South Africa’s submission on UNCITRAL ISDS reforms: Comments and implications
Investor-State dispute settlement (ISDS) has in recent years been criticised for its systematic imbalances, as well as inconsistent, flawed and excessive arbitral awards, among others. Many states have, as a result, terminated investment treaties with ISDS, adopted new or amended investment treaties to limit the scope of, or eliminate ISDS. Consensus (among States, inter- and non-governmental organisations) on the need for ISDS reform is clear but views on the options for reform differ considerably. Concerted efforts to reform ISDS are ongoing in different fora including at the United Nations Commission on International Trade Law (UNCITRAL).
In 2017, UNCITRAL established and mandated Working Group III to examine and come up with solutions for ISDS reform (i.e. to assess concerns on ISDS and find possible solutions). The UNCITRAL ISDS reform process is government-led, while non-state actors (inter- and non-governmental organisations) are invited to observe and present their expert views.
On 17 July 2019, the government of South Africa submitted its proposals for ISDS reform in preparation for the 38th Session of the UNCITRAL Working Group III to be held from 14 to 18 October 2019 in Vienna. Several other governments have also submitted proposals, which will be deliberated during the 38th Session. South Africa’s submission reflects the government’s position on ISDS – as enshrined in the South Africa’s Protection of Investment Act 22 of 2015, and also as reflected in the amended Annex 1 of the SADC FIP and the SADC Model BIT.
South Africa’s submission highlights that problems associated with ISDS system are embedded in the fundamental principles, standards and ideological foundations of existing investment treaties. Therefore, ISDS reforms should be tackled through an overhaul of not only procedural provisions but also address substantive issues of international investment law. The submissions first discuss ISDS in broader context, before proposing the approaches and principles to ISDS reform.
South Africa criticises the current international investment law framework that allows investors’ property and contractual rights to supersede the public interests and needs. South Africa also criticises that the framework only allows foreign investors to bring claims against host governments to international arbitration tribunals. Host governments, local investors, people and communities have no recourse to international arbitration when foreign investors violate their rights. South Africa warns against the pursuit of investment protection and liberalisation objectives at the expense of the protection of health, safety, environment and labour rights.
South Africa suggests that sustainable development objectives and protection of human rights, regulatory policy space, respect for the rule of law should serve as a yardstick to the reform and redesign of ISDS. It also proposes that ISDS should promote a comprehensive and inclusive investment-related dispute system – that is transparent and allows participation of third parties and civil society. South Africa also argues that ISDS should be a level playing field; States must be allowed to bring counter-claims against investors in ISDS international arbitration.
South Africa proposes, among others, the use of dispute prevention policies, state-state cooperation, or alternative dispute resolution (ADR) mechanisms such as conciliation and mediation. It also proposes the use of domestic courts, the ombud’s office or administrative review procedures, and exhaustion of local remedies prior to ISDS. South Africa proposes that third party funding be banned or transparent to avoid conflict of interest. It further proposes the establishment of a multilateral investment court and an appellate mechanism.
Some of the proposed substantive reforms suggested by South Africa include a unifying language of substantive obligations, exclusion of public interest laws, regulations and legislation (public interest carve-outs), supremacy clause, precedent (prior arbitral decisions to be binding on other tribunals), legal standing of everyone affected by a proceeding, and limiting jurisdiction to claims by responsible investors (i.e. who have not violated any laws, rules and regulations).
Comments and implications
South Africa’s submission also complements a wide range of proposals submitted by other governments. For example, the use of ombud offices is proposed by Brazil and Korea, the exhaustion of local remedies is proposed by Indonesia and Morocco, state-state dispute cooperation is proposed by Brazil, ADR is proposed by South Korea, and the establishment of a multilateral investment court and an appellate mechanism is proposed by the EU.
