1. Foreign Investment – a Major Component of Today’s Economy
Cross-border investments often involve major projects, such as construction of a long-distance gas pipeline, a power plant or financing and development of communications infrastructure. Such capital intensive investments are inherently subjected to a number of risks throughout their lifetime. In addition to those risks, foreign investors may experience political risks arising from changes in legislation and government policies that may specifically target foreigners, in particular after a regime change. In such cases, however, litigating in front of the host state’s domestic courts may not always be an option for a foreign investor due to concerns of potential bias and unfair treatment by state courts of the very state against which the claim has been brought.
This need has led the majority of states to adopt legislation offering investors an option to bring disputes to a neutral international tribunal. Such rights arise from various bi- or multilateral investment treaties that states have concluded with each other. These treaties usually provide for investor-state disputes to be resolved by arbitration as the most obvious alternative to state court litigation.
Despite the substantial foreign direct investment in Austria, so far only one claim based on an investment treaty has been brought against it as a host country. The claim that was filed in July 2015 was based on the bilateral investment treaty between Austria and Malta, whereby the majority shareholder of an Austrian bank requested compensation for damages resulting from criminal investigations against the bank and its management. The tribunal deciding in the dispute ruled in favour of Austria and dismissed the claim on the basis that it lacked jurisdiction to hear the case.
Due to the substantial investments of Austrian companies, especially in the CEE region, a number of investor-state disputes have been initiated by Austrian nationals as claimant.
2. International Centre for the Settlement of Investment Disputes (ICSID)
2.1 The 1965 ICSID Convention
Most investor-state arbitrations are conducted under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID), a neutral and autonomous forum for the resolution of disputes between states and nationals of other states created in 1965 by the ICSID Convention. ICSID is an autonomous body, but is closely linked to the World Bank. As of March 2019, 162 states have signed the ICSID Convention, 154 of which have already deposited their instruments of ratification, acceptance or approval. This may be seen as compelling evidence of the importance of ICSID in the context of international investment. Austria signed the ICSID Convention on 17 May 1966. The Convention entered into force on 24 June 1971.
2.2 Legal Framework for Cases brought before the ICSID
While originally most disputes were referred to ICSID by way of arbitration agreements in contracts between states and foreign investors, most of the cases brought before ICSID today are based on arbitration provisions contained in bilateral or multilateral investment treaties.
2.3 Overview of the Prerequisites for Cases to be resolved by ICSID
In order to have a dispute resolved by ICSID, three conditions have to be met:
Both parties have in some way have given their consent to arbitration in accordance with the ICSID Rules;
One of the parties is a Contracting State of the ICSID Convention while the other is a national of another Contracting State; and
The dispute to be resolved arises directly out of an investment.
Notably, the instrument containing the parties’ consent to arbitration may provide for further prerequisites.
3. The Prerequisites in Particular
3.1 Consent to Arbitrate
It is important to consider that the fact that a state is a party to the ICSID Convention does not mean that this state has given its blanket consent to refer any investment dispute to arbitration. Rather, express consent is required, either in national legislation, applicable bi- or multilateral investment treaties, or directly by way of an agreement with the relevant foreign investor.
It is certainly advisable for investors to include an arbitration clause in contracts with states or state entities so as to preclude comprehensively any challenges to jurisdiction. However, if investors – for one reason or another – fail to do so and the host state has given its consent to arbitration in an applicable treaty, the investors may base the jurisdiction of the arbitral tribunal on that treaty.
Where national legislation provides for arbitration for investment disputes or the host state is party to an investment treaty providing for arbitration, these provisions are generally seen as offers to arbitrate, which a foreign investor is free to accept. This acceptance may be given by a written statement; similarly, the investor is also considered as having accepted the offer to arbitrate by filing a request for arbitration with ICSID.
3.2 Contracting State and National of Another Contracting State
To become a Contracting State to the ICSID Convention a signatory state has to deposit its instrument of ratification, acceptance, or approval. As of March 2019, 154 out of the 162 signatories to the Convention have fulfilled this requirement.
Issues may arise under this requirement where an investment agreement has not been entered into by a Contracting State but merely by one of its constituent subdivisions or agencies. In order to allow such entities to agree on the jurisdiction of ICSID, the Contracting State has to fulfill additional requirements: It has to designate that subdivision or agency to ICSID and must either give its approval to the agency´s or subdivision´s consent to arbitrate, or else notify ICSID that its approval is not required. Thus, if an investor is contracting with a state agency or subdivision, it is advisable for such an investor to make sure this is included in the contractual documentation containing the agreement to arbitrate.
A “national of another Contracting State” is either a citizen of another signatory state to the ICSID Convention, or an entity or organization incorporated in another Contracting State.
3.3 Legal Disputes Arising out of an Investment
The term “investment” is not defined in the ICSID Convention. While the definitions adopted by arbitral tribunals vary significantly, it is nevertheless possible to derive from their case law a number of features that investments in the sense of the ICSID Convention typically have in common. An often cited illustration of what constitutes an investment was provided by the tribunal in Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, which noted that investments will typically involve contributions, a certain duration of performance of the contract, participation in the risks of the transaction and the contribution to the economic development of the host State.
