Market Implications and the Way Forward for Stakeholders — The Disputing Parties
THE AUTHOR:
Ali Shouzab, Arbitration Attorney
This article is part of a series discussing the implications and the ways forward for different stakeholders, including ICSID itself, parties (investors and the host states), legal service sector, arbitrators, and the third-party funders.
UNCITRAL Working Group III (“WG III”) is leading the current procedural reform to modernize Investor-State Dispute Settlement (“ISDS”) through a Multilateral Investment Court (“MIC”) with an appellate mechanism (“AM”). Part 1 of this series introduced the rationale for establishing the MIC and examined its background, including the legitimacy crisis in ISDS. That part discussed the market implications and ways forward for ICSID as a stakeholder. This part focuses instead on the disputing parties: Investors and States.
Before considering MIC’s market implications for the parties, a brief review of current ISDS trends is necessary. Rachel L. Wellhusen discovered several trends in ISDS, but two are most relevant for the disputing parties. First, the states are becoming more experienced than investors because they act as permanent respondents. Second, ISDS proceedings are becoming more costly and time-consuming. These trends remain relevant and are reflected in the reform trajectory of WG III. The frequency with which the states are making suggestions in the MIC travaux préparatoires shows that states, drawing on their experience, are participating far more in the reform process than investors. This one-sided shaping of a two-sided procedural law may create a disparity that leads to broader market impacts, as discussed below.
On the other hand, the issue of costlier and lengthier proceedings has also been one of the most crucial ones since the earliest stages of the reform (See p. 9, Concept Paper ‘Investment in TTIP and beyond – the Path for Reform). An AM, by its very idea, adds an extra layer of review to promote consistency and correctness of the awards. However, adding a second tier of proceedings may elongate the disputes, thereby increasing the costs. This could also have negative market implications, which need serious attention.
Problem 1: Exclusive States’ Participation: How is it Reflected in the MIC Proposals?
In the MIC context, the exclusive state participation in the reform is even reflected in how the proposals are being shaped. For instance, the appointment of adjudicators is expected to be made only from a roster of adjudicators, which are likely to be nominated by the states (Articles 7 through 13, Draft Statute of a Standing Mechanism A/CN.9/WG.III/WP.239). This would leave the disputing parties, particularly the investors, with limited choice in appointing adjudicators, as the roster itself would consist of candidates nominated by the states. Besides, the structure and composition of the Standing Mechanism of MIC is expected to consist of the “Tribunals” and “the Contracting Parties” (Article 3, Draft Statute of a Standing Mechanism A/CN.9/WG.III/WP.239). Article 3(2) highlights that the contracting parties would be the ones “that have ratified or acceded to this Protocol in accordance with article 41”. According to Article 41, only “a State or a regional economic integration organization” can be a signatory, ratifier, etc. This means that only states or regional economic integration organizations would have a say in the structuring of the standing court.
Comparing these procedural proposals to the existing ISDS models, the participation of investors seems nearly negligible. Consider, for example, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965) (“ICSID Convention”). These are primarily the parties that nominate the arbitrator(s) of their choice (Article 37(2)(b) of the ICSID Convention), only failing which the Secretary-General would step in to take charge of the constitution of the tribunal (Article 38, ICSID Convention). According to Article 44 of ICSID Convention, “Any arbitration proceeding shall be conducted in accordance with the provisions of this Section and, except as the parties otherwise agree”. Hence, the tribunal’s overall conduct of proceedings is primarily in the hands of the parties. Non-ICSID investor-state arbitrations also preserve this flexible character of ISDS, with parties acting as the ultimate architects of their proceedings.
First, the proposed MIC structure plans to solicit nominations for the appointment of adjudicators from the states, allowing investors to choose from those state-nominated candidates. Second, the MIC plans to take the perspectives of states and regional economic integration organizations, which are also constellations of states with some decision-making authority in specific matters. In such a setup, the participation of investors in shaping the structural compositions of the standing mechanism would be missing.
Implications
With such a MIC structure, it would be least likely that any investor would even choose MIC as their dispute resolution forum. The legitimacy of the process could be questionable, and thus a successful enforcement of any subsequent award would nearly be impossible. Even if we consider a hypothetical scenario where investors agree to MIC as their dispute resolution forum, leaving investors out of the process of structuring and nominating adjudicators completely defies the principle of party autonomy, which is generally regarded as a hallmark of international arbitration. Ideally, the constitution of the benches should be a mutually agreed and party-driven process. Overlooking the investors’ perspectives would be a deviation from the contractual and party-driven nature of ISDS, which would be detrimental to the parties’ right to procedural autonomy. This could violate the principle of equality of arms and may eventually raise serious concerns about access to justice. In fact, this shift can alter the dynamics of ISDS altogether: from a private contractual dispute resolution system to a public international adjudicatory system.
