An appellate mechanism for review of arbitral decisions in investor-state disputes: prospects and challenges.

Author:Gantz, David A.


At a time when complaints and decisions in investor--state arbitration are proliferating as never before, concerns are being raised by the U.S. Congress, NGOs and some foreign governments over the lack of consistency (or serious errors) among the decisions that emanate from the largely ad hoc arbitral panels that are created under the provisions of bilateral investment treaties and the investment provisions of free trade agreements, such as NAFTA, Chapter 11. As a result, it is suggested that an appellate mechanism, perhaps patterned after the generally successful Appellate Body of the World Trade Organization, be created, possibly under the auspices of the World Bank's International Centre for the Settlement of Investment Disputes. The United States-Central American-Dominican Republic Free Trade Agreement is likely to be the locus of the first serious negotiation aimed at creating such a body, given that such negotiations are mandated under that FTA's provisions. The chances of success, however, particularly in the near term, may well be elusive, in view of the extensive legal and practical challenges to creating a well-functioning mechanism, and the divergent constituencies that would have to be satisfied.

TABLE OF CONTENTS I. THE GENESIS OF THE APPELLATE MECHANISM CONCEPT II. REVIEW OF ARBITRAL TRIBUNAL DECISIONS: THE GENERAL APPROACH A. Review of ICSID Arbitral Awards B. Court Review of NAFTA Chapter 11 Awards III. THE RATIONALE FOR AN APPELLATE MECHANISM IV. STRUCTURING AN APPELLATE MECHANISM: THE LEGAL AND PRACTICAL HURDLES A. Standard of Review: Level of Deference to Tribunals B. Procedural and Jurisdictional Issues C. Transparency of the Proceedings D. Bonding Requirements E. Choice of Law F. Structure and Membership of an Appellate Mechanism G. Conflicts of Interest H. Situs and Secretariat I. Modifications to Existing BITs and FTAs V. CONCLUSIONS AND RECOMMENDATIONS During the past few years there has been increasing discussion of a new "appellate body," or to avoid confusion with the World Trade Organization (WTO), an "appellate mechanism," for reviewing arbitral decisions in investor-state disputes. (1) While the current interest in the concept appears to have originated in the debate leading up to the United States' Trade Promotion Authority legislation of 2002, Professor Thomas Walde indicates that the idea dates back at least to 1991. (2) The most recent concrete proposal, subsequently recanted and now in limbo, was offered in an October 2004 International Centre for Settlement of Investment Disputes (ICSID) Secretariat document. (3)

The appellate mechanism issue, however, is no longer simply an academic or theoretical one. Once the United States-Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) (4) enters into force, presumably some time in 2006 for most of the signatories, (5) an annex to CAFTA-DR requires the parties to establish a negotiating group for an "appellate body or similar mechanism" within three months and to prepare a suitable amendment to CAFTA-DR within a year thereafter. (6) It is thus reasonably possible that some sort of more concrete proposal for an appellate mechanism will evolve in the CAFTA-DR context. If the process outlined in CAFTA-DR succeeds, there will be renewed pressure to agree on a similar mechanism on the parties to the North American Free Trade Agreement (NAFTA) (7) (United States, Canada, Mexico) and signatories to other recent U.S. bilateral investment treaties (BITs) and free trade agreements (FTAs) with investment provisions.

Actual implementation of an investment appellate mechanism for CAFTA-DR, NAFTA, or other FTAs or BITs is, of course, another matter entirely. Such a process, which requires an amendment to each of the agreements by each party through its constitutional processes, could take years to complete, or may never reach fruition. The controversial nature of the appellate mechanism and the political sensitivity, after CAFTA-DR, of submitting any trade agreement or amendment thereto to the U.S. Congress or other legislatures, make prompt creation of an appellate mechanism highly problematic, even assuming that the

CAFTA-DR negotiating group actually produces a "draft amendment" in a timely manner.

This Article discusses how the investment appellate mechanism concept originated; reviews the current "appeal" process for investor-state arbitral decisions, with particular attention to the three NAFTA Chapter 11 arbitral decisions that have been reviewed to date; sets forth the rationale supporting an appellate mechanism; and considers the key legal issues, standard of review, and other major political, procedural, and legal hurdles. The Article concludes with a few comments and recommendations.


