International Arbitration : Contemporary Issues and Innovations [1 ed.] 9789004249318, 9789004246225

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International Arbitration

Sokol Colloquium VOLUME 5

The titles published in this series are listed at brill.com/soco

International Arbitration Contemporary Issues and Innovations Edited by

John Norton Moore

LEIDEN • BOSTON 2013

Library of Congress Cataloging-in-Publication Data International arbitration : contemporary issues and innovations / edited by John Norton Moore.   pages cm. — (Sokol Colloquium ; Volume 5)  ISBN 978-90-04-24622-5 (hardback : alk. paper) — ISBN 978-90-04-24931-8 (e-book) 1. Arbitration (International law) 2. Criminal procedure (International law) 3. Law of the sea. I. Moore, John Norton, 1937–  KZ6115.I58 2013  341.5’22—dc23

2012050867

This publication has been typeset in the multilingual “Brill” typeface. With over 5,100 characters covering Latin, IPA, Greek, and Cyrillic, this typeface is especially suitable for use in the humanities. For more information, please see www.brill.com/brill-typeface. ISSN 1873-6572 ISBN 978-90-04-24622-5 (hardback) ISBN 978-90-04-24931-8 (e-book) Copyright 2013 by Koninklijke Brill NV, Leiden, The Netherlands. Koninklijke Brill NV incorporates the imprints Brill, Global Oriental, Hotei Publishing, IDC Publishers and Martinus Nijhoff Publishers. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill NV provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, MA 01923, USA. Fees are subject to change. This book is printed on acid-free paper.

Contents

Preface ...............................................................................................................................

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General Aspects of International Arbitration Procedural Tension in International Arbitration: Arbitration in Autumn ........................................................................................................................ William W. Park

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Dispositive Motions in International Arbitration and the Role of U.S. Courts ................................................................................................................... James H. Carter

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Problems of Evidence before International Tribunals ....................................... Paul S. Reichler

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Arbitration of Private Law Matters Valuation in Investor-State Arbitration: Toward a More Exact Science ...... Joshua B. Simmons

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Human Rights and Investment Arbitration: A Brief Note on Some Methodological Problems ...................................................................................... 115 Ruth Wedgwood

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contents Arbitration of Public Law Matters

Arbitration and the Law of the Sea: A Comparison of Dispute Resolution Procedures ................................................................................................................... 123 Rüdiger Wolfrum Arbitration Under the Law of the Sea Convention ............................................. 135 J. Ashley Roach Arbitration Innovations in Recent U.S. Investment Treaties ........................... 147 Gary H. Sampliner

PREFACE

Attorneys typically are trained about courts as the core of their legal education. Not surprisingly with such a focus, there is less attention than might be justified on arbitration as a modality of dispute resolution. Clearly, however, arbitration and other non-judicial modalities of dispute resolution have much to offer, typically including less procedural complexity and greater ability to select judges. Moreover, at least in the United States, legal education typically focuses on the law of the American state and federal systems, with only brief detours into the world of international transactions and relations. Yet, for a variety of reasons, including fewer effective international courts of general jurisdiction, arbitration, rather than judicial settlement, is a staple of international dispute resolution. It is not surprising that the U.S.-U.K. Arbitration under the Jay Treaty following the Revolutionary War, and the Alabama Claims Arbitration following the Civil War, were the earliest examples of United States involvement in third party dispute resolution—not submission to an extant international court. Professor William W. Park, the President of the London Court of International Arbitration, summarizes well the importance of international arbitration as a core mechanism for resolution of international disputes today. Thus, he writes of the importance of arbitration as a mechanism for resolving international investment disputes: In an intractably heterogeneous world, lacking effective supra-national courts with general jurisdiction, arbitration promotes respect for shared ex ante expectations. The search for political and procedural neutrality finds special application in claims for discriminatory expropriation brought pursuant to investment treaties. In safeguarding property rights against unjust deprivation, arbitration also promotes public welfare and human rights, constituting a key element in the rule of law and facilitating creation of what Australian jurist Julius Stone called “enclaves of justice.”1

1 William W. Park, “Procedural Tension in International Arbitration: Arbitration in Autumn,” Chapter 1 in this volume at footnote 7.

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Arbitration, especially international arbitration, continues to receive less attention than justified by its importance. Though the international community now has a plethora of courts undreamed of at the time of the early United States leadership in submission of disputes to arbitration, for a variety of reasons international arbitration remains a central mechanism—perhaps even the central mechanism in third party resolution of international commercial disputes. This volume brings together some of the world’s top experts on international arbitration to examine important contemporary issues in international arbitration. Part I focuses on General Aspects of International Arbitration, beginning with an overview of contemporary procedural issues in international arbitration, including a powerful statement of the arbitral duty, by one of the best experts in international arbitration, Professor William W. Park, the General Editor of Arbitration International. Part I then turns to an essential overview of “Dispositive Motions in International Arbitration and the Role of U.S. Courts,” by James H. Carter, Senior Counsel in the International Arbitration Practice Group of Wilmer Cutler Pickering Hale and Dorr LLP in New York, and a retired partner from Sullivan & Cromwell. Carter particularly notes a 1999 federal district court decision which “considered that an arbitration panel’s ruling on a dispositive motion should be reviewed under the same standards that an appellate court [in the United States] would apply in reviewing a trial court’s grant of summary judgment, namely whether there is any ‘genuine issue of material fact’ that requires a ‘trial’.” He notes that this decision “appears to be an improper direction for development of the law” and that it “would restrict arbitrators’ incentives to grant potentially dispositive motions.”2 Part I then concludes with a masterful analysis of “Problems of Evidence Before International Tribunals” by Paul S. Reichler, Partner and Co-Head of the International Litigation and Arbitration Group of Foley Hoag LLP, and one of the most experienced international litigators in the United States. Part II of this volume then focuses on some of the most important contemporary issues in “Arbitration of Private Law Matters.” The first chapter of this part, by Joshua B. Simmons, an Associate at Covington & Burling LLP, provides a detailed exploration of “Valuation in Investor-State Arbitration: Toward A More Exact Science.”3 This chapter has already become the definitive analysis of this important subject. Professor Ruth Wedgwood, of the Johns Hopkins University, and one of the top international lawyers in the United States, then presents a second chapter in Part II focused on an important and creative analysis of “Human 2 James H. Carter, “Dispositive Motions in International Arbitration and the Role of U.S. Courts,” Chapter II in this volume. 3 We are grateful to the Berkeley Journal of International Law for granting permission to reprint this paper, to enable it to accompany the other chapters of this volume originally presented together at the 24th Sokol Colloquium at the University of Virginia School of Law.



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Rights and Investment Arbitration: A Brief Note on Some Methodological Problems.” Part III of this volume then shifts to contemporary issues in “Arbitration of Public Law Matters.” The first two chapters of this part concern dispute resolution procedures under the 1982 United Nations Convention on the Law of the Sea. They are written by two of the greatest experts in the world on the subject. Thus, the first chapter in this part “Arbitration and the Law of the Sea: A Comparison of Dispute Resolution Procedures,” is written by Judge Rüdiger Wolfrum, a member, and former President, of the International Tribunal for the Law of the Sea, a Professor of law at the University of Heidelberg, Director of the Max Planck Institute for Comparative Public Law and International Law (Heidelberg), and a former Ambassador of the Federal Republic of Germany. Professor Wolfrum points out the many reasons why governments should consider using the International Tribunal for the Law of the Sea, including, surprisingly, that litigation before the Tribunal can be expected to cost less than arbitration. The second chapter in this part is written by Captain J. Ashley Roach, JAGC, USN (Ret.), who, up until his recent retirement was the leading expert in the United States Department of State on law of the sea matters. Captain Roach, in this chapter on “Arbitration Under the Law of the Sea Convention,” provides the best compilation of state practice to date concerning arbitration under the LOS Convention. The chapter includes a table listing the arbitral cases brought under the Convention, a table of arbitrators to date and a discussion about the lists of arbitrators designated under Convention procedures, and a table concerning the exercise of optional exceptions to applicability of compulsory dispute resolution provisions of the LOS Convention as permitted under Article 298 of the Convention. The chapter begins by noting the numbers of the 162 States Parties which have selected various dispute resolution procedures under the Convention, with the clear conclusion that the most widely in force dispute resolution procedure today under the LOS Convention is the general arbitration default provisions under Article 287(3) of the Convention. There are, quite simply, no better discussions anywhere of the LOS dispute settlement issues presented here than in these two superb chapters by the foremost international experts. Finally, Part III concludes with a superb chapter by Gary H. Sampliner, Senior Counsel, Office of Assistant General Counsel (International Affairs), U.S. Department of the Treasury, on “Arbitration Innovations in Recent U.S. Investment Treaties.” Again, this chapter, written by one of the top United States Government experts on these investment treaties, is must reading for anyone interested in contemporary development of these treaties. It is with special pleasure that I note that this fine volume on International Arbitration marks the reappearance of the Virginia Sokol Proceedings which were a standard feature of the international law world for many years. The papers in this volume were delivered at the 24th Sokol Colloquium, entitled “International Arbitration: Prospects and Problems,” and presented on April 5, 2011, at the University of Virginia School of Law. The University of Virginia School of Law

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is grateful to the generous donation from Gustave Sokol which has made this outstanding Sokol series possible. Special thanks are also due Professors John K. Setear and Pierre-Hugues Verdier who assisted in this Sokol Colloquium and Ms. Judy Ellis who assisted in the administration of the Colloquium and the editing of these proceedings. John Norton Moore4 Editor

4 John Norton Moore is the Walter L. Brown Professor of Law at the University of Virginia School of Law and Director of the Center for Oceans Law and Policy and the Center for National Security Law at Virginia. Formerly he served as Counselor on International law to the Department of State, United States Ambassador to the United Nations Conference on the Law of the Sea, and Chairman of the Board of the United States Institute of Peace.

General Aspects of International Arbitration

Procedural Tension in International Arbitration: Arbitration in Autumn William W. Park1

I. The Two Faces of Autumn Tucked between summer and winter, autumn gives us days that grow shorter, flowers that fade, and leaves that fall from the trees. Often invoked as a symbol for decline and decay, the season possesses its share of melancholy tones. Autumn carries positive connotations as well. A sense of robust maturity infuses a season of mellow fruitfulness when apples turn red, orchards fill with fruit, grain ripens, and pumpkins present themselves for picking. In many places, the season triggers a new academic year for students and teachers. This dual metaphor carries into the field of arbitration, that chameleon-like process by which litigants renounce otherwise competent courts in favor of private and binding dispute resolution. According to some observers, arbitration has fallen into an autumn of decline and decay, shedding leaves of efficiency and coherence to reveal barren branches of rules without reason. Recent literature laments that a golden age of cheap and cheerful arbitration has yielded to backlash against a system marked by too many rules, excessive costs, and undue delay.2

1 Professor of Law, Boston University. President, London Court of International Arbitration. General Editor, Arbitration International. Adapted from presentations at the Sokol Colloquium, University of Virginia, April 2011 and the University of Geneva, September 2010. 2 See e.g., The Backlash Against Investment Arbitration: Perceptions and Reality 189 (Michael Waibel, Asha Kaushal, Kyo-Hwa Liz Chung, Claire Balchin, eds., Kluwer 2010). John Norton Moore (ed.) International Arbitration, pp. 3–37 Copyright © 2013, William W. Park.

