What to Expect in the January 2020 Session of UNCITRAL Working Group III on ISDS Reform

In January 2020, Working Group III (WG III) of UNCITRAL will convene in Vienna to work on possible ISDS reform. This will be the sixth week-long meeting that WG III has held on the topic since July 2017, when, prompted by widespread discontent with ISDS, the governing body of UNCITRAL gave WG III a broad mandate to pursue the issue. This note reviews developments at the most recent session of WG III in October 2019 and highlights key issues relevant for January and beyond.

1. Meetings to date

In its deliberations thus far, WG III has identified a wide range of concerns relating to ISDS, grouping them into four general categories: (1) costs and duration of proceedings; (2) inconsistency, incoherence, unpredictability and incorrectness of decisions; (3) arbitrators and decision-makers; and (4) third-party funding. WG III has agreed that reform solutions should be sought at the multilateral level for all of these.[1]

Delegates have also identified a set of cross-cutting issues that should be taken into account when crafting reform solutions, including:

• Means other than arbitration to resolve investment disputes as well as dispute prevention methods
• Exhaustion of local remedies
• Implications for third parties, and the role of third-party participation
• Investor obligations and counterclaims
• Regulatory chill
• Damages.[2]

Beginning with the October 2019 meeting, WG III discussions entered the critical Phase 3 of the mandate, during which delegates will develop solutions to be recommended to UNCITRAL. Phases 1 and 2 focused on articulating concerns and gauging the desirability of multilateral efforts to resolve them. Phase 3 will shape the breadth and depth of change actually being pursued.

2. What happened in October 2019

2.1. Scheduling the work

The 38th session, held in October 2019, began with the elaboration of a workplan—a rough timeline for addressing issues and crafting reforms. WG III agreed to focus in that October meeting on (1) a potential advisory centre or other assistance mechanism or mechanisms, (2) codes of conduct and (3) third-party funding. In January 2020, WG III will focus on a (4) stand-alone review or appellate mechanism, (5) a standing MIC and (6) the selection and appointment of arbitrators and adjudicators. Finally, in April 2020 it will discuss a range of issues, including dispute prevention and mitigation; treaty interpretation by states; security for costs; frivolous claims; multiple proceedings including counterclaims; reflective loss and shareholder claims; and a possible multilateral instrument or instruments for implementing reform solutions; it would also consider how to plan its future work.[3]

2.2. More voices and evolving issues

One notable aspect of the October session was how states focused on two issues—third-party funding and damages—that had not been highlighted in the UNCITRAL secretariat’s early catalogues of ISDS-related concerns.[4] However, they have been gaining increased attention throughout the process as delegates—particularly developing country governments—voiced their concerns.[5]

In October 2019, WG III tasked the secretariat with conducting further research on third-party funding and drafting text that could be deployed in arbitration rules, treaties or a multilateral convention to restrict or otherwise regulate the practice.[6] While some delegations highlighted the importance of coordinating with ICSID in developing solutions, others emphasized that the issues identified in, and reform options open to, the UNCITRAL process were broader than in ICSID, meaning that the UNCITRAL results need not be tied to ICSID’s. With respect to damages, delegates articulated concerns relating to their calculation and compensation in April 2019 and further emphasized them in the October 2019 meeting.[7] While some asked whether these issues fell under the mandate of WG III, the working group nevertheless requested that the secretariat consider how possible work on damages could be undertaken.[8]

3. What to look forward to in January

Per the workplan, the January 2020 session is “to consider the following reform options: (i) stand-alone review or appellate mechanism; (ii) standing multilateral investment court; and (iii) selection and appointment of arbitrators and adjudicators.”[9] Exploring these options offers governments and other stakeholders the opportunity to consider what is needed in international investment-related dispute settlement today and what type of dispute settlement system best meets those needs. Some of the issues relevant to that broad framing are previewed below.

