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Reform of Investor-state Dispute Settlement: In Search of a Roadmap

Note by UNCTAD, 2013

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This issues note by the UNCTAD secretariat outlines five paths for reform of the investor-State dispute settlement (ISDS) regime, which is plagued by concerns related to perceived deficit of legitimacy and transparency; contradictions between arbitral awards; difficulties in correcting erroneous arbitral decisions; questions about the independence and impartiality of arbitrators, and costs and time of arbitral procedures.

RefoRm of InvestoR-state DIspute
settlement: In seaRch of a RoaDmap


special issue for the multilateral Dialogue on Investment, 28-29 may 2013


no. 2
May 2013


IIA
ISSUES NOTE


U n i t e d n at i o n s C o n f e r e n C e o n t r a d e a n d d e v e l o p m e n t


Note: This report may be freely cited provided appropriate acknowledgement is
given to UNCTAD and UNCTAD’s website is mentioned (www.unctad.org/diae).


This publication has not been formally edited.


Key messages:
• Challengesposedbytoday’sinvestor-Statedisputesettlement(ISDS)regimecreate


momentumforitsreform.
• Concerns with the current ISDS system relate, among others things, to a


perceiveddeficit of legitimacyand transparency; contradictionsbetweenarbitral
awards;difficultiesincorrectingerroneousarbitraldecisions;questionsaboutthe
independenceandimpartialityofarbitrators,andconcernsrelatingtothecostsand
timeofarbitralprocedures.


• Thisnoteoutlinesfivemainreformpaths.
• Promotingalternativedisputeresolution;
• TailoringtheexistingsystemthroughindividualIIAs;
• LimitinginvestoraccesstoISDS;
• Introducinganappealsfacility;
• Creatingastandinginternationalinvestmentcourt.


• Eachofthefivereformoptionscomeswithitsspecificadvantagesanddisadvantages
andrespondstothemainconcernsinadistinctiveway.


• Someoftheoptionscanbeimplementedthroughactionsbyindividualgovernments
andothersrequirejointactionbyalargergroup.


• TheoptionsthatrequirecollectiveactionfromalargernumberofStateswouldgo
furtherinaddressingtheexistingproblems,butwouldalsofacemoredifficultiesin
implementation.


• Collectiveeffortsatthemultilaterallevelcanhelptodevelopaconsensusaboutthe
preferredcourseforreformandwaystoputitintoaction.


The proliferation of ISDS under international investment agreements (IIAs) shows the
importancethismechanismhasgained.Butitalsoincreasinglyrevealsthattherearea
number of problems. This note summarizes themain concerns relating to the current
ISDS regime, andsketchesout themainpossibleavenues for reform.Thenote rests
upon UNCTAD’s Investment Policy Framework for Sustainable Development (IPFSD)1
whichplacestheobjectivesofinclusivegrowthandsustainabledevelopmentatthecore
ofnationalandinternationalinvestmentpolicies.


1 UNCTAD (2012), Investment Policy Framework for Sustainable Development, available at http://unctad.org/en/PublicationsLibrary/
webdiaepcb2012d6_en.pdf.




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I. Main concerns about the current ISDS regime


As documented by UNCTAD’s annual update, ISDS cases have proliferated in
thepast10-15years,withtheoverallnumberofknowntreaty-basedarbitrations
reaching514bytheendof2012(seefigure1).Sincemostarbitrationforumsdonot
maintainapublicregistryofclaims,thetotalnumberofcasesislikelytobehigher.2


Figure 1. Known ISDS cases, as of end 2012


Source: UNCTAD.


InlightoftheincreasingnumberofISDScases,thedebateabouttheprosandcons
oftheISDSmechanismhasbeengainingmomentum,especiallyinthosecountries
andregionswhere ISDSisontheagendaof IIAnegotiationsand/orwhichhave
facedinvestorclaimsthathaveattractedpublicattention.


The ISDSmechanismwas designed for depoliticizing investment disputes and
creatingaforumthatwouldofferinvestorsafairhearingbeforean
independent,neutralandqualifiedtribunal.Itwasseenasamechanismforrendering
finalandenforceabledecisionsthroughaswift,cheap,andflexibleprocess,over
whichdisputingpartieswouldhaveconsiderablecontrol.3


Given that investorcomplaints relate to theconductofsovereignStates, taking
thesedisputesoutof thedomesticsphereof theStateconcernedwasseenas
providingaggrievedinvestorswithanimportantguaranteethattheirclaimswillbe
adjudicatedinanindependentandimpartialmanner.


However, the actual functioning of ISDS under investment treaties has led
to concerns about systemic deficiencies in the regime. They have been well
documentedinliteratureandneedonlybesummarizedhere.4


2 UNCTAD (2013), Recent Developments in Investor-State Dispute Settlement, available at http://unctad.org/en/PublicationsLibrary/
webdiaepcb2013d3_en.pdf.