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One group of critics has published a manifesto condemning arbitration for its negative effect on human development and environmental sustainability.3 On closer scrutiny, however, international arbitration reveals itself as having arrived at its autumn with fruitful maturity, not decay or decline. The harvest of a more refined arbitral process derives from productive exchanges among arbitrators, judges, scholars, legislators, counsel and professional associations, all of whom find their place among arbitration’s stakeholders.4 The very volume of debate about arbitration during the past decade testifies to robust growth rather than to decline. Geneva’s great criminal lawyer, the late Dominique Poncet, used to say, “On sert bien la justice en la critiquant.”5 In contrast, decay and death normally announce themselves by silence rather than debate.6 Testing this thesis, of course, calls for consideration of the context in which litigants choose arbitration. Not surprisingly, motives vary according to the type of dispute. For international transactions, arbitration justifies itself as a path to more

3 Public Statement on the International Investment Regime, 31 Aug. 2010 (visited May 30, 2011), available at http://www.osgoode.yorku.ca/public_statement/, which expressed concern regarding the ability of governments to act for their people in response to the concerns of human development and environmental sustainability because the current investment treaty arbitration process “is not a fair, independent, and balanced method for the resolution of investment disputes.” Michael McIlwrath commented on a recent survey sponsored by PricewaterhouseCoopers on corporate attitudes and practices of international arbitration. Michael McIlwrath, Ignoring the Elephant in the Room: International Arbitration: Corporate Attitudes and Practices 2008, 2(5) World Arb. & Med. Rev. 111 (2008). McIlwrath notes that 56% of the interviewees who tried to enforce their awards did not recover the full value. He suggests that more thought should be given to ways one might enhance corporate counsel preference for international arbitration. 4 This positive comparison holds true not only in arbitration’s traditional commercial stomping grounds, but also in newer frontiers such as finance, taxation, sports and foreign asset protection. For example the OECD has published a Model Tax Convention on Income and Capital, most recently updated in 2010. See generally, William W. Park & David R. Tillinghast, Income Tax Treaty Arbitration (Sdu Fiscal & Financial Publishers 2004). 5 “We advance justice by our critiques.” An illustration of how honest debate fosters improvement can be found in the reaction of Korean Air Lines to a disaster in Guam in 1997. An investigation revealed that one of the contributing factors was a culture among pilots of speaking obliquely rather than directly. A junior officer might say to his senior, “Sir, it’s raining,” rather than “Put on the weather radar right now!” To its credit, the airline took corrective action, requiring English in the cockpit to reduce the sometimes ambiguous verbal formulae used in Korean as a matter of courtesy. See Malcolm Gladwell, Outliers (2008) at 213–223. 6 Such critical debate, of course, in no way diminishes the achievements of or the deference owed to the pioneering grand old men (as they all were back then) who built international arbitration on a line that ran from London to Geneva stopping in Paris, with occasional detours to places like Stockholm and Zürich. Indeed, their contributions play a vital part in the maturing of international dispute resolution.



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level procedural playing fields,7 which in turn boost predictability in finding facts and applying law.8 In construction and insurance, the goal might be expertise. In the United States, arbitration often serves to remove consumer and employment disputes from the perceived vagaries of civil juries.9 With this caveat, let us turn to the maturing of arbitration through norms chosen to guide proceedings. II. From Hard Law to Soft Law For better or for worse, legal discourse sometimes distinguishes between “hard law” and “soft law” norms. In the realm of arbitration, the former looks at the process from the outside: the perspective of judges and legislators charged with providing a framework of statutes, treaties and cases setting the contours for judicial recognition of arbitration agreements and awards. By contrast “soft law” addresses arbitration as seen from the inside: the procedural and professional standards used in finding facts or ascertaining applicable law. The Federal Arbitration Act would exemplify the former, while the International Bar Association Rules on Taking Evidence might illustrate the latter. During the past half century, the arbitration community shifted much of its attention from the statutes and treaties, which permit modern arbitration to exist, toward the soft law guidelines that aim to balance fairness and efficiency.10

 7 In an intractably heterogeneous world, lacking effective supra-national courts with general jurisdiction, arbitration promotes respect for shared ex ante expectations. The search for political and procedural neutrality finds special application in claims for discriminatory expropriation brought pursuant to investment treaties. In safeguarding property rights against unjust deprivation, arbitration also promotes public welfare and human rights, constituting a key element in the rule of law and facilitating creation of what Australian jurist Julius Stone called “enclaves of justice”. Julius Stone, Human Law and Human Justice (Stanford U. Press, 1965). See also Jan Paulsson, Enclaves of Justice, Transnat’l Disp. Mgmt., Sept. 2007.  8 For present purposes, the notion of “law” encompasses an authoritative dispute resolution process including principles to guide general conduct as well as procedures for deciding cases, without the distinction often imposed by francophone jurists between “loi” (an enactment) and “droit” (legitimate norms of a more general character).  9 In some instances, arbitration may serve to create new agreements in otherwise politically charged climates. See Jeff Jacoby, Arbitration’s Intolerable Bind, Boston Globe, 12 January 2011 discussing arbitration to fix salaries for municipal employees. Arbitration has also been used to resolve emotionally-charged wrongful death claims (Blackwater Sec. Consult. LLC v. Nordan, [2011] WL 237840, [2011] EDNC) and is a questionable process for settling sexual harassment claims (Nelson v. Am. Apparel, Inc., [2008] WL 4713262, [2008] Cal. Ct. App.). 10 Interestingly, development of personal computer technology presents a similar pattern. In the early years engineers focused on improved hardware: better screens and smaller hard drives. Today the emphasis has shifted more to software, including internet search engines and debate on the relative merits of various operating systems.

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The hard law phase began in earnest in 1958 with adoption of the New York Arbitration Convention,11 which aimed to create mechanisms to promote arbitration’s international currency by making awards transportable from one country to another. That treaty was followed in short order by the ICSID Convention,12 serving to remove non-commercial impediments to the free cross-border flow of private investment, and the Panama Convention,13 intended to facilitate arbitration implicating Latin America. Thereafter, national arbitration statutes were streamlined to enhance the finality of awards through less intrusive judicial review. Significant reforms have been adopted notably in England, France, Belgium, Switzerland, Germany, and the sixty or so countries that enacted some variant of the UNCITRAL Model Law.14 In comparison, during the past dozen years the arbitration community turned its gaze toward guidelines for conduct of proceedings. The Chartered Institute of Arbitrators has issued protocols on subjects ranging from interviewing arbitrators to calculating interest. The International Bar Association adopted standards on evidence and conflicts of interest. And the International Chamber of Commerce (ICC) published its Techniques for Controlling Time and Cost in Arbitration.15 In the United States, which has sometimes lagged behind the rest of the world in sensitivity to arbitration’s complexities, the American Bar Association in 2004 overhauled its Code of Ethics for arbitrators. Two years later the College of Commercial Arbitrators issued a guide to “Best Practices,”16 followed in 2008 by American Arbitration Association protocols on “information exchange” aimed at making document production more efficient.17

11 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, adopted 10 June 1958, entered into force 7 June 1959. 12 The ICSID Convention, opened for signature on 18 March 1965 and entered into force on 14 October 1966. 13 Inter-American Convention on International Commercial Arbitration, 30 January 1975. 14 See generally, William W. Park, Arbitration of International Business Disputes 205–317 (Oxford Univ. Press 2006). 15 ICC Publication No. 843 (2007). Adding to the fabric of soft law, the ICC has also published a selection of procedural orders addressing matters such as organization of proceedings, witnesses and experts, hearings and interim measures. See ICC Bulletin, 2010 Special Supplement, Decision on ICC Arbitration Procedure (2003–04) (ICC Pub. No. 728E, 2011). 16 The College of Commercial Arbitrators published a second edition in October 2010. The Swiss Arbitration Association had published its own views on the matter in Best Practices in International Arbitration, ASA Bulletin Special Series No. 26 (M. Wirth ed., 2006). 17 During the same period of time, CPR (International Institute for Conflict Prevention and Resolution) issued multiple protocols on arbitral procedure, including recent guidelines on determining damages, adopted in 2010.



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Whatever might be the merits or drawbacks of the particular protocols, they demonstrate a deep concern for doing things right. Increasingly these guidelines enjoy the status of para-regulatory texts pressed into service for filling gaps in national law.18 III. The Three Musketeers of Arbitral Duty A. Accuracy, Fairness and Efficiency Articulating the contours of arbitral duty remains anything but an easy task, with or without the help of soft-law guidelines. The enormity of the mission brings to mind a comment by the French General Charles de Gaulle, when a protester tried to interrupt by shouting, “Away with all idiots!”19 Without missing a beat, the general repeated the taunt and then, gaze fixed directly on the heckler, responded, “Un vaste programme, en effet,” which would translate as “A formidable task, indeed.” Likewise, attempts to circumscribe arbitral obligations have tossed the best of minds upon the storm waves of inquiry, as they seek to express through sequential grammar a reality that remains stubbornly simultaneous. As a starting point for discussion, one might suggest three principal obligations of an arbitrator: accuracy, fairness and efficiency. These “Three Musketeers” of arbitral duty, however, often interact in anything but the “One-for-all” spirit of the original heroes in the Alexandre Dumas novel.20 The first duty of an arbitrator lies in rendering an accurate award, in the sense of fidelity to the text and the context of the relevant bargain, whether memorialized in a private contract or the terms of a public investment treaty. The arbitrator should aim to get as near as reasonably possible to understanding what actually happened between the litigants, and how the pertinent legal norms apply to the controverted events. The fact that arbitral awards are not generally reviewable for simple mistakes of law or fact in no way diminishes this obligation. Arbitration would provide poor justice if arbitrators aspired to nothing higher than to meet the minimum grounds for annulment.

