Restoring Legitimacy to the Investor-State Dispute Settlement System: Total Replacement or Incremental Improvement?

Author: Bo Hyun Kim*

I. INTRODUCTION

With no permanent body of law to determine the substantive rules of investment law, there have been long-standing demands for reform of the investor-state dispute settlement (ISDS) regime. Such demands seem to be a déjà vu of the legitimacy crisis of the GATT dispute settlement procedure in the 1980s which led to the creation of the WTO Appellate Body, a permanent structure ensuring the stability of rulings and interpretations.[1] Following its first major comprehensive attempt at ISDS reform in July 2017,[2] the United Nations Commission on International Trade Law (UNCITRAL) has entrusted Working Group III (WG III) – composed of all state members of the Commission – with a mandate to address concerns regarding ISDS.[3] Accordingly, WG III identified the principal concerns to be addressed by the reform process, including, inter alia, excessive legal costs, duration of proceedings, legal consistency, arbitral independence, impartiality, and diversity.[4]

While the much-awaited dialogue on reform has been welcomed by many, it has been subject to criticism because it presents a significant caveat in that the UNCITRAL mandate implicitly limits WG III to addressing reforms to dispute settlement procedures without accompanying substantive reform to the incumbent rules.[5] Against this backdrop, this article seeks to examine the two systemic reform proposals that have garnered much debate amongst scholars and practitioners: establishment of a multilateral investment court or an appellate mechanism. Next, the article will provide commentary on the feasibility of the reform options in counteracting the shortcomings of the current investment treaty regime. This article aligns with the view that the latter reform option seems more feasible. Finally, this article will end with some concluding remarks in light of the most recent WG III session held in Vienna in May.

II. TWO PROPOSED MULTILATERAL BODIES FOR DISPUTE RESOLUTION

There are two approaches to address inconsistencies in the interpretation of treaties by implementing new multilateral bodies for dispute resolution: (1) a Multilateral Investment Court (MIC) envisioned by the European Union and its member states and (2) a central and permanent appellate mechanism proposed by several states including China.[6] The MIC would call for total replacement of the system with a two-tiered standing Court with full-time adjudicators. The first tier would consist of a court of first instance that would presumably review facts and apply pertinent laws, and the second tier would be a court of appeals with the presumptive authority to reverse these findings.[7] The European Parliament has voiced its approval of the MIC approach, adopting a number of resolutions in agreements such as the EU-US TTIP, EU-Canada CETA, and the EU-Singapore ESIPA that provide for the adoption of the MIC once it has been established.[8] On the other hand, a standalone appellate mechanism is a measure advocating incremental reform within the incumbent ISDS regime, only replacing crucial parts of the system like annulment mechanisms, enforcement, and finality of awards.[9] The appellate mechanism would function as a “supplement to the traditional ad hoc ISDS with a standing tribunal for resolving appeals.”[10] The appellate mechanism approach is consistent with commentators’ views that such a system would greatly enhance efficacy and remove inconsistencies by creating precedential value in investment arbitration awards.[11] That is, awards designated as correct by the appellate body would create binding precedent for first-instance tribunals, ensuring greater control over the decisions of tribunals. Proponents of the appellate mechanism cite the success of the WTO appellate system and the legal certainty that a mechanism modeled after the WTO system would bring.[12]

III. ENHANCING INTERPRETATIVE CONSISTENCY AND ACHIEVING BALANCED REPRESENTATION OF ADJUDICATORS

The implementation of an appellate body or a MIC would have the effect of centralizing final decision-making and ensuring that adjudicators provide consistent interpretations of investment treaty provisions.[13] While the MIC would still be charged with resolving disputes arising under different investment treaties, greater consistency can be achieved in the interpretation of common treaty provisions. The consistency in interpretation will facilitate the drafting of treaty language while allowing investors to both clearly plan ahead and manage their expectations regarding their investments.[14] However, there are doubts as to the necessity of a two-tiered system because it could adversely affect the efficiency of ISDS.[15] Meanwhile, a separate appellate mechanism is likely to improve interpretative consistency and predictability for parties with regard to the effects of their drafting choices as with the MIC, arguably without adding an extra layer of quality control to the process as with a two-tiered system like the MIC.[16]

