COVID-19 and the Precarity of International Investment Law
By Daria Davitti, Jean Ho, Paolo Vargiu and Anil Yilmaz Vastardis
Things tend to look simpler in films. A virus breaks out of a lab where less-than-advisable experiments are taking place? There is someone to blame, and whoever is responsible ends up paying, one way or another. A pandemic hits the world and destroys Western civilization? A retired United Nations investigator with the looks and style of Brad Pitt finds a solution to the problem, and the whole world reacts collectively against the threat.
The COVID-19 outbreak, however, is exposing how contemporary society is economically and socially structured more like The Platform than like World War Z’s cooperative world. The greatest global pandemic of the last 100 years will have long-lasting effects. And while it might not destroy “civilization” as we understand it, it is exposing the often overlooked structural violence embedded in our world order where a minority of states (and a minority of people in those states) gather excessive amounts of resources, while leaving those majorities on the outside with inadequate levels of food, care and shelter. States are responding to the crisis with a series of policies aimed at mitigating and containing both the pandemic itself and its socio-economic consequences. These interventions range from partial or temporary closures of businesses, schools and social services, to various degrees of nationalization of key sectors to secure goods and services necessary to manage the pandemic.
The extensive state interventions in economic sectors across the globe in response to COVID-19 have raised important questions about the compatibility of these measures with the obligations vested upon states by customary international law and international treaty commitments, not least trade and investment agreements. Commentators have already discussed how, within the context of the regulatory regime for foreign direct investment (FDI), many of these state measures may be incompatible with state obligations under international investment agreements (IIAs), at least on paper. In this blog post, we do not engage with spurious and superficial exercises that try to pivot an agenda for investment treaty reform on polarizing political rhetoric. Instead, we have chosen to critique international investment law (IIL) through the lens of the COVID-19 outbreak, so as to demonstrate the inherent inequalities and injustices that enable and maintain it. In doing so, we also cast our eyes on states’ possible legal defenses, but only to show how they are mere fig leaves in a system that, in its search for continued relevance and legitimacy, may project an impartial veneer only to further entrench its systemic bias.
IIL’s Foundations in Inequality and Social (In)justice
An analysis of IIL through the lens of the COVID-19 outbreak rapidly and ruthlessly exposes the cracks of an unsustainable and unjustifiable legal system. Most comments on the investment law implications of the current pandemic focus on potential state liability for economic loss suffered by corporations affected by COVID-19 response measures. Since the protection of foreign investment and investors’ profits are at the heart of the investment treaty regime, secured through investment arbitration, such a focus is unsurprising. While commentators rush to debate the remedies that may be available for investors to recover losses, the socio-economic losses suffered by entire societies, many of which are likely to never get repaired, remain external to the investment law debate. We want to reframe the debate on investor protection and COVID-19 so as to ensure that the structural inequalities embedded in the logic and practice of IIL are not overlooked.
The technical musings on whether investor losses are compensable when the pandemic is over, and on whether and when the necessity defense and treaty exceptions could apply, clearly expose the faulty logic of this regime. As cogently highlighted in a recent blog post, measures adopted by states in the public interest, including those to protect life and public health, are portrayed as impediments to market activity and investment protection, and as such they can only be justified in very exceptional circumstances. Additionally, the regime’s asymmetrical nature also means that investment protection automatically translates into investors’ rights devoid of any corresponding obligation relating to the negative impacts of their business activities on the environment as well as on human, labour and indigenous rights. These two entrenched features facilitate foreign investors claiming sizeable damages for emergency measures taken by governments in response to COVID-19. And yet, these investors have no corresponding internationally recognized obligation to act and remedy losses, occasioned by the calculated deprioritisation of labour and dependent community welfare in the name of corporate liquidity.
If the flawed foundations and logic of IIL remain unknown to some, the gravity of this pandemic and of its long-term socio-economic implications sound like a much-needed wake-up call. The treatified architecture that sustains international economic governance is a petri dish for both the emergence of the pandemic and for the way in which IIL is set to continue prioritizing corporate interests over the well-being of local populations and the environment. It has already been observed that the heaviest losses are suffered by the most vulnerable in society. Several difficult questions often posed by critics of the system become more urgent than ever vis-à-vis the life-or-death choices imposed by the current pandemic: what is the justification for maintaining a legal enclave where the wealthiest economic actors become entitled to a more favourable treatment than the other segments of society that suffer disproportionately as a result of the pandemic and the responses to it? Why do the grievances of investors vis-à-vis states and their expectations of continued profit levels deserve more robust protection than the obligation to ensure an adequate standard of living to the broader population? Investment tribunals have often dismissed these concerns, arguing that there is no impediment to states simultaneously fulfilling both their obligations to investors and to their local populations. While this can be true in some circumstances, in the context in which this view was expressed, it ignores the realities and priorities of public emergencies and their aftermath. This is a serious concern for states who may become the targets of investor claims in the aftermath of the COVID-19 pandemic.
