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TWN
Info Service on WTO and Trade Issues (Jan20/02) The UN Commission on International Trade Law (UNCITRAL) Working Group III held its resumed 38th session between the 20th and 24th of January in Vienna to discuss reform of investor-state dispute settlement (ISDS). Since UNCITRAL was entrusted with this mandate in July 2017, the multilateral debate on ISDS reform has been largely concentrated at UNCITRAL. However, this issue has been a matter of discussions for years at the national, regional, and multilateral levels, including at UNCTAD in Geneva. In its March 2019 Issues Note titled “Reforming Investment Dispute Settlement: A Stocktaking”[1] UNCTAD had pointed out that States are adopting five different approaches to ISDS reform: not including ISDS in their treaties, adopting standing ISDS tribunals, limiting ISDS, improving ISDS procedures, or keeping ISDS unreformed. The deliberations at WGIII had identified four general categories of concerns with ISDS, including: costs and duration of proceedings; inconsistency, incoherence, unpredictability and incorrectness of decisions; arbitrators and decision-makers’ appointment methods and ethics; and third party funding. WGIII had also identified a number of ‘cross-cutting’ issues that were raised mainly by developing countries. These include: means other than arbitration to resolve investment disputes as well as dispute prevention methods, exhaustion of local remedies, third party participation, counterclaims and investor obligations, regulatory chill, and calculation of damages. While there was agreement in WGIII that these issues will be taken into account as the working group develops tools to address various concerns, they are rarely being addressed in an integrated manner as discussions on reform options evolve. Deliberations in WGIII take place primarily with reference to notes prepared by the UNCITRAL secretariat and guiding questions raised in those notes. The Third World Network had proposed in an intervention, during the meeting in Vienna, that it would be useful if the secretariat considers how to integrate these cross-cutting issues in the notes it presents on various possible reforms, where and as relevant. Generally, the discussions in WGIII do not touch upon changing the basic nature of the ISDS system, which is exclusively available to foreign investors allowing them to initiate claims against host countries based on alleged breach of standards of protection in underlying investment treaties. States cannot initiate claims against investors, even in cases where investors had breached domestic law, but can attempt a counterclaim. Currently, given that advance consent to arbitration by the State is assumed under international investment agreements, any foreign investor considered protected under such a treaty is able to bring a claim, and in many cases investors that have violated domestic or international obligations have been granted access to ISDS. The possibility of identifying additional concerns with ISDS is not discarded in WGIII. This however has no allocated time. Any country interested in bringing up additional concerns with ISDS will need to squeeze the issue on the agenda either by linking it to other issues already under discussion or by raising it when the agenda of future meetings will be discussed. Identification of agenda items for future meetings will be allocated time for discussion during the next session of WGIII scheduled to take place in New York between 30 March and 3 April 2020. The recent resumed 38th session of UNCITRAL’s WGIII focused on issues pertaining to setting up an appellate mechanism to review decisions of investment arbitral tribunals and the selection and appointment of ISDS tribunal members, including those of a proposed appellate mechanism. [Many intervening delegations prefaced their interventions by clarifying that what they propose is with no prejudice to their final decision on the issues under discussion.] While these issues were the focus of the discussions, the possibility of setting up a multilateral investment court and how it will deal with appeals and selection and appointment of adjudicators was weaved into these discussions throughout the week of deliberations. These issues are discussed below. (1) The ideas for an appeals mechanism WGIII considered the possible creation of an appeals mechanism. Discussions on the technicalities of the appeal proceeded without an initial discussion on what specific objectives are sought as a result of the appeal and the preferred type of appellate mechanism. A note by UNCITRAL’s secretariat[2] referred to multiple options for setting an appeal. One is a model appellate mechanism that could be used in three main ways: (i) for inclusion in investment treaties by Parties, (ii) for use on an ad hoc basis by disputing parties, (iii) for use as an option available under the rules of institutions handling ISDS cases. Another option is setting appeals as part of a permanent multilateral appellate body, which could either complement the existing arbitration regime, or constitute the second tier in a multilateral investment court. Discussions did not reveal a majority inclined towards any of the choices, but saw a significant variance among countries’ approaches. Furthermore, no prior discussion was undertaken on the broader systemic implications that could result from building an appeal mechanism on top of the existing body of international investment rules. Some systemic implications pertaining to setting up an appeals mechanism The effect of appeals, particularly whether it should bind the disputing parties only or whether it should have effect beyond these parties and the treaty underlying the dispute, carries several potential systemic implications. An appellate review is fundamentally about substantive obligations. Beyond being a corrective instrument for flawed decisions, it will potentially have an effect on the substantive coordination under international investment law, thus requiring consideration of the long-term consequences on international investment law. The underlying normative framework, currently represented by over 3,200 investment agreements, is generally imbalanced focusing on investor protection, lacking consideration of investor responsibilities, and lacking effective considerations of issues pertaining to sovereign regulatory space. Increasingly significant differences are emerging between old treaties and newer ones that take the sustainable development aspects into consideration. There is limited indication that States intend to get rid of old treaties. Given the nature of the underlying normative framework, the development of a more stable investment law is not necessarily good by itself, especially because this might make it harder to go back and revisit the substantive content of investment treaties, including aligning this normative framework with sustainable development. To the contrary, in the World Trade