Sovereign wealth funds invest across a range of asset classes and engage in capital markets and loan transactions. Their engagement in these activities is consistent with that of any other commercial actor. However, the connection between a sovereign wealth fund and the State by which it has been created raises the question of whether the fund will benefit from state immunity.

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Oil prices have recently reached historic lows and oil companies are faced with a number of potential legal issues as the prices impact their trading and operational agreements. In this podcast series, our energy disputes lawyers consider some of the key issues triggered by the current low oil price environment.

Even investments into relatively stable ‎jurisdictions may be affected by changes in the political and financial landscape. No investor can completely insulate their investment from such changes, but access to an investment treaty can be critical: Andrew Cannon, Laurence Franc-Menget and Hannah Ambrose discuss how investment treaties can protect foreign investments against state action in the second episode in the series.

The episode can be listened to here.

For more information, please contact Andrew Cannon, Partner, Laurence Franc-Menget, Partner, Hannah Ambrose, Senior Associate, or your usual Herbert Smith Freehills contact.

Andrew Cannon

Andrew Cannon
+44 20 7466 2852

Laurence Franc-Menget

Laurence Franc-Menget
+33 1 53 57 73 70

Hannah Ambrose

Hannah Ambrose
Senior Associate
+44 20 7466 7585


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
+44 20 7466 2852

Christian Leathley

Christian Leathley
+1 917 542 7812

Hannah Ambrose

Hannah Ambrose
Senior Associate
+44 20 7466 7585


The Dutch Government has recently published the final version of its model Bilateral Investment Treaty (the Model BIT). The key changes since the May 2018 Draft Model BIT (discussed in our blog post here) are addressed below.

The Model BIT includes some practical guidance for investors as to how the requirement of “substantive business interests” in a Contracting Party may be fulfilled. Among the innovative provisions, it includes a potential liability on investors in their home State for significant damage, personal injury or loss of life caused in the host State and a commitment to promote equal opportunities and participation for women and men in the economy.

The Model BIT reflects a change in emphasis in modern international investment agreements. The investor protections remain but there is an undoubted rebalancing of the operation of those provisions in the context of the treaty as a whole to address what is perceived by many to be a historic investor-bias in treaty drafting. Further, the Model BIT seeks to implement policy aims through a number of provisions which require recognition of, or aspirational behaviour towards, the achievement of certain development goals by the Contracting Parties.

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EU submits paper and work plan to UNCITRAL Working Group III advocating systemic reform as the only answer to concerns about investor-state dispute resolution

In advance of the next meeting of UNCITRAL Working Group III (WG III) in April 2019, the European Union and its Member States have made a submission on “Establishing a standing mechanism for the settlement of international investment disputes” (the Submission), as well as a possible work plan for achieving this aim.  As described in our blog post here, WG III has identified a number of concerns in relation to the resolution of investor-state disputes by ad hoc tribunals. In the Report of the 36th Session, WG III encouraged governments to submit proposals as to how the concerns about ISDS identified in the 36th Session should be addressed by way of reform.

The Submission advocates systemic structural change, proposing a two tier “standing mechanism” as “the only available option that effectively responds to all the concerns identified in the working Group” and “the only option that captures the intertwined nature of those concerns“.  The features of the “standing mechanism” proposed in the Submission are unsurprising given the previously published views of the EU’s institutions, in particular the European Commission (the Commission). The rhetoric in the Submission differs from the previous articulations coming out of the EU institutions which refer overtly to an “investment court system“. However, the Commission’s news page makes clear that the “standing mechanism” described in the Submission is a “multilateral investment court“. In addition, whilst the Submission makes reference to “adjudicators” rather than judges, the characteristics of the “adjudicators” are those described in the EU’s previous papers on this topic (see here).

The Commission has historically been the flag-bearer for the EU’s reform of ISDS. In the Submission however, it is emphasised that the proposal represents the views of the EU “and its Member States“.  This proposition may be tested if the proposed standing mechanism ultimately finds support: further to CJEU Opinion 2/15 on the European Union–Singapore Free Trade Agreement (FTA) on May 16, 2017, the instrument establishing a standing mechanism will need to be ratified by each of the Member States.

