UNCITRAL and ISDS Reforms: Concerns about Costs, Transparency, Third Party Funding and Counterclaims

As explained in a previous post, we have put together four posts that compile the most relevant quotes from the first two meetings of the UNCITRAL Working Group sessions on states’ concerns about investor-state dispute settlement. To facilitate discussions about the desirability of reforms and their potential nature, we have organized these quotes into key themes that emerged during the meetings. This blog sets out quotes about costs, transparency, third party funding and counterclaims. The other blogs deal with concerns about:

1. Facts versus Perceptions and Systemic Problems or Solutions
2. Consistency, Predictability and Correctness
3. Arbitral Appointments, Incentives and Legitimacy

We avoid editorializing because we think that it is important for other stakeholders to hear states’ concerns expressed in their own words. We have grouped states’ concerns under headings but otherwise have kept the interventions on each sub-topic in the order in which they were made. For an analytical framework for understanding these reform dynamics, see Anthea Roberts, Incremental, Systemic, and Paradigmatic Reform of Investor-State Arbitration, 112 AJIL _ (2018) (forthcoming).

1. Costs & duration of arbitral proceedings

SOUTH AFRICA – on significant costs of arbitration: “In terms of the issue of costs when it comes to ISDS, we believe that the amounts at stake in investment treaty arbitration are often very high. Claims for compensation do amount to billions of dollars in most cases and in this context entering into treaties with the investor dispute settlement clauses carry significant financial costs for governments particularly the developing countries whose fiscal position can be seriously affected even when cases have been discontinued or when the outcome is said to be in favor of the state. The state will usually have to bear the exorbitant costs of legal defense and arbitrators fees. Furthermore large claims may serve to sustain threats of arbitration increasing the bargaining power of investors in informal discussions with governments to water down regulatory measures or to settle a dispute.”

EUROPEAN UNION – on significant costs of ISDS and the relationship with consistency and predictability: “We think that the system has an effect of increasing those costs and hence by looking at the system we may be able to identify ways to gradually bring about reductions and these costs. We see this happening in three ways. The first way is because the system as it currently functions does not bring about predictability and does not bring about consistency. What does this mean. It means that in any given case before any freshly constituted ad hoc tribunal, a lawyer who is doing his or her job properly will make any possible argument that can be made legally in that particular situation. It doesn’t matter if that particular legal argument has been dismissed on multiple occasions by other tribunals. It may be the case that that particular ad hoc tribunal will accept the argumentation and so any diligent lawyer will have to make that argument again. So we think increasing and dealing with the issue of predictability and consistency will help address the issue of costs.”

EUROPEAN UNION – on significant costs of ISDS and selection of arbitrators: “In each case the lawyers will spend time thinking about strategizing as to who the arbitrators best suited for that particular case would be and they will spend time thinking about which arbitrators are most likely to support their particular argument in that particular case. And how any particular arbitrator would interact with other arbitrators and how they might predict that might affect the outcome of the case. And that obviously is a significant part of the costs of the legal fees of any particular case.”

EUROPEAN UNION – on multiple appointments being a systemic issue affecting costs: “Many arbitrators have multiple appointments. They are often managing a large number of arbitrators and a large number of cases, and that clearly also puts pressure on their time which is understandable and impacts their ability to draft and deliver and deliberate in order to produce awards within a reasonable period of time. That is another systemic issue which we think has an impact on costs.”

THAILAND – on the relevance of costs during arbitration and enforcement: “Thailand is of the view that time and cost consideration is not only the issue in the arbitration process but also in the enforcement phase. In the case where a state decides to seek for setting aside or annulment of an arbitral award, we should resolve in favour of foreign investors. These costs take more time and resources for them. In some cases it take longer time in enforcement battle than arbitration itself.”

CHILE – on facts versus perceptions on the issue of costs: “It is very important for this group to carry out work based on facts and not perceptions. When we talk about cost and duration, I would like to ask what is a comparator that we are actually using. Are we comparing it to international adjudication processes in general or to a specific country domestic proceeding? We need to work on actual facts and not perceptions. We should first of all establish a comparator, set facts and statistics and assess if this is an issue of perceptions or not.”

