Law Firms and Corporations Threaten to Sue States over Measures against COVID-19
Last updated: January 2022
From the start of the COVID-19 pandemic, corporations and law firms began to consider bringing Investor-State-Dispute-Settlement (ISDS) lawsuits to challenge government measures to mitigate its social, economic and health impacts. TNI published its first report on this issue in April 2020, “Pandemic Profiteers: How Foreign Investors Could Make Billions from Crisis Measures”, and a second in June, in collaboration with Corporate Europe Observatory, focusing on law firms’ advice to companies, “Cashing in on the Pandemic: How Lawyers Are Preparing to Sue States over COVID-19 Response Measures”. Its third report was published in August 2020 on the threats of arbitration that had already made by then – all of them against Latin American countries: “Juggling Crises: Latin America’s Battle with COVID-19 Hampered by Investment Arbitration Cases”.
In response to the imminent threat that these ISDS lawsuits might materialise, in 2020 more than 650 civil society organisations (CSOs) around the world prepared an Open Letter on ISDS and Covid-19 calling on their governments to ‘[p]ermanently restrict the use of ISDS in all its forms in respect of claims that the State considers to concern COVID-19 related measures’. To date, not a single government is known to have taken preventive measures to avoid these claims. Yet, there are new threats of Investor–State lawsuits and in August 2021 the first COVID-related lawsuit was filed.
2020 and 2021 – Years of the Pandemic and of a Record Number of ISDS Claims
The years 2020 and 2021 were not only affected by the worst economic, social and health crisis in decades, triggered by the COVID-19 pandemic, but were also a time when investors filed a record number of ISDS claims before their preferred international arbitration centres. The World Bank’s International Centre for Settlement of Investment Disputes (ICSID) registered 58 ISDS claims in 2020 and 66 ISDS claims in 202, seven of which were not based on Bilateral Investment Treaties (BITs) or Free Trade Agreements (FTAs) but on contracts or other international instruments. The Permanent Court of Arbitration (PCA) registered 59 new claims in 2020 (not all are ISDS) for a total of 211 claims falling under its authority, of which 126 are Investor–State claims based on investment-protection treaties or contracts. The PCA has not yet published its data for 2021, which was a record year for ISDS claims against governments in Latin America and the Caribbean – up to the 2003 level of 25 lawsuits.
A First ISDS Lawsuit Challenging COVID-19 Measures
Groupe ADP and Vinci Airports v. Chile
In January 2021, the shareholders of Nuevo Pudahuel Airport filed a notice of intent to sue the Chilean government for restricting air traffic during the COVID-19 pandemic. The French partners of Nuevo Pudahuel, namely Groupe ADP (Aéroports de Paris) and Vinci Airports, notified the government that they would bring a lawsuit before ICSID under the Chile–France BIT. This claim was filed at ICSID in August 2021.
Nuevo Pudahuel was requesting the extension of its contract to mitigate the financial burden caused by the decline of air traffic during the pandemic. Net losses were evaluated at US$ 37 million for 2020 and by June 2021 passenger movement dropped 78% compared to June of the previous year. However, its profits have ranged from US$ 300 million to US$ 400 million annually since 2015, the first year of the concession.
The Chilean Ministry of Public Works denied the extension, arguing that the law commands that the original terms of the contract must be respected and that ‘nothing said [by the claimants] are at stake, neither the service to passengers nor the conditions of flights, what they are looking for is to extend the contract, which means billions.’ The French shareholders believed, however, that by refusing to discuss the extension of the contract and restore the concession’s post-pandemic economic and financial balance, the government of Chile has not complied with its obligation to protect foreign investment. In response, Chilean Senator Carmen Gloria Aravena declared that ‘this threat of a lawsuit reactivates the need for civil contracts to include a contingency clause on unpredictable events […] because special situations require special measures’.
This case shows that:
- Foreign investors use the arbitration mechanism to put pressure on governments. Negotiations with the Chilean government were underway but since the investors were unhappy with the outcome, they activated the mechanism established in the BIT as a way to force the government to give way. Treaties allow investors to resort to arbitration even when government measures respond to exceptional circumstances.
- In the context of COVID-19, many foreign investors threatened to activate the ISDS mechanism embedded in treaties as a way to protect themselves from losses caused by the global health and economic crisis. This case shows how investors use this instrument to blackmail governments to change public policies deemed to affect their interests. If a government does not do so, they still seek compensation for their financial losses during the months of the pandemic, a burden on public coffers that in this case ultimately penalises Chilean citizens.