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Third party intervention in investment arbitration: Tribunal admits NGO submissions in Gabriel Resources’ claim against Romania concerning mining project

The Tribunal in Gabriel Resources v Romania recently issued an order (the Order) in response to an application (the Application) made by three Romanian NGOs, as non-disputing parties, for participation and an amicus submission (the Submission) in an ICSID arbitration under the Canada-Romania BIT (the BIT). Gabriel Resources’ allegations of breach of the BIT arise in relation to a proposed open pit mining development in Roşia Montană, Romania (the Project) which was not implemented.

The Tribunal granted the Application in part, admitting only certain sections of the Submission to the extent that they referred to factual issues within the specific knowledge of the Applicants and in relation to the interests which the Applicants claim to be protected.  However, the Tribunal denied admission to arguments on the law, as well as references to or reliance on testimonies which could not be tested by cross-examination. The Tribunal also rejected the NGOs’ request to attend and participate in the oral hearing.

The Tribunal’s analysis of the conditions relevant to an application by non-disputing parties – and its approach of considering each section of the Submission in relation to those conditions (rather than the Submission as a whole) – provides a significant contribution to jurisprudence in this area. The application in Gabriel Resources is also consistent with a general increase in such third party interventions, particularly in disputes which touch on issues of public interest, such as environmental protection, public health measures, labour standards, cultural rights and/or human rights.  Such a trend is likely to continue with civil society becoming more active in this context.

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Advocate General finds that CETA’s “Investment Court System” is compatible with EU law

One of the Advocates General to the Court of Justice of the European Union (“CJEU“), Advocate General Bot, has issued an opinion confirming that the mechanism for the settlement of disputes between investors and states provided for in the Comprehensive Economic and Trade Agreement  between the EU and Canada (the “CETA“) is compatible with European Union (“EU“) law.

If the opinion is adhered to by the CJEU, it confirms the viability of the EU’s mooted Investment Court System (“ICS“) in terms of its co-existence with the EU legal order, and permits the EU to continue to pursue adoption of the ICS on a wider scale across all of the EU’s trade agreements. Continue reading

Update on the future of ISDS: UNCITRAL Working Group III decides three areas for reform, indicating change is likely in 2019

The United Nations Commission on International Trade Law (“UNCITRAL“) has been considering the possible reform of investor-state dispute settlement (“ISDS“). UNCITRAL Working Group III (“WGIII“) has been given a broad mandate to identify concerns regarding ISDS procedure, consider whether reform is desirable, and, if so, develop relevant solutions to be recommended to the main UNCITRAL body (see our previous blog post here and article (issue 5, page 38) here). While WGIII enjoys broad discretion in discharging its mandate, any solutions devised will take into account the ongoing work of relevant international organisations, and each State may decide the extent to which it chooses to adopt the proposed solutions.

In the recent 36th session of WGIII, it was agreed that reform was desirable in at least three areas: (i) inconsistency and incorrectness of arbitral rulings; (ii) concerns about arbitrators and decision-makers; and (iii) the cost and duration of ISDS. However, the precise type of reform remains to be decided. Some States (and the EU) are advocating systemic reform while others propose a more nuanced approach, fixing perceived problems within the framework of the existing system.

Whilst WGIII’s mandate is limited to the procedural aspects of ISDS, changes to the way in which investor-state disputes are resolved may affect the value investors place on the substantive protections in investment treaties as a way of mitigating risks connected with foreign investment.   Continue reading

English Court of Appeal finds good arguable case that public policy exception applies to the foreign Act of State Doctrine allowing Ukraine to argue duress in claim under Eurobonds

In Ukraine v The Law Debenture Trust Corporation plc [2018] EWCA Civ 2026 the English Court of Appeal (the Court) partially upheld an appeal in favour of the state of Ukraine (Ukraine), reversing in part the summary judgment granted to The Law Debenture Trust Corporation plc (the Claimant) by the Commercial Court.

The Claimant brought the claim as the trustee of notes with a nominal value of US$3 billion (the Notes) after Ukraine defaulted on the payment of principal and the final instalment of interest. The sole subscriber of the Notes was the Russian Federation (Russia).

In allowing the appeal in part, the Court found that there was a good arguable case that the public policy exception applied to the foreign act of state doctrine and that Ukraine’s defence of duress – based on allegations of breaches of ius cogens norms of international law and treaty provisions by Russia – was therefore justiciable.

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