Market Implications and the Way Forward for Stakeholders – ICSID
THE AUTHOR:
Ali Shouzab, Arbitration Attorney
This article is part of a series discussing the implications and the ways forward for different stakeholders, including ICSID itself, parties (investors and the host states), legal service sector, arbitrators, and the third-party funders.
Recently, the UNCITRAL’s Working Group III has proposed the establishment of a Multilateral Investment Court (“MIC”) with an Appellate Mechanism (“AM”) through a procedural reform. This reform is expected to be a shift from ad hoc Investor State Dispute Settlement (“ISDS”) to a court-like system. The European Union and its member states have been prominent contributors to this ISDS reform through their documents on several procedural issues. The current ISDS is suffering a “legitimacy crisis”, as realized by Gracia, F. and others, which can be resolved through MIC by enhancing consistency and predictability of the system—characteristics the current ad hoc ISDS is criticized to have lacked. Still, one of the most novel aspects of this AM would be that it is expected to entertain appeals from any first-instance ISDS tribunals (Article 18(1), Draft Statute of a Standing Mechanism A/CN.9/WG.III/WP.239), including ICSID (International Centre for Settlement of Investment Disputes).
On the other hand, ICSID is one of the world’s most prominent forums for ISDS. In 2023, ICSID administered over 70% of all known international investment cases (ICSID Annual Report 2023). ICSID has a self-contained system whereby the post-award remedy of an appeal is usually not an option. This is because Article 53(1) of Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965) (“ICSID Convention”) outrightly bars “appeal” and only the post-award remedies available under the convention can be resorted to (Interpretation, Revision, and Annulment under Article 50, 51, and 52 of the ICSID Convention respectively). Out of the cases administered in 2023, 29% of cases involved European parties (followed by Central American and Caribbean, 22%), which makes the EU a prominent market player in ICSID proceedings (ICSID Annual Report 2023). If the MIC initiative (especially the AM) emerges as successful, this could have direct implications for the entire ISDS market. These implications could affect many stakeholders. While the forthcoming articles will discuss the rest of them, this study focuses on the implications for the primary stakeholder, ICSID. The insights of this study could be seen as a picture of how the future ISDS market might look.
Implications and Ways Forward for ICSID
If MIC and its AM emerge to be successful competitors of ICSID in terms of market share, ICSID would have to strive to keep both its relevance to parties and the market share intact. Failing this, it is very likely that at least some of the market share could shift from ICSID to MIC. To avoid such a scenario, ICSID could consider the following options:
Option 1: ICSID’s Recognition of MIC-AM as its Appellate Forum
In this scenario, it can be anticipated that a treaty reform that incorporates the possibility of an appeal within the framework of the ICSID Convention would be inevitable. Academic scholars like Calamita, N. Jansen have discussed mechanisms to make such a treaty reform possible. Such mechanisms include the inter se modification of the ICSID convention, renegotiation of AM on ICSID’s platform, or the adoption of an AM in the same manner as an ICSID appeals facility was to be made possible a few decades back. Regardless of the ways adopted for modification, ICSID’s recognition could come with some market consequences. Adopting this approach could imply that the ICSID proceedings become merely a step in a hierarchical system. As such, this would be a prominent shift from a self-contained ICSID system to a system with an external reliance on another body, which may even be against the object and purpose of the ICSID Convention. Ultimately, MIC could overshadow the long-established reputation and legacy of ICSID, which could imply a “subjugation” of ICSID to MIC. This could also undermine ICSID’s global institutional recognition. One can also not be sure of how ICSID member states would take the idea of MIC-AM or ICSID’s subjugation to it, as this idea currently resonates more in the EU.
Assuming a scenario where this approach is followed, there is a chance that the procedures of both ICSID and MIC could undergo standardization, especially if the MIC’s AM decisions begin to set binding or persuasive precedents. This could require both MIC and ICSID to harmonize their procedures with each other’s procedural expectations or jurisprudential standards. As a domino effect of this approach (given the wide recognition of ICSID and the potential interest in MIC for some states), it is possible that the procedural practices of ISDS could even undergo a global harmonization, possibly in the MIC’s footsteps.
Option 2: A Strategic Rebranding
ICSID could also adopt an approach where it defers an immediate action and rebrands its existing procedures. This might require a proactive and continuous oversight by ICSID to observe market trends, understand stakeholders’ needs, and portray its services and public image accordingly.
The self-contained nature of the ICSID system can be emphasized, provided that market behavior appears to be favorable for the existing ICSID systems. Emphasis can be, for instance, on the strengths of how it bars appeals and prefers Interpretation under Article 50, Revision under Article 51, or Annulment under Article 52 as sufficient and viable post-award remedies. ICSID could also emphasize its expertise and experience over the years and promote its modernized 2022 rules, its neutrality, and the high rate of award enforceability. This approach would entirely eradicate the need for a lengthy and cumbersome treaty reform or a renegotiation of ICSID principles. However, it is arguable if this approach would be a practical response to the “legitimacy crisis”. One can also not be sure if this approach would bring about the desired consistency in substantive interpretation of international investment law in the absence of an appellate forum. If the market behaviour does not lean towards the existing ICSID systems, adopting this approach would not be seen as practical at all. This would call for some modification of the existing ICSID systems.
