APPEAL MECHANISM IN INVESTMENT ARBITRATION: TIME TO REVISIT ICSID CONVENTION

Updated: Sep 21

-Aditya Rathore and Amit Chawla[1]


1. Introduction


Investor-State Dispute Settlement (ISDS) is a legal provision in International Investment Agreements (IIAs) and the Bilateral/Multilateral Investments Treaties, aimed towards the resolution of disputes between foreign investors and the host-states. ISDS empowers the foreign investors to invoke arbitration against the host-states in the event they believe that the host government has violated the concerned investment agreements. As per United Nations Conference on Trade and Development (UNCTAD), the total number of ISDS cases surpassed the 1,000 mark in 2019[2] while as per International Centre for Settlement of Investment Disputes (ICSID), 838 cases have been registered under the ICSID Convention and Additional Facility Rules.[3] These figures are a clear manifestation of the increasing confidence of the foreign investors in the ISDS system and in particular, the ICSID. This confidence, as reposed by investors and the states in ISDS, largely draws from the arbitration’s ability to give a binding decision and thereby bring finality to the dispute at hand. This finality is not possible if the parties were to take the judicial recourse to resolve their dispute wherein, they need to climb the rungs of the ladder in form of several courts in the judicial hierarchy to reach a binding decision which can take years, if not decades. However, in the process of attaining finality, stakeholders have had to let go of their recourse to appealing the award, even if the award was based on errant reasoning. While ICSID does have an annulment procedure, prescribed under Article 52 of the ICSID Convention, the purpose it serves is very limited and comes nowhere close to an appeals facility. This lack of an appellate structure in ISDS, especially in ICSID, not only denies the parties the opportunity of appealing awards but also adds up to the fractured jurisprudence in investment arbitration by creating inconsistent awards on the same point of law.


The authors, through this piece, will argue for the need for an appellate structure in the ICSID framework while discussing the finality vs correctness and consistency debate. The authors will further discuss the best possible option for an appellate structure in ICSID between a multi-lateral investment court or an appeals facility in ICSID.


2. Finality vs. Correctness & Consistency


Proponents of international arbitration have time and again cited the important role played by institutions like ICSID in improving international cooperation and economic development all around the world. More so, the record number of cases for arbitration registered with ICSID also points in the same direction.[4] Nevertheless, this is not to say that opponents of international arbitration do not exist. On the contrary, institutions like ICSID are now under constant criticism for their perceived bias towards multinational corporations and the high costs associated with ICSID along with a lack of an appellate structure.[5] Several Latin American countries have already withdrawn from the ICSID Convention.[6] Amidst all the systemic issues (consistency in decisions, legitimacy and transparency, cost, etc.) highlighted time and again within ICSID, one issue that has always been at the center of the controversy is the lack of an appeals facility in ICSID.


Amongst the international arbitration community, at the heart of the appeals facility question lies the finality vs. correctness and consistency debate. Members of the “finality” camp argue that ICSID arbitration removes the dispute from the hassle of the municipal courts and helps in providing predictability to the process.[7] Also, that the additional review system would impose heavy costs upon the parties and would also result in elongated proceedings. In addition to this, arbitrator bias against investors based on the notion that the state would have the power to appoint the arbitrator at the appellate stage and the additional caseload due to increased frequency of review appeals are some of the additional concerns associated with the appeal mechanism. On the contrary, members of the “correctness and consistency” camp argue that an appeal mechanism will help in bringing coherence and consistency to the already fragmented investment law jurisprudence.[8] An appeals facility can be an apt solution for keeping in check the constant inconsistent awards by the ICSID and other such tribunals on the same point of law. In CMS vs. Argentina[9] and LG&E vs. Argentina[10], tribunals in both these cases reached diverging conclusions over the validity of Argentina’s use of ‘state of necessity’ defence as an argument for the economic measures undertaken during the domestic downturn. The CMS tribunal had rejected this argument of the Argentine Republic whereas this argument, to a certain extent, was accepted by the LG&E tribunal. Similar instances of inconsistency in ICSID awards were observed in the SGS vs. Phillipines[11] and SGS vs. Pakistan.[12] These cases concerned themselves with textually similar umbrella clauses and the Tribunal had to determine whether the presence of an umbrella clause caused the breach of the contract into a breach of the treaty. Consequently, the tribunal in one of the cases held in the affirmative while in the other rejected the contention. These cases are an apt example of why the introduction of an appeals facility will allow for a smooth transition towards a precedent-based system which will help in ensuring consistency of jurisprudence as the decisions rendered could act as precedents in situations where two different awards are based on identical facts and legal principles and thereby increasing the legitimacy of the arbitral awards.


