of 608 cases through 2014)

Emerging and developing countries 20%

Developed countries 80%

Source: UNCTAD, World Investment Report 2015, June 2015, p. 146, <http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf>.

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BDI-Background Paper ISDS: Fears, Facts, Faultlines

Diagram 5 EU Investors file claims more often than U.S. investors Country of origin of claimaints in ISDS cases (total of 608* cases worldwide through 2014) Other countries of origin 26.1% (164 cases)

Data not available 0.2% (1 case)

From the United States 21.3% (134 cases)

From the EU 52.5% (330 cases)

*The cases in the diagram amount to 629 cases in total. With regard to 21 claims, there are several claimants who come from EU and United States, EU and another country or United States and another country; these were counted each as individual claims. The numbers reflect the UNCTAD ISDS database as of August 6, 2015. Because UNCTAD continuously updates the database, the numbers in the diagram can deviate from numbers mentioned in UNCTAD and other publications. BDI does not take responsibility for such deviations. Source: UNCTAD, Database of Investor-State Dispute Settlement (ISDS) (reduced version), <http://unctad.org/en/Pages/DIAE/ISDS.aspx> (accessed 6 August 2015).

Diagram 6 Fewer claims from U.S. companies than EU companies Share of global cases (through 2014) and share of foreign direct investment (outward stock, 2014) 60 53%

50 40%

30 21%

24%

Claims by EU investors Share of cases

Claims by U.S. investors

Share of FDI

The number of claims reflects the UNCTAD ISDS database as of August 6, 2015. Because UNCTAD continuously updates the database, the numbers in the diagram can deviate from numbers mentioned in UNCTAD and other publications. BDI does not take responsibility for such deviations.

Source: UNCTAD, Database of Investor-State Dispute Settlement (ISDS) (reduced version), <http://unctad.org/en/Pages/DIAE/ISDS.aspx> (accessed 6 August 2015); UNCTAD, World Investment Report 2015, June 2015, p. A7, <http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf>.

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Diagram 7 The most common countries of origin of claimants A total of 608 cases worldwide filed by the end of 2014

USA

134

Netherlands

United Kingdom

Germany

100

160

Source: UNCTAD, Database of Investor-State Dispute Settlement (ISDS) (reduced version), <http://unctad.org/en/Pages/DIAE/ISDS.aspx> (accessed 6 August 2015).

Diagram 8 Sued countries: mostly developing countries Cases directed against the countries of these country groups (total of 608 cases through 2014)

Industrialized countries 30%

Developing and emerging countries 70%

Source: UNCTAD, World Investment Report 2015, June 2015, p. 146, <http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf>.

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Diagram 9 Most frequently sued countries worldwide Number of ISDS cases against a country (through 2014)

Argentina

56 37

Venezuela 29

Czech Republic 24

Egypt Canada

Ecuador

Mexico

Ukraine

India

United States

Poland

Source: UNCTAD, Database of Investor-State Dispute Settlement (ISDS) (reduced version), <http://unctad.org/en/Pages/DIAE/ISDS.aspx> (accessed 6 August 2015).

Diagram 10 EU investors file claims mostly against EU and Latin American countries The 330 ISDS cases by EU companies were directed against countries in these regions* (percent, through 2014) Western Asia 6%

Africa 12%

South, East, Southeast Asia 10%

Central Asia 4%

Latin America 27%

Europe 40% (EU alone: 30%)

The numbers reflect the UNCTAD ISDS database as of August 6, 2015. Because UNCTAD continuously updates the database, the numbers in the diagram can deviate from numbers mentioned in UNCTAD and other publications. BDI does not take responsibility for such deviations. *Composition of regions according to the UN, <https://unstats.un.org/unsd/methods/m49/m49regin.htm> (accessed 6 August 2015). Source: UNCTAD, Database of Investor-State Dispute Settlement (ISDS) (reduced version), <http://unctad.org/en/Pages/DIAE/ISDS.aspx> (accessed 6 August 2015).

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BDI-Background Paper ISDS: Fears, Facts, Faultlines

Diagram 11 Most frequently sued countries by EU investors Of the 330 ISDS complaints from EU companies, this many were directed against the following countries (through 2014) 31

Argentina 25

Venezuela 24

Czech Republic 15

Egypt Hungary

Spain

India

11 10

Poland Russia

Slovakia

9 8

Bolivia 0

Source: UNCTAD, Database of Investor-State Dispute Settlement (ISDS) (reduced version), <http://unctad.org/en/Pages/DIAE/ISDS.aspx> (accessed 6 August 2015.)

Diagram 12 German investors file claims mostly against EU countries The 42 ISDS cases by German companies were directed against countries in these regions (percent, through 2014) Eastern Europe 7.1%

European Union 47.6 %

Asia 14.3%

Latin America 16.7%

Africa and Middle East 14.3%

The numbers reflect the UNCTAD ISDS database as of August 6, 2015. Because UNCTAD continuously updates the database, the numbers in the diagram can deviate from numbers mentioned in UNCTAD and other publications. BDI does not take responsibility for such deviations. Source: UNCTD, Database of Investor-State Dispute Settlement (ISDS) (reduced version), <http://unctad.org/en/Pages/DIAE/ISDS.aspx> (accessed 6 August 2015).

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Diagram 13 EU countries are mostly sued by EU investors The 131* ISDS cases against EU countries came from these countries 120

116

100

tes

EU ed

it Un

Sta

erl

itz

ssi

Ind

rk Tu

Isr

rda

ina

tin

Arg

n Ve

*There is one case among the cases against EU countries where two countries were sued at the same time: In 2003 investors from France and the UK sued both France and the UK on the basis of the Canterbury Treaty. EU countries were thus sued 132 times in 131 claims. In the count below, one gets to 151 (instead of 131) because of 13 cases in which EU countries were sued by investors from two or more States. The numbers reflect the UNCTAD ISDS database as of August 6, 2015. Because UNCTAD continuously updates the database, the numbers in the diagram can deviate from numbers mentioned in UNCTAD and other publications. BDI does not take responsibility for such deviations. Sources: UNCTAD, Database of Investor-State Dispute Settlement (ISDS) (reduced version), <http://unctad.org/en/Pages/DIAE/ISDS.aspx> (accessed 6 August 2015).

Diagram 14 ISDS: only 27 percent of all cases are decided in favor of the investor* Outcome of ISDS cases worldwide (405 concluded cases through 2014)

Discontinued 9%

Settled 26%

*The cases decided in favor of the State (36%) include the cases that are dismissed at the jurisdictional stage as well as cases in which the tribunal finds that the respondent State did not commit a breach of the IIA. In its World Investment Report 2015, UNCTAD has furthermore introduced a new counting method: not counting the cases that were dismissed at the jurisdictional stage, and only looking at the results of the decisions on the merits, 40 percent of cases were decided in favor of the State and 60 percent in favor of the investor. Source: UNCTAD, World Investment Report 2015, June 2015, p. 116, 146, <http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf>.

Breach but no damages 2%

In favor of State 36%

In favor of investor 27%

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BDI-Background Paper ISDS: Fears, Facts, Faultlines

Diagram 15 Cases against EU countries: Only 20 percent are decided in favor of the investor Outcome of ISDS cases against EU Member States (77 concluded cases through 2014) Other outcome* 16%

In favor of investor 20%

Settled 19%

In favor of State 45% *Discontinued (for unknown reasons) or neither investor nor State won. The numbers reflect the UNCTAD ISDS database as of August 6, 2015. Because UNCTAD continuously updates the database, the numbers in the diagram can deviate from numbers mentioned in UNCTAD and other publications. BDI does not take responsibility for such deviations. Sources: UNCTAD, Database of Investor-State Dispute Settlement (ISDS) (reduced version), <http://unctad.org/en/Pages/DIAE/ISDS.aspx> (accessed 6 August 2015).

Diagram 16 The most frequently defeated countries by investor claims Countries have lost this many cases in ISDS proceedings and they were charged this frequently (through 2014; the investor has won in 110 cases in total) 56

Argentina

Mexico

Venezuela

Kyrgyzstan

Russia

Ukraine

10 submitted cases

lost cases

The numbers reflect the UNCTAD ISDS database as of August 6, 2015. Because UNCTAD continuously updates the database, the numbers in the diagram can deviate from numbers mentioned in UNCTAD and other publications. BDI does not take responsibility for such deviations. Source: UNCTAD, Database of Investor-State Dispute Settlement (ISDS) (reduced version), <http://unctad.org/en/Pages/DIAE/ISDS.aspx> (accessed 6 August 2015).

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Diagram 17 ISDS cases are often in sectors with strong State intervention Distribution of all ISDS cases by economic sector (through 2014)

Other 28%

Supply of electricity and gas 19%

Mining, including oil and gas 16% Waste collection, treatment and disposal 3%

Transportation and storage 3% Financial and insurance services 9%

Manufacture of food products 4% Real estate activities 4% Telecommunications 6%

Construction 8%

Source: UNCTAD, World Investment Report 2015, June 2015, p. 146, <http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf>.

Diagram 18 ISDS is also an instrument for small and medium-sized enterprises (SMEs) Claimants in 95 ISDS cases* by size classification

Medium or large multinational companies 45%

Small investors (individuals, very small businesses, often family-owned 22%

Little or no public information 33% *Evaluation of cases from April 2006 to April 2010. Source: David Gaukrodger and Kathryn Gordon, Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community, OECD Working Papers on International Investment, December 2012, S. 18, <http://www.oecd.org/daf/inv/investment-policy/WP-2012_3.pdf>.

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Diagram 19 Sequence of events in ISDS proceedings in cases that are negotiated under ICSID rules

Information of the concerned government through the investor “cool down period”: Negotiations between investor and State

IIAs often establish by what procedural rules and in which organization an ISDS case is handled. The International Centre for Settlement of Investment Disputes (ICSID) is an international arbitration institution based in Washington, D.C., which belongs to the World Bank Group. The ICSID supports dispute settlement, especially in disputes under bilateral investment promotion and protection agreements (IIAs/BITs). The ICSID Convention of 1966, which 154 countries have now signed, is the basis for the work of ICSID.

Request for Arbitration (Investor and host-State must be members of ICSID) Written request to ICSID Secretary-General

Registration

Constitution of the tribunal (3 arbitrators)

• Investor shall nominate one arbitrator • Defendant State shall designate one arbitrator • Investor and defendant State agree on a presiding arbitrator ICSID has a list of arbitrators. Each Member State may nominate four judges for this list. For Germany, the BMWi designates the four arbitrators.

Consultations, written and oral procedures (national courts are not involved)

Arbitration Award • Distribution of legal costs • Damages Judgement is legally binding for the contracting States and only subject to appeal in procedural errors. A revision is not foreseen. A content review of the arbitration award i.e. the claims arising from this, does not take place. An annulment of the judgement is only possible on procedural grounds: Additional measures: annulment, interpretation, revision

Enforcement of the Judgement: • Recognition of the international legal judgement in ICSID-Member State by the presentation of the ICSID-arbitral award in a national court • Payment of the penalty through the State • Seizure of property of the defendant Sate in any ICSID-State is possible

• Arbitration was not performed properly or did not comply with any other procedural requirement • Arbitration exceeded its jurisdiction • Arbitrator was bribed • Arbitration was not justified

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Ten ISDS Cases in the Public Debate: Worth a Closer Look Against the backdrop of the TTIP negotiations, a highly controversial debate has flared up around investorstate dispute settlement. A few of these cases are repeatedly referred to as dissuasive examples. However, upon closer look, these cases prove to be markedly more complex than they are painted by ISDS critics.60 Moreover, most of the cases have not yet been decided. A number of selected disputes are described briefly below on the basis of publicly accessible documents.

Canadian company uses U.S. shell company against fracking ban in Canada?

