Investor-State Disputes during the Covid-19 Pandemic: Balancing Public Health Concerns and Foreign Investors’ Rights

par Francesca SEBASTIANI, étudiante au sein du Master Droit économique de Sciences Po.

In the midst of the Covid-19 pandemic, we have seen governments around the world scrambling to find a way to contain the spread of the virus through unprecedented measures.[1] During its harshest lockdown period, the Spanish government allowed its Ministry of Health to make public private health services.[2] The UK has put into place import and export restrictions.[3] Most Latin American countries saw their biggest oil sector projects slowed down due to measures ranging from curfews to total lockdowns that have resulted in the interruption of auctions and privatizations.[4] As these measures have deeply impacted the economy, they are likely to give rise to investor-states disputes as foreign investors see their businesses abroad hurt.[5] Mexico, whose pandemic response resulted in heavy cuts to its renewable energy sector, and Peru, who suspended toll fees payments, have both been warned of potential investment claims.[6] These recent developments have sparked renewed outcry against the International Centre for Settlement of Investment Disputes (ICSID), with the Institute for International Sustainable Development (IISD) conducting consultations pushing for a suspension of Bilateral Investment Treaties (BITs) for Covid-19 related measures as long as the pandemic endures.[7] This méfiance towards investor-state disputes inscribes itself in a deeper legitimacy crisis that the investment regime has been undergoing for the past two decades.[8] Critics of the investment regime often point to its alleged “regulatory chill” effect on State powers, claiming that the threat of costly litigation from foreign investors has often left States with little room to maneuver even when issues of public interest were at stake.[9] Future Covid-19 related arbitrations will see arbitral tribunals balancing measures taken to protect public health on one hand and foreign investors rights on the other, definitely testing, if not redefining, the notion and scope of State’s regulatory powers in the context of investment arbitration proceedings.

In the first part, this Article considers whether investors have a legitimate basis to oppose a State measure that negatively impacted their investment and that was adopted in response to the Covid-19 pandemic; in the second part, the Article discusses the defenses available to States both under existing BITs and customary international law.

 

I- Potential Grounds to Engage States’ Responsibility

 

As most measures taken by States in response to the Covid-19 pandemic have the potential to infringe many of the rights granted to foreign investors under their respective BITs, investors can potentially rely on a wide variety of protections that will, in turn, be assessed against a series of countervailing factors discussed in the second part of this Article.

 

Fair and Equitable Treatment Standard and Expropriation Obligations

 

The Fair and Equitable Treatment Standard (FET) is the most likely candidate for investors who wish to challenge Covid-19 related measures. It is an autonomous concept, often found in International Investment Agreements (IIAs) that encompasses both procedural and substantive protections.[10] From a procedural standpoint, the FET protects investors from measures taken by host States disregarding due process. Substantively, the FET protects investors from State measures deemed disproportionate, unfair or discriminatory. Harsh Covid-19 related measures could then be challenged by investors claiming a lack of proportionality between the measure adopted and the public interest it sought to address. For example, some commentators[11] have noted how certain Covid-19 related measures, such as the decision by some governments to suspend utility bills payments,[12] might be challenged by investors claiming that the suspension of payment was not proportionate and discounts would have probably been enough to help debtors. At the same time, investors should bear in mind that the context itself is also important. In Teinver v. Argentina,[13] the tribunal held that the investor, who was aware of the disastrous conditions of the Argentinian economy at the time of its investment, was barred from relying on the FET standard. This ruling could be relevant for investments made during the Covid-19 pandemic.