18 See Applied Industrial Materials Corp. v. Ovalar Makine Ticaret Ve Sanayi A.S., 492 F.3d 132 (2d Cir. 2007), affirming 2006 WL 1816383 (S.D.N.Y. 2006). The District Court at notes 12 & 13 considered ethical standards adopted in 2004 jointly by the American Bar Association and American Arbitration Association, as well as guidelines of the International Bar Association adopted in 2004. 19 The original French is variously quoted as “A bas tous les imbéciles!” or something even more discourteously vulgar. 20 As recorded by Dumas, the musketeers lived by the motto “Tous pour un, un pour tous” (All for one and one for all). Alexandre Dumas, Les Trois Mousquetaires (1844)) (Modern edition Elibron Classics ed., Adamant Media Corp. 2001).

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The second duty relates to procedural fairness, a capacious notion that incorporates several elements, notably (i) the responsibility to hear before deciding;21 (ii) the obligation to respect the contours of arbitral jurisdiction;22 and (iii) the observation of the general duty of impartiality and independence.23 The third obligation lies in an aspiration toward efficiency, to promote the optimum administration of justice. To the extent possible, the good arbitrator will seek to measure accuracy and fairness so as to arrive at a counterpoise which reduces the prospect of undue cost and delay.24 A violation of the duties of accuracy and efficiency normally would not in itself trigger intervention by a reviewing authority, whether it be a national court or an ad hoc ICSID committee.25 The possibility that an arbitrator might make a mistake, or be less than efficient, remains a risk assumed by both sides. By contrast,

21 Often called “due process” or “natural” justice in the Anglo-American legal world, and “principe du contradictoire” or “droit d’être entendu” in francophone legal systems. Likewise, Germans sometimes refer to the “fair-trial principle” (rechtsstaatliches Verfahren) or speak of a “hearing in accordance with law” (Anspruch auf rechtliches Gehör). In public international law, particularly investment disputes, due process inheres the notion of “denial of justice” claims. 22 In the negative, the duty might be expressed as avoidance of decisions which constitute an excess of authority either under the contract or by reason of some public policy constraint imposed on subject matter arbitrability or procedure. 23 Arbitrator bias, of course, presents tensions of its own. Critics of arbitration often talk as if bias remains a problem unique to arbitrators. Yet in the real world, judges also fall prey to unacceptable predispositions. See e.g., Notice & Order of George H. Painter, Administrative Law Judge, Commodity Futures Trading Commission, 17 September 2010, reporting on a colleague who during nearly twenty years of service on the bench had never ruled in favor of a claimant. See also, Michael Schroeder, If You’ve got a Beef With a Futures Broker, This Judge Isn’t for You, Wall Street J. (Washington), at 13 December 2000, A1. 24 A 2010 study by the Corporate Counsel International Arbitration Group found that 100% of corporate counsel think that arbitration takes too long, and 69% think that it costs too much. Lucy Reed, More on Corporate Criticism of International Arbitration, Kluwer Arbitration Blog ( July 16, 2010) (visited 30 May 2011), http://kluwerarbitrationblog.com/ (blaming delays on the limited availability of top-tier arbitrators and their “excessive concern for due process”). Another study, co-sponsored by a major law firm and a London university, suggested that 50% of the participating respondents were dissatisfied with the performance of arbitrators in international arbitration. See 2010 International Arbitration Survey: Choices in International Arbitration, White & Case LLP & School of International Arbitration (Queen Mary, University of London) (2010). The study follows an earlier survey sponsored by PriceWaterhouseCooper in 2006. 25 Although grounds for annulment find different articulations from one system to another, most aim at matters such as tribunal excess of powers, bias, or departure from a fundamental rule of fair procedure. See e.g., Federal Arbitration Act § 10; article 1520 of the French Code de procédure civile; article 52 of the ICSID Convention of 1965.



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violation of arbitration’s basic procedural fairness does and should give rise to sanctions.26 The penalty for breach of an arbitrator’s duty of fairness carries a certain irony, in that sanctions do not fall directly on the arbitrator who breached his or her duty. Although they may suffer a loss of reputation, offending arbitrators can benefit from immunity even for violations of basic procedural integrity.27 The price of misconduct thus falls most directly on the prevailing party, in the form of award annulment for breach of procedural integrity. B. An Enforceable Award: The Fourth Musketeer Enthusiasts of The Three Musketeers will remember a fourth member of the group, young d’Artagnan, who hoped to become one of the King’s guards along with his friends Athos, Porthos, and Aramis. Likewise, an additional duty figures prominently in the catalogue of arbitral obligations. To reduce the prospect that the arbitrator’s decision will remain nothing more than a piece of paper, arbitrators are expected to exercise vigilance in promoting an enforceable award. To the extent possible, and consistent with their other duties, arbitrators should avoid giving cause for annulment or non-recognition of the award by reviewing authorities.28 In practice, an inherent rivalry often permeates the intersection of the arbitrators’ various obligations. Too much efficiency may mean too little time to hear evidence. Overly intricate procedural safeguards can paralyze proceedings. In some cases, attempts to please a reviewing court can reduce the arbitrator’s fidelity to the parties’ expectations.29 26 Such scrutiny of procedural fairness also serves to promote accuracy by encouraging arbitrators to listen to both sides before deciding. 27 In one case, where a sole arbitrator failed to disclose his romantic relationship with the sister of respondent’s counsel, immunity was upheld even though the award had been vacated. See La Serena Properties v. Weisbach, 186 Cal. App. 4th 893, 112 Cal. Rptr. 3d 597 (Cal. Ct. App. 2010), in which claimants argued that the arbitrator should be liable for fraudulently inducing them to approve his appointment in a case which essentially denied the claim. The reviewing court found disclosure to be an integral part of the arbitral process, and thus protected by common law immunity for quasi-judicial acts. 28 This duty of enforceability has been memorialized in institutional arbitration rules. Article 35 of the International Chamber of Commerce Arbitration Rules provides, “In all matters not expressly provided for in these Rules, the [ICC] Court and the Arbitral Tribunal shall act in the spirit of these Rules and shall make every effort to make sure that the Award is enforceable at law.” The Rules of the London Court of International Arbitration provide in Article 32.2, “In all matters not expressly provided for in these Rules, the LCIA Court, the Arbitral Tribunal and the parties shall act in the spirit of these Rules and shall make every reasonable effort to ensure that an award is legally enforceable.” 29 For a thoughtful discussion of the delicate balance involved in arbitral duties, see Walking a Thin Line: What an Arbitrator Can Do, Must Do or Must Not Do

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IV. The Challenge of Caribbean Niquel A. The Right to Comment To illustrate the complex interaction among arbitral duties, it would be hard to find a better cautionary tale than the one supplied by the French Cour de Cassation in Sté Commercial Caribbean Niquel v. Sté Overseas Mining Investments.30 Affirming the litigants’ right to comment on new legal theories, even at the addition of cost and delay, the Court vacated an award based on an approach to damages which the court considered had not been addressed by the parties. After a Cuban mining joint venture had gone sour, arbitrators sitting in Paris awarded the claimant US $45 million on a theory of “lost chance” (perte de chance de poursuivre le projet). The parties, however, seem to have focused on a theory of lost profits ( gain manqué), which the arbitrators might have found less than satisfying with respect to a mine not yet operative.31 The court vacated the award for violation of provisions in the Code de procédure civile related to the right to be heard (principe du contradictoire) and public policy (ordre public).32 Although not questioning the assumption that arbitrators know the law, often expressed as jura novit curia,33 the court found it unacceptable (Belgian Centre for Arbitration and Mediation, CEPANI40, Colloquium 29 Sept. 2010). Contributions include essays by Maud Piers, Marc Dal, Jan Schäfer, Caroline Verbruggen, Bernd Ehle, Dirk de Meulemeester, Joana Kolber and Olivier Caprasse, addressing inter alia the arbitrator as “private judge” as well as the arbitrator’s role in ascertaining applicable law and costs. 30 Arrêt No. 785, 29 juin 2011 (10–23.321), Première chambre civile. The Cour de cassation (the highest civil court in France) rejected an appeal against the decision of the Cour d’appel de Paris (25 Mars 2010, No. 08/23901: La Semaine Juridique Ed. G., No. 23, 7 juin 2010, pp. 1202–03, obs. Seraglini.). 31 Indeed, the tribunal held that calculating the lost economic benefit was too uncertain, whereas calculating the value of the chance to take advantage of an economic opportunity could “undeniably” be evaluated. The tribunal therefore based the reasoning in its award on the legal theory that the party should be compensated for the economic value of the lost opportunity. 32 At the time of the decision, these provisions were contained in Article 1502 of the Code de procedure civile, but now have been shifted to Article 1520. See Décret no. 2011–48, 13 January 2011. In both the old and the new articles, the relevant text reads as follows: L’appel de la décision qui accorde la reconnaissance ou l’exécution n’est ouvert que dans les cas suivants: **** 4° Lorsque le principe de la contradiction n’a pas été respecté; 5° Si la reconnaissance ou l’exécution sont contraires à l’ordre public international. The French Code de Procédure Civile speaks of the “principe de la contradiction” (terminology used by the Cour de Cassation) while many commentaries speak of “principe du contradictoire”. See generally, Marie-Anne Frison-Roche, Généralités sur le principe du contradictoire, Thèse Paris II, 1988, p. 343. 33 For a recent decision on the judge’s ability to deal with questions of law, see Judge Posner’s concurrence in Bodum USA v. La Cafetière Inc., 621 F3d 624, 631–638 (7th Cir.



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that an award should rest on a theory of damages which the court assumed, rightly or wrongly, had not been addressed by counsel.34 B. Conflicting Duties The decision provides a stark example of the difficulty in balancing various arbitral duties, with measures aimed at reducing cost resulting in diminished opportunity for the litigants to present their cases. Apart from an award on the “lost chance” theory, raising the obvious risks lurking in any decision based on a damages methodology not argued, only a limited number of options were open to the tribunal. None was ideal. (i) The “lost chance” theory might have been raised during the hearings, assuming the arbitrators identified early enough the problematic nature of a profitsbased methodology. (ii) In the alternative, hearings might have been reopened, to address factual issues relevant to lost chance, and/or legal argument might have been invited on the applicability of an approach linked to lack of opportunity (chance) rather than missing profits. (iii) A final option would have been to dismiss the claim because lost profits (as contrasted to lost chance) had not in fact been proved. Any of these alternatives would have been open to criticism. Imagine that the arbitrators in the midst of their deliberations had re-opened the proceedings to hear testimony and set a briefing schedule for arguments on the new legal 2010). Although Rule 44.1 of the Federal Rules of Civil Procedure allows a court to take into account any admissible evidence in understanding a rule of foreign law, including expert testimony, it does not require reliance on an expert. Federal courts in the United States regularly apply the law of all fifty states without necessarily being well versed in the intricacies of state law, and without relying on expert testimony, because “judges are experts on law.” Party-appointed experts, however, are chosen not because of their objective expertise in a country’s law, but rather because his or her interpretation of that law helps the appointing party. 34 Other decisions in both France and Switzerland have come to similar conclusions. In Engel Austria v. Don Trade (Paris Cour d’appel, 3 Dec. 2009), the court annulled the award for having been based on “imprévision” (Wegfall der Geschäftsgrundlage) without giving the parties an adequate opportunity to comment on that doctrine. See Andrea Carlevaris, L’arbitre international entre Charybde et Scylla: le principe de la contradiction et impartialité de l’arbitre, Les Cahiers de l’arbitrage, 2001–2, page 433. When faced with a similar problem, the highest court in Switzerland, the Tribunal fédéral, or Bundesgericht, annulled a decision of the Tribunal Arbitral du Sport for voiding an exclusivity clause on the basis of a law never discussed with the parties. See José Urquijo Goitia c/ Liedson Da Silva Muñiz, Tribunal fédéral, 9 February 2009. However, the trend is not universal. See Supreme Court of Finland, Werfen Austria GmbH v. Polar Electro Europe B.V., Zug Branch, 2 July 2008.