Lone Pine v. Canada Arbitration Rules: UNCITRAL IIA: North American Free-Trade Agreement, NAFTA (signed 1992) Lone Pine is registered as a company in the U.S. State of Delaware and is the parent company of Lone Pine Resources Canada Ltd. Lone Pine Resources Canada has its headquarters in Calgary, Canada. At the time of the investment described below, both Lone Pine and Lone Pine Resources Canada were in turn fully owned subsidiaries of the U.S. Forest Oil Corporation. As a U.S. company, Lone Pine can take the Canadian government to court on behalf of Lone Pine Resources Canada, on the basis of the ISDS provisions in the NAFTA investment chapter. In 2006, the company Junex Inc. from Quebec was in possession of four oil and gas exploration licenses for four Canadian areas of the Utica Shale, a region with shale rock formations stretching from the United States to Canada. Forest Oil was also interested in these licences and reached a “Farmout Agreement” with Junex on 5 June 2006 whereby Forest Oil acquired the option of a 100 percent holding in the licenses. Forest Oil participated financially in drilling operations and the construction of installations and pipelines. Under the agreement, Junex was to carry out the first drillings and analyze the physical properties of the rock, and to share the costs with Forest Oil. After Junex had sent the results of the analysis to For-

est Oil, the latter had six months to decide whether the company wanted to make use of the 100 percent holding. If so, Forest Oil had 18 months to apply an unspecified amount on drillings, construction of installations, pipelines, and other activities in order to acquire the 100 percent holding. Forest Oil was interested first and foremost in a particularly promising section of the Saint Lawrence River. On 28 July 2006, shortly after the “Farmout Agreement” was concluded, Lone Pine Resources Canada applied for an exploration license for natural gas for this area. However, some months later, on 14 December 2006, Forest Oil and Junex agreed in the “River Permit Agreement” that Forest Oil would withdraw the application and that Junex should apply for this license instead. This would then exist under the same conditions of the “Farmout Agreement” as the four licences that Junex already owned. Forest Oil initiated the steps agreed to in the “Farmout Agreement” and “River Permit Agreement” necessary to acquire the 100 percent holding in the exploration licenses. In March 2009, the Province of Quebec’s Ministry of Natural Resources and Wildlife issued the exploration license to Junex for the particularly promising section of the river (the “River Permit”). In April 2009, Forest Oil transferred all of its rights, obligations, benefits, and costs to Lone Pine Resources Canada. Lastly, in January 2010, Junex transferred both the holding in the “River Permit” and in the other four exploration licenses to Lone Pine Resources Canada, once Forest Oil had met all necessary conditions for the transfer. The Province of Quebec’s Ministry of Natural Resources and Wildlife officially transferred all holdings in the licenses from Junex to Lone Pine Resources Canada in May 2010.61 Selection of case studies from TTIP critics: Thomas Fritz, TTIP vor Ort, Publication commissioned by campact, 2014, <http://blog. campact.de/wp-content/uploads/2014/09/Campact_TTIP_vor_Ort. pdf>; Pia Eberhardt, Investitionsschutz am Scheideweg. TTIP und die Zukunft des globalen Investitionsrechts, Internationale Politikanalyse, Friedrich-Ebert-Stiftung (Hg.), May 2014, <http://library. fes.de/pdf-files/iez/global/10773-20140603.pdf>; Greenpeace Austria, TTIP: Häufig gestellte Fragen zum Investor-State- DisputeSettlement (ISDS), 20 March 2014, <http://www.greenpeace.org/ austria/de/News/Aktuelle-Meldungen/Gentechnik-News/2014/TTIPHaufigste-Fragen-zu-Investor-State-Dispute-Settlement-ISDS-/>; attac Deutschland, Freihandelsabkommen TTIP stoppen,<https:// www.youtube.com/watch?v=Ljxv-yFBPQ8> (accessed 7 July 2015); attac Deutschland, Investitionsschutz. Der Wolf im Freihandelspelz, <http://www.wolf-im-freihandelspelz.de/> (accessed 7 July 2015). 61 Investment Treaty Arbitration, Lone Pine Resources Inc. v. The Government of Canada, Notice of Arbitration, via <http://www.italaw. com/cases/documents/1607> (eingesehen am 13.1.2015). 60

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Extraction of gas from beneath the Saint Lawrence River is controversial in Canada. Numerous civil society groups called on the government of Quebec to restrict exploration for and extraction of shale gas. Following a public consultation, the government set up a committee of experts. In November 2010, before the experts’ investigation was complete, the government published a draft moratorium on exploration and extraction of shale gas from beneath the Saint Lawrence River. However, at the same time, the Ministry informed Lone Pine and Junex that they would continue to have access to deposits into the future, on the basis of the “River Permit”.

In the ISDS proceedings of Lone Pine versus Canada, the claim is not about being able to frack contrary to valid environmental law in Canada. Rather, the company criticizes the Canadian government for breaching several principles laid down in the NAFTA investment chapter by withdrawing an already issued exploration license without compensation. The case is still pending.

But, in June 2011, Quebec’s National Assembly adopted a law designed to withdraw all licenses for exploration rights and explorations for a section of the Saint Lawrence River (including the section covered by the “River Permit”) without compensation. Lone Pine filed an ISDS claim against Canada on 6 September 2013. The company accused the Canadian government of infringing NAFTA rules on protection against expropriation without compensation and on minimum standard of treatment of investors (fair and equitable treatment, full protection and security) with the law. In so doing, Canada was said to have harmed Lone Pine’s legitimate expectations. In addition, according to the company, the withdrawal of exploration and mining rights was not a justified public purpose since the moratorium had already been imposed before the investigation committee had presented its findings. The company demanded damages of USD 118.9 million. The case has not yet been decided.62

Investment Treaty Arbitration, Lone Pine Resources Inc. v. The Government of Canada, Notice of Arbitration; Thomas P. O’Leary et al., „Canada“, in: James H. Carter (ed.), The International Arbitration Review, fourth edition, 2013, pp. 115-130, <http://www.dentons. com/~/media/FMC%20Import/publications/pdf/c/Canada%20 -%20International%20Arbitration%20Review%20edition%204. pdf>; UNCTAD, Recent Developments in Investor-State Dispute Settlement (ISDS), 10 April 2014, <http://unctad.org/en/publicationslibrary/webdiaepcb2014d3_en.pdf>.

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

In Veolia’s ISDS proceedings against Egypt, the purpose is not to challenge or reduce the minimum wage in Egypt. Rather, the company wants the remuneration for its services to be adjusted to reflect the changed cost structure – the city of Alexandria had assured the company of this by contract.

French company sues Egypt for increasing the minimum wage?

Veolia v. Egypt Arbitration Rules: ICSID

The case is still pending.

IIA: Bilateral investment treaty between France and Egypt (“Décret n° 75-1029 du 24 octobre 1975 portant publication de la convention entre le Gouvernement de la République française et le Gouvernement de la République arabe d’Egypte sur l’encouragement et la protection réciproques des investissements (ensemble deux échanges de lettres), signée au Caire le 22 décembre 1974“) (signed in 1974) In 2000, the French utilities company Veolia Propreté concluded a waste management contract in the framework of a public-private partnership (PPP) with the administration of Alexandria. A subsidiary of Veolia would collect, sort, clean, treat, and recycle waste in the city. Tasks included cleaning roads, beaches, and tourist sites as well as introducing landfills for medical waste and a program for compostable waste. This partnership covered 4,500 jobs. The PPP contract contained a clause to allow amendments to the contract in certain cases. This included a change in the exchange rate between the euro and Egyptian pound, a growth in the population of Alexandria, and an increase in wage costs. Due to an increase in the statutory minimum wage in 2011, wage costs did indeed increase, thereby reducing the Veolia group’s profit expectations. In line with the PPP contract, the company then demanded an adjustment to the remuneration for its services. The city of Alexandria refused this. In June 2012, Veolia lodged a complaint against Egypt with ICSID on the basis of the IIA between France and Egypt. Veolia justified the complaint with breach of contract since the agreed clause had not been respected. According to media reports, the amount in dispute could be as much as USD 82 million. The proceedings have not yet been concluded.63

Le Monde diplomatique, Profit als höchstes Rechtsgut, 12 June 2014, <http://www.monde-diplomatique.de/pm/2014/06/13/a0067.text>; Jeune Afrique, Veolia assigne l’Égypte en justice, 11 July 2011, <http://www.jeuneafrique.com/27151/economie/veolia-assigne-lgypte-en-justice/>.

Federation of German Industries Department for External Economic Policy

U.S. company seeks to challenge patents for expensive but ineffective medicines in Canada?

Eli Lilly v. Canada Arbitration Rules: UNCITRAL IIA: North American Free Trade Agreement, NAFTA (signed 1992) The U.S. pharmaceutical company Eli Lilly had owned patents in numerous countries for the medicines Strattera and Zyprexa since the 1990s. The Canadian patent for Zyprexa was applied for in 1991 and issued on 14 July 1998 (“113 patent”). The patent for Strattera was applied for in 1996 and issued on 1 October 2002 (“735 patent”).64 An internationally recognized condition for patentability is that the invention to be patented is “useful”. This is also provided for under the Canadian Patent Act.65 In the case of pharmaceutical inventions, it is usually easy to demonstrate “usefulness”, because they are used to treat illnesses.66 However, a strict “promise of the patent doctrine” has been applied in Canada since the early 2000s. This is not enshrined in law but is an important common law doctrine whereby the applicant must demonstrate more than just the benefit of a discovery. Rather, the “promise of patent doctrine” imposes the following three requirements: first, a judge must interpret subjectively where the promised benefit of the discovery lies. Second, the concrete benefit promised in the patent must be “demonstrated” or reliably predicted when the application for a patent is made. And third, the company must present a “factual basis” and “sound line of reasoning” with regard to the predicted benefit.67 If the applicant fails to provide this proof, it is possible that the patent will be refused. If an invention subsequently fails to deliver the promised benefit, a patent can also be declared invalid. On this basis, in 2010 the Canadian Federal Court of Appeal declared the Strattera patent invalid after the Canadian generic manufacturer Novopharm filed a complaint. The patent was due to expire in 2016. The patent application was claimed not to deliver the promised benefit within the meaning of the “prom-

BDI-Background Paper ISDS: Fears, Facts, Faultlines

ise doctrine”. A scientific study, which Lilly had referred to in the patent application, was also unable to demonstrate this proof, according to the Court.68 Lilly sought leave to appeal from the Supreme Court of Canada, which was denied in December 2011. In the case of the Zyprexa patent, this was a so-called “selection patent” since the active substance Olanzapin had already been patented previously in combination with other antipsychotic drugs. This patent would have expired in April 2011. Novopharm also complained against this “selection patent”. In 2009 a Canadian federal court decided that the “selection patent” was invalid. An appellate court reversed this decision in 2010. However, in 2011 the Zyprexa patent was once again declared invalid in a second decision by the federal court.69 Lilly renewed the appeal, but without success. The Zyprexa patent has been challenged in numerous countries, including the United States, United Kingdom, Australia, Germany, the Netherlands, Austria, Czech Republic, Russia, Portugal, Hungary, Romania, Slovakia, China, Finland, Norway, Spain, Bulgaria, and South Korea. Canada is the only country where the patent has been declared invalid due to an absence of usefulness.70

Investment Treaty Arbitration, Eli Lilly and Company v. Government of Canada, Claimant’s Memorial, 29 September 2014, p. 57, <http:// www.italaw.com/sites/default/files/case-documents/italaw4046. pdf>; Investment Treaty Arbitration, Eli Lilly and Company v. Government of Canada, Government of Canada Statement of Defence, 30 June 2014, p. 1-2, <http://www.italaw.com/sites/default/files/ case-documents/italaw3253.pdf>. 65 Patent Act, p. 1, <http://www.laws-lois.justice.gc.ca/PDF/P-4.pdf> (accessed 7 July 2015). 66 Investment Treaty Arbitration, Eli Lilly and Company v. Government of Canada, Claimant’s Memorial, p. 3. 67 Investment Treaty Arbitration, Eli Lilly and Company v. Government of Canada, Notice of Arbitration, 12 September 2013, p. 4, via <http://www.italaw.com/cases/1625> (accessed 21 July 2015). 68 Jason Markwell, Pharma in Brief - Federal Court Invalidates Patent for Lack of Utility [STRATTERA® (atomoxetine)], 22 September 2010, Norton Rose Fulbright, <http://www.nortonrosefulbright. com/knowledge/publications/33345/pharma-in-brief-federalcourt-invalidates-patent-for-lack-of-utility> (accessed 7 July 2015). 69 Jason Markwell, Pharma in Brief - Canada: Federal Court Finds Selection Patent Invalid for Lack of Utility [ZYPREXA® (olanzapine)], Norton Rose Fulbright, November 2011, <http://www.nortonrosefulbright.com/jp/knowledge/publications/58962/pharma-in-briefcanada-federal-court-finds-selection-patent-invalid-for-lack-ofutility> (accessed 7 July 2015). 70 Investment Treaty Arbitration, Eli Lilly and Company v. The Government of Canada, Notice of Arbitration, 12 September 2013, <http:// www.italaw.com/sites/default/files/case-documents/italaw1582.pdf>. 64

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

In both cases, Strattera and Zyprexa, the “promise doctrine” was applied retrospectively; it had not yet been established when the original patents were issued.

In the ISDS case Eli Lilly versus Canada the purpose is not to oblige a State to give patent protection to ineffective medicines. Rather, the issue is whether the retrospective withdrawal of existing patents was unfair and discriminatory.

Soon afterwards, the generic manufacturer Novopharm placed these medicines, whose effectiveness it had previously questioned, more cheaply on the Canadian market, leading to a loss of turnover and of jobs at Eli Lilly in Canada. In 2012, Eli Lilly sued the Canadian government on the basis of NAFTA using UNCITRAL rules. The company argued that Canadian courts had, unfairly and in a discriminatory way, declared the patent applications invalid with retrospective effect, and had applied disproportionately high requirements. The “promise doctrine” was claimed to go far beyond the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and beyond the Patent Cooperation Treaty (PCT). Furthermore, Eli Lilly argued that it had infringed Chapter 17 of NAFTA, which deals with intellectual property rights. It is specified in this chapter that a patent may only be revoked when there are reasons which would have justified not granting the patent in the first place (NAFTA Chapter 17, Article 1709(7) and (8)). According to Eli Lilly, the infringement of Chapter 17 was supported by the requirements of Chapter 11, the investment protection chapter. Hence, the Canadian government had infringed upon protection against expropriation without compensation and against minimum standard of treatment of foreign investors in accordance with NAFTA. The company has demanded damages of CAD 500 million. The case has not yet been decided.71

The case is still pending.

Investment Treaty Arbitration, Eli Lilly and Company v. The Government of Canada, Notice of Arbitration.

Federation of German Industries Department for External Economic Policy

U.S. group sues Uruguay and Australia for health protection?

