Corona crisis: Corporations could sue the Federal Republic for shutdown

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This complaint should never have been brought, said the representative of Germany. The Federal Republic had taken a measure “in good faith, fully within the defendant’s right to protect the health of its citizens, as required by the German constitution”.

Almost four years ago, attorney Sabine Konrad argued before the World Bank Arbitration Panel (ICSID) in Washington. It was about Vattenfall’s lawsuit. Because Germany quit nuclear power after the Fukushima reactor accident, the Swedish energy group is demanding compensation for the shutdown of two power plants. Interest is about a sum of more than six billion euros.

Last but not least, concerns about such demands drove hundreds of thousands of people against the transatlantic trade agreement TTIP onto the streets in Germany a few years ago. TTIP has done away with the election of Donald Trump as president. But the system of private investor lawsuits continues.

Vattenfall and Germany have been arguing for eight years, the process is actually well advanced. But the Federal Republic seems to be trying to delay it. Recently, for the second time, she filed an application for bias against the judges, which should be decided in early June. If he is successful, the entire main hearing could be repeated, according to SPIEGEL information.

When Corona dries up the revenue

Similar to the Vattenfall case, states could soon be forced to defend measures in the corona crisis before an arbitration tribunal. Because in the fight against the pandemic, many countries have intervened deeply in economic activity. Companies write losses or even go bankrupt. If foreign companies consider such interventions to be disproportionate, many of them can rely on investment protection agreements and go to private arbitration tribunals.

“I believe that lawsuits against restrictions in the corona crisis are possible. One or the other attempt will certainly be started,” says Klaus Sachs. He is an honorary professor for arbitration and was a judge at the ICSID until the beginning of the year. Sachs cites investor threats in Mexico as an example. There, the government decided in mid-May to limit the purchase of solar and wind power, which was due to the lower energy consumption in the pandemic.

However, lawsuits have long been discussed among lawyers that are directly directed against government measures to protect the population. The non-governmental organization Corporate Europe Observatory has documented numerous examples. For example, El Salvador and Bolivia decided that citizens do not have to pay their water bills, or only have to pay them in part, so that they can wash their hands enough during the pandemic.

“As a result, utilities, many of which are foreign-owned and have investor rights, saw their sources of income dry up,” said a comment from the law firm Hogan Lovells. The comment also mentions price controls for medicines and the state-mandated emergency production of medical equipment as possible impairments for investors. The major law firm Linklaters warned that states “have no free hand in disregarding their investment protection obligations, regardless of the severity of the crisis they are facing”.

The likelihood of lawsuits increases because the costs of many investor lawsuits are now borne by external litigation finance providers. According to an analysis by the giant law firm Freshfields, this lawsuit industry will “provide urgently needed ammunition for clumsy litigants, thereby fueling the waves of legal and arbitration proceedings that will follow the pandemic on foot”.

However, the hurdles for the success of such procedures are “quite high,” says the long-time referee Sachs. “After all, it is about the high-quality goods of life and health and the states follow recommendations, for example from the WHO.” Defense is likely to be easier than with the German phase-out, for example. The federal government dared to do it alone after a few months before it had decided to extend the nuclear terms.

A judgment that cut a trail

In addition, there has been a lot of hesitation in the system of investor lawsuits. Two years ago, the European Court of Justice (ECJ) ruled in a lawsuit brought by the Dutch financial company Achmea against Slovakia that bilateral investment protection agreements between EU countries were not compatible with EU law. Such disputes should always be settled in Europe before regular courts. As a result, 23 out of 27 Member States committed to terminate these agreements in early May.

“Achmea has made a real mark,” says Pia Eberhardt, trading expert at the Corporate Europe Observatory. Critics even hoped that the verdict could herald the end of the arbitration system. The federal government also tried to stop the Vattenfall trial by referring to the Achmea case. According to Eberhardt, it was “almost historical because Germany has been a fervent advocate of the old investment protection regime.”

But the attempt failed. Because Vattenfall relies on the multilateral energy charter contract, for which the Achmea judgment does not apply according to the court. The Swedish state, to which Vattenfall belongs, has also not signed the agreement to end bilateral agreements.

Austria is also among the refusers, from where another lawsuit against Germany is pending: The Strabag construction group sees its investment in German offshore wind farms affected by an amendment to the EEG law. The three arbitrators for the proceedings have already been named, and Strabag has not yet made a request.

Break for all arbitration proceedings?

The fundamental dispute over the arbitral tribunals has not yet ended, and the Energy Charter Treaty could soon land before the ECJ. As a result, the Vattenfall process shows that this is a procedure for balancing the tightrope: The Federal Government still considers the Achmea judgment to be applicable here – it made this clear in early May in response to a request from the left-wing faction. Accordingly, the arbitral tribunal in Washington would not have jurisdiction.

However, the officials of Minister of Economic Affairs Peter Altmaier (CDU) avoided the question of whether Germany should accept a possible compensation payment at all. The federal government does not consider “speculation about the response to hypothetical arbitral awards to be appropriate” and assumes that it will “fully prevail”. So far, Germany does not seem to have pushed ahead with a possible dispute before the ECJ or through an infringement procedure against Sweden – the Ministry of Economic Affairs does not want to comment officially.

“Vattenfall will, of course, exploit this zigzag course in front of the arbitral tribunal,” criticizes left-wing faction vice Fabio De Masi – and calls for a clear positioning. “If an arbitration award is made against Germany, the federal government must make it clear that it will not pay.” De Masi refers to Italy that the Energy Charter Treaty had already withdrawn in 2016. “The Federal Government should take that as a model.”

Such demands are likely to become louder if the corona pandemic actually leads to new billion-dollar lawsuits. A group of experts doesn’t want to let it get that far. In an appeal published at the beginning of May, she called for “an immediate moratorium on all arbitration suits by private companies against governments”. Signatories include the UN Special Rapporteur on Extreme Poverty and Human Rights, Olivier de Schutter and Harvard economist Dani Rodrik.

Of course, investors would lose their profits through the Corona requirements, the call says. But just as “every company in society faces an unprecedented situation”. Governments should be able to protect their citizens without fear of processes. One appeals to all “people with conscience” – expressly also lawyers and referees – “to put human life in this gloomy moment for humanity above corporate interests”.

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