REUTERS | Tobias Schwarz

The investment treaty implications of COVID-19 responses by states

The global health crisis caused by the COVID-19 pandemic not only stretches health systems beyond their maximum capacities, but the pandemic is also causing an economic crisis that could exceed the magnitude of the Great Depression.

To cope with both health and economic crises, states have adopted restrictive measures on an unprecedented scale. Many countries have issued lockdowns preventing free trans-border movement of goods and persons. With economies in free fall, states are distributing hundreds of billions of euros and dollars to cushion the economic repercussions. To borrow the words of former European Central Bank President, Mario Draghi, when confronted with the 2008 financial crisis, countries around the globe are “doing whatever it takes” to contain the severe effects caused by the pandemic.

Obviously, states are obligated to protect the health of their citizens and the economy by adopting all necessary measures as they deem fit. However, in doing so, states should adhere to some basic principles, such as the non-discrimination and proportionality principles, even when adopting emergency measures. Core fundamental rights, such as the protection of property, have also been considered non-alienable in emergency situations.

These basic principles are also reflected in the substantive protection standards commonly included in the more than 3,000 bilateral investment treaties (BITs), albeit with some variations.

Health measures and economic measures

At the start of the COVID-19 pandemic, states focused on adopting the necessary health measures.

For example, Spain adopted Royal Decree-Law 463/2020 of 14 March 2020, which declared a state of emergency. The decree specifies measures to ensure the supply of goods and services necessary for the protection of public health. This granted the state the power to intervene and temporarily occupy factories, production units, and private health care facilities. It also included issuing necessary orders to ensure the supply and operation of production centres affected by product shortages.

Switzerland adopted similar measures, which, among other things, allows the state to confiscate essential medical goods held by companies while compensating at sale price.

The United States opted for a similar measure by using the Defense Production Act of 1950, thereby compelling General Motors Company to switch its production to produce medical ventilators.

In the current phase, states are turning their focus to managing the expected economic fallout caused by the pandemic in practically all sectors of the economy, in particular, sectors connected to tourism, such as airlines, restaurants and hotels. For example, through an emergency decree on 16 March 2020, the Italian government took control of the loss-making airline Alitalia. However, the substantial financial backing by the Italian state caused competing airlines, such as Air Dolomiti, a wholly owned subsidiary of Lufthansa, Blue Panorama Airlines, and Neos, to claim that the aid offered to Alitalia created an uneven playing field in the airline industry. Similarly, other airlines such as KLM-Air France and Lufthansa have or are very likely to receive significant financial support from their respective home states, while other competing airlines are not getting the same treatment.

Whereas most health measures were certainly necessary and justified and will probably not raise any problems in connection with the BITs, some economic measures, depending on the way they are designed and applied, may potentially be in breach of substantive protection standards such as the fair and equitable treatment standard, most favoured nation standard or the protection against (in)direct expropriation without compensation.

Protectionism under the guise of COVID-19

Besides the specific measures adopted to contain the economic fallout of the COVID-19 pandemic, one can also note a general trend towards more protectionism. One particular example is the focus of many states on increasing and tightening the screening of foreign investments in sectors that are considered critical. Traditionally, the screening of foreign investments would focus on sectors such as security, defence and infrastructure, but now it has turned to health and other “vital” sectors. The recently adopted EU Regulation for the screening of foreign investments is a particularly powerful tool in this regard.

Indeed, on 25 March 2020, the European Commission issued guidance to member states ahead of the application of the EU Screening Regulation, which is supposed to enter into force on 11 October 2020. The regulation puts in place, for the first time, an EU-level mechanism to coordinate the screening of foreign investments likely to affect the security and public order of the EU and its member states. This guidance encourages increased foreign direct investment (FDI) screening for “strategic industries”, in particular, but by no means limited to, healthcare related industries.

Accordingly, in recent months, FDI regimes have been amended and tightened in several EU member states. For example, in Germany, the COVID-19 crisis has accelerated and modified the reform of the FDI rules, which was introduced at the beginning of this year. Spain has already adopted a Royal Legislative Decree 8/2020 on urgent extraordinary measures to deal with the economic and social impact of COVID-19, which restricts investments in the country’s main strategic sectors, for reasons of public security and public order for investors based outside the EU and the European Free Trade Association.

Inherently, the screening of foreign investments contains an element of discrimination and arbitrariness. States should thus be mindful that such screenings should be done in a transparent and non-discriminatory manner, otherwise this could result in breaches of the substantive protection standards contained in BITs.

Better safe than sorry

In sum, states should be aware of their obligations arising out of their BITs when designing and applying (economic) measures in response to the COVID-19 crisis. These obligations, as well as the right of foreign investors to bring claims against states for breaches of the BITs, remain applicable, even in COVID-19 times.

However, it must also be stressed that the contents of the 3,000 BITs vary. While some BITs, in particular older ones, provide for less explicit policy space for states to adopt measures for the protection of the public good and thus offer a higher chance of success for claims by foreign investors, other, newer BITs provide for significantly more policy space, which reduces the potential risk of liabilities for states.

Either way, it is important that both states and foreign investors consider and analyse the potential interaction between COVID-19 measures and the rights and obligations contained in the BITs.

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