How can States avoid being sued by the investors for having taken Covid-19 measures? Past experience and recommendations for the future

By Nazlicicek Semercioglu

State measures to curb the spread of the pandemic can lead to a detrimental impact on foreign businesses. Instead of having to defend costly claims filed by investors, States should more carefully tailor the dispute prevention mechanisms.

The current emergency has forced governments to take measures for the protection of public health with repercussions on national and international business interests. Indeed, certain undertakings operating in sectors not deemed essential were required to cease activities. In addition, financial or fiscal incentives were made available to domestic companies including small and medium sized enterprises and those engaged in the production of medical equipment to the exclusion of their foreign counterparts. Likewise, foreign direct investment (“FDI”) screening in Covid-19 relevant industries has been reinforced and export bans have been imposed to ensure the sufficiency of the resources at governmental disposal for countering the emergency.

The current state of International Investment Law

In certain cases, governmental actions taken to safeguard national interests can detrimentally affect the profitable ventures originating from another State. These are deemed to be in violation of a bilateral investment treaty (“BIT”) signed by the governments in question for the promotion and protection of reciprocal investment flows. This, in turn, leads investors to trigger certain provisions safeguarding them against host State conduct. The latter may, among others, be deemed unfair, non-transparent, discriminatory (due to more favorable treatment accorded to nationals or other foreigners), or expropriatory by investor state dispute settlement (“ISDS”) tribunals consisting of arbitrators. However, due to the broad nature of these concepts and the lack of appellate mechanisms or institutions ensuring uniform interpretation, often diverging conclusions have been reached in comparable cases.

In addition, inconsistency of the regime was exacerbated by two factors. First, most of the BITs do not stipulate the regulatory autonomy States need to fulfill human rights obligations they owe to their local populations. As a result, in these cases, arbitrators are not expected to take into account the public interests at stake when determining whether or not the conduct complained of is wrongful.  Secondly, under the BITs that refer to such regulatory autonomy, no rules were established as to how a balancing exercise should take place. However, arbitrators need guidance when they weigh evolving social, environmental and economic conditions that would require amendments of the legal regime on the part of governments and legitimate expectations of investors. Consequently, in the absence of clear provisions, foreseeing the outcome of a claim has become increasingly challenging for states. Likewise, this has made it harder for them to decide whether to defend or settle a claim.

 In this regard, it has been argued that the importance attached to preserving the profitability of foreign investments by investment tribunals  has led to the perception that arbitrators are biased in favor of foreign investors to the detriment of host States interests, throwing the system in a legitimacy crisis.

Consequently, State parties losing an ISDS case have been obliged to pay compensation the plaintiffs. Its  amount has proven to be burdensome for the developing and least developed countries. Therefore, efforts have been made to draft provisions striking a fairer balance between the public and private interests. For instance, some of the so-called new generation treaties oblige the foreign investors to respect human rights where they operate. Similarly, they include sections exclusively dealing with States’ right to take measures in the public interest for the fulfillment of human rights obligations and others designed to place limits on the standard of conduct expected from States.

Besides, with respect to the procedural fairness of the adjudication, provisions in recent treaties state that proceedings are permitted, or required to be conducted on an open basis, pleadings are to be publicly available and tribunals are entitled to accept third-party submission should they choose so. Nonetheless, the regime is currently not satisfactory from the point of view of transparency and proposed reforms such as the EU’s Multilateral Investment Court Project are yet to materialize.

However, the practice related to the enactment of new treaties is quite novel and does not always lead to favorable outcomes for the states due to the approach adopted by the arbitrators as explained above. Indeed, even governments with treaties that pay due regard to their interests can end up losing the cases filed on the basis of their Covid-19 related measures. This, in turn, renders the minimization of disputes imperative.

The Brazilian dissatisfaction with the BITs Regime

Although increased Foreign Direct Investment (“FDI”) inflows have traditionally been linked to a legal instrument in force between two States providing for the ISDS, Brazil presents a counterexample. Accordingly, it has succeeded in receiving significant amounts of capital despite having never ratified a BIT. It has developed Cooperation and Facilitation Investment Agreements (“CFIAs”) that boldly depart from their contemporary counterparts. This State’s choice to remain as an outsider stems from the non-compliance of the international investment law’s main rules with its constitution. The ‘Calvo Doctrine’, that has impacted many Latin American States after gaining their independence, has also inspired such choice. It was born as a reaction to the perceived imposition of certain rules to States by the formerly imperial powers. The Calvo Doctrine, in turn, considered it illegal for aliens to be entitled to rights and privileges that were not accorded to nationals, such as the possibility of suing a host State before an arbitral tribunal without having to first seek redress before local authorities.

In this respect, elimination of the ISDS altogether may also prove to be useful for States that have taken measures to counter the pandemic. Indeed, this would decrease the susceptibility of their actions to legal claims.


It goes beyond any doubt that the measures that have been and will be imposed by governments in order the mitigate the adverse impact of Covid-19 on general welfare will negatively affect the profitability or feasibility of certain foreign investments. As a result, unless an appropriate course of action is followed, investors will file claims against states requesting large sums of compensation. The payment of such damages often fundamentally jeopardizes public spending on areas such as housing and health that are of vital importance for the local populations. In order to avoid a legal confrontation in response to the precautions taken for the protection of public health throughout and following the health crisis, States should endeavor to take steps towards enhancing their relationship with the investors and resolving differences amicably. To this end, in some jurisdictions, administrative burdens and bureaucratic obstacles for firms have been alleviated and COVID-19 related information services have been set up.

In this respect, Brazil’s CFIAs are notable – they innovate by making the prevention of disputes a core element in the effort of promoting bilateral FDI flows. They aim to ensure that parties can find common ground with the assistance of institutions that act as intermediaries. In this regard, the national focal points or ‘ombudsman’ under the agreements were created in light of South Korea’s positive experience with them. Indeed, in the latter case, they have received 400 cases on average since their creation in 1999 and succeeded in resolving 90% of them between 2007 and 2011, a substantial increase from the initial rate of 25%. In addition, it has been recognized that the virtual absence of ISDS claims filed against this country (only one for around 90 treaties) stems from the proper functioning of these entities. In both Brazil and South Korea, they serve as the main point of contact for foreign investors and, are tasked with a wide array of assistance services. These include the provision of timely and useful information on investment projects, assessment of the suggestions and complaints and provision of recommendation of actions to improve the investment environment. Nonetheless, if it is considered that a specific measure adopted may potentially constitute a breach of the CFIA in force and the outcome delivered during the first stage does not prove to be satisfactory,  the matter can be brought to the attention of the Joint Committee composed of government representatives of both sides. In the event that no settlement occurs upon the completion of the time frames set forth under the CFIAs or there is a non-participation of a party in the previous meeting, the dispute may be submitted to state-to-state arbitration. Therefore, the CFIAs offer a great model that can be adapted to the national exigencies of states whose Covid-19 related measures are at risk of being subject of legal actions.

Nazlicicek Semercioglu is a PhD Candidate in Legal Studies at Bocconi University (International and  European Law Curriculum). Her research focuses not only on the business and human rights movement and the international investment law reforms, but also on how these two regimes can reinforce one another to ultimately end corporate impunity.  She graduated from the LLM in Sustainable Development at the University of Milan with a thesis entitled “Brazil’s Historic Resistance to the BITs and the ICSID Convention and the Path Leading to the Adoption of the Cooperation and Facilitation Investment Agreements”. She also holds a bachelor degree in law at the University of Istanbul and she is also an Istanbul-qualified lawyer.

Photo by Micheile Henderson on Unsplash


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