UNCITRAL Working Group III: ISDS’ Legitimacy Crisis Resolved?
Introduction
The Investor-State Dispute Settlement (“ISDS”) regime is a mechanism where an investor can bring claims against a foreign country for unjust state actions affecting their investment. These work under the aegis of bilateral investment treaties (“BITs”), which often lay down a neutral arbitration recommendation. At present, ISDS has been subjected to a public legitimacy crisis.[i] The rhetoric that that ISDS promotes rule of law, protects investors from arbitrary actions,[ii] and fosters economic development of the host state,[iii] is continuously being debunked. With a surging number of disputes, the dire need for a reform culminated in the UNCITRAL Working Group III (“WGIII”). In 2017, WGIII was tasked with the responsibility to fix the legitimacy crisis and to that end, UNCITRAL entrusted WGIII with a broad, open-ended, and a flexible mandate.[iv]
WGIII has organised 12 sessions since its inception in 2017. They are held annually or biennially in Vienna or New York. WGIII is government-led and attended by observer organisations.[v] At the 34th session, it was decided that WGIII will focus exclusively on procedural reform of ISDS.[vi] Moreover, WGIII will only focus on treaties and not investment contracts.[vii]
In this piece, I attempt to inquire whether the WGIII has lived up to its expectations to resolve the legitimacy crisis. To this end, first, I cull out the reasons for dissent against ISDS and the legitimacy crisis leading up to the formation of WGIII. The WGIII has started out ISDS reformation by suggesting procedural reforms. Therefore, next I analyse whether WGIII’s decision to constrict its discussion to procedural reforms is reasonable. Finally, within the procedural reforms, I iron out the procedural reforms that WGIII has failed to discuss at length. Importantly, this piece does not examine the normative value of the substance of the reforms.[viii]
The Legitimacy Crisis and Events Leading up to WG3
The primary concern against ISDS is that it interferes with the ability of states to regulate in public interest.[ix] A classic example of this would be the Argentina economic crisis where Argentine taxpayers were made to suffer due to investor’s extraordinary expectations in an economic crisis.[x] To contextualise, Argentina, in 2001-02, was in tragic state of affairs due to 50% fall in their Gross Domestic Product, unemployment rate above 20%, protests, demonstrations and weak political system. To handle the situation, the heads of state attempted to bring in a slew of economic reforms. However, between 2003-07, multiple claims before ICSID tribunals challenged these economic reforms, where inconsistent decisions led to Argentina paying large sums of compensation. Another example is Ethyl v. Canada where a government withdrew a proposed ban on gasoline additives with apparent health risks due to investor pressure through ISDS.
Consequently, ISDS leads to regulatory chill – a chilling effect on states from enacting regulations.[xi] States are reluctant to implement regulatory developments in public interest that might invite ISDS claims. These effects are sourced from inconsistent and incorrect decisions by tribunals.[xii] The adjudicators in ISDS lack diversity and concerns regarding their lack of independence and impartiality have been raised often.[xiii]
Mali, in WGIII, highlighted how developed countries exerted undue influence over developing countries through ISDS.[xiv] ISDS regime is perceived to be extremely pro-investor and oblivious to the problems of developing countries.[xv] In fact, as of 2017, 46% of cases had African countries as Respondent state.[xvi] Consequently, developing countries end up paying huge compensations and costs in a muddled jurisprudence papered by individuals without any regard for public interest. The trust deficit in ISDS is further widened since investors bear no obligations.[xvii]
Empirical studies have started to show that there is no correlation between ISDS and the economic development of host states.[xviii] In fact, arguments like ISDS promotes rule of law, increases foreign investment, depoliticises investment disputes are now being called “plausible folk theories”.[xix] The evidence is inconclusive.[xx] The macroeconomic effects of governance challenges due to ISDS have sometimes displaced the positive effects of ISDS on FDI.[xxi]
The dissent against ISDS has manifested in various forms. A broad spectrum of capital-exporting, capital-importing, developed, developing, and under-developed countries have taken measures to delineate their dissent. After the Achmea verdict,[xxii] 20+ European Union (“EU”) states have terminated intra-EU Bilateral Investment Treaties (“BITs”).[xxiii] The Canada-EU CETA exhaustively lists down FET breaches.[xxiv] The new USMCA removed ISDS.[xxv] Latin American countries like Bolivia, Ecuador, and Venezuela have started terminating BITs and denounced the ICSID Convention.[xxvi] The India-Brazil BIT has an ombudsmen mechanism.[xxvii] Morocco’s new BITs include dispute prevention, limited investor-protection, counterclaims.[xxviii]A few BITs have introduced investor obligations with respect to environment, human rights, and corruption.[xxix] In their written submissions to WGIII, Indonesia[xxx] and Brazil[xxxi] elaborated on how they reshaped their BITs.