South Africa’s proposals broaden the agenda of ISDS reform to cover both procedural issues to substantive issues. They might be welcomed by the governments and other stakeholders who are advocating for the complete overhaul of the international investment law. However, though transformative, the proposals may not succeed within the realm of UNCITRAL ‘because the agenda will be too broad and the room for reaching consensus too narrow’. In addition, multilateral negotiations (particularly on international investment law) are very complex. Reaching consensus has always been difficult in this area of law.
South Africa proposed that countries consider whether ISDS desirable or necessary. It must be noted that ISDS is not only about disputes. It is critical for promoting the understanding of investment law principles, rules-based investment governance, certainty and predictability. South Africa also proposed the adoption of an ISDS mechanism that protects investors while preserving the regulatory policy space of host governments. The key question is how an adequate balance can be struck between guaranteeing effective legal protection of the public interests of governments and the private interests of investors in international investment law?
The use of domestic courts in ISDS is a novel idea. It compels the improvement of domestic dispute settlement mechanisms and practices. However, several concerns need to be addressed to allow effective use of domestic courts in ISDS. For instance, the competence and expertise of domestic courts in interpreting and applying the intricacies of international investment law. In addition, most traditional English legal systems do not automatically apply treaties as their domestic laws. Treaties need to be domesticated to form part of municipal laws and to be applied directly by domestic courts. That way, investors may be able to pursue the rights accorded them in national court systems by the legislation which incorporates international investment rules.
Allowing governments to sue investors and giving non-state actors (e.g. civil society and affected communities etc) access to dispute settlement is critical for promoting an inclusive and transparent investment dispute mechanism. The right to access to a judicial system is a fundamental part of the rule of law, which is nearly accorded in all modern constitutions. However, international treaties are between States, and concerned primarily with protecting the rights investors and obligations of States. Under classical international investment law, investors do not have obligations – their obligations are found in domestic laws; States and communities cannot therefore sue investors in ISDS arbitration – their legal remedies are available in domestic legal systems. The extent to which States can sue investors in ISDS depends on the applicable investment treaty. Thus, investment treaties may need to create investors’ legal obligations.
State to state cooperation in dispute prevention is argued, by South Africa, as a cost and time efficient option. However, investors are the ones directly affected by government actions and should have legal remedies when their rights are violated. Many States (particularly in Africa) do not litigate against each other in investment related-disputes.
South Africa argues that a multilateral investment court and an appellate mechanism could a legitimate and independent system for investment treaty dispute settlement. Nonetheless, the establishment of multilateral investment court and an appellate mechanism comes with many questions and challenges.
For example, how will the court interact with domestic or regional courts currently offering arbitration to ISDS? How will tenured judges be elected and remunerated? How to ensure that the election of judges is not dominated, manipulated or politicised by a State or States? The awards of the multilateral investment court would be enforced under the New York Convention or Washington Convention?
Questions regarding an appellate mechanism include: what will be the grounds of appeal? Will the appellate body have authority to make its own determination of facts? Will all questions of fact be returned back to the initial arbitral tribunal? Will the body have authority to order interim and interlocutory relief to preserve the status quo pending the determination of the appeal? How many judges will it be composed of?
The UNCITRAL ISDS reform process provides a unique opportunity for States to thoroughly examine the concerns associated with ISDS and to significantly address its systemic imbalances. African States should actively participate in the process and present their positions on ISDS since they are increasingly becoming important actors in the international investment law. African States that have thus far participated in the UNCITRAL Working Group III sessions, include Burkina Faso, Côte d’Ivoire, Democratic Republic of the Congo, Guinea, Morocco, Nigeria and Sierra Leone and South Africa.
 The Working Group III comprises all UNCITRAL member states. The list of UNCITRAL member states is available at http://www.unis.unvienna.org/unis/en/pressrels/2018/unisl270.html
 The governments of Indonesia, the European Union countries, Morocco, Thailand, Chile, Israel, Japan, Costa Rica, Brazil, Colombia, Turkey, Ecuador, China, Korea, Bahrain, Mali, Mexico, Peru, Guinea have also submitted their proposals. See their submission at https://uncitral.un.org/en/working_groups/3/investor-state
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