The multinationals suing governments over their pandemic response

Law firms have been drawing investors’ attention to how they could pass their Covid-19-related losses onto states.

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The Covid-19 pandemic has killed almost 17,000 Chileans, battered the country’s large “cash-in-hand” economy and led to the widespread use of food banks.

In response to the government’s paltry economic support packages, its own legislators have voted through two opposition bills that each allowed citizens to withdraw up to 10 per cent of their pensions early.

“It is not the social security or state support measure that we would have liked, to make workers have to withdraw from their own funds to survive,” says Catalina Pérez, president of the opposition party Democratic Revolution.

“This is an emergency measure. This is an emergency measure that is happening because of the government's refusal to implement direct transfers from the state to the workers.”

Recently, a trade body representing American investors in Chile’s pension funds warned that firms could sue the government over the measures.

Most investment treaties allow foreign investors to sue their hosts for compensation over actions which breach their rights under investment treaties. These rights, however, are famously open-ended, allowing corporations to challenge a wide array of actions which harm their profits – including actions taken to protect public health.

Since May, experts and NGOs have been calling for a moratorium on investor-state disputes while governments deal with the pandemic.

“The government's priority should be to protect the economic stability of the workers of our country rather than the foreign investors who have been enriching themselves for a long time,” says Pérez.

In recent months, law firms specialising in investor-state disputes have been drawing investors’ attention to their investment treaty rights, and how they could be used to retrieve their pandemic-related losses from governments.

For instance, lawyers at DLA Piper have suggested that the forced closure of businesses during lockdown could constitute indirect expropriation. A vague term included in most investment treaties, “indirect expropriation” has been interpreted as encompassing any deprivation of the use or benefit of an investment – even for as little as four months.

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States’ actions in the early stages of the pandemic could also come under scrutiny. The law firm Corrs Chambers Westgarth has suggested that states could be required to pay compensation if the government “made public statements guaranteeing certain businesses would not be shut down during Covid-19, and subsequently mandated that those businesses be shut down”.

Law firms are not the only ones expecting a surge in Covid-related disputes. Omni Bridgeway, which funds investor claims in exchange for a share of any payout, has reported a “significant spike in funding applications since the onset of Covid-19”. In early April, as the virus ripped through the global economy, the group’s US chief investment officer told Law360: “Frankly, we’re drinking from a fire hose.”

“There are a lot of policy risks with third-party funding that should be considered,” says Lisa Sachs, director of the Columbia Center on Sustainable Investment. “When you have lawyers that are encouraging these claims and now you have funders that are encouraging these claims from an investor perspective, undoubtedly that has some consequence.”

Todd Weiler, a lawyer specialising in investor-state disputes, argues that such claims are always a last resort.

“If you're a country that wants to keep having business, that wants to keep having relations with a country, you want to consider very carefully whether you want to sue them because politically that's not going to go well for you,” he says.

Awards can be in the billions of dollars

Investor-state dispute settlements (ISDS) can pose a serious problem for developing countries, in particular. Treaties rarely specify a method for calculating awards, and arbitrators have often chosen to compensate not just sunk costs but all profits the investor could have expected to earn over the lifetime of the investment.

This has led to awards far in excess of the amount actually invested. In 2019, Tethyan was awarded $4bn against Pakistan – 60 per cent larger than the country’s annual healthcare budget – in compensation for the cancellation of a copper mine into which it had invested $220m. Pakistan was also required to pay $2bn in interest.

ISDS can drain public funds in developing countries
Net losses in ISDS cases for high-loss countries as a proportion of 2010 government spending
Samples (2018), bit.ly/39C7Efk

There is also no requirement for arbitrators to abide by case law, leaving them free to interpret treaty rights differently in each case. Combined with the average size of awards – $500m and growing – and the open-endedness of treaty provisions, this gives tribunals extraordinary power over sovereign states.

