Author: Sophie Low*
Most Favored Nation
I. Introduction & General Overview
In light of the Covid-19 pandemic, governments worldwide have adopted various measures to mitigate the impact on the health of its citizenry while balancing economic interests. However, these new policies have the potential to disrupt foreign investors and their investments in the host states, which increases the likelihood of Investor-State Dispute Settlement (“ISDS”).
While International Investment Agreements (“IIA”) between foreign investors and host states differ from country to country, there are certain principles and provisions that are usually present in most IIAs. As a brief overview, these include, inter alia, the host state’s obligation not to expropriate a qualifying investment without payment of compensation, the host state’s obligation to provide free and equitable treatment (“FET”), the host state’s obligation to ensure national treatment and most-favored-nation (“MFN”) treatment, and the investor’s right to transfer funds relating to the investments freely and without delay into and out of their territory.
As analyzed by the United Nations Conference on Trade and Development (“UNCTAD”) in its report on Investment Policy Responses to the Covid-19 Pandemic, the aforementioned obligations in an IIA may be easily breached by governmental responses to the pandemic. For instance, measures by governments to requisition hotels for quarantine, or medical equipment and facilities to treat patients, may be challenged by protected investors unless the state provides fair compensation. Government restrictions on the operation of businesses such as imposing lockdown measures may also constitute “indirect expropriation” if such measures amount to foreign investors being “deprived, in whole or significant part, of the property in or effective control of its investment: or for its investment to be deprived, in whole or significant part, of its value.” There is also an observation that the promise to uphold FET for foreign investors may be threatened, as it is uncertain that measures such as imposing export restrictions on medical supplies, for instance, are reasonable and proportional in relation to the pandemic. Some countries may also decide to limit capital outflows by implementing capital controls to mitigate the economic impact of Covid-19, and this would fly in the face of investors’ right to transfer funds freely.
II. In Practice
These theoretical possibilities of ISDS claims can be seen in practice.
In April 2020, the Peruvian government proposed an emergency measure that entails suspending the collection of toll fees on the country’s road network, as this would ease the cost of transporting essential goods and workers during a time where many Peruvian citizens are suffering economically. Requiring the concessionaires to suspend fees through a unilateral change in their contracts via this measure is likely to solicit International Centre for Settlement of Investment Disputes (“ICSID”) claims. Mr Luis Simeón Hurtado, a Peruvian parliamentarian, has argued that Peru would be exempt from responsibility as it is currently in a state of emergency. However, whether this is a valid defense for Peru depends on the provisions in the IIAs that Peru has with its foreign investors. For instance, Bilateral Investment Treaties (BITs) such as the Canada-EU Trade Agreement (CETA) contain provisions that reaffirm the states’ right to “regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, safety,…”. There has also been discussion over whether states can rely on defenses under customary international law – such as the defense of necessity under Article 25 of the International Law Commission (ILC) Articles – but it is recognized that the threshold for ‘necessity’ is extremely high.
Another country facing potential claims as a result of its measures in response to the pandemic is Mexico, after it placed restrictions on renewable energy production because the pandemic had led to a fall in demand. Mexico passed two resolutions in April and May 2020 suspending all pre-operative testing on solar and wind farms and giving preferential grid access to non-renewable electricity generation facilities, and giving Mexico’s state-owned Federal Electricity Commission (CFE) a more “proactive” role over planning in the electricity sector respectively. This resulted in 44 solar and wind projects being affected and these projects are reportedly backed by US$6.4 billion of investments. In this case, there is a general consensus from counsels interviewed that the link between the pandemic and these measures is unconvincing, with Covid-19 merely providing a convenient excuse for the Mexican government to strengthen its control in the industry.
While this issue was not explicitly discussed at the Singapore International Arbitration Centre (SIAC) Virtual Congress 2021’s panel on ‘The Multi-Million Dollar Question: Will the Pandemic and Governments’ Responses to it lead to a Spike in Investor-State Arbitrations?’, Dr. Tai-Heng Cheng, Global Co-head, International Arbitration and Trade, Sidley Austin LLP, had set out a typology as to the type of claims we are likely to see: firstly, bad-faith actions of governments using the pandemic as a pretext to target foreign investors; secondly, measures introduced by governments in good faith, but going too far in their implementation; and thirdly, measures introduced by governments in good faith, and properly calibrated in their implementation. It appears that the measures implemented by Mexico as discussed above would likely fall under the first category, and it is hence extremely likely that a tribunal would find Mexico in breach of its IIA with its foreign investors.
