Editors’ Note: This is the last post in our ongoing series of posts (see introduction here, first post on costs here, second post on duration of proceedings here, third post on the diversity deficit in investment arbitration here, fourth post on the impartiality and independence of arbitrators here, fifth post on an empirical assessment of ISDS here) , sixth post on incorrectness of ISDS decisions here) authored by individual members of the Academic Forum of the UNCITRAL Working Group III (UN WG III) on Investor-State Dispute Settlement Reform, in parallel with the ongoing UN WG III sessions taking place this week in New York. The series features summaries of more detailed concept papers prepared by various working groups of the Academic Forum. This post summarizes a more detailed concept paper prepared by members of Academic Forum Working Group 3.
This post is the product of the work of the UNCITRAL Academic Forum’s (own) “Working Group 3” whose focus is on the lack of consistency and coherence in the interpretation of legal issues. Lack of consistency has been identified in UNCITRAL Working Group III (WGIII)as one of the concerns with regard to the current system of investor State dispute resolution.
In the view of WGIII, the most glaring cases of unjustifiable inconsistency are cases “where the same investment treaty standard or same rule of customary international law was interpreted differently in the absence of justifiable ground for the distinction” (UN Doc No A/CN.9/935 (14 May 2018), para. 21). Other apparent inconsistencies may be wholly justifiable, where tribunals are interpreting similar, but materially different treaty texts – or interpreting the same treaty in relation to materially different facts. Usually, however, inconsistencies in the case-law fall somewhere between these poles. Indeed, there may be problematic inconsistencies where tribunals make too much of formal differences in treaty texts, where different interpretations may nevertheless prove materially unjustifiable. Not every difference in drafting across thousands of investment treaties necessarily signals a divergent meaning.
Rather than focus on only the glaring cases, we have sought to push further into analyzing the incidents, causes, and varied harms produced by discrete inconsistencies in the ISDS case law. In approaching our task, we have focused on three discrete issues:(1) the obligation to provide full protectionand security (“FPS”); (2) the treaty / contract relationship; and (3) the scope of the most-favoured-nation (“MFN”) clause. In determining whether there are unjustifiable inconsistencies with respect to these issues, we have explored the following questions: (a) what is the inconsistency?; (b) what is the cause of that inconsistency?; (c) what is the harm being caused by this inconsistency?; and (d) what is the solution for this inconsistency (if one can be identified)?
We have found that a fruitful distinction can be drawn between two kinds of unjustifiable inconsistencies: inconsistent interpretations of basic substantive obligations (e.g. FPS) and inconsistent interpretations of more structural “rules of the game” (e.g. MFN and the treaty / contract issue). The former phenomenon can be problematic, but such inconsistencies are to some extent endemic to any legal system. The life of the law is, everywhere, one of change and development. Moreover, such inconsistencies are relatively manageable. For example, should States worry about inconsistent interpretations of FPS, they can clarify the meaning of such treaty terms through treaty drafting, amendment, and/or joint interpretations. Governments and investors can also, in theory, manage such inconsistencies through private agreement, by contracting for what they consider important.
Unjustifiably inconsistent interpretations of the rules of the game are more problematic, insofar as they create severe uncertainty and unpredictability inthe making of investments and for national regulatory choice. Where there is uncertainty as to whether States and investors can contract around investment treaty rules, efficient private ordering is off the table, leaving price as the best lever to reduce uncertainty. Similarly with MFN, uncertainty about whether such clauses allow importation of substantive treaty rules from treaties with third-parties, procedural rules, or neither, creates severe ex ante uncertainty for all parties about the nature and extent of the regime applicable to the investment. In both cases, uncertainty as to the rules of the game creates harms ex ante and ex post. To the extent that States and investors are aware of these problems, they can lead to bargaining and price inefficiencies in the making of investments. To the extent they are unaware, such inconsistencies can lead to unfair and unjustifiable surprise ex post.
For the purposes of this short blog post, we draw out this distinction by sketching our analyses of inconsistencies in the case law on FPS, treaty / contract, and MFN.
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