New Wine in Old Casks: The Imperial Legacies of FDI Protection and its Chilling Effect on the Regulatory Autonomy of Latin American and Caribbean States

New Wine in Old Casks: The Imperial Legacies of FDI Protection and its Chilling Effect on the Regulatory Autonomy of Latin American and Caribbean States

Jodi-Ann Stephenson

The socio-political context of colonialism and imperialism, within which the rules on foreign investment protection originated, has had an enduring effect on the evolution of foreign direct investment (‘FDI’) and its protection. Despite the formal ending of colonialism, the imperial space within which the rules of foreign investment protection originated has profoundly impacted the character and development of modern international investment law (‘IIL’), producing both substantive and procedural asymmetries. Although the world today does not identically replicate all the features of this era, the ‘colonial mindset’ is evident in the utilisation of the public law of Western capital-exporting states (typically former colonial/imperial powers) to determine the content of IIL, which is reminiscent of metropolitan centres determining ‘the content of civilised justice’. This content bestows a plenitude of rights upon foreign investors and protection for foreign direct investments (without the burden of positive investment treaty obligations), while host states, domestic investors, and investment-affected communities are left without comparable rights and protections.

While the end of ‘formal’ colonialism brought political independence to the colonies, it also left the coffers of these newly reconstituted states practically bare. Since the domestic economies of many postcolonial nations had been wholly based on the production and export of raw materials under colonisation, with minimal to no industrial infrastructure, many of these nations struggled to create independent economies that would allow them to prosper as their former colonisers had. With limited financial resources at their disposal, and the absence of international financial aid, developing nations were obliged to depend on foreign direct investment—predominantly from citizens of former colonial powers—as the singular means of investment inflow to stimulate growth within their economies. For many of these nations, political independence was simply old wine in new casks, as the unequal social, economic and political arrangements that were established under colonialism became an engrained legacy within their societies.

The reification and legitimisation of western IIL content over time, by legal institutions, academics, lawyers, arbitrators and judges into normative, universally applicable principles, has eventually served as the foundation for the extensive protections provided by contemporary international investment agreements (‘IIAs’). The consequences of the foundational asymmetries on which these protections are based are particularly felt in developing nations, such as those within Latin America and the Caribbean, where insufficient consideration is given to the social, environmental, ethical, and human rights issues that arise as a result of the promotion and protection of FDI in these states. This lack of consideration exacerbates the present tension between FDI protection under IIAs, and the host state’s exercise of its sovereign regulatory powers. The creative and expansive arbitral interpretation of FDI protective provisions within IIAs, coupled with host states’ fear of foreign investor backlash via costly investment claims often has a chilling effect on host states’ implementation of public interest measures and governmental regulatory prerogatives.

The Impact of Creative and Expansive Arbitral Interpretation of IIAs

The current global investment environment continues be governed by BIT models, and standards of protection which arose due to the preoccupation of capital-exporting states with safeguarding their investors from nationalist hostilities during the post-colonial era. International arbitral tribunals have since applied and interpreted these treaty standards, and have made consequential and innovative decisions, often expanding the character and scope of particular fundamental IIL principles. Several Latin American decisions have seen that the broadened definition of ‘expropriation’, whether direct, indirect, regulatory or consequential, continues to require the payment of ‘prompt, adequate and effective’ compensation—with scant, if any regard paid to the purpose of the taking or the condition of the host state’s economy. Despite the vague drafting and the lack of clarity regarding the content of obligations such as ‘fair and equitable treatment’, ‘full protection and security’ or the ‘most favoured nation principle’ (‘MFN’), they tend to be generously interpreted in favour of the investor. While the proclaimed intent behind these protections is to defend against capricious state conduct, investors have progressively employed such protections to attack public welfare regulation. IIL is thus seen as continuing the ‘imperialist pattern of manipulation of legal doctrine’ in order to facilitate foreign investors’ encroachment into the host state’s policy-making sphere.

Constraint on Host State Regulatory Space

Although states possess the sovereign authority to take measures that are in the best interests of their citizens and their natural environment, state regulation which adversely impacts investment activities may result in a breach of its substantive treaty obligations. For example, state measures to alleviate the financial effects of COVID-19 that appear to favour certain investors based on nationality could potentially violate MFN and national treatment standards. These obligations constrain states’ ability to grant, in exceptional cases, preferential, (i.e. differentiated) treatment to specific or domestic investors. Arbitral tribunals’ expansive interpretations of these widely-drafted obligations have been highly criticised for fashioning a regime which has a potentially chilling effect on public interest measures, and that undermines governmental regulatory prerogatives, particularly in times of financial crisis and public emergency. 