BITs often contain guarantees that protect foreign investors from expropriation without compensation.[14] The nationalization of private health services to provide medical equipment in response to Covid-19 could potentially give rise to expropriation claims. Similarly, lockdown measures could result in indirect expropriation claims as foreign investors are forced to permanently shut-down their businesses after consecutive months of inactivity.[15] While most tribunals, by considering the public interest at stake, will likely rule in favor of the State, some measure might still amount to indirect expropriation. For example, States that merely justify their measures in light of the pandemic, but whose actions are motivated by protectionist or economic self-interests, could be held liable for expropriation. In the Myers v. Canada case,[16] the tribunal ruled that Canada’s regulations relating to public health concerns were being used for protectionist policy aims and in bad faith, and eventually ruled in favor of the investor. By the same token, a State that takes advantage of the pandemic-induced price slump to nationalize businesses might give rise to successful compensation claims by foreign investors.[17]

 

II – States Defenses under Existing Treaties

 

While balancing investors’ rights and State actions dictated by policy concerns is not new to arbitral tribunals, the Covid-19 pandemic represents an unprecedented international health crisis both in terms of its scale and severity. For this reason, States will likely be able to resort to a fairly wide range of defenses to justify measures that have negatively impacted foreign investors and that were taken as a response to the Covid-19 pandemic.

 

Emergency Clauses

 

Albeit not all treaties do, some of the most recent BITs contain the so called “emergency clauses” with an express reference to public health as one of the grounds to exonerate States from liability. These clauses could be particularly useful in the context of Covid-19 as they are meant to circumscribe and limit States’ obligations and responsibility vis à vis investors in the context of emergency situations. An example of an emergency clause can be found in article 12.6 of the Model BIT of the Netherlands dated 22 March 2019: “Except in the rare circumstance when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, nondiscriminatory measures of a Contracting Party that are designed and applied in good faith to protect legitimate public interests, such as the protection of public health [emphasis added], safety, environment or public morals, social or consumer protection or promotion and protection of cultural diversity, do not constitute indirect expropriations.” Similar clauses can also be found in the Japan-Korea BIT of 2002 or the new agreement between the United States, Mexico and Canada that was signed in 2019.[18] Even though these emergency clauses have a strong defensive potential, explicit references to public health tend to be quite rare.

 

III – States’ Defenses under Customary International Law

 

Absent emergency clauses with explicit language on public health measures, States can resort to customary international law as a way to escape liability for measures undertaken as a response to the Covid-19 pandemic.

Even when a State participates in an action that a priori would constitute a violation of International Law, it does not necessarily mean that the State has committed an internationally wrongful act. In fact, States enjoy a series of affirmative defenses under International Law that are set out in the International Law Commission’s Articles (ILC) on State Responsibility.[19] The relevant defenses in this context are: force majeure (art.23), distress (art.24) and necessity (art.25). Force majeure is less likely to be adopted by States as its “material impossibility” of performance requirement set out by article 23 is a very high standard to meet, especially in the context of Covid-19, where many measures were adopted on a precautionary basis. Similarly, distress is not as relevant in this context as the Commentary on ILC’s Articles on State Responsibility explicitly specifies that this defense does not apply to general emergencies as it is meant to protect specific groups of people and not a State’s population at large.[20] As Covid-19 has had world-wide effects, the ground most likely to succeed is the necessity defense as set out in article 25. An additional line of defense seems to be the “police powers” doctrine that has traditionally been invoked by States in the context of public health measures with adverse economic effects. Both are discussed in more details below.

 

Necessity (art. 25)

 

