Experts at UNCTAD Meeting Give Shape to IIA Reform Options
More than 300 experts and delegates from member states, international organizations, NGOs, the private sector and academia attended the United Nations Conference on Trade and Development (UNCTAD) Meeting on the Transformation of the International Investment Agreement (IIA) Regime from February 25 to 27, 2015 in Geneva. Working in breakout and plenary sessions, the experts explored options for reform of the IIA regime and investor–state dispute settlement (ISDS), to make them more conducive to sustainable development.
In the course of preceding debates, including at the IIA Conference that took place during UNTCAD’s Fourth World Investment Forum (WIF) in October 2014, a broad consensus emerged among government representatives and other stakeholders that IIA reform should be systematic and comprehensive, albeit gradual and properly sequenced. With this, the debate moved beyond “to reform or not to reform” and turned to “how to reform.
The aim of the Expert Meeting was to make progress on the many difficult issues regarding the reform of the IIA regime. The experts engaged in inclusive, constructive and solution-oriented debates centered around four broad themes: the substantive content of IIAs, the sustainable development dimension of IIAs, tools for modernizing the IIA network, and investment dispute settlement. By sharing experiences, identifying best practices and bringing in new ideas, the experts developed a rich menu of options and strategies for governments, IIA policy-makers and negotiators.
The transformation of the IIA regime
There was broad agreement that sustainable development should be the overall objective and guiding principle of IIA reform. Amongst others, this would help maximize the contribution of IIAs to the implementation of the post-2015 development agenda, which is currently being shaped through the Sustainable Development Goals (SDGs) and the preparations for the third International Conference on Financing for Development. Some experts emphasized that the reform processes should not undermine the role of IIAs in contributing to transparent, stable and predictable regulatory frameworks in host states.
Noting the limitations for individual countries to undertake IIA reform, experts appreciated the possibility of multilateral engagement on this issue. Given the complexity of the regime and the long-term commitments under IIAs, they considered that a step-by-step approach towards reform was preferable.
Many delegates provided insights into their national experiences with regard to concluded or ongoing review processes of their model investment agreements. One country presented a new model agreement that focused on investment promotion and facilitation, mitigation of investment risks and dispute prevention. Several delegates highlighted that the reviews of their model agreements involved a broad range of affected stakeholders.
Improving the substantive content of IIAs
With regard to the substantive IIA provisions, the experts stressed the need to promote more clarity in the terms, definitions and concepts used in specific treaty provisions.
Discussing the scope and definitions, the experts suggested that the definitions of “investment” and “investor” should be carefully circumscribed in IIAs. They considered the usefulness of excluding certain types of investment (for example, portfolio investment, contract rights) and including additional criteria for covered investors (for example, requiring substantive business operations in the home state and regulating the dual nationality of natural persons). Another option could be to exclude investors that had abused rights from treaty coverage or apply a denial-of-benefits clause to instances of treaty shopping.
Several options were proposed to provide more clarifications and guidance on fair and equitable treatment (FET) in future treaties, such as including an exhaustive list of state obligations or a negative list, linking the FET standard to the international minimum standard of treatment, replacing FET with a different term (for example, “fair administrative treatment”), and not including a FET provision in the first place, or including it as a political rather than a legally operative standard.
The experts considered it useful to add explanatory language on what constituted indirect expropriation, in line with recent treaty practice. However, questions were raised whether the new language would be effective and operative in the context of investment treaty arbitration. A cross-cutting issue that raised concern was the most-favoured-nation (MFN) clause, since it could potentially be used in investment arbitration to circumvent and undermine treaties with more refined standards.
With regard to the recent trend of a greater use of pre-establishment national treatment commitments in IIAs, the negative list approach to undertaking such commitments was discussed. Several challenges were noted, such as the need to undertake an extensive and careful domestic audit of existing non-conforming measures and the inability to foresee which new economic sectors might emerge in the future. The positive list approach and best efforts clauses on investment liberalization were also considered.
