The UNIDROIT-ICC Principles and Model Clauses for International Investment Contracts Available for Public Consultation

At its 107th session, the Governing Council of the International Institute for the Unification of Private Law (“UNIDROIT”) approved the public consultation on the Principles and Model Clauses for International Investment Contracts (“PMCIIC”). This instrument is the result of a joint project between UNIDROIT and the International Chamber of Commerce’s Institute of World Business Law (“ICC Institute”), which has been conducted over the last three years by a group of leading experts in international investment law (“IIL”) and investor-state dispute settlement (“ISDS”), under the chairmanship of Professors Eduardo Silva Romero and Maria Chiara Malaguti.

Now, stakeholders in IIL and ISDS – including states, investors, international and regional trade organisations, NGOs and, of course, the arbitration community – are able to submit their comments on the various issues addressed in the PMCIIC, especially those that have come to the fore amid the current wave of criticism directed at IIL and ISDS. 

After describing the background to the PMCIIC and its structure, this blog post provides some thoughts on how the PMCIIC addresses parallel proceedings and double recovery; stabilisation clauses and states’ right to regulate; sustainability, human rights, and environmental protection; and counterclaims by states, as well as states’ claims against investors.

The PMCIIC’s Background

For decades, International Investment Agreements (“IIAs”) have been concluded on the premise that “the best way of achieving development is through economic growth” and that “the availability of investor-state arbitration increases the free-flow of foreign investment”. This is why most of the IIAs in force – “old-generation” IIAs concluded in the 1990s and early 2000s – establish a robust investment protection regime, under which states undertake to guarantee a set of investors’ safeguards, known as protection standards.

This investor-centred approach, however, raises significant problems. Given that most IIAs impose obligations solely on states, their role in investment arbitration has been limited to that of respondents. Although the ICSID and UNCITRAL arbitration frameworks allow counterclaims, the admissibility requirements, particularly those relating to the direct connection with the claim and the tribunal’s jurisdiction over the counterclaim, are seldom met in practice. Similarly, as IIAs do not impose obligations on investors, the possibility of states bringing claims against them is virtually nil in treaty-based arbitration.

The asymmetric nature of IIAs also undermines the states’ regulatory power. Faced with the risk of becoming embroiled in lengthy and costly arbitrations and of being held liable for breaching protection standards, states refrain from adopting regulatory measures which, although in line with their international commitments, may affect foreign investment – the so-called “regulatory chill” effect of ISDS.

Another significant problem is “the inconsistency and unpredictability of arbitral awards”. Today, there are around 2700 IIAs in force – including bilateral investment agreements (“BITs”) and treaties with investment provisions (“TIPs”), which, while establishing similar protection standards, use different criteria and language. For this reason, it is not uncommon that arbitral tribunals construe and apply similar treaty provisions inconsistently, leading to conflicting decisions and, ultimately, to a lack of legal certainty regarding the rules governing states’ liability under IIL.

Against this background, international organisations, such as the UNCITRAL, the OECD, the UNCTAD, and the European Commission, have launched different initiatives to address the problems described above. 

The UNIDROIT and ICC’s project on International Investment Contracts (“IICs”) forms part of these initiatives. It was launched “as a response to the recent transformations of IIL” and its aim was to explore alternatives for addressing the problems described above at the contractual level, using the UNIDROIT Principles of International Commercial Contracts (UPICC) as a basis for developing a “transitional body of principles applicable to IICs”, which promotes the modernisation and standardisation of IICs.

The PMCIIC’s Structure

Following the UPICC’s structure, the PMCIIC addresses key contract law issues of IICs throughout their life cycle, specifically as to their formation and validity, the rights and obligations of states and investors, change of circumstances, remedies for non-performance, choice of law, and dispute settlement. 

Like the UPICC, the PMCIIC contains black-letter provisions and a commentary. The black-letter provisions in the PMCIIC are referred to as “Principles”. In turn, the commentary elaborates on the application and scope of both the Principles and the instrument itself. Additionally, the PMCIIC includes model clauses, which reflect the language and rationale of the Principles, and serve as a basis for the negotiation of IICs or even for their direct inclusion in IICs.    

It is important to note that the PMCIIC incorporate the UPICC by reference, adapting or supplementing some provisions therein, to make them compatible with IICs. The PMCIIC proceeds from the premise that IICs are commercial contracts, which justifies the application of the UPPIC – Principles 1(2) and 1(4) PMCIIC; however, in order to address the particularities surrounding IICs, some UPPIC provisions need to be adapted or supplemented – Principle 1(3) PMCIIC.

