THE COVID-19 RELATED POTENTIAL INVESTMENT ARBITRATION CLAIMS
As at the time of writing, 9 May 2020, there were at least 3,855,812 confirmed cases with 265,862 confirmed deaths across 215 countries, areas or territories. The World Health Organization ( WHO) declared a Public Health Emergency of International Concern on 30 January 2020 , i.e. an ‘extraordinary event’ which is ‘serious, unusual or unexpected’ carries trans-national implications, and may require immediate international action. On 11 March 2020, the WHO declared it a pandemic.
We are only a few months into the crisis now and the governments around the world have already enacted a wealth of emergency measures in response to the Covid-19, that might affect foreign investors– measures that they have taken, and measures that they have not taken.
The following measures are amongst a few that States around the world have taken:
A. Quarantine
Quarantine has impacted major business activities because some businesses have been asked to close other than those that are ‘essential’. There have also been examples of suspension of payments of debt obligations i.e. mortgage, loan, utility payments, imposing export controls, taking control of private house care facilities, for example, in Spain.
In the US more specifically, the government has ordered 3M, General Electrics (GE) and Metronics, which are all US companies to produce Personal Protective Equipment (PPE) under the Defence Production Act.
There has also been border closures around the world. The European Union (EU) is considering nationalization of key industries as part of its bail out packages including airlines.
In Italy, there was the law decree no. 18 of 17 March 2020, which passed a series of emergency measures including the recognition of hotels and medical equipment. Their application to transportation contracts, the rules on frustration in the Italian Civil Code with overriding mandatory rules that apply irrespective of the governing law of the contract. The right of the government to intervene in the governance of strategic companies like, for example, pharmaceutical companies.
In Peru, there has been suspension of collection of toll fees on the country’s road network by a legislation that has been passed recently. As a result, some government officials have said that these measures might bring some investment arbitration cases so they might consider amending the legislation. There are 74 toll road in Peru and 24 of them are run by State-owned companies which has already suspended fees, and operators of 32 toll roads have also done this voluntarily so there is a question of potential claims arising out of this concession contracts.
So, the kind of claims that can be brought about include not only treaty claims but also contractual claims.
B. Expropriation
Expropriation under investment treaties include both direct expropriation and indirect expropriation. Most of the investment treaty arbitrations relate to indirect expropriation.
In the context of coronavirus, if there is a forced transfer of ownership, it is a likely indirect expropriation.
The Spanish government has taken control of the private healthcare facilities but has not taken ownership of these facilities. In terms of indirect expropriation, where a State deprives an investor in whole or in significant parts, as the metacla tribunal put it, “the use of reasonably to be expected economic benefit of property.” The investment is said to have been expropriated indirectly through different forms including:
1. Repudiation of a concession;
2. Displacement of the investors’ management;
3. Imposition of severe taxes substantially eroding profits;
4. Denial of permits;
5. Freezing bank accounts etc.
What is important here is that even if one measure alone has not the effect of expropriation, the combined or net effect of border closures, quarantines, other emergency measure that have been taken may amount over time to indirect expropriation, or creeping expropriation.
Even if these measures are temporary in nature and have been lifted, the mere fact that the expropriation is a later remedy does not foreclose the possibility of a claim to excuse the State’s duty to compensate. Tribunals have found that ‘temporary, limited deprivation of an investment can constitute an expropriation.’
In Middle East Cement v. Egypt, suspension of an export license was four months was deemed an expropriation. In Wena Hotels v. Egypt, an investor’s loss of control of property for one year constituted an indirect expropriation.
There is also the fact that the forced bailout at an unusually low valuation may give rise to claims for fair compensation. As in Ping An v. Belgium, where the investor alleged that the Belgian government’s forced bailout of Fortis during the financial crisis was expropriation.
The mere fact that a State did not intend to expropriate investment does not foreclose liability. In Spurden Rossali v. Romania, the Tribunal noted that intent is relevant although not decisive as to whether there was an expropriation. Similarly, in Vivendi v. Argentina, the Tribunal rejected a State’s attempt to justify as a benign regulatory measure noting that there is extensive authority for the proposition that a State’s intent or subjective motives are at most a secondary consideration. The effect of the measure on the investor and not the State’s intent is the critical factor.
C. Fair and Equitable Treatment (FET)
In Tecmed v. Mexico, the tribunal has determined that a State is required to “act in a consistent manner, free from ambiguity and totally transparently” in relation to foreign investors.
In Azurix v. Argentina, the tribunal found that Argentina’s misrepresentation regarding its failures to adequately remove algae from the water was a consideration for fighting a breach of the FET