Increasing the sustainable development dimension of IIAs
The experts highlighted public policy exceptions as an important tool for IIAs. Concerns that public policy exceptions might give greater discretion to states and create uncertainty and the risk of abuse could be addressed by formulating such clauses in a way that prevented arbitrariness and discrimination. Procedural mechanisms for applying exceptions clauses could be created (for example, joint committees of the contracting parties). Finally, the experts discussed whether exceptions should address general policy matters across all sectors or only in specific areas and sectors.
The experts expressed different views on the need to include corporate social responsibility (CSR) standards and investor obligations in IIAs, and on their potential nature (binding versus voluntary) and content. One view was that relevant standards for investor conduct should be set in domestic laws and that the inclusion of investor obligations in IIAs could lead to competitive disadvantages for foreign investors. Another view supported the inclusion of investor obligations. One proposal was to integrate investor obligations in the definition of investment or in a denial-of-benefits clause as a basis for jurisdictional objections to ISDS claims; another was to take into account non-fulfilment of investor obligations at the merits and damages stage and allow for counterclaims by states on this issue.
With respect to rules for the promotion of sustainable development–friendly investments, some experts emphasized the role of domestic law in achieving a sound business climate and stated that IIAs were not the sole or main available tool. While the importance of protection clauses in IIAs was highlighted, more specific rules on investment promotion in IIAs could be included. It was noted that certain IIA provisions (for example, prohibitions of performance requirements) may constrain policy space in this regard.
Discussing whether IIAs should address incentives, some experts were of the view that incentives were a matter of domestic law. Others suggested that the granting and withdrawal of incentives could potentially become an issue in the context of expropriation and the non-discrimination principle in IIAs. The experts noted that some types of incentives and a race to the top in terms of incentives might be contrary to sustainable development objectives.
To clarify the relationship between IIAs and other areas of international law, the experts considered including a closed or open-ended list of other treaties in the annex of an IIA, creating an institutional mechanism for consultations among contracting parties on potential conflicts between different treaties, and referring such conflicts to another body or institution for authoritative interpretation. Generally, the potential for conflict was considered limited, since the Vienna Convention on the Law of Treaties would provide sufficient guidance. At the same time, it was pointed out that other areas of international law were not always sufficiently taken into consideration in investment arbitration.
Assessing tools for modernizing the IIA network
The experts considered that the increasing trend of regionalism could be a means to harmonize the fragmented IIA regime. However, a concern was expressed that, in both multilateral and regional processes, “powerful” states might impose their wills on smaller or less developed states. A proposal was made to grant non-participating states observer status during negotiations and to increase the overall transparency of regional negotiations.
The experts discussed the opportunities arising from multilateral approaches to achieve greater consolidation of the IIA regime and support reform efforts. In light of the limited prospect of reaching multilateral consensus on reform of the IIA regime in the near future, the experts considered the renegotiation of treaties a viable way forward. While it would allow contracting parties to coordinate reform, it could pose serious capacity problems to some countries and would depend on mutual consent. Another proposal was to use multilateral engagement to start with softer instruments, such as model laws, best practices, guidelines, recommendations, toolboxes or checklists for IIA negotiators, and thereby progressively move towards finding common ground.
Treaty interpretation, without amending treaty language, was considered a useful alternative to renegotiation. It could focus on the most controversial clauses to which tribunals had attributed contradictory meanings (for example, MFN, FET, umbrella clauses). Amongst others, contracting parties to a treaty could issue interpretative statements for the specific treaty or non-disputing contracting parties in ISDS proceedings could make submissions to assist in interpretation. The timing of interpretation notes, that is, whether a note was issued before, during or after a dispute, was noted as an issue that could raise fairness concerns.
The experts noted that political and economic concerns may deter states from terminating treaties. However, termination would not necessarily reduce attractiveness, as investor concerns might be addressed through domestic law and investment facilitation. It was also discussed that contracting parties could make a joint decision to revoke the survival clause before termination or provide for different lengths of continued application in future treaties (for example, depending on the needs of different sectors).
