As COVID-19 continues, governments must shield emergency measures from investor-state arbitration

IISD | 25 May 2020

As COVID-19 continues, governments must shield emergency measures from investor-state arbitration

By Nathalie Bernasconi, Sofia Baliño

How governments are responding to COVID-19 was the focus at this year’s virtual World Health Assembly (WHA), which concluded on May 19. The premier annual event in the international public health community tackled not only medical issues such as drug patent rules and neglected tropical diseases but also the economic fallout of the worst pandemic in our lifetimes.

Throughout the weeks prior, officials engaged in intense horse-trading over the language of a resolution on COVID-19. Some of the main areas of contention, media reports said, were how to address things like the pandemic’s impact on vulnerable workers and poverty levels and how to use international treaties to protect emergency health measures from unnecessary legal hurdles, such as from intellectual property rules.

One issue that officials should consider as they prepare for the short- and medium-term aftermath of COVID-19 is the prospect that they may soon face massive arbitration targeting such measures, due to the investor–state dispute settlement (ISDS) mechanism embedded in a vast web of international investment treaties.

These treaties allow foreign investors to sue host governments and demand damages on different grounds, including direct or regulatory expropriation, allegations that they have been treated “unfairly or inequitably,” or concerns that local investors enjoy better conditions. Potentially hundreds of claimants could bring suits in international arbitration as a result of COVID-related government measures. In fact, with the vast number of foreign investors impacted by these measures, it is only a matter of time before the first investor–state claims start being filed. Private law firms have already begun promoting advice on how foreign investors could go about it.

Under investor–state arbitration, each case is decided by an individual tribunal consisting of three arbitrators. This forces governments to fight cases on the same issue on multiple fronts, while running up hefty legal costs—not to mention the damages they could face if they lose, which can add up to hundreds of millions, or even billions, of dollars.

Many of the measures governments are taking or have taken to curb the spread of the virus—such as lockdowns, strict containment, privatizing hospitals, and banning exports of critical supplies and foods—have been vital for public health reasons. Looking at the longer term, though, these will have devastating economic impacts on both workers and companies, as public health officials have acknowledged at the WHA.

Governments worldwide need the policy space now, more than ever, to issue economic support packages and protect their public health systems, without worrying that their budgets could face even more strain from an all-consuming wave of arbitration. This is crucial for all governments, but especially so for poorer countries, which already have limited public budgets and other fiscal pressures to contend with. As the economic impact of COVID-19 worsens, it is these countries that will be hit the hardest, and where we are likely to see levels of income inequality grow dramatically both within and between countries.

Working together, governments can avoid this arbitration risk by agreeing to suspend treaty-based investor–state arbitration for all COVID-19-related measures. A political declaration could be a valuable first step, and there are forums where such declarations could be made, such as the G20. But political declarations on their own will be insufficient, as private parties will be able to use the vast web of investment treaties to launch legal claims regardless of the statements of leaders.

Governments can address this by reaching out to their investment treaty partners bilaterally, as a group or multilaterally, to agree on a suspension of ISDS on such measures, ensuring that such a response is adapted to governments’ economic and health priorities. There are legal options for doing so, drawing from public international law principles. Taking this approach is not only important from a practical perspective: it will also be a valuable sign of solidarity in the face of this crisis, especially as the strain of the pandemic continues to wear on individuals, communities, governments, and international organizations.

Understanding the interlinkages between public health and economic impact is vital, and the WHA resolution agreed on Tuesday was right to consider it and call for a “whole-of-government” and “whole-of-society” response. Indeed, the WHA has already sent an important signal supporting the use of flexibilities built into international economic legal frameworks, including by naming outright those built into World Trade Organization rules and declarations on intellectual property rights and public health.

It also showed that, even if not all governments agree, a concerted response is still possible. The United States dissociated itself from the intellectual property language of that final resolution, for example, along with paragraphs that made references to sexual and reproductive health. Even so, that did not bar others from moving ahead with a statement that they viewed as vital for the health system response, and that was backed in international law. The investment community would do well to learn from the WHA example.

source: IISD