Article 25 states that a State can rely on the necessity defense when it adopts a measure in violation of an international obligation by proving that it was the only way to safeguard an essential interest of the State from a grave and imminent peril. As the World Health Organization (WHO) has declared Covid-19 a Public Health Emergency of International Concern (PHEIC) on January 30, 2020 and then a Pandemic on March 11, 2020,[21] the spread of Covid-19 can well be considered a grave and imminent peril affecting an essential interest of the State in question. The International Court of Justice (ICJ) in the Gabcikovo-Nagymaros case specified that “[…] a peril appearing in the long term might be held to be ‘imminent’ as soon as it is established, at the relevant point in time, that the realization of that peril, however far off it might be, is not thereby any less certain and inevitable.”[22] Preventive measures adopted to face a potential surge in Covid-19 cases could then fall in the necessity defense as well. However, the first prong of the test, demonstrating that the measure adopted was the only way to face a determinate danger, is hard to meet and arbitral tribunals have applied the necessity defense inconsistently. Usually, the existence of another lawful way to address the same danger, even if more costly, has been enough for tribunals to dismiss the defense in its entirety.[23] The necessity defense was famously relied upon by Argentina during its financial crisis, when a total of 40 claims where lodged against it.[24] While the tribunal in LG&E Energy Corp. v. The Argentine Republic[25] found in favor of Argentina, the tribunal in Enron Corporation and Ponderosa Assets, L.P v Argentine Republic, stated that: “[a] rather sad world comparative experience in the handling of economic crises shows that there are always many approaches to address and correct such critical events, and it is difficult to justify that none of them were available in the Argentine case.”[26] Other tribunals found against Argentina by stressing the notion that the State had contributed to its financial crisis and was thus barred from invoking a necessity defense for an event it was partially responsible for.[27] As many commentators have noted,[28] States will hardly ever be held accountable for causing the Covid-19 pandemic, but the measures adopted by their administration, taking into consideration the information available to them at the time, will be scrutinized and might have a weight in future arbitral tribunals’ rulings.

 

Police Powers Doctrine

 

Measures aimed at the protection of public health have long been recognized as a prerogative of State powers. The police powers doctrine, tracing back to Roman law, has been used in investment arbitration especially in the context of indirect expropriation claims by investors.[29] The doctrine affirms that States cannot be held liable for certain types of measures that result in indirect expropriation but that are the product of bona fide legislative action. The police powers doctrine was used in 1903 by the Claims Commission in the Bischoff case to justify the State’s seizure of a carriage where two passengers infected with smallpox had traveled. In that case, the tribunal held that “during an epidemic of an infectious disease there can be no liability for the reasonable exercise of police power.”[30] Even if dating back many years, this case could be used as a an effective precedent as it appears to be the only one explicitly referencing the spread of an infectious disease. In more recent cases, such as Saluka v. Czech Republic, the tribunal stated that: “[i]t is … established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare.”[31] Similarly, the tribunal in Philip Morris v. Uruguay,[32] while discussing a plain packing requirement for tobacco cigarettes, held that “the responsibility for public health measures rests with the government and investment tribunals should pay great deference to governmental judgments of national needs in matters such as the protection of public health”.[33] The tribunal in Phillip Morris went on to quote the Glamis case where the tribunal set a very broad scope of State regulatory powers “[t]he sole inquiry for the Tribunal… is whether or not there was a manifest lack of reasons for the legislation.”[34] However, the tribunal in Philipp Morris stressed that “ […] the action must be taken bona fide for the purpose of protecting the public welfare, must be non-discriminatory and proportionate.”[35] Based on these consideration, many of the measures taken in good faith by States as a response to the pandemic could fall in the requirements of the police powers doctrine.

 

Concluding Remarks

 

The spread of the Covid-19 pandemic has forced States to take emergency measures in order to save the lives of millions of people while at the same trying to preserve their respective economies. As discussed in this Article, many of these measures have been so drastic and intrusive that will inevitably give rise to investment arbitration proceedings. Ultimately, most States’ Covid-19 related measures will likely be justified by arbitral tribunals as long as they are deemed to be proportionate with regards to their aim and non-discriminatory vis à vis foreign investors’ businesses. Given the importance of the issues at stake, both in terms of public health threats and economic concerns, future Covid-19 investor-state disputes should be closely monitored as they could yield interesting results concerning investment tribunals’ stance over the scope of States’ regulatory powers and might redefine the regime of application of many of the exceptions to States’ Responsibility.

 

 

[1] For a comprehensive analysis of State measures during the Covid-19 pandemic, see: “Coronavirus Government Response Tracker” (Oxford University) <https://www.bsg.ox.ac.uk/research/research-projects/coronavirus-government-response-tracker> accessed 3 November 2020.

[2] “Coronavirus: France Imposes Lockdown as EU Calls for 30 Days Ban” (The Guardian, 16 March 2020) <https://www.theguardian.com/world/2020/mar/16/coronavirus-spain-takes-over-private-healthcare-amid-more-european-lockdowns> accessed 6 November 2020.

