The Evolving Context: A Paradigm Shift to Treaty-Based Arbitration
Arbitration of investor-state disputes provides an external adjudicatory discipline to a country’s treatment of foreign investment, thereby enhancing rule of law for cross-border economic cooperation. In its early days, such arbitration was largely a matter of contract, with concession agreements serving as the foundation for arbitral authority to hear complaints about de jure or de facto expropriation. During the past few decades, however, investors have come to rely on bilateral and multilateral treaties to exercise a direct right of action against the host state, exercisable as the occasion arises for claims related not only to asset confiscation, but also to discrimination and other forms of inequitable treatment.
The paradigm shift from private contract to public treaty has meant heightened attention to arbitrator impartiality and independence. Some authors have characterized investor-state arbitration as “The Businessman’s Court,” with the suggestion that systemic incentives for reappointment push arbitrators to favor claimants. Neither evidence nor logic, however, supports the existence of pro-investor bias.
Indeed, the very notion of such bias remains counterintuitive. Reputations tarnished by deviation from duty do not bring reappointment when both host state and investor have a role in the process, which has always been the case. Rumors of prejudice decrease rather than enhance the credibility of professional decision-makers. Although teenage boys may hope to attract adolescent girls by showing themselves dangerous and daring, no similar rule works for judges or arbitrators. Any arbitrator incentives that may in fact operate for large international cases work principally to promote the exercise of honest and independent judgment.
Nevertheless, all stakeholders in the arbitral process have an interest in monitoring and refining standards for acceptable arbitrator behavior. Integrity is to arbitration what location is to the price of real estate: without it, other things do not matter all that much.
As in other areas of law, the devil remains in the detail. Concrete standards rather than diffuse rhetoric must be applied to establish guidelines for arbitrator comportment. In this context one might turn to the basic treaty provisions creating the framework for challenging arbitrators deciding investor-state disputes.
The Basic Texts: ICSID and UNCITRAL
Challenges to arbitrators in investor-state disputes would normally be brought under either the ICSID or the UNCITRAL régimes, the two principal avenues for arbitration established through bilateral investment treaties and free trade agreements. Under the former, arbitration is administered by a World Bank affiliate, the International Centre for Settlement of Investment Disputes, and conducted pursuant to the Convention on Settlement of Investment Disputes between States and Nationals of Other States. The latter involves ad hoc proceedings under rules adopted by the United Nations Commission on International Trade Law.
Although these systems share some common elements, their treatment of challenges diverges with respect to two key elements: the person who decides whether the challenge is justified, and the possibility of judicial review. On both matters UNCITRAL arbitration falls toward the commercial arbitration model, whereas ICSID arbitration follows an ad hoc internal control mechanism.
For ICSID arbitration, the touchstone is Article 14 of the ICSID Convention, which speaks of the individual’s ability to “exercise independent judgment.” This requirement is supplemented by a certification of independence made by the arbitrator at the beginning of the proceedings. A party to the arbitration may propose disqualification of an arbitrator on account of any fact indicating a “manifest” inability to meet that standard.
When a dissatisfied litigant contests an arbitrator’s fitness in an ICSID proceeding, the remaining arbitrators normally determine whether the individual lacks the capacity to exercise independent judgment. Any review of the resulting award would be made by an ICSID-appointed panel on limited treaty-based grounds, set forth in Article 52, rather than national judges who might conduct their own review of independence and impartiality. By contrast, outside ICSID, challenges to arbitrators in commercial arbitrations would initially be heard by the relevant supervisory institution and then again come before whatever national court is charged with considering motions to review awards.
Challenge under the UNCITRAL Rules differs in procedural mechanics, notwithstanding a basic similarity in the standards themselves. Article 10 provides for challenge if circumstances give rise to “justifiable doubts” about the arbitrator’s impartiality or independence. Unless the other side agrees or the arbitrator withdraws voluntarily, the challenge decision will be made by the appropriate “appointing authority” that constituted (or would otherwise have constituted) the tribunal itself. In UNCITRAL arbitration, as in ordinary commercial cases, the ultimate validity of any appointing authority decision will be subject to review by national courts under the appropriate arbitration statute and/or within the framework of the New York Convention.
In some cases challenge of an arbitrator may take place under a hybrid process applying the ICSID Additional Facility Rules, available either when the host state is not a party to the ICSID Convention or when an investor is not a national of a party to that Convention. In such instances, the arbitration will be supervised by ICSID, under procedures similar to those of regular ICSID cases, but outside the framework of the ICSID Convention. The rule for challenge remains the ability to “exercise independent judgment”, and the decision will normally be made by the challenged arbitrator’s remaining colleagues. However, in vacating an award national courts might also have their say on the matter pursuant to their own standards of arbitrator fitness.
Filling the Gaps: Soft Law Standards
Evaluating arbitrator comportment would be a very difficult job indeed if investor-state cases were isolated from lessons learned in other varieties of arbitration. Notions such as independent judgment, or justifiable doubts as to impartiality, must be given meaning in the context of specific fact patterns shared with analogous cases resolved under commercial and financial arbitration regimes.
