Pandemic Sovereignty: Does India have to Worry About Contesting Investment Treaty Claims
Keywords: Covid-19, BIT, expropriation, FET standard, pharmaceuticals
The COVID-19 pandemic has brought about an unparalleled and unprecedented level of State action as governments across the globe make difficult decisions to curb its affects. States are taking a variety of measures to stem the continuous spread of the virus, as evident from the WHO Coronavirus Disease dashboard.
While the purpose of these preventive measures is legitimate and backed by multiple concerns, it is likely that foreign investors under the protection of international investment agreements (IIAs) may initiate investment claims and seek relief for any adverse effects/ losses ensuing from State measures. Although States are trying to implement adequate, well-balanced and coordinated measures to protect public health whilst trying to mitigate both economic and societal damage, there also exist international law obligations that need to be fulfilled. Indeed, tribunals may accede to government judgement in adopting balanced measures to combat COVID-19, so long as they are neither arbitrary nor conducive to a ‘clash of cultures’ between public health and investment arbitration.
In this post, I focus on the impact of COVID-19 on investment arbitration from India’s perspective. I explore India’s legitimacy to embrace an effective approach to secure public health while simultaneously maintaining regulatory stability and positive commitments which constitute the grounds for the investments of foreign investors. I begin by highlighting some of the regulatory measures India has taken along with identifying the key substantive treaty standards on which an investor might trust in seeking compensation from India. Subsequently, I examine certain public health defences for India to shore up its sovereignty, based on treaty exceptions and customary international law defences. I conclude by offering remarks on the future impact of the present situation for India.
Background to India’s export restrictions and tax insinuations
As India becomes the third worst-hit nation by the pandemic, it continues to enhance the public healthcare system and its readiness to combat the virus, but at the cost of several regulatory measures. For instance, India banned the export of 26 active pharmaceutical ingredients (which constitute about 10% of its export capacity) while it still stands as a prominent leader and the largest provider in global pharmaceuticals. A substantial part of India’s pharmaceutical sector is foreign-owned and structured through foreign entities, which will significantly impact foreign investments.
Just like other nations, India has also adopted tax relief measures to support industries and businesses against the continuous challenges raised by the pandemic. Tax experts, in India, have proposed imposition of higher taxes on the super-rich and a COVID-relief cess for the middle class as a part of revenue mobilisation and economic impetus to fight the crisis. Additional taxes and fairer deals like these may violate foreign investment protections within IIAs and come under fire in investment arbitrations, if they are discriminatory and disproportionate.
Potential IIA claims arising out of COVID-19
While India has begun the phased suspension of its nationwide lockdown, new cases jump further, leading to immense burden on healthcare infrastructure. This will enable the government to take steadier measures, for instance – nationalising private businesses and occupying industries, factories and private health centres to use their production facility to ensure adequate supply of products and services to protect public health. These types of regulatory measures, where the government does not give ample weight to the investor’s private commercial interests or nationalises businesses without passable compensation, will interfere in contractual rights and retraction of favourable commitments. In turn this will impede the legitimate expectations of the investors; spawning investment treaty claims under investment treaties that India has signed.
Depending on how such sovereign powers are exercised, investors could allege that India committed a compensable breach of its respective bilateral investment treaties (“BITs“) and rely on the Investor-State Dispute Settlement (“ISDS“) provisions to substantiate such claims.
Out of these, the fair and equitable standard (“FET“) is of foremost relevance as it encompasses both procedural and substantive elements. Protecting ‘reasonably’ the legitimate expectations of an investor is a dominant yet contentious element of the standard. Procedurally, a State is permitted to exercise its regulatory powers even to the detriment of a foreign investor given that it establishes a mechanism to address investors’ legitimate interests. This means that the State is required to act in a consistent manner, free from ambiguity and with total transparency in relation to foreign investors (Tecmed v. Mexico, ¶ 154). Notably, within the fair and equitable standard, a balancing process takes place between the strength of legitimate expectations and the very legitimate goal for retaining “policy space” and governmental flexibility (Int. Thunderbird v. Mexico, separate opinion by Thomas W. Wälde, ¶ 102). In such a scenario, a ‘weigh and balance approach’ should be applied. If India exercises such sweeping powers in concrete cases, investors could allege that India committed a breach of the fair and equitable standard.
