South’s concerns over ISDS reform process need to be addressed
Third World Network
New TWN briefing paper: South’s concerns over ISDS reform process need to be addressed
Published in SUNS #9402 dated 6 August 2021
The full paper is available here.
Geneva, 5 Aug (Kanaga Raja) – The broad mandate given by the UN Commission on International Trade Law (UNCITRAL) to a working group on the reform of investor-state dispute settlement (ISDS) has been applied in a way that focuses on a limited set of procedural issues that fails to address the substantive concerns over the crisis of legitimacy confronting the international investment regime, and ISDS more specifically.
This is one of the main conclusions highlighted by Jane Kelsey and Kinda Mohamadieh in a paper titled “UNCITRAL’s work plan on ISDS reform: The role of the Commission in stopping marginalization of issues of concern to developing countries.”
Jane Kelsey is a professor of law at the University of Auckland, New Zealand and Kinda Mohamadieh is a legal advisor and senior researcher at the Third World Network.
In their paper, the authors pointed out that in 2017, UNCITRAL gave a broad mandate to its Working Group III (WGIII) to conduct a government-led consensus-based process on the possible reform of ISDS.
The WGIII is now in the third and final stage of its work, to identify solutions to issues that have been identified as problems. It is seeking more resources (time and budget) to complete this work by 2026, they noted.
So far, said the authors, the mandate given to WGIII has been narrowly interpreted and applied in a way that focuses on a limited set of procedural issues, which have been restricted to four issues: consistency, coherence, predictability and correctness of arbitral decisions; arbitrators and decision makers; cost and duration of cases; and third-party funding.
“The substantive concerns that underpin the crisis of legitimacy confronting the international investment regime, and ISDS more specifically, have not been addressed,” they argued.
According to the paper, a number of developing countries have argued that the following issues should be addressed by WGIII, which have been referred to as “other concerns” or “cross-cutting issues”.
These include means other than arbitration to resolve investment disputes, including the role of domestic courts, and the role of State-to-State mechanisms; domestic courts and the role of exhaustion of local remedies; participation by third parties and affected communities; counter-claims and investor obligations; calculation of damages; and regulatory chill.
The authors noted that at a meeting of WGIII held in New York during April 2019, there was agreement among participating Member States that these issues will be addressed as the Working Group develops tools to address various concerns.
“However, since then, they have rarely been addressed in a meaningful and integrated manner as discussions on reform options evolve,” said the authors.
The authors argued that the long list of “other concerns” or “cross-cutting issues” that developing countries had sought to get onto the WGIII agenda were clustered together and not granted specific time for deliberations.
They said that having conferred the mandate on WGIII, the Commission has a crucial role to ensure the Working Group’s process, agenda and proposals can deliver genuine, significant and meaningful reforms to ISDS.
The authors further said that the Commission also has a major role in ensuring that work achieved in WGIII meets the commitments and obligations undertaken by UN Member States to the Sustainable Development Goals (SDGs).
These include respect for human rights, governance structures that ensure inclusive participatory processes and equal access to justice, and encouraging sustainable new investment for development purposes in states that need it, they added.
“Currently, the possibilities of the WGIII meeting those obligations in a manner consistent with the sustainability and developmental mandates of bodies within the UN system, including UNCITRAL, seems remote unless major corrections in the direction of travel of WGIII are achieved,” said the authors.
PROPOSED WORK PLAN
According to the paper, the Commission decides the allocation of time and resources for WGIII, based on a submission prepared by the Secretariat and approved by the Working Group members.
In its most recent 54th session, the Commission heard reports on the latest deliberations of WGIII, including a proposed Work Plan that provides a road map for the finalization of the Working Group’s deliberations.
The Commission also considered a request from WGIII for more resources based on the proposed Work Plan to cover one additional week of meetings per year over the period between 2022 and 2026.
The authors noted that the Working Group’s previous proposal to the Commission for more time and resources was not adopted in 2020, reflecting the lack of consensus among Member States on the way forward, and consideration of the future allocations was deferred to the Commission’s meeting in 2021.
According to the paper, the Chair, Secretariat and Rapporteur for WGIII initially developed the draft of a Work Plan to justify more resources and an intensified schedule of meetings with inputs from just a small number of mainly developed countries.
