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What next for ISDS Reform at UNCITRAL Working Group III?

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TWN | 23 October 2020

What next for ISDS Reform at UNCITRAL Working Group III?

By Kinda Mohamediah

Meaningful reform aligned with sustainable development seems less likely

Discussions on reforming the arbitration-based investor-State dispute settlement (ISDS) system, which is built into most existing international investment agreements, continue at the United Nations Commission on International Trade Law (UNCITRAL) Working Group III (WGIII). (1) This working group was mandated to work on ISDS reform in 2017 by the 50th session of the Commission, including to develop relevant solutions in this regard.

At the outset of the process of WGIII, there was hope for an outcome that would be meaningful from a sustainable development perspective. Moreover, at UNCITRAL’s 50th session that adopted the mandate of WGIII, the approach was broad and extended beyond thinking of correcting arbitration; it addressed the usefulness of “considering the role of domestic courts, State-to-State mechanisms and any other means of dispute resolution”. There are currently fewer indications that comprehensive solutions rooted in the guiding principle of sustainable development are possible in this forum.

The 39th session of WGIII convened on 5 to 9 October, (2) which was the 7th meeting addressing the mandate pertaining to ISDS reform. Issues on the agenda of the 39th session included dispute prevention and mitigation, alternative dispute resolution, mediation, shareholder claims and reflective loss, multiple proceedings, counterclaims, security for costs and frivolous claims, and treaty interpretation. (3) Issues pertaining to the proposition of a multilateral instrument on ISDS reform were also discussed.

The discussions are of a technical nature and could be relevant to correcting some flows of the investment dispute settlement regime based on arbitration. Yet, one underlying question in this process has been whether it is focused on making arbitration work better or whether it also encompasses a re-envisioning of the dispute settlement system, including through exploring the roles of alternatives to arbitration.

Nudging the current system away from its over-reliance on international arbitration, and making it more attuned to sustainable development objectives, cannot marginalize crucial issues such as the role of the domestic legal processes and systems and the interface between domestic and international dispute settlement mechanisms. Important issues in this regard also include limiting the causes of action that are referred to international arbitration, rethinking the access of investors to this international dispute settlement system particularly in connection with investors’ obligations, as well as access by third parties.

Yet, the discussions and the way they have been organized and steered, including through the close cooperation of the UNCITRAL secretariat and the WGIII Chair, seem geared towards keeping the discussion narrowly focused on tweaking arbitration to make it ‘work better’ with the objective of regaining legitimacy of the existing ISDS system.

For example, the notion of ‘alternative means to dispute settlement’ has been approached in the context of WGIII working papers with a focus on mediation and conciliation. (4) A more comprehensive approach could weave in options like resorting to domestic remedies and State-to-State led mechanisms in this discussion. Several Member States and non-State participants active in WGIII had spoken of, and provided submissions on, the role of domestic mechanisms and courts and State-to-State led mechanisms. Furthermore, recent treaty practice, monitored in UNCTAD’s research, shows that several States have chosen to move away from arbitration or to limit reliance on arbitration in their investment treaties. (5)

alls to align reforms with the guiding principle of sustainable development

Over the course of WGIII meetings, multiple submissions by participating Member States had pointed to the need to more actively situate ISDS reform in a broader context that considers the needed reforms as part of a process of aligning investment policies, including the role of ISDS, with broader developmental objectives. For example, Morocco noted its objective that ISDS reform “lead to responsible international investment that will promote achievement of the Sustainable Development Goals”. (6)

Mali’s submission reflected support for a “comprehensive investor-State dispute settlement reform that fosters sustainable development by, inter alia, safeguarding the right of States that receive investments to establish regulations aimed at promoting the development goals”. (7) Mali stressed its support for “a system whereby responsible, sustainable investment that creates stable and decent jobs is promoted and facilitated”. (8)

Indonesia’s submission emphasized that “ISDS reform process should reflect an effort to strike a balance between the rights and obligations of all relevant stakeholders, protecting investors and their rights while preserving a State’s policy space and right to regulate foreign investments in its territories”. (9)

Similarly, South Africa stressed that “ISDS reform must be consistent with broader sustainable development objectives” and that ‘[p]romoting and attracting investment should not be an end in itself, but a step towards realising the broader objectives of the SDGs and the human rights obligations”. (10) South Africa’s submission proposed that “[c]ountries must consider whether there is a real need for ISDS mechanisms” and suggested that the starting point or question “is whether ISDS mechanisms are desirable or necessary in the first place. (11) South Africa added that “[c]ountries must not rush into assuming that ISDS policies must be a part of their investment agreements and must be mindful of the origins of ISDS. (12) ISDS “was never seen as a substitute for domestic legal dispute settlement, but as a stopgap in cases of extreme maladministration carried out by governments”, added South Africa in its submission. (13)

Historically, international investment arbitration was designed to complement other means of dispute settlement, particularly domestic legal processes. It was not initially designed as a total replacement of the latter. To that effect, the preamble of the ICSID Convention of 1966, for example, provides that “… while such disputes would usually be subject to national legal processes, international methods of settlement may be appropriate in certain cases”. (14)

In the first 20 years (1965-1984) of the International Centre for Settlement of Investment Disputes (ICSID), only eighteen arbitration cases were registered with it. It was only in 2001 that the benchmark of ten new ICSID cases was registered in one year. (15) So, while it may be difficult to imagine international investment agreements without arbitration-based ISDS, although some treaties are ISDS free, (16) the two were not necessarily so closely wedded throughout the history of such agreements.

