Investment Protection

April 14, 2020

COVID-19 & International Investment Protection


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Governments around the world will adopt profound and unprecedented measures to tackle the COVID-19 pandemic crisis and keep their economies afloat. The measures will affect investments in many ways, both positive and negative. Some interventions will be protectionist—they will seek to support or benefit domestic enterprises (strategic or otherwise) but not foreign investors.

This note looks at government action in relation to the current health and economic crisis under the prism of international investment law—a large network of treaties providing international law protections to foreign investors. Specifically:

  • We describe the actual and potential State measures in the context of the current COVID-19 crisis;
  • We examine the international obligations in relation to foreign investments to which States are bound;
  • We focus on how those obligations apply in relation to the current crisis; and
  • We provide practical guidance to States and foreign investors with respect to the impending government interventions.

COVID-19 Measures Affecting Foreign Investors

States have a duty (and a right) to protect public health and their economy. States have taken and will take many measures that will affect both domestic and foreign companies.

Measures to Protect Public Health

States are imposing lockdowns and curfews to differing degrees. Often, governments have required non-essential businesses that are not capable of operating remotely to shut down. States have temporarily taken over property rights to prop up hospitals and address crucial shortages: private hospitals have been nationalized in Spain, medical masks have been seized by France, the U.S. has required companies to manufacture ventilators and masks, and Italy has forbidden the export of ventilators without an authorization.

Short- and Mid-term Measures to Sustain the Economy

Governments are also taking (and will take) measures to mitigate the inevitable economic damage resulting from the virus and the efforts to contain it.

The immediate reactions have mostly taken the form of measures to sustain liquidity, purchasing power and employment: tax discounts or deferrals, direct cash injections, concessional credit lines and grants, mortgage suspensions and aid against unemployment. For example:

  • The European Union has adopted the State Aid Temporary Framework enabling Member States to ensure that sufficient liquidity remains available to businesses and to preserve the continuity of economic activity (such as by deferring taxes, or subsidizing short-time work across all sectors), suspended rules on public deficits, and adopted an envelope of €750 billion to purchase private and public sector securities across the EU.
  • Germany and Italy are making one-time payments to provide liquidity to impacted professional categories.
  • Some measures aim to reduce liquidity pressure by considering rent forgiveness (France) or suspension of energy bill payments (U.K.). While helping debtors, these measures would evidently impact creditors by causing loss of income.

States are also nationalizing (or considering the nationalization of) companies in the most impacted sectors (such as airlines), to prevent bankruptcies. An early example is Italy’s nationalization of Alitalia.

Protection of strategic sectors is also at play: governments are creating restrictions of foreign acquisitions of stakes in distressed companies in critical sectors. For example, the European Commission has issued guidelines on foreign investment screening, aimed at preserving EU companies, in particular in strategic sectors such as healthcare, medical research, biotechnology and infrastructure. Stricter foreign investment screening rules were also introduced by Spain, Japan, France and Italy.

Longer-term Economic Measures

The long-term policies that will be implemented are yet to be seen and are likely to vary. Some States might resort to liquidity injections, implement widespread nationalizations or re-direct their support from certain industries/sectors to others. Early changes in policy can already be seen, for example, in the United States, where the administration declared that environmental laws will not be enforced if companies can justify that lack of compliance was due to the COVID-19 pandemic.

It is evident that citizens and businesses need help from governments in these trying times. As we discuss next, whereas States have the duty to address the current situation, and enjoy a wide latitude in doing so, they must adopt the important measures that the crisis requires in a manner consistent with international law, especially bearing in mind that many measures will be far-reaching.

Key Issues of Investment Protection

Investment Treaty Protection in General

More than 3,000 treaties protecting foreign investments impose rights and obligations on States and investors in relation to foreign investments. These treaties seek to promote cross-border investment flows by requiring States to extend certain standards of treatment to foreign investors. While the specific scope of protection differs from treaty to treaty, investment treaties generally include the following obligations:

  • to pay fair, prompt and adequate compensation in the case of expropriation of foreign investments;
  • to abstain from arbitrariness and unreasonableness in relation to foreign investments;
  • to accord foreign investors due process and not deny justice;
  • to honor commitments in contracts;
  • not to discriminate against foreign investments. The prohibition of discrimination extends to compensation relating to losses suffered as a result of a series of circumstances such as armed conflict, civil revolt, natural disaster or national emergency; and,
  • crucially, to arbitrate disputes related to investments before international arbitral tribunals at the request of the foreign investor.