The obligation of full protection and security (FPS) is a related standard which requires the host state to provide full and unconditional protection for investors and their investments. Thus, during this pandemic, the host state is obligated to provide an investor with guarantee against all losses suffered due to destruction & deprivation of its investment due to the radical measures adopted. It is pertinent to note, however, that the state is not placed under an obligation of ‘strict liability’ to prevent such violation. Rather, it is expected that the state exercises ‘due diligence’ and take all measures of precaution to protect the investment as are reasonable in its territory. (AMT v. Congo, ¶ 6.05)
If India begins to weigh these short-term restrictions and turn to nationalisation, the obligation not to expropriate becomes relevant, as explained here. Nationalisation of businesses coupled with the closing of non-essential dealings and a compromise with an investor’s commercial operations for exceedingly preferential reasons could give rise to various compensation claims relying on the ISDS provisions in the BITs that India has signed.
Public health defences under IIAs
Although India has unilaterally terminated 58 out of 84 BITs that it has signed, 22 of these BITs were signed with member states of the European Union, which hold significant investments in the pharmaceutical sector. The sunset clause present in most of the BITs binds the country for investments made prior to such termination. This means that the BITs continue to protect the existing investments, and investors affected by India’s export restrictions can bring up an objective breach of the FET standard for export boundaries on pharmaceutical products that could previously be exported liberally (See Mobil Exploration v. Argentine Republic, ¶984: GOA’s export restrictions amounted to a breach of the FET standard due under the treaty).
In case such claims are brought forward, India should be able to justify its regulatory measures by way of public health exception clauses set out in IIAs, provided such measures are neither discriminatory nor disproportionate and adopted timely to protect legitimate public welfare objectives (See Article 32.1(ii) of The Model BIT, referencing the general exception clause to protect human, animal or plant life or health).
Second, in case a claim for indirect expropriation is brought, India can argue that the measures adopted were a valid exercise of the police powers doctrine. The tribunal in Philip Morris v. Uruguay (¶ 399) gave a greater margin of appreciation to the host State’s discretion while assessing whether the host State’s tobacco control measures constituted an expropriation. This has also been affirmed by the claims commission, back in 1903, in the Bischoff Case, that there can be no liability for the reasonable exercise of police powers during an epidemic of an infectious disease.
The possible regulatory changes can also be justified by India under the customary international law defences which are codified within the ILC Articles on State Responsibility, as discussed here. If any of the three defences are invoked and accepted by the tribunal, considering COVID-19 is an ‘unforeseen event’ of ‘grave and imminent peril’, India’s responsibility can be precluded.
Notwithstanding the above, States should accomplish the full realisation of prevention, termination, control of epidemics and endemics, occupational and other diseases based on human rights obligations and corporate social responsibility as noted here. The tribunal follows a nonpartisan regime, and the above defences should be taken into consideration by means of a rational and proportionate basis between the host State’s measure, the reasonable governmental objective and the foreign investor’s commercial interests.
Concluding remarks
Amidst the massive dislocation in global production, supply chains and trade, foreign investors have pulled more than USD 16 billion out of India. This blow comes at a time when the Ministry of Finance had been considering a draft proposal for a new law to safeguard foreign investment which included setting up of an investment tribunal in State High Courts.
Though India is in a better position after terminating a majority of the BITs, times like these call for greater accountability and the very need to dodge potential ISDS claims could not be higher. It would be interesting to see how India would formulate its strategies so as to revive foreign investment after the dust settles.
Tushar Behl is an alum of the School of Law, University of Petroleum and Energy Studies at Dehradun. He is currently a Research Associate, working with Justice (Retd.) Abhay Manohar Sapre, Supreme Court of India.
The views and opinions expressed in the article are those of the author(s) solely and do not reflect the official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.
