How to prepare for investor-state disputes related to coronavirus (COVID-19)

How to prepare for investor-state disputes related to coronavirus (COVID-19)

Law360: Parties can prepare for the coming storm of investor-state disputes arising from government measures to fight coronavirus (COVID-19) by reviewing international investment agreements for potential claims and the International Law Commission’s draft articles for state responsibility, say Ian Meredith, Matthew Weldon and Robert Houston, lawyers at K&L Gates.

United Nations Development Programme, COVID-19 pandemic: Humanity needs leadership and solidarity to defeat the coronavirus

As the United Nations Development Programme has said, ‘[t]he coronavirus pandemic is the defining global health crisis of our time and the greatest challenge we have faced since World War II’. (see, United Nations Development Programme, coronavirus pandemic: Humanity needs leadership and solidarity to defeat the coronavirus). It is no surprise, then, that governments have taken urgent action during these unprecedented times to institute a range of serious measures aimed to address this global public health concern.

While the public policy objectives behind such initiatives may often seem clear, extraordinary government measures to fight the pandemic can also have unexpected consequences, particularly as such measures may implicate the rights of private foreign investors under applicable investment protection frameworks in place around the world.

Governments should invest careful forethought into how such measures may impact the rights of investors in order to minimise potential liability in light of their existing obligations under applicable international investment agreements, or IIAs, which may come in the form of bilateral investment treaties, multilateral investment treaties, free trade agreements or other international legal instruments.

Similarly, affected investors would be wise to analyse measures implemented to fight the pandemic in order to consider whether they can seek remedies in respect of any violations of their rights through, inter alia, investor-state dispute settlement, or ISDS.

Even with careful consideration by both governments and foreign investors, it is inevitable that some disputes will arise from measures to fight coronavirus. A number of key legal issues that will be present in such cases can already be envisioned. As discussed below in the contexts of government measures, investment protection and state defences, responsible preparation is both possible and critical for public and private actors alike.

Government measures

Emma Graham-Harrison and Lily Kuo, China’s coronavirus lockdown strategy: brutal but effectiveChetan Chauhan, Covid-19: Disaster Act invoked for the 1st time in India, Hindustan TimesCambodia to ban some rice exports April 5 due to coronavirus, Straits TimesJon Henley, et al., Coronavirus: France imposes lockdown as EU calls for 30-day travel ban

Governments around the world have responded to the coronavirus with a number of serious containment and preventive measures. In Asia, for example, such responses include China’s quarantine strategy (see, Emma Graham-Harrison and Lily Kuo, China’s coronavirus lockdown strategy: brutal but effective), India’s implementation of the Disaster Management Act (see, Chetan Chauhan, Covid-19: Disaster Act invoked for the 1st time in India, Hindustan Times), and rice export bans or similar measures in Cambodia and Vietnam to promote food security in Southeast Asia (see, Cambodia to ban some rice exports 5 April 2020 due to coronavirus, Straits Times). Similarly, in Europe, Germany banned the export of masks and gloves, and Spain announced sweeping measures allowing the government to take over private healthcare providers and requisition materials such as facemasks and coronavirus tests (see, Jon Henley, et al, Coronavirus: France imposes lockdown as EU calls for 30-day travel ban).

Kevin Breuninger, Trump bans export of coronavirus protection gear, says he’s ‘not happy with 3M’

In the US, the Trump Administration invoked the Defense Production Act to ban the export of critical medical personal protective equipment (see, Kevin Breuninger, Trump bans export of coronavirus protection gear, says he’s ‘not happy with 3M’). In South America, Peru has proposed an emergency measure suspending the collection of toll fees on the country’s road network in response to the coronavirus outbreak (see, Cosmo Sanderson, Peru warned of potential ICSID claims over coronavirus measures, Global Arbitration Review).

Whether these or other public measures to fight the coronavirus may give rise to claims by foreign investors against a given state depends in part upon the terms of that state’s applicable international legal instruments for investment promotion and protection.

Investment promotion and protection

States have long employed IIAs strategically to promote and protect the foreign investment of their own nationals as well as to encourage inbound investment by nationals of other states through reciprocal investment protections in the territories of the state parties to a given IIA.

