The ICLRC took part in the discussion of the appellate mechanism at the 8th intersessional meeting of UNCITRAL Working Group III

On 24–25 October 2024, in Chengdu, China, the International and Comparative Law Research Center (ICLRC) took part as an observer in the 8th intersessional meeting of UNCITRAL Working Group III. The Center was represented by expert Ekaterina Petrenko.

The main focus of the intersessional meeting was the discussion of the appellate mechanism, the creation of which is being considered as part of the work on the reform of the ISDS system (the draft statute of a standing mechanism for the resolution of international investment disputes, “Draft statute” (A/CN.9/WG.III/WP.239)). During the intersessional meeting, visiting experts made presentations. There were organised the round tables as well so that delegates of member States of Working Group III could informally discuss the issues raised. 

It was noted that in the current system, tribunals can make conflicting decisions. So, this may encourage states to return to resolving disputes in national courts. On the other hand, not all cases of inconsistency constitute a problem, since the ISDS system is characterized by a variety of sources and applicable rules. We are talking only about cases when the same rule is interpreted differently by tribunals for no valid reason.

Using the WTO Appellate Body as an example, it is possible to trace the conditions under which the appellate mechanism can help achieve the goals of reform. In particular, experts proposed to narrow down the grounds for appeal, introduce an interim review of appellate decisions (following the example of the existing practice of interim review of arbitral panel reports in the WTO), encourage internal discussions between panels of appellate judges, and also make decisions by consensus among judges and dissenting opinions, including anonymous ones. To achieve consistency in practice, there was a suggestion to create a database of appellate rulings that would serve as a guide for first-tier tribunals.

In conclusion of the first part of the expert discussion, it was noted that the appeal is only part of the reform and should be integrated into the existing ISID system. In particular, the reform has to correct a number of shortcomings, but not to create a new system.

During the next session, the experts discussed the impact of the appellate mechanism on proceedings in the first tier and on the arbitral award, as well as on other proceedings. It was noted, in particular, that, unlike annulment, reviewing a decision on appeal can change the conclusions of the decision. Accordingly, it is necessary to clearly define the powers of the appellate court if an error is found, — can it independently analyze the case to correct the error or does it need to return the case for consideration by the first-tier tribunal? According to experts, the appellate mechanism should be authorized to independently correct the error based on the materials of the case in order to ensure the efficiency of the process and minimize costs. However, in some cases, it is advisable to return the decision to the first-tier tribunal with appropriate instructions. There may also be situations in which the error is so significant (for example, lack of independence and impartiality of arbitrators) that an appeal cannot either correct it independently or return the case to the first-tier tribunal. In such a case, the solution is to file a claim for a new hearing (following the example of Rule 74 of the ICSID Arbitration Rules).

In this vein, one of the experts proposed to lay down the conditions under which the case is returned to the first-tier tribunal (for example, the absence of facts sufficient to correct the error by the appellate judges, the emergence of new legal issues). It was also noted that it is worth providing for the discretion of the appellate court, rather than its obligation, to return the case.

During the discussion, experts raised the question of whether the appeal should replace the annulment mechanism or coexist with it. Both annulment and appeal will increase the fragmentation of the ISDS system. At the same time, it remains unclear whether all errors that give rise to grounds for annulment (e.g., contrary to public policy) will be taken as grounds for appeal. If not, it may be difficult for States to accept the possibility of substituting the annulment of decisions with an appeal.

At the roundtable, delegates of the member states and the observers discussed the issues raised in the presentations of experts and in the Draft Statute. The discussion began with models of the future appellate mechanism (ad hoc or standing mechanism). Delegates noted the pros and cons of each model. Thus, compared to standing mechanism, an ad hoc appeal will not lead to a comparable level of consistency in practice and is more difficult to ensure its functioning. Some delegates also noted that the correctness of decisions can be ensured in the ad hoc model as well. During the discussion, a hybrid version of the functioning of the appellate mechanism was proposed. It includes judges working on a permanent basis and judges appointed ad hoc (from the list). In the end, the chair invited delegates to consider key components for building an appellate mechanism by the next session of the Working Group.

Delegates also paid attention to the grounds for appeal. At the moment, these include errors in law and facts, as well as some grounds borrowed from traditional grounds for annulment of the decisions. A number of delegations criticized the proposed list of errors. They emphasized that some errors may fall under several grounds at once with different assessment standards (for example, clear abuse of authority and error in law). They also noted that some grounds are not suitable for appeal in the ISDS system (for example, public order).

Having joined the discussion, the Center's expert underlined that the inclusion of existing grounds for annulment of the decisions in the list of grounds for appeal should be carefully considered. The institution of annulment is fundamentally different from an appeal. When using grounds of appeal similar to those of annulment, the appellate judiciary may be inclined to rely on the practice of tribunals that had a limited mandate to address a narrow range of errors. In this regard, when transferring the grounds, conditions should be laid down under which the appellate mechanism will be cautious in substantiating its conclusions with the practice of annulment.

The delegates also discussed what meaning the appeal decisions would have for individuals not participating in a particular dispute (for example, for another party to an investment treaty or for parties to an investment treaty with language identical to the one on which the appeal decision was made). A number of delegations emphasized the importance of appellate judges taking into account joint statements by parties to an investment treaty on the interpretation of provisions of such a treaty when considering a dispute. Also, some delegates noted that parties to the statute of the appellate mechanism may be interested in the interpretation of the provisions of the statute and judicial practice on the interpretation of similar provisions in investment treaties. Such states (not involved in the dispute) should also be given the opportunity to file applications (for example, amicus curiae). At the same time, it is necessary to work out a mechanism for filing such applications and, in particular, the way they correlate with the confidential nature of proceedings.

The issues of the appellate mechanism raised at the intersessional meeting will be considered at the upcoming session of Working Group III in January 2025. The Center continues to closely monitor the progress of work within the Working Group and participate in discussions as an observer.