COVID-19 and investment protection

20 April 2020 | newsletters

As the world grapples with COVID-19, we are seeing some of the most unprecedented State measures of our time. Measures causing severe financial damage to many businesses and industries. Where does that leave foreign investors? Will they be able to claim compensation?

Corona measures can harm foreign investments

A series of drastic State measures, including restrictions and relief packages, have either halted businesses entirely (shutdowns) or heavily impaired those still "open for business".

With nearly every industry hit, the banking sector is no exception. CEE States in particular have rapidly introduced so-called loan moratoria, preventing banks and credit institutions from collecting loan and interest repayments from debtors. For instance: 

  • In Serbia, borrowers are entitled to a three-month moratorium on all loan repayments. 
  • In Czechia, a draft law on loan moratoria was passed on 1 April 2020, which could see debtors deferring their debts for three or six months.
  • In Romania, banks, non-bank financial institutions and foreign credit institutions may suspend loan repayments at the debtor's request, and for up to nine months.
  • In Hungary, an even stricter moratorium is in place for retail and corporate financing. All capital, interest and fee payment obligations have been suspended until 31 December 2020, and contracts that expire during this time will be prolonged until the same December date.  

These measures could be intensified or extended, as CEE continues to deal with the crisis.

Amidst the uncertainty, one thing seems clear: the measures can harm foreign investors. They will lower profits, affect the assets, reduce cash flows, and lower reinvested earnings.

Can foreign investors claim compensation?

Foreign investors may be able to reclaim their losses under existing investment protection regimes, if the COVID-19 measures violated their rights under international law or EU law. However, investors are often unfamiliar with the existing regimes, unaware of their rights, and uncertain if and to which extent those are protected.

Investor rights are commonly set out in bi- and multilateral investment treaties (BITs). There, States promise foreign investments a certain treatment. This typically includes a commitment not to unlawfully expropriate or discriminate, and to treat investors fairly and equitably. Investor rights under EU law are based on the four freedoms, the Charter of Fundamental Rights, and general EU law principles such as legitimate expectations and legal certainty. The exact rights of any given investor and its investments must be determined on a case by case basis, as must a potential violation of those rights by a State's COVID-19 measures. Those measures can violate the obligations to investors, entitling them to claim compensation for damage from the State in question.

The investment protection regimes of course allow states to take necessary measures for public policy reasons such as public health; but COVID-19 is no carte blanche to infringe on investor rights. COVID-19 measures are only justified if they are necessary and proportionate, and if that is not the case, States will have to answer for the  measures they put in place, before international tribunals or before national courts and the CJEU.

Whichever investment regime applies, investors should be prepared: 

How can foreign investors secure their rights?

Foreign investors should comply with the applicable State measures. For banks and credit institutions, that means complying with the moratoria. At the same time, investors should take active steps to reserve their rights for future damage claims. Determining where and how a foreign investor should reserve its rights will depend on the case at hand, and will require assessing:

  • whether the investor has a potential claim against the State in question;
  • which legal regime the investor could use to bring its damages claim;
  • what the potential damage is, and how to best document it; and
  • what the next steps should be, to avoid a waiver of rights for future damages claims.

In a crisis without precedent, easy fixes are hard to come by. It is all the more important that foreign investors understand their rights and take action to secure them.