In February 2021, the UNCITRAL Working Group III concluded its fortieth session that focused on the Investor-State Dispute Settlement ('ISDS') Reform.
There were three points on the agenda prepared by the UNCITRAL Secretariat,[2] namely:
The UNCITRAL ISDS reform was initiated in response to the legitimacy crisis of investment arbitration. One of the main proposals for reform was pursued by the European Union that advocated for the establishment of a Multilateral Investment Court, a permanent two-tier institution resolving disputes between investors and States by full-time adjudicators. Over time, however, the reform agenda fluctuated, bringing more options to the table (ranging from providing additional features to the current ISDS system to introducing a standing body as initially proposed by the European Union). What all options and variations have in common, however, is an increased institutionalization of the investor-state dispute settlement.
The perceived need to enhance the institutional framework arises from the considerable amount of public criticism and outcry against investor-state arbitration in its current form, but – at the same time - is equally a natural consequence of the judicialization of international arbitration as a whole (both in its “investment” and “commercial” variation). Consequently, although the UNCITRAL Working Group III contribution may operate as a catalyst to the changes in international arbitration (in general), arguably, this inevitable evolution would occur in any event.
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At the bottom of the discussion between proponents and critics of the current investor state dispute resolution mechanism is the purpose of the system itself. This has been well described by prof. Mistelis during his 2020 EFILA Lecture where he referred back to Aristotle’;s Nicomachean Ethics and recalled the distinction between remedial and distributive justice.[3]
In simple terms, one may consider that the current (investment arbitration) system provides only remedial justice (thus remedying a State’;s alleged wrongdoing) with little regard to distributive justice (in case other actors, such as local communities are affected). This ties back to the purely commercial arbitration origins of the current system, which by design offers no more than the (hermetic) resolution of issues between the disputing parties.
Indeed, the reason for a restricted mission of the international commercial arbitration tribunals (in non-investment (purely commercial) arbitration context) is the fact that they operate on a basis of limited States’; delegation of States’; adjudicative imperium to resolve bilateral (horizontal) disputes. Rather logically, States in a commercial arbitration setting have no interest to vest the private actors (arbitrators) with a power of rendering (distributive) justice because that would go beyond resolving conflict between disputing parties and thus would affect society at large.
Similarly, it is reasonable to consider that remedial justice was the only acceptable element of the States’; adjudicative imperium that States were willing to outsource when it came to their disputes with foreign investors. Considerably, remedial justice is also what is appealing to users (investors) of investment arbitration. This conclusion can also be derived from the QMUL-CCIAG 2020 survey,[4] which shows that both investment arbitration (treaty-based) and contract-based arbitration are the most highly rated dispute resolution mechanism, at least from the investors perspective (litigating in the host state’;s courts being the least preferred).
Nowadays, however, it appears that providing this remedial justice is not enough, because (bilateral) disputes between investor and State do not exist in a legal vacuum and does affect actors beyond parties in dispute. Consequently, taking into account public scrutiny of investment arbitration – there seems to be an increased demand for a distributive justice in the context investor-state arbitration coming from different stakeholders or critics (other than investors). Effectively, it would mean that the compensation given to investors (remedial justice) could (or even should) take into account external factors and potentially be discounted by distribution of wealth (for example taking into account affected non-party actors such as local communities). This, however, arguably requires a major overhaul of substantive (as opposed to procedural) investment law protection of investors by being more mindful of other actors/stakeholders. Instead, the efforts of the current reforms focus on the institutional design of a dispute resolution mechanism.
As mentioned above, international arbitration (in general) naturally evolves. Over the years, it went through self-sustaining institutional growth and judicialization which is only intensified by the current criticism-driven reforms undertaken in the UNCITRAL Working Group III. Number of proposals (including the Draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement[5] discussed during the most recent UNCITRAL meeting) and initiatives (e.g. Arbitration Pledge,[6] R.E.A.L.[7]) evidence that the international arbitration community and system (including investment arbitration) in its current form is apt to respond to the needs and concerns of its stakeholders. This does not prevent the investment arbitration system, however, to suffer an “external” legitimacy crisis, as mentioned at the beginning of this post.
The efforts of the European Commission in the context of UNCITRAL Working Group III are surely an attempt to address public opinion aversion to investment arbitration and enhance the “external legitimacy” of the system of investor protection. Importantly, however, the reform should not loose sight of “internal legitimacy” that depends on the trust of the users (including investors) in the ISDS system. Looking back at the QMUL-CCIAG 2020 survey,[8] one would see that contract-based arbitration remains the investors' favorite.
Addressing “only” “external legitimacy” concerns and neglecting confidence that users have in the current ISDS system, may drive away the investors who would seek remedial justice elsewhere. This will have adverse effect on the achievements of investment arbitration to date (see e.g. increased transparency of investment arbitration). In any event, it will not prevent the powerful users (such as multinational corporations) from securing their access to remedial justice through advantageous (and confidential) contract-based arbitration when dealing with States. At the same time, the position of small and medium sized companies with a limited bargaining power will become much more fragile (in particular if no access to third party funding is allowed).
Reform leaders should not forget that the new ISDS system needs to attract the confidence of the current investment arbitration users (“internal legitimacy”) . Otherwise proposed reforms will create an empty institutional vessel falling short in fulfilling any systemic purpose of delivering any type of justice.
To end on a positive note, all stakeholders seem to be in favor of systemic reforms. This stems us hopeful that a compromise is within reach, provided a balance between external and internal legitimacy of the ISDS system is preserved.
[1] Author is an Assistant Professor at the Erasmus School of Law and Professional Support Lawyer at Houthoff. The views expressed herein are personal and do not reflect the opinions or views of Houthoff or Houthoff’;s clients.
[2] http://undocs.org/en/A/CN.9/WG.III/WP.200 [last accessed 23.02.2021].
[3] https://www.youtube.com/watch?v=KGJpkAIa05o [last accessed 23.02.2021].
[4] http://www.arbitration.qmul.ac.uk/media/arbitration/docs/QM-CCIAG-Survey-ISDS-2020.pdf [last accessed 23.02.2021].
[5] https://icsid.worldbank.org/sites/default/files/amendments/Draft_Code_Conduct_Adjudicators_ISDS.pdf [last accessed 23.02.2021].
[6] http://www.arbitrationpledge.com/ [last accessed 23.02.2021].
[7] https://letsgetrealarbitration.org/ [last accessed 23.02.2021].
[8] http://www.arbitration.qmul.ac.uk/media/arbitration/docs/QM-CCIAG-Survey-ISDS-2020.pdf [last accessed 23.02.2021].