Over the past year, governments across the world have taken action to fight the spread of COVID-19, putting in place emergency measures to save lives, protect jobs and counter an economic disaster. These measures, ranging from social distancing requirements to retail closures to the nationalization of pharmaceuticals and other medical goods production, have impacts on companies in all industries.
Although the economic shock is most felt by small businesses, multinational corporations, under the purview of international investment treaties, may be able to claim hundreds of millions of dollars in compensation for financial hurdles they have faced due to emergency government interventions.
Investor–state dispute settlement (ISDS) procedures in regional and bilateral investment treaties allow foreign companies to sue governments, before private tribunals, for measures they claim violate their treaty rights to “fair” treatment and their protections against direct and indirect expropriation of current or future investments. In February, for example, the German energy firm RWE launched an ISDS lawsuit against the Dutch goernment for its decision to phase out coal-based energy production. And in March, Alberta premier Jason Kenney said the province, a part-owner of TC Energy, will be suing the United States under NAFTA’s legacy ISDS provisions for the Biden administration’s cancellation of the Keystone XL pipeline.
In the context of COVID-19, state restrictions requiring businesses to close, price controls over health equipment, and emergency support programs could all give rise to costly ISDS suits. Law firms have already started to prepare for a litigation wave and are even urging their big business clients to take governments to arbitration to recover financial losses incurred during the pandemic. In a blog last April, Linklaters LLP told investors they “need to be aware that states do not have free reign to disregard their investment treaty obligations, notwithstanding the severity of the crisis faced.” Another major international law firm, highlighted “a veritable coronavirus boom of investment arbitration cases on the horizon.”
In response, nearly 600 civil society organizations have called for a permanent restriction on all COVID-related investor–state arbitrations and an immediate moratorium on ISDS lawsuits more generally. The widespread historical use of ISDS to contest legitimate, non-discriminatory measures to protect the environment or public health, or to respond to national emergencies, provide ample reasons for governments to take this demand seriously.
It is certainly possible that governments will not escape liability under the ISDS regime, even for non-discriminatory measures imposed temporarily in response to the pandemic.
Lessons from the Arab Spring and Argentine financial crisis
Long before the pandemic, the ISDS regime was heavily criticized for being an exceedingly investor-friendly forum, lacking transparency and often ending in closed-door settlements between governments and investors. Even during the pandemic, foreign investors can claim dizzying sums in compensation for COVID-19 responses that have allegedly impacted their profits.
In fact, ISDS disputes often arise following economic and social crises. In 2012, the Arab Spring, and the political changes resulting therefrom, led to a surge in ISDS claims against countries in the Middle East and North Africa. In Egypt, the social unrest and unparalleled levels of violence caused a critical decline in domestic gas supplies. In an effort to support the country’s electricity needs during the crisis, the government suspended the sale of gas to a Spanish-owned plant. In turn, the foreign investor fought and won an ISDS claim under an Egypt–Spain bilateral investment treaty, receiving over US$2 billion in compensation and putting a considerable strain on public finances.
Likewise, in late 2001, Argentina saw a 50% drop in its GDP per capita and a dramatic spike in unemployment. In response to the growing social instability, the Argentine government put in place a series of emergency measures, which included freezing utility rates and nationalizing assets. Consequently, as a party to 58 investment treaties, Argentina amassed over 50 ISDS lawsuits challenging the measures it undertook during the crisis. Nearly half of the arbitral proceedings initiated against Argentina were decided in favour of the investors.
In the event of a COVID-related ISDS claim, governments can try to invoke a necessity defence. However, past ISDS tribunals have been unwilling to accept state claims that the measures in dispute were the only means available to safeguard an important interest. It is certainly possible that governments will not escape liability under the ISDS regime, even for non-discriminatory measures imposed temporarily in response to the pandemic.
Unless addressed through collective action, the mere risk of investor–state arbitration undermines governments’ policy space during this crucial time.
Possible litigation scenarios
Law firms have already considered numerous litigation scenarios, including suits against rent reductions and government restrictions on business activities.
