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According to OECD’s Report on China’s Belt and Road Initiative (BRI) in the Global Trade, Investment and Finance Landscape, the BRI covers over 100 economies and six economic corridors west from China, which “covers a large energy and resource-rich part of the world”. BRI investment projects are estimated to add over USD 1 trillion of outward funding for foreign infrastructure over the 10-year period from 2017.^[1]With the continuing advancement of the "going out" strategy and BRI projects, China has developed into the second largest investor in the world. The COVID-19 pandemic is similarly far reaching and has caused unprecedented global economic uncertainty. 

In response to the escalating crisis, states around the world have taken various measures to stem the spread of COVID-19 and to ensure supply of medical supports and protective equipment. Emergency declarations empowering governments to take control of private businesses, disruptions to supply chains around the world, closure of borders and travel restrictions could all account for slowdowns, suspensions and even terminations of the BRI projects. In particular, many of the BRI projects are in developing countries where resumption of works will largely depend upon how quickly the infection curve flattens and availability of medical and health care resources. As result of the COVID-19 pandemic, as one would expect, many China’s BRI projects have been largely halted. The long-term impact of the pandemic on the projects is a real cause for concern.

There is a likelihood of an avalanche of international investment claims brought by foreign investors against the states challenging their sovereign regulatory measures directed at combating the pandemic and its economic fallout, to seek relief and/or compensation for any losses resulting from State measures. Chinese investors affected by these measures need to understand their rights of recourse and available remedies in their investments in the BRI projects.

This article will analyze the main substantive treaty obligations that could become the basis for claims arising out of host states’ measures regarding COVID-19, and address potential defences for host states. 

Legal Basis for Claims by Foreign Investors 

If the investment contract concluded between the foreign investor and the host state contains a clause on dispute resolution by international arbitration, the investor may resort to arbitration accordingly and claim for compensation for breach of the obligations of the host state stipulated in the contract, such as expropriation, free exchange and transfer, fair and equitable treatment, stability and so on.

Domestic investment laws and related laws of some host states may also include investment protection, some of which may make it clear that disputes can be settled through international arbitration. For instance, the Kyrgyz Republic amended its Investment Law and agreed to resolve its investment disputes by international arbitration in 2003. Up to date, the country has been a defendant in 17 known arbitration cases^[2], of which at least five have jurisdiction claims^[3]based on the 2003 Investment Law. 

In addition to rights under the investment contract between the foreign investors and the host states and the domestic law of the host states, foreign investors also have rights under international investment agreements (IIAs) that can be found in bilateral and multilateral investment treaties (BITs and MITs) as well as free trade agreements (FTAs). IIAs are agreements between states in which they mutually agree to protect investments made in their state by investors from the other state(s) to the agreement. Usually, host states agree therein that such foreign investors are entitled to enforce the terms of IIAs directly against the host state through courts or (more commonly) international arbitration. There are thousands of IIAs currently in force worldwide, and currently China is a party to 126 BITs^[4]. 

Most IIAs provide a series of obligations on the host state typically including: the obligation not to expropriate a qualifying investment without payment of compensation; to provide fair and equitable treatment and full protection and security for investments; to provide a standard of treatment that does not discriminate against the investment as compared to treatment provided to domestic investors and/or investors of third states; the right to transfer/repatriate funds relating to investments outside the state; the obligation to honour contractual commitments and so on.

Expropriation

Expropriation includes direct expropriation and indirect expropriation. It is a direct expropriation if the state has outright seizure or assumption of legal title over the investor’s assets without adequate compensation, which is relatively rare nowadays. There could a claim for direct expropriation where the state fails to provide fair compensation for its requisitioning of hotels and medical equipment as the measures implemented to combat COVID-19.

For indirect expropriations, generally, tribunals have applied a “substantial” test that investors must “be 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”^[5].  Tribunals have found the suspension of an export license for four months^[6], and investor’s loss of control of property for one year^[7]can constitute indirect expropriation. Under this approach, if the state measures, such as border closures or lockdown orders, results in the BRI projects shutting down permanently, Chinese investor could have a claim for indirect expropriation.

It should be noted that tribunals may consider not only the effect of state measures, but also their purpose and characteristics^[8]. In this regard, it is less likely that state anti-pandemic measures aimed at protecting public health would amount to indirect expropriation. However, if a state, taking advantage of plummeting commodity and stock prices, nationalizes or engages in a forced bailout of businesses not directly related to its responses to COVID-19, such as utilities and natural resources companies, Chinese investors could have a claim for indirect expropriation. Forced bailout at a low price by the state can give rise to compensation claims when the values of such companies recover at a later point. ^[9]

Fair and Equitable Treatment

States are also typically obliged to afford foreign investors with “fair and equitable treatment”, which is a broad concept most often invoked in the international investment arbitrations. Amongst others, the host state is required to “act in a consistent manner, free from ambiguity and totally transparently” towards foreign investors^[10].  Generally, “the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety—as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process.”^[11]

The fair and equitable treatment is relevant where the host state breaches its representations which were reasonably relied on by the foreign investor.^[12]For instance, the state’s misrepresentation of its failure to remove algae contributed to a water quality crisis was a consideration for finding a breach of fair and equitable treatment standard.^[13]Similarly, state responses downplaying the risks of COVID-19 (such as advocating herd immunity) and subsequently reversing course and imposing drastic measures could violate the fair and equitable treatment standard.

