A First Set of ISDS Reforms
On 3 April 2023, UNCITRAL Working Group III (“WG III”) completed its work on a draft code of conduct for arbitrators in international investment dispute resolution (as well as a draft code of conduct for judges in a potential standing mechanism). In addition, WG III completed its draft provisions on investment mediation for possible inclusion in investment treaties, domestic legislation and investment contracts and draft guidelines on investment mediation. These texts will be presented to United Nations Commission on International Trade Law (“UNCITRAL”/ “Commission”), which is expected to adopt them at its 56th annual session, to be held from 3-21 July in Vienna.
This short article seeks to put this first set of WG III’s ISDS reforms in context. It will outline what ISDS is and why there is pressure to reform it, explain what WG III is and finally conclude by saying that the recently released code of conduct and mediation provisions and guidelines are low hanging fruit with many other proposed ISDS reforms likely to prove more difficult to achieve.
ISDS and Why Some Say it Needs Reform
Investor-State arbitration permits direct claims by investors against sovereign States alleging violations of investment protections which they may have under investment treaties, investment contracts, or certain national investment laws. Investor-State arbitration is also referred to as “international investment arbitration” and as “investor-State dispute settlement” (“ISDS”). Procedurally, ISDS claims are administered outside of national courts, often through the International Centre for the Settlement of Investment Disputes (“ICSID”) and other institutions (such as the Permanent Court of Arbitration (“PCA”), International Chamber of Commerce (“ICC”), and the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”), or as ad hoc arbitrations under specified arbitration rules (such as the UNCITRAL Arbitration Rules).
In recent years there have been increasing criticisms of ISDS (coinciding roughly with an increased incidence of claims by investors against States from the 1990s). For example, in an entertaining 2018 lecture entitled “ISDS The Wild Wild West of International Law and Arbitration“, George Kahale III (Chairman of the law firm Curtis which frequently represents States in ISDS) summarized some of the main criticisms and bleakly concluded with the suggestion that the ISDS system is “poorly designed and has been malfunctioning for three decades, and that dismantling it and starting from scratch is the wiser course”. The likely forthcoming withdrawal of the European Union (following the lead of various of its Members) from a major multilateral treaty giving rise to ISDS, namely the Energy Charter Treaty, will in our view further catalyze criticisms of ISDS and departures from the ECT and even ICSID (e.g., as recently announced by Albania which plans to establish a local commercial court instead). Still, it is our view that ISDS (including before ICSID), although flawed, is necessary to underpin huge investments, including those required to combat climate change. In our view investors may opt not to invest at all, especially in structurally weak countries (i.e. countries perceived as less likely to live up to their promises to investors), if their only recourse is to a national court.
What is WG III and how is it involved in ISDS Reform?
UNCITRAL has six working groups numbered I to VI. In the past, WG III covered: international legislation on shipping (1970 – 1975); transport law (2002 – 2008); and online dispute resolution (2010 – 2016). From 2017 onwards, WG III has covered ISDS reform. WG III is one of the most attended working groups within UNCITRAL. UNCITRAL works by producing products / recommendations that go to the General Assembly which can make recommendations on how to implement them. Thereafter, each State may decide the extent to which it chooses to adopt the proposed solutions. A good example is how the Mauritius Convention (prepared by Working Group II) has been used – some States have treated its rules more like model clauses to insert into their own treaties, some have used the rules expressly in their treaties, and finally, some States have ratified the Convention as well as used it.
In 2017, the “Commission entrusted Working Group III with a broad mandate to work on the possible reform of investor-State dispute settlement.” However, it was subsequently clarified that the mandate given to WG III focused exclusively on the procedural aspects of dispute settlement rather than on the substantive provisions (which have also attracted significant criticism). Further, it was agreed that WG III would initially focus on treaty-based (rather than contract and investment law based) ISDS. WG III divided its work on ISDS reform into three phases and is now in Phase (iii). Thus, having concluded that reform is desirable, WG III is now developing relevant solutions to recommend to the Commission. Originally, 2025 was envisaged as the target year for conclusion of work on ISDS reform. However, the revised workplan has been extended to 2026 (and further slippage is likely).
Low Hanging Fruit
In 2019, WG III concluded that the development of reforms by UNCITRAL was desirable to address the concerns related to lack of consistency, coherence, predictability and correctness of arbitral decisions by ISDS tribunals; arbitrators and decision makers; cost and duration of ISDS proceedings; third-party funding; as well as “cross cutting issues” (including, inter alia, means other than arbitration to resolve investment disputes as well as dispute prevention methods; exhaustion of local remedies; third-party participation; counterclaims; regulatory chill; and calculation of damages).
Several issues on WG III’s agenda are thorny; for example, the proposals to set up a standing mechanism and overhaul the appeal process will be hard if not impossible to achieve compromise on. However, the adopted “rolling basis” approval mechanism means that WG III is nonetheless able to produce output on an ongoing basis. WG III seems to be dealing with the low hanging fruit first – with the recent codes of conduct and mediation provisions and guidelines being obvious examples.
The draft code of conduct for arbitrators reinforces the duty of independence and impartiality, broadens the disclosure requirement, and surprisingly (in view of initial resistance from some quarters) limits the practice of “double-hatting” (which is where arbitrators play multiple roles concurrently as counsel, expert and arbitrator). Once adopted, the codes of conduct will likely serve as guidelines (likely in addition to rather than replacing the IBA Rules on Conflict of Interest) for parties and arbitrators (or if a standing mechanism is in due course set up, judges) in ISDS proceedings.
The draft provisions on investment mediation are model investment treaty/ law/ contract provisions and the draft guidelines on investment mediation are intended to provide guidance to parties on the use of mediation in investor-State dispute settlement.
Next Steps
As mentioned above, the (mediation and code of conduct) texts will be presented by WG III for approval to UNCITRAL at its annual session in Vienna in July 2023 and are widely expected to be adopted.
Going forward, we imagine that it will also be possible for WG III to produce output in relation to third-party funding, especially given that in 2022 the ICSID Rules were amended including the mandate disclosure of third-party funding.
The article was co-written by Caroline Thomas and Dr. Pijan Wu – Senior Counsel at LCS & Partners