Philip Morris International72 v. Uruguay/ Philip Morris Asia v. Australia Philip Morris International (PMI) and Philip Morris Asia (PMA) justified the investor-state dispute procedures against Uruguay and Australia with the argument that the governments had breached contractually agreed obligations with their smoker protection laws. Philip Morris International v. Uruguay Arbitration Rules: ICSID IIA: Bilateral investment treaty between Uruguay and Switzerland (“Agreement between the Swiss Confederation and the Oriental Republic of Uruguay on the Reciprocal Promotion and Protection of Investments”) (signed 1988) Uruguay is one of the countries with the strictest smoker protection laws in the world. In 2008, a law came into force with a range of health protection measures. In its wake, various decrees were adopted to implement these measures. Since then, only one product variant per brand may be marketed, at least 80 percent of the cigarette packaging must be covered with health warnings, and there must be images on the packaging illustrating the harmful consequences of smoking.73 Philip Morris International (PMI) complied with the ban introduced by the Uruguayan government on marketing no more than one product variant per brand. By contrast, it was possible for the Uruguayan market leader (77 percent market share) merely to rename its different product variants and to continue to place them on the market with almost unchanged presentation and design. PMI filed a claim against Uruguay with ICSID in February 2010. The basis for the claim was the IIA between Uruguay and Switzerland. PMI had a strong presence in Switzerland with around 3,000 employees. Since the IIA between Switzerland and Uruguay provides for a prior exhaustion of the national judicial route, the arbitration panel had to first clarify its legal competence.

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Thus, the tribunal first verified whether the consultation period (“cool down period”) of six months provided for in the IIA had elapsed. The parties are expected to work towards an amicable settlement of the dispute during this period. Only after this period can a complaint be filed. Second, it was verified whether the investor had followed the national judicial route for a period of at least 18 months. Regarding the six-month consultation period, the parties agreed that this had been complied with. However, Uruguay argued that the claimant had not met the requirement of an 18-month period for assessment by national courts. Philip Morris had indeed filed a suit before a national court during the corresponding period, but this claim had also been about infringements of Uruguayan constitutional and administrative law and not exclusively about the claim covered by the proposed ISDS procedure. However, the tribunal decided that a national judicial dispute does not have to have an identical legal basis or the same substance in order to meet the IIA’s requirement of an 18-month domestic litigation period. The arbitration panel accordingly deemed itself to be competent. In addition, PMI had referred to the IIA’s MFN clause, whereby foreign investors from the contracting country may not be treated worse than investors from third countries. PMI argued that other IIAs did not require the exhaustion of the national judicial route and hence investors from these countries were better placed. The arbitration panel did not pursue its examination of the case since it was already able to decide positively on the basis of the IIA between Uruguay and Switzerland.74

Philip Morris International (PMI) maintains (among many other holding companies) the Switzerland-based FTR Holding S.A. and Switzerland-based Philip Morris Products S.A. Together, these two companies own and control Uruguay-based Abal Hermanos S.A. The arbitration was launched by FTR Holding S.A., Philip Morris Products S.A. and Abal Hermanos S.A. The claimants together are here referred to as Philip Morris Internaional (PMI). See Todd Weiler, Philip Morris vs. Uruguay. An Analysis of Tobacco Control Measures in the Context of International Investment Law, Report #1 for Physicians for a Smoke Free Canada (Expert Opinion: Expert Opinion: An Analysis of Tobacco Control Measures in the Context of International Investment Law), 28 July 2010, via <http://www.italaw.com/ cases/460> (accessed 7 July 2015). 73 Todd Weiler (2010). 74 Investment Treaty Arbitration, Decision on Jurisdiction: Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. (the Claimants) and Oriental Republic of Uruguay (the Respondent) (ICSID Case No. ARB/10/7), 2.7.2013, <http://italaw.com/sites/default/files/case-documents/italaw1531.pdf>. 72

Federation of German Industries Department for External Economic Policy

Regarding the material infringements of the IIA between Uruguay and Switzerland, PMI argued that the described regulation had not been applied evenly to all market participants. Moreover, the increase from 50 to 80 percent of the package covered by health warnings constituted an infringement of trademark rights and caused a deprivation of the company’s intellectual property rights, since less than 20 percent of the packaging could be used for differentiation between brands. According to PMI, there was no coherence between the law and the actual objective of regulation, which is health protection. PMI sued Uruguay for damages of USD 25 million. The case has not yet been decided. A ruling is expected in 2015.75

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Philip Morris Asia v. Australia Arbitration Rules: UNCITRAL IIA: Bilateral investment treaty between Australia and Hong Kong (“Agreement between the Government of Hong Kong and the Government of Australia for the Promotion and Protection of Investments”) (signed 1993) In December 2011 the Australian government adopted the Tobacco Plain Packaging Act, which provides for plain packaging for tobacco products without the use of a brand logo. Warnings with graphical diagrams of the negative consequences of smoking must cover 75 percent of the front and 90 percent of the back of a package.76 In 2011, Philip Morris Asia (PMA) sued the Australian government for payment of an unspecified amount of several billion USD on the basis of the IIA between Australia and Hong Kong, where PMA has its headquarters for the Asia region. The firm’s seat there was founded in 1984 and currently employs around 120 people.77

“Zigarettenhersteller Philip Morris verklagt Uruguay auf Schadenersatz“, in: Deutsche Wirtschafts Nachrichten, 3 June 2014, <http:// deutsche-wirtschafts-nachrichten.de/2014/06/03/zigarettenhersteller-philip-morris-verklagt-uruguay-auf-schadenersatz/>; Philip Morris International, Philip Morris International Welcomes Decision by World Bank Tribunal to Hear Treaty Challenge to Uruguay’s Excessive Tobacco Measures, Press Release, 3 July 2013,<http://investors.pmi.com/phoenix.zhtml?c=146476&p=irolnewsArticle&ID=1835071#>; Philip Morris International, Uruguay Bilateral Investment Treaty (BIT) Litigation, <http://www.pmi.com/ eng/media_center/company_statements/Pages/uruguay_bit_ claim.aspx> (accessed 7 July 2015); ”Hearings to Begin in Antismoking Lawsuit by Philip Morris International Against Uruguay“, in: Industry Week, 4 February 2013, <http://www.industryweek. com/trade/hearings-begin-anti-smoking-lawsuit-philip-morrisinternational-against-uruguay> (accessed 7 July 2015); Valentina Vadi, Public Health in International Investment Law and Arbitration, Rout- ledge Chapman & Hall 2012. 76 Australian Government Department of Health, Introduction of Tobacco Plain Packaging in Australia, <http://www.health.gov.au/ internet/main/publishing.nsf/Content/tobacco-plain> (accessed 7 July 2015). 77 McCabe Centre for Law & Cancer, Philip Morris Asia Challenge under Australia – Hong Kong Bilateral Investment Treaty, <http://www. mccabecentre.org/focus-areas/tobacco/philip-morris-asia-challenge> (accessed 7 July 2015); Philip Morris International, Hong Kong: Country Overview, <http://www.pmi.com/marketpages/ pages/market_en_hk.aspx> (accessed 7 July 2015). 75

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

PMA, which also had a factory with 800 employees in Melbourne until its closure in 201478, believed its intellectual property and trademark rights to have been infringed in Australia by the new legislation. The company argued that the measure was indirect expropriation because PMA was no longer able to use its valuable brands. Australia had not treated PMA fairly and equitably. The Tobacco Plain Packaging Act was a disproportionate restriction of investments in Australia.79 Australia rejected the charges of the claim. The proceedings have not yet been decided.80 The ISDS cases of Philip Morris against Uruguay and Australia are not directed against health protection laws themselves. In the case against Uruguay, the issue is whether Philip Morris was discriminated against vis-à-vis competitors in the implementation of these laws. In both cases, it must be verified whether the de facto removal of the right to use valuable commercial brands meets the conditions of indirect expropriation. The company is not involved in “treaty shopping”, and there are no “shell companies” in either case. Both cases are still pending.

Michael Janda, „Philip Morris to Quit Australian Cigarette Manufacturing”, in: ABC, 2 April 2014, <http://www.abc.net. au/news/2014-04-02/philip-morris-to-quit-australian-cigarettemanufacturing/5361436>. 79 Investment Treaty Arbitration, Notice of Arbitration Australia I Hong Kong Agreement for the Promotion and Protection of Investments, 21 November 2011, <http://www.italaw.com/sites/default/files/ case-documents/ita0665.pdf>. 80 Australian Government, Tobacco Plain Packaging—Investor-State Arbitration, <http://www.ag.gov.au/tobaccoplainpackaging>; Matthew Taylor, Philip Morris v Australia: The Challenges of InvestorState Arbitration, <http://www.mallesons.com/publications/marketAlerts/2011/International-Arbitration-Update-November-2011/ Pages/Philip-Morris-v-Australia-the-challenges-of-investor-statearbitration.aspx> (accessed 7 July 2015). 78

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

U.S. agricultural giant files a suit against Poland’s EU accession?

Swedish group challenges German environmental standards?

Cargill v. Poland

Vattenfall v. Germany

Arbitration Rules: ICSID/UNCITRAL

Arbitration Rules: ICSID

IIA: Bilateral investment treaty between the United States and Poland (“Treaty between the United States of America and the Republic of Poland Concerning Business and Economic Relations”) (signed 1990)

IIA: Energy Charter Treaty (signed by Germany and Switzerland in 1994)

The U.S. agricultural company Cargill produced isoglucose in Poland. Isoglucose is a sweetener extracted from wheat, which competes with sugar. In the framework of its EU accession, Poland adopted production quotas for sweeteners in order to align national laws with the Common Agricultural Policy and the EU sugar directive. Cargill interpreted the new rules as a de facto requirement to export isoglucose production that exceeds the quotas. As a result, Cargill deemed the value of its investments in Poland to have been negatively influenced. In 2004, the company sued Poland following ICSID rules for an amount of USD 150 million. In 2005, the case was transferred to UNCITRAL at the wish of both parties. In 2008, the tribunal decided that the U.S. company had been discriminated against by Poland and had not been treated fairly and equitably. Inter alia, Poland had infringed the requirement of transparency. However, the arbitrators found that the claimed amount of USD 150 million had been set too high; Poland was sentenced to pay damages of USD 16.3 million plus interest. The smaller sum (16.3 million instead of 150 million) was justified by the company’s risky investment decisions which had led to losses in Poland. In addition, the tribunal rejected Cargill’s accusation that the company had suffered damages through the imposition of so-called performance requirements.81 Cargill’s ISDS claim is not directed against Poland’s EU accession. Rather, it was about verifying whether quotas for the production of sweeteners, which Poland had accepted as part of its accession, were fair, equitable, and non-discriminatory.

With a provisional authorization, in October 2007 Vattenfall started to build a coal-fired power plant in Hamburg-Moorburg at a value of EUR 2.6 billion. The definitive authorization was issued in 2008 by the new Green Hamburg government, but with stricter water quality standards after such standards had been adopted to protect the River Elbe. These water quality standards regulated the amount of Elbe water that Vattenfall was allowed to use for cooling. According to Vattenfall, these new regulations made the construction of a new coalfired power plant unprofitable.82 Vattenfall argued that the new standards infringed the principle of fair and equitable treatment as well as the Energy Charter’s expropriation ban. In March 2009 the company filed a claim against the Federal Republic of Germany with ICSID on the basis of the Energy Charter and called for damages of EUR 1.4 billion. The dispute was settled in March 2011 after Vattenfall managed to reach an agreement with the German federal government before the Higher Administrative Court of Hamburg, where Vattenfall had also filed a claim in October 2008. Germany agreed to grant the company less stringent water extraction rights and Vattenfall, for its part, had invested in a cooling tower.83 The verdict was not published. Luke Eric Peterson, IA Reporter, Investment Arbitration Reporter, Vol. 1, No. 5, 16. July 2008, p. 6-8, via <http://www.iareporter.com/downloads/20100107_23> (accessed 7 July 2015). 82 Nathalie Bernasconi, Background Paper on Vattenfall v. Germany Arbitration, International Institute for Sustainable Development (IISD), 2009, S. 1, <http://www.iisd.org/pdf/2009/background_vattenfall_vs_germany.pdf>. 83 Investment Treaty Arbitration, Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG v. Federal Republic of Germany, ICSID Case No. ARB/09/6 (formerly Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG & Co. KG v. The Federal Republic of Germany), <http://italaw.com/cases/1148> (eingesehen am 1.2.2015); Nathalie Bernasconi-Osterwalder und Rhea Tamara Hoffmann, The German Nuclear Phase-Out Put to the Test in International Investment Arbitration? Background to the New Dispute Vattenfall v. Germany (II), <http://www.iisd.org/publications/ german-nuclear-phase-out-put-test-international-investment-arbitration-background-new> (eingesehen am 1.2.2015). 81

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However, the authorization agreed upon in the settlement, which allowed Vattenfall open circuit cooling, was withdrawn in 2013 following a complaint by the environmental organization BUND against Hamburg. Vattenfall may still use Elbe water for closed-circuit cooling, but this type of cooling uses much less river water. Consequently, Vattenfall was required to pay for the additional investments – the cooling tower – to protect the environment but the water extraction rights it had been granted in 2011 were subsequently changed.84 The case continues to evolve outside of ISDS: In March 2015 the European Commission filed a claim against Germany before the European Court of Justice. The European Commission claims that the settlement between Germany and Vattenfall is in breach of the Flora-Fauna-Habitat Directive. According to the European Commisison, the allowed water extraction from the river Elbe might negatively impact certain protected fish species such as salmon, river lamprey, and sea lamprey. The Commission argues that “[w]hen authorising the plant, Germany failed to carry out an appropriate assessment as required by the Directive, and to assess alternative cooling processes which could avoid the killing of the protected species concerned.”85 Vattenfall and the Hamburg Environmental Authority stated that Vattenfall had already undertaken different measures to protect the fish, which included building a cooling tower as well as a system that drives fish away from the cooling water pumps.86 The case against the German federal government was not directed against environmental protection. Rather, it was intended to clarify whether the company had been fairly and equitably treated. Moreover, in this proceeding, Germany did not lose against Vattenfall. Instead, Vattenfall made investments at its own expense to meet higher environmental protection standards.

