A. Introduction
Covid-19 outbreak, which resulted in more than 70 million cases over the world, has been a serious threat worldwide since early 2020 and has been declared as pandemic with the World Health Organization's statement of 11 March 2020.1 Considering the spreading speed and the death rate of the virus, many activities around the world adversely affected and continue to be affected. As a result of the globalization of the virus and insufficient health care services, States were forced to take several economic, social, and cultural measures. Although these measures pave the way for controlling the spread of the epidemic on a country basis, larger global problems arise due to the Covid-19 outbreak.
In the temporary guidance dated 7 March 2020 issued by the World Health Organization, it is stated that States need to take serious measures in order to prevent the spread of virus in not just health sector but also in transportation, commerce, finance, security and in other related sectors.2 Correspondingly, apart from the curfews declared by the States,3 the examples for the extreme measures taken by States can be shown as; the expropriation of all private hospitals in Spain,4 seizure of the medical equipment sent to İtaly and Spain in France,5 suspension of the toll fees on the road network in the country during the state of emergency in Peru.6 Possible violations of the international investment agreements by the States as a result of these measures will cause serious problems in a global sense. The damages that foreign investors may suffer within the scope of these measures shall be evaluated within the framework of these issues.
According to the United Nations Conference on Trade and Development (UNCTAD) data, currently there are 2.341 bilateral investment treaties ("BITs") in force, across the world.7 Given the measures that governments are taking and will continue to take against the global epidemic, foreign investors would make allegations regarding the violations against States based on BITs or multilateral investment agreements. Within this context, the provisions of the investment agreements that investors would likely to invoke would be "fair and equitable treatment", "full protection and security" and "expropriation".
B. Regulations on Protection of Investments in Bilateral Investment Treaties
1. Fair and Equitable Treatment ("FET") Standard
Fair and equitable treatment is an international investment law norm included in most of the BITs or multilateral investment treaties. While the scope of fair and equitable treatment may be determined by the specific wording of a treaty provision, in essence, it can be expressed as a broad interpretation of good faith principle found in national law. The reason for this broad interpretation is to guarantee the investors that their investments will be treated in a fair and equitable manner.8
In Rumeli v. Kazakhistan (ICSID Case No. ARB/05/16), following principles were stated as five main principles of FET:
- Protection of reasonable and legitimate expectations
- Good faith principle
- Actions cannot be arbitrary
- Due process
- Transparency
- Non-discrimination (drafted as an independent investment protection clause in some investment treaties.)9
States can formulate FET clause in their investment treaties as they wish. In other words, there is no consensus on a certain definition of FET standard. Therefore, the possibility that the measures taken by States in relation with Covid-19 could trigger claims by foreign investors concerning the violation of FET obligation. There are different formulations of the FET standard in the BITs. For instance, FET standard in Article 4 of Spain-Turkey BIT (1995) is as follows:
"1. Each Party shall guarantee in its territory a fair and equitable treatment to the investments made by the investors of the other Party.
2. This treatment shall not be less favourable than that given by each Party to the investments made in its territory, by investors of a third country that enjoys a most-favoured-nation treatment."10
Article 5 of US Model BIT titled "Minimum Standard of Treatment" provides FET standard with a reference to customary international law;
"1. Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security.
2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments. The concepts of "fair and equitable treatment" and "full protection and security" do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights. The obligation in paragraph 1 to provide: (a) "fair and equitable treatment" includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and (b) "full protection and security" requires each Party to provide the level of police protection required under customary international law. (...)"11
Article 4 of France-Mexico BIT of 1998 states:
"Either Contracting Party shall extend and ensure fair and equitable treatment in accordance with the principles of International Law to investments made by investors of the other Contracting Party in its territory or in its maritime area, and ensure that the exercise of the right thus recognized shall not be hindered by law or in practice."12
The reference to the principles of international law would include all sources of international law, in addition to customary international law on the State responsibility in respect of aliens, treaty obligations and general principles of international law.
