A BALANCE OF OBLIGATIONS: THE RESPONSE TO THE COVID-19 PANDEMIC AND INVESTMENT TREATY PROTECTIONS

The COVID-19 pandemic has brought about an unprecedented level of state action as governments around the world make difficult decisions in response to the spread of the virus. Over the past few months this has resulted in a variety of measures in different countries, including the suspension of contractual rights, social distancing regulations, the requisitioning or nationalisation of private property, the closure of borders, export and travel restrictions, and bail-outs of state carriers.

In such extraordinary times, a degree of interference with private rights is almost inevitable. Many states are balancing multiple concerns, looking to protect public health and absorbing expert evidence in a fast-moving environment, whilst trying to mitigate both economic and societal damage in the short and longer term. However, even in times of crisis, states nonetheless have domestic and international law obligations (including under investment treaties), which impose standards against which their conduct may be held to account. Depending on the circumstances, state action in response to the COVID-19 pandemic which fails to meet these standards could give rise to claims.

This article describes the potential international investment law protections which may be relevant in response to COVID-19. It also discusses the key considerations for states and foreign investors alike when assessing whether state action may infringe a state’s international law obligations.

Protections for foreign investors under investment treaties

A foreign investor may enjoy protections under an international investment agreement (an IIA), which if breached by state action can give rise to the right to make a claim. An IIA is an agreement between two or more states containing reciprocal undertakings for the promotion and protection of private investments made by nationals of the state signatories in each other’s territories. Such agreements have historically been entered into to provide confidence to foreign investors that their investment will not be negatively affected by certain types of irregular action by the state hosting the investment (the host state) and that if it is, to enable the investor to claim damages. Most commonly, these IIAs are bilateral arrangements (called bilateral investment treaties, or BITs), multilateral treaties or free trade agreements containing investment protections.

The definitions of investor and investment vary between different IIAs but the definition of investment often includes a broad and non-exhaustive list of categories of assets. Whilst IIAs are state-to-state agreements, they usually contain provisions allowing an investor from one state to enforce the guarantees as to the treatment of their investment in the host state through international arbitration before an independent tribunal.

Each treaty must be considered on its terms but IIAs commonly include the following investment protections:

  1. a protection against the unlawful expropriation of an investment without adequate compensation, whether directly or indirectly through a series of governmental acts which encroach on an investment and result in it being deprived of value;
  2. the guarantee of fair and equitable treatment (or FET). Claims under FET provisions typically fall into two broad categories: prohibitions against a denial of justice and claims based on administrative decision-making. Not all regulatory changes will constitute a violation of the FET standard, and the existence of such protections does not deprive a state of its ability to exercise its regulatory powers. However, where the state’s exercise of its regulatory power is arbitrary or based on procedural unfairness or lack of due process, bad faith, discrimination or a failure to protect an investor’s legitimate expectations as to how they will be treated, a FET claim may be warranted;
  3. a guarantee of full protection and security for the investment and for the investor. Whilst this is generally understood to concern physical protection, it may also encompass legal protection;
  4. guarantees of treatment no less favourable than that given either to nationals of the Host State of the investment or to nationals of third states, which prevent the host state discriminating against the foreign investor; and
  5. the right to repatriate profit and capital.

Some treaties specifically guarantee non-discriminatory treatment with respect to restitution, compensation or other valuable consideration for losses due to civil strife or state of emergency.

Treaty obligations in the context of COVID-19

On the one hand, states are undoubtedly facing significant challenges in balancing the need to protect public health with the prospect of short and long term economic damage.  On the other hand, many foreign investors are facing wide-ranging governmental interference in multiple aspects of their business (including, in many jurisdictions, restrictions on the use and movement of their employees, the use of their property and the enforcement of their contractual rights). Some investors have questioned whether the extent of the measures imposed is justified, or whether the measures are proportionate to the serious economic damage which they can inflict.

