Suggested Reforms Regarding an Appeal/Review Mechanism for Investor State Dispute Settlement (ISDS) Awards

Isabelle Wenger, LL.M. in International Dispute Resolution at King’s College London

The aim of finality of arbitral awards in Investor State Dispute Settlement (ISDS) has resulted in one main problem: the absence of an appellate body. This means that errant legal rulings are not subject to any meaningful form of legal review.[1] While finality is indeed one of the main advantages of international arbitration – by reason of the savings it brings in terms of costs and time to the parties – the lack of an appellate system poses the risk of having flawed or inconsistent awards on the same facts or points of law.[2]

After exploring the advantages and disadvantages of establishing an appellate body in the realm of ISDS awards, this essay discusses whether such body would be feasible and how it might be designed.

Advantages & Disadvantages of an Appellate Body in ISDS

It is well known that the International Centre for Settlement of Investment Disputes (ICSID) has attempted to reach a compromise between this much-wanted finality, and a form of judicial review, by instituting an annulment mechanism in lieu of providing an appellate option. However, this does not seem to solve the core of the problem: uncertainty in international investment arbitration.[3]

ICSID itself recognised this flaw and responded to it by considering the use of an appellate mechanism in 2004.[4] Likewise, and more recently, the United Nations Commission on International Trade Law (UNCITRAL) has engaged in debates relating to reform options for the ISDS system. The III UNCITRAL Working Group will  “first identify and consider concerns regarding ISDS before going on to consider and develop any relevant reforms”.[5]

The rationale underlying the creation of an appellate mechanism for ISDS is that, as opposed to an annulment mechanism that may correct erroneous decisions of tribunals and improve consistency among awards, appeal procedures would enhance the predictability of investment law by providing “direction and order to the existing decentralized, non-hierarchical and ad hoc regime”.[6]

However, this reconstruction is not uncontroversial. Critics[7] argue that an appeal procedure would not necessarily improve the consistency of awards due to the fact that the ISDS system encompasses more than 3,000 legal texts.[8] Indeed, given the variations of language in these texts, it is quite likely that even an appellate body may not prevent different outcomes arising from the same factual circumstances and legal issues. Besides, an appellate body may also create procedural problems, in particular in terms of time and costs for the disputing parties.[9] While this issue might be mitigated by means of strict timelines along the lines of those of the World Trade Organisation (WTO) Appellate Body framework,[10] it is indeed something to be taken note of when weighing the advantages and disadvantages of an appellate mechanism in the field of investment arbitration.

Were the said appellate body to be established at a multilateral level, there would also be the additional issue of having to gain sufficient support from countries which would have to discuss whether the facility would be limited to ICSID arbitrations or would apply to all ISDS cases, the election of the appellate body’s members, and its means of financing.

 

The Way Forward

Should an appellate mechanism be set up, several options have been put forward on what it should look like. One such option concerns the creation of a permanent multilateral appellate body that would focus on all investment treaty awards. While this option would bring uniformity to the multitude of investment treaties in force, it is undoubtedly difficult to implement in practice, as it requires the consent of a large number of states. Consent, the cornerstone of investment law, creates the biggest challenge in terms of making the system more effective.

Another, arguably easier, option for reform would be to create appellate bodies for each individual investment treaty. While this option scales down the issue of consent, it does amount to a solution that has the disadvantage of creating even more fragmentation in investment dispute resolution. In the absence of coordination among appellate bodies, the number of diverging decisions adopted by arbitral panels may even duplicate. Therefore, since consistency and certainty are the main reasons behind the calls for an appellate system in the first place, resorting to this option of reform seems counterintuitive, and perhaps even ineffective.

A better option for reform could perhaps be the establishment of an institution that does not engage in review per se. An example of this is the work of the NAFTA Free Trade Commission, which provides a check on inconsistent rulings by means of legally binding interpretations of treaties’ rules. The supporters of this proposal maintain that interpretations that are “binding on all future arbitrations under NAFTA, […] should be able to correct inconsistencies in tribunal decisions and altogether eliminate current annulment inconsistencies”.[11] However, while this option has the advantage of targeting the issue of inconsistencies among arbitral decisions, it still requires amendments at the treaty level and, once more, poses a problem in relation to states’ consent.

 

Some Concluding Thoughts

In conclusion, the creation of an appellate body in ISDS faces significant, although not insurmountable, practical challenges. Each of the reform options discussed have advantages and disadvantages. If they all pursue the commendable aim of bringing consistency in the arbitral decision-making, they also require lengthy negotiations. In some cases, such options even seem to worsen rather than improve the system.

However, as investment arbitration is grounded in the concept of states’ consent, whether the system will yield to the calls for reform – and how it will do so – seems ultimately to be left to political negotiations.

 

[1]While legal review in the form of an appeal is not possible under ICSID, the Convention does offer the possibility of annulment albeit under the limited scope of Article 52 ICSID. Generally speaking, the difference between an appeal and an annulment is that the latter is restricted to limited procedural matters affecting the legitimacy of the decision, such as manifest excess of powers, whilst the former encompasses also a review of the substantive correctness of the decisions.

[2]C J Tams, ‘An Appealing Option? The Debate About an ICSID Appellate Structure’, Essays in Transnational Economic Law Working Paper No. 57 (2009)

[3]D Kim, ‘The Annulment Committee’s Role in Multiplying Inconsistency in ICSID Arbitration: The Need to Move Away from an Annulment-Based System’, NYUL Rev, 86 (2011), 242

[4]Secretariat, I.C.S.I.D., ‘Possible improvements of the framework for ICSID arbitration’ (2004)

[5]A Roberts, ‘UNCITRAL and ISDS Reform: Pluralism and the Plurilateral Investment Court’, EJIL (2017)

[6]United Nations Conference on Trade and Development, ‘Reform of investor-state dispute settlement: in search of a roadmap’ (2013) <http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d4_en.pdf>

[7]G M Alvarez, B Blasikiewicz, T Van Hoolwerff, M Mitsi, K Koutouzi, N Lavranos, E Spiteri-Gonzi, A Videgaray, and P Willinski, ‘A Response to the Criticism against ISDS by EFILA’, Journal of International Arbitration (2016)

[8]United Nations Conference on Trade and Development, ‘International Investment Agreements Navigator’ (2018) <http://investmentpolicyhub.unctad.org/IIA>

[9]K Yannaca-Small, ‘Improving the System of Investor-State Dispute Settlement, OECD Working Papers on International Investment (2006)

[10]Annex 2 of the WTO Agreement: Article 17 of the Understanding on rules and procedures governing the settlement of disputes

[11]C Smith, ‘The Appeal of ICSID Awards: How the Aminz Appellate Mechanism can Guide Reform of ICSID Procedure’, Georgia Journal of International and Comparative Law (2013), 577

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