COVID-19 and ‘War’ Clauses in Investment Treaties: A Breach through the Wall of State Sovereignty?

In the fog of COVID-19, lawyers are identifying ways to hold States accountable for the outbreak, indecision and/or actions, whether or not violating due diligence obligations. States have adopted different measures, with varying success and degree of intrusiveness: from lockdowns over export restrictions and requisitions, to stimulus legislation and even infection tracking.

As with previous crises, in particular the Argentinian economic crisis, it is highly probable that investors will file claims under international investment agreements. While many of those will fail, fair and equitable treatment (FET) is the most obvious weapon in the arsenal of the investor, as its shotgun approach has the highest rate of success. It prescribes a balance between the State’s prerogative to take emergency measures (e.g. in times of economic hardship: Hydro Energy v Spain) and the investor’s rights against unreasonable and discriminatory conduct (Merrill & Ring Forestry LP v Canada, Award, §233).

However, the State is defended well; it has multiple layers of walls to protect its sovereignty. Next to security clauses in (bilateral) investment treaties (BIT), previous posts have meticulously analysed general defences to State responsibility (force majeure, necessity, and distress), the police powers doctrine, and the large margin of appreciation under FET. Investors should indeed keep Teinver v Argentina in mind, rejecting a legitimate expectation claim (FET) as the investors should have been aware of the difficult circumstances the Argentinian airline industry found itself in. Due to COVID-19, Alitalia has already been (re-)nationalised, and Air France-KLM could follow.

Investors could therefore diversify their strategy and try to attack other, perhaps less-protected flanks of the State, dusting off and retooling some other investment provisions. Without taking a position on the desirability of COVID-19 claims, this post examines the application of so called ‘war’ clauses in potential claims arising out of States’ measures in the fight against COVID-19.

Applicability of ‘War’ Clauses to COVID-19 Measures

A classic example of a ‘war’ clause can be found in Article 3(3) US-Ukraine BIT:

Nationals or companies of either Party whose investments suffer losses in the territory of the other Party owing to war or other armed conflict, revolution, state of national emergency, insurrection, civil disturbance or other similar events shall be accorded treatment by such other Party no less favo[u]rable than that accorded to its own nationals or companies or to nationals or companies of any third country, whichever is the most favo[u]rable treatment, as regards any measures it adopts in relation to such losses. (Emphasis added.)

Investment treaties provide for two type of ‘war’ clauses. First, the example above is a ‘war’ clause that does not in itself entitle an investor to compensation for loss. Instead, these clauses provide for a specific non-discrimination obligation if compensation is provided, granting foreign investors the same protection as those of the most-favoured nation (MFN), its own nationals, or both (depending on the BIT). The application of these, ‘non-discrimination’ war clauses depend on the discretion of the State to compensate, with the clause merely constituting a floor, with respect to such compensation (CMS v Argentina, Award, §375).

Second, compensation-for-loss clauses (or: advanced/extended war clauses) in investment agreements go further. They grant investors a substantive right to compensation/restitution for unnecessary requisitions/destructions (see, for states of emergency: BG v Argentina, Award, §382). Compensation-for-loss clauses typically extend the possibility of compensation to other emergencies and give investors a corresponding procedural right to claim compensation directly from the host State, sometimes “irrespective of whether those losses have been caused by governmental forces or other subjects” (Article IV Italy’s Model BIT). However, Zrilič (The Protection of Foreign Investment in Times of Armed Conflict, OUP 2019, pp. 109-120) reports that such clauses are rarer (33% of investment agreements) than basic ‘war’ clauses (90%).

Although many world leaders, including Emanuel Macron, and Mario Draghi have adopted wartime language, it may be thought that reliance on these clauses in the COVID-19 context seems rather artificial. However, ‘war’ clauses do not only refer to war, or by extension emergencies following from armed conflict situations. Zrilič has put forward the criterion of “potential for mass impact that such an attack can have and the emergency situation to which it amounts” (p. 109, emphasis added). Even the term ‘armed conflict’ clauses seems to be too narrow for what it was originally intended to cover: political emergencies. So-called ‘war’ clauses are seldom, if not never, entitled ‘war clause’ in the BIT. Many are broadly defined, citing war in one breath with other emergencies.

