Successful Investing starts with courage- Will COVID-19 force states into loggerheads?

Posted On - 30 June, 2020 • By - Rajdev Singh

The Relations Among Indian States Due to COVID 19

In December 2019, a new strain of coronavirus was discovered in humans, which spread across the globe to the extent that it has been declared a pandemic by the World Health Organization.[1] The effect of the pandemic has forced the world into a massive economic crisis and forced countries across the globe to take unprecedented actions like containment measures, closure of businesses, lockdown orders, travel restrictions, import and export restrictions, closure of businesses and curtailing the movement of raw materials and labour.

Such actions are causing serious repercussions to foreign investments and investors. According to the United Nations Conference on Trade and Development (UNCTAD), the consequences of COVID-19 will reduce the share of foreign investments flowing into the markets, specifically reducing the profit margins of the Multi-National Enterprises (MNE) in the developing economies by 16%.[2] India is one of the top 10 countries for inbound FDI and is soon to be among the top 20 for outbound FDI.[3]

As we brace to face a global economic slowdown due to the outbreak of this deadly virus, post-pandemic developing host states will have to face arbitration claims brought by foreign investors under the applicable Bilateral Investment Treaties (BITs).

Investment Arbitration

Investment arbitration, also known as Investor-State Dispute Settlement (ISDS), is undertaken to resolve disputes between a foreign investor and the host state which arises from investment treaty like Multilateral Treaties Bilateral Treaties or general agreements entered with an intention of investment by one party in the business ventures of the others. The common routes for international investment treaty arbitration are ICSID[4], UNCITRAL[5] and ICC.[6] The investment treaties contain protections like prevention of investment expropriation without compensation or due process, prevention of arbitrary actions, an obligation of the host state for fair and equitable treatment, providing a secure investment environment, etc.

Investor-State Disputes

India has also adopted strict emergency measures in response to the unprecedented health crisis which affected investments made in India by foreign investors and entities. The aforesaid foreign investors are facing issues due to mandatory “lock-down” of all industrial and commercial activities like suspension of entrepreneurial freedoms, limitations on investors’ property rights, discriminations between domestic and foreign companies and suspension of bankruptcy proceedings, etc.

The said emergency measures taken by India could breach fair and equitable treatment and national treatment standards as per relevant Treaties. Foreign investors may face discrimination after the Indian government has recently endorsed the initiative of the “Buy local/Buy national” campaign to alleviate the post-pandemic economic crisis.

Export Restrictions By India

India reportedly banned the export of the antimalarial drug hydroxychloroquine, reportedly being classified as a potential treatment for COVID-19 and export of certain other pharmaceutical products. The Indian pharmaceuticals market accounts for approximately 20 per cent of the world’s generic drug supply.  The need of the hour is to determine whether foreign institutions may resort to arbitration in order to pursue claims against India, being impacted by foreign restrictions under specific investment treaties.

Will ‘Investor-State Arbitration’ Survive The Covid-19 Crisis?

As per the Director-General of WHO, the pandemic situation would be more severe in developing countries that have more-vulnerable populations and have poor health infrastructures the reactive control measures coupled with ill-coordinated policies, which will pave way for investment claims to be brought by foreign investors.[7] The investors may initiate arbitration proceedings arguing that it was impossible to exhaust domestic remedies/ cooling-off periods due to the nationwide shutdown and the closure of national courts where exhaustion of domestic remedies is required before filing an arbitration. 

The issue lies that developing states may seek annulment of adverse awards wherein the same is not in accordance with the treaties in accordance with Article 52(5) ICSID Convention and Rule 54 ICSID Rules. Likewise, enforcement proceedings for non-ICSID awards may be affected as well due to the partial or total closure of some national courts, and since enforcement, and setting aside of foreign arbitral awards are not considered essential litigations in some jurisdictions.

Investment Claims and Defences by Host states

Considering the pandemic as a force majeure event, Countries can defend their regulatory norms by stating that such measures (reasonable, proportionate, neither discriminatory nor arbitrary) were taken following the due process of law in securing a particular national interest.

Apart from the exclusions specifically provided in the treaty, States can also claim customary international law as a defence towards invoking principles like the “doctrine of police powers”. It was observed by ICSID (International Centre for Settlement of Investment Disputes) in Philip Morris v. Uruguay[8]  that, the State’s reasonable bona fide exercise of police powers in such matters as the maintenance of public order, health or morality, excludes the compensation even when it causes economic damage to an investor.” States can introduce such containment measures provided that it “achieves a legitimate policy objective and the effects of the intended measure remain proportionate with regard to the affected rights and interests.[9]

Many investors’ claims are related to fair and equitable treatment and indirect expropriation. The most relevant defence host countries take are as follows:

  1. Defence of national security exceptions like protecting the health of their citizens or public order. However, the State must prove that these measures were applied reasonably on a non-discriminatory basis.[10]
  2. Rebus sic stantibus defences: It is an escape clause that makes a contract or a treaty to inapplicable because of a fundamental change of circumstances.
  3. Further host state can cite, Article 12(2C) of the International Covenant on Economic, Social and Cultural Rights[11]. States should achieve full realization of the prevention, termination, and control of epidemics, endemics, occupational and other diseases.

Conclusion – The Relations Among Indian States Due to COVID-19

Considering the difficult situation, host countries may enjoy a wider margin of discretion in times of COVID-19 pandemic being recognized as a situation of emergency, however, this defence cannot be invoked by the countries in order to escape international liability through established conventions in place. The state must still exercise its regulatory powers with due regard to the rule of law such as good faith, non-discrimination and proportionality.

It is clearly understood that the government of various nations is facing a possibility of multitudinous litigations relating to investor-state arbitration as it seeks to comprehend the possibility of talking healthcare systems within the nations. However, it is time that governments come together to introduce economic support packages. Specific performance of such obligations can be mitigated during a time of such a crisis.

Hence, developing countries, including India, which account for more than half of the world’s population and most of the global GDP may play a crucial role in shaping the future of international investment adjudication. Also, investment damages in the current situation will be more complicated where the arbitral tribunal will face difficulty to strike balance between sovereign powers and private economic interests, while also facing challenges regarding the seat and the governing law as many nations may not agree to India being the place/seat of arbitration.

  • [1] WHO Director-General’s opening remarks at the media briefing on COVID-19 – 11 March 2020 Available at:—11-march-2020
  • [2] United Nations Conference on Trade and Development (UNCTAD), Investment Trends Monitor, Impact of the Coronavirus Outbreak on Global FDI, Special Issue, March 2020, Geneva, available on:
  • [3]
  • [4] International Centre for Settlement of Investment Disputes
  • [5] The United Nations Commission on International Trade Law
  • [6] the International Chamber of Commerce
  • [7]
  • [8] Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abdal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7
  • [9] Hydro Energy 1 and Hydroxana v. Spain (Hydro Energy 1 S.à.r.l. and Hydroxana Sweden AB v. Kingdom of Spain), ICSID Case No. ARB/15/42
  • [10] Too v. Greater Modesto Insurance Associates (1989),
  • [11] The Relations Among Indian States Due to COVID 19 (coronavirus)
  • [12]

Contributed By – Rajdev Singh, Partner
& Riddhi Bose, Associate

King Stubb & Kasiva,
Advocates & Attorneys

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