International Arbitral Appeals: What Are We So Afraid Of?

27 Pages·2014·1.4 MB·English

by  Erin E. Gleason

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Volume 7 Issue 2 Article 5
2-1-2007
IInntteerrnnaattiioonnaall AArrbbiittrraall AAppppeeaallss:: WWhhaatt AArree WWee SSoo AAffrraaiidd OOff??
Erin E. Gleason
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Erin E. Gleason, International Arbitral Appeals: What Are We So Afraid Of? , 7 Pepp. Disp. Resol. L.J. Iss. 2
(2007)
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Gleason: International Arbitral Appeals: What Are We So Afraid Of?
[Vol. 7: 2, 2007]
PEPPERDINE DISPUTE RESOLUTION LAW JOURNAL
International Arbitral Appeals: What
Are We So Afraid Of?
Erin E. Gleason
I. INTRODUCTION ...................................................................................... 4
II. INTERNATIONAL TRADE APPEALS PROCESSES ...................................... 8
W TO Ap pellate Body ....................................................................... 8
Other Trade-Related Arbitral Appeal Procedures ................................. 11
Advantages of International Trade Appellate Processes .................. 14
III. THE CASE FOR ARBITRAL APPEALS IN INVESTOR-STATE
A RB ITRA TIO N. ............................................................................................... 15
IC S ID ............................................................................................. .. 15
N AF T A ........................................................................................... .. 18
Effect of Insufficient Review of Investor-State Arbitration .............. 19
Recommendations for Providing Appellate Review of Investor-
State A rbitration ................................................................................ 25
IV. INTERNATIONAL COMMERCIAL ARBITRATION AND THE POSSIBILITY
FOR A PPELLATE REVIEW .............................................................................. 26
Existing Appellate Mechanisms for Review ff International
Com me rcial A w ards ...................................2.7......................................
Domestic Appeals Processes .................................................... 28
Institutional Scrutiny of Awards ............................................... 30
Institutional Appellate Review ................................................ 32
Recommendations for Providing Appellate Review of
International Commercial Arbitration .............................................. 33
V . C ONCLUSION ..........................................3.5..............................................
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I. INTRODUCTION
Appellate practice in international arbitration presents a paradox. It is,
at once, an accepted practice and a forbidden system. The status it holds de-
pends on the forum in which the parties find themselves, and the type of dis-
pute they seek to resolve. Commodity trade associations provide for arbitral
appellate processes, and on a much grander scale, international trade dis-
putes are regularly reviewed by the World Trade Organization's ("WTO")
internal Appellate Body. Commercial disputes in France, Belgium and
South Africa are eligible for institutional appeal and the incorporation of an
appellate mechanism is currently under review for some bilateral investment
treaties (BITs) and multilateral investment treaties (MITs). However, most
parties to international commercial and investor-state arbitration have no op-
portunity to appeal arbitral awards.
The past decade saw a dramatic upsurge in the adoption of BITs and
MITs. At the close of the 1980s, there were 385 BITs in existence;' by the
end of 2004, over 2,000 had been embraced. As a result, the number of in-
ternational investment disputes also increased.3 Claims filed before the In-
ternational Centre for Settlement of Investment Disputes (ICSID) have in-
creased exponentially.4 From its creation in 1965 through 2002, ICSID
registered 85 investor-state disputes and 10 Additional Facility cases.5
Since 2002, ICSID's case load has nearly doubled.6
Parties are increasingly considering the inclusion of an appellate mecha-
nism within BITs and MITs, as evidenced by some of the more recent trea-
ties.7 However, neither ICSID nor most other institutional providers of in-
ternational arbitration have adopted rules relating to appellate processes in
international investment dispute arbitration. Despite some discussion to
1U nited Nations Conference on Trade and Dev. (UNCTAD), Bilateral Investment Treaties 1959-
1999 (2000).
2 International Institute for Sustainable Development, Investment and Sustainable Development, A
Guide to the Use and Potential of InternationalI nvestment Agreements (2004).
3 International Center for Settlement of Investment Disputes, Possible Improvements for the Frame-
work of ICSID Arbitration, ICSID SecretariatD iscussion Paper (October 22, 2004).