Organization (WTO), appeals apply to an underlying body of law that is uniform for all concerned States and the developmental consideration are often inbuilt into the design of WTO treaties and mechanisms of undertaking commitments under these treaties. Some of the discussed issues pertaining to appeals Participating countries in the Vienna meeting debated the nature and scope of a potential appeals mechanism (particularly whether it will cover errors of law and fact as well as calculation of damages), the standard of review that will be adopted, the relation between the first instance and appeals, the relation between the appeals process and investment treaty parties, the effect of the appeal (i.e. whether it would bind parties to the dispute or will also bind subsequent arbitral tribunals), in addition to issues pertaining to enforcement of the appeal decisions and financing of an appeals mechanism. The potential impact of an appeals mechanism on cost and duration was discussed. Reference was made to the role of a filtering mechanism to ensure appeals will not become systematic, and to other control mechanisms, such as security of costs to control frivolous appeals. What decisions could be appealed, and when, was also discussed (i.e. whether final awards only or also preliminary issues and interim measures, as well as decisions from domestic courts and in contract cases). When it came to covering decisions by domestic courts, such as those based on domestic investment laws with similar standards as international investment treaties, most interventions were skeptical of this option and many expressed their opposition. Some countries were skeptical that achieving the sought objectives necessitates setting up a permanent appeals mechanism, and proposed that given the fragmentation of the underlying treaties and potential increase of costs and duration associated with appeals, more useful tools could be a scrutiny mechanism that would apply before issuance of awards along with enhancing State party participation in treaty interpretation. (2) On selection and appointment of adjudicators WGIII considered issues pertaining to who should make up the universe of ISDS adjudicators, their required qualifications, and means for their appointment to ISDS cases. Currently, there are no strict regulations on who can be appointed to investment arbitral tribunals. Studies have noted that the international investment arbitration industry is dominated by a small and tight-knit community of law firms and elite arbitrators mainly from Europe, the United States and Canada.[3] Delegations addressed the need to identify qualification criteria and mechanisms for selection, develop a list or roaster of adjudicators including for example regional roasters, and setting term limits and criteria for renewal. Among other issues that were discussed were criteria for constitution of particular arbitral tribunals and a cooling off period before an adjudicator on a potential court can take up other appointments. There was broad agreement on the importance of independence and impartiality, as well as neutrality in resolving disputes. Many delegations also stressed that adjudicators should not be subject to influence of investors nor States. They referred to needed competence among arbitrators in public international law, sustainable development, international investment and economic law, relevant domestic laws, valuation of damages and procedural issues pertaining to managing disputes. Much was said about the need to ensure diversity, including in respect to gender, age, regions, legal systems, culture and socio-economic backgrounds. Diversity was discussed in the context of arbitrators as well as the secretariat of a potential court. While several delegations noted the need to move away from appointment of adjudicators by parties to a dispute (i.e. the investor and the State), others expressed that party autonomy is key for them. The room was divided between those who envision a new permanent body as the best way forward, which some suggested could be established under the auspices of the United Nations, and others who prefer to maintain the status quo ad hoc system of investment arbitration while adding to it a code of conduct for arbitrators and possibly a list or roaster of pre-selected arbitrators. Some also suggested ad hoc party appointments at first instance and permanent mechanism of judges appointed by States at appeals level. (3) Experiences of developing countries with existing permanent dispute settlement institutions[4] At the WTO, the Dispute Settlement Understanding has a diversity requirement and Appellate Body members are supposed to be broadly representative of the Membership. Yet, panellists are overwhelmingly from developed Member States. So is more than half the Appellate Body. This has been a longstanding problem that reflects a development asymmetry in the institutional design and operation of the WTO’s dispute settlement system. While developing countries value greater diversity of arbitrators, there is no guarantee that a formal commitment to diversity built into the statute of a permanent body can break the dominance of the arbitral elite. Indeed, this dominance can even become more problematic if appointments are for long-term terms. Diversity aims to ensure that appropriate understandings of law and culture are brought to the matters under dispute, and that arbitrators can interpret core legal concepts through a development lens. Although it is a pre-requisite to doing justice, it should not become an end in itself. Furthermore, too much power vested in an unaccountable secretariat of a new permanent body can create additional problems of its own. For example, in the WTO, the secretariat recommends the panellists, and disputing States can only object for compelling reasons. Recent academic research shows the secretariat has more influence over reports than panellists, influencing the role of precedent and limiting dissents. While developing countries have been calling for fixing problems of the WTO dispute settlement system for years, reform has proven impossible. These experiences require from developing countries a proper reflection on how such problems that arose in the WTO context, which is supposed to be a member-controlled institution, would play out in the context of a new permanent investment court or investment appellate mechanism, despite the many promises made during WGIII discussions. This article was first published in SUNS #9056 dated 29 January 2020 [1] “Reforming Investment Dispute Settlement: A Stocktaking”, IIA Issues Note (March 2019) https://unctad.org/en/PublicationsLibrary/diaepcbinf2019d3_en.pdf [2] See: A/CN.9/WG.III/WP.185, at https://undocs.org/en/A/CN.9/WG.III/WP.185 [3] CEO and TNI “Profiting from Injustice” (2012) [4] This section is based on the intervention by Prof. Jane Kelsey on behalf of the Third World Network during WGIII meeting in Vienna.
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