Report from the UNCITRAL WG III Autumn session 2022 (41st) – Vienna

A special session of this working group has been called for 23-27 January 2023 to look at the next draft of the code of conduct for adjudicators and to discuss a proposed appellate mechanism to supplement the current ISDS system.  Input from members on these topics is invited. Please email MMcBrayer@ciarb.org. 

Report from the UNCITRAL WG III Autumn session 2022 (41) – Vienna 

The autumn session of UNCITRAL Working Group III on Investor-State Dispute Settlement (ISDS) Reform in October of this year was the first to resume as fully in person since the start of the pandemic.  It was noted at the outset that instruments on investor state mediation and the proposed Code of Conduct for Adjudicators (Code) are expected to go to the Commission within the year.  These would be the first work products generated by the working group since embarking on its ISDS reform mandate in 2018.  The second week of the session was devoted to a reading of the current draft version of the (Code), but further amendments were seen as desirable before finalisation. 

Key topics of discussion in the initial week began with the issue of selection of adjudicators for a standing multi-lateral investment court (MIC) as proposed by the European Union.  However, after extensive discussion among the states, it became clear that the prevailing view is that no mechanism that has been put forward fully addresses the issue of diversity.  Some were seen to address equality among states, but none is viewed as achieving equity. The most popular model among states is the one that ICSID currently uses to establish its standing panel.  However, the reservations with using this model stem from states not being required to nominate their nationals.  Thus, many under-represented states who do not have local practitioners with the capacity to arbitrate investment disputes appoint well known arbitrators from other jurisdictions to the ICSID panel.  Further, in this model parties would still be free to appoint their own arbitrators from outside the panel and so very few members of the standing panel could expect to receive appointments.  

The states continually expressed a desire to have a pool of “judges” available with both technical knowledge, legal training, experience in investment and trade law, and procedural expertise.  It was observed that the MIC panel would have to be considerably larger than the proposed 9 individuals to accommodate this.  Also, the appointments to a dispute could not be randomly allocated, as they are in a national court, but would have to be on a case-by-case basis, matching judges to the substance of the dispute.  To achieve this, in the end, would mean duplication of this aspect of the current system, which already provides this option to states and investors.  As the MIC would fail to address these issues under any model, the question arises as to whether a better, faster, cheaper, and more legitimate option would be to simply modify the ICSID selection mechanism to improve diversity of the panel and of appointments.  This could be particularly effective if the states concurrently enacted policies to appoint more diverse arbitrators in their disputes. 

A further discussion focused on the proposed advisory centre where it became clear that many states see the proposed two-pillar approach (an assistance pillar and a forum pillar) as problematic.  This is because those that want the assistance pillar to be developed are, in essence, requesting that UNCITRAL create a means of free representation for states in ISDS disputes.  However, there is no precedent for such a model in the UN system and the costs of creating such a service would inevitably be borne by wealthier states who do not use the service. There was also disagreement between states and the investor observers on whether micro, small and medium-sized enterprise (MSME) investors could be given access to the centre’s services.  States have taken the position that the centre may only serve contracting states while the investors have taken the position that it must be open to all parties to ISDS disputes who can show need.  

In separate consultations with states and investor observers, Ciarb proposed that one possible model could be that MSMEs be given access to the centre if they were from a contracting state and under the sponsorship of their home state vis a vis the same mechanism used to negotiate the bi-lateral investment treaties (BITs) and international investment agreements (IIAs) which underpin international investment.  This was accepted by many as a novel and fair proposal but was not sponsored on the floor as the view of most delegations is that it is too early to pursue compromise positions on this option.  Ciarb views the forum pillar as the most effective possibility for an advisory centre because it would focus on capacity building, training, and education.  A forum would also serve as a clearinghouse for providing information and access.  A key feature would be services that provide access to conflict avoidance, alternative dispute resolution (ADR) mechanisms, and mediation.  The forum pillar has received wide support with many states suggesting that this is something that can be developed immediately.   

One of the liveliest exchanges came during the discussion of reform instrument options.  Numerous African states took the floor on these issues in a concerted effort unobserved in past years from the region.  The highest priority for this bloc was the enactment of a cap on damages and/or a prohibition of the use of certain damages calculation methods, particularly discounted cash flow (DCF).  Other delegations, as well as the Chair, emphasised in response that arbitrators’ assessment of damages in a dispute is considered a substantive issue and that any reform instrument in the UNCITRAL working group context must be limited to procedural reforms.  However, the African states made a clear assertion that “we must have binding resolutions that force tribunals to be reasonable.”  It was noted that the countries that led the wave of African interventions on this point are some that are very high on international corruption indexes and have negative human rights records.  Yet they argued that international investors bringing claims against them in ISDS are preventing them from using public funds for development and projects such as education and healthcare.  However, it worth noting that African states regularly defend claims of direct expropriation and full protection and security due to corruption, civil unrest, and lack of strong democratic institutions.  Importantly, though, the non-African states broadly supported the development of guidance for arbitrators on calculation of damages in ISDS.   

All states agreed on concerns about the possible overuse of DCF calculation methods and claims that rely on “speculative loss” calculations and there was unanimity on a desire for clarity on the role of party appointed and tribunal appointed quantum experts.  Guidance on the burden of proof arbitrators should use when choosing a certain calculation was also suggested.  Investors were quick to point out consistency in calculations used across disputes. But this must be considered in light of comments from quantum experts that tribunals prefer DCF method, not because experts recommend it, but because it is the easiest method to understand.  Interestingly, data was presented that showed that award amounts are level over the last 15 years.  Ciarb notes that any guidance on damages calculations would also have to consider cases under commercial public-private partnership (PPP) agreements as well as those under BITs or IIAs. Guidance can also be given as to bifurcating quantum from the substantive liability phase so that all parties’ experts, the tribunal, and tribunal’s experts can focus on the discrete issues in damages calculations.  This would also save time and cost as, if the tribunal finds no liability, damages presentations can be eliminated.  Investors and even some states support the use of cost allocation and sanctioning powers of the current system to punish abusive or bad faith claim amounts by investors who are after a pay-out.  

The discussions on third party funding (TPF) were perhaps the most surprising because it was clear that there is almost no appetite among states to prohibit or restrain TPF.  Numerous states view TPF as integrally intertwined with access to justice.  The notion that TPF facilitates frivolous claims was broadly seen as an assertion without merit.  However, concerned remained regarding connections between funders and tribunals. Latin American states in particular expressed concerns that the presence of TPF inhibits a state’s ability to seek security for costs and can cause problems in the enforcement phase if there is a cost award against a claimant investor.  However, it must be noted that security for costs is a substantive issue and it is highly unlikely that any tribunal would accept that the presence of a TPF should be considered when determining such an application.  To do so would mean that funding could be added to the list of circumstances likely to give rise to the risk that a disputing party would not be able to pay an adverse award or pay a cost award against them.  This is contrary to the same analysis used in commercial disputes and creating a different standard in treaty disputes would cause clear contradictions with PPP commercial disputes. 

The states’ most fundamental concerns around TPF could be handled via disclosures and, thus, a proposal was made to create an instrument on required disclosures whereby parties would be required to disclose funding and tribunals would be required to disclose any connections to those funders or to affirm a lack of connection.  Acknowledgement was made that states are also beginning to avail themselves of TPF services in defending claims in ISDS and that the issues will soon no longer be exclusive to investors.   

You can also visit the working group page and view the working papers here.