As alluded to before, the ICSID does have an annulment procedure as well. Pursuant to an application for annulment under Article 52, an ad hoc annulment committee can annul the final award on the following grounds: (1) the tribunal was not properly constituted; (2) the Tribunal has manifestly exceeded its powers; (3) there was corruption on the part of a member of the Tribunal; (4) that there has been a serious departure from a fundamental rule of procedure; or (5) that the award has failed to state the reasons on which it is based. However, the constitution of an ad hoc committee, whenever an annulment application is made, has led to an extensive interpretation of the grounds of annulment[13] - Klockner vs. Cameroon,[14] Vivendi vs. Argentina[15] and MINE vs. Guinea[16] are such cases in point. Moreover, grounds for annulment are restricted solely to procedural irregularities and fail to take into account substantive measures like public policy. In fact, several questioned awards are not annulled because of the high standards set for the annulment procedure.[17] The high standard set for annulment procedure by the annulment committee concerns itself only with the legitimacy of the process in rendering the award. It has been observed that even if the awards are annulled, grounds are usually of wrong application of law rather than wrong interpretation of a correct law. Grounds such as failure to state correct reasons, erroneous interpretation of law, etc. are also not taken into account by the annulment committee. In comparison to annulment proceedings, an appeals facility will provide for a broader scope of review of an award (scope of review has been discussed in the next section).[18] In fact, investors and states alike, are perturbed by the fact that if they were to lose an ICSID arbitration based on erroneous reasoning, they will still have to comply with the award. Thus, to quell the rising discomfort amongst key stakeholders in ISDS, the authors believe that the establishment of an appeals facility in ICSID becomes pertinent. The methodology for the establishment of such an appeals facility will be discussed in the next section.


3. Multilateral Investment Court vs. Appeals facility


The debate concerning the establishment of an appeal mechanism in ISDS can be traced the back to early 1990s.[19]Whereas it was only in 2004 when a proposal to establish an ICSID Appeals facility was tabled by the ICSID Secretariat which laid down a possible broad framework for the efficient implementation of the appeals facility.[20] Recently and more prominently, the United Nations Commission on International Trade Law (UNCITRAL) Working Group III has also been working on the ISDS reforms and has suggested:


(i) establishment of a multilateral investment court and/or

(ii) creation of an appeals facility.[21]


The authors will also be making suggestions basis the UNCITRAL Working Group III reforms.


3.1. Multilateral Investment Court


The rationale behind the establishment of a multilateral investment court (“MIC”) is the idea of setting up a permanent ICJ-like body that will be adjudicating upon appeals from all tribunals/institutions in ISDS. The establishment of MIC would be premised on a two-layered structure for dispute adjudication i.e., a first instance tribunal and an appellate tribunal which would comprise of permanent full-time members as the deciding authority on disputes referred. Sovereign states would be entrusted with the task of appointing the adjudicators and the non-state actors would be given the task of nominating or vetting the candidates. The members of the multilateral investment court would be expected to adhere to a strict code of ethical conduct while deciding disputes.


Nevertheless, the composition and the functioning of MIC is fraught with criticism and concerns. The premise of MIC is based on the ground that the disputing party would have little or no role in appointing the arbitrators and the discretion to appoint the arbitrator rests solely with the state. This is in stark contrast to the principle of party autonomy which forms the backbone of arbitration and may also push the investor to lose confidence in the system. Concerning enforcement, the ISDS awards are enforceable in nearly every state however, if and when the MIC is constituted, it is highly probable that the setting up of MIC could disrupt the established procedures of enforcement of arbitral awards as there is no clarity on whether or not the awards rendered by MIC would be enforceable in jurisdictions that have not consented to MIC.


3.2. Appeals Facility


A safer alternative to Multilateral Investment Court can be the establishment of an appeals facility within the ICSID Convention. In the normal course of proceedings in ICSID, an award made under the convention is binding on the parties and is not subject to any appeal and the only recourse available to parties is to file for annulment of the award. This can often lead to the party being left remediless, even if the award by the tribunal is based on an erroneous application of the law. However, an appeals facility within the ICSID would ensure that such questionable or faulty awards are subjected to an additional review and thus, providing the parties with an additional remedy. The appeals facility in ICSID can be based on the blueprint of WTO Appellate Body with an eminent pool of highly qualified and experienced arbitrators. An appeals facility, based on the lines of the dispute settlement system of WTO, would go a long way could help in dealing with the credibility crisis faced by the first instance tribunal. At this juncture, it is important to clarify that the establishment of an appellate body will not imply that the award rendered by the first instance tribunals lacks authority. In fact, the appeals facility by acting as a watchdog over the decisions rendered by the first instance tribunals will not only ensure that awards are rendered error-free but also will help in unifying the fragmented investment law jurisprudence.


