The future of investor-state arbitration à la UNCITRAL

Posted by Dr. Barnali Choudhury
On September 23, 2020
arbitration, BITs, CSR, investment law, ISDS, UNCITRAL

UNCITRAL created a working group on investor-state arbitration in response to states’ and other organizations’ concerns of the challenges posed by the much debated role of the investor-state dispute settlement (ISDS) system. Since its formation about five years ago, the Working Group has considered several reform options, but given its limited mandate has focused only on procedural reform, considering substantive standards only insofar as it interacts with procedure. While the procedural changes being proposed are certainly warranted, a failure to reform the substantive shortcomings of international investment law risks only exacerbating the legitimacy concerns around the system as a whole (note for example the claims over the asymmetric nature of international investment law).

However, a recent note from the UNCITRAL Secretariat hints at the possibility of a new path for reform. In the note, the Secretariat proposes that the Working Group consider formulating investor obligation provisions in connection with the Working Group’s work on counterclaims. If the Working Group takes up the Secretariat’s suggestions, this could begin the path towards rebalancing investment treaties, which at present, contain rights, but not obligations for foreign investors.

“Soft” obligations

A small number of states have already begun introducing investor obligations, although they vary in term of the degrees of stringency. The first type of investor obligations are decidedly “soft” and are designed more as recommended conduct for investors rather than binding obligations. The Agreement between the United States of America, the United Mexican States, and Canada (USMCA), for instance, encourages investors to voluntarily incorporate internationally recognized standards of corporate social responsibility (CSR). Similarly, the EFTA-Central American States BIT encourages investors to observe international standards of good corporate governance.

States have attempted to increase the rigor of their investor obligations by employing tougher language. Thus, the Iran-Slovakia BIT specifies that investors should strive to make the maximum feasible contributions to the host state’s sustainable development. The Brazil-Malawi BIT, conversely, details the specific standards it wishes to impose on investors and then specifies that investors shall “develop best efforts” to comply with these standards.

Binding obligations

Another type of investor obligations create binding legal obligations for investors. Using obligatory language these treaties specify investor obligations such as upholding human rights; refraining from engaging in corruption; contributing to the host state’s economic, social and environmental progress; engaging in environmental impact assessments; and refraining from operating investments in a way that circumvents labour standards; among others.

Some states have increased the potency of their investor obligations by specifying consequences for failing to adhere to them. Thus, some bar an investor’s access to arbitration if the investor has violated host state law or engaged in corruption. Similarly, the Colombia Model BIT bars access to arbitration if the investor fails to comply with human rights or environmental provisions of international instruments. The Bangladesh-Denmark BIT takes an even more direct approach, specifying that investors will be obliged to compensate the host state if the investor causes loss or damages to public health, life or the environment.

The UNCITRAL Secretariat notes, counterclaims would be one avenue by which states could use investor obligations. Ecuador has already used this forum successfully to hold investors accountable for their environmental obligations. Yet by establishing a broader range of investor obligations, states could hold investors (acting in bad faith) accountable for a number of different issues relating to the establishment and operation of investments. These include respecting human rights, protecting the environment and refraining from corruption, among others. These goals align broadly with the UNCITRAL Secretariat’s and state aims to reform ISDS in light of sustainable development goals.

Beyond these procedural improvements, some investor obligations could strengthen the potential for investment treaties to become vehicles for improving the host state’s development. This could only contribute to the positive image of companies in establishing themselves as a trusted partner in the host country. With that, investors may become less likely to engage in bad behaviour, could bring higher quality investments, and step up the efforts to mitigate human rights or environmental harms arising from the investment.

Concluding remarks

If the aim is to reduce the asymmetries of ISDS (one of its major challenges), the Working Group could indeed work on developing certain obligations for foreign investors. This may enable any obligations imposed on investors to parallel the rights that are afforded to them with positive effects on the legitimacy of the system.

In the end, the Working Group’s aim in reforming ISDS is designed to address the concerns harming the legitimacy of the system. Introducing investor obligations seems to fit within that mandate. While these changes may appear uncomfortable to investors at the first sight, this approach could be an opportunity to preserve the ISDS. In the good tradition of democracy, this has to be done with proper involvement of all the stakeholders concerned, including the investors themselves.

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