Update on the future of ISDS: the discussions within UNCITRAL Working Group III – no apparent consensus to date

After a number of years of public debate in a variety of fora, the discussion of the future development of investor-state dispute settlement (ISDS) has recently moved to the United Nations Commission on International Trade Law (UNCITRAL). UNCITRAL Working Group III (WGIII) has been given a broad mandate to identify concerns regarding ISDS, consider whether reform is desirable and, if so, develop relevant solutions to be recommended to UNCITRAL.

WGIII started its work in the 34th session which took place from 27 November to 1 December 2017. As discussed further below, a number of key points were discussed, including: (i) the duration and costs involved in the procedure; (ii) the allocation of costs; and (iii) transparency. There was also some preliminary consideration of possible developments or changes in relation to the treatment of these issues. The Report of the 34th session indicates that some states advocate a fact-based analysis of ISDS but others note the need to address wider public perceptions of ISDS, as these can raise concerns over the legitimacy of the system.

Bringing the debate about the future of ISDS under the auspices of UNCITRAL, involving high level government representatives from across the world, and also in view of the transparent nature of WGIII’s process, raises the stakes, and perhaps also the prospects, of a more systemic reform. However, whilst the forum has the potential to generate a multilateral plan for ISDS, it is hard to discern any broad consensus at this stage either on the nature of the perceived problems associated with the current system of ad hoc arbitration, or on how those problems may be resolved. This is apparent from the Report and also from the audio recordings (helpfully summarised by IA Reporter, here). The 35th session will take place on April 23 to April 27 2018, following which further clarity on these issues may emerge.

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EU Council publishes Negotiating Directives for Convention establishing a Multilateral Investment Court: no real surprises but a couple of gaps

On 20 March, 2018 the Council of the European Union published negotiating directives dated 1 March 2018 authorizing the European Commission to negotiate a convention establishing a multilateral court for the settlement of investment disputes between investors and states. Whilst the detailed characteristics of the proposed multilateral investment court (the MIC) will be developed during the course of the negotiations, the Negotiating Directives give considerable indication of the EU’s intentions as to the MIC’s features.

The Negotiating Directives have their origin in the Commission’s Recommendation for a Council Decision authorising the opening of negotiations for a Convention establishing a multilateral investment court, published in September 2017.  This included a recommendation that negotiating directives be drawn up and made public immediately after their adoption.  The Commission has since commented that “the EU’s new policy on investment is fundamentally based on transparency” and that publication of the Negotiating Directives allows the EU “to continue to work with like-minded partners around the globe” towards creating a MIC, “knowing that EU citizens are fully informed of [its] negotiating instructions”.

Whilst the EU introduced its intention to move towards a multilateral system in a Concept Paper in 2015 (see our blog post here), the Commission’s Recommendation itself came shortly after UNCITRAL indicated in its 50th Session in July 2017 that UNCITRAL Working Group III would consider possible reform of investor-state dispute settlement.  This work began in the Working Group’s 34th session in November 2017, with its next session due to take place on 23 to 27 April 2018.  It will therefore be seen as no coincidence that the EU has chosen to publish these negotiating directives at this stage, and they will set the framework for the participation of the EU and its Member States, as further considered below.  The EU has also submitted a paper to the Working Group in advance of its next session highlighting its concerns over the current system of ISDS.

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North American trade and investment developments: No new NAFTA (for now), and Mexico signs the ICSID Convention

One month into 2018, the future of NAFTA continues to hang in the balance. The negotiating parties will reportedly convene in Ottawa for the sixth of seven planned negotiating sessions from January 23 – 29th.[1] The parties initially hoped to conclude the negotiations before the end of 2017, but US President Donald Trump indicated on January 11, 2018 that there was “no rush” in the negotiations.[2] In the same interview, Mr. Trump said that it may be difficult to reach an agreement before the July 1, 2018 federal election in Mexico, suggesting that the negotiations may continue for months. The parties’ agreement to keep the negotiations confidential[3] means that few concrete details about the negotiating texts and parties’ proposals have been made public.

For more analysis of the NAFTA renegotiations, see our previous updates:

August 7, 2017 – NAFTA renegotiation: ISDS reform objectives

August 16, 2017 – What to watch for as NAFTA (re)negotiators get to work

August 24, 2017 – A warning shot for Investor-State Dispute Settlement under NAFTA 2.0?

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A warning shot for investor-state dispute settlement under NAFTA 2.0?

The US Trade Representative (USTR) is reportedly finalizing a proposal to dramatically restructure NAFTA’s investor-state dispute settlement (ISDS) mechanism, transforming it into an “opt-in” regime under which each NAFTA state would elect whether or not to permit investors of other NAFTA parties to bring claims directly against it.[1] The proposal apparently remains under discussion within the US administration, and has not yet been formally communicated to Canada and Mexico.

