Financial Express Bangladesh | 6 July 2020
Revisiting BITs in the wake of Covid-19
by Shahrima Tanjin Arni
The tension between the state’s regulatory sovereignty and investor’s interest has recently mandated many states to repudiate or review their existing Bilateral Investment Treaties (BITs). This tension has aggravated with states introducing regulatory measures to curb the spread of Covid-19 and acclimate the unprecedented economic surf amidst global pandemic situation. Though the rationale behind such measures is manifest and incontrovertible, often the BIT mechanism counted on by arbitral tribunals in case of Investor-State-Dispute-Settlement (ISDS) falls short to accommodate such unprecedented epidemic sovereignty. Amidst the global risk of ISDS claims, it is incumbent to shed light on Bangladesh’s BIT structure and its feasibility to confront ISDS claims in the backdrop of Covid-19 regulatory space.
As the global health crisis unfolds, many states are taking measures to neutralise the sudden intimidation of public health and economy. For example, Spain passed a decree empowering the Minister of Health to temporarily occupy privately owned establishments and Canada passed Emergency Response Act allowing the government to directly produce and sell patented medicines and India has restricted export of 26 pharmaceutical ingredients through a gazette notification. Depending on the far-reaching effect of these regulatory choices, foreign investors may claim an alleged breach of treaty obligation which has resulted in a global debate among international investment lawyers as to whether states will be able to defend themselves in claims arising out of Covid-19 related regulatory measure. Such debates cannot be overlooked in the backdrop of ISDS outcomes during the previous political, regional and economic crisis. For example, in 2001, Argentina had to face almost 50 ISDS claims against emergency measures to tackle the almost total economic breakdown of which many final awards were decreed against Argentina amounting to more than US$ 2.0 billion. Amidst unprecedented internal unrest, Egypt suspended the sale of gas to a Spanish plant prioritising supply to the domestic market and investors were awarded more than US$ 2.0 billion in Union Fenosa v Egypt (2014). In contrast, the arbitral tribunal dismissed investor’s claim in Alexandros Bakatselos v Cyprus (2018) allowing the legitimate exercise of Cyprus’s regulatory power against Greek’s debt crisis. Also in Eli Lilly v. Canada (2017), the tribunal dismissed investor’s claim against Canada for invalidating two of its drug patents. The defence of ‘necessity’ as used by Egypt in the case mentioned was rejected on the threshold of not being the ‘only way’ whereas the tribunal accepted Cyprus’s defence of using ‘police power doctrine’ to protect public welfare which was rather rejected in SD Myers v. Canada (2004) as being second guess political and policy decision. Such a lack of uniformity in tribunal’s decision and interpretation makes the states sceptic devise a regulatory substructure during a crisis to avoid investors claim.
While dealing with unparalleled economic and non-economic repercussions of Covid-19 situation, the need to avoid ISDS claims is a fortiori. States may be baffled with multiple ISDS claims based on analogous facts from various investors and arbitral tribunals may as well address them divergently as it was observed in Spain’s renewable energy saga. This is largely attributable to vaguely framed treaty obligations and their inconsistent interpretation. Among substantive treaty obligations, investors have relied upon broadly drafted Fair and Equitable Standard (FET) in 83.0 per cent claims so far. Nevertheless, in Philip Morris v Uruguay (2016) the arbitral tribunal stipulated that legitimate expectations and legal stability as envisaged under FET standard do not over through the host states regulatory sovereignty to adapt to varying economic, legal or policy changes. However, in a slightly dissenting opinion, Gary Born observed that ‘the proper degree of deference’ must rely strictly on the terms of a treaty in the first instance and requires a rational and proportional connotation of the regulatory measure. Thus, in the backdrop of Covid-19 regulations, the tribunals will take recourse to the text of the investment treaty that caters for public health exceptions. Also while determining whether a regulation is rational and proportionate under FET standard, the tribunal will compare the relative preference of the state through independent clauses involving public health. As such it is crucial to assess the compatibility of BIT scheme of states to successfully defend the ISDS claims to challenge the regulatory intervention during Covid-19.
