International Investment Law and COVID-19

Mian Shazeb Quddous
LLM Student at University of Hertfordshire

A field of law that governs relationships and resolves disputes between states and foreign investors is “International Investment Law.”1 This field approximately consists of 2896 bilateral investment treaties (BITs) and 390 treaties with investment provisions (TIPs).2 The pivotal role of the BITs is the promotion and protection of private investments by the nationals (companies or individuals) of a particular state to another state.3 Furthermore, BITs as an instrument protecting international foreign investments is of significant value.4

This particular field of law owes its development to a drastic increase in cross-broader investments.5 International investment law due to its increased practices of dispute settlement under investment treaties6 has become an integral part of the international legal community.7 Whereas, the developments within the international investment arena are facing challenges due to the current Covid-19 pandemic which has engulfed the entire world not just by affecting human lives but also the economy at large.8

One such challenge is the effect of cancellation, postponement or relocation of scheduled or ongoing hearings by an authoritative body,9 as such in-person hearings due to the pandemic are currently unworkable. Consequently, to arbitrate the ongoing disputes the technology of virtual hearings is sought, though not heavily utilized previously in international arbitration will now be relied on. Nonetheless, there are clear drawbacks to a virtual hearing as even with the state of the art technological equipment the likelihood of technical problems increases with time and constant use. Similarly, the online hearing concept may cause parties the fear of being subjected to unfavorable terms due to their disparate locations and time differentials, which may potentially favor the other party.10

To control the spread of the virus the closure of projects, place of businesses and sites have caused delays in the implementation of investment projects. Which is another issue as this will have an immediate and potentially lasting impact on the Foreign Direct Investments (FDIs). That said, under the 2020 world investment report the global FDIs are projected to decline by 40% from its value of $1.54 trillion in 2019 thus bringing FDI below $ 1 trillion since 2005 and is further projected to decrease by 5% to 10% in the following year 2021.11

Moreover, the pandemic is also impacting the announced Greenfield projects12 and the cross-border mergers and acquisitions (M&As)13 as they are being delayed or suspended which in turn caused difficulties for foreign investors.14 The 2020 world investment report shows a decrease of over 50% in both the above stated in comparison to the monthly average of 2019.15

Over the first quarter of 2020, the worldwide announced greenfield projects dropped to 744, the lowest amount since December 2004 and outstripping the decades ago financial crisis when the projects reduced to 961 in August 2019.16 Similarly, the cross-border M&As reduced to 385 in the first quarter of 2020 and new M&A announcements were in course to globally drop by 70%.17 Due to the novel virus, more than US$ 10 billion worth M&As was terminated and at most 17 major transactions were jeopardized.18 For instance, during the first quarter of 2020, the US in comparison to 2019 saw a drop in the M&A levels by more than 50% to US$ 253 billion and significant pending M&A transactions are being abandoned by parties as such to cope with virus Xerox dropped its US$ 34 billion offer for HP.19

The impact of pandemic though widespread, the contraction in global FDI will severely have an impact on the developing countries as they may lack the capacity to put in place economic supports similar to that of developed economies20 and the fact that developing countries are highly reliant on international trade and investments.21 To illustrate, FDI flows to the developing economy of Africa are expected to fall by 25% to 40% in 2020 in comparison to the US$ 45 billion FDI flow in 2019. Likewise, the FDI flows of developing Asia in 2020 are expected to fall by 30% to 45% in comparison 2019 FDI flow of US$ 474 billion.22 Additionally, the investors at the initial stages of Covid-19 withdrawing US$83 billion from developing countries will pose an adverse impact.23

The treaty-making pace in response to the pandemic is slowed, several scheduled negotiation rounds of 2020 for the BITs and TIPs are either cancelled or postponed.24 That said, the postponement and cancellation of negotiating rounds due to the virus may affect the international investment agreements (IIAs) conclusions. Compared with the first quarter of 2019 which had concluded ten IIAs only two IIAs were concluded in 2020. It is expected that registered IIAs in 2020 will be lowest since 1985.25 It is further expected that countries in a post-pandemic time will put forth efforts in reforming their IIAs thereby ensuring the right to regulate in the public interest while maintaining an effective level of investment protection. IIA Reform Accelerator will be launched by the UNCTAD in support of such efforts.26

A double hit scenario is being projected on account of a second wave impacting economies that will result in a decline of global GDP by 7.6% in and trade -by 11.5%. Even if the possibility of avoiding a second wave exists, world GDP is expected to decline by 6% and trade by 9.5% in 2020.27

Investment promotion agencies (IPAs) are also profoundly impacted due to the Covid-19 outbreak thereby the IPAs are forced to adjust everyday activities, rethink organization functioning, and upgrade their strategies. Resultantly, 89% of agencies have been forced to postpone events, 83% to cancel international business travels and 68% had to assign their employees to work from home.28 IPAs have also contributed to curtailing the effects of the outbreak by introducing online support facilities for investors. That said, a survey conducted on IPA websites found that 64% of the agencies responded rapidly to the Covid-19 pandemic whereas 40% websites provide some or comprehensive information to the Covid-19 and 24% of the websites included notifications indicating whether the IPA is operational or not.29

In a nutshell, though the full extent of the outbreak is yet to be seen, it is evident that it will and continue to have a lasting effect on the investors and commercial actors in multiple sectors of the global economy.

Mian Shazeb Quddous
LLM Student at University of Hertfordshire