4id.
5 Id.
61id.
7 See, e.g., Jack J. Coe, Jr., The State of Investor-State Arbitration--Some Reflections on Professor
Brower's Pleaf or Sensible Principles, 20 AM. U. INT'L L. REv. 929, 950-51 (2005) ("[T]he United
States has agreed respectively with Singapore, Chile and its CAFTA counterparts that by dates cer-
tain, establishment of an appellate mechanism will at least be given consideration.").
8 See United Nations Comm'n on Int'l Trade Law [UNCITRAL] Arbitration Rules, art. 32.2 ("The
award shall be made in writing and shall be final and binding on the parties. The parties undertake to
carry out the award without delay."); London Court of Int'l Arbitration [LCIA] Arbitration Rules,
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include an appellate process within the ICSID and UNCITRAL Rules,9 no
such procedure has been adopted to date.
Further, while some review mechanisms have been instituted in interna-
tional commercial arbitration, there are only limited provisions for appellate
review of these awards. For example, the International Chamber of Com-
merce, Judicial Arbitration & Mediation Services, Inc. (JAMS) and the
China International Economic and Trade Arbitration Commission require
that arbitral tribunals submit draft awards to review committees for scru-
tiny. 10 As shall be discussed, these requirements should not supplant an ap-
pellate process.
The absence of arbitral appeals processes adversely impacts the legiti-
macy of international arbitration. As the frequency of cross-border transac-
art. 26.9 ("All awards shall be final and binding on the parties. By agreeing to arbitration under these
Rules, the parties undertake to carry out any award immediately and without any delay (subject only
to art. 27); and the parties also waive irrevocably their right to any form of appeal, review or re-
course to any state court or other judicial authority, insofar as such waiver may be validly made.");
China Int'l Econ. and Trade Arbitration Comm'n [CIETAC], Arbitration Rules, art. 43.8 ("The arbi-
tral award is final and binding upon both parties. Neither party may bring a suit before a law court
or make a request to any other organization for revising the award."); Am. Arbitration Ass'n [AAA],
InternationalA rbitration Rules, art. 27.1 ("Awards shall be made in writing, promptly by the tribu-
nal, and shall be final and binding on the parties."); Mexico City Nat'l Chamber Of Commerce
[CANACO], ArbitrationR ules, art. 39.2 ("The award shall be issued in writing and shall be final and
binding upon the parties.); Austl. Ctr. for Int'l Commercial Arbitration [ACICA], Arbitration Rules,
Section V, art. 43.3 ("To the extent permitted by the law of the seat of the arbitration, the parties
shall be taken to have waived any right of appeal or review in respect of any such decisions made by
ACICA to any State court or otherjudicial authority.").
9 Eric van Ginkel, Reframing the Dilemma of ContractuallyE xpanded Judicial Review: Arbitral Ap-
peal vs. Vacatur, 3 PEPP. DIsP. RESOL. L.J. 157, 203 (2003) ("Notably, the delegation for the United
Kingdom pointed out that '[w]hilst thoroughly understanding the point of view that the parties
should not be compelled to submit to recourse on questions of law, the United Kingdom suggests
that the logical consequence of party autonomy is that they should be allowed to have recourse, if
that is what they have agreed."' (quoting F. Davidson, The New Arbitration Act -A Model Law?,
1997 J. Bus. L. 101,125)).
10 ICC, Rules of Arbitration, art. 27, available at http://www.iccwbo.org/
court/english/arbitration/rules.asp (last visited Mar. 29, 2007) (hereinafter ICC), provides for scru-
tiny of the Award by the Court (emphasis added). See also CIETAC Arbitration Rules, art. 45,
available at http://www.cietac.org.cn/english/rules/rules.htm (last visited Mar. 29, 2007) (hereinafter
CIETAC), which states that "[t]he arbitral tribunal shall submit its draft award to the CIETAC for
scrutiny before signing the award. The CIETAC may remind the arbitral tribunal of issues in the
award on condition that the arbitral tribunal's independence in rendering the award is not affected.").
