Proposed Standing Multilateral Mechanism for Investor-State Disputes: Navigating the Negotiations
As UNCITRAL Working Group III meets this week to consider a “standing multilateral mechanism,” a number of important and complex issues are on the agenda
From February 14-18, 2022, UNCITRAL Working Group III is meeting to continue work on certain aspects of its ISDS reform mandate. In a January 28 message, the Chair proposed that the Working Group split its time evenly between two issues, a code of conduct and the creation of a standing ISDS tribunal. While there is some uncertainty regarding whether delegations will agree to that proposed split, this blog assumes that the standing tribunal will remain on the agenda, and highlights five of the myriad issues that are likely to be raised in the time dedicated to that topic. The issues highlighted are based on the Secretariat’s Note that is likely to serve as a basis for discussion.
What is being established?
The Secretariat’s Note refers to the creation of a “standing multilateral mechanism.” The draft text (draft provision 1) envisions the creation of a “Multilateral Investment Tribunal” (“the Tribunal”) comprised of a first instance and an appellate level. Some comments in the UNCITRAL discussions had suggested that states may want one or the other (e.g. a standing mechanism that would replace the system of arbitration, or an appellate mechanism) but not necessarily both. This text, however, suggests that the two are a block. It is unclear whether states will seek to disaggregate those components of what is now described as a unitary Tribunal.
The Secretariat’s Note also indicates that the Conference of the Parties established to govern this Tribunal may be responsible for governing an Advisory Centre and a Secretariat. (See draft provision 3). Thus, the mechanism as contemplated in the draft may form part of a relatively significant new investment law institution. The discussions this week will help shed light on whether states support this approach.
Jurisdiction: What can it do?
Members of Working Group III will also discuss the possible jurisdiction of the Tribunal. One often-cited idea is for it to have an “open architecture,” essentially open to any parties, state or non-state, that have consented to submit their dispute to the tribunal. One might envision, for instance, this involving state-to-state claims, ISDS claims, community-state claims, and community-investor claims. These claims could arise out of a treaty, investment law, or contract. This idea is presently reflected in “Option 2” of draft provision 2.
One question is whether the jurisdictional provision will clarify the possibility of counterclaims including, in particular, whether and to what extent an investor’s decision to submit a claim to the Tribunal constitutes consent to jurisdiction of claims against it. Investment treaties are often unclear on the issues of whether and to what extent they permit counterclaims; but to the extent that the instruments creating or enabling use of the Tribunal will modify existing investment treaties, the language used to address the Tribunal’s jurisdiction could be used to more clearly address whether and when counterclaims against investors are possible.
Irrespective of how “open” this architecture is to claims involving different types of parties and based on different types of legal instruments, one important issue is whether, for an investor to bring a claim alleging harm to its “investment,” the investor will have to establish the existence of an investment meeting any type of objective test. The content and demands of the “Salini-test” as a gatekeeper to jurisdiction over ISDS claims under the ICSID Convention are uncertain and controversial; but that could be addressed in this new mechanism. Some delegations, like the EU and its member states, would seemingly do away with the test as a condition for investors to bring their ISDS claims before the Tribunal. But the jurisdictional test could also be clarified and strengthened so as to ensure that claims heard by the Tribunal possessed certain objective characteristics of an investment.
Similarly, new criteria could be added, such as language indicating that, unless otherwise provided by the underlying treaty, claimants may not be beneficially owned by nationals of the host state, or dual nationals of the host state. The jurisdictional provisions of a Tribunal could usefully clarify and complement the vague, controversial, and uncertain jurisdictional issues in underlying BITs. At present, the Secretariat’s Note does not widely explore those possibilities. States may seek to address those issues more fully this week.
Governance: Who controls it and how?
