The Future of Investment Arbitration: Proposals for Change
On March 6, 2020, Columbia University Law School hosted a panel discussion on the future of investment arbitration, entitled “Reforming Investment Arbitration – Working Group III and ECT.” Moderated by Patrick Pearsall of Jenner & Block, the panelists included esteemed international arbitration practitioners Graham Coop of Volterra Fietta, Patricia Nacimiento of Herbert Smith Freehills, and Nathalie Voser of Schellenberg Wittmer.[1]
Pearsall began the discussion by situating investment arbitration – and calls for its reform –within a broader political, social, and economic context. According to Pearsall, the reform of investment arbitration and foreign investment is part of a larger “political and social re-ordering” amid this moment of “global anxiety.”
The panel then considered the following areas of reform in investment arbitration: building capacity in investment arbitration, posting security for costs and eliminating multiple proceedings to discourage frivolous and/or duplicative proceedings, and promoting environmental sustainability.
The Working Group III, a Government-led effort dedicated to the reform of investment arbitration under the mandate of the United Nations Commission on International Trade Law (UNCITRAL), is considering the creation of an Advisory Centre, which would aim to address capacity deficits in investment arbitration. Proposals considered by the Working Group, including submissions by States themselves, identified a capacity gap in States, particularly developing and least developed countries, regarding investment arbitration.[2] The Advisory Centre, according to Nacimiento, could contribute to “levelling the playing field between States and investors,” reduce the risk of any “disparity in the level of experience of all participants in investment arbitration,” and increase “consistency and transparency in investment arbitration.”
The panelists addressed whether parties other than States could or should be able to use the Advisory Centre. Voser believed that the Advisory Centre could play an important role in building the capacity of small- and medium-sized investors. Although small- and medium-sized investors may have legitimate claims against States, they may lack the resources to bring these claims. By providing education and training, the Advisory Centre could make investment arbitration more accessible to all types of investors. Indeed, Voser asserted, “It is crucial that small- and medium-sized investors have access to the Advisory Centre,” which would otherwise be “susceptible to criticisms of assisting States in ‘blocking’ legitimate claims by investors.”
The creation of the Advisory Centre also raised questions as to who would provide that education and training. Pearsall noted that the Centre may have no shortage of highly capable volunteers. The audience raised questions as to whether it would be appropriate for practitioners, who would train States at the Advisory Centre, to thereafter act as an arbitrator in proceedings for that State. Nacimiento noted that so long as the arbitrator disclosed as much, it would be up to the parties to decide whether such training posed a conflict.
As to when States and/or parties could access the resources available at the Advisory Centre, Voser believed that the Advisory Centre would be most effective prior to the constitution of the arbitral tribunal by, for example, assisting states in negotiating and/or amending bilateral and multilateral investment treaties, giving states the tools to negotiate effectively for external representation, and educating states on the arbitral process. Voser believed that outside counsel, as well as existing arbitral institutions and training centers, are better suited to and indeed already advise states and investors after the constitution of the arbitral tribunal.
The panel also addressed reforms regarding security for costs and eliminate multiple proceedings in investment arbitration.[3] Voser observed that these proposals are much more controversial than the creation of an Advisory Centre and consequently the way forward is much less clear. Some expressed the view that routinely requesting security for costs when a third party funder is involved could discourage the funding of frivolous claims by third-party funders. Others were less skeptical of the possibility that third-party funders bankrolled frivolous claims. Market realities, rather than the need for any legal reform, would quickly drive such funders out of business. According to Nacimiento, requiring third-party funders to post security for costs is not a simple decision. Whether a claim will be foreclosed, and who decides this issue, raises questions about the distribution of equities in investment arbitration. However this issue is determined, it must “protect ISDS and ensure the integrity of the investment arbitration system,” according to Nacimiento.
Coop led the discussion on current challenges and future prospects of the Energy Charter Treaty (ECT), with an emphasis on climate change and environmental sustainability.
Coop identified several critiques of the ECT. First, similar to other bilateral and multilateral investment treaties, the ECT has been criticized for lacking clear and consistent legal standards. According to Coop, the fair and equitable treatment (FET) standard has been criticized as being “broadly worded, giving rise to debate and inconsistent decisions.” Second, the ECT has been criticized for ignoring the environmental impact of energy. Coop pointed out, however, that the ECT has been successfully invoked by investors in renewable sources of energy, reflecting the flexibility of the treaty to protect investors in green energy. Coop explained that these criticisms, among others, have given rise to a variety of proposals for reform, including the alignment of the ECT with the Paris Agreement and requirements – rather than aspirations – of environmental sustainability.
The panelists provided an engaging and thoughtful reflection on the state of play of reforms in investment arbitration. Although proposals for reforming investment arbitration may have grown out of legitimacy crises and unease, Pearsall concluded the discussion with an inspiring call to action: “It is a rare moment of dynamism in investment arbitration. The future of investor-State dispute settlement is in the hands of students and young practitioners.”
[1] Gaela Gehring Flores of Arnold & Porter and based in Washington, D.C. was also slated to participate, but was unable to attend.
[2] UNCITRAL, Note by the Secretariat, “Possible reform of investor-State dispute settlement (ISDS) Advisory Centre” (July 25, 2019), available at https://undocs.org/en/A/CN.9/WG.III/WP.168.
[3] Multiple proceedings typically arise where “different entities within the same corporate structure have a right of action against a State or state-owned entity in relation to the same investment,” or where “a measure by a State has an impact on a number of investors which are not related.” UNCITRAL, Note by the Secretariat, “Possible reform of investor-State dispute settlement (ISDS) Multiple proceedings and counterclaims,” (Jan. 22, 2020), paragraph 6, available at https://undocs.org/en/A/CN.9/WG.III/WP.193.