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Foreign Investment Protection and Investor-State Arbitration in Times of Covid-19

by Matthew Weiniger

June 2020

Matthew Weiniger

Introduction

The Linklaters international arbitration group hosted a webinar on 28 May 2020 to discuss “Foreign investment protection and investor-state arbitration in times of Covid-19 ”. Matthew Weiniger QC chaired the webinar, Kirstin Schwedt provided an overview of investment protection and arbitration, Christian Albanesi explained how recent state measures could give rise to claims by investors and Andrew Plump shared insights on the possible defences for states. Finally, Gerard Meijer and Bo Ra Hoebeke discussed enforcing arbitral awards rendered in investment arbitration.
Investment treaty cases have historically arisen out of foreign investments made in emerging economies. The current situation has, however, affected most countries across the globe, regardless of whether they are emerging markets or developed economies . Governments have been forced to adopt measures that have disrupted most, if not all, industries. As a result, investment protection has become relevant to a significant number of companies as their businesses have inevitably been impacted.

Where investment protection is unavailable for investors (e.g. where there are few investment agreements with the host state, or no investor state arbitration provisions), they may consider restructuring their foreign investments in order to benefit from effective treaty protection. This may be particularly appropriate in case there is another wave of Covid-19 infections that would require states to adopt further measures affecting business.

Measures that may lead to an investment claim

There are many examples of such measures. To allow people to access certain services, payment for them has been suspended in some instances. Guatemala issued a decree allowing consumers to avoid paying for utilities while forcing electricity, water and telecoms companies to continue providing their services. Similarly, Peru suspended collection of toll fees for the duration of its national state of emergency. Other examples of measures include export bans such as the restrictions imposed by the Indian government on the export of various pharmaceutical ingredients.

Foreign investors may also be concerned about some governments using the health crisis to implement policies linked to their political agenda. An illustration is a recent regulation adopted by Mexico preventing renewable energy projects from fulfilling requirements to obtain operating licenses. The aim of this new law may be to prefer other means of electricity production, in light of the fall in consumption during the lockdown.
The targeted emergency measures may breach different standards of protection. Appreciation of the breach will depend on the underlying investment treaty and on the specific measure, so careful analysis is necessary before considering a claim. Emergency measures that last longer or are broader in scope than necessary, or, if applied to one sector, benefit other sectors of the economy, may constitute a breach of the fair and equitable treatment standard. Restrictions leading to seizures of property or nationalisations may amount to an unlawful expropriation (depending on duration, whether adequately compensated for, and on their impact on the value of, and control over, the investment). Discrimination against categories of investors may further violate national treatment and most favoured national treatment clauses.

When considering whether to bring an investment claim, investors should check that the relevant BIT does not contain provisions precluding  a treaty claim if they have already initiated local court proceedings. Although multiple proceedings may be tempting, these fork in the road provisions may restrict access to remedies.

State defences and exceptions

In addition to jurisdictional and admissibility defences, a state may seek to rely on carve-outs or exceptions in a particular investment treaty. Exceptions likely to be invoked as to Covid-19 measures could include those adopted for essential security reasons, to maintain public order or to protect human life or health. Importantly, conditions for these exceptions to apply may include the measure being non-discriminatory, based on a legitimate rationale, proportionate, and reasonable in duration.

A state whose Covid-19 measures are challenged may also seek to rely on defences recognized by customary international law, such as necessity, force majeure or distress. Invoking any of these is likely to engender debate. For the necessity defence, the state must, notably, show that the measure was the only way to safeguard an imperilled essential interest (an extremely high standard) and that the state did not contribute to the situation of necessity (possibly controversial, especially as to economic protection measures).

The threshold for force majeure is likewise very high, particularly as the state must prove that it was materially impossible for it to perform its international law obligations to the foreign investor. It may also be difficult for certain states to show that their measures address circumstances that were unforeseen and beyond their control. Distress has usually been invoked for more discrete situations of threat to human lives and may arguably not be intended for a general emergency.

Finally, states are, generally, afforded broad police powers to regulate in the public interest, including to protect public health. While such powers are not unfettered, some investment arbitration tribunals have upheld bona fide, non-discriminatory and proportionate state measures to, for example, regulate tobacco products or ban sales of products containing harmful chemicals.

Enforcement of awards

Enforcing and executing an arbitral award against a state may raise challenges. These may be different depending on the regime in which the award is rendered.

ICSID awards will be enforced as final court judgments in all ICSID Contracting States. Thus, no further review by national courts is allowed and no additional leave for enforcement is needed. However, non-ICSID awards will likely be enforced under the New York Convention, which allows local courts very limited grounds to refuse enforcement. Yet, the Covid-19 crisis will unlikely be a valid ground for refusal: the fact that a state has limited financial resources or faces severe crises generally does not lead to unenforceability of arbitral awards rendered against it. However, such argument could support a state’s plea for a stay of the enforcement in respect of both ICSID and non-ICSID awards.

At the execution stage, the difference between the regimes will generally be irrelevant. At that stage the local courts’ application of sovereign immunity from execution forms the main hurdle. Nonetheless, awards may be executed against, for example, assets that are used or intended for use for commercial purposes,  such as, in certain cases, shares held by the state, through wealth funds, in private companies.
However, a state may try to prevent execution by asserting that the relevant assets are needed to combat the pandemic and are, thus, not within the commercial purposes exception. Considering the current circumstances, courts may be more sympathetic to this argument.

This article first appeared at https://www.linklaters.com/en-us/insights/blogs/arbitrationlinks/2020/june/foreign-investment-protection-and-investor-state-arbitration-in-times-of-covid19.



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As Linklaters' global co-head of international arbitration, Matthew Weiniger specialises in international arbitrations, public international law, and trade law. He also advises on non-contentious matters involving the protection of investments under public international law. He has particular expertise in investment treaty arbitrations. Matthew regularly represents parties in proceedings before the English Commercial Court whereby arbitral awards are challenged under the applicable provisions of the English Arbitration Act 1996.

Matthew has conducted numerous international arbitrations, both ad hoc and institutional (including under International Centre for Settlement of Investment Disputes (ICSID), International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA), Hong Kong International Arbitration Centre (HKIAC) and Singapore International Arbitration Centre (SIAC) rules), in cases arising from all major industry sectors, in particular energy and financial services. Much of Matthew’s experience has been gained in emerging markets.

Matthew co-heads the team writing Arbitration Links, the firm’s arbitration blog with insights, updates and news from the firm’s arbitration experts.    



Website: www.linklaters.com/en-us/find-a-lawyer/matthew-weiniger

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