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Published: 05 Jul 2013
Author: James Zhan, Director of UNCTAD's Division on Investment and Enterprise
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Reform of Investor-State Dispute Settlement: In Search of a Roadmap
On 28th May 2013, UNCTAD published an Issues Note on “Reform of Investor-State Dispute Settlement: In Search of a Roadmap”. It was then integrated into chapter III of the 2013 World Investment Report, launched in close to 50 destinations on 26th June 2013.
The note's starting point is the increasing number of concerns that have emerged about the current ISDS system (e.g. a perceived deficit of legitimacy and transparency; contradictions between arbitral awards; difficulties in correcting erroneous arbitral decisions; questions about the independence and impartiality of arbitrators; and concerns relating to the cost and length of arbitral procedures).
We then identify five main paths for reform, noting that each of them comes with its specific advantages and disadvantages and responds to the above concerns in a distinctive way. Our five options for reform are:
· Promoting alternative dispute resolution;
· Tailoring the existing system through individual IIAs;
· Limiting investor access to ISDS;
· Introducing an appeals facility;
· Creating a standing international investment court.
The note was also distributed through UNCTAD’s World Investment Network (WIN), and reached the OGEMID Listserv, a community of professionals with interest and expertise in international investment law. Our Note generated considerable discussion on this forum, partially reproduced below. The response on OGEMID to the Note was both positive and negative and centered on three main issues: (1) alternative dispute resolution (ADR); (2) investor-State dispute settlement versus substantive treaty obligations; and (3) the role of arbitrators. UNCTAD thanks the OGEMID community and the individual commentators for agreeing to allow us to transfer their comments to the Investment Policy Hub in order to allow a larger part of IIA stakeholders to benefit from the various insights, open the debate up to the public and invite further discourse.
We therefore invite your comments, either in response to the discussion that occurred on OGEMID or to the ISDS Reform Note in general.
By: Sophie Nappert
Date: 28 May 2013
Please see UNCTAD's IIA Issues Note - “Reform of Investor-State Dispute Settlement: In Search of a Roadmap”, at the following link: http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d4_en.pdf.
UNCTAD has issued the press release reproduced below and calls for a multilateral policy dialogue on ISDS to search for "a multilateral policy dialogue on ISDS to search for a consensus about the preferred course for reform and ways to put it into action".
One might express a degree of surprise at the fact that the Note departs in some respects from the usually balanced and insightful UNCTAD standards in that it rehearses well-trodden criticism of ISDS and breaks little new ground in its proposed solutions.
The Note may be well-timed, however, in that the current thinking applied in the context of IIA negotiations, notably at EU level, might usefully inform a "new road map".
[Editor's note: click here for "press release"]
By: Velimir Zivkovic
Date: 28 May 2013
I just wanted to concur that in some regards the Note does seriosly depart from UNCTAD quality standards. In particular, I would like to draw attention to the fact that the part that proposes 'introducing' ADR into ISDS, namely mediation and conciliation, contains absolutely no mention whatsoever of the existing ICSID Convention provisions on conciliation. It is either a very grave but unintended omission, or an implicit discrediting of the ICSID system, but in any case one would expect more from UNCTAD.
By: Sophie Nappert
Date: 28 May 2013
We may have reached the stage that, in order to make any progress on these issues, it is looking like arbitrators will have to start making their voices heard. After all, they are front and centre in the line of fire - the Unctad Note adopts some of the more strident attacks on ISDS decision-making:
"The method where arbitrators are appointed by disputing parties has led to a. perceived tendency for each disputing party to appoint individuals sympathetic to its interests.
Moreover, arbitrators in ISDS cases are a relatively small group of individuals dominated by lawyers in private practice (about 60 percent), resulting in situations where the same individuals often serve as arbitrators in some cases and as counsel in others. This may incentivize arbitrators to decide issues in a way. that would be beneficial for them in a different case (so called “issue confict”). To this adds arbitrators’ interest in being re-appointed in future cases. All of this has cast doubt on arbitrators’ independence and impartiality. Regardless of whether such incentives actually impact arbitral decision-making, the resulting perception of conflicting interests itself is enough for eroding the credibility of ISDS in the eyes of many stakeholders."
It may be that, if they have any concern about the integrity of the ISDS system which they stand accused of abusing, arbitrators will have to do more than turn the historical cold shoulder.
