08 July 2020

Investment arbitration and measures implemented in relation to the Covid-19 crisis

*Authors: senior associate Fernando Badenes and associate Elena Cortés.

**Article published by CIAR GLOBAL

Due to the Covid-19 crisis, the governments of all States have been forced to implement extraordinary legislative measures, with very different scope and effect on foreign investments. 

Many of these measures may breach the provisions contained in certain bilateral investment treaties (BITs). This article will analyse some of these measures, as well as the possibilities for investors to trigger protection of their investments and the possible States defences.

Measures adopted by States

States have implemented legislative measures of very diverse nature and typology, through widely different procedures. Consequently, the sectors most affected by conflicts regarding foreign investment will be very different in each country.

Nonetheless, we can highlight, among others, the following measures:

(i) Establishment of significant limitations on commercial operations and on the productive sector, agreeing to stoppage of non-essential businesses (adopted by the majority of States).

(ii) Protection of industrial property in the health and pharmaceutical or related sectors, by establishing compulsory licences (Germany, Canada or Israel).

(ii) Related to the compulsory production of sanitary material (United States).

(iii) Temporary nationalization of private hospitals and seizure of medical and/or related material (Spain, Italy and Ireland).

(iv) Prohibition or indirect obstruction of the distribution of dividends (United Kingdom).

(v) Restrictions on the export of medicines and food (Russia, India or Ecuador).

(vi) Suspension of fee collection by private operators, e.g. of motorways or tolls (Peru).

(vi) Protection of the domestic economy from foreign investment in purchases of risky assets (Australia).

Possible principles that may be invoked by investors

Once a dispute over a foreign investment occurs as a result of some measure implemented by a State, specifically the BIT and its provisions should be analysed first, as they should prevail in any case.

In particular, possible exclusions from the BIT and whether there are provisions for non-precluded measures, allowing for exceptional measures to be taken in extraordinary circumstances to protect an essential interest of the State, or whether the invocation of exceptional circumstances for non-compliance with the treaty is expressly excluded, should be analysed.

In addition, other issues will need to be appraised, such as:

(i) if the process for implementing the measure has been transparent,

(ii) if there has been a properly and non-discrimination process,

(iii) if the measure was necessary or there were no other less invasive ways,

(iv) if there was some kind of compensation, etc.

It will even be of major relevance if the state has contributed to the creation of the crisis.

Furthermore, it will also be necessary to attend to consuetudinary law and invoke principles such as standards of full protection and security, the prohibition of direct or indirect expropriation, fair and equitable treatment or the most favoured nation clause.

Possible States defences

States could invoke figures such as force majeure, extreme danger or state of need. It has to be taken into consideration that the fact that the BIT does not provide for exclusion due to state of need does not mean that such principles cannot be invoked.

In particular, as the doctrine agrees, the state of need is one of the most problematic principles to interpret and apply, as it encompasses practically all other figures. Due to their similarity, the awards issued as a result of the Argentina crisis in 2001 and 2002 will be particularly relevant, since they constitute an essential precedent on the interpretation of the state of need as a cause of exclusion of illegality in the field of economic crisis.

Among others, the following relevant conclusions can be drawn from the resolutions issued by the ICSID on the Argentina crisis:

(i) The State has the burden of proof and must especially justify that there was an essential interest of the State that justified the measure, assessed on a case-by-case basis (ICSID Case ARB/01/3/2007 Encron Corporation and Ponderosa Assets v. Argentine Republic).

(ii) The State must prove that the situation of crisis could not be resolved with less harmful measures and, moreover, that the measures taken were the only possible ones (ICSID Case ARB/02/16, 348.2007 Sempra Energy International v. Argentine Republic).

(iii) However, in certain cases it was considered that it is up to the investor to prove the positive act of the State that has contributed to the crisis in order not to apply the state of need (ICSID Case ARB/02/1.2006 LG&E Energy Corp. LG&E Capital Corp, and LG&E International, Inc. v. Argentine Republic).

(iv) Finally, if the State has contributed to the consolidation of the crisis or of the danger to the social interest of the State, a state of need cannot be considered to exclude liability and, furthermore, all the conditions governing the state of need must be fulfilled cumulatively, so that the concurrence of some of their conditions is not sufficient (ICSID case ARB/01/8.2005 CMS Gas-Transmission Company v. Republic of Argentina).

Conclusions

Given the diversity of the measures implemented by States, a case-by-case analysis and the application of consuetudinary international law defence mechanisms, both from the perspective of the investor and of the State, will be essential.

In any case, it is important to note that such principles are of restrictive application and may conflict with treaty law - the BITs - which should prevail. In this sense, the arbitration panel may:

(i) apply simultaneously both standards and require the State to comply with them; or

(ii) in the event that both rules cannot be applied simultaneously, because they fall in contradiction, to take preference of one over the other, but always taking into account the limits imposed by the BIT, which are always mandatory.


Belt and Road Hub

We explore the opportunities the Belt and Road Initiative brings for your business, and provide our comprehensive, professional services to help.


Belt and Road

A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
Share on LinkedIn Share on Facebook Share on Twitter
    You might also be interested in

    This article was written by Patric McGonigal and Ramon Garcia-Gallardo. At a virtual ceremony on 11 June 2020, Singapore's Minister for Home Affairs and Law, K Shanmugam SC and the President of the...

    22 June 2020

    Measures concerning judicial and administrative proceedings resulting from COVID-19 health crisis

    18 March 2020

    Arbitration arose as a private out-of-court means to resolve disputes. Autonomy, confidentiality, flexibility, neutrality, and finality attracted users. However, some of these very features have...

    19 November 2018

    Our experts give their top 10 predictions about international arbitration in 2028

    19 November 2018

    Legal services for your business

    This site uses cookies to enhance your experience and to help us improve the site. Please see our Privacy Policy for further information. If you continue without changing your settings, we will assume that you are happy to receive these cookies. You can change your cookie settings at any time.

    For more information on which cookies we use then please refer to our Cookie Policy.