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Swedish group files a suit against nuclear exit?

Vattenfall v. Germany Arbitration Rules: ICSID IIA: Energy Charter Treaty (signed by Germany and Sweden in 1994) The withdrawal from nuclear energy in Germany started with an agreement between the German federal government and the energy supply company in June 2000. Until 2010 there was a progressive withdrawal (known as the “nuclear consensus”) with residual power volumes and without fixed switch-off deadlines, as agreed by the German federal government with the four German operators of nuclear power stations. In 2002, the agreement was made legally secure through an amendment of the Atomic Energy Act. The Stade and Obrigheim nuclear power plants had already been shut down completely in 2003 and 2005, respectively. In March 2011, soon after the catastrophe at the Fukushima nuclear power plant in Japan, the German federal government decided to set a markedly different course for its nuclear policy. First of all, it announced a threemonth nuclear moratorium for the seven oldest German power stations as well as for the Krümmel nuclear power station. Just a few months after the extension of the operating periods, the German federal government decided in June 2011 to switch off eight further nuclear power stations as well as a progressive exit from nuclear energy by 2022. As a result, the operating period extensions decided upon in autumn 2010 were reversed. This nuclear exit was enshrined in June 2011 through a new amendment of the Atomic Energy Act.

Justiz-Portal Hamburger Justiz, Urteilsbegründung im Verfahren um das Steinkohlekraftwerk Moorburg liegt vor , 26 March 2013, <http://justiz.hamburg.de/presseerklaerungen-archiv/4332428/ pressemeldung-2013-03-07-ovg-01/> (accessed 5 August 2015). 85 European Commission, Environment: Commission Refers Germany to Court over Coal Power Plant in Moorburg, Press release, 27 March 2015, <http://europa.eu/rapid/press-release_IP-15-4669_ en.htm> (accessed 5 August 2015). 86 “Kraftwerk Moorburg: EU verklagt Deutschland”, in: NRD.de, 27.3.2015, <http://www.ndr.de/nachrichten/hamburg/KraftwerkMoorburg-EU-verklagt-Deutschland,moorburg292.html> (accessed 5 August 2015). 84

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In May 2012 Vattenfall filed an ISDS claim (following ICSID rules) due to a presumed infringement of its rights promised in the Energy Charter. Vattenfall also filed a lawsuit before the Federal Constitutional Court of Germany. Through the amendment of the Atomic Energy Act in the wake of the German energy transition, the company has suffered considerable damage, Vattenfall argued. The company was involved in the two nuclear power stations Brünsbüttel and Krümmel, which had to be halted immediately under the law of summer 2011. Hence, Vattenfall is the only operator of nuclear power plants in Germany that had to close down its entire fleet immediately. Vattenfall’s exact justification for the claim is not publicly accessible; the amount claimed is EUR 4.7 billion.87 Vattenfall’s ISDS claim against Germany is not directed against the withdrawal from nuclear energy in itself. Rather, it is likely to be clarified whether the company was treated fairly and equitably. In addition, it will probably be assessed whether Vattenfall has been discriminated against vis-à-vis German investors. Lastly, an issue to be clarified is whether the withdrawal from nuclear energy constitutes an expropriation without compensation. The claim against the federal German government is neither public nor concluded.

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Oil company sues Ecuador due to protection of the rain forest?

Occidental Petroleum Corp. and Occidental Exploration and Production Company v. Ecuador Arbitration Rules: ICSID IIA: Bilateral investment treaty between the United States and Ecuador (“Treaty between the United States of America and the Republic of Ecuador concerning the Encouragement and Reciprocal Protection of Investment”) (signed 1993) The U.S. Occidental Exploration and Production Company (OEPC) had been active in Ecuador since the mid-1980s. In 1999, Ecuador and Occidental concluded a Participation Contract which promised Occidental exclusive rights to the exploration and extraction of oil in a part of the Ecuadorean Amazon region (“Block 15”). In 2000, Occidental was looking for possibilities to finance an expansion of its activities. Occidental therefore entered into a cooperative arrangement (“Farmout Agreement”) with Alberta Energy Corporation Ltd. (AEC), which in turn wanted to expand into Ecuador. The “Farmout Agreement” was signed in October 2000. According to the Ecuadorean government, this agreement should have been approved by the government. The government accused Occidental of having infringed Ecuadorean hydrocarbon regulations by transferring rights to AEC without prior government authorization. In May 2006, the government terminated Occidental’s Participation Contract, and it confiscated and nationalized Occidental’s property.

“Schadensersatz für Atomausstieg. Vattenfall will 4,7 Milliarden Euro“, in: Tagesschau.de, 15 October .2014, <http://www.tagesschau.de/inland/vattenfall-klage-101.html> (accessed 7 July 2015); Nathalie Bernasconi-Osterwalder and Rhea Tamara Hoffmann, Der deutsche Atomausstieg auf dem Prüfstand eines internationlen Investitionsschiedsgerichts?; March 2012, <http://www.iisd.org/ pdf/2012/powershift_forum_briefing_vattenfall.pdf>..

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Also in May 2006, Occidental filed an investor-state claim with ICSID and demanded damages of USD 2.3 billion. The company accused the government of terminating the Participation Contract without justification so that it had breached not only the usage contract itself but also Ecuadorean law and the IIA between the United States and Ecuador. The tribunal decided in October 2012 that the cooperation with AEC had indeed needed to be confirmed by the government. However, both the termination of the Parcitipation Contract and the expropriation were not proportional to this infringement. The court set Occidental’s damages at 75 percent of the amount demanded (USD 1.77 billion plus interest).88 Occidental’s ISDS claim against Ecuador was not directed against the protection of the rain forest. Rather, it was about the issue of whether confiscations in connection with the implementation of rain forest protection met the conditions for expropriation and the company should have been compensated.

Tai-Heng Cheng and Lucas Bento, ICSID’s Largest Award in History: An Overview of Occidental Petroleum Corporation v the Republic of Ecuador, Kluwer Arbitration Blog, 19 December 2012,<http://kluwerarbitrationblog.com/blog/2012/12/19/icsids-largest-award-inhistory-an-overview-of-occidental-petroleum-corporation-v-therepublic-of-ecuador/>; Investment Treaty Arbitration, Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador, ICSID Case No. ARB/06/11, <http://www.italaw.com/cases/documents/768> (accessed 7 July 2015).

Federation of German Industries Department for External Economic Policy

U.S. energy providers sue Argentina due to profit losses in the wake of the Argentine crisis?

LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentina Arbitration Rules: ICSID IIA: Bilateral investment treaty between the United States and Argentina (“Treaty Between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Invest- ment”) (signed 1991) The three U.S. investors, LG&E Energy Corp., LG&E Capital Corp., and LG&E International Inc., owned stakes in three Argentine gas distribution businesses which were founded in the early 1990s and held operating licenses until 2027. During the early 1990s Argentina guaranteed that tariffs on the transportation and distribution of gas would be calculated in U.S. dollars and that tariff adjustments were carried out twice a year on the basis of the U.S. energy producer price index (PPI). In this way, the government wanted to improve Argentina’s attractiveness as an investment destination. However, in the wake of the Argentine crisis (1998-2002), these guarantees were withdrawn, causing the investments of the LG&E companies to lose profitability. The investors interpreted this action as expropriation without compensation. LG&E then sued Argentina before ICSID. The grounds for the complaint were the IIA between the United States and Argentina. The claimants’ demands against Argentina ranged between USD 248 million and 268 million. The tribunal ruled that Argentina had been in an emergency situation between December 2001 and the end of April 2003 and that foreign investors had no entitlement to compensation during these 17 months. In addition, the tribunal found that the measures had not constituted indirect expropriation. To determine how strongly the private property of LG&E had been impaired by the Argentine government’s measures, the tribunal identified two criteria: the economic consequences (i.e. effective change of control over the investment or ownership; an impairment of the investor’s justified expectations) as well as the duration of

BDI-Background Paper ISDS: Fears, Facts, Faultlines

the measure. The tribunal found that the measure was not lengthy and had not led to a change in ownership or control over the investment. Without a permanent and massive loss of the investment or its value as a result of state intervention, this was not expropriation according to the tribunal.89 Nevertheless, the tribunal also decided that Argentina had infringed the standard of fair and equitable treatment and the IIA’s umbrella clause with the termination of the guarantees. The government of Argentina had to pay the three investors compensation in this regard (although not for the period from December 2001 to April 2003). The tribunal determined that the fair and equitable treatment standard encompasses consistent and transparent behavior by the host State – free of contradictions – which includes the obligation to create stable and predictable legal framework conditions to meet the justified expectations of the foreign investor.90 At the same time, the tribunal underlined that investors must always reckon with business risks. Compensation payments were set at USD 57.4 million. Losses during the period of the emergency situation were deducted from the compensation amount and thus not included therein. This case was not about obliging Argentina to compensate companies for all losses suffered in the wake of the crisis (1998-2002). Rather, the ruling shows that even if IIAs guarantee fair and equitable treatment, non-discrimination, as well as compensation for direct and indirect expropriation, companies are still not always protected against a decline in profitability of investments as a result of state measures. Companies must always reckon with business risk – which also includes the fact that laws can be amended. In addition, the ruling shows that a State’s room for action is maintained during financial and economic crises, despite IIAs.

LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v The Argentine Republic, Case Summary Prepared in the Course of Research for S Ripinsky with K Williams, Damages in International Investment Law (BIICL, 2008), p. 2, 5, <http://www.biicl.org/ files/3908_2007_lg&e_v_argentina.pdf>. 90 Cited in: UNCTAD, Latest Developments in Investor-State Dispute Settlement, IIA Monitor No. 4, 2006, <http://unctad.org/sections/ dite_pcbb/docs/webiteiia200611_en.pdf>. 89

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Conclusion, Perspective, and Recommendations What conclusion should be drawn from the analysis set out above? Is the criticism from opponents of the investor-state dispute settlement system unfounded? A look at arbitration practice shows that many of the critics’ concerns are without justification. Nevertheless, there is also a need for reform in some areas. IIAs must preserve the State’s legislative sovereignty (so-called “right to regulate”). Legal concepts should be defined as precisely as possible, transparency improved, and frivolous claims prevented. In addition, an appellate mechanism would be desirable. At the same time, however, investment protection agreements are indispensable to German businesses active around the world. Foreign investments often go hand in hand with high political risks. The investor must be able to safeguard against this. Accordingly, the protection of investments abroad must be maintained in any reform. A few selected points from the foregoing analysis are revisited and discussed briefly below. A detailed overview of BDI’s reform proposals can be found in the BDI position paper “The ‘I’ in TTIP”. Substantive Investment Protection Provisions The principles of national treatment and most-favored nation (non-discrimination), protection against direct and indirect expropriation, as well as the requirement of fair and equitable treatment are important components of IIAs. These central elements are indispensable to protect foreign direct investments. Thanks to arbitration rulings in ISDS procedures, a certain consensus has developed regarding their interpretation. At the same time, arbitration rulings show that the above-mentioned principles leave room for interpretation. More recent IIAs and investment chapters in FTAs seek to restrict this room through more precise legal concepts. Such IIAs also include the EU’s trade agreement with Canada, CETA.91 More precise legal concepts can improve predictability and legal certainty for both the investor and the host State. However, they must be formulated in a way that ensures foreign investments to be protected going forward. Investment and investor: IIAs already define what sort of investors and investments are protected under the agreement, albeit the scope of the definitions varies between IIAs.

For example, according to the 2008 German model investment protection agreement, protected investments are “every kind of asset which is directly or indirectly invested by investors of one Contracting State in the territory of the other Contracting State”. This includes ownership of movable and immovable property, shares, claims to money, intellectual property rights (e.g. brands and patents), trade names, trade and business secrets, know-how, as well as concessions governed by public law including exploration and extraction concessions for natural resources.92 Also according to the 2008 German model investment protection agreement, “investors” are owners or shareholders of an investment who are German citizens or citizens of another EU Member State who are established in Germany; or juridicial persons, commercial companies, or other companies and associations founded under German law or the law of an EU Member State and are registered in a public register in Germany or enjoy freedom of establishment under EU law as an agency or permanent establishment.93 In the CETA agreement between the EU and Canada, the definition of investment and investor is also broadly formulated – drawing on existing investment protection agreements. An investment is defined in CETA as an asset which the investor owns or controls directly or indirectly. Nevertheless, by way of restriction, CETA stipulates that the asset must be carried out for a certain duration before it can be deemed an investment within the meaning of the agreement. Furthermore, the capital must be committed, and associated with both a profit expectation and risk assumption. Regarding claims to money, the text lays down that these are not included if they arise solely from contracts for the sale of goods or services, financing of such contracts, or from an arbitral award. In addition, the text clarifies that only investments already made which do not infringe the law of the host State are protected. Investments that are still at the planning stage are excluded from the scope of application. CETA, 10. Investment. Section 1: Scope and Definitions. Article X.1: Scope of Application, 2014, <http://trade.ec.europa.eu/doclib/ docs/2014/september/tradoc_152806.pdf>. 92 Investment Treaty Arbitration, German Model Treaty -2008, <http:// www.italaw.com/sites/default/files/archive/ita1025.pdf>. 93 Investment Treaty Arbitration, German Model Treaty -2008, <http:// www.italaw.com/sites/default/files/archive/ita1025.pdf>. 91

Federation of German Industries Department for External Economic Policy

An “investor” within the meaning of CETA is a natural person or an enterprise of a Party that seeks to make an investment in the territory of the other party, is already making an investment, or has made an investment. Representative offices are not deemed to be investors within the meaning of CETA.94 From the angle of the investor, a broad definition of investment and investor is preferable to a narrow one, since this creates more comprehensive protection for foreign investments. From the angle of the State, however, a broad definition can become a problem if it opens the door to complaints via shell companies. More recent IIAs such as CETA therefore stipulate that the only investments protected are those made by investors who already do substantive business in the host State. A restricted scope of application and exclusion of mere shell firms can prevent “treaty shopping” and hence goes some way to meeting criticisms. The definitions of investments and investors should be precise in future IIAs. The formulations should, however, not prevent justified complaints but must deter abuse (e.g. through “treaty shopping”).

