OECD Investment Policy Reviews: Georgia

Report

OECD Investment Policy Reviews

15 December 2020

3. Domestic regulatory framework and investor protection

Abstract

This Chapter focuses on several core investment policy issues – the non-discrimination principle, the degree of openness to foreign investment, protections for investors’ property rights and mechanisms for settling investment disputes – under Georgian law and Georgia’s investment treaties. It also addresses the government’s approach to data protection and cybersecurity. It takes stock of recent achievements, identifies remaining challenges and makes recommendations to address them. In terms of investment treaty policy, this Chapter provides an overview of Georgia’s investment treaties, analyses the main substantive protections and investor-state dispute settlement provisions in these treaties and identifies considerations for possible policy reforms.

Summary and policy recommendations

The legal framework for investment has undergone substantial remodelling in the past three decades. Formerly a Soviet republic, Georgia is now a thriving liberal market economy. Georgia is now open to foreign investment in most sectors. Limited restrictions remain, notably in the agricultural sector in light of a ban on foreign ownership of agricultural land. The remaining sectoral restrictions nonetheless fall within the same sectors as those found in both EaP and OECD countries.

With the vast majority of de jure barriers to FDI now removed, the government’s investment policy challenge lies in improving the overall climate for investment. Significant strides have been taken in this area too. The Law on Promotion and Guarantees of Investment Activity (Law No. 473-IS of 12 November 2006, as amended, hereafter the Investment Law) is a centrepiece of these developments. It seeks to establish a level playing field as between domestic and foreign investors. Together with several other investment-related laws, it sets out non-discrimination guarantees, protections from expropriation, rights to free transfer of funds abroad and a limited set of investor obligations. The country’s land laws provide a clear and predictable framework for property rights, which is another important pillar for the investment climate. Well-developed laws and institutions on data protection and cybersecurity, which are edging closer to alignment with EU rules in this area, are also noteworthy.

A number of important challenges remain. Foremost among these are the ongoing efforts to reinforce the independence, accountability and capacity of the country’s judiciary. Legislative amendments adopted by Parliament in December 2019 seek to address some of the remaining concerns but there is a need for sustained momentum for systemic judicial reform to build investor confidence in the court system. Other important challenges include ensuring that intellectual property rights are enforced effectively, realising universal land registration and continuing to improve the legal and institutional infrastructure that supports alternative dispute resolution services. Recommendations in each of these areas are set out in Box 2.1.

Protections afforded under Georgia’s investment treaties are another important part of the legal framework for investment. These treaties grant protections to certain foreign investors in addition to and independently from protections available under domestic law to all investors. Georgia is a party to 33 investment treaties in force today. Like investment treaties signed by many other countries, Georgia’s investment treaties typically protect investments made by treaty-covered investors against expropriation and discrimination. They also give covered investors access to investor-state dispute settlement (ISDS) procedures, including international arbitration, in cases where they claim that the government has infringed these protections.

Georgia is participating actively in various inter-governmental discussions regarding possible reforms of investment treaties, including UNCITRAL’s Working Group III on ISDS Reform and the modernisation process for the Energy Charter Treaty, a prominent multilateral treaty to which Georgia is a party. Like many other countries, however, Georgia still has a significant number of older investment treaties in force with vague investment protections and ISDS provisions that may create unintended consequences in ISDS cases and ultimately undermine reform efforts. Many countries have substantially revised their investment treaty policies in recent years in response to these concerns as well as increased public questioning about the appropriate balance between investment protection and sovereign rights to regulate in the public interest and the costs and outcomes of ISDS. Recommendations to reconsider several aspects of the government’s approach to investment treaties in this context are set out in Box 2.1. Whatever approach the government takes towards investment treaty making, these treaties should not be seen as a substitute for long-term improvements in the domestic business environment including through measures to improve the capacity, efficiency and independence of the domestic court system, the quality of the legal framework, and the strength of national institutions responsible for implementing and enforcing such legislation.

Policy recommendations

Assess the impact of foreign ownership restrictions on agricultural land on investment in the agri-business sector and on participation of that sector in global value chains (as described in Chapter 4). In light of those findings, reconsider whether such restrictions fulfil their role and whether other non-discriminatory measures could instead be used to protect small landholders and other stakeholders.
Consider the merits of consolidating and harmonising the various laws that address expropriation. Expropriation protections are spread across several laws that include varying levels of detail for the scope of these protections. The government may also wish to consider whether there are good policy reasons for providing different standards of protection from expropriation for certain foreign investors under its investment treaties than for other investors under its domestic laws.
Continue to prioritise efforts to improve the regime for intellectual property (IP) rights, especially enforcement measures. Investors continue to report concerns with widespread software piracy and unlicensed online content, as well as the level of technical capacity among local judges, lawyers, prosecutors, police officers and customs officers responsible for IP enforcement. The government is well aware of these concerns and designs initiatives to address them. Improving investor confidence with IP enforcement in the country is a precondition for attracting further investment in R&D, new technologies and innovation.
Sustain momentum for systemic judicial reform. Concerns regarding the integrity of the judicial appointment process and the capacity of the courts to deliver quality outcomes continue to affect investor confidence in the court system. The government should continue to work closely with a wide range of stakeholders, including civil society organisations and international partners, to address persisting concerns. Low levels of trust in the judiciary affect the overall investment climate in a number of ways, not only the use of court services to adjudicate investment disputes but also perceptions about the integrity of court assistance with IP enforcement, arbitration and mediation, among other areas.
Evaluate potential amendments to the Arbitration Law (Law No. 1280-IS of 19 June 2009, as amended). Areas for possible legislative clarification include the scope of the “public order” ground for refusing enforcement of an arbitral award under Article 44 of the Law. It may also be prudent for the government to take stock of court decisions and user experiences under the Law over the past decade to assess the merits of these potential amendments to improve legal certainty, user experiences and the attractiveness of arbitration in Georgia.
Support initiatives to improve public perceptions and awareness of arbitration and mediation as credible alternative dispute resolution options. Negative public perceptions of arbitration institutions, arbitrators and courts that harken back to experiences under earlier arbitration laws is hindering the development of arbitration in the country. Existing arbitration institutions may be able to complement the government’s own efforts to foster a stronger culture of independence, competence and integrity in this sector.
Strengthen land administration services by completing and, if possible, expediting the universal land registration reform and improving options to resolve land disputes, including the framework for mediation introduced as part of the 2016 land reforms.
Maintain data protection and cybersecurity as a national policy priority. Georgia has relatively well-developed laws and institutions in these areas of increasing importance for all investors. It is nonetheless important to build on recent achievements by monitoring the effectiveness of the new State Inspector Service, seeking new opportunities to collaborate with international partners to exchange best practices and boost the government’s in-house technical capacity in these areas, and ensuring that existing laws evolve to align with international standards such as the Budapest Convention on Cybercrime.
Continue to reassess the government’s priorities for investment treaty policy and consider possibilities for introducing further clarification of key provisions in older investment treaties. These treaties should be calibrated to reflect an appropriate balance between investment protection and preserving the government’s right to regulate while also contributing to Georgia’s efforts to attract FDI. Georgia may wish to consider whether provisions in its existing investment treaties appropriately safeguard the government’s right to regulate and avoid unintended interpretations in ISDS disputes. Clearer specification of key provisions, where needed, would help to reflect government intent and ensure policy space for government regulation.
Continue to participate actively in and follow closely government and other action on investment treaty reforms at the OECD, UNCITRAL and ECT modernisation process. Consideration of reforms and policy discussions on frequently-invoked provisions in ISDS cases and whether investment treaties are achieving their intended purposes are of particular importance in current investment treaty policy. Emerging issues such as the possible role for trade and investment treaties in fostering responsible business conduct as well as ongoing discussions about treaties and sustainable development also merit close attention and participation.

Georgia is open to foreign investment, with limited exceptions

An open and non-discriminatory investment environment is a central tenet of an attractive investment climate. It helps to ensure that all investors are treated alike in like circumstances, irrespective of their ownership. One of the concepts derived from the principle of non-discrimination in the context of foreign investment is that of national treatment, which requires that governments treat foreign-owned or foreign-controlled enterprises no less favourably than domestic enterprises in like situations (OECD, 2015[1]).

No economy, including Eastern Partner (EaP) and OECD economies, accords market access or national treatment to foreign-owned enterprises in their territories across the board. Despite the potential benefits of FDI being generally accepted, and FDI attraction having become an important policy tool to finance development in many economies, concerns over the loss of national sovereignty and the protection of national interests continue to lead governments to discriminate or impose statutory restrictions on foreign direct investments. While there have been great FDI liberalisation efforts in manufacturing industries, where governments have more readily accepted the benefits of FDI, some services and primary sectors still remain partly off limits to foreign investors, although this varies greatly across economies.

The following analysis uses the OECD FDI Regulatory Restrictiveness Index (the FDI Index) to assess and benchmark market access and exceptions to national treatment (Box 3.1). This index gauges the level of restrictiveness of an economy’s statutory measures on FDI by looking at four main types of restrictions: 1) foreign equity limitations; 2) discriminatory screening and approval mechanisms for foreign investment; 3) restrictions on the employment of key foreign personnel; and 4) other operational restrictions (e.g. restrictions on branching and capital repatriation or land ownership). The index is not a full measure of investment climate attractiveness – a range of other factors come into play, including how FDI rules are implemented. Nonetheless, FDI rules are a critical determinant of an economy’s attractiveness to foreign investors: removing restrictions may not always lead to the hoped-for surge in FDI inflows, but high levels of restrictions are almost certainly likely to deter investors. Benchmarking FDI restrictions helps governments to see how they compare with their peers in terms of the restrictiveness of their FDI regimes.

Box 3.1. The OECD FDI Regulatory Restrictiveness Index

The OECD FDI Regulatory Restrictiveness Index seeks to gauge the restrictiveness of an economy’s FDI rules. The FDI Index is currently available for more than 60 economies, including all OECD and G20 members, allowing one to compare FDI policies and identify potential areas for reform. It is commonly used on a stand-alone basis to assess the restrictiveness of FDI policies when reviewing candidates for OECD accession and in OECD Investment Policy Reviews, including reviews of new adherent countries to the OECD Declaration on International Investment and Multinational Enterprises. The index does not provide a full measure of an economy’s investment climate as it does not score the actual implementation of formal restrictions and does not take into account other aspects of the investment regulatory framework, such as the extent of state ownership, and other institutional and informal restrictions which may also impinge on the FDI climate. Nonetheless, FDI rules are a critical determinant of an economy’s attractiveness to foreign investors; and the index, used in combination with other indicators measuring the various aspects of the FDI climate, may help to explain variations among economies in attracting FDI.

The FDI Index covers 22 sectors, including agriculture, mining, electricity, manufacturing and main services (transport, construction, distribution, communications, real estate, and financial and professional services). For each sector, the scoring is based on the following elements:

the level of foreign equity ownership permitted;
the screening and approval procedures applied to inward foreign direct investment;
restrictions on key foreign personnel (e.g. CEO, technical expert); and
other operational restrictions (e.g. land ownership, branching, profit repatriation).

Restrictions are evaluated on a 0 (open) to 1 (closed) scale. The overall restrictiveness index is the average of the 22 individual sectoral scores. The discriminatory nature of measures, i.e. when they only apply to foreign investors, is the central criterion for scoring a measure. State ownership and state monopolies, to the extent they are not discriminatory towards foreigners, are not scored.

Source: (Kalinova, Palerm and Thomsen, 2010[2]) .

Overall, openness to FDI varies greatly across economies and regions (Figure 3.1). Larger economies and those in the Asia-Pacific region tend to be more restrictive on average. Smaller European economies tend to the most open to FDI as measured by the FDI Index. Substantial variation is observed across EaP countries, with Georgia and Armenia among the most open. Georgia is particularly restrictive in agriculture and forestry, given the ban on foreign ownership of agricultural land (Figure 3.2). Foreign-controlled locally established enterprises are, nevertheless allowed to lease land for agricultural use or to obtain special permission from the government to purchase agricultural land on the basis of an investment plan. In Georgia, foreign ownership of agricultural land is restricted to 50% of equity. Overall, Georgia’s sectoral restrictions fall within the same sectors as those found in both EaP and OECD countries.

Relative to the size of its economy, Georgia attracts more investment than many other countries at a similar level of openness (Figure 3.3), although this performance is less pronounced when FDI stocks are measured on a per capita basis. Remaining restrictions may nevertheless be impeding investment into key sectors for structural transformation and economic development, particularly for agricultural land.

Figure 3.1. Georgia is one of the most open economies to foreign investment

Figure 3.2. FDI restrictions by sector broadly match those found in OECD countries

Figure 3.3. As a small, open economy, Georgia performs relatively well in attracting FDI overall

Competition policy is still a work in progress

Many areas of Georgia’s policy framework influence the attractiveness for investors as well as the potential benefits investment can bring to its economy. While this Chapter provides an in-depth assessment of investment policies, other aspects of domestic market regulation can also have a significant impact on the investment climate. This is notably the case for competition policy. A full assessment of the regime for competition would go beyond the scope of this review and could merit a separate competition assessment by the OECD. This section provides an overview of some of the issues that were identified by stakeholders and in discussions with Georgian authorities concerning competition.

Effective competition is essential for a dynamic business environment, in which firms are willing to invest and take risks. Creating and maintaining a competitive environment requires a sound and well-structured competition law, an effective competition authority that enforces this law, and, more widely, economic policies that respect the principles of competition and avoid unnecessarily restricting it.

Unlike the progress made in other areas affecting the investment climate, Georgia’s framework for competition remains underdeveloped. The size and structure of the economy plays a role, since it is often harder to prevent dominance in a small market with fewer players. The World Economic Forum’s 2019 Global Competitiveness Index notes that, while Georgia is very open externally, it scores poorly on the extent of market dominance internally and, in particular, on competition in services (World Economic Forum, 2019). When a few players dominate many sectors of a relatively small economy, cartels can be expected to be a pervasive problem. This comes at a high cost to Georgia’s consumers, who will pay 10-20% higher prices for goods and services (OECD et al., 2020). As cartels often target public procurement, public services also come at a much higher cost to taxpayers. In Georgia, long-term concession projects are frequently granted without any competitive process. This is detrimental to attracting the best provider of a required service. The principles of fair and effective competition should inform how the public sector procures its goods and services and awards concessions for the provision of services using public resources. Planned amendments to the Law on Public Procurement make some improvements to the procurement process but oversight could be strengthened (Transparency International, 2020a).

Notwithstanding these, notable advancements to competition policy have been made recently. In September 2020, the parliament approved important amendments to the 2014 Law on Competition, addressing key gaps in the previous law and moving closer to relevant EU legislation. Notably, the amendments expand the scope of the law to cover nearly all sectors, and give the Competition Agency of Georgia (GCA) more authority to implement and enforce competition policy. This is in line with Georgia’s commitments under the Association Agreement with the EU to maintain comprehensive competition laws and an authority responsible and appropriately equipped for effective enforcement of these laws (EU, 2014).