Based on the standard protections found in IIAs outlined above, key considerations as to whether a state’s response to COVID-19 is consistent with its international law obligations may include:

  • the evidential basis for state measures introduced to address the pandemic in different ways;
  • the length of time for which measures are imposed and the regularity with which they are reviewed;
  • whether measures restricting private rights and freedoms are proportionate based on the anticipated benefit in terms of fighting the virus and the possible negative impact of those actions on the affected investors;
  • whether steps have been taken to mitigate the damage caused by the measures;
  • whether the measures impact unequally or disproportionately on one sector, group or type of company or individual impacting the foreign investor;
  • whether the enforcement mechanisms used by states to implement COVID-19 regulations are consistent with domestic legislation;
  • whether, particularly in the context of any requisitioning or nationalisation, any provision has been made for compensation and, if so,
    • how such compensation is calculated; and
    • the availability (or otherwise) of compensation for all who are similarly affected (including whether nationals of the host State are placed in a better position than foreign investors);
  • whether the measures imposed are capable of, and are being used for, purposes beyond tackling COVID-19;
  • whether any assurances have been given to sectors, companies or individuals as to their treatment in the context of COVID-19 and whether those assurances were fulfilled; and
  • whether existing laws are being used to address COVID-19 in a manner which is inconsistent with their legislative intent.  

States may find it important, for a multitude of reasons, to retain comprehensive contemporaneous records of the reasons for decisions, as well as ensuring that communications with individual investors, as well as industry and sector groups, are clearly documented.

For investors, it will also be important to keep contemporaneous records of the impact on the investment(s) affected by state action. Any communications with states, particularly those seeking or receiving assurances as to treatment, should be carefully recorded and those records preserved.

Other relevant considerations

The fact that state action has negatively affected a foreign investment does not automatically lead to an actionable breach of an IIA. This will depend on the nature of the state action and the circumstances in which it has been taken, the wording and interpretation of the IIA, and whether the IIA contains exemptions or prudential carve outs which apply in certain circumstances (such as national security, public health or public order). In such extraordinary circumstances there may be defences available to a state, either based on the wording of the relevant treaty or on customary international law (including defences based on necessity, distress or force majeure).

In summary, notwithstanding the fact that COVID-19 presents an unprecedented and fast-developing challenge, the guarantees given to foreign investors under IIAs remain relevant to an assessment of state action in response to the pandemic. Whilst the question of whether an investor may be entitled to damages under an IIA is fact and treaty-specific, the prospect of such claims is therefore relevant to states and investors alike.

For more information about our investment treaty practice, and to find a key contact in a relevant jurisdiction, please click here.

Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852

Christian Leathley
Christian Leathley
Partner
+1 917 542 7812

Hannah Ambrose
Hannah Ambrose
Senior Associate
+44 20 7466 7585

ICSID issues first award involving China as Respondent, finding in host state’s favour

In an award dated 9 March 2017, the Tribunal in an ICSID arbitration between Korean investor Ansung Housing Co., Ltd and China dismissed all claims as time-barred. The Claimant's attempt to circumvent the limitation period by relying on the most favoured nation (MFN) clause did not succeed. The Tribunal came to this conclusion at an early stage of the proceeding, "with relative ease and despatch".

This is the first ICSID arbitration to involve China as the respondent state that has proceeded to a substantive hearing and resulted in an award.

See our previous blog on the case here

Click here for a copy of the Award.

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Mixed messages to investors as India quietly terminates bilateral investment treaties with 58 countries

The Government of India says it has sent notices to terminate bilateral investment treaties (BITs) with 58 countries, including 22 EU countries.  It has been reported that many of these BITs will cease to apply to new investments from as early as April 2017. The BIT between India and The Netherlands (which had been a common route for investment into India) has already been terminated from December 2016.  Termination of the BITs would also remove protection for new investments by Indian investors into the counterparty countries. For the remaining 25 of its BITs that have not completed their initial term, and so are not ripe for termination, India has circulated a proposed joint interpretative statement to the counterparties to these BITs seeking to align the ongoing treaties with its 2015 Model BIT.  While investments made before the termination of the 58 treaties may be protected for some years under the 'sunset' clauses in those BITs, India's actions send mixed messages at a time when the Indian government is making renewed efforts to attract inbound investment with its 'Make in India' campaign, and when outbound investment by Indian companies continues to increase into both developed and developing economies. 

