ISDS Reform: The Dimming Yet Discerning Voices of the Global South States

[Naimeh Masumy is a research fellow at the Swiss International Law School and a dispute resolution expert specialized in energy and investment disputes.]

A famous Persian proverb states, “This person resembles someone who has lost his horse and yet, is looking for its horseshoes”. This sentiment aptly describes the current reform efforts being undertaken by UNCITRAL Working Group III (“WGIII”) to address the ‘legitimacy crisis’ levied against the investor-state dispute settlement (“ISDS”) regime.

In 2017, when the WGIII was established, a wide range of concerns were raised, spanning from the integrity of the decision-makers to the lack of coherence, consistency, predictability, and accuracy of arbitral decisions. Coupled with the potential for an overly expansive interpretation of investment protection provisions. Consequently, a few reform options were formulated to address a myriad of concerns pertaining to the efficiency of the ISDS regime and other problems brought up by the stakeholders. However, during WGIII’s session last month, the critics, once again, raised concerns that the current reform efforts and the draft plan have failed to adequately confront the bigger issues that lie at the heart of the ‘legitimacy crisis’ of ISDS, calling for more radical and systematic solutions.

This blog will first explore the current arc of reform efforts undertaken by the WGIII. Then, it will discuss why legitimate concerns, especially those raised by the countries from Global South, are not incorporated within the Group’s primary agenda. It will finally argue that even if the current reform agendas are aggressively pursued and addressed, the current trajectory of the reform process will not help meet the growing demands of the new era in alignment with the priorities enshrined in important international instruments.

The Current Arc of the Reform Scheme

At the inception of WGIII, the majority of delegates expressed their well-founded concerns that the ISDS regime is ripe for serious and comprehensive reform, due to the issues identified in practice. The anti-ISDS sentiment reflects the growing apprehension that the investment disputes, which are capable of unleashing palpable impacts on individuals and societies, should not be resolved with the current deficient, flawed and fragmented framework. It was widely acknowledged that the current system and relevant institutions lack several basic characteristics expected from a regime of good governance.

A wide range of concerns raised by delegates spanned from the independence and impartiality of the decision-makers to the lack of coherence, and consistency.  Despite the diverse and antipathic background of delegates, one thing was clear- the concerns were profound and widespread, while the solutions are sought only in the procedural realm.  Today, both developed and developing countries share similar concerns about the conduct of ISDS due to consistently widening range of states facing claims, some of which are challenging key policies of public interest in the western states. A few issues, such as universal access to clean water, climate change, and universal access to education and healthcare underpin the ambition of the delegates to align the amendment process with the goals enshrined in important international instruments. This has coincided with the growing recognition that investment has become crucial to achieve the SDGs, eradicate poverty, and create jobs, and shift to clearer or more sustainable economies.

To address these issues, a broad mandate was given to the Working Group to identify, investigate, and develop solutions for the reform of ISDS, guaranteeing the protection of the States’ right to regulate. However, the following sections demonstrate how WGIII reoriented its attention towards marginal and procedural fixes, as opposed to amending the substantive provisions of the international investment treaties in force to align them with the inclusive and progressive agenda.

The Narrow and Carved-out Reform Approach

Despite the wide discretion discharged by WGIII that it would investigate concerns and develop relevant solutions, the reforms contemplated merely wrestle with the procedural inadequacies of ISDS mechanisms. On the other hand, the cross-cutting issues that might diminish the role of ISDS in investment disputes were left off the agenda and the draft work plan.

The current reform process encompasses three streams of reform which are mostly concerned with how to make this system more subject to law.

The first stream of reform pertains to procedural reforms, including a code of conduct for adjudicators in ISDS proceedings, and rules on third party funding. The second stream concerns the structural reforms, including an appellate body and a standing court of first instance. The final emerging component of reform was assistance mechanism; a prospect that garnered considerable attention, despite the weak support it enjoyed initially.

The assistance mechanism was based on the prevailing assumption that the less advanced or poorer states require facilities to participate in ISDS and prepare viable defenses that are on par with developed states.  This proposition reflects the growing desire of states to play more active roles in managing their treaties and disputes. The assistance mechanism (or Advisory Center, as referred to in the WGIII) purports to provide more consistency in the state’s pleadings, along with more assertive participation in the proceedings, by issuing clarifying interpretations of the treaties, initiating annulment or setting aside a proceeding. It was widely believed that the implementation of such proposals will enhance the correctness and consistency of the arbitration awards, and deter frivolous appeals. Essentially, it was meant to function as an equalizer, balancing the scale between the poor and rich states.

Although seemingly viable, this solution is hard to implement and deliver the intended results, due to its two distinct flaws. Firstly, this mechanism, which was modeled after the WTO assistance mechanism, increases the costs substantially. In fact, some delegates cautioned that the introduction of such a facility could have an adverse impact on the costs and the duration of the proceedings.

Secondly, other delegates questioned the mechanism’s ability to actually solve the most important problems, such as sovereignty concerns, climate change, frivolous claims , and crippling damages and the rights, interests of non-parties. 

The above analysis clearly demonstrates that the prevailing mantra governing the amendment process is guided primarily by the procedural inadequacies of the ISDS regime. Issues such as the fragmentation of case law, incoherent jurisprudence, duration of proceedings, costs, appeal, and annulment process quickly claimed the mantle of thought leaders, and occupied the center of action.

