Force Majeure under the ILC Draft Articles on State Responsibility: Assessing its Viability Against COVID-19 Claims
Mexico was recently put on notice that the measures it introduced to regulate its renewable energy sector in the wake of COVID-19 may give rise to investment claims. Peru received similar notice. In these circumstances, it is timely to review the defenses that states may advance when faced with such claims. While many of these defenses have been discussed elsewhere, less attention has been paid to the force majeure defense contemplated in Article 23 of the ILC Draft Articles on the Responsibility of the States for Internationally Wrongful Acts. This is surprising as states have, in the past, attempted to rely on this defense before investment tribunals.
This post analyzes the invocation and scope of Article 23, reviews its application to investor-state arbitration and considers whether it is a viable defense vis-à-vis certain types of measures taken in the face of the pandemic. Given the arguably high threshold for a successful invocation of Article 23, the post also considers whether and how 'reasonableness criteria' should be factored into the analysis.
In their responses to COVID-19, states have imposed a variety of measures ostensibly in the interest of public health and economic security, potentially leaving them susceptible to claims from disgruntled investors affected by these measures. Broadly, states have imposed five categories of measures: first, restrictions on the export of medical equipment and drugs; second, screening of foreign direct investment (FDI) to protect critical sectors; third, nationalization or takeover of management of certain establishments; fourth, compulsory licensing; and fifth, fiscal aid and financial stimulus to revive the economy.
For instance, India imposed restrictions on the export of certain personal protective equipment. This restriction extended to surgical masks, textile material for masks, sanitizers, and diagnostic kits. Foreign investors who have invested in the manufacture of these products may suffer a hit to the economic value of their investment as well as the returns on their capital in the wake of this measure. This will have direct implications on their legitimate investment backed expectations, possibly inviting a claim for violation of the fair and equitable treatment standard.
Similarly, Italy imposed strict rules for FDI Screening to protect assets from foreign takeovers during the battle with the pandemic. This mechanism controls the extent to which a foreign entity can invest in the businesses of "strategic industries." Through its "Golden Power," Italy mandated the government's prior approval for every acquisition (by a non-European entity) of shareholding higher than ten percent in capital share or voting rights. FDI Screening poses a unique challenge in the realm of investment claims by virtue of being a "pre-establishment" activity. However, umbrella clauses containing an obligation to promote and protect investments can be seen as a means of elevating municipal law obligations to the status of international law obligations. This would bring a claim against FDI Screening within the jurisdiction ratione materiae of the tribunal.
Lastly, Spain resorted to temporary nationalization of private hospitals and takeover of management of private healthcare facilities, factories, production units, etc. Through this measure, the government intended to direct and control all resources supporting the fight against COVID-19. However, this measure might give rise to a clear claim of investment expropriation.
The above examples are representative of the range of measures imposed by states during the COVID-19 pandemic and the type of investment obligations that may have been breached by these measures. States finding themselves facing investment claims under International Investment Agreements (IIAs) could justify these measures and excuse the breach of obligations by relying on exceptional defenses such as force majeure. The subsequent section of this post discusses the contours of this defense in international investment law.
Article 23 lists three cumulative criteria for successful invocation of the force majeure defense by a state: a) the force majeure event in question must be unforeseeable or irresistible, b) it must not be caused by the state, and c) it must render the performance of the state's obligations "materially impossible." Taken together, the state must show that the circumstances forcing it to breach international obligations are not due to the conduct of the state itself and could not have been resisted through its efforts. The state had "no element of free choice" in taking the measures that it did, making it impossible (and not merely onerous) to fulfil its obligations.
The text of the provision is as follows:
Article 23. Force majeure
1. The wrongfulness of an act of a State not in conformity with an international obligation of that State is precluded if the act is due to force majeure, that is the occurrence of an irresistible force or of an unforeseen event, beyond the control of the State, making it materially impossible in the circumstances to perform the obligation.
2. Paragraph 1 does not apply if:
(a) the situation of force majeure is due, either alone or in combination with other factors, to the conduct of the State invoking it; or
(b) the State has assumed the risk of that situation occurring.