As can be seen, various formulations of FET standard can be found in different BITs or multilateral investment treaties. In case that an arbitration claim is initiated by a foreign investor in this regard, wording of the treaty in question and the interpretation of the relevant provision by the arbitral tribunal will undoubtedly be determinative.
2. Full Protection and Security ("FPS") Standard
FPS standard is another international investment law norm which stipulates State responsibility vis-à-vis foreign investors for the losses caused by the host State or where the host State failed to prevent the loss therein. The reference to FPS standard is commonly referred in investment treaties as "constant protection and security", "continuous protection and security", or "full protection and security" standard. The case law shows that there are numerous interpretations with respect to the scope of the protection derived from this provision. It has been observed that whether the protection provided by FPS extends beyond the physical security and include legal or all types of protection has been a dilemma for the arbitral tribunals.13 For instance, in Saluka v. Czech Republic (PCA Case No. 2001-04), the tribunal expressed that:
"The full protection and security standard applies essentially when the foreign investment has been affected by civil strife and physical violence [...] the full security and protection' clause is not meant to cover just any kind of impairment of an investor's investment, but to protect more specifically the physical integrity of an investment against interference by use of force".14
On the other hand, the tribunal in Biwater v. Tanzania (ICSID Case No. ARB/05/22) found that the FPS standard "implies a State's guarantee of stability in a secure environment, both physical, commercial and legal".15
There is a broad consensus that the standard does not provide absolute protection against physical or legal infringement. The host state is not placed under an obligation of strict liability to prevent such violations. The host state will have to exercise 'due diligence'. So, in the light of the full protection and security standard, what is the degree of diligence that states are obligated to ensure when taking action to combat COVID-19? In Asian Agricultural Products Ltd. (AAPL) v. Republic of Sri Lanka (ICSID Case No. ARB/87/3) the tribunal embraced the approach that the "due diligence" "is nothing more nor less than the reasonable measures of prevention which a well-administered government could be expected to exercise under similar circumstances".16 In another arbitration, Pantechniki v. Albania (ICSID Case No. ARB/07/21), the tribunal indicated that the degree of "due diligence" required under the full protection and security standard in relation to the former circumstances might vary depending on the host State's level of development and on socioeconomic or political conditions prevailing at the time of the investment.
In general practice, it is acknowledged by investment arbitration tribunals that the measures taken by States must be at reasonable level. The reasonable level should be determined according to the circumstances on a case-by-case basis.
3. Expropriation
Expropriation is a notion defined under Turkish law as a procedure that prescribes the transfer of legal title of an immovable asset to the State by force17 and regulated in Article 46 of the Turkish Constitution:
"The State and public corporations shall be entitled, where the public interest requires, to expropriate privately owned real estate wholly or in part and impose administrative servitude on it, in accordance with the principles and procedures prescribed by law, provided that the actual compensation is paid in advance.
The compensation for expropriation and the amount regarding its increase rendered by a final judgment shall be paid in cash and in advance. However, the procedure to be applied for compensation for expropriated land for the purposes of carrying out agriculture reform, major energy and irrigation projects, and housing and resettlement schemes, afforestation, and protecting the coasts, and tourism shall be regulated by law. In the cases where the law may allow payment in instalments, the payment period shall not exceed five years, in that case payments shall be made in equal instalments.