Aligning ISDS reform with developmental objectives, as suggested above, requires a recognition that cases and measures that ISDS touches on have different implications from a sustainable development and public policy perspective. Consequently, investor-state arbitration does not necessarily provide the most effective avenue for dealing with all of the cases that might arise, even if some procedural changes to arbitration are to be adopted. This is especially so in cases arising out of governmental action for environmental, human rights, or other public interest objectives, which raises important issues pertaining to third-party rights, development and public policy. Yet, at this stage, the process seems to marginalize such crucial issues that are fundamental from a sustainable development and rights perspective.

The hybrid process in light of the COVID-19 related restrictions

The 39th session of WGIII was held in a hybrid format, dictated by the current COVID-19 related crisis. Most delegations joined through an online platform, while just a couple of delegates along with the secretariat’s staff were sitting in the UNCITRAL meeting room in Vienna, where the meetings usually take place.

Questions have been raised in light of this online format. Is it possible to continue the negotiations in such a format? What will that mean to the inclusivity of the process, particularly in terms of developing countries’ participation? What will it entail in terms of adjustments to the working methods and pace? (17)

While the virtual format did not fully impede participation, several delegations, and not solely from developing countries, did face technical problems in connecting and being well-heard. It has been reported that 134 States were registered to attend the meeting, and 406 State officials, including participation by several States that had not attended previously, including Botswana, the Maldives, Turkmenistan, and Zimbabwe. (18) Some States registered many more delegates than they usually send to the meetings, taking advantage of the low cost of online participation. However, numbers may not necessarily lead to effective participation in this virtual format. Yet, it does not seem that the online configuration will necessarily slow down the discussions / negotiations.

One particular adjustment came in a decision by the Commission to extend the offices of the Chair and Rapporteur of the process, including during the intersessional period, and until they are replaced by newly elected officers. (19) This means that the Chair will have a bigger role in shaping the process through the outreach and convening work that could be done during the intersessional period.

There was a tendency from the Chair to propose delegating to the UNCITRAL Secretariat the drafting of solutions and legal language (such as model clauses or guidance) pertaining to multiple issues under discussion.

The Russian delegation took the floor to characterize that as “excessive delegation of work to the UNCITRAL secretariat”. (20) The delegation noted that the Chair proposes delegating the secretariat to carry out propositional work on model clauses or drafting of guidelines even on issues where there are great contradictions between the various positions of participating States.

For the way forward, a proposition for a multi-year work plan will be developed by the Chair, Rapporteur and the UNCITRAL secretariat, with the possibility of consulting with any delegation that wants to be part of the process. Afterwards, a draft will be presented to the participating Member States for discussion, including through informal explanatory sessions to be held by the Chair. It is envisioned that the work plan will include specific ways for WGIII to tackle various topics, the sequence of work as well as the resources needed to undertake that work. It was proposed that the plan would be prepared during the intersessional period, with a view that an agreed plan would be presented to the working group at its next session in April 2021 for its approval, and subsequently to the meeting of the Commission in 2021.

This is a crucial process for participating Member States to attend to, especially that the work plan will determine the allocation of time to discuss issues that could be part of the agreed reforms. It also could have implications on which issues get covered by the secretariat’s working papers or get allocated time for discussions during WGIII meetings or during the intersessional period.

Deliberations in the WGIII take place primarily with reference to the secretariat’s notes/ working papers and the questions raised in these documents. If issues are not covered by such working papers, it is very hard to garner enough attention and technical discussions on them. For example, the issue of exhaustion of local remedies was listed on UNCITRAL’s website (21) as one of the issues to be addressed when discussing dispute prevention and mitigation, along with mechanisms other than arbitration, procedures to address frivolous claims and multiple proceedings, reflective loss and counterclaims. Given that each of the latter issues were covered by a dedicated working paper prepared by the secretariat, the subjects garnered the attention of Member States and discussions were undertaken on each subject. (22)

However, there was no working paper on exhaustion of local remedies, nor was it put on the agenda of the meeting that discussed prevention and mitigation. Consequently, it went undiscussed in the meeting, and it is not clear if and when this issue might be taken up in future discussions.

These process issues might seem to be a mere formality, but they could have significant implications on the underlying nature of the process and its direction, especially in terms of keeping the process effectively State-led and allocating enough space to discuss the various structural and systemic issues concerning ISDS reform.