With these issues in ISDS and response by different states, UNCITRAL started the WGIII project to reform ISDS procedure. 3 issues – inconsistency in awards, lack of impartiality of awards and high costs were identified as a core.[xxxii] This core is slowly expanded to encapsulate issues like third-party funding, dispute prevention, regulatory chill, counterclaims, sustainable development goals (“SDGs”), etc.[xxxiii]
The Procedural vs Substantive Reform Dilemma
If countries feel a vague notion of fair and equitable treatment or expropriation is being applied, then does it make sense to restrict ISDS reform to only procedure? While WGIII’s approach sounds prima facie outlandish,[xxxiv] I believe that WGIII got this aspect correct.
The critiques of WGIII’s approach believe that the procedural-substantive dichotomy is illusory.[xxxv] Accordingly, the real issues lie in the substance. In the legitimacy crisis, scholars have launched broadsides against the fundamental premises of ISDS and want ISDS to be obliterated.[xxxvi] South Africa, in their written submission to WGIII, advocated for obligations on investors.[xxxvii] A procedural reform would necessarily work under the assumption, that ISDS should be preserved and reforms should be carried out within the bounds of ISDS.
The procedural-substantive dichotomy may be illusory; however, it is axiomatic that achieving consensus in procedural reform is much likelier.[xxxviii] Not all countries agree that there are issues in substantive provisions that cannot be cured by procedural reforms. For instance, within Africa itself, there is no consensus of whether ISDS should be completely thrown out of the window.[xxxix]
At this juncture, it is imperative to understand Prof. Anthea Roberts’ categorisation of states based on their perspective of ISDS.[xl] The types of states are: incrementalists, systemic reformers, and paradigm shifters. Incrementalists (e.g. US and Japan) claim that ISDS issues can be resolved through targeted reforms like drafting treaties and joint interpretations without leaving much room for arbitral discretion. Systemic reformers (e.g. EU and Canada) believe that incremental changes are insufficient to cure inconsistency, and a multilateral investment court (“MIC”) and appellate mechanism is needed. Paradigm shifters (e.g. Brazil and South Africa) refute ISDS’ legitimacy and legitimacy of any system that allows direct international claims by investors.[xli]
Out of this, it is clear that the incrementalists and systemic reformers want procedural reforms. In fact, EU, in their submission, praised the effects of FDI in development and how ISDS was important.[xlii] The demands of paradigm shifters lie in a somewhat grey area as evinced from South Africa’s submission. South Africa expressed its discontent in the procedural mandate and suggested more substantive treaty reforms.[xliii] This echoes the disagreement in having substantive reforms.
Notably, WGIII has reiterated on multiple occasions that its mandate is flexible and it does not foreclose the possibility of extending it to substantive reforms in the future.[xliv] Reforms like appellate mechanism, exhaustion of local remedies, counterclaims have been discussed/brought up before WGIII.[xlv] These reforms have far-reaching consequences on the substantive treaty provisions. For instance, the possibility of counterclaims against investors will result in an entirely new interpretation and body of claims within ISDS. An appellate mechanism attempting to resolve inconsistency would evidently lead to outcomes different from the previous regime. To a great extent, one cannot assert that WGIII’s approach has been purely procedural. It is rather a convergence of reforms that can be early harvests but at the same time, have significant impact on ISDS. These early harvests could pave the way for more consensus in substantive reforms in the future. Therefore, WGIII is correct in their broad mandate.
Have the Concerns Been Addressed?
