Investment Arbitration and Investor Protection

Investment arbitration and investor protection: the short answer

Investment arbitration allows a foreign investor to bring claims directly against a host state for breaches of an investment treaty, such as expropriation without compensation or unfair and inequitable treatment. German companies investing abroad can rely on Germany's extensive network of bilateral investment treaties (BITs), which began with the 1959 treaty with Pakistan, and on multilateral treaties. Within the EU, however, investor-state arbitration between an EU investor and an EU Member State is no longer available: the Court of Justice of the European Union (CJEU) held in Achmea (2018) and Komstroy (2021) that such arbitration clauses are incompatible with EU law. Germany withdrew from the Energy Charter Treaty (ECT) with effect from 20 December 2023, and the EU itself decided to withdraw by Council Decision (EU) 2024/1638.

For German investors outside the EU, investment treaties remain a valuable tool for structuring investments and as leverage in disputes with host states. For foreign investors in Germany, treaty protection depends on their home state, and EU investors must rely on EU law and German courts.

Typical protection standards

The exact wording varies between treaties and determines the scope of protection. Investors should therefore check the specific treaty between Germany, or the state of an intermediate holding company, and the host state. Older German BITs tend to have shorter and broader standards, while newer treaties define fair and equitable treatment more narrowly and expressly preserve the state's right to regulate in the public interest.

How investment arbitration works

Most treaties offer arbitration under the ICSID Convention, administered by the International Centre for Settlement of Investment Disputes at the World Bank, or ad hoc arbitration under the UNCITRAL Arbitration Rules, sometimes also under institutional rules such as those of the Stockholm Chamber of Commerce or the ICC. Treaties often require a cooling-off period of negotiation, typically three to six months, and sometimes prior recourse to local courts. Some contain fork-in-the-road clauses, under which choosing local courts excludes arbitration.

ICSID awards are subject only to the annulment procedure within ICSID and must be recognised by all contracting states as if they were final domestic judgments. Non-ICSID awards can be challenged at the seat and enforced under the New York Convention. Enforcement against states faces sovereign immunity, which protects assets used for public purposes. See our article on enforcing foreign arbitral awards.

Intra-EU investment arbitration after Achmea

In Achmea (CJEU, judgment of 6 March 2018, Achmea, C-284/16), the Grand Chamber held that Articles 267 and 344 TFEU preclude a provision in an agreement between Member States under which an investor from one Member State may bring proceedings against another Member State before an arbitral tribunal. The case arose from a reference by the German Federal Court of Justice in setting-aside proceedings concerning an award seated in Frankfurt.

In Komstroy (CJEU, judgment of 2 September 2021, Komstroy, C-741/19), the Court extended this reasoning to the ECT, stating that Article 26(2)(c) ECT must be interpreted as not applicable to disputes between a Member State and an investor of another Member State concerning an investment in the first Member State. In PL Holdings (CJEU, judgment of 26 October 2021, PL Holdings, C-109/20), it held that a Member State cannot circumvent this by concluding an ad hoc arbitration agreement with identical content.

Most Member States, including Germany, signed an agreement in 2020 to terminate intra-EU BITs. In practice, investment arbitration between EU investors and EU Member States has become largely ineffective within the EU: German courts set aside or refuse to enforce such awards, and arbitration under intra-EU treaties may be declared inadmissible. Tribunals outside the EU framework have sometimes taken a different view, which creates enforcement conflicts in third countries.

Germany's withdrawal from the Energy Charter Treaty

Germany notified its withdrawal from the ECT on 19 December 2022, and the withdrawal took effect on 20 December 2023. The Council of the EU adopted Decision (EU) 2024/1638 on 30 May 2024 on the withdrawal of the Union; under Article 47(2) ECT, a withdrawal takes effect one year after the depositary receives the notification. However, under the sunset clause in Article 47(3) ECT, the treaty continues to apply to investments made before the withdrawal took effect for a further 20 years. Energy investors from non-EU ECT states in Germany, and German investors in non-EU ECT states, may therefore still be protected for existing investments.

The withdrawal reflected concerns that the ECT protected fossil fuel investments and conflicted with climate policy, as well as the intra-EU issue. For energy companies, the practical consequence is that new investments outside the EU need protection under BITs or other treaties rather than the ECT.

