Client Alerts

COVID-19 and Investment Treaty Claims

Volterra Fietta Client Alert
22 April 2020

States around the world have implemented unprecedented measures to respond to the COVID-19 pandemic.  These include a range of public health measures imposed on populations, such as social distancing, national lockdowns and other restrictions on movement.  States also have ordered the temporary closure of non-essential businesses and the requisition of the premises of certain investors in order to fulfil vital needs.  Equally, States have required that businesses take action in a number of other ways to protect individuals from the devastating consequences of this crisis.  This includes suspending loan instalments, modifying production lines to provide urgently needed goods and reducing or stopping their exports of some of those goods.

Many of these measures are causing serious prejudice to the operations and profits of foreign investors worldwide.  Faced with this situation, foreign investors and States should be fully aware of their rights and obligations under international law.  It is crucial to know whether, and to what extent, State measures implemented to respond to the COVID-19 pandemic could trigger an obligation to pay compensation under international investment law.  The answer to this question depends on a number of legal and factual considerations.

Investment treaty protection – preliminary considerations

The first step is to assess whether the foreign investor and a definable investment affected by the State measure are covered by an investment treaty.  To this date, there are more than 3,000 treaties, mostly in the form of bilateral investment treaties, that include provisions on the protection of foreign investment.  Investors and States should be mindful that, depending on the definition in the relevant treaty, investments may take the form not just of tangible assets but also, for example, of contractual rights or rights arising from licences and permissions granted by governments.

In addition, it is crucial to analyse whether the treaty or treaties in question are likely to apply to the relevant State measure.  A considerable number of investment treaties contain so-called “treaty exception” clauses.  These clauses exclude, from the scope of application of part or the entirety of the treaty, measures taken by the Contracting States in order to fulfil their obligations in relation to a variety of national interests.  Some of those clauses, expressly or implicitly, exclude measures to protect public health from application of the relevant treaty.

If the relevant treaty contains one of those clauses, one would need to consider multiple complex legal issues regarding both the interpretation and application of the clause and the nature, actual objective and effects of the State measure.  For example, a number of treaty exception clauses require that the State measure should not be applied in an arbitrary or discriminatory manner and should not constitute a disguised restriction on investors and investments.  By contrast, other clauses do not impose such limitations and even expressly give the State exclusive discretion to decide whether a measure has been taken to fulfil a national interest.

Substantive investment treaty protection standards

Beyond these threshold matters, parties must also consider whether the State measure is likely to constitute a breach of one or more of the substantive protections of the relevant investment treaty.  A number of protections seem particularly relevant in the current context.

For example, foreign investors might argue that the requisition of means of production, particularly if of a permanent nature, could constitute an uncompensated expropriation.  Others might argue that more temporary measures, including restrictions on exports of essential goods, are contrary to their legitimate expectations, in breach of the Fair and Equitable Treatment standard.  Similarly, State aid granted only to national investors could be challenged as discriminatory, while State failure to comply with contractual obligations owed to foreign investors could potentially constitute a breach of so-called umbrella clauses.   Equally, if social unrest results in the looting of businesses, foreign investors might claim that the State has breached its obligation to provide full protection and security.

State defences to investment treaty claims

Of course, the specific circumstances in which State measures are being implemented, and the objective of those measures, may play a key role in determining whether or not they constitute a breach of traditional standards of protection.

Specifically, States will likely rely on a number of principles or doctrines of international law in order to defend measures that, in other circumstances, might constitute a breach of an applicable investment treaty.

For instance, one can anticipate that States will rely on the doctrine of “police powers”.  Based on that doctrine, the tribunal in Philip Morris v. Uruguay found that “the State’s reasonable bona fide exercise of police powers in such matters as the maintenance of public order, health or morality, excludes compensation even when it causes economic damage to an investor” (ICSID Case No. ARB/10/7, Award, 8 July 2016).

In addition, States will likely argue that tribunals should pay great deference to governmental assessment of national needs.  There are a number of authorities supporting this view.  A pertinent example is the award in Continental v. Argentina.  In determining whether Argentina’s measures actually sought to protect essential security interests or the public order, the tribunal held that “this objective assessment must contain a significant margin of appreciation for the State applying the particular measure: a time of grave crisis is not the time for nice judgments, particularly when examined by others with the disadvantage of hindsight” (ICSID Case No. ARB/03/9, Award, 5 September 2008).

Yet the jurisprudence on this margin of appreciation is not settled.  Multiple investment treaty tribunals have found that the concept should be applied with caution, as the notion of investment and investor protection would be emptied of all meaningful content if States’ decisions could not be challenged.

Other tribunals have decided not to apply the concept of a margin of appreciation unless expressly embedded in the treaty at stake.   For example, after noting that it was not referred to by the applicable treaty, the tribunal in Pezold v. Zimbabwe noted that the concept had neither “found much support in international investment law” nor “achieved customary status” (ICSID Case No. ARB/10/15, Award, 28 July 2015).  On that basis, the tribunal declined to apply the margin of appreciation doctrine.

Another set of legal and factual considerations concerns a range of customary international law defences codified in the International Law Commission Articles on State Responsibility.   States will likely invoke these defences in response to investment claims.  The defences that are most likely to be relevant are necessity, distress and force majeure.

Each of these defences sets a high threshold.  However, if successful, they would operate to preclude the wrongfulness of State measures that are contrary to international investment protections.   Put differently, it is possible that an investment treaty does apply to a State measure implemented to respond to the COVID-19 crisis, that the measure is indeed contrary to that treaty and yet, despite this, that the measure does not trigger international liability because the State can successfully invoke one or more of these defences.

Finally, States and foreign investors should consider the effects that the universal nature of the COVID-19 pandemic could have on the minds of arbitrators.  A notable and unprecedented characteristic of this crisis is that it will likely affect all States in the world, including the home States of each and every arbitrator.  This could well have an effect on the level of empathy that arbitrators feel, and on the degree of deference which they grant to States.  It also could have unpredictable effects on the way international investment law is interpreted and applied going forward.


The COVID-19 pandemic has created a new reality for States, their citizens and businesses alike.  While the staggering cost of the pandemic is already evident, the long-term human costs and economic effects on State economies and business operations have not yet fully emerged.

It seems clear, however, that the current crisis will give rise to investment treaty claims.  Whether or not specific State measures in response to the COVID-19 pandemic will trigger an obligation to pay compensation depends on a range of legal and factual considerations.  The wording of relevant investment treaties, customary international law principles and the jurisprudence of arbitral tribunals provide useful guidance.  But this crisis will change the legal landscape.  Among other things, both States and businesses will need to undertake drastic changes in the way they assess the risks inherent to foreign investment and to the economies of host States more generally.

For further information, please contact Graham Coop ( or Álvaro Nistal (