S T U DY

The billions of dollars that

GLO BA L A N D REG I O N A L O RDER arbitral tribunals have
­ordered to be paid out to
investors in publicly known

UNCITRAL ISDS ­cases have diverted

taxpayers’ money away from
­funding public health, among

FIDDLES WHILE
other public concerns.

COUNTRIES BURN The Working Group III of the

United Nations Commission
on International Trade Law
(UNCITRAL) appears to be
a long way from delivering
meaningful reforms to the
investment arbitration regime.
Jane Kelsey and Kinda Mohamadieh
September 2021

As the recent ­history of ISDS

has shown, the negative
impacts will affect every
country in the world.

TWN
Third World Network
 UNCITRAL FIDDLES WHILE COUNTRIES BURN

Five years into its review of internation- specific issues of significance that are Aligning ISDS reform with developmen-
al investment agreements, and specif- of particular concern to developing tal objectives requires a recognition
ically investor-state dispute settlement countries. It calls for a re-opening of that cases, and the measures that
(ISDS), Working Group III (WGIII) of the the WGIII agenda and processes to these disputes touch on, have different
United Nations Commission on Interna- address concerns repeatedly raised by implications from the perspective of
tional Trade Law (UNCITRAL) appears participating States from the Global sustainable development and public
to be a long way from delivering mean- South and deliver genuine systemic policy than from the perspective of
ingful reforms to the investment arbi- reforms to the deeply flawed interna- investor promotion and protection.
tration regime. In the meantime, ISDS tional investment regime.
continues to provide foreign investors An effective consideration of the devel-
with an exclusive mechanism through Consistent with their origins, the vast opmental implications of ISDS therefore
which they can directly sue host states majority of ISDS disputes have been requires freeing the mandate given to
and challenge governmental action, in- brought by developed country investors WGIII from the narrow interpretation
cluding non-discriminatory regulations. against developing countries or transi- adopted to date and taking a serious
tion economies. Although the invest- look at alternatives to arbitration as
This paper analyses the work of ment regime has impacted on countries means to settle investment disputes.
­U NCITRAL Working Group III through of the Global South most severely, the The substantive concerns that underpin
a development lens, addressing the lodging of disputes against public poli- the crisis of legitimacy confronting the
issues at a macro-level, the WGIII cies in affluent countries has intensified international investment regime and
approach at an institutional level, and the pressure for substantive reform. ISDS are currently not addressed.

For further information on this topic:

https://geneva.fes.de/
 UNCITRAL Fiddles While Countries Burn

GLO BA L A N D REG I O N A L O R DER

UNCITRAL
FIDDLES WHILE
COUNTRIES BURN
 CONTENTS

Contents

1 INTRODUCTION 3

2 THE CONTEXT OF WGIII 5

2.1 ISDS Legitimacy Crisis ............................................................................... 5

2.2 Regulatory chill ........................................................................................ 7
2.3 The price of failing to act .......................................................................... 7
2.3.1 Climate change ......................................................................................... 7
2.3.2 Regulating the Digital Domain .................................................................. 8
2.3.3 Covid-19 .................................................................................................... 8

3 UNCITRAL WORKING GROUP III 10

3.1 Institutional dynamics in UNCITRAL WGIII ................................................ 10

3.1.1 Developing country participation .............................................................. 10
3.1.2 The role of the Secretariat and Chair ........................................................ 11
3.1.3 Virtual meetings during Covid-19 ............................................................. 11
3.1.4 Active contributions by practitioners and academics ................................ 12
3.1.5 The mandate ............................................................................................. 13
3.2 The Working Group’s three phase process ............................................... 14
3.3 WGIII Work Plan and its implications ....................................................... 14
3.4 Development as articulated in WGIII ........................................................ 16
3.5 State dynamics in UNCITRAL WGIII ......................................................... 17
3.5.1 Capital-exporters’ positions ...................................................................... 17
3.5.2 Developing country positions .................................................................... 18

4 ASSESSING THE PROPOSED SOLUTIONS 20

4.1 Narrow conceptualisation of alternative dispute settlement with

an emphasis on mediation ........................................................................ 20
4.2 Mediation and its limitations from a developmental and
policy space perspective .......................................................................... 21
4.3 An appeal system and the dangers of entrenching bad law .................... 21
4.4 A Multilateral Investment Court ............................................................... 22
4.4.1 The MIC proposal and its limitations ........................................................ 23
4.4.2 Developing countries’ positions on the MIC and appellate body .............. 24
4.5 Adjudicators, Diversity and Reviews .......................................................... 25

1
 UNCITRAL Fiddles While Countries Burn

4.6 A Multilateral »Solution« .......................................................................... 26

4.6.1 A multilateral investment institution ......................................................... 26
4.6.2 The Mauritius Convention as a model instrument for implementation ..... 26
4.6.3 The Multilateral Tax Instrument as a model .............................................. 27
4.6.4 An »Open Architecture« Instrument Won’t Solve the Problem ................ 27
4.6.5 Is a progressive multilateral instrument possible? ..................................... 28

5 ISSUES CRUCIAL TO REFORM ALIGNED WITH

SUSTAINABLE DEVELOPMENT CONSIDERATIONS 30

5.1 The role of domestic courts as an alternative to arbitration ..................... 30

5.2 State-to-State Mechanisms for Investment Dispute Settlement ................ 32
5.3 Investor obligations and ISDS ................................................................... 33
5.4 Affected party participation ..................................................................... 34

6 CONCLUSION: UNCITRAL FIDDLES

WHILE COUNTRIES BURN 36

6.1 The Current State of Play .......................................................................... 37

6.2 Recommendations .................................................................................... 37

References ................................................................................................. 39
ANNEX: Summary table ............................................................................ 46

2
 Introduction1

INTRODUCTION 1

Five years into its review of international investment agree- of ISDS. The dysfunctional and inequitable regime of inter-
ments, and specifically investor-state dispute settlement national investment agreements (IIAs) and ISDS will have
(ISDS), Working Group III (WGIII) of the United Nations been consolidated, and demands for real reforms put to bed
Commission on International Trade Law (UNCITRAL) ap- for some years.
pears to be a long way from delivering meaningful reforms
to the investment arbitration regime. In the meantime, ISDS Those who will suffer most from that failure are the peo-
continues to provide foreign investors with an exclusive ples of the Global South, who have borne the brunt of the
mechanism through which they can directly sue host states ISDS regime over the past few decades. But, as the recent
and challenge governmental action, including non-dis- history of ISDS has shown, the negative impacts will affect
criminatory regulations. In many cases, this has resulted every country in the world and potentially fetter the ability
in a »chilling effect« on the regulatory process. More than of States to address long-standing regulatory challenges,
1,000 known ISDS cases have resulted in serious pressures such as eliminating social inequality, delivering essential
on many countries’ public budgets. The billions of dollars services, ensuring access to justice, and preventing further
that arbitral tribunals have ordered to be paid out to inves- environmental degradation. Fear of a crippling investment
tors in publicly known ISDS cases have diverted taxpayers’ dispute could also deter governments from taking action
money away from funding public health, access to food and necessary to address the pressing 21st century challenges of
employment creation, among other public concerns. 1 global warming, digitisation, financial crises and devastating
global pandemics.
The failure of WGIII to make effective advances towards
urgently needed reforms can be traced back to several This paper analyses the work of UNCITRAL Working Group
factors, notably its narrow interpretation of the UNCITRAL III through a development lens, addressing the issues at a
mandate to cover a limited set of procedural issues, the macro-level, the WGIII approach at an institutional level, and
prescriptive agendas that have limited the range of issues specific issues of significance that are of particular concern
being discussed and side-lined a range of concerns raised to developing countries. It reveals the disturbing reality
by developing countries, and the procedures adopted be- behind the consensus-based, government-driven approach:
fore and during the Covid-19 pandemic. The process has capital-importing developing countries, which are the main
come to resemble a smoke and mirrors exercise, in which targets of ISDS cases and should have had at least as much
the Working Group is being steered towards an overriding influence over the process as the developed capital-export-
framework that does not resolve the crucial challenges with ing countries that primarily support ISDS, have struggled
ISDS, while long‑recognised problems associated with ISDS to make their concerns heard. That is due to a number of
continue to be ignored. mutually reinforcing factors:

Solutions currently under discussion would accommodate 1. The terms of reference for WGIII have been narrowly ap-
procedural »reforms« that include minimalist modifications plied in a way that focuses on a limited set of procedural
to the status quo at one end of the spectrum, and the issues, which were restricted to four areas: consistency,
European Union’s proposed multilateral investment court coherence, predictability and correctness of arbitral
(MIC) to implement existing pro-investor rules at the other. decisions; arbitrators and decision makers; cost and du-
If the Working Group continues to ignore the recognised ration of cases; and third-party funding. The substantive
deficiencies of the international investment regime, its concerns that underpin the crisis of legitimacy that the
»solutions« will effectively re-legitimise the current system international investment regime and ISDS are facing will
not be addressed.

1 The authors would like to thank Lise Johnson, Head, Investment Law 2. Matters of importance from a policy and regulatory
and Policy at the Columbia Center on Sustainable Investment (CCSI) perspective, which have been put forward to WGIII
and Cecilia Olivet, formerly Program Coordinator, Trade and Invest-
ment at the Transnational Institute (TNI) for their invaluable review primarily by developing countries, but ought to be of
and comments on the draft. concern to all countries, have either been excluded per
3
 UNCITRAL Fiddles While Countries Burn

se because they are deemed to be substantive issues

and therefore out of scope, or are acknowledged but
are then marginalised or disappear from WGIII agenda.

3. The procedures of WGIII, crafted by the Secretariat and

the Chair of the process, have helped steer the Working
Group’s activities in this narrowly constructed direction
since even before the Group received its mandate.

4. The way the meetings and work plan have been organ-
ised have made it difficult for participating countries to
caucus and develop common positions, support each
other on the floor, and challenge the manipulation of
the original mandate and each meeting’s agenda.

5. The hybrid meetings during the Covid-19 era have

further disabled delegations from the Global South
and critical observers and strengthened the Chair and
Secretariat control of the process.

6. The way the agenda has been managed by the Secre-

tariat and Chair means the »elephant in the room« –
the objective of establishing a MIC – has never been
explicitly discussed. The proposal has been advanced
more subtly through the issue-based discussion to the
point where it forms part of the »open« and »variable«
architecture in an envisaged multilateral instrument to
implement procedural »reforms« to IIAs. Yet, the Sec-
retariat/CIDS paper shows it was part of the anticipated
outcomes from the start.

7. The most likely outcome is a lowest­­‑common‑

denominator multilateral instrument that allows cap-
ital‑exporting States to adopt minimalist procedural
changes to ISDS and none to the fundamental systemic
problems undermining States’ policy and regulatory
space. Some of those States may not even sign or
ratify a final agreement. Despite that, UNCITRAL and
the Secretariat, as well as capital‑exporting States that
promised they would institute reforms, will seek to
proclaim a »successful« outcome.

The paper concludes by calling for a re-opening of the WGIII

agenda and processes to address concerns repeatedly raised
by participating States from the Global South and deliver
genuine systemic reforms to the deeply flawed international
investment regime.

4
 The Context of WGIII

THE CONTEXT OF WGIII

2.1 ISDS LEGITIMACY CRISIS There are already over 1,000 known ISDS cases according
to the United Nations Conference on Trade and Develop-
International investment agreements (IIAs) were creatures ment (Investment Dispute Settlement Navigator | UNCTAD
of decolonisation, designed to protect the investments of Investment Policy Hub, n.d.). Some developing countries
colonial and imperial powers against newly-sovereign de- have billions of dollars outstanding in pending ISDS claims.
veloping country States (Anghie, 2005, Chapter 5; Kosken- For example, a report by civil society groups indicates that
niemi, 2017; Sornarajah, 2015; Van Harten, 2007, Chapter in 2020 Mexico had 12 pending cases, making up a total
2). Those power asymmetries are built into the rules that of $5.4 billion3 in claims, while India had 13 pending cases
protect foreign investors and their investments, and can be amounting to $8 billion in claims (Olivet et al., 2020). The
enforced directly against their host governments in private report calculates that by the end of 2018, states worldwide
extra-territorial tribunals. Initially, international investment had been ordered or agreed to pay investors $88 billion in
arbitration was designed to complement other means of publicly known ISDS cases alone (Investment Dispute Set-
dispute settlement, particularly domestic legal processes.2 tlement Navigator | UNCTAD Investment Policy Hub, n.d.).
It was not designed to replace the latter. The preamble to In 2019, an investment tribunal ordered Pakistan to pay a
The Convention on the Settlement of Investment Disputes foreign mining company $6 billion in compensation, two
between States and Nationals of Other States (ICSID Con- months after the International Monetary Fund (IMF) had
vention) of 1966, for example, provides that »... while such agreed a $6 billion bailout with Pakistan to save its econ-
disputes would usually be subject to national legal process- omy from collapse (Masood, 2019). These massive awards
es, international methods of settlement may be appropriate of compensation by investment arbitration tribunals occur
in certain cases« (ICSID Convention English.Pdf, n.d.). even where investments continue to operate profitably or
where planned investments were never built, fuelling calls
Instead, arbitration-based ISDS grew to be the norm. As to reform the principles governing compensation (Bonnitcha
the neoliberal era advanced, IIAs offered a potent means & Brewin, 2020).
for foreign investors to constrain States’ exercise of their
regulatory authority. For some years, these agreements In effect, every ISDS award paid out by a losing state con-
remained largely under the radar and investor-State disputes stitutes a cash transfer to private investors from the pool of
were still rare (Van Harten, 2007). The negotiations at the public resources that ought to be invested in public collective
OECD for a Multilateral Agreement on Investment (MAI) in goods. This diverts taxpayers’ money away from funding
the mid-1990s brought these agreements, and ISDS, to the for public health, access to food, and employment creation,
attention of the public and attracted critical scrutiny (Multi- among other public policy priorities. The private arbitral
lateral Agreement on Investment, n.d.). tribunals that make these decisions lack independence,
accountability, and the credibility of judicial institutions.
That critique has intensified sharply over the past two
decades. A surge of investor-State disputes over laws and Consistent with their origins, the vast majority of ISDS
policies designed to serve the public interest has brought the disputes have been brought by developed country inves-
international investment regime, and especially ISDS, into tors against developing countries or transition economies.
disrepute (UNCTAD, 2012, pp. 84–92 & 132–162, 2014a, Although the investment regime has affected countries of
pp. 24–25, 2014b). So have the often-crippling sums of the Global South most severely, the lodging of disputes
compensation awarded against governments for speculative against public policies in affluent countries has intensified
future losses to foreign investors. the pressure for substantive reform.

2 In the first 20 years (1965–1984) of the ICSID, only eighteen arbi-

tration cases were registered with it. It was only in 2001 that the
benchmark of ten new ICSID cases was registered in one year (Happ 3 All monetary sums in this report as in US dollars unless otherwise
& Wuschka, 2017). stated.

5
 UNCITRAL Fiddles While Countries Burn

By 2015, demands for an end to ISDS and its replacement processes; permitting very large monetary awards to inves-
by a range of alternatives, or at least for fundamental sys- tors even when they breached the host State’s domestic
temic reform, were dominating debates on international laws; lack of institutional safeguards against conflicts of
investment law. Some States terminated their agreements interest; and other forms of unfairness in the arbitration
unilaterally (Public Citizen Global Trade Watch, 2018) or by process (UNCTAD, 2012, pp. 86–89). There were also fun-
mutual consent (Peterson, 2015). Several States developed damental questions as to whether the costs of investment
alternatives based on domestic or state-state dispute settle- treaties outweigh their purported benefits as tools for at-
ment (c.f. South African Protection of Investment Act (2015); tracting sustainable investment, depoliticising disputes, and
Model Cooperation and Facilitation Investment Agreement improving the rule of law.
of Brazil, as described in Government of Brazil (2019)). Other
States excluded ISDS from investment chapters 4 or commit- The balance between calls for paradigmatic change and
ted to oppose its inclusion in future agreements.5 the adoption of pragmatic reforms shifted notably after the
International Centre for Settlement of Investment Disputes
Capital exporting‑countries began responding to pressure (ICSID) and UNCITRAL became involved in the reform
for reforms by »modernising« the blunt pro-investor rules debate. Both institutions have an interest in the survival of
and ISDS mechanisms in older agreements. For some, the investment arbitration regime and both are dominated
this involved limited clarifications of investor-protection by the major capital‑exporting countries (Roberts, 2018,
rules and modified procedures in their new bilateral and p. 419). The UNCTAD has become marginalised in a debate
mega-regional agreements, such as the Australia Japan it once led and its focus has shifted from a critique of IIA and
Economic Partnership Agreement 2015 and the Trans-Pa- ISDS to promoting reforms of »old generation« agreements
cific Partnership Agreement signed in 2016. The European and urging states to select from a menu of »modernising«
Union (EU) went further and championed a new institutional options (UNCTAD, 2018, pp. 95–115).
arrangement for a two-level investment court in its bilateral
agreements with Canada6, Vietnam7, and Singapore8. During the four years of deliberations in the UNCITRAL
Working Group, the pattern of ISDS disputes has remained
Of the international institutions with a mandate on invest- the same. Of the 71 substantive arbitral decisions that
ment, the UNCTAD initially took the lead in documenting UNCTAD identified in 2019, almost half were still secret
the trends in ISDS and subjecting the scope, scale, and ge- (UNCTAD, 2020b, 2021). While investment tribunals ap-
opolitical distribution of claims to critical scrutiny (UNCTAD, peared to be more aware of the potential for backlash as
2012, pp. 86–89, 2014a, pp. 114–133). The challenges to they went about their business, the published decisions
IIAs and ISDS that were identified include: operating against still displayed divergent interpretations by arbitrators and
the interests of developing states; establishing a systemic tribunals on certain key issues (UNCTAD, 2021). Amounts
asymmetry in legal protection and an exclusive category awarded ranged from $7.9 million against Hungary (double
of international dispute settlement for foreign investors; the net funds it was awarded from the EU recovery fund in
displacing domestic adjudicatory decisions and domestic 2020) to $5.9 billion against Pakistan9 (which could consume
law and institutions; creating conditions for regulatory chill; its entire IMF bailout intended to support its economic re-
excluding affected communities from participating in legal

6 Canada European Union Trade Agreement (CETA), signed 30 Octo-

4 For example, the Australia-United States Free Trade Agreement ber 2016, provisional application, 21 September 2017, provides in
(FTA), entered into force 1 January 2005, and the Australia-Japan Article 8.27 for a Tribunal of first instance and in Article 8.28 for an
Economic Partnership Agreement, entered into force 15 January Appellate Tribunal. Article 8.29 says: »The Parties shall pursue with
2015, do not include arbitration as a choice for resolving disputes. other trading partners the establishment of a multilateral investment
More recently, the Regional Comprehensive Economic Partnership, tribunal and appellate mechanism for the resolution of investment
signed 15 November 2020, not yet entered into force, between 15 disputes. Upon establishment of such a multilateral mechanism the
Asian States has no ISDS. Article 10.18 requires discussion on ISDS CETA Joint Committee shall adopt a decision providing that disputes
within 2 years of entry into force, and their conclusion within 3 years, under this Section will be decided pursuant to the multilateral mech-
but any outcome is subject to consensus. In the investment chapter anism and made appropriate transitional arrangements«.
of the United States-Mexico-Canada Agreement (USMCA), entered 7 EU Vietnam Investment Protection Agreement, signed 30 June 2019,
into force 1 July 2020, ISDS was eliminated between the United entered into force 1 August 2020, Articles 3.38–3.39 constitutes an
States and Canada after a 3 year transition period (Annex 14-C), and investment tribunal system comprising a Tribunal and a permanent
investment disputes involving the United States and Mexico cover Appeal Tribunal. Article 3.41 provides that: »The Parties shall enter
limited rules and require prior pursuit of local remedies (Annex 14- into negotiations for an international agreement providing for a mul-
D). Investment disputes between Canada and Mexico are covered by tilateral investment tribunal in combination with, or separate from,
the CPTPP. (Bernasconi, 2018). a multilateral appellate mechanism applicable to disputes under this
5 The Australian Labour Government rejected ISDS in 2011, but Agreement. The Parties may consequently agree on the non-appli-
the Liberal Government subsequently opted for a »case by case« cation of relevant parts of this Section. The Committee may adopt a
­approach that included acceptance of ISDS in several new agree- decision specifying any necessary transitional arrangements«.
ments including the TPP/CPTPP. (Tienhaara & Ranald, 2011). In 2016 8 EU Singapore Investment Protection Agreement, signed 15 October
the New Zealand Government adopted a policy of no ISDS in new 2018, not yet entered into force, provides in Article 3.9 and 3.10 for
agreements. This was after the TPP had been signed. New Zealand a tribunal of first instance and appeal tribunal. Under Article 3.12 the
secured side-letters from a number of Parties in the Comprehensive parties commit to a variation of CETA provision on pursuing the es-
and Progressive Agreement for Trans-Pacific Partnership (CPTPP), but tablishment of a multilateral dispute settlement mechanism.
most of these co-existed with existing agreements that contain ISDS. 9 The award comprised $4 billion principal plus pre-award interest
New Zealand Ministry of Foreign Affairs and Trade, n.d.; Solomon, from 2011 and post-award interest, compounded annually, as well as
2018. costs of over $60 million. See also De Murard (2019).