PAKISTAN – on duration and the need for comparators: “the issue of duration has to be seen in the relative context of how well other multilateral institutions are performing.”

UNITED KINGDOM – on the issue of costs: “On the one hand costs of proceedings may help to deter frivolous claims and encourage mediation and early settlement of disputes. […] But the difficulties for states in defending expensive claims and for SMEs that are left without remedy are serious concerns worth considering.”

ITALY – on the sustainability and accessibility of ISDS for small and medium companies: Italy referred to the “systemic issue” that “small companies do not use the mechanism. But even for medium sized companies, sometimes, it is extremely difficult to access the system because of cost.”

CHINA – on delay and costs due to language barriers: “The current arbitration proceedings are carried out in some specific languages and most arbitrators use several specific languages or come from certain specific backgrounds, they may lack the relevant knowledge about the legal cultures of other countries. So for many developing countries including China, currently, we are facing difficulties related to language in terms of translation of our documents and this may also cause some extra delay and extra costs.”

SOUTH AFRICA – on costs of arbitration and equal access to justice: “There is no limit as to the costs nor the duration of the case which can last for several years and in which legal fees often amount to millions. The number of ISDS cases has increased greatly over the past years which means more use of public budgets. Furthermore, states where citizens cannot initiate ISDS disputes if an investor has failed to act responsibly or lawfully. Additionally only a foreign investor can initiate ISDS disputes if an investor’s actions fail to respect laws and standards, they can only be tried in the domestic court. Domestic investors cannot initiate an ISDS is a privilege for foreign investors only which raises the question of equal access to justice. Often SME enterprises cannot initiate ISDS disputes. In theory we can say they can. However because of the huge legal fees that are involved they cannot really use the system. Few of them can afford the costs. ISDS is first and foremost the system for the most powerful.”

SPAIN – on costs and parallel or drawn out proceedings: Spain suggested that parallel proceedings lead to a “significant issue of costs.” Suggested to avoid guerilla tactics through greater use of consolidation. Spain added that “the absence of clear rules of procedure lead to a situation whereby proceedings are interminable.”

EUROPEAN UNION – on the link between lack of consistency and cost: “This lack of consistency brings significant cost. This is problematic because there is a lack of predictability when analyzing the potential legislative or regulatory activities. This also engenders disputes because it is very often the case that one or the other party in a potential dispute can point to at least one instance in which an interpretation that suits them has been adopted and therefore they are tempted to seek to bring a case when it might not be necessary. In our view, there are differences [among the treaties], but these differences should not be exaggerated. Many countries in the world have negotiated investment treaties on the basis of models and there is a high degree of similarity. Virtually all of these treaties have key core obligations – obligations that we’re all familiar with: the non-discrimination obligations, the expropriation obligations, fair and equal treatment and types of obligations.”

SPAIN – on the costs that arise from inconsistency: Emphasized that “there are clear costs” to inconsistency and that “this inconsistency whether we call it incoherence or lack of predictability essentially means a lack of juridical or legal certainty. And this means then a risk premium for investors. And it means ceteris paribus, less investment, less employment and lower degree of welfare, well-being.”

2. Transparency

PAKISTAN – on transparency and appointment of arbitrators and annulment committee members: “One concern that springs to mind in relation to transparency is the manner in which arbitrators are chosen and members of the annulment committee. What precise criteria is applied in the selection of the arbitrators and members of the committee.”

ARGENTINA – on the need for procedural transparency including as to how institutions appoint arbitrators: “We think transparency should also guarantee the development of the arbitral proceedings and guarantee due process and the right to defend oneself and the right to legal equity in the search for justice. This should be an integral part of this but, when we talk about this type of transparency, what are we also getting at? Well, firstly, just how arbitral tribunal is actually acting, conveying information? How do these institutions act which administer the cases in appointing arbitrators?”

AUSTRALIA – on transparency and social license for ISDS: “Australia has been a very strong supporter of transparency in international dispute settlement including investor state dispute settlement. I think it links to the point I made earlier in relation to securing an adequate social license for ISDS and underscoring the legitimacy of that mechanism. Australia has taken various steps to enhance transparency in its bilateral investment treaties and the investment chapters of its FTAs and we very much welcome the convention as a model for transparency in ISDS.”

