Monday, October 12, 2020

International Investment Arbitration in the Age of Covid-19

Brian Chen
J.D. Candidate, Georgetown University Law Center. M.A., King’s College London.

Investor-state dispute settlement (ISDS) has long been the target of much critique by both non-government institutions and civil-society organizations who argue that the  echanism unequally targets developing countries, but its application during the Covid-19 pandemic poses particularly great risks to countries already struggling to manage their domestic public health crises. Generally, critics argue that ISDS produces regulatory chilling effects that hamper states’ reform and development goals and excessively consume states’ national budgets. In the context of the current pandemic, ISDS may further hinder states’ attempts to contain the spread of the coronavirus while destabilizing their alreadyfragile domestic economies and causing further recessions and potential political and social unrest. This article provides an overview of ISDS and its operational mechanism and describes the threat ISDS poses to developing countries during the pandemic. It argues that cross-border and public-private cooperation can significantly mitigate states’ exposure to ISDS claims and calls on the international investment community to work together in ensuring that ISDS does not exacerbate the already-devastating effects of the pandemic.

Generally speaking, ISDS allows a private investor to bring claims against a
foreign state in arbitration whenever the former has invested in the latter’s territory,
and host states are regulating in a way that discriminates against or infringes upon
the rights of their investors. Arbitration is a private law forum, typically governed
by rules of international institutions such as the International Center for Settlement
of Investment Disputes (ICSID), where parties to a dispute appoint their own
tribunal and there is no direct mechanism for appealing a case. As of 2019, 3,284
international treaty instruments including both multi- and bi-lateral investment
and free trade agreements contained ISDS provisions. Developing countries enter into these agreements in hopes of attracting foreign direct investment. That is,
developing countries offer private investors located in capital-exporting states a
means for protecting their cross-border investments under international treaty law,
rather than requiring foreign investors to engage with national court systems which
is inconvenient and costly.

ISDS represents a clear departure from international law principles that
assume only sovereign states may challenge the acts of other sovereign states. For
instance, private actors may not sue foreign governments at the International Court
of Justice or the World Trade Organization. Conferring rights to private actors for
challenging the regulatory conduct of sovereign states suggests a shift away from
the realist theory that states are the main actors in the international political arena.

The problem with ISDS is that claims are disproportionately brought against
developing states. In 2019, investor claimants brought 55 new ISDS claims,
and of those, 80 percent were against developing state respondents. The most
frequent developing states that receive ISDS claims include Argentina, Poland and
India, and almost every Asia-Pacific country has faced or is at least exposed to
such claims through their international investment agreements. In 2019, tribunals
resolved 71 ISDS disputes on their merits and in more than half of these cases
tribunals decided in favor of investors. Last year, the awards rendered ranged
from $7.9 million to $8.4 billion (USD). Since the modern iteration of ISDS was
introduced in 1987 by an investor claimant located in the United Kingdom who
sued Sri Lanka under the UK-Sri Lanka bilateral investment treaty, there have been
a total of one-thousand two-hundred and twenty-three ISDS disputes.

ISDS is a grave and imminent threat for developing states struggling to manage
their responses to the current pandemic. According to the Oxford University
Coronavirus Government Response Tracker, the vast majority of states have taken
exceptional and diverse actions to curb the virus’s spread. These measures include
assuming control of private healthcare providers, imposing certain export or import
restrictions on medicines and personal protective equipment, and mandating closures
of non-essential businesses. While they are arguably necessary for overcoming the
public health crisis, such measures create effects that spillover into the economy.
Indeed, the International Monetary Fund (IMF) predicts the Covid-19 pandemic will create the deepest economic recession since World War II. Some government responses will certainly impinge on the interests of foreign investors, who may claim that host states breached their investment treaty obligations by expropriating investors’ assets or failing to provide investors with fair and equitable treatment. Peru already received threats by foreign concessionaires for the state’s decision to suspend collection of traffic tolls during the pandemic to facilitate the transport of supplies and workers.

In the context of the current public health crisis, states’ policy goals and
foreign investors’ view that they should not bear the economic costs of battling
the pandemic may both be legitimate, but ISDS should not be the forum where
these disputes are hashed out. Sensitives matters of international public health that
arise during a once-a-century pandemic should not be decided by ad-hoc tribunals
consisting of arbitrators (who are often corporate lawyers by day) in a private
forum that does not provide much transparency and does not bind decisions to
precedent. Even if states succeed in defending their claims under ISDS, they may
only recover litigation fees. These proceedings are costly and time consuming, and
the significant effort dedicated to defending against ISDS claims is certainly better
directed at designing and implementing strategies for overcoming the pandemic.
For example, in the Philip Morris International v. Uruguay case, where the investor
claimant alleged that Uruguay’s anti-smoking legislation constituted an indirect
expropriation of its intellection property assets, Uruguay devoted 6 years and $7
million (USD) in litigation fees before the tribunal ruled in its favor.

Many international civil society groups and experts in cross-border investment
law are calling for a moratorium on ISDS claims arising out of or relating to
the Covid-19 pandemic. The capital exporting states of the G20 have already
coordinated the suspension of sovereign debt payments until March 2021, and
the IMF has doubled member states’ access to its emergency facilities to enhance
liquidity and resolve balance of payments problems. But due to the lack of uniform
standards in private dispute forums, the international investment community
must work together if it is to mitigate the risks of ISDS prolonging the current
pandemic and exacerbating its economic effects. Investors and their shareholders
should ensure that ISDS claims do not hinder states’ pandemic responses, the legal community should refrain from representing investors whose claims will interfere
with developing states’ response efforts or cripple their economies, arbitrators
who receive offers to hear such claims should refrain from doing so for the period
of the pandemic, and organizations such as ICSID that host such disputes should
refuse to provide a forum for these cases. At the state level, governments should
also endeavor to cooperate in suspending ISDS provisions contained in their
international treaties through bilateral negotiations.

While reform of the ISDS system for settling investor-state disputes may be
necessary, overhauling its framework will likely be a task for another day. The most
pressing concern for states and their citizens should be ensuring that ISDS does
not overwhelm economies and impede states’ regulatory efforts to overcome the
pandemic. In the words of Ghanaian President Nana Akufo-Addo: “We know how
to bring the economy back to life. What we do not know is how to bring people
back to life.” The international investment community must work together, set
aside individual interests, and allow states to protect the health and safety of their
citizens. Only then can economic development for states and sustainable profits for
investors be achieved.

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