In any such comparisons, care must be taken in identifying distinctions as well as common ground. For example, the International Chamber of Commerce arbitration rules speak of arbitrator independence, but not impartiality. By contrast, impartiality as well as independence has been explicitly addressed in the Code of Ethics promulgated jointly by the American Arbitration Association and American Bar Association (AAA/ABA), as well as in the Guidelines on Conflicts of Interest drafted by the International Bar Association (IBA Guidelines) and the arbitration rules of the London Court of International Arbitration (LCIA). Some national legal systems speak directly about arbitrator bias and partiality as a ground for award annulment, while others subsume prejudice under the general rubric of “public policy” violation. Certain rules provide for challenge on the basis of actual bias, while other systems sanction the appearance of impropriety. Most standards require disclosure of circumstances that may cause doubts as to an arbitrator’s ability to serve impartially and independently during a proceeding, whether by reference to “justifiable” doubts or circumstances which would cause doubt “in the eyes of the parties.”
Many rules include a nationality requirement as a surrogate for impartiality. When litigants are of different nationalities, the LCIA Rules and the ICSID Convention generally provide that an arbitrator may not have the same nationality as either party. Conversely, the UNCITRAL Model Law provides that “no person shall be precluded by reason of his nationality from acting as an arbitrator,” unless the parties agree otherwise.
The vitality of nationality-based rules has recently been put into question by a June 2010 decision of the English Court of Appeal in the case of Jivraj v. Hashwani, on appeal as of the date of this writing. Finding that arbitrators were to be considered employees under the provisions of European anti-discrimination rules, the Court went on to invalidate an agreement between two businessmen, both members of the Ismaili branch of Islam, which called for an all-Ismaili arbitral tribunal. According to some observers, the logic of invalidating religious qualifications in arbitration, even when accepted by all parties, will ultimately extend to nationality-based standards.
Increasingly, conflicts of interest implicate non-governmental instruments such as the professional standards issued by the IBA or the AAA, supplemented by the writings of scholars and practitioners setting forth what might be termed the “lore” of international arbitral procedure. When properly applied, such standards fill lacunae left by national statutes and international treaties, thereby enhancing certainty. Professional guidelines provide an alternative to ad hoc rulemaking by scholars who with facile eloquence articulate general legal principles that constitute little more than a fig leaf to cover personal preferences. Crafted with intelligence, professional guidelines present a better guide to the parties’ shared ex ante expectations than the unbridled discretion of clever arbitrators pursuing their own agendas.
Most often, professional guidelines get pressed into service to fill the gaps left by overly vague institutional rules or lack of foresight by the parties’ advisers. Perhaps the most oft-cited of these standards are the ones propounded by the IBA. Rightly or wrongly, the IBA Guideline’s lists of permissible and impermissible relationships have entered the canon of sacred documents cited when an arbitrator’s independence is contested.
The general standards contain both objective and subjective elements. According to the IBA Guidelines, arbitrators should decline appointment if they doubt about their ability to be impartial or independent or if justifiable doubts exist from a reasonable third person’s perspective. With respect to disclosure, the Guidelines require communication of facts or circumstances that may “in the eyes of the parties” give rise to doubts about impartiality or independence. Any potential conflict must be evaluated according to a “justifiable doubts” standard. In turn, doubts will be justifiable if a reasonable and informed third party would conclude that the arbitrator would likely be influenced by factors other than the merits of the case as presented by the parties.
One of the most useful (albeit controversial) features of the IBA Guidelines lies in its enumeration of illustrative elements that create varied levels of arbitrator disclosure. A “Red List” describes situations that give rise to justifiable doubts about an arbitrator’s impartiality. Some are non-waivable (such as a financial interest in the outcome of the case), while others (such as a relationship with counsel) may be ignored by mutual consent. An “Orange List” covers scenarios (such as past service as counsel for a party) which the parties are deemed to have accepted if no objection is made after timely disclosure. Finally, a “Green List” enumerates cases (such as membership in the same professional organization) that require no disclosure.
Admittedly, the practice of looking to different sources of authority will not be satisfying to those who seek a hierarchy of clear authority such as that formed within a single legal jurisdiction. For better or for worse, however, no such unified judicial system governs the world of international economic relations. Accordingly, an approach taking into consideration relevant national and administrative practice will likely provide greater predictability and fairness than allowing each challenge decision to be fashioned from whole cloth.
The Heart of the Matter
In a world lacking global commercial courts of mandatory jurisdiction, arbitration provides one way to bolster confidence in crossborder economic cooperation. Without binding private dispute resolution, many business transactions would remain unconsummated from fear of the other side’s hometown justice, or would be concluded at higher costs to reflect the greater risk due to the absence of adequate mechanisms to vindicate contract rights or investment expectations. Conflicts of interest thus take significance not only for the direct participants in cross-border trade and investment, but also for the wider global community whose welfare is directly affected by the arbitral process.
Thoughtful dialogue on ethical standards will seek to articulate principles which avoid either of two paths by which arbitration may come into disrepute. The first implicates lax canons of behavior, allowing arbitrator prejudgment and hidden links to parties. The second imposes unrealistic rules that facilitate abusive arbitrator challenge designed to disrupt the arbitral process.
Public and private interests each possess very real stakes in the systemic integrity of arbitration. All stakeholders in the process bear an obligation to work toward implementing standards calibrated to achieve an optimum balance between fairness and efficiency. Those who break faith with this duty make the world a poorer place. ■
William W. Park is a Professor of Law at Boston University, President of the London Court of International Arbitration and General Editor of Arbitration International. This article is adapted from Arbitrator Integrity, 46 SAN DIEGO LAW REV. 629 (2009).