Alicia Nicholls
All Caribbean countries have signed at least one treaty containing provisions meant to reciprocally protect, promote and liberalise the flow of investments between themselves and their treaty partner(s). Unfortunately, the vast majority of our countries’ international investment agreements (IIAs) are older generation bilateral investment treaties (BITs) which lack many of the development-friendly language and best practices of newer vintage IIAs. The end result is that Caribbean countries could potentially face significant legal exposure to claims brought by investors under these treaties.
Although most Caribbean countries’ experience thus far with investor claims have been contract-based and not treaty-based, the threat for treaty-based claims looms larger now in the midst of the novel coronavirus (COVID-19) pandemic. This is because Caribbean governments, like those governments around the world, have had to take measures to contain and mitigate the spread of the virus, and may face claims from foreign investors who feel aggrieved by these measures and seek legal protection under these BITs.
This article argues that the time is long overdue for Caribbean countries to re-evaluate whether their BITs remain ‘fit for purpose’ and to take proactive steps to mitigate the risk for investor disputes post COVID-19.
CARICOM Investment treaty landscape
CARICOM countries are party to a spaghetti bowl of IIAs. Some are investment chapters in free trade agreements, such as the CARIFORUM-EU Economic Partnership Agreement. However, the majority are the 83 BITs signed by individual Caribbean governments with external treaty partners, many dating back to the 1980-1990s. Of these BITS, 56 are currently in force according to data from UNCTAD’s IIA Navigator.
Although the effectiveness of IIAs at attracting foreign direct investment (FDI) inflows remains debated in the academic literature, countries sign these agreements in order to increase their attractiveness to foreign investors. Signing IIAs shows their commitment to guaranteeing investors and their investments certain minimum standards of treatment, as well as protection from heavy-handed State action, such as, for example, direct or indirect expropriation of investors’ investment(s) without compensation.
Another feature of IIAs is the inclusion of Investor-State Dispute Settlement (ISDS), allowing investors to by-pass domestic courts and bring a claim against a host State before a neutral and independent arbitration tribunal, either ad hoc or established under the rules of an established arbitration centre, such as the International Centre for Settlement of Investment Disputes (ICSID).
Though popular back in the 1980s-90s, in recent years, however, the legitimacy of ISDS internationally has been increasingly questioned for many reasons. Firstly, arbitral tribunals have been criticized for their generous interpretation of vaguely drafted provisions, such as the Fair and Equitable Treatment (FET) standard, in favour of investors. Secondly, in many cases, tribunals have arrived at different decisions on the same facts. Thirdly, there is concern about the lack of geographic and other diversity of persons who serve as arbitrators on these panels. Fourth, there is the potential of using Most Favoured Nation (MFN) clauses for treaty shopping.
A study I conducted a few years shows that there is no consistency in Caribbean countries’ BIT practice, which is reflective of our unequal bargaining power as rule-takers. Moreover, because of their vintage, our older BITs lack the best practices in development, such as more express provisions for the State’s right to regulate in the public’s interest, development exceptions and provisions on investor obligations.
There are, of course, defences that States can make to investor claims, but many of these older BITs have very broadly drafted protections and lack the exceptions or defences newer BITs have included permitting the State to take action in the interest of public health. Failing this, States would have to rely on other defences under international law, such as necessity.
ISDS and Caribbean countries
Caribbean countries have had some experience with claims brought by foreign investors. Although the majority of these claims have been contract-based, one of the most well-known examples of a Caribbean country which was on the losing end of an investor dispute under a treaty-based claim was that of the Dunkeld International Investment Ltd. V Government of Belize. Following Belize’s compulsory acquisition of certain shares in Belize Telemedia Company, in which Dunkeld held an interest, Dunkeld brought a claim against the Government of Belize under the Belize-UK BIT. Belize was ordered by the arbitral tribunal to pay millions of dollars in compensation.
In an excellent article from April 2020, the International Institute for Sustainable Development (IISD) raised the alarm about a possible deluge in investor claims post-COVID-19 and called for a ‘global, coordinated response’ to this risk. This fear and call to action are not unfounded as in the aftermath of the Global Financial Crisis, Argentina faced a litany of investor claims. The stakes are even higher for small States like ours. Defending investor claims is costly and the award amounts, if on the losing end, can be in the millions or billions of dollars, a cost which cash-strapped Caribbean governments, whose economies have been severely impacted by months of shutdowns and border closures, can ill-afford to pay. There is also the potential for reputational damage for those countries involved in investor disputes, which could affect their investment attractiveness.
How can we get around this?
Even prior to the COVID-19 pandemic, a growing number of countries around the world have already either suspended or completely overhauled their BITs to limit their legal exposure to investor claims under these treaties. For example, a couple years ago India unilaterally terminated its BITs with over 50 treaty partners, including Trinidad & Tobago, and South Africa terminated BITs with several EU countries. More recently, in May 2020, 23 EU countries signed an agreement to terminate all intra-EU BITs.
The CARICOM Secretariat has for many years been working on a Draft CARICOM Investment Code, as well as a template Member States could use for investment agreements with third country partners, incorporating many of the most recent investment treaty best practices. However, to my knowledge, there has not been a systematic review by individual CARICOM countries of their BITs and whether they are indeed ‘fit for purpose’, that is, drafted in a way that promotes investment for sustainable development. Moreover, current economic exigencies may make such a comprehensive evaluation of our BITs low down on the policy totem pole for Caribbean countries.
Despite this, Caribbean governments should support calls for a multilateral solution to prevent what many anticipate could be a slew of investor claims arising from governments’ COVID-19 measures. However, there are interim mitigating measures they can take, such as deciding with their treaty partners to issue interpretive notes for some of the most used (and abused) provisions by investors or carving out COVID-19 related measures from the application of ISDS.
On a final note, Caribbean governments need to be more actively involved in efforts to ensure investment rule-making actually creates an environment conducive to attracting investment for sustainable and inclusive development. We must move from simply being ‘rule-takers’ to part of the ‘rule-makers’. As such, our governments should, for example, consider taking an active part in the UNCITRAL Working Group III on ISDS reform.
Alicia Nicholls, B.Sc., M.Sc., LL.B is an international trade and development specialist. Read more of her commentaries here or follow her on Twitter @licylaw. All views expressed herein are her personal views and do not necessarily reflect the views of any institution or entity with which she may from time to time be affiliated.
Caribbean Trade Law and Development 