UNCITRAL Working Group III’s procedural and cross-cutting draft provisions: a sign of the times to come?

Introduction

The United Nations Commission on International Trade Law ('UNCITRAL') is the UN's most important legal body in the field of trade law. UNCITRAL meets annually and assigns the various areas entrusted to it to working groups.[1] Since 2017, Working Group III ('WG3') has been tasked with working on potential reforms to investor-State dispute settlement ('ISDS').[2] This deliberation process is State-led and based on State consensus. After concluding that a reform was necessary, WG3 started working on potential draft reform options for States to incorporate into current and future international investment law instruments, whether as treaties, domestic legislation or investment contracts.

Throughout its sessions over the past six years, WG3 has identified several treaty provisions that, in its view, are worth modifying. It considered recent treaty practice, the recently amended ICSID provisions, and consulted studies carried out by other international organisations. As a result, in July 2023, UNCITRAL's Secretariat published the first version of 25 Draft Provisions on procedural and cross-cutting issues[3] for discussion at the WG3's October 2023 session.[4]

This article briefly examines specific provisions WG3 is discussing and their potential impact on ISDS in years to come, if those provisions are ultimately adopted.

Recourse to local remedies

Investment agreements are inconsistent in how they address recourse to local remedies before resorting to ISDS. In practice, these treaties may: (i) state that recourse to local remedies is a final, definite choice, meaning that the investor is not entitled to submit the same claim to arbitration;[5] (ii) require that all local remedies be exhausted as a procedural requirement to have access ISDS[6] or require recourse to local remedies but for a limited period of time,[7] or (iii) make no reference to local remedies.[8]

Draft Provision 6[9] proposes requiring the investor to initiate dispute resolution proceedings in domestic courts with respect to a challenged measure and either: (i) obtain a final decision from a court, or (ii) wait a specific period after initiating the proceedings to submit a claim to arbitration. WG3 is still discussing whether to follow this approach or to instead encourage disputing parties to resort to local remedies to settle the dispute.

Limitation period

Limitation periods work similarly to a statute of limitations. This is another matter that treaties tend to address contradictorily. Many treaties fail to establish any limitation period.[10] And those that do, provide differing periods[11] and start dates for those periods.[12]

Draft Provision 8 proposes implementing a limitation period that would work similarly to a statute of limitations.[13] Under the proposal, an investor would not be entitled to submit a claim for resolution under an investment treaty if a specific period has lapsed since the investor acquired, or should have acquired, knowledge of the challenged measure and knowledge that it has incurred loss or damage. WG3 is still deliberating on how long this period should ultimately be and when it should start to run (i.e. when the investor acquires knowledge of the measure or incurs loss or damage).

Denial of benefits

Denial of benefits operates as a restriction for prospective beneficiaries of an international investment instrument. Not all of these instruments include this mechanism. Those that do, usually provide for denial of benefits against third-party nationals, who are subject to economic sanctions,[14] or who have no real economic link to the home State.[15]

Draft Provision 9 broadens the scope of the investors and investments for whom the host State may deny the investment treaty benefits.[16] Apart from including investments and investors owned or controlled by shell companies from a non-contracting State or by companies subject to embargoes by the host State – which is usual in investment treaties that do have a denial of benefits clause – it also includes: (i) investors who receive third-party funding that is forbidden under Draft Provision 21, or who fail to comply with its provisions, and (ii) investments made in violation of the laws of the host State, among other circumstances. WG3 is discussing whether to also include other instances, such as shareholder reflective claims – to which Draft Provision 10 refers – and whether denying benefits should cover a treaty's standards of protection or be limited to the ISDS mechanism.

Shareholder claims

Draft Provision 10 deals with shareholder claims. Its current drafting seeks to limit these claims to those pertaining exclusively to direct losses or damages incurred due to a breach of an obligation. The provision expressly states that this loss or damage is 'separate and distinct from any alleged loss or damage to the enterprise in which the shareholder holds shares.'[17] The draft provision seeks to exclude as loss or damage, a reduction in the value of the shareholding or dividends to which the shareholder is entitled.

The draft provision also conditions these claims upon the State in question expropriating all of the company's assets directly, or the company seeking local remedies and having been subject to 'treatment akin to a denial of justice under customary international law.'[18]

Finally, the draft provision limits the award to monetary damages and interest or the restitution of property to the company.

Very few international investment agreements currently include this type of clause. Therefore, this provision has serious effects on shareholders. It effectively limits the type of measure for which they can resort to ISDS, as well as the potential damages they are entitled to claim. All in all, this draft provision could have a potential combined effect of depriving shareholders of protection under investment agreements, except when their rights qua shareholders, such as collecting dividends, are directly affected.