One impediment to competition has been non-uniform application of relevant regulations and procedures. Enforcement of competition policy in regulated sectors (including energy and water supply, banking, and telecommunications) falls to sector regulators (rather than the GCA), which previously were not bound by the competition law, relying instead on limited provisions on competition in sector-specific laws. Sector regulators will now be guided by the amended Law on Competition. The amendments also clarify which cases fall under the authority of the sector regulator or the GCA, reducing previous uncertainties. The amendments also expand the coverage of the law to include securities market relations, but the law still does not apply to labour and intellectual property relations (Government of Georgia, 2020).

While the basic legal provisions on prohibited agreements, abusive conduct, and merger control are in place, the GCA was unable to exercise its mandate effectively as it lacked the powers to undertake key activities. This resulted in very limited enforcement. The GCA reviewed only seven mergers and conducted 15 investigations of antitrust infringements in 2016-18 (OECD et al., 2020). The competition agency should have the necessary power and tools to uncover illegal practices and to impose sanctions for infringements, so as to ensure a reasonable level of deterrence, while being proportionate.

The amended Law on Competition makes important improvements to the GCA’s enforcement capabilities, authorising new tools and sanctions for non-compliance. Undertakings are now obliged to provide the GCA with all relevant information for the agency to conduct evaluations and monitoring, and the GCA has the authority to impose fines if the requested information is not provided within the designated timeframe. The GCA can now also conduct unannounced on-site inspections (“dawn raids”) following court decisions. Effective dawn raid powers are an indispensable tool for uncovering illegal cartels. Cartel agreements cannot be established based on parallel conduct observations or other indirect evidence alone. They require direct proof of communication or agreement. The GCA now also has the authority to apply financial penalties in merger cases, if not informed of the merger or if undertakings do not implement mandated structural or behavioural measures within the relevant period (Government of Georgia, 2020). Concerns about the GCA’s possible abuse of these powers seem to lack a realistic foundation and should in any case be managed – as in other jurisdictions – by having proper oversight and recourse mechanisms in place.

All enforcement instruments would benefit from more flexible, and, when necessary, longer legal deadlines. The length of investigations was extended in the amended law from three to six months (with an extension for complicated cases of 18 months, up from 10 months). Even the extended period is very short by international standards. When necessary, longer timelines would enable better enforcement cases based on international best practice.

Other changes in the amended Law on Competition include the formation of an independent elected board for the agency, and the expansion of the GCA’s mandate to include enforcement of a new law on anti-dumping (passed in July 2020). The GCA is also expected to be the enforcement body for consumer protection (see below). Amendments of the public procurement act foresee that the staff of the dispute council will be subordinated to the GCA.

Notwithstanding the previous limitations on its authority, the GCA is very active in competition advocacy. The agency regularly conducts trainings, seminars and conferences across all target groups, including the private sector, public officials, media, lawyers, judges, and carries out market studies. It also actively comments on draft laws and regulations, with the aim of reducing or abolishing unnecessary restrictions on competition, and its enforcement action addresses state actors when they commit competition law violations. In all these investigations, the GCA is acknowledged by the legal community as a fair and transparent actor that strictly adheres to the rule of law.

Effective enforcement requires an adequately resourced, skilled and independent competition authority, which fulfils its mandate free from any political interference. This requires highly qualified enforcers who act in an institutional environment that assures independence from political or private stakeholder interventions. The GCA needs to further establish its reputation for impartial and neutral enforcement against public and private restrictions to competition. Its resource constraints, including finances to support competitive salaries and to procure the needed IT and office equipment, need to be addressed for it to attract and retain highly qualified staff.

The extension of responsibilities not only for competition enforcement, but also for public procurement, anti-dumping and consumer protection may lead to a dilution of the competition mandate. Adequate staffing, funding and training for these additional tasks would need to assured (OECD et al., 2020).

Consumer protection

A competitive market economy is key to maximising consumer welfare, but complementary policies are often needed to make markets work better for consumers. Empowered consumers can, in turn, play an important role in improving economic performance and driving innovation, productivity and competition (OECD, 2014). Georgia’s Association Agreement (AA) with the EU includes commitments to achieve compatibility with European legislation and instruments on consumer protection. This is important for fostering cross-border transactions, by assuring consumers that their rights related to health, safety, and economic interests are guaranteed. In particular, the AA specifies gradual approximation to a number of EU guidelines on product safety, marketing, contract law, financial services (in particular distance of marketing), consumer credit, redress, and enforcement. It also includes commitments to improve cooperation among relevant national authorities responsible for enforcement of laws on consumer protection (EU, 2014).

No specific law currently regulates consumer protection issues in Georgia. A previous law on consumer protection, adopted in 1996, has been invalid since 2012, but ceased to be enforced several years prior. In line with its commitments under the AA, the government has been working on a new draft Law on Consumer Protection, which will mandate the GCA with enforcement of consumer rights. Parliament has received technical support from the EU and the German Development Agency (GIZ) in drafting the law (European Commission, 2018). There have been repeated delays to its adoption by the parliament however.

Once the law is adopted, capacity building for GCA staff will be key to ensuring proper enforcement of consumer protection. EU directives on consumer protection include technical regulations on, for example, a consumers’ right of withdrawal in distance and off-premise contracts, and specific requirements on consumers’ rights to information, and classifications of misleading or aggressive commercial practices. As the GCA has not previously worked on consumer protection, comprehensive training will be required for the agency to be able to identify and sanction non-compliance. Ensuring effective enforcement will also require wider outreach to raise public awareness on consumer rights. It is important that the GCA continue and deepen initial work already begun to improve its capacity in this field (European Commission, 2020b; Government of Georgia, 2019).

As with wider competition policy, ensuring effective coordination between the GCA and other government agencies involved in consumer protection will be central to proper enforcement. This includes with the Central Bank, which has taken several steps under the AA obligations to ensure effective protection of consumers in financial services. These include outreach to consumers on financial education and risks related to financial imprudence, over-indebtedness and foreign currency borrowing (European Commission, 2019).

Investment protections under the Investment Law and related legislation

Georgian law provides a number of core protections to investors. Most of them appear in the Law on Promotion and Guarantees of Investment Activity (Law No. 473-IS of 12 November 1996, as amended, hereafter the Investment Law) with several other laws providing additional content to the scope of these protections.

Like many other countries, Georgia has enshrined in its domestic law a principle of non-discriminatory treatment as between foreign and domestic investors. Article 3(1) of the Investment Law provides that foreign investors will enjoy the same rights and guarantees as Georgian nationals “except for cases defined by legislation”. This basic rule establishes Georgia’s commitment to a level playing field for all investors and send positive signals regarding an open investment policy, without prejudice to the possibility for the government to adopt limited exceptions through its laws in order to pursue specific policy objectives. This provision in the Investment Law reinforces an equality guarantee in Article 11 of the Constitution. This and other constitutional rights apply equally to Georgian nationals and foreign nationals living in Georgia. The Law of Georgia on the Elimination of All Forms of Discrimination (Law No. 2391-IIs of 2 May 2014) also prohibits all forms of discrimination, including based on race, language, citizenship, origin, place of birth or residence. Some stakeholders indicate that anti-discrimination laws are enforced unevenly, especially with respect to women and LGBTI people in the workplace (Freedom House, 2020). Formal exceptions to these rules on non-discrimination, however, are relatively rare. They include restrictions on foreign ownership of agricultural land (discussed further in Chapter 4) and market access restrictions in sectors listed in Article 9 of the Investment Law.

Another important legal protection for investors is the government’s guarantee of protection from expropriation. Article 7 of the Investment Law provides that investors may only be “deprived” of their investments “in cases directly determined by law, by court decision and upon urgency determined by the organic law and only with appropriate compensation”. It provides an avenue for investors to appeal decisions on “deprivation” to the Georgian courts in cases where investors are not covered by an applicable investment treaty. Article 8 provides that compensation for deprived investments shall be the equivalent of “real market value” immediately before the taking and shall be freely transferable abroad.

Several other laws affect investors’ rights with respect to expropriation. The Constitution protects rights to own and inherit private property (Article 19). It provides that expropriation of private property shall only be possible “in cases of pressing social need as directly provided for by law, based on a court decision or in the case of urgent necessity”. Compensation for expropriation shall be “preliminary, full and fair” and exempt from taxes and fees. It also requires the government to provide compensation to investors if it expropriates their property. Compensation should reflect the market value of the property. Disagreements regarding the valuation of expropriated property may be settled through arbitration, if the parties agree, or through domestic courts.

The Law on the Expropriation of Property for Pressing Social Needs (Law No. No 2349-რს of 23 July 1999, as amended) provides clarifications regarding the expropriation powers in the Constitution. The Law sets out an exhaustive list of public works for which the government may seek to expropriate private property (Article 2). Many of the listed categories relate to public infrastructure works (building roads, highways, pipelines and railways; laying communications or transmission cables). More general categories include works required for national security, extraction of natural resources or building other “structures and facilities for pressing social needs”. The Law sets out in detail the procedures for carrying out an expropriation, including publication requirements, preconditions, valuation and payment of compensation and court review of disputed valuations. A separate law enacted in 1997 covers the rules for expropriations in situations of urgent necessity such as natural disasters and epidemics (see Law on the Procedure for Expropriation of Property upon the Urgent Necessity of Ensuring Public Needs, Law No. 1054-Iს of 11 November 1997).

Sectoral laws also refer to government powers to take property. The Oil and Gas Law (Law No. 1892-IIs of 16 April 1999, as amended), for example, allows the State Agency for Oil and Gas to apply to Georgian courts to “alienate” private property from landowners for the benefit of investors in oil and gas reserve areas (Articles 1(a.i.), 20(3)-(5)). This power applies in cases of “public necessity” and subject to “appropriate compensation”. It provides that this process shall take place “according to the Constitution”.

These various laws provide a relatively high degree of clarity for investors on rights in the event of an expropriation and the procedures that will apply. They also identify specific situations where expropriation by ministerial order or court judgment can occur, which further promotes legal certainty. Amendments to these laws in the past two decades have gradually increased the level of specificity and addressed issues with interpretation. Some stakeholders have also reported that disputes regarding expropriation are relatively uncommon (US Department of State, 2019).

The government may nonetheless wish to consider whether further clarifications could be made to expropriation regimes in these laws through legislative amendments or changes to related by-laws, policy documents or guidelines. Expropriation regimes that Georgia has established for some foreign investors under its investment treaties and expropriation regimes under investment laws in other countries – including in Myanmar and Egypt – are more specific in some areas including:

whether investors are protected from indirect expropriation in the form of government measures that have an effect equivalent to direct expropriation without formal transfer of title, ministerial order or court decision and, if so, how indirect expropriation is defined and whether there are any exceptions (e.g. for non-discriminatory regulatory actions designed to achieve legitimate public welfare objectives);
the valuation methodology for determining market value, including the valuation date, and whether any specific factors should be taken into account when determining this value such as the investor’s conduct, the reason for the expropriation or the profits made by the investor during the lifetime of investment;
whether compensation for expropriation includes interest and, if so, how that interest should be calculated; and
the distinction between compensable and non-compensable expropriations, if appropriate, to establish a minimum level of policy space for the government to implement public policy objectives without being constrained by obligations to compensate affected investors.

The government may also wish to consider whether there are good policy justifications for treating certain foreign investors that may benefit from expropriation provisions in Georgia’s investment treaties differently to other investors under its domestic laws.

Further harmonisation or consolidation of the various laws that address expropriation should also be considered. The Georgia 2020 strategy describes the Investment Law as “outdated and disconnected from reality”, noting that investor protections are “scattered among several normative acts”. It signals the government’s plan to update the Investment Law to address these and other concerns.

Another area for possible clarification is the interaction between the Law on the Expropriation of Property for Pressing Social Needs and the Investment Law. While the former Law provides clarifications on expropriation rights and procedures with reference to the Constitution, it does not refer to the expropriation regime in the Investment Law. The government should consider consolidating all relevant provisions on expropriation into the Investment Law or directly cross-referring to specific laws on expropriation in the Investment Law to reduce the scope for confusion and improve legal certainty. Consistent terminology should also be adopted. While the Investment Law refers to “deprivation” of property, most other laws refer to “expropriation” and Georgia’s investment treaties often refer to “nationalisation”. Confusion on terminology may also arise in sectoral laws. For example, the Oil and Gas Law appears to use the term “alienate” as a synonym for expropriation while the Law on Agricultural Land Ownership (Law No. 4848-IIს of 25 June 2019, as amended) uses “alienate” to refer to a landowner’s rights to sell, transfer or otherwise dispose of land.

Aside from expropriation and non-discrimination, the Investment Law also guarantees that investors may freely transfer and repatriate in foreign currency profits and other funds associated with their investment activities (Article 3(6)). Repatriation is subject to obligations to pay taxes and other government income associated with investment activities. The Law also guarantees that investors may open bank accounts, take out loans and own various forms of real and intangible property (Article 3).

Investor rights under the Investment Law are subject to a general obligation for investors to comply with Georgian law. This is a common feature of investment laws in other countries and Georgia’s investment treaties. Some investment laws in other countries have gone further in terms of investor obligations in areas such as responsible business conduct, corporate governance expectations and contributions of investment activities to sustainable development goals. Consideration of further specification on investor obligations in the Investment Law may align with the government’s aims to achieve Georgia’s climate change and green growth targets, including under the OECD Declaration on Green Growth. Chapter 6 on responsible business conduct address some of these issues in further detail.

Strengthening the protection and enforcement of intellectual property rights

An effective regime for registering, protecting and enforcing intellectual property (IP) rights is a crucial concern for many investors. As recognised in the Georgia 2020 strategy, strong IP rights provide investors with an incentive to invest in research and development (R&D) for innovative products and processes. These rights also instil confidence in investors sharing new technologies, for instance through joint ventures and licensing agreements. Successful innovations may be suffused within and across economies in this way, and contribute to elevating productivity and growth. This is a key goal of promoting innovation and R&D by small and medium-sized enterprises under the government’s SME Development Strategy 2016-2020. At the same time, IP rights entitle their holders to the exclusive right to market their innovation for a certain period. The protection granted to intellectual property therefore needs to strike a balance between the need to foster innovation and society’s interest in having certain products, such as pharmaceutical products, priced affordably and widely available.

Georgia has a relatively extensive legal framework for IP rights protection that generally complies with international standards in at least six main areas: trademarks, patents, industrial designs, copyright, geographical indications and plant varieties. Amendments to laws in all of these areas came into effect in 2018. The Constitution (Article 20) also recognises the protection of intellectual property rights as a constitutional guarantee.

At the international level, Georgia joined the World Intellectual Property Organisation (WIPO) in 1979 and the World Trade Organisation (WTO) in 2000. It is an active participant in the WTO Council for Trade-Related Aspects of Intellectual Rights. It has acceded to several key WIPO-administered IP treaties and made declarations regarding the continuing application of others originally signed by the USSR.1

The Georgian National Intellectual Property Centre (Sakpatenti) is responsible for defining the national agenda on IP policies. Sakpatenti is an independent legal entity with special status under Georgian public law. It has contributed to drafting and enacting over 30 laws, by-laws and guidelines for IP rights in various areas since its establishment in 1992. In its first 25 years of operation, Sakpatenti issued 8621 patents and registered more than 60,000 trademarks, 2254 applications for design and 208 applications for new plant varieties (Sakapenti, 2017). Sakpatenti also ensures the deposit of copyrighted works and registers Georgian geographical indications and appellations of origin. It has been a key driving force behind the considerable progress made in the past two decades to bring Georgia’s IP rights regime into line with international standards.