6
 The Context of WGIII

forms) and $8.4 billion against financially crippled Venezuela effective access to justice and equitable remedies for local
(ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. communities (French, Chief Justice R.S., 2014).
and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of
Venezuela, 2020; Magyar Farming Company Ltd, Kintyre Kft The development and investment asymmetries between
and Inicia Zrt v. Hungary, 2019; Tethyan Copper Company capital-importing and capital-exporting countries mean
Pty Limited v. Islamic Republic of Pakistan, Pending). that poorer countries and their vulnerable communities are
more susceptible to the threats and impacts of regulatory
Most of these disputes were under old bilateral investment chill. Concerns about regulatory chill were specifically raised
treaties (BITs), which have cruder terms that investors by participating States in the discussion of »other issues« at
unsurprisingly utilise. However, that does not mean those the WGIII meeting in April 2019 in anticipation of them then
claims would not have been brought or would not have being included on the agenda. The discussion was captured
succeeded under the new »modernised« versions. That in the WGIII session report of that meeting:
untested assumption is not, therefore, a justification for
rejecting more direct solutions- such as mutual termination »ISDS or the mere threat of using ISDS had resulted in
or unilateral withdrawal from BITs- in favour of modified regulatory chill and discouraged States from undertaking
versions of deeply flawed treaties or alternative forums for measures aimed to regulate economic activities and to
determining disputes involving States and investors under protect economic, social and environmental rights. The
existing investor-protection rules. inherent asymmetric nature of the ISDS system, costs
associated with the ISDS proceedings and high amount
of damages awarded by tribunals were mentioned as
2.2 REGULATORY CHILL some of the elements that could undermine the States’
ability to regulate…« (UNCITRAL, 2019d, para. 36)
The consequences of actual disputes for States’ sovereignty
and public finances are only part of the concern. Foreign The report also records the participating States’ agreement
investors often threaten ISDS claims, not in the hope of that »the potential impact of ISDS on the regulatory policy
securing compensation through an award, but to stop a of States should guide the work on ISDS reform«, and the
government from regulating in ways that the investor op- expectation that such critical cross-cutting issues should
poses. Governments, especially in the Global South, may form a part of any solutions developed by WGIII (UNCITRAL,
be understandably risk‑averse when they consider how 2019d, para. 37). However, the Working Group’s focus on
partisan and unaccountable arbitral tribunals might interpret specific procedural issues works against the consideration
the relevant investment protection rules, the quantum of of such systemic concerns. During the May 2021 session
damages they might face, and the cost of mounting a de- of WGIII, a number of developing country delegations
fence, especially when the investor has access to third-party challenged the failure of the proposed workplan to finalise
funding. This kind of regulatory chill goes to the core of the Working Group’s deliberations to provide equivalent
state responsibilities. It can severely undermine States’ con- time and resources to address these concerns, as discussed
stitutional obligations, subordinate their ability to regulate below.
in the public interest and for the public good, override elec-
toral mandates and democratic processes, erode political
accountability, and corrode the rule of law. 2.3 THE PRICE OF FAILING TO ACT

The fiscal costs of defending an investment dispute are a If the UNCTRAL Working Group fails to address the many
major factor in the chilling effect. Governments have to long-standing issues with ISDS, governments can expect to
prepare their response, tender for and appoint counsel, and face similar investment disputes, or threats thereof, as they
incur operational and opportunity costs within government. perform their public responsibilities to address the pressing
They know that even if their defence succeeds, they may not new challenges of our time.
be awarded costs. Any sum that is awarded may not fully
compensate the country’s fiscal outlay, opportunity costs, 2.3.1 Climate change
and costs from delays in implementing the measure. If costs Many governments are belatedly moving to avert a climate
are awarded, they may never be paid (Damages and Costs catastrophe. Foreign investors are seeking to defer the inevi-
in Investment Treaty Arbitration Revisited, 2017). table and demanding massive compensation for abandoning
practices that threaten to leave planet Earth uninhabitable
Regulatory chill also imposes political costs on governments (Kyla Tienhaara, 2020). A broad range of strategies have
when they cannot respond to the social, economic, or already been subjected to investment disputes: banning
cultural needs of their citizens. It can even impact on the ecologically destructive extraction techniques, such as frack-
judiciary. While customary international law recognises a ing (Lone Pine v. Canada, Pending); refusal to grant (Tethyan
right to pursue international remedies when the pursuit of Copper Company Pty Limited v. Islamic Republic of Pakistan,
local remedies is futile, the growing number of challenges Pending), or non-renewal (Bear Creek Mining Corporation
to ordinary decisions of domestic courts and tribunals risks v. Republic of Peru, 2017) of mining licenses; phasing out of
undermining the rule of law by making adjudicators unduly
cautious (Van Harten, 2007, p.110). That, in turn, denies
7
 UNCITRAL Fiddles While Countries Burn

coalfired power stations;10 restrictions on water extraction 2.3.2 Regulating the Digital Domain
to limit its use and minimise ecological impacts (Bernasconi, Regulating the digital domain is another 21st century
2009). challenge that risks generating a new groundswell of
ISDS claims. Big Tech corporations like Google, Amazon,
Other climate control policies are potentially open to chal- Facebook, Apple, Netflix, AirBnB, Uber, and AliBaba have
lenge, including forced disinvestment by pension funds or risen rapidly in a regulatory void that enables them to
public insurers in carbon unfriendly companies; taxes to establish global market dominance and create high levels
disincentivise fossil fuel extraction; restricting agriculture to of dependency. States are moving belatedly to regulate on
reduce methane emissions; phasing out petrol‑fuelled vehi- many fronts, including to reduce market dominance and
cles; cancelling allegedly fraudulent offshore carbon credits; counter anti‑competitive practices; protect consumers and
cutting subsidies to fossil fuel investments; and many clean address worker and human rights abuses; rein in corporate
energy initiatives. control and abuses of data; stem political interference and
tax evasion; and close the technological and digital divide.
The Energy Charter Treaty (ECT), which empowers energy Again, this is a global issue, but development asymmetries
companies to sue states under ISDS, has become the focus mean the impacts are most severe for the Global South.
for opposition to ISDS over climate policies (All Investment
Dispute Settlement Cases – Energy Charter, n.d.). The treaty There are already predictions of a new wave of investment dis-
was created in 1994 after the collapse of the Soviet bloc and putes as States seek to reassert some control over the largely
entered into force in 1998, with the goal of securing energy unregulated tech giants. In a Forbes magazine commentary,
resources in Eastern Europe (Hourticq, 2020). As of 2020 it Robert Ginsberg identified the potential for alleged breaches
had 53 signatories, including many Eastern European states. of investment rules on fair and equitable treatment, national
The rising number and value of disputes under the ECT – 135 treatment, full protection and security, and expropriation.
as of September 2020 – has fuelled calls for its termination, He observed that investors could structure their investments
for countries to withdraw, or for its fundamental modernisa- through holding companies in countries that maximise their
tion (Baliño, 2021a; Bernasconi-Osterwalder, 2018; Eberhardt protections across different agreements. Ginsberg made it
et al., 2018; List of Cases, n.d.). A petition calling for the clear that the »offensive« purpose of these threats is to pres-
European Union to quit the agreement, supported by a wide sure governments, not just to win a dispute, and predicted
coalition of organisations, including Avaaz, Campact, Climate that: »As the number of conflicts between US-technology
Action Network (CAN) Europe, Corporate Europe Observa- companies and host governments inevitably increases, so too
tory, Transnational Institute, WeMove and many others, has will the frequency with which investors use the protections
garnered over 1 million signatures (The Energy Charter Treaty under BITs as a sword and a shield« (Ginsburg, 2020).11 The
Is an Anti-Climate Agreement. Sign the Petition, 2021). first known threat of an investment dispute was by Uber to
Colombia in 2019 after its courts found Uber in breach of
In responding to such demands, the Energy Charter Confer- anti‑competition rules (Ginsburg, 2020).
ence initiated a »modernisation« process that goes further
than WGIII by discussing reforms to substantive investor The US has already launched unilateral investigations un-
protections. The positions taken there reflect the divisions der Section 301 of the Trade Act 1974 into a number of
among capital exporters in the WGIII. Some powerful devel- countries that have adopted novel digital services taxes,
oped countries are resisting change or proposing minimalist with threats of trade retaliation (Initiation of Section 301
reforms (Florou, 2020; Kunstyr & Svoboda, 2020; Moderni- Investigations of Digital Services Taxes, 2020). To date, these
sation of the Treaty, n.d.). Japan, which is the largest single investigations have mainly alleged breaches of trade rules.
funder of the ECT and the vice chair of the modernisation The prospect that future section 301 disputes might also
negotiations, has consistently opposed significant reforms cite international investment rules reinforces the dangers
and stressed that any »modernisation« should be minimal that existing IIAs pose, even if the US maintains its recent
on both substantive and procedural aspects (Lo, 2020). opposition to ISDS in new agreements. It also suggests that
While the EU promotes some protection for policy space, threatened or actual State-State enforcement of pro-inves-
notably for climate change measures, its proposals do not tor rules could produce equally problematic outcomes.
go far enough in making the treaty conducive to or sup-
portive of ambitious climate action, or in responding to the 2.3.3 Covid-19
climate emergency (Thornton & Bernasconi, 2020). Moreo- Covid-19 is not just a health crisis. Governments face a
ver, the application of any policy space protections would be broad range of regulatory challenges. To identify and treat
determined by a multilateral investment court. victims of the pandemic, stem its spread and protect the
health of workers on the frontline, governments have
requisitioned medical devices, imposed export controls,
10 ISDS Corporate Attacks, »Case Study: Vattenfall v Germany I« re- issued compulsory licenses for patented medicines and
ports that »the German government reached a settlement with Vat-
tenfall in 2010. The settlement obliged the Hamburg government to equipment, temporarily nationalised private hospitals, and
drop its additional environmental requirements and issue the con-
tested permits required for the plant to proceed. The settlement also
waived Vattenfall’s earlier commitments to mitigate the coal plant’s 11 Ginsburg is adjunct professor of international business at Loyola Uni-
impact on the Elbe River« (Corporate Attacks: Health, Case Study: versity Chicago and used to manage the foreign direct investment
Coal-Fired Electric Plant, n.d.). programme for the State of Illinois.

8
 The Context of WGIII

converted hotels to quarantine facilities. Lockdowns have In the broader investment community, there have been
required non‑essential businesses to close or severely curtail calls from global leaders, scholars and campaigners for an
their activities, while travel bans have brought international internationally coordinated response to avert an onslaught
and local transportation and tourist ventures to a standstill of ISDS disputes arising from the Covid-19 pandemic. Prom-
(Bernasconi-Osterwalder et al., 2020). inent international leaders James Bacchus and Jeffrey Sachs
published an open letter, supported by the Columbia Center
Addressing the economic, fiscal, and social impacts of Cov- for Sustainable Investment, which urged governments to
id-19 has required much broader regulatory interventions. commit jointly to a moratorium on investor-State arbitration
Countries have imposed export bans to guarantee their for Covid-related measures (Bacchus & Sachs, 2020; Bloom-
own food security (Coke Hamilton & Nkurunziza, 2020). er et al., 2020). An open letter to governments signed by
Restrictions on foreign investment and new screening more than 650 organisations world-wide made a similar call
thresholds have been adopted to protect distressed assets (Open Letter to Governments on ISDS and COVID-19, n.d.).
from predatory takeovers (OECD, 2020). Banks have been
required to provide interest holidays and suspend mortgage States could respond in a number of ways. Parties could
foreclosures (Arnold, 2020). Rents, interest rates and utility agree to terminate their investment agreements, including
bills have been frozen and/or deferred (Tenancy Services – the legal effects of the survival clause,13 or amend them to
COVID-19 (Coronavirus) – Announcement on Rent Increase prohibit ISDS disputes in these circumstances. Alternatively,
Freeze and Tenancy Terminations, 2020). Wage subsidies and they could notify the unilateral withdrawal of their consent
support payments have targeted specific local workers and to ISDS, or unilaterally terminate their BITs to prevent claims
businesses (OECD, 2021). Tax payments have been deferred, in the future (Bernasconi-Osterwalder et al., 2020; Johnson
further depleting revenue to stranded economies, as they et al., 2018). At the very least, State parties to IIAs could
face mounting expenditure. Faced with growing debt and agree to issue binding or authoritative joint interpretations
potential for defaults, developing‑country governments have of rules and exceptions to protect Covid-19 related measures
sought to restructure or defer repayments on debt and bonds in a dispute (Bernasconi-Osterwalder et al., 2020).
and are reluctantly turning once again to international finan-
cial institutions for debt relief and bailouts (UNCTAD, 2020a). To date, however, no international institution has been pre-
pared to sponsor such initiatives. UNCITRAL WGIII seems
Every country has suffered some of these impacts from the obvious place, given its home in the United Nations and
Covid-19. States in the Global South have the least systemic current role as the most active forum for debate on ISDS.
capacity and resilience to survive these challenges, but often But while Covid-19 has impelled the Working Group to meet
the greatest need to adopt such measures. That puts them in a virtual or hybrid form, its narrow procedural agenda and
at the highest risk of threatened disputes and subsequent decontextualised approach to its mandate has quarantined
retaliation. Lawyers and law firms have been advising their its deliberations from the reality posed by Covid-19. There
corporate clients on the use of ISDS to challenge such meas- has been no use of the lessons from the pandemic to test
ures (Olivet et al., 2020). Foreign investors may allege direct out the proposals currently being promoted, let alone to
or indirect expropriation without compensation, failure to engage with its implications for investment treaties and the
meet investors’ legitimate expectations and provide fair and regime of investor-state arbitration more generally.
equitable treatment, discrimination in favour of nationals,
and restrictions on cross-border capital flows and transfers. This section has reviewed the tensions between the threat of
If those threats materialise, developing countries will face investor-State disputes and the policy space governments re-
the unconscionable prospect that meeting the needs of their quire to take measures urgently needed in order to respond
people and protecting their economic and social structures to the global pandemic and other systemic crises, including
from collapse could incur catastrophic ISDS awards. the climate emergency and the challenges of adjusting to
rapid digitisation. Exorbitant compensation awarded to
In the trade context, the WTO website lists hundreds of investors in ISDS cases is feared for its constraining effects
measures notified as affecting international rules on trade on resources and public budgets, which governments need
in goods, trade in services and intellectual property rights. to respond to these crises. International action is needed
There is tacit recognition that many of these measures breach now to minimise the risks of ISDS claims and to safeguard
the multilateral trade rules and might not satisfy either the sufficient regulatory space in the context of international in-
multi-layered requirements of the general exceptions12 or vestment rules. Yet, serious action in that direction remains
stretched interpretations of the limited security exception scarce, including from UNCITRAL WGIII. The following two
(Public Citizen, 2019; Reinsch, 2019). That recognition has at sections will review UNCITRAL’s mandate, institutional
least prompted discussions within the WTO, if not effective dynamics, and States’ positions within WGIII, as well as the
reforms and remedies. main proposals currently on the Working Group’s agenda,
to identify the problems and what needs to be done.

13 Survival clauses are provisions that allow the extension of the pro-
tections provided under the treaty beyond its termination and thus
12 WTO Members have been unsuccessful in 48 of 50 disputes where allow for investment claims to be brought even after the treaty has
they have invoked the General Exception (Public Citizen, 2019). been terminated.

9
 UNCITRAL Fiddles While Countries Burn

UNCITRAL WORKING GROUP III

To date, UNCITRAL’s approach to ISDS reform has been a is needed for developing countries to take a more active
crucial factor in protecting the investment regime from more role in these deliberations. A fund was created for these
radical reform. This section considers institutional and State purposes. Yet, the availability of funding for travel does
dynamics, the influence of practitioners and academics, not necessarily translate into effective participation of de-
the Working Group’s mandate and its 3 phases, the work veloping countries in the different workings and processes
plan to finalise the work of WGIII, and how development is of WGIII, especially in the context of virtual deliberations
addressed in approaching the mandate. dictated by the Covid-19 pandemic and related restrictions.
Participation in such negotiations cannot be measured by
the number of countries represented, but must consider
3.1 INSTITUTIONAL DYNAMICS IN the extent to which developing countries are able to make
UNCITRAL WGIII effective contributions to the process. This is reliant on
proactive and consistent information-sharing within the
3.1.1 Developing country participation Working Group and by the Secretariat and Chair, as well as
UNCITRAL is not a forum where developing countries have the availability of support necessary to ensure that countries
traditionally been active as a group, such as is the practice in can effectively sustain their participation in the formal and
other multilateral forums. For example, at the World Trade informal processes.
Organization (WTO) developing countries have been work-
ing through multiple group configurations.14 At UNCTAD, When WGIII meetings were physically organised twice a
developing countries have often been active as the Group year, in New York and Vienna on a rotating basis, many
of 77 and China. developing countries faced multiple challenges. Even with
travel funds it was often difficult for the relevant officials to
A study of UNCITRAL’s proceedings and institutional be absent from capitals to attend. A number of countries do
dynamics points out that law is often created by a small not have delegations in both New York and Vienna. If they
number of countries within the forum, along with exten- do, they may not have the people available, especially with
sive participation by professional groups and associations the necessary expertise to effectively cover the technical dis-
(Block-Lieb & Halliday, 2017).15 In these processes, the voices cussions of WGIII and liaise back with their capitals. Ensuring
of developing countries have often been absent or silent the effective participation of developing countries in such
(Block-Lieb & Halliday, 2017). Such limited participation processes requires specific institutional arrangements that
could undermine the legitimacy of UNCITRAL processes as enable effective coordination between capital officials and
a means to advance global norms, especially when dealing diplomatic missions in New York and Vienna.
with issues that impact on the public interest and entail a
review of public international law principles, as is the case The Commission suggested that Working Group sessions
with ISDS. could be held in locations other than Vienna and New York
to increase participation by States and relevant stakeholders
When issuing the WGIII mandate, the Commission stressed (UNGA, 2016). That has not happened. There have been
the need for governments to be represented by officials several regional meetings outside Vienna and New York,
with adequate expertise and experience (UNGA, 2016). for the Asia Pacific in South Korea, for Latin America and
The UNCITRAL Secretariat has acknowledged that support the Caribbean in the Dominican Republic, and one for
Francophone Africa in the Republic of Guinea that excluded
Anglophone African countries, notably South Africa (Gov-
ernment of the Dominican Republic, 2019; Government of
14 These groups include the African Group, the group of Least Devel-
oping Countries, the African, Caribbean and Pacific Group, among the Republic of Guinea, 2019; Government of the Republic
other configurations. of Korea, 2018).
15 The authors studied particularly the UNCITRAL deliberations pertain-
ing to transport law, insolvency law, and secured transactions. The
reflections in this section are based on a presentation by the authors
at the Graduate Institute in Geneva.

10
 UNCITRAL Working Group III

3.1.2 The role of the Secretariat do so. Behind the scenes, the Chair works with the Secretar-
and Chair iat on various inter-sessional activities and consultations – a
The Secretariat has played an active and pivotal role. Invest- role that has become more influential and even less visible
ment scholar Anthea Roberts observes that all the arbitral during the Covid-19 era.
institutions »have an interest in maintaining the existence
and legitimacy of the system and preserving or improving 3.1.3 Virtual meetings during Covid-19
their market share« (Roberts, 2018, p. 419). Roberts notes The hybrid format dictated by the Covid-19-related re-
the particular institutional imperatives of UNCITRAL to justify strictions16 has triggered multiple additional questions: Is
its law‑making function and resources. The Secretariat has it possible to continue the negotiations in such a format?
actively framed the process from the start (Roberts, 2018, What will that mean for the inclusivity of the process,
p. 424). As noted above, the report it commissioned from particularly in terms of developing countries’ participation?
two active academic members of the arbitration community What adjustments to the working methods and pace will it
in 2016, and which informed the initial WGIII deliberations, require (Roberts & St.John, 2020)? While the virtual format
steered the outcomes towards an investment court or appeal did not fully impede participation, several delegations,
mechanism and an »opt-in« convention to streamline the and not solely from developing countries, faced technical
amendment of existing investment agreements along the problems in connecting and being well heard. Some States
lines of the Mauritius Convention discussed below (Potesta registered many more delegates than they usually send to
& Kaufmann-Kohler, 2016). Predictably, that is where Stage WGIII meetings, taking advantage of the low cost of online
3 of the WGIII process appears to be heading. participation.17 However, numbers do not necessarily lead
to effective participation in this virtual format, for example
The Working Group’s deliberations are primarily based on when officials are expected to continue their normal duties
the Secretariat’s notes and working papers and the ques- while taking part in the Working Group deliberations.
tions raised in these documents. If issues are not covered
by those documents, they stand little chance of being dis- The hybrid format has the additional drawback that country
cussed, much less being advanced in the reform discussions. delegations do not meet face to face during the negotiating
For example, the issue of exhaustion of local remedies was sessions, and do not have the chance to interact and build
listed on UNCITRAL’s website as one of the issues to be ad- personal connections among themselves. The latter often
dressed when discussing dispute prevention and mitigation, forms the basis for cooperation and potential coalition build-
along with mechanisms other than arbitration, procedures ing in negotiation processes. Developing countries often rely
to address frivolous claims and multiple proceedings, reflec- on these dynamics in order to enhance their voices in the
tive loss and counterclaims (Working Group III: Investor-State negotiations and their ability to reflect their collective in-
Dispute Settlement Reform | United Nations Commission On terests. These inter-State dynamics have endured a setback
International Trade Law, n.d.). Given that mechanisms other in virtual conditions, while the UNCITRAL Secretariat and
than arbitration, frivolous claims, and reflective loss were the Working Group Chair assumed more powerful roles as
each covered by a dedicated working paper prepared by interlocutors shaping the process, including through the
the Secretariat, the subjects drew the attention of Member outreach work done during the intersessional period.
States and discussions were undertaken on each subject
(Working Group III: Investor-State Dispute Settlement Re- The first two WGIII hybrid meetings held in October 2020
form | United Nations Commission On International Trade and February 2021 witnessed a strengthening of the role
Law, n.d.). However, there was no working paper on ex- played by the Secretariat. For example, during the 39th
haustion of local remedies, nor was it put on the agenda session in October 2020, the Chair proposed delegating to
of the meeting that discussed prevention and mitigation. the UNCITRAL Secretariat the drafting of solutions and legal
Consequently, it went undiscussed in the meeting and there language (such as model clauses or guidance) pertaining to
is no clarity as to whether and when it will be addressed. multiple issues under discussion (UNCITRAL, 2020d). This
caused discomfort among many delegations, who consid-
The Chair of WGIII also plays a directive role. The selection of ered that the talks were not sufficiently advanced to allow
the chair was contentious from the start. UNCITRAL makes the start of drafting and discussing text (Roberts & St.John,
decisions by consensus. After two days of deliberation there 2021). Such a move could lead the discussion to overly focus
was no still agreement on the initial selection of a chair. In on technical options without proper regard to how those
an extraordinary development, it was put to the vote. The options fit with the broader systemic considerations and
candidate from Canada prevailed over the nominee from reform objectives. Delegations could effectively »miss the
Singapore, who was appointed as Rapporteur (UNCITRAL, forest for the trees«, as noted by the International Institute
2019d, paras 11–15). Since then, the Canadian Chair has for Sustainable Development (Baliño, 2021b). The Russian
been routinely re-appointed at each meeting, as has the
Rapporteur. Publicly, the Chair conducts the meeting, puts
the agenda to the participants, decides who speaks for 16 The first hybrid meeting held was the 39th session of WGIII held dur-
how long, and presents the draft summary for approval. ing October 2020.
The meeting dynamics make it very difficult for States to 17 It has been reported that 134 States were registered to attend the
meeting, and 406 State officials, including participation by several
intervene and seek changes to the process or the summary States that had not attended previously, including Botswana, the
of the session, let alone for non-government observers to Maldives, Turkmenistan, and Zimbabwe.