The reform process that was poised to be problem-driven rather than solution-oriented, was meant to develop solutions in the advanced stage of the process without adequate considerations to explore the issues that were plaguing the system. Furthermore, instead of pursuing evidence-based solutions for the underlying issues, the focus seems to be directed towards whether the EU will prevail in its strong advocacy of abandoning ISDS and introducing a standing investment court with professional judges. However, in this discussion, the key substantive issues still remain unaddressed.

Such a detached and confined approach removes the impetus for a more comprehensive reform, signifying a lack of openness to structural reform. Major actors, such as the EU and the US, proposed various procedural reforms and set the tone guiding the discussions in the WGIII.   Such dominant voices overshadow critical concerns raised by countries from the global south, consequently widening the gap between the various interests and policy priorities in the ISDS reform process.

The Problematic Composition of UNCITRAL Working Group III

A pragmatic concern emerged regarding the feasibility of WGIII to address a diverse set of cross-cutting issues, specifically within the confines of mostly government-led group.  The sessions evidenced that several officials from capital prioritized maintaining close relationship with major actors. In doing so, some of their motions were heavily influenced by political considerations, with new regional networks becoming noticeable, while capital officials continue to forge new relationship on the margins of WGIII.

Such geopolitical positioning reaffirms the notion that the reform process is highly polarized, thereby questioning the viability of the development of a comprehensive and universal set of reform options.

The chart below illustrates that WG attributes significance mostly to procedural issues, while shying away from substantive issues raised by the Global south.

Reform Proposals Received by the Secretariat	Countries Submissions	The proposal that appeared on the working draft plan
Mandatory exhaustion of local remedies	Indonesia, Morocco	No
Providing Transparency with respect to third party funding	China, Chile, Israel, Japan, European Union	Yes
Dismissing frivolous claims	Brazil , Indonesia, Morocco	No
Reforming the cost and duration of ISDS	European Union, Chile, Israel, Japan	Yes
Establishing an Appellate Mechanism or Multilateral Investment Courts	South Africa	Maybe
Introducing investor obligation scheme	Bahrain	No
Streamlining timelines	Republic of Korea	No
Addressing high/crippling compensation	Ecuador, Burkina Faso	No
Implementing a code of conduct for arbitrators	European Union, Japan, Israel, Chile	Yes
Expanding policy space to recognize/ensure the concept of the principle of sustainable development	South Africa, Indonesia, Thailand	No
Protection and promotion of responsible investment	South Africa, Thailand	No
Mediation scheme	European Union, Japan, Israel, Chile, Indonesia	Yes
Appellate Mechanism	European Union	Yes
Assistance mechanism (capacity-building assistance)	European Union, China, Thailand	Yes

Pragmatic Concern

One persisting concern for critics of the ISDS system is the wide restriction posed by treaty obligations over the state’s sovereign right to regulate within its border. The threats of disputes by investors have removed the impetus for developing countries to regulate on behalf of the public health, safety, and environment. These concerns are amplified by the significant increase in disputes posed by investors against host states trying to enforce measures, resulting in awards worth billions, which are capable of crippling the economic growth of host states.  While there is a surge in the number of cases challenging the regulatory power of states, the ISDS no longer serves as a potent dispute resolution tool, and its place in the realm of investment arbitration is now eroding. Countries are taking steps to either terminate their investment treaties or develop new models replacing arbitration with a court system or even introducing substantive reforms of existing treaties.

Despite the ongoing reform process, most investment treaties are not including ISDS mechanism as their preferred dispute resolution mechanism. Over 19 investment treaties have been concluded, of which only 6 included ISDS. For instance, Brazil has denounced the current IIAs regime and, instead, introduced facilitate agreement with non-binding nature, in which the local courts are considered as a recourse. In a similar vein, Pakistan and India have decided to renegotiate and review the scope of existing treaties and considered introducing local courts as their preferred dispute resolution mechanism.

Therefore, practice proves that the discussions in WGIII do not address the realities of many states and do not cause hope for those states that are reconsidering their investment protection regime without the ISDS mechanism.

WGIII was poised to be a transformative and inclusive platform, offering opportunity to establish a positive agenda & a model for international investment governance. Instead, the current set-up and tone of the discussion of the WGIII calls into question its capacity to meaningfully affect practice under existing or future treaties, given the uncertainty of the eventual uptake by takes. In fact, in the absence of a harmonized set of solutions, or at least guiding principles, it is likely that the ISDS system will become further fragmented as a result of piecemeal treaty revisions and procedural designs.

Conclusion

As evident in this analysis, the so-called problem-centric model of UNICRAL Working Group has reoriented its attention to procedural deficiencies, while disregarding the well-founded concerns that the existing crisis cannot be addressed without shifting their attention to substantive reforms of the investment treaties. In addition, the biased reform process has brought into sharp focus the structural inequalities of international investment law and the subsequent draft has relentlessly exposed and acknowledged such disparity. Further, it has diluted the potential for movement towards multilateral approaches in investment law, neatly built on the consensus-building work. This piecemeal approach has failed to address the long-lasting and critical challenges to the regime and failed to confront the bigger issues plaguing the system. As such, if the status quo is maintained, such reform might be characterized as a new colonial exercise that continues to diminish the sovereign equality.