Host states vulnerable to claims by foreign companies for obstructing business and investment with new public health regulations that aim to ‘flatten the curve’ on Covid-19 and protect community wellbeing

An article from Rana Kassas, legal scholar and ISDS specialist

As companies rush to seek relief from the financial burdens and commercial hurdles created by the Covid-19 protective measures imposed by governments (or specifically host state governments for companies operating overseas), a responsive and protective course of appeal is solicited by investors. This is a global phenomenon that is highly time-sensitive, and with each passing week the cases against the conduct of states and the impact this conduct has had (and in some countries, continues to have) on business are maturing. A first wave of pandemic legal action is steadily building up (globally) and is likely to break aggressively. While governments struggle internally to protect public health and safety, corporations target an already overburdened regime via investment arbitration and other litigation avenues. Mediation can play a noteworthy role in providing the investor-state bridge that has the capacity to surpass other legal safeguards by providing an exceptional environment for a personalized and much needed dialog between investor and state in extraordinary times.

Mediation can… [provide] an exceptional environment for a personalized and much needed dialog between investor and state in extraordinary times.

In the past, overpowering circumstances that are typically out of the control of both investor and host state have triggered a chain of lawsuits (nationally) and investment claims (supranationally). These events include the Argentinian financial crisis of 2000, the Arab Spring in early 2010, and the Iranian revolution of 1979. The latter notoriously unleashed a series of investor claims that led to the call for the establishment of the Iran–United States Claims Tribunal to settle claims specifically between the nationals and governments of the Islamic Republic of Iran and the United States of America.

More closely linked to a public health case, in the Bischoff Case of 1903, the German claimant’s carriage was seized by Venezuelan authorities after they were informed that it carried two persons infected with smallpox, which was an epidemic in 1898. A Mixed Claims Commission determined that the seizure of the carriage did not amount to a wrongful taking under international law. The Commission stated: “Certainly during an epidemic of an infectious disease there can be no liability for the reasonable exercise of police powers.”[1]

The exercise of police and regulatory powers in contested occasions must prove to be proportional and limited to the constraints of the crisis, revolution, epidemic, or financial collapse that the state is facing. Any responsive action it takes in such circumstances must be limited to the reparatory measures that ensure a minimal infringement on private rights and business operations. When a judge, adjudicator or tribunal attempts to evaluate the alleged ‘misconduct’ of the respondent/defendant party, customary international law decrees that they do so within a margin of interpretation that allows for the accurate state of affairs to be deciphered and that the judgement/award be issued fittingly.

The exercise of police and regulatory powers in contested occasions must prove to be proportional and limited to the constraints of the crisis

The doctrine of the reasonableness in the police power has not yet been put to the test in the context of a pandemic that affects every state and entity under its sovereignty. The lack of precedent on pandemic-related cases such as those that are (and increasingly will be) linked to Covid-19 will likely push scholars and practitioners to seek customary law remedies that may not be germane in settling Covid-19 related disputes.

Presently, the protective measures that states have undertaken to shield their public during Covid-19 have varied greatly in terms of substance and application. For example, countries like the US and Canada have announced a response plan against the virus in April 2020, while other countries like South Korea implemented rapid and aggressive measures in the beginning of February, including a wide testing of thousands of asymptomatic people. This fragmentation in how states have responded to the virus (sometimes even within the same union block) could give more ground to claims from investors from home states that have managed ‘to better lower the curve’ (and consequently allow the reopening of businesses) than in the host countries of some of their operations, in which the state had failed to do so for one reason or another.  

For example, companies that operate both locally and internationally, and that have suffered significantly more financial loss and reduced profit overseas than in their home states due to the absence of compulsory regulatory measures by the sovereign state in the face of the pandemic, may have added legal standing to their claims under the protection of a bilateral investment agreement.

By the same token, Chinese legal experts are exploring the viability of suing the US government under international legal norms and standards applicable over the past few weeks. While their affected clients (international companies) have allegedly suffered largely due to the tardy response of the US government, it’s been business as usual since as early as February in many Chinese provinces where they also operate.

An expert (anonymous) in Chinese investment overseas tells the Global Times that “Lack of governance and mishandling of the pandemic by the federal government is a major reason for Chinese companies to bear losses…As long as they have evidence and their arguments are logical, Chinese companies and civil associations absolutely have reason to file lawsuit against the US”.

Another international protection is that which is offered by investment agreements whether bilateral or multilateral. These protections are numerous, and include the right to compensation for direct or indirect expropriation, the right to national treatment, and the right to fair and equitable treatment. When these protections are breached by host states, investors can resort to investor-state dispute settlement to initiate arbitral proceedings in front of an independent panel. The most attractive trait of investor-state dispute settlement  is the international enforceability of the final award against sovereign States. Recently, the Singapore Convention on Mediation (formally the “United Nations Convention on International Settlement Agreements”) has borrowed this feature; its Article 3(1) provides for the general principle of enforceability under the Convention:

Each Party to the Convention shall enforce a settlement agreement in accordance with its rules of procedure and under the conditions laid down in this Convention.

In addition to providing an enforceability mechanism that offers increased certainty and trust in the proceedings of the Convention, mediation is swifter and less costly for the parties. Also, more notably, it safeguards the relationship between the two disputing parties; this of utmost importance when one of the parties is a state due to the long-lasting impact and impression it may leave on the governing body, as it does regularly in investor-state arbitration.

