Safeguarding Foreign Investments During A Pandemic

By Nicholas Berg, Kathleen Saunders Gregor, Daniel Ward and Ellen Gilley
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Law360 (April 30, 2020, 3:40 PM EDT) --
Nicholas Berg
Kathleen Gregor
Daniel Ward
Ellen Gilley
To combat the public health crisis and economic effects of COVID-19, national governments have embraced their regulatory authority to implement far-ranging measures, including travel restrictions, limitations on business operations, new tax rules and stimulus packages.

These emergency measures may negatively impact businesses by reducing profitability or delaying operations, as well as through exclusion from government benefits provided to other businesses. COVID-19-related governmental actions, either independently or cumulatively, could be overly restrictive, last longer than necessary and/or discriminate against foreign businesses. 

In these instances of governmental overreach, investment agreements can be powerful tools for companies with foreign investments to recover or prevent loss. Thus, while responding to public health concerns and COVID-19 measures, companies should also assess their protections under investment agreements and consider when and how to leverage them. In particular, companies should consider the following:

  • Whether investment agreements currently in place protecting foreign investments from certain government action and related losses apply to its investments;

  • The duration, severity and application of COVID-19 measures to determine when the action violates an investor's rights and protections;

  • Whether instituting international investment arbitration would be an effective mechanism to recover losses; and

  • Whether alternative remedies, such as domestic or regional administrative or judicial relief, should be pursued in parallel with (or in advance of) instituting arbitration proceedings (particularly in the context of tax-related disputes and/or disputes within EU jurisdictions where a state action might also trigger claims under the EU charter).

Investment Agreements — Determining the Protection for Foreign Investments

Broadly, investment agreements protect foreign investors and foreign investments from certain types of government actions by guaranteeing some amount of regulatory stability and fairness. 

Investment agreements include the network of bilateral and multilateral investment and international trade agreements between states — such as the United States-Mexico-Canada Agreement and the Energy Charter Treaty — and individually negotiated contracts between the foreign investor and host government.

While these agreements still permit governments to change policies and respond to national emergencies, the regulatory power is constrained by investor rights and protections. Almost universally, investment agreements prohibit the host government from expropriating the investment either directly or indirectly, subjecting it to unfair or unequal treatment, or imposing discriminatory measures.

Additionally, individually negotiated investment agreements often include specific regulatory guarantees, such as reduced taxation or exclusivity guarantees.

If the host government violates any of these protections, foreign investors typically are permitted to bring an arbitration claim directly against the host government to recover losses. These protections apply even when government measures are implemented to respond to national emergencies like COVID-19.

Indeed, this is not the first time national or international crises have empowered governments to impose short-term emergency measures; nor will it be the first time that these measures violate investment agreements. For example, Argentina's economic crisis of 2001 through 2003 prompted the Argentine government to impose dramatic regulations, including implementing an austerity program and unpegging the peso from the dollar, after which companies leveraged investment agreements to recover losses on their Argentine investments.

Monitoring Government Regulations — Determining Violations of Investment Agreements

Whether a foreign investor could recover its losses against the host government is a fact-intensive analysis. It includes assessing the severity of the crisis, the proportionality of the government response and whether the government has any valid defense under international law generally or the terms of the agreement specifically.

Moreover, this analysis is as dynamic as the COVID-19 epidemic; as the severity of public health risk changes, so too does the reasonableness of any government response. That is, the government response needs to be calibrated to each distinct phase of the crisis.

Nevertheless, when monitoring government regulations, there are key questions to consider. As discussed below, these questions will vary depending on the type of regulation enacted: (1) compulsory restrictions on personal and business activities — such as limitations on travel and business operations, (2) new tax provisions, and (3) economic relief packages.

Questions for Compulsory Restrictions

First, as governments continue with compulsory restrictions on business operations and personal activities, foreign investors should be aware that resulting losses could be recovered directly against the host government.

