Investor–State Dispute Settlement Reform Talks Resume at UNCITRAL

The next meeting of a United Nations working group debating options for reforming investor–state dispute settlement (ISDS) will take place in New York from April 1 to 5.

Two years into the process, it remains unclear whether this work will lead to the desired reforms or what shape these changes may ultimately take.

Meanwhile, countries remain frustrated with the current system, and have extensively voiced their concerns in the ongoing multilateral ISDS reform discussions being held under the Working Group III process within the United Nations Commission on International Trade Law (UNCITRAL).

UNCITRAL is a UN body mandated to “further the progressive harmonization and unification of the law of international trade.” Their focus is on laws that involve private actors and how their activities affect interstate commerce.

The multilateral deliberations on possible ISDS reform began in 2017, when UNCITRAL gave the working group the mandate to “work on the possible reform of investor–State dispute settlement” and deemed that discussions would need to be “Government-led… consensus-based and fully transparent.”

Since then, delegates have met formally twice a year, in April and November, alternating between New York and Vienna. Delegates are now preparing for the third and final phase of their deliberations.

The two initial phases were devoted to having delegates (i) “identify and consider concerns regarding ISDS” and (ii) debate “whether reforms are desirable.” Phase three will be dedicated to “which type of reform would be preferable and which solutions would need to be developed.”

What is coming up at UNCITRAL Working Group III

Among the main subjects at next week’s session is third-party funding, which refers to cases where financial support is provided to the claimant investor from a third party, typically a litigation fund. Now increasingly common in investment arbitration, third-party funding is seen by many developing countries as a source of speculative and costly claims, putting them in a highly disadvantaged situation and making it difficult to settle the dispute amicably.

Delegates are also due to discuss “other concerns not already covered by the broad categories of desirable reforms already identified,” as agreed at their November session. Many issues that developing countries and observers have previously raised as concerns—such as investors’ ability to skirt domestic court systems for ISDS arbitration or the right to participation by affected parties—have ultimately ended up in an “other concerns” category, without giving them the time or space they deserve.

Also on next week’s agenda are proposals for developing a work plan for upcoming deliberations on phase three of the mandate. Delegates at the November 2018 session agreed that the work plan “would address: (i) how some or all of the concerns …identified as desirable for reform should be addressed in phase three of the mandate, and (ii) questions such as sequencing, priority, coordination with other organizations, multiple tracks, ways to continue the work between sessions of the Working Group, and any other matter that the Working Group considered necessary.”

Aside from third-party funding and the work plan for phase three, another item expected to draw intense scrutiny is the European Union’s proposal for a multilateral investment court (MIC). The European Commission submitted this proposal to the UNCITRAL process in January and accompanied it with a separate submission for a work plan leading up to an MIC.

Chile, Israel and Japan have also jointly made a work plan submission, where they propose an approach that prioritizes the concerns identified to date. They propose the Working Group “develop a Schedule for addressing the list of solutions, beginning with solutions that can have the most immediate material impact.” A submission by Costa Rica also proposes “prioritizing reform options,” while a submission by Thailand advocates for discussing and deciding on the best reform options based on their advantages and disadvantages, and discussing the details of the most desirable options that have been prioritized.

A third path to consider

The submissions are an indication of the crucial issue that the working group will have to decide: whether to prioritize certain concerns and put holistic reforms on the backburner or whether instead to tackle the more complex holistic reforms with the risk of leaving states for many years without solutions to the challenges they are facing today.  

In our view, neither solution is desirable. Rather, the working group should consider a third approach. Its members should conduct both discussions in parallel: this will allow them to begin discussing the much-needed holistic or systemic reform while addressing certain pressing issues that can be fixed as a priority.

This parallel two-track approach would require creative thinking in Working Group III, as some of the work would have to be undertaken and prepared at a distance, possibly through sub-committees, between the biannual UNCITRAL sessions. Similar approaches are often undertaken in trade negotiations, with intersessional meetings and exchanges in between major negotiating rounds. Of course, this will require travel support to developing countries, who are eager to participate and find solutions.

Only a parallel two-track approach can steer clear of mere tinkering while also avoiding getting caught up in long conversations about the pros and cons of deeper change.