UNCITRAL Group III standing mechanism: overview of an ambitious project that is about to become a reality

Overview

In 2017, the United Nations Commission on International Trade Law ('UNCITRAL') Working Group III ('Working Group') was established to explore the reform of the Investor-State Dispute Settlement ('ISDS') regime.

At its thirty-sixth session, the Working Group concluded that reforms were needed to address concerns around the: (i) (apparent) lack of independence and impartiality of ISDS tribunal members;[1] (ii) adequacy, effectiveness and transparency of disclosure and challenge mechanisms under treaties and arbitration rules;[2] (iii) lack of appropriate diversity among ISDS tribunal members;[3] and (iv) mechanisms for constituting ISDS tribunals.[4]

In this context, at its forty-eighth session, which took place in New York in April 2024, the Working Group produced a draft statute of the standing multilateral mechanism ('Draft Statute' and 'Standing Mechanism', respectively) for discussion.[5]   

Key features of the standing mechanism

The following section summarises the key aspects of the Standing Mechanism, as reflected in the current Draft Statute, and in particular, the functioning of both the Dispute and Appeals Tribunals.

Selection and appointment of tribunal members

The Standing Mechanism is composed of four bodies: the Conference of the contracting parties ('Conference'), the Dispute Tribunal, the Appeals Tribunal and the Secretariat.[6] The Conference acts as an executive body that oversees the Standing Mechanism. Among other tasks, the Conference appoints the members of both tribunals (Dispute Tribunal and Appeals Tribunal).[7]

The appointment of tribunal members is regulated under Section B, Articles 7-13. The goal of the Standing Mechanism is to have as broad a representation as possible from the contracting parties.[8] Therefore, it restricts the number of tribunal members from each contracting State to one[9] and establishes that both tribunals must be composed in a way that reflects an equitable geographical distribution, represents all relevant legal systems and is gender balanced.[10]

Candidates are nominated by the contracting parties, who must take into account gender representation and make 'all efforts' to consult representatives from the government, judiciary, civil society, bar and business associations, and academia.[11] The current Draft Statute provides that the Conference must adopt regulations to govern the nomination process.[12] In any case, candidates will be nominated to the Conference, which will circulate an initial list to a selection committee ('Selection Committee') in charge of vetting. The Selection Committee will issue a final public list of suitable candidates to the Conference for its consideration.[13] Once the list is received by the Conference, the Executive Director of the Secretariat will classify the candidates by gender and regional groups based on nationality.[14] The Working Group has not yet drafted the provision regulating the appointment of candidates.

Jurisdiction and process for initiating a dispute before the Standing Mechanism

The jurisdiction of the Dispute Tribunal and the Appeals Tribunal and the process for requesting dispute resolution are regulated under Section C and Section D respectively. Both sections contain analogous provisions based upon written consent.[15]

The Dispute Tribunal has jurisdiction over any investment dispute when the parties give their written consent. Once they do so, they cannot unilaterally withdraw their consent.[16] The Appeals Tribunal has jurisdiction to hear appeals of awards or decisions rendered by an arbitral tribunal or any adjudicatory body where the parties have consented in writing to submit the appeal to the Appeals Tribunal.[17] Evidently, the Draft Statute seeks to implement a written consent requirement where a party must make it explicitly clear that it submits either to the Dispute Tribunal, the Appeals Tribunal or both.

Both jurisdictional articles contain a second paragraph that allows a contracting party to consent to the jurisdiction of the respective tribunal by providing a list of treaties to which it is a party or legislation governing foreign investments that it has enacted, with the instrument of ratification or accession.[18] The tribunals will have exclusive jurisdiction over the dispute if all the contracting parties have included the same treaty or legislation in their list.[19]

Whenever a party wishes to initiate dispute resolution proceedings, or submit an award to the Appeals Tribunal, it must address a written request to the Executive Director summarising the issues in dispute or the information concerning the challenged award or decision, and providing the parties' identities and their consent to submit the dispute to the jurisdiction of either tribunal.[20]

