The UNCITRAL Code of Conduct: Breakthrough or diversion?

Of the various concerns raised by the current system of ISDS, some relate to the conduct of arbitrators. Specifically, certain types of conduct (such as conflicting appointments) give rise to doubts about the impartiality, independence, availability, and professional capability of arbitrators.

To address these concerns, UNCITRAL’s Working Group III (Working Group)—charged with global ISDS reform—has now circulated its third draft Code of Conduct for investment adjudicators (Code) and suggested means for its implementation and enforcement in September.

While providing helpful guidance, the Code contributes relatively little to the Working Group’s overarching mandate to reform ISDS. Reform requires more decisive action that goes to the core of some of the concerns raised around ISDS, including costs, third-party funding, damages, circumvention of domestic remedies, counterclaims, and impacts on third-party rights of affected communities, to name a few.

However, given that the UNCITRAL member states (member states) will discuss the Code at the upcoming meeting of the Working Group on November 15–19, this text is aimed at giving negotiators an overview of the Code’s provisions, clarifying what they mean in practice, and identifying specific key issues.

Compared to previous versions, the new draft introduces some welcome clarifications—particularly regarding the disclosure obligations of adjudicators and on independence and impartiality. Nevertheless, significant questions remain unanswered: How would member states implement the Code, and how would they enforce its provisions in practice? How would the Code apply to judges in a standing investment court if member states were to create such a court in the future?

The Code also does not decisively tackle the problematic practice of double (or multiple) hatting that many member states are mainly concerned with. The term “double hatting” refers to the practice of one individual acting both as an adjudicator and in a different role (legal representative, expert, or mediator) in separate ISDS proceedings simultaneously or within a short time. If the Code does not include an enforceable prohibition of double hatting, it would be of little additional value compared to existing, voluntary codes, such as the International Bar Association’s Guidelines on Conflicts of Interest in International Arbitration.

The Working Group’s fastest product

Work on the Code of Conduct began in April 2019, when the member states suggested that the Secretariat—together with the ICSID—prepare a draft for discussion. Since then (and compared to the other workstreams of the Working Group), efforts have moved forward extraordinarily swiftly. The Secretariat and ICSID circulated a first draft in November 2020 and a second revised draft in April 2021.

The initiative of the Code of Conduct is aimed at harmonizing the plethora of existing ethical standards applicable to ISDS tribunal members—and possibly adjudicators of a future standing investment court—at the multilateral level, as well as to clarify their practical implications.

The current third version of the draft Code considers member states’ deliberations and comments received on the first and the second versions, as well as separate comments received by the Russian Federation on the first draft. The Secretariat has also indicated that a commentary would accompany the final version of the Code, although no draft of such a document has been circulated.

Third version brings added clarity

As with previous versions, the third draft Code consists of 11 articles and an annexed disclosure form but does not address means of implementation. It contains definitions, a rule on the application of the Code, substantive articles containing the various duties of adjudicators, and an article on compliance.

While maintaining the structure of the previous version, the third version introduces helpful clarifications and precisions for the provisions of the Code. Since member states might decide that they wish to create a standing mechanism for investment disputes at a later stage, the drafters included references to arbitrators and judges of such a mechanism (jointly referred to as “adjudicators”) throughout the draft. The term “judges” is specifically required to ensure that the Code also applies to the adjudicators of such a mechanism, should it be established in the future. By frequently distinguishing between candidates and adjudicators, the new draft also offers a welcome clarification of the duration of the obligations in the Code.

The new draft furthermore contains a definition of “treaty party,” thereby clarifying the distinction between the parties to a specific dispute—i.e., the investor(s) and the host state—and the states that have signed and ratified the treaty in question. It nevertheless fails to expressly define subnational entities and different branches or agencies of the government of a treaty party that may be concerned by provisions in the Code. This omission is unfortunate since the treaty specifically refers to such entities without defining them in the provisions on multiple roles and disclosure obligations.

Definition of adjudicator clarified, but still narrow

Responding to concerns raised regarding the previous versions, the Secretariat slightly reworked the Code’s article on definitions and its scope of application. The definition of adjudicator still excludes conciliators, factfinders, mediators, or the staff of arbitral institutions, and the Code also does not directly apply to adjudicators’ assistants.

This exclusion is significant since, depending on the nature of their work, the intervention of assistants in the adjudication of investment disputes can be problematic. Indeed, arbitrators facing an increased complexity of cases and more voluminous submissions by the disputing parties might be inclined to delegate some substantive adjudicatory functions to assistants.

