Protection of Investments during the Pandemic
by Stanislaw Drozd, adwokat, Dispute Resolution & Arbitration practice, Wardynski & Partners
Published: May, 2020
Submission: May, 2020
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The COVID-19 pandemic is paralysing the global economy, but it is not the virus itself preventing businesses from operating. States seeking to protect their citizens against danger are introducing unprecedented limitations on civil rights and freedoms, rendering operations in some sectors of the economy impossible. In other sectors, business has become more burdensome, costly or risky. This has generated aheated debate over who should bear the financial consequences of limitations imposed on businesses and the huge resulting losses.
One element raising the temperature of the discussion is that although the belief in the justification for the drastic steps taken by states putting socio-economic life on ice seems to prevail, in this respect there is no consensus. We need not look to Belarus or Brazil for examples. Sweden also has also adopted amuch milder strategy in its battle with coronavirus. Assertions that governments are responding to the pandemic hysterically are made by genuine authorities, such as Jonathan Sumption, eminent historian and former justice of the Supreme Court of the United Kingdom.
What if it turns out that governments of some countries have truly gone too far? Will businesses be able to seek redress from states for the resulting injury they have suffered? And what if the restrictions are justified, but their intensity and economic consequences are so serious for some undertakings that leaving them without compensation would be irreconcilable with society’s sense of justice? Should such undertakings have aright to pursue claims for their losses, or should any award of compensation be solely amatter of political decisions and state redistribution of funds?
In Poland there has been alot of talk recently about rules under Polish law for the state’s liability for injury caused by administrative and legislative acts. This debate mainly concerns the manner and procedure in which limitations on civil rights and freedoms were introduced in Poland in response to the pandemic, and is highly charged politically. Nonetheless, aprecise description of the rules in force under Polish law for state liability for injury caused to businesses by legislative and administrative acts is not easy. The Polish courts have issued few decisions on this issue. And it should be borne in mind that this issue is governed also, and perhaps primarily, by international and European law.
State liability for hindering businesses’ operations may arise for example from treaties on mutual protection of investments, international agreements in which the signatory states undertake to treat fairly investments made in their territory by investors from the other state-party. One of the key advantages of these treaties is that they allow the investor to pursue claims against the state for violation of the treaty not in the national courts, but in the neutral forum of international arbitration.
Investment treaties set standards for treatment of investments, including fair and equitable treatment and affording the investor full protection and security of its investment. The gold standard for treaties of this type is the ban on expropriation of investments without avalid social justification, and arequirement to promptly pay the expropriated investor adequate compensation. This has to donot only with direct expropriation, where astate for example nationalises or takes from the investor the ownership of means of production and transfers them to another entity to be used for public purposes, but also indirect or “creeping” expropriation. In the latter case, the state does not seize the investor’s assets, but uses legislative or administrative measures that restrict or interfere with its operations to such an extent that they deprive the investment of its economic purpose and value. Then there is also an obligation to pay the investor damages.
But the duty of fair and equitable treatment of investments does not limit states’ right to regulate economic and investment activity in their territory without exposure to liability in damages (known as the “right to regulate”), so long as the regulation is justified, legitimate, i.e. respects the principles of proper legislation and administration and investors’ legitimate expectations, and does not infringe the essence of their rights (in other words, does not lead to indirect expropriation of the investment). An example of regulatory measures which astate has aright to introduce and for which it will be not held liable in damages are necessary and proportional measures taken to protect public health, so long as they donot infringe the essence of the investment (i.e. donot lead to its indirect expropriation).
Although traditional investment treaties have contributed to the world’s economic integration and growth, they are slowly giving way to more advanced systems of supra-national legal protection. These systems are based on far-reaching harmonisation and interweaving of national legal systems, as well as aspecific political morality based on the loyalty of the states-parties and mutual trust in the states and their national legal institutions. An example of such alegal system is European law.
The foundation of European commercial law is the European freedoms held by citizens and undertakings based in the EU: the freedom of establishment and to provide services, and free movement of people, goods, and capital. As arule, amember state must not hinder citizens and undertakings from other member states in exercising these freedoms in its territory. It must treat them as equal with its own citizens. It may not discriminate against them even indirectly (i.e. establish restrictions theoretically applicable to all but in practice especially burdensome for entities from other member states). Nor may it limit commercial activity in its own territory to such adegree that it would undermine the freedom to conduct such activity. In the event of violation of these rules, amember state is liable in damages to the injured persons. This liability in damages is aprinciple of European law, and national courts in the member states are required to ensure its effective enforcement.