The Executive Director may refuse to register a request if it finds that the dispute or appeal falls manifestly outside the jurisdiction of either tribunal.[21]

The Dispute Tribunal

The Dispute Tribunal will assign disputes to panels composed of three members. In forming the panels, the President together with the Vice-President of the Dispute Tribunal must take into account the same criteria as for selecting tribunal members. Once these panels are constituted, they will be assigned disputes at random. If a dispute is assigned to a panel a member of which is a national of the State party to the dispute, the Presidency may either assign the dispute to another panel or replace the panel member.[22]

The Dispute Tribunal procedure is regulated under Section E of the Draft Statute and is very similar to those of other arbitral institutions. It gives the panel the prerogative to conduct the proceedings as appropriate taking into account traditional arbitration principles such as equality and cost and time efficiency.[23]

The panel's decision will be rendered as a decision by the Dispute Tribunal.[24] Once rendered, under Article 24 of the Draft Statute, there are two options to challenge the decision: (i) if the party opted for a one-tier mechanism, it may request the decision's annulment; or (ii) if the party opted for a two-tier mechanism, the party may appeal the decision before the Appeals Tribunal.[25]

The final decision, whether it is handed down by the Appeals Tribunal or the Dispute Tribunal, is binding on the contracting parties as if it were a final judgment handed down by one of their domestic courts.[26] This provision closely resembles Article 54 of the ICSID Convention.[27]

If a party seeks to have the decision recognised and enforced in the territory of a non-contracting party, the Draft Statute establishes that the decision will be considered an arbitral award as defined in Article I of the New York Convention.[28]

The Appeals Tribunal

The real novelty of the Standing Mechanism lies in the appeals system. The Appeals Tribunal has jurisdiction to hear appeals regarding an award or decision rendered by any arbitral tribunal or adjudicatory body – including decisions rendered by the Dispute Tribunal – if the parties have given their express consent to this end.[29]

Just as the Dispute Tribunal establishes panels for disputes, the Appeals Tribunal creates chambers for appeals. Chambers and panels are regulated in a similar way.[30]

As to the scope of an appeal, a party may challenge an award or decision of a first-tier tribunal regarding jurisdiction, merits and even interim measures. The Draft Statute also includes a provisional and incomplete list of decisions that cannot be appealed such as procedural orders, decisions on bifurcation and challenges of arbitrators.[31] No time limit for filing the appeal has been established yet.

The grounds for appeal are broad enough to include errors in applying or interpreting the law or the facts (including the appreciation of relevant domestic legislation or assessment of damages).[32] Aside from these general grounds, the Draft Statute also includes specific issues such as corruption and improper constitution of the first-tier tribunal.[33]

If an appeal is registered and there are ongoing first-tier proceedings, the first-tier tribunal may suspend its proceedings until the Appeals Tribunal decides.[34] Moreover, once the appeal is registered, the award or decision can no longer be annulled, set aside, recognised or enforced until the appeal is finally decided.[35]

The Appeals Tribunal may uphold, modify or reverse the award or decision, or remand it to the first-tier tribunal if it deems the facts insufficient to decide the appeal.[36] Just as for decisions by the Dispute Tribunal, the plan is to incorporate in the final statute a limited timeframe for the chamber to issue a decision.[37]

An upheld, modified or reversed decision by the chamber will be final and binding, while a remanded decision or award will have no effect. If a decision is referred back to the first-tier tribunal, its second decision will not be subject to appeal.[38]

Issues that are yet to be resolved

Many issues still need to be resolved before the Standing Mechanism is adopted.