3 For a discussion of the key features of ISDS, see also, UNCTAD, Investor-State Dispute Settlement: A Sequel, UNCTAD Series
on Issues in IIAs II (forthcoming).


4 Michael Waibel et al. (eds.), The Backlash against Investment Arbitration: Perceptions and Reality (Kluwer Law International, 2010);
D. Gaukrodger and K. Gordon, “Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community”,
OECD Working Papers on International Investment, No. 2012/3; P. Eberhardt and C. Olivet, “Profiting from Injustice: How Law
Firms, Arbitrators and Financiers are Fuelling an Investment Arbitration Boom” (Corporate Europe Observatory and Transnational
Institute, 2012), available at http://corporateeurope.org/sites/default/files/publications/profiting-from-injustice.pdf.




3


Legitimacy and transparency


Inmany cases foreign investors have used ISDS claims to challengemeasures
adoptedbyStates in thepublic interest (forexample,policies topromotesocial
equity, fosterenvironmentalprotectionorprotectpublichealth).Questionshave
beenraisedwhetherthreeindividuals,appointedonanad hocbasis,canbeseen
bythepublicatlargeashavingsufficientlegitimacytoassessthevalidityofStates’
acts,particularlyifthedisputeinvolvessensitivepublicpolicyissues.


HostcountrieshavefacedISDSclaimsofupto$114billion5andawardsofupto
$1.77billion.6Althoughinmostcasestheamountsclaimedandawardedarelower
thanthat, theycanstillexertsignificantpressuresonpublicfinancesandcreate
potentialdisincentivesforpublic-interestregulation,posingobstaclestocountries’
sustainableeconomicdevelopment.


In addition, even though the transparency of the system has improved since
theearly 2000s,7 ISDSproceedingscanstill be kept fully confidential – if both
disputingpartiessowish–evenincaseswherethedisputeinvolvesmattersof
publicinterest.8


Further concerns relate to so-called “nationality planning”, whereby investors
structuretheirinvestmentsthroughintermediarycountrieswiththesolepurposeof
benefittingfromIIAs,includingtheirISDSmechanism.


Arbitral decisions: problems of consistency and erroneous decisions


Thosearbitraldecisions thathaveentered into thepublicdomainhaveexposed
recurringepisodesof inconsistent findings.Thesehave includeddivergent legal
interpretations of identical or similar treaty provisions as well as differences
in theassessmentof themeritsof cases involving the same facts. Inconsistent
interpretationshaveledtouncertaintyaboutthemeaningofkeytreatyobligations
andlackofpredictabilityofhowtheywillbeappliedinfuturecases.9


Erroneousdecisionsareanotherconcern:arbitratorsdecideimportantquestions
oflawwithoutapossibilityofeffectivereview.Existingreviewmechanisms,namely
the ICSID annulment process or national-court review at the seat of arbitration
(fornon-ICSIDcases),operatewithinnarrowjurisdictional limits. It isnoteworthy
thatanICSIDannulmentcommitteemayfinditselfunabletoannulorcorrectan
award,evenafterhaving identified“manifesterrorsof law”.10Furthermore,given
that annulment committees – like arbitral tribunals – are created on an ad hoc


5 This figure is the aggregate amount of compensation sought by the three claimants constituting the majority shareholders of the
former Yukos Oil Company in the ongoing arbitration proceedings against Russia. See Hulley Enterprises Limited (Cyprus) v. The
Russian Federation, PCA Case No. AA 226; Yukos Universal Limited (Isle of Man) v. The Russian Federation, PCA Case No. AA
227; Veteran Petroleum Limited (Cyprus) v. The Russian Federation, PCA Case No. AA 228.


6 Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador, ICSID Case
No. ARB/06/11, Award, 5 October 2012.


7 See for example, the 2006 amendments to the ICSID Arbitration Rules and the 2013 agreement reached by an UNCITRAL
Working Group regarding transparency in ISDS proceedings. In the case of UNCITRAL, the new rules have a limited effect in that
they are designed to apply not to all future arbitrations but only to arbitrations under future IIAs.


8 This applies to cases brought under arbitration rules other than ICSID (only ICSID keeps a public registry of arbitrations). It is
indicative that of the 85 cases under the UNCITRAL Arbitration Rules administered by the Permanent Court of Arbitration (PCA),
only 18 were public (as of end 2012). Source: the Permanent Court of Arbitration International Bureau. See further UNCTAD,
Transparency: A Sequel, Series on Issues in IIAs II (New York and Geneva, 2012), available at http://unctad.org/en/Pages/DIAE/
International%20Investment%20Agreements%20(IIA)/International-Investment-Agreements-(IIAs).aspx


9 Sometimes, divergent outcomes can be explained by the differences in wording of a specific IIA applicable in a particular case;
however, often they represent the differences in the views of individual arbitrators.