The ambition of this reported proposal, which would fundamentally reshape investor protection under NAFTA, far exceeds what the US administration had tabled in advance of the negotiations.[2]

Developed states may have historically viewed the submission to arbitral jurisdiction to resolve disputes with certain investors under investment treaties and free trade agreements primarily as a benefit for their own investors going abroad, rather than as a potential source of liability. However, that appears to be changing with the tides of global investment flows, and as developed states have increasingly been the respondents in investor-state arbitration. US Trade Representative Lighthizer has echoed this criticism, saying that he is “troubled by the fact that nonelected non-Americans can make the final decision that the United States law is invalid“, as the US has committed itself in numerous bilateral and multilateral international agreements, including NAFTA.[3]

This is not the first time that investor-state arbitration, which has the potential to hold states accountable for measures taken in violation of their international obligations, has come under fire. In recent international practice, states have explored alternatives to the investor-state arbitration mechanism. For example, the recently concluded Canada-EU Comprehensive Economic and Trade Agreement (“CETA“) instead adopted an international investment tribunal featuring a regularized 15-person membership and limited appellate procedures, among other innovations.

While the EU has sharply broken with past practice on ISDS mechanisms, the US recently supported including investor-state arbitration in the ill-fated Trans-Pacific Partnership (TPP) and the contemplated US-EU Trans-Atlantic Trade and Investment Partnership (TTIP). ISDS has lost favor among some governments and other stakeholders, but remains popular among influential groups; for example, in advance of the NAFTA renegotiations, the National Association of Manufacturers, which includes many businesses with investments in cross-border supply chains, mobilized to lobby in favor of maintaining NAFTA’s investor-state arbitration mechanisms.[4] The USTR proposal will likely generate significant controversy, as some stakeholders will think it goes too far to strip protections for international investors, while others would prefer the wholesale abandonment of ISDS.

It is, of course, too soon to attempt to draw far-reaching conclusions about the USTR’s reported proposal, but it does appear to signal a significant shift in US policy. Businesses with global supply chains and international investments should closely follow the NAFTA renegotiations, as a move by the US away from ISDS may signal the emergence of serious cracks in the foundations of investment protection under international law.

 

This is part 2 of our ongoing series concerning the future of NAFTA. Round one of the NAFTA renegotiations ended Sunday, August 20, 2017, after which the negotiating parties issued a trilateral statement reaffirming their intentions to continue at a rapid pace. Round two of the talks will take place in Mexico from September 1-5, before moving to Canada for round three from September 23-27.

For more context, see our previous posts:

 

 

If you have specific questions about how the NAFTA renegotiations may affect your business, please contact Christian Leathley, Partner, Timothy Hughes, Associate, or your usual Herbert Smith Freehills contact.

Christian Leathley
Christian Leathley
Partner
+1 (917) 542 7812
Timothy Hughes
Timothy Hughes
Associate
+1 (917) 542 7836

 

 

[1] http://www.foxbusiness.com/features/2017/08/22/u-s-bid-to-exit-nafta-arbitration-panels-draws-ire-from-businesses.html

[2] In the objectives released by the US Trade Representative on July 17, 2017, the administration signaled a more modest agenda in relation to NAFTA’s ISDS mechanisms, including measures to improve transparency and expanded opportunities for non-parties to make submissions in a dispute.

[3] http://www.foxbusiness.com/features/2017/08/22/u-s-bid-to-exit-nafta-arbitration-panels-draws-ire-from-businesses.html

[4] https://www.law360.com/articles/952633/biz-groups-mobilize-to-maintain-nafta-investment-arbitration

 

What to watch for as NAFTA (re)negotiators get to work

On August 16, 2017, trade representatives of the United States, Mexico and Canada will convene in Washington, DC for the first of seven scheduled rounds of negotiations in relation to the North American Free Trade Agreement (NAFTA). The negotiations have been covered extensively in national and international media and, given the scope of the interests at stake, we expect that coverage to only intensify.

To provide practical insights to stakeholders in key industries, we have focused this update on the context of the negotiations, the interests and objectives laid out by the states in advance of the talks, and our strategic view of what interested observers should watch for. We will periodically publish sector-focused insights as the negotiations develop. Continue reading

NAFTA Renegotiation: ISDS reform objectives

The United States will lobby for changes to the investor-state dispute settlement (“ISDS”) provisions of the North American Free Trade Agreement (“NAFTA”) in the upcoming discussions to renegotiate the regional treaty.

ISDS reform is one of several “negotiating objectives” announced last month by the Office of the United States Trade Representative (the “USTR”), the federal agency with responsibility for US trade negotiations.  The disclosure was made public in accordance with a 2015 statute that requires the USTR to release objectives at least 30 days before the start of formal trade negotiations.  The NAFTA talks are set to begin in Washington D.C. on August 16.

On the agenda are modest proposals for increased transparency in the NAFTA ISDS process, such as the introduction of mandatory public access to NAFTA arbitration hearings, and submissions, and awards.  Those amendments would be broadly in line with the recent trend toward greater public transparency throughout the investment treaty space.  A more striking departure from current practice is suggested by the proposed introduction of a “right” of “non-governmental entities . . . to request making written submissions to a panel.” Continue reading