Investor–state disputes based on contracts or domestic laws not covered

Importantly, as per the definition of “international investment dispute,” the Code applies only to adjudicators in treaty-based investment disputes. The exclusion of contract- and law-based investment dispute settlement is regrettable, as such proceedings would equally benefit from harmonized ethical standards.

Indeed, ICSID and other arbitral institutions such as the Permanent Court of Arbitration or the Stockholm Chamber of Commerce administer not only treaty-based but also contract- and law-based investment disputes.

Notion of independence and impartiality reinforced

In addition, one of the Code’s core rules—the provision regulating independence and impartiality of adjudicators—has been reworked. It now distinguishes more clearly between independence and impartiality as overarching duties on the one hand, and corollary duties, such as the absence of a financial interest in the outcome of the case, on the other.

The Secretariat announced that the difference between independence and impartiality would be further fleshed out in the commentary with reference to the rule established in Suez v. Argentina. According to this rule, “independence relates to the lack of relations with a party that might influence an arbitrator’s decision. Impartiality, on the other hand, concerns the absence of a bias or predisposition toward one of the parties” (para. 29). This would be highly welcome, as the article currently lacks a list of specific examples that would amount to a violation of the two principles.

Major concerns remain

Double hatting: Transparency option is insufficient

Besides the above-mentioned revisions, the new version also contains proposals to address the problematic issue of double hatting. For context, ICSID has also published a background paper on this issue. Double hatting raises concerns because it occurs frequently and can call into question an adjudicator’s independence and impartiality. A clear rule addressing this issue is therefore of vital importance for any code of conduct applicable to investment adjudicators.

Specifically, the Secretariat has proposed three options to address multiple roles: (1) a full prohibition, (2) a full prohibition with the possibility for the disputing parties to agree otherwise, and (3) an obligation of the adjudicator to make a full disclosure with the possibility for disputing parties to file a challenge. However, the proposed options remain less detailed than the provisions of other ethical codes, such as the International Bar Association’s Guidelines on Conflicts of Interest in International Arbitration. The choice of option could radically change the practical impact of the Code.

Subject to a clear implementation and strong means of enforcement, only the first option of a full prohibition would sufficiently address this concern. To be enforceable, a clearer definition of the types of roles that would qualify as double hatting would be required. If drafted broadly to encompass, for instance, acting as an expert witness or mediator, it is likely that such a provision would lead to greater diversity in appointments. It would also contribute to a greater availability of adjudicators.

Confidentiality and ex parte communication

Moreover, the Secretariat has overhauled the rules relating to confidentiality. The Secretariat suggested that the obligation of adjudicators to keep case details confidential be broadened to cover information that is publicly available and prevent disclosure of any decision, order, or award except in certain circumstances. This provision is likely to complicate the attempts of interested non-disputing parties—such as local communities or civil society organizations—to gain access to case-related information. The proposal is, therefore, contrary to recent efforts to increase transparency in ISDS.

While broadening the scope of confidentiality, the Secretariat suggests that an exception be added to address situations in which certain disclosures are required by law. However, the proposed text does not clarify what type of situation this exception specifically covers. It remains an open question whether adjudicators would, for instance, be required to disclose case-related information when acting as witnesses in court proceedings for the annulment of an award.

Furthermore, the Code defines ex parte communication as communication by an adjudicator with “a disputing party, its legal representative, affiliate, subsidiary or other related person” (Article 7(3)). The Code goes on to prohibit such ex parte communication except for such communication as is necessary for the selection of a suitable candidate. As it stands, the provision does not expressly prohibit ex parte communication with third-party funders. Third-party funders are specialized investment funds that finance investors’ arbitration claims against states and thereby acquire an interest in the outcome of the proceedings.

Given this commercial interest in the case, ex parte communication of an adjudicator with such a third-party funder would raise serious doubts as to the existence of a conflict of interest. While third-party funders are likely to fall under the category of “other related person[s]” mentioned in the article, an express mention in the definition would have ruled out any persisting doubts.

Success depends on implementation and enforcement, which remain unclear

Proposed means of implementation differ greatly

No matter how clear the substantive provisions of the Code, its practical impact depends on the chosen means of implementation and enforcement. While the Secretariat has circulated a Draft Note on the Implementation and Enforcement of the Code (Note), this crucial issue remains unresolved.

