ISDS reform at UNCITRAL: draft provisions on ISDS-specific arbitration procedures almost finalised

On 12–16 January 2026, the International and Comparative Law Research Center participated as an observer in the 53rd session of UNCITRAL Working Group III. The ICLRC was represented by Ekaterina Petrenko, a researcher on public international law.

The reform of the investor-state dispute settlement (ISDS) system has been underway since 2017 – now more than eight years. During this time, some progress has been made in two key areas of reform – updating the arbitration rules and establishing an investment court – but no concrete results have yet been achieved. At this session, there were renewed calls for the discussions to be accelerated and for some kind of outcome to be presented to the Commission by this summer.

The Working Group intended to complete its consideration of the draft provisions on procedural and cross-cutting issues (9–22) (A/CN.9/WG.III/WP.253, A/CN.9/WG.III/WP.262), discuss the form of implementation of the draft provisions and draft recommendations on the calculation of damages and compensation (A/CN.9/WG.III/WP.255).

Given that the next, 54th session of the Working Group, will be devoted to the new international investment court of first instance and appellate body, the 53rd session of the Working Group had the last opportunity to discuss and finalise draft provisions for submission to the Commission for adoption. Soon after the work began, it became clear that consideration of the draft provisions was dragging on. Ultimately, only five of them (9–12, 22) were considered, along with some consideration of the general question of the form and implementation of the draft provisions.

Although it was not possible to consider all the draft provisions, the Working Group will apparently be able to present a certain result to the Commission in the summer of 2026. Since, together with the previous sessions, all draft provisions that relate to procedural rules and are intended to supplement the UNCITRAL Arbitration Rules (draft provisions 1–9, 11, 12) have been considered, they could be submitted to the Commission as a “package” and even (if the remaining minor inconsistencies in the wording can be resolved) likely adopted as an optional additional document to the UNCITRAL Arbitration Rules applicable to the ISDS disputes.

Allocation of Costs (Draft Provision 9)

Draft provision 9 sets out the basic rules for the allocation of costs, the criteria that may be applied in the allocation, and certain requirements for the parties’ submissions and the tribunal’s decision on the allocation of costs. Costs incurred by the parties to a dispute during the proceedings are generally borne by the losing party. However, the tribunal may reallocate costs in a different manner if it deems this reasonable given the circumstances of the particular case.

The term “costs” is defined in the UNCITRAL Arbitration Rules (Article 40) and includes, among other things, “[t]he legal and other costs incurred by the parties in relation to the arbitration to the extent that the arbitral tribunal determines that the amount of such costs is reasonable”. Some delegates raised the question of whether the draft provision permitted the recovery of a success fee from the losing party as part of its costs, and if so, insisted that the recovery of such amounts should be expressly excluded. In practice, a success fee is usually understood to mean a certain remuneration (for example, a premium or bonus, a discount on the cost of legal services) paid by a party to its legal representatives upon the successful outcome of a dispute.

Delegates were divided. Some insisted that success fees are not reimbursable, as they do not reflect the actual work performed. Others noted that it is difficult to determine all possible forms of success fees: they can include both “problematic” forms that are purely incentives and do not reflect the services rendered by the representative, and those that are essentially payment for work performed. Delegates believe that the determination of the nature of the remuneration should be left to the discretion of the arbitrators, who will decide whether such remuneration qualifies as reimbursable cost of the proceedings and whether the amount of the claimed costs is reasonable under Article 40 of the UNCITRAL Arbitration Rules. As a result, a decision was reached to explicitly exclude from the reimbursable costs those amounts that represent exclusively a premium (bonus) for legal representatives, determined by the outcome of the proceedings and exceeding the remuneration for the work performed. Thus, the tribunal will assess whether the remuneration paid to representatives can be recovered. This appears to provide flexibility in assessing the “problematic” nature of costs, taking into account the structure of the agreement between the party and its representative, as well as the circumstances of the specific case.

Also, at the initiative of several delegations from developing countries, a proposal was discussed to exclude fees for legal assistance from the list of reimbursable costs if the winning party is the one receiving third-party funding (TPF). This provision would essentially penalise a party to a dispute for obtaining TPF, which is especially sensitive in cases where TPF is the only opportunity for a party to exercise its right to defence. Following lengthy discussions, the Working Group decided not to exclude such costs from reimbursement, thereby maintaining the general procedure for reimbursement of costs if TPF is used.

Counterclaim (Draft Provision 10)

Delegates considered this provision to be one of the most important for reforming the ISDS system. It provides a balance between the interests of investors and states by giving the respondent state the right to file a claim against the investor in the same arbitration, if the investor has violated its obligations to the state under domestic law, an investment agreement or contract (for example, due to causing environmental damage).

