A lot has changed in a decade of investor arbitration. But more has stayed the same.
By empowering investors to sue states, the world's web of 3000-plus investment treaties has made arbitration the dominant form of dispute resolution involving states. Supporters make a strong case that it has promoted the rule of law and the flow of investment. Certainly, it has created an industry worth watching and critiquing.
The American Lawyer's Arbitration Scorecard survey launched a decade ago with a plea for greater transparency in state-investor arbitration. (See Private Practices, Summer 2003.) We followed that with an exposé on conflicts of interest, and called for an appeal body of irreproachable independence. (See Are Two Hats Too Many? Focus Europe, Summer 2005, and Wanted: A World Investment Court, Summer 2004.) But while investment arbitrators have taken major steps to address the problem of secrecy, they have not begun to address the appearance of bias. The result is a lingering crisis of legitimacy.
The shrouds of secrecy are falling away slowly but steadily. In response to a media outcry over secret NAFTA tribunals, in 2003 the U.S. and Canada began to require in their investment treaties that all pleadings, hearings, and awards be made public. More modestly, in 2006 the International Centre for the Settlement of Investment Disputes (ICSID) started began publicizing the existence of its disputes and the reasoning of its awards. It also formally gave arbitrators the discretion to admit amici—although amici may have little to add unless the pleadings are public. Greater publicity disarmed critics and proved useful for the development of jurisprudence. However, parties who preferred secrecy could still opt for the United Nations Commission on International Trade Law (UNCITRAL) rules.
It took seven years of deliberating for UNCITRAL to catch up, and in some ways to surpass ICSID. In July the Commission is expected to adopt rules requiring open hearings and publication of most pleadings. Unfortunately these rules will only apply to existing treaties if both parties opt in. But one rulemaker's loss of nerve is another's opportunity: "ICSID should take the next step and apply open rules to existing treaties," argues Lise Johnson of the Vale Columbia Center on Sustainable International Investment. "It's time for ICSID to say: We're the leaders on transparency so we'll leapfrog UNCITRAL."
Even if both rulemakers leap forward, the system will not be fully transparent. That's because most treaties give the parties the right to opt for any rules they like, and thereby opt for secrecy. The most problematic cases will always remain behind the curtain unless treaties limit the parties to open rules.
With secrecy in remission, the greatest weakness of the treaty system is the appearance of bias. Alas, the critiques of arbitrator independence have gone unheeded, and they are only growing louder.
A study by the system's leading academic critic, Gus Van Harten of Toronto's Osgoode Hall Law School, concludes that treaty arbitrators find in favor of investors on key jurisdictional issues about three-quarters of the time. Van Harten cannot prove the reality (as opposed to the appearance) of bias because, as Penn State's Catherine Rogers puts it, no study can control for the correct legal outcome.
The charge of bias nevertheless rings true, because arbitration as it has evolved in the private realm is poorly designed for public law adjudication. Ad hoc arbitrators depend on future appointments to make their generous living—and many are drawn from the ranks of counsel, who are paid to take positions on the same few recurring issues. Insiders argue that building a just system is the arbitrators' greatest self-interest, and that conflicts can be cured by full disclosure in a system with no (formal) rule of precedent. But whatever one thinks of these trusting arguments, legitimacy is a matter of appearances.
Van Harten has long argued persuasively that no system of dispute resolution can maintain public confidence while mixing the functions of advocate and adjudicator. Even Jan Paulsson, a legendary arbitrator who built Freshfields Bruckhaus Deringer's top-rated practice group, thinks that wearing two hats is highly problematic. Paulsson tells of one case where he felt compelled to offer his resignation as arbitrator three separate times. "On almost every issue that arose, before you know it one of my partners was arguing before me on the same issue in the halls of my law firm," he says. On the third occasion Paulsson went so far as to resign, but the parties begged him to stay, and he did. The conduct of this case is no model—for in treaty arbitration the parties are not the only stakeholders, and should not be able to waive the objections of the larger public—but Paulsson's experience shows that the problem is inescapable.
