Mondaq | 28 September 2020
Austria: Thoughts on the legitimacy, sustainability and future of ISDS in times of crisis
by Sharon Schmidt, OBLIN Attorneys at Law LLP
As a health crisis of both economic and social proportion, the COVID-19 pandemic has exacted unspeakable loss of human life and menaced the world economy, leaving no industry or personal interaction untouched. Considering its severity on public health and detrimental impact on economies worldwide, governments have taken an active role in seeking to contain the spread of the virus by adopting broad travel and mobility restrictions while purporting to sustain the supply of essential foods as well as medical equipment and healthcare services. Notwithstanding the legitimacy of these interventions, their implementation has ultimately brought with it profound economic consequences, challenging the vitality of companies and impacting businesses by delaying their operations as well as reducing their profitability to a considerable degree. The suspension of entrepreneurial liberties and the disruption of competition is increasingly expected to bring with it a yet unprecedented risk of investment arbitrations arising from the now more than 3.000 bilateral investment treaties (BITs)1 concluded globally of which 69 are currently in force in Austria alone.
This article seeks to highlight the benefits associated with investor-state dispute settlement (ISDS) in safeguarding companies during times of economic strain, and yet outline dangers of a system that affords foreign investors significant avenues for recovery while restricting the power of states to protect the public in the face of unprecedented adversity. By acknowledging the procedural and substantive weaknesses of ISDS, this article will touch upon proposals for reform and offer thoughts on how its infirmities in balancing investors rights with other societal interests could be rectified.
The point of entry for an engagement with discussions on ISDS is two-fold. Firstly, it is paramount to note that this article is not blind to the fact that the pandemic constitutes a public emergency of both unprecedented depth and scale of which international investors and the international arbitration community may now be inclined to take advantage of. Secondly, it should not go unsaid that an attendant litigation risk of such proportion will ultimately pose profound threats to the public as well as socio-economic health at a national and global scale. Therefore, given the extraordinary challenges at multilateral, regional and domestic level, this article acknowledges the danger associated with the rash filing of lawsuits and the premature adjudication of such procedures.
In light of the persisting health crisis, legal practitioners have increasingly pointed towards international investment agreements (IIAs) as a means of protecting companies whose cross-border operations are said to have been damaged by unfair, arbitrary or discriminatory COVID-19 related regulations and policies. IIAs are enforced via ISDS and allow foreign investors to adjudicate arbitration proceedings against host states in front of an independent arbitral tribunal, enabling them to claim significant sums in compensation. With the issuance of binding, final and internationally enforceable treaty awards, such claims have thus been perceived as a powerful protectionist instrument in the hands of foreign investors. Yet by providing international companies with channels to obtain monetary awards that would not otherwise be available to them under their respective national legal systems, the current architecture of foreign investment governance has also been subject to severe criticism by legal scholars, trade unions and civil society groups. It is argued that in absence of a framework of rules that delimits tribunal power, sovereign actions are unduly interfered with leading to the creation of a ’parallel justice system’. With corporate liquidity taking priority over community welfare, the ISDS regime is accused of constituting an immoral legal structure that fails to facilitate an equitable sharing of benefits from economic activity while prioritizing corporate interest, reinforcing systemic biases and creating societal divides.2
It is here that the central issue of surrounding ISDS discussions is unearthed and clarification on the potential synergy between international law and national constitutional law becomes indispensable.
Expected Future Claims
Constitutional law affords state authorities extensive power to exercise discretion in their adoption of preventative measures in a timely and effective manner. The fact that states are able to rightfully exercise their sovereign powers to protect health/life and defend their implemented policies on the basis of veritable necessity does not, however, inhibit emergency legislation being subject to judicial review.3
Treaty rights that may be invoked in front of an arbitral tribunal may include the right to compensation for direct expropriation (i.e. taking of property), indirect expropriation (i.e. taking control over property), the right to security and protection as well as the right to fair, equitable and national treatment.
