With concerns from stakeholders growing, we consider how ongoing reforms could rebalance the ISDS process
In the first part of our two-part series, Christian Leathley, Chiara Cilento and Lucila Marchini examined the concerns of stakeholders about investor-state dispute settlement (ISDS). The concerns identified in our first article were divided into two key areas: first, whether the rights and obligations of states and investors were correctly balanced; and, secondly, whether the process itself needed structural reform. In this article, we turn to the future of ISDS. We look at what has been done to address the so-called legitimacy crisis and the reforms which may still be in the pipeline, focusing first on efforts to rebalance substantive rights and obligations, before evaluating efforts to overhaul the ISDS process itself.
In the first part of our two-part series, Christian Leathley, Chiara Cilento and Lucila Marchini examined the growing concerns of stakeholders about investor-state dispute settlement (ISDS). The concerns identified in our first article were divided into two key areas: first, whether the rights and obligations of states and investors were correctly balanced; and, secondly, whether the process itself needed structural reform. In this article, we turn to the future of ISDS. We look at what has been done to address the perceived legitimacy crisis and the reforms which may still be in the pipeline, focusing first on efforts to rebalance substantive rights and obligations, before evaluating efforts to overhaul the ISDS process itself.
Rebalancing rights and obligations
As ISDS jurisprudence has grown and developed, there has been a perceived expansion of the scope of the interpretation by tribunals of the standard of Fair and Equitable Treatment (FET), among others. Some stakeholders have also expressed concerns that older treaties limit the rights of states to regulate for human rights or the environment, failing to keep pace with the fast-developing ESG agenda. These concerns have led to diverse and disparate efforts from individual countries and regional groupings to rebalance these rights and obligations. To this end, we have seen treaties terminated, interpretative statements issued, domestic legislation released, and new treaties concluded.
What does this rebalancing look like? Some examples of ongoing reforms and changes include:
International Guidance: In 2015, the United Nations Conference on Trade and Development launched guidance for policymakers in the evolution towards a new generation of investment policies. The guidance sought to help countries negotiate investment agreements and promote sustainable development within those agreements.
Individual countries and treaties:
- India has sought to terminate 57 of its older bilateral investment treaties (BITs) and issue interpretative statements in relation to others, while aiming to enter into new BITs under India's new model BIT language. This provides for more limited protections and more restricted access to ISDS1.
- South Africa has been terminating BITs with plans to replace them with a domestic investment protection law without an FET provision or right of recourse to international arbitration.2
- Indonesia announced it would terminate all of its 67 BITs and has been actively renegotiating new BITs with new provisions on corporate social responsibility, anti-corruption and the right to regulate.3
- The 2016 Nigeria-Morocco BIT includes a dedicated right for the host state to regulate. It also promotes sustainable development.4
Regional and sectoral approaches:
- Wider African investment treaty templates exclude FET altogether or allow for it in a heavily restricted form, while some also provide expressly for counterclaims by states.5
- The United States-Mexico-Canada Agreement (which replaced the earlier NAFTA) contains updated and more restrictive investment protections, more room to regulate for states, and restrictions on access to investor-state arbitration.6
- The sector-focused multilateral Energy Charter Treaty (ECT) is also undergoing reform. In November 2017 the Energy Charter Conference launched a discussion on potential modernisation of the ECT and 15 rounds of negotiations have since taken place. On 24 June 2022 Agreement in Principle was reached.7 The agreed changes cover rights and obligations and also structural and procedural reform. In the first camp, definitions of key terms such as "investment" and "investor" and FET are being changed, while the right of states to regulate is being strengthened. There is also agreement to promote sustainable development and corporate social responsibility. In the latter, transparency, security for costs, and third-party funding are all being addressed. The draft text will be sent to Contracting Parties in August for adoption on 22 November.
Procedural and structural reform
Substantive and procedural reform go hand-in-hand. The examples above show that the rebalancing of rights and obligations is not being tackled in isolation. These new generation BITs and multilateral treaties have also introduced procedural changes, introducing restrictions on when ISDS can be accessed or requiring greater transparency in ISDS procedure.
That does not mean, however, that there are no initiatives focused purely on procedural reform. The 2014 United Nations Commission on International Trade Law (UNCITRAL) Rules on Transparency in Treaty-based Investor-State Arbitration and the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration have introduced greater accessibility of ISDS to the public within the existing ISDS system of investment treaty arbitration. However, there are also several initiatives which are focused on the structural overhaul of the entire ISDS process. These have the potential to bring about a seismic shift in the way disputes between investors and states are resolved.