The first actual ISDS claim that has materialized in relation to governmental responses to the pandemic is that of two French airport operators bringing an ICSID claim against Chile – filed on 13 August 2021 – in light of Chile’s refusal to renegotiate concession terms with them after the investors’ profits fell by 90% in 2020. Chile argues that the investors are disputing measures it took to contain the Covid-19 pandemic, while the investors contend that they are not challenging the measures adopted by Chile but rather its attitude towards the concession. Either way, this case brings to light the bigger question of which party should be responsible for absorbing the losses incurred by the pandemic.
III. Moving Forward
One should hence keep a close eye on how the Group ADP and Vinci Airports v. Republic of Chile case develops to gain a better idea of the extent of protection that foreign investors receive from the host state in light of the Covid-19 pandemic.
There are contentions that bringing claims against states over measures taken in response to the pandemic is controversial, and “cases such as this are bound to cause ripples and create further backlash” against ISDS. This is reflected in an open letter circulated by the Columbia Centre on Sustainable Investment, which called for a moratorium on treaty claims by private corporations against governments during the coronavirus pandemic. While governmental policies in response to Covid-19 must be appreciated in light of the significant threat the virus poses to humanity, foreign investors still have a right to bring their claims and seek to protect their own interests, especially if the policies are introduced in bad faith, or is disproportional to the effect of the pandemic.
It is then ultimately up to the tribunal to evaluate such claims and determine where the line should be drawn between balancing the interests of the state, and the foreign investor.
*Sophie is a 2L at Columbia Law School. She previously studied at the London School of Economics (LSE) for two years on the LL.B./J.D. dual degree program. She represented LSE at the Willem C. Vis International Commercial Arbitration Moot in 2020/21, making it to the quarter-finals of the Oral Rounds, and has interned in the international arbitration practice area of multiple international law firms.
 UNCTAD. Investment Policy Responses to the Covid-19 Pandemic. Inv. Pol’y Mon., May 2020, at 1, https://unctad.org/system/files/official-document/diaepcbinf2020d3_en.pdf.
 Id. at 13; Norton Rose Fulbright. Investor-state claims in the era of the COVID-19 pandemic (June, 2020). https://www.nortonrosefulbright.com/en/knowledge/publications/e8979151/investorstate-claims-in-the-era-of-the-covid19-pandemic#section2.
 Supra note 1.
 AES Summit Generation Limited and AES-Tisza Erömü Kft v The Republic of Hungary, ICSID Case No. ARB/07/22, Certified Award, ¶14.3.1, (ICSID, Sep. 23, 2010), https://www.italaw.com/sites/default/files/case-documents/ita0014_0.pdf.
 Supra note 1 at 13.
 Id. at 13.
 Cosmo Sanderson, Peru warned of potential ICSID claims over covid-19 measures, Glob. Arb. Rev. (Apr. 9, 2020), https://globalarbitrationreview-com.prx.law.columbia.edu/coronavirus/peru-warned-of-potential-icsid-claims-over-covid-19-measures.
 Comprehensive Economic and Trade Agreement (CETA) between Canada, of the one part, and the European Union and its Member States, of the other part art. 8.9(1), 14 Jan. 2017, 11 Off. EU J. 23, 35.
 Supra note 8.
 Cosmo Sanderson, Mexico faces potential claims over pandemic response, Glob. Arb. Rev. (May 22, 2020), https://globalarbitrationreview-com.prx.law.columbia.edu/coronavirus/mexico-faces-potential-claims-over-pandemic-response.
The Multi-Million Dollar Question: Will the Pandemic and Governments’ Responses to it lead to a Spike in Investor-State Arbitrations?, Sing. Int’l. Arb. Ctr. Virt. Cong., (Sep. 10, 2021), https://www.youtube.com/watch?v=D5rodqw20l0.
 Toby Fisher, Chile hit with claim over airport pandemic disruption, Glob. Arb. Rev. (Aug. 16, 2021), https://globalarbitrationreview-com.prx.law.columbia.edu/chile-hit-claim-over-airport-pandemic-disruption.
 Call for ISDS moratorium during COVID-19 crisis and response, Colum. Ctr. Sus. Dev. (May 6, 2020), https://ccsi.columbia.edu/content/call-isds-moratorium-during-covid-19-crisis-and-response.