In this section, we look at issues that WGIII left out or gave little time. In a quest to better understand WGIII’s approach, it is imperative to look at the dynamics of discussion. Before the 39th session, Chile, Japan, and Israel backed by US, submitted a paper to prioritise low-hanging fruits even within procedural reforms.[xlvi] This would include reforms such as disclosure of third-party funding instead of the appellate body. This is in line with the incrementalist approach. On the other hand, the systemic reformers, i.e. Switzerland, backed by the EU and Mauritius, advocated for prioritisation of systemic reforms like MIC. US and Japan are opposed to the creation of MIC. Contrarily, EU made attempts to include more developing countries on board with the MIC by creating a travel fund. Finally, a concurrent approach having both of the reforms discussed simultaneously was adopted.[xlvii] A shift in geopolitical power ensures a greater say for developing countries. In fact, it is observed that the Global South has become more active in WGIII.[xlviii]
However, inclusivity cannot be a mere catchphrase thrown around. It becomes significant to appreciate cross-cutting issues like counterclaims, dispute prevention, regulatory chill, calculation of damages, promotion of SDGs and protection of human rights from investors. A reform in these areas has been continuously emphasised by developing countries, who want greater investor obligations and balance the tilted scales towards the host state.[xlix] Institutions have commented that cross-cutting are barely given any time in the formal WGIII sessions.[l]
On a perusal of the sessions conducted by now, a similar picture emerges. The 34th, 35th, and 36th sessions was entirely dedicated to costs, impartiality of arbitrators and inconsistency of awards.[li] Issues of regulatory chill, counterclaims, and calculation of damages were finally brought up in the 37th session. However, the three were barely discussed and dismissed on the grounds that they can be discussed with other reform options.[lii] After a plethora of written submissions by states before the 39th session, the issues of dispute prevention and counterclaims was finally discussed. However, the slew of issues were cramped in 1.5 weeks of discussion of formal WGIII sessions and an unofficial “other meeting time”.[liii] The 40th session dealt with selection and appointment of adjudicators.[liv]
Time and again, WGIII is simply ducking an extensive discussion on these topics such as counterclaims, dispute prevention and mitigation. In fact, the South African delegates did complain about the lack of attention given to these issues.[lv] The future is not looking any brighter since the 45th session (2023) largely dealt with mediation.[lvi]
Understandably, the incrementalists camp would argue that dealing with arbitrator impartiality is an easy win. The systemic reformers camp would argue that a measure as radical as MIC deserves the lion’s share of attention. These cross-cutting issues lie somewhere in the middle of incremental and systemic reforms. However, their importance cannot be undermined given the submissions by a host of developing states across continents. The developing countries that endorsed discussion on MIC also advocated for reforms in cross-cutting issues.
As portrayed earlier, the legitimacy crisis was not simply about biased white men[lvii] giving inconsistent decisions in an expensive arbitral process. It is also about the experiences of developing countries with ISDS. The countries want to avoid having the disputes in the first place. They do not want investors, who with their commercial panoply, foray into their states, disregard human rights and SDGs for commercial gains, and bend states to their will when states pass laws in furtherance of public interest. If WGIII claims to be in any way inclusive, it should discuss the cross-cutting issues at length.
Conclusion
In this piece, I have attempted to flag out concerns with WGIII’s approach. While I agree with WGIII’s decision to look into procedural reforms first, the treatment of cross-cutting issues has been disappointing. It is hoped that the same is rectified in the coming sessions. As of today, the legitimacy crisis is far from being resolved.
[i] Susan Franck, ‘The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law through Inconsistent Decisions’ (2005) 73 Fordham Law Review 107; Michael Waibel (ed), The Backlash Against Investment Arbitration: Perceptions and Reality (Kluwer 2010).
[ii] Stephan Schill, ‘In Defense of International Investment Law’ (2016) 7 European Yearbook of International Economic Law 309.
[iii] UNCITRAL Working Group III (39th session) ‘Submission from the European Union and its Member States’ (2019) UN Doc A/CN.9/WG.III/WP.159/Add.1 [4] [‘EU Submission’].
[iv] UNCITRAL Working Group III (34th session) ‘Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-fourth session – Part I’ (2017) UN Doc A/CN.9/930/Rev.1 [‘WGIII 34th Session Report’].
[v] ibid [6].
[vi] ibid[20].
[vii] ibid[28].
[viii] For a detailed discussion on specific reforms, see Marike Paulsson, George Pothan and Supritha Suresh, ‘Ongoing Efforts Towards Reforming the ISDS System: An Aide Memoire of the System’s Need Amidst Calls for Iconoclasm’ in Dushyant Dave and others (eds), Arbitration in India (Oxford University Press 2021) 333.
[ix] Jonathan Bonnitcha, Lauge NS Poulsen and Michael Waibel, The Political Economy of Investment Treaty Regime (Oxford University Press 2017) 234; Julian Arato, ‘The Private Law Critique of International Investment Law’ (2019) 113 American Journal of International Law 1.
[x] Rumana Islam, The Fair and Equitable Treatment (FET) Standard in International Investment Arbitration: Developing Countries in Context (Springer 2018) ch 6; CMS Gas Transmission Company v The Republic of Argentina, Award (2005) ICSID Case No. ARB/01/8.
[xi] Bonnitcha (n 9) 238.
