Young ISDS Club – Corona pandemic investment disputes

by Suksham Chauhan, International Arbitration Trainee, Quinn Emanuel Urquhart & Sullivan, Paris

I was invited by Alexander Leventhal (Quinn Emanuel Urquhart & Sullivan) to participate in a webinar conducted by Young ISDS Club on 26 May 2020. Knowing Alexander’s undefined love for discussions on all things in investment arbitration, I was certain that the webinar would be intellectually stimulating. However, to my immediate surprise, it was not like the typical webinar where one could simply sit back and absorb the information. To the contrary, the webinar was interactive and made me think on my feet.

This is typical of Young ISDS Club. It is a club where members are expected to engage, think on their feet and at times be called upon to share their views and contribute ideas. Throughout the seminar, I sheepishly couched in my seat, with this write-up comprising my only contribution to what was otherwise a very engaging discussion.

1. Introduction

Aron Skogman (Mannheimer Swartling) welcomed the participants and introduced the topic – Corona pandemic investment disputes. The focus of the discussion was on the potential for State measures passed in response to Covid-19 to violate protections in international investment agreements (“IIA”) and the potential investment claims and the defenses arising therefrom.

Thereafter, Laura Halonen (WAGNER Arbitration) introduced the speakers and explained their roles as discussion leaders to familiarize the legal concepts along with some concrete examples to ignite the discussion to follow. She introduced the speakers and their roles:

• The first speaker (Isabella Cannata, Lalive) discussed the State measures in response to Covid-19 and various standards which may be invoked by the investors against these measures.
• The second speaker (Aaron de Jong, HANEFELD) discussed various defenses which the State may invoke to justify the measures.
• The third speaker (Alexander) gave concrete examples of various measures that the States have taken and may result in potential investment claims.

2. First Speaker (protections stipulated in international investment agreements)

The first speaker gave a brief overview of the various kinds of measures which the States have taken in response to Covid-19. She categorised the States’ actions into (a) measures responding to public health emergency (b) measures tackling the immediate economic consequences (tax discounts, suspension of loans or direct cash injection); and (c) measures aimed at easing the mid-term economic consequences (bailouts and sovereign debt restructuring).

At outset, she stated that the first wave of investment claims seems already on its way – investors are already considering bringing claims against Mexico after the government restricted the production of renewable energy production due to a fall in demand.

Thereafter, she stated that protection granted to the investors may vary from treaty to treaty and will depend on the exact language of the treaty. However, in the context of Covid-19, the following standards are likely to be invoked: fair and equitable treatment (“FET”), full protection and security standards (“FPS“), expropriation, and national treatment.

Under the FET standard, the investor may challenge the State’s decision in defining which business are essential on the grounds that it is arbitrary and/or disproportionate, if investors are left out. The State actions may also be challenged for failing to accord due process by passing the measure without any legislations or legislating in haste without any transparency. There is also a possibility that FPS may be invoked to argue that the State’s response has been untimely (e.g. if lockdown persists for longer in one State than in another).

The State’s measures of seizing assets for a long time without any adequate compensation may give rise to indirect expropriation. State’s measures may amount to indirect expropriation where business categorised as “non-essential” during the lockdown results into permanent closing of a business. Similarly, series of State measures over a period of time amounting to the closure of business or permanent harm to investment can also constitute indirect expropriation in the form of a “creeping expropriation”. State measures which benefit only national companies but not foreign companies can be potential investment claim for breach of the national treatment standard. Furthermore, where issues of nationality are not involved, investors may seek to rely on the discriminatory measures standard, both in situations where investors within the same sector have been treated differently and where investors within different sectors have been treated differently, without any justifiable reason.

3. The second speaker (State Defenses)

The second speaker discussed the defenses available to the State under customary international law and as express treaty exceptions, together with the question of the state’s general right to regulate.

Customary International law

At the outset, Aaron noted that the defenses under customary international law were to a large extent codified under the International Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts (2001) (“ILC Articles“). In relation to measures enacted in response to COVID-19, he considered that the defences States were most likely to invoke were necessity (Article 25) and force majeure (Article 23).

Aaron then briefly discussed the main elements required to establish necessity (Article 25). Of those, he suggested that States may struggle to establish that a specific measure was the “only way” to safeguard an essential interest from an imminent peril; in this case, a State’s population from a dangerous pandemic. If other lawful ways to address the threat existed, even if those were more costly or inconvenient, necessity would conceivably fail.

Aaron then discussed the defense of force majeure (Article 23), which covers events beyond a State’s control and which in effect compel it to act in a way inconsistent with its international law obligations. Aaron opined that force majeure was potentially even more difficult to prove than necessity as the State was required to demonstrate that it effectively became impossible for it to perform the particular obligation in question. Such could cause particular difficulty where a State has – necessarily without compulsion – elected to enact an affirmative measure that has violated a foreign investor’s treaty rights.

Treaty exceptions

Aaron then briefly touched on some of the prominent treaty-based exceptions. He noted that these varied from treaty to treaty, and encompassed so-called “essential security clauses” providing States latitude to enact measures, for example, “necessary for the public order”.

More recently, he noted that CETA had included a provision that provides that non-discriminatory regulatory measures designed and applied to protect legitimate public welfare objectives, including public health, would not constitute indirect expropriations, except in “rare circumstances”. Similarly, he noted that the recent China-Australia Free Trade Agreement had potentially gone further, providing that non-discriminatory measures for “legitimate public welfare objectives of public health … shall not be the subject of a claim” by an investor. He noted this could well insulate Covid-19 measures from a broader range of treaty claims than only indirect expropriation.

