19 May 2020
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Will COVID-19 open the floodgates of investment claims against Serbia?

 The COVID-19 pandemic and restrictive measures implemented by states worldwide have led to the effective “lockdown” of local, regional, and global commerce. Bans on free movement, assembly and doing business (except for the “lucky few” in essential industries) burdened national economies and generated enormous losses in the private sector. In a way, by choosing to save human lives, states, Serbia included, had to sacrifice their economies. However, though public health measures may have been justified, their implementation left the state exposed to the risk of claims for damages by business hemorrhaging capital.

Claims for damages by foreign investors and capital-owners, who are not in short supply in Serbia due to its investment- and capital-importing economy, are especially perilous vis-à-vis the state.



Cross-border investments are, principally, regulated by bilateral investment treaties (“BITs”) which states conclude in line with public international law rules. Based on a particular BIT, a foreign investor from one contracting party (“home state”) would invest in a certain economic sector of the other contracting party (“host state”), usually by concluding an agreement with a state authority, public enterprise or other entity designated by the host state. The foreign investor and the corresponding “local partner” set down by way of contract the mutual rights and obligations which are based on the application of municipal law.

But what happens if, due to acts or omissions by the “local partner”, a foreign investor incurs financial losses? Would the investor seek protection offered by domestic regulations and heard before the state’s courts? Such an option is, without a doubt, not very appealing to the foreign investor, either due to lack of knowledge of municipal law or due to doubts about the judiciary’s independence. For these exact reasons, foreign investors routinely seek protection before international investment arbitral tribunals, a type of hybrid dispute resolution mechanism provided in the BITs where different rules apply – disputes are transferred from municipal law and judiciary and to the arena of international law and neutral adjudicating forum.


What’s the problem?

The imposition of restrictive measures during the state of emergency in Serbia has led to great economic losses in the private sector. To alleviate this financial pressure, the Government implemented a number of aid measures which were, however, not accessible to all businesses. From the vantage of prospective investment disputes, both the restrictive measures and the distinction-based approach to access to aid is potentially problematic. This is because BITs by default contain clauses that prohibit discrimination and expropriation, as well as clauses that mandate national treatment of foreign investments, all of which are notions vaguely and broadly interpreted and applied in investment arbitration case-law.

In effect, this means that foreign investors from any of the 48 states with whom Serbia currently has BITs in force, as per UNCTAD’s website, may with some creativity and “legal gymnastics” qualify economic hardships of their businesses in Serbia as the result of actions attributable to the state and seek damages. If this were to happen en masse, Serbia would find itself between a rock and a hard place, seeing that when foreign investors sue, they sue for millions of EUR.


Does Serbia stand a chance in the investment claims arena?

If sued for COVID-19 related damages by foreign investors, Serbia has several lines of defense at its disposal.

It should, first and foremost, review the provisions of the relevant BIT for clauses excluding potential wrongfulness in case of force majeure and then determine whether the COVID-19 pandemic qualifies as force majeure within the meaning of the BIT.

Yet not all is lost if no such provisions are found in the BIT – Serbia may rely on the UN International Law Commission’s Articles on the Responsibility of States for Internationally Wrongful Acts (“ILC Articles”). The ILC Articles preclude the wrongfulness of a state’s act if force majeure, that is an unforeseen event beyond the state’s control, made it materially impossible for the state to perform its obligations, provided that the state did not contribute to the situation of force majeure or that it did not assume the risk of that situation occurring.

Alternatively, the state could invoke distress to preclude the potential wrongfulness of an act on which the foreign investor bases its claim. This is stipulated in the ILC Articles, which state that conduct will not be wrongful if the state could not reasonably have acted in any different way to save lives entrusted to it, provided, of course, that the state did not contribute to the situation of distress or that the disputed act did not create a comparable or greater peril.

Finally, as a last resort, Serbia cold invoke necessity. In line with the ILC Articles, the conduct of the state shall not be wrongful if the disputed act was the only way for the host state to safeguard its essential interests against a grave and imminent peril, and that, by doing so, it did not seriously impair essential interests of the foreign investor’s home state – again provided that the host state did not contribute to the state of necessity or that necessity was not excluded from the application of the particular BIT.



While a tide of international investment disputes is to be expected in the near future, the outcomes of these disputes are, at best, uncertain. Damages allegedly suffered by foreign investors and capital-owners during a highly specific and unprecedented set of worldwide circumstances means that both parties to an arbitration would benefit from qualified, apt and out-of-the-box legal thinkers if they are to come out on top.