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theory of lost chance. Loud moaning would have been heard about added expense and delay. Notwithstanding large amounts at stake, corporate legal departments remain sensitive to litigation costs. In raising the new theory with the parties, whether during the hearings or afterwards, the tribunal might also have exposed itself to criticism about lack of even-handedness. How would the arbitrators raise the new theory without exposing themselves to the charge of partiality? The respondent would have been less than thrilled to see the tribunal sending a signal that claimant could increase its chances of success by an amended pleading. Rightly or wrongly, a perception might have been created that the tribunal was acting as counsel for the side which needed to come up with a coherent calculation of damages, and which thus far had not been able to do so. However, it would have been equally problematic for the arbitrators simply to dismiss the claim because lost profits as such had not been proven, without any consideration of the “lost chance” methodology. Denying recovery entirely would have penalized an at least partially meritorious claim simply because of nuances in theories of recovery not necessarily apparent in an international context with counsel from different legal cultures.35 Notions of procedural fairness encompass a variety of distinct yet related obligations which in practice often compete against each other. Allowing an opportunity to address a new legal theory promotes the parties’ right to be heard. Yet suggesting the new theory in the first place potentially opens the door to a charge of bias. In the words of an old American adage, arbitrators will be damned if they do and damned if they don’t.36 V. Arbitral Jurisdiction A. The Parcel Tankers Case The decision of the United States Supreme Court in Stolt-Nielsen v. AnimalFeeds37 presents another testing ground for the elusive balance among an arbitrator’s various duties. The case arose from actions for price fixing against several ship 35 Although an arbitrator must hear the parties’ arguments on any legal theory, it is not always easy to draw a line between legal reasoning (which is properly presented in the arbitral award) and the legal theories on which the award is based (upon which the parties must be allowed to comment). Fear of stepping over the line cautions arbitrators away from suggesting new legal theories, and potentially appearing to favor one side or the other. La Semaine Juridique Ed. G., No. 23, 7 June 2010, pp. 1202–03, obs. Christophe Seraglini. 36 On the interaction between an arbitrator’s discretion to craft proceedings and the elements of due process, see e.g., William W. Park, Two Faces of Progress: Fairness and Flexibility in Arbitral Procedure, 23 Arb. Int’l 499 (2007). 37 Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010).



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owners by customers who had chartered vessels commonly known as “parcel tankers” to transport liquids such as food oils and chemicals. The customers alleged that the owners had engaged in anti-competitive practices.38 All of the charter parties included similar arbitration clauses. The customers requested a single consolidated proceeding to address their combined claims, often known as “class action arbitration” borrowing a term from American court procedures.39 The customers may have felt that consolidation would permit them to muster more significant legal firepower and to reduce legal costs to the level of making the litigation worthwhile.40 After a district court had ordered consolidation of related court actions, the parties agreed to constitute an arbitral tribunal, pursuant to the American Arbitration Association’s Supplementary Rules on Class Arbitration (AAA Supplementary Rules),41 to address whether the various arbitrations could and should be

38 In a companion criminal case, Stolt-Nielsen itself had admitted to engaging in an illegal cartel. In exchange, the Department of Justice granted amnesty. In 2003, however, the Department of Justice attempted to renegotiate the deal, claiming Stolt-Nielsen had failed to take corrective action. In 2007, the Eastern District of Pennsylvania held that the Department of Justice could not withdraw its bargain once Stolt-Nielsen executives had relinquished their Fifth Amendment right against self-incrimination. United States v. Stolt-Nielsen, S.A., 524 F. Supp. 2d 586 (E.D. Pa. 2007). 39 Although slightly misleading in the context of arbitration, the term “class action arbitration” is now widely used to describe consolidated arbitration proceedings. In a true class action, under Rule 23 of the Federal Rules of Civil Procedure, a small number of plaintiffs is “certified” to represent a larger class of plaintiffs who have substantially similar claims, whether they know it or not. By contrast, in Stolt-Nielsen there was no attempt to join parties who had not signed arbitration agreements with each other. In essence, the term is used as another way to describe consolidation of related claims and counterclaims which implicate different parties, all of whom have agreed to arbitration with each other on a bilateral basis, if not necessarily in a group proceeding. Herein, “class action arbitration” and “class arbitration” will be used interchangeably to refer to consolidation of arbitral proceedings. 40 During the arbitration proceeding, counsel for AnimalFeeds argued that the claims against Stolt-Nielsen were “negative value” claims that would cost more to litigate than could be recovered in case of a victory. Transcript of Stolt-Nielsen arbitration, at 82a83a. Rightly or wrongly, Justice Ginsburg in her dissent suggested that “only a lunatic or a fanatic sues for $30.” See Stolt-Nielsen, 130 S.Ct. at 1783. One can only speculate on the effect of this “negative value” on the settlement reached between Stolt-Nielsen and AnimalFeeds on 26 October 2010, when the District Court for the District of Connecticut approved AnimalFeeds’ voluntary dismissal of its claim. On the effect of “negative value” claims, see generally Robert G. Bone, The Economics of Civil Procedure (Foundation Press 2003). 41 The agreement to AAA arbitration came after a district court had ordered consolidation of related anti-trust proceedings pending before that court. See In re Parcel Tanker Shipping Services Antitrust Litigation, 296 F.Supp.2d 1370 (JPML 2003).

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consolidated.42 In a partial award, the tribunal construed the arbitration clause to permit class arbitration. This left to a subsequent stage the determination of whether consolidation should in fact be ordered on a finding that the AAA Supplementary Rules had been met, including a determination of common questions of law and fact among the claims. B. Excess of Authority The asserted efficiencies in class arbitration, with savings from grouping related claims into a single case, did not impress the ship owners, which sought to vacate the award for excess of authority under the Federal Arbitration Act.43 Ultimately a majority of the U.S. Supreme Court44 held that the arbitrators had exceeded their authority by imposing personal views of sound policy rather than deciding pursuant to applicable law as it then existed.45 The Court based its conclusion on a somewhat unusual feature of the case, which was a post-dispute stipulation concluded by the parties confirming that their contracts were silent on the matter of class action arbitrations, in the sense that “no agreement” had been reached. Significantly, the Court did not say that parties must agree explicitly to class arbitration, but simply that the case at bar implicated no agreement, whether explicit or implicit.46

42 AnimalFeeds brought the claim on behalf of itself and all others similarly situated in a putative class action against Stolt-Nielsen, Odfjell, Jo Tankers, and Tokyo Marine. 43 FAA§10(a)(4) “arbitrators exceeded their powers”. 44 The majority opinion of the Supreme Court was authored by Justice Alito, joined by Justices Scalia, Thomas, Kennedy, and Chief Justice Roberts. Justice Ginsburg wrote a dissent, joined by Justices Breyer and Stevens. Prior to reaching the Supreme Court, the District Court for the Southern District of New York had vacated the award, and the Second Circuit Court of Appeals reversed. Although Justice Sotomayor took no part in the Supreme Court’s decision, having been on the Second Circuit when the case was on appeal, she did agree with Justices Stevens, Ginsburg, and Breyer later that year by joining a dissent in Rent-A-Center, West, Inc. v. Jackson, 130 S.Ct. 2772 (2010), another politicized case addressing arbitral jurisdiction. 45 Justice Alito wrote, “It is only when an arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice that his decision may be unenforceable. In that situation, an arbitration decision may be vacated under § 10(a)(4) of the FAA on the ground that the arbitrator ‘exceeded [his] powers,’ for the task of an arbitrator is to interpret and enforce a contract, not to make public policy. In this case, we must conclude that what the arbitration panel did was simply to impose its own view of sound policy regarding class arbitration.” StoltNielsen at 1767–1768. 46 See Stolt-Nielsen, 130 S. Ct. at 1782, n. 10: “We have no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration.”



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In the view of the majority, the ship owners’ procedural right not to be subject to a class arbitration trumped the arbitrators’ ability to craft a more efficient proceeding. Procedural fairness, in giving effect to the parties’ original agreement, proved more important than avoiding costs which might otherwise discourage pursuit of the claim. C. The Political Context The decision divided the Court sharply along political lines. A vigorous dissent by three of the more liberal Court members argued that the arbitrators were simply doing what the parties had asked of them in the supplemental arbitration agreement invoking the AAA Supplementary Rules.47 The political dimensions of the case resist simple analysis. American conservatives tend to favor arbitration as a process in line with freedom of contract. Yet their preferences get reversed for class proceedings, which appear as an antibusiness tool of plaintiffs’ lawyers fomenting litigation on a contingency fee basis. In contrast, liberal justices often express skepticism of arbitration as a device to sidestep the perceived safeguards of a civil jury.48 Yet they seem to perceive class proceedings as a pro-consumer mechanism permitting multiple litigants to engage jointly a legal team, making pursuit of the claims feasible.49

47 The dissent pointed out that the parties had executed a supplementary agreement providing that the question of whether the dispute should proceed as a class action arbitration was to be decided pursuant to the AAA Supplementary Rules. Rule 3 of these rules explicitly grants the arbitrators jurisdiction to determine whether the arbitration might, as a matter of contract, proceed on behalf of a class, assuming satisfaction of the relevant criteria for class certification. Set forth in Rule 4, these factors largely parallel those in the Federal Rules of Civil Procedure. 48 Liberal doubts about arbitration are not new. See e.g., the dissent by Justice Stevens in the landmark Mitsubishi case allowing arbitration of anti-trust claims in an international context. Stevens wrote, “Consideration of a fully developed record by a jury, instructed in the law by a federal judge, and subject to appellate review, is a surer guide to the competitive character of a commercial practice than the practically unreviewable judgment of a private arbitrator.” Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985), at 666. 49 The current vogue for protecting consumers from arbitration in the United States can be seen in the Dodd-Frank Act (21 July 2010) which invalidates (or in some cases permits invalidation of ) pre-dispute arbitration agreements in cases with deemed imbalances in bargaining power. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. 111–203, 124 Stat. 1376–2223. If enacted, the pending Arbitration Fairness Act would yield similar results on a broader scale. Arbitration Fairness Act of 2009, H.R. 1020, 111th Cong. (2009). See also Department of Defense Regulation Restricting the Use of Mandatory Arbitration Agreements, 48 C.F.R. §§ 212, 222 & 252 (19 May 2010).