Nevertheless, this is not to say that the appeals facility is completely fool-proof and in fact, this set-up is also plagued with certain disadvantages such as the elongated costs and duration of proceedings, additional caseload due to filing of review applications, etc. Questions pertaining to the extent and standard of review of the appellate tribunal have also been raised. Critics have also time and again argued the merits of annulment provision over an appeals facility. In the humble views of the authors, an appeals facility is desirable as the ICSID annulment committee does not possess the power to rectify mistakes in the award despite identifying one. Also, as per Article 52(3) of the convention, the power to constitute the ad hoc annulment committee given to the ICSID Chairman without consulting the parties to the dispute raises pertinent doubts about the constitution of the ad hoc committee.[22] An appeals facility after taking into consideration the practical challenges can be a wise choice to tackle these issues.


As regards the scope of review, the authors suggest that public policy should also be subject to appeal in addition to the grounds stipulated under Article 52. Public policy, one of the most important facets in any arbitration, has been excluded from the annulment grounds mentioned in Article 52 of ICSID when in fact, Article 34 of the UNCITRAL Model Law explicitly states that the arbitral award can be set aside if it conflicts with the public policy of the state. More so, whether the arbitral award violates public policy or not is a primary consideration for the national courts while hearing any appeals against the validity of the award.


Additionally, the authors suggest that a de novo appreciation of law and facts at an appellate stage would result in elongated proceedings and impose a heavy cost on the parties. Hence, only manifest errors of facts along with errors of law should be subjected to appeal. The authors also suggest that the appeals facility could also explore a possibility to limit the scope of an appeal to certain facets of law such as principles of expropriation, non-discrimination, fair and equitable treatment etc. Also, subjecting only manifest errors of fact would accord a degree of deference to the conclusions reached by the first-instance tribunal and would help in reducing costs and delays. Manifest errors would also help in guiding the appeals facility in determining if errors based on facts for ex., dishonest testimony, failure to take into account any document etc. have influenced the decision of the first instance tribunal. This is also supported by the fact that The Comprehensive Economic Trade Agreement (CETA) entered into between EU and Canada which aims to bring the agreement in consonance with the Investment Court system also signifies the need for an appellate structure that would allow appeals based on issues of law and manifest errors of facts.[23] The WTO Appellate body also has a dedicated self-contained appeals mechanism however, appeals can only be instituted based on an issue of law and not of facts. The Appellate Body also has the power to uphold, modify and even reverse the findings of the panel but the annulment procedure under ICSID is only limited to the watertight provisions which run contrary to the scheme of WTO appellate body which provides appeals on substantive issues of law and also on errors in the interpretation of WTO provisions, if any. On the contrary, the ICSID Convention is only concerned with the legitimacy of the process even if it results in an error of law while the WTO appellate body is also tasked with the review of panel decisions if they are based on an error in interpreting any WTO provisions.


In the humble views of the authors, despite the practical challenges posed by an appeals facility in ICSID, it remains a considerate choice as the parties would now have a remedy against awards that contain errors of law rather than just filing for an annulment of such awards. It would also help in ensuring consistency in the awards by setting up precedents for cases where the treaties are similarly worded and have identical facts. The appeals facility would help to enhance a great deal of confidence in the investment law system and would pave the way for a progressive investment regime.


4. Conclusion


The authors, through this piece, have endeavoured to discuss the idea of establishing an appellate structure in the ICSID, while shedding light on possible pros and cons of such a procedure. The authors have discussed that the setup of an appellate structure in ICSID can either be fulfilled through the establishment of a MIC or an appeals facility in ICSID, however, both the setups pose their own set of problems. It suffices to say that a decision on establishing an appellate structure will involve a discussion from all the stakeholders of ICSID which in itself is a daunting task. As a matter of fact, the ICSID itself had abandoned the idea of establishing an appeals facility in 2005 (a year after it had initiated such a discussion) citing such an attempt as “premature”.[24] However, with the upsurge in economic investments and ISDS, the time has become ripe enough for the ICSID to not only reinitiate the discussion but also to take active steps towards the establishment of an appellate structure.


