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Foreign investment protection during COVID-19

06. 03. 2020

Author: JUDr. Ing. Miloš Olík, Ph.D., LL.M., FCIArb and JUDr. Margarita Karešová Kucharčuk

The state of emergency is over, government measures are slowly easing up and we are entering the unknown as regards further developments in the spread of the SARS-CoV-2 virus (but let’s leave that to the experts). The time is now here to calculate the current and future damage. The measures taken by the government have had an enormous impact on the economy as a whole, as well as on practically every legal and natural person individually: freedom of movement has been restricted, shops and restaurants have been ordered to shut, a ban has been placed on the provision of services and the borders have been closed (all subject to only a few minor exceptions primarily aimed at ensuring basic needs and supplies are satisfied). Furthermore, the government has adopted a number of measures to provide relief to persons affected by the coronavirus pandemic and by the government’s restrictive measures.

As we recently pointed out in the articleJe nárok na náhradu škody vůči státu ještě aktuální, at the very beginning of the measure-adoption process, it was discussed that according to Czech law, measures with such an impact cannot be adopted without appropriate compensation. In respect of international investors, the issue of potential damage inflicted upon investors overlaps with the law of foreign investment protection. Foreign investments are protected by investment-protection treaties (usually on a bilateral basis, i.e. BITs, or even multilaterally in the case of for example the Energy Charter Treaty).

The Czech Republic is bound by 77 bilateral investment treaties (including “intra-EU BITs”). Each of these bilateral treaties includes its own provisions on the protection of investments, including criteria setting out definitions of international investors and investments. Among the most common standards found in such treaties are, for example, the Fair and Equitable Treatment standard, the prohibition of arbitrary measures, the protection of legitimate expectations, and the prohibition of expropriation etc.

A potential breach may occur on two levels:

  • the measure itself breaches the investment-protection treaty (e.g. the measure is arbitrary or discriminatory in respect of both restrictive measures and measures aimed at mitigating the impact of the situation surrounding SARS-CoV-2);
  • the application of the measure is discriminatory.

Measures adopted by a state are often subject to the proportionality test conducted by tribunals. As stated by the tribunal in the case of Electrabel vs Hungary, the measures must be suitable to achieve a legitimate policy objective, necessary for that objective, and not excessive considering the relative weight of each interest involved.[1]

With regard to the prohibition of discriminatory application of adopted measures, the case of Saluka vs Czech Republic should be noted. The arbitral tribunal held that any differential treatment of a foreign investor must not be based on unreasonable distinctions and demands towards the foreign investor, and must not be motivated by a preference for other investments over the foreign-owned investment.[2]

Against the rights of investors established via investment-protection treaties stands the right of the Czech Republic as a sovereign state to regulate its internal affairs. According to the arbitral tribunal in the case of Unglaube v Costa Rica, where the action or decision taken relates to the state’s responsibility for the protection of public health and safety, such measures are accorded a considerable measure of deference in recognition of the right of domestic authorities to regulate matters within their borders.[3]

Also, the question arises whether the given circumstances may give rise to a legal defence against claims that the state conduct was unlawful, e.g. force majeure or distress.

The assessment as to whether an investment-protection treaty has been breached and whether the Czech Republic is liable for any damage incurred will therefore need to be done on an individual basis and may differ from case to case. The outcome of such assessment will depend on the wording of the specific investment protection treaty, on the assessment of the respective measure, including the circumstances of its adoption, and of course, on its impact on the particular investor.

[1] Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, odst. 179.

[2] Saluka Investments B.V. v. The Czech Republic, UNCITRAL, 2006, odst. 307

[3] Marion Unglaube v. Republic of Costa Rica, ICSID Case No. ARB/08/1, odst. 246.

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