It is now clearer than ever that the assumptions underpinning IIL are the basis for persistent and entrenched structural inequalities: stagnating real wages and collapsing health systems are the obvious outcome of years of austerity measures, of privatization of public services and of the widespread use of public funds to bail out financial institutions following the 2008 global financial crisis. The majority of COVID-19 economic responses, so far, have been similarly aimed at rescuing business actors, in the hope that these measures, in turn, will save jobs and prevent an economic collapse. These, however, are already proving to be false assumptions, as businesses are laying off staff on both temporary and permanent contracts, whilst still paying dividends to shareholders, engaging in tax avoidance, and benefiting from state rescue packages. Similarly, foreign investors have also rapidly withdrawn $95bn from stocks and bonds since mid-January 2020, when the extent of the outbreak became clear. To comprehend the implications of this withdrawal of funds, it suffices to think that it represents four times the outflows that took place at the start of the 2008 global financial crisis. IIL is a key component of the global economic governance architecture that permits investors to act to the detriment of workers, communities and the environment, and still be rewarded with large dividend pay offs, bail-outs and top these up with compensation under IIL for any reduction in profits arising from host state measures introduced to protect those same workers and communities and the environment.
The grave socio-economic impact of the COVID-19 pandemic on entire societies is rapidly becoming clear. While it is a cliché to claim that COVID-19 does not discriminate, it is apparent that the consequences of the pandemic are borne unequally across and within communities, as pre-existing inequalities and vulnerabilities are further exacerbated, laying bare the structural violence embedded in our world order. In all corners of the globe, small businesses and their employees are fighting for economic survival whilst workers on precarious employment are being made indefinitely redundant, some facing dangers of starvation. In the absence of safety nets to support these workers, severe knock on effects will occur on livelihoods, undermining the right to an adequate standard of living and other interrelated economic, social and cultural rights guaranteed under international human rights law. While some countries have offered financial support to those affected, these measures do not cover all losses and not all countries are able to offer support packages reaching all those in need. Crucially, those employed in the informal economy, involved in care and in social reproduction work are cruelly left behind by these measures, whilst existing gendered and racialized vulnerabilities are exacerbated by both current lockdown measures and by the myopic welfare packages adopted. There is a real risk that, once the pandemic is over and steps are taken to rebuild the economies around the globe, a large portion of these socio-economic losses will remain uncompensated. Most worryingly, questions about how the privatization of health systems and of drugs, housing, education and food production and distribution as well as irresponsible business practices may have contributed to such losses are likely to be swept under the carpet. Signs are already emerging that some governments are using the pandemic as an opportunity to accelerate the dismantling of state healthcare.
Yet, for businesses protected by investment treaties, this is the time to cash in their investment treaty protections. Empowered by IIAs to demand compensation from host states for losses arising from pandemic-related measures, this privileged group has access to international legal recourse to hold states liable for regulatory changes implemented in response to the outbreak. The threat of investment arbitration therefore looms large, for instance, when it comes to the possibility of seizing private hospitals which refuse to remain operative during the pandemic because they are not turning enough profits. This is despite the fact that large parts of public health systems have been opened up to private investors, relying on the well-known mantra that privatized services are more streamlined and efficient: in other words, that they offer more value-for-money. In simpler times of austerity, streamlining has already resulted in lethal shortcuts in planning permission and in the bypassing of fire-safety regulations in breach of the right to life and the right to housing. In times of the COVID-19 emergency, the allure of value-for-money has translated into a lack of adequate protective equipment for healthcare workers and hospital cleaners; lack of hospital beds and; most ominously, lack of ventilators. Some commentators have suggested that a state’s under-resourcing of its healthcare system could be interpreted as contributory negligence on the part of the state and, as such, an obstacle to invoking the defence of necessity. A more in-depth analysis of the situation, however, reveals that IIL and unbridled privatization are two sides of the same coin.