Specifics of investor-state arbitration
ICSID arbitration is special in that the involvement of state courts is generally undesired: Investors pursuing a claim against a state do not wish to submit to the laws of that state, usually due to concerns. States on the other hand are usually unwilling to submit to the laws of another state. Thus, an ICSID arbitration is entirely de-localized: The law of the place of the arbitration does not have any impact on it. It is the arbitral tribunal that decides on interim measures, without any assistance from any local courts.
Moreover, there is no review of the arbitral tribunal´s award by state courts. Rather, the ICSID Convention provides for a review procedure by a second tribunal – a so-called “ad hoc Committee”. This committee is constituted of three members that are appointed by the Chairman of the Administrative Council. It has the power to annul an award in full or in part; it cannot, however, modify an award. There is an exhaustive list of five reasons on which the annulment of an ICSID award may be based:
The tribunal was not properly constituted;
The tribunal manifestly exceeded its powers;
Corruption on the part of a member(s) of the tribunal;
A serious departure from a fundamental rule of procedure; and
- The award does not contain the reasons on which it is based
There is no review on the merits of the award.
Notably, ICSID is currently undergoing an important reform process concerning its Regulations and Rules. It was launched by the Secretariat in 2016 by inviting Member States to submit preliminary suggestions. ICSID is also aiming to keep the process transparent by publishing such proposal as well as comments it has received from the general public. In August 2018, it published a synopsis of the proposed changes as well as consolidated draft rules and invited its Member States to submit comments until the end of the year. The finalized reform package will be presented to the ICSID Administrative Council which will ultimately decide whether to adopt the amendments.
4. Bilateral Investment Treaties (BITs)
One of the main reasons for the increase in ICSID arbitration is the ever-increasing number of Bilateral Investment Treaties (BITs). As indicated by the name, those treaties are concluded between two states and confer special rights and protections on investors being nationals of, or incorporated under the law of, one of the state parties to the contract.
As investment treaties are negotiated and concluded between two or more sovereign states, their contents may vary greatly. Nevertheless, there tend to be at least some common features in most treaties.
4.2 General Content
Among the substantive rights of protection usually granted in BITs are the following:
Fair and equitable treatment: This is a very broad standard providing for a wide range of procedural and substantive protections, i.a., action in good faith, stability, consistency, protection of legitimate expectations, transparency, procedural propriety and due process, freedom from coercion and harassment;
Full protection and security: The host state shall take active measures to provide physical protection for the investment from state organs as well as private acts;
Protection against direct and indirect uncompensatedexpropriation or nationalization: Governments are only allowed to expropriate an investment under clearly defined and restrictive conditions: it must be for a public purpose, it must not be done in a discriminatory manner, and prompt and adequate compensation has to be provided;
National treatment: The host state must accord to foreign investors and their investments treatment that is no less favorable than that accorded to nationals of the host state;
Most favored nation treatment: The host state must treat foreign investors of another state party to the treaty in a manner that is at least as favorable than that in which they treat investors from third states.
Free transfer of funds: Funds related to the investment must be freely transferrable in and out of the host state. Notably, some treaties accord protection only to outward transfers.
4.3 Various Dispute Resolution Procedures
Investment treaties usually provide for disputes to be resolved by arbitration, yet there might be some requirements that an investor has to meet before arbitral proceedings may be commenced. Some treaties establish that the parties must first attempt to resolve the dispute through negotiation and consultation, usually within a period of about three to six months. This consultation period is commonly triggered by a letter from the investor to the state. Sometimes treaties provide for a number of different options open to the parties on how to proceed to resolve their dispute. The parties, or perhaps only the investor, may then choose to refer the dispute to ICSID, another arbitral institution, an ad hoc arbitral tribunal, or to commence proceedings before a local court. Investors therefore have to exercise care in selecting the approach that best suits their purposes, as an investment treaty that provides for different options frequently also provides that once a party has chosen one of those options, the other options are waived (fork-in-the-road provision).
4.4 Austria as Party to Investment Treaties
Austria is a party to more than 55 BITs. While their provisions do seem to follow particular patterns, they may nevertheless differ significantly from one another.
Some refer disputes to the exclusive jurisdiction of ICSID, while others allow for UNCITRAL arbitration. Many of Austria’s treaties additionally allow the parties to submit their disputes to arbitral institutions such as the ICC International Court of Arbitration or the Arbitration Institute of the Stockholm Chamber of Commerce.
Most of the BITs Austria has entered into do not require an investor to first exhaust all local remedies before commencing arbitration and some even expressly waive such a prerequisite. With respect to the applicable law, some of Austria’s BITs provide, on the one hand, that investment disputes are governed by the applicable treaty, by the national law of the host state as well as international law and agreements entered into in relation to the investment. Other BITs provide for international law as the law governing the substance of the dispute, including the applicable treaty and the principles of international law.
Austria’s BITs typically provide for protection against both direct and indirect uncompensated expropriation and allow it only for public purposes and under the condition that due process is guaranteed. Notably, while most of Austria’s treaties allow investors to assert their claims in arbitration proceedings against the respective host state regarding all aspects of expropriation, the BITs with the Russian Federation, the Czech Republic, Slovakia and Hungary only permit arbitration on the amount and mode of payment of compensation.