Another point of contention is the selection and appointment process of adjudicators under the two proposed reform options. The fact that disputing parties have no say in the selection of the panel hearing the specific dispute has been one of the main criticisms against establishing a MIC.[17] The EU’s proposal of employing full-time adjudicators at both tiers of the MIC could erode party autonomy with respect to selecting arbitrators. This is because allowing for the preselection of adjudicators under a MIC could create the appearance of effectively excluding investors from the selection process as states are likely to appoint adjudicators inclined to rule in their favor.[18] With an appellate mechanism, however, parties may continue selecting adjudicators under different arbitration rules such as the UNCITRAL rules for ad hoc arbitration and the ICSID Convention rules.[19] This would alleviate concerns about the exclusion of investors that could arise under a MIC while ensuring that the disputing parties retain capacity to appoint members of the tribunal.

It should be noted that this does not necessarily mean that the employment of full-time adjudicators under the MIC hamstrings the possibility of addressing ongoing concerns over balanced representation amongst members of ISDS tribunals. This is because the issue of whether lack of diversity can be adequately addressed hinges on the design of the process involving the selection and appointment of adjudicators.[20] A standing mechanism can be established with either: (1) full representation bodies wherein each state has an adjudicator on a permanent basis, or (2) selective representation bodies under which there are fewer seats than the number of states that are parties to the court’s statute.[21] Given the difficulties in achieving full representation in light of cost implications and the fact that courts with a global reach such as the ICJ, UNCLOS, ITLOS usually tend to be selective representation courts, a permanent body with selective representation seems more feasible if UNCITRAL were to opt for a MIC.[22] Measures such as rotation of adjudicators among member states will ensure that court is truly representative by assuring all states get the chance to have one of their own nationals appointed to the court.[23] Moreover, the court composition could be structured to reflect a geographically equitable representation between developed, developing, and least-developed countries, as well as a balanced representation in gender.[24]

IV. APPELLATE MECHANISM: A LIKELY OUTCOME THOUGH NOT A PANACEA FOR ALL ILLS

However, it is questionable whether the creation of a MIC would be desirable when it may be perceived as being inconsistent with the fundamental principle of fairness in arbitration by conferring contracting states with the sole right to appoint adjudicators, potentially resulting in pro-state biased decisions. Moreover, it would also call for radical changes to the incumbent regime. The investors would likely be more accepting toward an appellate mechanism given that a court composed of adjudicators nominated exclusively by states would likely tilt heavily in favor of states, unduly crippling investor rights. Furthermore, ameliorating the existing system by employing incremental changes in the form of an appellate body would be more realistic and less cumbersome for all member states, foregoing the need to renegotiate individual investment treaties and agreements.[25] Nevertheless, as commentators have pointed out, an appeal mechanism should not be deemed a panacea that will address all concerns under the current ISDS regime.[26] Other initiatives such as the adoption of specific rules on treaty interpretation, security for costs and frivolous claims, and third party funding should also be considered to deal with legitimacy issues of ISDS.[27]

V. CONCLUSION

In light of the aforementioned complexities and divergence in views, the latest 40^th session of WG III held in Vienna on May 4-5 adopted a long-term workplan with increased group sessions per year and extended the workplan to 2026.[28] While the Working Group discussed proposals to subject reform options to “approval in principle” (i.e., approval of broad policy considerations, general features, key objectives in a text) by UNCITRAL starting from 2022, the reform options would not be formally adopted until 2026.[29]  Although states are eager to reform the current ISDS, additional sessions will be required in the long-term to aid UNCITRAL in making an informed decision. Moreover, as think tanks and institutions such as the International Institute for Sustainable Development and the Columbia Center on Sustainable Investment have pointed out in their workplan submission, not only must the issues addressed during the sessions be broad and inclusive, but the process must be so as well.[30] Thus, enhancing cross-collaboration and transparency in all intersessional work (i.e., the involvement of developing states and observers whose participation is limited) is another important agenda that the Working Group may include in future sessions.[31]

[1] Marwa Farag, Arbitration Reform Efforts: Are Reformers Wasting a ‘Once-in-a-Lifetime’ Opportunity?, Kluwer Arbitration Blog (Jun. 4, 2021), http://arbitrationblog.kluwerarbitration.com/2021/06/04/arbitration-reform-efforts-are-reformers-wasting-a-once-in-a-lifetime-opportunity/.

