UNCITRAL and ISDS Reform: China’s Proposal

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On 19 July 2019, China submitted its proposal on investor-state dispute settlement (ISDS) reform to UNCITRAL. A Chinese version is available, though an English translation is yet to be posted. China reaffirms its commitment to ISDS as an important mechanism for resolving investor-state disputes under public international law. However, it takes note of significant criticisms of ISDS and suggests various pathways for reform including, most notably, supporting the study of a permanent appellate body. In combination with the European Union’s “open architecture” approach, where the EU has signalled that it is open to working with other states that might wish to sign onto an appellate body and/or the multilateral investment court, this means that two of the world’s three biggest economies have now signalled support for significant reform of ISDS, including the possible creation of a permanent appellate body.

China’s UNCITRAL submission

China began in the investment treaty system as an ISDS sceptic but, over the years, has become an ISDS convert. In this submission, China starts from the position that ISDS plays an important role in protecting the rights of foreign investors and promoting cross-border investment, as well as helping to build the rule of law in investment governance and avoiding economic disputes between investors and states escalating into political battles. Given this, China affirms its belief that ISDS is overall a mechanism that is worth maintaining. Given China’s growing interests as a capital exporter, particularly along the Belt and Road route, this endorsement of ISDS should not come as a surprise and is in line with the evolution of China’s treaty practice toward embracing ISDS over a full range of disputes.

Despite this general affirmation, China recognizes that there have been significant criticisms made of ISDS that need to be addressed. These include that: the current system lacks an institutionalized and reasonable error-correcting mechanism; the current system of ad hoc awards lacks stability and predictability; the professionalism and independence of arbitrators has been put into question; third party funding is affecting the balance of parties’ rights; and investment arbitration proceedings are long and costly. Of note, China also states that the phenomenon that the arbitrators and lawyers of investment arbitration are limited to a few experts deserves special attention. China states that ISDS should be more open and inclusive with increased participation of experts from developing countries.

China takes the position that some of the problems with ISDS are difficult to resolve through bilateral investment agreements and instead need to be resolved through improving multilateral rules and mechanisms for the resolution of ISDS. In this way, China affirms its commitment to multilateral international economic law governance. In order to safeguard the legitimate regulatory power of host states, protect the rights of foreign investors, enhance confidence in ISDS, and promote the rule of law in investment dispute resolution, China states that it is open to suggestions for improving ISDS, including but not limited to the following options (described below using wording as close as possible to a translation from the original Chinese):

  1. Permanent appellate mechanism

To solve the main problems in ISDS, China states that it supports research into a permanent appellate mechanism as a reform proposal. China believes that a permanent appellate mechanism would mean that there would be fixed procedures, institutions, staff and member states that would play an important role in promoting the rule of law in the settlement of investment disputes. China sees this as important for improving error correction and strengthening the coherence and legitimacy of the system. China points to the WTO example to suggest that an appellate body might be comparatively efficient and cost effective compared to the current situation.

  1. The right of the parties to appoint an arbitrator

From the traditional practice of international arbitration, the right of the parties to appoint arbitrators is a fundamental feature of international arbitration and also reflects the will of the parties, China states. China believes that in the first instance of investment arbitration, the right to appoint arbitrators is a widely accepted institutional arrangement that is important to enhance the confidence of the parties to the dispute and should be retained in the reform process. In this way, China signals that it currently seems open to a model based on (improved) ISDS plus potentially an appellate body.

  1. The qualifications and independence of the arbitrator

While retaining the appointment of the arbitrator by the disputing parties, China believes that it is necessary to improve rules governing the arbitrators’ qualifications, conflicts of interest, and selection and removal procedures. China notes that Working Group III and ICSID are both studying the possibility of a code of conduct for arbitrators. China believes that considering the public law nature of investment arbitration, arbitrators should have expertise in the field of public international law or international economic law and should avoid potential conflicts of interest and double hatting. China notes that different countries have different understandings of arbitrators’ conflicts of interest so further rules are needed to spell these issues out. There should also be more rational and transparent rules on the selection and removal of arbitrators.

  1. Alternative dispute resolution

China reaffirms its commitment to mediation. According to China, alternative dispute resolution mechanisms are conducive to maintaining long-term cooperative relationships between investors and host states and reducing the cost of dispute settlement. Compared with investment arbitration, investment mediation can provide host states and investors with a high degree of flexibility and autonomy, and mediators have more opportunities to adopt creative methods to promote the settlement of investment disputes. For this reason, China endorses the establishment of a more effective mediation mechanism in order to help the parties get to win-win results, thus avoiding a lengthy period of arbitration and high costs.

