As described in a previous post, the UNCITRAL mandate on the possible reform of investor-state dispute settlement (ISDS) requires states to first identify and consider concerns regarding ISDS before going on to consider and develop any relevant reforms. Although states in the November 2017 session did not debate potential reforms, different solutions lurked in the room like elephants, often seeming to inform the positions taken by various delegations on whether particular issues (such as inconsistency) amounted to “problems.”
In particular, a division appeared to be evident between some states that seem inclined (at least presently) toward incremental, bilateral reforms (such as the US and Japan) and others that openly embrace systemic, multilateral reform (such as the EU and Canada). This positioning reflects broader dynamics about debates over ISDS reforms, in which the issue is often framed as a comparison of the relative merits of investor-state arbitration and a multilateral investment court with states staking out positions as loyalists or reformists respectively.
This dichotomy is false and unhelpful, however, because it presents ISDS reforms as requiring a binary choice. To start with, these are not the only choices. In addition to states that favour incremental and systemic reforms of the existing system, there are states that reject the need for international claims by investors at all. These revolutionaries include Brazil, which has embraced an Ombudsman model followed by state-to-state dispute settlement, and South Africa, which has opted primarily for protection via national legislation and courts.
However, the problem of framing runs deeper. Even working within the reformist spectrum, the investor-state arbitration versus a multilateral investment court formulation is problematic. Instead of being a dichotomous choice, the international system is much more likely to end up with a plural solution in which both models, and possibly others, exist. Given this, it makes sense for states to think about how they can develop an effective suite of incremental and systemic reform options that they can pursue both bilaterally and multilaterally, in UNCITRAL and elsewhere.
Beyond a False Dichotomy
The dichotomy of investor-state arbitration versus a multilateral investment court is false for two reasons.
First, although multilateral in ambition and design, any international investment court would inevitably be far from universal in its membership. It would begin as something more like a “Plurilateral Investment Court” that would be characterised by a more limited number of treaty parties with the hope that its membership would grow over time. Of course, this is not uncommon for treaties. Many treaties, such as the New York and Washington Conventions, begin with relatively small numbers that grow over several decades. Other courts like the International Criminal Court also have limited membership. But some limping treaties start, and remain, small in terms of signatories, never really getting off the ground.
The membership of a Plurilateral Investment Court would likely begin with the EU along with states that are negotiating Free Trade Agreements (FTAs) with the EU that are persuaded to adopt a court model. Canada and Singapore accepted a court model in their EU FTAs, whereas Japan and the EU have been unable to reach agreement yet on whether to include a court or arbitration in their agreement. For many negotiating partners, accepting a court may make sense as part of a broader deal to secure an EU FTA and, if so, accepting a plurilateral court would be more cost-effective and efficient than establishing a bilateral one. The EU also wants to make the court applicable to the existing BITs of its Member States, which amount to a significant percentage of all current BITs, though jurisdiction over a particular treaty would depend on the consent of the other treaty partner. (For the EU’s negotiating directives with respect to a multilateral investment court, see here.)
How the numbers develop will depend on many things. One is whether some of the EU’s negotiating partners become converts, such as Canada which is now proposing the court model in other negotiations like NAFTA. Another is whether other states become early adopters, even without an EU FTA, because of a desire for systemic reform and/or due to bad experiences with investor-state arbitration. Given the growing domestic pushback against the legitimacy of ISDS in a number of states, a number of states could fall into this category. For states like Argentina that have suffered inconsistent awards, a systemic approach is likely to be attractive. Other states may hang back to see how such a Court develops, joining later if they become comfortable with its composition and rulings, and remaining on the side-lines if not.
Second, even if established, such a Court would be plural for another reason: it would be likely to exist alongside investor-state arbitration either indefinitely or for a long time to come. That is partly because some states are (at least currently) committed to the existing system, so they are unlikely to depart from it in their own practice. Japan and Chile are examples of this, both of which championed investor-state arbitration in TPP-11. The United States has long been a supporter of investor-state arbitration, though its current position in the new Trump era and in the NAFTA renegotiations is harder to discern. Yet even if the United States might one day walk away from fully supporting investor-state arbitration, it is hard to imagine it ever walking toward an investment court.
Other states may be less committed to investor-state arbitration, but are likely to continue to embrace it in at least some of their treaty practice given their position as rule-takers rather than rule-makers. Smaller states that either have existing agreements, or wish to enter into new agreements, with both reformists (like the EU) and loyalists (like the US and Japan) are likely to have to accept pluralism in their practice, with arbitration under some agreements and a court-model under others. It is conceivable (though perhaps less likely) that some states might provide for both a court and arbitration as options in a single treaty, giving investors the power of election. Arbitration will also remain the default choice under thousands of existing treaties, maintaining a reasonable level of strength through the power of inertia.