10 See CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Decision of the ad hoc Committee
on the application for annulment, 25 September 2007, paras. 97, 127, 136, 150, 157-159. Article 52(1) of the ICSID Convention
enumerates the following grounds for annulment: (a) improper constitution of the arbitral Tribunal; (b) manifest excess of power by
the arbitral Tribunal; (c) corruption of a member of the arbitral Tribunal; (d) serious departure from a fundamental rule of procedure;
or (e) absence of a statement of reasons in the arbitral award.




4


basisforthepurposeofasingledispute,theymayalsoarrive(andhavearrived)
atinconsistentconclusions,thusfurtherunderminingpredictabilityofinternational
investmentlaw.


Arbitrators: Concerns about party appointments and undue incentives


The method where arbitrators are appointed by disputing parties has led to a
perceived tendency for eachdisputing party to appoint individuals sympathetic
toitsinterests.Moreover,arbitratorsinISDScasesarearelativelysmallgroupof
individuals,dominatedbylawyersinprivatepractice(about60percent),11resulting
insituationswherethesameindividualsoftenserveasarbitratorsinsomecases
andascounselinothers.Thismayincentivizearbitratorstodecideissuesinaway
thatwouldbebeneficialfortheminadifferentcase(so-called“issueconflict”).12To
thisaddsarbitrators’interestinbeingre-appointedinfuturecases.


Allofthishascastdoubtonarbitrators’independenceandimpartiality.Regardless
ofwhethersuchincentivesactuallyimpactarbitraldecision-making,theresulting
perception of conflicting interests itself is enough for eroding the credibility of
ISDS in theeyesofmanystakeholders.Moreover, thishas led toan increasing
numberofchallengestoarbitratorsbydisputingparties,whichinvolvesspending
additional resourcesandmay indicateparties’ lackofconfidence in thecurrent
methodofarbitratorappointment.Somewell-knownarbitratorsthemselveshave
spokenagainstthesystemofpartyappointments13andthepracticeofcombining
the“hats”ofarbitratorandcounselbythesameperson.14


Cost- and time-intensity of arbitrations


Actual ISDS practice has put into doubt the oft-quoted notion that arbitration
represents a speedy and low-cost method of dispute resolution. On average,
costs,includinglegalfees(whichonaverageamounttoapproximately82%oftotal
costs)andtribunalexpenses,haveexceeded$8millionperpartypercase.15For
anycountry,butespeciallyforpoorerones,thisisasignificantburdenonpublic
finances.Even if thegovernmentwins thecase, tribunalshavemostly refrained
fromorderingtheclaimantinvestortopaytherespondent’scosts.Atthesametime,
highcostsarealsoaconcernforinvestors,especiallythosewithlimitedresources.


Largelawfirms,whodominatethefield,tendtomobiliseateamofattorneysfor
each case who charge high rates and employ expensive litigation techniques,
which include intensive research on each arbitrator candidate, far-reaching and
burdensome document discovery and lengthy arguments about minutest case
details.16 The fact that many legal issues remain unsettled contributes to the
needtoinvestextensiveresourcestodevelopalegalpositionbycloselystudying
numerouspreviousarbitralawards.Someofthesamereasonsarealsoresponsible
forthelongdurationofarbitrations,mostofwhichtakeseveralyearstoconclude.


11 D. Gaukrodger and K. Gordon, “Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community”,
OECD Working Papers on International Investment, No. 2012/3, p. 44.


12 For further details see ibid, pp. 43-51.
13 J. Paulsson, “Moral Hazard in International Dispute Resolution”, Inaugural Lecture, Miami School of Law, 29 April 2010, http://


www.arbitration icca.org/media/0/12773749999020/paulsson_moral_hazard.pdf.
14 T. Buergenthal, “The Proliferation of Disputes, Dispute Settlement Procedures and Respect for the Rule of Law”, Transnational


Dispute Management, 2006, Vol. 3(5).
15 Ibid., p. 19.
16 Lawyers’ fees may reach $1,000 per hour for senior partners in top-tier law firms. Ibid., pp. 19-21.




5


II. Mapping five broad paths towards reform


Thesechallengeshavepromptedadiscourseaboutthechallengesandopportunities
ofISDS.Thisdiscoursehasbeendevelopingthroughrelevantliterature,academic/
practitionerconferencesandtheadvocacyworkofcivilsocietyorganisations.Ithas
alsobeencarriedforwardundertheauspicesofUNCTAD’sInvestmentCommission
andExpertMeetings,itsmulti-stakeholderWorldInvestmentForum(WIF)17anda
seriesofinformalconversationsithasorganized,18aswellastheOECD’sFreedom-
of-InvestmentRoundtables.19


Fivebroadpathsforreformhaveemergedfromthesediscussions:


1.Promotingalternativedisputeresolution
2.TailoringtheexistingsystemthroughindividualIIAs
3.LimitinginvestoraccesstoISDS
4.Introducinganappealsfacility
5.Creatingastandinginternationalinvestmentcourt


1. Promoting alternative dispute resolution


This approach advocates for increasing resort to so-called alternative dispute
resolution (ADR)methodsanddisputepreventionpolicies (DPPs),bothofwhich
haveformedpartofUNCTAD’stechnicalassistanceandadvisoryservicesonIIAs.
ADRcanbeeitherenshrinedinIIAsorimplementedatthedomesticlevel,without
specificreferencesintheIIA.