Aaron concluded by stating that in the circumstances it was potentially going to be difficult for States to establish the narrowly defined customary international law defenses once liability had already been established, and that States may be more successful in arguing for their police powers in times of emergency. It was furthermore noted that if a respondent State were to be successful in arguing that its measures were excusable under ILC Articles 23 or 25, the State may still be held liable to compensate the investor in accordance with ILC Article 27 for any “material loss caused by the act in question”.

4. Third Speaker (Specific State measures)

Alexander commenced by speaking about State emergency measures and investment arbitration in the context of the 1998 Argentina economic crisis (“Argentina crisis”). He stated that about 15 investment cases resulted from the Argentina crisis. The majority of these cases dealt with one measure i.e. the emergency law that changed the tariff payments from US dollars to Argentine pesos. In all these cases (except in one or two) there was no question that the State’s measures gave rise to breach but the question was whether Argentina’s necessity defense was valid or not.

In the majority of these cases, the following was held: (a) Argentina’s essential interest was not at play, notwithstanding how bad the crisis was; (b) the emergency measure was not the only option available to Argentina, and (c) Argentina’s budgetary practices and policies at the relevant time had a major contribution to the crisis. He stated that Covid-19 and Argentina were similar in as much as the States have taken emergency measures. However, Covid-19 is different as there is no one single measure that has been applied by States as in the Argentina crises.

Thereafter, Alexander reflected on the State measures mentioned by Isabella by giving concrete examples:

1. Measures responding to the public health emergency

The definition of essential has been different from country to country e.g. eateries shops in Belgium, wine shops in France, and marijuana coffee shops in Netherland are treated as essentials. United States of America’s response to health crises has been the most confusing. The state of Michigan introduced complicated measures by exempting certain critical business. What is interesting is that not only the critical business but its suppliers and further suppliers’ suppliers’ were also exempted. Eventually, it became confusing to assess which business was concerned by confinement and which were not allowed. Similarly, Georgia considered that bowling, gyms, tattoos, hairdressers were all essential.

2. Immediate responses to the economic impact

There have been various bailouts and state aids e.g. France has announced 10 billion for Air France-KLM and the Dutch government’s proposed 2-4 billion aid package fo KLM. France has granted the moratorium period to pay rents and utilities for small businesses. There have been temporary expropriation of health care facilities in Spain and France.

3. Long-term measures

The long term measures can be only speculative at this stage. What can be expected is discriminatory bailouts, obligatory bail-ins, sovereign debt default, forced capital restructuring, and nationalization.

He also reflected on the EU Screening guidelines for foreign direct investment which provides for a mechanism that enables member States to define sectors that are essential to national security to protect them from foreign shareholdings. At the end of March 2020, the EU Screening guidelines were extended to the healthcare sector to ensure that any such foreign direct investment does not have a harmful impact on the EU’s capacity to cover the health needs of its citizens.

5. Discussions

This section incorporates the questions, queries, and moot issues raised throughout the discussion. Some of the issues raise pertinent legal questions – it would be nice to have the views of EFILA members on these issues.

1. Police power

In the context of State’s Police Power, to what extent can a State negate the allegation of liability by arguing the classic law defense that there was no obligation under the treaty itself e.g. there was no violation of FET standards or expropriation to start with.

2. Compensation under Article 27 of the ILC

How will compensation as stipulated under Article 27 of the ILC differ from the compensation otherwise owed to the investor in case of a treaty violation? Compensation under Article 27 appears to be narrower than in cases where a treaty violation is not excusable under Article 23 or 25, as the compensation is not intended to achieve full reparation but merely to compensate for “material loss[es]”.

3. Issue of due process

It was observed that some countries (e.g. Germany) are transparent and explains the reasons/economics behind the measures taken. While some other countries are very secretive and do not provide for a well-reasoned measure. In view of this, the questions were raised on tribunal’s approach in the case where measures are passed transparently in consultation with investors as opposed to measures that are mere dictum and passed secretively without any consultation. Will there be fewer investment claims in jurisdictions where a transparent process is followed while passing the measure as opposed to jurisdictions where measures are mere dictum without any consultations?

4. Protection of economy under the BITs

In the majority of the BITs, there are no specific provisions which allow the State to take measure to save the economy. The state may take measures for public interest but whether saving the economy comes under public interest is debatable. Further, under the FET standards, there is no coherent view on the State’s role at safeguarding public interest or public welfare. It would be interesting to see how the measures for protecting the economy will be justified under the BITs or MITs.

5. Discrimination based on nationality

The Swedish government has enacted various measures to provide relief to various businesses. Compensation for loss of revenue over a certain threshold has been announced for certain businesses on criteria that may be perceived as discriminatory and result in treaty claims. Similarly, loans that are being guaranteed to airlines which have their main business in Sweden or seats in Sweden may be perceived as discriminatory, and examples of discontent among investors have already emerged.

It would be interesting to see how discrimination is being judged within sectors or sub-sectors e.g. restaurant are forced to close and not hotels. Some countries have decided that the companies which are based in tax havens will not gain access to certain support schemes. This may give rise to treaty claims for discrimination based on nationality.

Aron summarised by observing that it would be interesting to see how the cases alleging discriminatory measures shape up. States are likely to argue that they must be excused since – in the unusual circumstances – measures that could otherwise be perceived as discriminatory measures within the meaning of the treaty impairment standards are justifiable for public policy reasons. In such cases, however, tribunals are likely to consider whether there is a clear connection between the discriminatory element and a (valid) public policy goal that must be achieved by way of such discrimination. He observed that the consequences of the measures will be dealt with for many years to come. What measure can be excused and what cannot be excused is yet to be seen.