The first defence available under the treaty mechanism is non-precluded measure (NPM) provision, widely known as ‘general exception’. NPMs generally curb some of the states regulatory measures out of the overall treaty obligation and allow the states somewhat of regulatory sovereignty over non-investment matters. Currently 163 BITs in force around the globe address public health as one such exception. The only Bangladeshi BIT with similar NPM clause is Bangladesh-Turkey BIT (2012) which empowers host state to take non-discriminatory legal measures to protect public health. The second defence available is an exception to specific provisions such as Most Favoured Nation (MFN) or National Treatment (NT) clause. Bangladesh-France BIT (1985) is the only Bangladeshi BIT that ousts environmental and public health measures of host state from MFN obligation towards investors. The third defence is independent treaty provisions protecting the sovereign rights of the host state in non-investment concerns. Among 32 Bangladeshi BITs, only the Bangladesh-Turkey (2012) BIT balances the investment and non-investment concerns at any stage of investment and allows states to take any legal measure for protecting public health, life and environment allowing regulatory sovereignty. Lastly, states may also defend current regulatory measures by invoking an investment commitment clause which requires investors to comply with host states international obligations about public health, as put only in Bangladesh-UAE BIT (2011). Though the effectiveness of these methods is still to be examined the new-generation of BITs are more protective of the regulatory space to be availed by host states, as such, 16 BITs entered by India under the Indian Model BIT(2012) include NPM or general exception clause. The USA Model BIT considers regulatory protection as policy justification and demarcates health, environment and safety as objectives in the preamble itself. Thus, Bangladesh immediately needs to revisit the existing BITs to adjust them with in-depth consideration of legal and economic paradigm shift, if not during, then after Covid-19 crisis.
There are at least ten options available to states to revisit its existing BITs including joint interpretation, amendment and replacement of existing BITs. Bangladesh signed its first Joint Interpretative Notes with India through Bangladesh–India BIT (2009) which clarified some clauses in the BIT. Engaging in joint interpretation for clarifying the provisions of existing BITs is one of the fastest ways to revise the BIT as per its changed economic and policy circumstances as it does not require ratification and amendment or renegotiation may require comparatively more time and cost. However, it further explains already existing provisions only and as such, it is not possible to bring in fresh concepts like independent clauses or general exceptions. Thus many BITs contain provisions for amendment of the agreement any moment during the continuance of the treaty-based on bilateral consensus. Only six recent Bangladeshi BITs provide for such amendment clause. Among rest of the BITs, the oldest BIT signed with the UK contains no such provision whereas the UK-Ethiopia BIT (2009) allows amendment by mutual consent directing a recent practice of adding amendment clause in BITs. Despite the absence of such express provisions, amending a BIT is possible through exchange of notes as illustrated by the Paraguay-United Kingdom BIT (1981) in 1997. However, these amendments are still in the process of ratification and are typically narrow as they do not affect the overall treaty design and as such states have resorted to this method rather frugally. Replacement of the existing treaty perhaps enables a state to comprehensively revise the entire treaty instead of picking some individual clauses and amending them. A fresh treaty offers the parties an opportunity to deal with earlier challenges, rigorously incorporating the new concepts that cater to their need. 130 BITs have been replaced till date and Netherland has itself replaced 79 older generation treaties suggesting popularity of the method. In 2008 Ecuador and 2012 India formulated a model BIT with revised policy autonomy for negotiation of future BITs even with prior treaty partners. Time being a decisive matter in revising a treaty, many scholars have suggested withdrawal of consent in treaty-based ISDS mechanism lately. Superficially it seems to solve the threat to the states at once but it is also argued that such sweeping powers will jeopardize global rule of law allowing many states to capriciously use Covid-19 situation to harm investors.
The pandemic has as such argued the regulatory perforation in existing Bangladeshi BIT mechanism to deal with complex, expensive and uncertain repercussion of ISDS claims. As such, the accommodation of public health policy space as suggested above within the ambit of Bangladeshi BITs only will allow the tribunal to provide an appropriate margin of appreciation to Bangladesh based on plain BIT texts and is likely to pronounce Covid-19 regulatory measures compatible with treaty obligation if they are non-discriminatory, necessary and proportionate.
Shahrima Tanjin Arni is the International Affairs Secretary of DUCSU and currently pursuing her LLM in International Law at University of Dhaka.