An avalanche of ISDS claims can hence be expected to arise inter alia from:
- Revenue losses due to restrictions on the freedom of movement;
- State price regulations ensuring the affordability of drugs, tests and vaccines;
- Financial relief measures supporting overburdened health systems;
- Rental price controls and relief from mortgage payments;
- Suspension of energy bills;
- Debt relief for households and businesses;
- Implementation of moratoriums on export contracts;
- Suspension of the issuance of dividends, share buybacks, executive bonuses;
- Suspension of the collection of fees on privately run national toll-roads; and
- Requisition of private hospital facilities, nationalization of private hospitals or mandating the production of ventilators by designated manufacturers.
The Past, the Present the Future
The filing of investor-state lawsuits in times of societal crisis is not a new phenomenon. Illustrations of the use of ISDS can be traced back to numerous periods of politico-economic instability including the Global Financial Crisis in 2007-2008, the Cyprus Bank Crisis in 2013 or periods of civil unrest such as the Arab Spring in 2011-2012.4 Limits of state freedom and investor protection have also been prominently tested in the context of the Argentinian government response to its financial slump in late 2001 and 2002, which saw investor rights significantly restricted.5 Through measures such as freezing utility rates or depreciating the currency rate in response to a 50% fall in GDP as well as an unemployment and poverty of 20% and 50% respectively, Argentina became the Respondent to over 50 ISDS cases by 2014.6
As states are currently struggling to rebuild economies and contain the spread of COVID-19, they may resort to customary law (codified in Art. 20-5 of the International Law Commission’s Articles on State Responsibility) or treaty law (codified in IIAs, i.e. force majeure, necessity, distress) as potential defenses to ISDS claims.7 The prevalence of a defense based on customary law, however, stands on unstable grounds. In this regard, the defense of necessity specifically provides a case in point, which if successfully pleaded requires four elements being present, namely (1) grave/imminent threat; (2) threat of an essential interest; (3) serious impairment of another essential interest through the state’s act; (4) the state’s action being the only way to safeguard essential interest from grave and imminent peril.8 Additionally, the plea would fail if the obligation excludes reliance on necessity and the respective state action contributes to said necessity.9 The fourth element sets a particularly high threshold by requiring states to have considered an indeterminable number of alternative measures that could have achieved the same end without infringing state obligations towards investors.
Similarly, most BITs are silent on the scope of the non-contribution requirement and thus suffer from grave uncertainty as to its interpretation. Considering the adequacy of the manifold state actions and assessing the extent to which they may have been conducive to a yet unprecedented and unforeseeable crisis seems like an impossible task. Not only does the vagueness of these treaty standards lend themselves to potentially contradictory outcomes, tribunals are also not bound by prior decisions, thus creating room for critics to call for an immediate moratorium on the ISDS mechanism.
The rationale for the moratorium on ISDS claims is three-fold. Firstly, it is posited that based on the regulatory chill hypothesis, states will refrain from putting necessary measures in place to combat the viral spread of COVID-19.10 Moreover, the vagueness of treaty standards is said to lead to speculative claims while distracting from the urgency of states to attend to their pandemic containment efforts.11 Lastly, the looming threat of exorbitant award sums is expected to weigh heavily against the dire budget crises faced in particular by developing countries.12
It is without doubt that the purpose, structure and jurisprudence of ISDS requires revision. Too often societal losses and community welfare have remained external to the investment state arbitration narrative. It is paramount that an adjudication of state responses refrains from reinforcing the portrayal of socio-economic and cultural rights as an impediment to investor rights. A system that affords greater protection to businesses by granting uninhibited and arguably unchallenged access to an international legal recourse, yet ultimately acts to the detriment of those that states seek to protect, cannot be upheld. At the same time, core principles of the international rule of law such as clarity, consistency, predictability or procedural fairness must not be disregarded.