The next meeting of WGIII is scheduled for April 2021. In the meantime, virtual inter-sessional meetings will be held, among which will be a meeting to discuss mediation in ISDS scheduled for 9 November 2020. (23)

A multilateral instrument as a delivery mechanism of reforms

WGIII discussed the idea of a multilateral instrument on ISDS reform as a means to deliver and implement the reform options to be agreed. It is proposed that the instrument would include a menu of reform options and States could choose to incorporate one or more of the proposed reform options based on their political and policy concerns and interest.

It is also proposed that the instrument would operate as a successive agreement as per the Vienna Convention on the Law of Treaties. (24) As such, it would provide a shortcut through allowing States to apply it to existing and future investment treaties and relieving States of the burden of pursuing amendments.

The OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration, and the United Nations Convention on the Law of the Sea that allow Contracting Parties to determine which mode of dispute settlement to accept (25) are taken as models in this discussion.

If the instrument is envisioned as a menu of options, each State could in effect be designing its own approach to reform through the selectivity it could exercise under such an instrument. While such an instrument might be most attractive in terms of ensuring widest participation, yet, it is fundamental to ask whether it is possible to actually correct a system or nudge it in a certain direction through such an approach.

Such instrument, if developed in the form of a fully optional menu, could be in tension with the broad objectives of moving the dispute settlement system towards more consistency, coherence, and certainty. It could increase the fragmentation of the system and further entrench the current challenges of the system without necessarily correcting some of the crucial issues that reform was set out to address, particularly if it leads to more treaty shopping.

More crucially, such an instrument, though it may be just a menu of differentiated options and approaches to tweaking the ISDS system, might be taken as a reflection of a new international consensus or multilaterally agreed standard. In particular, it will be the product of negotiations at UNCITRAL which is “the core legal body of the United Nations system in the field of international trade law”. (26) Consequently, it could become politically much harder for States, especially developing and least developed countries, to undertake reforms that fall outside those incorporated under the menu of such a multilateral instrument.

1. UNCITRAL WGIII was entrusted three-pronged mandate: (i) to identify and consider concerns regarding ISDS; (ii) to consider whether reform was desirable in light of any identified concerns; and (iii) if the Working Group were to conclude that reform was desirable, to develop any relevant solutions to be recommended to the Commission.
2. While earlier meetings were postponed due to the COVID-19 pandemic, thematic webinars were held on selected issues, convened by the UNCITRAL Secretariat and the Academic Forum, including on establishment of an advisory centre, a multilateral instrument on ISDS reform, treaty parties’ involvement and treaty interpretation, the role of mediation, shareholder claims and reflective loss.
3. See documents A/CN.9/WG.III/WP.170, A/CN.9/WG.III/WP.190, A/CN.9/WG.III/WP.191, A/CN.9/WG.III/WP.192, A/CN.9/WG.III/WP.193, available on :
4. See UNCITRAL Working Paper A/CN.9/WG.III/WP.190, available at:
5. UNCTAD IIA Issues Note, Reforming Investment Dispute Settlement: A Stocktaking (Mar. 2019),
6. Possible reform of investor-State dispute settlement, Submission from the Government of Morocco, A/CN.9/WG.III/WP.161, para 4 (4 March 2019),
7. Possible reform of investor-State dispute settlement, Submission from the Government of Mali, A/CN.9/WG.III/WP.181, para. 1, September 2019, available at:
8. Ibid, Mali.
9. Possible reform of Investor-State dispute settlement, submission by the Government of Indonesia, A/CN.9/WG.III/WP.156, para. 6, (November 2018):
10. Possible reform of Investor-State dispute settlement, Submission from the Government of South Africa, A/CN.9/WG.III/WP.176 (July 2019),
11. Possible reform of Investor-State dispute settlement, Submission from the Government of South Africa, A/CN.9/WG.III/WP.176 (July 2019),
12. Ibid, para. 37
13. Ibid.
14. ICSID Convention, Regulations and Rules,
15. Richard Happ and Sebastian Wuschka, From the Jay Treaty Commissions Towards a Multilateral Investment Court: Addressing the Enforcement Dilemma, Indian Journal of Arbitration Law,
16. For example, the Australia-United States Free Trade Agreement (FTA) and the Australia-Japan Economic Partnership Agreement do not include arbitration as a choice for resolving disputes. In the United States-Mexico-Canada Agreement (USMCA), ISDS was eliminated between the United States and Canada, and exhaustion of local remedies is required in the dispute settlement rules applicable between the United States and Mexico.
17. See : Anthea Roberts and Taylor St. John, “UNCITRAL and ISDS Reform (Online): Can You Hear Me Now?”, available at:
18. Ibid. The article noted that the UNCITRAL secretariat reported over 400 logins to the platform each day
19. See: Decisions adopted by States members of UNCITRAL in August 2020, A/CN.9/1038, (28, August 2020), paragraph 3, available at :
20. Intervention by the Russian delegation during the morning session of WGIII 29th session on Friday 9th October, 2020.
21. See the listings included under reform options on the following page :
22. The papers could be found here :
24. See Article 30 of the VCLT, available at: Under international law, the basic principle is that successive treaty prevails over a previously concluded treaty on the same subject matter.
25. See article 287(1) on choice of procedure. Text of the Convention available at :

 source: TWN