Covid-19 and investment treaty protections: state aid needs to be granted on a “fair and equitable” basis

States around the world are implementing financial measures aimed at mitigating the adverse impacts of Covid-19 on their economies. Such measures will undoubtedly pursue important public policy objectives. State aid may be made available to some and, potentially as a consequence of the resulting budget constraints, may need to be denied or limited to others.  However, foreign investors need to be aware that states do not have free reign to disregard their investment treaty obligations, notwithstanding the severity of the crisis faced.

Importantly, if state aid measures discriminate against foreign investments, the host state may be in breach of its investment treaty obligations. The seminal 2006 award in Saluka Investments BV v The Czech Republic (“Saluka”) is a salutary reminder that denying state aid to foreign investors without reasonable justification may breach the “fair and equitable treatment” (“FET”) obligation often contained in investment treaties.

Factual summary

The relevant events occurred in the Czech Republic (the “State”). By 1994, the State’s banking sector became dominated by four State-owned banks (the “Big Four”). Following a privatisation programme, the State held a significant but minority stake in each of the Big Four. In 1998, Nomura acquired the State’s shareholding in IPB, one of the Big Four. Nomura held its shares through Saluka, a Dutch SPV. 

By mid-1998, the Big Four suffered an existential threat, partly due to crippling bad debt. Between 1998 and 2000, the State provided various forms of assistance to each of the Big Four. That assistance included: (i) purchasing bad debt; (ii) subscribing for further share capital; (iii) loans; and (iv) compensation and indemnities for non-performing loans. 

However, when IPB sought State aid, the State did not engage. In parallel, the State commenced discussions with another of the Big Four (CSOB) to explore the possibility of CSOB acquiring IPB.

In early June 2000, IPB allegedly failed to meet applicable capital adequacy requirements, triggering the regulator’s obligation to revoke its banking licence. In mid-June 2000, IPB was put into forced administration and subsequently sold to CSOB for nominal consideration.

In July 2001, Saluka commenced an arbitration against the Czech Republic pursuant to the Agreement on Encouragement and Reciprocal Protection of Investments Between the Kingdom of The Netherlands and the Czech and Slovak Federal Republic, signed on 29 April 1991 (the “BIT”).

Breach of “fair and equitable treatment” obligation

The Tribunal held that by excluding IPB from the State aid provided to the other Big Four banks, the State discriminated against Saluka, thereby breaching the FET obligation. 

The following findings of the Tribunal are of particular relevance:

  • Differential treatment of a foreign investor must not be based on “unreasonable distinctions and demands”. Also, such treatment must not be “motivated by a preference for other investments over the foreign-owned investment” [308].
  • The State, “without undermining its legitimate right to take measures for the protection of the public interest, has therefore assumed an obligation to treat a foreign investor’s investment in a way that does not frustrate the investor’s underlying legitimate and reasonable expectations” and that such expectations include that the State will not act in a way that is “manifestly inconsistent, non-transparent, unreasonable (i.e. unrelated to some rational policy), or discriminatory (i.e. based on unjustifiable distinctions)” [309].
  • State conduct is discriminatory “if (i) similar cases are (ii) treated differently (iii) and without reasonable justification” [313]. 

The Tribunal found that on the facts, the Big Four banks were in a “sufficiently comparable situation” from 1998 to 2000 and that Saluka was therefore “justified in expecting that the Czech Republic, should it consider and provide financial assistance to the Big Four banks, would do so in an even-handed and consistent manner so as to include rather than exclude IPB” [322, 323]. However, IPB “has clearly been treated differently” without reasonable justification [326].

Furthermore, the State’s failure to negotiate with IPB in good faith was a further breach of the FET obligation.


Governments may be implementing a range of financial support measures for the foreseeable future. Such measures can include subsidies, bail-outs, tax reliefs, compensation and debt purchases or write-offs. As demonstrated by Saluka, if a state denies or impedes financial assistance to a foreign investor because of its foreign ownership, that may constitute a breach of a FET obligation.