COVID-19 Claims May Test Tribunals With Thorny Questions

By Caroline Simson
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Law360 (April 30, 2020, 12:56 PM EDT) -- Unprecedented actions by nations to halt the spread of COVID-19 have prompted warnings that governments may face a "new frontier" of investment treaty claims that could force arbitrators to tackle a particularly unsavory question: Just how appropriate were those measures?

The novel coronavirus has meant that 2020 will be forever remembered as a year marked by nationwide shutdowns, mandated closures of nonessential businesses, the requisition of companies' facilities to manufacture personal protective equipment for workers on the front lines and even the stopping of exports of some goods.

The measures have, of course, had a significant negative impact on businesses around the world, prompting many with investments outside of their home country to consider bringing a claim for damages against a host nation. Some observers have drawn parallels to disputes that arose in the past because of certain types of disasters, including a slew of cases brought against Argentina after the country devalued its currency and defaulted on its debt during a financial crisis in the early 2000s.

But investment treaty disputes relating to a global pandemic are unheard of in the modern era, and exactly how tribunals will view investor claims related to COVID-19 — and the likelihood that those claims will succeed — remains largely unknown.

"It's worth stating that investment claims have not been brought, in the form that we know them today, in the context of state measures taken to combat an epidemic," said DLA Piper of counsel Ben Sanderson. "There are some very historic cases ... and investors may try to cite those cases to draw a parallel. But this is very much now the new frontier of investment claims ... whether measures taken to combat a pandemic such as this would give rise to valid claims and whether the defenses available to states are applicable in these circumstances."

Among the claims that investors could bring is an argument that their investments were expropriated, such as if a company was ordered to begin producing personal protective equipment or ventilators in lieu of its usual products, or if private businesses are nationalized. That happened in Spain, which reportedly nationalized all of its private hospitals in March.

But those types of claims could be less likely to succeed if the requisition order or other measure was for only a short period of time, according to Álvaro Nistal, counsel at Volterra Fietta.

"The fact that the measure is temporary is a significant obstacle, though it's not necessarily insurmountable," he said, adding that tribunals will also consider whether nations offered compensation to investors and how much they offered.

Other claims might have to do with the lockdowns and quarantines, which will "inevitably affect foreign investors' projects and expectations (legitimate or not)," William Kirtley and Isabella Monnerat Mendes of Aceris Law LLC said in an email.

There are some clues that may provide insight into how tribunals will view COVID-19 related claims. It's expected that these cases will be extremely fact-specific, meaning that tribunals will have to take a close look at how the measures in question were drawn up and implemented.

For example, nations that adopted recommendations issued by the World Health Organization would be on relatively solid ground to argue that their measures were reasonable.

Tribunals are also likely to consider how a particular nation's measures compared to those of its neighbor's. Investors will probably have a hard time challenging initial measures taken by most nations in these first few months after a global pandemic was declared in March, since they've been largely universal.

"Where a nuance may come in is when some states choose to maintain measures for longer than other states, and whether that can be viewed as unreasonable or disproportionate," said Sanderson. "That could actually be the point where investors may have a better prospect of success on these such claims."

Other things that tribunals will look at is whether the measures are being enforced at a local level, and whether that's being done fairly.

Beyond that, tribunals will consider whether there might be exceptions in treaties under which the claims are asserted for measures taken in the interest of public health. The text of many modern treaties allows tribunals to give greater deference to nations that can prove they were acting with public health in mind.

In two recent examples, tribunals rejected claims brought against Uruguay and Australia by Philip Morris that centered on measures the countries had taken to reduce tobacco use. The case against Australia was dismissed on jurisdictional grounds, but the tribunal in the Uruguay case took pains to note that governments making decisions to protect public health are owed great deference so long as their decisions are rational and made in good faith.

"You can see a tendency on the part of tribunals to give states a reasonable amount of latitude to protect the health and well-being of its constituents," said Kate Brown de Vejar, global co-chair of DLA Piper's international arbitration practice.

Still, much of that analysis will depend on the exact wording of the treaty and the way arbitrators interpret certain phrases likely to be contained in them, since there are few treaties that refer expressly to measures taken to protect public health, according to Nistal. Arbitrators might also have to decide whether the measures were applied in an arbitrary manner, even if they were based on legitimate concerns.

One defense that could be relied upon by nations to defend themselves against COVID-19 claims is the police powers doctrine, which says that states have the right to regulate as long as they do so in a bona fide manner. But the doctrine does have limits, and tribunals will need to determine where exactly those limits are, according to Brown de Vejar.

If an investor complains about measures that are shown to be relatively consistent with what the rest of the world is doing, then a tribunal would likely conclude the measures were reasonable.

By the same token, if local enforcement bodies within a nation are shutting down businesses that refuse to pay a bribe, "that would be an example of where the police powers doctrine won't protect you anymore," she said.

Often, however, the standard by which the doctrine can be applied isn't so cut and dried.

"[W]hile the doctrine of police powers is accepted as a ground to dismiss claims for compensation for takings, the criteria for its application is far from certain," said Kirtley and Monnerat Mendes.

The margin of appreciation doctrine, meanwhile, could be used by nations to argue that tribunals should pay great deference to governmental assessment of national needs, according to a client alert released by Volterra Fietta this month. The doctrine, which has a wide scope in international human rights law, has a more narrow meaning in the context of investment treaty claims.

"Certainly it is more contested than the police powers doctrine" in international investment law, said Nistal, noting that its meaning and usage is widely debated among arbitrators.

Indeed, the strength of a nation's argument that it should receive a degree of deference for its decisions is one that has been met with mixed results.

Spain, for example, has been hit with dozens of claims relating to its revocation of economic incentives for renewable energy investors.

Although the country has prevailed in some of the claims, in others it's been ordered to pay millions of euros in damages to investors. Though there appears to be some relationship between the time the investor filed the claim with its potential for success — investors who waited for a more severe round of reforms have tended to be more successful — much has boiled down to individual arbitrators' opinions about how much deference is owed to nations when they make public policy decisions.

Still, "there's a strong body of opinion in the international jurisprudence that it's difficult to judge a state's decisions retroactively with the benefit of hindsight," said Volterra Fietta partner Graham Coop.

--Editing by Rebecca Flanagan and Alyssa Miller.

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