Compared to arbitration, non-binding ADR methods, such as conciliation and
mediation,20placelessemphasisonlegalrightsandobligations.Theyinvolveaneutral
thirdpartywhosemainobjectiveisnotthestrictapplicationofthelawbutfindingaso-
lutionthatwouldberecognizedasfairbythedisputingparties.ADRmethodscanhelp
tosavetimeandmoney,findamutuallyacceptablesolution,preventescalationofthe
disputeandpreserveaworkablerelationshipbetweenthedisputingparties.However,
thereisnoguaranteethatanADRprocedurewillleadtoresolutionofthedispute;an
unsuccessfulprocedurewouldsimplyincreasethecostsinvolved.Also,dependingon
thenatureofaStateactchallengedbyaninvestor(e.g.,alawofgeneralapplication),
ADRmaynotalwaysbeacceptabletothegovernment.


ADR could go hand in hand with the strengthening of dispute prevention and
managementpoliciesat thenational level.Suchpoliciesaim tocreateeffective
channels of communication and improve institutional arrangements between
investorsandrespectiveagencies(forexample,investmentaftercarepolicies)and
betweendifferentministriesdealingwithinvestment-relatedissues.Aninvestment
ombudsmanoffice,oraspecificallyassignedagencythat takesthe leadshould
aconflictwithan investor arise, canhelp resolve investmentdisputesearlyon,
aswell as assess the prospects of, and, if necessary, prepare for international
arbitration.21


17 http://unctad-worldinvestmentforum.org/
18 During 2010 and 2011 seven informal conversations were organized or co-organized by UNCTAD, taking the form of small-


group, informal discussions among various stakeholders about possible improvements to the ISDS system. These conversations
were oriented towards generating concrete outputs on possible improvements to the ISDS system.


19 See e.g., OECD, “Government perspectives on investor-state dispute settlement: a progress report”, Freedom of Investment
Roundtable, 14 December 2012, available at: http://www.oecd.org/daf/inv/investment-policy/foi.htm.


20 Mediation is an informal and flexible procedure: a mediator’s role can vary from shaping a productive process of interaction
between the parties to effectively proposing and arranging a workable settlement to the dispute. It is often referred to as “assisted
negotiations”. Conciliation procedures follow formal rules. At the end of the procedure, conciliators usually draw up terms of an
agreement that, in their view, represent a just compromise to a dispute (non-binding to the parties involved). Because of its higher
level of formality, some call conciliation a “non-binding arbitration”.


21 See further UNCTAD, Investor-State Disputes: Prevention and Alternatives to Arbitration (United Nations, New York and Geneva,
2010); UNCTAD, How to Prevent and Manage Investor-State Disputes: Lessons from Peru, Best Practices in Investment for
Development Series (United Nations, New York and Geneva, 2011).




6


Intermsofimplementation,thisapproachisrelativelystraightforward,andmuch
hasalreadybeendonebysomecountries.Importantly,giventhatmostADRand
DPPeffortsareimplementedatthenationallevel,individualcountriescanproceed
withouttheneedfortheirtreatypartnerstoagree.However,ADRandDPPsdonot
solvekeyISDS-relatedchallenges.Themosttheycandoistoreducethenumberof
fully-fledgedlegaldisputes,whichwouldrenderthisreformpathacomplementary
ratherthanstandaloneavenueforISDSreform.


2. Tailoring the existing system


Thisoptionimpliesthatthemainfeaturesoftheexistingsystemwouldbepreserved
andthatindividualcountrieswouldapplytailoredmodificationstoselectedaspects
oftheISDSsystemintheirnewIIAs.Anumberofcountrieshavealreadyembarked
onthiscourseofaction.22Procedural innovations,manyofwhichalsoappearin
UNCTAD’sIPFSD,haveincluded:23


• Setting time limits for bringing claims;forexample,threeyearsfromthe
eventsgivingrisetotheclaim,inordertolimitStateexposureandpre-
venttheresurrectionof“old”claims;24


• Increasing the contracting parties’ role in interpreting the treaty inorder
toavoidlegalinterpretationsthatgoagainsttheirintentions;forexam-
ple, throughproviding forbinding jointparty interpretations, requiring
tribunalstorefercertain issuesfordeterminationbythetreatyparties
andfacilitatinginterventionsbythenon-disputingcontractingparties;25


• Establishing a mechanism for consolidation of related claims, whichcan
helptodealwiththeproblemofrelatedproceedings,contributetothe
uniformapplicationof the law, thereby increasing the coherenceand
consistencyofawards,andhelptoreducethecostofproceedings.26


