International Law in times of crisis: COVID-19 and Foreign Investments


As the COVID-19 pandemic continues to unravel without regard to national borders, countries around the world are faced with both public health and economic issues on a scale not previously seen. In this context, international law, particularly international investment law, continues to apply. It does not present a binary choice between “State protection” and “investor protection” but involves a balancing of rights and interests. The measures adopted by sovereign States using their regulatory “police powers” to respond to the pandemic may have a significant impact on foreign investments situated within their territory. Therefore, it is imperative that countries hosting foreign investments take into account applicable international law safeguards and limits when adopting reactive measures, such as acting in a non-discriminatory and non-arbitrary manner, in order to prevent a potential fallout from disputes with foreign investors. Conversely, foreign investors must also be watchful of these intrusive measures, and should be pro-active in considering whether action taken by a host State is compliant with that State’s obligations under international treaty and customary law and whether the State’s conduct might give rise to an international law remedy in addition to remedies available under the laws of the host State.

Responding to the pandemic

International law recognises that sovereign States have a duty to protect the health and safety of their citizens, as well as their economy, when faced with a health crisis such as that presented by COVID-19. It is generally accepted that States enjoy a margin of appreciation in taking regulatory action in fulfilment of this duty. Whilst few would doubt that this margin expands considerably during a global pandemic of the kind we are witnessing, which has already claimed the lives of more than 200,000 human beings globally at the time of writing, States must always exercise their police powers in a manner which is not arbitrary, discriminatory or for illegitimate reasons, or they risk facing claims from foreign investors under applicable bilateral or multilateral investment treaties or customary international law before international tribunals. Nevertheless, it is imperative to remember that, as stated by the arbitral tribunal in Philip Morris v. Uruguay,[1] “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.” As this statement indicates, arbitral tribunals appear to give considerable deference to State regulators and scientific bodies, and appear to assign greater relevance to public health as a policy objective, in sensitive areas such as public health protection.

In response to the pandemic’s effects on public health, States such as the United Kingdom have swiftly adopted measures which, amongst other things, enforce a mandatory “lockdown” on the public, with only essential travel and work being permitted. The restriction on movement has consequential effects on a State’s economy, as businesses are unable to operate as normal, leading to economic measures being taken. A number of countries are offering substantial aid packages to domestic companies in an effort to rescue them from bankruptcy, whilst excluding foreign investors from such measures.

These wide-ranging measures taken by States using their police powers, while assumingly necessary to respond to a crisis of this magnitude, could have serious consequences for foreign investors and could negatively affect the economic value of their assets. The case of Poštová Banka, A.S. and Istrokapital SE v. The Hellenic Republic[2] demonstrates such consequences, where the effects of the global financial crisis of 2008 led to the Greek government restructuring its sovereign debt owed to foreign investors (amongst others) by effectively offering to reduce the value of the investors’ sovereign bonds by over 50%, so as to ensure the sustainability of the Greek government’s debt. This led to a devaluation of the sovereign bonds held by investors.

Protection under investment treaties

States have certain obligations to protect foreign investments admitted into their territory, which are set out in bilateral and multilateral investment treaties that they have concluded with other States. Such treaties only protect investors who are nationals of a contracting State other than the State hosting their investment. In terms of the investments eligible for treaty protection, this is usually defined quite broadly, generally covering any investment other than an ordinary sales transaction and including shares and rights in a company.

One of these obligations is the duty to offer due process to foreign investors, as typically assumed under the treaty standard of “fair and equitable treatment”—a significant concern for foreign investors during the present pandemic. Another standard, that of “full protection and security,” may assume greater relevance during the COVID-19 crisis, as inaction or reduced vigilance by States, or even contribution to the crisis, may result in significant harm being caused to foreign investments, contrary to the State’s obligation under this standard. For example, in Azurix Corp. v. The Argentine Republic (I),[3] the host State’s failure to carry out works to improve the water quality of a dam contributed to a water quality crisis, negatively impacting the foreign investor’s investment in providing drinking water and sewerage treatment services to local customers. The COVID-19 crisis increases the risk of looting, especially in areas of reduced patrolling by the police or military.