Jurisdictional issues

Primarily, the Working Group has yet to determine the scope of the Standing Mechanism's jurisdiction (Article 14 of the Draft Statute). In this respect, one of the key questions remaining to be answered is what types of disputes fall within the scope of the Dispute Tribunal's jurisdiction. More specifically, the Working Group has to decide whether to refer to the concept of 'international investment dispute' and if so, how to define it: would it include State-to-State disputes; would it extend beyond treaty-based disputes to include disputes based on investment contracts and domestic laws on foreign investment? ^[39]

At an early stage of the Working Group's work, the UNCITRAL Secretariat identified as issues to be considered 'the articulation between [a permanent dispute settlement body and/or an appellate body] and the current ISDS regime', and 'the relationship between an appellate body and the ICSID Convention, which excludes any appeal or other remedy, except for those provided for in the Convention itself'.[40] A particular concern was enforceability, since awards issued by the Standing Mechanism 'may not enjoy the nearly universal enforceability of awards under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ('New York Convention') and the '[ICSID Convention]'.[41]

To allow this 'articulation' between the ICSID Convention and the Draft Statute regarding the review and enforcement of awards, the Standing Mechanism's jurisdiction would have to be defined as closely as possible to that of ICSID under the ICSID Convention. Article 25 of the ICSID Convention sets out its 'outer limits', i.e. the basic requirements of ICSID jurisdiction from which no derogation is possible even with the parties' agreement. The jurisdiction of the Standing Mechanism could respect these 'outer limits' by allowing the Appeals Tribunal to review ICSID awards and/or the Standing Mechanism to enforce awards under the ICSID Convention, including through inter se modifications of the ICSID Convention, as the conditions set out in Article 41 of the Vienna Convention on the Law of Treaties[42] do not appear to be an obstacle to this.[43]

Another unresolved issue is whether the Dispute Tribunal should have 'exclusive jurisdiction'; that is, to what extent parties should retain the option of using other dispute resolution mechanisms. One perspective supports exclusive jurisdiction, meaning that if the parties to an agreement have agreed to it, the Dispute Tribunal would be the only body able to handle disputes arising from that agreement. This would reflect the parties' willingness to fully submit to the Dispute Tribunal's authority. The other view suggests that the Dispute Tribunal's jurisdiction should be non-exclusive unless all parties involved explicitly agree to make it exclusive. This approach emphasises flexibility, allowing parties to choose other dispute resolution institutions if they prefer.

The Working Group must also determine the scope of the Dispute Tribunal's power to determine its own competence and jurisdiction, as well as the test that it would apply in doing so. For example, whether the Draft Statute would adopt the 'double-keyhole' test, which arbitral tribunals follow to ascertain ICSID's jurisdiction under both Article 25 of the ICSID Convention and the relevant instrument containing the parties' consent to use ICSID.[44]

Lastly, the Working Group will need to develop further guidance on the terms and conditions under which non-contracting parties and their nationals may consent to the jurisdiction of the Dispute Tribunal, given that they would not normally be allowed to accept unilateral offers of consent from contracting parties without first becoming a contracting party themselves.[45]

Governance of the standing and appellate mechanisms

The second major issue that has been left for later is whether the standing and appellate mechanisms should be governed by the same or separate protocols.

One view is that using a single protocol containing both a first-tier and an appellate mechanism would allow common elements to be addressed together. In this way, the Working Group would avoid duplication and mitigate the risk of further fragmenting the ISDS system. Flexibility could be built into the protocol to allow States to opt in or out of the first-tier and appellate mechanism.

Those arguing that the two mechanisms should be addressed separately have noted that it would make it easier for States to decide which protocols to adopt, even if having two separate protocols could lead to discrepancies. The Working Group's greatest concern however is that working on a single protocol might pre-empt the final outcome of the mechanism's structure, when it has not yet decided on whether to develop a two-tier standing mechanism, a 'standing' appellate mechanism or a separate first-instance mechanism. Furthermore, it was also noted that, although there may be elements in common, some issues (such as governance or member appointment) would need to be considered differently under each of the mechanisms.

Panel composition and selection of adjudicators

Finally, also to be decided is the organisation of the Dispute Tribunal's work and the constitution of adjudicator panels. One unresolved question is whether the panels should be pre-established or formed after a request for dispute resolution is made, with some advocating for flexibility to tailor the panel to the specific dispute. Also unclear is whether fixed or rotating members should form the panels.[46]

The method of assigning members to disputes also needs to be determined. Some have proposed random assignations to ensure fairness and prevent parties from selecting their adjudicators, but questions remain on how all the relevant criteria can be incorporated into this process. The method of setting up the panel will need to be impartial while addressing practical considerations such as the balance of expertise, language requirements, members' remaining terms, among other things. The Working Group will also need to determine whether parties to a dispute or contracting parties should be allowed to appoint panel members, and how challenges against adjudicators would be handled.

