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Could COVID-19 emergency measures give rise to investment claims ? First reflections from Italy

GAR | 26 March 2020

Could COVID-19 emergency measures give rise to investment claims ? First reflections from Italy

As Italy emerges as the country worst affected by the COVID-19 pandemic, Massimo Benedettelli and other lawyers from ArbLit in Milan consider whether emergency measures passed by it and other countries to prevent the spread of the coronavirus and protect the economy could lead to claims under bilateral investment treaties.

In a fast-changing global situation, Italy has sadly emerged as the country with the largest number of individuals infected by COVID-19 and of fatalities.

In response to this unprecedented health crisis, the Italian government has passed emergency measures. Contained in a series of hastily drawn-up and ill-coordinated decrees that have been released day to day, these are mostly aimed at curbing the spread of the coronavirus within the Italian population and lessening the dramatic impact that the crisis has already had, and will likely continue to have, on the Italian economy.

Other countries are already following Italy by enacting similar provisions, including the United Kingdom, which originally minimised the extent of the COVID-19 crisis and suggested a different approach to fighting the spread of the disease. It is likely that still more will follow suit.

In Italy’s case, a first set of emergency measures that was passed aims to reduce social interaction to the minimum by ordering (under threat of administrative and criminal sanction) that individuals must not leave their homes and that all business activities, other than those characterised as “strategic” by the government should be suspended.

A second set of measures consists of state aids intended to compensate businesses for the losses that they have and will incur due to the inevitable recession that accompanies the “lock-down” of almost an entire country.

Both sets of emergency measures are likely to affect investments made in Italy by foreign investors. Indeed, they may result in harsh limitations on investors’ property rights ; fundamental and unpredictable changes to the “normative environment” of the investment ; potential discriminations between domestic and foreign companies ; and, possibly, failures to provide investors and their managers or employees with the safeguards they need to carry out their activities.

More generally, they may lead to a suspension of basic entrepreneurial freedoms and to distortion of competition.

As such, the COVID-19 emergency measures may well fall within the scope of the more than 70 bilateral investment treaties in force between Italy and other states, paving the way for damages claims brought by foreign investors against Italy and by Italian investors against other states that have enacted or will enact identical or similar measures.

Such claims would likely be vigorously defended as none would question the right of Italy or any other state to react to the ongoing health crisis by taking exceptional steps, especially in light of official statements of the World Health Organization that allows to consider the current situation a veritable state of necessity.

Indeed, in many Italian BITs the protection of essential security interests is expressly referred to as a ground a host state may invoke to justify measures that are prejudicial to foreign investments and (in some cases) to foreign investors.

Even when no such provision is contained in the BIT, a basic and non-waivable prerogative of any sovereign state is to safeguard the health and safety of its nationals and of anyone who happens to be present on its territory. This is confirmed by international instruments including the European Convention on Human Rights to which Italy is a party, which states that the right to health is a fundamental human right to be granted to all individuals, irrespective of their nationality.

But Italy’s rightful exercise of its sovereign powers to safeguard health does not mean that scrutiny of the country’s recent emergency measures is a priori impossible. Just as any form of emergency legislation has to comply with constitutional law and administrative measures implemented by government are subject to judicial review to ensure they are in line with administrative law principles, international investment law may limit the state’s legislative or administrative autonomy by requiring that the relevant powers be exercised without breaching any applicable treaty standard.

This is even more true if one considers that some of the emergency measures adopted by the Italian government so far are not self-executing and that further detailed provisions will have to be implemented to make them operational.

The treaty rights that might be invoked before arbitral tribunals are manifold, depending on the measure at stake, and include the right to compensation for direct or indirect expropriation ; the right to fair and equitable treatment ; the right to national treatment ; and the right to full protection and security.

The right to compensation for direct expropriation

The Italian government is currently entitled to order the requisition of hotels and medical equipment, provided that the investor receives an indemnity calculated by reference to the current market value of the relevant asset (as set out in law decree no.18 of 17 March 2020).

But nowhere does the law state how the current market value of the asset shall be determined, nor the form in which the indemnity shall be paid. There is therefore no guarantee that the law would satisfy the requirements of the relevant BIT or the customary public international law standard that compensation for expropriation must be “prompt, adequate and effective”.

