Update on the future of ISDS: the discussions within UNCITRAL Working Group III – no apparent consensus to date

After a number of years of public debate in a variety of fora, the discussion of the future development of investor-state dispute settlement (ISDS) has recently moved to the United Nations Commission on International Trade Law (UNCITRAL). UNCITRAL Working Group III (WGIII) has been given a broad mandate to identify concerns regarding ISDS, consider whether reform is desirable and, if so, develop relevant solutions to be recommended to UNCITRAL.

WGIII started its work in the 34^th session which took place from 27 November to 1 December 2017. As discussed further below, a number of key points were discussed, including: (i) the duration and costs involved in the procedure; (ii) the allocation of costs; and (iii) transparency. There was also some preliminary consideration of possible developments or changes in relation to the treatment of these issues. The Report of the 34^th session indicates that some states advocate a fact-based analysis of ISDS but others note the need to address wider public perceptions of ISDS, as these can raise concerns over the legitimacy of the system.

Bringing the debate about the future of ISDS under the auspices of UNCITRAL, involving high level government representatives from across the world, and also in view of the transparent nature of WGIII's process, raises the stakes, and perhaps also the prospects, of a more systemic reform. However, whilst the forum has the potential to generate a multilateral plan for ISDS, it is hard to discern any broad consensus at this stage either on the nature of the perceived problems associated with the current system of ad hoc arbitration, or on how those problems may be resolved. This is apparent from the Report and also from the audio recordings (helpfully summarised by IA Reporter, here). The 35th session will take place on April 23 to April 27 2018, following which further clarity on these issues may emerge.

WGIII'S MANDATE – PROCEDURE NOT SUBSTANTIVE PROTECTIONS - AND HIGH-LEVEL GOVERNMENTAL REPRESENTATION IN DISCUSSIONS

Previous arbitration-related work conducted by UNCITRAL - most recently the development of the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration (the Transparency Rules) and the consequent Mauritius Convention - took place within Working Group II. Historically, many states have delegated their representation in Working Group II to dispute resolution practitioners, which has encouraged depoliticised discussion of often technical issues. However, as UNCITRAL made clear when establishing WGIII's mandate with regard to ISDS, deliberations within WGIII are government-led, "with high-level input from all governments".

It was noted in the Report "that critical questions on possible ISDS reform involved the underlying substantive rules". However, WGIII confirmed that, whilst its mandate is broad, it is confined to the procedural aspects of dispute settlement rather than on the substantive provisions.

REPORT OF UNCITRAL WGIII'S 34TH SESSION: KEY CONCERNS IDENTIFIED AND POSSIBLE SOLUTIONS

Whilst it was made clear that the concerns identified were not exhaustive, a number of aspects of the procedure received particular attention. There was also some preliminary consideration of possible solutions. A number of different perspectives are considered in the Report with little indication as to which points represented the views of a clear majority.

• Cost and duration

Many members identified as a key concern the costs associated with ISDS proceedings. These costs were said to be frequently high and difficult to justify for developing states with scarce financial resources, and many members were of the opinion that they limited the access of small and medium-sized commercial enterprises to the ISDS mechanism. A significant proportion of these costs was considered by some to be due to the length of ISDS proceedings.

It was however noted that the question of whether duration and costs were excessive was relative, and should be determined on a case by case basis. It was also noted that duration and costs could be assessed by looking at other dispute resolution mechanisms by way of appropriate comparison.

A number of issues were identified as contributing to cost, including: the complexity of cases and scope of the evidence; the needs of the stakeholders in the proceedings; aspects of the procedure; and the lack of a rule of binding precedent.

It was noted that states have case-management tools and decision-making powers at their disposal that could help reduce duration and costs, and could also introduce specific mechanisms into their treaties. For example, some treaties already include provisions for bifurcation of claims, expeditious dismissal of frivolous claims, and consolidation of concurrent claims.

These tools, as well as clear rules on cost allocation taking into account party conduct and proportionality, were referred to as ways to combat "unjustified" time and costs. In relation to "justified" costs, procedural mechanisms considered included increased case management training for arbitrators and the adoption of modern technologies, with the state to be the agent in introducing such measures. It was also noted that even "justified" costs could place an undue burden on developing states and solutions could include a fund for defence costs and the creation of advisory centres.

• Costs and third party funding

There was also discussion about apportionment of costs, with concerns raised about different approaches taken by tribunals. A system of allocation of costs was proposed as a potential solution, and current trends in this regard would be examined in future meetings.

The availability of security for costs, and the development of the third party funding market (including its accessibility to states as well as investors), was also deemed to warrant further consideration.

• Transparency

Finally, some members of WGIII stressed the importance of transparency, both in practice and in terms of the broader perceptions of ISDS. Discussions focused on the Transparency Rules and the Mauritius Convention, noting that these instruments were making an impact. Two further areas of work were contemplated: (i) the implementation and promotion of existing transparency standards, including by use of soft law instruments to encourage parties and tribunals to apply these standards; and (ii) possible steps to enhance public understanding of the transparency mechanisms already in place. Transparency in relation to the appointment and remuneration of arbitrators was also noted for possible further consideration.

Overall approach for possible reform

Finally, there was also discussion around the overall approach that should be taken, whether to target specific improvements to the existing system, or to adopt a more wholesale systemic reform. As mentioned in our previous blogpost, the EU is a strong proponent of the more wholesale approach, promoting through its published negotiating directives its own proposal to establish a multilateral investment court.  Whether this will receive traction from other states around the world remains to be seen, as does whether the EU will be prepared to compromise on a more targeted set of reforms if that is the wish of the majority.  The WG has already contemplated at this first meeting the possibility of developing solutions that could be applied on both a bilateral and a multilateral basis, which were not mutually exclusive: "there could be a suite of solutions developed simultaneously on both tracks, particularly in light of the differences in experiences between States".

The Working Group will continue its discussion of these issues at its 35^th session, taking place in New York, 23-27 April 2018.

For further information, please contact Andrew Cannon, Partner, Hannah Ambrose, Professional Support Consultant, Vanessa Naish, Professional Support Consultant or your usual Herbert Smith Freehills contact.