3.1. Stand-alone review or appellate mechanism

Several countries have expressed their desire to discuss the option of an appellate mechanism, in particular as a tool for helping achieve the potentially competing goals of reducing inconsistency and incorrectness of ISDS decisions. This mechanism could take appeals from the existing regime of arbitration-based ISDS as well as from a new standing or court-type ISDS system.[10]

In this context, delegates will consider whether, to what extent and under what circumstances a review mechanism can address their concerns and will also seek to identify and avoid any unintended, undesirable consequences. While there are myriad practical and policy matters to address, some fundamental questions relate to the scope and purpose of review, balance between control by states and by an appellate body, and the impacts on the existing ISDS regime.

a. Scope and purpose of review

One critique of ISDS is that existing review mechanisms are too limited. In this context, states will consider additional grounds for final or interlocutory review. To what extent, for instance, are states concerned about tribunals’ abuses of discretion, erroneous interpretations of international law and errors of fact, including in assessments of domestic law?

The nature of the concern will inform what type of additional review is appropriate for both correcting individual cases and sending signals to arbitrators and adjudicators to prevent future errors. If, for instance, delegations perceive that tribunals have made errors in the appreciation of domestic law, how can they design a review mechanism to identify and correct those errors? Will the proper review mechanism always be up to another international level; or for some issues, down to courts, technical, or political officials of the host state or treaty parties?

Other critiques relate to issues of consistency, which can relate to consistency of awards under one treaty, across different investment treaties, across different areas of international law, and with states’ policies and interpretations of their treaties.[11] Not all review mechanisms will equally address the different types of consistency challenges. For example, an appellate mechanism that is independent and strong in relation to its states parties may be effective in harmonizing jurisprudence on investment protection standards across investment treaties and with other areas of international law. But the outcomes will not necessarily be consistent with all states’ understandings of their treaties.

As developments around the WTO’s Appellate Body help highlight, it will be important to consider the desired relationship between political and judicial power when it comes to interpreting and applying the treaties. It will similarly be important to identify what course-correction mechanisms would be desirable and available if one or more states (or other stakeholders) considered appellate decisions to be erring in their development of the law.

b. Balance between state control and appellate review in terms of enforcement

Related issues arise from the relationship between the reviewed award and subsequent domestic enforcement and challenge. Would the product of an international appellate process be like an ICSID award, relatively shielded from additional scrutiny by domestic courts? Or will there be some grounds under which courts at the seat of the ISDS award or the place of eventual enforcement can examine the award or the appellate decision for inconsistency with mandatory law or public policy? Assuming that an appellate mechanism would not be examining whether decisions are consistent with the public policy of the enforcing state, are states willing to forego that basis for review—even if only exceptionally successful—in the interest of increasing the finality of appealed awards?

c. Intersection between an appellate mechanism and existing ISDS mechanisms

Other important questions arise with respect to whether and how a review mechanism would operate in relation to ad hoc ISDS. Having an appellate body sit over ad hoc arbitrations may address some oft-cited concerns with ISDS, but also leaves core parts of the current system intact. For example, this constellation may fail to address such issues as those related to adjudicator independence and impartiality, incentives toward expansive interpretations of jurisdictional and substantive standards, and costs of proceedings.

3.2. Standing multilateral investment court

Several delegations, led by the EU and its member states, wish to discuss the idea of a MIC. Unlike an appellate mechanism, a new court would—for states that to sign up to it—replace the current ad hoc ISDS system. Notable issues that arise in this context relate to standing and jurisdiction, the relationship with other legal norms and institutions, and the structure of a two-tier mechanism in case some type of review is desired.

a. Standing and jurisdiction

One issue for delegates to consider is whether a MIC would be open for ISDS only. One concern about that approach is that setting up a special court providing legal privileges to just one narrow group of stakeholders—foreign investors—would be a difficult political sell for such an ambitious international law project. Another is that it would offer incomplete or, worse, misguided solutions. Investment disputes are commonly complicated matters that emerge from, and have effects that go well beyond, those considered in ISDS and involve a range of stakeholders.