11
 UNCITRAL Fiddles While Countries Burn

delegation took the floor on this issue to characterise such arbitrators with »a forum to exchange views, explore issues
a step as »excessive delegation of work to the UNCITRAL and options, test ideas, and make meaningful contributions
secretariat«.18 Russia’s representative objected that the Sec- to the ongoing discussions on possible reform of ISDS,
retariat should not be delegated authority to carry out work including in UNCITRAL’s Working Group III« (UNCITRAL,
on model clauses or to draft guidelines while significant 2018a, para. 9). Neither forum has formal standing with
differences of opinion persist among participating States. WGIII and they do not formally participate in its sessions, al-
However, the Working Group did not formally reject the though individuals associated with these forums participate
Chair’s proposal. in WGIII sessions and reference their links with the relevant
forum (UNCITRAL, 2018a, para. 9).
The second hybrid meeting saw further moves towards
work on textual suggestions for the reform options, encour- At the same time, the UNCITRAL Secretariat has explained
aged in particular by the Chair (Roberts & St.John, 2021). that, in exercising its discretion to seek assistance from
This entails an intensification of the process and additional outside experts, it contacts experts from both the Academ-
work during informal sessions held in between the formal ic Forum and the Practitioners Group, and it solicits their
Working Group meetings. Thus, contrary to expectations contributions when preparing the background documents
and despite the limitations that come with virtual engage- it presents to the WGIII (UNCITRAL, 2018c, footnote 1,
ment, the negotiating process in WGIII has accelerated, 2018e, 2018d, 2018f). Thus, background documents, which
rather than slowing down, during the pandemic period. This form the basis for discussions throughout the meetings of
creates the potential for challenges to the Working Group’s WGIII, are usually prepared with contributions from the two
transparency, inclusiveness, and effective participation of groups. The extent and nature of these contributions remain
delegations (Baliño, 2021b). These concerns tend to affect untransparent. While these notes and accompanying docu-
developing country participants more than their developed ments do not necessarily present comprehensive exhaustive
country counterparts, and consequently have implications coverage of the issues,20 they do carry weight in shaping the
for the legitimacy of the resulting outcomes (Paolo B. Yu III, way the discussions proceed.
2021). There were issues, for example, over the method by
which the draft workplan was initiated and prepared with The composition of the »Academic« and »Practitioners«
participation from a small number of mainly developed groups, together with the lack of clarity about the extent
countries. of their contribution to the Secretariat documents, have
raised concerns among public interest groups participating
These procedural issues have significant implications for the in WGIII. For example, the representative of Friends of the
underlying nature of the process and its direction, especially Earth-Europe, taking the floor during the Working Group
for ensuring that it remains effectively State-led and enough meeting in Vienna in November 2018, asked delegates
space is allocated to discuss the various structural and to »make sure that the research which influences the …
systemic issues concerning ISDS reform. Institutional chal- discussions is free of conflicts of interest...«, adding that
lenges leave many countries struggling to catch up, while they »understand that many active arbitrators and legal
the discussions are swiftly moving forward. That limits their counsels in arbitrations are members of [the] Academic
ability to effectively insert their voices and positions into Forum and there is no mechanism for disclosure of financial
the negotiations and to take a proactive role in shaping the interests [in the arbitration system]«.21 The Academic Forum
process. That, in turn, undermines confidence in the process subsequently published a disclosure register of its members’
and its potential outcomes. financial interests in ISDS, which showed almost half the
126 members who responded had played some formal role
3.1.4 Active contributions by in an investment arbitration as of February 2019 (Disclosure
practitioners and academics19 Register for ISDS Academic Forum, 2019).
UNCITRAL is a multi-stakeholder forum where consultations
with practitioners, especially legal experts, is a long-stand- Public interest groups constitute a small fraction of the over-
ing practice of the Secretariat. In the context of the WGIII all non-State participation in the meetings of WGIII. Some
mandate on ISDS, two groups of non-State actors have civil society groups who have long worked on ISDS had their
emerged and have had a significant influence on the pro- request for an invitation to attend the meetings rejected.22
cess. The »Academic Forum« involves academics active in It has also been observed that »the vast majority (85%) of
the field of ISDS, and aims to provide a space »to exchange the invited non-governmental organizations participating as
views, explore issues and options, test ideas and solutions, an observer in the first two sessions of WGIII are directly
and make a constructive contribution to the ongoing discus- or indirectly linked to the private arbitration industry (or
sions on possible reform of ISDS« (Academic Forum – CIDS,
n.d.; UNCITRAL, 2018a, para. 6). The »Practitioners Group«
20 It has been stated in the Secretariat’s notes that: »The topics dis-
provides lawyers active in the field of ISDS as counsel or cussed in the background documents are not intended to reflect a
comprehensive set of issues regarding ISDS that the Working Group
has discussed, or may yet wish to discuss. Additional concerns may
18 Intervention by the Russian delegation during the morning session of have to be addressed« (UNCITRAL, 2018b, para. 2).
WGIII 29th session on Friday 9th October, 2020. 21 Presentation by Friends of the Earth – Europe during UNCITRAL WG
19 This section is based on a paper by one of the authors, Mohamadieh III meeting, Vienna, 30 November 2018.
(2019) 22 Ibid, Bart-Jaap Verbeek

12
 UNCITRAL Working Group III

broader transnational business interests), with only 14% vestment tribunal and/or an appeal mechanism (UNCITRAL,
representing wider public interests«.23 2017a, paras 1–4). The proposed reform had three main
blocks: design of an International Tribunal for Investments;
The institutional dynamics within a forum selected to host design of an Appeal Mechanism; and a multilateral Opt-In
certain discussions or negotiations are important because Convention to extend those mechanisms to existing IIAs
they can carry structural bias towards or against effective (UNCITRAL, 2017a, para. 5). That study informed a ques-
participation by certain constituencies, whether States or tionnaire circulated and analysed by the Secretariat to which
non-State participants. The selection of the UNCITRAL WGI- only five capital‑exporting developed countries appear to
II, the manner in which its mandate has been implemented, have responded (UNCITRAL, 2017a, paras 8–67). This back-
and the active role of the Secretariat and Chair have clearly ground suggests a level of pretermination, at least by the
influenced the political dynamics of the deliberations. That Secretariat, from the start.
has affected which voices are dominant and heeded, which
questions are posed and from whose perspective, and how The second factor was intrinsic to UNCITRAL as a consensus
the discussion is linked to complementary reforms in other based international organisation (UNGA, 2017, para. 259).
forums. The mandate required the WGIII process to be govern-
ment-led, consensus‑based and fully transparent with
3.1.5 The mandate 24 high-level input from all governments. That should have
In 2017 the Commission conferred a broad mandate on enabled developing countries, as the predominant targets
Working Group III to consider possible reform of ISDS of ISDS arbitration, to ensure their concerns were at the top
(UNGA, 2016, para. 264).25 The UNCITRAL process acknowl- of the agenda and prevented institutional capture. However,
edged that current criticisms of the investment law regime »consensus« decisions are made in UNCITRAL when there
»reflect concerns about the democratic accountability and is no explicit objection. Delegations from the Global South
legitimacy of the regime as a whole«, and the main ob- privately report feeling under pressure from investors and
jective of undertaking reforms was »to restore confidence donors, including those that fund their presence at WGIII
in the overall system« (UNCITRAL, 2017b, 2017b, paras and regional meetings. As a result, they may not voice
45–47; UNGA, 2016, para. 243). The Working Group had their concerns or oppose proposals from the Chair, and not
broad discretion in discharging that mandate. Participating insist that their concerns are on the agenda and properly
non-governmental organisations urged UNCITRAL »to take recognised in the meeting record.26 It was not until the
a holistic view of the system, especially of whether it was discussion of the workplan to finalise the Working Group’s
achieving its purported objectives, when considering and deliberations in May 2021 that developing countries insisted
designing any ISDS reform.« (UNCITRAL, 2018b, para. 97). that issues they had raised were given more prominence,
It has done the opposite. with some success (UNCITRAL, 2021a, para. 16).

The Working Group’s deliberations were fettered from the However, the Commission also said that any solutions
start by three factors. First, the Secretariat had conducted were to take into account the ongoing work of relevant
a preliminary study in conjunction with two academics international organisations and be undertaken »with a view
from the Centre for International Dispute Settlement (CIDS) to allowing each State the choice of whether and to what
who were active participants in and supporters of ISDS. extent it wishes to adopt the relevant solution(s)« (UNGA,
Described as a preliminary analysis of the issues to be con- 2016, para. 264). This flexibility has opened the space for
sidered if ISDS reform was pursued at the international level capital-exporting countries to promote a mechanism that
and map the main options available, the study honed in on would allow them to opt for only minimal reforms to the
proposals to replace the existing IIAs with a permanent in- status quo.

The third factor was the narrow scope of ISDS reform that
23 Ibid. leaves the major causes of the legitimation crisis confronting
24 This account draws in part on (Kelsey, 2019a; Kelsey et al., 2019)
the investment regime intact. The Secretariat’s note to the
25 The mandate reads »The Commission entrusted Working Group
III with a broad mandate to work on the possible reform of inves- Commission on a possible reform agenda recognised that
tor-State dispute settlement. In line with the UNCITRAL process, recent »strong and growing criticisms« of ISDS »in various
Working Group III would, in discharging that mandate, ensure that parts of the world« raised diverse concerns. But it reduced
the deliberations, while benefiting from the widest possible breadth
of available expertise from all stakeholders, would be Govern- these concerns to a small subset of procedural matters
ment-led, with high-level input from Governments, consensus-based (UNCITRAL, 2017b, para. 11). The Commission’s discussions
and fully transparent. The Working Group would proceed to: (a) first, on the mandate called for the Working Group to »cover
identify and consider concerns regarding investor-State dispute set-
tlement; (b) second, consider whether reform was desirable in the the widest range of issues and possible solutions«, not ex-
light of any identified concerns; and (c) third, if the Working Group cluding any specific options. However, it considered the call
were to conclude that reform was desirable, develop any relevant to reform substantive aspects of IIAs, as well as procedural
solutions to be recommended to the Commission. The Commission
agreed that broad discretion should be left to the Working Group aspects of ISDS, was »less feasible« because it was more
in discharging its mandate, and that any solutions devised would be complex and controversial (UNCITRAL, 2017b, para. 257;
designed taking into account the ongoing work of relevant inter-
national organizations and with a view to allowing each State the
choice of whether and to what extent it wished to adopt the relevant
solution(s)«. 26 Private communications to authors

13
 UNCITRAL Fiddles While Countries Burn

UNGA, 2016, para. 14). That was interpreted in a way that exhaustion of local remedies, third-party participation,
excluded even the interface between substantive and pro- counterclaims and investor obligations, calculation of dam-
cedural matters from the WGIII agenda. ages and regulatory chill (UNCITRAL, 2018b, paras 26–40).
The Working Group agreed that these issues would be taken
Subsequent interventions from a number of participating into account as tools to address the identified concerns and
States contested that approach, pointing out that substan- would form a part of solutions that are to be developed by
tive rules on investor protection and ISDS are inseparable in WGIII (UNCITRAL, 2018b, para. 39).
key respects. For example, one year into the WGIII process
the Indonesian delegation tabled a paper that directly chal- However, most of these »other concerns« were deemed to
lenged the exclusive focus on procedure: be covered by the issues already identified, or more rele-
vant to the tools to be adopted in the solutions phase, or
»This paper aims to present Indonesia’s perspective on as guiding principles for developing reforms (Cotula et al.,
concerns regarding ISDS. The proposed ISDS reform 2019; UNCITRAL, 2019d, paras 26–40). Despite developing
discussions under UNCITRAL is [sic] built upon a sub- countries’ expectations that these concerns would never-
stance-procedure dichotomy. In light of this dichotomy, theless be specifically addressed in the context of the formal
Indonesia sees that it may actually defeat the purpose of agenda, they have largely been side‑lined. Most have not
having a meaningful ISDS mechanism as it is difficult to had designated discussion time, either in sessions or during
separate between substance and procedure. Indonesia is intersessional discussions.
of the view that procedural law is inherently substantive
and vice versa. Substantive and procedural provisions Phase 3, the quest for solutions to the four procedural
in the international investment agreements (IIAs) are concerns, is veering towards a non‑solution, with a menu of
intertwined in nature.« (UNCITRAL, 2018h) options for each and a framework instrument for their im-
plementation in existing and future investment agreements.
At the end of the WGIII process, and assuming they can
3.2 THE WORKING GROUP’S THREE agree on an outcome, States may be able to adopt (or not
PHASE PROCESS adopt) procedural reforms of their choice across a spectrum
that ranges from a barely‑altered status quo, to an appellate
The mandate set out a three-stage process. During Phase system grafted onto the current system, to a full-blown
1, participating States identified and considered concerns two-level multilateral investment court.
about ISDS. The broad wording of the mandate would have
allowed the Working Group to grapple seriously with the
entanglements between procedural issues and substantive 3.3 WGIII WORK PLAN AND ITS
investment rules, despite reservations about addressing sub- IMPLICATIONS
stantive rules directly. Instead, the discussion focused on a
number of matters relating to arbitral process and outcomes The Commission decides the allocation of time and resourc-
and arbitrators/decision-makers, which had been identified es for WGIII, based on a submission prepared by the Secre-
in the Secretariat’s background paper (UNCITRAL, 2017e, tariat and approved by the Working Group members. The
para. 20, 2018g, paras 22–24). Working Group’s proposal to the Commission for more time
and resources was not adopted in 2020, reflecting the lack
Phase 2 considered whether reform was desirable in light of consensus among Member States on the way forward.
of the concerns about procedure identified in Phase 1. Its Consideration of the future allocations was deferred to the
deliberations concentrated on three specific categories of Commission’s meeting in 2021.
concerns, pertaining to (1) consistency, coherence, predicta-
bility and correctness of arbitral decisions; (2) arbitrators and The Chair, Secretariat and Rapporteur initially developed
decision-makers; and (3) cost and duration of ISDS cases. the draft of a work plan to justify more resources and an
Third‑party funding was later added as a fourth concern. intensified schedule of meetings, with inputs from a small
This phase was completed in April 2019. The Working number of mainly developed countries. Delegations were
Group then began the final phase in which governments not prepared to adopt the proposed draft during the
were to develop any relevant solutions on these matters to Working Group’s meeting in February 2021. A dedicated
recommend to the Commission. two-day online session was then scheduled for May 2021
to finalise the work plan. The draft was shared with all
The UNCITRAL Secretariat’s scoping paper, issued at the delegations for review and comment in the run up to that
initial stages of WGIII deliberations in September 2017, also meeting, although feedback received from delegations was
recognised that States might wish to expand the Working not published by the Secretariat. Delegations’ responses to
Group’s consideration to »other relevant issues« (UNCI- the revised proposals at the May online session reflected the
TRAL, 2017c, para. 19). Especially when speaking to the links divergent positions presented in the Working Group over
between ISDS reform and development, several developing the previous three years and indicated that a consensus
States raised a number of further issues for consideration. outcome, especially one that addresses the principal issues
These included means other than arbitration to resolve for developing countries, was increasingly unlikely.
investment disputes and dispute prevention methods, the

14
 UNCITRAL Working Group III

The Chair described the work plan as »flexible«. Yet the That approach contrasted starkly with the allocation of time
identification of the topics for consideration and allocation and resources for reforms advocated by capital exporters. A
of time and resources to them, and modalities of formal and MIC and/or appellate body together accounted for close to
information meetings and drafting groups to undertake the one third of the formal Working Group days and the total
work, would inevitably circumscribe the possible outcomes. time. Very specific issues, such as Code of Conduct and the
That reality shaped the debate at the May 2021 meeting. Advisory Centre, had their own allocations, in addition to
During the second day of the meeting the Chair circulated a time already spent on them so far.
revised draft schedule of work for discussion, asking for any
additional comments within a week. The plan would then Developing countries had to invest significant negotiating
be revised and presented to the Commission to approve the capital in order to reclaim and defend a space in the work
allocation of time and resources. If there was no agreement plan for these »other concerns« or »cross-cutting issues«
among delegations, the document would be in the name of that they had been promised would form part of the on-
the Chair and Rapporteur. going deliberations. Several developing countries took the
floor to request that those issues be explicitly reflected in
The disagreements centred on the selection of topics, se- the work plan and given enough time and resources for
quencing of decisions, modalities, and timelines. discussion. For example, South Africa reminded the Work-
ing Group that »while there was agreement in WGIII that
The draft work plan was divided into 8 streams, each of these issues will be taken into account as the working group
which was allocated a proportion of the available WGIII develops tools to address various concerns, they are rarely
time and resources, split into 60 formal working days and being addressed in an integrated manner as discussions on
78 other meetings days or informal work days to complete reform options evolve« (WGIII – Resumed 40th Session – 5
specific tasks, including drafting groups. The original aim May – Floor, 2021). South Africa added that they »do not
was to conclude by 2025 (UNCITRAL, 2021b, paras 3–5). consider general considerations of these issues to be ade-
The revised draft proposed to extend that to 2026. quate without dedicated time for such discussion, both in
terms of time and resources«.
One of the 8 categories was vaguely entitled »ISDS Proce-
dural Reforms«. That was initially allocated around 18% of The Secretariat of the African Continental Free Trade Area
the overall meeting time, both formal and informal working pointed to genuine and long‑standing appetite for reform
days, or 20% of the formal working group time where deci- on these matters, which deserved dedicated, earmarked
sions could be taken. The Chair explained that the umbrella time for discussion. More broadly, Kenya stressed the need
term was expected to include consideration of new rules on for concerns of developing countries to be considered
frivolous claims, multiple proceedings, shareholder reflective seriously given that capital importers bear most of the chal-
loss claims, counterclaims, security for costs, third‑party lenging consequences of the ISDS regime and repeated the
funding and treaty interpretation, with the possible ad- call for reforms to address substantive as well as procedural
dition of procedural rules with respect to regulatory chill, concerns.
exhaustion of local remedies, denial of benefits, consolida-
tion, allocation of costs »and so forth« (UNCITRAL, 2021b, The Moroccan delegation, supported by Nigeria, raised
para. 9). In other words, the long list of »other concerns« or concerns that the tight time frame dedicated to these
»cross‑cutting issues« that developing countries had sought cross-cutting issues and damages could mean sacrificing
to get on the WGIII agenda were clustered together and not quality and the ability of officials to engage with capital.
granted specific time for deliberations. Morocco also questioned whether clustering these con-
cerns with multiple other issues as »ISDS Procedural Rules

Table 1:
Revised Proposed UNCITRAL WGIII Work Plan circulated by the UNCITRAL secretariat on 5 May 2021
Permanent Investment
ADR Mechanisms and

