The UNCITRAL Working Group III negotiations and the Multilateral Investment Court: Scrutinizing consistency in Investor State Dispute Settlement

by Sahaj Mathur

(Third Year Bachelor of Law Student at the National University of Juridical Sciences, Kolkata)

  1. Introduction

It has been widely suggested that the International Investment Arbitration regime is undergoing a legitimacy crisis. A major factor behind backlash against the regime is the lack of coherence and consistency in Investment Arbitration. Such inconsistency can be perceived to be a consequence of the existence of more than 3000 International Investment Agreements that form the legal foundation of International Investment Law. Inconsistency further arises due to the absence of binding precedent in Investment Arbitration. Thus, identical or similar Investment Treaty provisions may often be interpreted in different manner by different tribunals leading to inconsistency in lack of coherence in Investment Arbitration awards.

The lack of consistency in Investment Arbitral decisions is a core feature of the currently ongoing deliberations at the UNCITRAL Working Group III, which is assessing the reform of Investor State Dispute Settlement. To address this lack of consistency, among other issues, the European Union proposed the establishment of a Multilateral Investment Court (‘MIC’) as a possible reform option to replace the existing system of Investment Arbitration. The MIC is a permanent body comprising of tenured judges that would adjudicate investment disputes between host states and foreign Investors.

The proposal for the establishment of the MIC has evoked a mixed reaction from within the academic community. In particular, the issue of whether the MIC would lead to greater consistency presents a question of immense importance. The article attempts to contribute to the same by critically examining the interaction between the MIC and the consistency the MIC is proposed to establish in Investor State Dispute Settlement (‘ISDS’). In this regard, the paper identifies three issues that arise when assessing the issue of consistency in ISDS through the lens of the MIC. First, will the MIC necessarily lead to greater consistency in ISDS. Secondly, assuming that such consistency can be achieved by establishing the MIC, is this consistency always desirable? Thirdly, even if such consistency is desirable, what are the costs at which this consistency is achieved? 

2. Towards Resolving concerns of consistency in ISDS: Introducing The Multilateral Investment Court

The proposal to establish the MIC was developed in light of the significant concern regarding the inadequacy of the current mechanisms to ensure consistent decisions in investment disputes. The MIC forms one of the core reforms that is currently being considered by the UNCITRAL Working Group III which is deliberating reforms in ISDS. While the precise design, functioning and other technicalities of the MIC are dependent on these negotiations, the basic conception of the MIC broadly envisages two primary changes from the existing system of Investment Arbitration.

The first change envisaged is that MIC would comprise of tenured adjudicators that are permanently appointed and renumerated, as opposed to arbitrators that are appointed and remunerated by the parties. Secondly, the MIC would comprise of a court of first instance, as well as an appellate body. Therefore, as opposed to the limited grounds to challenge awards under the ICSID Framework, the proposal for the MIC is likely to expand the grounds to appeal a decision. The introduction of a limited number of permanent judges deciding investment disputes, along with the oversight of appeals chamber should, in principle, lead to a more consistent body of decisions in ISDS. As a Recent Report of the UNCITRAL Working Group III shows, it is likely that the appellate mechanism of the MIC would comprise of highly qualified professionals. Thus, in theory, the appellate mechanism can serve as a means to create higher consistency, particularly when the MIC is to rule on a series of non-consolidated cases from an analogous factual scenario, such as in the cases filed against Argentina in the 2000s. The assumption that the introduction of the MIC would lead to greater consistency has been largely unchallenged. However, this assumption merits further consideration. 

Firstly, the consistency proposed by the establishment of the MIC can be attained only if a high number of states become a party to the MIC. This caveat assumes importance given that numerous states such as the United States, Russia, Japan and Chile objected to such systematic reform of ISDS. In the absence of widespread participation, any consistency in decisions would be restricted to only a limited number of BITs and is unlikely to impact the Investment Regime generally.

Secondly, it is important to reiterate that the EU’s proposal for the MIC is inspired by World Trade Organisation’s(‘WTO’) system of dispute settlement. However, unlike the WTO regime which is based on a multilateral legal framework, International Investment Law is characterised by a fragmented framework comprising of over 3000 different International Investment Agreements. It is also important to note that the WTO Dispute Resolution forum interprets the same agreements. The establishment of the MIC could lead to more consistency in the interpretations of the same investment treaty. For instance, if the MIC is called to interpret the India-Brazil BIT, then the interpretation of the provisions of that BIT would be made consistent, as opposed to ad-hoc Investor-State arbitral tribunals that may interpret the same BIT in different ways. Similarly, the MIC could lead to more consistent interpretations of the same rules of Investment Arbitration. At the same time, unlike the WTO system, the MIC would have to interpret agreements from a fragmented network of International Investment Law which comprise of various treaties with diverse objectives, provisions and wordings. Given the fragmented nature of the International Investment Regime, it is unlikely that the MIC would offer the same coherence of decision making as that of the WTO Regime.

