Why Investors in Germany Need Investment Protection

by Dr. Richard Happ, LUTHER

It has been argued that ISDS would not be necessary between developed States. ISDS would grant foreign investors additional rights and treat them better than domestic investors.

That is – at least for Germany – not correct. And that is not due to an extraordinary high political risk, but due to a lack of protection under German law.

What very likely is not known outside Germany, and apparently not well known by ISDS critics in Germany, is that the German constitution (the “Grundgesetz” or “GG”) denies any protection to foreign companies. Under Art 19 (3) GG, only domestic companies enjoy the basic rights the constitution grants to natural persons (and even them only insofar as the nature of such rights allows). What is more, domestic companies owned by foreign state-owned companies are completely denied protection.

The consequences can be quite severe. Without basic rights, a company is left defenceless against detrimental legislation and cannot appeal to the constitutional court. This leads to a serious inequality. In the recent hearing at the constitutional court about the German nuclear phase-out in which the author participated) three companies had filed complaints: RWE and EON (both privately held German companies) and Vattenfall (state-owned German company). Whether Vattenfall, which was affected by the phase-out even worse than its domestic competitors, was entitled at all – even being a EU company – to seek protection was one of the main issues at the hearing.

However, the consequences of not being protected by basic rights even go beyond the lacking protection against legislative acts. Without basic rights, it will be difficult to seek protection against administrative acts. According to the Code of Administrative Court Procedure, an action against an administrative act (or the refusal or omission to act),

shall only be admissible if the plaintiff claims that his/her rights have been violated by the administrative act or its refusal or omission.”

It may be difficult to identify a right affected. Usually, courts therefore rely on the “catch-all” basic right of Article 2(1) GG to establish the standing of a claimant. Without basic rights, this possibility does not exist.

The problems also extend to civil law disputes. Without basic rights, it is not possible to interpret civil law “basic rights”-friendly (ie in a manner compatible with and in favour of basic rights). Where conflicting basic rights would collide (eg in labour law or libel disputes), usually courts would seek to balance those rights. But where a company does not enjoy basic rights, this balancing will always go against it.

To sum up, under the German constitution companies without basic rights are less than second-class companies. They enjoy no protection at all against legislative acts and seriously limited protection in administrative and civil law disputes.

Investment protection in Germany thus does not privilege foreign investors. It merely remedies existing shortcomings in their legal protection and thus is necessary to avoid discrimination.

Relying on treaties in front of German courts instead of investment arbitration tribunals is also no alternative. The German Constitutional Court recently decided (decision of 15 December 2015, case no. 2 BvL 1/12) that subsequent domestic legislation will override the provisions of a prior treaty, as the treaty’s provisions in Germany only have the status of domestic law. It will therefore be very difficult in a German court that a law is in breach of a treaty.

Consequently, investment arbitration merely establishes a venue and a remedy which under domestic law does not exist.

* Richard Happ, Luther Rechtsanwaltsgesellschaft, Hamburg

5 thoughts on “Why Investors in Germany Need Investment Protection

  1. Good point Richard. In my country–Portugsl–the issue is not access to legal protection (because foreigner companies and individuals are granted the same level of protection accorded to nationals) but rather a matter of access to Justice in a reasonable time. I personally have a few cases that are swamped in the administrative courts for more than five years, just waiting to get a hearing date. You would say that with the ArbitratIon-ISDS foreigner investors will be positively discriminated against national individuals and companies. That might well be true but the issue is rather: if there was not arbitration as a foreigner investment protection mechanism, most likely we would not had foreigner investment at all in the first place. We all know how critical foreigner investments are for the Portuguese economy and that foreigner investors make their investment decisions based, inter alia, on the quality and speediness of the available system to solve disputes with market agents and host states.
    Now, in the intraEU setting, Portugal is not alone in what the speediness of the judicial system is concerned.
    Is this a relevant point in Germany as well?

  2. Germany is bound by the European Convention on Human Rights (ECHR). Germany also ratified Protocol 1 to the ECHR. Art. 1(1) of the Protocol protects the property of every ‘legal person’. The second sentence thereof guarantees compensation in the event of expropriation. According to Art. 1 ECHR in conjunction with Art. 5 Protocol, the right to property is secured to everyone within German jurisdiction, ie including foreigners. The ECHR and the Protocol have the status of a federal law in the German legal order pursuant to Art. 59(2) German Basic Law (http://www.gesetze-im-internet.de/englisch_gg/englisch_gg.html#p0274).

    When Germany implements EU law, it is bound by the Charter of Fundamental Rights, see Art. 51(1), first sentence, Charter. In that connection, Art. 17 of the Charter guarantees the right to property. Again, foreigners are covered (‘everyone’).

    Also, both ECHR (in Art. 6) and the Charter of Fundamental Rights (in Art. 41) guarantee due process.

  3. Dear Dr Happ,
    your observation is formally correct, but there is of course more to the story. First, the constitutional background of the provision is that the basic rights of the German constitution are generally individual rights protecting natural persons only. Juridical persons may only rely on basic rights insofar as the scope of protection these rights applies also to juridical persons anyway. This constitutional limitation does not extend to the general civil or procedural law, however. Second, the Constitutional Court held in 2011 that EU companies are considered like German juridical persons in the sense of the constitution. Third – and most significantly -, a foreign investor incorporated under German law, is a German juridical person. This is usually the case for most if not all foreign investors. As you know, the German daughter of Vattenfall is hence claiming a violation of its basic rights in front of the constitutional court while the Swedish mother is relying on the investment chapter of the Energy Charter Treaty. Germany has signed 130 BITs since the 1960s. If the protection of foreign investors through BITs was as desperately needed as you seem to suggest one may wonder why Germany has only been sued twice so far and in both cases by the same investor.
    Many regards
    Markus Krajewski

  4. Dear Prof. Krajewski, your observations are correct, but do not rebut the points made, in particular in paras. 3 and 4. You rather confirm them. An Asian or US investor is still unprotected by the Constitution. And if it is state-owned, then even its domestic subsidiary will be unprotected. It is a fact that there is a huge gaping lacunae in the protection of foreign companies, whether one likes that or not.

  5. There is virtually no case (with the exception of state ownership, and this alone was the problem in Karlsruhe) where a foreign investor cannot easily get a German legal form and with it a constitutional protection that is more generous than in most EU states. With regard to civil law the statement is just wrong. The same holds for the administrative process where subjective rights are easily to identify, mostly statutory and not exclusively for Germans. Many flaws for such a short article!

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