Appellate Mechanism
ISDS Procedural Rules

Multilateral Advisory
Dispute Prevention

Code of Conduct
Appointment of
Selection and

Multilateral

Multilateral
Instrument
Arbitrators

Reforms

Centre

Court

Total

Working Group
7 4 4 12 6 9 8 10 60
days

Other
8 7 4 13 7 12 12 15 78
Meetings days

Subtotal 15 11 8 25 13 21 20 25 138

15
 UNCITRAL Fiddles While Countries Burn

Reforms« was adequate given the complexity of each issue Capital‑exporting countries were most concerned about
(WGIII – Resumed 40th Session – 5 May – Floor, 2021). They the sequencing of an outcome. The paper to the May 2021
proposed that certain issues, such as exhaustion of remedies meeting suggested that reform options could be »approved
and assessment of damages, should be treated as separate in principle« as they were developed, then formally adopted
issues with their own time allocation, just as the selection as part of the proposed final text. The Chair said this would
and appointment of arbitrators was. These practical sugges- allow any necessary adjustments when the whole project is
tions were set aside by the Chair as something that could be complete, but not the reopening of discussions on agreed
considered by the Working Group later on. solutions (Audio Recordings, n.d.). The phrase »approved in
principle« was later replaced by the ambiguous notion of
The Chair defended the proposed approach, saying the plan »consideration by the Commission«.
looked at the tools rather than the concerns themselves, and
the category of »ISDS Procedural Rules Reforms« was broad The US, Australia, Japan, Israel, and Chile objected that
enough to encompass the »cross-cutting issues«. There concrete solutions should be agreed to as soon as pos-
was no sign that the Chair would use the flexibility that he sible, with an »early harvest of low hanging fruit«.28 The
said was available in the work plan to accede to developing Chair’s approach was likened to a »single undertaking«, a
countries’ demands that equivalent time and resources be term in trade talks that means that nothing is agreed until
allocated to examining and finding effective solutions for everything is agreed. Presumably, they anticipated that
these concerns. The revised version on day two allocated trade-offs would be demanded by supporters of the MIC in
three days of intersessional work to explore the topic in end-game bargaining. Conversely, the EU and Switzerland
detail, and one formal Working Group meeting at which were clearly concerned that allowing piecemeal agreement
delegations could give the Secretariat specific instructions on reforms would work against agreement on a more
on cross-cutting issues to consider. How this process would comprehensive consensus outcome. Russia repeated its call
feed into deliberation on solutions remained unclear. to focus on matters where agreement was feasible. These
disagreements among capital‑exporting countries suggest
The second major issue involved modalities, especially the there is little prospect that they will agree on an outcome,
78 informal meetings proposed to further discussions on even as a »menu« they can select from in a multilateral
specific reform options for consideration, as shown in table instrument.
1 above. These are supposed to be meetings where no
decisions are taken, yet some may involve drafting groups The »early harvest« approach is also problematic for devel-
or expert groups and are likely to be driven by proponents of oping countries, as it increases the risks that the issues that
particular positions. The Chair indicated that interpretation have been allocated the most time will be closed. Remaining
in these meetings will be decided case by case depending issues, especially those of concern to developing countries,
on the availability of funding. The reports for other delega- which might be more complex in nature, have not been
tions will be written by the meetings’ hosts. The Honduras discussed so far, and lack equivalent time and resources, will
delegation warned that developing countries’ participation remain unresolved. Such an approach would also prevent
in these informal processes might be replaced by a greater a holistic assessment of the interlinkages between the dif-
role for the Secretariat and Academic Forum. Which coun- ferent reform options, how they influence each other, and
tries offer to organise these sessions, with what agenda, the meaningfulness of the final package of adopted reform.
resources, interpretation, and time zones will therefore
influence whose voices are heard loudest and which options Unless there are significant changes following feedback
would be on the table. after the May 2021 meeting – the chances of which seem
remote – the real time to be dedicated to the long list of
The intensity of the meetings’ pace and overall work was »cross-cutting« issues will be minimal, on top of the lack of
a third major concern, as it could jeopardise the effective any dedicated time or resources to date. The process over
participation of many delegations, particularly developing the remaining four years at present offers no real prospect
countries. Many delegations said this intensity was unrealistic of any significant reforms, even within the narrow ambit of
for several reasons, including the limitations on the officials’ ISDS »procedure«.
time and competing workloads, technical difficulties that
undermine the right to be heard, availability of translation
and interpretation, need to brief and seek instructions from 3.4 DEVELOPMENT AS ARTICULATED
capital, and competing UNCITRAL priorities.27 Honduras IN WGIII
made the point that rushed and incomplete deliberations
in which delegations were unable effectively to participate In 2018, the UN Secretary General warned that IIAs often
would be perceived as lacking in legitimacy and transparen- have the unintended consequences of constraining regu-
cy (Audio Recordings, n.d.). latory space or imposing large financial penalties through
arbitral awards, and called for reform policies that align
agreements with countries’ national development strategies

27 Sri Lanka, Honduras, Bahrain, South Africa, AfCFTA, India, Morocco,

Argentina, Indonesia, Russia, Nigeria, Jamaica spoke to these issues. 28 A phrase used by the Israeli representative

16
 UNCITRAL Working Group III

(Office of the Secretary General, 2018, para. 62). Multiple that the Sustainable Development Goals (SDGs) and the full
submissions by Member States participating in WGIII have realisation of human rights must be at the centre of any
echoed that call (UNCITRAL, 2019b, para. 4). For example, discussions of international economic governance. Despite
Morocco’s stated objective is that ISDS reform leads to being circulated and addressed by non-government observ-
»responsible international investment that will promote ers at the meeting of WGIII in New York, the rapporteurs’
achievement of the Sustainable Development Goals« (UN- intervention has been ignored.
CITRAL, 2019b, para. 4). Indonesia’s submission emphasised
that the »ISDS reform process should reflect an effort to
strike a balance between the rights and obligations of all 3.5 STATE DYNAMICS IN UNCITRAL
relevant stakeholders, protecting investors and their rights WGIII
while preserving a State’s policy space and right to regulate
foreign investments in its territories« (UNCITRAL, 2018h, Anthea Roberts, an Australian academic and independent
para. 6). Mali’s submission reflected support for a »com- participant in that State’s delegation, has identified three
prehensive investor-State dispute settlement reform that main camps in the WGIII process. She categorises them as:
fosters sustainable development by, inter alia, safeguarding »incrementalists«, wishing to retain the existing dispute
the right of States that receive investments to establish resolution system with modest reforms to address specific
regulations aimed at promoting the development goals« concerns; »systemic reformers«, who advocate for institu-
(UNCITRAL, 2019l, para. 1). tional innovations, notably a multilateral investment court
and/or appellate body; and »paradigm shifters«, who reject
Similarly, South Africa stressed that »ISDS reform must be the utility of an international process for investor-initiated
consistent with broader sustainable development objec- disputes against States and favour a range of alternatives
tives« and that »[p]romoting and attracting investment (Roberts, 2018).
should not be an end in itself, but a step towards realising
the broader objectives of the SDGs and the human rights That is an accurate description of States’ positions, if WGIII
obligations« (UNCITRAL, 2019g). It cautioned countries to is treated as a neutral arena. Those categories look different
»not rush into assuming that ISDS policies must be a part when they are contextualised with reference to States’ sta-
of their investment agreements« and reminded countries tus as predominantly capital importers or exporters, or as
to »be mindful of the origins of ISDS« (UNCITRAL, 2019g). home states of foreign investors and target states for ISDS
South Africa emphasised that ISDS »was never seen as a cases, or as rule makers and rule takers in IIA negotiations.
substitute for domestic legal dispute settlement, but as a Viewed through those lenses, the power imbalances in the
stopgap in cases of extreme maladministration carried out Working Group process become a defining feature of its
by governments« (UNCITRAL, 2019g). The proper starting deliberations.
point or question »is whether ISDS mechanisms are desira-
ble or necessary in the first place« (UNCITRAL, 2019g). 3.5.1 Capital-exporters’ positions
The categories of »incrementalists« and »systemic reform-
South Korea’s submission to WGIII in July 2019 reflected ers« are principally capital‑exporting countries that are
on »diverse opinions from academia and civil society«, competing over the preferred form of procedural reposi-
including proposals from several South Korean civil society tioning, while leaving the substantive investment rules and
groups working towards »a more democratic and human fundamentals of investment arbitration intact.
rights-friendly investment policy, based on the United
Nations’ Sustainable Development Goals and Millennium The Russian delegation has been the most vigorous propo-
Development Goals« (UNCITRAL, 2019k). The Group of nent of the status quo on the floor of the WGIII meetings,
77, which is the largest intergovernmental grouping of de- despite the massive $50 billion award against it in the Yukos
veloping countries in the United Nations, presented WGIII arbitration (Munsterman & Meyer, 2020). Russia posited
with a collective statement that pointed to »the impact a number of working principles, including »preservation
of ISDS on the development process« (Edrees, 2018). The of the advantages of the current ISDS system, such as its
Group stressed the importance of sustainable development, decentralized nature, flexibility and neutrality«, its depolit-
fairness, transparency, respect for the right to regulate and icised nature, the need to take into account any consensus
the flexibility of States to protect legitimate public welfare on specific initiatives, and the potential effectiveness of
objectives, as well as the need to appropriately address the proposed solutions (UNCITRAL, 2019o). Because UNCITRAL
rights and responsibilities of foreign investors (Edrees, 2018). decisions need to comply with the principle of consensus,
Phase 3 should focus on those aspects of the four catego-
The United Nations rapporteurs on the rights to develop- ries of concern in which there was the least divergence of
ment, human rights and transnational corporations, indig- views. Some solutions to those issues should be soft‑law
enous peoples, safe drinking water and sanitation, foreign instruments; others would need to be enshrined in relevant
debt and international financial obligations, a democratic treaties. Russia strongly implied that it would block any
and equitable international order, and a sustainable environ- consensus on a MIC (UNCITRAL, 2019o, para. 5).
ment echoed this call for fundamental reform in a joint letter
to United Nations Member States participating in WGIII in A second core group of »incrementalists« has been led by
March 2019 (Deva et al., 2019). Their detailed letter stressed Japan, Chile and Israel, with others such as Mexico and Peru,
17
 UNCITRAL Fiddles While Countries Burn

whose positions broadly align with the US investment model 64). The implications of this for UNCITRAL WGIII are un-
BIT and its recent iteration in the Trans-Pacific Partnership clear. At the May 2021 Working Group Session to discuss
Agreement (TPP). They have promoted a suite of options the work plan, the US reverted to the »incrementalist«
that enables them to adopt limited procedural reforms to position (Audio Recordings, n.d.). The US may be content
»first generation agreements« (UNCITRAL, 2019m). with a menu of options that enables it to choose and vary
its preference for different countries. However, a decision by
The »systemic reformers« – essentially the EU, supported the US not to adopt any outcome of the WGIII process, or to
by Canada and Mauritius – have consistently framed their make extensive reservations, would have a major impact on
procedural »modernisations« in ways that support a per- ISDS reform, given the number of IIAs involving the US, and
manent standing body, the MIC, discussed further below the prevalence of US investors as ISDS claimants.
(UNCITRAL, 2017d).
3.5.2 Developing country positions
As a capital‑exporter, China has an interest in broadly main- The voice of the Global South has been comparatively
taining the current ISDS regime and wants to ensure the muted at the Working Group meetings. Developing coun-
arbitration institutions it has been developing continue to try participants have no single position. Most of those who
act as the seat of arbitration in disputes that involve Chinese have tabled papers and spoken in plenary sessions are un-
investors. While endorsing the development of multilateral happy with the direction the WGIII process has taken. Some
rules, and lending support to an appellate mechanism, China delegations that support fundamentally different models
has not endorsed the EU’s institutionalised MIC (UNCITRAL, from traditional ISDS – those which Roberts terms »para-
2019h). digm shifters«, such as India31 and Brazil – have rarely made
interventions, because the agenda has not given them space
The US, previously the dominant rule‑maker in international to advocate genuinely alternative models (Government of
investment law and at UNICTRAL, has been unusually re- Brazil, 2019).
served. Initially, the US delegation’s interventions seemed to
support a TPP-based approach,29 although it has not tabled South Africa sought to make the case for paradigm change.
any papers (Roberts, 2018, p. 430). The delegation’s contri- The substantial first-principles paper it presented in July 2019
butions became blander under the Trump Administration. opened with a challenge to the ideological presumption that
USTR Robert Lighthizer considered ISDS was an unjustified underpins IIAs: that the »free market, individual property
attack on US sovereignty,30 a position reflected in the US and free flow of capital« are means for development and
Mexico Canada Agreement that removed ISDS in relation to the State’s role is to preserve the institutional framework for
Canada and restricted it for Mexico (Agreement between redistributing resources to foreign corporations. Protecting
the United States of America, the United Mexican States, the human rights of people whose lives are disrupted and
and Canada 7/1/20 Text | United States Trade Representative, sometimes destroyed by foreign investors’ »development
n.d., n. X). projects« must be considered part of the government’s
legal obligations. Yet ISDS, as a legal mechanism located
The Biden administration has indicated that it does not outside the State, protects foreign investors while people
support ISDS either (Hearing to Consider the Nomination of and communities that are harmed have no clear pathways to
Katherine C. Tai, of the District of Columbia, to Be United claim justice and reparation. Local companies are victimised,
States Trade Representative, with the Rank of Ambassador too (UNCITRAL, 2019g, paras 5–10).
Extraordinary and Plenipotentiary, 2021, questions 4, 29,

29 For example, see the interventions of the US during the 34th ses-
South Africa positioned itself among those developing
sion of WGIII held between 27 November and 1st of December
2017, when the US stressed that tools could be negotiated in trea- countries that have withdrawn from bilateral investment
ties as a way to address challenges with ISDS such as duration and treaties that were impacting on their ability to serve the
cost (28.11.2017 at 16:47), available at (UNCITRAL Speakers Log,
public’s interests, in its case replacing them with domestic
n.d.); and when the US noted that in relation to each of the concerns
that had been raised in the WG meetings, individual governments legislation:
have and could address them through the content of their individual
treaty practice (30.11.2017 at 9:58), available at: (UNCITRAL Speakers
»[The] current international investment regime is det-
Log, n.d.). As another example, in its intervention during the WGIII
meeting in January 2020 when an appeal mechanism was discussed, rimental to public budgets, regulations in the public
the US delegate argued that greater control of the meaning of trea- interest, democracy and the rule of law … [M]ore and
ties can be achieved through tools existing in treaties (UNCITRAL
more countries are trying to address the ISDS asymmetry
Speakers Log, n.d.).
30 Eg. Speaking to the US Senate Finance Committee on 21 June 2017: by changing or exiting from the international investment
»It’s an issue that is troubling to me... on a variety of levels. It’s a bal- regime and are pushing for a binding United Nations
ancing act. Our investors have a right to have their property pro- Treaty on multinationals with respect to human rights.«
tected. On the other hand, there are, in my judgment, at least sov-
ereignty issues. I’m always troubled by the fact that non-elected, (UNCITRAL, 2019g, para. 13)
non-Americans can make a decision that a United States law is in-
valid. This, as a matter of principle, I find that offensive. That’s what
can happen very often in this area... The most troubling aspect of 31 India made several interventions in the May 2021 session, expressing
all this is that it attacks our sovereignty.« Quoted in (Public Citizen, concerns about process and the need for consensus (Audio Record-
2018. ings, n.d.).

18
 UNCITRAL Working Group III

Consequently, they believe that procedural reform cannot Morocco is another developing country that regularly takes
be divorced from substantive concerns that are located in the floor, seeking to advance the framework of its new mod-
the wider context of sustainable development: el BIT. In March 2019, Morocco called for consensus-based,
comprehensive multilateral reform that would help achieve
»Countries need a broad, pragmatic, balanced, and the Sustainable Development Goals, and that would address
comprehensive mechanism that takes into account a the concerns of all, including developing countries suffering
complexity of cross-border investments and is flexible the negative consequences of the IIA regime. The result
enough to deal with a variety of disputes involving should achieve »a fair and equitable ISDS system« that all
diverse and potentially conflicting rights, interests and countries, in particular developing countries, could rely on.
obligations.« (UNCITRAL, 2019g, para. 26) A key objective for Morocco was to protect the jurisdiction
of national courts from external review. Hence it proposed:
Reform discussions on ISDS must »consider an expansive
range of reform proposals« that provide a real alternative to »A prohibition on submitting disputes to arbitration if
ISDS. The submission identified six fundamental principles the competent national courts have already delivered
for reform: protection of fundamental and human rights; a final judgment in respect of the dispute that has the
policy space to regulate; a level playing field of rights and force of res judicata … .« (UNCITRAL, 2019b, para. 14)
obligations; inclusivity; respect for the rule of law; and pro-
tection of responsible investment (UNCITRAL, 2019g, paras Morocco also called for a reformed ISDS regime that allows
29–35). States to bring a case against the foreign investor for violat-
ing national legislation or international treaties and prevent
Other developing country delegations also sought to shape investors from invoking investment treaty provisions »in
a very different agenda for WGIII. Indonesia has exited old- such a manner as to impose an obligation on the State that
style bilateral investment treaties and promotes a new style would render it unable to amend its own laws and national
of investment agreement. In setting out options for reform, legislation.« (UNCITRAL, 2019b, para. Annex 2, 9)
Indonesia adopted a nuanced approach to ISDS:
Thailand’s position seemed more pragmatic. Acknowl-
»Excluding ISDS provisions might not be a wise approach, edging there is no one-size-fits-all solution, and that new
particularly if the main intention is to attract foreign solutions could bring new problems, Thailand sought the
investments. Therefore, Indonesia rather considers a consideration of all possible options that listened to all
more balanced approach in the context of modernizing views, built on existing efforts in UNCTAD and ICSID, and
its investment treaty template to include more safe- were adaptable to combine with future work and options
guards in both substantive and ISDS provisions. Some (UNCITRAL, 2019c, para. 3). Even then, Thailand observed
safeguards that Indonesia considers important include that a »solution which is not widely accepted by the ma-
the definition of investment (asset-based definition with jority of States will be difficult to sustain in the long term«
certain exceptions and limitations), covered investment (UNCITRAL, 2019c, para. 9). In calling for the development
(requiring an admission text in accordance with domestic of model clauses, Thailand echoed Indonesia’s point and
laws), articles on right to regulate, measures against cor- argued that the Working Group:
ruption, corporate social responsibility (CSR), exclusion
of claims, general and security exceptions, balance of »… should keep an open mind on possible reforms on
payments (BoP), prudential measures, and public debt.« substantive issues. Substantive and procedural aspects
(UNCITRAL, 2018h, para. 16) of the ISDS system are often closely intertwined, and
reforms in both areas can go hand-in-hand.« (UNGA,
While a number of these items are included in recent »mod- 2016, para. 259)
ernised« agreements, usually in weak or pro-investor forms,
Indonesia encouraged an all-inclusive reform process that Other developing countries have made statements that
balances competing rights and obligations: advocate a similar holistic approach to ISDS reform and seek
to balance the interests of investors, States and affected
»The ISDS reform process may benefit from the inclu- communities in the international investment regime. Overall,
sion of all relevant stakeholders, public and private, however, interventions from the Global South have been
representing business and non-business interests in the less frequent and have remained marginalised by the nar-
deliberative process to ensure balance and create out- ratives and proposals from the capital‑exporting countries
comes that can be broadly accepted by states, investors that have dominated the WGIII deliberations.
and third parties alike. The ISDS reform process should
reflect an effort to strike a balance between the rights
and obligations of all relevant stakeholders, protecting
investors and their investments while preserving a state’s
policy space and right to regulate foreign investments in
its territories.« (UNCITRAL, 2018h, paras 5–6)

19
 UNCITRAL Fiddles While Countries Burn

ASSESSING THE PROPOSED SOLUTIONS

The further the WGIII reform exercise has advanced and sometimes as a stand-alone mechanism for resolving
through its three stages, the more remote it has become disputes.32
from assessing proposals against the first principles that
informed its mandate. It also faces the reality that there is More comprehensive approaches to discussing alternative
no consensus on the specifics of reform. The quest for a means to dispute settlement in WGIII could weave in
»successful solution« has become a pragmatic exercise in broader options, such as the role of domestic courts and
which the underlying issues, and even the narrow objectives State-to-State mechanisms. Several participating States and
originally adopted by WGIII, risk being lost from sight within non-State observers active in WGIII have spoken of, and
an overriding framework that resolves nothing. provided submissions on, these mechanisms. Furthermore,
recent treaty practice, monitored in UNCTAD’s research,
When Anthea Roberts assessed the prospects for com- shows that several States have chosen to move away from
promise across the three categories of »incrementalists«, arbitration or to limit reliance on arbitration in their invest-
»strategic reformers« and »paradigm shifters«, and the po- ment treaties (UNCTAD, 2019). Civil society groups partic-
sitioning of »yet‑to‑declare« States in 2018 she concluded ipating in WGIII have conceptualised »means other than
there was no prospect of consensus on a single solution, arbitration to resolve investment disputes« to encompass
even in the limited form that operates in UNCITRAL (Rob- alternatives to ISDS, such as domestic courts, ombudsmen,
erts, 2018, p. 419). Roberts predicted a pluralist outcome, alternative dispute resolution (ADR) and State-to-State
where multiple approaches co-exist and allow States to dispute settlement (International Institute for Environment
pick and choose from a suite of reform options in a single and Development et al., 2019). They emphasised the need
instrument that they can adopt or not, an outcome that to consider limiting the causes of action that can be pursued
closely resembles the outcome proposed in the paper the through ISDS (e.g., to denial of justice) and rules on referral
Secretariat commissioned from CIDS in 2016 (Roberts, 2018, to other courts and/or expert bodies, and on staying ISDS
p. 431). disputes while related proceedings are pending (Internation-
al Institute for Environment and Development et al., 2019).
In Part III, this paper critically examines the issues that arise
from three of the Working Group’s proposed options – al- The role of domestic courts and exhaustion of local reme-
ternative dispute resolution, an appeal mechanism, and a dies were captured in a preliminary note produced by the
MIC – and the legal frameworks being proposed to deliver UNCITRAL Secretariat on possible options for reform (UNCI-
them. TRAL, 2019i). This preliminary note presents an overview of
all possible reforms proposed by participating States during
the deliberations of WGIII and in their submissions. State-to-
4.1 NARROW CONCEPTUALISATION OF State mechanisms were discussed with reference to prelim-
ALTERNATIVE DISPUTE SETTLEMENT inary consideration of issues in a dispute, including through
WITH AN EMPHASIS ON MEDIATION technical consultations, decisions taken by the respective
State authorities, setting up a joint review committee by the
The notion of »alternative means to dispute settlement« has treaty parties, and establishing a review or appellate mech-
been approached in the context of WGIII working papers anism or a State-to-State body to which an application could
with a focus on mediation and conciliation (UNCITRAL, be made if the claim could not be settled at the technical
2020a). For example, the UNCITRAL Secretariat’s paper level in a given time period (UNCITRAL, 2019i, 2019j).
»Dispute prevention and mitigation – Means of alternative
dispute resolution« presents mediation and conciliation as
»an alternative to both investment treaty arbitration and
resort to national courts« (UNCITRAL, 2020a). There is an 32 Six hundred and twenty-seven out of the 2,577 IIAs mapped by
increasing number of references to these methods in recent UNCTAD include either voluntary or compulsory conciliation and
mediation. See Mapping of IIA Content | International Invest-
investment treaties, mostly as a precondition to arbitration ment Agreements Navigator | UNCTAD Investment Policy Hub, n.d.
See also Nitschke, 2020.