From a state’s standpoint, the proposals may seem to offer more bargaining power, but they could still work against states. Even though the adjudicators would be state-nominated, relying on a fixed pool of adjudicators could limit states’ own ability to choose. This is because the MIC roster may not always include adjudicators with the specific expertise needed for every type of dispute. Also, state-nominated adjudicators may even be perceived as biased towards their nominating governments. This perception may lead to the politicization of MIC, not only in its administration but also in its decision-making processes. This could lead to complications at the enforcement stage of a subsequent award. The risks could be greater if there is no strict moral or ethical code of conduct for the adjudicators to ensure impartiality. The existing soft-law instruments, like the IBA Guidelines on Conflicts of Interest in International Arbitration (2024), are based on the system of mutual party appointments. They may become ineffective in a system where adjudicators are nominated by the states. Obtaining enforceable decisions from such a body, as it is currently proposed, would be nearly impossible.
Given the criticism above, it is unclear whether the decisions of such a body will be meritorious or impartial, ultimately leading to legitimacy issues. Hence, MIC might create a whole new legitimacy crisis rather than resolving the one already suffered by the current ISDS models.
A Possible Way Forward
The criticism calls for practical proposals for MIC. One option could be to nominate the adjudicators in an ad hoc way, as in the current ISDS models. In such a scenario, a standing body for investment disputes is less likely to be envisioned. Ensuring fair participation from both investors and states in structuring and nominating adjudicators while maintaining the standing character of the MIC can be challenging, but not entirely impossible.
A few approaches can be adopted here to enhance the investor participation both in the structuring of MIC and adjudicator nomination. The investor participation can be increased at two stages: the member state level or the MIC level.
- At the member state level, there can be advisory bodies to the government comprising national chambers of commerce and representatives from the industrial and business community. This ensures that the proposals being made to the MIC for structuring or adjudicator nomination already include the investors’ perspectives.
- At the MIC level, an advisory body can be established with representatives from business or industrial associations and chambers of commerce, which could represent investors and their concerns.
- A third approach can be a combination of the two, that is, several national advisory bodies for each member state and an advisory body at the MIC level. This could ensure the utmost level of investor participation, bringing more sophistication to MIC structures with investor perspectives included. This could also mitigate issues at the enforcement stage and potentially help the MIC resolve the legitimacy crisis.
Problem 2: Cost and Time Concerns
One would not need to go into the future to see the effects of enhanced costs and lengthy proceedings on the parties, as the example of the current ISDS would suffice. If disputes prolong, the increasing costs include not only the costs of proceedings, but also prospective profits, damages, and other associated costs. Therefore, the total cost becomes substantial. For small and medium-sized investors, this additional financial burden deters them from pursuing legitimate claims altogether. High costs even force the investors to accept disadvantageous settlements rather than proceeding to arbitration, which could impact the fairness of outcomes. Besides, companies must divert significant resources to fund arbitrations, which is detrimental to their business and, consequently, to the global business environment. From the states’ perspective, developed states may be able to afford costlier and lengthier proceedings. However, the challenges faced by developing or economically struggling states would be no different from those suffered by small investors. High costs could also encourage more third-party funding, which raises new concerns about transparency, conflicts of interest, and control over proceedings. In such a scenario, the MIC would do little to improve the ISDS system, let alone address its legitimacy crisis.
A Possible Way Forward
To counterbalance the time and cost increases brought by an appellate mechanism, the MIC can adopt expedited procedures. Expedited procedures have already been experimented with in several arbitral rules, including UNCITRAL (United Nations Commission on International Trade Law), ICC (International Chamber of Commerce), SCC (Stockholm Chamber of Commerce), LCIA (London Court of International Arbitration), and even ICSID (International Centre for Settlement of Investment Disputes). These procedures often limit the length of written submissions, reduce the number of hearings, impose deadlines for rendering awards, and may even restrict the scope of disclosure. One approach could be to make the expedited procedures opt-in. This could allow the parties to agree at the outset of a dispute whether they want their case, or parts of it, to be settled expeditiously. Another approach could be to apply expedited procedures by default in cases where the monetary value of the dispute is below a certain threshold, and make them exclusively available to smaller investors. Nevertheless, the idea of expedited proceedings would not entirely be new to ISDS. However, tailoring all these known expedited procedures to innovate new procedures suited to the needs of MIC can be a challenge. For that matter, this study on devising the integration of expedited procedures into the MIC can be perused.
Conclusion
MIC’s current designs carry risks of negative implications and creating new problems for the disputing parties, particularly due to the limited role of investors in shaping MIC structures and the high costs and time required for the proceedings. For the MIC to succeed, it must strike a balance between state control and meaningful investor participation, and adopt mechanisms that are both cost- and time-efficient. Advisory bodies for investors, fairer procedures for adjudicator nominations, and the integration of expedited procedures are recommended to avert negative market implications for the parties. With such adjustments, the MIC can move beyond replicating the current shortcomings of ISDS and instead offer a genuinely improved system that strengthens trust, fairness, and predictability for both states and the investors.
ABOUT THE AUTHOR
Ali Shouzab is an arbitration attorney from Pakistan based in Sweden and holds an LL.M. in Investment Treaty Arbitration from Uppsala University.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