Another important driver of this progress has been Georgia’s co-operation with international partners. Georgia undertook to improve various aspects of its IP rights regime as part of the Deep and Comprehensive Free Trade Agreement (DCFTA) with the European Union, which it signed in June 2014 and brought into force in January 2016. The DCFTA attests to Georgia’s commitment to implement international IP agreements effectively, provides for international co-operation on a range of issues including customs powers related to IP enforcement and sets a range of substantive and procedural standards for the treaty partners to meet. Commitments in the DCFTA prompted a suite of amendments to Georgian IP laws that came into force in January 2018 aimed largely at improving the scope of certain IP rights and suppressing IP infringements. These commitments have also prompted Georgia’s accession in 2018 to the TRIPS amendment on measures to ensure better access to essential medicines that arose from the Doha Declaration.

Alongside DCFTA, Georgia has concluded a number of bilateral agreements with other countries on IP issues such as simplifying patent validation and mutual recognition of geographical indications. Protection for geographical indications and appellations of origin abroad is a particularly important issue for investors in the Georgian wine industry and other parts of the country’s agricultural sector. Sakpatenti co-operates actively with IP agencies from the European Union and the United States, among others, as well as WIPO, to build in-house technical capacity, conduct awareness-raising activities, develop quality control tools and improve its e-filing system and electronic database for IP applications and other procedures.

These efforts over the past two decades have greatly improved the transparency, legal certainty and quality of outcomes under the Georgian IP rights regime for the benefit of all users, including investors. This appears to be having a positive impact on investor engagement. A study in 2011 by WIPO on IP trends in 23 transition economies including Georgia noted that Georgia had witnessed an increase in the number of applications for patents filed by foreign applicants, which suggested that more foreign investors were preparing or had recently entered the Georgian market when compared to other markets in the study (WIPO, 2011). More recent data published by WIPO for the period 2009-2018 indicates that patent activity remains relatively regular despite some decline since a peak in 2010, but trademark and industrial design filings have seen steady increases over the same period, especially by foreign applicants (WIPO, 2020).

Some issues nonetheless remain for improvement, most notably the effectiveness of enforcement measures for IP infringements. Georgia is not listed as a priority country for IP enforcement issues in the USTR’s Special 301 Report or the EU Commission’s annual report on IP protection in third countries. But some stakeholders have reported concerns with the availability of unlicensed software and other pirated content online, as well as the level of technical capacity among local judges, lawyers, prosecutors, police officers and customs officers responsible for IP enforcement (US Department of State, 2019; USAID, 2011a; USAID, 2011b; UNDP, 2010). Counterfeiting and software piracy can have real economic consequences through reduced sales and profitability for manufacturers of branded goods, depreciation of brand image, increased costs for brand protection and disincentives for investment in IP-intensive sectors. These concerns are partly reflected in Georgia’s international rankings in this area. Georgia ranks 94^th out of 141 countries in terms of IP Protection in the World Economic Forum’s 2019 Global Competitiveness Report, well below its aggregated rank of 74^th across all 103 indicators in the Report. It ranks 48^th out of 129 economies in the Global Innovation Index 2019 prepared by WIPO, INSEAD and Cornell University.

The government is aware of these issues and seeks to address them. Legislative amendments mandated under the DCFTA have tightened sanctions for IP infringements and given new powers to rights holders (licencees and owners of IP rights) to apply to Georgian courts for the removal or destruction of offending objects together with compensation for damage suffered. These amendments take enforcement powers in Georgia beyond the TRIPS Agreement and bring them in line with the EU’s IP Enforcement Directive No. 2004/48/EC (Centre for European Policy Studies, 2016). New provisions on liability for intermediary service providers (e.g. online service providers) align with the EU’s E-Commerce Directive No. 2000/31/EC. The new amendments have also strengthened powers for customs officials to seize and detain suspected infringing goods at the border in line with similar powers in EU Regulation No. 608/2013 on customs enforcement of IP rights (see the Law on Border Measures related to Intellectual Property, Law No. N1723-Iს of 13 December 2017).

Sakpatenti works with government agencies and international partners to step up training and international co-operation as part of efforts to implement these new laws (Sakpatenti, 2018, 2019). Since 2015, Sakpatenti has hosted an annual conference on “Georgia against Counterfeiting and Piracy” with assistance from the Commercial Law Development Program (CLDP) of the US Department of Commerce and funding from the EU4Business Program. This annual event is a platform for national and international experts to discuss developments in the global fight against counterfeiting and piracy. CLDP arranges annual training workshops conducted by US judges for Georgian judges on adjudicating civil IP infringement cases. Sakpatenti offers distance learning and in-person training sessions to supplement these annual workshops. WIPO holds annual workshops to “train the trainers” in Sakpatenti’s IP Training Centre. Further IP training and awareness-raising activities are scheduled in 2020 under the government’s Action Plan for the Implementation of DCFTA.

The Revenue Service of the Ministry of Finance, which is responsible for customs enforcement at the border, works closely with the World Customs Organisation (WCO) to share experiences and best practices with customs officials from other countries in the International Customs Co-operation Council. It contributes to the WCO’s interactive database of goods specifications to assist customs agents in distinguishing genuine and counterfeit goods. Customs agents participate in regular training sessions held by WCO, as well as EU and US customs officials, on IP border enforcement, counterfeiting and fraud.

The government should continue to prioritise efforts to strengthen IP rights protections and enforcement as an important part of its goal to improve the overall investment climate. Building on the success of the DCFTA, the government should consider IP rights commitments in future trade and investment agreements as avenues for impetus to continually improving the domestic framework. The government should continue to support a wide range of international collaboration and co-operation in this field. It could also consider developing roadmaps for future implementation of additional WIPO-administered treaties such as the Trademark Law Treaty, the Singapore Treaty on the Law of Trademarks, the Patent Law Treaty, the Nairobi Treaty and the Marrakesh Treaty to Facilitate Access to Published Works for Persons Who Are Blind, Visually Impaired, or Otherwise Print Disabled.

Software piracy and unlicensed online content remains an important challenge to tackle. Around 95% of software for sale in Georgia as of 2010 was pirated and illegal (UNDP, 2010). The government has since sought to lead by example through its agreement with Microsoft in 2014 for the use of genuine Microsoft software licences for all Georgian government workstations (WIPO, 2016). It should also support the passage of legislation on e-commerce and amendments to the Copyright Law (Law No. 2112 of 1999, as amended) to address liability for internet service providers, drafts of which have already been prepared by Sakpatenti and the Ministry of Economy and Sustainable Development. Other initiatives could also be considered. IP agencies in other countries have reported encouraging outcomes with infringing website lists, which seek to encourage advertising brokers and networks to avoid placing advertisements on websites that infringe copyrights on a commercial scale. Sakpatenti or the Ministry of Internal Affairs, as the responsible entity for enforcing IP rights within the country along with the Financial Police, could be given powers to order copyright-infringing websites to be blocked. Sakpatenti should continue to explore such initiatives to tackle software piracy as part of its existing dialogues with international partners.

Sustained momentum is needed to build on recent improvements for the independence, accountability and capacity of the judiciary

The ability to make and enforce contracts and resolve disputes efficiently is fundamental if markets are to function properly. Good enforcement procedures enhance predictability in commercial relationships by assuring investors that their contractual rights will be upheld promptly by local courts. When procedures for enforcing contracts are overly bureaucratic and cumbersome or when contract disputes cannot be resolved in a timely and cost effective manner, companies may restrict their activities. Uncertainty about the enforceability of lawful rights and obligations raises the cost of capital, thereby weakening firms’ competitiveness and reducing investment. It can also foster corruption in the court system.

The government identifies its efforts to strengthen the judiciary as a key priority under the Georgia 2020 strategy, which notes that “a strong and independent judiciary is essential to efforts to improve the country’s business and investment environment, especially in terms of protecting property rights”. Four reform packages over the past decade have targeted various aspects of justice system reform. A key outcome of these reforms has been the increased level of independence and de-politicisation of the High Council of Justice (HCOJ). The HCOJ is a consultative body on the country’s justice system that is responsible for, among other things, appointing and dismissing judges, recruiting judges, developing policy recommendations and defending the interests of the judiciary. Established in 1997 under the Organic Law on Common Courts (Law No. 767IIs of 1997), power in the HCOJ resided in the hands of a few. Appointees from the executive branch dominated the HCOJ’s activities in practice. One individual – the Chairperson of the Supreme Court – was responsible for nominating judicial members of the HCOJ rather than the self-governing Conference of Judges as envisaged by the previous Constitution. Part of Georgia’s constitutional reform in 2017, which culminated in the adoption of a new Constitution in 2018, introduced new procedures for the selection and appointment of the Supreme Court judges that vested Parliament with the final decision, established selection criteria for judicial candidates and increased public-facing transparency.

The existing framework for adjudication of civil disputes in Georgian courts nonetheless continues to suffer from a number of significant problems despite the recent reforms. Foremost of these are persisting concerns with the independence, accountability and capacity of the HCOJ and the judiciary (European Commission, 2020b; Georgian Young Lawyers’ Association, 2020; US Department of State, 2020 and 2019; Council of Europe, 2019; Public Defender, 2019b; Coalition, 2017; Transparency International, 2015; EU Commissioner for Human Rights, 2014; see also Chapter 6 on responsible business conduct). Survey feedback collected in 2018 from over 2,000 Georgian citizens from all parts of the country suggests that trust in judges is low; many participants considered that judges are not free from political pressure (EMC, CRRC and IDFI, 2018). Stakeholder interviews conducted by the OECD Secretariat in Tbilisi for this Review also indicated that many investors in the country continue to perceive court processes as slow, inefficient, lacking in transparency and hampered by a lack of technical expertise. All of these issues affect public trust in the judicial system. They are among the most pressing concerns for investors in their assessments of the investment climate in Georgia.

The government is aware of these challenges and tackles them head on with backing from the highest political levels. Amendments under the fourth wave of judicial reform were finalised and adopted by Parliament in December 2019. The amendments have introduced changes to improve procedures for appointing judges, managing caseloads for individual judges and adjudicating disciplinary breaches by judges who communicate improperly with third parties with a view to influencing the outcome of a case. The Ministry of Justice has also drafted legislative amendments to address issues in the criminal justice system including the independence of prosecutors. Various stakeholders including civil society organisations and international partners including the Council of Europe, the European Union and the United States have supported the government on justice reforms over several decades and have broadly welcomed the progress made to date.

It will be crucial for the government to sustain the momentum for systemic judicial reform. This starts with the full implementation of the fourth wave of judicial reforms adopted by Parliament in December 2019 but must extend to addressing a number of remaining issues, especially regarding the integrity of the judicial appointment process. Several global indicators attest to these persisting concerns. Georgia ranks, for instance, 42^nd of 126 countries in the 2020 edition of the World Justice Project Rule of Law Index. Despite ranking first among 14 countries in the Eastern Europe and Central Asia region and 7^th of 42 countries in the Upper Middle Income category in the Index, Georgia’s performance is well below the Upper Middle Income category median score for “no improper government influence” in the civil and criminal justice system indicators. The World Economic Forum’s Global Competitiveness Index 2019, in which Georgia ranks 80th out of 141 economies on independence of the judiciary, also highlights this issue. According to Freedom House’s 2020 Freedom in the World Report, “despite ongoing judicial reforms, executive and legislative interference in the courts remains a substantial problem, as does a lack of transparency and professionalism surrounding judicial proceedings.” The Heritage Foundation’s 2020 Index of Economic Freedom also cites concerns about judicial independence as the main factor holding back progress in Georgia on the rule of law and greater economic freedom, prosperity and opportunity.

The government should continue to work closely with stakeholders to address persisting concerns. Various stakeholders are following closely the implementation of the recent reforms, especially those relating the HCOJ (Georgian Young Lawyers’ Association, 2020; OSCE, 2019 and 2020; EMC and IDFI, 2019a and 2019b; Venice Commission, 2019; Coalition, 2017). The government should continue to strive towards a truly fair, transparent and merit-based appointment process for judges in line with the detailed recommendations made by the Council of Europe’s Venice Commission and several civil society organisations. These observers have raised concerns that cronyism and a lack of transparency still plagues the culture surrounding judicial appointments despite recent legislative reforms. In particular, in December 2019 the Parliament appointed 14 candidates for life tenures to the Supreme Court through a process that lacked transparency. Events such as these continue to degrade public trust in the judiciary. Aside from setting rules that prevent events like this from happening in the future, changes to legal education and public awareness are key determinants in the success of these legal-institutional reforms. They may also be the only way to invert deep-seated attitudes regarding fairness and efficiency in the Georgian justice system for future generations of judges, prosecutors, lawyers, police officials and members of parliament. Another aspect of this culture is the availability of equal opportunities for women in the justice system. A recent study prepared for the Council of Europe suggests that transparent selection criteria for judges may have a positive effect on overcoming existing gender segregations in this field (ACT, 2019).

The government should continue to explore ways to improve the efficiency of court procedures to address concerns that routine cases take too long to resolve and judges lack sufficient technical capacity to deliver quality outcomes consistently. Stakeholders have welcomed a new electronic system for case distribution adopted by the HCOJ as part of the third wave of justice reforms but note that its usefulness may be limited by a lack of judges able to handle certain cases and have called on amendments to the system to address perceived deficiencies (EME and IDFI, 2019a; Coalition, 2017). These and other e-court services should be progressively designed, introduced and refined as ways to reduce the scope for corruption and cronyism in case allocation, increase access to court judgments, improve accuracy and reduce processing times.

Another issue under consideration in this regard is the merit of developing specialised judges or courts in certain areas. Georgia has a three-tiered court system consisting of over 25 first instance courts, two appellate courts and the Supreme Court together with a separate Constitutional Court. Investors have raised concerns with the absence of specialised courts or judges in this system with the government during consultations chaired by the Prime Minister in the Investors’ Council of Georgia. Establishing specialised courts or judges to deal with commercial, tax and small claims matters, among others, is conducive to improving the quality and consistency of decisions with potential knock-on effects for the speed with which judges can resolve cases within their area of specialisation. Increased judicial specialisation can also entail certain pitfalls linked to the separation of specialist judges from the general body of judges (Consultative Council of European Judges, 2012). The Ministry should bear these competing considerations in mind when designing models for specialised judges or courts and tools to allocate cases to specialised judges.

Strong legal framework for arbitration and mediation but some challenges remain in becoming an attractive place for alternative dispute resolution

Commercial disputes may arise for investors with joint venture partners, employees, local suppliers or contractors, or government agencies. The cheapest and quickest way to resolve disputes is by negotiation or mediation whenever possible, but if the parties cannot reach an amicable settlement by these means, then they have no choice but to pursue the issue in the courts or arbitration. Arbitration is possible only if the parties agree to it in an underlying contract or after a dispute has arisen between them.

