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Coping with Covid-19 - the Business Response

Covid-19 national restrictions vs. international protection of UK investments

by Natalia Jodłowska, attorney at law and Łukasz Ostas, trainee attorney at law, Gessel Attorneys at Law
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Both the Polish and the UK governments have imposed numerous restrictions due to the Covid-19 outbreak that affect businesses and result in losses to domestic and foreign investors. Some solutions implemented by the Polish authorities are being questioned by economists and lawyers as to, respectively, their economic rationale and their basic lawfulness.

It is estimated that, in Poland alone, the costs of the current economic lockdown are around 7-8 billion zlotys (£1.5 billion) per day. Some of these costs are bound to fall on British investors doing business in Poland. Can British and Polish investors hope for any compensation for their losses on the basis of the bilateral investment treaty for promotion and protection of investments signed by Poland and the UK on 8 December 1987?

There has been lively debate on the future and importance of intra-EU bilateral investment treaties (BITs) in recent years due to the European Commission's position on the termination of BITs and the judgment of the Court of Justice of the European Union of 6 March 2018 in case No. C-284/16 Slovak Republic v Achmea BV. Acting in accordance with recommendations of the European Commission, Poland – before Brexit – set in motion legislative procedures geared at terminating its BITs and, on 22 November 2019, submitted a formal termination notice with respect to the Polish-UK investment treaty. The notice period, however, is exceptionally long; the British-Polish BIT shall remain binding for the next 15 years with respect to all investments made between 26 May 1976 and 22 November 2019.

The Polish-British BIT

Under the treaty, Poland and the UK undertook to encourage and create favourable conditions for investors from the counterparty state for investing capital in their domestic markets, to protect and secure their investments, to ensure fair and equitable treatment of the investors, to counteract nationalisation or expropriation of the investments, and to compensate investors’ losses caused by any violation of the treaty.  

The treaty has a wide scope of application. Under the BIT, an 'investment' includes any kind of asset connected with economic activities, including, but not limited to, movable and immovable property and any other property rights such as mortgages, liens or pledges, shares in and stock and debentures of a company and any other form of participation in a company, claims to money or to any performance under contract having financial value, intellectual property rights and goodwill, or business arrangements established by law or under contract.

The status of 'investor' on the basis of the BIT is afforded to individuals – nationals of the other contracting state – as well as to any corporations, firms, organisations and associations incorporated or constituted under the law in force in the other contracting state or in its territory.

Potential investors’ claims under the BIT

An investor from one of the contracting states who suffers harm due to violation of the BIT by the other contracting state may refer the dispute to international arbitration. The investment arbitration must be preceded by a written notification of a claim. In the absence of an amicable settlement, and unless the parties to the dispute agree otherwise, the arbitration shall be conducted in accordance with the UNCITRAL Arbitration Rules.

Despite the general nature of the BIT, potential claims must be analysed and evaluated on a case-by-case basis. That said, actions taken to date by the Polish authorities may raise doubts as to their compliance with the BIT.

In accordance with the Polish emergency legislation adopted, ostensibly, to counteract the Covid-19 outbreak, business such as shopping malls, restaurants, hotels, beauty and hairdressing salons, cinemas and theatres have been closed altogether while many others have been forced to significantly limit their operations. These regulations might be regarded as a violation of the Polish state’s obligations under Article 2 of the BIT to create favourable conditions for

British investors, to protect and secure their investments, and to ensure their fair and equitable treatment. According to the investment arbitration case-law, the host state is required to take all measures of precaution in order to protect the investments on its territory. When analysing any claim submitted by an investor, an arbitral tribunal shall assess whether the imposed restrictions were justified, reasonable, non-discriminatory and proportionate from the perspective of the aims to be achieved by the state. Apart from that, in extreme cases, the present actions of the Polish authorities may potentially be considered as expropriation or so-called creeping expropriation and, as such, to violate Article 5 of the BIT.

British investors’ claims may also arise from Article 4 of the BIT, according to which investors whose investments in the territory of the other contracting state suffer losses owing to a state of national emergency shall receive compensation not less favourable than that which the latter contracting party accords to its own investors. To date, the Polish government has announced neither a state of emergency nor a state of natural disaster within the meaning of the Polish Constitution, although many constitutionalists argue that valid prerequisites for such a measure have already arisen. The current situation raises doubts as to whether entities harmed by the present restrictions are entitled to claim compensation, and the actions of the Polish government have been criticised also for this reason. Instead, international case-law emphasises that a state must act in a manner which is consistent, free of ambiguity, and totally transparent with regards to foreign investors. Lack of implementation of a state of emergency or natural disaster, while all along curtailing fundamental rights and freedoms, may be potentially considered as contrary to the BIT.   

It might be reasonably expected that, in the case of claims related to the Covid-19 restrictions raised by foreign investors, the host states would defend themselves by pleading force majeure, distress and necessity. However, the Polish-British BIT does not provide for exemption of state liability in the event of restrictions implemented due to protection of public policy or public security, health care, or environmental protection grounds – as a point of difference from recent investment treaties such as the Canada-EU Trade Agreement (CETA) or China-Australia Free Trade Agreement (ChAFTA).

Although assessment of potential claims under the BIT requires a case-by-case approach, it may, potentially, result in quantifiable compensation for foreign investors.

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