As mentioned above, IIAs allow investors to challenge the emergency measures taken by states and provide them with access to a remedial mechanism that goes well beyond the legal recourse available to any other group in society. Foreign investors can seek damages in full even when host states are in the midst of a pandemic or when they slowly struggle to rebuild their economy. This fairly unchallenged access to remedy means that host states will have to spend valuable resources defending a possible barrage of claims, resources that could instead be used to protect those most affected by the pandemic. And as discussed in the next section, states are conditioned to justify their actions by invoking constricting IIL defences in arbitration proceedings. These are most likely the same states that, lured by the promise of increased foreign investment, would have opened up key public sectors to foreign investors and locked in private protections through significant investor-friendly regulatory changes. Throughout these processes, they would have depleted indispensable social cushioning, and eroded workers’ rights as well as many other economic, social and cultural rights. In other words, the liberalization processes that have facilitated foreign investments have irrevocably undermined the same rights which would have contributed to the protection of the most vulnerable in society during this pandemic emergency. Leaving the adjudication of state responses to the COVID-19 outbreak to investment arbitration would not only be short-sighted and inappropriate; it would also further deepen social inequalities by continuing to channel public funds into large amounts of litigation and compensation costs. It would perpetuate the myth of social mobility and of efficient privatized public services. These myths have been forcefully debunked during this pandemic, which has also shone a light on the slow and structural violence inflicted on regimes which are based on systematic exploitation and social injustice.
IIL’s Fig Leaves in States’ Legal Defences
The array of defences that states may invoke to excuse or diminish their liability for economic loss caused to investors has long supplied the cover that IIL can be equally protective of investor and state interests. This disguise is disintegrating in the face of COVID-19, and the reality of IIL’s partiality towards investor interests will become even more pronounced as the pandemic drags on. States’ legal defences to alleged international wrongs can be found in customary law (as codified in Articles 20–5 of the International Law Commission’s Articles on State Responsibility (ASR)) and in treaty law (as codified in IIAs), two of the most important sources of IIL. Both genres of defences are quintessential fig leaves for the inequality and asymmetry burdening states and their people in IIL.
The difficulty of states prevailing on customary defences to investor claims for COVID-19 measures has been addressed in recent blog posts, and we see no need to rehash arguments which we are largely in agreement with here. But COVID-19 is more than a harbinger of future claims against states; it can also adversely affect states in ongoing claims. The recent report of a tribunal denying Bolivia’s request to suspend arbitral proceedings because the pandemic and its ensuing travel, work-from-home and other restrictions rendered impossible the timely filing of its Statement of Defence, is a case in point. Rather than simply requesting a suspension or extension of the submission deadline, which is standard arbitral practice, Bolivia (or their counsel, rather) invoked the customary defence of force majeure. This was highly problematic. As customary defences are only applicable when there is an alleged violation of an international obligation, Bolivia had to first concede that the non-performance of an international obligation was at stake in order to plead force majeure. On this Bolivia submitted that its consent to arbitrate with protected investors in the US-Bolivia IIA amounted to an international obligation. Bolivia’s decision to frame its standing consent to arbitrate as an international obligation, something no state has ever done since it greatly increases exposure to indemnity claims, belies a stubborn conviction that customary defences offer the best or only solutions for states in crisis. If raising the defence of force majeure is the best or only hope for suspending arbitral proceedings, then engineering Bolivia’s enhanced claims exposure is an unfortunate but necessary means to an end. This unsettling illustration cautions against reaching for customary defences in straightforward procedural matters which can be decided on the sole basis of the requesting state’s factual circumstances. It also helps to clear the fog that customary defences, which can only be invoked by states, level the playing field between investors and states in IIL.
The IIA defences, better known as exceptions, are no less of a fig leaf than customary defences. Many IIAs provide for exceptions that states may rely on to justify challenged COVID-19 measures. Such exceptions identify the type of circumstance that states can respond to, and exclude those responsive measures from treaty purview. States, however, have rarely prevailed on an invoked exception. In contrast to the generally glum forecast for customary defences, some predict that states can easily invoke IIA exceptions for COVID-19 measures and successfully insulate themselves from an anticipated flurry of investor claims. We beg to differ. Even exceptions found in updated IIAs, which are supposedly more respectful of a state’s regulatory space than their older counterparts, pose considerable challenge for states seeking to invoke them. A case in point is the 2016 Morocco-Nigeria Bilateral Investment Treaty, which is often cited as a model of a South-South treaty that incorporates sustainable development targets to better balance investor protection against state regulation. In this IIA, while “the Host State has the right to take regulatory or other measures to ensure that development in its territory is consistent with… legitimate social and economic policy objectives”, the “pursuit of its rights to regulate shall be understood as embodied within a balance of the rights and obligations of Investors and Investments and Host States”. What this IIA gives with one hand, it seemingly takes with the other. While it allows states to park a public health measure under the broad rubric of social policy objectives, thereby according considerable flexibility to the state’s regulatory agenda, it also compels states to balance this measure against its potentially adverse impact on investor rights. Whether a measure taken by a state in a pandemic is good or bad, fair or biased, can only be determined with the benefit of hindsight. By cornering states into an ex ante and treaty interpreters into an ex post balancing exercise with unpredictable outcomes for COVID-19 measures, this “balanced” IIA and its cousins are hardly symbols of reassurance for states who must act swiftly in a pandemic.
