Treaty claims arising out of COVID-19: What defences are available to a State? An Indian perspective

Like other countries, India announced a nationwide lockdown from March 25, 2020, on four separate occasions. Thereafter began the unlocking process, with states exerting more control – through “Unlock 1.0” and now “Unlock 2.0”. During the initial lockdown of three weeks - let’s call that lockdown 1.0 - only essential services were allowed to function and that too with restrictions.

With the introduction the Unlock phases, most activities are now permitted, except those prohibited and it is open to state governments to impose restrictions as required.

India’s BIT obligations and typical defences

While governments around the world need to take stringent measures to arrest the spread of COVID-19, and a State’s emergency response to secure health and safety cannot be faulted, such a response needs to meet the standard of India’s investment treaty obligations.

In 2017, India terminated a number of Bilateral Investment Treaties (BITs), including those with countries such as the UK, Germany, South Korea, France, and has continued to do so until March 2020, while it is in the process of renegotiating others.

Most BITs, for example the India-Bahrain BIT, contain language to the effect that nothing in the BIT precludes a party from taking steps to protect essential security interests or in case of “extreme emergency” so long as it is “in accordance with its laws normally and reasonably applied on a non-discriminatory basis.” Therefore, if any claim were to be brought in regard to a measure (and we argue that a lockdown order made pursuant to a law is a measure), it will have to be shown as being both in accordance with the local law and as non-discriminatory against any party, including the foreign investor.

In India, the basis of the lockdown is the Disaster Management Act, 2005, Section 10(2)(1), which empowers the Chairperson of the National Executive Committee to issue guidelines to the concerned Ministries or Departments of the Government of India, the state governments and the state authorities for measures to be adopted in response to disaster management. State governments have also issued similar notifications under the Epidemic Diseases Act, 1897. Therefore, India may be able to argue that the process of invocation of the lockdown was validly done under applicable national laws and was a binding measure.

An analysis of the defence standard

Under customary international law, in very few circumstances are States excused of their responsibility to comply with obligations under a given treaty. Article 25 of the Articles of State Responsibility state that the defence of “necessity” can be invoked only when it is the only way the State can safeguard such an essential interest against grave danger or where the act does not “seriously impair an essential interest” towards a State/international community.

Importantly, if necessity as a defence is excluded in respect of a given international obligation or where the State has contributed to the situation, it cannot be invoked. In the context of the lockdown circulars, a question that may arise is – whether a complete halt of all commercial activity was the only way in which India could cope with the pandemic or could it have employed alternate ways? Further, questions related to sufficient notice for complete preparation, and the manner in which selective sectors were given permission in later iterations while excluding others, could also be raised.

India and any other country’s defence in the face of a claim would be that the measure taken was for the purpose of ensuring the safety and security interest of its subjects and to avoid the further spread of a dangerous virus. Some years ago, a study found that national security plans of most countries, including Australia, Germany, Canada, France, Italy, the UK and USA, included “pandemics” as a part of their plan where the safety of their citizens was key priority.

In the aftermath of Argentina’s Peso crisis of 2001, where it first pegged its currency to the dollar and then no longer pegged it to the dollar, it received a number of treaty claims where its defence was that of “necessity” under international law, as well as protection of security interests under the respective BITs. Three tribunals found that a major economic crisis would fall within the purview of essential security interests under the respective BITs, but only one out of the three found that the standard of the defence of necessity had been met by Argentina. The other two tribunals found that the means adopted by Argentina were not the only means of protecting itself and that the country itself contributed to the situation, thus the conditions required to meet the necessity defence were not met.

The key that the above cases suggest is that a State has to justify whether the means adopted to curtail an essential security interest were indeed the only way in which it could have protected its interests and that it did not contribute itself to the given crisis. This is a difficult threshold.

Other measures of India and potential consequences under International Law

Force Majeure

The current situation presents many other questions. What happens when a country issues a notification to state that the outbreak of the COVID-19 virus is a “force-majeure” event under its existing contracts? The Finance Ministry issued a clarification in this regard. The clarification stated that the COVID-19 pandemic would constitute a force majeure event, classified as a “natural calamity” and may be invoked provided that due procedure is followed.