CHINA – on perceptions versus facts with regards to transparency: “Transparency is a relatively independent issue. We are of the view that if the working group needs to decide whether we need further work in terms of transparency. We believe that this decision should be based upon facts rather than simply perceptions or theories. As a result, we believe that it is necessary to recall relevant work carried out by international organizations to improve transparency in recent years and that the actual effect of these work including whether these work are satisfactory and can meet our expectation. Whether they’re going to have other implications for example implications upon ISDS duration and the costs.”

SWITZERLAND – on the legal framework for the implementation of transparency: “The legal framework to implement transparency is here and we have achieved that. So we should be happy about that. Practically all the new treaties have references to the transparency rules. So that is … quite a success for the works of this Commission. What might be missing still and because the picture is not entirely satisfactory at this stage is the implementation of the existing legal framework, the signature and the ratification of the Mauritius Convention on the one hand, but also the consent of disputing parties to transparency where transparency does not apply under the relevant BIT. There should be increased awareness also of tribunals. Tribunals should probably propose to use transparency rules, without imposing it of course, but making a proposal to the parties. Institutions could also promote the use of transparency rules within their proceedings.”

USA – on the relevance of facts versus perceptions: “The facts are yet to be determined about [the UNCITRAL transparency rules]. But again we think the question of what is the role of transparency in ISDS reform is critical. And it goes to a larger conversation that we’ve had today about the relationship between facts and perceptions and in our view it’s critical. Transparency has been critical in the sense that it is very challenging as a state to challenge some negative perceptions of some treaties or existing rules when we’re acting against a foundation of a lack of transparency.”

USA – on the relevance of transparency: “Many of the cases that have attracted the most scrutiny and most criticism by stakeholders in the United States have been cases that have been entirely lacking in transparency and so there have been essentially no facts to use to offer as a counter narrative to this negative perception or to concerns about process. And so in our practice again in this greater discussion about the relative importance of facts and perceptions we think they’re linked and we think that having greater transparency is a critical tool to address concerns that can evolve into negative perceptions about ISDS.”

USA – on transparency versus the lack of disclosure: “Many countries declined to make essentially any information public even when it is entirely permitted under the relevant arbitral rules and the relevant convention. And so in thinking about the extent that transparency is a problem that needs to be addressed I think we do need to look at state practice and each state should assess to the extent they value and prioritize transparency, what steps can they do now to enhance transparency with respect to their existing agreements, separate and apart from the UNCITRAL transparency rules and Convention.”

NETHERLANDS – on the Mauritius Convention and the resolution of transparency concerns via multilateral negotiations: “The Kingdom of the Netherlands is in favor of transparent procedures. The lack of transparency and openness are important concerns. The lack thereof namely has serious consequences for the legitimacy of our regime. That is why the Mauritius Convention has to be negotiated within UNCITRAL, to which by the way we are signatory. The Mauritius Convention is an excellent instrument to improve transparency and thus improve the legitimacy of the system. And the convention is also an excellent example that concerns related to ISDS can be solved via multilateral negotiations despite the differences between our bilateral treaties and the different procedural rules in place.”

NETHERLANDS – on transparency and the need for a systemic holistic approach: “The issue of transparency is really a crosscutting one and this is also indicated by the interventions of several other delegations highlighting possible further issues that can be addressed such as the one of third party funding. As we have seen in the previous discussions and our concerns are also crosscutting which ask and in view of this delegation for a systemic holistic approach.”

MAURITIUS – on the role of arbitrators in enforcing transparency: “Now that we’ve seen a shift of paradigm with the transparency rules and it’s getting more and more accepted it may be that the time has come to encourage tribunals to grapple themselves with the issue even in the absence of party consent. We would we respectfully agree with those delegations that have said that transparency is a very important part of the solution and we would therefore encourage those delegations to ratify the Mauritius Convention.”

SINGAPORE – on transparency and third party funding and institutional appointment of arbitrators: echoed the suggestions made by several delegations and stressed “the issue of transparency and disclosure in third party funding” and “the issue of transparency in the appointment of presiding arbitrators and tribunals by appointing authorities.”