For example, in response to COVID-19, the Spanish government has been empowered to seize private production lines to produce medical equipment,[1] and the U.S. federal government is similarly empowered under the Defense Production Act[2] — both of which could violate an investment agreement depending on their application.

Other examples include European Union restrictions on the export of certain medical goods,[3] the recent bill passed by the Peruvian Congress to suspend the collection of tolls, including for tolls owned by foreign investors,[4] and India's export restriction on 26 pharmaceutical ingredients.[5]

As foreign investors monitor and respond to these restrictions, they should assess the measure's severity, duration, scope and application to determine whether it could violate an investment agreement. In particular, foreign investors should consider the following questions.

Have the restrictions led to a seizure or nationalization of the foreign investment?

Almost universally, investment agreements prohibit a government from seizing or expropriating a foreign investment. The hallmarks of an impermissible, direct expropriation are government seizure of an asset. Although brief seizures are permitted in emergencies, seizures that last less than a year have been considered expropriations.[6]

For example, if either the Spanish government or the government of the U.S. uses its authority to seize foreign-owned factories or production lines to produce medical equipment (as noted above), the foreign investor could have an expropriation claim. The validity of the claim would in part depend on the duration of the seizure and the extent to which the foreign investor receives adequate or reasonable compensation.

Have the restrictions destroyed the value of the investment or prevented the company from controlling the investment?

In addition to direct seizures, an impermissible expropriation can occur when government regulations deprive foreign investors of the value of their investment or control over it.

For example, the Indian government's export restriction on pharmaceutical ingredients, discussed above, could substantially devalue a foreign-owned pharmaceutical business based in India. Additionally, if the Peruvian government does suspend the collection of all tolls, foreign-owned tolls would lose their income stream. Whether either would rise to the level of an unjustifiable expropriation would depend, in part, on the duration of the measure and the extent of the loss.

Have the restrictions been imposed openly and fairly?

The most commonly invoked investment agreement protection is the guarantee of fair and equitable treatment. Although somewhat amorphous, it requires that government regulations or restrictions be proportional to the risk and that the process by which the regulation is enacted be fair, transparent and in accordance with due process.

Generally, if COVID-19-related business restrictions are in effect longer than necessary or are broader in scope than necessary, a foreign investor could bring a fair and equitable treatment claim against the host government for its losses. Similarly, if the host government imposes unreasonable penalties for failing to comply with restrictions — such as harsh fines or immediate suspension of permits — a foreign investor could also have a fair and equitable treatment claim for related losses. 

Drawing on an earlier example, the Indian government's export ban on pharmaceutical ingredients could violate the guarantee of fair and equitable treatment if it is disproportionate to the public health risk in India or unnecessary to combatting COVID-19 within the country or if it were applied unfairly — for example, by granting exceptions to only domestic companies.

Have the restrictions been imposed in a discriminatory manner?

Investment agreements aim to provide foreign investors with the same regulatory treatment as both nationals of the host countries (e.g., national treatment) and other foreign investors (e.g., most favored nation). Therefore, if COVID-19 restrictions are imposed unevenly — for example, only on foreign investors or only on investors from a specific country — then, an investor could have a discrimination claim under either the national treatment provision or most favored nation provision, respectively.

Discrimination could be explicit or could be through the implementation of a rule where governmental discretion is involved. Taking the EU trade restrictions as an example, where export bans are lifted on a case-by-case basis where a company has obtained permission to export restricted products to a particular jurisdiction, the failure to grant such authorizations in a fair manner could also give rise to a violation under the fair and equitable treatment provision.[7]

Do the restrictions contradict any guarantee or benefit specifically granted to the foreign investment?

Finally, if a foreign investor entered into a specific investment agreement with the host government, the agreement will likely contain additional, specific rights for the investor, which could be affected by COVID-19-related restrictions. Again, certain interruptions are likely permissible, but as the interruption persists or grows or is imposed in a discriminatory manner, a violation is more likely to exist.