Other obligations include ensuring free transfer of funds or not imposing performance requirements (for example, achieving a given level of domestic content, according preference to national products or services or restricting sales) or not imposing nationality restrictions on senior management or directors. Some treaties protect only investments after they have been made, while other treaties extend their protection to the pre-establishment phase by including the obligation not to discriminate foreign investors that seek to make a cross-border investment.

Under International Law, States have a Broad Latitude to Deal with Crises

International law accords States latitude in dealing with emergencies and matters of important public interest. Such latitude can be expressly set or derived from the jurisprudence. For example:

  • Certain treaties, such as the China-Australia Free Trade Agreement (FTA), provide that non-discriminatory measures adopted to protect public health cannot be the subject of an investment treaty claim;
  • Other treaties, such as the Comprehensive Economic and Trade Agreement between Canada and the European Union (CETA), the EU-Singapore FTA, and the United States-Mexico-Canada Agreement (USMCA) expressly contemplate the States’ right to regulate within their territory to achieve legitimate policy objectives, including public health and safety;
  • The India-Mauritius bilateral investment agreement similarly provides that the treaty does not limit “in any way” the State’s right to regulate for the protection “of its essential security interests” or public health. The tribunal in CC/Devas v. India, applying this treaty, confirmed States’ “wide measure of deference” to regulate for the protection of their essential interests.

Even in the absence of an express provision, non-discriminatory measures of a general application adopted aimed at safeguarding public health and safety (the so-called police powers) are generally considered consistent with States’ international obligations. This means that the appropriate use of State police powers would ordinarily not give rise to State liability under international law, even if foreign investors have been negatively affected. For example:

  • In the wake of the 2008 financial crisis, some States were taken to arbitration in relation to measures adopted to deal with the recession. In one of those cases, Marfin v. Cyprus, the tribunal found that the measures adopted by Cyprus, including the acquisition of a majority ownership in a bank, the removal of members of the management and the bank’s recapitalization which resulted in the dilution of the shareholders’ interest in the bank, did not constitute an illegal expropriation but rather “non-discriminatory, proportional measures taken in good faith in the exercise of Cyprus’ regulatory powers in the pursuit of a legitimate public policy objective - the protection of the health of Cyprus’ financial system during a time of profound economic crisis.”
  • Similarly, in Philip Morris v. Uruguay, the tribunal found that certain anti-smoking policy measures taken by Uruguay “with a view to protect public health in fulfilment of its national and international obligations” were not arbitrary but rather an “effective means to protect public health.” The tribunal concluded that the measures were a “valid exercise by Uruguay of its police powers for the protection of public health” and, as such, did not constitute a breach of Uruguay’s international obligations.

The Latitude is not Unfettered: No Arbitrary, Disproportionate or Discriminatory Measures

Measures that are adopted in bad faith, deprive investors of due process, or are arbitrary, disproportionate or discriminatory may give rise to State liability under international law. The context in which the measures are taken, and the data and information available at that time—including the specific timing and circumstances of the measures, the conduct of the investor, and the specific scope of the State’s obligations vis-à-vis each investor—are taken into account in determining whether States have respected international law.

Transparency in the Adoption of Measures is Important

The transparency and public nature of the process through which the relevant measures are adopted are also relevant. If the State has consulted stakeholders when assessing policy options or presented draft regulations for public scrutiny and comment, this may militate in favor of the rationality of the policies pursued by the State. In a similar vein, the investors’ conduct at the time of the adoption of the measures is also an element for consideration. For example, investors who decline an invitation to participate in, and provide their views during, the legislative process, may have less legitimacy to complain about the measure.

In a Crisis, States might Invoke Exceptions to Liability

In exceptional circumstances, a State could be exempted from liability under international law. For example, a State may rely on the so-called necessity exception when a measure, even though in breach of its international obligations, is the only way to safeguard an essential interest of the State against a grave and imminent peril. A State could also invoke distress to justify measures adopted to address a threat to life and provided that there was no other reasonable way to deal with the threat.

Argentina invoked the necessity exception in a series of arbitrations in connection with the severe economic measures it adopted in the early 2000s to cope with a deep economic crisis. Some tribunals found that some of the measures were necessary to maintain public order and protect Argentina’s essential security interests and, as such, would not give rise to compensation; others rejected the necessity defense, and ordered Argentina to pay damages.