Under a proportionality approach, state conduct could violate the fair and equitable treatment standard if the tribunal determines that a State’s interference with the investment was not proportionate in light of the public interest pursued by State policy^[14]. It is likely that a discriminatory measure, such as any arbitrary border closures, violates the fair and equitable treatment standard.

Broad and unqualified fair and equitable treatment provisions in IIAs can potentially create tensions with measures related to COVID-19. Difficulties may arise when assessing the reasonableness and proportionality of a measure under a fair and equitable treatment clause. Evidently, the standard is to some extent a flexible one which must be adapted to the circumstances of each case.

Full Protection and Security

Obligation to provide full protection and security for investors and their investments requires a host state, once aware of risks to investments, to take all measures of precaution to protect the investment in its territory.^[15]In some areas with poor governance and safety, the pandemic may intensify the contradictions between investors and local stakeholders leading to mass exclusion incidents and even armed robberies, in which case the host state may fail to fulfill their treaty obligations to provide adequate protection and security.

Full protection and security often appears together with the fair and equitable treatment as a single standard in IIAs. There are cases in which tribunals have found that full protection and security has been breached because the investment was subject to unfair and inequitable treatment^[16]or, conversely, they have held that the obligation of fair and equitable treatment was breached because there was a failure to provide full protection and security^[17]. The inter-relationship of the two standards indicates that even if no physical violence or damage occurs,^[18]full protection and security may be breached.^[19]The term “full” implies a state’s guarantee of stability in a secure environment, both physical, commercial and legal.^[20]Therefore, obligation to provide full protection and security could be breached if the state failed to take early measures to stem the spread of the virus, which necessitated avoidable and drastic state measures that harmed the investments significantly.

National Treatment

The national treatment obligation prevents the host state from affording less favorable treatment, either de facto or de jure, to a foreign investor compared to a domestic investor in “like circumstances”. Analysis under this standard generally depends on a tribunal’s interpretation of “like circumstances”.

In applying this standard, competitive relationship could be considered.^[21]Bailout measures supporting certain domestic industries other than industries with significant foreign investments with a competitive relationship may constitute a violation of the national treatment standard. Also, state measures to close border to non-citizens (such as Chinese workers who are commonly employed on BRI projects) seem to give rise to a national treatment claim, unless it could be justified by, for example, the more fundamental right of a citizen to enter its own country.

Defences

While investors are able to establish violations of substantive treaty obligations, states may also have defences based on treaty-specific exceptions or under customary international law.

Some IIAs contain general exceptions, or incorporate the general exceptions that the standard obligations under the IIA will not prevent a party from adopting or enforcing measures to preserve public order, or to protect human life or health, provided that the measures are not arbitrary or discriminatory. For example, the recent China-Australia Free Trade Agreement provides that non-discriminatory measures for “legitimate public welfare objectives of public health … shall not be the subject of a claim” by an investor. Therefore, where possible, these general exceptions provisions will insulate the states from international investment claims in relation to state measures taken in response to COVID-19. 

In addition, under customary international law, states may be excused for breaches of international obligations in circumstances where they act out of necessity, force majeure or distress. Amongst others, necessity figured prominently in the treaty-based claims brought in the aftermath of the Argentine financial crisis.^[22]

In brief, to plead defence of necessity, there must be a grave and imminent peril that threatens an essential interest, and the host state’s act the “only way” to safeguard the interest from that peril must not seriously impair another essential interest. The plea is excluded if the obligation in question excludes reliance on necessity, or the host state contributed to the situation of necessity. To claim defence of force majeure, there must be an unforeseen event or an irresistible force beyond the control of the host state, which makes it “materially” impossible for the host state to perform its obligation, and the host state must not have contributed to the situation or have assumed the risk of the situation occurring. To establish defence of distress, the host state must show: threat to life; a special relationship between the author of the act, whether this is a state organ or an individual whose acts are attributable to the state, and the persons in question; that there was no other reasonable way to deal with the threat; and that the host state did not contribute to the situation; and that the sate measures were proportionate.^[23]

Under the COVID-19 pandemic, the host state may argue that its anti-pandemic measures are taken so as to protect public health or to preserve public order.  However, whether such measures are reasonable and legal depend on the specific implementation methods applied by the host state. While the host state enjoy a margin of appreciation in assessing the legitimacy of the course adopted in that circumstances, to name a few, Chinese investors may still claim that: (1) the state measures were discriminatory; (2) the state measures were taken for another motive such as community pressure^[24]or electoral motivations^[25]; (3) state actions contributed or worsened the extent of the pandemic and therefore harmed the investments at a later time^[26]; (4) the state measures were not necessary, and the state could have adopted measures to fulfill both investment obligations and its obligations to protect the public health^[27]; or that (5) the state measure were not proportionate, which were taken without balancing between the state’s interests and the degree of damage to the affected investor’ rights.

