UNCITRAL and ISDS Reforms: What are States’ Concerns?

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What are states’ concerns about investor-state dispute settlement (ISDS)? To help answer that question, we have put together four posts that compile the most relevant quotes from the first two meetings of the UNCITRAL Working Group sessions. 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.

As explained in a previous post, UNCITRAL granted Working Group III a mandate to: (i) identify and consider concerns regarding ISDS; (ii) consider whether reform was desirable in light of any identified concerns; and (iii) if the Working Group were to conclude that reform was desirable, develop any relevant solutions to be recommended to the Commission.

The mandate calls for the process to be “fully transparent” and thus recordings of the session are available online. These posts are in keeping with that call for transparency. They communicate states’ key concerns to other interested stakeholders, which is important given the disconnects that often exist between different communities in the field.

This post will list quotes about two general issues that emerged in the Working Group: whether states should be concerned with facts and perceptions, or just facts; and whether some of the problems identified were systemic in nature or called for systemic solutions. The next three blogs provide quotes about the concerns states raised with respect to the following topics:

  1. Consistency, Predictability and Correctness of Awards
  2. Arbitral Appointments, Incentives and Legitimacy
  3. Costs, Transparency, Third Party Funding and Counterclaims

A few caveats are necessary. Because the purpose of these blog posts is to reflect states’ concerns, views expressed by NGOs and other observers present at the meetings are not included. Although these quotes are intended to be representative, they represent highlights from two weeks of meetings and thus cannot be fully comprehensive. If a concern has already been raised, other states may not intervene to make the same point. We welcome others to supplement this record.

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. We note that statements made by states in UNCITRAL cannot be taken as final declarations of policy about the positions states will take with respect to potential reforms.

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). For previous EJIL: Talk! blogs on these reform processes, see:

  1. On the Relevance of Facts versus Perceptions

CHILE – on the importance of facts not perceptions and the need to establish a comparator: “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.”

AUSTRALIA – on the importance of perceptions and the need to maintain a social license for ISDS: “Just thinking about why we all here, why have our governments spent a considerable amount of money filling this room with some of the best legal minds in their systems. And I think the answer to that is that our countries are concerned about maintaining social license for ISDS. How do we maintain the legitimacy of ISDS? There’s been a number of comments in the room regarding perceptions versus facts and evidence. And I think from Australia’s perspective we certainly view facts and evidence as crucial and very significant and important to this discussion. But for Australia as well I think perceptions matter and I think are key to this idea of social license and if I could just briefly quote a quote from a Chief Justice of the English court: “Justice should not only be done but it should manifestly and undoubtedly be seen to be done again.” From Australia’s perspective I think it’s important that both real and perceived problems should be considered. At the end of the day we are all accountable to the public and we need to coner public perceptions to be relevant. It’s obviously not saying that facts and evidence are not important. But I’d just like to offer a slightly counter view to some of the interventions which have suggested that we shouldn’t be looking at perceptions. I would argue that those perceptions are fundamentally relevant to the discussion that we’re having today.”

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.”

USA – on perceptions versus facts with regards to transparency: “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.” “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.”

MAURITIUS – on the importance of perceptions: “This delegation begs to differ from those that have expressed the view that perceptions do not matter. We fully and respectfully endorse the views expressed by the distinguished delegate of Australia. Perception matters greatly for it is a basic tenet of the rule of law that justice must not only be done, it must be seen to be done.” “ISDS has now come under attack repeatedly in the mainstream press so that the mechanism that was meant to depoliticize disputes has itself become highly politicized. And we would say distinguished delegates that now rather than fostering trade and development it has become very arguable that this system is hindering trade and development as countries run scared of the legal risks and financial exposures that have come to be associated with the system and therefore with investment flows for there should be no mistake countries and particularly developing countries are deeply concerned. We have all come here to work in good faith on the reform which will rebalance the system and we urge all present here to work towards that end.”

SOUTH AFRICA – on the importance of perceptions: “Equally, like Australia, I believe that perceptions are very important.” Echoed the sentiment that “justice must not be done but should also be seen to be done”

AUSTRIA – on the importance of perceptions: “Obviously I think we can all agree that facts do matter and we are here in this room to establish a factual basis for further policy considerations. However if we look at the bigger picture I think it’s quite fair to say that perceptions do indeed constitute the crucial effect in any policy area and I think we can all agree that states are not always in a situation where they can make their policy choices merely on the basis of figures and numbers.”

