Alternatives to investor-state arbitration in a multipolar world.

Author:Appleton, Barry
Position:International Law in a Multipolar World

This panel was convened at 9:45 am, Thursday, April 4, by its moderator, Jason Yackee of the University of Wisconsin-Madison, who introduced the panelists: Barry Appleton of Appleton & Associates; Andrea K. Bjorklund of the University of California at Davis School of Law; Cliff Manjiao Chi of Xiamen University Law School; and Celine Levesque of the University of Ottawa. *

The Song Is Over: Why It's Time to Stop Talking About an International Investment Arbitration Appellate Body

By Barry Appleton ([dagger])

My goal today is to stimulate scholarly discussion on one of the most contentious issues that has arisen out of investor-state arbitration: the creation of an international treaty arbitration appellate body. This longstanding debate has focused on a perceived lack of consistency within international investment arbitration decisions and a need to have an appellate body (or even some form of appellate investment treaty court) available to discipline "rogue tribunals" which venture outside of the terms of the international economic law treaties. I am suggesting that these types of appellate bodies are unnecessary and in any event, likely a very bad idea. I suggest that it is time to put this discussion to rest and instead to focus on the pernicious underlying symptoms which led us all to consider appellate mechanisms.

When one considers the implementation of an appellate body in the context of nearly three thousand international economic law treaties, the mechanics suggested seem simply unworkable. In my view, there are insurmountable impediments to the creation of an international investment law appellate body. For example, in 2002, the U.S. Trade Promotion Act enabled the creation of an appellate body in future trade agreements. (1) This legislation provided a three-year window to enable the creation of appellate body mechanisms. Despite the legislative capacity, there was no appetite for such a process. During this three-year period, no agreements were negotiated with appellate bodies. So the challenge of discussing the operation of such an appellate body mechanism is simply that no international investment treaty appellate body has been created.

There are solid reasons why no international investment treaty appellate bodies currently exist. To be effective, an appellate body would require a wholesale amendment to the ICSID Convention--an arduous task with a low probability of success within a short period of time. The ICSID ad hoc annulment committee function is quite different from that exercised by an appellate body and incompatible with the functions of an appellate body. The ICSID system is self-contained and is essentially premised on the fact that ICSID panel decisions are controlled through an ad hoc annulment system. Antonio Parra, a former deputy Secretary-General of ICSID, was the author of a thoughtful discussion paper which considered ways in which ICSID could use its rules to effectively implement an appellate body. (2) Parra's paper concluded that such a process could actually take place in the absence of an amendment to the ICSID Convention through a general inter se agreement between state parties to go to an appellate body after the tribunal of first instance. (3) Such an approach has challenges in that it must modify the ad hoc annulment process in ICSID to have it operate as an appellate mechanism. This route does have its challenges. (4)

The World Trade Organization (WTO) has recently permitted the public to sit in on some of its appellate body hearings. I attended such a public hearing of the WTO Appellate Body, which provided an opportunity to observe a previously closely guarded process that the public generally does not have an opportunity to see. I witnessed the hard work done by the WTO Appellate Body to find consistency within the WTO's international economic law decisionmaking. An appellate body is best suited to address questions where there is substantial similarity in investment obligations between the parties. This is the case at the WTO. This could also be the case where there is a series of investment protection agreements based on the same model treaty, or a multilateral agreement such as NAFTA. In these situations, there is a possibility that an appellate body could be structured to make that work. But even in these cases where there is sufficient similarity in the substantive obligations of the treaties, there still are real questions about the practicalities of an appellate body. For example, would an appellate mechanism create two classes of arbitrators, with junior and senior arbitrators much like one finds in municipal appeals courts? This also raises the concern of whether this new process would disrupt the overall effectiveness of international economic law adjudication.

This is not to say that creating an appellate body within the constraints of current international investment treaties is impossible, but that it is difficult. There are ways to integrate an appellate system into some existing regional international investment treaty agreements. For example, NAFTA could permit the creation of an appellate body in the event that the treaty was amended. Regional investment treaties could also permit the creation of appellate mechanisms. But in every set of existing treaties, there are practical and political difficulties in modifying the treaty that hardly makes the creation of an appellate body worth the cost.

This review of the objectives that could be remedied by an appellate body necessitates a more fundamental consideration of the question about whether there really is a problem that needs to be addressed by an appellate body. My answer to this question is no.

Much of the current debate about an appellate body has actually been misplaced by having a focus on whether a particular tribunal or a particular arbitrator has had "pro-investor" or "pro-state" leanings. This simplistic two-sided view of international economic law is inadequate to explain how an appellate body might actually operate. At its most basic, this bipolar view is fundamentally the wrong dialectic lens to consider this area of the law. Such a view creates a series of questions and approaches that are irrelevant to the fundamental issue to be addressed. This is where the problems do arise.


States have negotiated treaties. These same states expect tribunals to give effect to the words of the treaty when they are interpreted as these words were carefully negotiated. But often tribunals ignore the wording in the treaty. A failure properly to interpret the words of a treaty can easily result in inconsistent decisions between tribunals considering the same substantive treaty provision. It can also result in an excess of jurisdiction or an error of law.

Many of the problems arise fundamentally from the lack of proper application of international law. Fundamental and basic concepts such as those contained in the Vienna Convention on the Law of Treaties and the ILC Draft Articles on State Responsibility are often not followed in the interpretation of international economic law treaties. When the proper rules of international law have not been applied, or are applied inconsistently or improperly, there is going to be a problem. By the time an appellate body is in place, the damage by the tribunal has been done. Appellate mechanisms were to address this type of fundamental problem where the rule of law is ignored because customary rules of international law have not been applied. In essence, this is a system where carelessness and lawlessness, rather than the application of the rule of law, applies.

The fundamental concern that needs to be addressed is to ensure that high standards of professionalism and competence are maintained by these international economic law tribunals. The issue is not really about the need for an appellate body. Instead, the need is to ameliorate the tribunal process. An improved process starts with having tribunals comprising the best possible arbitrators, who are ready to address the issues in a dispute based on the application of rules of international law to the terms of the particular treaty at issue.

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