[3] “Moving Goods through Customs During the Coronavirus (COVID-19)” (Gov. UK, 1 April 2020) <https://www.gov.uk/guidance/moving-goods-through-customs-during-the-coronavirus-covid-19.> accessed on 3 November 2020.

[4] Claudia Salas and Manuel Valderrama, “Energy Arbitration in Latin American: Potential State Defenses in Future Covid-19-Related Cases” (Global Arbitration Review, 13 August 2020) <https://globalarbitrationreview.com/review/the-arbitration-review-of-the-americas/2021/article/energy-arbitration-in-latin-america-potential-state-defences-in-future-covid-19-related-cases#footnote-076> accessed 3 November 2020.

[5] Julien Chaisse, “Both Possible and Improbable – Could COVID-19 Measures Give Rise to Investor-State Disputes?” (2020) 13 Contemp Asia Arb J 99, p. 101.

[6] Cosmo Sanderson, “Mexico Faces Potential Claims Over Pandemic Response”, (Global Arbitration Review, 22 May 2020) <https://globalarbitrationreview.com/coronavirus/mexico-faces-potential-claims-over-pandemic-response> accessed 3 November 2020; Cosmo Sanderson, “Peru Warned of Potential ICSID Claims over Covid-19 Measures” (Global Arbitration Review, 9 April 2020) <https://globalarbitrationreview.com/coronavirus/peru-warned-of-potential-icsid-claims-over-covid-19-measures> accessed 5 November  2020.

[7] “Consultations on a Concerted Response to Covid-19 Related ISDS Risks”, (IISD, 3 May 2020), <https://www.iisd.org/events/consultations-concerted-response-covid-19-related-isds-risks> accessed  3 November 2020; “Call for ISDS Moratorium During Covid-19 Crisis and Responses”, (Columbia Center on Sustainable Investment, 6 May 2020) <http://ccsi.columbia.edu/2020/05/05/isds-moratorium-during-covid-19/> accessed 5 November 2020.

[8] For a full discussion on this topic, see: Susan D. Franck, “The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law through Inconsistent Decisions” (2005) 73 Fordham L Rev 1521; William W. Burke-White, “The Argentine Financial Crisis: State Liability under BITs and the Legitimacy of the ICSID System” (2008) 3 Asian J WTO & Int’l Health L & Pol’y 199; Leon E. Trakman, “The ICSID Under Siege” (2013) 45 Cornell Int’l LJ 603.

[9] For a full discussion on this topic, see: James D. Fry & Odysseas G. Repousis, “Towards a New World for Investor-State Arbitration Through Transparency”, 48 NYU J.Int’l L.& Pol. 795,808 (2016) and Charles N. Brower & Stephen W. Schill, “Is Arbitration a Threat or a Boom to the Legitimacy of International Law”, 9 Chi.J.Int’L L.471,497-98 (2008) for a different take on this issue.

[10] Stephen Fietta, “Expropriation and the Fair and Equitable Standard: The Developing Role of Investors Expectations in International Investment Arbitration” 23 J. Int’l Arb. 375 (2006), pp. 375-378.

[11]Yas Banifatemi, Ilija Mitrev Penusliski and Yael Ribo Borman, “Covid-19 and International Investment Protection”, (Shearman and Sterling, 14 April 2020) <https://www.shearman.com/perspectives/2020/04/covid-19-international-investment-protection> accessed 3 November 2020.

[12]Idem.

[13] Teinver v. Argentina, ICSID Case No. ARB/09/01. Award of 21 July 2017.

[14] Muthucumaraswamy Sornarajah, “The International Law on Foreign Investment” (2010, 3rd edn, Cambridge University Press), p. 102-103.

[15] Lucas Bento, Jingtian Chen, “Investment Treaty Claims in Pandemic Times: Potential Claims and Defenses”, (Kluwer Arbitration Blog, 8 April 2020) <http://arbitrationblog.kluwerarbitration.com/2020/04/08/investment-treaty-claims-in-pandemic-times-potential-claims-and-defenses/> accessed 4 November 2020.