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D. The Right Answer to the Wrong Question 1. The Second Agreement The chief mischief of Stolt-Nielsen lies in its potential to decrease the finality of arbitration by making it easier for courts to vacate awards. Few would disagree that arbitrators must remain faithful to the parties’ contract, not create new public policy.50 Unfortunately, the majority opinion took that general proposition as an avenue to justify award annulment simply because the arbitrators got it wrong on a question submitted for their determination. In its zeal to send a signal of the admittedly problematic nature of class action arbitration, the majority conflated two distinct questions. The first relates to the limits of an arbitrator’s jurisdiction, which falls within the province of a national court’s review. The second concerns merits of an arbitrator’s substantive decision, which courts would not normally disturb.51 The opinion by Justice Alito rightly noted the parties’ post-dispute stipulation that the contract was silent in the sense of containing “no agreement” on class action arbitration. However, the litigants had unequivocally asked arbitrators, not judges, to construe their ex ante intent on class arbitration. Article 3 of the AAA Supplementary Rules, titled “Construction of the Arbitration Clause,” provides the arbitrators with an explicit grant of jurisdiction as follows: Upon appointment, the arbitrator shall determine as a threshold matter, in a reasoned, partial final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class (the “Clause Construction Award”).52

The arbitrators were thus empowered by the parties to address whether the arbitration clause permitted the case to proceed on behalf of a class.53 The litigants moved the class action question to the realm of the dispute’s substantive merits,

50 The Stolt-Nielsen majority opinion at 1767–68 declared that the award must be vacated because the tribunal simply “impose[d] its own view of sound policy regarding class arbitration.” 51 See generally, William W. Park, The Arbitrator’s Jurisdiction to Determine Jurisdiction, in 13 ICCA Congress Series 55 (A.J. van den Berg ed., 2007). 52 Moreover, Rule 3 recognizes that such a determination will be considered an award subject to review pursuant to the delineated grounds for vacatur, but no more, as provided in the Federal Arbitration Act. The Rule continues, “The arbitrator shall stay all proceedings following the issuance of the Clause Construction Award for a period of at least 30 days to permit any party to move a court of competent jurisdiction to confirm or to vacate the Clause Construction Award.” The point of Rule 3 is to construe the contract, as a threshold matter, to determine whether the parties agreed to submit their dispute to class arbitration at all. 53 The applicability of these AAA procedures was explicitly recognized by the majority. See Stolt-Nielsen, 130 S. Ct. at 1765.



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which under the Federal Arbitration Act normally remains within the purview of the arbitrators. In essence, the majority gave the right answer to the wrong question. The relevant inquiry facing the Court was not, “What did the parties agree in general?” but the more limited issue, “What did the parties agree to arbitrate?” By accepting the AAA Supplementary Rules, the parties gave to the arbitrators the question of whether the contract allowed class action arbitration, thus generally precluding judicial second-guessing on that matter. Courts might still intervene to monitor bias or lack of due process, but not to correct a simple mistake in the arbitrators’ contract interpretation. 2. Substantive Merits vs. Arbitral Jurisdiction In holding that the award should be vacated, the majority invoked excess of authority by the arbitral tribunal, one of the limited statutory grounds for vacatur under the Federal Arbitration Act.54 Under the facts of the case, however, the Court may well have blurred the distinction between excess of jurisdiction and simple mistake of law, dressing the latter in the garb of the former. True enough, articulating a robust definition of excess of authority has often proved elusive.55 On the basis that litigants do not expressly empower arbitrators to make mistakes, at least one judge has gone so far as to suggest that errors always constitute an excess of authority.56

54 9 U.S.C. § 10(a)(4) provides award annulment if arbitrators have “exceeded their powers.” 55 Attempts to define jurisdiction sometimes bring to mind the line by U.S. Supreme Court Justice Potter Stewart, admitting an inability to define “hard core” obscenity but adding, “I know it when I see it.” Jacobellis v. Ohio, 378 U.S. 184 (1964) at 197 (concurring opinion), examining when erotic expression falls outside the limits of Constitutionally protected speech in the context of a Louis Malle film Les Amants about a woman in an unhappy marriage. British judges sometimes apply a less risqué characterization test. In deciding that a floating crane was not a “ship or vessel” for purposes of insurance policy, Lord Justice Scrutton referred to the gentleman who “could not define an elephant but knew what it was when he saw one.” Merchants Marine Insurance Co. Ltd. v. North of England Protecting & Indemnity Association, [1926] 26 Lloyd’s Rep. 201, at 203; 32 Com. Cas. 165, at 172. 56 The great English jurist Lord Denning once suggested (albeit in an administrative context) that “Whenever a tribunal goes wrong in law it goes outside the jurisdiction conferred on it and its decision is void.” See Lord Denning, The Discipline of the Law 74 (Oxford Univ. Press 1979). See also Pearlman v. Keepers and Governors of Harrow School, [1978] 3 W.L.R. 736, 743 (C.A.) (“The distinction between an error which entails absence of jurisdiction and an error made within jurisdiction is [so] fine . . . that it is rapidly being eroded.”). Happily for the health of English law, the House of Lords in 2005 rejected this position several years ago in the Lesotho Highlands Development Authority v. Impreglio SpA [2005] UKHL 43 (30 June 2005).

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Such a stretch, however, ignores that the parties asked an arbitrator, not a judge, to decide the case, assuming the risk that the arbitrator might get it wrong. Nothing in the Federal Arbitration Act permits judges to impose their own views on matters submitted to arbitration. The integrity of the arbitral process requires not only that judges scrutinize gateway matters related to the contours of the litigants’ agreement to arbitrate, but equally that courts respect the arbitrators’ decisions on questions given to them for adjudication. In this context, one may recall words used from an earlier U.S Supreme Court decision addressing a dispute between a New York merchant and an Illinois store owner before arbitrators who ultimately awarded damages to the ill-treated storekeeper. Having lost in arbitration, the unhappy New Yorker succeeded in having the award set aside by a lower court. The Supreme Court reversed with the following reasoning: If the award is within the submission, and contains the honest decision of the arbitrators, after a full and fair hearing of the parties, a court of equity will not set it aside for error, either in law or fact. A contrary course would be a substitution of the judgment of the chancellor [the judiciary] in place of the judges chosen by the parties [the arbitrators], and would make an award the commencement, not the end, of litigation.57

Litigants should not be allowed to renege on their bargain to arbitrate simply when a decision proves not to their liking. There is nothing odd in saying that parties express their intent to arbitrate matters which might otherwise be jurisdictional in nature. For example, allegations that the signature in an arbitration clause had been forged would normally give rise to a judicial review. Yet it would always be up to the parties to agree that the allegation of forgery should be arbitrated,58 in which case the arbitrator would be the one to determine the genuineness of the signature.59

57 Burchell v. Marsh, 58 U.S. 344, 349 (1855). 58 With respect to the very existence of an agreement to arbitrate (such as raised by the allegations of forgery), a separate post-dispute agreement to arbitrate would normally be needed to confer arbitral jurisdiction. By contrast, with respect to procedural matters (such as respect for time limits) the parties might well confer arbitral authority in a single contract containing a clear mandate to arbitrate. See Howsam v. Dean Witter, 537 U.S. 79 (2002), addressing the right to interpret a requirement that arbitration be filed within six years after “the occurrence or event giving rise to the dispute.” 59 Such delegation of jurisdictional authority in a separate agreement is exactly what happened in Astro Valiente Compania Naviera v. Pakistan Ministry of Food & Agriculture (The Emmanuel Colocotronis No. 2), [1982], 1 All E. R. 823, where buyers of wheat refused to arbitrate a dispute with the shipper on the theory that the arbitration clause in the charter party had not been incorporated in the bill of lading. The parties submitted to ad hoc arbitration the question of whether the arbitration clause was incorporated into the bill of lading, and were subsequently held to be bound by an award finding that the buyers had agreed to arbitrate based on language in the bill of lading providing “All other conditions . . . as per . . . charter party”.



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At some point, of course, arbitrators might simply invent a legal standard informed only by their personal policy preferences.60 In such an instance, they would be exceeding their authority. The facts of Stolt-Nielsen, however, do not lend themselves to painting the arbitrators as such wild cards.61 It may well be that the majority’s aversion to forced joinder represents sound policy. Absent legislative pronouncement banning class arbitration, however, it was for the parties to adopt whatever path they preferred. Under the facts in Stolt-Nielsen, they had asked arbitrators, not courts, to interpret their agreement on this matter. In this respect, the dissent fared better in construing the various agreements together, reading the “no agreement” stipulation in conjunction with the post-dispute adoption of the AAA Supplementary Rules.62 3. Opt-in For Class Members The balance between efficiency and fairness finds further complications in the way the AAA Supplementary Rules describe the criteria for class certification, according to factors that largely parallel those set forth in the Federal Rules of Civil Procedure.63 As mentioned earlier, if arbitrators find that the contract