Article 16 of the Investment Law provides that investors can rely on Georgian courts, arbitration proceedings under applicable investment treaties or other procedures agreed by the parties to settle disputes that may arise with the government or its subsidiary entities. The Law does not specifically mention arbitration or mediation. The default option for all investors is court proceedings in the absence of any other agreed dispute resolution procedures.

The Arbitration Law (Law No. 1280 of 2009, as amended) governs domestic and international arbitrations in Georgia as well as the enforcement of foreign arbitral awards in line with the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). The Law provides a robust framework for arbitration in Georgia. It follows closely the Model Law published by the United Nations Commission on International Trade Law (UNCITRAL) in 1985 and amended in 2006, which is designed to assist states in reforming and modernising their laws on arbitral procedure. The Law replaced an earlier arbitration law enacted in 1997 and sought to address a number of gaps and other concerns with the earlier law regarding the powers and competence of arbitral tribunals, finality of awards and the role of the courts in assisting arbitrations taking place in Georgia (Caucuses Research Resource Centre, 2018; Gogadze, 2018).

While the Arbitration Law and recent amendments to it have greatly improved the framework for arbitration in Georgia, the government may nonetheless wish to consider further amendments at an appropriate time in the future to clarify certain aspects of it. One such issue relates to enforcement of arbitral awards. Article 44 of the Arbitration Law does not provide guidance on when the court should refuse to enforce an award that “conflict[s] with public order”. It is silent on whether it refers to Georgian or international “public order”. By contrast, Article 42 on the powers of courts to set aside arbitral awards refers to the concept of “public order in Georgia” while the Model Law and the New York Convention refer to “public policy” of the country in which enforcement is sought. Ambiguities such as these can lead to uncertainty. Guidance for practitioners and judges or clarification in the Law would help to reduce inconsistency in judicial interpretations and dissuade award debtors from filing frivolous defences to delay enforcement through costly and lengthy court procedures. A study published in 2018 for the EU4Justice programme and UNDP sets out a range of other recommendations for possible amendments to the Law, mostly on technical or minor procedural issues, which the government may also wish to consider (Caucuses Research Resource Centre, 2018).

Improving the legal framework for arbitration is an important aspect of improving legal certainty and predictability but its success also depends on user experiences with the courts and arbitration institutions in Georgia. A recent study found that Georgian courts have interpreted several aspects of the Arbitration Law inconsistently across several decades of court practice including in respect of their powers to intervene in arbitration proceedings, the role of arbitral tribunals and the grounds for refusing enforcement of arbitral awards (Caucuses Research Resource Centre, 2018). Some stakeholders have also reported some delays with court procedures to enforce arbitral awards in Georgian courts. Courts that act in aid of arbitrations taking place in Georgia must have the capacity to deal with enforcement and other applications efficiently. Mistrust of arbitration institutions and courts built on shortcomings in earlier arbitration legislation, perceptions about the integrity of arbitrators, the profit incentives for many Georgian arbitration institutions and low levels of public awareness about arbitration are also seen as major hindrances for the development of arbitration in Georgia.

The Georgian International Arbitration Centre (GIAC) may have an important role to play in addressing some of these concerns. The Georgian Chamber of Commerce and Industry established GIAC in Tbilisi in 2013 as a not-for-profit institution. GIAC aspires to serve as a leading arbitration institution in the country and wider Caucuses region by leveraging its independent status to promote arbitration as a credible method for resolving commercial disputes. It has developed a modern set of arbitration rules with a competitive fee structure. It contributes to awareness-raising efforts through an annual arbitration conference, co-operation agreements with other arbitration institutions, various publications and training activities. It co-operates with the Georgian Association of Arbitrators, which published in 2014 a draft Code of Ethics for Arbitrators. Together with amendments to the Arbitration Law regarding appointment criteria and procedures for challenging arbitrators, these developments should help gradually to overcome entrenched scepticism regarding arbitrator integrity.

A number of other local institutions besides GIAC administer arbitrations and provide a range of alternative dispute resolution (ADR) services. Although it is difficult to be precise due to the lack of public information regarding these institutions, there appears to be around 35 such institutions operating in Georgia (Caucuses Research Resource Centre, 2018). All of these institutions except GIAC appear to be registered as limited liability companies under Georgian company laws. The Investors’ Council of Georgia and the Business Association of Georgia have discussed an initiative whereby the government could grant these companies a limited time to convert themselves to non-commercial entities as a way of removing profit-based incentives and seeking to redress negative public perceptions. Four of these institutions – GIAC, the Dispute Resolution Center, the Mediation and Arbitration Center of the European Business Association and the arbitration centre of the Chamber of Commerce and Industry of the Ajara Autonomous Republic – signed a memorandum of understanding in July 2020 agreeing to comply with the GAA’s Code of Ethics.

Mediation has seen relatively little uptake in the local market to date but new legislation may prompt increased awareness and demand. The new Mediation Law (Law No. 4954 of 2019) enacted in September 2019 and effective as of January 2020 aims to promote mediation services in Georgia by providing a clear legal framework to regulate mediations. The Law sets rules for court-ordered and private mediations, including on the appointment of mediators, selection criteria, the efficient conduct of mediations, mediator remuneration, enforcement of mediator decisions and confidentiality. Importantly, it emphasises independence and impartiality as core principles. It establishes a self-regulated body, the Georgian Association of Mediators, to maintain a public register of certified mediators from which all court-appointed mediators must be selected. The new Law requires the Association to offer training for mediators, conduct awareness raising activities and providing recommendations to the government on future policy directions in this area. Aside from encouraging the creation of new mediation institutions, the Law may also open up opportunities for existing arbitral institutions to expand their offerings to provide mediation services and contribute to the Association’s awareness-raising activities.

These are encouraging developments for the future of ADR services in Georgia but further efforts may be needed to overcome public perceptions that continue to hamper user uptake in this sector. Given these lingering public perceptions, the government may wish to evaluate the costs and benefits of regulating – possibly on a temporary or trial basis with a defined end point – the organisational structure, ethical standards or activities of ADR service providers to foster a stronger culture of independence, competence and integrity in this sector. The Mediation and Arbitration Laws currently do not perform this role. This appears to align with the Georgia 2020 strategy, which identifies the development arbitration courts, the competence of arbitrators and independence of arbitration institutions as a priority for the government. These are vital priorities for the future of the ADR services in Georgia. In the meantime, many foreign investors are likely to prefer institutions based in established ADR hubs like Geneva, London, Paris or Stockholm.

The success of recent land reforms should provide a base for continual improvement of land tenure rules and land administration services

Secure rights for land tenure and an efficient, reliable system for land administration are key components of a sound investment climate. This requires a clear legal framework for acquiring, registering and disposing of land rights, as well as proactive land use plans at all levels of government.

Land tenure rules in Georgia are set out in the Constitution, several dedicated land laws and various sectoral laws. These rules provide a clear and predictable framework of property rights for all investors. The Constitution affirms the rights of individuals to own and inherit property (Article 19). Books 2 and 3 of the Civil Code clarify the conditions for land ownership, transfer of ownership and the permissible rights and claims over land including leases, mortgages and easements. Several other dedicated land laws and sectoral laws supplement this overarching framework.

The Law on Recognition of Property Rights of the Parcels of Land Possessed (Used) by Natural Persons and Legal Entities under Private Law (Law No. 5274-ES of 11 July 2007, as amended) clarifies the rights of individuals to use or squat in state-owned land lawfully.
The Law on State Property (Law No. 3512-რს of 21 July 2010, as amended) regulates the privatisation of state-owned property, including land, and the conditions under which investors may acquire it.
The Law on Oil and Gas (Law No. 1892-IIს of 16 April 1999, as amended) addresses state ownership of natural resources that exist in the subsoil and sets out investors’ rights and obligations under land allotments to exploit natural resources.
The Organic Law on Agricultural Land Ownership (Law No. 4848-IIს of 25 June 2019) regulates the right to own and use agricultural land.
The Law on Determination of the Designated Purpose of Land and on Sustainable Management of Agricultural Land (Law No. 4849-II of 25 June 2019) provides pre-emptive rights for the state to acquire agricultural land.

Rules on ownership and rights over non-agricultural land apply equally to Georgian and foreign nationals. This means that unlike many other jurisdictions, foreign investors can own and transfer most types of residential or commercial property without any extra conditions or restrictions when compared to domestic investors. Restrictions exist, however, for foreign investors seeking to acquire agricultural land. The Constitution generally prohibits foreign nationals from owning agricultural land except in “exceptional cases” determined by other laws (Article 19(4)). The Law on Agricultural Land Ownership envisages two such exceptions to the general rule: where foreigners inherit agricultural land and where Georgian companies with foreign shareholders obtain the government’s consent to buy agricultural land in accordance with an approved investment plan (Article 4). Chapter 4 on promoting sustainable investment in Georgia’s agri-food value chain addresses these restrictions and the public debate surrounding them in further detail.

The government has taken significant strides in recent years towards ensuring streamlined, transparent and reliable land administration services to support legal rules on land tenure. Land reforms introduced in 2016 under the Law on the Improvement of Cadastral Data and the Systemic and Sporadic Registration of Rights to Plots of Land (Law No. 5153-რს of 3 June 2016) aim to register all available parcels of land in Georgia and improve the accuracy, quality and public accessibility of cadastral data.

The National Agency of Public Registry (NAPR), a sub-entity of the Ministry of Justice, is responsible for carrying out the land registration reforms. It reports that between August 2016 and February 2019 it registered over 300 000 hectares of land, taking the overall percentage of registered land in Georgia to 45% of the country’s territory (Agenda, 2019). In May 2020, the Minister of Justice announced the government’s plans to register a further 1.2 million hectares over the next three years (Agenda, 2020a and 2020b). These most recent plans appear to address stakeholder concerns regarding the massive resources needed to implement the reforms (for which financing has been secured from international donors) and the need to focus on systemic rather than sporadic land registration campaigns (with renewed focus on systemic land registration) (Transparency International, 2016). As of July 2020, NAPR has registered over 850 000 plots of land since August 2016. It is working with the Norwegian government and the World Bank to implement its systemic land registration programme and improve its digital land maps. The National Agency of State Property (NASP) has also started to register state-owned land but these efforts are currently on hold pending comprehensive registration of privately owned land. Chapter 4 on promoting sustainable investment in Georgia’s agri-food value chain addresses issues relating to the registration of agricultural land in further detail.

The government’s land reforms have also sought to simplify registration procedures, increase the availability of land information and reduce fraud in the titling process. NAPR has accepted and processed over 600 000 requests from private landholders to register their property, free of charge, under the new reforms. It has also created a “one-stop-shop” to provide landowners with free access to a variety of registration services upon submission of the relevant documents pertaining to their land plots (NAPR, 2019). NAPR reports that it can register property within one business day of receiving a registration application, which takes the form of a single document that can be lodged electronically. It has made an impressive amount of land data publicly available online. NAPR maintains electronic registers of pending registration applications, mortgages, leases, liens, debtors, public notifications and property seizures, as well as up-to-date statistical information on land registration, all of which are accessible to the public on its website. It accepts requests for information regarding other registered land titles through an online request form. New land titling information and a growing portion of pre-2016 land title data is stored electronically in a single database maintained by NAPR. Information stored in the database is encrypted using blockchain technology in order to reduce its vulnerability to fraudulent tampering (Agenda, 2019 and 2017).

International indicators partly reflect these achievements. Georgia ranks 5^th out of 190 countries included in the 2020 edition of the World Bank’s Doing Business indicators (down from 1^st in 2014) in terms of the time and number of procedures needed to register property. Notwithstanding this overall ranking, Georgia ranks slightly lower on the quality measures for registering property in several comparator economies such as Armenia, Belarus and Moldova. The overview in Chapter 1 addresses some general concerns regarding these indicators. Georgia also ranks 41^st out of 141 countries in terms of quality of land administration in the World Economic Forum’s 2019 Global Competitiveness Report.

The government should seek to transform its largely successful land reform efforts since 2016 into a top tier offering of land registration services in the longer-term. It should sustain and, to the extent possible, expedite the systemic land registration programme and continue to raise awareness in rural communities of the free land registration services offered by NAPR. The quality, and not just the quantity, of data recorded in NAPR’s electronic database during this process is paramount. Quality cadastral data and drawings of all available land parcels in the country obtained through a consistent surveying method would provide a valuable resource for many different actors. Aside from improving the security of existing land tenure, it would help to inform investment decisions and allow the government to identify suitable land plots for prospective investors. Conversely, large swathes of unregistered land titles, as is currently the case, has the potential to complicate transfers of land rights and hamper investment projects.

Universal land registration is also an essential precondition for potential land consolidation projects, which have an enormous potential to support the development of a well-functioning market for agricultural land (see Chapter 4 on promoting sustainable investment in Georgia’s agri-food value chain). It would also support better government policies on land use, planning and spatial development. A new national land use agency, the National Agency for Sustainable Land Management and Land Use monitoring, established in 2019 will be responsible for establishing a database for registering agricultural land and developing land use policies. The success of the Agency and other government bodies that address land use and development policies including the Spatial Planning and Construction Policy Department of the Ministry of Economy and Sustainable Development will depend, in large part, on the quality and extent of available land data.

Another area for possible improvement is the resolution of land disputes. Georgia’s strong results in international indicators on land registration do not necessarily reflect the challenges that remain in this area. As noted in the Georgia 2020 strategy, promising results on property registration in the Doing Business indicators can be undermined if property rights are not properly observed and if disputes concerning property ownership are not resolved quickly. NAPR reports for the purposes of these indicators that 1175 “land disputes” were filed in the Tbilisi City Court during 2017 and 819 “land disputes” were filed in first instance courts across the country in 2018. It reports that these cases take 1-2 years on average to reach a first instance decision. The indicators do not, however, capture the wider issues regarding independence, efficiency and capacity in the judiciary addressed above in this Chapter that have undermined public trust in the court system.

The 2016 land reforms established a framework for mediation of land disputes arising from the implementation of the reforms, which signals that the government seeks to address these issues through greater use of ADR options. It is nonetheless likely that public awareness, uptake and confidence in mediation as a form of ADR will take some time to develop following the promising law reforms for the mediation services sector discussed above in this Chapter. The government should monitor the use of mediation services arising from the law reforms and collect user feedback to improve the quality of these services. Results of this monitoring could help to develop proposals to strengthen ADR services for land disputes. In June 2020, NAPR launched on its website a public registry of pending cases and administrative complaints brought against it by individuals. The government should consider pursuing similar initiatives, which promote transparency and accountability, in relation to other land-related disputes.

Strong legal frameworks for data protection and cyber security

Developing Georgia’s digital economy is one of the government’s top priorities. The Georgia 2020 strategy highlights the importance of improving the infrastructure and legal framework to support investments in new technologies, R&D and innovation. The National Strategy for the Protection of Human Rights 2014-2020 also recognises the importance of high standards of protection for personal data to support the right to privacy. Recent statements by the Deputy Minister of Economy and Sustainable Development at the 5th annual Georgian Internet Governance Forum in November 2019 reiterated these ambitions and noted the important challenges being tackled to achieve them (Ministry of Economy and Sustainable Development, 2019a). One of these challenges lies in establishing a strong regulatory framework for data protection and cybersecurity that businesses and consumers can trust.