Delegations were not prepared to adopt the proposed draft during the Working Group’s meeting in February 2021, and a dedicated two-day online session was then scheduled for May 2021 to finalize the Work Plan.
The draft was shared with all delegations for review and comment in the run-up to that meeting, although feedback received from delegations was not published by the Secretariat.
Delegations’ responses to the revised proposals at the May online session reflected the divergent positions presented in the Working Group over the previous three years and suggests that a consensus outcome that addresses all the principal issues, especially for developing countries, was increasingly unlikely, said the authors.
According to their paper, the Chair described the work plan as “flexible”. However, the topics that were identified for consideration and allocation of time and resources to them, and modalities of formal and information meetings and drafting groups to undertake the work, would inevitably circumscribe the possible outcomes.
That reality shaped the lively debate at the May 2021 meeting, with disagreements among participating States centering on the selection of topics, sequencing of decisions, modalities and timelines, said the authors.
During the second day of the meeting, the Chair circulated a revised draft schedule of work for discussion, asking for any additional comments within a week. The plan would then be revised and presented to the Commission to approve the allocation of time and resources.
If there was no agreement among delegations, the document would be forwarded in the name of the Chair and Rapporteur, said the authors, noting that participating States’ comments are not publicly available.
SOUTH’S ISSUES BEING MARGINALIZED
According to the paper, the revised Work Plan was divided into eight streams, each of which was allocated a proportion of the available WGIII time and resources, split into 60 formal working days and 77 other meeting days or informal work days to complete specific tasks, including drafting groups.
The original aim was to conclude by 2025 but the revised draft proposed to extend that to 2026.
According to the authors, one of the eight categories was vaguely entitled “ISDS Procedural Reforms”, and this was initially allocated around 18% of the overall meeting time, both formal and informal working days, or 20% of the formal working group time where decisions could be taken.
The Chair explained that the umbrella term was expected to include consideration of new rules on frivolous claims, multiple proceedings, shareholder reflective loss claims, counterclaims, security for costs, third party funding and treaty interpretation, with the possible addition of procedural rules with respect to regulatory chill, exhaustion of local remedies, denial of benefits, consolidation, allocation of costs “and so forth”.
In other words, the authors argued, the long list of “other concerns” or “cross-cutting issues” that developing countries had sought to get onto the WGIII agenda were clustered together and not granted specific time for deliberations.
“That approach contrasted starkly with the allocation of time and resources for reforms advocated by capital exporting States,” said the authors.
The authors pointed out that developing countries had to invest significant negotiating capital in order to reclaim and defend space in the work plan for these “other concerns” or “cross-cutting issues” that they had been promised would form part of the ongoing deliberations.
Several developing countries took the floor to request that those issues be explicitly reflected in the Work Plan and given enough time and resources for discussion, they said.
According to the paper, South Africa, for instance, reminded the Working Group that “while there was agreement in WGIII that these issues will be taken into account as the working group develops tools to address various concerns, they are rarely being addressed in an integrated manner as discussions on reform options evolve”.
South Africa added that they “do not consider general considerations of these issues to be adequate without dedicated time for such discussion, both in terms of time and resources”.
Kenya more broadly stressed the need for the concerns of developing countries to be considered seriously given that importers of capital bear most of the challenging consequences of the ISDS regime. It repeated the call for reforms to address substantive as well as procedural concerns.
Meanwhile, the Moroccan delegation, supported by Nigeria, raised concerns that the tight time-frame dedicated to these cross-cutting issues and damages could mean sacrificing quality and the ability of officials to engage with their capitals.
According to the authors, Morocco proposed that certain issues, such as exhaustion of remedies and assessment of damages, should be treated as separate issues with their own time allocation, just as the selection and appointment of arbitrators was.
The authors said that these practical suggestions were, however, set aside by the Chair as something that could be considered by the Working Group later on.
The Chair instead defended the proposed approach, saying that the plan looked at the tools rather than the concerns themselves, and that the category of “ISDS Procedural Rules Reforms” was broad enough to encompass the “cross-cutting issues”, the authors noted.
CONCERNS OVER MODALITIES & PACE OF WORK
In their paper, the authors highlighted a second category of concerns involving the modalities for the future Work Plan, especially the 77 informal meetings proposed to further the discussions on the specific reform options for consideration.