CHILE – on the transparency problem being one of lack of implementation: “I heard a number of delegations today saying that we had done the work already. We had the convention and it was quite surprising considering that many of those countries haven’t ratified or signed the convention or have implemented them in their in their agreement. Which leads me to think that the problem is not that we haven’t identified the problems we haven’t identified the solutions but the problem is we’re not implementing them. So maybe we should focus on how to actually implement the core elements of the Mauritius convention even if some countries have some problems ratifying it.”

CHILE – on the transparency and the problem of public perceptions: “The problem is that even though we are transparent and we disclose everything, the public is not understanding it. There is a problem of actually understanding because these are legal documents. These are very large and extensive and of course big law firms can understand them and can actually make summaries. But maybe we should be doing more about that. That’s when the problems of perceptions come in.”

3. Third party funding

ISRAEL – on third party funding and transparency: “We believe that the issue of third party funding raises issues of transparency that should be discussed on our work.”

POLAND – on the relationship between third party funding and frivolous claims: “Many proceedings are funded by third parties. Under the current substantive and procedural rules, the third party funder runs a low risk of indemnifying the whole state for the incurred costs of arbitration. Such situation creates an obvious asymmetry between the investor and the state and can induce investors to raise unrelated claims.”

SINGAPORE – on the issue of third party funding: the issue of third party funding “is not just related to cost per se but actually has a much broader implication on other aspects of ISDS as well including on things like the independence of arbitrators and conflicts of interest.” Singapore believes that “the increasing prevalence of third party funding in arbitration cases these days is something that is not being sufficiently addressed in the current ISDS framework but it needs to be more fully addressed in order to safeguard the integrity and impartiality of ISDS proceedings.”

AUSTRALIA – on transparency and third party funding: “one of the areas to look at concerning ways of improving transparency is in relation to third party funding.”

ITALY – on systemic issues re costs, third party funding and legitimacy: “some issues on security for costs, of third party financing are also linked to the legitimacy of the system because transparency and conflicts are connected.” Those issues should be seen as “linked together for helping investors to find the right mechanism to get what they want and not only on the side of the state.”

NETHERLANDS – on transparency and the need for a systemic holistic approach: “The issue of transparency is really a crosscutting one and this is also indicated by the interventions of several other delegations highlighting possible further issues that can be addressed such as the one of third party funding. As we have seen in the previous discussions and our concerns are also crosscutting which ask and in view of this delegation for a systemic holistic approach.”

SINGAPORE – on transparency and third party funding and institutional appointment of arbitrators: echoed the suggestions made by several delegations and stressed “the issue of transparency and disclosure in third party funding” and “the issue of transparency in the appointment of presiding arbitrators and tribunals by appointing authorities.”

INDIA – on the problem of pro-investor and pro-state arbitrators for impartiality and independence: “The very fact that there are investors’ arbitrators and there are states’ arbitrators is a testimony that impartiality and independence is lacking in the system. The system is lacking in adequate ethical requirements. And there’s a lot of conflict of interest in this system which needs to be corrected. Third party funding is a problem as well. The mix of third party funding, multiple hatting and lack of adequate ethical standards has the potential to derail the system.”

NIGERIA – on the problem of third party funding: “We noted the argument that third party funding will provide access to justice for SMEs who may lack funds. Essentially, in our experience, we find that third party funders are attracted by the high level claims, the perceived finality of awards, and the enforcement regime. But it still raises a moral, ethical, policy issues. Why a total stranger who has suffered no injury should be allowed to benefit from the injury caused to others. In our view the danger of the third party funding is that funders are not known to BITs. It poses real challenges including the possibility of encouraging unmeritorious claims, the possibility of discouraging settlement and the risk that the funders may put their own interests ahead of that of the claimant. Going forward we are of the view that the secretariat could consider how we could tackle these third party funding challenges either by way of enhanced transparency or outright ban.”

CANADA – on third party funding and perceptions: “The link to the discussion of third party funding is very much because of the perception that third party funding really benefits not legitimate investors, that it is a way of exploiting the system and that it does give rise to claims that would not otherwise justifiably arise. That being said, there is growing consensus and a number of recent treaties look at the issue of transparency as well as security for cost and the link to third party funding.”

