Investor-state disputes arising from the pandemic
|Construction Law International homepage » December 2020|
In response to the Covid-19 pandemic, governments globally are engaging in a difficult balancing act of protecting public health, mitigating economic damage and avoiding interference of private rights. Even in a pandemic, however, states are likely to be challenged for implementing measures that interfere with an investor’s private rights. Yet do investors have legitimate claims? How would a state defend such claims?
As governments navigate their way out of the shutdowns necessitated by the coronavirus pandemic, foreign investment in construction and infrastructure projects will play a crucial role in the global financial recovery. For foreign investors and high-value contracts there are certain risks for which recourse to investor-state arbitration is the forum in which those injured foreign investors may recover losses. This article considers whether investors have a legitimate basis to claim an indemnity under an international investment agreement for their loss arising from government-mandated Covid-19 measures. It also discusses the potential defences under international investment agreements and customary international law available to a state that is implementing measures to prevent the spread of the virus.
Governments globally have taken different approaches to prevent the spread of the virus. At the most extreme, governments in countries such as Italy and India have suspended manufacturing, construction and mining. The Spanish and Irish governments nationalised private hospitals and healthcare. A number of countries, including China and Australia, have imposed internal travel restrictions or closed borders to limit the movement of people between regions within those countries. At the other end of the scale, the Swedish Government has taken a recommendations-over-restrictions approach. Bars, restaurants and businesses all remain open, with the government putting the onus on the elderly to remain inside.
A tribunal may consider whether a state’s Covid-19 measures restricting an investor’s private rights are proportionate to the anticipated benefit of preventing the spread of the virus.
Potential claims by investors
Government-mandated restrictions may be challenged by investors if the measures breach the protections owed by the state to the investor under an international investment agreement. An international investment agreement is an agreement between two or more states that contains rights and protections to promote private investment between the states. The most common types of international investment agreements are bilateral investment treaties (BITs), multilateral treaties or free trade agreements (FTAs) (with investor protections). Although every international investment agreement is different there are a number of investor protections that are common across the agreements. It is possible that an investor could make a claim under an international investment agreement arising from the government measures on the following bases:
• a breach of an investor’s right to fair and equitable treatment (FET);
• a breach of investor’s right to full protection and security (FPS);
• a breach of the national treatment standard; or
• indirect expropriation by the state.
Australia, for example, is a party to 15 different bilateral investment treaties and 12 free trade agreements.1To make a claim under an international investment agreement an investor relies on the investor-state dispute settlement provisions in the agreement.
Fair and equitable treatment
Generally, international investment agreements require the state to ensure an investor receives fair and equitable treatment. For example, Chapter 8, Article 6(1) of the Singapore-Australia FTA (SAFTA) states: ‘Each Party shall accord to covered investments treatment in accordance with the customary international law minimum standard of treatment of aliens, including fair and equitable treatment and full protection and security’.2 The United States-Australia FTA contains the same protections at Article 11.5(1).
The requirement for a state to afford an investor fair and equitable treatment has both procedural and substantive elements. From a procedural perspective, the FET protection requires the state afford the investor procedural fairness and due process in the exercise of its powers. One of the key drivers of this protection is transparency. For example, a state that made public statements guaranteeing certain businesses would not be shut down during Covid-19 and subsequently mandated that those businesses be shut down may be in breach of its requirement to afford investors FET. Substantively, a tribunal may consider whether a state’s Covid-19 measures restricting an investor’s private rights are proportionate to the anticipated benefit of preventing the spread of the virus.
Full protection and security
In international investment agreements the FET protection is generally accompanied by a State’s obligation to provide full protection and security to an investor and its investments. A critical question is whether the FPS protection applies only to physical security or extends to legal and commercial protection. This question has divided international tribunals and remains unsettled. On the one hand, physical protection extends to the state being obliged to defend the investment from physical violence or force. If a tribunal interprets the FPS protection narrowly in this way it is unlikely that government mandated Covid-19 measures would result in physical violence or force. On the other hand, if a tribunal was to interpret the FPS protection more broadly, a state’s failure to implement appropriate and timely Covid-19 prevention measures may give rise to a claim that the state breached its obligation to provide full commercial protection and security to the investor and its investment.