[xii] ibid 249; Example of contradictory judgments on similar facts: CME Czech Republic B.V. v The Czech Republic, Award (2001) UNCITRAL and Ronald S. Lauder v The Czech Republic, Final Award (2001), UNCITRAL.
[xiii] Malcom Langford, Michele Potestà, Gabrielle Kaufmann-Kohler, and Daniel Behn, ‘Special Issue: UNCITRAL and Investment Arbitration Reform: Matching Concerns and Solutions’ (2020) 21 The Journal of World Investment and Trade 167, 171.
[xiv] UNCITRAL Working Group III (39th session) ‘Submission from the Government of Mali’ (2019) UN Doc A/CN.9/WG.III/WP.181 [3] [‘Mali’s Submission’].
[xv] Siobhán McInerney-Lankford and Manuela Corredor Vasquez, ‘UNCITRAL WGIII and Human Rights: towards a More Balanced ISDS System?’ (EJIL Talk!, 8 October 2020) <https://www.ejiltalk.org/uncitral-wgiii-and-human-rights-towards-a-more-balanced-isds-system/> accessed 29 September 2021.
[xvi] WGIII 34th Session Report [27].
[xvii] Bonnitcha (n 9) 257.
[xviii] Joachim Pohl, ‘Societal Benefits and Costs of International Investment Agreements: A Critical Review of Aspects and Available Empirical Evidence’ OECD Working Papers on International Investment 2018/01. <https://www.oecd-ilibrary.org/finance-and-investment/societal-benefits-and-costs-of-international-investment-agreements_e5f85c3d-en> accessed 29 September 2021.
[xix] Anthea Roberts and Taylor St. John, ‘UNCITRAL and ISDS Reform: Plausible Folk Theories’ (EJIL Talk!, 13 February 2020 <https://www.ejiltalk.org/uncitral-and-isds-reform-plausible-folk-theories/> accessed 29 September 2021.
[xx] ibid.
[xxi] Kyle Dylan Dickson-Smith and Bryan Mercurio, ‘Australia’s position on investor – state dispute settlement: Fruit of a poisonous tree or a few rotten apples?’ (2018) 40(2) Sydney Law Review 213; Eckhard Janeba, ‘Regulatory chill and the effect of investor state dispute settlements’ (2019) Review of International Economics.
[xxii] Slowakische Republik v Achmea BV, Case C-284/16, 6 March 2018 (Court of Justice of the European Union).
[xxiii] Paulsson (n 8) 339.
[xxiv] Comprehensive Economic Trade Agreement (Canada-EU) (30 October 2016), art. 8.10(2).
[xxv] Agreement between the United States of America, the United Mexican States, and Canada (7 January 2020), art 14.2(4).
[xxvi] Bonnitcha (n 9) 227.
[xxvii] Investment Cooperation and Facilitation Treaty Between the Federal Republic of Brazil and the Federal Republic of India (25 January 2020), art 14.
[xxviii] UNCITRAL Working Group III (39th session) ‘Submission from the Government of Morocco’ (2019) UN Doc A/CN.9/WG.III/WP.161 [9].
[xxix] Cooperation and Investment Facilitation Agreement Between the Federal Republic of Brazil and Cooperative Republic of Guyana (13 December 2018), art. 14(1)(b); The Reciprocal Promotion and Protection of Investments between The Argentine Republic and The State of Qatar (6 November 2016), art 12.
[xxx] UNCITRAL Working Group III (39th session) ‘Submission from the Government of Indonesia’ (2019) UN Doc A/CN.9/WG.III/WP.156 [3] [‘Indonesia’s Submission’].
[xxxi] UNCITRAL Working Group III (39th session) ‘Submission from the Government of Brazil’ (2019) UN Doc A/CN.9/WG.III/WP.171 [2].
[xxxii] Lorenzo Cotula and Terrence Neal, ‘UNCITRAL Working Group III: Can Reforming Procedures Rebalance Investor Rights and Obligations?’ International Institute of Environmental Development Investment Policy Brief No. 15 (2019) < https://www.southcentre.int/wp-content/uploads/2019/03/IPB15_UNCITRAL-Working-Group-III-Can-Reforming-Procedures-Rebalance-Investor-Rights-and-Obligations_EN-1.pdf> accessed 29 September 2021.
[xxxiii] ibid.
[xxxiv] Lisa Sachs, Lise Johnson, Brooke Guven, Jesse Coleman, and Ladan Mehranvar, ‘The UNCITRAL Working Group III Work Plan: Locking in a Broken System?’ (Columbia Center on Sustainable Investment, 4 May 2021) <https://ccsi.columbia.edu/news/uncitral-working-group-iii-work-plan-locking-broken-system> accessed 25 April 2023.