Many states are exposed

The scope for claims is substantial. Law firms have drawn attention to possible violations by the US, the UK, Canada, Mexico, Spain, Ireland, Italy, France, Hungary, Czechia, Serbia, Romania, Ukraine, India, China, Japan, Peru, Australia, Argentina, Guatemala, Senegal and El Salvador.

The risk of lawsuits is particularly great in Latin America, given the region’s relatively stringent pandemic response – lockdown measures were stricter than in many other parts of the world – and high level of inward investment. As well as Chile, Peru and Mexico have already faced threats of arbitration related to their pandemic response.

Latin American countries are particularly exposed to claims
Countries with more inward investments and stronger pandemic response measures are at greater risk of Covid-related investment disputes. Larger circles indicate a higher number of previous ISDS disputes.
IMF/World Bank/UNCTAD/Blavatnik School of Government

Countries more heavily exposed to investment in sectors affected by pandemic-control measures are also at particular risk. Within the OECD, the inward energy investments of Norway and Canada, and the inward utility investments of Chile, make them particularly vulnerable.

Exposure to Covid-related FDI disputes varies across OECD countries
Net inward FDI position as a percentage of GDP for selected industries in OECD countries, 2018. Retail excludes automobiles and motorcycles. The Netherlands and Luxembourg have been excluded due to the unreliability of their inward FDI statistics.
OECD

The legal defences available to states are few in number and uncertain in strength. Only 9 per cent of treaties contain any mention of health or the environment, according to the United Nations Conference on Trade and Development (UNCTAD), and these are largely symbolic, as lawyers from Corrs Chambers Westgarth have noted.

States are therefore likely to rely on defences from customary international law. For instance, governments can be excused from their treaty obligations if they are able to demonstrate that the offending action was the only way to avoid an imminent threat to public health.

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According to lawyers from Twenty Essex, however: “It might be difficult for states to rely on [such a plea] in respect of measures taken to combat Covid-19. The plea has been interpreted in very restrictive terms by tribunals and it could be difficult for states to establish all of the requisite elements.”

In particular, governments may struggle to demonstrate that their specific measures were the only way of controlling the pandemic. This requirement has been described as a “high bar” by lawyers from Corrs Chambers Westgarth and as an “extremely high standard” by lawyers from Linklaters.

Such a plea also requires that the state must not have contributed to the crisis itself, for instance, through insufficient preparedness or a botched initial response. Lawyers from DLA Piper and Corrs Chambers Westgarth have noted that this may be difficult for states to establish.

The worst may be yet to come

In total, 27 law firms have published articles advising investors on the potential for suing states over their Covid-related measures, according to Lexis Library. Yet there have been no cases launched so far, and Chile is one of only three known threats.

Dispute specialists at Stephenson Hardwood have said that there “simply has not been sufficient time for disputes to progress to a stage whereby they reach the courts or arbitral tribunals”. Similarly, third-party litigation financer Burford Capital recently told its shareholders to expect a “significant uptick in litigation activity as the world normalises, which will continue for years”.

“There's no real statute of limitations with these cases,” says Lisa Sachs. “Arguably, a case is stronger when you can allege greater losses, especially in a system where there really are no parameters to the date of valuation or what measures amount to the violation. So, I think there's limited reasons why investors would bring a challenge early.”

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The pandemic has come at a consequential moment in Chile’s history, as it grapples with the legacies of authoritarianism. In April, an assembly will be elected with the task of rewriting the country’s Pinochet-era constitution.

“The commitments that Chile has acquired in the area of human rights often collide with what has been acquired in terms of opening up to the movement of international capital,” says Catalina Pérez. “These must be fairly balanced [...] so, it seems to me that they must be reviewed.

“The costs that have to be paid in political and economic terms will have to be paid to guarantee the stability of our people, our workers. That is what is now at stake.”

Additional reporting by Marina Leiva.

Ben van der Merwe is a data journalist at Investment Monitor.

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