Overview

Around the globe, COVID-19 has presented governments with painful economic and health challenges. With over 108 million infections and nearly 2.4 million deaths worldwide as of February 15, 2021, states are continuing to undertake various emergency interventions to curb the virus’s spread, limit its impact, and accelerate efforts at immunization. 

The African continent alone has seen over 2.7 million confirmed cases, and with many of these emergency measures hitting businesses hard, there is a looming risk of foreign investors initiating investor–state dispute settlement (ISDS) claims under the web of investment treaties that African governments have with other countries. Indeed, this ISDS risk is not limited to African countries alone, nor is it linked solely to investment treaties. Virtually all states have taken COVID-19-related measures. Moreover, ISDS claims challenging these measures could also emanate from investment contracts and national laws. 

Arbitration newsletters and international law firms are already signalling to their clients the claims they could bring against different types of COVID-19-related measures, as well as how they could formulate breaches under the typical investor protections found in most treaties. Mounting a defence against these claims is costly for governments, especially given the myriad demands that the pandemic has already placed on public budgets. Past crises have shown that state actions, even when taken out of necessity and in times of grave and imminent peril, are not immune to ISDS claims. Customary international law defences, such as the doctrine of necessity, may not succeed in front of an arbitral tribunal.

IISD has extensively examined the particular challenges of ISDS claims arising from investment treaties and investment laws. Our research considers why these claims can be problematic for governments, unpacking which kinds of treaty and domestic law provisions could lead to ISDS claims and whether investors can use them to challenge COVID-19 measures. Our research also considers the interaction between national laws and old-generation bilateral investment treaties while presenting options for mitigating ISDS risks. International organizations, such as the United Nations Conference on Trade and Development (UNCTAD) and the African Development Bank, have also highlighted the potential for disputes to arise between investors and states under international treaties. 

African Union Decision: Options and support for states

The African Union Commission has responded to this imminent threat by adopting a declaration that raises awareness of the issue among African Union (AU) member states while also inviting them to explore all available options under international law to mitigate this risk. This declaration is also referred to in the UNCTAD’s February 2021 Investment Policy Monitor. Adopted first at ministerial level in November, it has now been adopted by the AU Assembly of Heads of State and Government as of December 2020.

This is an important development that will give AU governments further moral and political support as they make decisions aimed at limiting the economic devastation wrought by the pandemic while laying the groundwork for eradicating COVID-19 entirely and rebuilding their economies. 

The declaration consists of a preamble and six policy recommendations. Among some of its recommendations, the declaration invites AU member states to explore all available options under international law to mitigate against the risk of COVID-19-related ISDS claims, considering the interaction between pandemics and international investment law. The declaration also invites them to explore all possibilities for mitigating the risks of ISDS, including a mutual temporary suspension of ISDS provisions in investment treaties in relation to measures that governments have taken to tackle the pandemic. AU member states are also encouraged to consider renegotiating their investment treaties so that these feature provisions that are better suited to exceptional situations, such as pandemics, will also bring these deals in line with new trends at the regional and international levels.
 
While the declaration sets out a series of international law considerations that are centred around the principles of cooperation, multilateral action, and the proactive exploration of options for mitigating ISDS risk, it also highlights one of the possible options under customary international law that states have at their disposal. Namely, states can seek the suspension of ISDS provisions with their respective treaty partners. 

In this article, we explore the viability of this option in mitigating treaty-based ISDS claims while analyzing the advantages and limitations of other available reform options. This is especially important for other regional economic blocs or like-minded countries aiming to take a similar approach and who may wish to coordinate their responses to ISDS risks both internally and with other country groups.

What Are the Key Issues for Governments to Consider?

There are at least three key issues that governments should keep in mind as they determine how to respond to the risk of COVID-19-related ISDS claims. 

First, governments would need to assess the extent to which they would like to mitigate against the risk of COVID-19-related ISDS claims and, therefore, whether a broad or narrow response is the most practical approach. This assessment will depend on the language contained in their investment treaties, domestic laws, and investment contracts. 

Undertaking this type of assessment will ensure that governments choose an approach that is commensurate to how exposed they are to COVID-19-related ISDS risks.

For most governments, a narrow approach, such as the temporary suspension of ISDS, would be quicker to implement and give them the breathing space to develop broader, more systemic reforms that require more time. The speed of implementing reforms is another practical concern. In crisis situations, the perfect option can be “the enemy of the good,” especially given the pace at which this virus has spread and the swift emergency measures that governments have had to take. 
 
Second, governments would need to consider the most legally sound options relative to their domestic laws and international law. Otherwise, states could adopt solutions that expose them to legal challenges further down the road. 

Third, governments would need to assess whether to pursue these options at the bilateral, regional, or multilateral level—or a combination thereof. Indeed, governments may wish to implement various solutions in parallel or sequentially. For example, a government may try one option at first and later switch tack if this approach fails to yield the necessary results. 

