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COVID-19 and the risk of foreign investor challenges

Tensions are likely to surface between the public-policy directions of governments managing a challenging economic climate and foreign investors' private interests.

Financial district and courthouse

States worldwide have taken extraordinary and wide-ranging emergency measures to curb the spread of COVID-19 and address the economic fallout triggered by the pandemic. Ensuring the economy is more resilient in the face of ongoing adversity is an understandable policy response. But in doing so, national governments are also running the risk of displeasing foreign investors. Some of them might be tempted to recoup their losses by turning to investor-state arbitration.


It should come as no surprise that there have been calls to shield government from legal action over Covid-related measures. The fears that government policies will lead to a dramatic surge in investor-state disputes are real. Governments have seized control of private health providers and imposed restrictions on the import and export of certain commodities. They've shut down non-essential services and placed constraints on local or national movement. They've also adopted a raft of regulatory measures to soften the economic blow


These can arouse suspicion among foreign investors tempted to claim they are being unfairly treated.


The thousands of trade and investment agreements concluded worldwide appears, at least at first glance, to provide them with some recourse for legal action.


Foreign investors can challenge government-imposed measures using arbitration provided under the investor-state dispute settlement (ISDS) provisions found in most bilateral treaties and investment chapters of trade agreements. 


Ultimately, these will be arbitrated by ad-hoc panels of lawyers who operate outside of domestic court systems and who are not obliged to follow precedent. 


"The standards of protection for foreign investors are broadly framed in the treaties," notes Gus Van Harten, an ISDS critic who is associate dean and professor at Osgoode Hall Law School. "So it is a matter of the imagination of the lawyer just how a dispute between a foreign-owned business and a government could lead to a claim."


We can expect foreign investors to argue, for instance, that there is a prohibition under investment treaties to "expropriate" or appropriate private resources such as health care facilities for the public good without compensation. Others will likely assert that the public-health emergency measures were implemented unfairly and have had a disproportionate effect on their interests. State aid packages are also likely to come under scrutiny -- especially those that benefitted companies in certain sectors, thereby creating an uneven playing field. That would expose governments to charges they have breached investors' right to national and most-favoured-nation treatment. 


"It will take time to see how arbitration panels apply customary international law terms such as non-discrimination and fair and equitable treatment -- standard terms typically included in these treaties," says international trade lawyer Lawrence Herman.


Whether they succeed is another matter. Even if an investor were to establish a violation of an investment protection right, a state could invoke a series of defences that rely on customary international law or specific language in a bilateral investment treaty. The International Law Commission's Articles on Responsibility of States for International Wrongful Acts establishes six defences that governments can invoke to avoid liability. States will most likely invoke either force majeure, distress (a threat to life) or necessity (situations where they must take action to safeguard an essential interest against a grave and imminent peril) to defend themselves against COVID-related claims.


States can also rest on the police powers doctrine, or broad regulatory power, which protects their bona fide right to enact measures to protect their citizens' health, safety and welfare. As such, state measures that are a prime facie exercise of police powers may not be considered expropriation. So they don't give rise to compensation even when they cause economic damage to an investor. "Tribunals have become more aware and more sophisticated in terms of looking at the government's role, its right to regulate, and the public purpose behind some of the measures that otherwise might be determined to be an expropriation," says Michael Woods, a founding partner of Woods, LaFortune LLP, an international trade law boutique.


We've recognized protecting public health as an essential manifestation of the State's police powers going as far back as 1903. In the Bischoff case, a rare judgment involving an a epidemic, the Claims Commission found that the seizure of a German carriage by Venezuelan authorities after it carried two persons infected with smallpox did not constitute a wrongful taking under international law. The Commission held that "certainly during an epidemic of an infectious disease there can be no liability for the reasonable exercise of police powers." More recently, in Saluka v. Czech Republic, the ISDS tribunal found that it "is now 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."


"That's exactly where the debate would take place," says Martin Valasek, an international arbitration expert with Norton Rose. Given the circumstances of the pandemic, he says, "there is an argument that that is within the State's police powers, especially if it meets the conditions of being non-discriminatory (and) if the evidence shows that it was adopted in good faith to protect an even greater ill."


While arbitration panels are no strangers to public health-related issues, Van Harten has little faith that ISDS arbitration panels will consider expert evidence. He asserts that ISDS arbitrators who have dealt with public health issues or other matters requiring technical expertise have issued "questionable" rulings against countries, due to their lack of expertise. 


ISDS arbitrators, he adds, have shown little deference to the courts' practices when reviewing expert decision-makers or decisions by governments acting on public health specialists' advice. "To combine this breadth and non-deferential intensity of review with the sledgehammer of uncapped retroactive damages awards is highly exceptional and poses a high-cost risk for governmental capacity to act in protection of public health," says Van Harten, the author of Sovereign Choices and Sovereign Constraints.


The likelihood that ISDS arbitrators will take the position that states have the right to enact emergency measures during a pandemic is strong. But they can also decide that they still need to pay compensation. It's one of the reasons why over 350 global labour unions and international civil society organizations have called for a restriction on liability claims against governments for COVID-related measures. 


But that's not going to happen, says Herman of Herman & Associates and Cassidy Levy Kent. Too much money is at stake. Valasek goes even further, arguing it makes little sense to call for a moratorium on ISDS COVID-related actions. It betrays the "na├»ve" belief that all governments will be acting in the most upright and upstanding way during the pandemic. 


"Actors who are calling for a moratorium are assuming that all states will act properly, and I'm not sure that that's the proper assumption to make," he says. "All rules of all justice systems are in place precisely to test whether actors are conducting themselves properly or not."