[2] Malcolm Langford et al., Special Issue: UNCITRAL and Investment Arbitration Reform: Matching Concerns and Solutions, 21 J. of World Inv. & Trade 170 (2020), https://brill.com/view/journals/jwit/21/2-3/article-p167_1.xml?language=en&body=pdf-44182.

[3] Comm’n on Int’l Trade Law, Report of Working Group III (Investor-State Dispute Settlement Reform) on the Work of Its Thirty-Fourth Session, U.N. Doc A/CN.9/930/ Rev.1 (2017).

[4] Comm. on Int’l Trade Law, Possible Reform of Investor-State Dispute Settlement (ISDS), U.N. Doc A/CN.9/WG.III/ WP.149 (2018).

[5] Langford et al., supra note 2, at 172.

[6] Julian Arato et al., Parsing and Managing Inconsistency in Investor-State Dispute Settlement , 21 J. of World Inv. & Trade 336 (2020), https://brill.com/view/journals/jwit/21/2-3/article-p336_5.xml?rskey=wfQf5U&result=5.

[7] Id.

[8] Multilateral Investment Court: Overview of the Reform Proposals and Prospects, at 2, 6 (Jan. 2020), https://www.europarl.europa.eu/RegData/etudes/BRIE/2020/646147/EPRS_BRI(2020)646147_EN.pdf.

[9] Kashpee Wahid & Ylli Dautaaj, 2020 in Review: Institutional Reform Efforts and Developments in Investment Arbitration, Kluwer Arbitration Blog (Jan. 10, 2021), http://arbitrationblog.kluwerarbitration.com/2021/01/10/2020-in-review-institutional-reform-efforts-and-developments-in-investment-arbitration/.

[10] Arato et al., supra note 6, at 370.

[11] See Deepu Jojo Sushama, Appellate Structure and Need for Legal Certainty in Investment Arbitration, Kluwer Arbitration Blog (May 1, 2014), http://arbitrationblog.kluwerarbitration.com/2014/05/01/appellate-structure-and-need-for-legal-certainty-in-investment-arbitration/.

[12] See Id. (“The success of the WTO Dispute Settlement system shows that there is a high chance of success for the ICSID Appellate system as well.”).

[13] Langford et al., supra note 2, at 185.

[14] Arato et al., supra note 6, at 370.

[15] See Margie-Lys Jaime, Reshaping Investor-State Dispute Settlement Through an Appellate Review Mechanism, in The Investor-State Dispute Settlement System: Reform, Replace or Status Quo? 144-145 (Alan M. Anderson & Ben Beaumont eds., 2020).

[16] Id. at 145.

[17] Id. at 142.

[18] Id.

[19] Id. at 149.

[20] Langford et al., supra note 2, at 185.

[21] Comm’n on Int’l Trade Law, Possible reform of investor-State dispute settlement (ISDS) Selection and appointment of ISDS tribunal members, U.N Doc. A/CN.9/WG.III/WP.169 (2019).

[22] Id.

[23] Id.

[24] Id.

[25] Jaime, supra note 15, at 156.

[26] Dr. Margie-Lys Jaime, Could an Appellate Review Mechanism “Fix” the ISDS System?, Kluwer Arbitration Blog (Feb. 11, 2021), http://arbitrationblog.kluwerarbitration.com/2021/02/11/could-an-appellate-review-mechanism-fix-the-isds-system/.

[27] Id.

[28] Comm’n on Int’l Trade Law, Report of Working Group III (Investor-State Dispute Settlement Reform) on the Work of its Resumed Fortieth Session, U.N. Doc A/CN.9/1054 (2021), https://uncitral.un.org/sites/uncitral.un.org/files/wg_iii_resumed_40th_session_final_003.pdf.

[29] Id.

[30] Workplan Submission to UNCITRAL Working Group III on ISDS Reform, Columbia Ctr. on Sustainable Inv. et al. (2021),  https://ccsi.columbia.edu/sites/default/files/content/docs/publications/IISD%20IIED%20CCSI%20Submission%20to%20UNCITRAL%20on%20Workplan%20-%20March%201.pdf.

[31] Id.

*Bo Hyun Kim is a second-year student at Handong International Law School in South Korea where she is studying U.S. and international law.