Regulatory Chill

The desire for FDI may cause states to sometimes refrain from adopting policies or recall measures implemented to address pressing social, environmental and human rights issues, and even violate international obligations in these respects to avoid facing multi-million-dollar investment claims, and to be viewed as having a favourable foreign investment climate. While enforcement mechanisms in environmental and international human rights law are quite limited, IIL is contrastingly well-equipped, having stringent dispute settlement mechanisms which may be utilised by aggrieved investors to obtain compensation. Furthermore, investors have prevailed in 70 per cent of the cases brought against Latin American and Caribbean (‘LAC’) countries. Consequently, LAC countries have already paid out US $20.6bn to foreign investors—which is equivalent to Bolivia’s health and education budget for four years. 

Defending ISDS claims is also quite costly, and these awards can greatly impact a state’s budget—as seen, for example, in Occidental v Ecuador, where the US $2.3bn award encompassed Ecuador’s annual health budget. When confronted with this dilemma, states—particularly developing states who have witnessed the dire consequences meted out to other countries for breaching their investment obligations—may be more inclined to prioritise and satisfy these obligations rather than their environmental, social and human rights obligations. Recently, for example, the Peruvian congress decreed a state of emergency due to the COVID-19 pandemic and suspended the toll collection, in order to, inter alia, facilitate the transport of essential goods and workers. However, upon being threatened by foreign investors with ISDS claims, the executive branch launched constitutionality proceedings to reverse the law suspending tolls, for fear of exorbitant investment awards being levied against them. 

Although arbitration tribunals do not always rule in the investor’s favour, by tending to disregard the state’s legitimate motives and overprotecting investors’ interests through their expansive treaty interpretation, arbitral tribunals have arguably crept into the policy space of many developing countries, and have forced such host states to ‘outsource’ the adjudication of critical aspects of domestic public policy to international investment tribunals.

Government Measures in Response to COVID-19 Pandemic and Threat of ISDS Claims

There is a growing concern that governmental response to the COVID-19 pandemic, including public interest measures adopted to safeguard public health and to counter the dire socioeconomic impact of the pandemic, could expose states to investor-state dispute settlement (‘ISDS’) proceedings. Developing countries may be especially susceptible to the far-reaching effects of the pandemic, due to already overburdened and under-resourced healthcare systems. Peru, Mexico, Argentina, Bolivia and Guatemala represent a few of the Latin American states being threatened by foreign investors for the mitigation measures being implemented. Despite calls for a moratorium on all ISDS claims and a permanent bar on all ISDS claims connected to state measures concerning the health, economic and social aspect of the pandemic and its impacts, international law firms are advising current and potential clients on how host state measures could give rise to lucrative ISDS claims. Moreover, arbitrators are declining states’ requests to suspend ongoing arbitrations, and are pressing governments to pay out millions to investors, despite the dire need by states to allocate public funds to more urgent public health priorities.

Notwithstanding the pressure being faced by developing states in particular to combat the public health, social and economic crisis arising from the pandemic, foreign investors have placed further stress on governmental capacity by continuing to file new arbitration claims. Between March 2020 to the end of June 2021, at least 116 new ICSID claims have been filed globally, 29 of which are against LAC countries. Although these claims may not be directly connected to the host states’ responses to the pandemic, they shift financial and human resources from where they are presently most needed: in fighting COVID-19 and its socio-economic fallout. The COVID-19 pandemic emphasises the need to strike a truly fair and equitable balance in IIL. 

