On 3 March 2018, protesters cemented their feet together outside Labour MP Ruth Dyson’s office in Christchurch. Perhaps there was a deeper meaning about the Government sealing its fate; whatever the explanation, it accurately captured public sentiment towards the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). The protest was a final expression of opposition before the CPTPP was signed the following week.
One of the main objections of protestors was to investor-state dispute settlement (ISDS) provisions. ISDS is an enforcement mechanism that allows private investors to sue states before ad hoc arbitration tribunals. It is available where a state has breached an investment standard, such as national treatment (which requires foreign investors to be treated the same as domestic investors). The Labour-led coalition had negotiated some suspensions to the CPTPP’s ISDS clause, but it remained partly effective. Critics say ISDS erodes the sovereignty of the nation-state, among other things. It is present in over 3,000 international investment treaties.
The controversy about ISDS is not limited to New Zealand. Therefore, multilateral talks are being facilitated by Working Group III of the United Nations Commission on International Trade Law (UNCITRAL). In October 2019, delegates from states and organisations around the world will convene in Vienna for the next session of Working Group III. They will enter perhaps the most important phase of the three-part reform process: deciding on solutions to be recommended to UNCITRAL and, in turn, to the General Assembly.
The problem with ISDS
The rationale of ISDS clauses is to hold states to promises they make in international agreements. In terms of procedure, each party appoints one arbitrator and a third is chosen by mutual agreement. This panel of three arbitrators hears submissions and issues a decision.
ISDS is said to depoliticise disputes by ending “gunboat diplomacy” and providing a neutral forum to solve legal problems outside domestic courts. Proponents argue it makes investment conditions more favourable. Opponents regard a panel of three unaccountable individuals deciding significant disputes on sensitive issues as unacceptable. One scholar has labelled ISDS the “Wild West” of international law, for its lack of rules and institutions.
The European Commission views the perceived illegitimacy of ad hoc tribunals as a threat to multilateralism. It proposes a permanent investment court. Other countries, such as India, see ISDS as a threat to sovereignty and have been revoking bilateral treaties with ISDS clauses. Brazil has never signed a treaty with ISDS provisions.
At UNCITRAL, Working Group III delegates have found consensus on three groups of procedural problems, which impugn the legitimacy of ISDS. They relate to:
- A lack of consistency, coherence, predictability and correctness of arbitral decisions;
- Arbitrators and decision-makers;
- Cost and duration of ISDS cases.
Substantive questions about ISDS are outside the scope of the Working Group’s review. These are regarded as best dealt with on a bilateral or plurilateral basis.
UNCITRAL’s mandate and progress
On the fourth floor of the labyrinthine United Nations’ Vienna headquarters are the offices of UNCITRAL’s Secretariat, a department in the Office of Legal Affairs, which facilitates working group and commission sessions. UNCITRAL was established in 1966. Its mandate is the harmonisation and modernisation of international trade, in which capacity it has developed instruments on dispute settlement, insolvency, international contract practices, electronic commerce, secured transactions and the sale of goods.
For membership, 60 states are drawn from the United Nations, representing diverse legal systems, geography and levels of economic development. The membership term is six years (New Zealand has never been a member). Working group sessions are held alternately in Vienna and New York every six months. All decisions are made by consensus as far as possible, although consensus merely means a prevailing majority and no formal objection.
The commission assigns work to one of its six working groups, each supported by the Secretariat. These are run by member states and attended by observer states and organisations. Since 2017, Working Group III has provided a forum for ISDS discussions. UNCITRAL has a history of success in dispute resolution – it champions the New York Convention, whose 159 state participants are required to recognise and enforce arbitral awards.
Working Group III currently has a three-part mandate: (i) to identify ISDS issues; (ii) to consider whether reform is desirable; and (iii) to develop solutions.
Following a multilateral discussion, UNCITRAL usually devises one of three types of instrument:
Conventions achieve the greatest harmonisation. It is easy for others to understand a state’s laws when it is a signatory to a UNCITRAL convention.
Model laws are legislative texts which states can enact as part of national law. These are appropriate where strict harmonisation may be less important or achievable. UNCITRAL decides whether the domestic law complies with the model law.
Legislative guides are the most flexible and used when there are divergent approaches internationally.
It is not yet known what form the ISDS solution will take.
Solutions
At its 36th session, the Working Group requested that the Secretariat prepare a work-plan outlining the possible ISDS reform options. The work-plan (A/CN.9/WG.III/WP.158) outlines a number of proposals: a system of precedent; preliminary rulings; joint interpretative agreements; a code of conduct, training, rosters and certification for arbitrators; dispute prevention measures; and security for costs. But perhaps the most significant proposal is the establishment of a permanent investment court.
