UN review of ISDS faces severe problems

September 21, 2021: In 2016, following mounting criticism of abuse by global corporations of Investor-State Dispute Settlement (ISDS) the United Nations Commission on International Trade Law (UNCITRAL) began a review. But after five years, the UNCITRAL Working Group III (WGIII) appears to be a long way from delivering meaningful reforms to the investment arbitration regime.

UNCITRAL is a United Nations agency, and is one of the two global bodies which organises ISDS cases. The other is the World Bank agency, International Centre for Settlement of Investment Disputes (ICSID).

WGIII still has a further five years to complete its tasks and a new report argues that the danger is that it may very well entrench and legitimise the very problems with ISDS which provoked the review.

Since 2016 ISDS has continued to provide foreign investors with an exclusive mechanism through which they can directly sue host states and challenge governmental action, including non-discriminatory, public-interest regulation. This is a threat to regulation required for climate change, the digital economy and the UN Sustainable Development Goals.

More than 1,000 known ISDS cases have resulted in serious pressures on many countries’ public budgets. The billions of dollars that arbitral tribunals have ordered to be paid out to investors in publicly-known ISDS cases have diverted taxpayers’ money away from funding public health, access to food and employment creation, among other public concerns.

Jane Kelsey and Kinda Mohamadieh argue in their paper, UNCITRAL fiddles while countries burn, that the failure to make effective advances towards urgently needed reforms can be traced back to the power of capital-exporting countries and their corporations compared to the power of capital-importing developing countries.

The UNCITRAL Secretariat, and the consulting experts from the Academic Forum and the Practitioners Group, are dominated by the capital-exporting nations and corporations, and have from the start promoted the European Union plan for a Multilateral Investment Court. Substantive concerns of developing countries have been sidelined to the point where they are unlikely to be properly addressed and lead to genuine reform proposals.

The authors argue that the most likely outcome is a lowest-common-denominator multilateral instrument that allows capital-exporting States to adopt minimalist procedural changes to ISDS and not address the power imbalances undermining States’ policy and regulatory space. Some States may not even sign or ratify a voluntary final agreement. Despite that, the UNCITRAL Secretariat, as well as capital-exporting States that promised reforms, will seek to proclaim a “successful” outcome.

The authors propose that the mandate given to WGIII be freed from the narrow interpretation adopted to date so that it takes a serious look at alternatives to arbitration as means to settle investment disputes. In particular, they suggest that domestic legal systems become the main location for settling investment disputes.