See also JAMS International Arbitration Rules, art. 32.3, available at http://www.jamsadr.com/
rules/international -arbitration rules.asp (last visited Mar. 29, 2007) (hereinafter JAMS International
Arbitration Rules), which provides that, "Before signing any Award, the Tribunal will submit it in
draft to JAMS. JAMS may suggest modifications as to the form of the Award and may also draw
the Tribunal's attention to points of substance. No Award will be rendered by the Tribunal until it
has been approved by JAMS as to its form."
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tions continues to increase, parties have evidenced a need for meaningful re-
view of arbitral awards.l' Many of the disputes arising from these transac-
tions present stakes too high to forbid opportunities for correction of flawed
results. 1 Indeed, in a "survey of 606 corporate lawyers from America's
largest corporations, 54.3% of those who chose not to opt for arbitration said
that choice was made largely because arbitration awards are so difficult to
13
appeal."
The lack of an appellate process has also resulted in a lack of public
confidence in international arbitral systems. The potential for inconsistent
awards in investor-state disputes, for example, may also "affect foreign in-
vestment decisions, economic development and foreign relations. For in-
vestors, this means investment uncertainty.
This article will explore the advantages of instituting appellate mecha-
nisms in investor-state disputes and international commercial arbitration.
Part II begins with a review of the WTO Appellate Body's development and
workings, followed by an analysis of other appellate procedures for interna-
tional trade law arbitration, including the MERCOSUR system's Permanent
Court and the Grain and Feed Trade Association's appeals process. These
examples demonstrate successful appeals processes within the international
realm, which can serve as models for investor-state and international com-
mercial arbitration appeals. Part III examines the current methods for re-
viewing investor-state arbitration awards under ICSID and NAFTA. Neither
system provides an effective method for appealing arbitral awards. The lack
of such a structure has a deleterious effect on the development of a reliable
and consistent body of law in this area. Part III goes on to advocate for the
creation of an Appeals Facility, separate from current arbitral institutions,
which would be empowered to hear appeals in investor-state arbitrations.
Part IV studies the lack of appellate practice within international commercial
arbitration. This section examines current domestic appeals processes
within the US and institutional scrutiny of awards. After analyzing exam-
ples of Austrian, South African and French institutional appellate proce-
" William H. Knull, III & Noah D. Rubins, Betting the Farm on InternationalA rbitration: Is it Time
to Offer an Appeal Option?, I I AM. REV. INT'L ARB. 531, 531 (2000).
12 Id. at 532.
13 See CHRISTIAN BCTHRING-UHLE, ARBITRATION AND MEDIATION IN INTERNATIONAL BUSINESS,
404 (1996) ("The study revealed that of twelve potential barriers to choosing arbitration, corporate
counsel named only the unwillingness of the other party to agree to ADR as more significant than
the lack of appeal. In another study that polled about fifty American and European lawyers, arbitra-
tion commentators, and corporate executives, about one-third stated that the absence of appeal was
not an advantage to arbitration, while another third declared that this was a 'highly relevant' advan-
tage to private dispute resolution.").
14 Susan D. Franck, The Nature and Enforcement of Investor Rights Under Investment Treaties: Do
Investment Treaties Have a Bright Future, 12 U.C. DAVIS J. INT'L L. & POL'Y 47, 57 (2005).
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dures, Part IV argues that the lack of these processes in other jurisdictions
must be remedied in the interests of efficiency and party autonomy. Part V
concludes that parties should be permitted to participate in appellate review
of arbitral awards, if they so choose.
II. INTERNATIONAL TRADE APPEALS PROCESSES
Appellate review of international trade disputes is well established. Not
only has the WTO Appellate Body been in existence for more than a decade,
but smaller trade organizations have also provided appeals of arbitration
awards.' 5 Further, the Southern Common Market, or MERCOSUR, has also
incoTorated an optional appeals court within its dispute resolution proce-
dure. 6 This section reviews how these systems have been implemented and
analyzes their effectiveness in providing for a consistent and reliable body of
trade law. This discussion shall inform the need for a formal appellate re-
view procedure within other areas of international arbitration.