[xxxv] Langford (n 13) 172-173.
[xxxvi] Marwa Farag, ‘Arbitration Reform Efforts: Are Reformers Wasting a ‘Once-in-a-Lifetime’ Opportunity?’ (Kluwer Arbitration Blog, 4 June 2021) <http://arbitrationblog.kluwerarbitration.com/2021/06/04/arbitration-reform-efforts-are-reformers-wasting-a-once-in-a-lifetime-opportunity/> accessed 29 September 2021.
[xxxvii] UNCITRAL Working Group III (39th session) ‘Submission from the Government of South Africa’ (2019) UN Doc A/CN.9/WG.III/WP.176 [29] [‘South Africa’s Submission’].
[xxxviii] Langford (n 13) 173.
[xxxix] Farag (n 34).
[xl] Anthea Roberts, ‘Incremental, Systemic, and Paradigmatic Reform of Investor-State Arbitration’ (2018) 112 American Journal of International Law 410.
[xli] ibid.
[xlii] EU’s Submission [4].
[xliii] Anthea Roberts and Taylor St. John, ‘UNCITRAL and ISDS Reforms: Agenda-Widening and Paradigm-Shifting’ (EJIL Talk!, 20 September 2019) <https://www.ejiltalk.org/uncitral-and-isds-reforms-agenda-widening-and-paradigm-shifting/> accessed 29 September 2021.
[xliv] UNCITRAL Working Group III (35th session) ‘Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-fifth session’ (2018) UN Doc A/CN.9/935 [44] [‘WGIII 35th Session Report’].
[xlv] UNCITRAL Working Group III (39th session) ‘Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-ninth session’ (2020) UN Doc A/CN.9/1044 [‘WGIII 39th Session Report’].
[xlvi] Malcolm Langford and Anthea Roberts, ‘UNCITRAL and ISDS Reforms: Hastening Slowly’ (EJIL Talk!, 29 April 2019) <https://www.ejiltalk.org/uncitral-and-isds-reforms-hastening-slowly/> accessed 29 September 2021.
[xlvii] Anthea Roberts and Taylor St. John, ‘UNCITRAL and ISDS Reform: The Divided West and the Battle by and for the Rest’ (EJIL Talk!, 30 April 2019) <https://www.ejiltalk.org/uncitral-and-isds-reforms-the-divided-west-and-the-battle-by-and-for-the-rest/> accessed 29 September 2021.
[xlviii] Malcolm Langford, ‘UNCITRAL and Investment Arbitration Reform: A Little More Action’ (Kluwer Arbitration Blog, 21 October 2019) <http://arbitrationblog.kluwerarbitration.com/2019/10/21/uncitral-and-investment-arbitration-reform-a-little-more-action/> accessed 29 September 2021.
[xlix] See Indonesia’s Submission (regulatory chill and damages); South Africa’s Submission (investor obligations); Mali’s Submission (counterclaims); UNCITRAL Working Group III (39th session) ‘Submission from the Government of Burkina Faso (2019) UN Doc A/CN.9/WG.III/WP.199 (damages).
[l] Lisa Sachs, Lise Johnson, Brooke Guven, Jesse Coleman, and Ladan Mehranvar, ‘The UNCITRAL Working Group III Work Plan: Locking in a Broken System?’ (Columbia Center on Sustainable Investment, 4 May 2021) <https://ccsi.columbia.edu/news/uncitral-working-group-iii-work-plan-locking-broken-system> accessed 29 September 2021; Farag (n 34).
[li] WGIII 34th Session Report; WGIII 35th Session Report; UNCITRAL Working Group III (36th session) ‘Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-sixth session’ (2018) UN Doc A/CN.9/964.
[lii] UNCITRAL Working Group III (37th session) ‘Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-seventh session’ (2019) UN Doc A/CN.9/970 [34]-[38].
[liii] Sachs (n 48); Langford (n 46).
[liv] UNCITRAL Working Group III (40th session) ‘Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its fortieth session’ (2021) UN Doc A/CN.9/1050.
[lv] Sachs (n 48).
[lvi] UNCITRAL Working Group III (45th session) ‘Annotated Provisional Agenda’ (2023) UN Doc A/CN.9/WG.III/WP.225.
[lvii] Malcolm Langford, Daniel Behn and Runer Hilleren Lie, ‘The Revolving Door in International Investment Arbitration’ (2017) 20 Journal of International Economic Law 301, 313.