ISDS Reform: From the Forest to the Trees of an Appellate Mechanism

Last week, the United Nations Commission on International Trade Law (UNCITRAL) Working Group III (WGIII) made substantial progress toward designing an appellate mechanism for investment disputes. As readers of this blog may be aware, WGIII is charged with developing multilateral reforms to the current ad hoc system of investor-state dispute resolution (ISDS). This government-led process involves delegations from scores of States, with active participation by dozens of observer delegations from international organizations, arbitral institutions, NGOs, business associations, and learned societies. Beginning in WGIII’s 34th Session in 2017, this work has continued through biannual sessions in Vienna and New York. From 2017 to 2018, delegations registered substantial concerns with ISDS, relating to fragmented arbitral outcomes; arbitrator independence, impartiality, and diversityduration and cost; multiple proceedings; and third-party funding (Phase 1). In the fall of 2018, WGIII decided to work multilaterally to reform such concerns within UNCITRAL (Phase 2). As of its 37th Session in 2019, WGIII has moved firmly into working on concrete reform options (Phase 3).

The design phase is complex, because WGIII is actively considering at least twelve different reform projects (which may be ultimately integrated in a unified multilateral instrument). Juggling these projects involves an iterative winnowing process. The idea is that delegations initially consider each project at a high level. After each discussion, WGIII would request that the Secretariat work up more detailed, modular reform options. It would then rotate to the next topic. As the carousel cycles, the WGIII returns to each topic with increasing granularity. Eventually, the Secretariat would produce draft text on each project, to be considered in plenary over multiple rounds (first reading, second reading, and so on), prior to final decisions and possible adoption.

WGIII completed initial high concept debates on each reform option over three sessions from 2019-2020 (its bipartite 38th Session and its 39th Session).  In the first week of its 38th Session, it had initial deliberations on (i) developing a multilateral advisory center; (ii) a code of conduct; (iii) reforms to third-party funding. (See further here). At its resumed 38th Session, delegations considered (iv) a standing appellate mechanism; (v) a multilateral investment court (MIC); and reforms to (vi) selecting and appointing adjudicators. (See further here). In its 39th Session, WGIII wrapped up first round discussions on: (vii) dispute prevention; (viii) multiple proceedings and shareholder claims for reflective loss; (ix) counter claims; (x) security for costs; (xi) frivolous claims; (xii) treaty interpretation; and began discussing (xiii) an omnibus multilateral instrument on ISDS reform that might house some or all of the above reform options. (See further here).

Where are we now? Last weeks’ 40th Session marked a first real shift from the forest to the trees. The Working Group turned to far more specific reports by the Secretariat focused on designing an appellate mechanism or MIC (per a longstanding compromise dividing time equally between designing permanent institutions and other building blocks for reform, see here). The Working Group engaged with specific text-based reform options on (iv) the design of an appellate mechanism (here); and on (vi) selection and appointment in relation to the appellate mechanism or MIC (here). Delegations were also invited to submit written comments on these texts, which were published in advance of the session (here). These materials were complemented by three concept papers by the Academic Forum on ISDS Reform on selection and appointment (here).

Reform Options for an Appellate Mechanism

WGIII made substantial progress toward developing the musculature of an appellate mechanism for ISDS. The discussions focused on a Secretariat paper setting out twelve tentative “rules,” demarcating the core features of an appellate instance—each with a number of options responsive to delegations’ suggestions in the previous session. These covered the scope and standard of review (Rules 1-3); appealable decisions (Rules 4-5); effect of appeal / powers of appellate instance (Rules 6-10); timelines (Rule 11); and security for costs (Rule 12).  Options in the draft reflected different ways of balancing the tradeoffs. In most instances, the basic tradeoff involved weighing values like promoting consistency, coherence, correctness, and justice, against reducing costs and duration. The Working Group settled on preferred options on some of questions, and narrowed the range of options on others—providing the Secretariat with instructions for proceeding with drafting more concrete draft text for the next go around.

Scope and standard of review (Rules 1-3):

Rule 1(a) review of law: the Working Group found early consensus that, should an appellate mechanism be adopted, it would have to be competent to review for errors of law without deference to the lower instance. Delegations tentatively settled on a formulation authorizing review of “errors in the application or interpretation of applicable law.