Fair and equitable treatment (FET): The principle of fair and equitable treatment is not given concrete form in most existing IIAs. However, a reading of past arbitration rulings provides information about what is to be understood by FET. On this basis, the investor is not treated fairly and equitably, for example, if he/she is placed under political pressure or is refused access to the national legislative route. FET is also infringed if government decisions are arbitrary, inconsistent, opaque, and contradictory, or if the legitimate expectations of the investor are infringed. Under traditional IIAs, the investor enjoys protection of legitimate expectations. Legitimate expectations can arise through explicit or implicit statements and assurances from the State to the investor. The definition of FET in CETA differs markedly from this traditional, broad definition. The text of the agreement lists concrete actions that infringe the principle of fair and equitable treatment: denial of justice in criminal, civil, or administrative proceedings; fundamental breaches of due process, including a breach

BDI-Background Paper ISDS: Fears, Facts, Faultlines

of transparency, in judicial and administrative proceedings; manifest arbitrariness; targeted discrimination on manifestly wrongful grounds, such as gender, race, or religious belief; abusive treatment of investors, such as coercion, duress, and harassment.95 Accordingly, the scope of protection falls markedly short of the formulations of the principle of fair and equitable treatment used previously. Reliability in legal standards, predictability, appropriateness, and consistency in state action are not called for, and neither is the investor guaranteed protection of legitimate expectations. All in all, the principle of fair and equitable treatment is restricted to very serious infringements of IIA provisions such as ‘manifest’ arbitrariness.96 As a result, relevant cases can be excluded and the overall level of investment protection is clearly reduced. A more precise formulation of the requirement of fair and equitable treatment in the EU’s future IIAs is also desirable from the angle of German industry. However, for situations not covered by this list, future IIAs should provide for the possibility to extend the list. CETA introduces new legal concepts which still need to have life breathed into them in practice. Criteria such as “manifest arbitrariness” or also “targeted discrimination” must not lead to “minor” infringements of an IIA’s provisions going unpunished. In addition, state action should always be proportionate and the investor’s legitimate expectations safeguarded. The requirement of fair and equitable treatment (FET) should be given concrete form in future IIAs. Nevertheless, investors must also enjoy protection of legitimate expectations in the future. In addition, state action should always be proportionate.

Foreign Affairs, Trade and Development Canada, Consolidated Ceta Text, 10. Investment, Article X.3: Definitions, <http://www. international.gc.ca/trade-agreements-accords-commerciaux/agracc/ceta-aecg/text-texte/10.aspx?lang=eng> (accessed 7 July 2015). 95 Schill (2014), p. 14. Foreign Affairs, Trade and Development Canada, Consolidated Ceta Text, 10. Investment, Article X.9: Treatment of Investors and of Covered Investments, <http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/ ceta-aecg/text-texte/10.aspx?lang=eng> (accessed 7 July 2015). 96 European Commission, Investitionsbestimmungen im Freihandelsabkommen EU-Kanada (CETA), 15 October 2014, <http:// trade.ec.europa.eu/doclib/docs/2013/december/tradoc_151959. pdf>. 94

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BDI-Background Paper ISDS: Fears, Facts, Faultlines

Indirect expropriation: Past arbitration rulings show that capital investments abroad may only be expropriated directly or indirectly for the public good and in return for prompt and appropriate compensation. Profits foregone as a result of state measures do not generally constitute an instance of indirect expropriation. To meet the conditions for indirect expropriation, the company must have suffered a permanent and massive loss of the investment or its value following a state intervention. Criteria often applied for assessing an indirect expropriation are the economic consequences (i.e. effective change of control over the investment or ownership; an impairment of the investor’s legitimate expectations) as well as the duration of the measure.

Non-discrimination: With the signature of an IIA, the contracting parties undertake not to discriminate against foreign investors – either vis-à-vis domestic investors (principle of national treatment) or vis-à-vis other foreign investors (principle of most-favored nation, MFN). Both of these principles are among the core protection standards of IIAs.

Under CETA, too, an indirect expropriation occurs only if fundamental ownership characteristics are taken away from the investor to a large degree. This includes, inter alia, the right to use, own, and dispose of its investment.97 However, the text of the agreement goes one step further than traditional IIAs. All state measures that serve to protect a public purpose such as health, security, or environment only constitute an indirect expropriation eligible for compensation in exceptional cases.

CETA guarantees investors both national treatment and MFN. A condition for national treatment is that the foreign investor is in a “like situation” to the domestic investor. Nevertheless, several exceptions apply for national treatment, both sector-specific and of a general nature. The most-favored-nation principle is also clearly more restricted than in traditional investment protection agreements. Investors from Canada or the EU cannot claim procedural rights from other IIAs with reference to MFN. In order to guarantee an international level playing field, a strong ban on discrimination is indispensable. General exceptions should therefore be restricted and formulated in precise terms so as not to open the door to rejection of legitimate complaints. A strong discrimination ban (national treatment, MFN) is also indispensable in future IIAs. Exceptions must not open the door to rejection of legitimate claims.

This is the case if the state measure is “manifestly excessive” in comparison to the legislative objective pursued.98 Thus, CETA emphasizes the State’s legislative discretion. However, at the same time, the “manifestly excessive” clause could become a problem for investors – depending on the interpretation of tribunals. If this concept is interpreted narrowly by tribunals, all complaints citing indirect expropriation could be rejected. This should be avoided in the EU’s future IIAs. The definition of an indirect expropriation should be as concrete as possible in future IIAs. It must safeguard the State’s legislative discretion but may not block justified complaints.

Europäische Kommission, Investitionsbestimmungen im Freihandelsabkommen EU-Kanada (CETA), 2014, S. 2. 98 Schill (2014), S. 18. 97

Federation of German Industries Department for External Economic Policy

Umbrella clause: Many European IIAs contain umbrella clauses that make promises by a State to an investor enforceable before international investment tribunals. The German model IIA is no exception in this respect. The U.S. model agreement and many U.S. IIAs also include umbrella clauses as components of their dispute settlement arrangements. Conversely, CETA does not have an umbrella clause. It is clear that not all breaches of contract between the State and the investor are also breaches of international agreements. Despite this, an IIA should contain an umbrella clause for certain categories of negligence. Such an umbrella clause does not include a disproportionate burden for a State since it merely requires it to comply with obligations which it has voluntarily entered into.

BDI-Background Paper ISDS: Fears, Facts, Faultlines

in the sector, for instance, action to protect investors, regulate payment flows and cross-border financial services, and to safeguard the stability of the financial system.99 An intergovernmental financial services committee serves as a filter. It is intended to decide whether an ISDS complaint can be rejected in reference to this exception.100 States’ right to regulate should also be explicitly protected in future investment agreements. However, interests of the common good and exceptions should be formulated as precisely as possible. An appropriate balance needs to be found that sufficiently protects foreign direct investments and at the same time guarantees the State’s legislative sovereignty. The regulatory sovereignty of States must not be brought into question by future IIAs. Protection of health, environment, and security must be safeguarded. But common good clauses must be formulated precisely so that effective investor protection is maintained.

Future IIAs should also contain umbrella clauses. States should be required to meet obligations that they have entered into voluntarily.

Safeguarding state sovereignty and the right to regulate: States need political maneuvering room. The State must be in a position to take legislative and regulatory action in the public interest, inter alia to protect the environment and climate, to protect the consumer and health, or also to protect cultural diversity. More recent IIAs such as those of the United States already explicitly protect the State’s legislative sovereignty. It is made clear in the preamble to CETA that the agreement does not restrict the parties’ right to pursue justified objectives for the public good. Furthermore, numerous exceptions are defined in the text of the agreement that restrict the investment protection provisions. For instance, free movement of capital is protected under CETA. However, the State can allow restrictions on capital flows, for example if there are problems with the State’s balance of payments. Economic sanctions are allowed to enforce collective security measures. The non-discrimination requirement can be restricted should it be necessary to protect certain interests. This includes protection of public security and order, public morals and health, animals, or plants. Numerous special arrangements apply in particular for the financial services sector. The text of the agreement allows for numerous interventions

Schill, (2014), p. 18ff. CETA, Annex XX of the Financial Services Chapter, Understanding between Canada and the EU Guidance on the application of Article 15.1 (Prudential Carve-out) and Article 20 (Investment Disputes in Financial Services), published on 26 September 2014, <http:// trade.ec.europa.eu/doclib/docs/2014/september/tradoc_152806. pdf>. published on 26 September 2014,

100

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Investor-state dispute settlement (ISDS)

Prevention of abusive or frivolous claims: Frivolous and manifestly unjustified claims should be prevented. Even if the case is ultimately decided in favor of the State, every claim creates costs and ties up resources. Therefore, today’s ISDS procedures already contain mechanisms to deter frivolous claims.

Improving transparency: Transparency is a fundamental condition for the legitimacy and acceptance of IIAs and ISDS among the population. This is particularly true because these disputes are not conflicts between private actors, but between private entities and the State, which means that the public interest is directly affected. Thus far, the transparency requirements have varied markedly depending on the IIA and dispute settlement body. There have therefore been efforts at the international level for several years to improve the transparency of ISDS procedures. In July 2013 UNCITRAL adopted transparency rules for arbitration proceedings. They entered into force in April 2014. Similar rules are a component of more recent U.S. IIAs and of CETA. Under CETA, not only are all documents published (submissions by the disputing parties, tribunal decisions), but in addition, the hearings are public and stakeholders (non-governmental organizations, trade unions etc.) can submit statements. Future European investment agreements should also contain such transparency rules. But just like national court proceedings, tribunal procedures also call for a certain degree of discretion and can therefore not be completely transparent. For instance, trade secrets and privacy rights must also be protected going forward. Tribunal procedures must become more transparent. The benchmark for future IIAs is the UNCITRAL transparency rules.

CETA goes one step further than traditional IIAs. According to the text of the agreement, the unsuccessful party must bear the costs of the arbitration procedure as well as the costs of legal representation, to an appropriate level (“loser-pays principle”). This new provision for allocating procedural costs is likely to deter companies from filing frivolous claims. Provisions to minimize unjustified claims are desirable. Apportioning costs to the losing party is one possibility for preventing frivolous claims. Nevertheless, this should not lead to small and medium-sized enterprises no longer making justified claims in the framework of investor-state dispute settlement because of the financial risk.101 In addition, the loser-pays principle could entail implementation problems in practice because a party often wins with respect to some but not all of the points of the claim. Accordingly, the tribunal should in the future have some discretion for apportioning procedural costs between the parties – even where the loser-pays principle applies. If an ex-ante admissibility test is introduced for claims, this should be as simple, quick, and cost-efficient as possible. In addition, it is important to prevent any such preliminary test from being politicized. Future IIAs must deter frivolous claims. A possible mechanism is the loser-pays principle. Any preliminary test of cases must be politically neutral.

101

DIHK, Stellungnahme des DIHK zum Freihandelsabkommen zwischen der EU und Kanada, CETA. Anhörung des Ausschusses für Wirtschaft und Energie im Deutschen Bundestag, 10 December 2014, <http://www.bundestag.de/blob/345490/26609a16bbe76be fe7356275aa78daec/felix-neugart--dihk-data.pdf>.

Federation of German Industries Department for External Economic Policy

Avoidance of conflicts of interest among arbitrators: A very high degree of integrity among arbitrators is indispensable for the effectiveness and legitimacy of ISDS procedures. Only if arbitrators are neutral and independent can the settlement mechanism function. ICSID and UNCITRAL rules therefore already include corresponding tests for arbitrators. Furthermore, under CETA a binding code of conduct is intended to ensure the independence and impartiality of arbitrators. Arbitrators who infringe the code of conduct should be replaced. Moreover, the creation of a concrete list of qualified arbitrators is foreseen, among whom the disputing parties can choose. The EUâ&#x20AC;&#x2122;s future agreements must also place high standards on the selection of arbitrators. Nevertheless, disputing parties must have sufficient freedom in the selection of arbitrators. Even today, it is anything but simple to find qualified arbitrators for the majority of highly complex ISDS cases. In addition, a preliminary choice of arbitrators as provided for in CETA must not lead to a politicization of arbitration procedures. Arbitrators must be qualified, neutral, and independent, and not be affiliated with the government. Future IIAs must place high requirements on the qualifications and independence of arbitrators. For investors, there must be a sufficient choice of arbitrators so that the great diversity and complexity of cases can be dealt with properly.