Several other EU Member States have also withdrawn from the ECT, while others remain parties and have approved its modernisation, as recital 8 of the Council Decision anticipates. The resulting patchwork means that energy investors should check, for each host state and each investment date, whether the ECT still applies, whether the sunset clause covers the investment and whether an intra-EU element excludes arbitration altogether. Where coverage is doubtful, contractual protections, such as stabilisation clauses and arbitration clauses in concession agreements, gain importance.

Who and what is protected

Treaty protection depends on two definitions: investor and investment. Most German BITs define investors as German nationals and companies with their seat in Germany. Some treaties require real economic activity or control, while others accept a mere registered seat. Shareholders are often protected as investors in their own right, which allows indirect claims through holding structures, although tribunals examine carefully whether such structures were created for treaty shopping.

Investments are usually defined broadly as every kind of asset, including shares, loans, intellectual property, concessions and contractual rights with economic value. ICSID arbitration additionally requires an investment within the meaning of Article 25 of the ICSID Convention, which tribunals interpret with varying strictness. Ordinary sales contracts are generally not investments, while long-term projects with capital commitment and risk usually are. Investments must also comply with the host state's laws when they are made; investments obtained through corruption may lose protection.

Steps when a dispute with a host state arises

1. Preserve rights. Document the investment, the state measures and communications, and avoid steps that could trigger a fork-in-the-road clause.
2. Analyse treaties. Identify applicable treaties, protection standards, dispute resolution options and procedural prerequisites such as cooling-off periods.
3. Notify the dispute. Send a formal notice of dispute to the host state, which starts the cooling-off period and often opens negotiations.
4. Assess quantum and funding. Investment arbitration is expensive and takes several years; damages experts and, where appropriate, third-party funding should be considered early.
5. Plan enforcement. Identify state assets not protected by immunity before filing, because collecting an award against a state can be the most difficult part.

Negotiation remains important throughout. Many investment disputes end in settlements, often after the claim has been filed and the state has assessed its exposure. A credible treaty claim strengthens the investor's position in negotiations with the host state.

Investment arbitration against Germany

Germany itself has been a respondent in investment arbitration, most prominently in ICSID proceedings brought by a Swedish energy company in connection with the nuclear phase-out, which were ended by a settlement. Such cases illustrate that regulatory measures in the energy sector can lead to treaty claims. After Komstroy, claims by EU investors against Germany under the ECT are no longer viable within the EU legal order, but investors from non-EU states with treaty protection may still bring claims.

Illustration: a hypothetical German manufacturer holds a production plant in a non-EU country that has a BIT with Germany. The host state revokes the plant's operating licence without a hearing and grants it to a local competitor. The company sends a notice of dispute under the BIT, negotiates during the cooling-off period, and, when negotiations fail, files a claim at ICSID for breach of fair and equitable treatment and indirect expropriation. Throughout, it documents its investment and the state's conduct to support its claim.

The EU's approach to investment protection

The EU has competence for foreign direct investment as part of its common commercial policy and negotiates investment protection in its trade agreements. Its newer agreements replace traditional investor-state arbitration with an Investment Court System with appellate review and more detailed protection standards that preserve the state's right to regulate. The EU also promotes a multilateral investment court. For German investors, existing BITs of Germany with third countries remain in force until replaced by EU agreements, under the framework of EU law on bilateral investment agreements.

Investment treaties also interact with commercial arbitration. A state-owned company's breach of contract is not automatically a treaty breach, but an umbrella clause or the state's use of sovereign power can bring it within the treaty. Investors with state contracts should therefore consider both contractual and treaty remedies and coordinate their strategy.

Political risk insurance, including the German government's investment guarantees, complements treaty protection. Such guarantees typically require that the host state has an investment treaty with Germany or offers comparable legal protection, which is another reason to check treaty coverage early.

Finally, litigation funding is common in investment arbitration, because claims are often large and proceedings long. Funding agreements and disclosure requirements under institutional rules should be considered at the outset.

How TRW & Co helps with investment protection

We advise German companies on investment protection when structuring foreign investments, analyse treaty coverage and nationality planning, and support clients in disputes with host states, from notice of dispute and negotiations to investment arbitration and enforcement. We also advise on the consequences of the intra-EU case law for existing claims. Our work connects with our international arbitration and energy and infrastructure practices. See also ICC arbitration seated in Germany. To discuss an investment, contact us.