Update on the future of ISDS: UNCITRAL Working Group III decides three areas for reform, indicating change is likely in 2019

The United Nations Commission on International Trade Law ("UNCITRAL") has been considering the possible reform of investor-state dispute settlement ("ISDS"). UNCITRAL Working Group III ("WGIII") has been given a broad mandate to identify concerns regarding ISDS procedure, consider whether reform is desirable, and, if so, develop relevant solutions to be recommended to the main UNCITRAL body (see our previous blog post here and article (issue 5, page 38) here). While WGIII enjoys broad discretion in discharging its mandate, any solutions devised will take into account the ongoing work of relevant international organisations, and each State may decide the extent to which it chooses to adopt the proposed solutions.

In the recent 36^th session of WGIII, it was agreed that reform was desirable in at least three areas: (i) inconsistency and incorrectness of arbitral rulings; (ii) concerns about arbitrators and decision-makers; and (iii) the cost and duration of ISDS. However, the precise type of reform remains to be decided. Some States (and the EU) are advocating systemic reform while others propose a more nuanced approach, fixing perceived problems within the framework of the existing system.

Whilst WGIII's mandate is limited to the procedural aspects of ISDS, changes to the way in which investor-state disputes are resolved may affect the value investors place on the substantive protections in investment treaties as a way of mitigating risks connected with foreign investment.  

Background

WGIII started its work on ISDS reform in late 2017. A number of key points were discussed, including: (i) duration and costs; (ii) the allocation of costs; and (iii) transparency (see our previous blog post about WGIII's 34^th session here). In WGIII's 35^th session, which took place in April 2018, these issues were further clarified. In particular, WGIII analysed the following: (i) the coherence and consistency of arbitral outcomes; (ii) arbitrators and decision-makers, including their independence and impartiality; and (iii) third-party funding.

36th session of WGIII

WGIII's work on reform of ISDS passed a notable milestone at the 36^th session. At this session, WGIII agreed that ISDS reform was "desirable" to address concerns falling within the following three broad categories:

1.            Lack of consistency, coherence, predictability and correctness of arbitral decisions

Providing context, reference was made to the IBA's November 2018 Report on "Consistency, efficiency and transparency in investment treaty arbitration", as well as WGIII's previous discussions on this issue.

Views were expressed that a lack of consistency, coherence, predictability and correctness of arbitral decisions was a material concern, as opposed to only one of perception, and that this could affect reliability, effectiveness and predictability of the ISDS regime, its credibility and legitimacy. WGIII discussed examples of how States were addressing these concerns (e.g. joint interpretative declarations), but noted the importance of addressing interpretative inconsistency at a multilateral, rather than treaty by treaty level.

WGIII agreed to focus its discussion on unjustifiably inconsistent interpretations of substantive standards, jurisdiction and admissibility and procedural inconsistency. The WGIII will also develop reforms to address concerns related to the lack of (i) a framework for multiple proceedings and (ii) mechanisms in treaties to address inconsistency or incorrectness of arbitral decisions.

2.            Arbitrators and decision makers

WGIII discussed the potential causes of lack of independence and impartiality of arbitrators (or perception thereof), such as repeat appointments, conflicts of interest and switching roles as arbitrator, counsel and expert in different ISDS proceedings ("double-hatting"). WGIII recalled the trend of States to adopt their own code to address these concerns and include it in their investment treaties. There was also consideration of development of a global code of conduct, which could address independence and impartiality, as well as broader ethical considerations, such as conflicts of interest and issue conflict, disclosure requirements, and double-hatting. Such a code could also cover others involved in ISDS, such as counsel. Previous discussions had speculated on whether ICSID and UNCITRAL would develop such a code together. There were views expressed that a code would not be sufficient to restore the perception of legitimacy, and that more systemic reform may be necessary.

A decision was made that development of reforms was necessary, although no conclusion was reached on their nature. WGIII also decided that reform was required to address the transparency and effectiveness of the disclosure obligations of arbitrators and the procedures to challenge an arbitrator. WGIII further determined that reform was necessary to the way tribunals were constituted to address concerns regarding diversity and the qualifications of arbitrators.

3.            Cost and duration of ISDS

WGIII emphasised that lengthy and costly ISDS proceedings were often caused by the lack of a mechanism to address frivolous or unmeritorious cases under some investment treaties and arbitration rules. However, it was noted that there were also other factors contributing to the cost and duration of ISDS, such as interim measures applications, bifurcated proceedings, arbitrators' appointments and challenges, and delays in rendering awards.

To address these issues, WGIII distinguished between factors which:

• Are outside of the control of parties, and cannot be addressed in any reform (for instance, the need for translations in complex cases);
• Are addressed through the improvement of procedural rules (for instance, the introduction of time frames and expedited procedures); and
• Need more systemic reform (for instance, the lack of a rule of precedent).

Various mechanisms were considered to address or mitigate the above mentioned issues, such as potentially setting up an advisory centre to assist States facing costs difficulties.

WGIII decided that reform was needed to address concerns relating to costs and duration, and that proposals would be made on issues of cost allocation and security for costs. Concerns relating to third-party funding were also mentioned, but WGIII decided to consider this issue further in its next session.

Future WGIII Sessions and overall approach for possible reform

States' delegations will make written submissions in the coming months in advance of WGIII's 37^th session to take place in New York in April 2019. These submissions will cover the third party funding issue, as WGIII has left this matter to be discussed at its upcoming session. The next session will shift WGIII's focus from identifying ISDS concerns to discussing the types of reforms to be pursued to address such concerns.

Agreeing on a work plan will likely be a major decision point in the upcoming WGIII session. It appears that diverging views on the design of specific reforms exist already. While some States (including Chile, Japan and the US) have expressed a preference for prioritising the specific concerns identified by WGIII, others (including EU member states, Canada and Mauritius) advocate for wholesale reform, such as the establishment of an investment court or appellate mechanism. On 18 January 2019, the EU and its Member States submitted two papers to WGIII, outlining their proposal for a permanent multilateral investment court, and putting forward a concrete work plan to implement this proposal. These papers will be discussed in a further blog post.

Given the involvement of high-level government representatives from across the world in this reform initiative, it remains to be seen whether WGIII can reach consensus on its proposed solutions. In light of the upcoming WGIII sessions, we will continue to follow its work closely, as 2019 promises fresh updates on the proposed ISDS reform.

For further information please contact Andrew Cannon, Partner, Hannah Ambrose, Senior Associate, or your usual Herbert Smith Freehills contact.