WTO Appellate Body
In February 1995, the WTO Dispute Settlement Body ("DSB") provided
for the creation of an Appellate Body, a Rermanent international tribunal
which hears appeals of WTO panel reports. It is comprised of seven mem-
bers; three members are assigned to hear each appeal, on rotation.18 To en-
sure for a reliable appellate process, members are required to discuss each
case with the other members of the Appellate Body, who were not selected
to hear the appeal. '9 An award is only rendered after this exchange.2°
'5 WTO, UNDERSTANDING ON RULES AND PROCEDURES GOVERNING THE SETTLEMENT OF DISPUTES
(DSU), art. 17 (1995).
16 UNCTAD, COURSE ON DISPUTE SETTLEMENT ON INTERNATIONAL TRADE, INVESTMENT AND
INTELLECTUAL PROPERTY, REGIONAL APPROACHES, MERCOSUR, at 20, available at
http://www.unctad.org/en/docs/edmmisc232add28-en.pdf at 27 (last visited Mar. 29, 2007).
17See WTO, Understanding on Rules and Procedures Governing the Settlement of Disputes (herein-
after DSU), art. 17 (1995) (The WTO dispute settlement system has jurisdiction over any dispute
between WTO Members arising under the WTO agreements contained within Appendix I to the
DSU, including the WTO Agreement, the GATT 1994 and all other Multilateral Agreements on
Trade in Goods, the GATS, the TRIPS Agreement and the DSU.); see also UNCTAD, Course on
Dispute Settlement, WTO, Module 3.1, Overview (2003), http://www.unctad.org/
en/docs/edmmisc232addl ILen.pdf (last visited Mar. 29, 2007).
18W TO, Working Procedures for Appellate Review, Rule 6(1).
'9 Id. Rule 4(3) states, "Each Member shall receive all documents filed in an appeal. A Member,
who has a conflict of interest, shall not take part in the exchange of views."
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In the past decade of its operation, the Appellate Body has demonstrated
that the appeals processes need not invite: (1) undue delays to the dispute
resolution process, (2) increased costs for parties, or (3) an unmanageable
• • • 21
caseload for the institution. The WTO estimates that its dispute settlement
process usually takes one year when a case is not appealed; appeals take an
additional three months. The timetable for general appeals provides that,
after a notice of appeal has been filed, parties have twenty-five days to make
all submissions. Oral hearings are held ten days later, and can last for up
to ten days.24 Thereafter, the Appellate Body Report is circulated to WTO
members within ninety days of the date when the Notice of Appeal was
filed.25 The Appellate Body's decision becomes public immediately, upon
circulation.26 Keeping the arbitral process to such a relatively short period
of time protects parties from the cost and time involved in prolonged litiga-
tion.
Whereas, in 1996 and 1997, one hundred percent of the panel reports
were appealed, the rate of disputes appealed had dropped to sixty percent by
2005. This implies that the workings of the Appellate Body have provided
for some predictability in the dispute settlement process; such predictability
can be relied upon by governments to anticipate the consequence of an ap-
peal.28 Moreover, the Appellate Body's reliance on prior cases, while not
binding and not necessarily conclusive, has provided "a degree of consis-
tency which, in turn, enhances the predictability of the whole system." 29 In
"establishing an institution that can uphold the rules of world trade", the
WTO Appellate Body has "furthered the cause of lowering barriers to trade
in the world and maintaining security, predictability, and stability in the
20S ee UNCTAD, Course on Dispute Settlement, WTO, Module 3.3 Appellate Review, 7 (2003), at
http://www.unctad.org/en/docs/edmmisc232add I 7en.pdf (last visited Mar. 29, 2007).
21 WTO, Understanding the WTO: Settling Disputes, at
http://www.wto.org/english/thewto-e/whatis-e/tif e/displ-e.htm (last visited Mar. 29, 2007).
22/d.
23 WTO, supra note 18, Rules 20; 21(I); 22, 23(I), (3), (4); 24(1), and (2).
24 Id. at Rule 27.
25 DSU, supra note 17, art. 17:5.
26 id.