While China's foreign investments are at the high level, most of which have been made to states with weak legal systems and high political risks. What does not commensurate with Chinese investors’ status as the major international investors in the world is their low involvement in international investment arbitration. Up to date, there has only been 7 cases claimed by Chinese investors in ICSID with only one in 2020.^[28]On the face of the number and outcome of these cases^[29], few Chinse investors resort to international arbitrations for disputes with host states. 

Whether Chinese investors of BRI projects will have the appetite to challenge those state measures taken under the circumstances of COVID-19 remains to be seen. However, in the global recession, with such measures being compounded by an already difficult economic environment, Chinese investors affected by state measures may have little choice but need to understand and make use of their rights of recourse and available remedies afforded under domestic law, IIAs and international law. 

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1. See OECD, China’s Belt and Road Initiative (BRI) in the Global Trade, Investment and Finance Landscape, available at https://www.oecd.org/finance/Chinas-Belt-and-Road-Initiative-in-the-global-trade-investment-and-finance-landscape.pdf

2. See UNCTAD Investment Policy Hub, Investment Dispute Settlement Navigator, available at https://investmentpolicy.unctad.org/investment-dispute-settlement/country/113/kyrgyzstan

3. Sistem v. Kyrgyzstan, ICSID Case No.ARB(AF)/06/1, Award, para.176 (2006); Nadel. v. Kyrgyzstan (2012); Levitis v. Kyrgyzstan (2012); Stans Energy v. Kyrgyzstan (II),PCA Case No.2015-32(2015); Consolidated Exploration v. Kyrgyzstan (2013)

4. See UNCTAD Investment Policy Hub, International Investment Agreements Navigator, available at https://investmentpolicy.unctad.org/international-investment-agreements/countries/42/china

5. AES Summit Generation Limited and AES-Tisza Erömü Kft v The Republic of Hungary, ICSID Case No. ARB/07/22

6. Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/99/6, para.107

7. Wena Hotels Limited v. Arab Repubic of Egypt, ICSID Case No. ARB/98/4, para. 82

8. Marvin Feldman v. Mexico, ICSID Case No. ARB(AF)/99/1

9. Ping An Life Insurance Company of China, Limited & Ping An Insurance (Group) Company of China, Limited v. Kingdom of Belgium, ICSID Case No. ARB/12/29

10. Tecnicas Medioambientales Tecmed S.A. v. The United Mexican States, ICSID Case No. ARB (AF)/00/2, para.154

11. Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/ 00/3, para.98

12. Ibid.

13. Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, paras. 143 and 374

14. Occidental Petroleum Corporation Occidental Exploration and Production Company v. The Republic of Ecuador, ICSID Case No. ARB/06/11, para. 338

15. Wena Hotels Limited v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, paras. 85 and 131

16. Occidental Petroleum Corporation Occidental Exploration and Production Company v. The Republic of Ecuador, ICSID Case No. ARB/06/11

17. Wena Hotels Limited v. Arab Republic of Egypt, ICSID Case No. ARB/98/4

18. Occidental Petroleum Corporation Occidental Exploration and Production Company v. The Republic of Ecuador, ICSID Case No. ARB/06/11

19. Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, paras. 408

20. Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, para.729

21. Cargill, Incorporated v. United Mexican States, ICSID Case No. ARB(AF)/05/Z, paras. 211-214

22. See Federica Paddeu & Kate Parlett, Covid-19-and-investment-treaty-claims, available at http://arbitrationblog.kluwerarbitration.com/2020/03/30/covid-19-and-investment-treaty-claims/

23. Ibid.

24. Tecnicas Medioambientales Tecmed S.A. v. The United Mexican States, ICSID Case No. ARB (AF)/00/2

25. Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12

26. Ibid.

27. AWG Group v. The Argentine Republic, ICSID Case No. ARB/03/19

28. See ICSID, Case Database, available at https://icsid.worldbank.org/cases/case-database

29. UNCTAD Investment Policy Hub, Investment Dispute Settlement Navigator,available at https://investmentpolicy.unctad.org/investment-dispute-settlement/country/42/china