Questions for New Tax Provisions

Second, many governments are attempting to mitigate the economic effects of COVID-19 by reducing or delaying tax payment obligations. Some governments, including the U.S., are incorporating key stimulus provisions into the tax systems, in the hope of getting money more quickly distributed to businesses in need.

In the future, governments will likely be more aggressive in enforcing tax laws in order to fund economic stimulus packages related to COVID-19. In all of these situations, foreign investors should evaluate whether taxes are being applied evenly and fairly to foreign investments.

Are foreign investors or investments excluded from tax benefits?

If a foreign investor is unjustifiably excluded from new tax benefits such as increased credits, deductions, deferrals and income exclusions, there could be a discrimination claim under either national treatment — in the event these benefits are only available to nationals — or most favored nation provisions — in the event these benefits are only available to some foreign-owned companies.

Are additional taxes being imposed that significantly reduce the value of the foreign investment?

As governments seek to fund stimulus packages, they will likely look to taxation as a source of revenue and could be tempted to place the burden of this tax on non-nationals. If a tax, either by itself or in connection with other government regulations, drains the value of the foreign investment, the action could constitute an impermissible expropriation or a violation of the guarantee of fair and equitable treatment.

Are new taxes being imposed only on foreign investors/foreign investments?

Relatedly, if new taxes are imposed only on foreign investors or a subset of foreign investors, then such action could violate the guarantees of the national treatment and most favored nation provisions, respectively.

Is the process for contesting a tax assessment or obtaining a tax benefit unduly burdensome or futile?

If foreign investors are effectively denied the opportunity to contest a tax within the host country's administration, then the investor's right to fair and equitable treatment might be violated. The violation could occur whether the denial is explicit or arises due to biased or unduly burdensome procedure.

Did the government guarantee the investor a specific tax rate or tax treatment?

Investment agreements negotiated directly between the investor and host government often guarantee a specific tax rate or tax treatment for a set period of years. If there is no qualification for national emergencies, investors could have the power to strictly enforce these agreements.

Economic Stimulus Packages

Finally, governments are providing economic stimulus packages outside of tax benefits, such as monthly payments, to further ease the economic burden of COVID-19. As is the case with the application of taxes, economic benefits could infringe on investment agreement protections if they are applied to exclude foreign investments from these benefits.

For example, after France, Poland and Denmark announced that they would restrict stimulus aid to companies headquartered in jurisdictions on the EU tax haven blacklist, the European Commission informally confirmed it would accept limiting aid on this basis.[8] In determining whether any discriminatory treatment could give rise to an investment claim, foreign investors should consider the following.

Are foreign investments ineligible to receive economic benefits?

If government excludes all foreign investments from economic benefits or some foreign investments from economic benefits, then this could infringe on the guarantees of national treatment or most favored nation, respectively. Among other factors, it will be important to understand the rationale for any disparate treatment.

Is the process for obtaining an economic benefit unduly burdensome or futile?

If foreign investors are effectively denied the opportunity to apply for a benefit, whether explicitly or due to a biased or unduly burdensome procedure, then this could also infringe on the right to fair and equitable treatment. A key consideration will be the fairness of the procedure and whether it accords with due process.

Recovering Losses Through International Arbitration and Considering Alternative Remedies

To uphold their rights under an investment agreement, foreign investors are typically given the choice of either litigating a claim in the host country's court system or submitting a claim to binding international arbitration. International arbitration is often praised as a superior forum to national courts due to the independence and neutrality of the arbitrators, the efficiency of the process and the enforceability of an arbitral award.

These characteristics take on greater importance when, due to a prolonged emergency, a host country's court system could be subject to closures or biased towards retaining government funds. As a result, investment agreements are not only powerful due to their substantive protections but also because of their effective dispute resolution procedure.

The procedure for initiating an arbitration will be specific to the investment agreement. Regardless, it will be important for the foreign investor to monitor government regulations and any resulting loss to determine when a claim will be ripe, what preliminary steps are required prior to initiating an arbitration and when a claim could be time-barred.

