Recent developments in ISDS reform

Introduction

Investor-State dispute settlement (ISDS) is an important feature of investment treaties. ISDS, the procedural mechanism through which an investor may claim compensation for a violation of a substantive investor-protection standard, be it included in a bilateral investment treaty (BIT) or a trade treaty with investment protections, determines the robustness of those protections. The traditional mechanism (investment arbitration between the investor and the host State, modelled on commercial arbitration) has been under attack for some time now from a range of actors and for a variety of reasons. Hostility to the traditional model, which has spread from the academic realm to the political stage, has led to changes in individual treaties and wider reform initiatives.

ISDS reform in treaties

While important changes are afoot, the vast majority of investment treaties (some 90 per cent) in force around the world were concluded before 2012 (old generation treaties) and have traditional ISDS provisions. Indeed, the majority of known ISDS cases have thus far been based on old generation treaties. The new generation of treaties concluded since 2012 (of which there are approximately 300) have incorporated many new features, albeit on an inconsistent basis given the vagaries of bilateral negotiations and individual State preferences.

Most of the changes to new treaties are to substantive provisions, for example, refined definitions of investor and investment, circumscribed fair and equitable treatment (FET) standard, clarified standard on indirect expropriation, and promotion of corporate and social responsibility. However, there have also been modifications to ISDS provisions. These range from omitting ISDS altogether (e.g. in favor of domestic courts, mediation or State-to-State dispute settlement), limiting ISDS to particular types of treaty breaches, or incorporating various enhancements to the traditional model of ISDS such as provisions bolstering impartiality of arbitrators, early dismissal opportunity for frivolous claims, or transparency provisions opening ISDS proceedings to the public and third parties.

Reform has also come to some old generation treaties, in the form of amendments or wholesale replacement. For example, in 2018 the Republic of Korea and the US signed an amendment to their 2007 treaty. The amendment includes clarifications on the meaning of the minimum standard of treatment and excludes ISDS procedures from the scope of the most-favored-nation (MFN) clause. It also forms a joint committee to explore improvements to the ISDS provision that meet both countries’ objectives.

In North America, the best known system for ISDS is set out in Chapter 11 of NAFTA. In 2018, following President Trump’s election based in part of his promise to scrap NAFTA, Mexico, Canada and the US signed a new NAFTA – the United States-Mexico-Canada Agreement (USMCA) – after months of intense negotiations on many substantive issues. ISDS did not escape the negotiators’ scrutiny. Under the new treaty, which has yet to be ratified by all the three countries, Canada would withdraw from ISDS entirely, leaving ISDS in place only between the US and Mexico, albeit for a narrower set of disputes.

What’s new in the EU?

The EU has seen the most vociferous opposition to ISDS. The European bloc has also been at the forefront of the most direct challenge to the traditional model of ISDS. In recent treaties concluded by the EU – with Canada (CETA), Singapore and Vietnam – the traditional model has been replaced by a so-called Investment Court System (ICS), whereby investment disputes may be submitted to a permanent and institutionalized court yet to be established. The members of the court are appointed in advance by the States that are parties to the treaty, subject to independence and impartiality requirements. And the court’s decisions are subject to review by an appellate body. The EU’s ultimate objective is to replace the bilateral investment courts of each treaty by a single Multilateral Investment Court (MIC). The MIC envisioned by the EU would be a permanent international institution to adjudicate disputes under both existing and future investment treaties.

Progress towards the MIC is slow, although some initial steps have been taken. On March 20, 2018, the Council of the European Union adopted negotiating directives authorizing the European Commission to negotiate a convention establishing the MIC. The Commission intends to start negotiations within UNCITRAL.

ISDS has also been challenged within the European courts. In 2018, in the Achmea decision, the Court of Justice of the EU (CJEU) invalidated traditional ISDS in intra- EU treaties on the basis that the traditional system incorporated into a treaty between Member States was incompatible with the autonomy and supremacy of EU law and the requirement that EU law be effective. By contrast, in April 2019, the CJEU sided with ICS, holding that this new form of ISDS was compatible with (i) the autonomy of the EU legal order, (ii) the general principle of equal treatment, (iii) the requirement that EU law be effective, and (iv) the right of access to an independent and impartial judiciary.

Multilateral reform initiatives

In addition to these changes in specific jurisdictions, there are reform initiatives taking place on a number of fronts, including the OECD, the WTO, UNCITRAL and ICSID.

UNCITRAL, for example, is overseeing a State-driven ISDS reform initiative, through Working Group III (the Group). The mandate of the Group is the following: (a) first, identify and consider concerns regarding investor-State dispute settlement; (b) second, consider whether reform was desirable in the light of any identified concerns; and (c) third, if the Working Group were to conclude that reform was desirable, develop any relevant solutions to be recommended to the Commission. The Group has identified concerns that fall into four categories

• Consistency, coherence, predictability and correctness of arbitral awards.
• Arbitrators and decision-makers.
• Cost and duration of ISDS cases (with focus on arbitration proceedings)
• Third party funding.

The Group’s work now turns to identifying relevant solutions. The Group is following a three-step workplan for developing solutions

• Delegations submitted solutions to be developed to UNCITRAL in July 2019.
• The submitted proposals are being discussed and a project schedule will be developed at the next session in October 2019 in Vienna.
• Once the project schedule is created, the Group will begin to substantively discuss and develop potential solutions for recommendation to the Commission.

States have acknowledged that a distinction must be maintained between well-founded concerns, which are supported by facts and empirical research, and unfounded concerns, which are based on perceptions. Further, States have also acknowledged that some of the concerns raised with respect to ISDS can be resolved within the framework of international investment treaties, through amendments or interpretive statements.

As the leading arbitral institution for ISDS, ICSID is also focused on reform. While amendment of the ICSID Convention itself is not on the table – or not yet anyway – the ICSID Secretariat has been busy leading extensive consultations about the ICSID Arbitration Rules to

• Modernize the rules based on case experience
• Make the process increasingly time and cost effective while maintaining due process and a balance between investors and States.
• Make the procedure less paperintensive, with greater use of technology for transmission of documents and case procedures.

In March 2019, the ICSID Secretariat published its second working paper on proposals for rule amendments, building on proposals that were originally published in August 2018.

The jury is out whether these reform initiatives will achieve meaningful improvements. At a recent event in London, a leading practitioner is reported to have lamented a “collective failure of imagination” when it comes to procedural improvements of ISDS. Nor is it clear that the posited reforms will appease die-hard opponents of ISDS, many of whom appear focused on eliminating ISDS altogether in any of its current forms.

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