The Covid-19 pandemic has tragically led many states to enact a panoply of emergency measures with the double aim of curbing the spread of the virus and lessening the economic impact of the voluntary or forced “lockdown” of most business activities.

It is legitimate to question if and to what extent such measures could be challenged before arbitral tribunals by foreign investors seeking indemnification for alleged breaches of their protections under bilateral investment treaties (BITs).


The question is legitimate, first, because a “state of necessity” does not necessarily justify a Carl Schmitt-like “state of exception” where governments would have absolute powers and be allowed to disregard the rule of law; second, because respect of the rule of law in the field of foreign direct investments means also to comply with the network of more than 2500 BITs currently in force worldwide and with the states’ obligation under the 1965 Washington Convention or the 1958 New York Convention to enforce awards rendered by arbitral tribunals on such basis; third, because both international customary law and the BITs provide instruments by which a state’s sacrosanct sovereign right to safeguard the health of its people can be balanced with, and if necessary prevail over, the rights the same state has agreed to grant to foreigners in order to attract direct investments.  

Meeting obligations

Obviously, states hosting foreign investments are fully entitled to react to the current crisis. The real issue is not if emergency measures can be enacted, rather how a state hosting foreign investments should exercise its relevant powers to meet its relevant international obligations. In this respect, the analysis should focus on two main distinct questions: whether the challenged measure breaches an investment protection standard; whether there is a circumstance that precludes wrongfulness of the state action.

As to the first question, the protection standards that may become relevant are: (1) the right to compensation for direct expropriation, e.g. with respect to requisition orders of hotels and medical equipment, if the amount and modalities of the indemnification do not meet the applicable requirements; (2) the right to compensation for indirect expropriation, e.g. with respect to the mandatory “lock-down” of industrial and commercial activities other than those which the host state considers “strategic”, bans on revoking credit lines, suspension of payments due under mortgaged loans, prohibitions to distribute dividends, extensions of “golden share” mechanisms to preclude predatory take-overs, granting of withdrawal rights not contemplated by the governing law of the contract; (3) the right to a fair and equitable treatment, under its “proportionality” and “legitimate expectations” prongs, when the measure reflects choices, e.g. as to the industries which are “strategic” or can benefit of state aids, which the investor argues are arbitrary or source of an unjustified prejudice to its interests; (4) the right to national treatment, e.g. with respect to “buy national” campaigns or state aid measures when they benefit only national companies; (5) the right to full security and protection, e.g. with respect to failures to provide the investor’s managers and employees with access to the national health system, or the suspension of pending judicial proceedings, including bankruptcy proceedings, when this impacts on the investor’s access-to-justice.

The second question should be answered by checking whether the relevant BIT contains express wording in the sense that the promotion of foreign investments should not prejudice the contracting states’ “essential security interest” to the protection of health and safety. Moreover, the host state could rely on international customary law defences to exclude its liability on grounds of “state of necessity”, or, less likely, “distress” and “force majeure”.   

Margin of appreciation

Adjudicating BIT claims brought by foreign investors in response to emergency measures enacted to combat the Covid-19 pandemic will undoubtedly be a difficult task for arbitral tribunals. The “margin of appreciation” that states normally enjoy when exercising normative powers in pursuit of legitimate public goals will obviously be wider than usual because of the scale of the pandemic and the limited scientific knowledge on how to effectively fight the contagion. On the other hand, in an era in which nationalism is increasingly challenging globalisation, one cannot exclude the possibility that a state may go beyond what is necessary to protect public health and the national economy and take measures that are both detrimental to foreign investors and unjustified. In such circumstances international investment tribunals should perform their task of guarantors of the rule of law and strike the certainly difficult balance between sovereign powers and private economic interests that the current crisis commands. 

Massimo Benedettelli is a professor of International Law at the “Aldo Moro” University in Bari, Italy. He is also a partner at law firm ArbLit in Milan.