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Interpretation of agreement texts: One point on which IIAs attract criticism is the variable interpretations of legal concepts by different tribunals. CETA takes this criticism into account by providing for the possibility of external consultations and ex-post interpretation of the agreement. Uncertainties in the interpretation of the agreement could be eliminated in this way and legal certainty increased. This will make rulings more predictable â&#x20AC;&#x201C; for both the investor and the State. It is also important that the traditional interpretation methods are applied. This also includes a ban on retrospective action: an interpretation to which the investor could not adjust when making his/her investment decision may not generally apply retroactively. Interpretation agreements must be restricted to future investments. In addition, such consultations must not be used to circumvent the rules and modify the content of the agreement. Only the contracting partners should have the competence to make amendments to the text of the agreement. Moreover, external consultations must not lead to a circumvention of the division of competences between the EU and the Member States (which would have to be involved in any agreement modification) as well as the division of powers among the EU institutions. To clarify interpretation issues, future IIAs can provide for consultations of the contracting parties. But such consultations must not lead to covert agreement modifications or undermine investorsâ&#x20AC;&#x2122; rights under the agreement.

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

ISDS and the relationship with national courts: IIAs help investors to protect themselves against political risks abroad. Investor-state arbitration procedures are an important instrument for settling disputes between foreign investors and governments. Especially in many developing countries, the national legal system does not guarantee foreign investors fair and equitable treatment. The national legal system often functions unsatisfactorily. However, it is also a good idea to conclude investment protection agreements between industrialized countries. International minimum standards have previously been inconsistently and incompletely taken into consideration in national court proceedings.

Introduction of an appellate mechanism: Hitherto, the rulings of tribunals have been final and binding and can only be challenged in the case of procedural errors. An appellate mechanism could increase the acceptance of ISDS procedures. CETA provides for the possibility of developing an appellate mechanism, but makes no concrete proposals for its design. In the eyes of German industry, such a mechanism should have a multilateral character. It could be constructed similar to the Appellate Body of the WTO’s Dispute Settlement Body. Such a body could in the long-term lead to investment protection law being interpreted more uniformly and to greater legal certainty for investors and States. But when appellate mechanisms are being developed, it must be borne in mind that procedural costs should not be driven up further and procedures should not be disproportionately drawn out.

IIAs should therefore not require investors to exhaust the national legislative route first. This would run counter to the purpose of ISDS, which is to settle disputes rapidly and effectively. It would be similarly problematic to require the investor to opt either for the national or the international judicial route (known as the “fork in the road approach”). The investor would thus lose the right to file the same case in another forum. Conversely, it is sensible to restrict the possibility for multiple claims. Accordingly, CETA prohibits a dispute from being heard simultaneously via the national and international judicial route. Should proceedings be launched simultaneously under an additional international agreement, the two tribunals would have to first reach an understanding in order to avoid contradictory decisions. It is right to coordinate procedures and rulings, also in order to prevent excessive compensation. Many IIAs make provision for a “cool down period” in dispute settlement. In this period, the parties must work for an amicable settlement of disputes. Only then can a claim be filed. The approach taken in CETA, which promotes the voluntary use of alternative dispute settlement mechanisms such as mediation, also fits in with this. By contrast, compulsory mediation is not a good idea since this could considerably increase the length and costs of ISDS procedures.

Future IIAs should provide for an appeal procedure. A model for an appellate body could be the WTO’s Appellate Body.

Federation of German Industries Department for External Economic Policy

Establishment of a Standing Court of Arbitration: The establishment of a standing court of arbitration for the settlement of investment disputes has been proposed by the European Commission, as well as the German Federal Ministry for Economic Affairs and Energy. German industry is open to this proposal. The EU Commission’s proposal to create this court multilaterally and to allow other parties to join is to be welcomed – even if this is a very long-term project. The following aspects should, however, be taken into account: First, investors should still be able to file claims. The system should remain an investor-state dispute system and should not turn into a state-tostate dispute system. The claimant must be entitled to select an arbitrator himself. Second, the court of arbitration should not be subject to the jurisdiction of the host country; cases might otherwise be politicized. Third, the court should, if possible, build on existing structures such as ICSID, UNCITRAL, or the Permanent Court of Arbitration (PCA). Fourth, such a court should enable appeals. And fifth, it is important that investor-state proceedings continue to be carried out as it might take years to establish such a court. The proposal of a standing court of arbitration for the settlement of investment disputes must not result in the suspension of investor protection until such a court is established. The negotiations on a standing investment court should not be allowed to slow down or block ongoing negotiations on trade and investment agreements such as the TTIP negotiations. The EU Commission’s proposal for the establishment of a standing court of arbitration should be welcomed. This proposal must not result in the suspension of investor protection until such a court is established.

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Annex I: Germany’s IIAs (129 Agreements in Effect)102 Trade Partner

Entered into Force on

Trade Partner

Entered into Force on

Afghanistan

12 Oct. 2007

Lithuania

27 June 1997

Albania

18 Aug. 1995

Macedonia

17 Sept. 2000

Algeria

30 May 2002

Madagascar

21 March 1966

Angola

1 March 2007

Malaysia

6 July 1963

Antigua and Barbuda

28 Feb. 2001

Mali

16 May 1980

Argentina

8 Nov. 1993

Malta

14 Dec. 1975

Armenia

4 Aug. 2000

Mauritania

26 April 1986

Azerbaijan

29 July 1998

Mauritius

27 Aug. 1973

Bahrain

27 May 2010

Mexico

23 Feb. 2001

Bangladesh

14 Sept, 1986

Moldova

15 June 2006

Barbados

11 May 2002

Mongolia

23 June 1996

Belarus

23 Sept. 1996

Montenegro

IIA with the former Yugoslavia continues to be valid

Benin

18 July 1985

Morocco

12 April 2008

Bosnia and Herzegovina

11 Nov. 2007

Mozambique

15 Sept. 2007

Botswana

6 Aug. 2007

Namibia

21 Dec. 1997

Burkina Faso

21 Nov. 2009

Nepal

7 July 1988

Bulgaria

10 March 1988

Nicaragua

19 Jan. 2001

Burundi

9 Dec. 1987

Niger

10 Jan. 1966

Brunei Darussalam

15 June 2004

Nigeria

20 Sept. 2007

Cambodia

14 April. 2002

Oman

4 April 2010

Cameroon

21 Nov. 1963

Pakistan

28 April 1962

Cape Verde

15 Dec. 1993

Palestinian Authority

19 Sept. 2008

Central African Republic

21 Jan. 1968

Panama

10 March 1989

Chad

23 Nov. 1968

Papua New Guinea

3 Nov. 1983

Chile

8 May 1999

Paraguay

3 July 1998

China

11 Nov. 2005

Peru

1 May 1997

Costa Rica

24 March 1998

Philippines

1 Feb. 2000

Côte d’Ivoire

10 June 1968

Poland

24 Feb. 1991

Croatia

28 Sept. 2000

Portugal

23 April 1982

Cuba

22 Nov. 1998

Qatar

19 Jan. 1999

Czech Republic

IIA with the former CSFR continues to be valid

Romania

12 Dec. 1998

CSFR

2 Aug. 1992

Rwanda

28 Feb. 1969

Dem. Rep. Congo

22 July 1971

Russia

IIA with the former Soviet Union continues to be valid

Republic of the Congo

14 Oct. 1967

Saudi Arabia

8 Jan. 1999

Dominica

11 May 1986

Senegal

16 Jan. 1966

Ecuador

12 Feb. 1999

Serbia

IIA with the former Yugoslavia continues to be valid

El Salvador

15 April 2001

Sierra Leone

10 Dec. 1966

Egypt

22 Nov. 2009

Singapore

1 Oct. 1975

Estonia

12 Jan. 1997

Slovakia

IIA with the former CSFR continues to be valid

Ethiopia

4 May 2006

Slovenia

18 July 1998

Gabon

4 July 2007

Somalia

15 Feb. 1985

Georgia

27 Sept. 1998

Soviet Union

5 Aug. 1991

Ghana

23 Nov. 1998

Sri Lanka

16 Jan. 2004

Greece

15 July 1963

St. Lucia

22 July 1987

Guatemala

29 Oct. 2006

St. Vincent and the Grenadines

8 Jan. 1989

Guinea

13 March 1965

Southern Sudan

The IIA with Sudan continues to be valid

Guyana

9 March 1994

Sudan

24 Jan. 1967

Haiti

1 Dec. 1975

Swaziland

7 Aug. 1995

Honduras

27 May 1998

Syria

20 April 1980

Hong Kong

19 Feb. 1998

Tajikistan

25 May 2006

Hungary

7 Nov. 1987

Tanzania

12 July 1968

India

13 July 1998

Thailand

20 Oct. 2004

Indonesia

2 June 2007

Togo

21 Dec. 1964

Iran

23 June 2005

Trinidad and Tobago

17 April 2010

Jamaica

29 May 1996

Tunisia

6 Feb. 1966

Jordan

28 Aug. 2010

Turkey

16 Dec. 1965

Kazakhstan

10 May 1995

Turkmenistan

19 Feb. 2001

Kenya

7 Dec. 2000

Uganda

19 Aug. 1968

Korea, Republic of

15 Jan. 1967

Ukraine

29 June 1996

Kosovo

IIA with the former Yugoslavia continues to be valid

Uruguay

29 June 1990

Kuwait

15 Nov. 1997

Uzbekistan

23 May 1998

Kyrgyzstan

16 April 2006

United Arab Emirates

2 July 1999

Laos

24 March 1999

Venezuela

16 Oct. 1998

Latvia

9 June 1996

Vietnam

19 Sept. 1998

Lebanon

25 March 1999

Yemen (Arab. Rep.)

28 March 2008

Lesotho

17 Aug. 1985

Yugoslavia

25 Oct. 1990

Liberia

22 Oct. 1967

Zambia

25 Aug. 1972

Libya

14 July 2010

Zimbabwe

14 April 2000

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Annex II: Members of the Energy Charter Conference103 Members of the Energy Charter Conference

Observers to the Energy Charter Conference

International Organizations with Observer Status

Afghanistan (2006)

Algeria

ASEAN

Albania (1991)

Bahrain

BASREC

Armenia (1991)

Canada (1991)

BSEC

Australia* (1991)

Chad (2015)

CIS Electric Power Council

Austria (1991)

China, Peopleâ&#x20AC;&#x2122;s Republic of

EBRD

Azerbaijan (1991)

Egypt

IEA

Belarus* (1991)

Indonesia (2009)

IRENA

Belgium (1991)

Iran

OECD

Bosnia and Herzegovina (1995)

Jordan (2007)

UN-ECE

Bulgaria (1991)

Korea

World Bank

Croatia (1993)

Kuwait

WTO

Cyprus (1991)

Mauritania (2014)

Czech Republic (1993)

Montenegro (2012)

Denmark (1991)

Morocco (2012)

Estonia (1992)

Niger (2015)

European Union and Euratom (1991)

Nigeria

Finland (1991)

Oman

France (1991)

Pakistan (2005)

Georgia (1991)

Palestine (2014)

Germany (1991)

Qatar

Greece (1991)

Saudi Arabia

Hungary (1991)

Serbia (2001)

Iceland* (1991)

Syria (2010)

Ireland (1991)

Tunisia

Italy (1991)

United Arab Emirates

Japan (1991)

United States of America (1991)

Kazakhstan (1991)

Venezuela

Kyrgyzstan (1992)

Yemen (2014)

Latvia (1991) Liechtenstein (1991) Lithuania (1992) Luxembourg (1991) Malta (1991) Moldova (1992) Mongolia (1997) The Netherlands (1991) Norway* (1991) Poland (1991) Portugal (1991) Romania (1991) Russian Federation** (1991) Slovakia (1993) Slovenia (1992) Spain (1991) Sweden (1991) Switzerland (1991) Tajikistan (1991) The former Yugoslav Republic of Macedonia (1996) Turkey (1991) Turkmenistan (1994) Ukraine (1991) United Kingdom (1991) Uzbekistan (1991) * Ratification of the Energy Charter Treaty is still pending. ** The Russian Federation signed the Energy Charter Treaty and was applying it provisionally until 18 October 2009 inclusive.

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Annex III: ISDS Cases of German Investors All ISDS cases initiated by German companies that are listed in the UNCTAD database for contract-based investor-state cases104 , as of end of 2014 (42105 cases)

German Investor (Case Year)

Respondent State

Reason for Conflict

Decision

Judgement on Damages

Arbitration Rules and Legal Instrument

Saar Papier (three cases) (1994, 1996, 1998)

Poland

The government blocked the import of scrap paper because of environmental considerations. The paper was fundamental for the investor and the operation of his business.

The investor won and was awarded compensation. In the second case, the State won. The status of the third case is unknown.106

2.3 mil Deutsche Mark

UNCITRAL IFV Germany-Poland

Sedelmayer (1996)

Russian Federation

Expropriation of property of the investor in Russia by the government.

In favor of the investor107

2.35 mil USD

SCC Germany-Russian Federation BIT

Siemens (2002)

Argentina

Alleged breach by the government of Argentina in relation to a contract for the production of identity cards, after which the agreement was suddenly cancelled.

In favor of the investor, which led to corruption accusations and the investor appealing the judgement and turning into a full-court agreement.108

Original decision: 237.8 mil USD plus interest

ICSID Argentina-Germany BIT

Fraport AG Frankfurt Airport Services Worldwide (two cases) (2003, 2011)

Philippines

Cancellation of a contract for the construction of an airport terminal.

Initially in favor of the State. Later, the case was reopened. The tribunal again decided in favor of the State.

The investor demanded 450 mil USD. The investor had to pay the State 5 mil USD as part of the fees and costs.109

ICSID Germany-Philippines BIT

Ed Züblin AG (2003)

Saudi Arabia

Construction of university buildings.

Settled

Unknown

ICSID Germany-Saudi Arabia BIT

Wintershall AG (2004)

Argentina

The investor argued that the government damaged his oil and gas business through the denial of dividends to the Argentine subsidiaries and the circumcision of subsidy rights, among other things.