By: Hernando Diaz-Candia
Date: 28 May 2013
Good morning. Perhaps the UNCTAD note was referring to the fact that many (most?) BITs do not even mention conciliation and possibly making a subtle suggestion to consider a tiered approach. p.s., a quick search on the ICSID webpage only shows nine conciliation cases [list omitted for space purposes].
By: Anonymous
Date: 28 May 2013
UNCTAD's recommendations seem to be largely clueless although it is necessary to take on board criticisms of the current system because such criticisms are widespread even though many of us think to a large extent unjustified.
To expect that any significant positive results could be achieved by adding an ADR layer to precede binding arbitration is totally -- oh well, almost totally -- unrealistic. The experience on the ground that I have had dealing with state and state organization arbitrations is that the state parties almost always find it impossible to settle if it involves paying state treasury funds to a foreign investor due to the negotiator's vulnerability to political and frequently even physical repercussions if he has given away state money to a private investor. The state negotiator will almost always insist that the arbitration -- even if a negative result is foreseen -- go to its term since a binding award imposed on the state is more palatable than any surrender.
One must not forget as well that binding arbitration pursuant to the ICSID Convention and BITs was designed to replace the state to state diplomatic negotiations procedure which had been found unsatisfactory, not the least by investor states like the United States which found it distasteful and inefficient to have to put its weight behind its investors claims sometimes to the detriment of its foreign policy objectives and not being able to investigate sufficiently the legitimacy of its investors' claims. Better to put it in the hands of a neutral arbitral body!
It appears to me that a lot of the criticisms made in the UNCTAD report are not truly based on faults in the arbitration procedure but rather on the substance of the obligations undertaken in investment treaties. These are always subject to renegotiation but let's not mistake negotiations on substance for improvement of procedure.
Do arbitrators for instance insufficiently take into consideration public policy motivations for state action? If Zimbabwe, for instance, decides that because of the history of its country, and of colonialism, it is necessary for its indigenous people to succeed to the lands of white settlers does this mean that such settlers, if protected by treaty, are deprived of rights to fair compensation for the land of which they are deprived? If so, on what basis? The issue is substantive not an issue of the arbitral process.
One can see the public interest motivation for having some centralizing review body but if the purpose would be to avoid inconsistent arbitral awards one would be into full legal merits review which would cause the break down of the whole system. Perhaps that was intended! Public perception would appear to lean towards finding something inherently wrong with inconsistent awards and one ends up with having to square the circle.
By: Rob Howse
Date: 28 May 2013
I believe, based on recent work on MIGA, that the availability of structured ADR could well make a positive contribution to the solution of investment disputes. I do not see ADR as the same thing as "settlement" of a claim, but rather as operating at an earlier stage, where it may be possible to consider alternatives that avoid a situation where the only solution is paying monetary compensation to the investor. I see UNCTAD as perhaps going in that fruitful direction, and thus it is not surprising to disturbing to me that the note doesn't mention the ICSID formal "conciliation" procedure. I don't regard that as genuine ADR.
The real challenge is early warning or identification of a dispute, before the relationship between the investor and the host state has not completely broken down, and while the host state still feels it has policy flexibility and that responding to investor concerns doesn't inevitably entail a public image of defeat or surrender.
To see how and where ADR could work, a close look at MIGA is very helpful.
By: Velimir Zivkovic
Date: 28 May 2013
Indeed, the general recourse to ICSID conciliation (and its mentioning in BITs) seems to be low, but this does not undermine the fact that there is a framework in place for it. IMHO, it deserved at least some mention by the UNCTAD, even perhaps as an example of how not do it (the ICSID procedure does lean a lot towards formalized, arbitration-like scenario).
By: Anonymous
Date: 28 May 2013
The UNCTAD note, as I take it, is intended to be read by politicians and diplomats as well, not only lawyers. It may be strident but it puts serious issues on the table by a credible institution (not by some marginal bomb-throwers). Now, here is an unrealistic and strictly rethorical suggestion: in order to evaluate comments more seriously, perhaps we all should agree to disclose how much fees, personally or institutionally, has the commentator made overall in or from investment arbitration (as advocate, arbitrator or expert witness). Charging fees is perfectly legitimate of course (no argument there), but it may give more context to the comments.
By: Todd Weiler
Date: 28 May 2013
As they say, it takes two to tango (or to engage in any other form of ad hoc or institutionalised form of dispute resolution).