CHILE – on perceptions regarding transparency of the proceedings: “Even though we are transparent and we disclose everything, the public is not understanding it because these are very large and extensive legal documents. That’s when the problems of perceptions come in.”

AUSTRALIA – on the relevance of perception regarding the lack of sufficient guarantee of independence and impartiality of individual arbitrators: Regarding the lack of sufficient guarantee of independence and impartiality on the part of the individual arbitrators, Australia “does consider that both real and perceived problems with arbitrator independence, neutrality and accountability must be considered particularly as governments are accountable to the public and we do consider the perceptions to be relevant in this regard. And on that it’s true that there does seem to be a perception at least that arbitrators are at least partially motivated by a desire to be appointed or reappointed by the states or the investors and a perception that there are divisions between state-friendly and investor-friendly arbitrators.”

CANADA – on perceptions versus facts in arbitrator appointments: “We need to look at numbers and facts and we can’t necessarily conclude from those numbers that there is bias. It could be that certain arbitrators have certain views about investment law – that may be a broader interpretation of the FET standard – and this is really not very different from domestic courts. If we look at Supreme Courts in many of our countries, our judges are identified with certain views and we can’t deny that. So what is the difference? The difference really comes back to this idea that arbitrators benefit from the views that they express and they have an interest in being reappointed and that the remuneration in some way influences the procedure, for example that they have no incentive to reject frivolous claims and that it may also influence the outcome. And so we are dealing very much with a perception problem perhaps more so than a true bias. And I say that while being very mindful of the challenges that any alternatives to the current system. The challenges that would be tied to for example developing a permanent tribunal, including difficulties in composition of a balanced tribunal that need representativeness and other criteria. I think Professor Brower, the USCIB, risks of politicization of such a system are real.”

ROMANIA – On perceptions & the arbitrator appointment process: “In our view the parties’ perception of the system is a key element for well-functioning. The distinguished delegate of the US has noted this morning that perceptions of the parties relating to the impartiality of the arbitrators or rather the lack thereof do not necessarily reflect the reality in each individual case. However in this delegation’s opinion, even the recurrence of instances where there is a mere perception of a lack of impartiality which does not necessarily correspond to reality is sufficient to undermine the legitimacy of the system. As it is generally acknowledged, perceptions of fairness of adjudication systems are capable of promoting better compliance, cooperation and deference even in the face of unfavorable decisions. It is this delegation’s submission that the perception of a lack of impartiality in the system and ultimately of a lack of fairness affects its overall efficiency. Should this working group reach the conclusion under its mandate that reform is indeed needed, and we believe it is, then the reform should address these concerns in order to ensure neutrality and impartiality of adjudicators in ISDS procedures. In this sense, a potential sensible approach would be in our view the creation of a judicial body which would guarantee neutrality similar to other fora dealing with international disputes and whose overall impartiality and independence is generally not questioned.”

JAPAN – on the problem of relying on perceptions: “Perception is a magic word, which has the power to turn everything into something illegitimate. Some people say perception is everything and others say perception is nothing. You can turn anything you like as perception. You can deny anything you do not like equally as perception. This is the magic over the word perception. First we need to identify well-founded perceptions, that it was founded on facts and empirical evidence and identify the other perceptions founded on false allegations and misunderstanding. In order to make such distinction between well-founded perceptions and unfounded perceptions, this working group, our discussion showed that there is a need to conduct overarching research in the facts surrounding the reality of practice of investor state arbitration, with the assistance of practitioners and organizations. On unfounded perception, Japan does not consider that the perceptions founded on false allegation or misunderstanding should be ignored if such perception preoccupy the general public. To the contrary we have to face them, we have to address such perceptions. But if we can see that the public perceptions do not refer to reality, what we have to do is not to distract attention but to engage in genuine dialogue with the public in good faith.”

RUSSIA – on not overplaying the relevance of perceptions: “In our opinion, UNICTRAL’s aim is to improve international trade law, and not to work with public opinion. I’m sure that in some states there are problems with the perceptions of this current ISDS system, and there are doubts as to its objectivity and its effectiveness. However there are other opinions too. Basically the issue of perceptions is a subjective one. We believe that perceptions need to be taken into consideration. However, we should not overemphasize the importance of this. If in some specific state, the media has been critical regarding an investment agreement stipulating an arbitration mechanism, the government should explain to society what reasons guided it when it was concluding that particular agreement. But that doesn’t mean that the whole of the international community needs to disrupt this existing system and incidentally that could also have a negative perception to cause negative perceptions in those very same leading media outlets.”

