Covid-19: Why doesn’t India need to worry about investor-state dispute settlement claims? Analysis
To stop the spread of the coronavirus pandemic (Covid-19) and to boost the public health care system and preparedness, India has taken several regulatory steps. For example, the government has banned the export of 26 active pharmaceutical ingredients and announced a 21-day national blockade. If the situation does not improve, the government could be forced to take other regulatory measures, such as ordering several manufacturers to allow their production facilities to be used to produce ventilators or personal protective equipment (PPE) for health workers; issuance of compulsory licenses for certain drugs manufactured by foreign pharmaceutical companies; or even nationalize some of the industries for a limited time.
All of these regulatory measures will disrupt supply chains, interfere with contractual rights, and may also restrict the property rights of foreign investors. When the dust settles, some understand that foreign investors can file lawsuits against India over these regulatory measures, alleging the violation of different bilateral investment treaties (BITs). Investors would rely on the Investor-State Dispute Settlement (ISDS) provisions in these BITs to file these claims. Although India has unilaterally terminated several BITs, these treaties continue to bind the country due to the survival clause for investment made prior to termination.
In the event of such ISDS claims, India should be able to defend its regulatory measures for the following reasons.
First, several Indian BITs allow the host State to deviate from the treaty obligations in “extreme emergency” situations. Covid-19 has been declared a global pandemic and has already killed 25,000 people worldwide. Therefore, the current situation falls into the category of “extreme emergency”. Furthermore, some Indian BITs specifically allow the host State to adopt measures for the protection of public health. India may use this provision to justify its Covid-19 regulatory measures.
India will have to demonstrate that these measures were necessary to achieve the objective of public health. Therefore, if the 21-day national blockade is challenged, to pass the test of necessity, India will have to demonstrate that the blockade had a rational connection or a causal link to stop the spread of the pandemic; and that there was no other less restrictive alternative measure reasonably available to achieve the objective.
Since “social distancing” and “isolation” have been globally recognized as an effective and essential method of combating Covid-19, it will not be difficult for India to demonstrate that the blockade was necessary. In some situations, there may be an additional requirement to demonstrate that the regulatory action taken was neither excessive nor disproportionate. Therefore, India will have to demonstrate that the benefits of the 21-day blockade or any other regulatory measures taken to combat the pandemic outweigh the costs these measures impose on foreign investment.
Second, in the event of an indirect expropriation claim, India can argue that the measures taken to combat the pandemic are part of the state police powers. Many ISDS courts have held that states do not violate their BIT obligations when acting in the exercise of their police powers. For example, in a case known as Philip Morris v Uruguay, the court held that “[the] The reasonable exercise in good faith of the police powers by the State in matters such as the maintenance of public order, health or morality, excludes compensation even when it causes economic damage to an investor and that the measures taken to that end do not should be considered expropriatory. “Therefore, India can argue that the 21-day blockade or other regulatory measures are part of a In good faith Exercise of the Indian police powers to achieve an important health objective. In any case, indirect expropriation means a substantial or total deprivation of the investment, which none of these measures would cause.
Third, ISDS courts grant a margin of appreciation to host states when judging their regulatory measures on public health, the environment, national security, etc. As the Philip Morris court held, “The responsibility for public health measures rests with the government, and investment courts must pay close attention to government judgments of national needs in matters such as the protection of public health.” Therefore, an ISDS court is expected to be respectful of the Indian state in judging its regulatory measures related to Covid-19, especially given the severity and scale of the disease.
India need not worry about ISDS claims in its fight against Covid-19. Still, it is important that the Indian executive, central and state governments, are aware of such a possibility and ensure that their actions are not arbitrary, discriminatory or disproportionate, and that they are taken in good faith after due process.
Prabhash Ranjan is a senior assistant professor at the Faculty of Legal Studies at the University of South Asia.
The opinions expressed are personal.