27 WTO, APPELLATE BODY ANNUAL REPORT (2005), available at
http://www.wto.org/english/tratop-e/dispue/statse.htm (last visited Mar. 29, 2007).
28 WTO, Report by the Consultative Board to the former Director-GeneralS upachai Panitchpakdi,
The WTO Dispute Settlement System, (2005) http://www.wto.org/english/thewto e/
I Oannive/future-wto-chap6e.pdf (last visited Mar. 29, 2007). Others, however, suggest that re-
ports of the Appellate Body in recent years have often been "essentially unreadable." Peter Van den
Bossche, Debating The Future Of The World Trade Organization:D ivergent Views On The 2005
Sutherland Report, 8 J. INT'L ECON. L. 759, 765 (2005) ("[U]nlike reports from the first few years of
the Appellate Body, [recent reports] read as if they were largely written by the Secretariat with only
the key findings formulated by the Appellate Body Members themselves.").
29Van den Bosshe, supra note 28, at 765.
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world trading system." 30 In such a setting, parties are well informed as to
the workings of the Appellate Body and in a better position to decide
whether to file an appeal.
Other Trade Related ArbitralA ppeal Procedures
Appellate systems, similar to the WTO Appellate Body, have been de-
veloped under the auspices of other trade related institutions. For example,
the Southern Common Market, or MERCOSUR, recently established a Per-
manent Court of Review ("Permanent Court") to hear arbitral appeals.31
MERCOSUR was formed by the Treaty of Asuncion between Brazil, Argen-
tina, Uruguay and Paraguay and was entered into force in 1991.32 The objec-
tive in establishing MERCOSUR was to form a common market and found a
dispute settlement system for member countries. 33 Further clarifying the
availability of MERCOSUR dispute settlement, the Olivos Protocol for the
Settlement of Disputes in MERCOSUR was entered into force in 2004.34
The Olivos Protocol modified MERCOSUR's dispute settlement system
to enhance the predictability of the system.35 Accordingly, the Olivos Pro-
tocol provides a three-tier dispute settlement system, which includes (1) di-
rect negotiations, (2) ad hoc arbitration, and (3) appeals before the Perma-
nent Court. 36 The Permanent Court may be comprised of three or five
arbitrators, dependent on the number of MERCOSUR States involved in the
arbitration.37 Appeals are limited to legal issues of the dispute and to the le-
30 Proceedings of the Ninety-Ninth Annual Meeting of the American Society of International Law,
New World Order or a World in Disorder? Testing the Limits of InternationalL aw, WTO Appellate
Body Roundtable, 99 AM. SOCY INT'L L. PROC. 175, 179 (2005).
31 UNCTAD, supra, note 16.
32i d.
33 UNCTAD, supra note 16, at 8 (last visited Mar. 29, 2007). The institutional structure of
MERCOSUR was set up in 1994 by The Additional Protocol to the Treaty of Asuncion on the Insti-
tutional Structure of MERCOSUR, or the Protocol of Ouro Preto. Id. at 12. This established
MERCOSUR as an international organization. Id. However, as none of its founding Member States
chose to transfer their sovereignty to MERCOSUR, it holds no supranational authority. Id. at 13.
See also Treaty of Asuncion, Annex III (1991).
34 UNCTAD, supra note 16, at 24.
" Id. at 26.
36 Michael Cornell Dypski, An Examination Of Investor-State DisputeR esolution Under The Merco-
sur And NAFTA Regimes, 8-SPG L. & Bus. REV. AM. 217, 227-28 (2005).