I concur with the anonymous commentator, in so much as he/she is making the observation that the correct circumstances must be present in order for any form of alternative dispute settlement to have a chance of success. I think Rob's contribution rests on a similar premise.
As such, in addition to good faith - which is more likely to still be present earlier in the dispute than later - interests must also be aligned. Both conditions are necessary and must therefore be present, and neither is a predicate to, necessarily causative of, nor even contributory to the promotion of, the other. This is the point at which we must call upon the political scientists for their many useful analytical paradigms, including public choice (and its subsidiary theories of regulatory capture, rent-seeking and political failure), the Weberian rationality bureaucracy versus the Machiavellian acquisitive bureaucracy, and all of the means available to understand how political leaders make decisions both in their own interests and in light of the perceived democratic will.
I would submit that while, in theory, there may be times early in the course of a dispute during which the opportunity for resolution presents itself - and that therefore it never hurts to strive towards ensuring that all possible means of facilitating such resolution are available - I'm not aware of any systemic analyses that would permit us to quantify the number of occasions upon which these opportunities will arise. My anecdotal experience suggests: (1) that it might not be possible to undertake a successful quantitative analysis because the circumstances of each case tend towards being sui generis; and (2) in any event, in the current political climate, institutional and political interests will rarely, if ever, align in favour of resolution (as opposed to defiance, obfuscation and/or delay on the part of the respondent).
As very much reflected in the tenor of the UNCTAD document itself, there seems to be little upside for the political/bureaucratic decision-maker - who might otherwise be reasonably inclined towards resolving a dispute - to do so because his/her actions will inevitably be labelled - at best - as early capitulation to the cast of boogeymen who haunt the nativist (e.g. "foreigners" "big corporations" etc.). Such allegations will undoubtedly be cast, with wanton abandon, both by opportunistic members of the political opposition and by those whose Statist sentiments honestly inure them towards an embrace of the 'sovereignty = democracy = good / sovereign constraints =
hegemony/autarchy = bad' meme. Would it not be rational to simply choose to pass the hot potato to the next minister, or government, instead?
I shall assume that we agree - at least in principle - that constraints upon the exercise of governmental discretion can and should sometimes be undertaken, voluntarily, by States. When these undertakings are made on a bilateral or multilateral basis, they commonly (although not exclusively) take the form of a treaty. These treaty promises generate legitimate expectations on the part of intended beneficiaries (such as security of property rights, procedural fairness in decision-making, treatment no less favourable or reasonable reliance upon prior pledges). If we agree that this process is a good thing (either because it promotes economic activity or just because we value the rule of law in and of itself), I think we would be much better off focusing on how compliance with these obligations should be fostered, rather than on how non-compliance should be adjudicated.
To be sure, dispute settlement mechanisms are part and parcel of any compliance regime, but they're by no means the whole story. As the anonymous commentator observed, the author(s) of the UNCTAD report appear to have sometimes failed to distinguish between their estimation of the value of the the substantive obligations contained within these treaties and the means by which alleged cases of non-compliance should be resolved. As such, my prescription may fall on deaf ears. Nevertheless, what I would suggest is that we go even further back in time than Rob has suggested - by focusing on how to ensure that governments engage in policy-making activities that are consistent with treaty obligations in the first place, such that less disputes ever even arise.
By: Christian Campbell
Date: 29 May 2013
Many good points with which I agree. In defence of the UNCTAD Note, it final paragraph addresses substantive obligations:
"An important point to bear in mind is that ISDS is a system of application of the law. Therefore, improvements to the ISDS system should go hand in hand with progressive development of substantive international investment law itself. UNCTAD's Investment Policy Framework for Sustainable Development (IPFSD) offers policy options in this regard."
Given the note is actually about ISDS (process and not substance) and the importance of "the last word", I don't think the authors of the UNCTAD note underestimate the substantive obligations.
Your last (=important) point - ensuring policy-making activities that are consistent with treaty obligations - is also spot on, and I think you can attest to the benefits (and limitations) of this (even) in a well-developed State like Canada. Many States will not have the means (if they have the inclination) to vet policy proposals against treaty obligations, so capacity building is needed. The task would also be simplified if States did not have to vet each proposal against dozens of (different) BITs.
