UNCITRAL looks narrowly at the problems with investor-state dispute settlement (ISDS)
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CIEL | 11 December 2017

UNCITRAL looks narrowly at the problems with investor-state dispute settlement (ISDS)

By Layla Hughes

November 27 – December 1, more than 40 governments met as part of a working group of the UN Commission on International Trade Law (UNCITRAL) to discuss reforms to the investor-state dispute settlement (ISDS) system.

The conversation focused primarily on identifying problems with ISDS, while potential solutions — including the EU’s proposed Multilateral Investment Court (MIC) — will be discussed at future UNCITRAL meetings. Still, one delegate aptly characterized the EU’s proposal as “the elephant in the room,” as the EU is hoping the forum will provide a mandate for the MIC to move forward.

Unfortunately, the scope of the discussion was limited. Some parties insisted that the group was meant to focus solely on the procedural aspects of dispute resolution (such as costs of proceedings) and not the substantive provisions of investment protection. By foreclosing a discussion about the broader problems with investment protection rights, the working group may be narrowing its future discussion of the full range of solutions.

The issues discussed at the working group meeting include:

The Cost of ISDS to Investors & Governments

Some states raised concerns about the costs of arbitration to investors. ISDS cases are expensive. But should states aim to make it less costly for corporations to challenge legitimate regulations that protect the public interest?

As for governments, the discussion raises the question: Do the benefits of these agreements actually outweigh the cost of arbitration, the cost of awards, and the chilling effect on a country’s regulatory bodies, who may not pass much-needed laws in fear of corporate retaliation? As some states pointed out, costs are relative. But it wasn’t clear whether states actually conduct any kind of cost-benefit analysis of ISDS that would allow them to properly evaluate the relative costs. A transparent cost-benefit analysis would also reveal how a country weighs the value of laws to protect the public interest and its ability to regulate in the public interest in the future.

Transparency of Investor-State Arbitration

Few states have signed or ratified the Mauritius Convention, which makes information about investor-state arbitration publicly available. (Though some countries have included transparency provisions even though they haven’t signed the convention.) Transparency is important in ISDS proceedings because it prevents companies from secretly strong-arming governments into overturning public-interest laws. Therefore, the working group should encourage states to adopt the Mauritius Convention.

Early Dismissal of Bad Cases

The cost of arbitration is high even before ISDS cases ever reach a tribunal. For that reason, States agreed that they should consider an early dismissal mechanism to weed out unfounded claims. In this context, countries should also consider a mechanism to preclude claims that challenge regulations made in the public interest and claims brought by investors that have committed fraud or human rights abuses in the country, or otherwise violated national or international environmental, social, consumer, or labor laws.

Counter-Claims by States

Currently, corporations can sue countries under ISDS, but not all investment agreements allow countries to use the system to challenge foreign corporations who have violated their laws. Countries agreed not to rule out a mechanism that allows such counter-claims.

CIEL made an intervention supporting counter-claims by states: in order for a judicial process to be fair, anyone who is affected by the proceedings should be allowed to participate and/or raise a claim. For the same reasons, countries should consider allowing third parties who have a direct interest in the dispute to join, such as communities who are impacted by a company’s operations.

Coherence and Consistency

One of the fundamental problems with creating a multilateral investment court is that it would be charged with interpreting investor’s rights, and creating a consistent body of law regarding those rights, even though there is no general agreement (by the UNCITRAL members, or anyone else) about the scope of investment protection. As the German Judges Association explains, “the difficulty of reaching agreement internationally concerning such rights highlights the necessity of not leaving their definition to an appeal chamber of a multilateral investment court.”

The Role of Domestic Legal Systems

Some states highlighted questions about the relationship between ISDS and domestic law. A requirement that investors exhaust domestic remedies or that an investment court defer to domestic courts on issues of domestic law could help to address concerns that ISDS undermines democracy and the sovereignty of states.

Throughout the discussions, states mentioned the importance of maintaining a “social license” to continue ISDS. This approach assumes that ISDS should continue. As states consider a broad range of potential reforms, they should aim to truly address the problems with ISDS, not just to improve the “social license” for ISDS.

Although discussions did not focus on the EU’s MIC proposal, it seemed that states were roughly divided between those that perhaps would support the proposed investment court and those that would prefer to see smaller or no changes to the ISDS system. Thus, ironically, it was the EU and its Member States that advocated for “broader, more systemic reform” during the conversation. The EU’s proposal, unfortunately, does represent truly systemic reform. Instead, the MIC would institutionalize the current ISDS system. However, countries have yet to propose any alternate solutions besides the MIC.

The UN Commission made clear that the discussion in the working group was to be government led. But some states were entirely represented by arbitrators, and others had arbitrators speak for them much of the time. Some of these same arbitrators are at the center of a close-knit web of people who decide ISDS cases. A vast majority of the non-state observers were arbitration associations and academic institutions that support international arbitration. Which begs the question: When a process to reform ISDS includes so many of those who benefit from it, how can we be assured that this process will actually address the problems of ISDS?

Some states were frank in their descriptions of the harm ISDS cases have brought them, including examples of when a government was sued for cancelling a concession won through fraud. There is still time for these states and others to insist that the UNCITRAL process be used to advance meaningful reform.

The discussion of ISDS reform should build on past work — for example, that of UNCTAD, which the UNICTRAL working group included in its meeting materials but did not discuss. UNCTAD outlines a variety of options for reform including replacing ISDS with state-to-state and domestic dispute resolution and limiting investor access to the court in order to allow fewer cases. The UNCITRAL members should consider these recommendations carefully.

CIEL will continue to work to support meaningful reform and ensure that whatever solutions UNCITRAL adopts, these do not serve to merely entrench the undemocratic, unjust ISDS system.

source: CIEL