Investment Law and COVID-19: the Interplay

The analysis presented above applies to any State measure. Below, we look at the interplay between investment law and some of the specific measures taken (or likely to be taken) to tackle the COVID-19 crisis.

Investment Law and Measures to Protect Public Health

The first type of measure adopted by States was primarily to require social distancing, aimed at slowing down the spread of the virus. Although the scientific understanding of the virus and the sophistication of the policy analysis related to the response are still evolving, as a general matter, the social distancing requirements can arguably be said to be proportional and reasonable in relation to their goal.

More intrusive public health measures will have to be closely examined in their context as they arise, to determine whether they are consistent with international investment law. For example, where States take over private property, order the production of specific goods, or limit exports, compensation to companies (including to those owned by foreign investors) might be warranted, depending on the circumstances. In addition, States’ decisions to close down certain businesses but not others may be examined under international non-discrimination standards. While investment treaties do not prevent States from treating differently economic actors or sectors, or to differentiate between strategic and non-strategic enterprises, any differences in treatment must be justified by sound policy reasons.

Investment Law and Short- to Mid-term Economic Measures

The measures adopted to address the immediate economic fallout will also need to comply with international law. With a recession being likely, States are acting quickly and with limited data available to them. As mentioned earlier, the degree of flexibility that States enjoy when dealing with a crisis is broad. Many individuals and companies (domestic or foreign) who will be impacted and who will be unhappy with the government interventions will nevertheless have to endure the measures.

At the same time, egregious, arbitrary and/or discriminatory measures, including measures ostensibly taken to deal with a serious problem but otherwise disproportionally affecting certain businesses—such as a manifestly uninformed or discriminatory measure or an abuse of crisis measures to target foreign investors—may be inconsistent with international law. If subsidies are granted to specific sectors/companies while others are left behind, a showing of why this differentiation is justified may be needed. If suspension of payments to utility companies leads to bankruptcy, the question will arise whether the State considered appropriate financial assistance to address the suspension. Last but not least, States cannot seize on the crisis to nationalize companies without paying compensation.

Investment Law and Long-term Economic Measures

Long-term economic policies by States will also affect foreign investment. It will be crucial for States to adopt measures that are reasonable and non-discriminatory. Insofar as the new economic policies will entail the reneging on past commitments given to investors, this may conflict with international investment law.

Practical Guidance for States and Investors

The practical considerations below are aimed to assist States and investors when assessing their rights and obligations under investment law in light of the COVID-19 pandemic and its economic effects.

Practical Considerations for States:

  • When adopting measures to deal with the crisis, States should be aware that foreign investors may be affected, and therefore assess their rights, obligations and commitments under international investment agreements, investment contracts and national investment laws.
  • Far-reaching economic measures affecting broader sectors (utilities, energy, transport and construction) may give rise to disagreement with investors and potentially lead to a series of disputes. States should seek to ensure that their contemplated measures are consistent with international law in advance to avoid having to deal with a flurry of arbitrations.
  • States should be as transparent as possible as to the scope and purpose of the measures to be adopted.
  • To the extent possible, States should attempt to consult with the potentially affected enterprises and stakeholders when assessing policy options and present draft regulations for public scrutiny and comment.
  • The protection of strategic enterprises is, in principle, allowed, provided that it is justified by policy reasons and does not impose an unreasonable, excessive burden on foreign investors.
  • Nationalizations are ordinarily subject to the payment of fair, prompt an adequate compensation.
  • States may adopt more stringent requirements for the establishment of new investments, subject to their treaty obligations.

Practical Considerations for Investors:

  • Investors should be aware of the investment treaties that may extend protections to their investments in the jurisdictions in which they operate.
  • Investors should review their rights and obligations under investment contracts with the host State.
  • To the extent possible, investors should seek to engage in consultations with the host States regarding proposed measures or other concerns, participate in the legislative process when invited and provide their views and comments on the proposed measures.
  • If an investor considers that it has been, or may be, significantly and unfairly affected by one or more measures, it should attempt to engage in good faith consultations with the State, bearing in mind that investment treaties and/or contracts may regulate the process of negotiations.
  • Investors should be aware of any limitations to the establishment of new investments and speculative investments.

Our International Arbitration team has a vast experience in international investment law and arbitration, and stands ready to advise States and investors alike in relation to the government measures that have been or will be adopted in the context of the COVID-19 pandemic.

A special thanks to Vincenzo Speciale for his contribution to this publication.