The draft provision provides that a state may bring a counterclaim against an investor in arbitration if it “aris[es] directly out of the subject matter of the claim” or “[is] close[ly] connect[ed] with the factual or legal basis of the claim” (subparagraph (a) of paragraph 1). Some delegates sought to significantly expand the possibility of filing counterclaims, objecting to the introduction of a “close” connection criterion. The absence of this criterion would significantly reduce the degree of connection between counterclaims and the original claims. As a result, the Working Group retained the conditions in paragraph (a) and supported strengthening the second standard of connection by specifying the need for a “direct” (instead of “close”) connection.

As expected, the mention of “domestic law” among the grounds for filing a counterclaim (subparagraph (b) of paragraph 1), which could result in the dispute between the state and the investor being considered under the laws of that state, rather than under international law or a private law contract, also became a stumbling block. This is a sensitive issue for some states, which do not consider it appropriate to allow an international body to directly interpret and apply their legislation. They have therefore sought to exclude references to domestic law from the grounds for filing counterclaims. For other states, on the contrary, it was important to retain the reference to domestic law, since it is precisely by reference to it, in their opinion, that claims against the investor can be brought – primarily due to the absence of any detailed provisions regulating the investor’s activities in investment treaties. There are significant examples of such cases in practice: Burlington v. Ecuador and Perenco v. Ecuador.

Ultimately, a compromise was found: the wording in subparagraph (b) of paragraph 1, which specifies the grounds for filing a counterclaim, was made more general, and the specific grounds in it were replaced by a reference to only one general category – “any legally binding instrument to which the respondent is a party”. Thus, States may file counterclaims relying on domestic law if they find this acceptable, while other States will be freed from the risk of problems of coordination with their authorities, for whom a corresponding mention (and admission) in the text would make the draft provision unacceptable.

Under paragraph 4, in order to file a counterclaim, the State shall waive the right to initiate or continue proceedings on the same claims in other forums. Such a refusal will, first of all, prevent parallel processes at the national level (in courts or administrative bodies) and the adoption of conflicting decisions. In this regard, Ekaterina Petrenko stated that it would be desirable to exclude such consequences of the application of paragraph 4 that could lead to the deprivation of the state’s right to hold the investor liable and receive compensation, in particular, in cases of human rights violations, environmental damage and other cases of harm. Thus, if the tribunal has refused to consider the counterclaim, the state should not be bound by any restrictions on filing claims against the offending investor in other forums.

The discussion of paragraph 4 was not completed; this and other open questions (for example, whether the state should also waive the right to criminal prosecution of the investor, and whether the withdrawal of a counterclaim by the state constitutes a waiver of the right) will be considered at future sessions. It was decided to move paragraph 4 to draft provision 15, which is a general provision on the waiver of the right to initiate dispute resolution proceedings.

Consolidation and Coordination of Proceedings (Draft Provision 11)

The Working Group supported draft provision 11, which provides that parties to multiple proceedings may agree to consolidate and/or coordinate them; in such a case, a single award will be rendered on the consolidated proceedings (or aspects of the proceedings). This draft generally represents a straightforward case, as it does not require detailed regulation and leaves it to the parties to agree on all the parameters of the consolidation or coordination. The only formal condition for the consolidation in the original draft – the same respondent. However, as a result of the discussion, this condition was removed, as a representative of one of the observers – the Permanent Court of Arbitration (PCA) – drew attention to the possibility of multiple respondents (see Eurotunnel Arbitration). Although this is very unlikely to happen for “ordinary” disputes under international investment agreements (IIAs), the Working Group agreed to remove this limitation.

States also adapted paragraph 4 of the draft provision to the situation where the arbitral tribunal for the case that the parties wish to consolidate with other proceedings has not yet been constituted to resolve the dispute. As a result, it is envisaged that the parties to the proceedings, when determining the parameters of the consolidation, consult either with an already constituted tribunal or with an arbitral institution, and the relevant formal decisions on the further course of the proceedings in accordance with the agreements of the parties are taken by such a tribunal or institution (if the tribunal has not yet been constituted).

The second draft provision on consolidation of proceedings – 11 bis, which deals with consolidation of proceedings by order of the tribunal if only one of the parties requests consolidation, was not considered by the Working Group at this session. It is generally understood that this provision is not intended to be included in arbitration rules but falls within the category of provisions to be included in an IIA and will accordingly be dealt with later.

Third-Party Funding (Draft Provision 12)

Draft provision 12 aims to promote transparency in arbitration proceedings by requiring the party receiving TPF to disclose TPF to the other party to the dispute and the tribunal, and by enforcing this obligation with “sanctions” for failure to disclose.

Paragraph 2 provides a list of information that a party is required to disclose upon receipt of the TPF. Delegates initially disagreed on whether all types of information specified in this paragraph should be mandatory to disclose, or only the information specified in paragraphs (a) and (b) – about the funder (if it is a legal entity, then also about the persons who own or control it), the beneficial owners of such funder and the persons who have the right to make decisions on behalf of this party in the proceedings.

Some existing arbitration rules provide that a party to a dispute shall disclose the identity of the funder (see, for example, Rule 14 of the ICSID Arbitration Rules). Initially, disclosure of information about the funder was necessary to verify whether the arbitrator had a conflict of interest – an impermissible interest in the dispute – that could influence the arbitrators’ findings on the merits of the dispute and lead to the annulment (setting aside) of the award.