In exercising their police powers during the COVID-19 crisis, countries hosting foreign investments should also be wary of being deemed to have indirectly expropriated foreign investments. For example, a State may enact a law in reaction to the crisis allowing it to order hotels and medical equipment to be provided for the State’s use during the current pandemic, whilst promising to provide the affected investor with an appropriate indemnity from the State as a result of such requisitions being made. Whilst this may seem to be a necessary measure that is justified by the extraordinary circumstances of the present pandemic, it could amount to indirect expropriation, given that affected foreign investors may be deprived, for the foreseeable future, of the economic value or benefit of their assets, or at least their reasonable expectations as to the use of their assets.

To deal with potential investment disputes arising from the pandemic, host States may seek to invoke defences generally available under international law, including under investment treaties. The case of Continental Casualty Company v. The Argentine Republic[4] concerned the economic crisis in Argentina which began in 1989, and Argentina’s economic measures taken in response to the crisis led to a devaluation of the investment securities owned by a foreign-owned insurance company. Argentina invoked a defence under the relevant bilateral investment treaty, which allowed for measures to be applied which were necessary for the maintenance of public order. Such a treaty-based defence concerns the scope of application of a treaty. The international tribunal in this case noted that “[a]n interpretation of a bilateral reciprocal treaty that accommodates the different interests and concerns of the parties in conformity with its terms accords with an effective interpretation of the treaty. Moreover, in the tribunal’s view, this objective assessment must contain a significant margin of appreciation for the State applying the particular measure: a time of grave crisis is not the time for nice judgments, particularly when examined by others with the disadvantage of hindsight.” (Emphasis added). The tribunal’s statements in this case are a stark reminder that in the event of a grave crisis, particularly a health crisis on the scale we are witnessing, the margin of appreciation for a State in enacting reactive measures may in fact be wider than usual. Still, the interpretation of an applicable treaty will be subject to the international law of treaties as codified in the 1969 Vienna Convention on the Law of Treaties and arbitral tribunals will generally verify whether a State’s action was reasonable and proportionate to the aims sought to be achieved.

It is also worth noting that certain investment treaties go beyond the general defences found within them. The China-Australia Free Trade Agreement specifically prevents a claim being made by a foreign investor in response to measures which are non-discriminatory and made in relation to legitimate public welfare objectives of public health. This is arguably a comprehensive defence to any investment disputes arising from the COVID-19 crisis.

Protection under customary international law

States also owe duties to foreign investors as “aliens” under customary international law, such as affording to them a minimum standard, which many believe includes fair and equitable treatment, and acting in good faith and in a non-discriminatory manner. Customary international law is derived from a general practice of States followed out of a sense of legal obligation.

However, even under customary law, a State may shield itself against potential investment claims arising from the exercise of its police powers. For example, a State may invoke the defence of force majeure,[5] or an unexpected change in circumstances, to justify its emergency actions taken in response to the present pandemic, given that it constitutes an unforeseen event beyond the State’s control.

Another defence that may be invoked by a State as a circumstance precluding wrongfulness is that of “state of necessity”,[6] i.e., reactive measures taken to protect an essential interest from a grave and imminent peril. However, the case of National Grid PLC v. The Argentine Republic,[7] which again concerned the economic crisis in Argentina and reactive economic measures taken by that country to combat the crisis, demonstrates that this defence has a high threshold and generally will not be available where a State has substantially contributed to the crisis. Accordingly, States cannot expect to be able to rely on this defence following the pandemic where they have, for example, taken delayed measures to deal with the virus (thereby arguably contributing to it).

