As the outbreak of the COVID-19 pandemic has already impacted over 150 countries worldwide, it is hard to imagine that investment arbitration will not be impacted.
While the future remains uncertain, the response to the COVID-19 pandemic is likely to violate various protections provided in bilateral investment treaties (“BITs”) and may bring rise to claims in the future by foreign investors.
Although arbitral tribunals have accepted the adverse effects of (primarily economic) crises in the past, they have not always acknowledged that a State’s measures were fair and right. In the case of a pandemic, when national health systems are at stake, this approach may be different, but only time will tell.
To curb the spread of COVID-19, States have adopted unprecedented restrictions on travels and isolation measures. Many States have closed all non-essential businesses and some have nationalized private businesses to fight COVID-19.
Quarantine measures will impact foreign investors’ projects. They may also engage States’ responsibility under FET provisions. Likewise, travel bans may affect obligations under BITs, such as non-discrimination. In addition, the nationalization of businesses has consequences under public international law. Furthermore, economic measures taken in response to the COVID-19 pandemic, as well as the anticipated economic crisis, may force States to change existing regulations in a manner that will be detrimental to certain foreign investors.
While States may invoke force majeure and a state of necessity to justify their actions, as observed in previous crises that were economic in nature, these defenses may not always succeed.
FET in Investment Arbitration and the COVID-19 Pandemic
The FET standard is provided for in the vast majority of BITs. As a flexible standard of protection, FET provisions give arbitrators a great margin of interpretation. In addition, depending on the BIT’s wording and context of negotiation, the scope of FET may change significantly. FET ensures that foreign investors are not unfairly treated, with due regard to all circumstances.
Most of the previous cases involving crises and FET concern Argentina. The State faced several arbitrations following its economic crisis of 2000-2001.
In LG&E v. Argentina, for instance, the arbitral tribunal recognized the impact of the economic crisis.  It accepted Argentina’s defense of a state of necessity and, thus, excluded its liability for damages caused to foreign investors. Nonetheless, the tribunal found that Argentina breached its FET obligation. According to the tribunal, the State “went too far by completely dismantling the very legal framework constructed to attract investors”
On the other hand, in Sempra Energy v. Argentina, the arbitral tribunal did not accept Argentina’s plea of a state of necessity, while acknowledging the serious effects of the crisis in the country. According to the tribunal, Argentina breached its FET obligation because it chose measures that impacted investors’ expectations.
States’ Defenses in Investment Arbitrations arising from the COVID-19 Pandemic
With the impact of the pandemic, many States will be unable to fulfill their obligations under public international law. Can States rely on grounds such as force majeure and the state of necessity to justify the non-performance of international commitments?
Both force majeure and a state of necessity are provided for in the International Law Commission’s Draft Articles on the Responsibility of States for Internationally Wrongful Acts (“ILC Articles”), which are widely regarded as an authoritative restatement of public international law .
1. Force Majeure
According to Article 23 of the ILC Articles, a plea of force majeure must be a result of irresistible forces or unforeseen events that:
- are beyond the control of the State, and
- make it materially impossible to perform the obligation.
Given the rapid spread of COVID-19, States can hardly run as usual without putting in danger large segments of their population. Nonetheless, States have many different choices to address the crisis. An incorrect choice may undermine a potential plea of force majeure.
There are also certain obligations of States that may not be impossible to perform despite the existence of the COVID-19 pandemic. It would not been unforeseeable for future arbitral tribunals to find that certain obligations were not impossible to perform, despite the COVID-19 pandemic, defeating this defense.
2. State of Necessity
A state of necessity is another defense that may be invoked by States in relation to their acts to fight the COVID-19 pandemic, should claims arise.
According to Article 25 of the ILC Articles, a state of necessity must meet the following conditions:
- The State faces a grave and imminent peril.
- The peril threatens an essential interest of the State.
- The State’s act is the only means to safeguard this interest.
With respect to health and welfare, the tribunal in National Grid v. Argentina ruled that an essential interest depends on the circumstances of each case.
In the instant case, the actions of the Respondent had as an objective the protection of social stability and the maintenance of essential services vital to the health and welfare of the population, an objective which is recognized in the framework of the international law of human rights.
The COVID-19 pandemic is clearly a grave an imminent peril that threatens an essential interest of every State. It is an imminent peril that puts in danger the State’s population and its health system. The COVID-19 disease has shown itself to be a real threat, although the total number of victims remains unknown.
However, it can always be debated as to whether particular acts taken by States are the only means to safeguard an important interest, as the very different reactions of States to confront the COVID-19 pandemic in fact illustrate.
While the international community tries to define robust guidelines to tackle the pandemic, States should be aware that unless the means taken are the only means to safeguard what are clearly essential interests, a defense of the state of necessity may fail as a matter of public international law.
 Sempra Energy International v. The Argentine Republic, ICSID Case No. ARB/02/16 Award, 28 September 2007, ¶ 304.
 Sempra Energy International v. The Argentine Republic, ICSID Case No. ARB/02/16 Award, 28 September 2007, ¶ 303.