The United Nations Commission on International Trade Law’s (“UNCITRAL“) Working Group III (Investor-State Dispute Settlement Reform) (“WGIII“) has published its report (the “Report“) on the work conducted between 20 and 24 January 2020 during its resumed 38th session. The Report provides details about the discussions around the following issues: (i) whether the investor-state dispute settlement (“ISDS“) process should provide for an appellate mechanism; (ii) the enforcement of decisions of permanent bodies; (iii) the financing of permanent bodies; and (iv) the selection and appointment of arbitrators and adjudicators.
UNCITRAL has been considering the possible reform of ISDS through the work of WGIII, which has been given a broad mandate to identify concerns regarding ISDS procedure, and develop relevant solutions to be recommended to the main UNCITRAL body. While WGIII enjoys broad discretion in discharging its mandate, any solutions devised will take into account the ongoing work of relevant international organisations, and each State may decide the extent to which it chooses to adopt the proposed solutions. For further information about WGIII’s previous work on ISDS reform, please see our extensive coverage of this topic here: PIL Notes posts of April 2018, January 2019, February 2019 and November 2019.
Some delegations noted that the existing ISDS mechanisms for reviewing arbitral awards were too limited. They considered that an appellate mechanism would enhance the correctness, consistency, predictability and coherence of ISDS awards. Some delegations drew an interesting distinction by querying whether the goal of an appellate mechanism was to ensure the quality of the awards, or to enhance the coherence and consistency of the ISDS regime. In addition, some delegates cautioned against potential increases in costs and duration of proceedings to which such an appellate mechanism might give rise.
Concerns were raised that an appellate mechanism could actually increase incoherence and inconsistency in ISDS. This would be because substantive protections standards are found in different sources of law, such as investment treaties and domestic laws. This multitude of sources results in fragmentation already, which could increase by virtue of multiple tribunals and appellate mechanisms’ interpretations. However, some delegates reiterated that the common standards in those sources of law could be interpreted more consistently and predictably by the relevant appellate body than currently done by ad hoc arbitral tribunals.
The nature and scope of appeal of awards was considered. It was noted that existing annulment grounds (under the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention“) for instance) are limited. The following potential additional annulment grounds were considered: (i) errors in the interpretation and application of law; (ii) (manifest) errors in the finding of any relevant facts; and (iii) the grounds for annulment under the ICSID Convention and the grounds for refusal of recognition and enforcement of awards under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention“).
Concerns were expressed that broader grounds of appeal could entail a review of all issues de novo, which could impact adversely on the costs and duration of the proceedings. In addition, to avoid overburdening the appellate bodies through an unmanageable number of cases, some delegations suggested that certain decisions should not be appealed. Such decisions could include decisions on procedure (such as challenges), interim measures and, potentially, jurisdiction.
In terms of the effect of the appeal, it was generally felt that an appellate body should be able to affirm, reverse or modify the decision of the first-tier tribunal, and render a final decision. It was also considered whether the appellate tribunal should be able to annul or set aside an award, or remand it to the first-tier tribunal. With regard to concerns expressed about possibly incorrect decisions of the appellate body, discussions were held about the possibility for the appellate body to rectify its decision in exceptional circumstances.
WGIII agreed to consider the option of an appellate mechanism in ISDS further as one of its possible reform options. WGIII asked the Secretariat to consider the related discussions of WGIII, and prepare relevant draft provisions, as well as provide further information on the issues raised.
Enforcement of decisions of permanent bodies
WGIII considered how decisions rendered by permanent bodies (i.e. a permanent appellate mechanism or a standing first-tier body) should be enforced and whether reform was needed. The New York Convention and the ICSID Convention already provided a robust enforcement mechanism and WGIII considered the possible application of these existing mechanisms to decisions made by a permanent body. However, it was also suggested that, if a permanent body were to be established, it could be preferable to include an internal enforcement mechanism in its founding instrument. Enforcement in non-participating States would most likely be achieved through the New York Convention or ICSID Convention.
Financing of a permanent body
WGIII had a preliminary discussion on the financing of a permanent body, which could handle appeals, or be composed of two tiers to hear disputes. Key budget components of such a permanent body would include: (i) the remuneration of adjudicators; (ii) case administration costs; (iii) costs of the administrative staff supporting the tribunals; and (iv) the overhead costs of the permanent body. This budget could be covered by States and the disputing parties.
Some delegations took the view that the level of States’ contributions should be assessed by reference to their level of economic development and the number of claims brought against particular States. However, concerns were raised that such a contribution structure could have the negative consequence of some States having more influence in the permanent body than others.
The possibility of voluntary State contributions was also mentioned, but it was thought that this would be a volatile mechanism, which might undermine the independence of a permanent body, as it could subject it to undue influence by the donors. Another view was that the current practice whereby disputing parties pay the costs of the ISDS process should be retained. This existing “user-pay” system could increase accountability, and deter systematic appeals and frivolous claims.
Selection and appointment of ISDS tribunal members
WGIII considered the qualifications and requirements that serving ISDS tribunal members should have. These included knowledge of the subject matter, independence and impartiality, accountability and integrity.
The general view was that ISDS tribunal members should have knowledge of public international law, international trade and investment law. Some views were expressed that ISDS tribunal members should also understand the policies underlying investment, such as sustainable development. Some advised caution in requiring too many or strict qualifications, as this would reduce the pool of individuals significantly at the expense of aims such as achieving diversity. It was also reiterated that geographical, gender and linguistic diversity, as well as equitable representation of the different legal systems and cultures enhances the quality of the ISDS process.
One of the possible reform options expressed was the establishment of a roster of qualified candidates and the setting up of a permanent body composed of full-time adjudicators. By establishing a list or roster, the method of selecting and appointing arbitrators would be regulated, but party autonomy would also be preserved. Suggestions were made that, to preserve the balance of the current party-led appointment system, both States and investors should be involved in the establishment of such a roster. The administration of such a roster could include a procedure to remove an arbitrator.
In terms of the selection and appointment of adjudicators in a permanent body, the general view was that broad geographical representation, and a balance of representation between developed, developing and least developed countries should be sought.
Upcoming WG III session and comment
WGIII is due to meet in March 2020 in New York for its 39th session. It has been agreed that the upcoming session will focus on: (i) dispute prevention and mitigation, and other means of alternative dispute resolution; (ii) treaty interpretation by States; (iii) security for costs; (iv) means to address frivolous claims; (v) multiple proceedings including counterclaims; and (vi) reflective loss and shareholder claims.
WGIII has not decided which particular reform options should be adopted at this stage of the deliberations, and instead requested the Secretariat to provide further information on more concrete possible reform steps. We will continue to follow and update on the deliberations pending WGIII’s final recommendations on these issues.
For more information, please contact Andrew Cannon, Partner, Helin Laufer, Associate, or your usual Herbert Smith Freehills contact.