Counterclaims

International investment law instruments rarely address counterclaims, especially those by a respondent State. Draft Provision 11 seeks to fill this gap. Counterclaims can be filed if they directly relate to the subject matter of the claim; are connected to the factual and legal bases of the claim; or the claimant has breached its obligations under the treaty, domestic law, investment contract or any other binding legal instrument.[19]

The draft provision also establishes that the respondent's consent to a claimant filing a claim is subject to the claimant reciprocally consenting to the respondent filing a counterclaim. The draft seeks to overcome the consent issues that typically arise when counterclaims are filed in ISDS.[20]

Evidence

Draft Provision 13 aims to set evidentiary standards and rules.[21] Very few international investment instruments address this issue currently.

The draft provision includes commonly accepted rules such as placing the burden of proof on the party whose claim or defence relies on facts that need evidence, or reaffirming the tribunal's power to compel the parties to produce evidence. This draft provision includes a notable rule: a tribunal may reject a party's request for document production, unless all parties to the dispute make the request.

Early dismissal

Draft Provision 19 regulates the early dismissal of claims.[22] This draft provision seeks to complement procedural rules, such as the UNCITRAL Rules, that do not currently contemplate this possibility.[23] The draft provision, as currently worded, allows both the parties to request the tribunal to dismiss a claim early or the tribunal to do so ex officio.

Damages and compensation

Draft Provision 23 addresses damages and compensation.[24] Again, very few international investment instruments dealt with this issue exhaustively. Most treaties merely refer to compensation in expropriation cases.[25] But other than establishing this method of compensation, legal instruments fail to touch on other relevant aspects of damages and compensation in the context of ISDS.

This draft provision directs tribunals to only award monetary damages and any applicable interest, or the restitution of property (or the expropriated asset's fair market value). Furthermore, the draft provision urges tribunals to consider issues such as the claimant's contributory fault, failure to mitigate loss or damage, prior monetary damages received for the same loss or damage, restitution of property, the repeal or modification of the measure in question, and the claimant's failure to comply with the UN Guiding Principles on Business and Human Rights[26] and the OECD Guidelines for Multinational Enterprises.[27]

The draft provision links evidentiary issues to damages, excluding damages that are 'inherently speculative'[28] and sets conditions for accepting future-cash-flow-based claims, such as the investment's track record, and the existence of a record of profitability. The draft provision excludes punitive damages.

Most notably, the draft provision states that the tribunal 'shall not award monetary damages exceeding the total expenditures (adjusted for inflation) incurred by the claimant in making its investment.'[29] It also states that a tribunal may consider the existence of an inflated claim when allocating costs.[30]

Final remarks

The current draft seems to be taking an aggressive stance against claimants, setting out myriad limitations and clarifications that relate to previous awards against States, as with shareholder claims, counterclaims, and damages and compensation. Another notable issue is that it seeks to tackle issues that international investment instruments rarely address, or which do so inconsistently. As such, these draft provisions reflect an attempt to fill gaps in current instruments that put States in a vulnerable position.

These draft provisions are merely the first stage in a series of WG3 discussions, which only began in October. In the coming months, the rules and their wording may change significantly. Therefore, it is still too early to be concerned about their consequences, given that they are not expected to enter into effect in the near future. But stakeholders, such as States, investors, practitioners, arbitrators and academics, should keep a close eye on developments as these provisions will likely change the nature of investor-State relationships, and the way ISDS is regulated.

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[1] UNCITRAL, 'About UNCITRAL' (2023) <https://uncitral.un.org/en/about> accessed 27 October 2023.

[2] E. Shirlow, 'UNCITRAL Working Group III: An Introduction and Update', in Kluwer Arbitration Blog (23 March 2020) <https://arbitrationblog.kluwerarbitration.com/2020/03/23/uncitral-working-group-iii-an-introduction-and-update/> accessed 26 October 2023.

[3] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023) <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.

[4] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023), paras. 3-5 <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.

[5] Comprehensive and Progressive Agreement for Trans-Pacific Partnership ('CPTPP'), 8 March 2018, Annex 9-J <https://www.dfat.gov.au/trade/agreements/in-force/cptpp/comprehensive-and-progressive-agreement-for-trans-pacific-partnership> accessed 26 October 2023.

[6] Agreement between the United States of America, the United Mexican States, and Canada ('USMCA'), signed 30 November 2018, entered into force 1 July 2020, and Annex 14-D, Article 14.D.5 <https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement> accessed 26 October 2023.