It was repeatedly suggested that a possible way forward might resemble the opt-in approach of the Convention on Transparency in Treaty-based Investor–State Arbitration developed by the United Nations Commission on International Trade Law (UNCITRAL). This approach could potentially be used to address other key issues, such as FET or indirect expropriation, and allow states to improve their entire portfolios of investment treaties at once. However, experts considered it a challenge to reach consensus among all states on controversial substantive provisions; the differences in wording found in a myriad of IIAs would further complicate such efforts.
Reforming investment dispute settlement
The experts discussed the need to reform existing ISDS mechanisms, sharing their national experiences in taking steps in this regard.
The experts considered that a single, standing appeals mechanism might be preferable to multiple ad hoc mechanisms, as it would better address the lack of legal consistency and predictability of arbitral decisions. However, in light of differences in the language of IIAs, an appeals facility would be unlikely to resolve these problems fully, even though it could considerably enhance the regime’s legitimacy. The Appellate Body of the World Trade Organization (WTO) was seen as a possible model, and the International Centre for Settlement of Investment Disputes (ICSID), as a possible forum, albeit with some limitations. A more detailed analysis would be needed of different ways in which an appeals facility could be established, the potential scope of appellate review and other specific issues.
Some experts considered that an international investment court could resolve concerns related to the overall legitimacy of ISDS and the independence and impartiality of arbitrators, including by providing access to stakeholders other than investors and states (for example, communities affected by investment projects). However, it was noted that the court might raise sovereignty concerns among states, involve costs for a broader range of countries and contribute to the politicization of disputes. It was also pointed out that considerable political will was required for its creation. Several delegates encouraged more research by UNCTAD and other institutions on the prospective court (focusing, for example, on the relationship to ISDS and state–state procedures; jurisdiction; remedies and enforcement mechanism; and best practices of international and regional courts, tribunals and mechanisms).
With regard to investor access to ISDS, one view was that ISDS should no longer be provided for, in view of the well-known deficiencies of the regime; at a minimum, local remedies should be pursued first (that is, for a certain time or until exhaustion). The experts shared national experiences to circumscribe investors’ access to ISDS and to shift focus towards greater reliance on domestic remedies. The other view emphasized the difficulties that investors faced when investing abroad and that, in response, IIAs had internationalized rule-of-law issues. Proposals were made to improve ISDS mechanisms, for example, through increased transparency; an arbitrator code of conduct; better use of cooling-off periods; mechanisms for appeals, collective actions by smaller investors, and the early dismissal of frivolous claims; fork-in-the-road provisions; clear rules on interest calculation and cost allocation; and enhanced provisions on the right to regulate.
The experts considered it important that home states and arbitral institutions advocate the advantages of increased transparency for investors. Other suggestions included piloting projects on transparency with individual countries, restricting the enforcement of arbitral awards that were not publicly available, using adherence to the UNCITRAL Rules on Transparency as a condition for loans from international financial institutions, and applying transparency rules to settlements.
The road towards IIA reform
There is an inherent challenge in attempting to develop a comprehensive and coordinated plan for reforming a network of IIAs that is multilayered, multifaceted and highly atomized. Some guiding principles are needed for the long road towards such reform. Sustainable development should be the overarching goal of reform of the IIA regime, while the focus of action should be on the systemic deficiencies, and synergies with other public policy–making processes should be ensured. Future action should be collaborative in spirit, benefiting from the collective wisdom of all stakeholders, and oriented towards finding concrete solutions. There is need for further multilateral, multistakeholder and multidisciplinary engagement on the matter at hand.
Multistakeholder discussions will continue at the next IIA conference during the World Investment Forum, to be held in March 2016 in Lima, Peru.
Information and documents related to this Expert Meeting, including a background note, the chair’s summary, presentations, rapporteurs’ synopses and the results of the UNCTAD “report-back” project, are available at http://unctad-worldinvestmentforum.org/followup-events/single-year-expert-meeting/.
The views expressed in this article are those of the authors and do not necessarily reflect the views of UNCTAD.
James Zhan is Director of UNCTAD’s Division on Investment and Enterprise and Chief Editor of the World Investment Report.
Diana Rosert is Associate Legal Affairs Officer in UNCTAD’s Section on International Investment Agreements.