UNCITRAL Working Group III on reforms of investor-state dispute settlement is meeting in New York this week. The focus of the discussions will be the EU’s proposal for a multilateral investment court – also known as MIC. While it’s not clear the EU’s court idea will gain traction, there is a lot of appetite by participating states to curb claims brought by investors, writes Nikos Lavranos.
Readers will recall that at the end of 2017 the United Nations Commission on International Trade Law’s Working ‘Group III’ received a mandate to advise on potential reforms of the investor-state dispute settlement system.
The Working Group’s mandate was subdivided into three phases:
- Phase 1: Identify and consider concerns regarding investor-state dispute settlement;
- Phase 2: Consider whether reforms are desirable in light of the identified concerns;
- Phase 3: Develop and recommend any relevant solutions.
After several rounds of discussions, the working group has concluded the first two phases and has identified several ‘concerns’ regarding the currently existing ISDS system. The areas of concern identified focused on the following issues:
- Consistency, coherence, predictability and correctness of arbitral decisions and ISDS tribunals
- Arbitrators and decision makers
- Cost and duration of ISDS cases
- Third party funding
Now the working group is considering possible options to address those concerns. If one or more options were to be selected, work will begin to translate those options into legally-binding instruments.
EU MIC push
The UNCITRAL secretariat has published a lengthy note in which various options are described for each concern. This is complemented by proposals from individual parties to UNCITRAL.
The EU’s proposal argues that the MIC is the “only available option that effectively responds to all the concerns identified in the Working Group”. The EU, with support from Mauritius, Canada and the Canadian chair of the Working Group, continues to push robustly for it.
To garner broad support, EU aims to provide states with maximum of flexibility by proposing an ‘opt-in’ system – similar to the one which has been applied for the UNCITRAL Transparency Rules – also known as the Mauritius approach. Under this approach each state is free to decide whether to accept the jurisdiction of the multilateral court, and if so, to which of its bilateral investment treaties the court’s jurisdiction applies.
This approach enables to EU to push the its court proposal and have it formally adopted by its UNCITRAL working group counterparts, while giving the sceptical countries more time to make up their minds without them blocking the whole process.
The EU will be aided by the numerous NGOs and academics which will be present as observers in in the working group meetings next week (starting April 8) and who will hold side-events to maintain political pressure.
Broad appetite for ISDS reforms – but who wants MIC?
In its submission, Indonesia says that “maintaining the conventional approach of ISDS is hardly an option, given today’s criticism of the existing ISDS mechanism”. Jakarta wants “the conventional approach of ISDS be improved in a manner that may effectively reduce state’s exposure to legal and financial risks posed by the ISDS mechanism”.
In this context, Indonesia refers to its recent its BIT review process and recommends, in particular:
- The inclusion of the exhaustion of local remedies requirement
- The requirement of separate written consent for ISDS claims
- The introduction of mandatory mediation as an alternative to ISDS proceedings
These features can also be found in a recent Indian ‘model bilateral investment treaty’. This indicates there could be broad support at UNCITRAL for Indonesia’s recommendations.
So far, only very few countries have openly resisted the EU’s MIC proposal. Among those is Japan, the United States and Russia.
Japan brought Chile and Israel on board with a common paper, which discusses a whole range of options for ISDS reform which stop short of the MIC proposal. The EU has failed to agree on a bilateral investment agreement with Japan due to Tokyo’s resistance to a formal court idea to resolve disputes between investors and states.
Thailand published its own paper in which it stresses that sufficient flexibility in the format of dispute settlement proceedings should be maintained so that the particular needs of each country can be catered for. Thailand appears to say that the MIC should not be imposed as a straightjacket on states.
China has not yet revealed its views on the MIC proposal.
Third party funding in focus
There’s not only the MIC. The secretariat has devoted a separate note on third party funding, or TPF. In the previous discussions, many delegations have expressed several concerns in connection with TPF, notably regarding:
- Conflicts of interest between arbitrator and TPF
- Lack of disclosure and transparency
- TPF control and influence on the proceedings
- Confidentiality and legal privilege
- Impact on costs and security for costs
Among the most vehement criticisms listed by UNCITRAL is this: “Beneficiaries of third-party funding include small- and medium-sized enterprises as well as large companies. Noteworthy is the fact that third-party funding in ISDS offers a specific context, as states are always in the role of respondents and private investors in the role of claimants. Third-party funding appears as a one-sided funding, provided to investors, which creates unbalance.” [emphasis added]
The particular concern regarding TPF is also visible in the recent EU investment agreements which it has concluded with Singapore, Vietnam and Canada. These accords contain specific provisions on the disclosure of the name and address of any third party involved in a dispute, while the EU-Vietnam deal in addition also requires the disclosure of the “nature of the funding arrangement”.
These developments suggest that TPF will also be specifically in focus during discussions next week.
In summary, while it is difficult to predict the outcome of next week’s negotiations in New York, it is clear that a large majority of the working group members is eager to get rid of the current ISDS system as quickly as possible and replace it by something that essentially reduces claims by investors to the absolute minimum. It seems possible that a large majority of the Working Group will conclude that the MIC is indeed the “only option”.
If that is the case, work on drafting a binding treaty will commence in order to be further discussed in autumn when the Working Group will meet again in Vienna.