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22 May 2014
In 2013 the Caribbean Court of Justice delivered an important decision which may significantly affect the future enforcement of arbitral awards in Belize.
As a result of a related dispute, arbitration was commenced before the London Court of International Arbitration (LCIA). It was settled by a March 2005 settlement deed which contained, among other things, a tax regime that would apply to members of a group of companies including BCB Holdings Limited and the Belize Bank Limited. The tax regime was at variance with the applicable tax legislation, but it was implemented by the government and the group of companies for two years.
In 2008 there was a change in government and the new political party disavowed the settlement deed. BCB and the bank instituted arbitration before the LCIA, claiming that the government had repudiated the agreement and was in breach of its representations under the settlement deed.
One of the primary issues during the arbitration – which the government boycotted – was the government's capacity to enter into the settlement deed and consequently whether the settlement deed was valid and binding between the parties. The tribunal found that the minister of finance had the capacity to enter into the agreement and that the government was in breach of it. The tribunal awarded damages to the claimants, which it calculated as the value of the benefits of the tax concessions that would have been enjoyed over the remaining life of the agreement.
BCB and the bank applied in Belize to enforce the award against the government and at first instance the court ruled in favour of the claimants. On appeal, the Court of Appeal held by majority that the provisions of the Arbitration Act that provide for recognition and enforcement of New York Convention Awards were unconstitutional and void. It therefore did not pronounce on the merits. The matter ended up before the Caribbean Court of Justice, the final appellate court for Belize.
The court determined that the provisions of the Arbitration Act for the enforcement of New York Convention Awards were constitutional. Based on this, the Caribbean Court of Justice proceeded to address the issue of whether the award should be enforced. The decision that the provisions of the act relating to the enforcement of the convention awards is constitutional has resonance in those former British colonies which have made statutory provision for such enforcement as a colony. The decision explores in depth the validity of the provisions in light of the colonial constitutional arrangements and the state's succession to independence.
The government contended that the court was entitled to revisit the issue of illegality of the settlement deed, notwithstanding the fact that the tribunal had fully considered the issue and found the deed legal. The tribunal had decided that the minister had capacity to enter into the settlement deed, and in view of the minister's statutory power to make the concessions, the government's rejection of the settlement deed was a breach and the claimants were entitled to damages. It was the government's position that the tax concessions were so extensive that they constituted violations of the fundamental legal order of Belize and therefore the court should revisit the issue of the legality of the underlying deed. If it agreed, the government submitted that the Caribbean Court of Justice should refuse enforcement, as it would be contrary to public policy to enforce an award based on an unlawful deed.
The Caribbean Court of Justice confirmed that the act has a pro-enforcement bias. It held that courts should approach the public policy defence cautiously, as losing parties often seek to improperly reopen issues already determined in the arbitration. Public policy was first to be assessed in accordance with "the values, aspirations, mores, institutions and conception of cardinal principles of law of the people of Belize". However, this obviated the need for the court to have regard to international perceptions of public policy. In order to succeed, the government had to establish that the illegality relied on lay "at the heart of fundamental principles of justice or the rule of law and represented an unacceptable violation of those principles". The threshold that must be attained was "therefore a very high one".
The court concluded that in the face of credible allegations of illegality "the court must examine the Agreement and the promises the Minister made to the Companies against the backdrop of fundamental principles and rules". At the heart of the deed were the government's representations and warranties that it would afford specific tax concessions to the companies, and that the deed was to remain confidential. There was no legislative approval of the concessions enjoyed by the companies. It was the government's case that the deed was:
The court therefore concluded that these allegations entitled it to revisit the deed, notwithstanding the contrary finding of the tribunal.
The government did not participate in the arbitration and therefore its case was not fully put. The claimants had properly put before the tribunal as much evidence as they could gather – including pleadings filed by the government in domestic court proceedings – to enable the tribunal to consider possible arguments on which the government would have relied had it participated.
The Caribbean Court of Justice affirmed that the minister of finance had wide prerogative powers to enter into the deed. It also confirmed that the merits on which the state chose to settle claims brought against it was a matter exclusively for the executive. However, the court concluded that the taxation of persons is for the legislature, so that the absence of legislative imprimatur was fatal. The implementation of the tax concessions (as distinct from agreeing to them) without legislative approval was a violation of the separation of powers. The Caribbean Court of Justice disagreed with the tribunal that the minister of finance had statutory power to afford favourable tax treatment to the companies.
In refusing to enforce the award, the Caribbean Court of Justice concluded that the sovereignty of Parliament, subject to the Constitution, and Parliament's exclusive role in imposing taxes and conferring benefits, and respect for the separation of powers doctrine "are core constitutional value[s]" and "to disregard these values is to attack the foundations upon which the rule of law and democracy are constructed". As the award was based on a deed which was regarded as violating these fundamental core values, the requisite standard of 'international public policy' was met and enforcement was therefore refused.
This is an exceptional case and should be confined to its unusual facts. However, it does stand as highly persuasive authority for the proposition that violations of the constitutional order by a government when affording tax concessions to investors may afford a defence to enforcement of an arbitral award. The Caribbean Court of Justice affirmed for Belize, and by necessary implication the Commonwealth Caribbean, the pro-enforcement bias towards New York Convention Awards, and the cautious approach to parties raising the public policy defence.
For further information on this topic please contact Eamon Courtenay at Courtenay Coye & Co by telephone (+1 345 814 2013), fax (+1 345 949 4901) or email (email@example.com). The Courtenay Coye & Co website can be accessed at www.courtenaycoye.com.
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