Covid-19: Emergency measures & investor-state arbitration claims

The unprecedented nature of the Covid-19 pandemic has re-kindled debates around the appropriateness of investor-state dispute settlement (ISDS) provisions in bi- and multi-lateral investment treaties.

The global Covid-19 pandemic has forced governments the world over to take extraordinary and necessary measures to bolster public health responses in an effort to protect their citizens.

Indeed, the provision of non-essential services has been restricted, requiring retailers, industries and other businesses to drastically downsize or altogether halt operations due to contentious emergency regulations, including those enacted by the South African government under the auspices of the Disaster Management Act, 2002.

The financial implications are far-reaching, and likely to run into billions. Where emergency measures negatively affect the financial rights of investors, they have the potential to trigger investor-state disputes under a web of international treaties.

In anticipation of the fall-out between investors and governments, various stakeholders in the international community have called for an immediate moratorium on all arbitration claims by private investors against governments instituted under the auspices of international arbitration treaties, particularly around health, economic and social policies aimed at combating the effects of the pandemic.

Investment Treaties and ISDS

To date, thousands of international investment treaties have been entered into between various states.  A large number of these contain ISDS provisions, which are mechanisms in investment and trade agreements that allow investors (of a state that is party to such agreement) to bring claims directly against states in which the investment is made, if that state has allegedly breached the agreement.

ISDS is considered an effective tool in protecting investors from arbitrary state abuse, in spite of the fact that no direct agreements between the host state and investor may exist, with the aim of promoting foreign investment.  Traditionally, investment treaties have provided extensive substantive protection against, among other things, unlawful and insufficiently compensated expropriation, unfair and inequitable treatment under national laws and policies, and the failure to protect and secure investments fully. When such events occur, investors may pursue claims against the relevant state through binding international arbitration proceedings.

Arguments for and against ISDS

Foreign investors are unlikely to have direct recourse against a state in the absence of ISDS mechanisms.  ISDS is in theory only triggered where the state takes actions that detrimentally affect an investor's investment, or fails to fulfil its obligations in respect of the investment. The scope of ISDS is thus limited to circumstances outlined in the underlying investment treaty, rather than a catch-all, far-reaching mechanism that dulls states' agency.

The ability of investors to sue host states directly is argued to be a modest limitation on the host state's sovereignty. Without ISDS provisions, aggrieved investors are obliged to rely on either the intervention of their home state in furthering their claims, which is certainly far from guaranteed owing to the fragile and contentious nature of foreign policy, or on the domestic courts in the host state.  Through ISDS, the problems arising from the potential of courts in the host state to remain sensitive to national interests (to the detriment of investors), can be avoided.

From a state's perspective, ISDS mechanisms are considered a double-edged sword, giving rise to tensions between the binding nature of such treaties and the concept of sovereign authority.  On the one hand, international investment treaties attract foreign investment critically needed to address societal inequalities.  On the other hand, states and civil society stakeholders have long asserted that ISDS mechanisms have a chilling effect on the ability of states to implement and enact public policies that could negatively impact the value of an investor's investment.

The South African position

In 2009, the South African government commissioned a review of its investment policies, including those relating to bi- and multi-lateral investment treaties. The review concluded that investment treaties were not aligned with the South African Constitution and public law values, endangered the South African government's ability to implement important policies and had no material bearing on the flow of foreign direct investment into South Africa.

As a result of this review, the South African government has terminated several Bilateral Investment Treaties (BITs) to which it was a party and then sought to "substitute" the treaty protections with domestic legislation, which ultimately led to the passing of the Protection of Investment Act, 2015. The Act has no direct effect on any protections which foreign investors enjoy under international treaties; those protections remain governed by the international instruments from which they arise. The Act does, however, constitute a substantial departure from features of the investment treaty regime and international law standards and, in particular, the Act does not provide for compulsory investor-state arbitration and subjects disputes under the Act to the South African domestic courts. To the extent that international arbitration is mentioned in the Act, it may only be conducted as between two States (i.e., not involving the investor directly) and only with the consent of both States.

The Covid-19 pandemic

According to the International Institute for Sustainable Development, the extraordinary interventions taken by governments to combat the pandemic are not restricted to the developing world, with almost all governments adopting such measures.

In particular, governments are scrambling to reorganise health care networks, taking steps to ensure the sustainable supply of medicines, medical devices and personal protective equipment.  Canada, Ecuador, and Germany have all taken steps to ensure they can more easily issue compulsory licences to utilise patented drugs and devices likely to prove critical in treating the virus.  African countries are no different, with the United Nations urging countries on the continent to "demand urgent access to medical intellectual property". To support overburdened public healthcare systems, Spain and Ireland have gone so far as to temporarily nationalise private hospitals.

To the extent that emergency measures negatively impact the rights of investors, they have the potential to trigger rights under investment treaties.  Affected investors may well have recourse to ISDS arbitrations in order to protect their financial interests.

In anticipation of such claims, certain stakeholders are calling for the temporary or even permanent suspension of investor–state arbitrations arising from Covid-19 and requesting clarity on the application of international law defences during these unprecedented times and this has given rise to significant disagreement on the appropriateness of such a call.

While we have yet to see any significant ISDS claims relating to the pandemic being instituted, the debates which are now taking centre stage should be monitored closely. Pandemic-related ISDS proceedings are likely to bring about changes in the international arbitration landscape that will last long after the threat of the virus has passed.