We are pleased to introduce the third part of our trilogy of brief commentaries on Investment Treaty Protection & Covid-19 driven State Intervention. In Part I, we saw that states had taken invasive measures in response to the COVID-19 pandemic; some of those could give rise to significant claims, discussed in Part II. The present Part III is devoted to the defenses, which the host states may use to respond to the potential investors’ claims against the measures.
Between May and December 2020, fifty-two countries and the European Union took 96 investment policy measures in response to the COVID-19 pandemic.1 These may have an impact on foreign investments. The pandemic itself and the subsequent economic crisis may be the factual justification for a state’s particular measure; its legal defenses will depend on the character of the measure, its purpose, and the context of such decision-making. Host states may rely on various legal concepts offered as a part of the treaty-based framework (public interest and emergency clauses) or customary international law (necessity and force majeure).
- Public health and public interest
- National emergency clauses/protection of essential security interest
- Defenses under customary international law
Public health and public interest
A number of investment agreements expressly contemplate a host state’s right to regulate within its territory to achieve legitimate policy objectives, including public health and safety.2 Tribunals also tend to highlight the broad discretion of a state to regulate in the interests of protecting public health as a legitimate public interest and “an essential manifestation of the State’s police power”.3 Tribunals are likely to test whether a particular measure meets the criteria of proportionality, non-discrimination and is generally bone fide.
In practice, a plea of public health was successful in cases of Uruguay’s introduction of the tobacco plain packaging requirements,4 Canada’s ban of the use of the chemical lindane as a pesticide due to its adverse effect on health and the environment,5 and the US’ ban of the investor-manufactured drugs in its market due to concerns regarding their quality.6
As a result, arguments advanced by a host state that justify its actions in the interests of public health may be accepted by tribunals if such measures appear proportionate and non-discriminatory. One may argue that such a defense would be more persuasive in circumstances where a state measure related to the treatment of COVID-19, like introducing a compulsory license for drugs for COVID-19;7 but less persuasive if it related to the economic consequences of the pandemic (like the provision of state aid only to the host state’s nationals or restrictions on foreign investment). This would also be separate from the issue of compensation for losses, even in the event that the loss was caused by a legitimate measure.
National emergency clauses/protection of essential security interest
Approximately 10% of the investment agreements contain so-called “emergency clauses” to the effect that the non-performance of obligations by the host state may be excused in the event of a national emergency.8 Such clauses refer to “the maintenance of public order,” “the protection of the host state’s essential security interests,” or allow states to fulfill their obligations for “the maintenance or restoration of international peace or security.”9 In practice, it is often accepted that a severe economic crisis may constitute a national emergency in the same way as a military action or war may do.10 Tribunals are likely to take into account the proportionality of the measure as compared to the severity of the economic crisis. Accordingly, the applicability of the national emergency or essential security defense will depend on the context of the measure in a particular state, as the COVID-19 economic downturn will affect states differently.11 Given the global nature of the pandemic, a tribunal may well compare measures taken in different jurisdictions, as well as consider the overall proportionality and reasonableness of the measures
Defenses under customary international law
In addition to treaty-based defenses, host states may also refer to customary international law, namely, the doctrines of necessity and force majeure. Both are included in the ILC’s Articles on State Responsibility and provide a justification for the non-performance of an obligation. While the necessity defense underwent great scrutiny in the investor-state cases following the Argentine financial crisis,12 there has been little reliance on force majeure in publicly reported cases. The exceptional nature of the COVID-19 pandemic and the consequent economic downturn may mean that host states would be more willing to rely on this defense. The same underlying events, in theory, may give rise to both the defense of necessity and force majeure, as pleaded alternatively in some pending cases against Libya. Necessity applies where the act by the host state: (i) is the only way for the state to safeguard an essential interest against a grave and imminent peril; and (ii) does not seriously impair an essential interest of the state or states towards which the obligation exists, or of the international community as a whole. A state may not be the sole judge of the necessity: the tribunal in Pezold v Zimbabwe found that a domestic declaration of a state of emergency could only serve as evidence of a state of emergency that may give rise to a necessity defense under international law.13 In any case, a successful necessity defense does not necessarily prevent the state from having to pay compensation for damages that resulted from the measure during the period of necessity.