By: Steve Ratner
Date: 30 May 2013
[ . . . ]
1. I don't think it's fair to suggest that UNCTAD is singling out investor-state dispute settlement and neglecting other issues related to foreign investment. UNCTAD's mandate is broad, and it is studying many aspects of the foreign investment process, including preparation of BITs and compliance with them. They are even working on a massive quantitative analysis of different BIT provisions. This latest report may be of particular interest to OGEMID, but it needs to be put in context.
2. Even taking the report in isolation, I think it's pretty cautious in tone and looks fairly at the advantages and disadvantages of alternatives to the status quo. Of course we can say that the dispute settlement process works reasonably well insofar as most disputes don't even reach arbitration, and most arbitrations -- at least those that are published -- do not generate significant controversy and are reasonably (at least) well-argued in their analysis of the law and facts. It's clear that many investor claims are obviously well-founded and some are just as obviously not.
3. But we can't neglect the concerns about legitimacy whether in terms of outcomes or process. These are not just academic or UNCTAD concerns or we would not be witnessing the re-evaluations of BITs by Australia, South Africa, and others, as well as outright withdrawals. I think those processes are not just about the content of BITs -- although certainly some states seem less interested than in the past in protecting foreign investment -- but also about the process of their interpretation -- or least the appearance of it -- in some cases. If these actions of governments are not evidence that some of these concerns are worth addressing, what counts? That the number of controversial outcomes is small is not surprising (investment law would be in deep trouble if it were not), but it's not cause for dismissing alternatives. For the Americans, it would be like saying that Bush v. Gore is an outlier that overall says nothing about the way the Supreme Court is behaving. The most interesting question left open is whether the system will adjust without external shocks -- like new institutions -- or whether it will recalibrate on its own.
By: Rob Howse
Date: 30 May 2013
I think Steve and I are on the same wavelength here. I would only emphasize the point that a relatively small number of controversial, badly reasoned, poorly justified outcomes can create a major legitimacy crisis. I remember the massive effect of the Tuna/Dolphin panel rulings on perceptions of the legitimacy of the GATT/WTO system.
By: Anna Joubin-Bret
Date: 31 May 2013
Allow me to add some thoughts to the ongoing discussion about UNCTAD's note on reform to the ISDS system. I don't want to comment on the arguments and concerns spelled out in the note but rather on the more constructive options and ways forward.
Like many of you I think that monitoring, analysis, criticism and debate are useful. They are a much needed ingredient to make things move in international relations although, not surprisingly, they move slowly, at the pace of States. Some of you may remember the process and discussions that led to introducing transparency into the ISDS system in treaties and in arbitration rules. Today it is an established fact although many commentators had predicted that it would not be feasible. The discussion about an appeals facility has been on the table for the last10 years now and I think that we are getting there. A new generation of treaties is addressing scope of ISDS and clarifying substantive obligations in a much more balanced way. Establishing an international investment court has been discussed for far longer alongside discussions on multilateral investment rules, that remain, in my view, the ultimate objective.
I would like to venture three comments:
- the debate and options lack an important dimension, namely the role of the domestic courts of host States. The entire ISDS system is an exception to the natural fora to hear disputes related to investment and in my view, it is an element that should not be simply discarded as irrelevant when seeking ways forward. The example of Australia is not isolated.
- the more I look into alternative dispute resolution, particularly investment mediation with the recent launching of the IBA Investor-State Mediation Rules, the more I see a concrete move towards its inclusion into treaties (see the EU-Canada negotiations or the ASEAN ACIA are good examples) and disputes themselves. I don't see anything unrealistic there. ICSID statistics show that a significant number of cases (39%) get settled before an award is rendered at various stages of an arbitration. Many more cases are simply not going to arbitration because neither the investor nor the State party see merits in a final decision that will also put an end to the investment in the country. Munir's point it is a trend on the ground that mediation has also found its way into commercial arbitration is very valid. Since the ISDS system is patterned on commercial arbitration, the same causes are likely to produce the same effects. The more arbitration becomes lengthy, costly and cumbersome, the more parties will look for alternative routes. We are hearing this put forward more and more forcefully by in-house counsel of multinational enterprises and treaty practice shows that States follow suit.
-Sharing of good practice and experience among States on dispute prevention policies (DPPs) is important. A lot is being done by States and institutions such as the World Bank or APEC for example that warrants attention. Like for successful amicable settlement of investment disputes, there is not enough information and evidence out there. Maybe colleagues in academia could give us more.
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