As in any crisis, there will be winners and losers from this global pandemic.
Those paying the price for COVID-19 are becoming more visible every day – from the nurses risking their own lives to save others, to the poorly paid workers toiling overtime to produce food and deliver essential goods. Globally, we are also starting to see the impact on impoverished countries that have been forced to deal with an unprecedented health and economic crisis.
Some of the winners are also becoming clear – Jeff Bezos, pharmaceutical corporations, tech firms – companies that are booming while small businesses collapse. But they are just the tip of the iceberg. Behind the scenes, many companies and international law firms are weighing up the legal options that might enable them to benefit from this crisis. Their point of entry is not the money they hope to make from this crisis, but rather the money they didn’t make due to the emergency measures taken by governments.
The capacity of foreign investors to sue states has been enabled thanks to a global web of investment protection agreements signed largely over the last three decades. Over 2,600 treaties in force worldwide allow foreign investors to sue states at international arbitration tribunals for government measures that affect corporate profits, including those that protect the environment and public health; extend affordable access to energy; clean water or enact better working conditions. There are more than 1,000 known examples of investors suing states worldwide. They have skyrocketed in the last decade, and so has the amount of money involved.
‘The beginning of a boom’
Over the past few weeks, law firms specialising in arbitration have presented the unfolding global crisis as “a chance to revolutionize arbitration and boost and strengthen its virtues” and “the beginning of a boom”. Lawyers and investors are well aware that past crises – like Argentina’s economic collapse of 2001, the Arab spring of 2011, or the global financial crash of 2008 – have provided opportunities to sue states, and therefore predict that “it is almost certain that such instability and uncertainty will result in a growth in the number and types of disputes”.
In our new report, 'Cashing in on the pandemic: how lawyers are preparing to sue states over COVID-19 response measures', we identify more than twenty international law firms who have discussed such cases. Examples include one firm that has considered the case for investor-state lawsuits against action to provide clean water for hand-washing (as in El Salvador where families impacted by COVID-19 will not have to pay water bills for several months, and Bolivia which suspended water service disconnections due to lack of payment during the crisis). Other firms have highlighted the potential for claims against measures to prop up overburdened public health systems (as in Spain where private hospitals have been taken under public management, or in the US where General Motors has been ordered to produce ventilators). Price caps on medical supplies have also been identified as a target of claims by foreign investors as they “may dramatically decrease sales revenues even for in-demand products”.
Economic relief measures for those in need, such as the suspension of utility bills or mandatory rent reductions, could also be challenged. “While helping debtors, these measures would inevitably impact creditors by causing loss of income,” one firm warned in a recent client briefing on COVID-19 and international investment protection.
Governments will likely defend themselves arguing that measures taken to protect public health and livelihoods in the midst of the current crisis were legitimate and necessary under extreme circumstances (‘force majeure’). However, lawyers have warned “the plea of force majeure is a very strict one, and States have rarely been successful when invoking it”. This line of defence has proved insufficient in the past to stop expensive lawsuits. For example, in eleven out of the fourteen cases where Argentina used the state of necessity defence in cases related to the 2001 crisis, arbitration tribunals rejected the argument. Investment lawyers are already questioning “whether the extent of the measures imposed is justified, or whether the measures are proportionate to the serious economic damage which they can inflict”.
A drain on public budgets
These potential lawsuits, and the financial compensation involved, will only add to the already heavy foreign debt burden of countries in the Global South. By the end of 2018, states worldwide had been ordered or agreed to pay investors in disclosed arbitration cases a staggering US$88 billion. This is taxpayers’ money that has been diverted away from funding for public health, access to food, and employment creation.
Just as the pandemic is revealing profound health and social inequities, it is also showing the dangers of trade and investment agreements that can curtail governments’ sovereignty and drain limited public budgets.
Governments must act quickly to avert the surge of investor-state arbitrations that may soon be on the horizon. Experts have called for a permanent restriction on legal challenges to government measures targeting the health, economic and social effects of the COVID-19 pandemic – and for an immediate moratorium on investor-state arbitrations more generally. There is already a draft proposal for an agreement to suspend ISDS claims for COVID-19 related matters.
But ultimately, the only real solution is to terminate the investment agreements that are creating these risks.