Conclusion

The Standing Mechanism is one of the most ambitious projects the Working Group has undertaken in past decades. While there are several issues that need to be reconsidered and resolved, since the announcement of the creation of the Standing Mechanism, the Working Group members have been making steady progress.

The Working Group is expected to hold four sessions this year.[47] By the end of 2025, at least some of the pending issues may be resolved and incorporated into the Draft Statute. In the medium to long term, and depending on States' willingness to move forward with the Standing Mechanism, it could become a reality and provide an opportunity to test its novel provisions.

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[1] A/CN.9/964, para 83.

[2] A/CN.9/964, para 90.

[3] A/CN.9/964, para 98.

[4] A/CN.9/964, para 108.

[5] United Nations Commission on International Trade Law, Working Group II (Investor-State Dispute Settlement Reform) Forty-eighth session, 'Draft statute of a standing mechanism for the resolution of international investment disputes' (1-5 April 2024) <https://documents.un.org/doc/undoc/gen/v24/008/78/pdf/v2400878.pdf> accessed 14 January 2025.

[6] Draft Statute, Art 3.

[7] Draft Statute, Art 4.

[8] Draft Statute, Art 3.

[9] Draft Statute, Art 8.

[10] Draft Statute, Art 8.

[11] Draft Statute, Art 9.

[12] Draft Statute, Art 9.

[13] Draft Statute, Art 10.

[14] Draft Statute, Art 10.

[15] Draft Statute, Arts 14 and 18.

[16] Draft Statute, Art 14.1.

[17] Draft Statute, Art 18.1.

[18] Draft Statute, Arts 14.2 and 18.2.

[19] Draft Statute, Arts 14.3 and 18.3.

[20] Draft Statute, Arts 15 and 19.

[21] Draft Statute, Arts 15.1 and 19.1.

[22] Draft Statute, Art 16.

[23] Draft Statute, Art 22.

[24] Draft Statute, Art 23.

[25] Draft Statute, Art 24.

[26] Draft Statute, Art 26.

[27] 'Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State', Art 54, ICSID Convention.

[28] Draft Statute, Art 26.3.

[29] Draft Statute, Art 18.

[30] Draft Statute, Art 20.

[31] Draft Statute, Art 27.

[32] Draft Statute, Art 29.1.

[33] Draft Statute, Art 29.2.

[34] Draft Statute, Art 30.

[35] Draft Statute, Art 31.

[36] Draft Statute, Art 33.

[37] Draft Statute, Art 33.9

[38] Draft Statute, Art 34.

[39] See Art 25 of ICSID Convention.

[40] 'Possible future work in the field of dispute settlement: Reforms of investor-State dispute settlement (ISDS) Note by the Secretariat', A/CN.9/917, paras 16(iv) and 23.

[41] 'Summary of the inter-sessional meeting on investor-State dispute settlement (ISDS) reform submitted by the Government of Singapore, A/CN.9/WG.III/WP.233' (20 October 2023), para 12.

[42] Art 41 of the Vienna Convention on the Law of Treaties: 'Agreements to modify multilateral treaties between certain of the parties only'.

[43] See fn 41, paras 80-83.

[44] For more on the double-keyhole test, also known as the double barrelled or the two-fold test, see: Duggal Kabir A.N. and Fahrner Ambroise, 'Double barrelled / Two-fold test' in Jus Mundi (updated: 21 May 2024), <https://jusmundi.com/en/document/publication/en-double-barrelled-two-fold-test> accessed 14 January 2025.

[45] Draft Statute, Art 14.

[46] Draft Statute, Art 16.

[47] See <https://uncitral.un.org/en/working_groups/3/investor-state> accessed 14 January 2025.