According to the authors, these are supposed to be meetings where no decisions are taken, yet some may involve drafting groups or expert groups and are likely to be driven by the proponents of particular positions.
The informal meetings are to be hosted voluntarily by States, who will write the reports for other delegations, they said.
Which countries offer to organize these sessions, with what agenda, resources, interpretation, and time zones will therefore influence whose voices are heard loudest, what is reported and what options would be on the table, the authors argued, noting that the Chair has also indicated that interpretation in these meetings will be decided on a case-by-case basis depending on the availability of funding.
“There is no guarantee of funding support, making it even harder for developing countries to participate, let alone to ensure their concerns are prioritized,” the authors underlined.
They also pointed to another major concern regarding the intense pace of the meetings and the overall work, which they said could jeopardize the effective participation of many delegations, particularly developing countries.
According to the authors, many delegations said that this intensity was unrealistic for several reasons, including the limitations on the officials’ time and competing workloads, technical difficulties that undermine the right to be heard, availability of translation and interpretation, the need to brief and seek instructions from capital, and competing UNCITRAL priorities.
With regard to the modalities for finalizing the reforms of ISDS, the authors noted that capital exporting countries were most concerned about the sequencing of an outcome.
The paper to the May 2021 meeting of WGIII suggested that reform options could be “approved in principle” as they were developed, then formally adopted as part of the proposed final text.
According to the authors, the Chair said that this would allow any necessary adjustments when the whole project is complete, but not the reopening of discussions on agreed solutions. The authors noted that the phrase “approved in principle” was later replaced by the ambiguous notion of “consideration by the Commission”.
According to the authors, the United States, Australia, Japan, Israel, and Chile objected that concrete solutions should be agreed to as soon as possible, with an “early harvest of low hanging fruit”.
Conversely, the European Union and Switzerland were clearly concerned that allowing piecemeal agreement on reforms would militate against agreement on a more comprehensive consensus outcome, while Russia repeated its call to focus on matters where agreement was feasible.
“These disagreements among capital exporting countries raise significant doubts that they will be able to agree on an outcome, even as a “menu” of options they can select from in a multilateral instrument,” said the authors.
The authors pointed out that the “early harvest” approach is also problematic for developing countries, as it increases the risks that issues that have been allocated the most time will be closed.
The remaining issues, especially those of concern to developing countries, which might be more complex in nature, have not been discussed so far, and lacking equivalent time and resources, will remain unresolved, they said.
“Such an approach would also prevent a holistic assessment of the inter-linkages between the different reform options, how they influence each other, and the meaningfulness of the final package of adopted reforms,” they added.
The authors pointed out that the sequencing of the outcomes, whereby some reform options are “approved in principle” or “considered by the Commission”, could become a de facto “early harvest”.
“Such approaches will prevent a holistic assessment of the inter-linkages between the different reform options, how they influence each other, how they are presented in the legal instrument that will present the reforms for adoption, and the meaningfulness of the final package of reform, especially for developing countries as the main targets of ISDS disputes.”
The authors also noted that a Multilateral Legal Instrument is being promoted as the means to adopt the outcomes and is one of the eight topics in the Work Plan.
“Discussion suggests that this instrument may allow capital exporting States to pick and choose which reforms to adopt, allowing them to avoid reforms that are most important to developing countries,” they said.
In sum, said the authors, unless there are significant changes to the current draft Work Plan, the real time to be dedicated to the long list of “cross-cutting” issues will be minimal, on top of the lack of any dedicated time or resources to date.
Despite promises of “flexibility”, the process over the remaining four years at present offers no real prospect of any significant reforms, even within the narrow ambit of ISDS “procedure”, they warned.
REQUEST FOR ADDITIONAL RESOURCES
According to the paper, on 15 July 2021, the Commission considered for the second time a request from WGIII for additional resources, which would allow it to meet for three instead of two weeks every year between 2022 and 2026. The first request raised to the Commission in 2020 was not agreed.
The Chair of the Commission’s session, the head of the UNCITRAL Secretariat and the Chair of WGIII urged Member States to focus their attention on the resource requirements and the related request to the General Assembly and not to discuss the content of the draft Work Plan of WGIII.
