Another round of the discussions on ISDS Reform has been completed at the 51st session of UNCITRAL Working Group III

From 7 to 11 April 2025, the International and Comparative Law Research Center (ICLRC) participated as an observer in the second part of the 51st session of Working Group III of the United Nations Commission on International Trade Law (UNCITRAL), dedicated to the reform of the investor-State dispute settlement (ISDS) system. ICLRC was represented by the researcher on public international law Ekaterina Petrenko.

Read more about the discussions held within UNCITRAL Working Group III:

• at the 8th intersessional meeting of UNCITRAL Working Group
• at the 49th session of the Working Group
• at the 47th session of the Working Group
• at the 46th session of the Working Group
• at the 44th session of the Working Group
• at the 38th session of the Working Group
• at the 50th session of the Working Group

Appellate Mechanism

One of the key areas of the Working Group’s efforts is the creation of an appellate mechanism. The initiative stems from concerns that the existing ISDS system does not adequately ensure the correctness, consistency, coherence, and predictability of arbitral awards. Currently, arbitral awardsare final and cannot be reviewed on the merits. A party may seek set aside/annulment in national courts or through an ICSID annulment committee only on limited  grounds (e.g., issues related to the conduct of the proceedings or the composition of the tribunal). Set aside/annulment is aimed at preserving procedural integrity, not legal or factual correctness — which may be achieved through an appeal mechanism.

Discussions on the purpose and design of the appellate mechanismhave been ongoing since 2017. During the 51st session, the Working Group focused on provisions related to the procedure (draft articles 27–33). Reaching consensus on the exact wording of the provisions was often hindered by the lack of agreement on fundamental issues (such as how the appellate mechanism should be integrated into the existing ISDS system, the scope of jurisdiction of the appellate body, and whether it should be established as a standalone entity or part of an investment court). As a result, several delegations again expressed cautious reservations about the necessity of introducing an appellate mechanism. It was noted that further progress depends on resolving these matters, which is expected to take place at the next session in September 2025.

Earlier, during the 38th, 40th, and 44th sessions, the Working Group considered which awards/decisions should be subject to appeal and on what grounds. In its current discussions of the scope of appeal (draft article 27), the Working Group supported allowing appeals against final awards — on jurisdiction and the merits of the dispute. Whether decisions on interim/provisional measures should also be subject to appeal remains unresolved. Some delegations supported inclusion, while others opposed, citing the non-final nature of such measures, which may be modified or revoked by the tribunal itself. The discussion on whether to include these decisions will continue at upcoming sessions.

The conditions for appellate review (draft article 28) in its current version provide that, in order to appeal an award, a party must waive the right to initiate other parallel proceedings — such as annulment, setting aside, recognition, or enforcement. The Working Group was invited to consider whether such a waiver should apply in general or only for the duration of the appellate proceedings. It appears that the article attempts to extend the waiver to various procedures that differ in nature. Members of the Working Group also noted this, stating that the impact of an appeal on the procedures for recognition and enforcement should be considered separately from those for setting aside/annulment, and that this issue will be further discussed. The main focus of the discussion was whether a party should be required to waive the right to initiate annulment or setting aside proceedings — in other words, whether appeal should be the sole available remedy for challenging awards, or whether it should coexist with other remedies already present in the system (in particular, the setting aside/annulment mechanisms before national courts and ICSID annulment committees). This issue is one of the foundational questions for the design of the appellate mechanism and has been raised repeatedly in previous discussions of the Working Group. It is expected that the necessary agreements on this matter will be reached at the session in September this year.

During the discussion of the text of the relevant article, the representative of ICLRC drew attention to the advisability of specifying the form of the waiver of the right to initiate procedures for annulment, setting aside, recognition, or enforcement of an award. She also noted that the article in question requires the party to waive the right to initiate such procedures, while another provision (draft article 31) allows parties to request the suspension of these same procedures before the first-instance adjudicatory body. This may create confusion in the statute regarding what exactly is meant by "waiver" and how it relates to the alternative procedural option of suspension.

According to members of the Working Group, the list of grounds for appellate review (draft article 29) will depend on the Working Group’s decision regarding the nature of the appellate mechanism — specifically, whether it is to be regarded as the exclusive means of protecting the parties’ rights. The current draft of the article envisions replacing the annulment procedure with the appellate mechanism and therefore includes both typical appellate grounds (various types of errors in law and fact) and grounds characteristic of annulment under the ICSID Convention and refusal of recognition and enforcement under the New York Convention.

