Covid-19 and ISDS Moratorium – An Indiscreet Proposal

[Prabhash Ranjan is a senior assistant professor of law at the faculty of legal studies, South Asian University.]

The tenacious critics of the international investment law (IIL) regime have seized the current moment of crisis created by the Covid-19 pandemic to sharpen their attacks against the regime. The critics tend to present the IIL regime as an immoral arrangement that prioritises corporate interests over the well being of local populations. Such a description comes close to an important dimension of populism, which as political scientist Cas Mudde describes, divides the society into two homogenous and antagonistic groups – the ‘corrupt elite’ and the ‘pure people’. In the context of the IIL regime, the foreign corporations, the law firms who advise them, and the arbitrators form part of the supposedly ‘corrupt elite’ or the transnational capitalist class as Marxist scholars describe, whereas the local population is the ‘pure people’ who empower their governments to morally represent and act on their behalf. The investor-State dispute settlement (ISDS) mechanism that lies at the heart of the IIL regime is showcased as the real villain of the piece that provides coercive legal firepower to the ‘corrupt elite’ who use their resources to further their interests at the cost of ‘pure people’.

These critics argue, not without merit, that there is a likelihood of an avalanche of ISDS claims brought by ‘bad’ foreign investors against ‘good’ States challenging sovereign regulatory measures directed at combating the global pandemic and its economic fallout. Thus, it is considered befitting that there should be an immediate moratorium on all arbitration claims brought by private corporations against governments using investment treaties. It has been further proposed that there be a “permanent restriction on all arbitration claims related to government measures targeting health, economic, and social dimensions of the pandemic and its effects”. In short, this fresh onslaught on the ISDS mechanism tantamounts to suspending international investment law for some time to come. 

Taking up the Challenge 

Drawing inspiration from the argument of Anthea Roberts and Nicolas Lamp that the Covid-19 pandemic requires analysts to develop meta-frameworks that would allow policymakers to integrate different perspectives, I wish to challenge the proposal to have an immediate moratorium on ISDS. The authors of the proposal seem to have completely negated the possibility of States being able to defend their Covid-19 related regulatory measures, in case of ISDS claims, by relying on the treaty and other defences in international law. I do not wish to repeat these arguments, which have already been made by others. Instead, I will deal with each of three reasons advanced to have an immediate moratorium on ISDS claims; and also offer other reasons to show why the proposal is injudicious.   

First, it is argued that an immediate moratorium on ISDS claims is needed to enable the governments to adopt the regulatory measures without the fear of lawsuits. This argument is based on the regulatory chill hypothesis that posits that governments will fail to regulate in the public interest (in this case adopt measures to combat the pandemic or to deal with it’s economical consequence) in a timely and effective manner due to the fear of ISDS claims. However, this regulatory chill hypothesis has been contested. According to one empirical research, contrary to ISDS having a chilling effect on State regulation, there seems to be a positive relationship between ISDS cases and regulatory activity of low-income countries i.e. ISDS cases seem to have a ‘regulatory heating’ effect. Moreover, measuring regulatory chill is not easy. As Tietje and Baetens argue, at the heart of several public interest regulations in liberal democracies are conflicting political and socio-economic interests and claims of different stakeholders that need to be balanced. In such complex situations, the possibility of an ISDS claim maybe just one of the many factors that may have a chilling effect. 

Besides, a look around the globe shows that governments, developed and developing, are adopting all kinds of regulatory measures ranging from imposing strict lockdowns to setting up surveillance mechanisms, to fight the pandemic and its fallout. There is no evidence to demonstrate that any imagined or actual threat of ISDS claim has led to the chilling of any regulatory measures.

The second reason advanced to support an immediate moratorium on ISDS is that if an ISDS claim is brought against a State it would distract the State from the urgent control of the Covid-19 crisis. This is a weak argument as it presumes without offering any evidence that foreign investors, when the world is amid a pandemic, are rushing to file claims against States. Moreover, modern-day States are not a singular entity but complex creatures having specialised departments to deal with dissimilar matters. Governments carry out distinctive responsibilities simultaneously. Thus, even if an ISDS claim is brought against a State, its relevant agency can deal with it without hampering in any way the fight against the pandemic. 

