Analysis of the Report of UNCITRAL Working Group III (Investor-State Dispute Settlement Reform)

- Raghav Bhargava [1]


Introduction


Under the aegis of United National Commission on International Trade Law (“UNCITRAL”), various Working Groups or Committees are constituted to look into reforms. Each Working Group is tasked with working on different focus areas such as Small and Medium Enterprises, Dispute Settlement amongst others. My point of interest is Working Group III (“Working Group”), responsible for recommending reforms on Investor-State Dispute Settlement. In October last year, the Working Group met in Vienna from 14th to the 18th of October during its thirty-eight session and came out with a report highlighting three major reforms. The purpose of this article is to analyze these reforms.


I. Multilateral Advisory Centre


The discussion surrounding a Multilateral Advisory Centre (“MAC”) stems from the call to establish a Multilateral Investment Court. In the absence of any governing body or an international multilateral treaty, the purpose of the investment court is to remedy unpredictability of investment dispute decisions, reduce time taken to arrive at decisions and also make the investment dispute resolution process cost-effective. The motive is to create a independent body/ organizations that functions taking into consideration interests of big as well as small nations so that they may be able to effectively and efficiently either pursue or defend investment claims.


In the background of Multilateral Investment Court, the Working Group proposes to establish MAC to compliment the court. Apart from having an advisory centre which will complement other reforms recommended by the Working Group, the primary purpose is to assist, least-developed and developing states with costs related to defending claims, sound legal advice to states with limited experience in addressing ISDS. The Working Group also recommended the MAC to help investors to bring successful claims, specially Small and Medium Scale Enterprises. While the discussion in the thirty-eighth session was limited to establishment of the centre and not on the extensive services which the MAC should offer, a reference was made to a previous report of the Working Group which discusses the services which may be offered in detail.


It is interesting to note that the Working Group went ahead to discuss the modalities of the MAC and the possible structure and financing of the same. It was recommended that the advisory centre be established as an intergovernmental body, with each member state making financial contribution to keep it afloat. The Working Group made an interesting reference to the Advisory Centre on WTO Law (“ACWL”). It was noted that the ACWL could provide a useful model.


In order to understand the motive behind the MAC, it is imperative to highlight that international investment law, is not governed by any multilateral treaty or rules and regulations of any independence body. While trade law has World Trade Organizations and related agreements, international criminal law has the International Criminal Court and its statute, investment law does not have any third party governing document or rules. When investment disputes are taking to arbitration, the only governing rules are those of arbitration institutions such as ICSID should the dispute be taken to them. Bi-lateral treaties or International Investment Agreements often play a vital role in the resolution of such disputes; however, the contents of these agreements are based upon the deliberations between the states concerned. Consequently, there are widely criticized for either be biased, not in the true intereste of the investors amongst other. A very prominent example of the same is India’s Model Bilateral Investment Treaty which does not contain any National Treatment or Most Favoured Nation clause amongst others. The lack of any multilateral treaty or regulation, thereby makes this recommendation come at an apt time.


The ACWLprovides free legal training and advice to Least Developed Countries (“LDC”) and reduced fee for support in dispute settlement proceedings. On the other hand, they provide some financial concession to developing countries. At the present, the services of ACWL are only limited to developing countries and LDCs. Hence, should the MAC decide to follow such approach, it would be in the interest of investors and developing and LDCs wherein increased investments are being made. However, this move may gather opposition from developed countries which also have significant investments within their territories. The membership of ACWL is automatic for those developing countries and LDCs which are members of the WTO or in the process for becoming members. For countries, otherwise, a fee payment is required to become part of ACWL. This may create a hurdle in ISDC cases as there is no independent body whose membership states have or can take for dispute resolution. A possible solution to the same could be relying on membership of one of the dispute resolution centres such as ICSID, but that may defeat the purpose of the MAC as it would be restrictive and constrained to a limited number of countries only. Most of the member countries of ICSID are developed countries and this move may impose an undue obligation on developing countries or LDCs to become a part of ICSID.


II. Code Of Conduct For ISDS Tribunal Members


Impartiality and independence of arbitrators, freedom to appoint arbitrators by parties are just some of the characteristics that have formed the basis of arbitration, even in investment disputes. However, recently, there has been a growing resentment towards the method of functioning of arbitrators. Biased approach, unreasoned awards, undisclosed relationships which affect appointments and just a few among the many problems that are plaguing the dispute resolution process and have given rise to criticism about the legitimacy of the ISDS system. In light of this pressing issue, the Working Group discussed creation of a Code of Conduct (“CoC”) for arbitrators


The Working Group relied on its own special report which was limited to the contents of CoC to decide that this report was serve as the basis for contents. While discussing the structure of the CoC, the Working Group recognized the need to have two sets of contents in the report. The first, general set of rules which shall be applicable in all situation. Second, specific set of rules which should be adhered to keeping in light with various socio-cultural background of the arbitrator and countries and national laws which they need to adhere to.