The head of the UNCITRAL Secretariat and the Chair of WGIII insisted that the Work Plan is a notional, flexible living document providing a road map and that adjustments to it could be adopted as and when needed. They both noted that without the additional resources, WGIII will need up to 2028 or possibly longer in order to finish its work.
According to the authors, despite these attempts to minimize the debate, several countries raised concerns about the request for additional resources, particularly given the lack of consensus in WGIII on the proposed Work Plan.
These countries pointed out that issues of concern to developing countries have not been allocated adequate time and resources for proper consideration, the authors said.
According to the authors, even though countries that did not support the request did not change their position, the Chair concluded, applying the “silence procedure”, that an overwhelming majority supported the request, while noting that some delegations had reservations and concerns over the need to give greater visibility to cross-cutting issues, transparency, the pace of work and impact on delegations, and the need to review the Work Plan.
Consequently, a request for additional resources was to be drafted and raised by the Commission to the UN General Assembly with clear wording to “better accommodate” cross-cutting issues, revise and adjust the Work Plan “as needed”, and ensure transparency and inclusivity in the process.
The authors noted that the vagueness of this wording has echoes of past unfulfilled promises of the “flexibility” of the Work Plan.
Genuine and concrete changes to the Work Plan will require ongoing pressure on the WGIII Chair, the Secretariat, and capital exporting countries that have so far dominated the WGIII agenda, they said.
The authors said that the one real safeguard is the Commission’s intention to evaluate the progress of the work in 2022 and to revisit this year’s decision based on that review.
RECOMMENDATIONS ON THE WAY FORWARD
In their paper, the authors highlighted a number of recommendations for the way forward in order to enhance the possibilities that WGIII delivers “genuine, significant and meaningful” reforms of ISDS:
(1) Amending the WGIII Work Plan
The authors said issues of concern to developing countries, including the “cross-cutting” issues, cannot continue to be rolled forward until they are never properly addressed.
“The work plan must give priority now to the concerns and reforms raised by developing countries, given they are the principal targets of ISDS disputes.”
The authors said an acceptable work plan must allocate time and resources equitably to the issues of concern to developing countries, recognizing that they have not been discussed to date in WGIII.
The list of “cross-cutting issues” must also be disaggregated, so they can be considered as reform options on their own and allocated clear stand-alone time. Solutions to these issues must form part of the minimum standards for any agreed outcome in WGIII, the authors added.
(2) Implementation of the revised Work Plan
The authors said that establishing a transparent monitoring mechanism is essential to ensure that no State is left behind in the negotiations process due to lack of capacity or resources to participate in the extensive number of meetings.
“The measure of participation by developing countries in the WGIII process must be their ability to make effective contributions to the process, not the number of countries represented.”
The authors said that where the active participation of developing countries drops significantly, additional efforts must be made to ensure developing countries can participate effectively and equitably in all WGIII activities and deliberations.
In this context, the authors proposed that all communications, meetings, and work – including involvement in inter- sessional projects – must be conducted on an opt-out, rather than opt-in, basis that ensures the widest possible access of States to the process, and all drafting and other work undertaken by WGIII must be conducted in an open and participatory manner, and provided to states on an accessible portal.
According to the authors, where informal meetings form part of the Work Plan: (a) they must meet the minimum requirements to allow effective participation of developing countries, including attendance, translation and interpretation; (b) all the States participating in WGIII must decide the agenda and issues for such meetings in a way that ensures progress towards solutions on issues of concern to developing countries; (c) reports must be provided to non-participating States that are full and accurate accounts of the discussion and their relationship to the formal discussions; and (d) they must not involve any drafting of text or formal or de facto decision-making.
(3) Decision-making procedures on reforms to be agreed in WGIII
According to the authors, modes of decision-making on the outcomes to be adopted by WGIII must not undermine the achievement of outcomes that address the issues of concern to developing countries.
Moreover, the Commission must retain the ability to effectively assess, approve or reject the final outcome, taking into account the totality of the reforms and the balance of the final package, including effective solutions to issues of concern to developing countries, they said.
Furthermore, any instrument adopted for implementation of any agreed outcome must ensure that its mandatory provisions include reforms that address those matters of importance to developing countries, the authors concluded.