[16] S.D Myers, Inc. v. Government of Canada, UNCITRAL. Award of 13 November 2000.

[17] Ping An v. Belgium, ICSID Case No. ARB/12/29. Award of 30 April 2015.

[18] Michael Ostrove, Kate Brown de Vejar and Ben Sanderson, “Covid-19— a legitimate basis for investment claims?”, (DLA Piper, 16 April 2020) <https://www.dlapiper.com/en/italy/insights/publications/2020/04/covid-19-a-legitimate-basis-for-investment-claims/> accessed 3 November 2020.

[19] Jens D. Ohlin, “International Law: Evolving Doctrine and Practice” (2nd edn, Foundation Press 2018), p.270.

[20] International Law Commission, “Draft Articles on the Law of Treaties with Commentaries”, (1966) 2 Yearbook of the International Law Commission 187, art. 23(7).

[21] “Archived: WHO Timeline-Covid-19”, (WHO, 27 April 2020) <https://www.who.int/news/item/27-04-2020-who-timeline—covid-19> accessed 4 November 2020.

[22] Gabčíkovo-Nagymaros Project (Hungary v Slovakia) [1997] ICJ Rep 7 (“Gabčíkovo-Nagymaros”), ¶ 54.

[23] Federica Paddeu and Freya Jephcott, “Covid-19 and Defences in the Law of State Responsibility: Part I”, (EJIL:Talk!, 17 March 2020) <https://www.ejiltalk.org/covid-19-and-defences-in-the-law-of-state-responsibility-part-ii/> accessed 4 November 2020.

[24] William W Burke-White, “The Argentine Financial Crisis: State Liability under BITs and the Legitimacy of the ICSID System” (2008) 3 Asian J WTO & Int’l Health L & Pol’y 199, p. 200.

[25] LG&E Energy Corp. v. The Argentine Republic, ICSID Case No. ARB/02/1. Award of 3 October 2006.

[26] Enron Corporation and Ponderosa Assets, L.P v Argentine Republic, ICSID Case No. ARB/01/3. Award of 22 May 2007, ¶ 308 as quoted in Claudia Salas and Manuel Valderrama, “Energy Arbitration in Latin American: Potential State Defenses in Future Covid-19-Related Cases” (Global Arbitration Review, 13 August 2020) <https://globalarbitrationreview.com/review/the-arbitration-review-of-the-americas/2021/article/energy-arbitration-in-latin-america-potential-state-defences-in-future-covid-19-related-cases#footnote-076> accessed 3 November 2020.

[27] BG Group Plc v. The Republic of Argentina, UNCITRAL. Award of 24 December 2007.

[28] Yas Banifatemi, Ilija Mitrev Penusliski and Yael Ribo Borman, “Covid-19 and International Investment Protection”, (Shearman and Sterling, 14 April 2020) <https://www.shearman.com/perspectives/2020/04/covid-19-international-investment-protection> accessed 3 November 2020.

[29] Noam Zamir, “The Police Powers Doctrine in International Investment Law” (2017) 14 Manchester J Int’l Econ L 318, p. 318.

[30] Germany – Venezuela Mixed Claims Commission, Bischoff Case (1903) 10 RIAA 420.

[31] Sluka v. Czech Republic, UNCITRAL, 255. Award of 17 March 2006, ¶ 255.

[32] Philip Morris v. Uruguay, ICSID Case No. ARB/10/7. Award of 8 July 2016.

[33] Philip Morris v. Uruguay, ICSID Case No. ARB/10/7. Award of 8 July 2016, ¶ 399.

[34] Glamis Gold, Ltd. v United States of America, UNCITRAL. Award of 8 June 2008, ¶ 805 as quoted in Philip Morris v. Uruguay, ICSID Case No. ARB/10/7. Award of 8 July 2016, ¶ 399.

[35] Philip Morris v. Uruguay, ICSID Case No. ARB/10/7. Award of 8 July 2016, ¶ 305.

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