The report while relying on other rules for arbitrators such as the UNCITRAL Arbitration Rules , International Bar Association guidelines on conduct for arbitrators discussed certain criteria which must be addressed while making these rules. Factors such as impartiality and independence of arbitrators, restrain from adjudication in situations which give rise to justifiable doubts, integrity, not dealing with parties unilaterally and acting diligently to deliver decisions without any undue delay, are some which require to be mentioned in the CoC. However, these recommendations have not yet considered specific situations which may constitute of interest or what is the threshold of disclosure. While the factors discussed are imperative to be included in the CoC, it is equally important that explanations to each of these rules must be provided.


International arbitration rules on conflicts of interest such as UNCITRAL, IBA, SIAC and other arbitral institutions have incorporate elaborate events which may fall within conflict of interest and require either disclosure by the arbitrator to the parties or constitute grounds for the arbitrator to step down from the proceedings. These arbitral institutions have been able to develop comprehensive rules for arbitrators in commercial arbitration. These elaborate rules also impacted the Indian arbitration scenario wherein the Indian Arbitration Act was amended to include Schedule V and VII containing rules regarding conflicts of arbitrators. As a result, these could serve a potential basis for the Working Group to include the requirements mentioned therein as the basic threshold required to be met and subsequently tailor make requirements to suit investment arbitration.


The Working Group has also recognized the dilemma between optional disclosures and mandatory adherence to these rules, resulting in challenge to the arbitrator’s appointment. While optional disclosure may not solve all issues of impartiality and transparency, compulsory disclosure leading to challenge in appointment may create situations wherein the arbitrators are not willing to take the responsibility upon themselves as a result of onerous burdens. This recommendation is apt coming at a time when investment dispute resolution is heavily criticized for its functioning. The challenge would be with regards to the functioning and enforcement mechanism of CoC as it would determine its effectiveness.


III. Third Party Funding


Third-Party Funding (“TPF”) is a recent growing trend that has found acceptance in commercial as well as investment arbitration. TPF is a process wherein an individual or corporate entity who is not a party to the arbitration proceedings provides financial support to a party to the proceeding. More and more countries and arbitral institutions are accepting this method of either bringing claims or defending claims. Investment tribunals have in the arbitrations of Quasar De Valores v. Russian Federation and Philip Morris Brands v. Oriental Republic of Uruguary have accepted third party funding.


The Working Group discussed having concrete rules for regulating TPF amidst concerns including conflicts of interest arising out of TPF, impact of TPF on costs and on security for costs, disclosure of information to third-party funders not subject to confidentiality obligations, control or influence of third-party funders over the arbitration process, negative impact on amicable resolution of disputes amongst others. The Working Group acknowledged the need for regulating the largely unregulated TPF in ISDS. Varied suggestions were put forth with regards to the TPF. One set of suggestions were to completely prohibit TPF, while another set of suggestions were to only permit TPF in situations wherein the claim was not frivolous or not politically motivated. It was also recommended that a clear definition of what constitutes as TPF must be decided. Some members recommended having a broad definition while some members recommended having a narrow definition so as to exclude pro bono assistance, funding for non-profit purposes, contingency arrangements and inter-corporate financing.


The Working Group settled on the following preliminary recommendation regarding TPF before deciding on any concrete steps. It was settled that TPF and the identify of the third-party funder should be disclosed at an early stage along with the identity of the ultimate beneficial owner. It was also suggested that the terms of the funding agreement should also be disclosed to reveal the nature of third-party funder’s involvement. The Working Group also suggested that costs related to third-party funding should not be considered as recoverable costs. Keeping these recommendations in mind, it was decided that the Secretariat would working closely with ICISD and other institutions and prepare draft provisions on TPF.


TPF as a mode of financing claims has gathered large support from corporations and countries incapable of either bringing forth high stake claims or defending such claims. It has served as a basis for many countries to defend claims against bring corporation. The best example of this is the TPF provided to Uruguay by the Bloomberg Foundation’s anti-tobacco wing to help it defend claims from Phillip Morris. However, TPF at the same time may encourage frivolous claims and claims to intimidate LDCs and developing countries. Additionally, confidentiality plays an essential role in inter-state disputes. TPF for inter-state disputes may also serve as a method for furthering political agendas of states against each other. Hence, it is safe to say that the stakes inside and outside the arbitral hearing are higher in ISDS than commercial arbitration. Commercial arbitration rules may provide as a reference point but may not be best suited for the ISDS regime. As a result, the modalities, functioning, enforcement mechanism and the rules would require to be robust and stringent to take into consideration the socio-political and economic factors surround such disputes.


CONCLUSION


The Working Groups’ reports and their recommendations are welcomed at a time where arbitration across the global is developing rapidly. Newer concepts are developing which are being adopted by parties and arbitrators alike. In the context of such rapid development, it is imperative that ISDS also adapts to such changes in order to remain relevant. These recommendations come at a crucial time wherein the ISDS has been under constant scrutiny for various operative and procedural shortcomings. However, it is equally important that factors unique and intrinsic to ISDS are taken into consideration while tailoring these recommendation and not merely adopting rules from other investment and commercial arbitration institutions.

[1] Raghav Bhargava is a 4th year student of Gujarat National Law University pursuing law. He has a keen interest in commercial arbitration and international humanitarian law. He is also the Editor-in-Chief, GNLU Student Law Review. He has previously worked under Justice Deepak Verma, Former Judge of Supreme Court of India and has written for the Cambridge International Law Journal. He can be reached at raghavbhargava@hotmail.co.uk

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