• Providing for more transparency in ISDS;forexample,bygrantingpub-
licaccesstoarbitrationdocumentsandarbitralhearingsaswellasal-
lowingtheparticipationofinterestednon-disputingpartiessuchascivil
societyorganisations;27


• Including a mechanism for an early discharge of frivolous (unmeritorious)
claims,inordertoavoidwastingresourcesonfull-lengthproceedings.28


Tothese,addchangesinthewordingofIIAs’substantiveprovisions,introducedby
anumberofcountries.Theseinnovationsseektoclarifytheagreements’content
and reach, therebyenhancing thecertaintyof the legalnormsand reducing the
marginofdiscretionofarbitrators.29


22 In particular, Canada, Colombia, Mexico, the United States and some others. Reportedly, the European Union is also considering
this approach. See N. Bernasconi-Osterwalder, “Analysis of the European Commission’s Draft Text on Investor-State Dispute
Settlement for EU Agreements”, Investment Treaty News, 19 July 2012, available at: http://www.iisd.org/itn/2012/07/19/
analysis-of-the-european-commissions-draft-text-on-investor-state-dispute-settlement-for-eu-agreements/.


23 Policy options for individual ISDS elements are further analyzed in UNCTAD, Investor-State Dispute Settlement: A Sequel–
(forthcoming).


24 See e.g., NAFTA Articles 1116(2) and 1117(2); see also Article 15(11) of the China-Japan-Republic of Korea investment
agreement.


25 On various means that can be - and have been - used by States, see UNCTAD, Interpretation of IIAs: What States Can Do,
IIA Issues Note, No.3, December 2011. Two issues merit attention with respect to such authoritative interpretations. First, the
borderline between interpretation and amendment can sometimes be blurred; second, if issued during an ongoing proceeding,
a joint party interpretation may raise due-process related concerns.


26 See e.g., NAFTA Article 1126; see also Article 26 of the Canada-China BIT.
27 See e.g. Article 28 of the Canada-China BIT; see also NAFTA Article 1137(4) and Annex 1137.4.
28 See e.g., Article 41(5) ICSID Arbitration Rules (2006); Article 28 United States-Uruguay BIT.
29 UNCTAD, World Investment Report 2010, available at: http://unctad.org/en/Docs/wir2010_en.pdf. See also UNCTAD’s Pink


Series Sequels on Scope and Definition, MFN, Expropriation, FET and Transparency, available at: http://investmentpolicyhub.
unctad.org/Views/Public/IndexPublications.aspx




7


TheapproachwherebycountriesprovidefocusedmodificationsthroughtheirIIAs
allowsforindividuallytailoredsolutionsandnumerousvariations.Forexample,in
their IIAs,specificcountriesmaychoose toaddress those issuesandconcerns
thatappearmostrelevanttothem.Atthesametime,thisoptioncannotaddressall
ISDS-relatedconcerns.


Mechanismsthatfacilitatehigh-qualitylegaldefensetodevelopingcountriesatan
affordablepricecanalsoplayarole.Thisideastoodattheoriginofa2009initiative
whenUNCTAD,togetherwiththeAcademiadeCentroamerica, theOrganization
ofAmericanStates(OAS)andtheInter-AmericanDevelopmentBank(IADB),were
invitedtopursuethepossibilityofestablishinganAdvisoryFacilityonInternational
InvestmentLawand ISDS.This resulted inaseriesofmeetings thataddressed
technical issues, including what should be the type of services such a Facility
shouldoffer,whatcouldbeitsmembership(opentoallcountriesandorganizations
orlimitedtospecificcountries)andhowitshouldbefinanced.


Implementationof this “tailoredmodification”option is relatively straightforward
giventhatonlytwotreatyparties(orseveral–incaseofaplurilateraltreaty)needto
agree.However,theapproachislimitedineffectiveness:unlessthenewtreatyisa
renegotiationofanoldone,themodificationsareappliedonlytonewlyconcluded
IIAswhilethelargenumberof“old”onesremainunaffected.Moreover,oneofthe
keyadvantagesofthisapproach,namely,thatcountriescanchoosewhetherand
whichissuestoaddress,isalsooneofitskeydisadvantages,asitturnsthisreform
optionintoapiecemealapproachthatstopsshortofofferingacomprehensiveand
integratedwayforward.