Other issues addressed in the Secretariat’s Note relate to governance. Who will have what powers over the first instance and appellate layers of the Tribunal, any associated Secretariat, and any associated Advisory Centre? In draft provision 3 and associated commentary, the Note speaks of a Committee of the Parties with largely unspecified rights and duties to govern all of those entities, and indicates that decisions of the Committee of the Parties could be made by a simple or two-thirds majority. But, as the comments of some delegations reflect, it seems exceedingly difficult to outline the rights, obligations, and voting rules for a Committee of the Parties without knowing more about what states and their stakeholders ultimately think a Committee of the Parties should, and should not, do. Moreover, based on its roles, it may be that some decisions should be taken by a simple majority, some by two-thirds, some unanimously, depending on the issue at stake. It seems an important opportunity to thoroughly assess, given the relatively unique features of international investment protection, the implications of different voting systems. It may also be that the right approach will depend based on how “open” the architecture is and whether the nature of litigants and sources of applicable law will change over time.
It is also not clear that all states that may be part of a Committee of the Parties will or should have the same voting powers on all issues. The EU and its member states, for instance, “are against the possibility that tribunal members are selected by States other than those that accept the tribunal’s jurisdiction.” But could such states that did not accept jurisdiction of (either layer of) the Tribunal vote on any other matters related to the Tribunal? Could a state vote on all or any issues if it only gives consent to be sued under one of its many investment treaties, and is extremely unlikely to be sued under that instrument?
With respect to governance of the Tribunal specifically, the Secretariat’s Note states in draft provision 3 that the Committee of the Parties “shall establish the rules of procedure” for the Tribunal, but that the Tribunal shall determine “relevant rules for carrying out its functions” and “lay down regulations necessary for its routine functioning.” It is not clear where the Tribunal’s authority stops and the authority of the Committee of the Parties takes over, or whether appropriate checks and balances exist between the Tribunal and the Conference of the Parties that meet state delegations’ expectations from the investment law system. Indeed, there has yet to be a real reckoning on the broader policy question of what power states as investment treaty drafters and subjects should have as compared to the Tribunal empowered to interpret, apply, or even develop and modify the law. Clarification of those issues will help inform discussions of how best to structure governance of the Mechanism.
Tribunal members: Who appoints and removes them? How long can they serve?
Another set of issues relates to the power to appoint and remove Tribunal members. In draft provision 8 and associated commentary, the Secretariat’s Note suggests that one option is to ensure that Tribunal members are from each of the UN regional groupings: Asia-Pacific, Africa, Latin America and the Caribbean, Western Europe and others (including the United States and Canada), and Eastern Europe. But again, particularly in light of the nature of investment law and changes in economic, political, and demographic conditions that have taken place in recent decades, it is not clear that those categories are the optimal ones.
Even if the UN’s existing regional groupings are used, a separate and crucial question raised by the draft text is how many Tribunal members can or must represent each regional group.
The Secretariat’s Note also has a provision (draft provision 5) enabling the use of ad hoc judges – i.e., judges that can be appointed for a particular dispute. A respondent state, for instance, may want the ability to appoint an ad hoc judge of its nationality to the Tribunal to hear a case against it, particularly when the case involves issues of domestic law and fact. This might arise under an “open architecture” system when the case is based on a contract governed by domestic law; it might also arise in treaty-based cases requiring the Tribunal to understand, interpret, or apply domestic law to, for instance, evaluate an umbrella clause claim, assess the nature and scope of property rights allegedly expropriated by the state, or adjudicate a counterclaim based on breach of domestic law.
Some delegations have suggested that they are unsure about the idea of ad hoc judges. The EU and its member states, for instance, noted that ad hoc party-appointed judges may introduce into the Tribunal some of the concerns about partiality raised by the current ISDS system of party-appointed arbitrators. Ad hoc judges, the EU and its member states suggest, may be biased in favour of the appointing state. They cite research on the voting records of the ICJ and Inter-American Court of Human Rights, which seems to evidence such partiality. But voting patterns may be just as likely to be due to the judge’s greater understanding of the underlying issues and context than its desire to please and be reappointed by the respondent state.
The costs and benefits of ad hoc judges may also be closely intertwined with questions relating to the possible jurisdiction of the Tribunal (e.g., might a Tribunal be called upon to evaluate contract or tort claims based purely on domestic law?), and the representativeness of the Tribunal (e.g., will some states feel that, absent an ad hoc mechanism, their legal and policy systems will not be adequately represented?). Whether the use of ad hoc judges is possible and, if so, under what circumstances, is therefore another important and complex issue on the delegates’ agenda.