Austria’s BITs typically provide for the national treatment standard and include a most favoured nation clause. Notably, however, many of them stipulate that the protection accorded under these standards does not extend to the benefits of membership of a customs union or free trade area, taxation agreements and legislation. With respect to the active protection of foreign investment against adverse actions by state organs and private parties, Austria’s BITs do not provide for uniform wording. Rather, the standards range from merely “full protection” to “full protection and security,” or even “full and constant protection and security.”
Many of Austria’s BITs require that potential claimants have their seat within the territory of a contracting party and have made or are making an investment in the territory of Austria. Investors are often defined as entities that are controlled or influenced by nationals of a contracting party, whereby such control is sometimes required to be “decisive” or “dominant.” Most of Austria’s bilateral investment treaties stipulate a very broad definition of investment encompassing every kind of asset owned or controlled by an investor.
5. BITs and Law of the European Union
Under the Lisbon Treaty, foreign direct investment – as a matter of common commercial policy – has fallen exclusively under the competency of the EU, meaning that only the EU may adopt legally binding acts concerning that subject matter. This raises questions as to the legal status of the BITs already concluded by EU Member States.
EU Regulation No 1219/2012 establishes procedures for the transition from BITs concluded between EU Member States and third countries and treaties with third countries concluded by the EU itself (extra-EU BITs). While EU Member States are required to take steps necessary to eliminate any existing incompatibilities between EU law and their extra-EU BITs, the agreements that were signed before 1 December 2012 may be maintained in force until replaced by an investment agreement between the EU and the respective third state. Extra-EU BITs into which Member States have entered between that date and 9 January 2013, i.e., the effective date of the Regulation, may be authorized by the European Commission provided that they do not conflict with EU law principles, that the EU has not yet decided to start negotiations with the respective third country and that they will not constitute a serious obstacle to such potential future negotiations. These conditions must be satisfied also with respect to extra-EU BITs signed by Member States after 9 January 2013. In addition, however, the respective Member State must notify the European Commission about the negotiations and request its approval. The Commission may request to participate in the negotiations and will expect to be kept updated on their progress. Before signing an agreement, the Member State has to send it to the Commission, which will assess whether it meets the aforementioned requirements.
Apart from extra-EU BITs, there are nearly 200 BITs in force between EU Member States (intra-EU BITs) which provide for an investor-state dispute settlement clause. Austria is party to 12 such BITs which were ratified by the Member States before their accession to the European Union1.
The European Court of Justice (ECJ), in its landmark decision of 6 March 2018, in the so-called Achmea case, ruled that investment arbitration clauses between EU Member States are incompatible with EU law. The ECJ reasoned that while an arbitral tribunal constituted under an intra-EU BIT may have to interpret EU law, it is not authorized to commence a preliminary ruling procedure before the ECJ, thereby requesting it to provide such interpretation. The preliminary ruling procedure, however, is crucial for the coherence, autonomy and full effectiveness of EU law. Therefore, the ECJ claimed that the arbitration clause in the BIT between the Netherlands and the Slovak Republic is “such asto call into question not only the principle of mutual trust between the Member States but also the preservation of the particular nature of the law established by the Treaties, ensured by the preliminary ruling procedure provided for in Article 267 TFEU, and is not therefore compatible with the principle of sincere cooperation.”
The ECJ’s reasoning is brief and general and leaves many questions unanswered. In particular, it is unclear what the effects of this decision on already pending investment protection cases are. The decision, however, had a very powerful political effect as it prompted most EU Member States, including Austria, to pledge to terminate their intra-EU bilateral investment treaties.
Meanwhile, in its own trade agreements with third states such as Canada, Singapore, and Vietnam, the European Commission has adopted a new approach as to investment protection. It replaces arbitration by specialized courts, a notion that has become known as the Investment Court System (ICS). This new system consists of a standing court with a permanent seat including also an appellate body with state-appointed judges. Furthermore, the European Commission is trying to find support in the international community for its idea of a single Multilateral Investment Court (MIC) established on the same principles. Currently, the idea is being discussed at Working Group III of the he United Nations Commission on International Trade Law (UNCITRAL).
Importantly, to change the existing framework, ICS will first have to survive a challenge before the ECJ. In September 2017, Belgium requested the court to issue an opinion on ICS’s compatibility with EU law. It has become particularly relevant in light of the Achmea judgement of the ECJ on arbitration clauses in intra-EU BITs and their effect on the autonomy of EU law, as discussed above. In a recent opinion, Advocate General Bot found that it does not jeopardize the ECJ’s exclusive jurisdiction on the interpretation of EU law, it does not infringe on the principle of equal treatment, and is not in conflict with the principle of effectiveness of EU competition law. It remains to be seen if the ECJ will agree with his assessment.
1 Austria has BITs in force with following countries: Hungary, Poland, Czech Republic, Slovakia, Estonia, Latvia, Lithuania, Romania, Bulgaria, Slovenia, Malta and Croatia.