Those who remain partial to “balanced” IIAs may point to the establishment of Committees in newer generation treaty templates as the panacea for any difficulties states may experience when invoking exceptions under IIAs. After all, these Committees, one of which is also present in the Morocco-Nigeria BIT, can recommend suitable interpretations or even the amendment of ambiguous or inconvenient treaty provisions. These Committees operate by consensus. In the absence of a looming investor-state dispute, consensus on a tabled issue is easier to obtain because there is nothing concrete at stake for any of the State Parties whose nominees make up the Committee. The prototype of these Committees is the Free Trade Commission (FTC) which is empowered to resolve interpretive disputes over provisions in the North American Free Trade Agreement (now known as the United States-Mexico-Canada Agreement). The FTC has only ever issued one interpretive note in 2001, without a looming or ongoing dispute, clarifying the scope of the disputing parties’ duty of confidentiality, as well as the character of the minimum standard of treatment of investments. However, once a dispute takes hold, the dynamics between the State Parties will most likely change. A State Party whose national is suing for treaty protection from a damaging COVID-19 measure may not be eager to agree (or for its nominee to agree) to an interpretation or an amendment of the treaty that would facilitate the respondent State Party prevailing on an exception. Although Committees have the honour of finetuning concluded treaties in theory, it seems unlikely, once a dispute has arisen, that Committees will often achieve consensual finetuning in practice. So the difficulties encountered by states invoking treaty exceptions will persist with a hung Committee.
The COVID-19 global health crisis also ushers in the realization that the right to regulate was never the answer to the disillusionment with treaty-based investor-state dispute settlement (ISDS). And as seen from the strained application of treaty exceptions outlined above, the purported enhancement of this right in “balanced” IIAs in fact achieves quite the opposite. As the right to regulate is an essential attribute of sovereignty, it cannot be curtailed or reclaimed in the way the misguided proponents of “balanced” IIAs suggest. What treaty-based ISDS does is force a clash between conflicting interests, namely, sovereign autonomy and the need to protect the public interest, and private entitlement. And when the decision is rendered in favour of one party or another, one interest prevails over the other. By failing to appreciate how the basic attributes of sovereignty operate, the advocates of the articulated right to regulate sought to ringfence the exercise of sovereignty in newer generation IIAs, introducing conditions and constraints that the older generation IIAs, whatever their shortcomings, did not. It is the worst kind of irony when states might find it easier to justify a COVID-19 measure under an older treaty than a newer one. Discourse on the right to regulate and the onset of treaty tinkering have thus diverted attention from the root cause of disillusionment — IIL’s thinly-disguised and precarious foundations.
4. Concluding Remarks
Metallica were already singing about the absurdity of fighting fire with fire almost 40 years ago. A number of writers have pointed out how the COVID-19 pandemic has exposed not only widespread inequalities, but also that the same legal instruments that create such inequalities are hardly appropriate to tackle a crisis that, as global as it certainly is, affects people and states at very different levels. Moreover, should those instruments govern the aftermath of the crisis, it is likely that the chasm of inequality will become even wider. It is now evident that most legal instruments regulating relationships between businesses and states were drafted without due consideration for the possibility of an economic recession, let alone one caused by a social, health, and human rights crisis on a global scale.
Cross-border investment has become an undeniable fact of life. It can enable societies to flourish if it is not based on sheer exploitation and extractivism, and if it is properly regulated and taxed. At this juncture, however, there is an urgent need for policymakers to recognise that the current model of foreign investment governance has failed time and again to facilitate an equitable sharing of benefits from economic activity within and among societies. The current model focuses solely on maximising corporate profitability at all costs. IIL has supplied the nuts and bolts of a global governance architecture that continues to entrench inequalities locally and globally. It privileges investors whilst allowing them to escape their responsibilities. It restricts states’ powers to protect the public in times of crisis. IIL has been designed to safeguard the interests of the few at great cost to the many. The current reform campaigns of IIAs and dispute settlement via arbitration offer only cosmetic changes to a deeply flawed system of governance. One cannot build an equitable system of foreign investment governance on the foundations of a deeply flawed model. True reform requires immense courage. The time has come to re-imagine foreign investment governance by putting the people and the planet, and not profits, at the heart of governance.
Daria Davitti is Postdoctoral Fellow at the Department of Law, Lund University, Jean Ho is Associate Professor at the Faculty of Law, National University of Singapore, Paolo Vargiu is Lecturer at Leicester Law School, University of Leicester and Anil Yilmaz Vastardis is Lecturer at the Essex School of Law and Human Rights Centre, University of Essex.
This article is published as part of The IEL Collective Series on Medium. For further information and other work by The IEL Collective community, please visit our website.