The unprecedented health and economic consequences of the COVID-19 pandemic have only underscored the importance of these priorities. Reliance on information and communication technologies soared as governments sought to use personal health and geolocation data to track the spread of the virus, malicious actors sought to take advantage of business and consumers during the crisis and entire workforces were sent home to work remotely (OECD, 2020a, 2020b, 2020c).

Together with a strong framework for IP rights, data security is an increasingly important aspect of the regulatory framework for all investors, not just digital services and new technology firms. Data protection legislation and the institutions to support it are essential to guard against the risks of data processing and enhance business and consumer trust. Cybersecurity is equally important. Digital security incidents can have far-reaching economic consequences for investors in terms of disruption of operations (e.g. through inability to provide services or sabotage), direct financial loss, litigation costs, reputational damage, loss of competitiveness (e.g. in case of theft of trade secrets) and loss of trust with customers, employees, shareholders and partners. The most recent cyberattacks on Georgia hit the banking sector in 2018 and more than 2,000 websites in October 2019 including that of the President of Georgia, courts, NGOs, local governments and private enterprises. These attacks are a cause for some concern among Georgia’s international partners. The EU has urged the government to align its cyber safeguards with the EU to prevent the country becoming a backdoor for cyberattacks against the EU (European Parliament, 2020; Akhvlediani, 2019). While investors must develop their own risk management and data integrity strategies, governments are increasingly being called upon to support investor efforts in this area with institutions to monitor and protect against cyber threats (OECD, 2012, 2015, 2018a).

Georgia has relatively well-developed laws and institutions for data privacy and cybersecurity. Amendments that came into effect in 2019 to the Law on Personal Data Protection (Law No. 5669-რს of 28 December 2011, as amended) have brought the legal framework on data privacy in line with the EU’s General Data Protection Regulation. In response to stakeholder concerns, the functions of the Personal Data Protection Inspector under the Law were also overhauled in 2019 with the creation of the State Inspector Service. As the successor to the Personal Data Protection Inspector, the new State Inspector monitors compliance with data processing rules, handles individual complaints and investigates potential breaches. Together with over 50 staff, she also works with different ministries, the Prosecutor’s Office, the High School of Justice, the private sector and academia to raise awareness about data protection rules (UNDP, 2019). The State Inspector’s office conducted over 150 investigations in 2019 and received over 1300 rulings from first instance courts in 2018 and 2019, respectively, to conduct covert telecommunications recording and surveillance (State Inspector Service, 2019). These activities are encouraging, and increasingly transparent, but every effort should be made to continue to improve transparency and public awareness in this area. Stakeholders have raised concerns with non-transparent secret surveillance activities taking place under the Law and have filed challenges before the Constitutional Court (Transparency International, 2020b). The State Inspector Service should also seek to address concerns raised by the Public Defender that unsanctioned breaches of privacy rights are still all too common in practice, whether through unjustified police raids and seizures or recent examples of personal data disseminated unlawfully as part of political smear campaigns (Public Defender, 2019a, 2016).

Cybersecurity has also been a priority for the government in recent years. The country’s main cybersecurity legislation, the Law on Information Security (Law No. 6391-IS of 5 June 2012), was amended in June 2020 to more closely approximate EU cybersecurity regulations. Stakeholders nonetheless raised some concerns regarding certain aspects of the amendments and the reduced level of stakeholder consultation during their development (IDFI, 2019 and 2020). Two government entities are primarily responsible for cybersecurity policy: CERT.GOV.GE, operating under the Data Exchange Agency of the Ministry of Justice, and the Georgian Research and Educational Networking Association (GRENA). These entities contribute to developing and implementing the government’s Cyber Security Strategy. Georgia’s country profile in the 2018 edition of the Global Cybersecurity Index, prepared by the United Nations’ International Telecommunication Union, notes that Georgia is developing its capacity in this area by providing on-the-job training to different stakeholders in the country. These improvements are linked to bilateral initiatives with international partners, such as the EaP Connect programme with the EU, that seek to improve training, technical capacity and public awareness. Georgia scores strongly in the Index (9th in the Europe region and 18th globally) which is a measure of the government’s success in building effectively its capacity to prevent and manage cybersecurity incidents. Georgia is a member of the Committee of the Council of Europe responsible for the Budapest Convention on Cybercrime. The government should continue to engage with international partners to strengthen Georgia’s cybersecurity laws, exchange good practices and implement fully the Budapest Convention, especially on outstanding procedural aspects.

Trade and investment treaties may be another means by which the government could seek to strengthen coherence on domestic laws affecting investors in this area. Georgia undertook to align its data protection laws with EU regulations as part of the DCFTA. The government has also signed several bilateral co-operation agreements on cyber security and information technology. Recent trade and investment agreements concluded by other countries have addressed the parties’ domestic laws on cyber security, data protection and other aspects of the digital economy such as data localisation requirements, technology transfers and online consumer protection. Some agreements also require the treaty parties to take into account international guidelines and standards when developing their national laws such as the OECD Recommendation concerning Guidelines governing the Protection of Privacy and Transborder Flows of Personal Data (2013) and the OECD Recommendation on Digital Security Risk Management for Economic and Social Prosperity (2015).

Investment treaties

Investment treaties concluded between two or more states typically protect certain investments made by nationals of one treaty party in the territory of other treaty parties. Protections afforded under investment treaties generally arise in addition to and independently from domestic law protections. Treaty-based protections normally only cover investors defined as foreign. Increasingly, investment treaties also address market access for foreign investment.

Investment treaties typically contain substantive protections for covered investments against expropriation or discrimination. Provisions requiring “fair and equitable treatment” (FET) are also common, providing a floor below which government behaviour should not fall. While there are some significant recent exceptions, investment treaties often allow covered investors to file claims with international arbitration tribunals to seek monetary damages if they believe that treaty protections have been infringed in an effort to depoliticise such disputes.

Overview of Georgia’s investment treaties

Georgia is a party to 33 investments treaties that are in force today:2 32 bilateral investment treaties (BITs)3 and 1 multilateral trade and investment treaty, namely the Energy Charter Treaty (ECT) (see summary table in Annex 2.A.). Georgia has also acceded to two important multilateral treaties related to enforcement of arbitral awards in investor-state arbitration under investment treaties – the New York Convention (in 1994) and the Washington Convention (in 1992).

Georgia signed most of its investment treaties in the 1990s and early 2000s. More recently, Georgia has entered into BITs with Belarus (2017), Switzerland (2014), Turkey (2016) and the United Arab Emirates (2017). A timeline of Georgia’s investment treaties appears in Figure 3.4.

The government is currently negotiating or considering some new investment-related agreements. Many of these negotiations feature in Georgia’s Foreign Policy Strategy 2019-2022. Negotiations regarding new investment agreements are ongoing with Canada (first round of negotiations in August 2018), Hong Kong, China (negotiations began in 2017), Hungary (draft text finalised in 2017), Japan (final stage of negotiations as of March 2019) and Qatar (draft text finalised in June 2017), among others. Several of Georgia’s existing trade agreements including with China expressly contemplate future negotiations on investment protection.

Figure 3.4. Evolution of Georgia’s investment treaty relationships

The government is also participating actively in multilateral discussions regarding potential amendments to the ECT aimed at “modernising” the existing treaty. These discussions are potentially very significant for investment treaty policy in Georgia. The ECT is the most frequently-invoked investment treaty in ISDS cases: investors have filed more than 130 known ISDS cases under the ECT since the first such claim was filed in 2001 (Energy Charter Secretariat, 2020); at least 3 of Georgia’s 15 known ISDS cases were filed under the ECT. Formal negotiations in the ECT modernisation process began in November 2019. An approved list of topics for discussion includes all core investment protections and ISDS provisions. The Energy Charter Secretariat published a set of policy options identified by the ECT Members, including Georgia, on the various topics in October 2019 (Energy Charter Secretariat, 2019); the EU published a detailed set of proposals separately in May 2020 (European Commission, 2020c). The discussion below addresses some of these proposals in further detail.

Georgia has treaty protection in force for a significant portion of its inward FDI stock (74%) and outward FDI stock (64%) (Figure 3.5).4 FDI trends are discussed in further detail in Chapter 2. For current purposes it is notable that Georgia’s treaty relationships with Azerbaijan (under a BIT signed in 1996 and the ECT) cover just over a third of total inward FDI stock (34%) and a fifth of total outward FDI stock (22%). A treaty relationship with Russia (under the ECT) covers the largest portion of outward FDI stock (32%). BITs with China, the Netherlands and the United States account for a significant portion of inward FDI stock treaty coverage (22% combined). Many Georgian investment treaty relationships cover none of Georgia’s inward or outward FDI stock or only negligible portions of it. This is a common phenomenon in many countries’ treaty samples (Pohl, 2018).

Figure 3.5. Approximate evolution of Georgia’s inward and outward FDI stock coverage from investment treaties in force

Treaty use: ISDS claims under Georgia’s investment treaties

Georgia has had several first-hand experiences defending formal legal claims brought by investors under investor-state dispute settlement (ISDS) provisions in its investment treaties. Based on publicly available information,5 foreign investors have filed at least fourteen treaty-based claims against Georgia between 2005 and 2020.6 Georgia’s ISDS disputes have primarily concerned investments in the energy sector, especially in oil and gas projects, mining ventures and power generation plants. The most recent one, filed in July 2020, concerns a USD 2.5 billion construction project for a deep-sea port. Aside from treaty-based claims, investors have brought at least two contract-based claims against Georgia relating to investment disputes.7 As of October 2020, there have been no publicly-known treaty-based investment claims brought against Georgia’s treaty partners by Georgian investors operating abroad.

Georgia’s investment treaty policy

Georgia’s investment treaty policy deserves continued attention. Many of Georgia’s investment treaties in force today contain features often associated with older investment treaties concluded in great numbers in the 1990s and early 2000s. Such treaties are generally characterised by a lack of specificity of the meaning of key provisions and extensive protections for covered investors. Some of Georgia’s most recent BITs contain more precise approaches in some areas. A significant number of Georgia’s older investment treaties nonetheless remain in force alongside these newer agreements.

This scenario may expose Georgia to a range of unintended consequences, especially given the potential scope for ISDS claims under these treaties. While many countries have revised their approaches to negotiating new investment treaties in response to these and other concerns, retrospectively addressing older BITs has proven to be more challenging. Some governments have negotiated treaty amendments with existing treaty partners to revise individual treaties but these efforts can require significant time and resources. Ongoing multilateral initiatives at UNCITRAL and ICSID to consider recent innovations, best practices and possible reforms are primarily technical and limited to ISDS and ICSID’s arbitration rules, respectively, while the ECT reform negotiations addressing substantive provisions and increasingly broader issues such as treaty impact on climate change goals are focused on a particular sector and concern only ECT member countries. For these reasons, the government should continue to follow and participate actively in intergovernmental discussions in the OECD and elsewhere on evolving approaches to stay abreast of these and other common challenges.

Governments continue to weigh concerns regarding older investment treaties against their potential benefits. Some consider that investment protection provided under investment treaties can play an important role in fostering a healthy regulatory climate for investment. Expropriation or discrimination by governments does occur. Investors need some assurance that any dispute with the government will be dealt with fairly and swiftly, particularly in countries where investors have concerns about the reliability and independence of domestic courts. Government acceptance of legitimate constraints on policies can provide investors with greater certainty and predictability, lowering unwarranted risk and the cost of capital. Domestic judicial and administrative systems provide investors with one option for protecting themselves. Access to international arbitration under investment treaties gives substantial additional leverage to covered foreign investors in their dealings with host governments.

Investment treaties are also frequently promoted as a method of attracting FDI and this is a goal for many governments. The fundamental assumption that international investment can contribute to prosperity, help overcome challenges such as the climate crisis and the need to transform economies, create employment, and address crises remains valid. Most immediately, international investment has a central role to play in a sustainable recovery from the Covid-19 pandemic. Despite many studies, however, it remains difficult to establish strong evidence of impact in this regard (Pohl, 2018). Some studies suggest that treaties or instruments that reduce barriers and restrictions to foreign investments have more impact on FDI flows than BITs focused only on post-establishment protection (Mistura et al., 2019). These assumptions continue to be investigated by a growing strand of empirical literature on the purposes of investment treaties and how well they are being achieved.

The balance of this section examines four key aspects of possible reform – three frequently-invoked provisions in ISDS (fair and equitable treatment (FET) provisions, most-favoured nation (MFN) treatment provisions, and provisions on indirect expropriation) as well as dispute settlement and ISDS provisions. It then briefly outlines some other aspects of investment treaty policy.

Provisions referring generally to “fair and equitable treatment” may generate serious risks and costs, and should be addressed where possible

All of Georgia’s investments treaties in force today contain provisions that require Georgia to provide covered investors and/or their investments with FET.8 Since the early 2000s, the FET standard has become the most-frequent basis for claims in ISDS. Most FET provisions were agreed before the rise of ISDS claims related to this treatment standard. Starting around 2000, broad theories for the interpretation of FET provisions by arbitral tribunals emerged as the number of ISDS cases increased markedly. Based on public information, investors in at least three of the fifteen known ISDS cases brought against Georgia have relied on FET provisions in older investment treaties.9

Most FET provisions in investment treaties do not provide specific guidance on what treatment should be considered fair and equitable. Arbitral tribunals in ISDS cases under investment treaties have taken different approaches to interpreting such “bare” FET provisions. This creates considerable uncertainty and high litigation costs for governments and investors alike. It has also resulted in some broad interpretations of bare FET provisions that go beyond the standards of investor protection in some advanced economies. Governments have reacted to these developments in various ways, including by adopting more precise or restrictive approaches to FET or excluding FET in recent treaties (Box 3.2). These recent approaches in broader treaty practice can serve as a useful point of comparison for approaches to FET in Georgia’s investment treaties.

Some Georgian investment treaties adopt some of these more precise or restrictive approaches to FET. For example, the France-Georgia BIT (1995) provides an indicative list of what could constitute a breach of FET. Most of Georgia’s investment treaties, however, contain an unqualified or “bare” reference to FET without any further specific guidance on its meaning. Some contain multiple different references to “bare” FET in the same treaty.10 The prevalence of “bare” FET provisions and of varying approaches more generally creates uncertainty as to the scope of these FET obligations and exposure to expansive interpretations by arbitral tribunals in ISDS cases. More specific approaches to FET provisions could improve predictability for the government, investors and arbitrators alike. They could also potentially contribute to preserving the government’s right to regulate in the context of investment treaties (Gaukrodger, 2017a, 2017b). In some cases, governments may be able to achieve greater clarity on the scope of FET by agreeing on joint government interpretations of provisions in existing investment treaties with treaty partners.11 In other cases, agreement on new treaty language may be required to reflect government intent and preclude undesirable interpretations.