Article 23 and Investor-State Arbitration
Force majeure has been interpreted in investor-state arbitrations as well. However, the invocation of Article 23 by parties and tribunals has been rare, with cases largely restricting themselves to the requirements envisaged in the international investment agreement or investment contract in question. While disputes in the wake of the Iranian Revolution did not overtly address the criteria in Article 23, they did deal with the impossibility of performance of obligations. In refusing to terminate the obligations in question in those cases, tribunals adopted a high threshold of impossibility, which may have filtered into the interpretation of Article 23 as well. The following cases have discussed a force majeure defense mirroring that in Article 23.
The dispute in Autopista v. Venezuela arose out of an investment contract which required Venezuela to periodically increase highway tolls. In the arbitration, Venezuela raised a force majeure defense contending that it was unable to comply with its contractual obligations because the increase in tolls resulted in widespread protests. In assessing the ingredients of the defense, the tribunal injected a reasonability analysis into the criterion of impossibility, observing that it would have been unreasonable for Venezuela to have deployed armed forces to quell the protests and uphold its commitments. Yet, the tribunal found that the issue turned on the unforeseeability of the event. Rejecting Venezuela's position, the tribunal concluded that Venezuela ought to have predicted the "magnitude and form" of the protests as similar disruptions had occurred in the past when gasoline prices were increased.
The tribunal in RSM v. Central African Republic was faced with a similar factual matrix. Political turmoil and civil strife in the Central African Republic (CAR) allegedly made it impossible for RSM to continue with its oil extraction activities. Consequently, it requested the CAR for a suspension of its contract. When this request was denied, RSM approached an investment tribunal, seeking an extension of the contract due to the prevailing force majeure situation. In its analysis, the tribunal focused on the degree of foreseeability of the conflict, concluding that RSM could not have predicted the quick deterioration of the situation.
The juxtaposition of these two cases begs the question: do tribunals apply different thresholds based on the party that forwarded the argument? In Autopista, the tribunal rejected the force majeure defense for failure to meet the threshold of unforeseeability. By contrast, when confronted with similar circumstances, the tribunal in RSM accepted the argument. One difference between the two cases was that the force majeure argument was forwarded by a state in the former, and by an investor in the latter.
While case law on this point is limited, it appears that tribunals are prone to reject a force majeure defense by relying on an artificially high threshold. Tribunals may also have differing expectations from states when it comes to analyzing force majeure requirements. This could affect the viability of Article 23 in defending measures taken in the wake of COVID-19.
Despite the apparent suitability of a force majeure argument in response to the pandemic, its current understanding in international law renders the successful invocation of the defense difficult. Indeed, the reliance on a high threshold seemingly defeats the very purpose of the provision itself, i.e., a viable option for states to excuse non-performance of their obligations in certain unique circumstances.
In light of the extant contours of Article 23 set out above, it is clear that the measures states have imposed may not pass muster. For instance, India may fail to establish the unforeseeability of the pandemic. Given its geographical location and the relative delay in the spread of the coronavirus in India, it could be argued that India ought to have prepared a contingency plan which would have permitted fulfilment of obligations as well. Therefore, this defense might not be useful in precluding the wrongfulness of the export restrictions.
Similarly, Italy may find itself in a precarious position with respect to proving the "material impossibility" of the performance of its obligations, i.e., continuing to allow acquisition of Italian companies. Given its tenuous nexus with the economic security or protection of the health of the Italian population, it could be argued that the FDI Screening measure is a disguised restriction on trade and investment. Thus, a tribunal might not view the force majeure defense favorably.
Lastly, the nature of COVID-19 is such that the government's response is critical to inhibiting the coronavirus. In this scenario, it might be an uphill task to prove that the government had no role to play in the spread of the coronavirus. Spain might find itself caught in this Gordian knot in proving that the exacerbation of the virus cannot be attributed to the government. In fact, reports show that Spain's delayed and incoherent response contributed to the outbreak within its borders. Therefore, a force majeure defense might not succeed in justifying the nationalization measure.
The above analysis demonstrates that there are practical problems plaguing the invocation of a force majeure defense. A solution may be a serious, full consideration of reasonableness by the tribunal. This was, indeed, the approach (at least partially) taken in Autopista where the tribunal conducted a "reasonableness" analysis in determining impossibility. It remains to be seen whether other tribunals will follow suit determining whether the measures taken by a state were reasonable in light of the pandemic, whether the performance expected of the state could have reasonably been considered as impossible, and whether the force majeure event was reasonably unforeseeable even by a state.
About the Author:
Riddhi Joshi is in the final year of her law program at Symbiosis Law School, Pune, India. She focuses her research on issues in international arbitration and connected fields.
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