UNCTAD proposes ISDS reforms

On 26 June 2013, the United Nations Conference on Trade and Development (UNCTAD) published a report proposing a series of paths to reform and improve the existing international system for settling disputes between foreign investors and States.  The report builds on UNCTAD's May 2013 survey of recent developments in the field of Investor-State Dispute Settlement (ISDS), which identified a number of potential threats to the legitimacy and effectiveness of the ISDS system:

• Divergent interpretations of the same or similar provisions in International Investment Agreements (IIAs);
• Claims arising out of State measures to address financial crises;
• Challenges to State measures taken to protect the environment or public health;
• Ineffective enforcement of awards rendered against States in investment-related cases;
• Legitimacy questions raised by the lack of transparency in certain cases, especially under the existing UNCITRAL arbitration rules; and
• Third-party funding of claims.

UNCTAD's proposed roadmap for reform of ISDS includes five distinct paths.  The report recognizes that the proposed reforms would have to be implemented by different groups of stakeholders, and that there are advantages and disadvantages to each in respect of their ability to address challenges to the system.  Further, some of the proposed reform paths would require a much more fundamental reshaping of the ISDS system than others, and the transaction costs of implementing drastic reforms might place them out of reach.  UNCTAD's report lists the reform paths roughly in order of the magnitude of change necessary to implement them.

Promoting alternative dispute resolution

UNCTAD's report proposes that enhanced use of ADR mechanisms could reduce the number of investor-State disputes that must go to arbitration.  The advantages of ADR mechanisms like conciliation and mediation, especially at an early stage in a dispute, principally include the potential savings in costs and time from reaching a negotiated settlement and the greater flexibility inherent in fashioning an agreement as compared to an arbitral award – ADR mechanisms may be better tools for fashioning a result that is fair as between the parties, even if it is not grounded strictly in applicable law.

Tailoring the existing system through individual IIAs

This proposal would incorporate modifications to selected aspects of the ISDS system into new IIAs, to account for developments in law and practice, in order to make sure that the next generation of IIAs matches the expectations of States.  Among other things, some States have already begun to implement procedural innovations like setting time limits for bringing claims, increasing the role of the contracting parties in interpreting the treaty, establishing a mechanism for consolidation of related claims, increasing transparency, and allowing for the early discharge of unmeritorious claims.  In addition to procedural innovations, this path would involve changes to the wording of substantive provisions in IIAs to clarify their meaning and reduce the discretion of arbitrators.  UNCTAD also suggested that a mechanism to facilitate high-quality legal defence for developing States could play a role in improving the current system, building on the proposal for such a mechanism made in 2009 by UNCTAD, the Academia de Centroamerica, the Organization of American States, and the Inter-American Development Bank.  An advantage of tailoring the existing system would be that to implement it would require the agreement of relatively few parties – two, in case of BITs, or several in the case of multilateral treaties.  On the other hand, it is a piecemeal approach that could cause significant fragmentation, ultimately not delivering on the initiative to provide greater consistency and legitimacy to the system.

Limiting investor access to ISDS

UNCTAD notes that choosing this path, especially in the way that some recent treaties have by not providing for ISDS at all, suggests a return to the system of state-to-state disputes by way of diplomatic protection for injured foreign nationals.  States would slow the proliferation of investor-State claims by restricting the types of investors or investments which may enter the ISDS system.  For example, States could revise the scope of their consent to arbitration in future treaties to (i) reduce the subject matter scope of ISDS claims; (ii) restrict the range of investors who qualify to bring claims, or (iii) introduce a requirement to exhaust local remedies before resorting to international arbitration.  The effect would, as UNCTAD's report points out, likely be to reduce the number of claims that are referred to ISDS in the first instance, thereby reducing the costs of defending claims and paying adverse awards.

Introducing an appeals facility

Creating a central appellate system is a potential means of improving consistency among awards and enhancing predictability.  UNCTAD's report notes these advantages, while also recognizing that absolute certainty and predictability would not be achievable in light of the significant body of international investment jurisprudence and the fact that different results may be appropriate in light of variations in treaty drafting.  Further, to implement a meaningful appellate mechanism would require the coordination of many States on a number of weighty issues, a more difficult – but, according to UNCTAD, "not insurmountable" – challenge than coordinating two or several States.  The UNCTAD report also raised several important structural questions: Would the facility be implemented as an amendment to the ICSID Convention, and therefore limited in scope to ICSID awards?  How would members be appointed, and for what duration?  How would it be financed?  What would be the scope of review?  The answers to these questions would directly impact the efficacy of this reform.

Creating a standing international investment court

The most far-reaching reform path would involve wholesale replacement of the current system of ad hoc arbitral tribunals, and the construction in its place of a dedicated international court to hear investment disputes.  Some have suggested that this is a more appropriate mechanism for resolving disputes about State action, because the applicable law is public international law.  UNCTAD's report notes improvements to transparency and the legitimacy of judgments, consistency, and the independence of decision-makers among the advantages of establishing a standing international investment court.  It is clear, though, that this reform path would be among the most difficult to implement, although UNCTAD's report is optimistic that such a court could begin as an initiative between several states, and grow organically as other states joined.

UNCTAD's report builds on previous work by ISDS stakeholders to identify problems with the system and formulate improvements.  The conversation on the state and future of ISDS continues to gain momentum, and UNCTAD's policy suggestions are a valuable contribution to the development and refinement of thinking on these important topics.