In line with a textual interpretation (Article 31 Vienna Convention on the Law of Treaties), it is the inclusion of states of (national) emergency in the ‘war’ clause that justifies their application to COVID-19 measures. Several States have declared such states of emergency (see here and here). However, whether a national emergency has been formally declared does not seem to matter much to the invocation of the clause, as opposed, for example, to the derogation clause in Article 4 International Covenant on Civil and Political Rights. The tribunal in von Pezold v Zimbabwe (Award, §624) held that a domestic declaration of a state of emergency can only serve as evidence for the necessity defence. The El Paso v Argentina tribunal found that a state of emergency can be of an economic nature (Award, §611). While in the context of defences, the definition of national emergency appears to be a broad one. Moreover, other ‘war’ clauses specifically add natural disasters to the list of emergencies (e.g. Article 7 India’s Model BIT 2016). While the current crisis is a natural disaster, it is not excluded that future epidemics could be man-made as a form of biological warfare, triggering ‘war’ clauses as such.

Also a contextual interpretation explains the nomenclature ‘war’ rather than ‘emergency’ clauses, namely to distinguish them from ‘essential security and emergency’ (or: ‘non-precluded measures’) clauses, which allows the host State to protect its essential security (e.g. Article 4(2) Syria-France BIT). Simply labelling a situation as an ‘emergency’, also avoids all the gradations of (non-)international/internationalised armed conflict and its pitfalls.

A no-man’s-land with many (jurisdictional) obstacles

Whether investors can claim compensation for COVID-19 measures, such as the requisitioning of key industries to convert their manufacturing processes, depends on the specific BIT. Investors seeking to bring claims against the US will have to tackle several hurdles. The language of the US Model BIT 2012 limits (i) the non-discrimination war clause to the international minimum standard, (ii) compensation-for-loss clauses to requisitions and (unnecessary) destructions by governmental forces/authorities, and (iii) both to armed conflict or civil strife (Article 5(4-5)). States of emergency, whether of a public health nature, are thus likely excluded. A similar provision can be found in Article 7 Iran Model BIT – another heavily hit country – limiting its scope of application to “war, any armed conflict, revolution or similar state of emergency” (emphasis added). Some level of belligerency thus seems to be required.

Other limitations may also be found in BITs. In the US Model BIT, non-discrimination war clauses are intrinsically linked to national and MFN treatment (Articles 3-4). However, these obligations do not apply to government procurement, i.e. “the process by which a government obtains the use of or acquires goods or services, or any combination thereof, for governmental purposes and not with a view to commercial sale or resale, or use in the production or supply of goods or services for commercial sale or resale” (Article 1) (ADF Group Inc v USA, Award). This would exclude requisitions of respirators, as obliged under the recent revitalisation of the Defense Production Act. Likewise, Articles 5(6) and 14(5)(b) prevent the application of non-discrimination war clauses to “subsidies or grants provided by a Party, including government-supported loans, guarantees, and insurance”, possibly excluding COVID-19 stimulus checks and the like.

Moreover, in addition to the limitations to war clauses mentioned above, some BITs,  e.g. the Australia – Hong Kong BIT, contain a clause which excludes public health measures (regulation of pharmaceuticals, medical devices, vaccines and the like) (Annex II, Article 3(b)). These clauses would limit the ability of investors to rely on these treaties to bring claims for measures arising out of COVID-19. If the treaty does not apply to public health, then the war clause cannot be invoked in this scenario.

Conclusion

This post only tried to highlight one aspect of the COVID-19 crisis, its link with war. It does not contend that claims under ‘war’ clauses will necessarily be successful, as the pandemic has given the State room to regulate. Some level of emergency is needed, States often choose not to award compensation (under non-discrimination war clauses), and public health can be carved out in the BIT in the first place. Yet, war clauses could offer another, forgotten and perhaps underestimated, strategy for investors. With the necessary polish, it could provide an additional tactic or secret weapon to circumvent the shield of the State’s sovereignty.