The European Union: An investment court system
The European Union has been at the forefront of this structural overhaul. Following protests against the inclusion of ISDS provisions in proposed trade agreements with both Canada and the US, the European Commission began a period of consultation about reforming the whole ISDS process and infrastructure.8 This resulted in a concept paper which envisaged a very different future for the resolution of investor-state disputes.9 The proposal was for an investment court system in each treaty with a standing roster of adjudicators and an appeal mechanism, to replace the current ad hoc arbitral procedure. Bilateral agreements between the EU and Canada, Singapore, Vietnam and Mexico each adopted this new system. The European Commission has also proposed that this system be established internationally through a permanent multilateral investment court and is currently seeking to attract international support for this proposal through the work of UNCITRAL.10
UNCITRAL Working Group III: Broader review and overhaul
In July 2017, UNCITRAL gave a working group (called Working Group III) a broad mandate to work on possible reform of ISDS.11 The group sought input from a wide range of stakeholders, including governments, NGOs, practitioners and investors. It was then asked to consider the concerns raised, decide whether reform was necessary and develop solutions. There has been considerable disagreement among delegates and observers about the project's scope and ambition and whether systemic reform, or more modest change, was required. After many meetings and discussions about the focus of reform, in April 2021 the Secretariat published a draft workplan.12 The draft proposed working on eight distinct reforms as separate, parallel workstreams, with different delivery dates:
At present, the most advanced project is the Code of Conduct for arbitrators and adjudicators which is being worked on in collaboration with the secretariat of ICSID. Currently in its third draft and still a work in progress, the outcome of this project has the potential to bring about significant change to the eligibility of arbitrators in investment treaty cases.13 Other notes or initial draft reports have also been published. These include notes on the regulation of third-party funding;14 the feasibility of an appellate mechanism;15 an advisory centre;16 a standing multilateral mechanism;17 and a potential multilateral instrument to introduce these changes.18
ICSID – Own path, new rules
In the first part of this series, we discussed the unique position of ICSID in this debate and the consultation underway to revise the ICSID rules. On 21 March 2022, the Member States approved wide-ranging amendments to the ICSID Regulations and Rules, which came into effect on 1 July 2022. This marks the end of a consultation spanning over five years. These changes form part of a wider project which has also introduced a new ICSID mediation process. The new rules incorporate and codify experience gained through administration of hundreds of cases, with the aim of modernising the efficiency of ICSID arbitrations. The wide-ranging and substantive amendments are a welcome development for parties and their counsel.
So, what do these changes look like?
Some key changes
Provisional measures: The new ICSID Rules introduce greater clarity around when parties can seek measures from a Tribunal preventing action that causes harm or prejudice to a party or the process, preserve evidence, or maintain or restore the status quo. Rule 47(3) of the new regime sets out the circumstances and factors a tribunal can consider. While the language in the rule is new, this is generally understood as simply codifying what ICSID tribunals have already been doing in practice.
Transparency: Greater transparency has been provided in the new rules, particularly regarding access to documents in proceedings:
- Awards: Under Rule 62(3) parties are deemed to consent to the publication of an award if no written objection is made within 60 days after dispatch of the award. If an objection is made, the Secretariat will publish excerpts of the legal reasoning (following party review).
- Tribunal orders and decisions: Rule 63 states that the ICSID Secretariat "shall" publish Tribunal orders and decisions. However, to balance the interests of the parties, they are asked to agree redactions, and any disagreement is to be resolved by the Tribunal. The Tribunal also needs to avoid publishing confidential information.
- Party submissions: Under Rule 64 publication is dependent on the parties' consent and subject to redactions agreed by the parties.
Third-party funding: the new rules introduce a requirement for parties to provide written notice of third-party funding when registering a request for arbitration or as soon as the funding arrangement is agreed. This was a much-debated issue throughout the consultation but the end result in Rule 14 is to adopt a very broad definition of funder. This new disclosure requirement is intended to provide greater transparency regarding the identity of the funder and allow arbitrators to identify any conflict of interest.
Costs and security for costs: Rule 52 now gives guidance to a tribunal on the factors they can consider when allocating costs between parties. This includes the outcome of the proceedings, conduct of the parties, complexity of the issues and the reasonableness of costs claimed. New Rule 53 is dedicated to the issue of security for costs and sets out guidance to the tribunal when considering whether to order a party to provide security. Interestingly, the existence of third-party funding is included as a relevant factor.
Special Procedures: At the start of a case, a party may wish to make preliminary objections, apply for bifurcation or argue that a claim is manifestly without legal merit. These three processes have been separated into individual rules with different procedural requirements and time limits for each. This has been done to improve clarity and brings the ICSID rules themselves in line with current practice.
You can find out more detail about these changes in our blog post here.
ISDS is evolving. The so-called legitimacy crisis has sparked challenging discussions and led to significant reform efforts at the regional, national, and international level. Some of these reforms have reached an end point, at least for now. The new ICSID Rules are now in place, likely to be left unchanged for many years, and provide a more robust and transparent model for resolving future investor-state disputes. In contrast, Working Group III's mandate is still some considerable way from completion. In particular, it remains unclear from the drafts and notes to date whether the ultimate recommendations will be for seismic overhaul or evolutionary improvement.
Even once those recommendations are made, it is still uncertain whether there is the international will to implement them. Substantive reform of rights and obligations is similarly in a period of transition. New generation treaties are emerging which introduce a different balance into the relationship between investors and their host states. It remains in the balance whether this new generation of treaties will meet the aims and expectations of their drafters while still encouraging foreign direct investment. Reform certainly, but rebirth? The case remains unproven.
5. African Union’s 2016 Pan-African Investment Code, the ECOWAS 2018 Common Investment, COMESA’s Revised Investment Agreement, The SADC