On May 6th 2020, legal scholars issued a joint statement for action against investor-state dispute settlement in all matters related to the pandemic:

In this regard, we call on the world community for an IMMEDIATE MORATORIUM on all arbitration claims by private corporations against governments using international investment treaties, and a PERMANENT RESTRICTION on all arbitration claims related to government measures targeting health, economic, and social dimensions of the pandemic and its effects. These investor-state cases (often referred to as “ISDS” cases) empower foreign private companies to challenge government actions that affect narrow corporate interests, and often result in large payouts, sometimes of billions of dollars, to these companies for alleged lost profits. These suits pose an immediate danger to the ability of developing nations, and the global community as a whole, to confront the COVID-19 challenge.

Customary International Law

Customary International Law and the legal grounds for pressing claims against States for taking regulatory measures that protect public health against Covid-19

The International Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts of 2001 (ILC Articles)[7] list the circumstances under which States may not be held liable for conduct which would otherwise be considered internationally wrongful (referred to as “circumstances precluding wrongfulness”).

If the state were to face claims by investors or injured parties in relation to COVID-19 claims, it may contend that it cannot be held liable for breach of its obligations under customary international law for one of the following circumstances: “force majeure” (Article 23), “distress” (Article 24), or “necessity” (Article 25).

Force majeure (Article 23)

When a force majeure impedes a state from carrying out its obligations to the fullest, the state cannot be held liable for its breach under international law. Article 23 provides for this exception stating:

“1. The wrongfulness of an act of a State not in conformity with an international obligation of that State is precluded if the act is due to force majeure, that is the occurrence of an irresistible force or of an unforeseen event, beyond the control of the State, making it materially impossible in the circumstances to perform the obligation.

2. Paragraph 1 does not apply if: the situation of force majeure is due, either alone or in combination with other factors, to the conduct of the State invoking it; or the State has assumed the risk of that situation occurring.”

As respondents, States will carry the burden of proving that the pandemic itself, and beyond the control of the state, rendered the performance of its obligations impossible in COVID-19 related I-S cases.

Distress (Article 24)

The commentary to this Article also emphasizes that:

“Distress may only be invoked as a circumstance precluding wrongfulness in cases where a State agent has acted to save his or her own life or where there exists a special relationship between the State organ or agent and the persons in danger. It does not extend to more general cases of emergencies, which are more a matter of necessity than distress.”

In the case of the pandemic, this exception is ruled out since it does not expand to also include the general and broad sense of emergency to saving lives that the pandemic poses (at least) nationwide.

Necessity (Article 25(1))

Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act:

(a) is the only way for the State to safeguard an essential interest against a grave and imminent peril; and

(b) does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole.

The defense of necessity has been historically the most invoked between the three circumstances precluding state wrongfulness. The Argentinian financial crisis of 2007 triggered a series of investment arbitrations by affected investors against the Argentinian government under the Argentina-United States BIT. The state of necessity was invoked by Argentina in defending the measures it had taken in the face of the claimant, CMS.[12] The tribunal decided that “the Argentine crisis was severe but did not result in total economic and social collapse” and as such, the “Treaty will prevail over any plea of necessity”. This means that notwithstanding the severity of the financial crisis that Argentina faced, the Tribunal did not find that the conditions for the defense of Necessity were met by the respondent since the interest of the community as a whole was not totally affected economically and socially.

Relevant to the pandemic, one of the requisite conditions to invoking this defense is the existence of ‘a grave and imminent peril’ which is fulfilled. Another requisite is for the state to ‘not seriously impair’ another essential interest. This can provide grounds for a counterclaim if one argues that community interests were impaired as a whole as a result of the government’s measures.

In short, the circumstances precluding wrongfulness under the ILC Articles have never before been invoked by a state in the context of a pandemic-related dispute. A lot is yet to be formulated by the international legal community in this regards; pro-state one may straightforwardly argue that the circumstances of Necessity or Force Majeure would easily ‘umbrella’ the crisis of a pandemic, whereas pro-investors may argue that the profit lost and other financial burdens that investor companies must now endure as a result of the direct (public health) measures enforced by the state are wrongful acts that are not reasonable or proportional to the persisting crisis.

The Way Forward

As companies assess the economic and business ramifications of Covid-19, they should also consider the prospective benefit of Investor-State mediation before they choose to pursue other safeguards that are likely to impose complex legal ramifications, as well as political backlashes. Governments worldwide are currently overburdened by the laudable mission of facing Covid-19. Legal actions against authorities in these controversial times are unlikely to yield the desired outcome of a lucrative award in favor of investors and would only distract state parties from better handling the Covid-19 crisis by forcing respondent states to reallocate resources and funding to counter the alleged claims.

The leeway that mediation offers amidst a multifaceted crisis that is a first of its kind in modern times must not be overlooked or underestimated (especially by States and their representatives) for its potential impact in reducing legal tensions that are currently simmering in global political turmoil and that aim to attribute the current state of affairs to a state, laboratory, government agency, party, or any entity. The quest for liability must disperse, and in its place a mutual goal of overcoming the pandemic and its grave consequences that are endured daily must prevail.  Mediation is the soundest tool in bringing us as close as is possible to attaining such an outcome. 


[1] Germany – Venezuela Mixed Claims Commission, Bischoff Case (1903) Volume 10, pp. 420.

[7] International Law Commission, Draft Articles on Responsibility of States for Internationally Wrongful Acts, November 2001, Supplement No. 10 (A/56/10), chp.IV.E.1, available at: https://legal.un.org/ilc/texts/instruments/english/draft_articles/9_6_2001.pdf

[12] CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8

Rana Kassas

Posted by Rana Kassas

Investment law researcher and legal regulatory consultant

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