Keeping these considerations in mind, there are a few other key issues to note before we present reform options. First, states’ public interest measures—be they related to health, trade, or finance—can come under challenge from investors, especially in times of severe national crises. Second, not all government COVID-19-related measures will constitute a breach that is enforceable under ISDS. Third, all the options listed below are legally sound under international law and would not bar access to justice for foreign investors who have domestic or other applicable international processes in force to address any disputes that arise.

How Can Governments Ensure Sufficient Policy Space to Support Their Health Systems and Economies Without Incurring ISDS Risks?

Suspension

The Vienna Convention on the Law of Treaties provides for the suspension of all or part of a treaty. This is set out in Articles 57 and 58 of that convention. An agreement to suspend the operation of ISDS for all COVID-19-related measures could be concluded multilaterally, regionally, or bilaterally. This agreement could be initiated by and concluded between a small group of like-minded states, after which additional states could sign on. This would minimize the potential for lengthy negotiations and could address multiple treaties at once. For this option to be effective, it will need significant buy-in from states—particularly those states whose investors are the most frequent users of ISDS. 

Given that virtually all states have taken COVID-19-related measures, the risks of ISDS challenges to those measures extend to all states with investment treaties. Government positions in favour of or against this type of agreement may not fall along the traditional fault lines between capital-importing and capital-exporting states. Sustained diplomatic engagement and moral persuasion to convince as many states as possible to sign on would be a necessary precondition for this option to be effective. Importantly, suspension would be a timely and well-targeted option, as it bars ISDS claims from the outset without requiring the launch of arbitral proceedings to review claims on their merits. 

Termination by Consent With a Treaty Partner or Unilaterally

Two states can agree to terminate an investment treaty between them at any time. They can also agree to extinguish the treaty’s “survival clause,” which would otherwise allow established investors to continue bringing ISDS claims for a set period after termination, usually over 10 or 15 years. By contrast, unilateral termination can only be done “in conformity with the provisions of the treaty,” according to Article 54(a) of the Vienna Convention on the Law of Treaties. Most investment treaties allow unilateral termination only after the treaty’s first term has expired—and the terminating state cannot unilaterally extinguish the survival clause. 

Termination by consent would clearly be a lawful and effective way of barring COVID-19-related ISDS claims. Its main drawback is the pace: states would need to negotiate to terminate each treaty one by one, which would be slow, onerous, and resource-intensive. Terminating a treaty will impact all claims, not just those that are related to COVID-19, so it may also be seen as an option that is too broad in scope relative to the issue it means to tackle. Unilateral termination would not be an effective way to bar COVID-19-related ISDS claims, given that the survival clause would remain intact.

Joint Interpretation

Joint interpretation can clarify the meaning of a treaty provision and narrow an arbitral tribunal’s interpretive discretion. States could use such a statement in various ways. For example, they could use it to define “COVID-19-related measures” and assert that the parties consider such measures to fall within one of the treaty’s public interest exceptions or outside the scope of the treaty’s substantive protections. 

Joint interpretation shares the same procedural drawbacks to termination by consent, requiring a treaty-by-treaty negotiation process that could be time consuming. In addition, arbitral tribunals do not always consider themselves bound by interpretive statements, especially those that go beyond clarifying the states’ original intent when concluding the treaty. Instead, they relate to the parties’ current understanding of the treaty. Unlike with the suspension option, a joint interpretation is likely to leave tribunals with a margin of discretion on how to handle COVID-19-related measures and, therefore, would not bar the ISDS claim from the outset.

Amendment

An amendment changes a treaty’s content by adding new provisions or changing or removing existing ones. An amendment that, for example, carves out COVID-19-related measures from the scope of ISDS could be an effective way to mitigate the risk of ISDS claims. However, like joint interpretation and termination by consent, an amendment would likely need to be negotiated treaty by treaty. An additional drawback is that an amendment usually requires a domestic ratification process (e.g., parliamentary approval) to come into effect. This means that it would not be a timely option.

Options for Broader, Systemic Reforms 

UNCTAD has long advised states to consider long-term reforms to address the risks involved with old-generation treaties. The organization has lately developed an International Investment Agreements Reform Accelerator, which aims to expedite the modernization of the existing stock of old-generation International Investment Agreements (IIAs). The reform accelerator was built upon UNCTAD’s Reform Package for the International Investment Regime, which focuses on three phases: moving to a new generation of IIAs (Phase 1), modernizing the existing stock of IIAs (Phase 2), and improving investment policy coherence and synergies (Phase 3). Through renegotiating and developing new model treaties that can be used in future negotiations, countries could proactively address a wider set of risks now and in the future, such as pandemics or other global shocks.

Conclusion

The African Union’s Declaration on COVID-Related ISDS Risks is an important step that paves the way for possible actions by member states according to their needs and priorities. It also sends an important signal to countries and country groups in other world regions: that it is possible to act in concert to avert these ISDS risks while at the same time providing flexibility and policy space in light of the varying circumstances that governments face. 

*The authors would like to thank Nathalie Bernasconi-Osterwalder, Sarah Brewin, and Sofía Baliño for their feedback on earlier drafts.