REUTERS | Enrique Castro-Mendivil

Investment protection and COVID-19: who will pick up the tab?

The COVID-19 pandemic has put to the test the resources and skills of governments around the world. Most have taken public health measures to tackle the pandemic, often coupled with additional measures to deal with the attendant economic consequences. As it is often the case when governments flex their regulatory muscle, tension has arisen between the public and the private sectors, particularly in respect of who will pick up the tab. For example, in April 2020 the Peruvian government passed a bill suspending the collection of toll fees on the country’s road network in an attempt to ease the costs of the transport of essential goods and workers. Affected toll road operators have opposed this measure and threatened litigation against the state. A month later, the Mexican government sought to modify the country’s energy regime by restricting private renewable energy generation and granting preferential grid access to facilities generating electricity by conventional means. The rationale for this was reportedly that the pandemic had caused demand for electricity to fall, and the government needed to protect the country’s energy security. In practice, it has been suggested in some quarters that these measures will favour Mexico’s state-owned electricity company. Legal action is ongoing in the Mexican courts.

At a domestic level, the question as who is to pick up the tab is one decided by local courts by reference to domestic administrative law. In many cases, that would be the only forum available to aggrieved investors. Some foreign investors, however, may be able to submit this question to arbitral tribunals established under investment treaties and some free trade agreements (FTA). These treaties generally afford qualifying investors a range of general protections or ‘standards’, including fair and equitable treatment (FET), full protection and security of investments (including the physical protection of an investment), and national and most favoured nation (MFN) treatment, guarantees that in conjunction ensure that foreign investors are not treated less favourably than local ones, or investors from other countries. In addition, these treaties usually forbid the government to expropriate an investor’s property, whether by direct or indirect means. However, each treaty and FTA is worded differently, customary international law also has a role to play, and of course the facts of each dispute are different too, so it is difficult to make generalisations.

The investor’s perspective

Where the current pandemic is concerned, qualifying investors are perhaps most likely to claim for breach of the FET standard.  Here, an important consideration is whether the government’s measures were proportionate, given their likely effect on investors.  In relation to Peru’s suspension of toll fees, for example, a claimant might argue that the government could have taken measures that were less cumbersome for investors, such as granting road users subsidies or other forms of financial support.

Investors could pursue claims based on discrimination under the FET standard, the national treatment or MFN standards if they believe that the burden of the measures taken to deal with the pandemic has not been evenly shared. This might well be the approach they take in relation to Mexico’s energy reforms, given the different ways in which state-owned and foreign-owned companies have been affected.

Investors may also pursue expropriation claims. For example, it has been reported that the French company Vinci Airports and the French state-owned Groupe ADP have threatened legal action against Chile on the ground of expropriation, among others things, in response to the government’s closure of flight routes from Santiago’s airport, which is operated by the two companies.

The state’s perspective

In theory, states can respond to the claims arising from measures related to the pandemic in three different ways.

First, they can seek to rely on a relevant ‘non-precluded measures’ (NPM) clause, if one is included in the relevant treaty. This allows a state to act in ways that are generally inconsistent with treaty protections, provided certain specified goals are being served. These were relied on by Argentina, for instance, in the first four investment treaty cases that it faced following the economic crisis of 2001/2002 (including CMS Gas Transmission Company v The Argentine Republic).

Secondly, a state can invoke what is sometimes called the ‘police powers’ doctrine. This allows it a general discretion to regulate for public health and safety purposes. The doctrine is not settled law, but it is not new either: it was used more than a century ago in the Bischoff Case of 1903 to resist claims arising from regulatory measures designed to protect public health during an epidemic. The German-Venezuelan Commission held then that “certainly during an epidemic of an infectious disease there can be no liability for the reasonable exercise of police powers” ((1903), 10 UNRIAA 420, (RLA-138)). However, the government must act in good faith, and the measures must be non-discriminatory and an attempt to address a real public health concern (Philip Morris v Uruguay).

A third approach is for a state to invoke the customary international law defences of necessity, distress or force majeure, which have been codified in the International Law Commission’s Articles on Responsibility of States for International Wrongful Acts. However, as with the FET standard, the defence of necessity raises the question of whether a government could have tackled the same issue in a different way. Meanwhile, the defences of distress and force majeure are narrow in scope. Distress requires lives to be in danger, and the state not to have contributed to that danger. As for force majeure, in 2003, for example, Venezuela unsuccessfully relied on the doctrine when defending a claim relating to road tolls, arguing in particular that it was unable to comply with a contractual obligation to increase toll fees because of civil unrest in the country. However, the defence failed as the unrest was found to be foreseeable in Autopista Concesionada de Venezuela v Venezuela. In claims arising from the current pandemic, investors might argue that pandemics in general are foreseeable, even if COVID-19 specifically was not, and governments should have put effective contingency measures in place. Needless to say, the success of this type of argument depends largely on the specific facts of the case, including the medical advice obtained by a government at the relevant times.

Greater clarity?

It seems inevitable that a wave of investment claims will result from COVID-19 and governments’ responses to it. The economic impact of the pandemic is simply too great for investors to ignore. How the claims will play out is difficult to predict given the range of treaty protections and other legal principles involved and the very different facts that may underlie each dispute. What should emerge, though, is a clearer understanding of some of those protections and principles, particularly as they apply in a crisis, whether caused by a pandemic or anything else.

The authors thank associate George Bazinas for his research.

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