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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:
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.
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.
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:
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.
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.
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:
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.
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:
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:
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.
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 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.
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.
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.
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.
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.
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.
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.