The defence of distress[8] may also be invoked by a State to protect itself against future investment claims relating to COVID-19. A threat to life is required for invoking this defence, and the devastating effects of the present pandemic affect its chances of success. Under this defence, a State must also show that it did not contribute to the situation created by the pandemic, which may in fact provide some scope for foreign investors to bring claims against host countries that either were not pro-active in protecting those within its territory against the pandemic or over-reached in their response to the pandemic.

It remains to be seen how investment tribunals will treat the UN International Law Commission’s Articles on the Protection of Persons in the Event of Disasters, adopted in 2016, in this context.[9] It is unclear to what extent these Articles, which present a framework of rights and responsibilities during disasters, reflect customary international law binding on States and apply to the COVID-19 pandemic.

Attribution and its use as a defence by host States

In many countries, the official response to the COVID-19 pandemic is associated with de-centralised decision-making by lower bodies and officials. A claim before an international court or tribunal will fail unless there is convincing evidence of the violation of some rule of international law by the State party. The international law breach must also be attributable to the State party for the State to incur responsibility. A State party could use the element of attribution as a defence and argue that the acts of certain officials, bodies or authorities are not attributable to the State in the circumstances.

Practical considerations for investors and host States

It is clear that foreign investors may face challenges in respect of their investments in host States during the present pandemic as such States take action to deal with the COVID-19 crisis and protect the health and safety of people and companies situated within their territory.

Foreign investors should be proactive in considering what protection may be available for their investments, by checking:

  • whether there is an investment treaty in force between their home country and the country hosting their investment – this includes verifying that the treaty has been signed and ratified by both countries;
  • that they satisfy the “investor” requirement under that investment treaty. Investors should consider how the treaty defines corporate nationality, e.g., whether by place of incorporation or headquarters and/or by a certain level of in-country business activity;
  • whether their investment is one which is covered by the treaty (most treaties define “investment” broadly);
  • whether the treaty contains the typical substantive protections such as fair and equitable treatment, full protection and security and national treatment;
  • whether non-discriminatory treatment is guaranteed in the event of losses owing to a national emergency or other significant event in the host State;
  • whether the treaty contains an essential security interest or emergency measures clause which allows the host State to avoid its international law obligations;
  • whether the treaty contains the host State’s consent to international arbitration for a broad range of investment disputes;
  • whether they are able to refer an investment dispute to investor-State arbitration; and
  • whether there are any admissibility criteria for arbitration claims.

States hosting foreign investments should consider how the adoption of certain measures in response to the COVID-19 pandemic affects foreign investors and their ability to complain about such measures before international tribunals under investment protection treaties or customary international law. Prior rulings by tribunals adjudicating investor-State disputes provide useful guidance regarding the content and scope of international investment law and the defences available to host States when confronted with claims of foreign investors. States should keep in mind that the jurisdiction of an investor-State tribunal is decided by reference to international law, not their domestic law, and that an investment dispute could be decided exclusively based on international law, depending on the applicable arbitral mechanism and choice of law principles.

The CMS Investment Arbitration Task Force specialises in investment treaty arbitration and can assist with any queries you may have in relation to this subject matter. Please contact Peter Bekker to discuss further (E-mail: [email protected]; Telephone: +1 917 510 3537).

The helpful assistance of Imtiyaz Chowdhury, a London-based CMS Cameron McKenna Nabarro Olswang LLP trainee, in preparing this Law-Now is acknowledged.

[1] ICSID Case No. ARB/10/7.

[2] ICSID Case No. ARB/13/8.

[3] ICSID Case No. ARB/01/12.

[4] ICSID Case No. ARB/03/9.

[5] International Law Commission Report, UN Doc. A/56/10, August 2001, Article 23.

[6] Ibid., Article 25.

[7] UNCITRAL Award of 3 November 2008.

[8] International Law Commission Report, UN Doc. A/56/10, August 2001, Article 24.

[9] International Law Commission Report, UN Doc. A/71/10, 2016, at 13.