[Rajarshi Singh & Anamika Singh]
[This article was first published on The Russian Arbitration Association (RAA). The copyright to this article is vested with the RAA and is being republished on this blog without any intention to infringe the copyright owned by it.]
Introduction
In an effort to minimize the impact of the Covid-19 virus on its demography, the Indian government on March 23 announced a 21-day nationwide lockdown. This follows the decision of the World Health Organization (‘WHO’) dated 11th March 2020, wherein it declared Covid-19 as a global pandemic.[1] Executive measures taken by the State to contain the spread of the virus continue to have adverse effects on economic interests. These measures have a significant impact on various sectors of the economy. Businesses are drying up as restrictions are placed on the movement of individuals and goods.
The government is taking various regulatory steps to ensure that the country is stocked in terms of medical supplies. To this end, the government has banned the export of 26 active pharmaceutical ingredients. Additionally, in order to ameliorate the medical infrastructure of the country, it is anticipated that the government may undertake several regulatory steps such as ordering manufacturers to allow their production facility to be used for producing ventilators or personal protective equipment (‘PPEs’) for health professionals; issuing compulsory licenses for certain drugs made by foreign pharmaceutical companies; or even nationalising some of the industries for a limited duration.[2]
2015 Model BIT Provisions Which can Preclude Investment Claims
These measures may result in disturbing the ‘normative environment’ of the investment, as envisaged under respective Bilateral Investment Treaties (‘BITs’), resulting in limitations on property rights of foreign investors, interference in contractual relations and unpredicted disruption in business. Looking at the crystal ball, this apprehension finds the basis that as soon as the dust settles, India may face investment claims from foreign investors alleging a breach of BITs. Since arbitration jurisprudence is guided largely by contractarian origins, these treaties typically set out procedural preconditions for submitting a claim, the substantive obligations owed by the contracting states to a foreign investor, and remedies available in the event of a breach.[3] These BITs provide the legal basis for investor-state claims by defining the contours of a State’s obligation to foreign investors.
Under the new BIT, Article 5.5 limits the State’s obligation vis-à-vis expropriation of investment, having its foundational basis in the protection of public health. It reads;
“5.5 Non-discriminatory regulatory measures by a Party or measures or awards by judicial bodies of a Party that is designed and applied to protect the legitimate public interest or public purpose objectives such as public health, safety and the environment shall not constitute expropriation under this Article.”
Further, Article 32.1(ii), as represented below, creates an exception for measures applied which are necessary for safeguarding public health. However, such measures must be non-discriminatory in nature.
“32.1 Nothing in this Treaty shall be construed to prevent the adoption or enforcement by a Party of measures of general applicability applied on a non-discriminatory basis that are necessary to:
….. (ii) protect human, animal or plant life or health;”
Article 32.1 qualifies the measures taken under this provision by a condition of ‘necessity.’ Hence, it is imperative to understand the threshold of this qualification. In other words, what would constitute as a ‘necessary’ measure and whether the measures undertaken by the Indian government in response to Covid-19 will qualify this condition. The assessment of what constitutes a ‘necessary’ measure lies with the Arbitral Tribunal. As provided for in the Treaty, in considering whether a measure is “necessary”, the Tribunal shall take into account whether there was no less restrictive alternative measure reasonably available to the government.[4]
The WHO declared Covid-19 a Public Health Emergency of International Concern. The connotation carried with such a declaration is that it is ‘serious, unusual or unexpected’ and can potentially result in trans-national implications requiring immediate international action. Hence, expeditious interference to restrict the outbreak was imperative. Practices such as ‘isolation’ and ‘social distancing’ have attained global recognition as essential methods to combat Covid-19. Moreover, the necessity of a complete lockdown can be ascertained by considering that globally, several countries have adopted this method including India, the list consists of UK, China, France, Italy, South Africa, New Zealand and several others. Additionally, owing to the fact that countries which declared lockdown are currently in a better position against the impact of this virus, it should not be a hard task to evidence that the lockdown was a ‘necessary’ measure. Examining the coronavirus pandemic in this light, it should, in principle, be able to meet this qualification of necessity as envisaged under this BIT.