20
 Assessing the Proposed Solutions

Nearly two years later »means of dispute resolution al- rights, developmental and public policy considerations, and
ternative to arbitration« has barely referenced the role of the role of domestic legal processes. Part of the problem
domestic courts and State-to-State dispute settlement. That of the current ISDS regime has been its failure to attend to
has the effect of restricting ISDS reform to changes within these specificities.
the existing system of investment dispute settlement and
diverting the discussion away from a more fundamental While mediation is often characterised as a »win-win«
rethink of the system. situation, whether a party effectively »wins« as a result
of mediation depends on what it could potentially have
achieved through other means of dealing with the dispute.
4.2 MEDIATION AND ITS LIMITATIONS The encouragement of early settlements through mediation
FROM A DEVELOPMENTAL AND POLICY or other confidential means risks increasing the number of
SPACE PERSPECTIVE »wins« that investors accrue without having to make their
case, especially if there is a significant imbalance between
The relevance of mediation as a choice for dispute settle- the economic power of the investor and that of the host
ment, particularly from the point of view of investors, has State. This could exacerbate the current challenges resulting
been bolstered by the addition of the United Nations Con- from the existing model of ISDS, and potentially intensify
vention on International Settlement Agreements Resulting the chilling effect on the regulatory process. Resorting
from Mediation (i.e., the Singapore Convention) that focuses to mediation and conciliation as an option for reforming
on the enforcement of international settlements that result ISDS would need to effectively address problems of the
from mediation (The Convention Text, n.d.). The Singapore lack of transparency, imbalance between the parties, and
Convention is the product of negotiations undertaken in selection of mediators and conciliators, as well as potential
UNCITRAL Working Group II (UNGA, 2017, paras 238–239, implications for the regulatory and public policy processes.
2019). It provides a framework and a set of multilateral Otherwise, mediation could perpetuate the same pitfalls of
standards to facilitate cross-border enforcement of settle- ISDS based on arbitration.
ments emerging from mediation, including between an in-
vestor and a host government, in a similar way to which the
New York Convention on the Recognition and Enforcement 4.3 AN APPEAL SYSTEM AND THE
of Foreign Arbitral Awards does in the case of international DANGERS OF ENTRENCHING BAD LAW
arbitration. If a country joins the Singapore Convention, it
makes it easier for investors to enforce settlements to which An appeal mechanism is one of the prominent reform op-
the country is a party in other jurisdictions that are also par- tions being discussed in WGIII. A note by UNCITRAL’s Secre-
ties to the Convention (The Convention Text, n.d., art. 3).33 tariat referred to multiple options for providing recourse to
The Convention focuses on the enforcement of agreements appeal (UNCITRAL, 2019n). One option is a model appellate
that result from mediation. mechanism that could be used in three main ways: for in-
clusion in investment treaties by Parties, for use on an ad
Confidentiality is often considered an advantage and hoc basis by disputing parties, or as a facility made available
prerequisite in mediation, particularly considering the rep- under the rules of institutions handling ISDS cases. Another
utational costs known to be associated with ISDS disputes is providing recourse to appeal as part of a permanent mul-
(Titi & Fach Gómez, 2019, pp. 35–36). Increasing reliance tilateral appellate body, which could either complement the
on confidentiality-centred mediation within the context of existing arbitration regime, or constitute the second tier in
ISDS would entrench the same problems that the reform a multilateral investment court. Discussions in the Working
sought by WGIII system aims to address. Furthermore, Group do not show a majority is inclined towards any of
the role of mediation as an alternative to arbitration could these options, and significant variance among participating
have different implications depending on the nature of countries persists.
the disputed issues. For example, there is ample difference
between a dispute concerning the valuation of a direct Among the issues linked to the establishment of an appeals
uncompensated expropriation and a dispute arising out of system are: the nature and scope (particularly whether it
action taken by a government for environmental, human would cover errors of law and fact, as well as calculation of
rights, or other public interest objectives (Güven, 2020). The damages), the standard of review that would be adopted,
latter raises important issues pertaining to affected-party the relation between the first instance and appeals, how
investment treaty parties relate to the appeals process, the
effect of the appeal (i.e whether it would bind parties to
33 See Art. 3 General Principles of the Singapore Convention, which the dispute or also bind subsequent arbitral tribunals), en-
provides, ‘Each Party to the Convention shall enforce a settlement forcement of the appeal decisions, financing of an appeals
agreement in accordance with its rules of procedure and under the mechanism, and the impact on cost and duration of the
conditions laid down in this Convention.’ Accordingly, each party to
the Convention undertakes the commitment to enforce a settlement dispute settlement process. Depending on rules pertaining
agreement covered under the Convention. Reservations provided un- to standing, an appeals system could also have implications
der Art. 8.1 of the Convention are narrow, allowing a State Party to for affected-party rights, including possible access for
reserve its right to not have to enforce a settlement between its gov-
ernment and an investor and to take a reservation based on reciproc- non-disputing parties.
ity. See Ng (2019) and Ponniya et al. (2019).

21
 UNCITRAL Fiddles While Countries Burn

During the 40th session of the Working Group, multiple ment law to other bodies of law. In such circumstances, an
issues of a systemic nature relating to appeals were raised. appeal mechanism might lead to a more consistent body
These included the potential impact that an appellate mech- of law, but one that reflects severe imbalances between
anism might have on the development of investment law; competing rights and that potentially restricts the right
how to avoid systematic appeals or abusive use of an ap- to regulate. Consequently, the objectives of »consistency,
pellate process through frivolous appeals; the increased coherence and predictability« could end up trumping other
cost and duration of ISDS as a result of institutionalising an priorities, including the States’ obligations pertaining to hu-
appeal mechanism; and how an appeal mechanism would man rights and the environment, as well as the host State’s
interact with the legal framework for setting aside awards development objectives.35 So long as WGIII focuses only on
which is the role of domestic courts (UNCITRAL, 2021a, procedure, it is difficult to keep the consequences of these
para. 23). Design features also have systemic implications. potential changes for substantive law in view.
For instance, an appeal that is treaty‑ and case‑specific has
very different consequences from a multilateral appellate Unpacking, understanding and potentially addressing these
body that applies to different treaties. Whether a decision systemic issues must be an integral part of any such dis-
by an appellate body would bind the disputing parties only cussions. Yet, Working Group III has moved to considering
or have broader effects would also have critical, and poten- textual suggestions pertaining to different appeal options
tially negative, long-term consequences for the substance without convergence on the desirability of an appellate
of international investment law. The proposal for a menu mechanism, let alone a preferred type. So long as these
of options that would allow States to adopt different ap- matters are not decided, it is not possible to discuss the sys-
proaches to jurisdiction, procedure and institutional forms temic implications that could potentially arise from adding
for appeals, potentially varying for each of their agreements, an appeal level to ISDS.
would compound these problems.

As is well documented, the underlying normative framework 4.4 A MULTILATERAL INVESTMENT

for investment promotion and protection, currently includ- COURT
ing over 3,200 investment agreements, is fragmented and
in many instances imbalanced. That framework focuses on It is well documented that one of the main reasons why
investor protection, fails to address investor responsibilities, ­UNCITRAL emerged as a space for discussions on ISDS re-
and lacks effective consideration of issues pertaining to sov- form was the European Union’s desire to find a multilateral
ereign regulatory space. Increasingly, significant differences arena in which to pursue the idea of a multilateral invest-
are also emerging between old treaties and some newer ment court as an alternative to ad hoc ISDS (Langford et
ones that make reference to the right to regulate, sustain- al., 2020, p. 172; UNCITRAL, 2019a). Although the proposal
able development, human rights, and investor obligations, for a MIC has been directly discussed in only one of the
albeit weakly. These divergences might widen in the future. WGIII sessions, and then only briefly, it has been subtly but
At the same time, there is limited indication from States that systematically embedded throughout the different sessions
they intend to systematically get rid of old treaties. and issues under discussion (UNCITRAL, 2020c). For exam-
ple, the drafting of options for reform, such as an appellate
The WTO Appellate Body is often used for comparative mechanism, includes model texts that could operate in
purposes when discussing an appeal mechanism for ISDS. the context of a standing body. This way of weaving the
Yet, under the WTO dispute settlement system both first option of the MIC throughout the discussions on various
instance panels and the Appellate Body apply an underly- items on the Working Group agenda does not allow the
ing body of law that is uniform for all concerned States. necessary space to examine the systemic implications of a
Developmental considerations are built into the design of new multilateral body that is dedicated to serving investors
the treaties and mechanisms for undertaking commitments bringing disputes against States. This technique has provid-
under different WTO treaties, although the extent to which ed a practical way for the EU to advance discussions on the
they do so is inadequate. MIC, while limiting the space for those who oppose the MIC
to raise systemic issues and explicitly record their opposition
Given this fragmentation and the lack of any pretence of to the idea.
balance in the underlying normative framework, developing
more stable investment law through means of an appeal
mechanism would not necessarily produce positive reform.
A centralised appeal system that institutes the doctrine of
precedent would require the same approach in cases with 34 The delegate representing the United States made a similar point
similar scenarios and facts. That could in effect take the role during the discussion on appellate mechanism held at the WGIII 38th
session held between 20 and 24 January in Vienna (Audio Record-
of managing the meaning of treaties out of the hands of
ings, n.d.).
States Parties and put it in the hands of the appeal insti- 35 See Johnson & Sachs (2018), where it is argued that minimizing the
tution.34 This might make it harder to align this normative risk of inconsistency of ISDS arbitral decisions with broader societal
framework with sustainable development. It could even objectives and commitments, including the Sustainable Development
Goals (SDGs), international treaty commitments, or other areas of
consolidate an imbalanced body of investment law and domestic or international law requires reversion to state-to-state dis-
create more challenges in organising the relation of invest- pute settlement.

22
 Assessing the Proposed Solutions

The proposed MIC retains major aspects of the current court could create new law or set precedent that favours the
traditional ISDS system: it would be an exclusive system for interests of investors.
investors to sue the host State in relation to any measure
or public policy issue that is considered to undermine their For example, if the court addressed the relation of invest-
investments and that have not been carved out from the ment law to other bodies of law, such as human rights law,
scope of the applicable IIA.36 The EU proposed that »[t]he there would be fears that its jurisprudence would look to
non-disputing party to the treaty in question should also find coherence through an investment lens at the expense
be able to participate in the dispute« and »[i]t should also of a human rights lens. The standard of review to be applied
be provided that third parties, for example representatives in cases dealing with human rights or other public interest
of communities affected by the dispute, be permitted to issues, and the degree of deference that the international
participate in investment disputes« (UNCITRAL, 2019a, adjudicator grants to national decision-makers when dealing
2019a, para. 29). However, the proposal does not clarify with such cases, will affect the extent to which it upholds
whether parties affected by cases brought to the court, such human rights or the right to regulate (Henckels, 2013; Vadi
as communities affected in a case that deals with natural & Gruszczynski, 2013). The decisions of a MIC composed of
resources or land to which indigenous communities have investment experts mandated to apply investment law could
rights, would automatically have standing. Furthermore, it give the upper hand to investment protection over human
is not clear how the proposal would address the right of the rights and public interests.
host States to bring counterclaims against the investor, nor
whether host States and communities impacted on by the The EU’s proposal also leaves unclear or unaddressed several
investment could bring direct claims against investors, and if issues of great relevance to achieving meaningful reform of
so, in which circumstances (e.g. An Open Letter To The Chair ISDS that is aligned with developmental considerations.38
Of UNCITRAL Working Group III And To All Participating For example, the negotiating directive to the European
States Concerning The Reform Of The Investor State Dispute Commission and the EU’s submission to WGIII do not ad-
Settlement: Addressing The Asymmetry Of ISDS, 2019). dress the relationship of the proposed body to the system of
domestic remedies, including the possibilities for exhaustion
4.4.1 The MIC proposal and its of local remedies before proceeding to a multilateral court.
limitations Consequently, the new body could continue to marginalise
The proposed court could entrench several of the major domestic legal systems. The directive and submission do not
flaws in the current ISDS system. The EU’s proposal sug- clarify, either, the relationship of the proposed body to the
gests that the Court could be funded through States parties’ existing ISDS system based on ad hoc tribunals, although
financial contributions and/or user fees, while noting that general statements by the European Commission have not-
»care should be taken not to tie these fees directly to the re- ed that »[t]he ultimate aim is to establish a single permanent
muneration of the adjudicators« (UNCITRAL, 2019a). It is an body to decide investment disputes, thus moving away from
open question as to whether States would be willing to fund the ad hoc system of investor to state dispute settlement
an institution that only gives benefits (access to adjudication (ISDS) which is currently included in around 3200 investment
of claims) to private investors. Alternatively, financing the treaties in force today ...«.39
Court through users’ fees could raise possibilities of conflict
of interest, whereby the court’s adjudicators and possibly These issues are closely intertwined with the potential for
its secretariat might be inclined to promote the bringing of attaining reforms that are »balanced«, fulfil the principle
ISDS disputes in order to sustain the institution. An institu- of »fairness«, and address developmental considerations.
tionalised court designed for foreign investors might also They are also essential for substantive reforms that respect
tend towards increasing its own power by ruling expansively the »right to regulate« and are aligned with the sustainable
on its jurisdiction and in favour of the claimants, making the development agenda. Yet, the current proposal for the MIC
investor bias inherent in today’s private arbitration system is not geared towards redressing core imbalances of the
even more intense in such a standing body (Sornarajah, ISDS system, such as changing the fact that only investors
2016).37 can bring claims. Rather, it has the potential to inflate the
market available for arbitration cases without correcting the
The EU’s submission to WGIII also noted that a standing underlying challenges of the existing system.
mechanism would »be better positioned to gradually devel-
op a more coherent approach to the relationship between
investment law and other domains, in particular domestic 38 This is based on the information provided in UNCITRAL, 2019a, Eu-
ropean Commission & Government of Canada, 2016 , and European
law and other fields of international law« (Sornarajah,
Commission, 2017.
2016, p. 10). This same point could be raised as a reason for 39 According to statements by the European Commission: »[t]he ulti-
caution regarding the idea of a MIC, especially that such a mate aim is to establish a single permanent body to decide invest-
ment disputes, thus moving away from the ad hoc system of inves-
tor to state dispute settlement (ISDS) which is currently included in
around 3200 investment treaties in force today ... [It] would be open
36 This section is partly based on Mohamadieh (2019). for all interested countries to join and would adjudicate disputes un-
37 See also: Dreyfuss (2016), where the author notes that »An Invest- der both future and existing investment treaties. For EU level agree-
ment Court may be similarly prone to resolve disputes in ways that ments, it would also replace the bilateral Investment Court Systems
aggrandize its role, which is to say, to reach decisions that will induce included in EU level agreements with FTA partners« (European Com-
investors to assert more claims«. mission & Government of Canada, 2016).

23
 UNCITRAL Fiddles While Countries Burn

While a standing body could address certain challenges »Taking into account the issues that are likely to arise,
emanating from the current ad hoc manner of establishing the MIC proposal seems aimed at keeping many of the
arbitral tribunals, which often leads to conflicts of interest key features intact, effectively locking in ISDS. Overall,
and a distorted set of incentives among the arbitrators, its the MIC proposal amounts to cosmetic reforms, not
potential to entrench multiple aspects of the problems with touching on the fundamental problems of the system.
ISDS seriously outweighs the potential benefits. Moreover, Effectively, the MIC seems to preserve and confirm the
the presumed benefits could be achieved through alterna- ISDS system. An investment court would exacerbate and
tive and often much simpler ways of reform, without the entrench this unbalanced and harmful system.« (UNCI-
potential challenges of building a multilateral institution TRAL, 2019g, para. 103)
that is geared towards providing a forum for the exclusive
use of one category of economic players. Several of these South Africa therefore called for the Working Group’s de-
alternatives, which have been raised and are practiced by liberations to move beyond ISDS and a court system to a
participating States, are discussed in Part IV. dialogue that addresses deeper substantive concerns about
investment rules, within a wider context that explores vari-
4.4.2 Developing countries’ positions on ous alternatives and refers to other instruments, such as the
the MIC and appellate body UN binding treaty on business and human rights.
In its detailed engagement with the arguments for a MIC
and appellate body, the South African delegation concluded Morocco has offered a different developing country per-
it was possible for such an institution to address the cor- spective. Morocco rejected an ad hoc appellate tribunal,
rectness of decisions, but it would fail to meet the stated saying it would encourage the proliferation of appeal courts
goal of producing coherence, which is to contribute to the and further fragment the system, and supported the idea of
predictability and legal certainty of an emergent jurispru- a neutral, standing appellate mechanism as a way to achieve
dence (UNCITRAL, 2019g, para. 77). South Africa’s critique consistency in interpretation, greater predictability and rec-
addressed both the practical problems with the MIC (such tification of errors in awards (UNCITRAL, 2019b, para. 4).
as the grounds for appeal, whether it would determine facts However, the scope of Morocco’s proposed reforms and its
anew or remand a dispute back to the original tribunal, vision for a standing appellate court go much further than
interim and interlocutory relief, working procedures, time the EU’s MIC.
limits, etc) and broader problems of the legitimacy of such
a body (including where it would be headquartered, ap- In a submission in 2019, Morocco recorded its concerns
pointment processes, diversity, judicial independence while about the »legal imbalance« and »substantive imbalance« in
maintaining state’s roles, enforcement, and relationships to ISDS. »Legal imbalances« include the investor’s monopoly on
domestic courts). recourse to arbitration, when the State has no such power,
and the investor’s ability to abuse that access as a bargaining
While a number of other countries also raised these issues, chip to pressure governments – regulatory chill. »Substantive
South Africa went further, observing that institutional imbalances« include the one-sided rules that grant investors
improvements would not solve substantive inequities and »absolute protection through a set of obligations imposed
imbalances in the system (UNCITRAL, 2019g, paras 77–80). on the host State«, while the foreign investor’s obligations
The MIC, or any other appellate body, might instead ex- are »modest or completely non-existent«. Other imbalances
pand the scope of investor guarantees in a more permanent include broad interpretation of terms by »arbitral tribunals
way (UNCITRAL, 2019g, para. 81). Restrictions on access that lack the guarantees, accountability and transparency
for investors to the system were needed as safeguards to of national judicial systems« and definitions of unclear
prevent regulatory chill. Domestic courts had to be involved phrases like »legitimate expectations of investors« that may
on matters of national law, not just for proper guidance but conflict with »the country’s political outlook or encroaches
to avoid agreements being interpreted in ways that are in- on its sovereign right to amend its own national legislation,
compatible with national laws, including constitutions. The particularly in the areas of health, the environment, security
consequences of the proposal for pressing policy challenges and cultural diversity« (UNCITRAL, 2019b, paras 4, Annex II).
such as climate change, data protection, and intellectual
property rights reform would be very real, especially for the Morocco has also emphasised the need for deference to na-
Global South: tional courts. It would exclude final judgements of national
courts from an appellate body’s jurisdiction, whether the
»A MIC, in contrast with domestic law systems, would dispute relates to investment contracts or the application of
give investors possibilities to claim compensation. This national law. While the applicable law of an appeal should
would make government reforms prohibitively expen- be both international law and the national law of the host
sive, cause regulatory chill, and thus impede crucial state, the investment tribunal should be bound by interpre-
measures.« (UNCITRAL, 2019g, paras 99–102) tations of domestic law by the national courts or agreed
upon by the parties. Conversely, despite the obvious vari-
The paper concluded that proceeding with the MIC would ations in the legal provisions and applicable law, Morocco
impede, rather than instigate, real reform: considered that final awards should constitute precedents
and case law for similar issues raised in BITs.

24
 Assessing the Proposed Solutions

The seemingly deliberate omission of the MIC as a stand- The WTO provides a particularly pertinent lesson on the
alone item on the WGIII’s agenda until the final stage work appointment and selection of adjudicators, which was dis-
plan means that the interventions from these and other cussed at the January 2020 session of the Working Group
developing countries have never been properly explored. (UNCITRAL, 2020c). Developing countries have consistently
stressed the need for diversity of adjudicators, whatever
adjudication process is used. Diversity is not just about
4.5 ADJUDICATORS, DIVERSITY geography or gender, nor is the goal simply to increase the
AND REVIEWS 40 opportunities of people from under-represented countries
for their personal advancement or national pride. Develop-
Those who promote the MIC and an appellate mechanism ment diversity is a pre-requisite to achieving justice, ensuring
commonly cite the World Trade Organization’s (WTO) two- that adjudicators can interpret core legal concepts through
tiered system of ad hoc panels and a standing Appellate a development lens and that appropriate understandings of
Body as a model. The analogy is flawed in several ways and law and culture are brought to the matters under dispute,
ignores numerous problems with the WTO’s dispute system, something rarely seen to date. Those insights are, in turn, es-
especially from a development perspective. sential to improving the quality and legitimacy of decisions.

