Are FPS Claims Looming in the Aftermath of the Corona-crisis? Potential Consequences of the Failure to Enact Measures to Contain COVID-19

By Laura Yvonne Zielinski, International Associate at Holland & Knight México, S.C.

The COVID-19 disease, declared a pandemic by the World Health Organization on 11 March 2020, is upending normal life around the world with many borders closed, businesses forced to pause their activities and millions of people ordered to stay at home. Those measures taken by the majority of countries following health emergency declarations under their domestic laws, are an attempt to contain the virus’ further spread and mitigate its strain on the health care systems. Although more than painful for the economy in the short term, those measures are said to be the only way to avoid even worse in the long term.

While most countries have urged social distancing once the presence of the virus in their population became apparent, the timing and extent of the measures taken varied significantly. Assuming the fact that it is correct that early restrictions are needed to protect a country’s population and allow for the safe normalization of public and economic life after a given amount of time, the question arises whether States can be held liable for not enacting stricter measures, or not doing so on time.

Hypothetically, the failure to enact measures that are commonly accepted as the best way to contain the current crisis could have severe consequences in terms of human loss, a prolonged economic contraction, and possibly even social upheaval. All of this could cause losses to foreign investors that might be avoided if a host State follows the general recommendations. Affected investors might then over time consider their legal options to demand indemnification for their allegedly unnecessary additional losses. In this context, it needs to be noted that most bilateral investment treaties, and trade agreements with investment protection provisions, guarantee foreign investors “full protection and security” (“FPS”) or some similarly-formulated level of protection.

While some investment treaties specifically exclude liability for measures taken by a host State to protect public health for example, arguably such an exception could not be invoked for claims over exactly the failure to enact measures that would otherwise be excused from liability. The same would apply to defenses under customary international law such as necessity or force majeure.

Remains to determine the scope of the FPS standard: FPS claims generally refer to omissions by host States in relation to measures that would have been necessary to protect foreign investments. Said differently, it is generally accepted that under the FPS standard, a host State has to exercise a certain level of due diligence and is obliged to take such measures to protect foreign investments as are reasonable under the circumstances (R. Dolzer, C. Schreuer, Principles of International Investment Law, , 2nd ed., Oxford, OUP p. 161). A look at past awards offers insight into the level of diligence that has been found necessary to avoid liability.

Twenty-three years ago, the tribunal in AMT v Zaire found a violation of the applicable FPS standard as a result of then Zaire’s failure to protect AMT’s investment against looting by parts of the armed forces: “the Tribunal deems it sufficient to ascertain, as it has done, that Zaire has breached its obligation by taking no measure whatever that would serve to ensure the protection of the investment in question. […] Zaire’s responsibility is incontestably engaged by the very fact of an omission by Zaire to take every measure necessary to protect and ensure the security of investments made by AMT in its territory.” (ICSID Case No. ARB/93/1, Award, 21 February 1997, paras. 6.08-6.11).

Other awards have distanced themselves from this qualification of the FPS standard as almost an obligation of result, having instead taken into account the means that were available to host States in protecting the investments in question. Sole arbitrator Jan Paulsson for example famously observed in his award in Pantechniki v Albania that a difference needs to be made between the inability and the unwillingness to protect, in concluding that the Albanian police being unable to intervene was “crucially different” from refusing to intervene, and that the Albanian authorities simply had been powerless in the face of the social unrest of the magnitude in question in the case before him (ICSID Case No. ARB/07/21, Award, 30 July 2009, para. 82).

Similarly, the tribunal in Cengiz v Libya concluded in 2018 when analyzing Libya’s conduct in face of the destruction of Cengiz’s investments by armed groups, that Libya could be held liable for failing to protect only those investments whose protections would have been within its means: due diligence required Libya to deploy means to protect Cengiz Libya’s two main Camps but not its ability to perform its remaining construction activities, as the dynamic protection and level of security necessary to ensure the continuing construction on various sites would have “over-stretched the resources of most countries, and certainly those of Libya in 2011-2013” (ICC Case No. 21537/ZF/AYZ, Award, 7 November 2018, para. 446). In the tribunal’s view, the FPS standard required only what Libya could reasonably have done – in the case in question, provide basic static protection of Cengiz’ two Main Camps. Libya was found to have failed to provide such protection at all, with the result of mobs repeatedly entering the Camps looting and destroying the property, despite having had the resources needed to provide the static protection that would have been required to prevent this, and was thus held to have violated the FPS standard.

The foreseeability of the harm caused to the investment in question is another aspect that tribunals have considered in assessing the liability of a host State for its failure to protect. Jan Paulsson in the same award mentioned above held in this regard that “[t]here is no issue of incentives or disincentives with regard to unforeseen breakdowns of public order; it seems difficult to maintain that a government incurs international responsibility for failure to plan for unprecedented trouble of unprecedented magnitude in unprecedented places.” (ICSID Case No. ARB/07/21, Award, 30 July 2009, para. 77).

In turn, the Ampal v Egypt tribunal, analyzing whether Egypt acted diligently in preventing attacks on the Trans-Sinai pipeline and repairing the damage caused to it, acknowledged that the circumstances were difficult for Egypt in the wake of the Arab Spring Revolution with armed military groups taking advantage of the political instability, security deterioration and general lawlessness to perpetrate the attacks in question. In this context, it found that Egypt could not be held liable for the first of the attacks that could not have been prevented. But it did find a breach of the applicable FPS standard in the failure of the State to take the necessary measures to prevent the subsequent attacks: “[i]t is thus clear to the Tribunal that the failure by the Egyptian authorities to take any concrete steps to protect the Claimants’ investment from damage in reaction to third party attacks on the upstream pipeline system, as of the date of attack no. 5, […], constitutes a breach of the obligation of due diligence that Egypt was required to exercise in ensuring the full protection and security of the Claimants’ investment. (ICSID Case No. ARB/12/11, Decision on Liability and Heads of Loss, 21 February 2017, para. 290).

An analogy of the COVID-19 virus with the violent physical attacks that were addressed in the above-cited case law is necessarily imperfect. Nonetheless, not much imagination is needed to see how the current crisis could result in situations that might no longer look that different from the ones discussed above. It is in light of this possibility that those cases present a cursory overview over issues that tribunals consider when addressing FPS claims. Assuming foreign investors were able to demonstrate a causal link between their losses and their host State’s failure to enact appropriate measures to contain COVID-19 on time, the cited case-law might serve as a first reference for tribunals assessing whether the protection of foreign investments from COVID-19 required host States to follow certain scientific recommendations.

Applying the criteria that were taken into account in those previous cases, tribunals would analyze the means that would have been at a host State’s disposal in taking the omitted measures, and most crucially, the foreseeability of the harm resulting from the alleged omissions. Given the unprecedented scope of the Corona-crisis, the still limited scientific knowledge and especially the difficulty of proving the various measures’ effectiveness, it is likely that tribunals would grant host States a wider margin of appreciation over their individual responses than they would in more tested waters.