This by itself will not avoid treaty claims or exonerate a government department from performing its part of the bargain by invoking a force majeure clause. This clarification is applicable only in respect of the Procurement Manual and arguably does not bind the investor in all respects in its contracts with various state agencies or government departments. Even the Delhi High Court in a recent decision vacated its earlier order restraining the invocation of bank guarantees on the basis that COVID-19 could not be an excuse for not performing a contract.

Further, even assuming force majeure is invoked, it will have to be invoked exactly in accordance with the terms of the contract, the result of which will be suspension of the contract at the first instance. Complete excuse from performing a contract will occur only if the force majeure situation complained of goes on for a sustained period of time and also removes the very basis of the contract.

Even where contracts do not provide for force majeure, state departments may wish to argue frustration of a contract under Section 56 of the Indian Contract Act, 1872, where it becomes impossible to perform the contract as a result of this intervening event. However, such impossibility cannot be just commercial impossibility or price rise (even if only for one side), since that is not treated as frustration of a contract under Indian law.

Therefore, an investor may argue under an underlying contract that the rise in tariff or the reduced availability of a particular material resulting in price rise will not allow state entities to avoid contracts and potential BIT claims can arise from this as well as a result of the avoidance of a contract or concession. Investment tribunals in the past have treated contracts itself as “investments”, leading to justiciable claims as a result of their termination.

Singapore has passed a legislation that allows for parties to certain contracts to claim temporary relief from performance due to COVID-19. Similarly, the Chinese government has issued force majeure certificates to various entities as an excuse from performance.

Other Actions

Many countries have already warned about likely investment treaty claims arising from steps taken to abate the COVID-19 emergency. Upon further scrutiny, steps taken by the Indian government could also result in potential claims. If some commercial activities have been permitted, it may be available for investors to argue as to why certain activities were felt more essential than others, what criteria were applied when drawing distinctions between different kinds of commercial activities, and also in doing so whether the standards of fair and equitable treatment (which, to put broadly means meeting a minimum standard of treatment in accordance with international law), as also national treatment (meaning that foreign investors are treated at par with locals) were met. The State will also justify that the measures it adopted were proportionate to and justified the end.

The above actions could also lead to a claim of denial of fair and equitable treatment. For example, the complete closure of a number of industries from March 24 and then a partial reopening of some while denying the same opportunity to others may give rise to claims of failure to protect the investment and even creeping expropriation. One could question why industries such as coal, oil and gas and construction (partially) were reopened in some versions of the lockdown, but not others. While the State could, of course, argue that there was intelligible differentia in the industries that were opened as being essential for the functioning of the economy and infrastructure, there is room to also counter this by saying that other industries may be treated equally as “essential”.

Further, in some respects the restrictions set out do not make sense. For example, why were e-commerce portals allowed to sell essential commodities, but not other products, while other standalone shops were allowed to function irrespective of this distinction? This position of course changed over time and now non-essential items are also permitted for online sale and delivery. The State’s response in justifying this measure would be taking into account requests of single shop traders who are unable to compete with big online giants, but the counter argument would be that delivery whether of essentials or otherwise ought not to be distinguished because it avoids citizens from going physically and purchasing those items, thereby reducing the incidence of the virus spread.

Even services that are permitted - including grocery stores and high-end grocery chains with foreign investment - which typically operate in large malls with greater footfalls, are impacted more than the local ones, since malls and large commercial complexes are shut due to the lockdown, while individual stores are open. This could be seen as an application of unequal treatment, although one can easily see that the rationale of this is to avoid crowding, which is typical of places such as malls.

Conclusion

The coming days and the steps taken by the government will be critical in countering this pandemic. However, each of these steps will have to be carefully evaluated and determined on the basis of necessity, proportionality, non-discrimination and balancing competing interests in order to avoid any treaty claims. It will be an act of fine balance on the part of the government if it is to be properly achieved and one that has to take all interests into account, keeping in mind the health and safety of its citizens.

Shaneen Parikh is a Partner and Shalaka Patil is a Principal Associate at the Disputes team at Cyril Amarchand Mangaldas.