As the world faces a significant financial crisis as a result of the impacts of the COVID-19 pandemic, Nation States will need to enact a variety of regulatory measures to protect now fragile economies and the financial wellbeing of citizens. There is a risk that enacting such measures could lead to foreign investor claims against Nation States. The mere threat of such claims, not unlike that brought by Philip Morris Tobacco against Australia in relation to the Tobacco Plain Packaging legislation, can give rise to ‘regulatory chill’. This means that the threat of costly Investor State Arbitration proceedings alone might dissuade States from implementing regulatory measures to protect their economies if those measures might adversely impact foreign investors.

Most bilateral investment treaties (‘BIT’s) and free trade agreements (‘FTA’s) include obligations on States not to engage in any action against foreign investors or their investments which amount to expropriation of investors’ assets, or to a breach of the fair and equitable treatment standard. Note that expropriation is defined to include ‘indirect expropriation’ which can arise out of regulation which adversely impacts on a foreign investor’s enjoyment of their investment. In the event of a breach of those obligations, most BITs and FTAs provide that foreign investors can sue host States through an Investor State Dispute Settlement (‘ISDS’) mechanism, usually Investor State Arbitration.

There are a number of examples of regulatory actions designed to protect national economies, which have given rise to ISDS claims. Sovereign debt workout measures taken in Argentina and Greece were challenged by foreign investors in the 2011 decision of Ablacat v Argentine Republic (ICSID Case No. ARB/07/5) and the 2015 decision of Postova Banka and Istrokapital SE v Greece (ICSID Case No ARB/13/8). Cyprus providing bank bailouts but not to a foreign bank was challenged in the 2013 decision of Cyprus-Theodoros Adamkopoulos and others v Republic of Cyprus (ICSID Case No ARB/15/49). A post Global Financial Crisis government bailout by the Belgium government restricted to Belgium nationals was challenged by a Chinese investor in the 2015 decision of Ping An Life Insurance Company of China Limited v Kingdom of Belgium (ICSID Case No ARB/12/29).

Currently, States might defend ISDS claims arising out of financial regulation to protect their economy in times of crisis, under provisions of the International Law Commission’s Articles on the Responsibility of States for Internationally Wrongful Acts (‘ILC Articles’). Article 23 of the ILC Articles provides the force majeure defence, operating to forgive a wrongful act of a State where an irresistible force or an unforeseen event makes it materially impossible for a State to perform an international obligation. Article 25 of the ILC Articles provides the defence of necessity which might similarly be invoked.

There should probably, however, be more attention paid to ensuring specific provisions in BITs and FTAs protecting State rights to regulate to protect their economies. There has been an increasing focus in the negotiation of BITs and FTAs in recent years on including ‘carve outs’ from the types of disputes subject to ISDS, and protecting State sovereignty, for example in relation to legislative, executive or judicial action to protect the environment or health and welfare of citizens. This has included some focus on protecting State sovereignty with respect to financial regulation: for example, debt restructuring action is precluded as a basis for investor claims under Annex 9-G to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The 2012 US Model Bilateral Investment Treaty includes in Article 20 a ‘carve out’ for measures to ensure the integrity and stability of the financial system. However, in the absence of such a ‘carve out’ in the vast majority of currently operational BITs and FTAs, the risk of ISDS claims being brought against States in relation to necessary financial regulation to deal with a financial crisis, remains a real and most unwelcome threat.

By Associate Professor Therese Wilson