3. Limiting investor access to ISDS


Thisoptionenvisagesnarrowingdowntherangeofsituationsinwhichinvestors
mayresorttoISDS.Thiscouldbedoneinnumerousways,including:(i)byreducing
thesubject-matterscopeforISDSclaims;(ii)byrestrictingtherangeofinvestors
whoqualify tobenefit fromthe treaty,and (iii)by introducing the requirement to
exhaustlocalremediesbeforeresortingtointernationalarbitration.Afar-reaching
version of this approach would be to abandon ISDS as a means of dispute
resolutionaltogetherandreturnstoState-Statearbitrationproceedings,assome
recenttreatieshavedone.30


Somecountrieshaveadoptedpoliciesofthefirstkind,forexample,byexcluding
certaintypesofclaimsfromthescopeofarbitralreview.31Inthepast,somecountries
usedthisapproachtolimitjurisdictionofarbitraltribunalsinamorepronounced
way,forexample,byallowingISDSonlywithrespecttoexpropriationdisputes.32


30 Recent examples of IIAs without ISDS provisions are the Japan-Philippines Economic Partnership Agreement (2006), the
Australia-United States FTA (2004) and the Australia-Malaysia FTA (2011). In April 2011, the Australian Government issued a
trade policy statement announcing that it would stop including ISDS clauses in its future IIAs as doing so imposes significant
constraints on Australia’s ability to regulate public policy matters: see Gillard Government Trade Policy Statement: Trading Our
Way to More Jobs and Prosperity, April 2011, available at: http://www.dfat.gov.au/publications/trade/trading-our-way-to-more-
jobs-and-prosperity.pdf.


31 For example, claims relating to real estate (Cameroon-Turkey BIT); claims concerning financial institutions (Canada-Jordan BIT;
claims relating to intellectual property rights and to prudential measures regarding financial services (China-Japan-Republic
of Korea investment agreement); claims relating to establishment and acquisition of investments (Japan-Mexico Free Trade
Agreement); claims concerning specific treaty obligations such as national treatment and performance requirements (Malaysia-
Pakistan Closer Economic Partnership Agreement); and claims arising out of measures to protect national security interests
(India-Malaysia Comprehensive Economic Cooperation Agreement). For further analysis, see UNCTAD, Investor-State Dispute
Settlement - A Sequel (forthcoming).


32 For example, some BITs concluded in the 1980s and early 1990s, particularly by China and Eastern European countries provided
investors access to international arbitration only with respect to disputes relating to the amount of compensation following an
investment expropriation (for example, Albania-China (1993), Bulgaria-China (1989), Belgium-Poland BIT (1987)).




8


Torestrict the rangeofcovered investors,oneapproach is to includeadditional
requirements in the definition of “investor” and/or to use denial-of-benefits
provisions.33Amongotherthings,thisapproachcanaddressconcernsarisingfrom
“nationalityplanning”/“treatyshopping”byinvestorsandensurethattheyhavea
genuinelinktotheputativehomeState.


Requiringinvestorstoexhaustlocalremedies,oralternatively,todemonstratethe
manifestineffectiveness/biasofdomesticcourts,wouldmakeISDSanexceptional
remedyoflastresort.Whileingeneralinternationallaw,thedutytoexhaustlocal
remedies is amandatoryprerequisite forgainingaccess to international judicial
forums,34mostIIAsdispensewiththisduty.35Instead,theyallowforeigninvestors
toresortdirectlytointernationalarbitrationwithoutfirstgoingthroughthedomestic
judicial system. Some see this as an important positive feature and argue that
reinstating the requirement to exhaust domestic remedies could undermine the
effectivenessofISDS.


These options for limiting investor access to ISDS can help to slow down the
proliferationof ISDSproceedings, reduceStates’ financial liabilitiesarising from
ISDSawardsandsaveresources.Additionalbenefitsmaybederivedfromthese
options if they are combinedwith assistance to strengthen the rule of law and
domesticlegal/judicialsystems.Tosomeextent,thisapproachwouldbeareturnto
theearliersystem,inwhichinvestorscouldlodgetheirclaimsonlyinthedomestic
courts of the host State, negotiatearbitration clauses in specific investor-State
contractsorapplyfordiplomaticprotectionbytheirhomeState.


In termsof implementation– like theoptionsdescribedearlier – thisalternative
doesnot requirecoordinatedactionbya largenumberofcountriesandcanbe
putinpracticebypartiestoindividualtreaties.Implementationisstraightforward
forfutureIIAs;pasttreatieswouldrequireamendments,renegotiationorunilateral
termination.36Similartothe“tailoredmodification”option,however,thisalternative
resultsinapiecemealapproachtowardsreform.


4. Introducing an appeals facility37


An appeals facility implies a standing body with a competence to undertake
substantivereviewofawardsrenderedbyarbitraltribunals.Ithasbeenproposed
as a means to improve consistency among arbitral awards, correct erroneous
decisionsoffirst-level tribunalsandenhance thepredictabilityof the law.38This
optionhasbeencontemplatedbysomecountries.39 Ifconstitutedofpermanent
members,appointedbyStatesfromapoolofthemostreputablejurists,anappeals


33 Denial of benefits clauses authorize States to deny treaty protection to investors who do not have substantial business activities
in their alleged home State and who are owned and/or controlled by nationals or entities of the denying State or of a State who
is not a party to the treaty.


34 Mummery, D. “The content of the duty to exhaust local judicial remedies”, The American Journal of International Law, Vol. 58.
No2 (April 1964).