For a start, the history, nature and content of multilateral Achieving development diversity therefore requires much
trade and bilateral investment agreements are very differ- more than ensuring independence, impartiality, qualifica-
ent. The WTO is the exclusive domain of sovereign states tions, and experience, and adopting a code of conduct,
who enter into reciprocal bargains that only they can en- which have dominated the WGIII discussion of arbitral
force, whereas private foreign investors are the recipients appointments. Unless diversity in its fullest sense is actively
of substantive and directly enforceable rights in investment embraced, the dominance of a slightly broader arbitral elite
treaties. The WTO dispute settlement system applies is likely to continue in a self-perpetuating cycle, especially
compulsorily to all its Members in relation to covered agree- if appointments to a standing investment court were for a
ments, which apply to them all. six‑ or even nine-year term.

The governance and structure of the WTO dispute mecha- Experience at the WTO shows that formal commitments to
nism, as well as its rules, reflect the primacy of Members’ diversity do not solve the problem (Johannesson & Mav-
sovereignty. The entire WTO Membership sits as the Dispute roidis, 2017, p. 46, 2017, fig. 3,4). The DSU that governs
Settlement Body (DSB) (WTO | Legal Texts – Marrakesh the dispute process at the WTO has a diversity requirement
Agreement, n.d., art. IV.3). Under the Dispute Settlement and Appellate Body members are supposed to be broadly
Understanding (DSU) all decisions that the rules and proce- representative of the Membership (WTO | Dispute Settle-
dures require the DSB to take must be made by consensus ment Understanding – Legal Text, n.d., art. 8.2, 8.10, 17.3).
(WTO | Dispute Settlement Understanding – Legal Text, Despite that, panellists are overwhelmingly from the Global
n.d., art. 2.4). Any amendments to the DSU must also be North. So are more than half the Appellate Body members
by consensus (WTO | Legal Texts – Marrakesh Agreement, appointed so far (WTO | Dispute Settlement – Appellate
n.d., art. X.8). There is no equivalent comprehensive, unitary Body Members, Biography, n.d.). This longstanding prob-
regime for investment treaties and realistically there will not lem reflects systemic bias in the appointment criteria and
be, especially if governments can choose from a menu of processes, institutional design, and operation of the WTO’s
reform options, as is being proposed in WGIII. dispute settlement system.

Aside from these differences, there are also important A related problem is that too much power over appointments
lessons to be learned from the WTO. Developing countries has been vested in an unaccountable secretariat (Kanth,
have long criticised its dispute settlement system. Their con- 2020; Monicken, 2019). The WTO Secretariat recommends
cerns include the extended duration of hearings and failure the first instance panellists, and disputing states can only
to meet deadlines; adjudicators who exceed their powers object to them for compelling reasons. Recent academic
and usurp the right of Members to interpret rules; lack of research concluded that the Secretariat has more influence
retrospective compensation to the date a proven breach over reports than panellists, which in turn has influenced
began; abuse of retaliatory powers by powerful States and the development of a de facto system of precedent and lim-
their failure to comply when they lose; the high cost of and ited dissent (Pauwelyn & Pelc, 2019). Developing countries’
dependency on foreign legal experts; no award of costs to concerns about institutionalised bias at the Secretariat level
successful complainant or respondent States; unrepresenta- have largely been ignored (Raghavan, 2000).
tive and pro-North panellist and Appellate Body members;
the dispute settlement secretariat’s unaccountability and A further, institutional problem is that developing coun-
improper influence; and the need for special and differential tries were unable to obtain agreement to fix the dispute
treatment and flexibility for developing countries and Least settlement regime, established in 1995, once its systemic
Developed Countries (Raghavan, 2000). development asymmetries became apparent. A full review
of the dispute settlement rules and procedures was to be
completed within four years after the WTO entered into
40 See Kelsey, 2020a, 2020b force, followed by a decision as to whether to continue,
25
 UNCITRAL Fiddles While Countries Burn

modify, or terminate those rules and procedures. That re- of sustainable development (Schill & Vidigal, 2020, pp. 317,
view has never been concluded because there is no consen- 323). That seemed not to matter. Far from addressing even
sus on reform (WTO DSB, 2019). At the same time, the US the procedural concerns that WGIII has focused on – in-
has (ab)used the WTO’s consensus decision-making rules to consistencies, incoherence and unpredictability, cost and
paralyse the Appellate Body by blocking the appointment of delays – their »flexible« design would allow States to choose
new adjudicators, holding the system to ransom until other their approach to investment disputes. The effect would be
Members deliver on the US’s demands for reform. to legitimise and institutionalise current ISDS mechanisms,
with the addition of an investment court, within a single
If these problems have arisen in the WTO, which is supposed organ.
to be a Member-driven institution, how would the promise
of diversity, or the many other promises being made to The paper conceded that such a proposal was politically
developing countries during the WGIII process, play out in a unrealistic, given the positions delegations have taken in
multilateral investment court or a standing appellate mech- WGIII. Such a body would also be seen as threatening by
anism? There is a very real risk that developing countries that existing arbitral forums that each have their distinctive legal
agree to such a system in the expectation of major changes mandates and would compete to become the supreme
to the current ISDS regime would be unable to secure future investment arbitration institution.
reforms if the promised transformation fails to materialise.
The Secretariat’s paper set aside this notion of an uber-ar-
bitral institution. It focused instead on two models of
4.6 A MULTILATERAL »SOLUTION« multilateral agreement that could simultaneously enable
amendments to existing investment agreements without
The UNCITRAL Secretariat prepared a paper for the March needing to revisit them one by one and prescribe new rules
2020 session of WGIII that explored means to reach a con- for incorporation into future treaties. While purporting not
sensus without needing agreement among the participating to take a position on the desirability of such an approach,
delegations on specific reforms (UNCITRAL, 2020b). Be- the paper clearly favours an overriding instrument as a
cause that meeting was cancelled due to the Covid-related means to deliver an agreed outcome and bridge the deep
restrictions, this paper was discussed during the October divisions among delegations who have taken the floor at
2020 session. The focus of that discussion was the design WGIII meetings. There is a simplistic elegance in a single
of the potential delivery mechanism, in other words, the instrument that appears to address problems of fragmen-
instrument through which all or some of the reform options tation, inconsistencies, incoherence, and unpredictability.
which are being considered by WGIII would be presented However, that single instrument would host a menu of
to States for adoption (UNCITRAL, 2020d). The following options that States could pick-and-mix – a »solution« that
section explores these options and what they might imply seems likely to intensify, entrench and even institutionalise
for meaningful multilateral reforms to ISDS. the existing problems.

4.6.1 A multilateral investment The two models the Secretariat considered were the Mau-
institution ritius Convention on Transparency through which parties
One option the Secretariat briefly considered was based can apply the Commission’s Transparency Rules to their
on an influential paper by two members of the Academic existing investment agreements, and the Multilateral Legal
Forum, Stephan Schill and Geraldo Vidigal. They advocated Instrument developed in the OECD/G20 Base Erosion and
for a »comparative institutional design analysis« that seeks Profit Shifting (BEPS) project for parties to amend their
»inspiration« from existing international adjudicatory ap- international tax treaties by a single legal instrument.
proaches (Schill & Vidigal, 2020, p. 317). That comparison
led them to propose a Multilateral Institution for Dispute 4.6.2 The Mauritius Convention as a
Settlement on Investment that would bring the array of model instrument for implementation
existing and proposed investment dispute settlement The first example of a single instrument through which to
mechanisms – »reformed« ISDS, inter-State arbitration, a adopt the agreed outcome from WGIII is The United Nations
permanent investment court, and strengthened domestic Convention on Transparency in Treaty-based Investor-State
remedies – under a single institutional umbrella. The Mul- Arbitration. Known as the Mauritius Convention, it pro-
tilateral Institution could be seen as a proxy for the MIC, vides a vehicle to apply the Transparency Rules adopted by
which the paper describes as the »centripetal force to reduce ­UNCITRAL in 2013 to all existing IIAs without needing to
the negative consequences of fragmentation«, including by amend them individually. These are general rules of appli-
conducting reviews, determining challenges to arbitrators, cation relating to transparency in ISDS disputes where the
and issuing preliminary rulings and binding interpretations host state and home state of the investor are both Parties.
of »shared norms« (Schill & Vidigal, 2020, p. 331). Their application is subject to negative list reservations for
specific treaties or arbitration rules other than UNCITRAL,
The authors acknowledge that their decontextualised ap- and a Party can declare that it will not provide a unilateral
proach fails to address the underlying concerns about ISDS offer of application in situations where it is a respondent to
and side-lines core »first order principles«, such as the rule of a claim.
law, democracy, protection of human rights and promotion

26
 Assessing the Proposed Solutions

The agreement applies to disputes arising from investment demic analysis by Avi-Yonah and Xu notes that developing
treaties in force in April 2014 where both Parties agree, countries might find elements of the rules appealing, but
and automatically to disputes initiated under UNCITRAL »the absence of the United States is important, and other
Arbitration Rules under agreements concluded between OECD members have agreed to only a limited set of provi-
Parties to the Convention after that date, unless they agree sions« (Avi-Yonah & Xu, 2017, p. 216).
otherwise. Adopted in 2014, the Convention entered into
force in October 2017. It has been signed by 23 states but Another academic commentator, Yariv Brauner, provides
so far ratified by only 7. some highly relevant observations on the politics of the
agreement. The US and Brazil both refused to join the
The Mauritius Convention was promoted as a model for im- MLI for political reasons. Other States which reserved on
plementing agreed ISDS reforms in the paper commissioned many MLI provisions, including Canada, the UK, China, and
by the Secretariat from academic-arbitral lawyers Gabrielle Germany, nevertheless benefitted from participating: »The
Kaufmann-Kohler and Michele Potestà (Kaufmann-Kohler relative flexibility of the regime facilitates their power, while
& Potestà, 2016). However, its precedent value is limited by the institutionalisation gives the regime legitimacy, and
three factors: the subject matter of »transparency« is much them opportunities to promote aspects, such as mandato-
narrower and less controversial than the WGIII mandate; the ry arbitration, that they could not otherwise have done«
Convention provides for the implementation of rules that its (Brauner, 2019, p. 443). The ability of powerful states to
parties have previously agreed, when no such rules are yet take reservations to measures they dislike poses the »sym-
agreed in WGIII and may never be; and only a small number bolic and therefore political question« of whether such an
of UNCITRAL Member States signed the Convention, with agreement »may be viewed by less powerful states as being
even fewer having ratified. representative of an unbalanced power of the OECD and
its dominant members over the agenda«, and generate
4.6.3 The Multilateral Tax Instrument as suspicion of and resistance to the whole project (Brauner,
a model 2019, p. 443).
The second possible model for implementing the WGIII
reforms is The Multilateral Instrument to Implement Tax Colombia proposed the MLI model in June 2019 as a means
Treaty Related Measures to Prevent Base Erosion and Profit of implementing the »menu« approach advocated by Chile,
Shifting (BEPS) – referred to as the Multilateral Instrument Israel and Japan, and providing »flexibility, transparency
or MLI. This agreement was concluded in November 2016 as and clarity« (UNCITRAL, 2019f, para. 22). Some minimum
part of the OECD/G20 BEPS project and entered into force standards would be required, subject to negotiation, and an
in July 2018. The goal was to streamline the process for ability to opt out of non-minimum standards. A proposed
making consequential amendments to some 3000 bilateral structure listed many of the topics discussed in WGIII as
tax treaties by creating »a global consensual treaty override minima, including an appellate body but not costs and
to apply the result of the [BEPS] simultaneously to all the tax duration, and some »other concerns« such as counterclaims
treaties where the countries involved agree« (Avi-Yonah & and exhaustion of local remedies.
Xu, 2017, p. 158).
The MLI may be a more relevant model for WGIII, because
Consistent with the Vienna Convention on the Law of the questions it addresses are politically more complex and
Treaties, the MLI is a subsequent treaty between parties contentious than transparency. Whereas the Mauritius
that amends an earlier treaty on the same subject matter. Convention required adoption of the whole agreement, the
However, it does not automatically apply a single set of MLI has flexibility for most provisions. But the MLI still imple-
provisions to all the tax treaties of those who adopt it. mented content that was already agreed on in BEPS. There
Academic commentators have described its principles as is no such agreement in WGIII. Any minimum standards or
embodying »idealism«, while the flexible implementation of other options that might be agreed for inclusion will reflect
its provisions reflects the pragmatism needed to secure an the lowest common denominator, being the status quo or
overall package (Avi-Yonah & Xu, 2017, p. 162). Even then, »modernised« texts in agreements like the TPP.
the US refused to sign.
4.6.4 An »Open Architecture«
The MLI has three categories of provisions: minimum stand- Instrument Won’t Solve the Problem
ard provisions that all signatories must meet without reser- In 2020 WGIII conducted several webinars (under Covid-19
vation, which already have consensus support within BEPS strictures) that further explored the »open« or »variable«
agreements; recommendations for treaty amendments, architecture approach of the MLI. Anthea Roberts, Taylor St
which are also based on consensus outcomes from the BEPS John and Wolfgang Alschner proposed a flexible architec-
project and have been incorporated into the OECD model ture that has three limbs: a framework convention, separate
tax treaty; and measures that signatories can adopt even opt-in protocols, and a central forum (Roberts et al., n.d.).
though those measures did not enjoy consensus support The protocols would contain soft and hard law instruments
(Brauner, 2019, p. 442; OECD, 2016). on interpretive mechanisms and procedural rules, supported
by dispute settlement options that span domestic courts, al-
As with the Mauritius Convention, the jury is out on how ternative dispute resolution, state-state dispute settlement,
effective the MLI will be, even on its own terms. An aca- ISDS and a MIC, with an appellate mechanism for the latter
27
 UNCITRAL Fiddles While Countries Burn

three. Developing countries would be supported through to keep governments on board and justify its law-making
capacity building, advice and representation (Roberts et al., functions and resources. The notion of »open« or »variable«
n.d.). Parties would be required to upgrade their existing architecture, with a single instrument providing a menu of
agreements to meet minimum standards based on »today’s options, allows UNCITRAL to deliver an outcome, while the
best practices« or a »normative consensus« that is derived nominally »government-driven process« allows the Secre-
from recent IIAs (Roberts et al., n.d.). Other protocols would tariat to disavow responsibility for its deficiencies.
reflect the degrees of convergence and divergence on pro-
cedural rules. The EU would not be unhappy, either. While it would not
achieve the ideal of a global investment court, an MLI-style
There are several reasons why an MLI-style »open« architec- instrument would legitimise its MIC. That would work fine
ture would fail to deliver on the UNCITRAL mandate. First, for the EU, which has included a MIC-like mechanism in the
States would have a wide range of options. They could: investment chapters of its recent free trade agreements.
determine which investment agreements to list as covered; But it would create major problems for countries that con-
adopt diverse ways of implementing the minimum stand- clude agreements with the EU and have not adopted this
ards; adopt negative reservations to some of the rules; opt multilateral instrument or have done so, but chosen other
in and opt out of non‑minimum standard provisions; apply options, especially where they have accepted different ar-
divergent dispute resolution mechanisms; and only apply the rangements in other IIAs. These are most likely to be devel-
instrument to investment agreements if the other parties oping countries, which will remain vulnerable to problems of
had made »matching« commitments. This fragmented array coherence, consistency, correctness, controls over cost and
of diverse positions, adopted by different States variably duration, alongside all the other flaws of IIAs that have not
across new and old international investment agreements, been addressed.
would deepen rather than solve the problems of coherence,
consistency, correctness, cost, duration etc. The dysfunctional and inequitable regime of IIAs and ISDS
would have been consolidated and re-legitimised and de-
Secondly, if the »protocols« of the instrument proposed are mands for real reforms put to bed for some years.
limited to issues on which there is a high degree of con-
sensus among the Working Group, that would presumably 4.6.5 Is a progressive multilateral
limit them to the four identified procedural issues. Most instrument possible?
of the »other issues« raised by developing States have not The Columbia Centre on Sustainable Investment and Centre
yet been discussed in WGIII, so there is no evidence of a for the Advance of the Rule of Law at Georgetown Law
consensus about the concerns, let alone about the solutions. have taken the concept of a multilateral instrument and
The substantive issues that never made the agenda would redirected it to serve sustainable development and address
be considered »out of scope«. substantive and procedural matters that WGIII has ignored.
Their Framework Convention on Investment and Sustainable
Thirdly, the examples of »best practice« that Roberts et Development promotes a »flexible, multilateral mechanism
al used are from controversial recent agreements, such as both for reform of existing IIAs and for broader work to
the TPP, USMCA and several EU FTAs (Roberts et al., n.d., align international investment law with the principles of
pp. 13, 15, 36). This approach would embed those texts as sustainable development« (Porterfield et al., 2020).
minimum standards for the future. There is no suggestion
of using India or Morocco’s model BITs, Brazil’s Cooperation The structure of their Framework Convention would com-
and Facilitation Investment Agreements, or South Africa’s prise: a statement of objectives and principles; institutional
domestic Protection of Investment Act 2015. Those and arrangements that combine a conference of the parties,
other States will likely be expected to accept the new norm. a secretariat and a dispute settlement mechanism; and
procedures for adopting subsequent protocols on specific
At the geopolitical level, this »variable architecture« is not provisions to implement the objectives. New mechanisms
politically neutral. Some capital‑exporting States may not would support governance of IIAs that advance sustainable
sign or ratify the instrument. When both parties to an IIA development and protect governments’ policy space against
do so, but support different approaches, foreign investors regulatory chill and the costs of exercising their authority.
will prevail on their home states to insist on their preferred They would also develop and implement rules that support
option. Even if developing countries have some legal rights positive practices and outcomes.
to object, they may not have the political capacity to resist.
Different elements would positively facilitate investment
It is not surprising that this approach currently seems the that supports the SDGs, including assistance for States in
most likely outcome for WGIII, assuming any agreement is assessing the impacts of proposed investment projects.
reached. UNCITRAL is not a neutral forum. Its institutional A cooperative approach to governance of transnational
imperatives require it to conclude a »successful« outcome, investors and investment could integrate approaches to
whatever the contradictions or failure to deliver on its human rights, climate change, tax evasion and other means
mandate. With no prospect for consensus around a unitary of regulating transnational corporations more effectively at
dispute mechanism, or even a Mauritius-style agreement the national and international levels.
that is adopted as whole, the Secretariat needs alternatives

28
 Assessing the Proposed Solutions

Following the Mauritius and MLI approaches, the Frame-

work would be flexible in scope, participation, and timing,
with opt-in and opt-out mechanisms grafted onto minimum
substantive reforms. These reforms could include changes
to substantive IIA provisions that UNCITRAL WGIII is not
addressing.

As a strategic advocacy tool, the Framework Convention

exposes the pro-investor bias of the UNCITRAL process and
the failure of the current proposals to address the power
and development asymmetries that beset the current IIA
regime. However, when viewed as a viable alternative it
suffers similar flaws to the multilateral instrument proposed
by proponents of the status quo, with far less chance of
being implemented. In particular, the »variable geometry«
still allows capital‑exporting countries to pick and choose
which measures to adopt and, if there are robust and effec-
tive minimum standards, whether to participate at all. There
is a further risk that promoting optimistic but unrealistic
alternatives will dissipate the momentum for real reform.

29
 UNCITRAL Fiddles While Countries Burn

ISSUES CRUCIAL TO REFORM ALIGNED

WITH SUSTAINABLE DEVELOPMENT
CONSIDERATIONS

This section explores multiple other reforms to ISDS that of compensation in domestic law, while also pursuing other
would increase the potential for meaningful changes that remedies – such as the striking down of a law – in domestic
are aligned with sustainable development considerations. courts.
These include the role of domestic courts, the role of State-
to-State mechanisms, investor obligations and affected-par- These practices contradict the oft-stated goal of investment
ty participation. While these issues have been brought up agreements and ISDS to enhance the rule of law. A prima-
in the discussions of WGIII by several participating States ry means for doing so is to preserve the role of domestic
and civil society observers, they have not been effectively legislative, judicial, and administrative processes in creating,
integrated into deliberations thus far. It remains unclear how applying, and enforcing legal commitments. The focus
they will be engaged with under the rest of the workplan. should be to strengthen these institutions. An investment
court model, much like ISDS, would generate a substitute
system for the settlement of investment disputes that risks
5.1 THE ROLE OF DOMESTIC COURTS AS disincentivising and undermining this type of reform at
AN ALTERNATIVE TO ARBITRATION 41 the domestic level, especially in the absence of a duty to
exhaust local remedies and show deference to the domestic
ISDS permits foreign investors to circumvent a country’s institutions.
courts, regardless of whether they offer justice, and allows
foreign investors to avoid the ordinary laws and courts that A common objection to such a proposition is the claim that
govern everyone else. In customary international law, private domestic courts are usually overburdened and often not
parties must exhaust local remedies before their grievances efficient in addressing investment cases where the investor
can lead to an international claim against a country. That rule is looking for a fast decision.42 Consequently, the require-
shows respect for the country’s institutions and gives the ment to exhaust local remedies is often opposed on the
country a chance to fix problems before they are brought to grounds that it would lead to delays in the resolution of
an international tribunal. It also recognises that the foreign the disputes and consequently could increase costs. While
national’s choice to enter a country carries a responsibility these critiques may apply to many domestic courts, they
to accept domestic laws and institutions. Customary law also apply to international investment arbitration, which is
allows an international tribunal to waive the duty if a for- evident in the fact that issues of duration and cost are some
eign national shows that local remedies were not reasonably of the concerns under discussion at WGIII. Thus, the fact
available or would be obviously futile to pursue (Van Harten, that domestic systems might need improvement should
2007, pp. 110–113). not be a barrier to discussing their role in settling disputes
between the investor and the host State.
In most IIAs, and many FTAs, foreign investors have been
excused from this duty completely before resorting to ISDS. Considering the interface between domestic courts and
This remarkable step has opened up dubious lawyering arbitration is an essential step for the redesign of the in-
options for investors, especially by those most able to fi- vestment dispute settlement regime. Building effective legal
nance ISDS litigation (that is, large multinationals and the and other domestic institutional systems and capacities is
ultra-wealthy). Investors with the sole discretion to decide central to any notion of sustainable development and the
on the reliability and suitability of local remedies might: rule of law. Otherwise, arbitration would continue to evolve
sidestep the courts altogether; bring an ISDS claim if they into a completely parallel legal system that marginalises the
lose in domestic courts, including a challenge against that role and contribution of domestic courts in the realm of
court’s decision and/or award; bring disputes to both forums investment law (UNCITRAL, 2019g, para. 44).
in parallel; or seek an international order of compensation
against the country, thus avoiding limits on judicial awards
42 According to UNCTAD, among the main arguments made against lo-
cal litigation requirements are ‘[c]oncerns that some host States can-
not guarantee an efficient and well-functioning domestic court sys-
41 This section is is based on Kelsey et al., 2019 and Mohamadieh, 2020. tem’ (UNCTAD, 2017).