In the Note, the Secretariat proposed three options to implement the Code that are not mutually exclusive: (1) by incorporating the Code in a treaty, (2) by integrating it via the agreement of the disputing parties on a case-by-case basis, and (3) by incorporating it into procedural rules of arbitral institutions, adjudicators’ disclosure declarations, or court rules and regulations.

There is consensus among states that the Code, if implemented, should be binding and contain concrete rules rather than guidelines. However, the proposed means of implementation differ in their capacity to ensure a harmonized and coherent application and raise questions as to the exact legal conditions.

All three options have advantages and weaknesses

According to the first proposed option, the Code could be implemented in treaties in different ways. It could serve as a model to be integrated into future treaties or as an amendment in existing ones. Both require individual negotiations, so that adopting the Code would be just one step in a longer, potentially difficult process, which might fail. Alternatively, it could be integrated into a future multilateral instrument on ISDS reform. The effectiveness of the Code would then similarly depend on whether such an instrument is adopted. In short, the adoption of the Code alone will do little, and its impact will depend on whether integration succeeds or fails.

Leaving the Code for adoption on a case-by-case basis—the second proposed option—would provide little comfort for governments concerned about independence and impartiality since they would have to convince the claimant-investor to agree to the Code’s application in a specific case. This would add little, if anything, to what governments can already do today when they face a claim.

Lastly, an incorporation in procedural rules of arbitral institutions or adjudicator’s disclosure declarations—the third proposed option—would cause additional difficulties. Only some arbitral institutions might be willing to incorporate the Code into their procedural rules, leading to piecemeal implementation. Also, if the Code were to be implemented in adjudicators’ disclosure declarations, it is unclear whether this would be discretionary or compulsory. An implementation in such declarations would also prevent the Code from applying to candidates at the pre-appointment stage.

Enforcement remains unclear

Significant uncertainties also exist concerning the proposed options of enforcement. States have called for sanctions in the Code to be “sufficiently strict to have a deterrent effect.” In its Note, the Secretariat suggests applying existing sanctions that are part of procedural rules, such as “removal through the challenge of arbitrators,” to the Code. Such sanctions could then be supplemented by additional sanctions, including reduced remuneration or certain disciplinary measures.

However, the Note does not define the legal link between the Code and sanctions in existing procedural rules, which it might even partly replace. It is also not certain whether additional sanctions would be part of the Code itself, achieved through a multilateral instrument or the incremental reform of institutional arbitration rules, or another option.

A diversion from more urgent topics for ISDS reform?

While the joint effort of ICSID and the UNCITRAL Secretariat to develop a Code of Conduct has moved forward swiftly and is set to feature prominently at the UNCITRAL Working Group III’s next session in November, its significance and impact will be limited considering the broader reform agenda. Whether it makes any difference at all will depend on its final content and how and if it will be implemented.

With regards to content, if it fails to disallow double, triple, or quadruple hatting, it will add little to what other guidelines and standards are already doing on topics such as conflicts of interest. Further, the adoption of the Code alone will only have an impact once it is actually implemented and enforceable, and this will depend on future negotiations or the success of the overall reform outcome at UNCITRAL.

Moreover, the mandates of ICSID to revise its rules and of the UNCITRAL Working Group III in undertaking investor–state dispute settlement reform are limited to matters of procedure. The Code of Conduct appears as a limited initiative in the context of reform efforts that are already limited by mandate. Member states would therefore be well advised to limit their expectations for this initiative. It is evident that the Code of Conduct cannot address most major concerns with the current system of investor–state dispute settlement. These concerns include the increasingly broad interpretation of substantive standards of protection by arbitral tribunals, the use of incoherent valuation techniques (and the award of excessive amounts of compensation), the frequent use of third-party funding, the lack of representation of affected communities, and the termination of outdated investment treaties.

For instance, even if arbitral tribunals were to adhere to a Code of Conduct, this alone would not prevent them from awarding excessive amounts of compensation based on entirely speculative valuation techniques.

At the next UNCITRAL Working Group III session in November, states should ensure that the Code properly addresses the issue of double hatting and implementation. But they should also recognize that the Code will not be a gamechanger and must not divert from the more urgent tasks of more systemic reforms that can actually make a difference.

Authors

Lukas Schaugg is an International Economic Law Fellow at IISD and a PhD-researcher in investment law at Osgoode Hall Law School, Toronto, Canada.

The author would like to thank Nathalie Bernasconi-Osterwalder and Suzy Nikièma for their valuable feedback on this article.