    The current impetus in the United States for an investment appellate mechanism in investor-state dispute arbitration comes primarily from non-governmental organizations (NGOs), several domestic government agencies (e.g., Environmental Protection Agency and Department of Justice), and Congressional concerns regarding NAFTA Chapter 11. Chapter 11 contemplates the likelihood of disputes between a foreign investor or service provider and the host government or an agency. (8) Under Chapter 11, foreign investors may seek arbitration under Chapter 11 of any of the rights and obligations guaranteed in Section A: most favored nation treatment, fair and equitable treatment, freedom from export or local content performance requirements, the right to make most financial transfers, and restrictions against expropriation, whether direct or indirect. (9) Among the concerns that NGO and Congressional critics have raised is the claim that "normal" regulatory actions, including but not limited to those in the environmental or health fields, would constitute compensable takings. These issues were raised, inter alia, in Methanex Corp. v. United States (10) and Sun Belt Water v. Canada. (11)

    With regard to "regulatory" takings, the focus has been on Methanex. The Canadian firm Methanex challenged the action of the State of California in banning MTBE, a gasoline additive, because of the perceived risks of MTBE pollution of the underground water supply. (12) Methanex manufactured methanol, the principal ingredient in MTBE, and argued that the measures taken by California constituted a "substantial interference and taking of Methanex US' business and Methanex's investment in Methanex US. These measures were characterized both directly and indirectly tantamount to expropriation." (13) The original tribunal did not reach the question of whether California's action constituted a compensable taking under Article 1110; it dismissed the original complaint on grounds that the connection between the California MTBE ban and Methanex's operations was not "legally significant" enough to satisfy the "relating to" language in NAFTA Article 1101. (14) All claims against the United States contained in a revised claim, both jurisdictional and substantive, were also dismissed; the United States was awarded attorneys' fees and court costs that will likely exceed $4 million. (15)

    The concerns raised by Methanex were thus ultimately unfounded. NGOs and other NAFTA critics, however, continue to argue that were a future tribunal reviewing similar facts to require compensation, it could lead to a chilling effect on national and state government regulation in these areas. (16) Some, including a majority of the Congress, as noted below, have felt that an appellate mechanism to review investment decisions could deal with the possible "rogue" arbitral decision, although others have argued that this would not be a panacea for the many perceived shortcomings of Chapter 11. (17) Whether members of the business investment community will support the idea of an appellate mechanism remains to be seen. Presumably, this will turn in large part on the following factors: the scope of appellate review; the likelihood that payment of an award will not be unduly delayed by appeal, as has happened on some occasions with the ICSID Annulment Committee Process (Annulment Committee) (18); the belief by some claimants that "betting the farm" high-stakes arbitrations of very complex matters require a solid and predictable appellate process (19); and whether support for such a mechanism might head off efforts to substantively weaken the Chapter 11 protections in subsequent BITs and FTAs. The objectives of the proponents for an investment appellate mechanism, however, are clearly broader than these concerns. Supporters of an investment appellate mechanism desire greater consistency among the increasing volume of ICSID, UNCITRAL, and other investment tribunal decisions (20) that are increasingly adopting conflicting interpretations of similar treaty provisions on "fair and equitable treatment" or indirect expropriation. (21)

    The most extreme example of such conflicting interpretations is evident in the "Lauder" cases, which involved a dispute between a U.S. investor and the Czech Government. One action was brought in London by Ronald S. Lauder under the United States-Czech BIT, while the other was brought in Stockholm by CME Czech Republic B.V. (a Dutch company owned by Lauder) under the Netherlands-Czech BIT. The two tribunals reached radically different results despite the similarity of the two BITs; most significantly, the London tribunal declined to find an expropriation, while the Stockholm tribunal, on the same facts, determined that an expropriation had indeed taken place. (22) On review of the Stockholm decision, a Swedish court concluded that it lacked jurisdiction to reconcile the two decisions, in part because the awards involved different parties (Lauder in the London action and the Dutch company in the Swedish case). (23) Numerous other conflicts, however, exist among tribunals considering the same BIT language. (24)

    For many...

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