This week more than one hundred states and sixty non-governmental organisation agreed in principle on several incremental reforms of the current investor-state dispute settlement system – or ISDS – at a meeting in Vienna.
As readers will recall, at the last meeting of Working Group III of United National Commission of International Trade Law in New York last April, participants agreed to a work programme with a dual track. One track would deal with incremental reforms. The other track would discuss ‘structural reforms’: the creation of a multilateral investment court.
After two years of identifying concerns regarding the existing ISDS system and discussing potential reform options, the UNCITRAL group was able to show some results and harvest the ‘low hanging fruit’ in the talks. Although a lot of work still needs to be done in order to find consensus on the details, here are the main decisions taken this week:
Advisory Centre for Investment Disputes
Members agreed to establish a body that mirrors the Advisory Centre at the World Trade Organization, which provides legal assistance to developing countries involved in WTO disputes.
The Advisory Centre for Investment Disputes would have to be largely financed by contributions of developed countries – as is the one dealing with WTO cases. The details still need to be worked out.
There was no general agreement yet as to whether small-and-medium-sized enterprises would also be able to use this Centre. This would address one of the concerns regarding the current ISDS system, namely, the limited accessibility of the ISDS system due to the high legal costs associated with investment disputes.
Code of conduct for arbitrators
The working group also broadly agreed that a binding code of conduct for arbitrators is required. It would also need to be flanked by robust, enforceable sanctioning regime.
There already exist many such codes – for example that of the International Bar Association – to which recent investment treaties such as the EU Canada agreement CETA refer to. But there was a widespread perception among state delegates that these lack bite.
Proposals were made for imposing significant sanctions against arbitrators such as removing them from the bar and requiring them to pay back any money they have earned in the course of the arbitration in question.
The need was emphasized to make such a code of conduct legally binding by way of an international treaty – which would be applicable to all investment arbitrations.
Negotiators will also seek maximum consistency with existing codes of conduct in order to avoid fragmentation and divergent obligations for arbitrators.
Third party funding
The working group largely agreed that third party funding must be regulated in much more detail than so far. However, views among delegations were quite diverse.
Some delegations called for a complete ban of all types of third party funding. Others stressed the need to keep the current system because it enables investors, who otherwise would be unable to bring a claim against a state, to do so with the help of the funder. This is seen by many delegations as an important tool to guarantee access to justice, in particular for small and medium-sized businesses.
Nonetheless, there was broad agreement that, as a minimum, claimants must disclose the fact that they are using a third party funder and must disclose the name of the funder. Other delegations called for more far-reaching obligations such as disclosure of the funding agreement. The middle-ground position taken by other delegations was that the funding agreement should only be disclosed if ordered by the tribunal.
This item was linked with the code of conduct of arbitrators in the sense that any links between arbitrators and third party funders regarding a specific dispute should be disclosed as well.
Interestingly, states were far less inclined to apply the same disclosure obligations when they use third party funders themselves. This was for instance the case of Uruguay, which accepted a huge sum from Mike Bloomberg and Bill Gates in order to pay its defence against Philip Morris in the dispute regarding plain packaging of cigarettes. The reason given for this different approach was that the gift by Bloomberg and Gates was of philanthropic nature, while third party funders usually fund a case with the aim of making a profit.
Be that as it may, there was broad consensus that third party funding should be further regulated. Note that CETA and other recent agreements already require the disclosure of the name of the third party funder.
This reform item will require a lot more detailed work in future.
To MIC or not to MIC, that is the question
The most difficult discussion on ISDS reform still lies ahead. It will most likely begin at the next meeting in January 2020, when the working group must decide whether, and if so, in which shape and form, a multilateral investment court of some sort should be established.
There is still significant resistance by Japan and the United States against the ‘MIC’ as it is called. The court idea comes from the EU and is one of the priority goals of its commercial diplomacy. China has proposed a middle way by suggesting the creation of an appeal tribunal, while leaving the arbitration tribunals as a first instance intact as they currently exist.
Any MIC would be established by way of an opt-in treaty, similar to the 2014 UNCITRAL Transparency rules convention. This would mean that probably only a handful of states would opt in to the MIC. The most obvious candidates are the EU and its member states, Canada and some other states. A large number of states would operate under the current ISDS system, albeit slightly reformed. This would likely create more rather than less inconsistency – which is one of the concerns that is perceived to be particularly in need to be addressed.
In sum, after the preliminary results have been achieved – at least on a general high level – delegations, in particular the EU, are now gearing up for the real crunch time.
The outcome of these negotiations is still very much open.