The tribunal refused a hearing.110

ICSID Argentina-Germany BIT

Daimler Chrysler Services AG (2004)

Argentina

The conflict was based on the decision of the Argentine government to settle the current US dollar debt of the State in pesos in response to the financial crisis. Thus, the debt burden towards Daimler was significantly reduced.

The case was annulled in 2015.111

ICSID Argentina-Germany BIT

Walter Bau (2005)

Thailand

The conflict arose during the building by Walter Bau of a toll road. The investor accused the Thai government of increasing the tolls, thereby reducing the competitiveness of the road.

In favor of the investor. The case was appealed in 2011, and the aircraft of a Thai prince was confiscated at the Munich Airport as a guarantee for the outstanding payments. In 2015, a regional court in Berlin decided in favor of the investor after a rare intervention from the German government on the question of sovereign immunity.112

The original sum amounted to 29.21 mil euros plus interest and plus transaction costs (1.8 mil euros) 113 Decision after the appeal: 29 mil award against Thailand.114

UNCITRAL Germany-Thailand BIT

R.J. Binder (2005)

Czech Republic

The investor ran a transport company and the claim related to alleged fraud by Czech customs authorities which drove the investor’s company into bankruptcy.115

The case was dismissed.116

UNCITRAL Czech Republic-Germany BIT

Nordzucker (2006)

Poland

The dispute arose due to the privatization of Poland’s sugar sector. The State allegedly delayed the acquisition of two sugar factories, whereby Nordzucker lost valuable time in the search for alternative investments.

The case was dismissed.

UNCITRAL Germany-Poland BIT

Hochtief AG (2007)

Argentina

This was based on a contract for the construction of a toll road and bridges. The government adopted measures during the financial crisis, which violated the contract agreements on the calculation of toll revenue in USD with regular inflationary adjustments.

Judgement pending, the case was accepted by the Tribunal.

ICSID Germany-Argentina BIT

Gustav F W Hamester GmbH (2007)

Ghana

Joint cocoa production, whereby losses were incurred due to the failure to properly provide cocoa bean supplies, among other things.

The case was dismissed.

ICSID Germany-Ghana BIT

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

German Investor (Case Year)

Respondent State

Reason for Conflict

Decision

Judgement on Damages

Arbitration Rules and Legal Instrument

Traco Deutsche Travertinkwerke GmbH (2008)

Poland

The investor accused the government of discrimination and expropriation in the course of an investment in a state-owned enterprise.

In favor of the State.

UNCITRAL Germay-Poland BIT

Marion & Reinhard Hans Unglaube (two cases) (2008, 2009)

Costa Rica

The investor was being commissioned to develop a tourist area, when the government decided to decree that the land should be a national park and began to expropriate the territory.

Marion Unglaube’s case was decided in favor of the investor. Reinhard Unglaube’s case was decided in favor of the State.

3.10 mil USD plus interest

ICSID Costa Rica-Germany BIT

InterTrade (2008)

Czech Republic

The investor argued that, through irregularities in government regulations on forestry and in tendering procedures, the investor had experienced losses on shares at Czech forestry companies.

The case was dismissed.117

UNCITRAL Germany-Czech Republic BIT

GEA Group AG (2008)

Ukraine

The dispute arose from the accusation that the Ukrainian partners stole fuel from GEA.

First, the investor won; but the debts were not paid by Ukraine. The investor complained in a bid for compensation before ICSID and lost. The investor had to pay the costs of the State.118

In the original decision, the Ukraine was sentence to pay 30 mil USD. In the second decision, GEA had to raise 1.6 mil USD for the Ukrainian court costs.

ICSID Germany-Ukraine BIT

Inmaris Perestroika Sailing Maritime Services GmbH and others (2008)

Ukraine

The Ukrainian government violated a contract that said that the investor could use a Windjammer-Sailboat after its repair, which the investor paid for.

In favor of the investors.119

Compensation amount not public

ICSID Germany-Ukraine BIT

Nepolsky (2008)

Czech Republic

The conflict arose following the refusal of the State to issue a permit for water use.

Case was dropped by the investor.120

The investor demanded 968 mil CZK in the year 2008

UNCITRAL Germany-Czech Republic BIT

Deutsche Bank AG (2009)

Sri Lanka

The national oil companies of Sri Lanka failed to comply with their payment obligations to Deutsche Bank, which had been guaranteed by an interest rate hedging agreement.

In favor of the investor, including a differing vote of one of the arbitrators.

60.4 mil USD plus interest plus 8 mil USD in legal costs121

ICSID Germany-Sri Lanka BIT

Adem Dogan (2009)

Turkmenistan

The successful poultry farm of the investor was expropriated by the State.

In favor of the investor.

Unknown

ICSID Germany-Turkmenistan BIT

P.F. Vöcklinghaus (two cases) (2008, 2009)

Czech Republic

The investor owned 50% of a company that was supposed to build a golf course. When the company went bankrupt, the golf course was sold by the State to a third party.

The first case, under UNCITRAL, was decided in favor the State. The ICC case is pending.

UNCITRAL, ICC Germany-Czech Republic

ECE Projektmanagement (2009)

Czech Republic

The investor complained to have had conflicting and persistent problems with authorities on the construction of a shopping center.

In favor of the State.

The investor had to pay the State’s arbitration costs of 2,826,632.78 euro122

UNCITRAL Germany-Czech Republic

Bernhard von Pezold and others (Germany, Switzerland) (2010)

Zimbabwe

The investor argued that the State had expropriated timber plantations without compensation during a land reform.

Pending

ICSID Germany-Zimbabwe BIT; Switzerland-Zimbabwe BIT

Oiltanking GmbH (Germany, Peru) (2010)

Bolivia

According to the investor, the State had nationalized its interest in a pipeline company.

Settled

UNCITRAL Germany-Bolivia BIT; Bolivia-Peru BIT

ST-AD Gmbh (2010)

Bulgaria

The investor argued that the restitution of formerly expropriated land in Sofia had been unlawful and thus was indirect expropriation.

In favor of the State.

The investor had to refund the procedural costs of 1,124,384.35 euros plus 175,000 euros to the State

UNCITRAL Bulgaria-Germany BIT

AES Solar and others (from Denmark, Ireland, Luxembourg, Netherlands and United Kingdom) (2011)

Spain

The investors argue that the removal of subsidies for alternative environmental technologies breaks the joint contract agreement, reducing the profits of photovoltaic installations, solar thermal plants, and wind turbines dramatically.

Pending

UNCITRAL Energy Charter Treaty

Ampal-American Israel Corporation and others (including the Germans, who invested in the company) (USA, Germany) (2012)

Egypt

The investor complained that the State breached a contract related to its investment in a local gas company.

Pending

ICSID US-Egypt BIT; GermanyEgypt BIT

Slovak Gas Holdling, GDF International SAS and E.ON Rurhgas International GmbH (France, Germany, Netherlands) (2012)

Slovakia

Investors argue that altered regulations reduced the price of natural gas and thus led to financial losses for the investment.

Settled

Agreement not public

ICSID Energy Charter Treaty

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

German Investor (Case Year)

Respondent State

Reason for Conflict

Decision

Judgement on Damages

Arbitration Rules and Legal Instrument

Gelsenwasser AG (2012)

Algeria

The government terminated the contract with the investor on water management due to lack of progress in its investment activities.

Discontinued (for unknown reasons or reasons other than settlement).

ICSID Algeria-Germany BIT

Deutsche Telekom (2013)

India

The Indian company Devas, of which Deutsche Telekom holds 20% of the shares, won the contract for the provision of broadband internet in a remote region. Devas had agreed with an authority that they could use a certain proportion of the broadband capacity provided by satellites. This agreement was revoked after the government decided that the capacity must be held back for strategic purposes.

Pending. Other shareholders in Devas require 1.6 bn euros.

Ad hoc Germany-India BIT

Utsch M.O.V.E.R.S. International GmbH, Erich Utsch Aktiengesellschaft, und Helmut Jungbluth (2013)

Egypt

Unknown.

Pending

ICSID Egypt-Germany BIT

JĂźrgen Wirtgen, Stefan Wirtgen and JSW Solar (zwei) GmbH & Co. KG (2013)

Czech Republic

Unknown.

Pending

UNCITRAL Germany-Czech Republic BIT

Antaris Solar GmbH and Dr. Michael GĂśde (2013)

Czech Republic

The investor demanded reparation for heavy financial losses due to the introduction of retroactive, discriminatory measures, i.e. a solar tax of 26% on all income from solar energy systems.

Pending

UNCITRAL Germany-Czech Republic BIT; Energy Charter Treaty

Photovoltaik Knopf Betriebs-GmbH (2013)

Czech Republic

The investor demanded reparation for heavy financial losses due to the introduction of retroactive, discriminatory measures, i.e. a solar tax of 26% on all income from solar energy systems.

Pending

UNCITRAL Germany-Czech Republic BIT; Energy Charter Treaty

Voltaic Newtork GmbH (2013)

Czech Republic

The investor demanded reparation for heavy financial losses due to the introduction of retroactive, discriminatory measures, i.e. a solar tax of 26% on all income from solar energy systems.

Pending

UNCITRAL Germany-Czech Republic BIT; Energy Charter Treaty

RWE Innogy GmbH and RWE Innogy Aersa S.A.U. (2014)

Spain

Cuts of incentives to renewable energy involving retroactive changes in solar energy subsidies, which hurt the overall operating results of the company.

Pending

ICSID Energy Charter Treaty

Blusun S.A., Jean-Pierre Lecorcier and Michael Stein (from Belgium, France, and Germany) (2014)

Italy

Photovoltaic energy project, revisions of energy sector incentive scheme.

Pending

ICSID Energy Charter Treaty

Federation of German Industries Department for External Economic Policy

Document dated November 2014. BMWi has not published an updated version. Bundesministerium für Wirtschaft und Energie (BMWi), Übersicht IFVs, 21 November 2014, <https://www.bmwi. de/BMWi/Redaktion/PDF/B/bilaterale-investitionsfoerderungsund-schutzvertraege-IFV,property=pdf,bereich=bmwi,sprache=de, rwb=true.pdf>. 103 Energy Charter, Members and Observers, via <http://www.encharter.org/index.php?id=61> (accessed 23 July 2015). Year listed is the year the country signed the Energy Charter. 104 UNCTAD, Database of Investor-State Dispute Settlement (ISDS) (reduced version), <http://unctad.org/en/Pages/DIAE/ISDS.aspx> (accessed 1 July 2015). The database includes cases that have been submitted to and including 2014. Cases that were filed after 2014 are therefore not included in the table. A case that is known, but not yet listed in the UNCTAD database is the action of the Stadtwerke München and other companies against Spain. The case was filed at ICSID on January 7, 2015. The underlying IIA is the Energy Charter Treaty. The applicant companies have built the solar thermal power plant, Andasol 3, in the Spanish province of Granada and commissioned it in September 2011. In the course of the sovereign debt crisis, the Spanish government first reduced the green electricity promotion in 2012 with retroactive effect and abolished it completely in 2013. This has so seriously affected the profitability of the power plant that the Münchner Stadtwerke have written off their purchase completely in the Summer of 2013, amounting to 64 million euros. The company now sues for compensation. The arbitral tribunal for this case has not yet been constituted. The process has not yet started. 105 Counting multiple claims by the same investor as separate cases. Where such scenarios arise, it is indicated in the table following the name of the German investor. 106 Luke Eric Peterson, “Early Investment Arbitrations against ‚Improper‘ Use of Environmental Laws Uncovered“,in: INVEST-SD: Investment Law and Policy Weekly News Bulletin, 5 January 2004, <http://www.iisd.org/itn/wp-content/uploads/2010/10/investment_ investsd_jan5_2004.pdf>. 107 Sergey Ripinsky and Kevin Williams, “Case Summary: Mr. Franz Sedelmayer v The Russian Federation“, in: Damages in International Investment Law, November 2008, <http://www.biicl.org/ files/3932_1998_sedelmayer_v_russia.pdf>. 108 International Institute for Sustainable Development, International Investment Law and Sustainable Development: Key Cases from 2000-2010, edited by Nathalie Bernasconi-Osterwalder and Lise Johnson, p. 128-131. 109 International Centre for Settlement of Investment Disputes, Award: Fraport AG Frankfurt Airport Services Worldwide v. Republic of Philippines, ICSID Case No. ARB/11/12, p. 167, <http://www.italaw. com/sites/default/files/case-documents/italaw4114.pdf>. 110 Elizabeth Whitsitt, “German Firm Fails to Pass Jurisdictional Hurdle in Claim Against Argentina; Decision Provokes Questions about the 102