The acts covered by the doctrine of necessity must be of an exceptional nature in order for this defense to be successful. Although it has been invoked numerous times by respondent states, arbitral tribunals have rarely upheld it. Namely, the tribunals upheld the plea of necessity in LG&E v. Argentina, Continental Casualty v. Argentina, Total v. Argentina, and Urbaser v. Argentina14 due to the Argentinean economic crisis. However, the same factual circumstances were not accepted in the context of a necessity defense in a number of other cases against Argentina.15 Given that the plea of necessity has been invoked to protect a wide variety of interests, including ensuring the safety of a civilian population, states may well rely on the necessity defense in the context of the COVID-19 pandemic.
Force majeure is a doctrine under which a state may be excused from liability where there is the occurrence of an irresistible force or of an unforeseen event, beyond the control of the State, makes it materially impossible in the circumstances to perform the obligation.
Force majeure does not include circumstances in which performance of an obligation has simply become more complicated, for example, due to some political or economic crisis.16 Accordingly, it may be challenging to establish the absolute and material impossibility of performance. Whilst the state’s actions and the underlying context may vary, the regulatory measure of the state may presuppose that a state had a range of options to respond to the peril, which virtually excludes the possibility of referring to the involuntary or coerced conduct. Impossibility is, therefore, a high threshold to reach.
This article was originally published in Global Arbitration News.
****1 UNCTAD Investment Policy Monitor, Issue No. 24 (UNCTAD website, accessed on 10 April 2021, https://unctad.org/system/files/official-document/diaepcbinf2021d2_en.pdf)2 See, e.g, Comprehensive Economic and Trade Agreement between Canada and the European Union (Article 8.9); United States-Mexico-Canada Agreement (Article 14.10(c)); Canada 2014 Model Investment Protection Agreement; US 2012 Model BIT (Article 8(3)(c)); 2012 Bangladesh – Turkey BIT (Article 4).3 Philip Morris Brand Sàrl (Switzerland), Philip Morris Products S.A. (Switzerland) and Abal Hermanos S.A. (Uruguay) v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award, 8 July 2016, para. 2914 Philip Morris Brand Sàrl (Switzerland), Philip Morris Products S.A. (Switzerland) and Abal Hermanos S.A. (Uruguay) v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7.5 Crompton (Chemtura) Corp. v. Government of Canada, PCA Case No. 2008-01.6 Apotex Holdings Inc. and Apotex Inc. v. United States of America, ICSID Case No. ARB(AF)/12/1.7 Vsevolod Tyupa and Alexey Shadrin, Russian government issues first compulsory pharmaceutical licence, (Lexology website, 11 January 2-21, accessed on 10 April 2021, https://www.lexology.com/library/detail.aspx?g=ee05c5b9-3973-4012-90ca-2bb6dff5b417)8 Canada 2014 Model Investment Protection Agreement (Article 18(4)(b)); US 2012 Model BIT (Article 18), number of Singapore BITs.9 2001 Qatar-Turkey BIT (Article 7), 2003 Denmark – Morocco BIT (Article 2), US 2012 Model BIT (Article 18), 2019 Belarus-Hungary BIT (Article 16).10 LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, para. 238; Mobil Exploration and Development Inc. Suc. Argentina and Mobil Argentina S.A. v. Argentine Republic, ICSID Case No. ARB/04/16, Separate Opinion of Antonio Remiro Brotóns, para. 43.11 National Grid PLC v. The Argentine Republic, Award, 3 November 2008, para. 180; Total S.A. v. Argentine Republic, ICSID Case No. ARB/04/1, Decision on Liability, 27 December 2010, para. 164.12 See: LG&E v. Argentina, Continental Casualty v. Argentina, Total v. Argentina, Urbaser v. Argentina, CMS Gas Transmission v. Argentina, Enron v. Argentina, Sempra v. Argentina, El Paso v Argentina, Suez v Argentina, SAUR v Argentina.13 Bernhard von Pezold and others v. Republic of Zimbabwe, ICSID Case No. ARB/10/15, Award, 28 July 2015, 62414 LG&E v. Argentina, Continental Casualty v. Argentina, Total v. Argentina and Urbaser v. Argentina15 CMS Gas Transmission v. Argentina, Enron v. Argentina, Sempra v. Argentina, El Paso v Argentina, Suez v Argentina, SAUR v Argentina.16 Sempra v Argentina, ICSID Case No. ARB/02/16, paragraph 246; Greentech v Italian Republic, SCC Case No. V 2015/095, paragraph 451.