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Urbaser v. Argentina and Burlington v. Ecuador: Investment arbitration is not over the counterclaims yet

Two recent decisions by tribunals have advanced the body of tribunal practice considering the issue of counterclaims by respondent states in investment treaty arbitration: Burlington Resources Inc. v. Ecuador, in which the tribunal awarded damages against the investor for breach of Ecuadorian environmental law in the performance of its investment, and Urbaser SA and Consorcio de Aguas Bilbao Bizkaia v. Argentina, in which the tribunal accepted jurisdiction to hear Argentina's counterclaim asserting that the investor had violated international human rights obligations. These decisions arise in the context of conceptual challenges to the pursuit of counterclaims in investment arbitration.

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New dispute resolution rules for foreign investors in South Africa

South Africa’s draft regulations for investor-state mediation require refinement to work effectively with international arbitration.

Interested parties have until 28 February 2017 to comment on draft Regulations on Mediation Rules (Regulations) published by South Africa’s Department of Trade and Industry (DTI) on 30 December 2016, under the Protection of Investment Act, 2015 (Act).

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“Planes, paintings and Russian space assets” – Practicalities, challenges, successes and failures in the enforcement of arbitral awards against states and state entities

Wednesday 6 July 2016, 12.45 – 1.45pm BST

States are increasingly involved in disputes arising from commercial transactions and arbitrations with investors under various bilateral and multilateral investment treaties.  Resolving a dispute with a state is only the first step – more significant is the ability to enforce the award.

In this webinar, our speakers will draw on recent examples to discuss:

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Video post in “Observations on Arbitration” series: “Introduction to Investment Arbitration”

In this video post in the "Observations on Arbitration" series, Christian Leathley provides an Introduction to Investment Arbitration, discussing the ways in which an investment arbitration can arise, explaining what bilateral investment treaties (BITs) are and outlining the nature of the obligations owed by a state to an investor under such agreements. Continue reading

Investor’s claims against Peru thrown out due to abusive corporate restructuring to acquire treaty rights

In an award rendered on 9 January 2015, an ICSID tribunal (Gabrielle Kaufmann-Kohler (presiding), Eduardo Zuleta, and Raúl Vinuesa), determined that one of the Claimants had acquired shares in a Peruvian company only for the purpose of obtaining treaty rights, in relation to a foreseeable dispute and less than two weeks before the announcement of the State measures at issue in the case. The Tribunal concluded that the only plausible reason for the restructuring was to provide an investment treaty claim against Peru. The restructuring was therefore abusive. On that basis, the Tribunal declined to rule on the merits of the case, dismissed the claims, and ordered the Claimants to pay the Republic of Peru more than US$1.5 million in costs.

Investors are increasingly alive to the investment protections offered by bilateral and multilateral investment treaties.  Not all structuring (or re-structuring) of investments will constitute an abuse of process and with careful advance planning, investors can make their investments using the right vehicle and transaction structure to ensure the best treaty protections possible. For more information on this topic, please contact Prudence Heidemans to access our webinar on Structuring Investments and Maximising Treaty Protection.

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Investment protection and ISDS in the TTIP: the discussion continues with more consultation around the corner

Yesterday afternoon, the EU Commission issued its Report on the outcome of the public consultation on the inclusion of investment protection and investor-state-dispute-settlement (ISDS) in the Transatlantic Trade and Investment Partnership (TTIP) being negotiated between the EU and the US. As discussed in our blog post here, the public consultation was launched against the backdrop of vociferous debate about the nature of ISDS and investment protection more generally and in relation to the TTIP. The controversy surrounding investment protection and ISDS in connection with the TTIP is described in our recent podcast.

