Introduction

Investor-state dispute settlement (ISDS) is an important feature of investment treaties. ISDS is the procedural mechanism through which investors can claim compensation for a violation of a substantive investor-protection standard – be it included in a bilateral investment treaty or a trade treaty with investment protections – and it determines the robustness of those protections. The traditional mechanism (ie, investment arbitration between the investor and the host state, modelled on commercial arbitration) has been increasingly criticised by a range of actors for a variety of reasons. Hostility towards the traditional model – which has spread from the academic realm to the political stage – has led to changes in individual treaties and wider reform initiatives.

ISDS reform in treaties

While important changes are afoot, 90% of existing investment treaties were concluded before 2012 (old generation treaties) and have traditional ISDS provisions. The majority of known ISDS cases have thus far been based on old generation treaties. The new generation of treaties concluded since 2012 (of which there are approximately 300) have incorporated many new features, albeit on an inconsistent basis given the whims of bilateral negotiations and individual state preferences.

Most of the changes to new treaties are to substantive provisions – for example:

  • the redefinition of 'investor' and 'investment';
  • the limitation of the fair and equitable treatment standard;
  • the clarification of the indirect expropriation standard; and
  • the promotion of corporate and social responsibility.

However, some ISDS provisions have also been modified, including by:

  • omitting ISDS altogether (eg, in favour of domestic courts, mediation or state-to-state dispute settlement);
  • limiting ISDS to particular types of treaty breach; or
  • incorporating various enhancements to the traditional model of ISDS, such as:
    • provisions bolstering impartiality of arbitrators;
    • early dismissal opportunity for frivolous claims; or
    • transparency provisions opening ISDS proceedings to the public and third parties.

Some of the old generation treaties have also been reformed by amendments or wholesale replacement. For example, in 2018 South Korea and the United States signed an amendment to their 2007 treaty, which:

  • provided clarifications on the meaning of the minimum standard of treatment;
  • excluded ISDS procedures from the scope of the most-favoured-nation clause; and
  • established a joint committee to explore improvements to the ISDS provision that meet both countries' objectives.

In North America, the best-known system for ISDS is established in Chapter 11 of the North American Free Trade Agreement (NAFTA). In 2018, following President Trump's election based in part on his promise to scrap the NAFTA, Mexico, Canada and the United States signed a new trade agreement – the US-Mexico-Canada Agreement – after months of intense negotiations on many substantive issues. ISDS did not escape the negotiators' scrutiny. Under the new treaty – which has yet to be ratified by all three countries – Canada would withdraw from ISDS entirely, leaving it in place only between the United States and Mexico, albeit for a narrower set of disputes.

Multilateral reform initiatives

In addition to these changes in specific jurisdictions, reform initiatives are taking place on several other fronts, including at:

  • the Organisation for Economic Cooperation and Development;
  • the World Trade Organisation;
  • the United Nations Commission on International Trade Law (UNCITRAL); and
  • the International Centre for Settlement of Investment Disputes (ICSID).

For example, UNCITRAL is overseeing a state-driven ISDS reform initiative through Working Group III. The group's mandate is to:

  • identify and consider concerns regarding investor-state dispute settlements;
  • consider whether reform is desirable in light of any identified concerns; and
  • develop relevant solutions to recommend to the commission in order to aid reform.

The group has identified concerns that fall into the following categories:

  • the consistency, coherence, predictability and correctness of arbitral awards;
  • arbitrators and decision makers;
  • the cost and duration of ISDS cases (with a focus on arbitration proceedings); and
  • third-party funding.

In order to identify relevant solutions, the group has created a workplan as follows:

  • in July 2019 delegations submitted solutions to be developed to UNCITRAL;
  • the submitted proposals will be discussed and a project schedule developed at the next session in Vienna in October 2019; and
  • once the project schedule is created, the group will begin to substantively discuss and develop potential solutions for recommendation to the commission.

States have acknowledged that a distinction must be maintained between well-founded concerns supported by facts and empirical research and unfounded concerns based on perceptions. Further, states have acknowledged that some of the concerns raised with respect to ISDS can be resolved within the framework of international investment treaties, through amendments or interpretive statements.

As the leading arbitral institution for ISDS, the ICSID is also focused on reform. While amending the ICSID Convention itself is not possible, the ICSID secretariat has been conducting extensive consultations about the ICSID Arbitration Rules to:

  • modernise the rules based on case experience;
  • make the process increasingly time and cost-effective while maintaining due process and a balance between investors and states; and
  • make the procedure less paper-intensive, with greater use of technology to transmit documents and case procedures.

In March 2019 the ICSID secretariat published its second working paper on proposals for rule amendments, building on the proposals that were originally published in August 2018.

Comment

Whether these reform initiatives will achieve meaningful improvements has yet to be seen. At a recent event in London, a leading practitioner is reported to have lamented a "collective failure of imagination" when it comes to procedural improvements of ISDS. It is also unclear whether the posited reforms will appease opponents of ISDS, many of whom appear focused on eliminating ISDS altogether in any of its current forms.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.