UPDATE ON THE FUTURE OF ISDS: WORKING GROUP III UNCITRAL DISCUSSIONS OF FEBRUARY 2021

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 40^th 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.