The right to compensation for indirect expropriation

Several measures already enacted by Italy may give rise to indirect de facto expropriation claims, including the mandatory “lock-down” of all industrial and commercial activities, other than those activities which by presidential decree of 25 March the government has declared to be “strategic”.

Others include a ban on revoking credit lines ; the suspension of payments due under certain mortgaged loans and financial leases ; the possible suspension of bankruptcy proceedings ; the granting of a right to withdraw from tourism package contracts ; and the application to transportation contracts of rules on frustration set out in the Italian Civil Code (in the last two cases as “overriding mandatory rules” that apply irrespective of the governing law of the contract).

All these measures were contained in law decree no.18 of 17 March, referred to above.

A further proposal that has yet to be implemented but could give rise to an indirect expropriation claim would see the extension of a “golden share” mechanism, which grants the Italian government special rights to intervene in the governance of strategic companies, to pharmaceutical companies or even to all companies listed in an Italian regulated market.

The right to fair and equitable treatment

Other emergency measures could be challenged for breaching the fair and equitable treatment standard of relevant BITs by violating “proportionality” and “legitimate expectations”.

Measures that would be vulnerable are those in which the government distinguishes between “strategic” and “non-strategic” businesses and allows only the former to continue their activities ; or those in which it grants aid to compensate for extraordinary losses only to companies active in certain sectors such as aviation and not to others (as in law decree no.18).

The right to national treatment

State aid measures such as those just mentioned could also be alleged to breach the national treatment standard of relevant BITs if they benefit only Italian companies, at least in cases where the foreign investor does not receive the same kind of financial support in its home country on the basis of similar measures enacted by its government.

Even more serious discrimination to the detriment of foreign investors could arise if the Italian government goes down the path of endorsing “buy national” campaigns, as has already been mooted in some political and economic circles to alleviate the post-pandemic economic crisis.

The right to full security and protection

Although the response of the Italian government to the health emergency has been huge and prompt, with reducing the spread of the virus as its main objective, a foreign investor could nevertheless claim that the country has failed to take effective measures to protect the health of managers and employees active in Italian territory.

An investor could also invoke the same protection standard to advance claims relating to the suspension of all pending civil, criminal and administrative judicial proceedings in Italy (by law decree no.18) except when this is deemed to be “seriously prejudicial” to the interests of the disputing parties.

Such a claim might be brought if the investor finds that that the assessment of whether a prejudice exists or not, which the decree says should be made by the competent court on a case-by-case basis, was wrong.

The investor might also allege that its access-to-justice right has been breached by the moratorium on bankruptcy proceedings.

How would tribunals approach such claims ?

Adjudicating BIT claims brought by foreign investors in response to emergency measures enacted by Italy or other states to combat the COVID-19 coronavirus pandemic will undoubtedly be difficult for arbitral tribunals. The “margin of appreciation” that states normally enjoy when exercising normative powers in pursuit of legitimate public goals will obviously be wider than usual because of the scale of the pandemic and risks posed to public health, as well as of the limited scientific knowledge of how to effectively fight the contagion.

Such considerations may lead arbitral tribunals to take a self-restrained approach, also seeking guidance from certain international law principles that have emerged in the neighbouring field of international environmental law and which could be applied, mutatis mutandis, to determine the right balance among the conflicting interests at bar, namely the “precautionary”, “prevention” and “sustainable development” principles set out in the United Nations’ 1992 Rio Declaration on Environment and Development.

On the other hand, in an era in which nationalism is increasingly challenging multilateralism and globalisation, tribunals may not be able to exclude the possibility that a state would go beyond what is necessary and proper to protect public health and their national economy and seek to profit from the current crisis by taking measures that are both detrimental to foreign investors and unjustified.

As already predicted by the United Nations Conference on Trade and Development (UNCTAD), the COVID-19 pandemic will heavily reduce the flow of foreign direct investments at a global level. It does not take a prophet of doom to forecast that, when the emergency is over, states will also have to face arbitration claims brought by foreign investors under any applicable BIT, while arbitral tribunals will be confronted with one of the most difficult balances to be stricken between sovereign powers and private economic interests.

This article was written by Massimo Benedetteli with ArbLit associates Caterina Coroneo and Nicolò Minella

 source: GAR