As a result, the investment treaty system is unlikely to face a choice between investor-state arbitration or a multilateral investment court. States will not all fly in one direction nor will they change course in unison. Instead, the system is likely to be marked by the co-existence of investor-state arbitration and an international investment court, leading to pluralism rather than a dichotomous either/or choice or a clear before-and-after moment.
Embracing Incremental and Systemic Reform
Given the diversity of views of ISDS reform, and the likely reality of pluralism for many decades to come, it makes sense for states and institutions like ICSID, the OECD, UNCTAD and UNCITRAL to be looking at identifying and developing a range of incremental and systemic ISDS reform options. Some of these reforms might be best pursued bilaterally and others multilaterally. Some might be more suited to the UNCITRAL process and others less so. States are yet to make those decisions, but framing the options through the lens of pluralism is helpful in identifying the spectrum of reform options and the range of fora that might be involved.
At one end of the spectrum, states could look at options for incremental reform of investor-state arbitration. Many newer treaties, like TPP-11, include reforms designed to improve investor-state arbitration, such as a code of conduct for arbitrators, an early dismissal procedure and mechanisms for joint interpretations. While these best practices may be helpful with respect to newer-style treaties, the question remains what to do with the thousands of existing older-style treaties that do not include such provisions. One question is whether it would be possible to adopt an opt-in multilateral treaty that applies retrospectively to existing treaties, as UNCITRAL did for the Mauritius Convention on Transparency. Other options are also being pursued. For instance, the IBA has adopted guidelines on conflicts of interest and ICSID is currently undertaking another round of reforming its rules.
At the other end of the spectrum, states could draft a treaty to establish an investment court with a built-in appellate review mechanism. This would be the most ambitious reform proposal, requiring the most work and the longest lead time. Given that some states might be open to appellate review without wanting to sign up to an investment court, it would be a good idea for such a model to delink the underlying court and the appellate review. This would allow for some states to accept the Investment Court plus an Appellate Body, while other states accept investor-state arbitration plus the Appellate Body. Such flexibility would increase the potential reach of such an institution, though it would also add to the system’s pluralism.
In between, states could pursue a variety of creative options that fall between the extremes of largely tweaking with the existing system and totally transforming it. These could include: (1) creating an Appellate Body, without creating an investment court, which would be superimposed on top of the existing system of investor-state arbitration; (2) creating an investment court without including appellate review; and (3) establishing rosters of arbitrators selected by states from which disputing parties could select their particular arbitrators. The court- and appellate-models, along with a number of other reform options like rosters, are canvassed in the excellent first and supplemental CIDS reports.
Examining a suite of incremental and systemic reforms makes sense not only because it suits the current political climate, but also because these options run on different time lines and may be pursued in different ways (eg bilaterally or multilaterally) and in different fora (eg ICSID, the OECD or UNCTAD). Incremental reforms could prove to be early wins while establishing systemic reforms like a court or appellate body will take more time. That is not to say that incremental reforms should be pursued first and systemic reforms should be pursued later as that would just play into the hands of those states that don’t want to see systemic reform. Rather it is simply a recognition that different reform options are likely to have different gestation periods even if conceived at the same time.
It is also worth recognising the potentially dynamic interaction among different reform options. For instance, many proponents of the existing system of investor-state arbitration are not keen to see change. However, if they believe that the investment court option is gaining steam or that states are at real risk of revolting against ISDS, they will have additional incentives to invest in incremental reforms to see if those changes would be sufficient to head off criticisms of the system. On the flipside, if incremental reforms turn out to do little if anything to appease underlying legitimacy concerns about the system, the case for systemic reform or revolution will only increase.
One of the questions that states in the UNCITRAL process will need to face is which of the many potential reform options are best pursued bilaterally or outside UNCITRAL (for instance, through the ICSID reform process or through UNCTAD’s current work on reforming existing BITs) and which lend themselves to multilateral reform and the UNCITRAL process. Part of the issue here is one of bandwidth: states will only have a certain amount of time and energy available to focus on multilateral reforms (and, indeed, reforms more generally), so they will need to choose how to spend their UNCITRAL time wisely. It is premature to seek to answer these questions, but recognising the system’s pluralism is the first step toward thinking about how to tackle the difficult and politically charged issue of ISDS reform, both inside and outside of UNCITRAL.