It is no surprise that the Report reveals strong opposition to, and concerns about, ISDS in the TTIP. It is also no surprise that the discussion as to both the content of the investment protections (including any “right to regulate”, as it is known), and the nature of the mechanism by which these can be enforced, will continue. In its Report, in response to the criticisms of inclusion of ISDS in the TTIP, the Commission refers back to the fact that the consultation takes place in specific circumstances in which the Council (and therefore, to all intents and purposes, each Member State) has unanimously entrusted the Commission to negotiate high standards of investment protection and ISDS within the TTIP, providing the final outcome corresponds to EU interests.   Further, whilst the negotiating directives include an element of conditionality and make clear that a decision on whether or not to include ISDS is to be taken during the final phase of negotiations, it cannot be ignored that the US position is also that investment protection and ISDS should feature in the TTIP.

Whilst the consultation received an extremely high proportion of pre-populated responses organised by NGOs (which generally opposed the inclusion of ISDS), it also solicited responses from a broad cross-section of stakeholders which has allowed the Commission to identify a number of key points areas (or “core issues”) to develop. These are:

  • The protection of the right to regulate
  • The supervision and functioning of arbitral tribunals
  • The relationship between ISDS arbitration and domestic remedies
  • Review of ISDS decisions for legal correctness through an appellate mechanism

The Commission has committed to further consultation with EU stakeholders in the first quarter of 2015.  However, at this stage it is not clear how further consultation on these “core issues” will put the Commission in a better position to develop the investment chapter. For example, the “right to regulate” is the flip-side of the guarantee to an investor of fair and equitable treatment. Any re-consideration of the right to regulate will be deficient if it does not take into account the positive rights of investors which impact on the state’s right, as well as the sectors in which such right should exist without limitation. Again, the relationship between ISDS arbitration and domestic remedies depends on the balance struck between investment protections and the rights of states.  A holistic approach is needed.

The Commission’s Report on the responses to the Consultation is found here, and the accompanying Commission Memo is found here. Aspects of the Report are considered in further detail below. You may also wish to hear Herbert Smith Freehills public international law partner Matthew Weiniger QC discussing these issues on the Today programme on Radio 4 on 14 January 2014 (at 18.55 mins into the broadcast).

For further information, please contact Matthew Weiniger QC, partner, Christian Leathley, partner, or Andrew Cannon, partner, or your usual Herbert Smith Freehills contact.

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Potential risks to investors highlighted by two ICSID tribunals declining to recommend provisional protection against criminal investigations

Investors in some states face a real risk of reprisals after commencing investment claims. Reprisals may range from entirely legitimate (albeit unusually forceful) investigation of serious wrongdoing, which is the prerogative of a sovereign state, to the abuse of power to obtain unfair advantage in the arbitration, which is prohibited.

Consistent with the approach taken by previous tribunals, two ICSID decisions published in December 2014 show the difficulty that the investors faced in overcoming the “particularly high threshold” necessary to convince a tribunal to interfere with a criminal investigation being conducted by the host state – anything short of “concrete instances of intimidation or harassment” may not be sufficient (Churchill Mining Plc and Planet Mining Pty Ltd v. Indonesia (ICSID Case No. ARB/12/14 and 12/40; Caratube International Oil Company LLP & Mr. Devincci Salah Hourani v. Kazakhstan ICSID Case No. ARB/13/13). Despite an apparent link between the criminal investigation and arbitration in each application, provisional relief was refused.

These decisions illustrate that vigorous criminal investigations may be a legitimate state-response to an investment claim, and should be anticipated by investors prior to making a claim. The consequences of such investigations may be particularly difficult to mitigate where the investor relies on an ongoing relationship with the state to conduct its business. Investors might not be entitled to protection against such investigations by way of provisional measures, except where there is compelling evidence that the state’s conduct amounts to intimidation or harassment, or directly prevents an investor from presenting their case. In practice, as the Churchill Mining and Caratube decisions show, this evidentiary burden may be difficult for an investor to discharge and these risks would be better addressed prior to commencing arbitration.  Continue reading