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Government measures around the globe will lead to more investment treaty claims

Measures taken by governments in response to the Covid-19 pandemic may give rise to investment arbitration claims in the year ahead, but 2020 also saw a number of other political developments that may have the same effect. As a result, the pattern of year-on-year growth in the number of investment arbitration claims filed globally looks likely to continue in 2021.

Energy sector reforms

Over the past two decades, many governments have established favourable subsidy and support schemes to attract foreign investment in renewable energy development. Faced with global economic turmoil, such as the 2008-2009 financial crisis, or the 2020-2021 Covid-19 crisis, however, many of these countries have scaled back or eliminated their original investment frameworks, thereby sparking disputes with foreign investors. Such was the case for Spain, Italy and the Czech Republic, which faced numerous claims for compensation in response to their post-financial crisis energy reforms. Mexico, Peru, France and Ukraine are also considering altering their renewable energy regimes and facing threats of claims by foreign investors. Several countries are also facing claims in response to their decisions to phase out electricity production from coal, including the Netherlands and Chile.

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Technology sector interventions

The technology, media and telecoms (TMT) sector has become truly global over the past two decades, with companies making significant investments in new markets, including in infrastructure such as data centres and high speed cables. In recent years, governments have begun to intervene in the sector, ostensibly for security, consumer protection and tax purposes, but sometimes also to conduct surveillance or to censor content for political purposes. TMT companies may face fines, criminal sanctions or other penalties if they fail to comply with such laws, while they also risk failing to meet international standards of conduct, losing customers or incurring unexpected costs if they do comply. In 2020, TMT companies objected to laws in Turkey, Pakistan, Germany, Russia, India, Thailand, Burma, Australia, China, Hong Kong, Singapore, Colombia and Mexico, among others. Unsurprisingly, investment arbitrations claims involving the TMT sector are reportedly on the rise, with seven cases involving information and communications companies filed at ICSID in 2020 and others threatened, including one by a ride-sharing app against Colombia. 

Armed conflicts and regime change

Foreign investors in a range of sectors, including energy, manufacturing, construction and infrastructure, have been affected by armed conflicts, territorial disputes and frozen conflicts coming to life in the past decade. Some have brought claims under investment treaties, including investors in the Ukrainian territories of Crimea and Donbas, which have been annexed and de facto controlled by Russia respectively, and investors in Libya, which was affected by armed conflict following the Arab Spring. A number of conflicts that broke out in 2020 prompted talk of possible investment arbitration proceedings, the Nagorno-Karabakh conflict between Armenia and Azerbaijan chief among them. Early 2021 also saw a coup in Myanmar and related regulatory changes, which have affected foreign investments in that country. Thus, 2021 may see more disputes involving politically charged circumstances and the interaction between investment law and other fields of international law, including human rights and humanitarian law. 

Sovereign debt defaults

In recent years, dissatisfied creditors have brought investment treaty arbitrations following sovereign debt defaults or restructurings. Most notably, Argentina faced a series of high value arbitrations following its 2001 default, one of which it reportly settled for USD1.35 billion. The culmination of the economic effects resulting from Covid-19 has put significant pressure on the debt obligations of countries around the world, many of which were already facing debt struggles before the crisis. As a result, 2020 saw a record six sovereign defaults, including Argentina again, along with Zambia, Belize, Ecuador, Lebanon and Suriname. Many fear that there will be a wave of sovereign debt crises in emerging economies this year, some of which may result in claims by foreign investors. 

Regulatory changes in the pension fund sector

Governments in emerging markets have implemented regulatory changes with the intent of allowing investors in general, and specialised pension fund investment companies in particular, to diversify their holdings and obtain additional fundraising opportunities. These changes have encouraged foreign investments in the pension funds sector in a number of countries, particularly in Latin America. Now some countries, including Argentina and Bolivia, have returned their pension systems back to public administration and are facing investment arbitration claims as a result. The status of pensions systems is also under review in Mexico, Uruguay, Peru, Chile and Colombia, and some of these same states have allowed contributors to withdraw funds during the Covid-19 crisis to the detriment of pension fund administrators. Investment treaty claims can be expected as a result of some of these changes. 

We may also see claims on a wider array of types of investment, including:

  • Project finance: In August 2020, the tribunal in Portigon AG v. Kingdom of Spain clarified that the project finance provided by Portigon, a German financial services company, qualified as an investment protected under the Energy Charter Treaty (ECT) and the ICSID Convention. It further held that there was a direct relationship between the project financing provided by Portigon and the dispute at issue, i.e. whether Spain’s 2013–2014 changes to its renewable energy regulatory framework breached the ECT. Portigon could, therefore, proceed with its claim that Spain’s measures adversely affected the renewables projects it financed, impairing their creditworthiness, and thus the value of the project finance loans.
  • Loan portfolios: In March 2020, an ICSID tribunal in UniCredit Bank Austria v. Croatia ruled on the state’s jurisdictional and admissibility objections. UniCredit’s claims relate to a law passed in 2015 that converted some 3.4 billion Swiss francs in loans by a number of banks, including UniCredit, into euros, and was touted as relief for borrowers who took on mortgages or other franc-denominated debt in the 2000s, when interest rates for the currency tended to be lower. While the 2020 jurisdictional decision has not been published, the case remains pending, suggesting that some claims at least will proceed to the merits and that the tribunal found that UniCredit’s loan portfolio amounted to a protected investment under the BIT (a requirement for the tribunal to have asserted jurisdiction). 

More mass claims against States

We may also see more mass claims pursued against States. Argentina faced mass investment treaty claims in the wake of its 2001 sovereign default, in the Abaclat, Ambiente and Alemann cases, all which settled in 2015/16. In the first mass claim since then, Cyrus now faces a claim by nearly 1,000 mostly unrelated claimants under the Cyprus-Greece and Cyprus-Belgium/Luxembourg BITs in relation to emergency measures it implemented during its 2012-2013 economic crisis. In March 2020, the ICSID tribunal hearing the case, Theodoros Adamakopoulos and others v Republic of Cyprus, granted permission for claims to proceed together. It held that, despite involving a very large number of claimants and falling under two separate treaties, the claims were still a single “dispute”, which was capable of fair administration under the ICSID framework. This decision may well lead to more such claims coming forward.

These decisions provide welcome news for providers of debt, including project finance and loan portfolios, including mortgages. They will likely encourage financial institutions to carefully consider the structure of proposed or existing cross-border financing arrangements to ensure the availability of optimal treaty protection and drive an increase in the use of ISDS by financial institutions.

This article is part of the International Arbitration Review.

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