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Increased pressure to reform use of arbitration in investor-state dispute settlement

While global foreign direct investment (FDI) collapsed in 2020, efforts to reform the complex system of nearly 3,000 treaties that protect foreign investment continued largely (but not entirely) unabated. In recent years, some States have challenged the use of arbitration as the primary means of ISDS. They have also sought to reaffirm their rights and limit their obligations vis-à-vis foreign investors by renegotiating their international investment agreements (IIAs). This reform agenda will undoubtedly continue in 2021 (including at several meetings that were postponed in 2020), with the potential to radically transform ISDS as we know it today.

International Arbitration Review

Investor-State Dispute Settlement (ISDS reform)

In 2020, various national governments and multilateral institutions spearheaded wide-ranging reform initiatives in response to an increasing sense of political hostility to the current system.

Working Group III (WG III) of the United Nations Commission on International Trade Law (UNCITRAL) was tasked in 2017 with considering multilateral ISDS reform. Its discussions continued through 2020 and into early 2021 but as yet there is still no consensus amongst its members as to the timeline for discussions on the concrete substance of any multilateral instrument.

The past year also saw the publication by the International Centre for Settlement of Investment Disputes (ICSID, an arm of the World Bank and the main forum for ISDS) of its fourth working paper on proposals for amendments to its arbitration rules. New proposals – in addition to matters such as clarifying the tribunal’s power to order security for costs, mandatory disclosure of third party-funding arrangements, and a default presumption in favour of publication of awards – include a recommendation for the disclosure of ownership and control details of corporate claimants (in the request for arbitration) and a clarification that there is no presumption in favour of document production. A fifth working paper is expected shortly, with a view to presenting final proposals for a vote later in 2021.

ICSID and UNCITRAL jointly published a draft code of conduct for adjudicators in May 2020. The draft code seeks to address various concerns relating to the way in which ISDS is practiced, including concerns over repeat appointments for arbitrators and lawyers practising as both arbitrator and counsel in parallel. ICSID and UNCITRAL have announced that they will continue to progress the draft code in 2021.

A shift away from arbitration in Investor-State Dispute Settlement

The past year also witnessed renewed efforts towards the rebalancing of IIAs to allow States more regulatory policy space and, in some cases, to eliminate investor-State arbitration or replace it with an investment court system.

The Energy Charter Treaty (ECT), which now has over 50 signatories, including the EU and its Member States, is a key example of this. The first formal round of negotiations on a modernised ECT was held in July 2020 and deliberations centred on potentially narrowing the scope of the substantive measures of protection (such as fair and equitable treatment, full protection and security, and expropriation), inserting a ‘right to regulate’ clause, and introducing sustainable development and corporate social responsibility rules. A November 2020 report revealed significant differences among States, with the EU’s proposals for extensive reform at one end of the spectrum, and Japan’s preference for a minimalist approach at the other end. Calls are mounting within Europe to prepare for a coordinated withdrawal from the ECT in the event that core objectives (including alignment with the 2019 Paris Agreement on climate change) are not attained within a reasonable timeframe. It remains to be seen whether states can arrive at a consensus at the five further negotiations rounds scheduled this year.

The U.S.–Mexico–Canada Agreement (USMCA) entered into force on 1 July 2020, replacing the North American Free Trade Agreement (NAFTA). The USMCA substantially narrows the scope of protections that were available under NAFTA for all sectors, except oil and gas, power generation, telecommunications, transportation and infrastructure. Moreover, Canada and Canadian investors are removed from the scope of the ISDS mechanism. U.S. or Mexican investors (except those in the sectors listed above) must spend 30 months seeking to exhaust domestic remedies before initiating arbitration.

On 15 November 2020, 15 Asia-Pacific countries signed the Regional Comprehensive Economic Partnership (RCEP). The signatories include the ten members of the Association of Southeast Asian Nations (ASEAN) plus Australia, China, Japan, New Zealand and South Korea. While RCEP contains standard investment protections and sections on investment promotion and facilitation, it does not include ISDS. Instead, RCEP lays out a process for the parties to enter into discussions on whether to include ISDS, and apply the treaty’s prohibition of expropriation to taxation measures. These talks are expected to take place in the next two years.

The EU continues to push for a new multilateral investment court (MIC) to replace the arbitration system for ISDS, notably in the discussions on the reform of the ECT. In recent years, it has entered into IIAs with Canada and Vietnam that establish investment court systems pending the establishment of an MIC. However, in its latest IIAs it failed to reach agreement with the UK and China on such a system (although the agreement with China commits the parties to pursuing negotiations within the next two years).

This article is part of the International Arbitration Review.

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Recent developments and emerging trends in international arbitration law and policy