This article considers whether measures taken by States in response to the COVID-19 pandemic could provide a legitimate basis for claims under bilateral investment treaties (BITs) or other investment protection instruments, and identifies some of the defences that may be available to States. A second article will address in more detail defences under customary international law that may be available to States.

Overview

On 11 March 2020, the World Health Organization (WHO) declared the COVID-19 situation a pandemic.1 In light of the increasing spread of the virus, the WHO called on States “to take urgent and aggressive action”. In response, States around the globe have been taking emergency measures of differing degrees to seek to limit the impact of the virus. Such measures range from requesting social distancing and restricting travel (at the low end of the scale) to the mandatory closure of non-essential businesses and strict restrictions on movement of persons (at the high end of the scale). The economic impact of these measures has already resulted in a significant slowdown in the global economy, with the full economic shock yet to be fully understood.

In many countries, non-compliance with emergency measures is subject to criminal sanctions. As such, businesses have been required to take difficult decisions that will have a significant impact on the their day-to-day operations, as well as their future financial viability. There have already been a number of instances where goods and manufacturing equipment, capacity and facilities have been requisitioned to be deployed by the State in the fight against the virus. It is likely that some businesses may be nationalized, while many others will fail as a result of the emergency measures. Governments have also put in place widely disparate schemes to provide significant financial and other forms of government aid to businesses and workers.

Given the unprecedented scope of such measures in peace time, investors and States should be aware of how their rights and obligations under investment treaties and other investment instruments may be impacted by these events.

Investment protections

The measures that have been taken by States to combat COVID-19 will no doubt form the basis of claims by investors who will feel that they have been unfairly treated.

The merits of such claims will of course be highly fact specific both with respect to the State measures and the specific circumstances of the investments. Before bringing any claims, investors will need to consider carefully whether the measures taken by States have the potential to give rise to a breach of any of the protection standards commonly found in investment treaties. The protection standards that investors might seek to invoke include, among others:

  • the prohibition on expropriation without compensation – as well as any outright requisition or nationalization, issues such as whether enforced lockdowns or classification of a business as “non-essential” might constitute indirect expropriation would need to be considered;
  • the right to fair and equitable treatment – the COVID-19 measures may be challenged by some investors on the basis of their proportionality, or on whether such measures may have been implemented unfairly, having a disproportionate effect on certain investors, or unfairly favouring some sector players while disadvantaging others; and
  • the right to national and most-favoured nation treatment – for example, tribunals may be called on to consider whether State aid packages offered to companies in certain sectors, or to certain host-State companies, created an uneven playing field.

Given the unprecedented situation, it remains to be seen whether such claims would in fact satisfy the international law standards that tribunals will apply. It should also be noted that many BITs include a provision that relates to compensation or reparation in time of war or conflict. Some of these clauses are in fact drafted more broadly to encompass the more general concept of “national emergency”, and could provide an additional basis for claims. By way of example, the UK-Mexico BIT includes the following provision:

Investors of one Contracting Party whose investments in the territory of the other Contracting Party suffer losses owing to war or other armed conflict, revolution, a state of national emergency, revolt, insurrection or riot in the territory of the latter Contracting Party shall be accorded by the latter Contracting Party treatment, as regards restitution, indemnification, compensation or other settlement, no less favourable than that which the latter Contracting Party accords to its own investors or to investors of any third State. (emphasis added)

It remains to be seen whether tribunals would conclude that the outbreak of COVID-19 in any particular country constitutes a national emergency within the meaning of such a provision.

What defences might a State have?

Even if an investor were able to establish that there has been a breach of an investment protection right, State parties may nonetheless have one or more valid defences to claims of violation of investors’ rights. Such defences may be established either (i) on the specific wording of the treaty or investment code at issue or (ii) as may be available under customary international law.

Treaty defences

While many investment treaties and codes contain broadly similar provisions, the drafting of each does vary. Each case would therefore require an independent assessment.

For many years, investment treaties and codes have tended to adopt a similar format under which investors are granted rights and host States have assumed obligations in respect of foreign investments. States commonly have little in the way of defences or exceptions that are spelled out in the treaties. In recent years, however, new investment treaties have started to include provisions that have sought to redress this perceived imbalance between the rights afforded to investors and the obligations placed on host States.

By way of example, the Model BIT of the Netherlands (2019)2 expressly seeks to prevent claims for indirect expropriation when measures have been taken to protect, among other things, public health:

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, safety, environment or public morals, social or consumer protection or promotion and protection of cultural diversity, do not constitute indirect expropriations. (Art. 12(8))

Similarly, the new Agreement between the United States of America, the United Mexican States, and Canada (USMCA)3 provides that:

Non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations, except in rare circumstances. (Annex 14-B Expropriation, para. 3(b))

Certain treaties also contain a general exception in respect of measures taken to maintain “public order”. For example, the Japan-Korea BIT (2002) does not afford investors protections where a State takes “any measure necessary for the maintenance of public order. The public order exceptions may be invoked only where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society.”4 Such clauses, however, are relatively rare.

Customary international law defences

In the absence of specific language in a BIT, a State may nonetheless be able to invoke a range of defences available under customary international law.

The International Law Commission’s (ILC) Articles on Responsibility of States for Internationally Wrongful Acts (2001)5 establish six defences that States may invoke as to avoid responsibility. These defences are referred to in the draft Articles as “circumstances precluding wrongfulness”, and apply in addition to any exception or defence provided for in the applicable BIT.

Of the six available defences, the most likely grounds to be invoked in relation to COVID-19 related claims are (i) force majeure (Article 23), (ii) distress (Article 24), and (iii) necessity (Article 25). The law on necessity is relatively well-developed, having been a core defence of the Republic of Argentina to the raft of claims it faced following the country’s 2001-2002 economic crisis. Force majeure and distress, meanwhile, are legal concepts that have been invoked far less frequently as a matter of international law.

In our next article in this series, we will explore each of these possible defences in further detail.