Each IIA is the result of unique negotiations, however, and may therefore contain unique investment protections specific to the covered investors under that particular IIA. For example, an essential security provision in a given IIA may apply to limit the jurisdiction of any arbitral tribunal hearing a claim from a covered investor under that IIA with respect to public health measures, such as those in relation to the coronavirus.

Customary international law principles often do assist arbitral tribunals to resolve ambiguities in the text of IIAs as drafted, but one must first confirm on a case-by-case basis whether the language of the IIA at issue effectively excludes the relevant customary international law principles.

As a result, for each jurisdiction in which a coronavirus measure is taken, applicable IIAs must be analysed separately through the dual lenses of treaty interpretation and of customary international law application in order to determine any impact such measures may have on the rights of covered investors.

As a general matter, substantive investment protections that are common to the majority of IIAs include:

  • protection from unlawful expropriation (whether direct or indirect in nature)

  • the right to fair and equitable treatment, which may require, inter alia, that foreign investors’ legitimate expectations be protected, that foreign investors be treated no less favourably than nationals of the host state (or, sometimes, investors from third countries), that investors be treated in a nondiscriminatory, transparent manner and that investors not be subjected to bad-faith conduct

  • the right to full protection and security, which may protect investors’ covered investments from armed takeover as well as, potentially, from lack of legal security, and

  • the right of a foreign investor to transfer funds out of a state (ie, back to the foreign investor’s home state), often implicated in relation to economic measures such as capital controls or export controls

Depending on the circumstances, a state’s measure to fight the coronavirus that affects the rights of foreign investors (such as the common substantive protections listed above) could be argued to be in violation of the relevant state’s public international law obligations under the applicable IIA and, as a result, may provide an impetus for foreign investors to file claims in ISDS (eg, in investor-state arbitration).

Whether a state may be found to have violated its international obligations to provide investment protection through the implementation of public health measures or economic measures in response to the coronavirus pandemic is a fundamental question that undoubtedly will be subject to development by tribunals, taking account of both the claims of affected investors and a number of key state defences under customary international law.

State defences

States may assert a number of defences under customary international law as reflected in the International Law Commission’s, or ILC’s, Draft Articles on Responsibility of States for Internationally Wrongful Acts and particularly with respect to Article 23, Force Majeure; Article 24, Distress; and Article 25, Necessity.

Draft Articles on Responsibility of States for Internationally Wrongful Acts with commentaries, International Law Commission (2001)

The effect of a tribunal’s finding that a state defence applies to preclude wrongfulness is not to ‘annul or terminate the obligation’, but rather to ‘provide a justification or excuse for nonperformance while the circumstance in question subsists’. (See, Draft Articles on Responsibility of States for Internationally Wrongful Acts with commentaries, International Law Commission (2001) at Chapter V, para. (2), p 71). Still, the impact of such defences in a given dispute can be significant for the outcome. As such, we consider, in turn, each of the above key defences that are likely to be advanced in relation to investor-state disputes over measures responsive to the coronavirus.

Force majeure

ILC Article 23 confirms that a force majeure situation involves ‘the occurrence of an irresistible force or of an unforeseen event’ that is ‘beyond the control of the state’ and renders the performance of a state’s international obligation ‘materially impossible in the circumstances’ (ILC Article 23(1)).

ILC Article 23(2) does make it clear that a state may not rely on force majeure where the situation is due (even in part) to the invoking state’s conduct or the invoking state ‘has assumed the risk of that situation occurring’ (eg, by the allocation of such risk in a treaty or other agreement).

This is a high standard. As a result, force majeure has proven to be a difficult defence with which to succeed in defeating the claim of a foreign investor. As measures arising from the coronavirus pandemic trigger ISDS in the near future, tribunals will be considering novel questions with regard to whether the circumstances surrounding the pandemic are properly understood as force majeure events and whether any breach of state obligations to provide investment protection should be excused accordingly.

Distress

The customary international law defence of distress, as described at ILC Article 24, precludes the wrongfulness of an act of a state where ‘the author of the act in question has no other reasonable way, in a situation of distress, of saving the author’s life or the lives of other persons entrusted to the author’s care’ (ILC Article 24(1)).

