Unlocking Expectations: UNCITRAL Working Group III Finalized its First Drafts - Does it Deliver?
After six years of intense discussions, UNCITRAL's Working Group III (WGIII) is set to deliver its first outputs to the Commission in July 2023. These outputs consist of several significant documents, including the Draft Provisions on Mediation, the Draft UNCITRAL Guidelines on Investment Mediation, the Draft Code of Conduct for Judges, and the more controversial Draft Code of Conduct for Arbitrators. These long-awaited final drafts are presented as a step towards reforming the investor-state dispute settlement system (or ISDS). However, the scope and ambition of these drafts raise serious questions about the extent to which the process will effectively address the legitimacy concerns of the system or will codify existing dynamics and practices under the symbolic banner of the UN.
In 2017, the UNCITRAL Commission entrusted its WGIII with “a broad mandate to work on the possible reform of investor-State dispute settlement.” However, WGIII’s interpretation of this mandate was narrow, focusing solely on a set of procedural issues, and excluding the reform of substantive provisions in investment treaties. Nonetheless, WGIII's mandate was considered the most comprehensive attempt at ISDS reform at the time of its inception. Among other reform processes are the OECD's current work program, titled “The Future of Investment Treaties,” aimed at addressing the role of investment treaties in contributing to sustainable development and responsible business; bilateral and multilateral treaty reform efforts; the European Union’s proposal for establishing a permanent multilateral investment court; and the procedural reforms at ICSID and UNCITRAL.
The investment treaty regime, including ISDS, has long been a matter of concern due to a number of its inherent features. These concerns have raised significant alarm about the negative impacts of the system, which far outweigh the potential benefits. One notable issue is that ISDS fails to effectively stimulate investment, as many states expected it would. Some other contentious aspects include the lack of transparency of the system, and the fundamental asymmetry in legal protections (afforded only to foreign investors) and legal obligations (imposed only on host states). Additionally, the current system overlooks the interests and rights of other investment-impacted third parties. There is also unease surrounding the escalating size of ISDS monetary awards and legal costs, particularly against low-income countries. Furthermore, investment treaties restrict the regulatory space of host governments in areas critical to the public interest, such as public health and the environment; and the system tends to displace domestic adjudicatory decisions and the role of domestic law and institutions. Inconsistency and incoherence in interpretating and applying treaty protections are prevalent, along with concerns regarding the independence, impartiality, and neutrality of adjudicators. Finally, over the past decade, third-party funders have financed an increasing number of investor-state arbitrations, raising ethical issues, such as potential conflicts of interest, third-party control and influence of ISDS proceedings, as well as the risk of increasing speculative and/or frivolous claims. Such speculative interests exacerbate the aforementioned concerns and place a growing burden on the public budgets and policies of host countries.
Given this context, the main objective assigned to WGIII was to identify the core issues of concern with ISDS, delve into understanding the nature of those problems, and find potential solutions to rectify those concerns. Since 2021, WGIII has been actively engaged in crafting texts that encompass various reform options identified. Before these drafts can be proposed to the Commission for adoption, the Working Group must achieve a political consensus on the content. Despite the interruption caused by the pandemic, which necessitated a shift to online meetings, delegations participating in WGIII have dedicated a total of fifteen weeks to negotiations and held twenty-four informal meetings to reach, among other things, consensus on these four drafts.
During the 45th Session in March 2023, consensus was achieved on the two mediation drafts. However, reaching consensus on the Code of Conduct for Arbitrators (CoC), which was eagerly anticipated as a crucial part of the reform process, proved to be a formidable challenge. The negotiations on the draft working paper on the CoC extended over five sessions, well beyond the initially allotted time. Therefore, there was immense pressure during the last Session in New York to conclude the round of negotiations with drafts to propose to the Commission, and in particular, a draft CoC. It was not until the very last few minutes of the last day of the 45th Session, in light of mounting pressure, that consensus was finally reached.
The CoC encompasses a set of articles that form a crucial component of the efforts to address the perceived and/or real lack of independence and impartiality of adjudicators. The disagreement among delegations primarily centered around the content of article 4 of the CoC ("limit on multiple roles"). The practice of multiple hatting arises when an arbitrator acting in a treaty-based ISDS dispute undertakes another role – as legal representative or expert witness – in another treaty-based ISDS dispute either concurrently or in the very near future (after a “cooling-off period”). Divergent opinions especially emerged with respect to the specific duration, or cooling-off period, during which arbitrators are prohibited from serving as legal representatives or expert witnesses in subsequent proceedings related to the same measure(s), same or related party(ies), or the same provision of the same instrument of consent.
The United Kingdom, United States, and Singapore held strong positions on one side of the spectrum, namely to eliminate the cooling-off period altogether or to restrict it to three or six months at most. Argentina, Ecuador, Sierra Leone, and India, among other delegates, took an opposing stance, preferring a cooling-off period of at least three years and ideally five or more years. This resulted in a deadlock at the end of the 44th Session in January 2023 that persisted until the final day of the 45th Session.
On the last morning of the 45th Session, a new coalition of "like-minded" countries emerged, spearheaded by Sierra Leone and including all African States in the room, along with Pakistan and Jamaica. This group steadfastly held on to their collective position that the cooling-off period should be at least three years. The emergence of this coalition was unexpected, given the relatively lower participation of low-income countries in the negotiations compared to their high-income counterparts. In this charged atmosphere, the last hours of negotiations were characterized by intense discussions focused on the cooling-off periods. Numbers and proposals were rapidly exchanged in the room, creating an atmosphere reminiscent of an auction.
After extensive formal and informal negotiations, a compromise was eventually reached, resulting in the establishment of a three-year cooling-off period for disputes involving the same measure, or the same or related party(ies), and one year for disputes involving the same provision of the same instrument of consent. This compromise text substantially condensed the wide range of viewpoints that had initially emerged with respect to the ethical requirements to be imposed on arbitrators.
While WGIII delegates have generally agreed on the significance of codes of conduct and ethical requirements for arbitrators, the final draft CoC falls far short of the initial ambitions set by the Working Group on these standards. More broadly, these draft texts are woefully insufficient to address the widespread concerns with ISDS that the WGIII delegates have surfaced, never mind the far greater fundamental problems that were considered outside the Working Group’s procedural focus. Nearly six years into the WGIII mandate, there is no real prospect within the reform process of helping states actually achieve their aims with respect to mobilizing investment for sustainable development. Meanwhile, investment treaties continue to enable foreign investors to contest government actions designed to promote national development priorities, sustainable development goals, and efforts related to climate change mitigation and adaptation. Arbitrators continue to possess unfettered power to interpret and apply broad substantive protections, and other investment-impacted stakeholders continue to remain on the sidelines.
 A forthcoming publication from CCSI analyses the interventions at the WGIII negotiations. What emerges from the research is that capital-exporting countries in the Global North make a far greater number of interventions during the negotiations than Global South countries, which are often at the receiving end of the ISDS claims. The publication of this report is forthcoming in the latter half of 2023.
 For example, article 4 provides only a partial prohibition on double-hatting, instead of a full prohibition, as hoped by several delegations, including Argentina, Canada, Chile, the EU, Sierra Leone, Spain, Zimbabwe, and the Secretariat of the AfCFTA.