Finality versus consistency: does investor-state arbitration need an appellate system?

AuthorLaird, Ian
  1. INTRODUCTION

    Investor-state arbitration is so new that the vast majority of claims and decisions in this area have only occurred in the last six or seven years, and many areas of the law and procedure remain to be developed. The combination of international commercial arbitration procedure (1) and the substantive obligations arising under public international law (2) has created many challenges for those interested in the development of this new and fast-growing area of the law. Many of these challenges relate to the application of fundamental principles of the administration of justice. One such challenge is deciding whether there is a need for an appellate mechanism in investor-state arbitration.

    There are over 2,200 Bilateral Investment Treaties (BITs) in the world today. (3) These international instruments provide foreign investors with a direct means for redress against states for breaches of international law obligations. This is referred to as "investor-state arbitration." (4) The provisions found in Chapter 11 of the North American Free Trade Agreement (NAFTA) (5) are a well-known example of this type of instrument. BITs, like the provisions in NAFTA's Chapter 11, are not homogenous and provide ample room for a diversity of tribunal opinions. With an explosion of investor-state disputes and new decisions arising from those arbitrations, concern has developed over whether there are sufficient means to assure consistency and correctness in the ad hoc arbitral process. This concern cuts to the heart of what is clearly one of the fundamental features, and benefits, of arbitration: finality. The debate divides scholars and practitioners into two camps, one consisting of those who believe it is more important to have an arbitration process that provides finality, and one composed of those who advocate that consistency and correctness in decisionmaking should be the primary objective of the process. (6)

    The drive towards an appellate mechanism is partly in response to the fact that, in three recent cases, domestic courts in Canada have been effectively asked to help in determining the future viability of investor-state arbitration. In addition, powerful political influences intent on preserving American sovereignty have targeted investor-state arbitration as a threat, thus helping to force the issue to the fore.

    The substantive portion of this paper is divided into three parts. The first two parts examine the main impetuses for a new investor-state appellate mechanism, with Part II providing a brief overview of the judicial review of NAFTA Chapter 11 in the Canadian Courts, and Part III containing a discussion of the push in the United States to add an appellate mechanism to the investor-state arbitration process. Finally, Part IV explores some of the key issues in the creation of a new appellate mechanism.

  2. JUDICIAL REVIEW OF INVESTOR-STATE AWARDS UNDER THE NAFTA

    First, we look to NAFTA Chapter 11 as one of the key elements of this unfolding drama. Under NAFTA, which is procedurally based on the model of international commercial arbitration, a judicial review of an arbitral award can be initiated by a disputing party in the national courts of the place of arbitration under the local law of that jurisdiction. Once review is initiated in the national courts, the challenging party can seek to vacate or annul the award.

    In the early 1990s, the drafters of NAFTA Chapter 11, like the drafters of other BITs, decided to adopt many elements of the international commercial arbitration model into the procedures of those arbitrations. This likely seemed a workable and balanced model with the appropriate safeguards. It had the benefits of adopting a well thought out system without the need of creating a new process. It recognized the inherent flexibility of arbitration and was consistent with the way these things had been viewed with regard to other BITs. Under NAFTA Article 1120, claimants may choose from one of two basic sets of rules, the UNCITRAL Arbitration Rules (7) and the rules of the International Centre for the Settlement of Investment Disputes (ICSID). (8)

    The UNCITRAL Arbitration Rules, originally designed for commercial arbitration, are presently being used in a variety of investor-state arbitrations. In international commercial arbitration, as in much of investment arbitration, the only permissible review is by a domestic court at the place of arbitration. The standard of review under the UNCITRAL Model Law Article 34(2), (9) which has been applied in Canada in these judicial reviews, is limited to six grounds: (1) invalidity of the agreement to arbitrate; (2) lack of notice to a party or other inability to present the case; (3) inclusion in the award of matters outside the scope of submission; (4) irregularity in the composition of the tribunal or arbitral procedure; (5) nonarbitrability of the subject-matter; and (6) violation of domestic public policy. This type of challenge does not extend to the review of errors of law, or a review of the application of the facts to the law. It is not an appellate style review.