Option 3: Re(de)fining the Existing Systems
If the idea of a MIC and its AM gains global traction, ICSID could refine or even redefine the existing post-award remedies under Articles 50, 51, and 52 of the ICSID Convention. Article 53 bars appeals, impliedly leaving no scope for an appellate review based on merits. But there might be a scope to expand the grounds for annulment or revision or to modify the existing procedures to address some consistency concerns without introducing a full merits-based appeal. This is potentially the least disruptive yet practical pathway, as it largely operates within the existing ICSID frameworks. It avoids a direct challenge to the core principle of Article 53 yet creates some room for an appeal-like remedy post-award. Still, it would require a careful interpretation of existing provisions or some amendments.
Interestingly, Article 6(1)(a) & (b) of the ICSID Convention grant its Administrative Council authority to adopt rules for ICSID proceedings. Using this power, ICSID’s Additional Facility Arbitration Rules and the recent 2022 rule modernization have proven ICSID’s capacity for internal reform without altering its mainframe extensively. Therefore, this route could have a high practicality, as it may avoid a cumbersome treaty reform or renegotiation to introduce a full appellate mechanism. It is also likely less politically challenging to implement than other options. Simultaneously, this approach preserves the self-contained nature of the ICSID system. It could also improve the perception of fairness and address some procedural consistency issues. However, this option is unlikely to fully satisfy a demand for merits-based appellate review, which is an important feature of the MIC-AM (Article 29 (1), Draft Statute of a Standing Mechanism A/CN.9/WG.III/WP.239). This option may therefore be seen as an insufficient response to the “legitimacy crisis”, particularly if it does not address concerns about consistency in the substantive interpretation of international investment law.
Option 4: An ICSID Appeal Facility
Discussion on the creation of ICSID’s own Appeal Facility is not entirely new and has previously been discussed in a prominent ICSID working paper in 2004. The paper realized that appeals would be detrimental to Article 53(1) of the ICSID Convention. So, creating this Appeal Facility would require an inter se amendment of the Convention. For parties not agreeing to such a modification, it was discussed that the Appeal Facility can still be utilized by them simply by consenting through “Additional Facility, UNCITRAL Rules, in investment laws and contracts”. Although an Appeal Facility was not developed elaborately, the paper provided some details on the structure of the ICSID Appeal Facility while also discussing the scope of review. The grounds of appeal were proposed to be “clear error of law” and the five grounds of annulment set out in Article 52 of the ICSID Convention.
This option preserves ICSID’s institutional recognition and autonomy, as the appellate review would remain within its own framework. This might even address the legitimacy concerns in the same way MIC-AM seeks to resolve. Introducing this Appeal Facility could allow ICSID to retain its dominant market position, present itself as a modern and forward-looking forum and could even undermine the MIC’s comparative advantage, especially if it is perceived as more efficient or if it operates earlier. However, the grounds for appeal proposed for the MIC-AM are considerably broader than those proposed for the ICSID Appeal Facility in 2004. In addition to the grounds proposed for the Appeal Facility, MIC’s expected grounds of appeal are instances of facts, incapacity or invalidity of an agreement, and conflict with the international public policy (Article 29, Draft Statute of a Standing Mechanism A/CN.9/WG.III/WP.239). With such vast grounds for appeal, MIC-AM could be more attractive for the parties. Consequently, ICSID may need to revisit and update the grounds for appeal that were proposed in 2004 to better align with modern expectations. However, such an introduction of the Appeal Facility could be perceived by the market as a reactionary measure to the development of the MIC. To counter this perception, ICSID could emphasize that it was, in fact, the originator of the concept of an appellate forum, as it introduced the idea well before the MIC initiative emerged.
This pathway may serve better for ICSID to retain some of its market share against a potential competitor, MIC. But it could be harmful for the overall ISDS landscape. The establishment of an internal ICSID appellate forum could potentially lead to the creation of a parallel system competing with the MIC-AM. This could result in further fragmentation rather than consistency in the substantive interpretation and jurisprudence of international investment law. It might also not fully satisfy the states that are pushing for a truly multilateral, universal appellate body for all investment disputes.
A Strategic Way Forward for ICSID?
The choice between the four options depends on the success of the MIC initiative. Presently, the choice could be difficult and premature when we do not yet know the extent to which the MIC initiative will succeed in diverting the market share from ICSID. Depending on how successful the MIC initiative becomes, ICSID may consider the four options in the following order of preference: Option 2 if the MIC has limited success, followed by Option 3 as the MIC gains more traction, then Option 4 if the MIC becomes a strong competitor, and only in rare circumstances, Option 1 if the MIC achieves widespread acceptance and dominance.
Nevertheless, a combination of all these approaches can also be followed. It would be logical to adopt a flexible strategy that allows ICSID to incrementally respond to market developments. For instance, ICSID may begin with observing the market trends and then consider rebranding or procedural refinement while keeping in mind the possibility of an appellate facility or recognition of MIC-AM. This way, ICSID will be more attractive for its users as it would be preserving its institutional identity, be responsive to shifts in the global ISDS landscape, and open for a reform (if so needed).
Regardless of the approach adopted by ICSID, their strategy should serve the broader interests of the ISDS community. The MIC should not be seen as a mere competitor. It may also become a collaborator or a lesson, depending on its level of success.
ABOUT THE AUTHOR
Ali Shouzab is an arbitration attorney from Pakistan based in Sweden and holds an LL.M. in Investment Treaty Arbitration from Uppsala University.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