[7] See e.g. Bilateral Investment Treaty between Argentina and Spain, 3 October 1991, Art. X, <https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/119/download> accessed 26 October 2023.

[8] Canada-European Union Comprehensive Economic and Trade Agreement ('CETA'), 14 September 2017 <https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A22017A0114%2801%29> accessed 26 October 2023.

[9] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023), Draft Provision 6 <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.

[10] See, for instance, the Bilateral Investment Treaty between Italy and Romania (1990) <https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/1708/download> accessed 26 October 2023, and the Bilateral Investment Treaty between Argentina and Italy (1990) <https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/5898/download> accessed 26 October 2023.

[11] E.g. the CPTPP, 8 March 2018, Art. 9.2, sets a three-years-and-six-months limitation period <https://www.dfat.gov.au/trade/agreements/in-force/cptpp/comprehensive-and-progressive-agreement-for-trans-pacific-partnership> accessed 26 October 2023, while the USMCA, signed 30 November 2018, entered into force 1 July 2020, Art. 14.d.5, sets a four-year limitation period <https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement> accessed 26 October 2023.

[12] E.g. the Bilateral Investment Treaty between Colombia and Venezuela, 3 February 2023, Art. 12.c.iii, sets a three-year limitation period that starts on the date the investor knew or should have known about the alleged breach of the treaty <https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/6951/download> accessed 26 October 2023; the USMCA, signed 30 November 2018, entered into force 1 July 2020, Art.14.D.5, follows a different trend by including a limitation period that starts on the date the investor acquired or should have acquired knowledge of the breach and knowledge that the claimant or the enterprise has incurred loss or damage <https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement> accessed 26 October 2023.

[13] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023), Draft Provision 8 <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.

[14] See e.g. CETA, Art. 8.16, 14 September 2017 <https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A22017A0114%2801%29> accessed 26 October 2023, and the Bilateral Investment Treaty between Colombia and Spain, 16 September 2021, Art. 18 < https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/6373/download> accessed 26 October 2023.

[15] See e.g. USMCA, Art. 14.14.1.(b), signed 30 November 2018, entered into force 1 July 2020, <https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement> accessed 26 October 2023, and CPTPP, 8 March 2018, Annex 14-D and Art. 9.15 <https://www.dfat.gov.au/trade/agreements/in-force/cptpp/comprehensive-and-progressive-agreement-for-trans-pacific-partnership> accessed 26 October 2023.

[16] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023), Draft Provision 9 <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.

[17] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023), Draft Provision 10.1 <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.

[18] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023), Draft Provision 10.2 <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.

[19] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023), Draft Provision 11.1 <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.

[20] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Annotations to the draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.232 (31 July 2023), para. 29 <https://undocs.org/en/A/CN.9/WG.III/WP.232> accessed 26 October 2023.

[21] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023), Draft Provision 13 <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.

[22] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023), Draft Provision 19 <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.

[23] By contrast, ICSID Arbitration Rules (2022), Rule 41, allows claims to be dismissed early if they manifestly lack legal merit.

[24] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023), Draft Provision 23 <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.

[25] See e.g. the Bilateral Investment Treaty between Mexico and Argentina, 13 November 1996 <https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/105/download> accessed 26 October 2023; and the Bilateral Investment Treaty between Argentina and Algeria, 4 October 2000 <https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/40/download> accessed 26 October 2023.

[26] OHCHR, 'Guiding Principles on Business and Human Rights: Implementing the United Nations 'Protect, Respect and Remedy' Framework' (2011) <https://www.ohchr.org/sites/default/files/documents/publications/guidingprinciplesbusinesshr_en.pdf> accessed 27 October 2023.

[27] OECD, 'OECD Guidelines for Multinational Enterprises on Responsible Business Conduct' (Ed. 2011) <https://www.oecd-ilibrary.org/finance-and-investment/oecd-guidelines-for-multinational-enterprises-on-responsible-business-conduct_81f92357-en> accessed 27 October 2023.

[28] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023), Draft Provision 23.4 <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.

[29] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023), Draft Provision 23.8 <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.

[30] UNCITRAL Secretariat, 'Possible reform of investor-State dispute settlement (ISDS) Draft provisions on procedural and cross-cutting issues Note by the Secretariat', A/CN.9/WG.III/WP.231 (26 July 2023), Draft Provision 23.9 <https://undocs.org/en/A/CN.9/WG.III/WP.231> accessed 26 October 2023.