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The pandemic profiteers

On 26 March 2020, Italy recorded more than 8,000 deaths from the Coronavirus for the first time. At that time, that was more than twice as many as anywhere else in the world. On the same day, lawyers from an Italian law firm pondered possible corporate lawsuits against state emergency measures to contain the Virus and its devastating economic consequences. Their conclusion: the” hasty and poorly coordinated " measures of the Italian government could fall within the scope of international investment agreements – and lead to a wave of expensive claims for damages against Italy in private arbitration courts.

Worldwide, more than 2,600 trade and investment agreements allow foreign investors to sue states in private arbitration courts if they consider their far - reaching rights in the agreements to be violated. Corporations can claim dizzying sums in damages for alleged investment losses-as a result of expropriations but also indirect damages through virtually any kind of regulation.

Well-known examples from Germany are the two Investor-state lawsuits filed by the Swedish group Vattenfall. In 2010, Vattenfall reached an agreement to reduce environmental requirements for the controversial coal-fired power plant in Hamburg’s Moorburg district in an initial process worth 1.4 billion euros. Since 2012, the second lawsuit for 6.1 billion euros in damages for the accelerated nuclear phase-out after the Fukushima nuclear disaster has been ongoing. The legal costs for the defense of this lawsuit alone amount to 20 million euros on the part of the federal government.

In the midst of the Corona crisis, global law firms are preparing the ground for Investor-state lawsuits against measures taken by governments to save lives, contain the pandemic and mitigate its economic consequences.

In the midst of the Corona crisis, global law firms are now preparing the ground for Investor-state lawsuits against measures taken by governments to save lives, contain the pandemic and mitigate its economic consequences. In webinars and publications, they point out to their clients the possibility of reclaiming their lost pandemic profits on the basis of investment agreements. As Ropes & Gray wrote in April 2020: “governments have responded to Covid-19 with a number of measures, including travel restrictions, business restrictions and tax benefits. Regardless of their legitimacy, these measures can have a negative impact on companies by reducing profitability, delaying operations or excluding them from government services… For companies with foreign investments, investment agreements could be an effective tool to offset or prevent losses from Covid-19 related measures.”

The law firms do not tire of pointing out that many of the more than 1,000 Investor-state lawsuits known worldwide have arisen as a result of economic crises such as the Argentine financial crisis in the early 2000s or political upheavals such as the Arab Spring in the early 2010s. The corona pandemic could now trigger a new wave of complaints.

The range of state protections that law firms are targeting is wide. For example, foreign utilities could sue countries such as El Salvador, Bolivia, Colombia or Argentina because they have decreed that households in the pandemic should continue to have access to water to wash their hands – even if bills cannot be paid. Property companies registered abroad could sue countries that protect tenants who are unable to pay their rent due to illness or crisis-related job losses. “While these measures help debtors, they inevitably affect creditors by causing loss of income,” Shearman & Sterling explains the rationality of potential Corona lawsuits.

Price caps for drugs and the relaxation of patent protection for the development of a cheap vaccine could also be challenged by companies in arbitration courts as an alleged expropriation. The same applies to fiscal measures such as capital controls to curb destabilizing cash outflows, as well as debt relief and rescheduling that states may be forced to undertake in the context of the Corona economic crisis.

Such corporate actions can weigh heavily on public budgets. The legal costs amount to an average of 5 million euros per party, but can be much higher. Even states that do not lose often remain sitting on their legal fees. For example, Australia had to pay half of its costs in the Philip Morris lawsuit against anti-tobacco laws, despite an arbitration court dismissing the lawsuit for abusive conduct by the group. If a government loses, it becomes even more expensive. By the end of 2018, States had been ordered to pay a total of 88 billion dollars – 18 times the World Health Organization’s budget for 2020. the figure only refers to the cases that have been made public in which compensation was paid.

In a paper on “Investor-state lawsuits for Covid-19 losses”, Sidley cites one of the reasons why the lawsuits can be so expensive for states: in investment law, under certain circumstances, not only actual amounts invested are liable for damages, i.e. the actual costs of an investor, but also lost future profits. Since other legal systems usually if no compensation is provided for completely hypothetical lost future profits, Investor-state arbitration awards can be much more lucrative for companies than decisions of ordinary courts.

Why are investors and their desire for gushing profits more protected than the government’s duty to protect health and an adequate standard of living?

Its one-sidedness also makes international investment law a favourable legal system for profit interests. Investment agreements stipulate rights, but not obligations, for foreign investors. The arbitral tribunals interpreting them do not follow a property compromise that has grown over decades in constitutional law, which recognizes the social function of property and balances it with other social interests. In addition, arbitration courts tend to restrict state decision-making more than democratically legitimated courts, which, as an expression of separation of powers and respect for the Democratic Sovereign, Grant governments and parliaments wide discretion in dealing with complex political issues.

The need to prevent Investor-state lawsuits has rarely been as clear as today, when the international community is struggling not only with a global health crisis, but also with a global economic crisis. That is why experts around the US economist and former Harvard Professor Jeffrey Sachs are calling for an immediate moratorium on lawsuits-as well as a permanent restriction of Investor-State proceedings against Covid – 19 emergency measures. A draft for a corresponding international agreement is already being discussed.

More far-reaching steps have been taken by countries such as South Africa, Indonesia and India, which have already terminated some of their bilateral investment treaties. Just recently, 23 EU states, including Germany, have signed a treaty that will end some 130 intra-European investment agreements that the European Court of Justice declared illegal.

Like no other, the corona crisis poses the question of legitimacy to a parallel legal system that makes some of the richest in our society better than all the others. Why are investors and their desire for bubbly profits more protected than the government’s duty to protect health and an adequate standard of living? What is the justification for a special right under which wealthy economic actors receive more favourable treatment than all those who are already suffering particularly badly from the pandemic and its consequences?

These questions bring to the point the blatant injustice of special rights for corporations. In the current crisis there must be no place for these special rights.