Measures Undertaken were in Exercise of State’s Police Power
Investors may raise claims assailing State’s regulatory actions as being expropriatory in nature. In such a case of indirect expropriation, the doctrine of police power serves as a frontier defence. Police powers mean powers that vest with the States, which enables them to undertake bona fide, non-discriminatory measures for the protection of public health and public welfare in general. Though there is no specific provision regarding this in the new BIT, but since it is a principle of customary international law, its applicability is not conditional upon a specific provision to that effect.
The tribunal in Philip Morris v Uruguay considered that the police power of States was reflected in customary international law and applies to the expropriation analysis accordingly.[5] This holding was further acknowledged in Saluka v Czech Republic.[6] In Philip Morris, the tribunal held that “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 and that measures taken for that purpose should not be considered expropriatory.”
Another significant ruling on this point is the Bischoff Case[7], wherein the Claims Commission held that “during an epidemic of an infectious disease there can be no liability for the reasonable exercise of police power.” Hence, on a close assessment of the factual matrix around coronavirus pandemic, and the ease of its transmission amongst humans, State measures in exercise of its police powers, which may result in economic damage, bearing a direct nexus with the objective, will not constitute as expropriation of investment from the vantage of international investment law.
Customary Law Defence of Force Majeure
Another defence which could be invoked against ISDS claims is that of force majeure. It must be noted that the new BIT does not provide for a specific force majeure clause and it will have to be invoked as a principle of international law. However, since the term force majeure has been used and accepted by international tribunals on a regular basis, thus it can be said to constitute a rule of customary international law hence reinforcing its validity in such claims.[8]
Force majeure precludes the acts of a state in non-conformity with an international obligation if an act is due to the occurrence of an irresistible force[9] or of an unforeseen event[10] that is beyond the control of the state, making it ‘materially impossible in the circumstances to perform the obligation.[11] Force Majeure is said to be scantly argued in investment treaty arbitration but it has been in fact, successfully invoked at several instances.[12] Moreover, there is a precedent in this regard since a deadly virus outbreak in West Africa was considered to be a force majeure event.[13]
From a national policy perspective, it is evident that Indian government is willing to rely on Force majeure since a recent direction issued by the Ministry of Finance, Government of India stated that unwarranted disruption in supply chains, as a result of spread of coronavirus, should be considered as a ‘natural calamity’ and hence the defence of Force Majeure can be invoked.[14] A similar reading of the situation was furthered by the Ministry of New & Renewable Energy with respect to ‘solar project developers.’[15] This interpretation of the situation is not merely a domestic practice as similar approach is taken in other jurisdictions, for example, on Feb 17, 2020, the China Council for Promotion of International Trade (CCPIT) issued over 1600 Force Majeure certificates to firms in 30 sectors.[16].
Moreover, it must be noted that the threshold of invocation of this clause is particularly high and on account of no definition under the new BIT, its application becomes onerous since they do not specifically enumerate public health events. Having said that, the determination of it being a force majeure event will depend on a case-to-case basis bestowing attention to the obligations arising out of the instrument as well as the surrounding circumstances applicable such as the nature of the obligation, extent of impact, expediency of the disputed measure and the underlying factual situation.
Conclusion
The measures undertaken by the Indian government to curb coronavirus pandemic will significantly impact the flow of foreign direct investment and severely effect current investments. As a result, there is a strong apprehension that several ISDS claims will be brought against the State, once the coast is clear. The new model BIT on the basis of which India has been negotiating its bilateral investment relations post 2015, seems to provide solace for executive State actions aimed at protection of public health. Though it is difficult to ascertain with certainty how the tribunals will be moved, but it seems there is sufficient basis to preclude responsibility under the new BIT. From the vantage of international investment law, the contours of the tussle between private economic interest and sovereign powers are well accounted for in the new BIT. And under the regime of this new BIT, it is difficult to attribute State responsibility for measures put into place by the Indian government, regardless of whether one views lex lata through the lens of investment protection, sovereignty or development.