MAURITIUS – on the importance of perceptions: “It ultimately matters little whether these are just perceived problems or real problems because despite investment arbitration being a specialized and technical subject, it now finds itself in the mainstream news far too frequently and always for the wrong reasons. What has happened is that the mechanism which was meant to depoliticize the settlement of disputes between investors and states has itself become highly politicized. And it is thus now arguably hindering rather than fostering trade and investment flows as states that would otherwise welcome such flows run scared of the real or perceived legal risks that are now associated with them. That would by itself be reason enough for reform. Perception is not magic which allows one to conjure something out of nothing. What public opinion perceives as reflected on the first page of The New York Times, of Le Monde, of the Guardian matters greatly. States themselves contribute to that perception.”

  1. The Existence of Systemic Problems or the Need for Systemic Solutions

BRAZIL – on its choice to not use ISDS at all: “There were many reasons why Brazil decided not to have ISDS in its agreements. Some of them coincide with the general critique that many organizations and scholars make regarding ISDS, which is the fact that it may be considered discriminatory against national investors who do not have the chance to resort to international arbitration and must tackle any issues within the domestic courts. This has been as one of the reasons why Brazil historically has decided not to go down this road. So from our perspective, ISDS is intrinsically flawed. No reforms would be enough to redeem the system. At the same time, we fully understand that for those who have adopted the system, reforming the system may make sense and may be needed and may be needed urgently. Again, that’s not the position we take. For us the best solution is simply throw it out of the window and use something different. And we use SSDS, state to state dispute settlement.”

SOUTH AFRICA – on the reform of its investment treaty system: “As South Africa I would like to start off by saying I think as some countries may be aware, South Africa undertook a review of its investment policy, which included its bilateral investment treaties and we have since moved away from the ISDS system and have gone to a state-to-state dispute settlement system. 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 UNIONon 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.”

MAURITIUS – on the need for a dual track of bilateral and multilateral reforms: endorsed “the observations made by the distinguished delegate from Australia about the dual track of progress on the revision reform however you want to call it bilateral and multilateral.” It added that “it would have a freezing effect even on their participation here if they felt that somehow those multilateral negotiations we are conducting here would exclude whatever they have chosen to do on a bilateral basis. So I think that message from here should be loud and clear that multilateral and bilateral can and must proceed in parallel.”

POLAND – on the existence of systemic problems and the need for a holistic approach: “[I]n order to identify the problems related to ISDS system, a holistic approach should be taken. These problems are systemic in nature. So they should be neither considered in isolation nor solved by minor adjustments to the current system.”

EUROPEAN UNION – on the need for systemic reform: “I believe we would be hoping to also consider [an] additional transparency element as part of a broader more systemic reform approach also within this working group.” Referring to the origins of UNCITRAL work on transparency, noted that “there was also a feeling that a purely bilateral approach would be suboptimal and that the best way forward would be to have a more multilateral approach to allow to reform the multitude of existing treaties.”

ARGENTINA – on the need for systemic reforms: “Argentina considers it important and necessary to adopt a multilateral approach, necessarily a systemic approach. In other words we need to look at these issues not just from a bilateral point of view but also from a multilateral one. This is the reason why we’re here. We think that to look at these things simply as problems that can be solved by reforming the instruments per se deprives us of the opportunities to have clear rules and standards for all of us.”

AUSTRALIA – on incremental and systemic reforms not being mutually exclusive and the possibility of pursuing a suite of options: “We don’t necessarily see a systemic or multilateral approach versus bilateral or targeted approaches a binary choice and for Australia we’re certainly open to potentially considering both options. We think they can be complementary and I think in the context of this working group we would like to be able to move towards a position of considering a suite of different options some of them potentially multilateral or bilateral some of them more targeted and focused on specific issues which members can potentially engage with as they think is fit.”

SPAIN – on abuse of proceedings and misuse of structures and the need for a multilateral solution: on “the issue of abuse of proceedings and misuse of structures or the use of fund shopping or shell companies for abusive claims. We think that this issue is profoundly linked to the overall benefits of the system. We’ve seen such groups of companies being formed in third countries by domestic investors, the only goal being from that to be able to bring claims against the state by abusing an instrument conceived initially and exclusively for foreign investors. It is essential that these procedural issues be addressed in a multilateral context because they are intimately linked to the legitimacy of the whole system. And we should think and analyze multilateral instruments to prevent such abuses so that such issues are not even being registered by institutions or are addressed early on so that proceedings don’t drag out and prove expensive, so that they can be thrown out as early as possible in the course of proceedings.”

