By Dr. Kariuki Muigua, PhD (Leading Environmental Law Scholar, Policy Advisor, Natural Resources Lawyer and Dispute Resolution Expert from Kenya), Winner of Kenya’s ADR Practitioner of the Year 2021, ADR Publisher of the Year 2021 and CIArb (Kenya) Lifetime Achievement Award 2021*
It is worth pointing out that the influx in the number of Investor State Dispute Settlement (ISDS) cases filed by private investors is not only directed at the developing countries only but is also affecting middle income countries as well as the developed countries. However, the bulk of these cases still involve developing countries as the respondents. More countries and policy makers have therefore been calling for reforms to the ISDS system which is still largely viewed as more investor friendly at the expense of the hosts’ countries’ interests. The prevailing trend points towards more balanced International Investment Agreements (IIAs).
Incidentally, the trend was started by the United States (US) and its North American Free Trade Agreement (NAFTA) partners, Canada and Mexico, in response to a number of high-profile ISDS cases, where the three NAFTA countries introduced a number of pioneering provisions that aimed to recalibrate the relationship between investment protection and the regulatory policy space of host countries. The recalibration of IIAs sought to increase governmental policy space relating to the regulation of foreign investors featuring a more restrictive definition of the investments covered, fair and equitable treatment clauses that do not require more beneficial treatment than is granted by customary international law, and a more constrained meaning of indirect expropriation.
With regard to the ISDS mechanism, the US introduced transparency requirements for arbitral proceedings and provisions aimed at preventing the filing of ‘frivolous’ claims, and it also strengthened the role of non-disputing parties. In 2017, the United States announced it would seek to excise the investor-state dispute settlement from NAFTA, and in 2015, the European Commission declared that an investor-state dispute settlement is not suited to resolution of investment treaty disputes, and it began publicly pursuing development of alternative models. According to the United Nations Conference on Trade and Development’s (UNCTAD’s) World Investment report 2019, forward-looking international investment agreements’ reform is well under way and involves countries at all levels of development and from all geographical regions, and with almost all the treaties concluded in 2018 containing a large number of reform features.
Some of the reforms are sustainable development-oriented, meant to take into account the sustainable development goals and aspirations. The UNCTAD’s Reform Package for the International Investment Regime sets out five action areas which include: safeguarding the right to regulate, while providing protection; reforming investment dispute settlement; promoting and facilitating investment; ensuring responsible investment; and enhancing systemic consistency. UNCTAD’s World Investment Report 2019 has also pointed out that Investor– State arbitration continues to be controversial, spurring debate in the investment and development community and the public at large.
As such, it has identified five principal approaches which have emerged from IIAs signed in 2018: (i) no ISDS, (ii) a standing ISDS tribunal, (iii) limited ISDS, (iv) improved ISDS procedures and (v) an unreformed ISDS mechanism. In these principal approaches to ISDS, used alone or in combination: (i) No ISDS: The treaty does not entitle investors to refer their disputes with the host State to international arbitration (either ISDS is not covered at all or it is subject to the State’s right to give or withhold arbitration consent for each specific dispute, in the form of the so-called “case-by-case consent”) (four IIAs entirely omit ISDS and two IIAs have bilateral ISDS opt-outs between specific parties). (ii) Standing ISDS tribunal: The treaty replaces the system of ad hoc investor–State arbitration and party appointments with a standing court-like tribunal (including an appellate level), with members appointed by contracting parties for a fixed term (one IIA).
On the other hand, in case of (iii) Limited ISDS: The treaty may include a requirement to exhaust local judicial remedies (or to litigate in local courts for a prolonged period) before turning to arbitration, the narrowing of the scope of ISDS subject matter (e.g. limiting treaty provisions subject to ISDS, excluding policy areas from the ISDS scope) and/or the setting of a time limit for submitting ISDS claims (19 IIAs). (iv) Improved ISDS procedures: The treaty preserves the system of investor–State arbitration but with certain important modifications.
Among other goals, such modifications may aim at increasing State control over the proceedings, opening proceedings to the public and third parties, enhancing the suitability and impartiality of arbitrators, improving the efficiency of proceedings or limiting the remedial powers of ISDS tribunals (15 IIAs). (v) Unreformed ISDS mechanism: The treaty preserves the basic ISDS design typically used in old-generation IIAs, characterized by broad scope and lack of procedural improvements (six IIAs). Following the above highlighted approaches, countries, therefore, have a number of options to choose from while negotiating their IIAs with foreigners. They can settle on the approach that most favours their domestic interests while participating in international investments development.
*This article is an extract from the Book: Settling Disputes Through Arbitration in Kenya, 4th Edition, Glenwood Publishers, Nairobi, 2022 by Dr. Kariuki Muigua, PhD, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), ADR Publisher of the Year 2021 and ADR Lifetime Achievement Award 2021 (CIArb Kenya). Dr. Kariuki Muigua is a foremost Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert in Kenya. Dr. Kariuki Muigua is a Senior Lecturer of Environmental Law and Dispute resolution at the University of Nairobi School of Law and The Center for Advanced Studies in Environmental Law and Policy (CASELAP). He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Dr. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Africa Trustee of the Chartered Institute of Arbitrators and the Managing Partner of Kariuki Muigua & Co. Advocates. Dr. Muigua is recognized among the top 5 leading lawyers and dispute resolution experts in Kenya by the Chambers Global Guide 2022.
References
Muigua, K., Settling Disputes Through Arbitration in Kenya, 4th Edition, Glenwood Publishers, Nairobi, 2022, p. 315 to 322.