35 Some IIAs require investors to pursue local remedies in the host State for a certain period of time (e.g., Belgium/Luxembourg-
Botswana BIT and Argentina-Republic of Korea BIT). A small number of agreements require the investor to exhaust the host
State’s administrative remedies before submitting the dispute to arbitration (e.g., China-Côte d’Ivoire BIT).


36 Termination of IIAs is complicated by “survival” clauses that provide for the continued application of treaties, typically for 10 or 15
years after their termination.


37 In 2004, the ICSID Secretariat mooted the idea of an appeals facility but at that time the idea failed to garner sufficient State
support. See ISCID, “Possible Improvements of the Framework for ICSID Arbitration”, Discussion paper, 22 October 2004, Part
VI and Annex “Possible Features of an ICSID Appeals Facility”. In the eight years that have passed since, the views of many
governments may have evolved.


38 For the relevant discussion see, e.g., C. Tams, “An Appealing Option? A Debate about an ICSID Appellate Structure”, Essays in
Transnational Economic Law, No.57, 2006.


39 Several IIAs concluded by the United States have addressed the potential establishment of a standing body to hear appeals
from investor-State arbitrations. The Chile-US FTA was the first one to establish a “socket” in the agreement into which an
appellate mechanism could be inserted should one be established under a separate multilateral agreement (Article 10.19(10)).
The Dominican Republic-Central America-US FTA (CAFTA) (2004) went further, and required the establishment of a negotiating
group to develop an appellate body or similar mechanism (Annex 10-F). Notwithstanding these provisions, there has been no
announcement of any such negotiations and no text regarding the establishment of any appellate body.




9


facility has a potential to become an authoritative body capable of delivering
consistent–andbalanced–opinions,whichwouldrectifysomeofthelegitimacy
concernsaboutthecurrentISDSregime.40


Authoritativepronouncementsbyanappealsfacilityonissuesoflawwouldguide
boththedisputingparties(whenassessingthestrengthoftheirrespectivecases)
andarbitratorsadjudicatingdisputes.Eveniftheprocessforconstitutingfirst-level
arbitraltribunalsremainedunchanged,concernswouldbealleviatedthroughtheir
effective supervision at the appellate level. In aword, an appeals facilitywould
adddirectionandordertotheexistingdecentralized,non-hierarchicalandad hoc
regime.


Atthesametime,absoluteconsistencyandcertaintywouldnotbeachievablein
a legal system that consists ofmore than 3,000 legal texts; different outcomes
maystill bewarrantedby the languageof specificapplicable treaties.Also, the
introductionofanappellatestagewouldfurtheraddtothetimeandcostof the
proceedings,althoughthatcouldbecontrolledbyputtinginplacetighttimelines,
ashasbeendonefortheWTOAppellateBody.41


Intermsofimplementation,fortheappealsoptiontobemeaningful,itwouldneed
tobesupportedbyasignificantnumberofcountries.Inadditiontoanin-principle
agreement, a numberof important choiceswouldneed tobemade:Would the
facilitybelimitedtotheICSIDsystemorbeexpandedtootherarbitrationrules?42
Whowouldelect itsmembersandhow?Howwould itbefinanced?Would the
appeal be limited to the points of law or also encompass questions of fact?
How to ensure the coverage of earlier-concluded IIAs by the new appeals
structure?43 In sum, this reform option into one that is likely to face significant,
althoughnotinsurmountable,practicalchallenges.


5. Creating a standing international investment court


Thisoptionimpliesthereplacementofthecurrentsystemofadhocarbitraltribunals
withanewinstitutionalstructure,namelyastandinginternationalcourt.Thelatter
wouldconsistofjudgesappointedorelectedbyStatesonapermanentbasis,for
example,forafixedterm.Itcouldalsohaveanappealschamber.


Thisapproachrestsonthetheorythatinvestmenttreatyarbitrationisanalogous
todomesticjudicialreviewinpubliclawbecause“it involves an adjudicative body
having the competence to determine, in response to a claim by an individual,
the legality of the use of sovereign authority, and to award a remedy for unlawful
State conduct.”44Under thisview,aprivatemodelofadjudication (arbitration) is
inappropriate formatters that dealwithpublic law. The latter requiresobjective
guaranteesofindependenceandimpartialityofjudgeswhichcanbeprovidedonly
byasecurityof tenure–to insulatethe judgefromoutside interestssuchasan
interestinrepeatappointmentsandinmaintainingthearbitrationindustry.Onlya
courtwithtenuredjudges,theargumentgoes,wouldestablishafairsystemwidely
regardedtobefreeofperceivedbias.45


40 An alternative solution would be a system of preliminary rulings, whereby tribunals in ongoing proceedings would be enabled or
required to refer unclear questions of law to a certain central body.