EUROPEAN UNION – on the lack of consistency being a systemic problem: “And in our view this problem is again a systemic problem because it’s a problem which flows from the ad hoc nature of the existing regime that there are always three individuals asked to hear a particular case and they may take a slightly different view or they may take a different view from their predecessors on any particular issue. And we also think that this is related to the fact that there is no broad appeal review that allows to establish some notions of hierarchy and authority within the system.”

FRANCE – on the need for systemic reforms: “The absence of coherence in case law has an impact on the choice of arbitrators who are selected on the basis of their affinities for certain approaches. So this can lead to doubts, calls for recusal and can undermine the legitimacy of the system. So all of this justifies the argument that this working group should look at coming up with a global or systemic approach to resolving those issues.”

SPAIN – on systemic problems requiring a systemic response: “We fully agree with the views that were expressed previously by other distinguished delegations to the extent that they consider that the issue of coherence and consistency of arbitral decisions is a systemic matter because the current system based on ad hoc tribunals creates this difficult issue.” “It’s a systemic matter and that’s why it equally requires a systemic response in order to modernize the current system to ensure that coherence and consistency become values in and of themselves. And as a value in and of themselves that means that it is equally necessary to increase the legitimacy of the system in order to thus be able to deal with the criticisms that are being leveled against the system by civil society from states as well, and also in order to increase predictability for the investors themselves who are after all the users of the system.”

ALGERIA – on the need for in-depth reform: “Either we make the adjustments and we rectify as we should, without delay, or we should expect a rebellion which will reject all of the norms and rules which have been proposed by UNCITRAL, even though UNCITRAL is not responsible for what happens on the ground. But these amendments or rectifications need to be in-depth, they need to be done transparently, they need to go to the next level, an in-depth study of the issues, because sometimes the judgment is given but there is no remedy after that, once the case has been dealt with. It must be a democratic discussion, it must get to the bottom of things and there should not be mocking, or frivolous changes.”

GERMANY – on the need for systematic reform: “This is about a systemic issue that lies at the very core of ISDS, and that is that there is one tribunal per case that is dissolved after a decision and will not decide a case in the same constitution as before. From that follows that there is no consistency in awards and we have no systematic correction of awards. At the same time we note that consistency is something that is in everybody’s interest who is involved in ISDS proceedings.” The delegate for Germany then added that “the current system has quite considerable systematic disadvantages that we believe need to be corrected and it need to be corrected in a more systemic matter.”

MAURITIUS – on inconsistency and the need for systemic reform: “It is true that the law consistently applied to different facts will result in different outcomes. But that’s where the fact of multilateral proceedings comes in. And that’s why I think whenever we are discussing the issues we are discussing in this working group we need to come back to this question of the lack of a system. By its very nature, arbitration is fragmented. Each tribunal is its own master, it doesn’t report to anyone. It has no duty to a system. And for that reason, practitioners are very regularly faced with how to manage multiple proceedings. It can be similar facts being adjudicated by different tribunals You will often have multiple proceedings that are involving the same facts with tribunals with no coherent tool as to how to coordinate their proceedings as to how to make sure that they can all adjudicate on these facts to reach a consistent outcome which may well mean one case is won, one case is lost, but at least the factual findings will be coherent. If you’re a state nowadays you cannot be sure of even that. The existence of a system of review mechanisms which would be systemic have the ability to deal with most of these problems.”

FRANCE – on limited review and the need for systemic reform: “The French delegation believes that limited control in ISDS in its origins and practical consequences poses systemic problems which require reforms and solutions like that which is up to the work to be done in this group.”

SINGAPORE – on the need for a systemic solution to the issue of inconsistency regardless of the reform adopted: “In the event that any of all reform efforts lead to a more systemic solution, it bears repeating that such a solution must certainly also adequately address and enhance predictability, coherence and finality in the recognition and enforceability of ISDS outcomes and to do so in a more holistic and comprehensive manner than what is currently being achieved to date.”

KENYA – on the need for a holistic reform of ISDS: “Speaking from our experience, the piecemeal reform of the ISDS system will not lead to the desired outcome for developing nations. The desired outcome will only be achieved when we begin to consider the substantive issues in an open, frank, free, and transparent manner in this working group, noting the need to fast track the conclusion of a holistic reform process of the ISDS.”