The easy solution is for institutions to require arbitrators and counsel to be drawn from separate pools, as does the Court of Arbitration for Sport, as well as the model treaty of the Southern African Development Community. Failing that, arbitrators and counsel should make such a commitment voluntarily.
Leading arbitrators Bernard Hanotiau and Albert Jan van den Berg have done precisely that. Their Brussels-based firm, Hanotiau & van den Berg, declared this spring that it would decline all assignments as arbitration counsel in cases arising out of investment treaties or laws. This policy does not eliminate all appearance of bias—the firm will still write expert opinions in a treaty arbitration, and act as counsel in a related court proceeding—but in the current landscape, it qualifies as a laudatory best practice.
Hanotiau, who co-chairs the International Bar Association's committee on arbitration conflicts, says that a working group on the "two hats" problem agreed that the only solution was a simple one: arbitrators should wear one hat. However, Hanotiau adds, "the arbitration community, in its majority, is not prepared to accept this." If the community dislikes being caricatured as a greedy industry, however, then it may wish to adopt this most basic conflict rule, which is present in every other system of public adjudication. And the IBA ought to revise its guidelines accordingly.
The more ambitious way to dispel the appearance of bias would be to create a permanent appellate body. Although the debate over this reform has stalled, it has considerable support within the arbitration establishment as a way to establish a jurisprudence constant. (For two of my previous essays on this theme, see here and here.)
An appellate body would not only force arbitrators to wear one hat, but it would take them out of the business of selling their services to parties altogether. That, not incidentally, would lower their pay. Would a one-hat policy, and a fortiori an appeals court, attract mediocrities? This objection underestimates the pull of history, the capacity of lawyers for disinterested public service, and the potential of those who may lack a big name to learn on the job and grow into oracles of public international law. The success of the World Trade Organization's Appellate Body suggests that fears of mediocrity are misplaced.
The other most common objection, usually shared confidentially, is that the appellate body would be saps for states, because capital importers might exert undue influence in the selection of arbitrators. This argument is reminiscent of the hesitation by the elites running the European Union to submit to popular votes. They act as if the clockmaker has no right to tinker with the clock. Investor arbitration is a creature of the states, and a negotiation among states is the proper way to select the mix of arbitrators that will interpret their treaties' intent. If a fairly-negotiated redesign of the system would recalibrate the balance between investor and state, then perhaps a recalibration is in order. And if the needed rebalancing doesn't happen, then perhaps the system will collapse of its own weight.
There are some signs of a state backlash, although each comes with a caveat. Bolivia, Ecuador, and Venezuela have each withdrawn from ICSID, but they remain subject to UNCITRAL arbitration. Australia plans to remove dispute resolution from future trade agreements, and South Africa has begun to terminate its investment treaties, but these are relatively small players, and their current policies may not last. India is reviewing its investment treaty program—but China is expanding its commitments.
Brigitte Stern of University Paris I, who is widely seen as an arbitrator sympathetic to states, argues that these developments should be kept in perspective. "What I see is the incredible growth of investment arbitration," she says. "The majority of states are still on board, and all together, the parties find the system quite trustworthy."
The most genuine danger sign is Argentina's refusal to pay large awards in the CMS, Azurix, National Grid, and Vivendi cases, with several other large awards apt to be confirmed soon. Will Russia thumb its nose at the potentially vast award that is likely to issue in favor of Yukos? A system so vulnerable to charges of bias and inconsistency is easier to ignore.
Without a redesign to enhance its legitimacy, treaty arbitration is always one notorious case away from existential crisis. And notwithstanding its more radical critics, the system is worth saving. If one accepts the research—admittedly contested—showing that arbitration promotes investment, then bilateral investment treaties may take some credit for broad economic gains in both the global north and the global south. "The system's success over the last ten years is measured not only by the hundreds of cases that have come to arbitration," Stern argues, "but by the thousands of successful investments that have not."
At the very least, the system gives recourse to the genuine victims of economic, and sometimes political, persecution. Yes, the world would be a better place if human rights victims who are not billionaires had comparable rights. But any accountability for sovereign wrongs is a victory for the rule of law, and in particular the rule of international law.