URUGUAY – on transparency, impartiality of the arbitrators and third party funding: “Transparency of the proceedings is vital. We would suggest the idea that there be a proper phase in arbitration whereby a group or committee would analyze the relevance the documents brought forward as evidence, look at the claim and then consider costs. This could also look at the list of arbitrators in order to ascertain the skills, the professional ethics and their links with the parties or third party funders in order to avoid conflicts of interest. The investor is looking at his particular interests and the state is looking at the public interest and the arbitrators therefore need to be aware of this and be better involved to a greater degree in the cases, that the awards affect the public interest or are certainly involved with it. So we need to have impartiality which means that without prejudice to the private aspects of the dispute, the public impact of the award has to be considered and the effects thereof. One solution could be to have in all treaties something on the process for dispute resolution looking at arbitrators, the process of resolution and the entire proceedings.”

USA – on the need to better understand different types of third party funding: “We too acknowledge that third party funding is playing an increasing role in the conduct of investment arbitration and share the view that its role needs to be better understood in the context of ISDS. But we also note that third party funding can encompass a number of different forms as the delegate from El Salvador noted – there are contingency fees and that can be one form of third party funding. And others have noted that it plays an important role for access to justice for small and medium enterprises. Given these different forms, it’s important to have more information and a better inventory of these types of different forms available to the working group so that we can not only understand how third party funding is being used but that we can define it in order to be in a better position to assess what solutions may be appropriate for what types of third party funding may raise concerns.”

4. Counterclaims

ARGENTINA – on the issue of counterclaims: Argentina started by saying it is “in favor of counterclaims and the possibility to establish a mechanism for a counter-claim.” It then noted that there are many drawbacks to the use of counterclaims and noted that “there is no substantive basis on which states can base themselves. The old generational conventions conclude rights for investors and duties for states. But even if we look at the more recent treaties, the so-called third generation conventions, we can see that the rights which have been incorporated in favor of states, it has been recognized that the states can try and re-establish a balance. This is the situation the state faces when thinking about a possible counterclaim. We are not so much aware of specifically drafted obligations incumbent on investors. So we think it’s difficult for such a counterclaim from a state to prosper. Now if we go to other sources of jurisdiction we look at certain contracts there, the state could perhaps invoke certain obligations incumbent on the investor because that’s the basis of such counterclaims but we do think this is rather complicated. That is if we’re going to incorporate other instruments apart from the treaty as applicable law it would mean that each state would have to decide.”

KOREA – on the issue of counterclaims: “With respect to counterclaims we believe that the counterclaim should be permitted only if there is a specific obligation in a specific instrument at issue. Perhaps some ISDS dispute, the way a contract is an issue through the umbrella close where the counterclaim could be natural or could be reasonable. But in other instances, we should be careful in discussing counter-claim even though counterclaim itself is an important tool for the responding host government.”

SOUTH AFRICA – on the benefits of counterclaims “We believe that it’s an issue that could bring rebalance into the system. And additionally I think in terms of benefits it may contribute towards procedural fairness and legitimacy and enhancement of the rule of law. It may actually also contribute to some of the concerns that we’ve raised in terms of probably discouraging frivolous claims and it may also have an effect on third party funding decisions as funders would have to assess the likelihood of affirmative liability in addition to the likelihood of success on the merits in the case against the opposing party.”

GERMANY – on the issue of counterclaims: “Counterclaims very often are subject to local laws or domestic laws and in investment arbitration the usual applicable law is public international law and investment treaty rules. So we have to consider whether it’s actually appropriate and possible for a tribunal to substantially look into claims that are either based on domestic public law or domestic private law, and whether arbitrators or judges have the competence to do so and if it can be assured that their rulings will then also be enforceable in the domestic legal systems accordingly and there will not be any conference towards national jurisdiction.”

CANADA – on the drawbacks of counterclaims: “There have been issues that are good examples that raise concerns and questions about why do investors have privileged access to investor-state dispute settlement where the state is not capable of enforcing for example environmental obligations or ensuring payment of taxes and so on. However, bringing everything into the ISDS system – whether it be an investment tribunal, multilateral investment tribunal or ad hoc tribunals – has the potential of raising even more concerns about the legitimacy of the system and taking away from domestic courts which may be much better placed to deal with domestic law issues and concerns.”