A particularly heinous scenario involves possible ISDS claims disputing the provision of clean water for handwashing in low-income households. Many countries, especially in Latin America, have forbidden the suspension of water services due to lack of payment during the pandemic. While the international community has applauded these acts, investment lawyers have advised foreign-owned utility companies to seek recourse under investment treaties and to use the threat of ISDS claims as a means to lobby against any restraint imposed on business operations.
“Clients are well advised to arm themselves with the necessary tools to protect their investments in this volatile climate,” said the law firm Freshfields Bruckhaus Deringer LLP, in a “top trends” report near the very start of the pandemic in March 2020.
Government action to secure affordable drugs, tests and vaccines may also be subject to ISDS lawsuits. Several countries, including Israel and Ecuador, have taken steps to make compulsory licensing easier, allowing individuals and companies other than the patent holder to produce and supply certain products. Some international investment lawyers deem these measures to be tantamount to expropriation, violating core provisions under investment treaties.
“In response to COVID-19, the Spanish government has been empowered to seize private production lines to produce medical equipment, and the United States is similarly permitted to do so—both of which could violate an investment agreement depending on their application,” wrote the law firm Ropes & Gray LLP in April last year.
When the Peruvian Congress approved a bill that would suspend the collection of toll fees to facilitate the transportation of essential goods, parliamentary members cautioned that the proposed amendments could attract ISDS claims over unilateral changes to contracts with foreign-owned toll roads. In Chile, French investors have acted on their threat, confirming in January that they will file an ISDS claim over State measures that have allegedly disrupted passenger traffic in their investments in the Santiago International airport. They argue that the State’s refusal “to restore the economic-financial balance of the concession” has discriminatorily impacted their investment.
Unless addressed through collective action, the mere risk of investor–state arbitration undermines governments’ policy space during this crucial time. Multiple foreign investors will be able to file identical claims, challenging the same measures and posing a serious threat to economic recovery post-COVID. Developing countries, who often act as respondents to ISDS claims and who are exceptionally burdened by the pandemic, may grow reluctant to enforce public health measures in order to avoid a devastating volume of ISDS suits.
Suspension of investment treaties, whether on a bilateral or plurilateral level, will ensure that government resources are not diverted from saving lives, jobs and livelihoods.
The need for a coordinated suspension of ISDS
The International Institute for Sustainable Development (IISD) has developed a Draft Agreement that could be used for bilateral, regional or multilateral suspension of ISDS. While the agreement suggests that a multilateral solution—in reaching a wider scope of countries and potentially covering hundreds of investment treaties—would be advantageous, IISD recognizes that such an arrangement will likely require extensive negotiations.
In the interest of time, the language of the agreement can easily be adapted for suspension at the bilateral level. If adopted, governments will be able to take actions to protect the health of their citizens and enact policies to rebuild their local economy, without having to worry about the possibility of engaging in costly ISDS litigation. It will shield host governments from a worst-case scenario and could be vital in preparing for the aftermath of COVID-19.
The African Union (AU) Commission has responded to this imminent threat, adopting a declaration that invites all AU states to explore available options to mitigate the risk of COVID-related ISDS. However, ISDS is not only a concern for the Global South. In the past decade, capital-exporting states have also grown apprehensive of the mechanism.
Canada is among a handful of states that have taken steps to terminate investment treaties. Under the Canada–United States–Mexico Agreement (CUSMA, the NAFTA replacement deal), Canada no longer consents to ISDS, in light of the considerable number claims brought against it under NAFTA Chapter 11. Given this repudiation of ISDS in CUSMA, the Trudeau government should refrain from obstructing international efforts to suspend investment arbitration.
Suspension of investment treaties, whether on a bilateral or plurilateral level, will ensure that government resources are not diverted from saving lives, jobs and livelihoods. It would also set up governments to be able to quickly, effectively, and more affordably respond to the climate crisis without the risk of even more ISDS claims such as those against the Dutch and U.S. governments for phasing out or cancelling fossil fuel projects.