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Epidemic sovereignty? Contesting investment treaty claims arising from coronavirus measures

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EJIL:Talk! | 27 March 2020

Epidemic sovereignty? Contesting investment treaty claims arising from coronavirus measures

by Oliver Hailes

Though nothing can be immortall, which mortals make; yet, if men had the use of reason they pretend to, their Common-wealths might be secured, at least, from perishing by internall diseases. Hobbes, Leviathan (1651).

My morning radio plays a hit parade of measures adopted by various States to combat the pandemic spread of coronavirus disease (COVID-19), from Italian lockdown to British equivocation. Our collective infirmity has exposed the dependence of supply chains and financial forecasts on the predictability of sovereign responses to emergent threats. Policies so far seem disjointed, parochial, ad hoc. Economic loss is escalating in the scramble to save lives. When the dust settles, some foreign investors could call upon their host State to cough up. Indeed, allegedly arbitrary or disproportionate measures, albeit in the public interest, provide regular grist for the mill of investment treaty arbitration.

In the debate whether investment treaties create a chilling effect, there is an assumed ‘clash of cultures’ between public health and investment arbitration. By embedding investor claims in international norms that underscore the importance of public health, however, tribunals may defer to government judgement in adopting novel measures to combat COVID-19, so long as they are neither discriminatory nor arbitrary. I begin by identifying treaty standards on which an investor might rely in seeking compensation, then examine possible techniques by which the State may shore up its sovereignty in the adoption of epidemic measures and, finally, look at the long-term relevance for investor expectations.

Often a distinction is drawn in international law between primary norms of conduct, such as the State’s obligation not to expropriate an investor without compensation, and secondary norms of State responsibility, including remedies and defences. Already readers of EJIL:Talk! have benefited from authoritative insights of Federica Paddeu and Freya Jephcott on the difficulty in applying three defences to viral pandemic: force majeure, state of necessity, and distress. Each arises, however, only if there is an established breach of a primary norm. In this post, I address different defence arguments that apply upstream at the stage of liability for breach of the primary norm.

Investment treaty claims

It helps first to identify recent measures that illustrate the potential for treaty claims. Foreign investors could be impacted by India’s restriction on the export of 26 active pharmaceutical ingredients, representing about 10% of export capacity. On 14 March, moreover, the Government of Spain decreed a state of alarm under the Spanish Constitution. Among other things, the decree empowered the Minister of Health to ‘intervene and temporarily occupy industries, factories, workshops, farms or premises of any nature, including privately owned health centres, services and establishments, as well as those that carry out their activity in the pharmaceutical sector’ so that the State may ensure the supply of goods and services necessary for the protection of public health.

Depending on how such sweeping powers are exercised in concrete cases, foreign investors could allege that Spain committed a compensable breach of its investment treaties. The widely invoked standard of fair and equitable treatment (FET) is of foremost relevance. FET tends to be applied through the prism of legitimate expectations; that is, whether the State induced an expectation upon which the claimant reasonably relied at the time it made an investment. Elements of the regulatory framework, however, may ground an expectation that any changes will be reasonable, proportionate, non-arbitrary, and non-discriminatory. The standard also includes requirements of due process.

This month, the tribunal in Hydro Energy 1 v. Spain reaffirmed the proportionality element under FET: ‘A measure must be suitable to achieve a legitimate policy objective, necessary for that objective, and not excessive considering the relative weight of each interest involved, and a balancing or weighing exercise so as to ensure that the effects of the intended measure remain proportionate with regard to the affected rights and interests.’ An investor could well claim that a measure in response to COVID-19, such as temporary control over its factory, gave insufficient weight to its commercial interests in breach of FET.

If temporary requisitions turn into nationalisation, or if social unrest frustrates commercial operations through looting or occupation, then two further standards would be relevant: first, the obligation not to expropriate without compensation, which is breached by outright taking or measures that virtually destroy an investment’s value; and, secondly, the obligation to provide full protection and security, which is traditionally concerned with physical protection from third parties. (I cannot here go into the intricacy of so-called umbrella clauses, by which contractual obligations may be transformed into investment treaty claims; but see this list of how COVID-19 has impacted business contracts in several jurisdictions.)

