Investor-State Arbitration: An Opportunity for Real Reform?

By Lorenzo Cotula, Brooke Guven, Lise Johnson and Thierry Berger
December 7, 2018

The United Nations Commission on International Trade Law, headquarters building in Vienna (Photo: Michela Mazzoli, Creative Commons via Flickr)

An ongoing multilateral process could provide a unique opportunity to reform a contentious area of global economic governance – but only if it properly identifies the key problems.

At its third session this autumn, the Working Group on Investor-State Dispute Settlement (ISDS) Reform of the UN Commission on International Trade Law (UNCITRAL) called for reform of certain aspects of the investor-state arbitration system.

UNCITRAL member states led the discussion, but the event was also attended by approved observers from international organisations, arbitration associations, research centres and non-governmental organisations – including the Columbia Center on Sustainable Investment (CCSI) and IIED. The audio recording is available online, and highlights are summarised on EJIL:Talk!, WorldTradeLaw and IAReporter.

As the reform process enters a crucial phase, this blog reflects on issues to consider in the run-up to the working group’s next meeting (New York, 1-5 April 2019).

Concerns about ISDS

In recent years, ISDS has attracted widespread public concern. Investors have used broad substantive protections to challenge wide-ranging public policies and conduct, and the legitimacy of procedures that adjudicate these claims has come into question.

The working group was established due to this heightened public scrutiny and has thus far explored three categories of concerns:

• Arbitral outcomes, including consistency, coherence and ‘correctness’ of arbitral interpretations
• Arbitrators, including independence, impartiality, conflicts of interest and diversity, and
• Costs and duration.

In each of these areas, delegates agreed that ISDS merited multilateral reform. At its April meeting, the working group will further examine concerns about third-party funding of arbitration claims, and any ‘other concerns’ yet to be adequately discussed. It will also begin discussing reform options to address identified issues.

The working group chair has emphasized that governments can raise additional concerns throughout the negotiations. In practice, however, delegates should raise them by or during the April meeting to ensure they get on the reform agenda.

Laying the foundations for reform

The three categories of concerns identified so far are important, but they are not comprehensive. Rather than taking the current system as a given and identifying certain concerns requiring reform, a bolder and more appropriate approach would revisit some fundamental questions.

For example, what does ISDS aim to achieve? Debates often suggest the goal is to promote investment. But evidence that ISDS does so is inconclusive, not all types of investment advance sustainable development, and the costs of attracting investment may outweigh the benefits. Alternative policies may be needed to overcome the real barriers on quality investment.

Also, the working group’s remit focuses on the procedural dimensions of ISDS, rather than the substantive rights and obligations of investors and states. But procedural and substantive concerns are inextricably linked and effective reform is unlikely if they are arbitrarily disassociated.

That said, anything with a procedural element or that can be addressed through a procedural solution is arguably within the working group’s remit.

Procedural issues deserving further attention

The procedural concerns already identified are potentially wide-ranging. As the UNCITRAL report acknowledges, questions of cost and duration, for example, encompass not only concerns about the fees paid to lawyers and arbitrators, but also the costs governments incur in terms of reduced regulatory space and reputational damage.

Reforms to address these issues could include such procedural solutions as restricting ISDS to certain claims, requiring investors to exhaust domestic remedies before they access ISDS, narrowing powers to review domestic conduct, or replacing ISDS with state-to-state dispute settlement.

Several concerns warrant additional consideration to ensure they are appropriately addressed when reform paths are explored. The subsequent sections provide a few examples.

Claims and counterclaims

In public debates, many governments have expressed concern about the ‘one-way street’ of arbitration claims – where investor claimants have rights but no obligations. While these concerns relate to substantive standards, procedural solutions could help mitigate the problem.

For example, if the working group considers the European Union’s proposal to establish a Multilateral Investment Court (MIC), a MIC treaty could condition access to the MIC on investors’ compliance with domestic and international standards of responsible investment.

Reform could also help turn the one-way street into a multi-directional one: some respondent states have brought counterclaims against investors, asking the tribunal to look into allegations of investor misconduct. However, counterclaims have rarely succeeded. And when brought, they raise concerns of their own, which likewise merit further attention.

Indeed, a counterclaim may be linked to the rights or interests of third parties who cannot participate in the dispute – raising questions about whether the state is able or willing to espouse these claims, whether third parties should have a role in the proceedings, and how to ensure that any monies the state obtains through a successful counterclaim are used to provide effective redress to relevant third parties.

Participation of impacted third-parties

Contemporary investment disputes are complex, and several arbitrations are rooted, at least in part, in disputes that involve people affected by the investment – for example, indigenous peoples or consumers of public services.

In other national and international dispute settlement contexts, it is well recognised that disputes between two parties can impact third-party rights and interests. Many procedural rules entitle affected non-parties to intervene in or join the proceedings, and they require courts to consider dismissing the case when a non-party’s rights will be affected but the non-party cannot join the proceedings.

ISDS lacks comparable arrangements. Depending on applicable rules and at the tribunal’s discretion, third parties may be allowed to provide circumscribed, informational input in the form of amicus curiae (“friend of the court”) submissions. But these are not designed to provide effective voice or protection for people whose rights or interests are directly at stake in the dispute.

Besides affecting third parties, this situation can make it more difficult for tribunals to consider different perspectives on the facts and all relevant, applicable norms, including norms outside of investment law.

Remedies

Damages is the most common form of remedy in ISDS claims. When cases go in favor of the investor, the average amount awarded is roughly US$500 million, and the median $20 million. Amounts may exceed what would be available under national law or in regional human rights systems.

Such substantial liabilities raise concerns for the public purse, particularly in lower-income countries struggling to finance their basic development needs. They also underpin the concern that, faced with the prospect of large damage awards, authorities may be discouraged from acting to advance the public interest (‘regulatory chill’).

Reducing compensation amounts could help mitigate these concerns. Substantive investment treaty provisions typically govern compensation standards for lawful expropriations but are silent on how to calculate damages for unlawful treaty breaches. Procedural reforms could remedy this issue.

Non-monetary remedies also cause concern. In several arbitrations, investors have sought a tribunal’s order for the state to adopt a certain conduct – either as a provisional measure in often protracted proceedings, or in relation to the final decision (‘injunctive relief’).

This practice exacerbates concerns about regulatory chill. Some such requests have also interfered with relief non-parties obtained against the investor, compounding concerns about the asymmetrical nature of ISDS and its impacts on the rights of third parties.

Settlement agreements

States and investors can save time and expense if they settle the dispute before awards are issued. But settlements raise concerns, particularly because their terms are rarely transparent.

Some national laws govern judicial oversight of settlement agreements, enable non-parties to comment on or even object to proposed settlements, and/or prevent enforcement of agreements that violate legislation. ISDS procedures have no such arrangements to protect non-party rights or ensure public oversight.

Ways forward

The working group has touched briefly on concerns about counterclaims, affected non-party participation and injunctive relief but these issues are yet to be properly discussed. Some of the other concerns are still to be introduced in the UNCITRAL process.

The working group encouraged governments to raise any other concerns in writing before the April meeting, and propose ‘workplans’ of how to implement their visions of reform. This opening provides an avenue for states to ensure that all key concerns are systematically discussed before exploring reform solutions.

Effectively addressing the problems already identified by the working group could improve the current system. But a narrow focus would miss the opportunity for real reform, and risks locking states into a system that remains fundamentally flawed.

Lorenzo Cotula is principal researcher on law and sustainable development at the International Institute for Environment and Development (IIED).