This defence is inapplicable where ‘the situation of distress is due…to the conduct of the state invoking it’ (even in part, as with force majeure above) or where ‘the act in question is likely to create a comparable or greater peril’ (ILC Article 24(2)(b)). Given the narrow circumstances in which the defence of distress may be applicable, it is perhaps unsurprising that this concept has been relatively underdeveloped in investor-state disputes to date.

As the coronavirus pandemic draws attention to measures that may be argued literally to have been the only reasonable way to save lives, there is a good chance that this defence may see a resurgence of interest in tribunal interpretation in the very near future.

Necessity

As outlined in ILC Article 25, a respondent state may be able to invoke the defence of necessity as a ground to preclude ‘the wrongfulness of an act not in conformity with an international obligation of that state’ in circumstances in which the act:

  • ‘is the only way for the state to safeguard an essential interest against a grave and imminent peril’; and

  • ‘does not seriously impair an essential interest of the state or states towards which the obligation exists, or of the international community as a whole’ (ILC Article 25(1)(a–b)

Draft Articles on Responsibility of States for Internationally Wrongful Acts with commentaries, International Law Commission (2001) at Chapter V, para. (2), p. 71

The ILC’s corresponding commentary to ILC Article 25 explains this second requirement as follows:

‘In other words, the interest relied on must outweigh all other considerations, not merely from the point of view of the acting state but on a reasonable assessment of the competing interests, whether these are individual or collective.’

This is certainly another high standard, heightened even further as ILC Article 25 expressly states that a state may not invoke necessity as a defence if ‘the international obligation in question excludes the possibility of invoking necessity’ or ‘the state has contributed to the situation of necessity’ (ILC Article 25(2)(a–b)).

Moreover, the elements of the defence of necessity are considered to be cumulative, meaning that the respondent must prove each element for the defence to apply. This has made it extremely difficult in practice for states to succeed in advancing the defence of necessity and this is likely to continue to be the case in disputes arising from measures to fight the coronavirus.

In this regard, the timing of implementation of the relevant measure by reference to the factual record is likely to be important. In Unión Fenosa Gas SA v Arab Republic of Egypt (ICSID Case No. ARB/14/4), the claimant investor alleged various breaches of substantive treaty protections arising from the curtailment of the gas supply to the claimant’s plant in Egypt (Unión Fenosa Gas at [2.2]).

In the 2018 arbitral award in that case, the tribunal decided that the respondent state had ‘not proven the defence of necessity under customary international law’ in part because the tribunal had found that disruptions in the supply of gas to the investor’s plant had begun in 2006 while ‘the continuing social and political instability in Egypt’ arising from the Spring 2011 Egyptian Revolution was only cited as the basis of a defence by the state in 2013 (Unión Fenosa Gas at [8.42], [8.62]).

Similarly, states may come under the scrutiny of affected investors for the timing of measures to fight the coronavirus, whether with respect to the implementation or the relaxation of such measures.

BBC, Social distancing and coronavirus: The science behind the two-metre rule

The degree to which a state’s response to the coronavirus has been consistent with, implemented within the same time frame as, and/or of the same degree of severity as the range of measures implemented by other states (or in some way unique to that state) may also test the boundaries of interpretation. In regard to social distancing policies during the pandemic, for example, ‘[t]he World Health Organization says that a distance of one metre is safe, while others suggest 1.5m or 1.8m with the UK opting for two metres’, a decision with a potentially significant impact on the economic viability of different forms of business activity (see, BBC, Social distancing and coronavirus: The science behind the two-metre rule).

Looked at collectively, it can be seen that states have tended to draw from the same toolkit when developing responses, but over time, variations in approach and timing of response may become a focus of close analysis.

Conclusion

Uncertainty may be greater during a time of pandemic. Nevertheless, an investor’s claim in ISDS does not necessarily have any less merit merely because it arises at such a time. On the other hand, a state’s response to an unprecedented public health crisis should not be understood in isolation, but rather with the full and proper context of the global pandemic that prompted the relevant measures.

Ultimately, each potential dispute must be considered carefully in consultation with experienced legal counsel, assisting respondents and claimants alike in the serious consideration of each case on its own merits. This is how decision-makers in both the public and private sectors may take steps now to prepare to weather the coming storm of coronavirus disputes.

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This content is based on an article first published by Law360, a LexisNexis® company, on 8 June 2020 and is published with permission.

Further information can be found at: www.law360.com/internationalarbitration (subscription required).

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