Editor’s Note: This week, we will be featuring several posts critically examining the UNCITRAL ISDS reform process, which held its latest Working Group III meetings in New York on April 2019. We begin with today’s introduction from Anthea Roberts and Malcolm Langford. Malcolm Langford attends UNCITRAL Working Group III as Chair of the ISDS Academic Forum and a representative of Pluricourts, University of Oslo. He writes here in his independent academic capacity.Anthea Roberts attends UNCITRAL Working Group III as part of the Australian delegation but she acts and writes in her independent academic capacity.
UNCITRAL’s Working Group III on investor-state dispute settlement (ISDS) reform continues to attract substantial and growing interest. In the first week of April 2019, a record number of states and observers descended on New York to clarify the final list of concerns and establish a work plan for moving forward on concrete reforms. This session continued the earlier trend of hastening slowly. A recognition of the need for reform amongst states is clear but the tempo remains modest given the reticence of some and the panoply of reform options being considered. This blog post sums up the four main takeaways of the week and will be followed by three reflective analytical posts on the West/Rest politics underlying the process, the role of academics in international politics, debates around naming and framing (“we are all systemic reformers now”) together with a concluding post.
- A narrow but deep mandate
The session kicked off with a tidying up of outstanding concerns about ISDS. In Vienna in October 2018, states reached a consensus that reform must address three broad concerns: (1) the cost and length of proceedings; (2) inconsistency and incorrectness of decision-making; and (3) problems with arbitral diversity and independence. In New York, attention turned to third-party funding and the identification of “other issues.” Although these agenda items provided an opening for some actors to push for broader reforms, the procedural mandate remained in place.
Third-party funding was viewed by virtually all as a concern to be addressed. While a number of states suggested that definitions of third-party funding differed or were uncertain, a common refrain was that there needed to be greater transparency about such funding. Thailand’s written submission, for instance, highlighted the need for “regulation” in order to ensure “transparency” and avoid “conflict of interests between the arbitrators and the third-party funders”. In the plenary, some states noted the link between third-party funding and access to justice, particularly for SMEs, but others (including observers) expressed concerned that such funding usually benefited one party only (investors), would increase overall arbitration costs, and might reduce incentives for settlement.
Opening up the topic of “other concerns” generated a diverse discussion with NGOs becoming particularly active. Some states and many observers highlighted the need for a focus on alternative dispute resolution, exhaustion of local remedies, genuine participation of third parties (including affected communities) in proceedings, recognising investor obligations with respect to human rights and environmental protection, the role of ISDS in creating regulatory chill, and the calculation of damages. Some also highlighted the need for reform of substantive treaties, e.g., narrowing investor rights or developing model substantive clauses.
The response from the Chair and many states was three-fold. The first was to underline that the mandate was focused on “procedural” reforms to the system. Substantive reforms, such as treaty amendments or investor obligations, were the responsibility of states to pursue bilaterally or plurilaterally. The second was to refer to the “open” nature of the reform process – it must be “flexible enough” to adapt to developments in substantive law and (as the Chair noted) any reform package needs to be legitimate in the eyes of the general public. The third was a reminder of the reform possibilities within the procedural mandate. Third-party financing was a concern about costs; improved third-party participation and damages calculation could enhance the consistencyand correctness of decisions; and investor obligations could be procedurally addressed through counter-claims. In other words, the mandate was narrow but deep.
- The battle over working methods
As in a Game of Thrones episode, the real battle was happening elsewhere. The key question for the week was the structure of the Phase 3 work plan: Would delegates work sequentially or concurrently on a series of reform proposals? In other words, should WGIII proceed proposal-by-proposal, finishing one before starting another, or could multiple proposals be considered simultaneously? On this question, the long-standing proxy battle between the two ‘incremental and ‘systemic’ reform camps, represented respectively by the United States and the European Union, burst into the open.
On one side, a ‘joint paper’ by Chile, Israel and Japan, with backing from the United States, Mexico and Russia, set out a detailed sequential approach. The essence was the prioritisation of low hanging fruit. Reform proposals that attracted a ‘high degree of consensus” amongst states (e.g., a code of conduct for arbitrators and disclosure of third-party funding) would be addressed first while more ambitious and controversial ideas would be postponed. According to its proponents, such a sequential approach would secure quick wins and represent a more efficient use of time. Some other states, such as Thailand which had submitted a paper, seemed to agree.
Against this was Swiss proposal, supported by the European Union, Germany and Mauritius, among others. Instead of simply picking low hanging fruit, much of which Mauritius claimed had already being picked elsewhere (e.g., in the ICSID reforms), the Working Group should prioritise reforms likely to respond to systemic concerns about ISDS. This could result in proceeding on two tracks: one dealing with incremental reforms and another with systemic reforms. A concurrent approach would permit the plenary group to address changes to the existing system of investor-state arbitration on one track, along with a number of structural proposals, such as the Multilateral Investment Court (MIC), an appellate review mechanism and an advisory centre, on another track.