The list of information subject to mandatory disclosure in paragraph 2 of draft provision 12 is broader than required by the existing arbitration rules and is not aimed solely at ensuring transparency of the proceedings by verifying whether the arbitrator has a conflict of interest. This list reflects situations that have begun to arise in practice: for example, the existence and conditions of TPF were taken into account by tribunals when making decisions on security for costs and allocation of costs. Ultimately, the majority of delegations agreed with paragraph 2 in the proposed version (with minor clarifications), since disclosure of information in practice already goes beyond simply ensuring the impermissibility of conflicts of interest and will help to eliminate other issues that raise concerns in connection with the receipt of TPF by the party (for example, the question of whether the funder can prevent the claimant from reaching an amicable settlement of the dispute).

It was agreed that, with respect to paragraphs (c)-(f), it would be sufficient for a disputing party to provide information in a “yes/no” answer, thereby addressing the concerns of some delegations regarding the confidential nature of the information subject to mandatory disclosure.

The Working Group supported paragraph 3, which provides that the tribunal can request additional information if the tribunal deems it necessary, including any other agreement between the party’s representative and the funder and terms of such agreement (subparagraph (b)), number of other claims against the respondent, which are financed by the funder or its related structures (subparagraph (c)).

The disclosure obligations in paragraphs 2 and 3 are supported by liability measures, some of which have quite serious consequences – including termination of the proceedings. The proposed version of paragraph 7 gave the tribunal discretion to impose measures for failure to disclose information (for example, to take the non-disclosure into account when allocating costs, to order security for costs, to suspend or terminate the proceedings, or to take other appropriate measures) or impose no measures at all. The Working Group supported the measures and decided to require the tribunal to take them in case of a breach of the disclosure obligation. At the same time, the tribunal retains the right to choose an appropriate measure that is not expressly listed in paragraph 7.

The updated wording of this provision is the result of a compromise between states that seek to ban TPF entirely and those that adhere to existing rules (and provision of different categories of investors with access to justice). As a result, draft provision 12 (which provides for broad mandatory disclosure of information, additional disclosure and measures for failure to disclose any information, including that to which a party may not have access), as appears, will be a serious tightening of the rules on TPF and may act as a disincentive to the use of TPF.

The Working Group is developing another provision dedicated to the regulation of TPF, draft provision 12 bis. It is intended for those states interested in more stringent regulation of TPF, specifically, its limitation (i.e., the return of received funding). The Working Group will consider this provision at a later stage as it falls within the category of provisions to be included in IIAs.

Form and Implementation of the Draft Provisions

Having considered the draft provisions, which were generally agreed to be arbitration rules in nature, the Working Group discussed in more detail how best to ensure their implementation. Various ideas were put forward, but the general understanding was that the provisions would best be adopted as a supplementary document to the UNCITRAL Arbitration Rules. Such a document will not introduce changes to the Rules themselves, which are successfully applied to disputes of other categories, primarily those considered in international commercial arbitration (ICA). Some delegates supported the adoption of such a document by the Commission (similar to the UNCITRAL Arbitration Rules themselves), while others proposed including it in a future multilateral treaty on the ISDS reform.

The ICLRC supported the first option, noting, however, that States would still need to amend their treaties to provide for the application of this supplement to the UNCITRAL Arbitration Rules. This could be achieved by including a provision for such changes in a future multilateral treaty on the reform. Ekaterina Petrenko also noted the need to establish the priority of the developed provisions over existing and incompatible provisions of the UNCITRAL Arbitration Rules. It was noted that if the Working Group decides to include the developed provisions directly in such a multilateral treaty, then it is necessary to provide for the optionality of participation of states in this part (in order, in particular, not to complicate for itself the possibility of making changes to the provisions due to the need to conclude a new treaty).

Overall, the Working Group intends to move in this direction. Considering the positions of a number of delegations, it was decided that the finalised provisions would be drafted in a version that could be included in a future treaty and simultaneously adopted by decision as a supplementary document to the UNCITRAL Arbitration Rules.

In terms of optional implementation of procedural provisions, it was emphasised that it could significantly reduce the positive effect of the reform (in contrast to the selective implementation of treaty provisions, where this is more appropriate). The procedural provisions are unified by their internal structure and are intended to make proceedings more efficient. Ultimately, it was decided to retain the “package” approach to integrating procedural provisions into the UNCITRAL Arbitration Rules.

The ICLRC continues to actively follow the progress of the Working Group and participate in discussions as an observer.

Participants in the 2025/2026 Investment Law and Arbitration Lab also take part in the analysis of the issues on the agenda of the Working Group, including certain issues of draft statutes for the standing mechanism and draft provisions on procedural and cross-cutting issues.

Read about the progress of discussions within UNCITRAL Working Group III on our website:

• at the 52nd session of the Working Group
• at the 51st session of the Working Group (its 2nd part)
• at the 50th session of the Working Group
• 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