National treatment standard
The national treatment standard exists to ensure that foreign investors and their investments will be treated no less favourably than domestic investors and their investments. For example, Article 3(c) of the BIT between Australia and China states: ‘A Contracting Party shall at all times […] treat investments and activities associated with investments in its own territory […] on a basis no less favourable than that accorded to investments and activities associated with investments of nationals of any third country.’3
A tribunal may find that a state has breached the national treatment standard if the government implements measures that discriminate against foreign investors. Government mandated Covid-19 protection measures have the potential, at least arguably so, to discriminate against foreign investors. For example, a number of governments globally have implemented Covid-19 measures that mandate the closure of airports and prohibit flights in or out of the country. These measures adversely affect both domestically owned and internationally owned airlines. If, however, a state government subsequently implemented bailout measures that only applied to domestically owned airlines, the state may face a claim that it has breached the national treatment standard.
Indirect expropriation by a state occurs when a state implements measures that have the effect of controlling or interfering with the use, value or benefit of an investment. For example, in the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA), Article 14.11 states that:
‘A Party shall not expropriate or nationalise a covered investment either directly or through measures equivalent to expropriation or nationalisation (expropriation), except:
1. for a public purpose;
2. in a non-discriminatory manner;
3. on payment of prompt, adequate and effective compensation; and
4. in accordance with due process of law.’
An International Centre for Settlement of Investment Disputes (ICSID) tribunal held that a series of state measures over a period of time that has the same effect may also constitute indirect expropriation.4 In Spain the government has issued a royal decree that has the effect of allowing the government to assume control of private hospitals and clinics in an attempt to ‘nationalise’ the Spanish health system and its response to Covid-19.5 Such government measures may provide a basis for an investor to allege indirect expropriation by the government.
A tribunal may find that a state has breached the national treatment standard if the government implements measures that discriminate against foreign investors.
Defences under international investment agreements
If it can be established that government-mandated Covid-19 measures are incompatible with a state’s obligation under a relevant international investment agreement, the question will then turn to whether the state has a valid defence to a claim. A state may have a defence under the relevant international investment agreement or at customary international law.
Where an exception exists under an international investment agreement and the exception applies, the international investment agreement obligations will not apply to the Covid-19 measure. The General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS) include general exceptions that the agreements will not prevent a party from adopting or enforcing measures to protect human life or health, provided that the measures are not arbitrary or discriminatory.6
Only few bilateral investment treaties include general exceptions of a similar nature. For example, some BITs include exceptions for non-discriminatory measures ‘necessary for the maintenance of public order’7 or permit actions taken in ‘circumstances of extreme emergency’8 or ‘for the protection of its own essential security interests’.9 Exceptions are increasingly present in more modern international investment agreements, for example:
• the SAFTA that entered into force on 28 July 2003 provides that non-discriminatory measures are permitted where ‘necessary to protect public morals or to maintain public order’, ‘necessary to protect human […] life or health’ or ‘necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Chapter including those relating to […] safety’;10
• the China-Australia FTA that entered into force in December 2015 provides that non-discriminatory measures for ‘legitimate public welfare objectives of public health, safety, the environment, public morals or public order shall not be the subject of a claim’ by an investor;11
• the IA-CEPA provides that non-discriminatory measures are permitted where ‘necessary to protect public morals or to main public order’ and to ‘protect human […] health’;12
• the Australia-Hong Kong FTA that entered into force on 18 January 2020 incorporates the general exceptions found in the GATT and GATS.13
While there is a strong argument that Covid-19 measures would be classified as a measure to protect ‘public health’ and ‘safety’, it must be remembered that for the exceptions to apply, the measures taken must be ‘non-discriminatory’ in nature. States may also seek to rely on the doctrine of the state’s police power which provides that state regulations within the bounds of accepted police power or regulatory power of states are not compensable expropriations where such measures are for the bona fide purpose of protecting public welfare. The same caveat applies, however, to the power being exercised in a non-discriminatory and proportionate manner.14
Defences under customary international law
States may also defend against treaty claims on the basis of customary international law defences.15 The three defences relevant to defending Covid-19 measures include force majeure, distress and necessity. The plea of necessity featured heavily in the investment treaty-based cases arising from the Argentine financial crisis, whereas force majeure and distress have not featured prominently in investment treaty cases.
The defence of necessity requires a state to fulfil four requirements: a grave and imminent peril; that threatens an essential interest; the state’s act must not seriously impair another essential interest; and the state’s act was the ‘only way’ to safeguard the interest from that peril. The plea of necessity will be excluded if the obligation in question excludes reliance on necessity and the state contributed to the situation of necessity.16 The issue of contribution was live in the claims arising from the Argentine financial crisis. For example, one tribunal dismissed Argentina’s attempt to rely on necessity, finding it contributed to the situation of necessity with ‘well-intended but ill-conceived policies’.17 Another tribunal found the plea of necessity required some degree of fault and accepted Argentina’s reliance on the plea.18 Satisfying the requirements of necessity is a high bar and the level of contribution by the government to the Covid-19 pandemic will become a critical factor.
