Before the flood? The looming risk of corporations suing states for Covid-related measures
During the Covid-19 pandemic many governments took unprecedented steps to protect public health and the economy, restricting freedoms for citizens and businesses. Now the pandemic is no longer in the headlines in many parts of the world, the risk corporations will use investment treaties to claim compensation from governments to cover their losses during these exceptional times is increasing - with some investors already threatening to do so.
A lawyer from the Italian law firm ArbLit stated at the beginning of the pandemic: “when the emergency is over, states will… have to face arbitration claims brought by foreign investors under any applicable bilateral investment treaty.” Those claims are only possible because of a special mechanism in international investment agreements called investor-state dispute settlement (ISDS). ISDS provisions exist in more than 2,000 trade and investment agreements around the world. They provide international investors with the possibility of suing their host government for damages if public policies threaten their business and (future) profits. ISDS claims are carried out behind closed doors before an international arbitration tribunal made out of three arbitrators (lawyers). Interestingly, only investors can bring ISDS claims and governments are always the target. Normal people, labour unions or civil society organizations do not have access to these tribunals. ISDS claims are brought before a tribunal because of many reasons, one of the latest: the Covid-19 pandemic.
In August 2021, 18 months after the Covid-19 pandemic broke out, the first known ISDS claim concerning pandemic-related measures was registered by French airport operating companies ADP International and Vinci against Chile. The companies are arguing Chile’s decision to close its borders during the height of the pandemic – a decision made to protect citizens and prevent the overburdening of the health system – caused them financial losses of US$37 million. The ISDS claim, made under the France-Chile investment treaty, is intended to recover that money from the Chilean public purse. The verdict is not expected until at least next year.
Although this is the only officially registered ISDS claim by an investor in relation to the pandemic to date, there is the looming threat of further claims. For example, Peru´s Congress passed a law to suspend payment of tolls on highways in April 2020, intended to ease the financial burden inflicted upon its citizens by the pandemic. Following multiple threats by the foreign concession holders of the highways, the government turned tail and presented a claim of unconstitutionality at Peru´s Constitutional Court to annul the law. The Minister of Economy, María Antonieta Alva, argued that this was done in order to prevent ISDS claims and related costs. The measure was declared unconstitutional by Peru´s Constitutional Court in August 2020. This behaviour is known as “chilling effect”: an investor threatens to bring an ISDS claim against a state and to avoid the financial and bureaucratic costs related to these claims the government changes its mind and gives in to the investor´s demand. Ultimately, it is citizens who pay the price.
A further example can be found in Chile, a country with a privatized pension system and many US insurers providing services. As many people experienced huge financial hardship during the pandemic, the Chilean parliament passed legislation in April 2021 which allowed Chileans to immediately access 10% of funds previously paid to insurance companies for pension annuities. So far, this legislation has led to three threats of ISDS claims by foreign insurers: ON Global Holdings, Consolidated Life Insurance and Metlife (which is currently also involved in an ISDS claim against Argentina). These corporations are now negotiating with the Chilean government: if the negotiations fail, those arbitration threats could become reality.
A poll conducted by the international law firm Freshfields Bruckhaus Deringer recently found that lawyers and corporations consider ISDS claims related to the pandemic to be the second most likely disputes to arise in the coming months and years.
But why are there not yet more ISDS claims related to the pandemic? There are several possible reasons.
First, such a claim might cause significant reputational damage to a corporation as governments will argue they only acted as they did because of force majeure. Yet, as Freshfields points out: “...the threshold to rely on these defences is becoming increasingly high with courts and arbitral tribunals taking the view that the second and subsequent waves of COVID-19 (and the attendant recurring lockdowns and restrictions) are not sufficiently ‘unforeseeable’.”
Second, investment treaties often include a so-called cooling-off period, which usually varies from six to 18 months. During this period, the government and the investor must try to reach an agreement. Only once the cooling-off period is over can investors register an ISDS claim.
Third, many states put in place measures to support businesses and avoid a wave of bankruptcy. But with such support schemes coming to an end, investors might seek alternative ways to cover their financial losses.
Governments would be well advised to work together to restrict the use of ISDS related to COVID-19 measures. In fact, to prevent ISDS claims threatening the public interest and the upholding of human rights, international investment agreements need to be revised and ISDS in all its forms dismantled. If not, governmental decisions favouring the public good will always come with a price tag and are likely to be jeopardised by international investors searching for one thing: their own material benefit.
Bettina Müller is an associate researcher with the Transnational Institute