This option, even though it does not grant a right of appeal, may help improve consistency in arbitral decision making. See e.g.,
C. Schreuer, “Preliminary Rulings in Investment Arbitration”, in K. Sauvant (ed.), Appeals Mechanism in International Investment
Disputes (OUP, 2008).


41 At the WTO, the appeals procedure is limited to 90 days.
42 It has been suggested that the application of an appeals facility to ICSID disputes would require an amendment to the ICSID


Convention, which in turn, may be hard to achieve.
43 Some further questions include: Would it have the power to correct decisions or only a right of remand to the original tribunal?


Would the establishment of an appellate review mechanism imply the phase-out of the ICSID annulment mechanism and
national-court review?


44 G. Van Harten, “A Case for International Investment Court”, Inaugural Conference of the Society for International Economic Law,
16 July 2008, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1153424.


45 Ibid.




10


A standing investment court would be an institutional public good serving the
interestsofinvestors,Statesandotherstakeholders.Thecourtwouldaddressmost
oftheproblemsoutlinedabove:itwouldgoalongwaytoensurethelegitimacy
andtransparencyofthesystem,facilitateconsistencyandcuracyofdecisionsand
ensureindependenceandimpartialityofadjudicators.46


However, thissolutionwouldalsobethemostdifficult to implementas itwould
requireacompleteoverhaulof thecurrent regime throughacoordinatedaction
byalargenumberofStates.Yet,theconsensuswouldnotneedtobeuniversal.A
standinginvestmentcourtmaywellstartasaplurilateralinitiative,withanopt-in
mechanismforthoseStatesthatwillwishtojoin.


Finally,itisquestionablewhetheranewcourtwouldbefitforafragmentedregime
thatconsistsofahugenumberofmostlybilateral IIAs. Ithasbeenargued that
thisoptionwouldworkbest inasystemwithaunifiedbodyofapplicable law.47
Nonetheless,evenifthecurrentdiversityofIIAsispreserved,astandinginvestment
courtwould likelybemuchmoreconsistentandcoherent in itsapproachtothe
interpretationandapplicationoftreatynorms,comparedwhithnumerous ad hoc
tribunals.


III. Concluding remarks


GiventhenumerouschallengesarisingfromthecurrentISDSregime,it istimely
forStatestoassessthecurrentsystem,weighoptionsforreform,andthendecide
uponthemostappropriateroute.


Amongthefiveoptionsoutlinedhere,someimplyindividualactionsbygovernments
andothersrequire jointactionbyasignificantnumberofcountries.Mostof the
optionswould benefit from being accompanied by comprehensive training and
capacity-building to enhance awareness and understanding of ISDS related-
issues.48


While thecollectiveactionoptionswouldgo further inaddressing theproblems
posedbytoday’sISDSregime,theywouldfacemoredifficultiesinimplementation
and require agreement between a larger number of States.Collective efforts at
themultilaterallevelcanhelpdevelopaconsensusaboutthepreferredcoursefor
reformandwaystoputitintoaction.


AnimportantpointtobearinmindisthatISDSisasystemofapplicationofthe
law.Therefore, improvements to the ISDSsystemshouldgohand inhandwith
progressive development of substantive international investment law itself.
UNCTAD’s Investment Policy Framework for Sustainable Development (IPFSD)
offerspolicyoptionsinthisregard.


46 A system where judges are assigned to the case, as opposed to being appointed by the disputing parties, would also save
significant resources currently spent on researching arbitrator profiles.


47 Similarly to the European Court of Human Rights that adjudicates claims brought under the European Convention for the
Protection of Human Rights and Fundamental Freedoms.


48 Such capacity building activities are, being carried out by UNCTAD, among others, (together with different partner organizations).
Latin American countries, for example, have benefitted from UNCTAD’s advanced regional training courses on ISDS on an annual
basis since 2005: see http://unctad.org/en/Pages/DIAE/International%20Investment%20Agreements%20(IIA)/IIA-Technical-
Cooperation.aspx.




11


For the latest investment trends
and policy developments, including


International Investment Agreements (IIAs),
please visit the website of the UNCTAD


Investment and Enterprise Division
www.unctad.org/diae
www.unctad.org/iia


For further information,
please contact


Mr. James X. Zhan
Director


Investment and Enterprise Division
UNCTAD


Tel.: 00 41 22 917 57 60
Fax: 00 41 22 917 04 98


Join us at


http://investmentpolicyhub.org


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N


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TA


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B


/D
IA


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12


For the latest investment trends
and policy developments, including


International Investment Agreements (IIAs),
please visit the website of the UNCTAD


Investment and Enterprise Division
www.unctad.org/diae
www.unctad.org/iia


For further information,
please contact


Mr. James X. Zhan
Director


Investment and Enterprise Division
UNCTAD


Tel.: 00 41 22 917 57 60
Fax: 00 41 22 917 04 98


Join us at


http://investmentpolicyhub.org


U
N


C
TA


D
/W


E
B


/D
IA


E
/P


C
B


/2
01


3/
4




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