Although a clear minority of states spoke in favour of the sequential approach, the majority of delegations from Africa, Latin America and Asia emphasised that the reform process should consider the multiple reform proposal. After long consultations on Wednesday evening and Thursday morning, the Chair announced a compromise that was grounded on making everyone “equally unhappy”. The somewhat ambiguously worded compromise had three elements.
First, the Working Group would proceed concurrently. It would “discuss, elaborate, and develop multiple potential reform solutions simultaneously” (para. 81 of the report). Second, there was to be “balanced time allocation” between “structural reforms” and “other potential solutions” – which partly became the new names for the systemic and incrementalist options after the names became highly politicised (paras. 82 and 83). Third, states would put any other reform proposals they wanted considered on the table by 15 July, and discussions on how to proceed on these would be considered at the next meeting, but work would go ahead on structural reform proposals. States also requested the Secretariat to produce papers on five topics that were relevant to potential reform proposals:
- Development of a code of conduct for arbitrators and possibly counsel, in cooperation with ICSID;
- Indirect and shareholder claims;
- Selection and appointment of adjudicators, with the involvement of the Academic Forum in collecting and analysing relevant information;
- Third-party funding; and
- Establishment of an advisory centre on international law.
The discussions on the compromise foreshadowed the most significant political development during the week: the clear arrival of the South. As Roberts and Taylor St John discuss in a subsequent post, developing states hold the key to the reform process. However, what developing states want remains somewhat of a mystery. In Vienna in 2018, these states sided with the ‘systemic reformers’ in moving the process forward to discussing reform options; and likewise, in New York, they hindered the adoption of a sequentialist model. However, in both written submissions and plenary interventions, developing states named a range of reform options they were interested in, but few named support for a court, even if they declared an open mind on the matter. Developing states treat the ISDS concerns seriously and want to consider a range of responses. This makes them resistant to attempts to thwart serious discussions of a full range of options and attempts to railroad them into accepting a single solution.
The combination of a multitrack approach with a ‘large developing middle’ puts the different types of reform into some sort of competitive relationship. If the sequential approach had been adopted, states that were less keen on significant reforms might have had an incentive to draw out discussions on various incremental reforms. But now that both structural and other reform proposals are being considered concurrently, these states will have an incentive to ensure that incremental reforms materialise and are attractive to a broad range of states to help lessen enthusiasm for a court. Systemic or structural reformers will also need to carefully build coalitions with developing states to ensure sufficient consensus on their preferred reforms. Ultimately, this regulatory competition may be positive as a smorgasbord of reform options may be particularly important for law-takers who are likely to end up being subject to multiple regimes.
- Dilemmas for observers
Political dilemmas were not only the reserve of states. Observer delegations continued to explore how they could best engage in the process. To what extent should observers seek to support the process with their knowledge or experience and to what degree should they challenge it? This tension was symbolically evident in the ASIL delegation, for example. One member, a prominent arbitrator, was openly critical of the EU’s reform proposal and the UNCITRAL process, while the second member, an academic, intervened to provide research insights and analysis.
Many delegations faced this underlying tension of cooperation versus confrontation. For instance, ICSID is currently engaging in a series of reform processes that overlap, and potentially compete, with the UNCITRAL mandate. The ICSID Secretary-General was careful to signal an interest in a constructive and mutually supportive relationship. Civil society groups had previously used the Working Group sessions to criticise the narrowness of the mandate. Yet, in this session, many of these groups tactically sought to identify their more substantive concerns within the existing procedural mandate. Such an approach was also evident in the Open Letter sent in advance by 65 critically-minded academics on the asymmetry on ISDS. It began by noting sweeping concerns but quickly moved to identify procedural reforms (e.g., mechanisms for investor obligations) that could potentially fall within the Working Group’s mandate.
How these dilemmas are resolved is important because observer submissions continue to have an influence on the process even if it is clearly state-led. This was apparent in the reception of some states to the side event organised by the Academic Forum. Members presented seven papers that analysed the pros and cons of different reform options (from ‘No ISDS’ to a MIC) in addressing the identified concerns with ISDS (see summaries on EJIL:Talk!). A concluding slide seemed to point towards the MIC being the option that addressed most concerns. This slide led to some pro-MIC states claiming support from the Academic Forum, until a clarification came from the Chair that the Forum had not expressed support for any option.
The UNCITRAL process is slow, but it is moving. Momentum on the need for reform is clear and has been developing throughout the process. But the direction or directions of ultimate reform remain unclear. The most significant outcome from the last session was that work would go forward concurrently on targeted reforms to ISDS and broader structural reforms. It remains to be seen which proposals, if any, garner sufficient state support to be adopted at a multilateral level. And it remains to be seen how long and contentious the road will be to get to that point.