The Secretariat’s Note also sets forth draft language and placeholders for rules on how long Tribunal members should serve, and whether their appointments should be open to renewal. Again, these are complex issues with important implications. If Tribunal members were appointed for a certain non-renewable term, their independence from and lack of accountability to the states that appoint them may have both advantages and disadvantages. Additionally, if their terms are non-renewable and not particularly long relative to the number of working years they expect to have in front of them after their Tribunal post, there is a risk that they will be considering their future professional activities when deciding the cases before them. The EU and its member states proposed requiring Tribunal members to wait three years before they could begin representing parties in cases before the Tribunal as counsel. But it may also be important to have rules preventing Tribunal members from acting subsequently as counsel or arbitrator in other ISDS cases (assuming that those continue to exist alongside the ISDS disputes before this standing mechanism).
Applicable law: What governs and who decides what it means?
The Secretariat’s Note also highlights a few of the other policy issues delegations may wish to consider related to the establishment of a standing multilateral mechanism. The three issues it highlights are the means of establishing the mechanism, the rules and procedures to be followed by the Tribunal, and issues of applicable law and treaty interpretation.
On the issue of the rules and procedures, the Secretariat’s Note returns to the issue of what will be dictated by the instrument establishing the Tribunal, developed by the Committee of the Parties, or crafted by all or some of the Tribunal members. Relatedly, it is not clear whether or through what processes the Tribunal would be required to adopt any of the other reforms being developed by Working Group III to address such issues as frivolous claims, claims for reflective loss, the rights of non-parties, and third-party funding. Which of those reforms are “core” or essential to the legitimacy and functioning of an acceptable multilateral Tribunal? And how will those reforms be integrated?
On the issue of applicable law, the Secretariat’s Note flags that the Tribunal could provide for or enable the use of tools aimed at increasing the state’s role in treaty interpretation. The instrument establishing the Tribunal could integrate rules giving state parties to the underlying treaty the option to adopt binding interpretations; it could also adopt particular rules on treaty interpretation aiming to adjust, or fill holes in, existing investment treaties’ approach to the issue. These and other possible strategies (such as mechanisms giving states the power to reject awards, requiring exhaustion of local remedies, or referring certain issues to domestic courts or other officials for determination), present an opportunity to address the balance of power between domestic and international courts by “institutionalizing subsidiarity” in the design of a new Tribunal. This balance has been an issue raised by various delegations; it is therefore an issue that might work its way into this week’s meeting.
Each “day” of negotiations is only four hours, so delegations will have tight timeframes to address a series of complex issues, made even more complex by the existence of various open “big-picture” questions relating to states’ ultimate objectives. The topics discussed above are just some of the issues addressed in the Secretariat’s Note, which are just some of the issues related to the creation of a standing multilateral mechanism.
Moreover, discussion of the standing multilateral mechanism is only part of the Working Group’s agenda. While the Chair had proposed that the standing mechanism get half the time (2.5 days), that time appears to already be shrinking. Due to some opposition to the Chair’s proposal regarding a 50-50 split between discussing the standing mechanism and the code of conduct for arbitrators, the Working Group will now start the meeting by discussing and deciding on the agenda itself. Even if the topics remain unchanged, the time discussing the agenda will take time from discussion of the standing mechanism, the code of conduct, or both.
Importantly, Covid-19 and related travel challenges will make participating in this session particularly difficult for many delegations. For those unable to attend in person, time differences and technological challenges will, as in past sessions, limit the meaningful participation for many countries.
This meeting is the last formal session before the Working Group reports to the Commission on its progress, but it does not promise to be an easy one.
For more on CCSI’s engagement with UNCITRAL’s Working Group III, please click here.
*Lise Johnson is Counsel at Curtis, Mallet-Prevost, Colt & Mosle LLP, and Senior Fellow at the Columbia Center on Sustainable Investment. The opinions expressed are those of the author and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.