At a time when a global health crisis is compounded by a profound economic crisis, it has been argued that the need to avoid ISDS claims has never been greater.13 Yet it is the juncture between sovereign autonomy, public interest and private entitlement that offers an opportunity to rethink established structures of investment arbitration and consider new ways in which to navigate between them. A number of potential solutions have been offered. As indicted above, some have called for the complete suspension of ISDS claims concerning measures relating to the COVID-19 pandemic. Others have presented emergency options including the withdrawal from or termination of existing BITs as a viable option to counteract the system’s shortcomings.14 However, in order to sustain international rule of law precepts in an investment arbitration context, establishing adequate review standards must move to the forefront of ISDS reform efforts. Only by recognizing the unprecedented effects of COVID-19 and encouraging inter-state cooperation to clarify the application of international law defenses, can a coordinated and sustainable response to the infirmities of investment arbitration be ensured. It is anticipated that the upcoming 39th session of the UNCITRAL Working Group III, to be held in October, will offer a platform for the inclusive and transparent exchange of proposals to reform existing mechanisms on resolving investment-related disputes.
1. Maina, N.; Brewin, S.; Bernasconi-Osterwalder N. (2020) Protecting Against Investor-State Claims Amidst COVID-19: A call to action for governments, International Institute for Sustainable Development. Available from https://www.iisd.org/system/files/publications/investor-state-claims-covid-19.pdf [accessed: 10.09.2020], p1.
2. Davitti, D.; Ho, J.; Vargiu P.; Vastardis A. (2020) COVID-19 and the Precarity of International Investment Law. IEL Collective. Available from: https://medium.com/iel-collective/covid-19-and-the-precarity-of-international-investment-law-c9fc254b3878 [accessed: 14.09.2020].
3. Benedetteli, M; Coroneo, C.; Minella, N. (2020) Could COVID-19 emergency measures give rise to investment claims? First reflections from Italy. Global Arbitration Review. Available from: https://globalarbitrationreview.com/article/1222354/could-covid-19-emergency-measures-give-rise-to-investment-claims-first-reflections-from-italy [accessed: 15.04.2020].
4. Maina, N.; Brewin, S.; Bernasconi-Osterwalder N. (n i), pp3-4.
5. Burke-White, W. (2008) The Argentine Financial Crisis: State Liability Under BITs and the Legitimacy of the ICSID System, U of Penn, Inst for Law & Econ Research Paper No. 08-01. Available from SSRN: https://ssrn.com/abstract=1088837 or http://dx.doi.org/10.2139/ssrn.1088837 [accessed: 12.09.2020], p4.
6. Maina, N.; Brewin, S.; Bernasconi-Osterwalder N. (n i), pp3-4.
7. Paddeu, F.; Parlett, K. (2020) COVID-19 and Investment Treaty Claims, Kluwer Arbitration Blog. Available from: http://arbitrationblog.kluwerarbitration.com/2020/03/30/covid-19-and-investment-treaty-claims/ [accessed 12.09.2020].
10. Ranjan, P. (2020) Covid-19 and ISDS Moratorium – An Indiscreet Proposal, OpinioJuris, Available from: http://opiniojuris.org/2020/06/15/covid-19-and-isds-moratorium-an-indiscreet-proposal/ [accessed 13.10.2020].
11. Maina, N.; Brewin, S.; Bernasconi-Osterwalder N. (n i), pp3-4.
Burke-White, (n v), p5.
13. "Cashing in on the pandemic: how lawyers are preparing to sue states over COVID-19 response measures." (2020) Corporate Europe Observatory, Available from: https://corporateeurope.org/en/2020/05/cashing-pandemic-how-lawyers-are-preparing-sue-states-over-covid-19-response-measures#:~:text=es-,Cashing%20in%20on%20the%20pandemic%3A%20how%20lawyers%20are%20preparing%20to,over%20COVID%2D19%20response%20measures&text=As%20governments%20take%20action%20to,save%20lives%20or%20the%20economy [accessed 14.09.2020].