  1. Procedures for pre-arbitration consultation

China supports the inclusion of a mandatory three to six month pre-arbitration consultation procedure to permit notification of and consultation about potential claims before they are brought. This would be used to allow both sides to better understand the position of the other and to see if the dispute could be resolved before it is escalated to arbitration.

  1. Transparency for third-party funding

China supports transparency with respect to third-party funding. Relevant parties should continue to disclose relevant funding and avoid direct or indirect conflicts of interest between arbitrators and third-party funders. If the disclosure obligation is not fulfilled, the legal consequences of the relevant party should be clarified.

The EU’s open architecture approach

China has now stepped forward as a proponent of an improved version of ISDS plus potentially an appellate body. In this way, it straddles the divide between being a proponent of “structural” reforms and “other” reforms in the UNCITRAL process. In doing so, it may better represent the current temperature of the negotiating room than any of the other declared powers.

It remains to be seen is whether China strongly stands behind this hybrid approach or whether its own practice evolves over time. It is possible that this mixed approach reflects a compromise position among different positions within the Chinese government that might shift over time. China has also taken a pragmatic approach to its negotiations in the past, accepting a wide variety of terms rather than insisting on a single model.

If China strongly stands behind this hybrid ISDS/AB approach, an important question will be whether it seeks to anchor this approach as the – or one of the – main approaches to reform in an exclusive way, or whether it works flexibly with other major players, like the European Union, to develop an overlapping approach with other proposals like the multilateral investment court and appellate body.

In projecting forward in July 2018, one of us wrote in favour of taking a flexible, open architecture approach to reform options: “Flexibility can also be built into specific reform proposals by, for instance, adopting open architectural approaches that permit differently situated states to sign up for new multilateral approaches or institutional mechanisms.” This could include using a flexible Mauritius Convention-style treaty to permit states to “decide individually whether to opt in to a court and/or an appellate body, or neither.”

As explained in an EJIL: Talk! blog in November 2018, this approach was intended to capture how negotiating dynamics and potential alliances might unfold and develop:

The European Union is unlikely to give up easily on its two-tier solution given its belief in reform and the toxicity of “private justice” in some of its domestic settings. One option would be to try to get agreement on considering an Appellate Body first and a Court second. But if you want an integrated system at the end, this seems far from ideal. Probably a better move would be to consider both at the same time but with a flexible open-architecture structure that allowed states to sign onto either the first level court and/or the appellate mechanism.

One reason for suggesting this was our reading that China’s statements on the floor in UNCITRAL seemed to be signalling that China might be “warming up to a position of supporting ISDS, with possible improvements, but subject to an Appellate Body.”

In its subsequent submission to UNCITRAL, the European Union took up this open architecture approach, citing these articles and blogs. According to its January 2019 submission:

3.16. Open architecture

39. The EU and its Member States consider … that only a two-tier permanent structure can remedy all the identified structural concerns in the current system. A certain level of flexibility would, nevertheless, need to be built into a standing mechanism. This would be necessary, for example, for countries that might want to use the standing mechanism for state-to-state dispute settlement, but which do not use investor-state dispute settlement in their agreements. It may also be the case that some countries may like to retain the flexibility to utilise only an appeal mechanism even if, in the view of the EU and its Member States, such an approach would not effectively resolve a number of the concerns which have been identified. If that is indeed the case, the open architecture of the standing mechanism could be a way of providing for such flexibility for those countries.

Arguably, the EU’s open architecture approach works like an invitation to China and other states to come on board for the creation of an appellate body without having to commit to an underlying multilateral investment court. This approach by the Europeans was smart because there was broader support in the room for the appellate body than for the underlying court and this approach potentially allows them to square the circle. With its submission to UNCITRAL, the question is whether China is embracing a potential appellate body instead of the European’s approach or whether the two could co-exist in an open architecture model.

With two of the world’s largest economies now supporting consideration of a permanent appellate mechanism, other states will need to pay increased attention to this possibility. Like ISDS reform as a whole, any appellate mechanism is likely to emerge through a mixture of multilateral innovations and bilateral actions. If the European Union and China make access to a multilateral appeals mechanism a feature of their own free trade and bilateral investment agreements, they have substantial bargaining power to shift the preferences of third states on this issue. In this way, 1 + 1 has the potential to make much more than 2 … though many discussions remain to be had to figure out what is politically feasible and how the variable geometry of ISDS reform will ultimately play out.

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Aditya Roy says

August 6, 2019

Insightful article. I have some queries such as:
1. Will this be able to ensure more compliance with the award ?
2. Will this be able to address the concerns of systemic bias ?