[Rajarshi Singh, a fourth-year student at the National University of Study and Research in Law, Ranchi is an Editor of this blog (TCCLR)]
[Anamika Singh is a fourth-year student at the National University of Study and Research in Law]
[1] WHO Director-General's opening remarks at the media briefing on COVID-19, 11 March 2020, available at https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020 Last accessed on 08.04.2020. [2] Prabhash Ranjan, Covid-19: Why India doesn’t need to worry about investor-State dispute settlement claims, available at https://www.hindustantimes.com/analysis/covid-19-why-india-should-not-worry-about-investor-state-dispute-settlement-claims/story-iV8VHHoQGxMrc7Hao3Jj7L.html last accessed on 02.04.2020. [3] Beharry, Christina L., and Melinda E. Kuritzky. "Going Green: Managing the Environment Through International Investment Arbitration." American University International Law Review 30 no. 3 (2015). [4] Chapter VI: Exceptions, Model Text for the Indian Bilateral Investment Treaty, available at https://dea.gov.in/sites/default/files/ModelBIT_Annex_0.pdf Last accessed on 10.04.2020 [5] Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, (2018). [6] Saluka Investments BV v Czech Republic, Saluka Investments BV v Czech Republic, Partial Award, ICGJ 368 (PCA 2006), 17th March 2006, Permanent Court of Arbitration. [7] Bischoff Case, Reports of International Arbitral Awards, VOLUME X pp. 420-421 (1903). [8] William W. Burke-White & Andreas von Staden, Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties, 48 Va. J. Int'l L. 307 (2008). [9] Article 23, ILC Articles. An irresistible force is defined as “a constraint which the State was unable to avoid or oppose by any means”; See also Doug Jones, Investor-State Arbitration in Times of Crisis, 25 Nat'l L. Sch. India Rev. 27 (2013), Pg 33. [hereinafter ‘Investor-State Arb in Crisis’]. [10] Article 23, ILC Articles. An unforeseen event is one that is “neither foreseen nor easily foreseeable”; See also Investor-State Arb in Crisis, ibid n 9. [11] Article 23, ILC Articles. Materially impossible is qualified with the Statement that “a more difficult performance is not sufficient, for example in case of political or economic crisis.”; See also Investor-State Arb in Crisis, ibid n 9. [12] Gould Marketing, Inc. v. Ministry of National Defence of Iran, Interlocutory Award No., ITL 24-29-2 (Jul. 27, 1983); Amoco International Finance Corporation v. Government of the Islamic Republic of Iran, Award (Jul. 14, 1987), 15 Iran-U.S. CI. Trib. Rep. 189; Phillips Petroleum Company Iran v. The Islamic Republic of Iran & the National Iranian Oil Company, Award (Jun. 29, 1989), 21 Iran-U.S. CI. Trib. Rep. 79. [13] Klaus Peter Berger, Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators, 1(4) Transnat’l Disp. Mgmt. (2004), at 4; see also Hubert Konarski, Force Majeure and Hardship Clauses in International Contractual Practice, 2003 Int’l Bus. L. J. 405, 425 (2003) (noting that force majeure clauses “constitute ordinary commercial safeguards as a means of protecting the parties against an unexpected turn of events”). [14] Memorandum No. F18/4/2020-PPD, Ministry of Finance, Government of India, 19.12.2020, available at https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf, Last accessed on 10.04.2020. [15] Memorandum No. 283/18/2020-GRID SOLAR, Ministry of New & Renewable Energy, Government of India, 20.03.2020, available at https://mnre.gov.in/img/documents/uploads/file_f-1584701308078.pdf, Last accessed on 10.04.2020. [16] China Council issues 4,811 force majeure certificates to firms amid virus disruptions, Reuters, March 3 2020, available at https://www.reuters.com/article/media-china-council-issues-4811-force-ma/media-china-council-issues-4811-force-majeure-certificates-to-firms-amid-virus-disruptions-idUSL4N2AW3MA Last accessed on 10.04.2020