30
 Issues crucial to reform aligned with sustainable development considerations

For those purposes, reform of ISDS could include targeted In the renegotiation of The North American Free Trade
initiatives to strengthen domestic systems.43 UNCTAD point- Agreement (NAFTA) (renamed the United States-Mexi-
ed out that increased reliance on domestic courts, coupled co-Canada Agreement (USMCA)), ISDS was eliminated
with support for States whose legal systems are less de- between the United States and Canada. After a transition
veloped, can strengthen the rule of law and consistency in period of three years for investors already established in
jurisprudence, and remedy some deficiencies that are used the foreign jurisdiction, the investors will have to revert
to justify ISDS (World Investment Report 2015: Reforming to domestic courts or seek consideration of their issue
International Investment Governance, 2015, p. 149). This is through the State-to-State mechanism. Between the United
part and parcel of fulfilling Sustainable Development Goal States and Mexico, new dispute settlement rules require
16 which calls for »provid[ing] access to justice for all and exhaustion of local remedies through initiating domestic
build[ing] effective, accountable and inclusive institutions at remedies and seeing them through until a final decision or
all levels«. Moreover, customary international law allows a until thirty months have passed with no decision (Analysis
foreign national to avoid exhaustion of local remedies by of the NAFTA 2.0 Text Relative to the Essential Changes We
showing that such remedies are not reasonably available. Have Demanded to Stop NAFTA’s Ongoing Damage, n.d.;
It should not be onerous to show when weak or corrupt Canada-United States-Mexico Agreement (CUSMA), 2020,
courts genuinely fail this test, relieving the investor of the Annex 14-D; Bernasconi, 2018).
duty to use them (Kelsey et al., 2019, p. 9).
South Africa is another country that chose to move invest-
The Working Group has agreed that requiring investors to ment disputes away from international arbitration and to
exhaust local remedies before bringing their claims to in- its domestic courts. Under its Protection of Investment Act
vestment arbitration is a tool to be considered in reforming (2015), which was set in place after it terminated its IIAs,
ISDS (UNCITRAL, 2019d, p. 7). Besides this option, domestic investors have the usual recourse to domestic courts, as well
courts could also be considered as a full alternative to ar- as the option of referring any investment dispute with the
bitration for all claims or certain subject-matter disputes. government to a mediation process facilitated by the South
Furthermore, domestic courts could contribute towards African Department of Trade and Industry (Leon & Muller,
addressing challenges faced in the interpretation of do- 2017; Protection of Investment Act, 2015, 2015, sec. 13).
mestic law by arbitral tribunals by serving as a reference
point for those tribunals on interpretation of domestic law. A further alternative allows countries to reserve certain
This is important, especially as arbitral tribunals could be disputes for the domestic courts, such as those involving
over‑influenced by commercial rather than public policy con- taxation, natural resources, obligations in treaties with In-
siderations, tipping the balance in favour of private rather digenous Peoples, or other issues pertaining to crucial public
than public interests (UNCITRAL, 2019g, para. 45).44 These interest considerations and non-discriminatory regulatory
different approaches to the role of domestic courts have interventions (Kelsey, 2019b). This could require a filter to
not been comprehensively addressed in WGIII, despite the identify such cases, such as agreement by the States Parties
fact that several countries’ submissions have referred to the to the investment treaty or an autonomous mechanism they
role of domestic courts, including, but not limited to, the establish (Menon & Issac, 2018). For example, the Austral-
requirement of exhaustion of local remedies (UNCITRAL, ia-China FTA provides for a State-to-State filter, whereby
2018h, para. 12, 2019b, para. 14, 2019g, para. 12). both States could agree that a potential ISDS claim is about a
non-discriminatory regulatory issue and should not proceed
There are multiple investment agreements where domestic to arbitration (Polanco, 2019, p. 89).
courts are the only recourse available for investors. For
example, the Australia-United States Free Trade Agreement UNCTAD’s mapping of IIAs reveals that only 82 of the 1,616
2005, the Australia-New Zealand Investment Protocol 2013, agreements examined require exhaustion or pursuit of local
and the Australia-Japan Economic Partnership Agreement remedies before proceeding to international arbitration
2015 do not include investor-State arbitration as a choice (Mapping of IIA Content | International Investment Agree-
for resolving investment disputes. Under these treaties, in ments Navigator | UNCTAD Investment Policy Hub, n.d.).
case of a dispute foreign investors must resort to domestic Some countries clarify the interface between domestic and
courts. Alternatively, investors going abroad can insure their international remedies in more detail. For example, under
investment against political risks by purchasing public or the 2018 India-Belarus BIT, the investor is required to pursue
private insurance, rather than relying on ISDS. domestic judicial or administrative remedies related to the
measure for at least five years from when it became aware
of the measure, after which an investor may pursue ISDS
(Treaty Between The Republic Of Belarus And The Republic
43 Domestic reforms could include considering the utility of conferring Of India On Investments, 2018, arts. 15.1 & 15.2). A fork-in-
certain courts, such as those dealing with administrative issues, ex-
the-road clause requires the investor who initiates arbitra-
clusive competence to deal with investment disputes, or establishing
specialized courts to deal with such disputes. tion to abandon any ongoing domestic proceedings with
44 For example, the unrestricted mandate of arbitrators has led to cases respect to the same measure. The agreement also prohibits
where arbitral tribunals have also questioned decisions by the higher an arbitral tribunal from reviewing the merits of a decision
courts of several countries, such as in ISDS cases against India and
Ecuador. See White Industries v. India, 2010 and Chevron and TexPet given by a domestic judicial authority (Treaty Between The
v. Ecuador (II), 2009.

31
 UNCITRAL Fiddles While Countries Burn

Republic Of Belarus And The Republic Of India On Invest- State authorities, establishing a joint review committee by
ments, 2018, arts. 13.4). the treaty parties, or a mechanism for State-to-State review
if the claim cannot be settled at the technical level within
There are multiple issues to consider in designing the inter- a specific timeframe (UNCITRAL, 2019j). However, the
face between the role of domestic courts and international Secretariat’s paper only refers to these as means for prelim-
arbitration in investment dispute settlement, particularly if inary consideration of issues in a dispute; it did not address
designing a hybrid dispute settlement system that integrates State-to-State dispute settlement as an alternative to inves-
a role for both. For example, it is not enough to provide tor-State arbitration, even though that is what both Brazil
the investor with the option of recourse to domestic courts and South Africa had proposed. Although the Secretariat’s
through a »fork‑in‑the‑road« clause. Such clauses make it paper for the March-April 2020 session cites South Africa’s
unlikely for investors to direct disputes to domestic courts, paper as urging parties to strengthen such processes as an
and thus would contribute very little to redesigning the alternative to investment arbitration, it again focused on
ISDS regime (Bisiani et al., 2016, p. 61). A more express and State-to-State cooperation as a pre‑cursor to investor-State
unequivocal provision of exhaustion of local remedies would arbitration (UNCITRAL, 2020d, paras 29, 34–42).
require that the investor »shall« exhaust local remedies be-
fore initiating international arbitration and would determine Reliance on State-to-State prevention and dispute settle-
the legal nature of the remedies to be exhausted, whether ment mechanisms has been expanding in State treaty prac-
administrative or judicial (Brauch, 2017; Southern African tice. The delegation from Brazil tabled a paper in June 2019
Development Community, 2012, art. 28, para. 4(a)). explaining the system for dispute prevention it has adopted
under its investment facilitation and cooperation model
It is possible to address procedural issues, such as duration (CFIA) (Government of Brazil, 2019). The institutional core
and costs that could arise as a result of a requirement to of the CFIA’s prevention pillar is a joint committee and an
exhaust local remedies, by imposing time limitations or ombudsman. The »joint committee for administration of the
establishing particular domestic procedures, such as sin- Agreement« is composed of government representatives of
gle-instance court proceedings. However, if these time limits both Parties designated by their respective governments.
are too short, the requirement to exhaust local remedies or The agreement also establishes »focal points« or »ombuds-
attempt a settlement in the host State’s domestic courts men«, which have as their main responsibility the provision
would yield no meaningful outcomes. of support to investors from the other Party (Hees et al.,
2018).
Another particular concern for governments arises when
treaty tribunals set themselves up as courts of appeal vis- The Brazilian approach was influenced by the experience of
à-vis a host State’s domestic courts (Schreuer, 2005, refer- the Office of Foreign Investment Ombudsman (OFIO) of the
enced in: Wehland, 2019). Different tribunals have exhibited Republic of Korea, which provides investment aftercare to
different approaches to judgments of local courts (Fouad support investors who face grievances in their day-to-day
Alghanim & Sons Co. For General Trading & Contracting, business to ensure the investment environment is appropri-
W.L.L. and Fouad Mohammed Thunyan Alghanim v. Hash- ate. The Brazilian Direct Investment Ombudsman (DIO) was
emite Kingdom of Jordan, 2017; Robert Azinian, Kenneth established within the Foreign Trade Board. It coordinates a
Davitian, & Ellen Baca v. The United Mexican States, Award, focal point network comprised of main agencies and entities
1999). That not only compounds problems of uncertainty, of the public administration at the national and subnational
but also impacts on the rule of law and the legitimacy of ar- levels, including the investment promotion agencies. It
bitration, and has a potential chilling effect on the domestic handles complaints related to the Federal Government and
courts as described earlier. It is essential that a redesigned to Brazil’s different States (Figueiredo de Oliveira, 2020).
investment dispute settlement system does not marginalise In a submission to WGIII, Brazil notes that »[i]n extensive
domestic courts. consultations with Brazilian multinational companies, the
government realized that investors were more interested
in the improvement of the institutional framework for in-
5.2 STATE-TO-STATE MECHANISMS FOR vestment with foreign governments than in after-the-fact
INVESTMENT DISPUTE SETTLEMENT45 remedies that would provoke long and expensive litigation«
(UNCITRAL, 2019e).
Strengthening the involvement of State authorities has been
integrated as one of the reform options considered by WGI- Brazil also provides for State-to-State dispute settlement as
II. In July 2019, the Secretariat prepared a table of reform one element of the model it adopts under the CFIA. The
proposals made by participating States, which included CFIA does not include ISDS. For example, the Brazil-India
proposals from the EU, Costa Rica, Brazil, South Africa and bilateral investment treaty (2020) provides that »[a]ny dis-
Bahrain for establishing or strengthening State-to-State pute between the Parties which has not been resolved after
processes (UNCITRAL, 2019j). This could include technical being subject to the Dispute Prevention Procedure may be
consultations among States, decisions by the respective submitted by either Party to an ad hoc Arbitral Tribunal, …
[or] … to a permanent arbitration institution for settlement
of investment disputes« (Investment Cooperation And Facili-
45 This section is partly based on: Mohamadieh, 2020. tation Treaty Between The Federative Republic Of Brazil And

32
 Issues crucial to reform aligned with sustainable development considerations

The Republic Of India, 2020, art. 19.1). The treaty says the 5.3 INVESTOR OBLIGATIONS AND ISDS
purpose of the arbitration is to decide on the interpretation
of the treaty or the observance by a Party of the terms of the Recognition that not all investors and investments add value
treaty, but the arbitral tribunals cannot award compensation when it comes to developmental and sustainability objec-
(Investment Cooperation And Facilitation Treaty Between tives has become part of the mainstream narrative. Yet the
The Federative Republic Of Brazil And The Republic Of India, place of investor obligations under investment agreements
2020, art. 19.2). has been largely left on the margins of discussions pertain-
ing to reforming investment rules, including in WGIII.
Another example is the South Africa’s Protection of In-
vestment Act of 2015, which provides for the possibility Historically, securing binding and enforceable obligations
of State-to-State arbitration after exhaustion of domestic on investors has been an issue of crucial importance for
legal remedies, with the States’ consent required on a case- developing countries. Negotiations on a code of conduct
by-case basis (Protection of Investment Act, 2015, 2015). for transnational corporation (TNCs) were sought during
The Southern African Development Community (SADC) the 1970s and 1980s as part of the project towards a New
also decided to amend its Finance and Investment Protocol International Economic Order, with the aim of establishing
in 2016 to exclude the ISDS clause, leaving State-to-State a multilateral framework on the rights and responsibilities
dispute settlement as the only option (SADC, 2016). Fur- of TNCs and host State governments (Sauvant, 2015; UN
thermore, the process of reforming the dispute settlement Economic and Social Council, 1988). Failure has been attrib-
mechanisms under the Organization of Islamic Conference uted to multiple factors; the lack of interest, and sometimes
(OIC) investment agreement includes a proposal to adopt objections, by developed countries to establishing obliga-
a State-to-State mechanism. As proposed, this mechanism tions for their multinational corporations was arguably the
would be operational after the exhaustion of local remedies, most influential factor leading to the end of the negotiations
should the investor not be satisfied and claim there is a deni- (Sauvant, 2015).46
al of justice. At that stage, a State-to-State mechanism could
be resorted to in order to arrive at an amicable settlement Recently, negotiations on an international legally binding
and avoid the movement towards arbitration (Kane, 2020). instrument on business and human rights have been
launched under the auspices of the United Nations Human
The proposition by the EU for a MIC, which is being ad- Rights Council (UNHCR, n.d.). The UN Guiding Principles on
dressed through WGIII, integrates the possibility of using Business and Human Rights, adopted by consensus at the
the proposed court for State-to-State dispute settlement UN Human Rights Council in 2011, provide a clear statement
(UNCITRAL, 2019a, para. 6). This reflects a recognition by that business enterprises can have an impact on virtually the
the EU that States are increasingly choosing to rely on State- entire spectrum of internationally recognised human rights,
to-State dispute settlement as a substitute for ISDS. although in practice, some human rights may be at greater
risk than others in particular industries or contexts (OHCHR,
State practices and multilateral intergovernmental experi- 2011, commentary on principle 12). The Guiding Principles
ences show that State-to-State led mechanisms, including instructed that businesses »should avoid infringing on the
State-to-State dispute settlement, could be viable options human rights of others and should address adverse human
and do not necessarily have to be tainted with politicisation. rights impacts with which they are involved« (principle
States do not need to establish a standing body in order 11), including to »avoid causing or contributing to adverse
to advance State-to-State dispute settlement in investment human rights impacts through their own activities, and ad-
cases and there may be drawbacks to doing so. As dis- dress such impacts when they occur« and »seek to prevent
cussed earlier, while the World Trade Organization (WTO) or mitigate adverse human rights impacts that are directly
dispute settlement system is State led in terms of its design, linked to their operations, products or services by their busi-
assignment of adjudicators, bringing cases and overseeing ness relationships, even if they have not contributed to those
decisions, it is beset with power asymmetries. If States want impacts« (principle 12) (OHCHR, 2011).
to move away from ad hoc case-by-case appointments,
without an institutionalised structure, they could establish Recent OECD research on the qualities of foreign direct
treaty-specific dispute settlement commissions appointed, investment (FDI) has focused on »assessing the contribution
ex-ante to the emergence of cases, by State Parties to that of foreign investment to sustainable development and iden-
treaty. tifying policies to maximise positive impacts and minimise
potential negative impacts«, with reference to five qualities:
The suggestion that State-to-State dispute settlement and productivity and innovation, employment and job quality,
ISDS live side by side in a multilateral instrument poses cru- human capital and skills, gender equality, and carbon
cial questions about the role of each and the relationship footprint (OECD, 2019; Sauvant & Mann, 2017). During the
between the two. This includes, for example, how one de- OECD investment roundtable held in March 2019, OECD
cision in a State-to-State dispute settlement might influence
an ISDS case that deals with the same issues and whether
the former would be binding in subsequent State-to-State 46 Some of the factors referred to include including the complexity of
the negotiations and changes in the underlying political and eco-
or investor-State cases. nomic circumstances and interests of developed and developing
countries.

33
 UNCITRAL Fiddles While Countries Burn

governments accepted a proposal to start intergovernmental investments that violate human and environmental rights or
work on business responsibilities and investment treaties.47 breach domestic laws remain potentially protected under
investment treaties.
The 2020 OECD Investment Treaty Conference (postponed
due to Covid-19) intended to address how governments Whether the obligations of investors in relation to human
approach issues of business responsibilities in their trade and rights, the environment and corporate social responsibility
investment treaties. The consultation paper for the confer- warranted further consideration was briefly discussed under
ence pointed to a »powerful convergence of thinking about the heading of »other concerns« at the 37th session of the
both the respective roles of governments and business in Working Group in April 2019. The report of the meeting
addressing business conduct that generates adverse im- observed that this was closely related to the question of
pacts, as well as on the content of business responsibilities« allowing counterclaims by States as well as claims by third
(Gaukrodger, 2020, p. 104). The paper described respon- parties against investors (UNCITRAL, 2019d, para. 34). It
sible business conduct as »a broad concept that focuses went on to blandly record »a general understanding that
on two aspects of the business-society relationship: (i) the any work by WGIII would not foreclose consideration of the
positive contribution businesses can make to sustainable possibility that claims might be brought against an investor
development and inclusive growth; and (ii) avoiding adverse where there was a legal basis for doing so« (UNCITRAL,
impacts on others and addressing them when they do oc- 2019d, para. 35). Consequently, investor obligations have
cur« (Gaukrodger, 2020). It identified a number of related not re-appeared on the Working Group’s agenda and their
issues for discussion, such as policy space for governments, fate in the revised work plan is very uncertain.
provisions that buttress domestic law and its enforcement
in areas such as labour, environment, anti-corruption, and
human rights, and provisions that speak directly to investors, 5.4 AFFECTED PARTY PARTICIPATION 48
such as establishing conditions for access to investment
treaty benefits (Gaukrodger, 2020). A striking procedural flaw in ISDS is the exclusion of non-in-
vestors from the adjudication of claims. Only the foreign
Reflecting this trend, States are increasingly addressing investor that brings the claim and the respondent State have
investor obligations in their treaty practice. For example, the a right to legal standing. Yet, when foreign investors sue
Nigeria-Morocco investment agreement (2016) imposes a States, they often make allegations and raise issues that
number of human and social obligations on investors and affect others who have no legal right to participate. That is
incorporates an enforcement mechanism whereby the in- not just unfair. It also means the tribunal cannot consider all
vestor can be held civilly liable in its home state for damages the relevant facts and arguments and may issue decisions
caused in the host state (Morocco – Nigeria BIT, 2016, arts. and relief that prejudice those whose voices are not heard.
15 & 20). Labour chapters in some recent FTAs, such as
the TPP, provide stronger and potentially enforceable legal Various actors may be left in this unfair situation, such as
obligations on states and rights of workers to access judicial an individual accused of involvement in corruption, a do-
forums, but these obligations have no legal cross-over with mestic investor in competition with foreign competitors,
the investment chapter, and no effect on investor protec- a sub-national government alleged to have violated the
tions enforced through investment arbitration. treaty, communities whose land claims overlap with those
of the foreign investor, or private parties engaged in do-
Most treaties that address corporate responsibilities are mestic litigation with the foreign investor (AbitibiBowater
currently limited to hortatory language addressed to either Inc., v. Government of Canada, Notice of Intent to Submit
States or investors (Gaukrodger, 2020). For example, Brazil’s a Claim, 2009, paras 8–9; Bernhard von Pezold and Others
investment agreement with Malawi provides a section v. Republic of Zimbabwe, Procedural Order No. 2, 2012,
on »Corporate Social Responsibility«, which requires that para. 62; Eureko B.V. vs. Republic of Poland, Dissenting
»Investors and their investment shall strive to achieve the Opinion, 2005, para. 11; St. Marys VCNA, LLC vs. Govern-
highest possible level of contribution to sustainable devel- ment of Canada, Notice of Intent to Submit a Claim to
opment« and »shall develop their best efforts to comply Arbitration, 2011, paras 1, 33–34).49 Under the current ISDS
with … voluntary principles and standards for a responsible
business conduct and consistent with the laws adopted by
the Host Party«, including human rights of those involved 48 This section draws on Kelsey et al., 2019, pp. 4–6.
in the companies’ activities (Investment Cooperation And 49 See, also Chevron and TexPet v. Ecuador (II), Second Partial Award
Facilitation Agreement Between The Federative Republic on Track II, 2018, para. 7.39–7.44, where the tribunal rejected Ecua-
dor’s cross-claims on the ground that the government did not have
Of Brazil And The Republic Of Malawi, n.d.). Without standing to assert the claims, which dealt with environmental harm
clauses expressly linking investor obligations with access to that affected Ecuadorian citizens. Yet a key issue was whether Chev-
investment treaty benefits, including access to international ron could use ISDS to attack a domestic court ruling against Chevron
and in favour of private plaintiffs who had suffered from the environ-
dispute settlement mechanisms, situations will persist where mental harm. See, Chevron and TexPet v. Ecuador (II), Second Partial
Award on Track II, 2018, para. 9.20–9.97, Part X. See also Chevron v.
Ecuador, First Interim Award on Interim Measures, 2012, paras 11 &
16; Chevron v. Ecuador, Second Interim Award, 2012, para. 3; Chev-
47 The roundtable involves over sixty countries including G20, OECD ron v. Ecuador, Third Interim Award on Jurisdiction and Admissibility,
and other governments. 2012, para. 4.59–4.71; Johnson & Güven, 2017.