There are plenty of examples of existing “standing” dispute resolution systems. At the World Trade Organisation (WTO), disputes are heard in the first instance by ad hoc panels, but there is a permanent panel at the appellate level. In the first hearing, the parties may oppose nominations for “compelling reasons”. But in the second hearing, individual judges cannot be challenged.
However, WTO appellate body judges have already been approved by state actors ex-ante. A report prepared by the Geneva Centre for International Dispute Settlement (CIDS) in November 2017 considers this implication in detail. Essentially, states may have less control over a specific case heard by a permanent court. But if, with the power to approve judges in the first place, a permanent court would represent a shift in the balance of the investor-state relationship.
Some commentators have attempted to categorise Working Group III participants by their respective positions on ISDS. There are said to be three “camps”: systemic reformers, who favour the establishment of an international investment court and an appellate body (such as the European Union); incrementalists, who argue that ISDS criticisms are exaggerated and that only minor reforms may be necessary (United States); and paradigm shifters, who oppose ISDS completely and favour alternatives such as state-to-state arbitration (Brazil, South Africa).
These camps are helpful for illustrating some points. An important decision in the 37th session in April 2019 was to consider structural and targeted reform options concurrently, rather than sequentially. In the October session, this could have the effect of “incrementalists” hastening to formulate procedural reforms that attract a broad number of states, in an attempt to stave off competition from the “systemic reformers”, who themselves will be seeking consensus for a multilateral investment court.
The categorisation of states into camps is ultimately artificial and can detract from the more cooperative reality of the Working Group. Indeed, significant concessions have already been made by powerful actors. Some “incrementalists” were entirely opposed to reform at first and some “paradigm shifters” opposed the narrow terms of reference for the Working Group. But it is obvious that there are still divergent views on ISDS. Perhaps, then, a suite of reform options is necessary. This is the view of Anthea Roberts, a commentator attending Working Group III as an independent expert with the Australian delegation who has argued for a combination of hard and soft instruments.
It is overwhelming to contemplate the amendment of over 3,000 treaties at once, but an equally ambitious OECD project comes to mind. In June 2017, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI) came into effect. The MLI has 89 signatories and modifies thousands of bilateral double tax agreements, to varying degrees, depending on elections made by states. Modifying rather than repealing is messy: the effect of the MLI on each treaty is currently computable on an inelegant comparison database. But the project is evidence that the simultaneous and wholesale amendment of treaties is feasible.
New Zealand trade and investment
The Government opposes ISDS in all new treaties and has yet to significantly contribute to Working Group III discussions. But it does not necessarily follow that the Government opposes improvements to ISDS. New Zealand is already subject to ISDS clauses in its free trade agreements with a number of countries, including China and the ASEAN countries. Further, the CPTPP renegotiation by the Labour-led coalition included signing “side letters” to partly or fully exclude the provision for compulsory ISDS with five countries, but it remains effective in respect of the others.
The issue is obviously regarded as important, as New Zealand does not attend all of UNCITRAL’s other working group sessions (interestingly, at least two observer organisations at Working Group III are represented by New Zealanders too). As a law-taker, perhaps New Zealand is keeping an open position to maintain flexibility. If powerful actors ultimately take divergent stances, the Government could manoeuvre itself to benefit from both options. However, if the Government truly holds such a strong position on ISDS, it would be better to highlight concerns now and influence a global solution, rather than take its own path.
Conclusion
ISDS could be UNCITRAL’s most politically charged work to date – it took two days just to elect a chairperson (though two years is a remarkably short time to have obtained consensus on the first two limbs of the mandate). It is difficult to see where consensus currently lies, with no obvious middle ground. States meet again from 14 to 18 October 2019 in Vienna for the 38th session of Working Group III. If UNCITRAL eventually settles on an ISDS instrument, it would be ground-breaking: the OECD tried and failed to reach an agreement in the 1990s.
In this polarising and complex debate between over 400 delegates representing developing countries, superpowers, charities, industry and non-governmental organisations, discussions can seem distant from New Zealand. But the ISDS review is a reverberation of international adjustments to national economic goals and the outcome could be enormously consequential for future state relations. In the arena of Working Group III, the nation-state could wrest back dominance from the market-state and the very trajectory of globalisation could be influenced. As yet, the proceedings have certainly not garnered the same attention as the CPTPP negotiations and there has been limited domestic coverage. But after October, a more definitive proposal may arise.
Michael Hansby michael.w.hansby@pwc.com is an associate at PwC, Auckland. He attended the 36th session of Working Group III in November 2018, during an internship with the UNCITRAL Secretariat in Vienna.