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RECOMMENDATIONS FOR INVESTOR-STATE DISPUTE SETTLEMENT REFORM IN CARICOM

Clinic: Georgetown University Law Center, Spring 2022


Executive Summary

Read the full memo here


The global recognition that the international investment law regime is not fit for purpose has led to reform efforts across multiple fora. CARICOM member states should capitalize on the current momentum to better align international investment obligations with their development goals.


This policy brief was prepared to provide representatives of the Caribbean Community (CARICOM) with recommendations for reforming their relationship to Investor-State Dispute Settlement (ISDS). In recommending implementation of reforms, special focus was given to whether and how CARICOM should engage in the ongoing reform efforts of the United Nations Commission on International Trade Law (UNCITRAL) Working Group III (WGIII).


The recommendations result from an assessment of the position of CARICOM members in the landscape of international investment and its related law and policies. Key findings of the assessment are listed in this summary, followed by synopses of recommended conceptual approaches to reform and reforms to substantive investor protections.


KEY FINDINGS FROM ASSESSMENT

  • There is no conclusive evidence that the adoption of ISDS provisions correlates with Foreign Direct Investment (FDI). Further, not all FDI promotes sustainable development, and thus blanket investment incentives may not align with a sustainable development strategy.

  • The International Investment Agreements (IIAs) of CARICOM members are mostly “old generation” agreements that do not align with sustainable development strategies in substance or procedure. Substantively the IIAs provide overly broad protections to foreign investment without discriminating between investments that have positive and negative effects on sustainable development. Procedurally, the IIAs generally allow claimants to bypass the domestic court systems by choosing arbitration.

  • CARICOM members have faced a relatively small number of investment arbitrations. However, they have seen large arbitral awards. The complexity and costs associated with these claims results from both the substance of the IIAs and ISDS procedure.

  • The Caribbean Single Market and Economy (CSME) has not yet achieved harmonization of investment law and policy in the region that is a prerequisite to capital market integration. Harmonization would be most directly achievable through a replacement of IIAs with a regional investment code, ultimately subject to dispute settlement under a regional authority.

SUMMARY OF RECOMMENDATIONS


This brief presents a range of options for ISDS reform, loosely grouped under three approaches. These recommended approaches are presented in conceptual categories, but should be viewed as a continuum, from the most to least extensive. Specific reform options outlined under each approach are not mutually exclusive, and many recommended reforms appear under multiple recommended approaches. Separately, reforms to substantive investor protections are recommended regardless of which approach is adopted.


Recommendations are further elaborated in the respective section.


Option A: Regionalization

  • This approach rejects ISDS in favor of regional dispute settlement. A regional system could take a variety of forms, including the creation of a new regional body or utilization of an existing one (e.g., a regional court).

  • Substantively, a regional system could adjudicate current treaty obligations, national investment laws, entirely new regional investment laws, or some combination thereof.

  • Procedurally, a regional dispute settlement system could function to replace domestic courts (e.g., arbitration without local remedies) or complement domestic courts (e.g., an appellate function)

  • Steps to implement a regionalization plan would likely include: amending or reforming ISDS provisions under existing IIAs; amending or adopting domestic law; amending or adopting a regional law.

  • Versions of this approach are most in line with CARICOM integration efforts. However, most versions of this approach require a politically complicated execution and have the potential to increase inconsistencies.

Option B: Redomestication

  • This approach rejects ISDS in favor of domestic dispute settlement.

  • Substantively, redomestication would involve domestic courts adjudicating treaty provisions, contract provisions, and national investment laws.

  • Procedurally, this approach would follow the rules of the domestic court system. For members that have adopted the Caribbean Court of Justice (CCJ) as their highest court of appeal, this approach is effectively a version of regionalization.

  • Steps to implement redomestication would likely include: amending or reforming IIAs by eliminating ISDS provisions to require domestic dispute settlement; adopting or updating a national investment

  • Redomestication is recommended as either an alternative or precursor to regional integration. It is not as politically complex and would eliminate some present obstacles to regional harmonization, while still realizing benefits of cost reduction and improved consistency over the current system

Option C: Mitigation

  • Mitigation maintains the ISDS system and focuses on discrete problems and abuses.

  • Substantively, mitigation involves a similar construction of the ISDS system, arbitrating investment protections under treaties.

  • Procedurally, mitigation involves a more restricted range of options, such as reform to selection of arbitrators, a code of conduct for arbitrators, restrictions on third-party funding, and enhanced dispute prevention procedures.

  • Steps to implement these reforms would take place almost entirely at the international level through amending and renegotiating IIAs. UNCITRAL WGIII is exploring an option for multilateral implementation of some reforms.

  • This approach is considered inferior to options A and B because it does not clearly serve regional integration goals and may pose an obstacle to later regional harmonization if it results in different members adopting more disparate international obligations. However, this approach still has the potential to be a substantial improvement over the status quo by reducing costs and enhancing state involvement.

Recommended Reforms to Substantive Investor Protections


Numerous options exist for updating substantive investor protections. These recommendations are focused on the most problematic provisions that deserve greater attention.

  • The definition of “investment” should be updated to an exhaustive or limited list to reduce ambiguities and inconsistencies in scope of protected interests.

  • Most-Favored Nation (MFN) clauses should be either eliminated or updated. Eliminating MFN clauses would leave national treatment (NT) provisions intact while preventing claimants from relying on rights under other BITs. Alternatively, an updated MFN clause could be designed to exclude rights and protections in other BITs.

  • “Fair and Equitable Treatment” (FET) clauses should be eliminated or updated. Eliminating FET provisions would prevent claimants from seeking protections that are above NT standards. An updated FET could be a “Fair Administrative Treatment” standard that essentially functions as a protection against denial of justice while reducing the ambiguities and inconsistencies of FET claims.

  • An explicit “right to regulate” clause should be adopted. Such a provision would guarantee that a State’s basic regulatory functions cannot be considered violations of one of investor protections.

Read the full memo here.