CHINA – on the need for systemic solutions to deal with the independence and impartiality of arbitrators: “We need an approach that is integral, comprehensive in order to systematically deal with the question of independence and impartiality of arbitrators. As a result to ensure the independence and impartiality of arbitrators is a systematic issue one which requires an integral approach in order to resolve the issues.”

CYPRUS – on the need for a systemic reform in relation to arbitrator appointments: “Cyprus echoes the concerns expressed by many of the delegates during the proceedings regarding systematic issues with ISDS, including with respect to the arbitrator appointment process. These concerns include the appointment of repeat players, lack of diversity both in terms of region and gender diversity, and lack of transparency in the appointment process. Slight adjustments to the current arbitrator selection process will continue to be insufficient to address these issues fully. Indeed the parties could be at a disadvantage if they don’t appoint these same repeat players. Promoting increased impartiality and independence of arbitrators can be better achieved through systematic reform, while not compromising on the experience and reputation and competence of the adjudicators.”

GERMANY – on the need for a systemic reform to increase diversity in arbitral appointments: “If you want to increase diversity in the judicial system responsible for settling investment disputes and you likewise want to fight the double hatting problem, then the only solution that you quite have is fundamental systematic reform and that is for the following reasons. If you increase the number of arbitrators or if you limit the number of cases an arbitrator can sit on, that means that this arbitrator has to look for different sources of income to pay for his livelihood. And that usually means, because they have to be experts in their fields, that they have to work as counsels or somewhere in the field of investment arbitration. Increasing diversity without reforming the system as such will increase the double hatting necessarily because otherwise you will not find any people that voluntarily would want to sit as arbitrators.”

SPAIN – on the inherent characteristics of the current system creating nefarious incentives and the need for a systemic response: “What is key here and this is evident from an economic point of view is a matter of incentives. The same person, if you give him incentives of one sort will function in one way and if he has incentives of another sort he’ll function in a different way. The problem facing us is that the existing mechanism, the existing incentives, inter alia compensation and fees. But that’s not the only incentive. I would like to emphasize the fact that the mechanism determining the conduct of those who have to take decisions is of vital importance and here it must be stated clearly that the current incentives current fees foster dependency and bias. It’s a matter of the remuneration. So I think here we are up against a systemic problem, a structural one. As clearly emerges from the documents submitted by the EU and as this is a systemic issue, we can’t improve it to just incrementally. For us, the matter of codes of conduct is identical to an incremental improvement. It’s necessary it’s there but it’s manifestly inadequate.”

PAKISTAN – on the need for systemic reform, not just increasing the pool of potential arbitrators: “Is it the smallness of number that is the cause of problem? I dare say not. It is the design of the system, the way the system is designed, the way arbitrators work, the culture that that design breeds that affects the ultimate outcome of proceedings. So yes by all means, smallness of pool and diversity is a desirable ambition that we should pursue with all the rigor we could muster. But at the same time, without addressing the key fundamental systemic concerns, without addressing the culture of the way the system works it would not affect the ultimate outcome by merely increasing the pool of arbitrators, by merely raising the number of arbitrators. And so I urge this House to consider the deeper systemic questions as we are then merely the cosmetic effect of increasing numbers.”

PAKISTAN – on the need for a systemic reform with respect to arbitral appointments: “Is it the smallness of number that is the cause of problem? I dare say not. It is the design of the system, the way the system is designed, the way arbitrators work, the culture that that design breeds that affects the ultimate outcome of proceedings. So yes by all means, smallness of pool and diversity is a desirable ambition that we should pursue with all the rigor we could muster. But at the same time, without addressing the key fundamental systemic concerns, without addressing the culture of the way the system works it would not affect the ultimate outcome by merely increasing the pool of arbitrators, by merely raising the number of arbitrators. And so I urge this House to consider the deeper systemic questions as we are then merely the cosmetic effect of increasing numbers.”

BAHRAIN – on double hatting not being a sufficient concern to justify abandoning the current system: “The double hatting is raising very serious issues of bias and impropriety in investment arbitration. It is already very problematic in the field of commercial arbitration in some situations. It is even more serious in investment arbitration as the chances of encountering overlapping issues and fact patterns in such a field are even greater. I am not convinced however that the issue justifies abandoning the system of investment arbitration altogether. Solutions can be devised that would not jeopardize the quest for greater diversity in investment arbitration.”

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