COVID-19 and international investment issues for diplomats

Lockdowns and other restrictions imposed by governments as a result of the COVID-19 pandemic have caused catastrophic losses to businesses. Foreign investors around the world, whose investments are protected under international investment treaties, are entitled to have disputes with the host state arbitrated by an international arbitration tribunal. As a result, arbitration requests have been filed against host states by foreign investors, who claim that the actions taken by host states’ governments contravene the protections provided by international law, causing huge financial losses.  

The main defence that states will have to these claims will be ‘necessity’ under Article 25 of the Responsibility of States for Internationally Wrongful Acts report. The report’s draft articles, which are a codification of customary international law, were prepared by the UN’s International Law Commission (ILC). The ‘force majeure’ under Article 23 is likely not relevant since it excuses failure by a state to perform its legal obligations, but does not apply to active measures taken by a state which contravene their obligations under international law.

Article 25.1 (a) requires a state to show that its actions in response to the pandemic ‘is the only way for the State to safeguard an essential interest against a grave and imminent peril’. Investors will attempt to demonstrate that other states did not implement such drastic measures (such as lockdowns) as their host state, and that there were no significant differences in outcomes for the populations. They will additionally claim that milder measures did not have such catastrophic effects on companies in these countries. Thus, they will assert that the state could have taken less drastic measures, and thus the necessity defence is not applicable.

States may also claim that the measures taken fall within the police powers of the state, and are therefore a valid defence.

Arbitration awards issued by arbitration panels under the International Centre for Settlement of Investment Disputes (ICSID) have also dealt with the necessity defence, particularly related to the claim of necessity by Argentina when it acted in its financial crisis. The cases split over the issue of whether there was sufficient necessity to warrant the actions taken by Argentina.

The important element to consider is that the tribunals will be looking at the necessity issue in the light of hindsight. Were the government’s actions ‘the only way for the state to safeguard’? The hearings will take place a few years after the events, at which time the science issues will be more settled, and the tribunal will be able to distinguish between actions based on science as it is currently, with a clear divergence between scientific experts. Later clarifications of the scientific realities of the pandemic may change the perspective as to what should have been done by states versus what was done.

Tribunals will also be able to analyse the statistics on the number of deaths caused by government measures (e.g. deaths caused because people with other illnesses could not obtain hospital treatment; mental health issues, including the increase in suicides and drug overdoses; and the increase in the number of deaths due to poverty, both in the West and the resultant deaths in developing countries) to see whether the actions taken caused more harm than good.

Tribunals may pay deference to the ‘margin of appreciation’, a concept developed by the European Court of Human Rights (ECHR), which suggests that a government may understand the societal problems within the state in a manner that a court cannot, and therefore, in some cases, the court should defer to the views of the government. However, the margin of appreciation concept has not yet been applied in necessity cases.

National security may be another defence available to the state, as many international investment agreements provide the right of the state to act in  the protection of national security. These provisions usually allow the state to determine when an issue is a matter of national security, and thus may foreclose an investor’s attempt to claim that the national security provision was not applicable during the COVID-19 crisis.

However, the purpose of this article is not to discuss the intricate issues related to the necessity defence, but rather to make diplomats and MFAs aware of the issues, as they will likely be required to deal with them as part of their work. Those posted abroad may be contacted by their nationals, who have suffered losses as a result of the actions of the host state, for help and advice. Similarly, they may be contacted by foreign investors to discuss the potential claim against the state of the diplomat.

It is important for diplomats to be aware that they have the power to bind their home state in international law through their statements and assertions. Thus, caution is required when answering questions from investors.

For a recent discussion of these issues from before the COVID-19 pandemic, see Gülçür (2019).

References

Gülçür, Abdulkadir (2019) The Necessity, Public Interest, and Proportionality in International Investment Law: A Comparative Analysis, University of Baltimore Journal of International Law 6 (2), Article 2. Available at: https://scholarworks.law.ubalt.edu/ubjil/vol6/iss2/3/ [accessed 1 June 2020].

Alan Franklin obtained an LLB and JD from the University of Toronto, and an LLM in international law from the London School of Economics. He is currently teaching courses on international legal business risk to MBA students at Athabasca University, international and constitutional law at Royal Roads University, courses on international law for the University of London international LLM programme, and the Diplomatic Law: Privileges and Immunities online course at DiploFoundation.