By Arne Fuchs, LL.M. and Pauline Walde
Numerous states around the world have adopted strict measures limiting and sometimes even altogether suspending the most fundamental rights of residents and companies operating within their respective territories. This includes travel restrictions, import and export restrictions, business closures, lock-down orders and even seizures. These measures often have devastating economic effects on companies across sectors.
Looked upon in isolation, many of the measures imposed would violate a number of standards for the protection of foreign investments commonly contained in bilateral and multilateral investment treaties, for example the obligations of the host state to accord fair and equitable treatment to foreign investors and their investments and to grant them full protection and security as well as the rules on (indirect) expropriation.
However, these measures do not stand in isolation but in the context of the prevailing COVID-19 pandemic. With more than 1.5 million confirmed cases of COVID-19 around the world and steadily growing numbers, the measures are usually implemented to slow down the spreading of the coronavirus and protect the health of millions of people living in a state’s territory, i.e. for a legitimate public interest. International law, including investment protection law, recognizes the state’s right to regulate in such a context without incurring international liability.
For example, some (more recent) investment treaties contain express carve-outs for measures implementing legitimate public welfare objectives (See, e.g., Article 9.11 of the China-Australia Free Trade Agreement which provides that “[m]easures of a Party that are non-discriminatory and for the legitimate public welfare objectives of public health, safety, the environment, public morals or public order shall not be the subject of a claim” by an investor). Where such an express exception does not exist in the specific treaty, international liability may still be excluded under customary international law defences such as force majeure, distress, necessity, or the so-called police powers doctrine. In particular the latter has already been applied in a factually similar scenario, a smallpox epidemic in the late 19th century. In the Bischoff case (1903), a Mixed Claims Commission (Germany-Venezuela) unanimously found that the seizure of a German carriage by Venezuelan authorities after it had carried two persons infected with the disease did not constitute a wrongful taking under international law. In this regard, it noted that “[c]ertainly during an epidemic of an infectious disease, there can be no liability for the reasonable exercise of police power.”
This general rule notwithstanding, the COVID-19 pandemic is also not a defence that can be invoked by states “no matter what”. Where the pandemic serves as a pretext, the state cannot escape international liability. While a state generally enjoys a wider margin of discretion in times of crisis and recognized state of emergency, it must still – and arguably particularly then – exercise its regulatory powers with due regard to the most fundamental principles of the rule of law such as good faith, non-discrimination and proportionality. In line with this principle, the Mixed Claims Commission in the Bischoff case also confirmed that even “where the original taking was lawful, [the] government is liable for damages for the detention of the property for an unreasonable length of time and injuries to the same during that period.”
Similarly, the Iran-US Claims Tribunal stressed in Too v. Greater Modesto Insurance Associates (1989) that “a State is not responsible for loss of property or for other economic disadvantage resulting from bona fide […] action that is commonly accepted as within the police power of States, provided it is not discriminatory and is not designed to cause the alien to abandon the property to the State or to sell it at a distress price.”
Investors and states: What to do now
Investors who suffered serious economic damage as a result of a state’s COVID-19 measures therefore must analyse the specific facts applicable to them and determine with the help of experienced counsel whether the measures taken were in compliance with the state’s international law obligations. Sometimes, so-called compensation for losses clauses (see, e.g., Article 12 of the Energy Charter Treaty ) also establish a separate obligation of the host state to provide prompt, adequate and effective compensation for losses suffered in the context of a national crisis and/or stipulate that the host state must grant foreign investors the same treatment that it grants to its own nationals or nationals of a third state with regard to restitution, indemnification, compensation or other settlement resulting from losses suffered in this context (most often, the relevant wording refers to “losses due to armed conflict, war, state of national emergency or civil disturbance”. Sometimes “acts of God” or “force majeure scenarios” are also specifically mentioned).
States, on the other hand, are well advised to take their international law obligations into consideration early on to ensure that their measures are not only effective but also withstand legal scrutiny if subsequently challenged.