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Scope and Applicability of MFN Protection“, IISD Investment Treaty News, 5 January 2009, <https://www.iisd.org/itn/2009/01/05/ german-firm-fails-to-pass-jurisdictional-hurdle-in-claim-againstargentina-decision-provokes-questions-about-the-scope-and-applicability-of-mfn-protection/> (accessed 31 July 2015). 111 International Centre for Settlement of Investment Disputes, Decision on Annulment: Daimler Financial Services A.G. v. Republic of Argentina, ICSID Case No. ARB/05/1, p. 97 <http://www.italaw. com/sites/default/files/case-documents/italaw4092.pdf>. 112 Thomson, Douglas. “Thailand Award Confirmed after Germany Files Amicus Brief”, in: Global Arbitration Review, 11 March 2015, <http:// globalarbitrationreview.com/news/article/33613/thailand-awardconfirmed-germany-files-amicus-brief/?utm_source=Law%20 B u s i n e s s % 2 0 R e s e a rc h & u t m _ m e d i u m = e m a i l & u t m _ c a m paign=5461451_GAR%20Briefing&dm_i=1KSF%2C3922Z%2CIR RWX5%2CBN1IN%2C1> (accessed 8 July 2015). 113 Investment Treaty Arbitration, Werner Schneider, Acting in His Capacity as Insolvency Administrator of Walter Bau Ag (In Liquidation) v. The Kingdom of Thailand, UNCITRAL (Formerly Walter Bau AG (in Liquidation) v. The Kingdom of Thailand), <http://www.italaw.com/ cases/123> (accessed 8 July 2015). 114 Thomson, Douglas. “Thailand Award Confirmed after Germany Files Amicus Brief”, in: Global Arbitration Review, 11 March 2015, <http:// globalarbitrationreview.com/news/article/33613/thailand-awardconfirmed-germany-files-amicus-brief/?utm_source=Law%20 Business%20Research&utm_ medium=email&utm_campaign=5461451_GAR%20Briefing&dm_i=1KSF%2C3922Z%2CIR RWX5%2CBN1IN%2C1> (accessed 8 July 2015). 115 International Institute for Sustainable Development, Investment Treaty News (ITN), 17 January 2008, <http://www.iisd.org/pdf/2008/ itn_jan17_2008.pdf> (accessed 13 August 2015). 116 Olivet (2013), p. 10. 117 Olivet (2013), p. 10. 118 Damon Vis-Dunbar, “Ukraine Cleared of Claim by German Investor over Stolen Fuel“, in: IISD Investment Treaty News, 12.7.2011, <http://www.iisd.org/itn/2011/07/12/awards-and-decisions-4/> (accessed 8 July 2015). 119 Investment Treaty Arbitration, Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine (ICSID Case No. ARB/08/8, p. 55-56, <http://italaw.com/sites/default/files/case-documents/ italaw1411.pdf> (accessed 8 July 2015). 120 Olivet (2013), p. 10. 121 International Centre for Settlement of Investment Disputes, Award: Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/09/02, p. 124, <http://www.italaw.com/sites/ default/files/case-documents/italaw1272.pdf>. 122 United Nations Commission on International Trade Law (UNCITRAL), Award: ECE Projektmanagement International GmbH v. The Czech Republic, PCA Case No. 2010-5, p. 383, <http://www.italaw. com/sites/default/files/case-documents/italaw4258.pdf>.

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Further Sources Further BDI Literature on IIAs and ISDS Mildner, Stormy-Annika and Christoph Sprich, Position Paper. Protecting European Investment Abroad: A Roadmap for Improved International Investment Agreements, March 2014, <http://www.bdi.eu/BDI_ english/download_content/BDI_Protecting_European_Investment_Abroad.pdf>. Mildner, Stormy-Annika, Elizabeth Johnson and Christoph Sprich, The “I” in TTIP. Why the Transatlantic Trade and Investment Partnership Needs an Investment Chapter, BDI Positionspapier, 2014,<http:// www.bdi.eu/download_content/GlobalisierungMaerkteUndHandel/BDI_The_I_in TTIP_140930.pdf>. Mildner, Stormy-Annika, Elizabeth Johnson and Christoph Sprich, Background: Facts and Figures, International Investment Agreements and InvestorState Dispute Settlement, 2014, <http://www.bdi.eu/ images_content/GlobalisierungMaerkteUndHandel/ BDI_Facts_and_Figures_International_Investment_ Agreements.pdf>. Mildner, Stormy-Annika, Julia Howald and Fabian Wendenburg, Transatlantic Trade and Investment Partnership (TTIP). Myths, Facts, & Arguments, June 2014, <http://www.bdi.eu/BDI_english/download_ content/TTIP_Myths_Facts_Arguments.pdf> Visit us at: Transatlantic Trade and Investment Partnership (TTIP), BDI Webpage, <http://www.bdi.eu/BDI_english/TTIP.htm>. Facebook: Pro TTIP – Deutsche Industrie für transatlantischen Freihandel, <https://de-de.facebook. com/ industrieprottip>. Twitter: Industrie pro TTIP, <https://twitter.com/ bdi_ttip>-

International Investment Arbitration + Public Policy (IIAPP), Cases and Regulatory Impacts, <http:// www.iiapp.org/cases-regulatory-impacts/>. Investment Treaty Arbitration, Investment Treaty Cases, <http://www.italaw.com/awards/chronological>. Stockholm Chamber of Commerce (SCC) Arbitration Institute, Statistics, <http://www.sccinstitute.com/ hem-3/statistik-2.aspx>. United Nations Conference on Trade and Development (UNCTAD), Database of Investor-State Dispute Settlement (ISDS) (reduced version), <http:// unctad. org/en/Pages/DIAE/ISDS.aspx>. United Nations Conference on Trade and Development (UNCTAD), International Investment Agreements Navigator, <http://investmentpolicyhub.unctad.org/IIA>. Further Reading Abbott, Roderick, Fredrik Erixon and Martina Francesca Ferracane, Demystifying Investor-State Dispute Settlement, ECIPE Occasional Paper, No 5/2014, <http://www.ecipe.org/media/publication_pdfs/ OCC52014 1.pdf>. Bierbrauer, Elfriede, Abschluss der Verhandlungen über ein umfassendes Wirtschafts- und Handelsabkommen (CETA) zwischen der EU und Kanada, Europäisches Parlament, Generaldirektion Externe Politikbereiche, 2014 <http://www.europarl.europa. eu/RegData/etudes/IDAN/2014/536410/EXPO_ IDA(2014)536410_DE.pdf>. Broß, Siegfried, Freihandelsabkommen, einige Anmerkungen zur Problematik der privaten Schiedsgerichtsbarkeit, Hans Böckler Stiftung, Mitbestimmungsförderung, Report Nr. 4, 2015, <http://www. boeckler. de/pdf/p_mbf_report_2015_4.pdf>.

Databases to IIA and ISDS Cases International Centre for Settlement of Investment Disputes (ICSID), Cases, <https://icsid.worldbank. org/apps/ICSIDWEB/cases/Pages/AdvancedSearch. aspx>.

DIHK, Stellungnahme des DIHK zum Freihandelsabkommen zwischen der EU und Kanada, CETA. Anhörung des Ausschusses für Wirtschaft und Energie im Deutschen Bundestag, 10 December 2014, <http:// www.bundestag.de/blob/345490/26609a16bbe76befe 7356275aa78daec/felix-neugart--dihk-data.pdf>.

Federation of German Industries Department for External Economic Policy

Directorate General for External Affairs of the EU (Hg.), Investor-State Dispute Settlement (ISDS) Provisions in the EU’s International Investment Agreements, 2014, <http://www.europarl.europa. eu/RegData/etudes/STUD/2014/534979/EXPO_ STU(2014)534979_EN.pdf> Draper, Peter and Andreas Freytag, “Streitpunkt Investitionsschutz: Für und Wider des Investitionsschutzes im TTIP-Abkommen”, in: ifo Schnelldienst 12/2014 – 67. Jahrgang, 26 June 2014. Eberhardt, Pia, Investitionsschutz am Scheideweg. TTIP und die Zukunft des globalen Investitionsrechts, Internationale Politikanalyse, Friedrich-Ebert-Stiftung (Hg.), May 2014, <http://library.fes.de/pdf-files/ iez/global/10773-20140603.pdf>. European Commission, Report. Online Public Consultation on Investment Protection and Investor- toState Dispute Settlement (ISDS) in the Transat- lantic Trade and Investment Partnership Agreement (TTIP), 13 January 2015, <http://trade.ec.europa.eu/doclib/ docs/2015/january/tradoc_153044.pdf>. European Commission, Fact Sheet: Investment Protection and Investor-state Dispute Settle- ment in EU Agreements, November 2013, <http:// trade.ec.europa. eu/doclib/docs/2013/november/tradoc_151916.pdf>. Fischer-Lescano, Andreas and Johan Horst, Eur- opaund verfassungsrechtliche Vorgaben für das Comprehensive Economic and Trade Agreement der EU und Kanada (CETA), Juristisches Kurzgutachten im Auftrag von attac/München <http://www.ttip- unfairhandelbar.de/fileadmin/download/dokumente/31_10_CETA-Rechtsgutachten_Oktober_2014_Fischer-Lescano_Uni_Bremen.pdf>. Fritz, Thomas, Comprehensive Economic and Trade Agreement (CETA). Zusammenfassung und kritische Bewertung, Studie im Auftrag von ver.di, 2014 <http://www.epb.uni-hamburg.de/erzwiss/lohmann/ Fritz_CETA-Zusammenfassung.pdf>.

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Gerstetter, Christiane and Nils Meyer-Ohlendorf, Investor-State Dispute Settlement under TTIP - a Risk for Environmental Regulation?, Heinrich-Böll-Stiftung, Berlin 2014, <http://eu.boell.org/sites/default/ files/hbs-isds.pdf>. ICSID, Annual Report, 2014, <https://icsid.worldbank.org/apps/ICSIDWEB/resources/Documents/ ICSID_AR14_ENG.pdf>. Krajewski, Markus, Zu Investitionsschutz und Investor-Staat-Streitbeilegung im Transatlantischen Handels- und Investitionspartnerschaftsabkommen (TTIP), Gutachten im Auftrag der Bundestagsfraktion Bündnis 90/Die Grünen, 2014. Krajewski, Markus, Modalities for Investment Protection and Investor-State Dispute Settlement (ISDS) in TTIP from a Trade Union Perspective, Friedrich-Ebert-Stiftung 2014, < http://www.fes-europe.eu/attachments/489_FES%20Studie%20TTIP%202014%20 Brussels.pdf>. Mildner, Stormy-Annika, Christoph Sprich and Elizabeth Johnson, “Investitionsschutz im Kreuzfeuer der Kritik. Warum die USA und die EU trotzdem nicht auf das „I“ in TTIP verzichten sollten”, in: Ifo Schnelldienst 67 (12), 2014. Miller, Scott and Greg Hicks, Investor-State Dispute Settlement: A Reality Check, CSIS Working Paper, A Report by the Scholl Chair in International Business at CSIS 2014, <http://csis.org/publication/ investor- state-dispute-settlement-reality-check-working-paper>. Olivet, Cecilia, A Test for European Solidarity, the Case of Intra-EU Bilateral Investment Treaties, Transnational Institute, Januar 2013, S. 10, <http://www.tni.org/sites/ www.tni.org/files/download/briefing_on_intra-eu _bits_0. pdf>. Schill, Stefan, Auswirkungen der Bestimmungen zum Investitionsschutz und zu den Investor-Staat-Schiedsverfahren im Entwurf des Freihandelsabkommens zwischen der EU und Kanada (CETA) auf den Handlungsspielraum des Gesetzgebers (Kurzgutachten), Gutachten im Auftrag des BMWi, 22.9.2014, <http:// www.bmwi.de/BMWi/Redaktion/PDF/C-D/cetagutachten-investitionsschutz,property=pdf,bereich=b mwi2012,sprache=de,rwb=true.pdf>.

Federation of German Industries Department for External Economic Policy

Tietje, Christian and Freya Baetens, The Impact of Investor-State-Dispute Settlement in the Transatlantic Trade and Investment Partnership, Study prepared for the Minister of Foreign Trade and Development Cooperation, Ministry of Foreign Affairs, The Nether lands, Ecorys, Rotterdam 2014, <http://media.leide nuniv.nl/legacy/the-impact-of-investor-state-disputesettlement-isds-in-the-ttip.pdf>. UNCTAD, International Investment Policymaking in Transition, Challenges and Opportunities of Treaty Renewal, June 2013, <http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d9_en.pdf>. UNCTAD, Investor-State Dispute Settlement: An Information Note on the United States and the European Union, June 2014, <http://unctad.org/en/PublicationsLibrary/webdiaepcb2014d4_en.pdf>. UNCTAD, Recent Developments in Investor-State Dispute Settlement, IIA Issue Note No. 1, April 2014, <http://unctad.org/en/PublicationsLibrarz/webdiaepcb2014d3_en.pdf>. UNCTAD, Recent Developments in Investor-State Dispute Settlement, IIA Issue Note No. 1, February 2014, <http://unctad.org/en/PublicationsLibrary/ webdiaepcb2015d1_en.pdf>. UNCTAD, World Investment Report 2015, June 2015, <http://unctad.org/en/PublicationsLibrary/wir2015_ en.pdf>. Voß, Jan Ole, Brauchen Investitionen im TTIP Schutz? Überlegungen zum Investitionsschutz im transatlantischen Freihandelsabkommen, Friedrich Ebert Stiftung WISO Diskurs, November 2014, <http://library.fes. de/pdf-files/wiso/11047.pdf>.

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Federation of German Industries Department for External Economic Policy

BDI-Background Paper ISDS: Fears, Facts, Faultlines

Imprint Publisher BDI – Federation of German Industries Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu Authors Dr. Stormy-Annika Mildner, Head of Department Julia Howald, Project Manager Dr. Christoph Sprich, Senior Manager Suzanne Nuss, Intern Department for External Economic Policy Design and Implementation Sarah Pöhlmann Department of Marketing, Online and Event Management Layout Europrint Medien, Berlin Tilman Schmolke www.europrint-medien.de Print Das Druckteam Berlin www.druckteam-berlin.de Publishing Company Industrie-Förderung GmbH, Berlin Picture Credits Cover: Fontanis / fotolia.com Status September 2015 BDI-Publications-No.: 0023