60 The sting in the majority’s vacatur of the award lies in the line, “what the arbitration panel did was simply to impose its own view of sound policy regarding class arbitration.” Stolt-Nielsen at 1767–1768. However, Justice Ginsberg in her dissent notes that the tribunal did in fact tie its conclusion “to New York law, federal maritime law, and decisions made by other panels pursuant to Rule 3 [of the AAA Supplementary Rules].” 130 S.Ct. at 1780. 61 In Stolt-Nielsen, the arbitrators’ understanding of the law was made on the basis of an earlier U.S. Supreme Court decision in which a mere plurality of the Court held that determinations on consolidation were for the arbitrators themselves. See Green Tree v. Bazzle, 539 U.S. 444 (2003). The legacy of this case was anything but clear. None of the four opinions in Bazzle commanded a majority. The plurality felt that the arbitrator should decide whether the parties’ agreement allowed for class action arbitration. Justice Stevens concurred with the outcome but did not endorse its reasoning. The dissent by Chief Justice Rehnquist argued that the parties’ contract demonstrated no consent to class action arbitration. The dissent by Justice Thomas noted that the case originated before South Carolina states courts, and contended that the Federal Arbitration Act did not apply to state proceedings. In the context of the point made by Justice Thomas, it is interesting that Stolt-Nielsen implicated a maritime matter, falling within the purview of federal rather than state law. 62 Although stressing that the award was not yet “ripe” for review, the opinion by Justice Ginsburg acknowledged the effect of the agreement to apply the AAA Supplementary Rules. Her dissent notes: “The parties’ supplemental agreement, referring the classarbitration issue to an arbitration panel, undoubtedly empowered the arbitrators to render their clause-construction decision. That scarcely debatable point should resolve this case.” 130 S.Ct. at 1780. 63 AAA Supplementary Rule 4 provides that the arbitrator shall permit one or more parties to represent the class only if each of the following conditions is met: (i) class is so numerous that joinder of separate arbitrations is impracticable; (ii) questions of

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permits class action arbitration, they proceed to examine whether satisfaction of other prerequisites (such as common issues of law and fact) justifies proceedings on a class basis. Among these prerequisites is the requirement that each class member has entered into an agreement containing an arbitration clause substantially similar to the one signed by the class representative. A careful observer will note the reference to an agreement by “each class member,” which is to say, the claimant, not the respondent. On its face, such language seems to leave open the prospect that a company which never had an arbitration clause with the ship owners (to take the Stolt-Nielsen context) might become part of the arbitration through a unilateral post-dispute “opt-in” process. Lacking reciprocity, such a mechanism poses policy concerns of significant magnitude, given that arbitration (unlike court proceedings) presupposes consent. Under the facts of Stolt-Nielsen, all owners and all customers had agreed to arbitrate with each other through clauses in the charter-parties.64 Consolidation simply moved things from bilateral to multilateral proceedings, without deeming into life an agreement to arbitrate where none had existed. The calculus for class arbitration, however, would change dramatically if a unilateral “opt-in” process were to bring into the arbitration potential claimants with which respondents had never concluded any arbitration agreement at all.65 Courts must show special vigilance in connection with attempts to extend arbitration clauses to non-signatories,66 a much-vexed matter which recently gave rise to conflicting high-profile decisions in France and Britain during the Dallah law or fact common to the class; (iii) claims or defenses of the representative parties are typical of the claims or defenses of the class; (iv) representative parties will fairly and adequately protect the class interests; (v) counsel selected to represent the class will fairly and adequately protect the class interests; and (vi) each class member has entered into an agreement containing an arbitration clause substantially similar to that signed by the class representative(s) and other class members. 64 Stolt-Nielsen, 130 S.Ct. at 1765. 65 Statutory court-ordered consolidation of arbitration is a different matter, of course, given that all parties will presumably be subject to the relevant judicial jurisdiction. See, e.g., Mass. Gen. Laws, ch. 251, § 2A, allowing consolidation of actions involving a common question of law or fact, held applicable in federal cases, at least if the parties’ agreement is silent on the matter. New England Energy v. Keystone Shipping, 855 F.2d 1 (1st Cir. 1988) See also Mass. Gen. Laws ch. 90 § 7N1/2, requiring non-voluntary arbitration of claims over allegedly defective vehicles. See also Cal. Code Civil Procedure, § 1281.3, which permits consolidation of arbitration proceedings that involve a common issue of law or fact. Compare Gov. of United Kingdom v. Boeing Co., 998 F.2d 68, 69 (2d Cir. 1993), limiting judicial discretion to grant consolidation of arbitration proceedings “absent the parties’ agreement to allow such consolidation.” 66 Non-signatories may sometimes be brought into proceedings on the basis of agency or corporate veil piercing. See generally, William W. Park, Non-Signatories and International Contracts: An Arbitrator’s Dilemma, in Multiple Party Actions in International Arbitration: 3 (Permanent Court of Arbitration, 2009). The U.S. Supreme Court, of course, is well aware of the various theories on which non-signatories might



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saga.67 Like marriage, commercial arbitration implicates mutual consent, not an open-ended option to be exercised by a host of partners.68 E. A Legacy of Open Questions Although the peculiar facts of Stolt-Nielsen limit its precedential value,69 the case does signal greater latitude for award annulment. By ignoring the litigants’ agreement to arbitrate the question of whether class proceedings were authorized, the decision raises the prospect that arbitration will become mere foreplay to litigation. Apart from sowing confusion on the allocation of tasks between judges and arbitrators, the case leaves a legacy of open questions. For example, the majority provides little if any guidance on factors that might demonstrate the parties’ intent to permit class arbitration. In a key footnote, the majority punts to future decisions the important question of how to define the contours of an agreement to class action proceedings, stating “We have no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration.”70 Likewise, the Court fails to address the much-vexed matter of whether “manifest disregard of the law” continues to exist as an independent ground for review

be joined in arbitration. See Arthur Andersen v. Carlisle, 129 S.Ct. 1896 (2009) (addressing notions of third party beneficiaries). 67 See Dallah Real Estate and Tourism Holding Co. v. Government of Pakistan, [2010] UKSC 46 (3 Nov. 2010), implicating an award made in Paris but presented for enforcement in Britain. Although the British Supreme Court held that there was no justification to join the government of Pakistan, the Paris Cour d’appel came to an opposite decision on 17 February 2011. In determining whether Pakistan was bound, each court purported to apply the same principles of French law, known as the Dalico rule, emphasizing the “common will of the parties” (commune volonté des parties) as a transnational standard free from the idiosyncrasies of national law. As Dallah illustrates, however, transnational principles may prove themselves stubbornly parochial in their application. The French court emphasized post-contract behavior by the government of Pakistan, while the British focused on the relationship of the parties. For a general discussion of the conceptual difficulties in determining the applicable law for purposes of joining nonsignatories, including New York Convention Article V(1)(a) which tests the validity of an arbitration agreement by the law of the country where the award is made. See William W. Park, Rules & Standards in Private Int’l Law, 73 Arbitration 441, 444 (2007). 68 A different analysis applies to proceedings based on bilateral investment treaties and free trade agreements, where host states provide standing offers to arbitrate with potential investors. 69 The decision rests on an explicit “no agreement” stipulation not likely to be repeated if the parties resisting class arbitration have competent counsel. For a scholarly perspective on the effect of Stolt-Nielsen in future cases, see S. I. Strong, Opening More Doors than it Closes, 2010 Lloyd’s Maritime & Consumer Law Q. 565 (Nov. 2010). 70 See Stolt-Nielsen 130 S. Ct. at 1782, n. 10.

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of arbitral awards.71 Instead, the decision says only that if such a standard exists, it was satisfied under the facts of Stolt-Nielsen,72 thus leaving the vitality of the doctrine open to question.73 Regardless of any substantive guidance it may offer, the decision will likely provoke further politicization of arbitration in the United States.74 The drama springs from idiosyncrasies of American legal culture, including the absence of any general nation-wide statute to insulate consumers and employees from abusive arbitration arrangements,75 and doubts about the reliability of civil juries, sometimes perceived as facilitating unreasonable verdicts tainted with bias against manufacturers or employers. New battles have already been fought on validity of contractual waivers of class action arbitration, based both on arbitration-specific state law doctrines of unconscionabity, as well as more general concerns about the economic viability of “bilateral” as opposed to collective arbitration. In AT&T Mobility v. Concepcion, the same Court which decided Stolt-Nielsen addressed arbitration arising from a federal court action brought by consumers against the manufacturer of cell 71 First introduced in dictum of the 1953 U.S. Supreme Court decision Wilko v. Swann, “manifest disregard of the law” has raised considerable concern in some quarters. See, e.g., the opinion by Chief Judge Posner in Baravati v. Josephthal, Lyon & Ross, Inc., 28 F.3d 704, 706 (7 Cir. 1994), which refers to the doctrine as having been “[c]reated ex nihilo [as] a nonstatutory ground for setting aside arbitral awards.” Judge Posner, continued: “If [manifest disregard] is meant to smuggle review for clear error in by the back door, it is inconsistent with the entire modern law of arbitration. If it is intended to be synonymous with the statutory formula that it most nearly resembles-whether the arbitrators ‘exceeded their powers’-it is superfluous and confusing.” 72 See Stolt-Nielsen, 130 S.Ct. at 1768, n. 3: “We do not decide whether ‘manifest disregard’ survives . . . as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. § 10.” The Court then continued, “Assuming, arguendo, that such a standard applies, we find it satisfied for the reasons that follow [in the majority opinion].” 73 Whether “manifest disregard of the law” exists as an independent ground for judicial review of awards was put into doubt by the 2008 Supreme Court decision in Hall Street v. Mattel, 552 U.S. 576. Stolt-Nielsen avoided the question by stating that if such a standard exists it was satisfied. 130 S.Ct. 1768, at note 3. The Supreme Court passed up another opportunity to consider “manifest disregard” in Certain Underwriters at Lloyd’s, London v. Lagstein, 607 F.3d 634 (9th Cir. 2010), petition for cert. denied. 74 For the current state of controversy over the costs and benefits of arbitration in the United States, readers are directed to the history of the Arbitration Fairness Act of 2009, H.R. 1020 & S. 931 (111th Congress, 1st Session). 75 The U.S. Congress, however, can and has passed legislation limiting arbitration on behalf of special interest groups. See Motor Vehicle Franchise Contract Act of 2002, § 11028, Pub. L. No. 107–273, 116 Stat. 1758, 1835–36 (codified at 15 U.S.C. § 1226 (2000)), sometimes known as the Bono Bill in recognition of its original sponsor, the late Sonny Bono. Recently, Senators Jeff Sessions and Russell Feingold proposed a bill intended to provide broad protection of consumer interests, albeit perhaps of an over-inclusive nature that sacrifices vital elements of party autonomy and efficient dispute resolution.



