The United Nations Commission on International Trade Law’s (“UNCITRAL“) Working Group III (Investor-State Dispute Settlement Reform) (“WGIII“)​ has published the advance copy of its report (the “Report“) on the work conducted between 8 and 12 February 2021 during its resumed 40th session. The Report provides details about the discussions around the following issues: (i) the selection and appointment of adjudicators in a potential standing mechanism; and (ii) the potential establishment of an appellate mechanism.

Background

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, November 2019, February 2020 and November 2020.

Selection and appointment of adjudicators in a standing mechanism

WGIII recalled that, at its resumed thirty-eighth session, it had a preliminary discussion on the selection and appointment of adjudicators in a standing mechanism. It was generally thought that the “reform efforts should focus on improving the existing regime rather than replacing it“.

The use of a predetermined list of adjudicators or a roster was said to go against the essence of arbitration given that the selection of decision-makers must be made by the parties. A concern was also expressed that investors’ role in the appointment process would be diminished or even eliminated in a standing body, which raised questions around the legitimacy of such a system.

In addition, various logistical concerns were discussed, including (i) the financial resources required to establish a standing mechanism, and (ii) the need for a substantial number of States to participate in the establishment of such an adjudicative system for it to be financially and logistically viable.

Composition of a “permanent body”

WGIII discussed whether the permanent body should comprise adjudicators on the basis of a “full representation” or “selective representation” model. In the case of the former, each contracting State would appoint an adjudicator on a permanent basis. In the latter case, only some contracting States would be represented in the pool of adjudicators. In view of the cost implications and operational complexity of having too many adjudicators, the preference was to adopt a “selective representation” model.

As such, it was discussed whether ad hoc judges should be appointed to hear cases where the respondent State is not represented in the standing mechanism. Such judges need not be nationals of the respondent State – what matters is rather that the respondent State be involved in the appointment of the judge or arbitrator. In terms of the number of judges in the selective model, it was said that this should be determined based on the standing mechanism’s projected caseload, as well as the number of contracting States. We note that the Report uses the words “judge”, “arbitrator” and “adjudicator”, and this post reflects the word used in the relevant section of the Report.

Selection and appointment process

WGIII outlined the following options for selecting and appointing adjudicators: (i) direct appointment by each State; (ii) appointment by a vote of the contracting States; or (iii) appointment by an independent commission. It was further suggested that non-State stakeholders, such as investors and civil society, should also be involved in this selection process to ensure the legitimacy of the standing mechanism. In addition, it was said that the disputing parties should be able to choose adjudicators from a mandatory roster only at the first instance, rather than at the appellate level.

Conclusion on the selection and appointment of adjudicators in a standing mechanism

It was recalled that WGIII was yet to decide on the desirability and feasibility of a standing mechanism, which would be considered at a later stage. WGIII proceeded to instruct the Secretariat to prepare a text on the selection and appointment of adjudicators in a standing mechanism.

Appellate mechanism

WGIII considered the nature, scope and effect of an appellate mechanism on the basis of the related working paper published in November 2020 (see our previous PIL Notes post about this development here). In terms of the form which this appellate mechanism would take, it was discussed that this could be ad hoc, a standing appellate body or the second tier of a standing court.

The appellate mechanism was thought to potentially enhance the correctness and consistency of decisions rendered by tribunals, thereby increasing the overall predictability and the efficiency of ISDS. The appellate mechanism is, however, not meant to enable systematic or frivolous appeals, or the full rehearing of each aspect of a case. To this end, it was discussed whether certain features, such as a high standard of review, security for costs and early dismissal, would have to be developed.

In terms of the scope and standard of review of the appellate mechanism, the following were considered as potential options: (i) (material, prejudicial or substantial) errors of law; (ii) (manifest) errors of fact; and (iii) annulment and set aside proceedings. It was also discussed whether appeals should be limited to decisions rendered based on ISDS treaties or, more broadly, based on contracts or national investment laws. In addition, it was generally thought that decisions on merits should be subject to appeal. There were, however, further discussions about whether decisions on jurisdictional issues or challenges of arbitrators should be appealable.

Furthermore, it was suggested that the appellate mechanism should be able to confirm, modify or reverse decisions of the first instance tribunal. However, some delegates expressed the view that it would be more cost and time effective for the appellate mechanism to make a final decision, instead of returning the case to the first instance tribunal.

Conclusion on the appellate mechanism

WGIII highlighted the importance of taking into account the potential impact of an appellate mechanism on the cost and duration of the proceedings overall before such a mechanism is established. WGIII instructed the Secretariat to further develop the provisions on an appellate mechanism.

Upcoming WGIII session and comment

WGIII is due to resume its 40th session on 4-5 May 2021 in Vienna. It has been agreed that the upcoming session will focus on: (i) issues around enforcement; and (ii) the code of conduct for adjudicators in ISDS.

As explained above, 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. WGIII recalled that a number of organisations, including the ICSID Secretariat, have indicated their readiness to provide analysis and research assistance for the purpose of WGIII’s reform-related discussions. 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.

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.

Background

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.

Appellate mechanism

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.