Business Lunch (#05 May 2012)

Leveling Up Investors Protection

The task of improving Ukrainian investment law remains relevant for many years. Despite the fact many favorable changes have been made, the country can hardly be regarded as a friendly jurisdiction (despite numerous geographical and economic advantages!).

As Ukraine attempts to be closer to Europe and learns its experience of investment protection, we asked Dr. Sabine Konrad, an expert in international arbitration, partner of K&L Gates and one of the designees of the Government of the Federal Republic of Germany to the Panel of Arbitrators of the World Banks International Center for Settlement of Investment Disputes (ICSID), to share her views about EU investment treaties and their prospects.

What are the special features of protecting investments in the EU? Are investment disputes widespread? Are there any differences depending on the nationality of the investor (if any)?

Sabine Konrad (S.K.): Investments in EU countries are protected by national law (which is influenced to a significant degree by EU law), the European Convention on Human Rights and most importantly by bilateral investment treaties and the Energy Charter Treaty.

Differences in the protection standards vary depending on the applicable bilateral or multilateral investment treaty. Therefore, it is first and foremost a question of whether the investors home State has concluded a BIT with the State where the investment has been made and what the terms of that BIT are.

However, in an oral hearing of the Regional Court of Appeal in Frankfurt, the court indicated recently that differences between the treatment of (i) investors from one EU State that has no BIT with the EU host State and (ii) investors from an EU State that has a BIT should be solved by leveling up the protection for all EU investors. It stated that by virtue of the EU law anti-discrimination provision all EU investors should enjoy the same high BIT protection when they have invested in an EU State which has concluded at least one BIT. This means that the rights enjoyed by EU investors under a BIT are also extended to investors from other EU States even in the absence of a BIT between their home State and the host State. This includes the right to investor-State arbitration.

So the anti-discrimination provision in EU law operates like a most favored nation clause.

Worldwide, the number of investment disputes is on the rise. While disputes against Latin American states have traditionally been particularly prominent, disputes are not restricted to any one continent or country. For example, although less common, investment treaty cases against EU states are not a rarity. It shows that also stable countries can be accused of having made a mistake. It is then for the independent international tribunal to decide whether there was really a mistake. Being sued in a treaty arbitration does not mean that a State is bad. On the contrary, it is a healthy sign that international law works and that the State has submitted to independent international review. If the tribunal then comes to the conclusion that the State has done nothing wrong all the better!

How can you explain the priority of national remedies of investment protection compared to international ones?

S.K.: Ideally, an investor should always have both options: treaty arbitration and/or national courts.

Having the option of going to treaty arbitration means that the investor has an incentive to try solving its dispute with the State in the national courts without having to fear that it will lose the option of treaty arbitration.

Conversely, it creates healthy competition between national courts and international arbitration. If the national courts establish a track record of solving disputes as fairly and independently as an international tribunal, but at the same time faster and more cheaply, then many investors will opt for national courts rather than arbitration.

Thus, the availability of treaty arbitration is beneficial for the national court system.

That does not mean that the need for having access to investor-State arbitration disappears once the national courts have improved. On the contrary, only the continuing availability of treaty arbitration gives investors enough comfort to invest (and try national courts if necessary).

It is an insurance that things will remain stable and that if everything goes wrong there is still an international tribunal they can turn to.

In order to create this healthy competition, access to treaty arbitration must be comprehensive and without limits.

In particular, there should not be a requirement of exhausting domestic remedies (not even for a limited time-period), nor a fork-in-the-road clause. Such limiting provisions create distrust in national courts (which are seen as an onerous impediment en route to treaty arbitration) and have a negative impact on the investment climate.

Investment disputes are generally regarded to be very complicated. Do national courts have sufficient knowledge and experience to consider these disputes? Are the ad-hoc arbitral tribunals more professional?

S.K.: Lawyers serving as judges in national courts and as arbitrators in ad hoc tribunals each have their own specific expertise. However, national courts judges tend to focus on questions of national law only, while arbitral tribunals consist of professionals who typically have been trained in various national laws, but also have the requisite knowledge and experience in international law.

Many national courts deal with complicated cases in a very professional way.

In my opinion, arbitration is so successful not because international arbitrators are better lawyers than national judges. Far from it. I have met very impressive lawyers both amongst judges as well arbitrators.

The keys to the success of arbitration are independence and equality of arms. Each party (State and investor) has the same influence on the composition of the tribunal. Whereas a national court in the State, where the investment has been made, is funded (and the judges are appointed) by one of the parties to the dispute the respondent State. That does not create trust for foreigners.

This is by no means meant as a criticism of national courts of a particular country it is just a fact of life. I am not sure a French investor in England, or a German investor in the USA, feels completely at ease facing the State before the States own courts.

The other advantage is language. English is the lingua franca of international commerce. It makes a huge difference if a party can follow an oral hearing without of the help of an interpreter. Your client feels a lot less helpless and much more comfortable if he/she can understand the tribunal.

What are the main issues in EU cases?

S.K.: There is a great danger that the EU destroys its attractiveness for investments from other EU States. The EU Commission is trying to undermine the continuing validity of approximately 190 Intra-EU BITs (BITs between two EU member states).

The Commission has appeared in several intra-EU investor-State arbitrations as amicus arguing against the treaties.Doing so, it attacks the rule of law and undermines its own credibility. It seems to have forgotten that the EU was created to bring prosperity to its citizens and to make cross-border trade and investment more and not less attractive.

As I said earlier, the anti-discrimination provision in the EU treaties leads to leveling up by extending treaty protection across the EU. The Commission should advocate this rather than destroy treaty protection. The Commissions current conduct also gives a very bad signal to other States, especially developing States.

I hate to say it but the Commissions attack on Intra-EU investment is good for Ukraine. It gives Ukraine as a non-EU State a competitive edge over EU States such as Bulgaria or Romania. Ukraine has a great chance of attracting investments which would otherwise have gone to EU States. In order to encourage such investments, Ukraine should amend its investment law to align it with BIT standards. This would send a powerful message!

What amendments should Ukraine introduce to its investment law?

S.K.: The Ukraine investment law is a good start. However, there are some weaknesses as well. It would be beneficial if the law would be amended to include more BIT-type protections. This would give investors greater comfort because they recognize the gold standard.

Moreover, it is problematic if the application protections, which are rule of law standards, is limited to investments made in accordance with Ukrainian law. Let me be clear here, I am not advocating illegal conduct by investors. However, what we see in arbitrations is that the respondent State suddenly finds a law which nobody had ever thought of in 50 years. Or it advocates a novel interpretation of a law that makes the investment allegedly illegal and robs it of protection.

Also, on a doctrinal level, investor protection, which is basically rule of law, is not on the same level as investment incentives. While incentives can be reserved for particularly important or beneficial investments, investment protections must apply to all investments. Human rights protection also applies irrespective of whether you are a good person or not.

The States actions taken to rectify or punish illegal conduct must be measured against the rule of law standards of investment protection. Quite in the same way as the fairness of a criminal trial is measured against Article 6 of the ECHR.

Lastly, the investment law should also be amended to give access to investor-State arbitration. Access to arbitration is the most important element of investment protection. It would send a very good signal for investors, especially those from EU countries.

I have been in Ukraine several times,

I believe this country has great potential.

It has great people, art, history and this is my particular weakness divine pastries.If the investment law becomes only half as good as the pastries, the future is bright.

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