Additionally, foreign investors should consider the effect of pursuing local remedies and parallel proceedings. Depending on the investment agreement and the specific claim, foreign investors may be required to exhaust local remedies before initiating an arbitration claim under an investment agreement.

By contrast, other investment agreements restrict an investor's ability to bring an arbitration claim if local remedies are pursued. From a tactical perspective, investors should consider whether there are strategic benefits to initiating parallel proceedings before multiple arbitration panels or before a local court and an arbitral panel.

Those benefits could include the ability to bring legally distinct claims and broaden the potential for recovering losses as well as the ability to negotiate a settlement.

As a result, it is important to understand the requirements, restrictions and opportunities that multiple proceedings impose or offer. In particular, it is critical (1) to monitor filing deadlines to ensure claims do not become time-barred under either the domestic law or the investment agreement; (2) to determine the structure of any fork-in-the-road or waiver provision that would limit recourse to international arbitration; (3) to evaluate whether any misconduct of local proceedings itself constitutes another violation of the investment agreement; and (4) to weigh the strategic benefits of multiple proceedings against the cost and administrative burden of multiple proceedings.


With COVID-19 continuing to present a public health threat, upholding the protections of an investment agreement cannot be the top priority of national governments. Accordingly, investment agreements give national governments appropriate leeway and certain defenses to accommodate proper emergency measures and relief.

For example, bilateral and multilateral investment treaties might exclude from discrimination claims government actions taken to preserve public welfare,[9] and customary international law excludes state responsibility in cases of force majeure, necessity and distress.[10]

Nevertheless, it is likely that some COVID-19-related regulations will violate the rights afforded to foreign investors under investment agreements, either through their cumulative impact or due to an instance of substantial overreach. Thus, as events unfold and new evidence becomes available, it is important for both national governments and investors to monitor regulations to determine whether they are proportionate to the risk or whether they infringe on the protected rights of foreign investors.

Nicholas Berg, Kathleen Saunders Gregor and Daniel Ward are partners, and Ellen Gilley is an associate at Ropes & Gray LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Government of Spain, Real Decreto 463/2020 (14 March 2020), available at

[2] Pub.L. 81–774.

[3] Implementing Regulation (EU) 2020/402 of 14 March 2020 making the exportation of certain products subject to the production of an export authorization, Official Journal of the European Union, L 077I, 15 March 2020, available at

[4] Cosmo Sanderson, Peru warned of potential ICSID claims over COVID-19 measures, GAR, April 9, 2020.

[5] Government of India, Notification No. 50/ 2015-2020 (3 March 2020), available at

[6] Middle East Cement v. Arab Republic of Egypt, ICSID Case. No. ARB/99/6, Award, ¶ 107 (April 12, 2002) (holding there was an expropriation after a license was delayed for four months); Wena Hotels v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award,¶ 82 (Dec. 8, 2000) (holding there was an expropriation when the property was seized for one year).

[7] Note however, that as a result of the Achmea decision, intra-EU investment treaties may be supplanted by the EU treaty. Slovak Republik v. Achmea BV. Case C‑284/16 (AG Ruling, Fed. Ct. Germany, 19 Sep 2017). Thus, a non-EU foreign investor may need to look to both EU freedoms contained in the EU treaty as well as existing bilateral investment treaties with specific EU states. 

[8] Joseph Boris, Virus Signals Need To End Use Of Tax Havens, Report Says, Law360 (April 27, 2020) available at: [last accessed, April 29, 2020].

[9] E.g., China-Australia Free Trade Agreement ("CHAFTA") (2017) (providing that non-discriminatory measures for "legitimate public welfare objectives of public health … shall not be the subject of a claim" by an investor).

[10] See International Law Commission, Draft Articles on the Responsibility of States for Internationally Wrongful Acts, arts. 23-25, Supplement No. 10 (A/56/10), chp. IV.E.1,available at:[last accessed April 27, 2020].

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