Threats of Arbitration Challenging COVID-19 Measures
Insurance companies v. Chile
On 28 April 2021, the National Congress of Chile approved Bill 21330 which allows the population to “exceptionally withdraw up to 10% of their savings held in the Pension Fund Management System (AFP in Spanish)”, also covering life annuity pensioners who may withdraw up to 10% of the nominal reserve held in their insurance company. The explicit purpose of the constitutional reform was ‘to mitigate the impacts of the health crisis caused by the COVID-19 Coronavirus’. The measure was well received. Just one week after its entry into force, 8% of annuitants (some 56,000 people) had already been on insurance companies’ websites and filed information requests. Applicants are now waiting for a decision on their requests.
This law had already raised concerns in November 2020, when it was still under discussion. The American Council of Life Insurers (ACLI) threatened that its members could use the Chile–United States FTA to launch Investor–State lawsuits against the Chilean government. In mid-May 2021, the US-based Ohio National Financial Services, through its Chilean subsidiary Ohio National Seguros de Vida, was the first company to notify its intention to take the Chilean State to an arbitration tribunal. A second notice of intent to submit a dispute to international arbitration came a month later from Chile’s Consolidada Seguros de Vida, a subsidiary of the Zurich Insurance Group (which is currently pressing another ISDS claim against Bolivia over the re-nationalisation of its pension system). The two companies are claiming that the Chilean law ‘undermines the fundamentals of annuity pensions, the sanctity of contracts and the right to property’ and thus harms the insurance business. The notices of intent to go to arbitration mark the beginning of a six-month negotiation phase during which the parties try to settle the dispute. If unsuccessful, the companies can then effectively bring the claim to an arbitration tribunal.
A formal claim may result in many other companies, still hesitant, to follow suit.
Peru
In early April 2020, the Peruvian Congress passed a law suspending the national collection of road tolls during the pandemic. In order to ‘contain the concessionaires’, who had threatened to file ISDS lawsuits, in June that year the Executive initiated a claim that the law was unconstituional and should be repealed. On 25 August, the Constitutional Court declared that the suspension of road tolls was indeed unconstitutional, thus reversing the measure. This case demonstrates that investment arbitration is another means for corporations to put pressure on governments. Simply the threat of arbitration enables companies to achieve their objective of making governments think twice before passing legislation that could cost millions of dollars in claims, what is known as the ‘regulatory chill’ effect.
Another government measure which was subject to possible arbitration claims was the ‘Law for the extraordinary deferral of debt payments to protect savings and strengthen the financial system in the context of the national state of emergency’, approved by Congress in October 2020. This was intended as a relief measure for those unable to comply with their debt-payment schedule during the crisis caused by the pandemic. The then Minister of Economy María Antonieta Alva warned that ‘considering the foreign capital owned by some financial entities, this could end up in international arbitrations with huge costs for the State’. To date, the law has not been threatened with a lawsuit or constitutional challenge as was the case with the road tolls. However, as the former minister’s statement suggests, Peru’s investment-protection regime certainly affects decision making and severely limits government sovereignty and its power to legislate for the common good.
Guatemala
In 2019, the US electricity firm TECO engaged in a legal battle to be awarded US$ 21 million (including interest, the total amount exceeds US$ 36 million). Guatemala asked for a suspension of payment arguing it could not pay this given the catastrophic situation caused by the pandemic, but a US Court judge dismissed the request. To avoid defaulting, Guatemala paid TECO US$ 37.3 million in November 2020. Thanks to proceedings in US courts, the law firm White & Case and BNY Mellon placed immense pressure onforcing the government to pay up, despite the pandemic, in order to avoid the risk of ‘default, cross-defaults, and cascading effects both domestic and foreign’.
Mexico
In April and May 2020, given the reduction in energy demand resulting from the COVID-19 pandemic, the Mexican government passed a series of decrees to reform and add various provisions to the Electricity Sector Act, including measures to pause the operation of new renewable energy plants and limit electricity generation from wind and photovoltaic plants, among others. By June 2020, the electricity companies had filed 172 injunctions against these provisions, and threatened to go to international arbitration unless they were revoked. Nine months later, on 19 March 2021, a Mexican judge suspended indefinitely the Electric Power Industry Act. This is possibly another case of regulatory chill.
In conclusion
Governments across Latin America have faced many threats of international arbitration lawsuits since the beginning of the COVID-19 pandemic. As in the case of of ADP International and Vinci Airports against Chile, these threats may eventually become effective claims. The region continues to be the main target of ISDS lawsuits, with at least 43 new cases filed throughout 2020 and 2021, a record number.
In the face of threatened ISDS claims, a whole apparatus is set in motion, with financial and physical implications that divert governments’ attention and resources away from addressing the wide-ranging social, economic and health crises affecting their countries. Once again, this calls for the urgent revision of the investment-protection regime imposed on Latin America and the Caribbean, and for governments to take concrete steps to guarantee that the common good takes precedence over the profits of foreign investors.