The PMCIIC: A Timely and Necessary Contribution

As noted above, the traditional investor-centred approach has given rise to significant problems, leading some to claim that there is a “legitimacy crisis plaguing investment arbitration”, and even to warn that “the arbitration community is ‘losing’ the fight to ensure the survival of ISDS”. In this context, where a “Reform (is) needed to reinforce the legitimacy of ISDS in resolving societal challenges”, the PMCIIC represents a timely and necessary contribution. 

First and foremost, the PMCIIC establishes a comprehensive normative framework that not only facilitates the negotiation of IICs in accordance with the latest and most generally accepted international practices, but, more importantly, sets out a set of transitional principles that promote a uniform interpretation of IICs. This will notably enhance the consistency and predictability of arbitral awards, especially in contract-based arbitrations.

Precisely in regard to the predictability of arbitral awards and the need to avoid conflicting decisions, the PMCIIC set forth provisions aimed at preventing parallel proceedings. Principle 32 stipulates that “parties should endeavour to avoid parallel […] adjudicative dispute resolution proceedings” and, to this end, the PMCIIC’s commentary suggests that parties “should ideally have recourse only to the dispute settlement mechanism specifically designated in the contract” and waive their right to initiate treaty-based proceedings – §§634-635 PMCIIC. By the same token, Principle 27 specifies that “none of the parties shall recover compensation more than once for an injury suffered due to non-performance of the IIC”, which reinforces the parties’ duty to avoid parallel proceedings. Under IIAs, investors usually have access to different fora, which they sometimes utilise to attempt to obtain double compensation for the same loss; however, Principle 27 puts an end to this possibility. 

Regarding stabilisation and the state’s right to regulate, the PMCIIC seeks to strike a balance between private and public interests by favouring the use of economic equilibrium clauses over traditional freezing clauses, which are limited to fiscal matters – Principle 23(2)(2) PMCIIC. Under economic equilibrium clauses, if the state adopts a regulatory measure that “substantially reduces (…) the economic return expected at the time of entering into the IIC”, the investor is entitled to request renegotiation of the IIC, with a view to achieve its economic equilibrium – Principle 23(2)(1) PMCIIC. As for the so-called regulatory expropriations, Principle 23(3) PMCIIC makes it clear that, when the regulatory measure in question was “adopted in good faith, in a non-discriminatory manner and in the public interest”, stabilisation clauses are excluded, thereby ensuring regulatory freedom, even when it entails an indirect expropriation.

In respect of sustainability, human rights and environmental protection, it is important to note that the PMCIIC provides a series of obligations incumbent on investors, at different phases of the IIC. In the pre-contractual phase, investors “must perform a sustainability due diligence assessment”, which implies conducting “an environmental, social and human rights impact assessment report” and consulting “with potentially affected stakeholders” – Principle 11. In the implementation phase, Principles 21 and 22 require investors “to put in place a continuous sustainability monitoring mechanism” and to make their “best efforts” to ensure that their subcontractors and suppliers comply with the “highest environmental, social, human rights and climate-change-related standards applicable to (investors)”.

This not only reinforces sustainability, human rights and environmental protection, but also levels the playing field between states and investors in terms of the reciprocal allocation of obligations and rights, thereby paving the way for counterclaims and states’ claims against investors. In this regard, Principle 33 provides that the parties to IICs “have a right to bring counterclaims in relation to the obligations of the other party in connection with the IIC”. Also, the PMCIIC’s commentary makes it clear that “a symmetrical approach to dispute initiation and counterclaims is warranted” – §61 PMCIIC, Cf §645 PMCIIC.

Conclusion

The PMCIIC offer a series of practical and well-thought-out normative solutions to address the most significant problems arising from the current legal framework of IIL and ISDS. Not only are the PMCIIC based on the tried-and-tested UPICC, but they also reflect the most widely accepted international practices in what has been termed “sustainable investment”.

The PMCIIC also offer states and investors a set of model clauses that serve as a basis for negotiating IICs or for their direct inclusion in IICs. More importantly, arbitral tribunals will be able to draw on a new source of “transnational principles” that were specifically developed to resolve issues pertaining to IICs. In this manner, the PMCIIC begins to set the tone for the contractualisation of IIL and the rise of contract-based investment arbitration.