The third reason advocated for an immediate moratorium on ISDS is that since ISDS tribunals award exorbitant damages to foreign investors, these damages “would weigh heavily against the dire budget crises facing developing countries in the context of the COVID-19 pandemic”. This argument erroneously presumes that foreign investors would surely succeed in such ISDS claims. Furtherore, the argument lacks nuance and presents a misleading picture. While it is true that some ISDS tribunals have awarded inflated damages, the empirical evidence shows that between 1987-2017, there have been only five instances where ISDS tribunals awarded damages exceeding $1 billion. In half of the cases the damages awarded were below $16 million, which is much less than what the investors claimed.  

Creeping Authoritarianism 

A fundamental flaw with the proposal to have an immediate moratorium on ISDS claims is that it postulates that States are innocuous actors who shall not abuse their regulatory powers to the detriment of foreign investors. This assumption flies in the face of the growing literature on how the Covid-19 pandemic is being used to propel authoritarianism with would-be autocrats using it as an excuse to amass greater power and control. While some governments have handled the pandemic by acting within the constraints of the law, some have acted like autocratic opportunists by spurring narrow nationalism, creating a surveillance State as Yuval Noah Harari warns us. In a situation such as this, the apprehension that populist and nationalist governments shall misuse their regulatory powers to impair the legally protected rights of foreign investors under international law cannot be ruled out.

International rule of law 

Given this creeping authoritarianism, political scientist Francis Fukuyama, in the context of the current pandemic, argues that what distinguishes a liberal democracy from an authoritarian regime is that the former balances State power with institutions of constraint like the rule of law and democratic accountability. The same argument can be made at the global level where State power in international relations is balanced by what is described as the common core of international rule of law. This common core consists of respect for international legal norms; non-arbitrary behaviour; clarity, consistency and predictability in the promulgation and application of the law; peaceful settlement of disputes; and respect for due process of law and procedural fairness. 

Notwithstanding all the imperfections, the IIL regime and the ISDS mechanism are part of the legal infrastructure of the global economy. They act as useful restraints on the capricious use of State power vis-à-vis foreign investors and serve an important purpose of holding States accountable under international law for their international investment relations, thus enforcing the international rule of law principles. This role of the IIL regime and the ISDS mechanism is very important in the times of Covid-19 when we see creeping authoritarianism in many countries.    

Conclusion 

The critics of the IIL regime are right in arguing that the ISDS mechanism suffers from several procedural and substantive weaknesses. These infirmities come in way of allowing the IIL regime to fulfil its role in enforcing international rule of law precepts to the extent it should. The solution to this problem is to reform, not to slay the system. Several reform proposals are already being deliberated. But, demanding an immediate moratorium on ISDS or asking States to withdraw their consent to ISDS, at the time of a pandemic, is an affront to the common core of the international rule of law. Such draconian proposals are oblivious to the fact that States often abuse their regulatory powers to the detriment of foreign investors.

It is not disputed that some over-powered foreign investors may try benefitting from the pandemic by bringing spurious ISDS claims against hapless States. But, if States act in good faith and adopt bona fide regulatory measures that are not excessive or disproportionate, it is unlikely that ISDS tribunals shall find fault with such measures. There are several instances where ISDS tribunals have upheld such State regulations including in the famous Philip Morris v Uruguay case. Keeping the scale of the pandemic in mind and the fact that States need adequate regulatory space to deal with it, arbitrators should be encouraged to adopt an appropriate standard of review while adjudicating disputes between foreign investors and States.

 Contrary to weakening institutional checks and balances and letting States suspend international law subject to convenience, that would give a free pass to populist nationalist leaders to do as they please, liberal internationalists should work towards strengthening the international rule of law. Populist leaders who display blatant muscularity in claiming to defend their motherlands against foreigners – capital, goods and people, today dominate the global political landscape. The liberal international order must be guarded against such precarious forces.