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

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