With respect to specific grounds, the Working Group decided to allow for appeal based on any error in the interpretation or application of the law. It also supported the introduction of a higher threshold for appeals concerning errors in the assessment of facts.

Members of the Working Group also expressed the need to simplify and assess the applicability of the proposed grounds for appeal within the ISDS system. These grounds were initially drawn from the grounds for annulment under the ICSID Convention and for refusal of recognition and enforcement under the New York Convention. As a result, the following list of grounds was identified:

1. lack of independence or impartiality of a member of the first-instance adjudicatory body, as well as improper constitution of that body
2. an award rendered beyond the scope of the claims submitted
3. a serious departure from a fundamental rule of procedure; and
4. failure to state the reasons on which the arbitral tribunal based its decision (unless the parties have agreed otherwise).

Revised versions of these provisions will be reviewed by the Working Group in upcoming sessions.

Work on the draft statute of the standing mechanism, including the appellate provisions, is progressing more slowly than anticipated, and key decisions required to finalize the statute have yet to be reached. The Working Group has exceeded the timeline originally adopted, which envisioned the completion of all reform elements by 2025. The issue of the need for additional time and resources has been raised on multiple occasions, and at its 50th session, the Working Group decided to recommend that the Commission request additional resources to continue its work. Given the current UN budget crisis, there is growing pressure to increase efficiency and accelerate the pace of the discussions.

Draft Provisions on Procedural and Cross-cutting Issues

Another major area of work is the procedural reform of the ISDS mechanism. The draft provisions under development may, as one possible option, serve to supplement the UNCITRAL Arbitration Rules and thereby promote their harmonization with other procedural frameworks, including the 2022 ICSID Arbitration Rules. In turn, this could enhance the efficiency of proceedings and provide greater legal certainty for disputing parties. States may also use the draft provisions as model clauses when concluding new investment treaties or amending existing ones. In particular, States may modernize older-generation treaties, and the inclusion of certain draft provisions could offer them additional tools to protect their interests — for example, provisions on the right to file counterclaims, the right to regulate, and others.

During the 51st session, several provisions were discussed, which may be used to amend existing treaties:

• Recourse to local remedies (draft provision 14)
• Waiver of the right to initiate dispute resolution proceedings (draft provision 15)
• Limitation period (draft provision 16)
• Denial of benefits (draft provision 17)
• Shareholder claims (draft provision 18)
• Right to regulate (draft provision 19).

If these draft provisions are to be incorporated into existing investment treaties, it is necessary to determine how each draft provision will interact with existing treaty provisions that address the same subject matter. For example, the provision encouraging recourse to local remedies prior to arbitration (draft provision 14) may need to be reconciled with a treaty provision requiring the exhaustion of such remedies. Several delegates emphasized that the draft provisions under consideration should not conflict with the provisions of their investment treaties and proposed exploring ways to eliminate potential inconsistencies. The Working Group has yet to decide how to prevent conflicts between existing and new rules.

With regard to local remedies (draft provision 14), the Working Group had previously decided that investors should be encouraged — but not required — to seek recourse to such remedies (e.g., filing a claim with a national court or competent authority) prior to initiating arbitration. At this session, it was decided that encouragement to use local remedies should be supported through the application of special rules on limitation periods (draft provision 16). It was proposed either to (i) establish a longer limitation period for submitting a claim to arbitration or another forum agreed upon in the investment agreement, (ii) allow the limitation period to “restart” after the conclusion of proceedings before national courts or competent authorities, or (iii) suspend the limitation period during the duration of national procedures. A final choice will be made from among these three options.

The Working Group also discussed the draft provision on the waiver of the right to initiate any other dispute resolution proceedings for the settlement of a dispute, if the investor brings a claim against the State before a dispute resolution body (draft provision 15). It was decided to clarify who qualifies as an “investor” under the draft provision in order to prevent potential parallel proceedings, and to include affiliated entities controlled by the investor within the scope of this definition.

The draft provision on the denial of benefits under an investment agreement (draft provision 17) sparked lively debate. It proposes two sets of grounds for the denial of benefits: a “classic” set (paragraph 1), reflecting existing treaty practice, and a “new” set (paragraph 2), which includes situations where third-party funding was obtained in a manner incompatible with draft provision 12 (regulating third-party funding of arbitration), where the investment was made in violation of national laws and regulations, resulted from or was linked to corruption, fraud, or deceitful conduct, or where bringing a claim would amount to an abuse of the investment agreement and its objectives.