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telephones.76 The standard form sales contracts provided for arbitration, but prohibited class proceedings. Relying on an earlier California judicial ruling striking down such prohibitions as unconscionable, the district court refused to compel arbitration. The Supreme Court reversed, saying that the Federal Arbitration Act preempted state rules barring class-action waivers. A vigorous dissent by Justice Breyer stressed the advantages of class arbitration, and argued that the California rule on waivers fell within the role accorded to state law in determining the validity of arbitration agreements. Such decisions on class arbitration have already resulted in push-back from lower courts. In a multiple stage anti-trust case brought by merchants against a charge-card issuer,77 the Second Circuit invalidated class action waivers in arbitration even after two remands for reconsideration.78 The named claimants, companies in California and New York as well as a national trade association, sought to represent all merchants which had agreed to accept Amex cards. Although happy for the business from “charge” cards (simply a means of payment), the merchants objected to having to honor “credit” cards permitting customers to finance purchases over time, apparently issued to a less affluent group of customers than the charge card holders. Claimants argued that the Amex “Honor All Cards” policy constituted an illegal “tying” arrangement in violation of Section 1 of the Sherman Act. The American Express card acceptance agreements allowed either side to resolve claims by arbitration. However, the contracts also provided that choice of arbitration by either side precluded the merchant from participating “in a representative capacity or as a member of any class of claimants” during the arbitration proceedings. Rightly or wrongly, the appellate court found that high cost of “bilateral” arbitration would effectively preclude vindication of statutory rights. On the first reconsideration, directed in light of Stolt-Nielsen, as well as its second reconsideration, following AT&T Mobility, the Court found its original analysis unaffected,

76 AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). 77 The named plaintiffs sought to represent all merchants which, having agreed to accept American Express “charge cards” (simply a means of payment) were forced by the issuer’s policy to accept credit cards permitting cardholder to finance purchases without paying the full amount. The merchants objected to having to honor credit cards, apparently issued to a category of customer less affluent than the “charge card” holders. Asserting that the “Honor All Cards” provision of their agreement with American Express was an illegal “tying” arrangement in violation of Section 1 of the Sherman Act. 78 In re American Express Merchants Litigation, (“Amex I”), 554 F.3d 300 (2d Cir. 2009); In Re American Express Merchants Litigation (“Amex II”), 634 F.3d 187 (2d Circ. 2011); In re American Express Merchants Litigation (“Amex III”), 2012 WL 284518 (2d Circuit 2012).

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and declared the arbitration clause unenforceable. Relying on testimony of an economist who opined that the cost of an economic antitrust study might fall between “several thousand dollars” and “in excess of $1 million” the Court found the arbitration clause unenforceable.79 An order to arbitrate on a class action basis was not an option in light of StoltNielsen, which requires agreement on the matter. Thus the Second Circuit simply concluded that the arbitration clause itself was unenforceable, and remanded to the district court with instructions to deny the motion to compel arbitration. In doing so the Court was careful not to not suggest that all class-action waivers were to be deemed per se unenforceable. Rather, analysis rested on the proposition that in the instant case the only economically feasible means for enforcing rights under competition law lay via class action. If the arbitration clause precluded such proceedings, then the agreement to arbitrate was unenforceable. Such an approach leaves litigants in a difficult position. If a contract contains a class action waiver, a judge is unable to compel class proceedings. Yet the same judge might feel unable to grant a motion for non-class arbitration, considering bilateral proceedings to be unconscionable because the cost denies the claimant an ability to enforce statutory rights on an individual basis. The dilemma is certain to stimulate practitioners to focus more on drafting arbitration clauses,80 whether within the framework of consumer transactions or business-to-business contracts.81 The Supreme Court decisions beg the question of how courts outside the United States will address legal actions in conflict with class arbitration, if and when arbitrators allow unilateral “opt-in” by individuals or companies which had not previously agreed to arbitrate.82 In the context of litigation in France or England, for example, it is far from evident that a French or English court would refuse to hear a claim merely because a respondent had opted into a class proceeding in the United States.

79 In re American Express Merchants Litigation (“Amex III”), 2012 WL 284518 (2d Circuit 2012), *7, citing testimony from one Gary L. French, Ph.D. 80 See Paul Friedland & Michael Ottolenghi, Drafting Class Action Clauses After StoltNielsen, 65 Dispute Res. J. 22 (May–October 2010), who suggest explicitly addressing the question of class action arbitration in the arbitration clause to avoid any confusion resulting from how future courts will interpret Stolt-Nielsen. 81 Justice Ginsburg’s dissent noted that the parties in Stolt-Nielsen were sophisticated businesses with sufficient resources and experience to bargain, rather than parties subject to contracts of adhesion. Whether this argument cuts in favor or against a presumption to allow class action arbitration remains an open question. Stolt-Nielsen, 130 S.Ct. at 1783. 82 See discussion supra of Rule 4(6) of the AAA Supplementary Class Arbitration, which makes references to agreements by “each class member,” (i.e., the claimant) to enter the arbitration, irrespective of any prior agreement to arbitrate with the respondent.



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Whatever lessons might or might not be apparent from Stolt-Nielsen, the case is sure to highlight the way in which tensions among the arbitrator’s various duties resist facile analysis. In large measure, resolving these tensions, to promote an optimal accommodation among the different obligations, will depend on honest and mature debate about the relevant rivalries.83 VI. Signposts to the Future Lectures about legal trends often speculate on the future, a mission fraught with peril.84 If arbitrators had special knowledge of what lies in store, they would be in another business.85 Although tomorrow cannot be built on an assumption of yesterday’s permanence, it must nevertheless be built on something. Our knowledge of yesterday and today usually provides the only possible starting point.86 With this caution, let us explore challenges of the next decade. A. Arbitral Duties and Societal Values The right way to do things from the arbitrator’s perspective may be the wrong way to do things from the viewpoint of the society at large. The general community often has a stake not only in the outcome of arbitration, but also in the way proceedings have been conducted.87

83 See generally, William W. Park, Les devoirs de l’arbitre: ni un pour tous, ni tous pour un, 2011 Cahiers de l’arbitrage 13. 84 A brief look into our past provides a stern reminder of the limits of forecasts. This lecture was delivered on 29 September, the date when, at the 1938 Munich conference, the so-called four Great Powers of Europe partitioned Czechoslovakia, granting Adolf Hitler the Sudetenland region of that country. When the agreement was announced the next morning, British Prime Minister Neville Chamberlain hailed it as a guarantee of “peace in our time.” Less than a year later Europe was experiencing anything but peace, as the Second World War was beginning. 85 It has been observed that prediction is particularly difficult when it concerns the future. Attributed to French Resistance leader Pierre Dac: “La prévision est difficile surtout lorsqu’elle concerne l’avenir.” For a more systematic treatment of the unforeseeable nature of great events see Nassim Nicholas Taleb, The Black Swan (2007). 86 Even the computational algorithms used in the random sampling of so-called Monte Carlo Simulations derive from knowledge linked to past experience. 87 In some instances the conflicts between public and private interests will be more theoretical than real, as exemplified in matter of arbitral confidentiality. If arbitration implicates societal interests, the public wants to watch, as demonstrated by calls for transparency with respect to investor-state disputes. Yet when such proceedings have been opened to the public, hearings usually prove so utterly boring that the audience dwindles quickly. Moreover, investor-state awards usually end up being published, in full or in sanitized versions, providing some accommodation between the public and private interests.

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A recent English Court of Appeal decision, now on appeal, provides an example of one of the less tractable conflicts between the expectations of the arbitration community and the values of society at large.88 The court struck down an arbitration clause providing for a tribunal composed of Ismaili Muslims, deemed to violate the anti-discrimination provisions of British law based on a European Union human rights Directive,89 finding the allegedly discriminatory provision not severable from the general duty to arbitrate.90 Concern has been expressed within the arbitration community that the logic which prohibits religion from being taken into account would also apply to nationality-based considerations in arbitral appointments. From that perspective, an extension of the court’s logic runs afoul of the practice of many arbitral rules and institutions that see nationality requirements as surrogates for impartiality, intended to foster a sense of fair play. Traditionally, litigants have insisted on a default rule by which the sole arbitrator or tribunal president should not share the nationality of either side. In a dispute between a Paris claimant and a Boston respondent, there is nothing odd about asking that the presiding arbitrator be neither French nor American, however fine and noble the respective candidates from those two countries might otherwise be. If the parties want a different rule, they can always agree otherwise.

88 Jivraj v. Hashwani, [2010] EWCA Civ 712. 89 A business dispute arose between two individuals who were members of the Ismaili Muslim community, a branch of Sunni Islam. The agreement to arbitrate provided that the arbitrators be members of that community. When one side had second thoughts and appointed a retired English judge who was not Muslim, the clause was challenged as a violation of the Employment Equality (Religion and Belief) Regulation of 2003, which had been introduced into English law to comply with a European Union Directive. EU Council Directive 2000/78/EC. The Court held that arbitrators are “employees” within the meaning of the Regulation and that the provision for only appointing Ismaili arbitrators violated the anti-discrimination provisions. 90 For a contrasting New York decision in which a religious requirement was severed from the general duty to arbitrate, see In re Ismailoff et al., 836 N.Y.S.2d 493 (2007, Table Decision, Surrogate’s Court, Nassau County, New York), 14 Misc.3d 1229, 2007 WL 431024. Faced with an arbitration clause requiring arbitrators to be “persons of the Orthodox Jewish faith,” the court felt unable to make the appointment due to the Constitutional provisions (First Amendment, Establishment Clause) prohibiting civil courts from resolving issues concerning religious doctrine, as enunciated by the U.S. Supreme court in Presbyterian Church v. Hull Church, 393 U.S. 440 (1969). A general reference to a Beth Din ( Jewish rabbinical court) would have been acceptable, since the court would not have been required to pass judgment on who was or was not a member of the Orthodox Jewish faith. In the end, the court avoided the problem by having each side name one arbitrator, and designating the American Arbitration Association to appoint the third tribunal member in the event of further disagreement.



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The nationality requirement affects both sides equally, and operates to reduce fears and perceptions of bias, which in a cross-border context may be significant.91 One can imagine the outcry if an international sports match were to be refereed by nationals of one of the two opposing teams. The principle of partyautonomy, as well as understandable fear of bias, raises legitimate apprehension about attempts to sanitize arbitral tribunals from all nationality qualifications. The matter provokes more anxiety than certainty and leaves much suspense. B. Enforceability Revisited 1. Procedural Rules on Costs Of all the arbitrators’ duties, the obligation to seek an enforceable award may prove the most persistently troublesome, as it implicates not only tensions among the various duties themselves, but also conflicts between the arbitral seat and the law of the enforcement forum. To illustrate, few legal rules serve as well as the English invalidation of pre-dispute agreements to allocate arbitration costs “in any event”.92 In advance of the dispute, parties may not by contract forbid an arbitrator from allocating costs on the basis of who won and who lost.93 The provision casts a wide net, catching even reasonable arrangements among sophisticated business managers to split arbitrator compensation on a 50/50 basis, and/or to require each side to cover its own legal expenses. In such an instance, what is to be done by a conscientious arbitrator? Aiming at fidelity to the parties’ agreement, an arbitrator would normally let the costs lie where they fall. Yet to do so might run the risk of award annulment

91 Those with experience in international arbitration readily bring to mind many fine arbitrators for whom nationality plays no role in decision-making. Moreover, the use of citizenship as a surrogate for legal culture or national predisposition clearly has limits. Well-known arbitrators include an Irishman raised and educated in the United States, a Bahraini citizen born in Sweden and living in Paris, and dual nationals who might have ties to both Switzerland and the United States, or to both France and Brazil. 92 Section 60, Arbitration Act of 1996: “An agreement which has the effect that a party is to pay the whole or part of the costs of the arbitration in any event is only valid if made after the dispute in question has arisen.” Section 61 goes on to set forth the general principle that “costs should follow the event except where it appears to the tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs.” This standard, however, is made subject to the parties’ agreement otherwise, which in context with Section 60 would be an agreement after the dispute has arisen. 93 The rule’s most understandable application lies in an anti-abuse mechanism to prevent clauses that would require weaker parties to pay all costs, thus discouraging otherwise legitimate claims. To be clear, the statute does not impose the English “costs follow the event” rule, but simply invalidates pre-dispute attempts to eliminate the arbitrator’s discretion in fixing obligations for items such as attorneys’ fees and amounts paid to the arbitrators and the arbitral institution.