Compensation for the land expropriated from the small farmer who cultivates his/her own land shall be paid in advance in all cases. An interest equivalent to the highest interest paid on public claims shall apply in the instalments envisaged in the second paragraph and expropriation costs not paid for any reason."18
The first internationally recognized document regarding the States' power to expropriate is the UN General Assembly's Resolution No. 1803 of 14 December 1962 titled "Permanent Sovereignty Over Natural Resources".19 In the resolution, it was opined that States have a sovereign right to expropriate, however the expropriation shall be for "public utility, security or the national interest", accompanied by an "appropriate compensation".20 It was also stated that the compensation shall be determined taking into account the rules of national and international law, and that in case of dispute, the domestic remedies shall be exhausted, yet, "upon agreement by sovereign States and other parties concerned, settlement of the dispute should be made through arbitration or international adjudication". Another milestone for regulating expropriation under international law is UN General Assembly's Resolution No. 3281 of 12 December 1974 titled "Charter of Economic Rights and Duties of States".21 By virtue of Article 3 of this Resolution, it was accepted that to expropriate foreign property, States should pay compensation, the compensation should be calculated solely according to the national law and procedure, and unless otherwise agreed, disputes should be resolved by judges of the State which realized the expropriation act and under the law of that State.22 In calculation of the compensation, a method called Hull Formula has been embraced as a conventional practice. The method which can also be found in the bilateral investment treaties signed by Turkey requires that expropriation be accompanied by compensation in a relatively strict manner that is "prompt, adequate and effective".23 "Prompt, adequate and effective" compensation means that the investor should be granted, as soon as the investment is made (prompt), an amount equal to the total value of its expropriated investment (adequate) in a freely transferable and exchangeable currency (effective).24 For instance, Article 4 of Slovakia - Turkey BIT (1995) states:
"1. Investments of investors of either Party shall not be nationalized, expropriated or subjected to measures having effect equivalent to nationalization or expropriation (hereinafter referred to as "expropriation") in the territory of the other Party except for a public purpose. The expropriation shall be carried out under due process of law, on a non-discriminatory basis and shall be accompanied by provisions for the payment of prompt, adequate and effective compensation. Such compensation shall be equivalent to the market value of the investment expropriated immediately before expropriation or before impending expropriation became public knowledge, whichever is the earlier, shall include applicable interest from the date of expropriation, shall be made without delay, be effectively realizable and be freely transferable in a freely convertible currency.
2. The investor affected shall have a right to a prompt review by judicial authorities of that Party of its case and of the valuation of its investment in accordance with the principles set out in this Article."
In the context of international investment law, there are two types of expropriation: a) direct expropriation, b) indirect expropriation. Direct expropriation involves a forcible deprivation of property by means of administrative or legal measures whereas in indirect expropriation, the investor retains the ownership of the investment but loses the ability to exercise the economic benefits arising out of it. In addition, direct expropriation requires the transfer of title that the owner is deprived of the possibility to make use of the investment while an indirect expropriation leaves the title untouched but deprives the investor of the possibility to utilize the investment in a commercially meaningful way.
In Middle East Cement v. Egypt (ICSID Case No. ARB/99/6), the tribunal defined expropriation as "measures are taken by a State the effect of which is to deprive the investor of the use and benefit of his investment even though he may retain nominal ownership of the respective rights being the investment".25 Given the examples of Spain expropriating private hospitals, France seizing the mask and medical equipment, and Germany prohibiting export of certain medical products; foreign investors may consider initiating international arbitration claims to compensate for their losses, arguing that their investments have been directly or indirectly expropriated unlawfully by their respective host State's, that their investments have not been subject to fair and equal treatment, or that they have violated their full protection and security obligations.
C. Legal Grounds for Intervening in Investment Activities by the States
1. Exceptions Prescribed under the Bilateral or Multilateral Treaties
As a result of the measures taken by the States due to the Covid-19 outbreak, States can defend themselves against the claims arising from their international investment protection obligations by relying on two legal grounds. The first one is the exceptions in the bilateral investment treaties signed between the States regarding the protection of health and relevant public interests. For example, Article 5(1) of the Agreement Between the Government of the Republic of the Turkey and the Government of the Republic of Azerbaijan on the Reciprocal Protection and Promotion of Investments states that;
1. Nothing in this Agreement shall be construed to prevent a Contracting Party from adopting, maintaining, or enforcing any non-discriminatory legal measures:
a) designed and applied for the protection of human, animal or plant life or health, or the environment;
b) related to the conservation of living or non-living exhaustible natural resources.26
On the other hand, there are similar provisions some multilateral international treaties as well. For instance, Article 25 of the General Agreement on Tariffs and Trade (GATT)27 and Article 14 of the General Agreement on Trade in Services (GATS)28 refers to the exceptions including the measures regarding the protection of public health. In the presence of such exceptions, States may argue that the measure in question was applied due to the protection and maintenance of public health and public security.