A MIC could, however, be designed to avoid institutional myopia by having jurisdiction over other types of claims relating to investment, including, for instance, state–state cases, torts cases against investors and certain types of contract cases. Also related to jurisdiction and scope is the ability of interested and affected third parties to intervene to protect their rights and interests,[13] as well as the ability of a respondent to invoke counterclaims.

Details pertaining to these issues, including the range of causes of action a court could hear and the types of disputes over which it may take jurisdiction, might not be discussed in January. Nevertheless, WG III could take intermediate steps, such as agreeing in principle to pursue a broad approach to investment-related dispute settlement, one that is not limited to cases of investment protection and that is designed to ensure that the rights and interests of non-parties are not adversely affected.

b. Relationship with other legal norms and institutions

Other sets of considerations relate to how a MIC would interact with other norms and institutions at domestic and international levels. The system could, for instance, build in referral mechanisms to ensure a profound understanding of and coherence with other bodies of law, such as international labour, human rights and environmental law and domestic law. This could help address concerns that rulings on investment protection focus too narrowly on investment law and fail to adequately or correctly incorporate norms from other spheres.

An additional set of considerations relates to the role of a potential new MIC relative to domestic law. Some delegations have emphasized the need to ensure that ISDS is an exceptional remedy, a system of last resort.[14] With that aim in mind, what principles of complementarity and subsidiarity can be integrated into the court design and how can they be operationalized?

c. Combining the standing court with an appellate mechanism

The EU MIC submission proposes a two-layer institution, including a first-instance tribunal and an appellate mechanism. WG III could examine the rationale for this, going beyond the experience at the WTO and considering the structure of other courts, including human rights courts such as the European Court of Human Rights and the Inter-American Commission and Court on Human Rights.

3.3. Selection and appointment of adjudicators

The topic of selection and appointment of adjudicators intersects with a range of issues, such as those relating to the independence, impartiality, quality, competence and other desired characteristics of adjudicators; ensuring diversity (including in terms of gender, nationality and cultural and socioeconomic background); and balancing potentially competing qualities of independence and accountability.[15] WG III will likely consider these issues with respect to each scenario explored: under existing investor–state arbitration, an appeals mechanism or a MIC.

Each of these scenarios will generate overlapping, but also distinct, questions and responses. For example, addressing multiple hatting would be relevant for all scenarios, but a requirement not to have outside professional activities would be relevant only for full-time adjudicators. The method of selection and appointment will vary across all options. Consequently, discussions will need to address fundamental issues such as the disputed importance of party autonomy in appointing adjudicators, the design and use of rosters, practical options for nomination and selection and the terms of more permanent roles.[16]

Even adjudicators in a court or appellate mechanism may be mindful of their professional prospects as counsel and ISDS arbitrators upon expiration of their tenure. Thus, it will be important for WG III to also consider cooling-off periods or other approaches to address concerns about financial incentives that may cause—or be perceived to cause—adjudicators to favour claimant-friendly interpretations of treaty provisions.

4. Conclusion

UNCITRAL WG III offers a platform for countries to creatively discuss the reform of investment-related dispute settlement. The January 2020 meeting is a key moment for delegates to demonstrate whether and how they will seize the moment and push for real change.

Authors

Nathalie Bernasconi-Osterwalder leads the Economic Law and Policy Program at IISD and is Executive Director of IISD Europe in Geneva. Lise Johnson is head of Investment Law and Policy at CCSI. The authors would like to thank Martin Dietrich Brauch and Brooke Skartvedt Guven for reviewing and providing helpful comments on drafts of this piece.