Investment treaties contain exclusions that may be triggered by the event of an epidemic or simply where public health is the object of regulation, many modelled on Article XX of the GATT. In this post, however, I focus on two defence arguments that arise not from specific treaties but through manifestations of sovereignty under general international law that tribunals have recognised as relevant in the application of primary norms.

Police powers doctrine

The tribunal in Philip Morris v. Uruguay, in assessing whether tobacco control measures constituted an expropriation, reaffirmed that ‘the State’s reasonable bona fide exercise of police powers in such matters as the maintenance of public order, health or morality, excludes compensation even when it causes economic damage to an investor’. In 1903, moreover, the Claims Commission in the Bischoff Case held that ‘during an epidemic of an infectious disease [in casu smallpox] there can be no liability for the reasonable exercise of police power [taking and detention of a carriage]’.

This customary doctrine of police powers may be traced, as Jorge Viñuales has shown, from recent awards through United States constitutional law to the classics of Adam Smith and Emer de Vattel. The label ‘police’ is misleading to the modern anglophone. The originary French embraced any legitimate government policy or regulation that encroached on individual economic interests. In his lectures at the Collège de France, Michel Foucault identified five objects of police power from seventeenth-century administrative manuals: population, necessities of life, health, labour, and ‘the set of regulations, constraints, and limits, or the facilities and encouragements that will allow the circulation of men and things in the kingdom and possibly beyond its borders’. Foucault observed that ‘health is not just a problem for police in cases of epidemics, when plague is declared, or when it is simply a matter of avoiding the contagious, such as those suffering from leprosy; henceforth the everyday health of everyone becomes a permanent object of police concern and intervention.’ As we are witnessing, protection of public health from epidemic disease is a precondition to the salutary flow of bodies, commodities, capital.

International law should thus attach normative priority to sovereign regulation in an epidemic, responses to which have been a core expression of police power since its formulation. But the ‘autonomous customary concept’, as described by Viñuales, tends to be applied only to expropriation. Under the head of FET, tribunals incorporate the State’ right to regulate for public health by according deference to government judgement in interpreting and applying the treaty standard, sometimes described as a margin of appreciation.

Margin of appreciation

In Philip Morris, drawing on jurisprudence of the European Court of Human Rights, the majority accepted that a margin of appreciation should be granted: ‘The responsibility for public health measures rests with the government and investment tribunals should pay great deference to governmental judgments of national needs in matters such as the protection of public health.’ In his partially dissenting opinion, Gary Born held that ‘the proper degree of deference’ should be derived strictly from treaty and custom, which he held to ‘forbid any second-guessing of [regulatory and legislative] judgments’ but required ‘a minimum level of rationality and proportionality between the state’s measure and a legitimate governmental objective’.

In determining whether a measure is reasonable or proportionate under FET, therefore, investment tribunals will likely give weight to the relative expertise of the State in complex policy contexts such as public health. More so if the measure complies with the State’s human rights obligations, including the right to health.

A tribunal could further turn to standards and recommendations of international organizations in determining whether a measure is reasonable or proportionate. In Philip Morris, the World Health Organization (WHO) and the Secretariat of the WHO Framework Convention on Tobacco Control (FCTC) filed a submission as amici curiae under ICSID Arbitration Rule 37(2). Born emphasised that the FCTC did not require one of the challenged measures, which was ‘a significant departure from both prior international practice and internationally recommended regulatory measures’. The majority was nonetheless satisfied that FET did not ‘preclude governments from enacting novel rules’, even if these were ‘in advance of international practice’, provided they had ‘some rational basis’ and were ‘not discriminatory’.