Members of the ECT, including Georgia, are considering the scope of FET as part of the ECT modernisation process. Most ECT Members agree on the need to update the existing provision on FET in the ECT to clarify its scope (Energy Charter Secretariat, 2019). Issues for discussion include whether FET should be linked to the MST under customary international law, whether FET should be linked to other substantive protections or a stand-alone provision, and whether FET should refer to the concept of legitimate expectations. Some ECT Members, such as Switzerland, Turkey and the EU, propose a list-based definition of FET. Other Members, including Georgia, propose MST-FET but are open to considering list-based formulations that are consistent with prevailing understandings of the content of MST-FET. Georgia’s proposals during the ECT modernisation process note the “serious inconsistencies” in ISDS cases regarding the “determination of the content and level of obligations” under FET provisions (Energy Charter Secretariat, 2019).

Box 3.2. Recent approaches to the FET provision and ISDS for FET claims

States are becoming more active in the ways in which they specify, address or exclude FET-type obligations in their treaties and submissions in ISDS. Dissatisfaction with and uncertainties about FET and its scope have also led some governments to exclude it from their treaties or from the scope of ISDS. Some important recent approaches are outlined below.

The MST-FET approach: express limitation of FET to the minimum standard of treatment under customary international law (MST). This approach has been used in a growing number of recent treaties, especially in treaties involving states from the Americas and Asia (Gaukrodger, 2017). In addition to using MST-FET, the CPTPP clarifies that the claimant must establish any asserted rule of MST-FET by demonstrating widespread state practice and opinio juris (Article 9.6 (3)-(5), Annex 9A). Evidence of these two components has rarely been provided by claimants or arbitrators in ISDS cases. This approach has since been replicated by other states (e.g., Australia-Indonesia CEPA (2019), Article 14.7). The NAFTA governments have further reformed their approach to MST-FET claims in the USMCA (see below).

Exclusion of FET from ISDS, investment arbitration or from treaties. The recently-concluded USMCA (which replaced the North American Free Trade Agreement (1992) on 1 July 2020) includes MST-FET but generally excludes it from the scope of ISDS (except for a narrow class of cases involving certain government contracts) (Article 14.D.3). ISDS under the USMCA generally applies only to claims of direct expropriation and post-establishment discrimination (and only to Mexico-United States relations); only state-to-state dispute settlement (SSDS) is available for MST-FET claims. India’s Model BIT does not refer to FET and instead identifies specific elements; Brazil’s model treaty and recent treaties also exclude FET.

The definition approach: stating what FET means or listing its elements. Recent treaties negotiated by the European Union, China, France and Slovakia contain defined lists for the elements of FET. This approach can vary greatly depending on the nature of the list. Some lists include elements such as a denial of justice, manifest arbitrariness, fundamental breach of due process, targeted discrimination on manifestly wrongful grounds, and/or abusive treatment of investors. This approach likely results in a broader concept of FET than MST-FET, especially if state practice and opinio juris must be demonstrated to establish rules under MST-FET.

Clarifications of treatment excluded from FET. Some recent treaties have also clarified that FET does not protect investors from certain types of treatment. Starting with the Australia-Singapore FTA as revised in 2016, and followed by the CPTPP signed in March 2018 and the Korea-United States FTA as revised in 2018, several treaties now exclude government measures that may be inconsistent with an investor’s expectations concerning its investment from giving rise to a breach of the FET provision.1 Several recent treaties concluded by Australia clarify that the modification of government subsidies or grants is not protected under the FET provision.2

1. See also, e.g., Argentina-Japan BIT (2018); Australia-Peru FTA (2018); USMCA (2018); Australia-Hong Kong Investment Agreement (2019); Australia-Indonesia CEPA (2019). Recent EU treaties such as the EU-Singapore Investment Protection Agreement and the EU-Viet Nam Investment Protection Agreement also contain clarifications relating to investor expectations. However, they clarify certain exclusions of liability generally rather than referring specifically to the FET provision.

2. Australia-Singapore FTA (2003), as amended in 2016, Article 6(5); Australia-Peru FTA (2018), Article 8.6(5); Australia-Uruguay BIT (2019), Article 4(5).

Most-favoured nation (MFN) treatment provisions in Georgia’s investment treaties may have a range of unintended consequences

All of Georgia’s investment treaties provide for MFN treatment. Like national treatment (NT) provisions, MFN clauses establish a relative standard: they require Georgia to treat covered investments at least as favourably as it treats comparable investments by investors from third countries. As with FET provisions, most of the MFN treatment provisions in Georgia’s investment treaties and the global sample of investment treaties are vague with little guidance on how to interpret or apply them. More specific approaches to MFN treatment provisions could improve predictability for the government, investors and arbitrators alike (Box 3.3).

Box 3.3. Recent approaches to MFN treatment provisions and ISDS for MFN treatment claims

Recent investment treaty policies and debates over MFN have centred on three key issues outlined below.

MFN clauses and treaty shopping. ISDS arbitral tribunals have frequently interpreted MFN provisions to allow claimants in ISDS cases to engage in “treaty shopping”.12 These interpretations allow claimants to use MFN provisions to “import” provisions from other investment treaties that they consider more favourable than the provision in the treaty under which their case is filed.13 This can create uncertainty and also dilute the effect of investment treaty reforms. While MFN claims in trade law have centred on domestic law treatment of traders from different countries, most claimant attempts to use MFN in ISDS have sought to use the clause to access other treaty provisions.

Some governments have clarified in recent treaties that MFN provisions cannot be used to engage in treaty shopping at all. Others have limited treaty shopping to the importation of substantive provisions or limited the application of MFN clauses to cases where government measures have been adopted or maintained under the third country treaty. Article 8.7(4) of the CETA between Canada, the EU and EU Member States, for example, clarifies that “substantive obligations in other international investment treaties do not in themselves constitute ‘treatment’, and thus cannot give rise to a breach of [the MFN provision], absent measures adopted or maintained by a Party pursuant to those obligations”. The CETA also prohibits “treaty shopping” for procedural provisions. The USMCA similarly clarifies that treaty shopping is excluded under its MFN clause for both substantive and procedural matters (Article 14.D.3(1)(a)(i)(A), footnote 22): “For the purposes of this paragraph […] the “treatment” referred to in Article 14.5 (Most-Favored-Nation Treatment) excludes provisions in other international trade or investment agreements that establish international dispute resolution procedures or impose substantive obligations”.

Comparison criteria in MFN treatment provisions. A second area of interest and government action with regard to MFN treatment provisions involves the determination of what investments or investors are comparable. Many older-style treaties do not provide any specificity on this issue, leaving it to arbitral interpretations in ISDS. Some recent treaties provide that comparability requires “like circumstances”. Further clarifications have also been added. For example, some recent clarifications have stated that deciding on whether there are “like circumstances” requires, among other things, consideration of whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives.1

Negative lists, carve-outs or conditions. A third area of interest and government action with regard to MFN treatment provisions involves exclusions or limitations. Some recent treaties include negative lists of exclusions from MFN clauses in their investment chapters. Thus, a schedule may specify exceptions to MFN treatment for existing benefits granted under customs unions, other international treaties or specific domestic law schemes.

1. See, for example, United States-Mexico-Canada Agreement (2018), Article 14.5(4) (“For greater certainty, whether treatment is accorded in ‘like circumstances’ under this Article depends on the totality of the circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives”); CPTPP (2018), “Note on Interpretation of ‘In Like Circumstances’”, https://www.mfat.govt.nz/assets/Trans-Pacific-Partnership/Other-documents/Interpretation-of-In-Like-Circumstances.pdf (accessed 28 May 2020).

Georgia has had first-hand experience of these interpretations in at least one ISDS case – Bidzina Ivanishvili v. Georgia (ICSID Case No. ARB/12/27) – where the claimant sought to rely on an MFN provision to benefit from provisions that it considered more favourable in other Georgian investment treaties, including dispute resolution provisions.

Some of Georgia’s investment treaties include specifications or restrictions on MFN provisions that reflect these recent treaty practices and debates. All Georgian BITs exclude benefits granted under existing customs, economic or monetary unions, double taxation agreements and/or multilateral investment agreements from MFN treatment. Several of them – including with the Czech Republic (2009), Kuwait (2009), United Arab Emirates (2017) and the United States (1994) – require an assessment of MFN treatment with respect to comparable investments. Four Georgian BITs clarify that MFN treatment does not extend to ISDS provisions in other investment treaties;14 none contain a similar exclusion for substantive protections in other treaties. While the current text of the ECT does not contain any such specifications, the EU and several other ECT Members propose to update it to include them (European Commission, 2020c). Georgia supports these proposals and suggests further that “treatment” should be defined in line with recent treaty practice (Energy Charter Secretariat, 2019).

Unqualified provisions referring to protection for indirect expropriation should be clarified where possible

All of Georgia’s investment treaties contain provisions that protect covered investments from expropriation without compensation. Many of these provisions refer to direct takings of investor property by the government (direct expropriation) as well as other government measures that have effects equivalent to a direct taking without a formal transfer or outright seizure (widely referred to as indirect expropriation). Provisions on indirect expropriation have become the second most frequently invoked basis for claims in ISDS cases after provisions on FET. As with FET and MFN treatment provisions, most of these provisions in Georgia’s treaties and the global sample of investment treaties are vague with little guidance on how to interpret or apply them.

Only two of Georgia’s BITs contain elements of further specificity on the scope of protection for indirect expropriation. BITs with Belarus (2017) and the United Arab Emirates (2017) clarify that investor protections against indirect expropriation shall not restrict the treaty parties’ rights to enforce laws or take other measures that they deem appropriate to protect legitimate public welfare objectives such as public health, safety and the environment, or to ensure the payment of fines and taxes.

Since 2003, other countries have introduced a range of additional clarifications on the scope of indirect expropriation. The most common examples are positive definitions of the concept of “indirect expropriation”, guidance on how to determine whether an indirect expropriation has occurred, clarifications that certain regulatory measures do not constitute indirect expropriation and restrictions on the types of assets covered by this protection. None of Georgia’s investment treaties contains these features. The EU and other ECT Members have made proposals to update the existing ECT provisions on expropriation with these and other elements (Energy Charter Secretariat, 2019; European Commission, 2020c).

Clarifications such as these are likely to improve predictability as to the scope of indirect expropriation and reduce the possibility for unintended interpretations in ISDS cases. They are also likely to continue to feature in debates regarding the balance between investment protections and governments’ rights to regulate in investment treaties, including as part of ongoing discussions in the OECD’s Investment Committee in this area. The impact of these clarifications may depend, however, on the scope of other provisions in the same treaty such as FET that have often been invoked in ISDS cases as a substitute basis for indirect expropriation claims. It also remains to be seen how arbitrators interpret such provisions as very few investor-state arbitrations have been brought under treaties that contain these features. At least one government (Brazil) has responded to this residual uncertainty by excluding indirect expropriation altogether from its investment treaties concluded since 2015 through clear language to that effect.

Georgia’s investment treaties contain relatively few specifications or clarifications in investor-state dispute settlement (ISDS) provisions

Many investment treaties allow covered foreign investors to bring claims against host states in investor-state arbitration, in addition or as an alternative to domestic remedies. Investor-state arbitration currently generally involves ad hoc arbitration tribunals that adjudicate disputes in an approach derived from international commercial arbitration. ISDS provisions appear in all of Georgia’s BITs in force today, as well as in the ECT.

Recent treaty practice has seen both greater specification of ISDS and, in some cases, replacement of investor-state arbitration with more court-like systems. Treaties like the CPTPP and the EU-Canada CETA are among some recent treaties that have included investor-state arbitration reforms to reduce possible exposure to unintended consequences of ISDS. Common features in these treaties include time limits for claims, possibilities for summary dismissal of unmeritorious claims, mandatory transparency requirements, provisions for non-disputing party participation and possibilities for joint interpretations of the treaty by the state parties that are binding on the arbitral tribunal. The USMCA contains many similar investor-state arbitration reforms but has reduced the scope for ISDS claims to direct expropriation and post-establishment discrimination (and only to Mexico-United States relations); only state-to-state dispute settlement (SSDS) is available for claims under other provisions, such as MST-FET claims. The EU, which supports the concept of a multilateral investment court, has included court-like dispute settlement in all its recent investment protection treaties. Brazil’s treaties omit ISDS and designate domestic entities (“National Focal Points”) to act as an ombudsperson by evaluating investor grievances and proposing solutions to a Joint Committee comprised of government representatives from both states. Under this model, state-state dispute settlement is also available if necessary. South Africa has terminated its BITs with European countries. Domestic legislation governs the claims of foreign investors against the government in domestic courts and provides for the possibility of case-by-case agreement to arbitration.

Some Georgian investment treaties contain reform elements in investor-state arbitration provisions that reflect recent treaty practice. At least seven Georgian treaties specify the governing law for ISDS cases, albeit using different formulations, and one other treaty addresses transparency in ISDS by requiring arbitrators and parties in ISDS cases to apply the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration (see Switzerland-Georgia BIT (2014)). At least four treaties – BITs with Austria (2001), Belarus (2017), Switzerland (2014) and the United Arab Emirates (2017) – prescribe limitation periods for investor claims starting from when investors knew or should have known about the events giving rise to their claims. A standard feature of domestic law systems, time limitations have become increasingly common in investment treaties concluded since 2005. Most Georgian treaties in force today nonetheless do not include this feature.

The vast majority of Georgia’s investment treaties contain no such specifications regarding investor-state arbitration procedures. They thus leave substantial decision-making power to arbitrators or investors and their legal counsel. For example, in ISDS, the appointing authority in a case plays a key role notably because it chooses or influences the choice of the important chair of the typical three-person tribunal (Gaukrodger, 2018). Following NAFTA, many recent treaties provide for a single appointing authority for all cases. Some Georgian treaties – including BITs with France (1997), Israel (1995), the Netherlands (1998) and the United Kingdom (1995) – remove this choice by providing for a single forum for investor-state arbitration. Most other Georgian treaties give claimants and their counsel a choice between at least two and as many as four different arbitration institutions at the time they file a claim. This allows them to choose or influence the choice of appointing authority and exacerbates the competition for cases between arbitration institutions (Gaukrodger, 2018).

Multilateral reform efforts for ISDS are underway in numerous fora, including at UNCITRAL and ICSID. The government participates actively in these discussions, in particular through oral and written comments in the process to amend parts of ICSID’s arbitration rules and other rules of procedure. The government has not filed written submissions as part of the work programme of UNCITRAL’s Working Group III on ISDS Reform but it has indicated as part of the ECT modernisation process that it supports a wide range of reforms in this area (Energy Charter Secretariat, 2019). These include mechanisms to discourage frivolous claims, require claimants to provide security for costs, impose time limits for claims, regulate claimants that rely on third party funding to litigate their claims and increase the level of transparency in for ISDS cases. Other possible ISDS reforms under consideration at UNCITRAL and in the ECT modernisation process (no decisions have yet been reached) include both structural-type reforms (a permanent multilateral investment court with government-selected judges or a permanent appellate tribunal) as well as more targeted reforms such as a code of conduct for arbitrators or adjudicators.

Clearer specification of investment protection provisions would help to reflect government intent and ensure policy space for government regulation

Specifications on key provisions in investment treaties play an important role calibrating the balance between investor protection and governments’ right to regulate. The government is keenly aware of these concerns. It supports updates to the ECT that “strike balance between the protection of investors and their investments and Contracting Parties’ sovereign regulatory, legislative and policy interests” (Energy Charter Secretariat, 2019). Specifications seeking to achieve this balance should reflect policy choices informed by Georgia’s priorities. Policy-makers need to consider the costs and benefits of these choices and their potential impact on foreign and domestic investors, together with the government’s legitimate regulatory interests and potential exposure to ISDS claims and damages.