Rule 1(b) review of fact: delegations were more divided on errors of fact. In the Chair’s count, a large majority supported limited review for “manifest errors in the appreciation of facts.” But a substantial minority preferred prohibiting factual review, noting that it would drive up costs by encouraging dilatory tactics—even potentially leading to rehearing every case on appeal. WGIII instructed the Secretariat to tentatively proceed with a “manifest error of fact” standard, on the understanding that no decision had yet been made whether factual review was worth the cost

Rule 2 review for grounds of annulment and set aside. The Secretariat’s proposed text included an option to incorporate the ICSID Convention grounds for annulment and NY Convention grounds for set aside in the scope of appeal. The idea was to avoid a tripartite review process, by funneling all review and annulment processes into the appellate mechanism – potentially coupled with waivers requiring that appellants forgo other review mechanisms. While most shared a desire to avoid fragmented system of review, some expressed concerns about how these different treaty regimes might interact – not just here but even more importantly with respect to enforcement. Several delegations resisted simply incorporating the ICSID and NY Convention grounds by reference. WGIII instead requested that the Secretariat provide more specific information about why individual grounds in those conventions might or might not be appropriate for inclusion here.

Rule 3 exceptional grounds for appeal. The Working Group tentatively rejected including a catch-all provision allowing for review of errors of law or fact not covered by Rule 1 on an exceptional basis. The shared concern was that such a vague device would open the door to discretionary review on any issue, driving up both uncertainty and costs.

Appealable decisions (Rules 4-5)

Rule 4 basis of claim. There was some debate about whether to limit an appellate mechanism to treaty-based ISDS claims, or to extend to ISDS claims based on contracts or domestic investment laws. There was also debate as to whether to make appealable contract disputes between investors and state-owned entities (to which China notably objected). The Working Group decided to defer these questions now, but requested options that might afford States the flexibility to opt in to hearing different disputes with different bases through signing declarations or reservations.

Rule 5 appealable decisions. Delegations mostly agreed that only final decisions should be appealable. All accepted that final awards could be appealed, and most seemed to agree that decisions on jurisdiction could also be appealed. The main questions concerned timing and effect. The Working Group requested that the Secretariat explore options for when jurisdictional appeals must be made (immediately, or only after the final merits award), and whether or not any interlocutory appeal would stay first instance proceedings. 

Effect of appeal / powers of appellate instance

Rule 6 notice of appeal. Most delegations supported an automatic “right of appeal,” and WGIII instructed the Secretariat to proceed on this basis for now. Some were open to a more mediated model, requiring parties to request “leave to appeal.” This would allow screening for frivolity up front, allowing cost control at some potential expense to access to justice. The Chair suggested considering control mechanisms alongside other possible filtering devices in a future session.

Rule 7 confirmation, reversal, modification. Delegations generally accepted that an appellate mechanism should be able to confirm, reverse, or modify decisions of the first instance tribunal.

Rule 8 annulment. Delegations were open to endowing the appellate mechanism with the power to annul the underlying award, but this might depend on whether grounds for annulment fell within the scope of review (see above). Moreover, some expressed that the need for annulment might turn on whether the appellate instance had a power of remand (see below).

Rule 9 remand. Delegations were more split on the possibility of remand. All agreed that an appellate instance should decide the case where it can (“complete the analysis” in WTO parlance). Where this was not possible, several delegations supported endowing an appellate instance with an exceptional power to remand a case to the first instance tribunal. Others, however, continued to express reservations about remand driving up costs. The core question was what to do about situations where the first instance tribunal simply failed to develop sufficient facts to decide the case on appeal. Without a power of remand, an appellate instance would be forced to either resolve such cases on the basis of burden of proof (leading to potentially absurd and unjust results), or resort to annulling the entire annulment (potentially ballooning costs). Readers of this blog may recall that such problems are endemic in the WTO system, which does not provide for remand—but note that the sting would be worse here given ISDS’ compensation-based remedial structure.  The Working Group instructed the Secretariat proceed with a remand option for now, and work on ways to reduce costs, including clear language for providing instructions to first instance tribunals.

Rule 10 rectification. Delegations generally supported giving an appellate mechanism the capacity to correct errors in its own decisions within a short time frame (currently 30 days). 