Returning to COVID-19, investors will likely seek some standard to discipline State overreach. Eyal Benvenisti noted that governments went beyond the WHO Emergency Committee’s Temporary Recommendations, made under the International Health Regulations in January 2020, which ‘[did] not recommend any travel or trade restriction based on the current information available’. As the Emergency Committee cautioned in recommendations on Ebola virus disease, restrictions that are ‘implemented out of fear’ with ‘no basis in science’ can ‘compromise local economies and negatively affect response operations from a security and logistics perspective’. A measure might be proportionate in preventing epidemic, but unduly impact other States and thus have the unintended consequence of deterring timely reporting of potential pandemic.

As Mike Davis wrote of 1918 influenza, however, a pandemic is ‘a constellation of individual epidemics, each shaped by local socioeconomic and public-health conditions’. WHO recommendations would doubtless generate some normative pull in assessing whether measures are reasonable, yet the deference accorded in Philip Morris should permit States to adopt ambitious measures adapted to national risks and capacities. In Mamidoil v. Albania, the tribunal accepted that FET must be calibrated by the circumstances of the host State: ‘the heritage of the past as well as the overwhelming necessities of the present and future’. The transition status of Albania, in that case, meant the investor could not expect ‘the same results of stability as in Great Britain, USA or Japan’. The comparators are perhaps outmoded. Nonetheless, as COVID-19 begins to spread into developing States with weaker health systems, arbitral deference to government judgement in public health should accordingly increase in the event of regulatory change or requisitioning.

Long-term relevance for investor expectations

The pandemic will doubtless generate several waves of sovereign measures as it crashes through the world economy. UNCTAD has projected a ‘negative impact on global FDI flows ranging from -5% to -15% in 2020 (with the effect of the demand shock filtering through 2021)’. Any new entrants to sensitive sectors or jurisdictions would be wise now to evidence due diligence if they hope later to rely on the protection of investment treaties.

Take, for instance, the civil aviation industry, which has been clobbered in recent weeks. In Teinver v. Argentina, three Spanish companies acquired majority stakes in two Argentine airlines in October 2001 and later alleged FET was breached by measures affecting their ability to charge economically reasonable airfares. In rejecting the legitimacy of the investors’ expectations, the tribunal considered broadly the circumstances in which the investment was made. The acquired airlines had been ‘facing serious financial difficulties’ and, moreover, ‘the Argentine economy was also in very difficult circumstances and on the verge of economic crisis. The international airline industry had also been affected by the events of September 11, 2001. Further, the airlines operating in Argentina were engaged in a destructive airfare war which was depressing airfares.’

Investment treaties, in short, are not insurance policies against bad business decisions in uncertain times. In Antaris v. Czech Republic, which arose from amendments to an incentive regime for renewable energy, the majority described the principal claimant as ‘essentially an opportunistic investor who saw a window of opportunity and who was aware, or should have been aware, that dealing with the solar boom was a fast-moving and controversial political issue’. Beyond initial attempts to curb the spread of COVID-19, therefore, the systemic repercussions of pandemic should inform the expectations of investors as to the degree of regulatory change.

Coda

Most of this post was written as a therapeutic distraction. I hoped to render juridically legible what I have come to experience as a hyperobject, a term which describes ‘events or systems or processes that are too complex, too massively distributed across space and time, for humans to get a grip on’. Understood as a hyperobject, COVID-19 is not merely an infectious disease but serves as shorthand for a system configured by relations among all kinds of other entities. Pandemics, as Paddeu and Jephcott observe, ‘are man-made emergencies, which are the result of a combination of causes, including natural events, long term ecological and political trends, as well as human and societal choices’. Multiple narratives are nonetheless emerging, each framing the threat in a fashion favourable to an existing agenda. But responses to COVID-19 will wipe out wealth in ways for which it is difficult to attribute State responsibility from the vantage of international investment law, regardless of whether one views lex lata through the lens of sovereignty, development, or investment protection. Like broader challenges posed by the Anthropocene, therefore, the ubiquitous risks of this pandemic present an opportunity to rethink established relations of law in the world economy.


 source: EJIL:Talk!