37 UNCTAD, supra note 16, at 36.
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gal interpretations in the underlying award.38 The Permanent Court's deci-
sions are final.39
The MERCOSUR dispute settlement system has not yet been widely
used.40 In practice, disputes have been settled through direct negotiations
between state officials.. Appeals procedures are, however, readily utilized
within commodity trade arbitration.42 Here, trade associations provide for
review of arbitral awards through institutional appellate processes.43 The
Grain and Feed Trade Association (GAFTA), for example, offers arbitration
services for contractual disputes which incorporate the GAFTA Arbitration
Rules.44 These rules provide a rather extensive explanation of parties' right
to appeal,45 the constitution of a board of appeal, the appeals procedure,47
appeals on string contracts, 48 withdrawal of appeals 49 and appeal awards. 50
GAFTA arbitration awards may be appealed by either party within thirty
days after an award has been rendered; if both parties appeal the award,
they may be consolidated for hearing by the same board of appeal.52 Where
the first award was made by a sole arbitrator, the board of appeal will in-
clude three members;53 where the first award was issued by a tribunal of
three arbitrators, the board of appeal shall be comprised of five members.54
Here, appeals involve a new hearing of the dispute wherein the board of ap-
peal is empowered to: (a) vary an award by increasing or reducing the liabil-
ity of either party, (b) correct any errors in the award or otherwise alter or
38 ASIL, International Law in Brief Southern Common Market (MERCOSUR): Protocol of Olivos
(February 18, 2002), http://www.asil.org/ilib/ilib0509.htm (last visited Mar. 29, 2007).
39
Id.
40 Id.
41 See, e.g. Dypski, supra note 36, at 228 n. 61.
42 Knull, supra note 11, at 557.
43 Id., stating: "Many of these commodity arbitration rule systems include separate, default proce-
dures for appeal. Appeal is commonly heard by a panel or board with five members, drawn from a
list of approved arbitrators maintained by each trade association. As a rule, appeals board members
are senior practitioners in the trade with experience in arbitrating complex disputes." See also infra
note 44 at Rule 10; COFFEE TRADE FEDERATION ARBITRATION RULES, RULE 40; LONDON RICE
BROKERS' ASSOCIATION ARBITRATION RULES, RULE 111.
" See The Grain and Feed Ass'n [GAFTA], Arbitration Rules No. 125 (2003), availablea t
http://www.medimedica.com/Contratti%20tipo/125.pdf (last visited Mar. 29, 2007).
45Id. at Rule 10.
46I d.at Rule 11.
41Id. at Rule 12.
8Id. at Rule 14.
9Id.a t Rule 13.
50G AFTA, supra note 44, at Rule 15.
II'd .a t Rule 10.1.
52Id.a t Rule 10.2.
53 Id. at Rule 11.1.
54 id.
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amend it, (c) award the payment of interest, (d) award the payment of costs,
fees and expenses of and incidental to the hearing of the arbitration and the
appeal.55 The board of appeal's award is final and binding on the parties.56
This review process is also conducted in a cost efficient and timely
manner; GAFTA estimates that awards will be published within six months
of receipt of parties' first submissions.57 The finality of the arbitral Frocess
is preserved as awards of the board of appeals are final and binding.5 Thus,
GAFTA is able to provide disputants with an effective means for ensuring
the issuance of accurate awards and to recognize parties' interests in design-
ing an arbitration process to fit their needs.
Advantages of InternationalT rade Appellate Processes
The rationale for instituting appellate review for international trade arbi-
tration awards was due to parties' desire for certainty within the arbitral
process and consistency as the law developed.59 Each of the provisions for
such review, discussed above, allow for institutional review of awards.
These systems have proven to be timely and cost-effective means for provid-
ing parties with the option for appeal.
As discussed below, the advantages in providing for institutional review
of arbitral awards far outweighs current review processes. The lessons
learned by the implementation of appellate review of international trade dis-
putes should be applied to investor-state and international commercial arbi-
tration. The appellate mechanisms available for international trade arbitra-
tion show that appellate processes in international arbitration are not only
preferable to seeking judicial remedies, but they are desired by parties as an
efficient and cost-effective means for ensuring reasoned awards.
III. THE CASE FOR ARBITRAL APPEALS IN INVESTOR-STATE ARBITRATION
When international trade arbitration awards are dubious, parties can turn
to the appellate vehicle available to them for review of said award. But in
investor-state disputes, parties who wish to challenge an award "end up in a
55Id . at Rule 12.4.
56 GAFTA, supra note 44, at Rule 12.6.
" Id. at Rule 4.6.
58I d. at Rule 12.6.
5'K null, supra note 11,at 550.
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