There are a range of techniques that governments can use to affect the balance between the right to regulate and investor protections under investment treaties (Gaukrodger, 2017a). The most obvious technique involves decisions about whether to include or exclude particular provisions, whether to draft them narrowly or broadly, precisely or in broader terms. The most important provisions in this regard are likely to be those most often the focus of alleged breach in investor claims such as the FET provision.

Depending on whether the parties wish to clarify original intent or revise a provision, it may be possible to clarify language through joint interpretations agreed with treaty partners or treaty amendments. These types of government action have been relatively rare in recent years, however, and can require significant time and resources to engage with individual treaty partners. Replacement of older investment treaties by consent in the context of new treaty negotiations may also be appropriate in some cases.

The government’s experiences with the COVID-19 pandemic may cause it to recalibrate the appropriate balance between investor protections and the right to regulate. Measures taken by governments to protect their societies and economies during the pandemic affect companies and investors. Investment treaties should be drafted with sufficient precision to provide flexibility for governments to respond effectively to the crisis and to take vital measures such as securing quick access to essential goods and services. While it may be too early to assess the consequences of the pandemic for this area of investment policy, it is likely that experiences with the crisis may refocus government attention on the balance between investor protection and governments’ right to regulate, especially in times of crisis (OECD, 2020). Governments have been addressing the balance between investment protection and the right to regulate in investment treaties through analysis and discussion at the OECD (Gaukrodger, 2017a, 2017b).

Investment treaties can be used as tools to liberalise domestic investment regimes

While liberalisation provisions are common features of international trade agreements, they have been much less common in BITs. Investment treaties can be used to liberalise investment policy by facilitating the making or establishment of new investments (Pohl, 2018). This can be achieved by extending the national treatment (NT) and MFN treatment standards to investors seeking to make investments (i.e. the pre-establishment phase of an investment) or by expressly prohibiting measures that block or impede market access.15

At least three Georgian BITs and three Georgian trade agreements grant so-called pre-establishment NT or MFN treatment, or both, to investors.16 The provisions are subject to SSDS, like in trade agreements, but investors could also bring ISDS claims under these provisions in the three BITs. Article 10 of the ECT contains non-binding market access provisions envisaging that the parties “shall endeavour” to provide pre-establishment NT and MFN treatment. It also contemplates that the parties would conclude a “supplementary treaty” to formalise these undertakings into binding obligations but the parties never concluded such a treaty.

Some of the market access obligations in Georgia’s treaties are accompanied by certain exclusions and reservations (Box 3.4). Georgia may wish to consider whether entering into liberalisation obligations aligns with its policy goals when signing new investment treaties in the future.

Box 3.4. Negative and positive list-approaches to NT and MFN exceptions

When countries grant national and/or most-favoured nation treatment, whether pre- or post-establishment, they typically do so subject to exceptions or reservations adopted under one of two different approaches.

A negative list-approach typically provides that MFN and NT are granted subject to specific exceptions or reservations (negative lists) that are often contained in detailed annexes to the treaty. Chapter 6 of the EFTA States-Georgia Free Trade Agreement (2016) and Chapter 10 of the Georgia-Hong Kong (China) Free Trade Agreement (2018) adopt this approach. They provide that the governments may adopt and maintain measures in certain sectors that do not confirm with the MFN and NT provisions and identify sectors in a Schedule of Reservations for which they wish to reserve full policy space.

A positive-list approach involves limiting the application of MFN and NT liberalisation provisions to specific identified sectors (positive lists). None of Georgia’s investment treaties adopt this approach, an example of which appears in Article 3(3) of the ASEAN Comprehensive Investment Agreement (2009). Generally, the negative list-approach is seen as more conducive to investment liberalisation particularly over time. New areas of economic activity are not covered by negative lists.

Addressing the unique approach to claims for reflective loss in ISDS

Georgia should continue to engage in multilateral fora such as at the OECD and UNCITRAL to develop proposals to address the unique approach to claims for shareholders’ reflective loss in ISDS. Shareholders incur reflective loss if a company in which they hold shares suffers a loss that results, in turn, in the shareholders suffering a commensurate loss, typically a loss in value of the shares. In contrast to the approach of domestic laws in many countries, many investment treaties have been interpreted to allow ISDS claims by covered shareholders for losses incurred by companies in which they own shares.

Governments have been considering these issues at the OECD since 2013 (OECD, 2016; Gaukrodger, 2014a, 2014b, 2013; Summary of 19th FOI Roundtable, October 2013, pp. 12-19; Summary of 18th FOI Roundtable, March 2013, pp. 4-9). Ongoing discussions at UNCITRAL’s Working Group III on ISDS Reform are considering possible reforms to address these issues, which were underlined in a recent UNCITRAL Secretariat note (UNCITRAL, 2019d). At the request of the Working Group, these discussions are being conducted jointly with the OECD. Given that the current approach towards reflective loss in ISDS provides claimants with exceptional benefits and greatly expands the number of actual and potential ISDS cases, however, only government-led reform is likely to address the issues.

Opportunities for investment treaties to address investor responsibilities

The OECD Investment Committee is currently considering how trade and investment treaties can affect business responsibilities including through their impact on policy space for governments, their provisions that buttress domestic law or its enforcement, or their provisions that directly address business by, for example, encouraging observance of RBC standards (Gaukrodger, 2020). Ongoing work will take account of input received during an OECD public consultation on this topic in January-February 2020.

Some Georgian BITs refer to RBC-related objectives and investor responsibilities. These provisions vary in terms of scope and level of generality; some are binding on arbitral tribunals in ISDS or SSDS but others may not be. Several Georgian BITs contain provisions that seek expressly to preserve policy space for government regulation, including provisions establishing a general right to regulate in the public interest17 and general exceptions clauses.18 Two of Georgia’s newest BITs clarify that the expropriation provisions shall not restrict the parties’ ability to regulate to achieve specified public interest objectives such as public health, safety and the environment.19 Only one Georgian BIT buttresses domestic law in this area by clarifying the parties’ understanding that it is inappropriate to encourage investment by relaxing environmental or health measures.20 Treaty provisions that buttress domestic law or its enforcement in key areas in host states remain rare but they are increasing in importance. Some recent trade and investment treaties such as USMCA, EU-Canada CETA and the Australia-Indonesia Comprehensive Economic Partnership Agreement reaffirm government duties to regulate in key RBC-related areas.

Almost all of Georgia’s BITs contain provisions that address investors directly on RBC-related issues. All but one of the BITs concluded by Georgia since 2000 contain legality requirements that restrict the scope of treaty protections to investments made in accordance with Georgian law. These requirements appear most frequently in provisions defining covered investments but also appear in provisions on the scope of application of the treaty. Some Georgian BITs also contain hortatory language in the preamble or elsewhere in the treaty reaffirming the importance of encouraging companies to respect corporate social responsibility norms.21

Investment treaties concluded by some other governments have addressed investor responsibilities in various other ways. For example, some treaties impose obligations on investors to uphold human rights and maintain an environmental management system;22 exclude the possibility for ISDS in relation to government measures relating to the treaty’s environmental and labour provisions;23 exclude investments procured by corruption from the scope of ISDS;24 refer to the parties’ commitments to implement international standards related to RBC;25 and recognise that investments should contribute to the economic development of the host state26 (Gordon et. al., 2014; Gaukrodger, 2020). Some of Georgia’s trade agreements, including the EU-Georgia Association Agreement, contain provisions of a similar nature in the context of bilateral trade relations.

Some ECT Members including the EU propose to update the ECT by including new provisions addressing sustainable development and RBC-related objectives (European Commission, 2020c). Georgia has indicated that it supports amendments that seek to promote sustainable development and RBC-related objectives in this context (Energy Charter Secretariat, 2019). It proposes to affirm the parties’ commitments to these issues in new preamble language and consider further the need to include additional provisions in this area.

Evaluating overlaps between investment treaties

Georgia has two investment treaties – namely a BIT and the ECT – in force with 28 countries. (Figure 3.6).

Overlapping investment treaties that apply to investments by investors from the same country may raise some policy concerns. As a general matter, Georgia should strive to minimise inefficient inconsistencies between international obligations entered into with different countries. In the case of the ECT, any potential overlap with protections offered under BITs with the same partners applies to investments in energy or energy-related sectors – while the ECT applies only to these sectors, Georgia’s BITs apply to investments in all sectors. In practice, this means that covered foreign investors in Georgia’s energy or energy-related sectors may be able to rely on more favourably-worded provisions in Georgia’s older BITs in their dealings with the government or in ISDS disputes. This approach could potentially undermine the impact of the ongoing ECT modernisation process if investors in the energy sector can circumvent reforms to ECT provisions by relying on older BITs that are still in force.

Figure 3.6. Overview of Georgia’s overlapping investment treaty relationships in force today

Georgia may wish to evaluate the likely impact of these overlaps in treaty protection for investments in energy or energy-related sectors. It may also wish to consider engaging with relevant treaty partners to consider these overlaps and how they could be addressed as part of the ongoing ECT modernisation process.

Despite the concerns that may arise with overlapping treaties, some governments may consider that they need to provide certain extra incentives or guarantees to some treaty partners over others in order to attract FDI. This may be because they expect that investors from those countries are less likely to invest their capital in the absence of such treatment or assess that the broader benefits associated with attracting FDI from those countries are particularly lucrative. Some governments may also consider that similar provisions in different treaties, while framed differently, are likely to be interpreted in a consistent way. The balance between these interests and assessments is a delicate one and may evolve over time.

Evaluating overlaps between investment treaties and domestic law

The scope of investor protections and obligations under Georgia’s domestic laws and its investment treaties overlap in some respects. Some overlaps appear to give rise to inconsistencies in approach. For example, the Investment Law does not contain a FET provision unlike all of Georgia’s investment treaties in force today. Likewise, the protection from expropriation is narrower under domestic law than under many Georgian BITs. Many of Georgia’s investment treaties provide the government’s consent to investor-state arbitration, while a provision on direct access to arbitration for all investors – not only certain foreign investors covered by Georgian treaties – was removed by legislative amendments to the Investment Law in 2009. Investment contracts that the government enters into with specific investors could create an additional layer of contractual rights and obligations for specific investors.

Differences between the domestic laws on investor protection and investment treaties may create more favourable legal regimes that apply to some investors and not others based on their nationality. It may also prompt some investors to structure their investments through a company in one of Georgia’s treaty partner countries to seek to benefit from treaty protections and/or treaty-based ISDS if they perceive these to be more favourable than protections and dispute resolution options under domestic laws. The government may wish to evaluate the extent of these differences and whether there are good policy justifications for them. One way of doing so would be to conduct a gap analysis between domestic laws on investor protection and investment treaty provisions.

Developing approaches to prevention of ISDS claims and ISDS case management

Georgia may wish to prioritise the development of strategies to prevent and achieve early settlement of investment-related disputes, as well as its approach to case management of ISDS cases. Aside from participating in inter-governmental discussions on these topics, the government may wish to consider taking certain steps at a domestic level. Whatever approach a government adopts towards international investment agreements, complementary measures can help to ensure that treaties are consistent with domestic priorities and reduce the risk of disputes leading to international arbitration.

Several branches of the government have responsibilities in these areas. The Ministry of Foreign Affairs is responsible for negotiating investment treaties, while the Foreign Trade Policy Department of the Ministry of Economy and Sustainable Development is responsible for negotiating Georgia’s trade and investment agreements. The Ministry of Justice is responsible for representing Georgia in disputes with investors under investment treaties. The Ministry’s Department of State Representation in Arbitrations and Foreign Courts, established by Ministerial Order No. 191 of 19 October 2010, co-ordinates Georgia’s involvement in arbitrations and foreign court proceedings, including any related settlement negotiations, annulment proceedings or enforcement actions. The Department has a good track record of engaging constructively with investors to achieve amicable settlements of potential disputes or more formal settlements during legal proceedings. It is also responsible for policy proposals on dispute prevention but no public information is available on current dispute prevention strategies. It is unclear whether and how these different government departments co-ordinate in these areas. Guidelines for coordination or similar policy documents to clarify the relevant processes in these areas could be considered if time and resource constraints allow it.

The Ministry of Justice may also wish to consider drawing on examples of institutional frameworks in other countries for the prevention of investment disputes as part of its policy-setting activities. At a domestic level, some countries, such as Colombia and Peru, have adopted comprehensive legislative and regulatory frameworks to encourage the early detection and resolution of investment disputes (OECD, 2018b; Joubin-Bret, 2015). Other countries, such as Chile, have opted for an informal prevention system where sectoral agencies directly manage disputes with investors. Some governments have reported successful outcomes with inter-ministerial committees established to advise line agencies on investor grievances, propose strategies for reforming investment treaty policy and domestic legal frameworks for investment protection, and supervise the government’s defence of ISDS cases. As noted above, Brazil does not include ISDS in its investment treaties but instead establishes with each treaty partner a Focal Point or ombudsman within each government to address investor grievances, with a Joint Committee of government representatives to oversee the administration of the agreement. Korea has also had a successful track-record of early dispute resolution with its Foreign Investment Ombudsman since it was established in 1999 (Nicolas, F. et al., 2013). It may be worth exploring options to build awareness within government ministries, agencies and local or sub-national government entities regarding Georgia’s obligations under investment treaties and the potential impact that government decisions may have on investor rights under these treaties. Internal written guidelines or a handbook could be a useful way to disseminate this information and encourage continuity of institutional knowledge as personnel changes occur over time.

The government may also wish to explore ways to share and learn from its experiences with ISDS and those of other governments. Several states that have been frequent respondents in ISDS cases – including Argentina, Canada, Mexico, Spain and the United States – have developed dedicated teams of government lawyers to advise the government on investment disputes and investment treaty policy. The Department of State Representation in Arbitrations and Foreign Courts of the Ministry of Justice appears to play this role in Georgia. Within the limits of time and resource constraints, nurturing an internal expertise to evaluate investor claims candidly before a legal dispute arises can be an important step in preventing a protracted and costly legal process.

Procedural considerations: exit and renegotiation

A growing number of countries are considering ways to replace, update or exit older investment treaties that no longer reflect governments’ current priorities. Review and renegotiation of investment treaties takes time and significant governmental resources, however, and the option to terminate a treaty is not necessarily available at any moment, as the relevant provisions on temporal validity in the treaty may place limits on exit options (Box 3.5).

Many Georgian investment treaties in force today contain temporal validity provisions that will operate to delay possibilities for unilateral exit from the treaty. Most of Georgia’s investment treaties contain an initial validity period of between 5 and 20 years. This period is 30 years for one of Georgia’s treaties – the Georgia-Kuwait BIT (2009). Seventeen of Georgia’s investment treaties in force today provide for an automatic renewal period after the period of initial validity and allow either treaty party to denounce the treaty within 6 or 12 months (depending on the treaty) of the expiry of the renewed period. Treaties that renew for fixed terms require more monitoring as they limit the possibilities to update or unilaterally end the agreement. If no termination occurs in the defined notice period, the treaty automatically renews for the agreed period, thereby committing Georgia to these treaties for a further 5 or 10 years in most cases – and 30 years in one case – before the next opportunity to terminate the treaty will arise.

