REUTERS | Mike Segar

A preview on the upcoming UNCITRAL negotiations for a multilateral investment court

In the first week of April, the UNCITRAL Working Group III (Investor-State Dispute Settlement Reform) will continue its work replacing the currently existing investor-state dispute settlement (ISDS) with a multilateral investment court (MIC) in New York.

The UNCITRAL Working Group consists of 60 states and has accepted many observers, in particular the European Union, non-governmental organisations (NGOs), arbitral institutions as well as academic institutions.

After several rounds of negotiations in New York and Vienna, the UNCITRAL Working Group has identified several “concerns” regarding the currently existing ISDS system that should be addressed.

These “concerns” have been grouped into the following subgroups:

  • Concerns pertaining to consistency, coherence, predictability and correctness of arbitral decisions and ISDS tribunals.
  • Concerns pertaining to arbitrators and decision-makers.
  • Concerns pertaining to cost and duration of ISDS cases.
  • Concerns pertaining to third-party funding.

After having identified those concerns as being in need of reform, the Working Group will now consider possible options to address those concerns. While the UNCITRAL Secretariat has published a lengthy note in which various options are set out for each issue, the EU has submitted its proposal for an MIC as the “only available option that effectively responds to all the concerns identified in the Working Group”.

So far, Indonesia is the only Working Group member which has submitted comments for the upcoming session. Indonesia’s conclusion is that:

“… maintaining the conventional approach of ISDS is hardly an option, given today’s criticism of the existing ISDS mechanism. It is therefore suggested that the conventional approach of ISDS be improved in a manner that may effectively reduce state’s [sic] exposure to legal and financial risks posed by the ISDS mechanism”.

In this context, Indonesia refers to its recent bilateral investment treaty (BIT) review process and recommends, in particular:

  • The inclusion of the exhaustion of local remedies requirement.
  • The requirement of separate written consent for ISDS claims.
  • The introduction of mandatory mediation as an alternative to ISDS proceedings.

As regards the general concerns listed above, it is interesting to note that the Secretariat has devoted a separate note tothird-party funding. Many delegations have expressed several concerns in connection with third-party funding, notably regarding:

  • Conflicts of interest between arbitrator and third-party funder.
  • Lack of disclosure and transparency.
  • Third-party funder control and influence on the proceedings.
  • Confidentiality and legal privilege.
  • Impact on costs and security for costs.

In this context, the rather negative perception, which the note contains regarding third-party funding, is of particular interest:

“10. Beneficiaries of third-party funding include small- and medium-sized enterprises as well as large companies. Noteworthy is the fact that third-party funding in ISDS offers a specific context, as States are always in the role of respondents and private investors in the role of claimants. Third-party funding appears as a one-sided funding, provided to investors, which creates unbalance.” [Emphasis added.]

The particular concern regarding third-party funding is also visible in the recent EU free trade agreements (FTA) which it has concluded with Singapore, Vietnam and Canada. These contain specific provisions on the disclosure of the name and address of any third-party funder involved in a dispute, while the EU-Vietnam FTA also requires the disclosure of the “nature of the funding arrangement”.

These developments suggest that third-party funding will be specifically targeted in the context of the MIC by requiring higher disclosure standards.

In general, and based on the previous sessions, it is clear that a large majority of the Working Group members is eager to get rid of the current ISDS system as quickly as possible and replace it with something that essentially reduces claims by investors to the absolute minimum.

The only countries which continue to resist the EU’s MIC proposal are Japan, the USA and Russia. Interestingly, China so far has been pretty much silent in relation to its views on this issue.

It will therefore be interesting to see whether the EU can create enough traction so that a large majority of the Working Group members will support the MIC proposal. In this context, it is important to note that the EU aims to provide states with a maximum of flexibility by offering an “opt-in” system (similar to the one which has been applied to the UNCITRAL Transparency Rules). Accordingly, each state is free to decide whether to accept the jurisdiction of the MIC, and if so, to which BITs it is applicable.

In this way, the EU is able to push the proposal towards adoption by the Working Group members, while giving the doubting countries more time to make up their minds without blocking the adoption of the proposal.

Hence, while it is difficult to predict the outcome of the negotiations in New York, it does not seem impossible that the Working Group will conclude that the MIC is indeed the “only option” and that the EU’s proposal should therefore be adopted.

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