Timelines

Rule 11. Many delegations preferred setting timelines in which parties might file for appeal, and in which appeals should be decided. Drawing on the experience of the WTO, delegations debated whether to make timelines hortatory or rigid, and how they might be enforced. WGIII requested options for giving timelines teeth without overly restricting the working of the adjudicative body. 

Security for costs

Rule 12. Some supported requiring appellants to post security as a way to deter frivolous claims. However others raised concerns of access to justice for impecunious appellants. Here, the Working Group requested that the Secretariat develop more information on options and tradeoffs.

Selection and Appointment of Adjudicators to Standing Bodies

WGIII also made progress on developing rules for selecting and appointing adjudicators to a standing body (appellate or MIC), working from a separate Secretariat paper (here) that posed discrete questions to delegations (rather than draft rules). Here the tradeoffs involved choices about how to prioritize representation, diversity, costs, and control.

Selective Representation. The Working Group instructed the Secretariat to focus on a selective representation model for appointments, rather than a perfect or “mirror” representation model. Delegations mostly accepted that it might be unwieldy to require representation of every member state in the adjudicator pool. The Working Group asked the Secretariat to produce options for a smaller, flexible number of (possibly full-time) adjudicators, tied to case load, or for a larger pool of (likely part time) adjudicators on a “roster” model.

Qualifications. Delegations tended to agree that expertise in public international law and international investment law were crucial to include. Others suggested further areas of expertise, including facility with basic economic issues, and competence in calculating damages. Some stressed competence in domestic law, but others questioned how far this should be emphasized. WGIII requested that the Secretariat draft options enumerating the required qualifications of adjudicators, balanced against the need to avoid formal qualifications becoming too numerous or onerous to allow a diverse pool of adjudicators from which to choose.

Nominations procedure. Delegations requested that the Secretariat prepare options for several possible procedures, including nominations by member states; by independent commission; through direct applications by interested individuals; or some combination thereof. The Working Group further requested options for including non-state actors in the process, including civil society and investor groups. WGIII stressed that these options should respond to the goals of transparency, openness to stakeholders, and ensuring diversity.

Term of office and removal. The Working Group requested draft treaty text reflecting different options, including non-renewable and renewable terms on various time frames. The Secretariat was further requested to draft options on rules and procedures for removing adjudicators.

Assignment to panels. The most controversial question related to the assignment of adjudicators to panels for hearing particular disputes. On the one hand, delegations like the EU and its Member States strongly preferred rotational assignments such that disputing parties could not affect or predict which adjudicators would decide their disputes. On the other hand, many delegations prioritized leaving disputing parties some immediate control over appointments. Several favored sticking with the party appointment model standard in current ISDS. Here the division lines were relatively deep, although some compromise options seemed open. At the Chair’s suggestion, WGIII requested options for hybrid models, including ad hoc judges (on the model of the ICJ); mixed panels with a limited degree of party appointment (including panels of either three or five members); and allowing party appointment within the bounds of larger roster appointed by the member states in advance.  As with initial nominations, the Working Group stressed that such rules should be drafted to ensure representativeness, diversity, and impartiality on any particular panel.

Conclusion

All in all, the structure of a possible appellate mechanism for ISDS is starting to take shape. As the project undergoes gradual refinement, the key tradeoffs are coming into focus. The main concerns with permanent institutions relate to cost and duration, and loss of control. The costs issue arises with almost all of the above design questions. But it is becoming increasingly clear that cost control cannot always be prioritized to the same degree across all issues. At the end of the day, if an appellate mechanism is established – a big if! – it must be possible to ensure that justice is done. Justice has to come first, even if costly. It may not always be possible to thread the needle between justice and cost, and/or other goals and values like ensuring consistency and coherence,  sovereign control, and party autonomy. Sometimes there are no silver bullets; as Puig and Shaffer put it, the task is often to identify the best institutional choices among imperfect alternatives. Here, the Working Group has been making steady process. At least with designing an appellate mechanism, WGIII and the Secretariat have already done remarkable work in identifying the tradeoffs across a range of approaches, winnowing the field of options, and identifying some initial sites of consensus.

The Working Group meets again in November, in Vienna (potentially again in hybrid format, with some digital participation). The next topic will likely be the code of conduct (currently being developed in coordination with ICSID), although the Working Group will likely also get to other topics in November. The draft work and resource plan is available here.


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