2. United Nations International Law Commission's Draft Articles on Responsibility of States for Internationally Wrongful Acts (ILC Draft Articles)
If there are no exceptional provisions in the relevant BIT, it may be argued that whether the measures can be applied in the scope of customary international law. Within the framework of the customary international law there are accepted legal grounds for wrongful acts internationally. The Draft Articles on Responsibility of State's for Internationally Wrongful Acts published by United Nations International Law Commission on 2001(ILC Draft Articles), prescribes the circumstances where the actions of the States may be considered as an internationally wrongful act and when these acts are justifiable. Even tough ILC Draft Articles is not binding directly over the States, investment arbitration tribunals usually refer to the provisions of the ILC Draft Articles to determine the States' responsibilities. This is also same for the cases before the International Court of Justice. According to Article 2 of the ILC Draft Articles, in order to consider an act or omission of a State as an internationally wrongful act, the conduct in question must be attributable to the State under international law and the conduct must constitute a breach of an international legal obligation of that State. On the other hand, there are also exceptions prescribed under ILC Draft Articles where the actions of the State cannot be considered as an internationally wrongful act. These are "Force Majeure (Article 23)", "Distress (Article 24)" or "Necessity (Article 25)".
Article 23 of the ILC Draft Articles provides that the wrongfulness of an act of a State, which is not in compliance with an international obligation shall not be accepted as unlawful, if the act is (i) beyond the control of the State (ii) occurrence of an irresistible force or (iii) of an unforeseen event and (iv) it is impossible in the circumstances to perform the international obligation.
On the other hand, Article 24 of the ILC Draft Articles regulates the "Distress" claim. In this case, if a measure violating an international obligation was taken by the State in order to protect the life of the citizens, it shall be not considered as a wrongful act. On the other hand, parties shall not apply to "Distress" argument if (i) the situation of distress is due, either alone or in combination with other factors, to the conduct of the State invoking it; or (ii) the act in question is likely to create a comparable or greater peril.
Lastly, the defense of "Necessity" is regulated under Article 25 of the ILC Draft Articles. According to this, if the measure taken by the State; (i) is the only way for the State to safeguard an essential interest against a grave and imminent peril; and (ii) does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole, then the State may argue that the applied measure does not violate its international obligations.
D. Conclusion
Covid-19 is a pandemic which has adversely affected almost all commercial activities around the world and probably continue to affect the world for a while. During this period, States try to minimize the negative effects of the outbreak by taking several measures. Within this framework, States take measures in compliance with their domestic law. Each measure taken by a State regarding Covid-19 should be evaluated in accordance with the circumstances at the case at hand. Lockdowns, seizure of the masks and medical equipment, expropriation of the private hospitals and related measures shall be evaluated within this scope. Although these measures prevent the spread of this virus substantially, investors may be exposed to serious damages economically. In order to avoid this, especially foreign investors may rely on "Fair and Equitable Treatment", "Full Protection and Security" and "Direct or Indirect Expropriation" provisions in the bilateral investment treaties and may request compensation. On the other hand, against these treaty claims, States may argue that those measures should be considered within the scope of exceptions prescribed under the bilateral investment treaties with respect to the protection of public health and/or similar public security precautions or due to "Force Majeure", "Necessity" or "Distress" exceptions under the customary international law regulated under ILC Draft Articles.
Consequently, in each case, while hearing the claimants' and respondent states' arguments, an investment arbitration tribunal should look at the specific factual circumstances to determine whether the respondent state should be held liable or not for the relevant measure applied in response to Covid-19 pandemic.
Footnotes
1. Coronavirus. World Health Organization. Available at: https://www.who.int/emergencies/diseases/novel-coronavirus-2019. See also WHO Director-General's opening remarks at the media briefing on COVID-19 - 11 March 2020. World Health Organization. Available at: https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020.