3. The Multilateral Investment Court and the limits of consistency

As established in part II, the establishment of the MIC is unlikely to lead to the consistency in ISDS that is assumed by its proponents. However, let us assume for the sake of argument, that the MIC would lead to greater consistency. Existing scholarship on ISDS reform(see, here and here) has typically viewed greater consistency in the Investment Regime as an unconditional positive. However, such a theorisation would amount to an oversimplification.

It is crucial to consider ‘what’ rules are being made consistent and whether the rules being made consistent in their application are desirable. These questions are of particular importance due to the nature of the MIC. In Investment Arbitration, the tribunals are constituted on an ad hoc basis. Therefore, the decision of the tribunal would impact only the outcome of a single case. However, in the case of the MIC, the rules that are created by the judges of the MIC would apply to all subsequent Investment disputes. This concentrates the power to interpret the inconsistent and ambiguous rules of International Investment Law in the hands of the few judges of the MIC. In other words, the judges of the MIC possess an unfettered power to create and develop International Investment Law’s jurisprudence.  Thus, unlike Investment Arbitral tribunals, the MIC possess the power to crystallize the rules of International Investment Law. However, such crystallization and consistency are not an unconditional positive. The establishment of the MIC presents the risk of crystallizing undesirable rules, which would then be universally applied. If such rules are made consistent, it would weaken the regime further, rather than strengthen it.

In large part, the issue of whether the rules that are made consistent are desirable to the regime at large is hinged on the question of who are the judges that are appointed to the MIC, and what are the rules and interpretations they uphold. Based on the current negotiations, the judges of the MIC would be appointed unilaterally by the constituent states. Owing to this, States are likely to appoint judges that typically favor State parties in investment disputes. This would not be wholly unsurprising, given that respondent states in an Investor-State arbitration also appoint arbitrators that are likely to favor them. At the same time, the appointment process would also become more politicised, with the interests of states, rather than investors being upheld. This may lead to the crystallization of rules that are skewed in favour of states, thereby impacting the interests of investors.

Aside from this, an inherent advantage of the Investment Arbitration model has been the appointment of highly qualified arbitrators. However, the lucrative salaries associated with arbitral appointments in Investor-State Disputes, as well as the flexibility of such appointments, where the most sought after investor-state arbitrators often serve as counsel in other matters may diminish the possibility of the MIC appointing a permanent body of judges with a similarly high caliber.

Owing to these reasons, it may be possible that the ‘consistent’ rules created by the MIC are unlikely to represent the high standard of decision making that Investment Arbitration has come to be associated with. In fact, it may be so that the rules created by the judges of the MIC may themselves suffer from deficiencies. However, unlike in investment arbitration, these rules would apply to all subsequent cases, becoming rigid and difficult to modify. These considerations would equally apply to rules created by an appeal’s chamber of the MIC given that it is the same appointment process that would constitute the appeals chamber. This can be juxtaposed with the case of Investment Arbitration, where the decision of a tribunal would be applicable only between the parties, thereby reducing the consequences of on the regime at large. In sum, if undesirable rules are made consistent and predictable by the MIC, it is likely to further contribute to ISDS’s legitimacy crisis, rather than resolve it.

4. Concluding Remarks: The MIC and the costs of consistency

Given the severe backlash against Investment Arbitration, the importance of the ongoing UNCITRAL negotiations cannot be understated. At the core of the UNCITRAL’s deliberations, which range from minor procedural reform of Investment Arbitration to an overhauling structural reform of ISDS, lies a trade-off of values. When the reform process is viewed as a trade-off of values, the UNCITRAL negotiations can undertake reform that best embodies the values that the investment regime aspires to uphold. In this regard, even if we were to assume that the MIC can achieve a desirable form of consistency in ISDS, the need for greater consistency must be weighed against the ‘costs’ of the establishment of such consistency.

Firstly, the widening of the possibility of appealing decisions would impact the efficiency and finality of the proceedings given the proclivity of the losing party to appeal against the decision of the court of first instance.

Secondly, the establishment of a permanent roster of judges is unlikely to offer the same level of expertise offered by arbitration, particularly in highly complex, technical or emerging industries and fields of law, where the existence of specialist arbitrators significantly contributed to the precision, efficiency and accuracy of ISDS proceedings.

Thirdly, the establishment of the MIC would lead to significant issues the recognition and enforcement of the judgement of the MIC, given that the judgement is unlikely to fall within the ambit of an ‘arbitral award’ which can be enforced under the New York Convention. This would, in turn, require deliberation on the possibility of a different enforcement regime, similar to the ICSID Convention. Such an argument, however, is beyond the scope of this piece.

At the same time, this is not to wholly disregard the MIC as a viable reform option. It is merely to outline the trade-off of values that the UNCITRAL Working Group is presented with. While the its obvious benefits of the MIC cannot be disputed, it is important to note that the MIC is not the cure to every problem. In the absence of substantive reform of Investment Treaties, even the establishment of the MIC is unlikely to resolve the underlying issues with Investment Arbitration. The conversation surrounding ISDS reform does not, and should not, end with the MIC.

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