Attempts to Address the Imbalance

Recent decades have witnessed a heightened demand for scrutiny and transformation of the IIL system. There are growing concerns that foreign investors are taking advantage of its structural asymmetry, and are weaponising ISDS to attack even legitimate governmental policies and measures, that they claim diminish the value of their investments. Critics have asserted that the failure of ISDS to offer equal and effective rights to all participants, and those adversely impacted by investor-activity, casts doubt on the legitimacy and fairness of the entire IIL regime. In light of these criticisms, states and international arbitration institutions have taken steps to effect ISDS reform. Contemporary IIAs and arbitration rules have largely focused on improving transparency, arbitral independence and impartiality. However, the issue of structural asymmetry remains to be effectively addressed. For example, while the inclusion of corporate social responsibility provisions into IIAs, for example, is a step in the right direction, it has had limited success due to the non-binding, non-enforceable and largely hortatory nature of the provisions. Additionally, third-party participation in ISDS is not currently devised to safeguard third parties, despite the possibility of their rights and interests being directly impacted by investor activities. Counterclaims may involve third-party rights and interests; however, there is uncertainty regarding a state’s suitability to espouse these claims. For example, the Chevron v Ecuador tribunal notably dismissed environmental counterclaims, reasoning that the proper parties to launch the claims were the persons harmed by the environmental damage. This state of the law often leaves negatively impacted parties without an appropriate remedy, as IIL does not currently allow adversely affected individuals or communities to initiate ISDS proceedings against foreign investors. Furthermore, notwithstanding the potential of amicus submissions to provide balanced access and aid tribunals in taking a more holistic approach to determining disputes, their admissibility remains at the tribunal’s discretion, and the disputants’ agreement to accept them. Despite the steps made thus far attempting to create a greater balance, the shortcomings of these measures and proposals demonstrate that there is still much work to be done. 

The Way Forward

The reification of western foreign investment protection rules as pre-existing, apolitical, and universally applicable international principles guided the development of IIL into an asymmetric regime. The current IIL regime harks back to the era of imperialism, by continuing solely to safeguard foreign investors interests, without imposing the burden of corresponding obligations, while constraining the host state’s regulatory autonomy and saddling it with commitments to protect foreign investments, even to the detriment of competing public interest priorities. This state of affairs is only exacerbated by the indifference of IIL system to non-economic issues such as the adverse impact of investors’ activities on the host state’s health, labour, human rights and environmental concerns, as well as the exclusion of the host state and third-parties harmed by these activities from the scope of protection afforded by IIL. This exclusion is, of course, most profoundly felt by developing and least-developed countries, who bear the brunt of ISDS claims, and whose citizens often cannot obtain effective recourse locally or internationally. 

Although the heightened criticisms and backlash against the IIL system has resulted in some baby steps towards positive change, there is much work to be done. Attaining a levelled playing field in IIL is no small feat, and it requires co-operation among developed states, developing states, arbitral institutions and other non-state actors alike. Achieving an inclusive and symmetrical international legal framework for FDI regulation demands a complete paradigm shift: from the investor-centredness of the present regime, to one that balances investors’ plethora of rights with positive obligations; one that takes into equal account the needs of the foreign investor and the interests of local communities; and one that allows for reasonable and well-defined public policy exceptions that safeguard the state’s regulatory autonomy to act in the best interests of its citizenry. This shift needs to be seen in the negotiation and drafting of IIAs and institutional rules, as well as reflected in arbitral tribunals’ interpretation and reasoning of these agreements and rules. The drafting and interpretation of IIAs must protect and encourage good faith public interest regulatory measures, without the fear or threat of ISDS proceedings, as well as protect and promote FDI for sustainable development. The present COVID-19 crisis, and the potential onslaught of ISDS claims as a consequence of measures taken by states to combat the pandemic, only make it more apparent that the time for change is now.

Jodi-Ann Stephenson is a 2019/2020 Chevening Scholar and an attorney-at-law who is called to the Bars of Jamaica and Saint Lucia. She holds a Master of Laws (LLM) degree in International Commercial Law at University College London. Jodi-Ann is a passionate advocate for the development of arbitration in Jamaica and the wider Caribbean. She is a member of the Chartered Institute of Arbitrators and sits on the Executive Committee of the Caribbean Branch. She is also the Chair of the CIArb Caribbean Young Members Group – the first international ADR group in the Caribbean, that is geared specifically towards promoting the awareness and use of ADR among young professionals and students.  Jodi-Ann has gained experience in the banking and finance sector through her work with Inter-American Development Bank as legal consultant on their LIBOR contract remediation project.  She currently acts as a legal consultant in the manufacturing and construction industries. For more from Jodi-Ann, please see
Does a Right to a Physical Hearing Exist in International Arbitration?

Photo by Marvin L on Unsplash

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Investment Law, Latin & South America, Symposia
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