2. Updated WHO recommendations for international traffic in relation to COVID-19 outbreak. World Health Organization. Available at: https://www.who.int/news-room/articles-detail/updated-who-recommendations-for-international-traffic-in-relation-to-covid-19-outbreak.
3. Sandford, A., 2020. Coronavirus: Macron announces France lockdown extension until May 11. euronews. Available at:https://www.euronews.com/2020/04/13/watch-live-president-macron-to-address-french-nation-on-coronavirus-latest.; Coronavirus: UK lockdown extended for 'at least' three weeks. BBC News. Available at: https://www.bbc.com/news/uk-52313715.
4. Payne, A., 2020. Spain has nationalized all of its private hospitals as the country goes into coronavirus lockdown. Business Insider. Available at: https://www.businessinsider.com/coronavirus-spain-nationalises-private-hospitals-emergency-covid-19-lockdown-2020-3.
5. Ntv, 2020. Fransa, İtalya ve İspanya'nın milyonlarca maskesine el koydu. ntv.com.tr. Available at: https://www.ntv.com.tr/galeri/dunya/fransa-italya-ve-ispanyanin-milyonlarca-maskesine-el-koydu,S_Jlv4qvKUCwSRggSdI6Hw
6. Peru warned of potential ICSID claims over covid-19 measures. Global Arbitration Review - GAR. Available at: https://globalarbitrationreview.com/article/1225319/peru-warned-of-potential-icsid-claims-over-covid-19-measures
7. IIA Navigator. International Investment Agreements Navigator | UNCTAD Investment Policy Hub. Available at: https://investmentpolicy.unctad.org/international-investment-agreements.
8. Pehlivan O., Yatırım Antlaşmalarında Yer Alan Adil ve Eşit Muamele İlkesinin Hukuki Niteliği (Legal Characteristic of the Principle of Fair and Equitable Treatment), TBB Dergisi, 2018 (139), p. 241
9. Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of Kazakhstan (ICSID Case No. ARB/05/16), Award, 29 July 2008, para. 609
10. https://ticaret.gov.tr/data/5b8c278813b8760dc40cabf4/%C4%B0spanya_yatirim.pdf
11. https://ustr.gov/archive/assets/Trade_Sectors/Investment/Model_BIT/asset_upload_file847_6897.pdf
12. https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/1253/download
13. AWG Group Ltd. v. Argentine Republic, UNCITRAL, Decision on Liability, 30 July 2010, para. 174-177; Anglo American PLC v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/14/1, Award, 18 January 2019, para. 482
14. https://www.italaw.com/sites/default/files/case-documents/ita0740.pdf
15. https://www.italaw.com/sites/default/files/case-documents/ita0095.pdf
17. Gözübüyük Ş., Tan T., Administrative Law, V. 1, Updated 9th Edition, Ankara, 2013, p. 992 ff.
18. https://www.anayasa.gov.tr/en/legislation/turkish-constiution/
19. https://www.ohchr.org/Documents/ProfessionalInterest/resources.pdf
20. Article 4 of the resolution.
21. http://www.un-documents.net/a29r3281.htm
22. Article 3 of the resolution.
23. Anca Radu, 'Foreign Investors in the EU—Which 'Best Treatment'? Interactions Between Bilateral Investment Treatiesand EU Law (2008) 14/2 European Law Journal 237, 255; Rafael Leal-Arcas, 'The Multilateralization of InternationalInvestment Law' (2009) XXXV N.C.J Int'l L. & Com. Reg. 80
24. https://www.iisd.org/pdf/2013/best_practice_compensation_expropriation_en.pdf
25. Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Eygpt, ICSID Dava No. ARB/99/6, Award, 12 April 2002, para. 107.
26. Agreement Between the Government of the Republic of the Turkey and the Government of the Republic of Azerbaijan on the Reciprocal Protection and Promotion of Investments
27. https://www.wto.org/english/docs_e/legal_e/gatt47.pdf
28. https://www.wto.org/english/docs_e/legal_e/26-gats.pdf
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