    The determination of the place of arbitration, or the lex loci arbitri, thus becomes critical to the determination of judicial review and enforcement. (10) If one is going to ask a domestic court to review an international arbitral decision, the claimant in particular wants to be sure that it will receive a fair hearing. Of course, this adds an element of forum shopping. (11)

    The main exception in investment arbitrations is the example of the ICSID Convention. The review process for arbitrations under the ICSID Convention is an internal annulment process pursuant to Article 52, (12) but has similar standards to that of a judicial review under the UNCITRAL Model Law or New York Convention. (13) Disputes can go to ICSID where arbitration is entirely removed from the domestic court system. Whereas an appeal is concerned with the substantive correctness of the decision and a court is permitted to substitute its view, annulment voids a decision in whole or in part and sends the case back to a new tribunal for a new decision. (14)

    Underlying the judicial review and annulment processes is implicit support for the concept of finality. This is such an important benefit of arbitration because it is understood that the decision of the tribunal is the final word on the facts and law of the case before it. This provides a great deal of predictability to the process. There is no appeal to a superior body, unlike in domestic court systems, or as in the international context, the World Trade Organization's Appellate Body.

    The balancing of finality with consistency and correctness hits the wall at this point. Is justice being met when there is no second opinion on the issues of fact and law of an arbitration? Are other values, such as correctness and consistency, in conflict with the benefits of finality? This brings us to the part of the story involving domestic courts and one of the main arguments that is being made for the need of an appellate-style review of investment awards.

    For those in the "correctness and consistency" camp, judicial review is simply an insufficient level of review. There is evidence, as discussed below, that the NAFTA governments take this point of view. It appears that they are looking for a safeguard that provides a high level of consistency, with the equivalent of a full standard of appellate review. However, if the intent is that the courts are only permitted a limited scope of review, as was contemplated in the UNCITRAL Model Law or the New York Convention, then clearly domestic courts are entirely appropriate for the task.

    The first judicial review of a NAFTA Chapter 11 arbitral award occurred in British Columbia in May 2001 with the review of the final award in the Metalclad Corporation v. Mexico arbitration. (15) There have subsequently been two further judicial reviews of the final awards in the Feldman v. Mexico and S.D. Myers v. Canada arbitrations. All three claims were initially brought under the NAFTA's Chapter 11 provisions. The latter two judicial review processes were concluded in January 2005 and January 2004, respectively. (16)

    The Metalclad judicial review decision is controversial and has been the subject of a great amount of discussion and angst in the Canadian arbitration community. The consensus opinion about that award is that it was not supportive of arbitration in Canada. More directly, some criticized Judge Tysoe for saying the right things in his decision, but failing to apply the law consistently with the spirit of deference to arbitral awards. He "talked the talk," but did not "walk the walk." (17)

    As a result of the adoption of the UNCITRAL Model Law in British Columbia in 1986, (18) which was about when most other provinces in Canada also adopted it, and the New York Convention, a pro-arbitration policy position was adopted by Canadian governments, and then subsequently by the courts. (19) Such earlier court decisions as Quintette Coal Ltd. v. Nippon Steel Corp. (20) demonstrated this pro-arbitration position in a very concrete manner. (21) One of the key elements of the adoption of the UNCITRAL Model Law and the New York Convention is the deference accorded to arbitral awards.

    However, a very real concern arose in all three of the NAFTA judicial review cases with respect to the position of the Governments of Canada and Mexico on this point of deference. In each of the cases, strong arguments were made that the courts should not use the usual standard of review applied to commercial arbitration awards, and that the courts ought to show very little deference to the decisions of NAFTA panels. Arguments advanced by Canada and Mexico indicated a standard that would have effectively...

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