One of the elements of the U.S. response to the Covid-19 pandemic has been the invocation of wartime rhetoric, from the president’s press briefings to his tweets, and the invocation of the Defense Production Act. While the message and the policy may have its own benefits, investment treaties provide a limit, one that is not readily apparent.
While investment treaties (agreements regarding a state’s treatment of investments made by individuals or companies from another state) may not be the first thing considered in response to a pandemic, there are only limited grounds to depart from a treaty commitment in a time of crisis—under the narrow grounds of state of necessity, often invoked but rarely successful, and the “essential security interest” clause of many treaties.
Since the “essential security interest” clause might be a state’s best chance at avoiding liability, its scope is crucial, both for states as they implement their regulatory response and for any foreign investor that may be denied a treaty’s benefits.
Essential Security Interests
In the expansion of international trade that followed World War II, the U.S. has routinely insisted in its commercial treaties on reserving the ability to adopt measures in response to an essential security interest of the treaty parties.
This practice started with the new wave of Friendship, Commerce & Navigation Treaties—or FCN Treaties—negotiated right after World War II. FCN Treaties have existed in U.S. diplomatic practice since the times of the Founding Fathers, but this post-war development laid down a marker that the U.S. has continued to follow.
Like other nations, the U.S. normally begins negotiations with a template treaty, called a “Model Bilateral Investment Treaty” or “Model BIT.” These Model BITs include a clause regarding essential security interests that says something like this ––the specimen language comes from Article 18 of the 2004 U.S. Model BIT: “to preclude a Party from applying measures that it considers necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.” The 2012 U.S. Model BIT keeps the same language.
But not every treaty adopts a wide-ranging description of an “essential security interest.” In a recent study by the Columbia Center on Sustainable Investment, 95 treaties have an essential security interest clause that is limited to specific subjects.
For instance, NAFTA Article 2102 defines “essential security interests” with a list of items that invoke war-time activities: traffic in arms and materials “directly or indirectly for the purpose of supplying a military or other security establishment,” actions “taken in time of war or other emergency in international relations,” or “implementation of national policies or international agreements respecting the non-proliferation of nuclear weapons or other nuclear explosive devices.” Each of these items connects to war-time activities.
This text could still apply to today’s response, despite the agreement between the U.S., Mexico, and Canada (the USMCA), the much-touted renegotiation of NAFTA that went back to the language of the 2012 U.S. Model BIT.
In any event, the broader language of the 2012 U.S. Model BIT may be insufficient to respond to the economic emergency provoked by Covid-19. A handful of tribunals have analyzed the language used in the 2004 and 2012 U.S. Model BITs, and the standard is quite high.
U.S. Covid-19 Response
Where does this leave the U.S. in its response to Covid-19? Serious questions could arise regarding measures taken that at first blush violate treaty protections given to foreign investors. The U.S. has invoked the Defense Production Act, but in the findings that form the basis for the legislation, the law focuses heavily on national defense and response to military conflicts.
Indeed, the Obama and Trump administrations have both invoked the Defense Production Act in the past, but in response to threats posed by cybersecurity and biological weapons. Covid-19 is not a weapon, and there is no evidence that any country has used it against the U.S. as such. In other words, merely invoking the Defense Production Act does not mean an essential security interest is at risk for purposes of the U.S. commitments under its investment treaties.
Stepping back even further, the standard set by certain international tribunals a few years ago requires that the emergency be such as to put in doubt the continued existence of the State. For instance, in CMS, Enron, and LG&E—three cases under the Argentina-U.S. BIT dealing with measures adopted by Argentina in a grave social, economic and political crisis in the early 2000’s—shows that a state may have to prove its existence was put at stake. President Donald Trump has used the language of war, stating that “WE WILL WIN THIS WAR,” but this could be insufficient especially when a good faith standard could be applied to a war where "[w]e are learning much about the Invisible Enemy. It is tough and smart, but we are tougher and smarter!” In this context, war looks more like a metaphor, and less like the kind of essential security interest that prevents the triggering of violations of treaty commitments.
Against the backdrop of the thousands of investment treaties currently in place, decisions by sovereigns—including the U.S.—to favor domestic companies over similarly situated foreign investors, discriminate against foreign investors based on their nationality, or enact measures that deprive foreign investors from a reasonable rate of return in regulated industries could all result in claims for liability.
One of the defenses would be the essential security interests protected in the treaties, but in the vast majority of cases, it may be no defense at all. The same could very well be true for investors and states around the world as they weigh their responses to Covid-19 and whatever fallout results.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Ignacio Torterolais is one of the founding partners of GST LLP, a leading international dispute resolution law firm, and is based in their Washington, D.C., office. He has served as lead counsel, sole arbitrator, chairman and tribunal member in more than 70 high-stakes international arbitrations. He is a top-ranked attorney and has been named a “Leading Arbitration Practitioner” in Latin America and worldwide by Chambers Latin America, Chambers Global and Legal 500 consecutively since 2015.
Quinn Smith is one of the founding partners of GST LLP, and is based in their Miami office. He has served as counsel or arbitrator before more than 45 arbitral tribunals and ad-hoc committees under the rules of the International Chamber of Commerce (ICC), International Centre for Dispute Resolution (ICDR), International Centre for Settlement of Investment Disputes (ICSID), the Arbitration Rules of the U.N. Commission on International Trade Law, and others.
Diego Gosis is a partner at GST LLP, based in the Miami office. He has participated as counsel, conciliator, sole arbitrator or chair in more than 75 high-value and high-stakes disputes and has been ranked among the leading practitioners of international arbitration in Latin America by Chambers & Partners, Legal 500 and Who’s Who.