[1] Aditya Rathore is a final-year student at NLU Odisha. He can be reached at rathore.aditya731@live.com. Amit Chawla is a law graduate and can be reached at­­­­ amit.chawla016@gmail.com. [2] UNCTAD, ‘Investor-State Dispute Settlement Cases Pass The 1,000 Mark: Cases and Outcomes in 2019’ < https://unctad.org/system/files/official-document/diaepcbinf2020d6.pdf> accessed 7 August 2021. [3] ICSID, ‘The ICSID Caseload-Statistics’ <https://icsid.worldbank.org/sites/default/files/Caseload%20Statistics%20Charts/The%20ICSID%20Caseload%20Statistics%202021-2%20Edition%20ENG.pdf > accessed 8 August 2021. [4] Pinsent Masons, ‘Record year for arbitration cases registered with ICSID’ <https://www.pinsentmasons.com/out-law/news/record-year-arbitration-cases-registered-icsid> accessed 8 August 2021. [5] Silvia Karina Fiezzoni, ‘The Challenge of UNASUR Member Countries to Replace ICSID Arbitration’ (2011) 2 BLR <https://file.scirp.org/pdf/BLR20110300004_33841852.pdf > accessed 7 August 2021. [6] Nicolas Boeglin, ‘ICSID and Latin America: Criticisms, Withdrawals and Regional Alternatives’ (bilaterals.org, June 2013 ) <https://www.bilaterals.org/?icsid-and-latin-america-criticisms> accessed 9 August 2021. [7] ‘UNCITRAL Working Group III: Reforms in the Realm of Investor-State Disputes - UNCITRAL’s Proposals for an Appeals facility and Its Impact on Duration and Cost’ (Kluwer Arbitration Blog, 26 March 2020) <http://arbitrationblog.kluwerarbitration.com/2020/03/26/uncitral-working-group-iii-reforms-in-the-realm-of-investor-state-disputes-uncitrals-proposals-for-an-appellate-mechanism-and-its-impact-on-duration-and-cost/> accessed 9 August 2021. [8] Thomas W Walsh, 'Substantive Review of ICSID Awards: Is the Desire for Accuracy Sufficient to Compromise Finality' (2006) 24 BJIL 444 accessed 7 August 2021. [9] CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8. [10] LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc .v. Argentine Republic, ICSID Case No. ARB/02/1. [11] SGS Societe Generale de Surveillance S.A. v. Republic of the Philippines, ICSID (W. Bank) ARB/02/6 [12] Societe Generale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID (W. Bank) ARB/01/13. [13] Christoph Schreuer, ‘From ICSID Annulment To Appeal Half Way Down The Slippery Slope’ <https://www.univie.ac.at/intlaw/wordpress/pdf/icsid_annulment_appeal.pdf> accessed 29 August 2021. [14] Klöckner Industrie-Anlagen GmbH and others v. United Republic of Cameroon and Société Camerounaise des Engrais, ICSID Case No. ARB/81/2. [15] Compañiá de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3. [16] Maritime International Nominees Establishment v. Republic of Guinea, ICSID Case No. ARB/84/4. [17] Tai-Heng Cheng, ‘Reconsidering ICSID Awards’ <http://arbitrationblog.kluwerarbitration.com/2011/05/11/reconsideringicsid-awards/> accessed 31 August 2021. [18] Thomas W Walsh, 'Substantive Review of ICSID Awards: Is the Desire for Accuracy Sufficient to Compromise Finality' (2006) 24 BJIL 444 accessed 7 August 2021. [19] Albert Jan van den Berg, ‘Appeal Mechanism for ISDS Awards: Interaction with the New York and ICSID Conventions’ (2019) 34 (1) ICSID Review <https://academic-oup-com.eres.qnl.qa/icsidreview/article/34/1/156/5637244> accessed 8 August 2021. [20] Secretariat, I.C.S.I.D., ‘Appeal Mechanism for ISDS Awards: Interaction with the New York and ICSID Conventions’ <https://icsid.worldbank.org/sites/default/files/Possible%20Improvements%20of%20the%20Framework%20of%20ICSID%20Arbitration.pdf> accessed 7 August 2021. [21] Secretariat, I.C.S.I.D., ‘Appeal Mechanism for ISDS Awards: Interaction with the New York and ICSID Conventions’ <https://icsid.worldbank.org/sites/default/files/Possible%20Improvements%20of%20the%20Framework%20of%20ICSID%20Arbitration.pdf> accessed 7 August 2021. [22] David Collins, ICSID Annulment Committee Appointments: Too Much Discretion for the Chairman? (2013), available: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2246756 [23] EU-CETA, Article 8.28.2 [24] Secretariat, I.C.S.I.D., ‘Suggested Changes to the ICSID Rules and Regulations’ < https://icsid.worldbank.org/sites/default/files/Suggested%20Changes%20to%20the%20ICSID%20Rules%20and%20Regulations.pdf> accessed 7 August 2021.

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