Update on the future of ISDS: latest Working Group III UNCITRAL discussions

The United Nations Commission on International Trade Law's ("UNCITRAL") Working Group III (Investor-State Dispute Settlement Reform) ("WGIII")​ has published its report (the "Report") on the work conducted between 14 and 18 October 2019 during its 38th session. The Report provides details about the discussions around three issues in particular: (i) the establishment of an advisory centre; (ii) a code of conduct for decision-makers; and (iii) third-party funding.

Background

UNCITRAL has been considering the possible reform of investor-state dispute settlement (“ISDS“) through the work of WGIII, which has been given a broad mandate to identify concerns regarding ISDS procedure, and develop relevant solutions to be recommended to the main UNCITRAL body. 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. For further information about WGIII's previous work on ISDS reform, please see our previous PIL Notes blog posts here, here and here.

The Establishment of an Advisory Centre

The Report states that general support was expressed for the establishment of an advisory centre on ISDS, which could address some of the concerns previously identified by WGIII, such as the costs of the arbitration proceedings, the correctness and consistency of decisions, and access to justice issues. In addition, it was stated that an advisory centre could enhance transparency in ISDS.

The beneficiaries of the advisory centre would be States, with a preference given to least-developed and developing States, as well as States with limited ISDS experience. In principle, investors already involved in current ISDS proceedings would not be able to access the services of the advisory centre, so as to avoid conflicts of interest and overburdening the advisory centre.

It was recognised that the Advisory Centre on WTO Law could provide a useful model for the establishment of this advisory centre. However, the structure of the latter would be considered in light of the ISDS regime and its reform efforts.

Given the limited resources available to the advisory centre, WGIII emphasised the necessity to define and limit the scope of the services provided by the advisory centre. The question of financing of the advisory centre was considered carefully. Some proposals for sources of financing included: (i) contributions by member States (taking into account their level of economic development); (ii) voluntary contributions; (iii) contributions from users of the advisory centre; and (iv) fees charged to users of structures such as the multilateral investment court ("MIC").

The related discussions also highlighted the need for long-term sustainability of the advisory centre. In addition, it was said that the establishment of the advisory centre should not lead to an unjustifiable increase in ISDS cases. After these discussions, WGIII asked the Secretariat to conduct preparatory work on the establishment of an advisory centre in relation to issues which include: (i) the identification of suitable services to be offered by the advisory centre; (ii) the financing of the advisory centre; and (iii) the staffing and operation costs of the advisory centre.

Code of Conduct for Decision-Makers

WGIII recognised that a code of conduct for ISDS tribunal members would address some concerns previously identified by WG III – in particular, the perceived lack of independence and impartiality of ISDS tribunal members. The general consensus was that any code of conduct should be binding and mandatory, and have a harmonised and universal application.

The code of conduct would address various key issues, including independence and impartiality, integrity, diligence and efficiency, confidentiality, competence or qualifications, and disclosures. Concerns around "double-hatting" were emphasised, i.e. the view that arbitrators should refrain, and be prevented, from acting as counsel or party-appointed experts or witnesses in any pending or new ISDS cases. However, the definition and scope of "double-hatting", as well as the extent to which "double-hatting" should be regulated, are yet to be determined.

The issue of enforcement of the code of conduct was given special attention, as the WGIII delegates generally stated that "it would not be prudent to rely on voluntary compliance and that the consequences for non-compliance (sanctions) would need to be clearly set forth".

WGIII prompted the Secretariat to conduct preparatory work on a code of conduct, including  considering: (i) how the code of conduct could be binding; (ii) the clarity and flexibility of the code of conduct; (iii) the potential of the code of conduct to apply to persons other than the adjudicators (for instance, counsel and personnel employed by the tribunal); (iv) the scope of the obligations contained in the code of conduct; and (v) issues of enforcement, including the potential imposition of sanctions for non-compliance. The Secretariat was asked to work with ICSID, and other interested delegations and institutions to prepare a draft code of conduct, having regard to and analysing existing codes of conduct.

Third-Party Funding

The Report notes that third-party funding is largely unregulated in ISDS. While, in most delegates' view, it should be regulated, "flexibility should be provided as third-party funding could permit access to justice to those with insufficient resources". Furthermore, it was acknowledged that there was currently no consensus on the definition of third-party funding, and that a clear definition should be adopted to enable effective regulation.

The report noted general agreement that the identity and any ultimate beneficiary of the funder should be disclosed in ISDS proceedings. In addition, it was suggested that arbitral tribunals should determine if the terms of the funding agreement and the nature of the funder's involvement would also be disclosable. On the costs front, it was considered whether third-party funding should impact on the ordering of security for costs. The report noted the general view that the mere existence of such funding would not justify a security for costs order, although this may be something that the tribunal could take into account in deciding the application.

WGIII requested that the Secretariat prepare draft provisions on third-party funding reflecting WGIII's related discussions. Such provisions could be used by States in their treaties or in arbitration rules, or incorporated in a multilateral convention, which could apply to all treaties in a harmonised manner. The Secretariat was prompted to work with ICSID and other relevant institutions to avoid a fragmented approach in this area.

Other Issues

WGIII discussions highlighted the need to ensure that ISDS did not undermine States' obligation to take action under the Sustainable Development Goals and against climate change under the Paris Agreement. On the contrary, ISDS had to be aligned with objectives combating climate change. WGIII also considered: (i) how a multilateral instrument on ISDS procedural aspects could be structured to incorporate different reform options (most likely, into existing investment treaties). It was suggested that the phased entry into force of such a multilateral instrument could facilitate the expedited entry into force of some of the reform options; (ii) the matter of tribunals' calculation of damages. WGIII asked the Secretariat to consider these latter two issues further.

Upcoming WG III sessions and Comment

WGIII is due to meet in January 2020 in Vienna, and in March 2020 in New York for its 39th and 40th sessions respectively. The upcoming session will focus on the following: (i) whether the ISDS process should consist of a stand-alone review or provide for an appellate mechanism; (ii) a standing MIC; and (iii) the selection and appointment of arbitrators and adjudicators. The 40th session will consider: (i) alternative dispute resolution; (ii) treaty interpretation by States; (iii) security for costs; (iv) means to address frivolous claims; (v) multiple proceedings, including counter-claims; and (vi) reflective loss and shareholder claims. Depending on its workload, WGIII might request an additional session.

WGIII's upcoming work, particularly the discussions around setting up a MIC in its 39^th session, have the potential to result in significant developments to the ISDS framework. It will also be interesting to see whether concurrent related international developments will impact on WGIII's approach to ISDS reform. For instance, it remains to be seen whether the European Commission's recent proposals around the Investment Court System envisaged under the EU-Canada Comprehensive Economic and Trade Agreement ("CETA") will result in wider support for establishing a MIC (read our previous PIL Notes posts on CETA here, here and here).

For more information, please contact Christian Leathley, Partner, Andrew Cannon, Partner, Helin Laufer, Associate or your usual Herbert Smith Freehills contact.