No consensus was reached on whether paragraph 2 should be retained. Some delegates expressed concern that its inclusion would represent a significant departure from current treaty practice, noting that the circumstances described are typically considered matters of tribunal jurisdiction and the admissibility of claims. Nonetheless, work on paragraph 2 will continue in upcoming sessions. Even if the paragraph is ultimately not retained, the Chair of the Working Group noted that adopting a provision on the denial of benefits in any form and incorporating it into existing treaties would already constitute a significant element of ISDS reform.

The ICLRC representative emphasized the importance of specifying the timing of notification to the investor regarding the denial of benefits. The timing depends directly on the grounds invoked: where the denial is based on the grounds listed in paragraph 1, it could potentially follow the traditional model, i.e., with notification prior to the emergence of a dispute. In contrast, for the grounds listed in paragraph 2, such an approach appears more difficult. In practice, there may be cases where an investor receives third-party funding in a manner incompatible with draft provision 12, but the State is unable to detect the violation until a dispute arises. Similarly, breaches of law or instances of corruption often become apparent only after the case has already been brought. Members of the Working Group supported including in the draft a provision on the timing of notification and emphasized that notification should take place after the claim is filed (during the dispute). A revised version of this draft provision will be considered by the Working Group at one of its upcoming sessions.

Several delegates voiced concern that the current version of the draft provision on shareholder claims (draft provision 18) does not provide sufficient protection to investors, as a shareholder may only bring a claim in their own name in cases of direct loss or damage (paragraph 1). In practice, however, the range of claims investors may bring is broader — for example, relating to a decrease in the value of shares or the payment of dividends. Other delegates supported the current version of the provision, arguing that it may help avoid duplicative proceedings and double recovery. Following a lively debate, the Working Group decided to continue discussions based on the current version of the draft provision.

It was also decided to clarify paragraph 2, which allows a shareholder to bring a claim on behalf of an enterprise that they own or control. In particular, it will be specified which shareholders fall within the scope of this provision (majority or minority shareholders), and the percentage of ownership or control required to bring such a claim will be indicated.

The Working Group also emphasized that the State possesses an inherent right to regulate (draft provision 19), which, as an expression of sovereignty, is enshrined in customary international law. Doubts were once again raised as to whether the inclusion of this provision falls within the mandate of the Working Group. As a result, it was decided to continue work only on two versions of the provision on the right to regulate (options 2 and 3). There it was agreed to reflect a greater balance between the interests of States and investors, in particular to prevent abuse of the right to regulate — i.e., its use by a State to conceal breaches of an investment agreement.

The broad list of public policy objectives reflected in options 2 and 3 was generally supported. However, several delegates expressed concerns about referencing specific international treaties among these objectives — such as the Paris Agreement and the UN Framework Convention on Climate Change — as well as references to the protection of essential security interests, human rights, and the promotion and protection of cultural diversity. As a result, the Working Group decided to remove the references to specific international treaties and to clarify the meaning of "essential security interests."

Under option 2, delegates also generally supported the idea that the tribunal should accord a certain level of deference to State measures taken in pursuit of legitimate public policy objectives. However, views differed as to whether this should be a “high level of deference,” as reflected in the current draft, or another standard. The Secretariat was tasked with preparing a new version of the provision reflecting the positions expressed.

Following the 50th session of the Working Group in January of this year, it became clear that work on the draft statute of the standing mechanism and the draft provisions will not be completed before the Commission's session in summer 2025. It is planned, however, that the Commission will be presented with a report on the progress achieved during the year, as well as a request for additional resources to continue the work.

In addition to the draft statute and the provisions on procedural and cross-cutting issues, the Working Group is also considering another key document — a draft multilateral instrument on ISDS reform, which is intended to consolidate the various reform elements developed by the Working Group in recent years. The draft multilateral instrument follows a framework convention model, with protocols addressing specific reform components (including the draft statute and the draft provisions on procedural and cross-cutting issues). According to its drafters, the instrument is intended not only to provide a framework for participation in newly agreed ISDS mechanisms but also to offer parties the possibility of simultaneously amending numerous bilateral investment treaties. (The Center previously submitted written comments on the draft to the Working Group.) The draft multilateral instrument will be discussed at upcoming sessions of the Working Group.

In addition, participants of the current and previous groups of the Investment Law and Arbitration Lab have explored the topics on the agenda of UNCITRAL Working Group III and studied the mechanisms of its work (for example, on denial of benefits and the right to regulate, as well as certain aspects of the appellate mechanism, here and here).