Notes

[1] Brauch, M. D. (2018, December 21). Multilateral reform is desirable: What happened at the UNCITRAL meeting in Vienna and how to prepare for April 2019 in New York. Investment Treaty News, 9(4), 4–7. Retrieved from https://stg.ITN.IISD.org/2018/12/21/multilateral-ISDS-reform-is-desirable-what-happened-at-the-uncitral-meeting-in-vienna-and-how-to-prepare-for-april-2019-in-new-york-martin-dietrich-brauch

[2] For a discussion of these topics, see Columbia Center on Sustainable Investment (CCSI), International Institute for Environment and Development (IIED) and International Institute for Sustainable Development (IISD). (2019, July 15). UNCITRAL working group III on ISDS reform: How cross-cutting issues reshape reform options. Retrieved from https://www.IISD.org/sites/default/files/uploads/uncitral-submission-cross-cutting-issues-en.pdf

[3] UNCITRAL. (2019, October 23). Report of Working Group III (Investor–State Dispute Settlement Reform) on the work of its thirty-eighth session (Vienna, 14–18 October 2019) (A/CN.9/1004), paras. 25, 27, 104. Retrieved from https://undocs.org/en/A/CN.9/1004

[4] Some early notes by the secretariat did briefly reference third-party funding, but did not catalogue the range of concerns related to it that have since been raised in WG III. See UNCITRAL. (2017, September 18). Possible reform of investor–State dispute settlement (ISDS) (A/CN.9/WG.III/WP.142), para. 44. Retrieved from https://undocs.org/en/A/CN.9/WG.III/WP.142

[5] The evolution of the discussion on third-party funding can be seen in the reports of WG III meetings, from the 34th through to the 38th sessions, all available at https://uncitral.un.org/en/working_groups/3/investor-state

[6] UNCITRAL (2019), supra note 3, para. 97.

[7] UNCITRAL (2019), supra note 3, para. 24.

[8] UNCITRAL (2019), supra note 3, paras. 102–104.

[9] UNCITRAL (2019), supra note 3, para. 25.

[10] The UNCITRAL secretariat is preparing a document, A/CN.9/WG.III/WP.185, on review, appellate and multilateral court mechanisms. As of the time of writing, it was not yet available.

[11] See Johnson, L. and Sachs, L. (2019). Inconsistency’s many forms in investor–state dispute settlement and implications for reform. Retrieved from http://ccsi.columbia.edu/2018/11/27/inconsistencys-many-forms-in-investor-state-dispute-settlement-and-implications-for-reform

[12]

[13] For additional discussion of issues relating to the rights and interests of third parties in the context of ISDS and reform options, see, for example, CCSI, IIED and IISD. (2019, July 15). Third-party rights in investor–state dispute settlement: Options for reform. Retrieved from https://www.iisd.org/sites/default/files/uploads/uncitral-submission-third-party-participation-en.pdf

[14] Comments to this effect were made, for instance, by Colombia in the 38th session (October 14, afternoon). Other relevant comments related to support for exhaustion of local remedies, which were made, for instance, in the 38th session by a number of governments (for example, Colombia, the Dominican Republic, Indonesia and Sri Lanka), discussed in the third intersessional meeting in Guinea, and have also been highlighted in written submissions, including those from Indonesia, Mali, Morocco and South Africa. The written submissions and report from the Guinea intersessional are available at https://uncitral.un.org/en/working_groups/3/investor-state. The audio recordings are available at https://uncitral.un.org/en/audiorecordingstemporary

[15] For more on these and other issues, see, for example, UNCITRAL. (2019, 31 July). Possible reform of investor–State dispute settlement: Selection and appointment of ISDS tribunal members (A/CN.9/WG.III/WP.169). Retrieved from https://undocs.org/en/A/CN.9/WG.III/WP.169; Larsson, O., Squatrito, T., Stiansen, Ø., and St John, T. (2019, September 17). Selection and appointment in international adjudication: Insights from political science (Academic Forum on ISDS Concept Paper 2019/10). Retrieved from https://www.jus.uio.no/pluricourts/english/projects/leginvest/academic-forum/papers/papers/larsson-selection-and-appointment-isds-af-10-2019.pdf

[16] For further discussion of some issues and options, see, for example, sources cited id.