Even if Georgia were to terminate unilaterally some or all of its treaties, most of them would continue to apply for a survival period of at least 10 years or more. These provisions are often intended to provide a measure of legal certainty for investors who frequently make long-term capital commitments in the host country. This situation may leave the government potentially exposed to ISDS claims for alleged breaches of treaty obligations far beyond the termination date. Treaty partners may be able to agree mutually to replace or exit an older treaty in such a way that the survival provisions no longer apply.

As a hypothetical example to illustrate the possible effects of these clauses, as of October 2020 the earliest occasion that Georgia could unilaterally withdraw from all of its investment treaties is 2043 (taking into account the automatic renewal periods in some treaties) and the effects of post-termination survival periods could last until 2063 even if appropriate actions were started today (Figure 3.8).

Box 3.5. Designs of temporal validity provisions in investment treaties

Unlike most international treaties, which can be denounced at relatively short notice, investment treaties typically contain clauses that extend their temporal validity for significant periods of time. Three designs can be found, often cumulatively in the same agreement. First, most investment treaties set an initial validity period of often 10 years or more, counting from the treaty’s entry into force. After that period, many treaties only allow states parties to denounce the treaty at the end of specific intervals of often 10 years or more. Finally, treaty obligations almost universally continue to apply for a sunset period after the termination of the treaty, again for periods of typically 10 years or more. Many treaties thus bind the treaty parties for at least two decades, and in some extreme cases for up to 50 years.

Treaty designs that automatically extend the validity of the treaty for fixed terms are included in around 30% of the global treaty stock, but this design is used less frequently in recent times. This design tends to prolong the period for which states parties are bound without granting additional benefits in terms of predictability for investors: on the contrary, the oscillating residual treaty validity is hard to predict without detailed study (see illustrative comparison in the figure below).

Figure 3.7. Different approaches to residual treaty validity

Figure 3.8. Projection of the temporal validity of Georgia’s investment treaties

Unilateral action is not the only option to update or address older investment treaties but the impact of temporal validity provisions may influence how treaty amendments or agreed exits can be negotiated with treaty partners, especially if the renewal period is imminent. Georgia may therefore wish to consider whether the current design of its temporal validity provisions can serve its interests in future discussions with treaty partners.

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Annex 3.A. Georgia’s investment treaties

No	Treaty partner	Date of signature	Date of entry into force
1.	Belarus	01/03/2017	01/12/2017
2.	Switzerland	03/06/2014	17/04/2015
3.	Estonia	24/11/2009	21/11/2016
4.	Kuwait	13/10/2009	30/05/2013
5.	Czech Republic	29/08/2009	13/03/2011
6.	Sweden	30/10/2008	01/04/2009
7.	Finland	24/11/2006	30/12/2013
8.	Lithuania	09/11/2005	01/11/2006
9.	Latvia	05/10/2005	05/03/2006
10.	Austria	18/10/2001	01/03/2004
11.	Moldova	28/11/1997	25/02/1999
12.	Netherlands	03/02/1998	01/04/1999
13.	Romania	11/12/1999	01/07/1998 or 24/07/1998 (see note)
14.	Kyrgyzstan	22/04/1997	28/10/1997
15.	France	03/02/1997	13/04/2000
16.	Kazakhstan	17/09/1996	24/04/1998
17.	Armenia	04/06/1996	18/01/1999
18.	Turkmenistan	20/03/1996	28/07/1995
19.	Azerbaijan	08/03/1996	10/03/1996
20.	Iran	27/09/1995	22/06/2005
21.	Uzbekistan	04/09/1995	24/05/1999
22.	Israel	19/06/1995	18/02/1997
23.	United Kingdom	15/02/1995	15/02/1995
24.	Bulgaria	19/01/1995	06/08/1999
25.	Ukraine	09/01/1995	18/12/1996
26.	Greece	09/11/1994	03/08/1996
27.	United States	07/03/1994	17/08/1997
28.	Germany	25/06/1993	27/09/1998
29.	Belgium/Luxembourg	23/06/1993	03/07/1999
30.	China	03/06/1993	01/03/1995
31.	Turkey	30/07/1992	28/07/1995
32.	Spain	26/10/1990	28/11/1991

Note: Arranged in descending chronological order based on date of signature. It is difficult to be precise about the exact status of Georgia’s BITs due to some inconsistencies in publicly-available information, especially entry into force dates. Full-text versions of many Georgian BITs are available on the Legislative Herald of Georgia website maintained by the Ministry of Justice: https://matsne.gov.ge/. The Ministry of Foreign Affairs also publishes information on the dates of signature and entry into force for many of Georgia’s treaties: https://mfa.gov.ge/MainNav/ForeignPolicy/InternationallegalAgreements.aspx. Some of the information published by Georgia is inconsistent with information published by Georgia’s treaty partners, in particular with respect to dates of signature and entry into force. For example, information published on the Legislative Herald of Georgia website indicates that the Georgia-Romania BIT (1997) entered into force on 1 July 2008 while the Romanian government’s legislation portal (http://legislatie.just.ro/) indicates that it took effect on 24 July 1998. Third-party databases for investment treaties indicate a range of other conflicting dates that have not been taken into account for the purposes of this Chapter.

No	Treaty partner	Date of signature	Date of entry into force	Effective date of termination	Type of termination
1.	Italy	15/05/1997	26/07/1999	26/07/2014	Unilaterally denounced

No.	Treaty partner	Date of signature	Date of entry into force
1.	United Arab Emirates	17/07/2017	-
2.	Turkey	19/07/2016	-
3.	Egypt	10/08/1999	-

No.	Treaty	Date of signature for Georgia	Date of entry into force	Date of entry into force for Georgia
1.	Energy Charter Treaty (as amended)	17/12/1994	16/04/1998	16/04/1998

Notes

← 1. These treaties include the Madrid Protocol Concerning the International Registration of Marks (in 1998), the Paris Convention for the Protection of Industrial Property (in 1994), the Patent Co-operation Treaty (in 1994), the Berne Convention for the Protection of Literary and Artistic Works (in 1995), the WIPO Copyright Treaty (in 2001), the WIPO Performances and Phonograms Treaty (in 2001), the Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks (in 2002), the Hague Agreement Concerning the International Registration of Industrial Designs (in 2003), the Lisbon Agreement for the Protection of Appellations of Origin and their International Registration (in 2004), the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (in 2004), the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure (in 2005) and the International Convention for the Protection of New Varieties of Plants (2008).

← 2. Investment treaties considered for the purposes of this Chapter contain investment protections, investor-state dispute resolution provisions and/or investment liberalisation provisions. Georgia has concluded a range of other treaties that also relate to investment matters, at least partially. It has concluded investment co-operation agreements with Italy (1997), Moldova (1995), the United Kingdom (1995) and Uzbekistan (1995). It has also addressed certain investment-related matters in the context of trade agreements such as establishment rights for businesses and investment-related aspects of labour and environmental issues without including dedicated investment chapters in these agreements. These include free trade agreements concluded with China (2017), Hong Kong, China (2018) and the EFTA states (2016), as well as the Georgia-United States Trade and Investment Framework Agreement (2007), the EU-Georgia Association Agreement (2014) and the Georgia-United Kingdom Strategic Partnership Agreement (2019).

← 3. One of these BITs is the Spain-USSR BIT (1990). Spain states publicly that it considers this treaty to remain binding as between Georgia and Spain. Preliminary research undertaken for the purposes of this Review indicates that this may be the only BIT of the 14 BITs concluded by the former USSR that Georgia or a relevant third country considers binding on Georgia today. Ten of the other 13 countries that concluded a BIT with the former USSR subsequently concluded a new BIT with Georgia: Austria, Belgium/Luxembourg Economic Union, China, Finland, France, Germany, the Netherlands, Switzerland, Turkey and the United Kingdom. The remaining three countries – Canada, Denmark and Korea – have not concluded a new BIT with Georgia and do not state publicly that their treaty with the former USSR is binding on Georgia. It is beyond the scope of this Chapter to address debates surrounding the application of the Vienna Convention on Succession of States (1978) to bilateral investment treaties. In addition to the 32 BITs in force, three BITs signed by Georgia are not in force as of August 2020: the Georgia-Egypt BIT (1999), the Georgia-Turkey BIT (2016) and the Georgia-United Arab Emirates BIT (2017).

← 4. The coverage is assessed based on FDI stock data (2017 or, where 2017 data was unavailable, data of preceding years, giving preference to more recent data, based on data released by OECD and IMF) and investment treaties in force in July 2020. For several reasons, reported FDI stock data is not a valid measure for assets that benefit from treaty protections (Pohl, 2018) and available data does not allow to determine ultimate ownership of assets. The proportions of FDI stock data may nonetheless serve as a rough approximation of stock held by the immediate investing country to illustrate features and outcomes of Georgia’s past investment treaty policies.

← 5. The discussion here refers only to known claims. The number of actual ISDS claims against Georgia may be higher on account of confidential pending cases.

← 6. Bob Meijer v. Georgia (ICSID Case No. ARB/20/28); Telcell Wireless, LLC and International Telcell Cellular, LLC v. Georgia (ICSID Case No. ARB/20/5); Gardabani Holdings B.V. and Silk Road Holdings B.V. v. Georgia (ICSID Case No. ARB/17/29); Bidzina Ivanishvili v. Georgia (ICSID Case No. ARB/12/27); Itera International Energy LLC and Itera Group NV v. Georgia (ICSID Case No. ARB/09/22); Karmer Marble Tourism Construction Industry and Commerce Limited Liability Company v. Georgia (ICSID Case No. ARB/08/19); Itera International Energy LLC and Itera Group NV v. Georgia (ICSID Case No. ARB/08/7); Ron Fuchs v. Georgia (ICSID Case No. ARB/07/15); Ares International S.r.l. and MetalGeo S.r.l. v Georgia (ICSID Case No. ARB/05/23); Ioannis Kardassopoulos v. Georgia (ICSID Case No. ARB/05/18); Iconia Capital LLC v. Georgia (UNCITRAL); KazTransGas JSC v. Georgia (UNCITRAL); iZee Enterprises LLC, Lazer-2 Tbilisi Ltd., and Cafe Rustaveli Ltd. v. Georgia (UNCITRAL); Zaza Okuashvili v. Georgia (SCC); Range Resources Limited v. Georgia (unknown).

← 7. PJSC Inter RAO and Telasi JSC v. Government of Georgia (SCC); Gardabani Holdings B.V. v. Government of Georgia, Ministry of Economy and State Service Bureau LLC (SCC).

← 8. Most Georgian treaties refer to “fair and equitable” treatment but some refer to “fair and impartial” treatment (Georgia-Kuwait BIT (2009)); “fair and equal” treatment (BITs with Armenia (1996), Azerbaijan (1996), Kyrgyzstan (1997), Moldova (1997) and Ukraine (1995)); or “just and fair” treatment (Italy-Georgia BIT (1997), which was terminated in 2014).

← 9. See claims filed in Bidzina Ivanishvili v. Georgia (ICSID Case No. ARB/12/27) under Article 3(1) of the France-Georgia BIT (1997); Ron Fuchs v. Georgia (ICSID Case No. ARB/07/15) under Article 2(2) of the Georgia-Israel BIT (1995); and Ioannis Kardassopoulos v. Georgia (ICSID Case No. ARB/05/18) under Article 2(2) of the Georgia-Greece BIT (1994) and Article 10(1) of the ECT.

← 10. See Georgia’s BITs with Azerbaijan (1996), Belarus (2017), Kazakhstan (1996), Kyrgyzstan (1997), and Ukraine (1995). Other formulations of FET in Georgian treaties may leave scope for broad interpretations by arbitral tribunals. For example, Article 3(3) of the Belgium/Luxembourg-Georgia BIT (1993) refers to FET as being “in no case …less favourable than [treatment and protection] recognised under international law.” This creates a “floor” for FET, rather than a “ceiling” that would limit FET to the protections already afforded under international law. There is no guidance in this BIT or any other Georgian BIT about the extent to which protections may exceed those under international law.

← 11. Gaukrodger, D. (2016) (reviewing the applicable law on joint interpretations of investment treaties without express provisions on the issue); Gordon, K. and Pohl, J. (2015). For a recent example of a joint interpretation, see the Joint Interpretative Declaration between Columbia and India (2018) regarding the Columbia-India BIT (2009).

← 12. Treaty shopping is a phrase used broadly herein to describe the power for a beneficial owner of an investment to choose between investment treaties or between provisions of different investment treaties. See further detail on treaty shopping below.

← 13. For a recent discussion of the uncertainty surrounding the interpretation of MFN clauses in ISDS, see Batifort, S. and Benton Heath, J. (2018) “The New Debate on the Interpretation of MFN Clauses in Investment Treaties: Putting the Brakes on Multilateralization”, American Journal of International Law, Volume 111, Issue 4 (October 2017), pp. 873-913.

← 14. Georgia-Estonia BIT (2009) as amended by the Georgia-Estonia Protocol (2015), Switzerland-Georgia BIT (2014), Georgia-United Arab Emirates (2017) (not in force), and Georgia-Belarus BIT (2017).

← 15. See, for example, EU-Canada CETA (2016), Article 8.4; EU-Vietnam FTA (2018), Article 8.4.

← 16. Estonia-Georgia BIT (2009), Article 3; Georgia-Finland BIT (2006), Article 3; Georgia-Latvia BIT (2005), Article 3; EFTA States-Georgia Free Trade Agreement (2016), Chapter 6 (Establishment); EU-Georgia Association Agreement (2014), Article 79; Georgia-Hong Kong (China) Free Trade Agreement (2018), Chapter 10 (Establishment).

← 17. See, for example, Georgia-United Arab Emirates BIT (2017), Article 10; Belarus-Georgia BIT (2017), Article 11; Georgia-Switzerland BIT (2014), Article 9.

← 18. See, for example, Finland-Georgia BIT (2006), Article 14; Georgia-Latvia BIT (2005), Article 13.

← 19. Georgia-United Arab Emirates BIT (2017), Article 6(3); Belarus-Georgia BIT (2017), Article 4(3).

← 20. Georgia-Switzerland BIT (2014), Article 3.

← 21. Georgia-Switzerland BIT (2014), preamble; Georgia-Sweden BIT (2008), preamble.

← 22. Morocco-Nigeria BIT (2016), Article 18.

← 23. See, e.g., Belgium/Luxembourg-Colombia BIT (2009), Articles VII(5) and VIII(4).

← 24. See, e.g., Australia-Indonesia Economic Partnership Agreement (2019), Article 14.21.

← 25. See, e.g., Chile-United States FTA (2003), Article 18.1.

← 26. See, e.g. China-Peru FTA (2009), which states in the preamble that the State Parties “RECOGNIZE that this Agreement should be implemented with a view toward raising the standard of living, creating new employment opportunities, reducing poverty and […]”.

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