34
 Issues crucial to reform aligned with sustainable development considerations

system, none of these parties has a right to standing in the option can be very helpful, but its purpose is very different
legal proceedings. To reply effectively on issues relating to from ensuring that affected parties are heard and able to
their rights or interests, the affected party needs to have protect their rights and interests.
access to the relevant evidence put before the tribunal, an
opportunity to test the evidence, an opportunity to make Although non-party participation is a procedural issue, it
claims and submit evidence, and so on. As the proceedings was not selected as one the focuses for WGIII. As the notes
unfold, it may emerge that the party can provide facts that of the meeting in New York in 2019 show, the issue was
the investor and government could not or did not provide. raised by several developing countries as an »other concern«
Where the person has been denied the right of standing, an warranting attention (UNCITRAL, 2019d, paras 31–33).
ISDS tribunal risks making a decision that harms someone Participation by affected communities and individuals, as
without having heard from him or her. That is deeply unfair. well as public interest organisations to present arguments
on investors’ obligations on matters like the environment
Developed countries have been reluctant to allow third-par- and protection of human rights, were considered important
ty participation. In the (never-concluded) TransAtlantic Trade »as a matter of legitimacy of the ISDS system.«
and Investment Partnership (TTIP) negotiations, the EU
proposed a right for anyone with a direct interest in an ISDS The interventions made it clear that delegations were seek-
proceeding to intervene, but that was limited to supporting ing the right for affected persons and communities to par-
the position of the claimant investor or the respondent ticipate, not simply to make submissions or present amicus
State (Transatlantic Trade and Investment Partnership, briefs. That important distinction was not clearly captured
Commission Draft Text, n.d., art. 23). This proposal did not in the formal record. Instead, the discussion reverted to
find its way into other EU FTAs (Comprehensive Economic considering third-party submissions, and even suggested
And Trade Agreement (CETA), Entry into Force 21 Sep 2017, the issue could be dealt with as part of the »inconsistency
2017; Free Trade Agreement between the European Union and incorrectness of awards« (UNCITRAL, 2019d, para. 33).
and the Republic of Singapore, Entry into Force 21 Nov
2019, 2018; Free Trade Agreement between the European South Africa argued this point strongly in its submission
Union and the Socialist Republic of Viet Nam, Entry into to the WGIII in July 2019: allowing »affected individuals or
Force 2020.08.01, 2020). communities to bring claims against investors means allow-
ing natural or legal persons with a direct and present interest
A number of agreements and procedural rules allow arbi- to intervene in the proceedings« and is an essential step to
trators to give amicus or limited »third person« status (Com- »making it a forum that protects the rights of all people –
prehensive And Progressive Agreement For Trans-Pacific not just those of multinationals« (UNCITRAL, 2019g, paras
Partnership, 201 C.E., art. 9.23(3); Free Trade Agreement 52–54). Several civil society observers echoed the call for
between the European Union and the Republic of Singa- ISDS to safeguard the rights of all affected parties, including
pore, Entry into Force 21 Nov 2019, 2018, Annex 9-G, art. by giving them a right of standing to the extent of their
3; Levine, 2011, p. 29; Salazar, 2012, pp. 4–8). However, affected interest (International Institute for Environment
tribunals are not required to give standing to persons who and Development et al., 2019). Those calls have so far gone
have a direct interest in the proceedings (Blackaby & Richard, unheard.
2010, pp. 253, 259–266; Wieland, 2011, pp. 334, 344–345,
359–360). In those rare cases where tribunals have granted
amicus status, the rights of participation have been severely
limited (Wieland, 2011, pp. 341–344). The amicus party has
no right to access all relevant documents before the tribunal,
leaving them to draft a submission without knowing what
the investor and government have told the tribunal (Infini-
to Gold Ltd. V. Costa Rica, Procedural Order No. 2, 2016,
paras 43–45). This is especially invidious for amici whom
the tribunal requires to bring their submissions within the
scope of the existing dispute, make contributions distinct
from the other parties, and not favour one »side« or the
other (Gabriel Resources Ltd. And Gabriel Resources (Jersey)
v. Romania, Procedural Order No. 19, 2018, paras 50, 62;
ICSID Convention, Regulations And Rules, n.d., Rules 37(2)(a)
& (b); Infinito Gold Ltd. V. Costa Rica, Procedural Order No.
2, 2016, para. 38). Additionally, tribunals have directed amici
to limit their input to narrow issues of fact or law (Gabriel
Resources Ltd. And Gabriel Resources (Jersey) v. Romania,
Procedural Order No. 19, 2018, paras 60, 66). In other
areas of law, amicus is used to give individuals and groups
an opportunity to participate in a proceeding where they
otherwise have no right of full standing. That procedural
35
 UNCITRAL Fiddles While Countries Burn

CONCLUSION: UNCITRAL FIDDLES WHILE

COUNTRIES BURN

This paper has exposed the reality behind the consen- at which meetings, the written record of the meetings, and
sus-based, government-driven approach that is meant to the next steps in the work plan. The Secretariat’s extensive
form the foundations for deliberations in UNCITRAL WGIII. technical papers circumscribe the topics for discussion,
The views of predominantly capital-importing developing which the developed countries then dominate.
countries that are the main targets of ISDS cases should
have had at least as much influence as the developed cap- The way the meetings and work plan have been organised
ital-exporting countries that primarily support ISDS, if not have made it difficult for participating countries to caucus
more. That has not happened, due to a number of mutually and develop common positions, support each other on
reinforcing factors. the floor, and challenge the manipulation of the original
mandate and each meeting’s agenda. The online meetings
The terms of reference for WGIII have been narrowly applied during the Covid-19 era have further disabled delegations
in a way that focuses on a limited set of procedural issues, from the Global South and critical observers and strength-
which were restricted to four issues: consistency, coherence, ened the Chair and Secretariat control over the process.
predictability and correctness of arbitral decisions; arbitra- Developing countries also struggle with time zones, poor
tors and decision makers; cost and duration of cases; and quality internet, difficulty making timely and in-person inter-
third-party funding. The substantive concerns that underpin ventions, and isolation from other members and observers.
the crisis of legitimacy confronting the international invest-
ment regime and ISDS will not be addressed. The way the agenda has been managed by the Secretariat
and Chair means the »elephant in the room« – the objective
Other matters of importance from a policy and regulatory of establishing a MIC – has never been explicitly discussed.
perspective, which have been put forward to WGIII primarily The proposal has been advanced more subtly through the
by developing countries, but ought to be of concern to all issue-based discussion to the point where it forms part of
countries, have either been excluded per se because they the »open« and »variable« architecture in a potential mul-
are deemed to be substantive issues and out of scope or tilateral instrument to implement procedural »reforms« to
are acknowledged and then marginalised or disappear from IIAs. Yet, the Secretariat/CIDS paper shows it was part of
WGIII agenda. Expectations that »other matters« raised by the anticipated outcomes from the start.
developing countries (such as alternative dispute resolution,
dispute prevention, participation by affected communities The wide divergence of positions between capital‑export-
beyond third party submissions, investor obligations and ing States suggests it will be difficult to secure agreements
counterclaims, and protecting State’s policy autonomy among them even on the Working Group’s limited proce-
against regulatory chill) would form part of the discussions dural issues. The proposal for a framework instrument that
about solutions have largely remained unfulfilled. The de- allows States broad flexibility to decide what changes they
bate over the workplan at the May 2021 session showed might make to their existing and future investment agree-
how developing countries have struggled simply to keep ments is intended to finesse the problem of consensus. As
many of their issues on the record. There is currently little a consequence, any agreed outcome will maintain a menu
prospect that they will secure any effective »solutions« to of provisions that may or may not address the concerns
them from the WGIII process. identified at the start of the WGIII process and that may be
applied across a range of investment dispute mechanisms.
The procedures of WGIII, crafted by the Secretariat and
the Chair of the process, have helped steer the Working There has also been minimal activist pressure from cam-
Group’s activities in this narrowly constructed direction since paigners against ISDS on the outside, due in large part to
even before the Working Group received its mandate. Since the selection of the little-known UNCITRAL as the forum
then, the Secretariat’s background papers have continued for ISDS reform. Internal pressure from observers within
to frame the agenda and deliberations. In this constricted the meetings, who are not aligned to the arbitral industry
environment, the Chair and the Secretariat have effectively or corporate lobbies, has been constrained by restrictions
determined what topics are to be discussed in what order on who is accredited, their prescribed role, the strategically

36
 Conclusion: UNCITRAL fiddles while countries burn

designed agenda, priority for States’ interventions, and the for dealing with any disputes that might arise, even if some
Chair’s limitations on speaking time. procedural changes to arbitration end up being adopted. An
effective consideration of the developmental implications of
ISDS therefore requires freeing the mandate given to WGIII
6.1 THE CURRENT STATE OF PLAY from the narrow interpretation adopted to date and taking
a serious look at alternatives to arbitration as means to settle
After five years of WGIII deliberations, it is clear that its investment disputes.
current approach will not deliver meaningful reform unless
there is a substantial realignment of the agenda, procedures A revised Working Group work plan that meets these stand-
and power dynamics within the Working Group. ards would:

At this stage the most likely outcome is a lowest common 1. Enable a process whereby developing countries, as the
denominator solution that allows UNCITRAL and the Sec- principal targets of ISDS disputes, can set a new agenda
retariat to proclaim »success«. The »open architecture« that elevates their concerns and reform priorities to set
approach to a multilateral instrument, which is emerging as the minimum standards for any new Agreement;
the favoured outcome, would allow capital‑exporting States
to adopt minimalist procedural changes to ISDS and none 2. Audit the process, agenda and proposals against United
to the fundamental systemic problems undermining States’ Nations Member States’ commitments to and obligations
policy and regulatory space. Some of those States may not under the Sustainable Development Goals, which include
even sign or ratify a final agreement. So, in addition to the respect for human rights, governance structures that
likely reforms being unduly moderate and ineffective, there ensure inclusive participatory processes and equal access
may not be enough buy‑in from foreign investors’ home to justice, and encouraging sustainable new investment
States to make any difference at all for countries on the for development purposes in states that need it.
receiving end of ISDS claims.
3. Link any UNCITRAL Agreement on investor-state dispute
settlement to instruments being developed in other
6.2 RECOMMENDATIONS parts of the UN system, such as the proposed interna-
tional legally binding instrument to regulate, in interna-
If the international investment regime is to become sup- tional human rights law, the activities of transnational
portive of development and overcome its legitimacy crisis, corporations and other business enterprises, as well as
UNCITRAL WGIII needs to recall and act upon the original advancements in tackling investor obligations through
impetus for reform: deep-seated concerns about the dem- treaty practice (UNHCR, n.d.).
ocratic accountability and legitimacy of the international
investment regime as a whole, especially of ISDS, and its 4. Ensure transparency and inclusiveness in the process as
implications on the policy and regulatory space countries re- a matter of substance, not just of form.
quire to address developmental challenges as well as current
transformational challenges, particularly in regard to the It will no doubt be argued that it is now too late for Working
climate crisis and preparedness to face global pandemics. Group III to deliver on its original mandate in this way. In re-
sponse, participating States and the Commission itself need
While the UNCITRAL process cannot solve all contentious to recognise that failure to move beyond narrow procedural
issues, if it is to alleviate the legitimacy crisis confronting reforms to ISDS on their selected categories of issues and
the international investment regime to a significant degree address the fundamental challenges that confront the re-
then its work plan must genuinely address these core con- gime will not resolve the crisis the investment regime faces.
cerns. The participating States must also act as responsible At the same time, it will create an additional wedge in the
members of the United Nations, committed to coherence in process towards delivering on the SDGs, instead of ensuring
their policy and legislative choices and international commit- that the system that underpins international investment
ments, in a way that contributes to fulfilling their promises governance supports and enables sustainable development.
on the development agenda.
By purporting to offer a »solution« to the deficiencies in the
Aligning ISDS reform with developmental objectives re- current ISDS regime, the UNCITRAL process would legitimise
quires a recognition that cases, and the measures that these the deeply problematic rules and forms of the international
disputes touch on, have different implications from the per- investment regime. The fundamental systemic problems will
spective of sustainable development and public policy than remain unaddressed at a time when major crises of climate
from the perspective of investor promotion and protection. change, pandemics, geopolitical conflicts, debt defaults,
This is especially so in cases arising out of governmental and social upheaval create new opportunities for foreign
action for environmental, human rights, or other public investors to capitalise on the partisan and deeply flawed
interest objectives, where major public policy considerations investment regime.
and important issues pertaining to third-party rights have to
weighed against private interests. It cannot be assumed that There is a risk that a purported »solution« may be used to
investor-State arbitration provides the most effective avenue silence ongoing calls from most developing countries and
37
 UNCITRAL Fiddles While Countries Burn

civil society observers to address the power imbalance and

development asymmetries that are endemic to both the
substance and procedure in the current IIA regime. But,
however confident its architects may be that they have
diverted and defused demands for more radical reforms
to the international investment regime, the realities of the
imbalanced and unjust investor-State disputes that have
created this crisis will not go away.

38
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 UNCITRAL Fiddles While Countries Burn

ANNEX: SUMMARY TABLE

The discussion in this paper is not meant to be an exhaustive the international investment regime requires reform of the
account of the issues tackled by WGIII. It has focused on substantive investor protection rules in a way that approach-
systemic proposals that would have the most significant es these substantive rules and ISDS procedures as part of
implications for ISDS regime reform. The following table an integrated whole. Treating reform of substantive pro-in-
summarises the points raised regarding those elements, as vestor rules in international investment agreements as too
well as a number of issues raised by delegations that the hard, and addressing only ISDS procedures by which those
Working Group has not addressed. rules are applied to States, essentially fails to recognise that
substance and procedure are intertwined. Furthermore, a
While this paper focused on discussing procedural issues reform of ISDS that rules the substantive issues out of scope
pertaining to ISDS reform given the focus of WGIII on these will lack effectiveness, credibility, and legitimacy.
issues, it is evident that meaningful and effective reform of

Selected issues Related risks (the following is a non-exhaustive list of Proposals from a developmental and public interest
concerning ISDS risks, focusing on the most challenging risks from a systemic perspective
reform perspective)

Selected issues currently addressed by WGIII

Alternative dispute A narrow approach that limits the notion of alternatives Expand discussions of alternative dispute settlement to
settlement to mediation and conciliation, both of which are often include serious consideration of the role of domestic courts
approached as a mere pre-condition to arbitration, would and State-to-State mechanisms
restrict ISDS reform to changes within the existing system of
investment dispute settlement, and divert the discussion away
from a more fundamental rethink of the system.

Mediation Increasing reliance on confidentiality-centred mediation Address lack of transparency in mediation, the imbalance
could entrench the same problems that ISDS currently suffers. between the parties to a mediation process, selection of
These include increasing the number of “wins” that investors mediators and conciliators, and potential implications for the
accrue without having to make their case and undermining regulatory and public policy processes.
affected-party rights and public interest considerations where
cases relate to public policy issues.

An appeal system An appeal system will be an additional layer to the investment Avoid approaching the idea of instituting a centralised appeal
arbitration system, and will not fundamentally carve out system as an acceptable reform option for ISDS.
public interest related cases from the realm of arbitration. Carefully address its potential impacts, including
Depending on the design of the appeal (including whether systemic risks associated with an appeals system, such
a decision by an appellate body would bind the disputing as subordinating the jurisdiction and oversight function
parties only or have broader effects), an appeals system of domestic courts and developing jurisprudence that
could affect the development of investment law, potentially entrenches pro-investor biases when interpreting investment
consolidating an imbalanced body of law and creating more rules.
challenges in reconciling investment law with other bodies Effectively address issues pertaining to participatory rights
of law. in an appeals mechanism, including possible access for non-
disputing parties, potential for systematic or abusive use of
an appellate process, and the increase in cost and duration of
ISDS as a result of institutionalising an appeal mechanism.

A multilateral The proposal retains major aspects of the current traditional Avoid the idea that creating a new multilateral body
investment court ISDS system and risks inflating the market available for dedicated to serving as an exclusive platform for investors to
arbitration cases without correcting the underlying challenges sue the State would constitute ISDS reform.
of the existing system.
The MIC remains an exclusive system that provides investors
only with the ability to sue the State in relation to any
measure or public policy issue and is unclear in regard to its
relationship with domestic courts.
The MIC proposal does not guarantee the right of standing of
affected non-disputing parties or the right of the host States
and communities impacted by the investment to bring direct
claims against investors.
The MIC could entrench several of the major flaws in the
current ISDS system: a court, especially one funded through
user fees, might tend towards increasing its own power by
ruling expansively on its jurisdiction and in favour of the
claimants, thus continuing the investor bias inherent in
today’s private arbitration system. It could thus create new
law or set precedent that favours the interests of investors.
The relationship of the proposed body to the existing ISDS
system based on ad hoc tribunals remains unclear, risking
the creation of an additional and parallel adjudicative system
without correcting the existing ad-hoc arbitration based ISDS
regime.

46
 ANNEX

Selected issues Related risks (the following is a non-exhaustive list of Proposals from a developmental and public interest
concerning ISDS risks, focusing on the most challenging risks from a systemic perspective
reform perspective)

Issues at the time of writing this paper unaddressed at UNCITRAL WGIII

The role of Keeping the role of domestic courts out of the discussions Reform and strengthen domestic judicial systems to support
domestic courts as of ISDS reform will maintain the marginalisation of domestic effective, accountable, and inclusive institutions in line with
an alternative to laws and institutions within the international investment the SDGs, and prioritise domestic courts as the appropriate
arbitration regime. forum to handle investment disputes. Restrict oversight
of domestic courts by extra-territorial tribunals, except in
extreme cases of denial of justice.

State to State Leaving State-to-State mechanisms as means for settling Enhance the role of States, as masters of their own treaties,
mechanisms for investment disputes outside the reform discussions would in interpreting and clarifying their treaties, including through
Investment Dispute marginalise the recent choices and practices of major establishing and strengthening the role of State-to-State
settlement developing country economies who choose to rely on State- mechanisms in handling investment disputes.
to-State mechanisms and dispute settlement. A multilateral standing body is not needed in order to
advance State-to-State dispute settlement in investment cases.

Investor obligations Without effectively addressing investor obligations, Ensure that investor obligations are effectively incorporated
and ISDS investment law will remain imbalanced and risk offering into investment treaties and their performance is linked
privileges to investors that violate human and environmental with access to investment treaty benefits. There must also
rights, as well as various domestic laws. be coherence between investment treaties and laws and
evolving norms and laws concerned with investor obligations
and duties of business more generally.

Affected party The exclusion of non-investors from the adjudication of Affected parties, whether governments, local communities,
participation claims means that investors have an unfair influence over or other individuals, should have a right to participate in
the investment dispute settlement regime. Access to justice investment disputes beyond being an amicus party. Their
is fundamental for all those whose lives and interests are at rights ought to include right of standing to the extent of
stake. their affected interest, access to the relevant evidence, an
opportunity to test the evidence, an opportunity to make
Tribunals cannot consider all the relevant facts and arguments, claims and submit evidence.
and may issue decisions that prejudice the rights of those left
unheard.

Regulatory Chill The threat or initiation of costly, prolonged investment A holistic approach must be taken to address the leverage
disputes that may result in a crippling award of damages gives of foreign investors over states, including unbalanced pro-
foreign investors leverage to pressure States to terminate or investor protections, the high costs of proceedings, the risk of
not to pursue measures that are in the public interest. The massive awards with compound interest and lack of investor
resulting regulatory chill undermines State’s responsibilities, responsibilities. Foreign investors should have the same rights,
democracy, the public good and the rule of law. responsibilities and remedies as local investors, subject to
domestic law in domestic courts that maintain a margin of
appreciation for state responsibilities, and to constitutional
and related legal norms.

47
 IMPRESSUM

ABOUT THE AUTHORS IMPRINT

Kinda Mohamadieh is legal advisor and senior researcher Friedrich-Ebert-Stiftung e.V. | Godesberger Allee 149 |
with the Third World Network office in Geneva. TWN is an in- 53175 Bonn | Germany
ternational policy research and advocacy organisation based
in Malaysia, dedicated to promoting the rights and interests E-Mail:
of the South and its peoples. https://www.twn.my/ info@fes.de

Jane Kelsey is professor at the faculty of law at the Univer- Register no.: VR2392
sity of Auckland, New Zealand. Bonn Register of Associations
Bonn Local Court

President: Martin Schulz

Secretary General: Dr Sabine Fandrych

Responsible:
Hajo Lanz | Director | FES Geneva
Chemin du Point-du-Jour 6bis | 1202 Geneva | Switzerland
Phone: +41-22-733-3450 | Fax: +41-22-733-3545

https://geneva.fes.de

Contact / Orders:
Christiane.Heun@fes.de

The views expressed in this publication are not necessarily

those of the Friedrich-Ebert-Stiftung. Commercial use of
­media published by the Friedrich-Ebert-Stiftung (FES) is not
permitted without the written consent of the FES.Publica-
tions by the Friedrich-Ebert-Stiftung may not be used for
electioneering purposes.

FES GENEVA

The FES office in Geneva serves as a liaison office between

UN agencies, other Geneva-based international organiza-
tions and FES field offices as well as partners in developing
countries to strengthen the voice of the Global South. It
contributes to the debates in »International Geneva« on
trade and sustainable development, decent work and so-
cial policies, human rights, economic and social rights in
particular, as well as on peace and security.

This publication is printed on paper from sustainable forestry. ISBN 978-3-96250-942-2