But clearly the European freedoms are not absolute. Member states have aright to limit them, but only when the limitations are necessary and proportionate. An example of such valid restrictions is measures taken to protect public health. But such measures are always subject to oversight in terms of whether they impose on undertakings from other member states excessive burdens or restrictions or discriminate against them unlawfully, either directly or indirectly. It appears that in the current situation, it is in this area that disputes may most easily arise. Member states may succumb to the temptation to exploit the opportunity of taking emergency measures against the pandemic to favour domestic enterprises or strengthen their position at the cost of their foreign customers, suppliers or competitors. Actions of this type would be unlawful, and the injured parties could demand that the member states cease and desist as well as redress the resulting injury.
It should be added in this context that European law also imposes specific obligations on the member states with respect to granting state aid to undertakings and in the activity of monopolies, undertakings with special privileges, and other state enterprises. The member states must ensure that their activity and the activity of such licensed or supervised entities donot violate the rules of functioning of the common market, particularly the rules of competition. Here as well, post-pandemic conflicts may be anticipated between states and undertakings, as during the crisis member states may be tempted to give preferential treatment to “national champion” companies. Persons injured by such actions may also demand that the states cease and desist as well as pay adequate compensation.
Both investment treaties and European law have their limitations. They can generally be applied only in cross-border situations, not in purely national cases. In other words, aPolish business whose operations are limited to the domestic market will not be able to rely on an investment treaty or EU law to challenge actions targeted against it by the Polish state. As arule, such abusiness will have to rely on national law and for example argue that the constitutional principle of non-discrimination requires that it be afforded the same protection as aforeign business would receive under European law or an investment treaty.
But unjustified or disproportionate interference by the state in abusiness’s operations may also violate human rights. These are also protected in national cases. One of the basic rights is the right to property, which is protected for example under Art. 1 of Protocol No. 1 to the European Convention on Human Rights.
Under the case law of the European Court of Human Rights, this provision protects abroad range of property rights, including ownership of means of production, shares in companies, business licences and permits, intellectual property rights, clientele, contractual claims, and so on. Any state intrusion on these rights must be justified and proportionate and comply with the rule of law (not arbitrary, based on understandable and accessible rules, and respecting the holder’s justified expectations), and when required to maintain the balance between public and private interests should be combined with adequate compensation.
A core issue in the ECtHR case law is maintaining the proper balance between public and private interests in actions by the state. When taking measures in the public interest encroaching on the property rights of individuals, the state has aduty to exercise due regard for these rights and to respect them to the maximum degree possible. Although the court respects the states’ freedom to select specific means of exercising their authority, in each instance it requires the state to duly weigh whether the intended public aim can be achieved through less intrusive means, interfering with property rights to alesser degree. Also relevant to the court’s assessment is whether the injured party had an opportunity to be heard and to dispute the rationale for the measures taken. The temporal dimension of the measures is also relevant: whether they are permanent or only temporary.
The court takes adifferent approach to limitations on ownership enacted as part of universal reforms and policies resulting from the democratic legislative process, than to ad hoc or individual actions aimed at specific persons, which are more likely to be arbitrary. When the restrictions imposed on owners are not individual in nature or overly burdensome, the state may not be required to pay compensation. In any event, the European Court of Human Rights will examine the lawfulness of the state’s actions and whether the actions were taken in compliance with democratic procedures and fundamental principles of the rule of law. Transparency and accessibility of regulations introducing restrictions on property rights, predictability of acts of authority, and respect for principles of the certainty of law and security of commerce (e.g. through fair notice to stakeholders of planned further steps, modifications to measures taken and the like) are particularly relevant in this context.
Restrictions on property rights introduced without respect for the procedures prescribed by law, chaotically or arbitrarily, in violation of good legislative practice, unnecessarily surprising citizens and leaving them in astate of uncertainty, when this was avoidable, would violate Art. 1 of Protocol No. 1 of the convention. Such solutions should be assessed similarly under European law and under investment treaties.
States’ affirmative duties
It should be added that investment treaties, European law, and international conventions on human rights require states not only to refrain from taking certain actions infringing citizens’ property rights. They also impose affirmative duties on states, requiring them to afford due protection to these rights, e.g. by allowing businesses to seek effective protection before the courts when their rights are infringed.
Paralysis of the courts or other legal bodies, inept introduction of solutions by the authorities preventing such bodies from operating effectively despite the pandemic, may deprive businesses of legal protection. This in and of itself may constitute an infringement of international and European law and lead to liability in damages on the part of the state—particularly when the experience from some countries shows that it is possible to introduce the appropriate solutions smoothly and effectively.
It is highly likely that actions taken by states in response to the COVID-19 pandemic will infringe businesses’ rights and cause them significant losses. Thus injured parties should be aware of all the grounds and methods for pursuing damages on this basis—and not only under national law.
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