The defence of force majeure is strict. It requires the fulfilment of five conditions: unforeseen event or an irresistible force; the event or force must be beyond the state’s control; the event must make it ‘materially’ impossible to perform an obligation; and the state must not have assumed the risk of the situation occurring.19
The defence of distress requires the state to show: threat to life; a special relationship between the author of the act and the persons in question; that there was no other reasonable way to deal with the threat; that it did not contribute to the situation; and that the measures were proportionate.20
As aforementioned, the defences of force majeure and distress have not received much attention in investment treaty cases and it remains to be seen whether this will change in any claims arising from the Covid-19 pandemic.
1 Australia is party to bilateral investment treaties with Argentina, China, Czech Republic, Egypt, Hungary, Laos, Lithuania, Pakistan, Papua New Guinea, the Philippines, Poland, Romania, Sri Lanka, Turkey and Uruguay. Australia has entered into free trade agreements with Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Peru, New Zealand, Singapore, Thailand and the United States. See Department of Foreign Affairs and Trade, ‘Australia’s bilateral investment treaties’ www.dfat.gov.au/trade/investment/Pages/australias-bilateral-investment-treaties accessed 22 September 2020.
2 See Department of Foreign Affairs and Trade, ‘Official documents’ www.dfat.gov.au/trade/agreements/in-force/safta/official-documents/Pages/default accessed 22 September 2020.
3 Agreement between the Government of Australia and the Government of the People’s Republic of China on the Reciprocal Encouragement and Protection of Investments www.austlii.edu.au/au/other/dfat/treaties/1988/14.html accessed 22 September 2020.
4 Generation Ukraine Inc v Ukraine (2003) ICSID Case No ARB/00/9 [20.22]www.italaw.com/sites/default/files/case-documents/ita0358.pdf accessed 22 September 2020.
5 Royal Decree 463/2020 (14 March 2020) www.redaccionmedica.com/contenido/images/BOE-A-2020-3692.pdf accessed 22 September 2020.
6 Article XX of the General Agreement on Tariffs and Trade and Article XIV of the General Agreement on Trade in Service.
7 This wording does not appear in BITs entered into by Australia (see n 2 above). See, eg, Japan-China BIT (Beijing, 27 August 1988) and Latvia-United States BIT (Washington, 13 January 1995) and summary table www.oecd.org/daf/inv/investment-policy/40243411.pdf accessed 22 September 2020.
8 Appears in BITs entered into by India, see eg Hungary-India BIT (New Delhi, 3 November 2003); United Kingdom-India BIT (London, 14 March 1994) and summary table www.oecd.org/daf/inv/investment-policy/40243411.pdf accessed 22 September 2020.
9 Australia-India BIT (New Delhi, 26 February 1999, entry into force 4 May 2000, terminated 23 March 2017) and summary table www.oecd.org/daf/inv/investment-policy/40243411.pdf accessed
22 September 2020.
10 Ch 8, Art 19, see www.dfat.gov.au/trade/agreements/in-force/safta/official-documents/Pages/default accessed 22 September 2020.
11 See Art 9.11(4) and 9.8 www.dfat.gov.au/trade/agreements/in-force/chafta/Pages/australia-china-fta accessed 22 September 2020.
12 See ch 17, Art 17.2(3) and 17.2(4) www.dfat.gov.au/trade/agreements/not-yet-in-force/iacepa/iacepa-text/Pages/default accessed 22 September 2020.
13 See ch 19 www.dfat.gov.au/trade/agreements/in-force/a-hkfta/a-hkfta-text/Pages/default accessed 22 September 2020.
14 Philip Morris Brands Sàrl, Philip Morris Products SA and Abal Hermanos SA v Oriental Republic of Uruguay, ICSID Case No ARB/10/7
15 See the International Law Commission’s Articles on State Responsibility (2001) ch V.
16 Ibid, Art 25.
17 Impregilo v Argentina (ICSID Case No ARB/07/17), at 356 and 359.
18 Urbaser v Argentina(CISID Case No ARB/07/26) at 711.
19 Ibid, Art 23.
20 Ibid, Art 24.
Joshua Paffey is a partner and Head of Arbitration at Corrs Chambers Westgarth and can be contacted at email@example.com. Lee Carroll is a special counsel at Corrs Chambers Westgarth and can be contacted at firstname.lastname@example.org.