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if proceedings are seated in London. Arbitrators may find themselves between a rock and a hard place when the award must be enforced in a jurisdiction that values respect for the parties’ procedural choices. Although flouting clear contract language on cost allocation would please an English judge,94 the disregard of the parties’ ex ante expectations may appear as excess of authority to a New York court called to enforce an award of legal costs inconsistent with the terms of the agreement.95 2. Substantive Mandatory Norms The double-edged nature of promoting award enforceability remains problematic in respect of substantive as well as procedural norms. In the well-known Mitsubishi case, the U.S. Supreme Court considered a dispute between a Japanese manufacturer and an American automobile distributor providing for application of Swiss law by arbitrators in Japan.96 Ordering arbitration, the Court nevertheless warned that American antitrust law must be considered in connection with any antitrust counterclaim, despite the contractual choice-of-law clause.97 The Mitsubishi pronouncements on U.S. competition law, like the English rule on cost allocation, place arbitrators between the Scylla and the Charybdis of inconsistent requirements. An arbitrator must satisfy norms both at the arbitral seat, where proceedings take place, and at the recognition forum, where the winner goes to attach assets. Another such conflict was presented in Accentuate Ltd. v. Asigra Inc.,98 involving an English distributor of software products for a Canadian company, pursuant to a license calling for application of Ontario law and arbitration in Toronto. After

94 Presumably Section 68 of the 1996 Act (serious irregularity causing substantial injustice) would permit judicial intervention with respect to an arbitrator’s failure to respect Section 60. 95 Not infrequently, contracts between American policyholders and British insurers provide for London arbitration but subject to New York substantive law. These so-called “Bermuda Form” arbitrations have been discussed in Richard Jacobs, Lorelie S. Masters & Paul Stanley, Liability Insurance in International Arbitration The Bermuda Form (Hart Publishing UK, 2004). 96 Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985). This particular choice of law explains itself by the fact that a Swiss affiliate of the American company Chrysler was also involved in the contractual arrangement with the distributor and the manufacturer. 97 Mitsubishi footnote 19 suggests a “prospective waiver” doctrine that would invalidate choice-of-law agreements that operated to waive a right to pursue American remedies. Moreover, the so-called “second look” doctrine warned that American courts would exercise their power at the award enforcement stage to “ensure that the legitimate interest in the enforcement of the antitrust laws [of the United States] had been addressed.” Id. at 638. 98 [2009] EWHC 2655 (QB).



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the Canadian company attempted to terminate the license, an arbitral tribunal in Toronto found for the distributor on a breach of contract counterclaim. The tribunal rejected a parallel request for damages under EU commercial agency regulations, considering the regulations outside the scope of Ontario law. A competing action was brought in England, where the Canadian company argued that the Toronto award barred claims related to the EU Regulations. Overturning a lower court stay of proceedings, the High Court required a determination on whether the Regulations gave the distributor an action independent of Ontario law. 99 If so, the award would have no res judicata effect on that matter.100 The English court thus raised the prospect that the EU Regulations might constitute mandatory norms, not unlike the antitrust counterclaims in Mitsubishi, from which the parties could not derogate.101 Such cases raise the vexed matter of divergence between an arbitrator’s duties and the perspectives of courts called to intervene in the arbitral process. Whatever the obligation of judges reviewing awards, arbitrators themselves normally aim for fidelity to the parties’ bargain, and thus hesitate to ignore explicit contract language, whether related to applicable law or cost allocation. Judges are answerable to the citizenry as a whole, while arbitrators remain in large measure creatures of contract.102

 99 The High Court also expressed the view that if the EU Regulations did apply, a claim for compensation would be governed by English law. Thus the award could not defeat the claim brought before the English court, given that the arbitrators had never addressed a matter they considered governed solely by Ontario law. Id. at paragraph 92. 100 The award was tested not in an application to refuse recognition, but rather in the collateral context of Section 9 of the English Arbitration Act which permits a stay of legal proceedings connected to matters governed by an arbitration agreement, as long as that agreement does not fail for being null, void or inoperative. According to the High Court, the district judge “fell into error” by failing to determine whether a binding arbitration clause applied to the claims under the EU Regulations, in the absence of which no award could be recognized on that point. Opinion of Justice Tugendhat, paragraph 95. 101 In this connection, it is important to note that the effect of the award was challenged in the context of a competing legal claim brought in an English court. It may well be that the award would nevertheless retain its vigor under Article III of the New York Convention in some other recognition forum. However, the peculiar facts of this case make it unlikely for the Canadian company to rely on the award except as a bar to a rival judicial action. Although the arbitral tribunal held for the distributor under Ontario law, the amount of quantum presumably was far less than that available under the EU Regulations. 102 Of course, fidelity to the agreement would not justify violation of international public norms on matters such as bribery, corruption or money laundering. However, for most matters on which sophisticated parties bargain (applicable law, costs, and damage limitations) arbitrators normally strive to let the chips fall where they may notwithstanding idiosyncratic local rules.

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C. Refining Notions of Bias Few would disagree that an arbitrator should hesitate to accept an appointment after publishing an article on a genuinely open question of law forming the precise object of the dispute. Yet it would be alarming to allow overly abstract notions of impartiality to disqualify arbitrators with knowledge and experience. Pushed to an extreme, the author of a learned treatise on commercial law might be challenged for knowing too well that contracts require offer and acceptance.103 To exclude service by those with learning would leave arbitration to dim-wits who live alone in caves, a state of affairs that hardly serves economic justice or commercial security.104 D. Rehabilitating the Search for Truth 1. Perceptions of Accuracy Assertions about the end of arbitration’s golden age often contain a disturbing subtext which marginalizes an arbitrator’s search for truth when compared with efficiency. Not long ago, at a major conference on truth seeking in arbitration, several in-house lawyers suggested that what they really want from arbitrators is simply imposition of a peace treaty providing a fair end (whatever that might mean) to the commercial warfare.105 Along similar lines, much recent arbitration literature focuses only on saving money and time,106 sometimes with positive suggestions about making the process more efficient.

103 At least two recent analyses have emphasized the repeat arbitrators’ concern to maintain reputation as an incentive to render fair and accurate awards. See generally, Daphna Kapeliuk, The Repeat Appointment Factor: Exploring Decision Patterns of Elite Investment Arbitrators, 96 Cornell L. Rev. 47 (2010); William W. Park, Arbitrator Integrity: The Transient and the Permanent, 46 San Diego L.Rev. 629 (2009). 104 The requisite open-mindedness comes into play at the beginning of the case (lack of pre-judgment or pre-disposition) not at the end of the arbitration, after evidence and argument have been heard and the arbitrator must render an award. In this context, one remembers the observation attributed to G. K. Chesterton, to the effect that “impartiality is a pompous name for indifference, which is an elegant name for ignorance.” Chesterton probably had in mind a lack of sensitivity to violations of universal values (such as brutality or racism) rather than adjudication of commercial disputes. 105 The proceedings of the 2009 annual meeting of the Swiss Arbitration Association held in Zürich will soon be published in the ASA Bulletin. In the interim, the meeting was reported in Nathalie Voser’s article Document Production in International Arbitration: What Does It Have to Do with Discovery?, 3 World Arb. & Med. Rev. 491 (2009), at 489, stating that “four in-house counsel responsible for dispute resolution at large multinational companies unanimously expressed the view that the truth was not their primary concern in dispute resolution.” 106 See e.g., Jean-Claude Najar, Inside Out: A User’s Perspective on Challenges in International Arbitration, 25 Arb. Int’l 515 (2009) After listing arbitration’s current defects, the author concludes, “By whatever means necessary, arbitration needs to be repaired, to



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Without denying the value of speed and economy, thoughtful observers might wonder whether the baby risks being thrown out with the bath water.107 Indeed, some have predicted a strong comeback for truth seeking in arbitration.108 Not truth in some absolute sense, with a capital “T” in the mind of God. Rather, truth in sense of an accurate award, which in a commercial context means fidelity to the parties’ bargain. As mentioned earlier, arbitrators would normally seek to get as near as possible to understanding what happened between the parties, to grasping what the contract says, and to ascertaining what the applicable law provides. Lawyers trained in some Continental traditions sometimes suggest that their litigation tradition does not concern itself with seeking truth. What seems to be meant, however, is that German or Swiss procedure lays stress on what has sometimes been called the “formal truth” rather than absolute truth: what the documents demonstrate, rather than what may be true in the eyes of an all-knowing Deity, thus permitting a more efficient administration of justice.109

be returned to its simple foundations—speed, cost efficiency, and user-friendliness.” In the article’s introduction the “purpose” of arbitration is defined as “cost efficiency, speed, and user-friendliness,” with no reference to a reasonably correct result. For contemporary debate on efficiency, see also Alan Redfern, Stemming the Tide of Judicialisation of International Arbitration, 2 World Arb. & Med. Rev. 21 (2008), at 37; Jean-Claude Najar, A Pro Domo Pleading: Of In-House Counsel, and their Necessary Participation in International Commercial Arbitration, 25 J. Int’l Arb. 623 (2008); Michael McIlwrath, Ignoring the Elephant in the Room: International Arbitration: Corporate Attitudes and Practices, 2 World Arb. & Med. Rev. 111 (2008); Steven Seidenberg, International Arbitration Loses Its Grip, ABA J 50 (April 2010). 107 In this connection, Biblical scholars may also recollect the parable of wheat and the tares in Matthew’s gospel, chapter 13, where a farmer must intervene to stop hired hands from uprooting wheat along with the weeds. 108 See William W. Park, Arbitrators and Accuracy, 1 J. Int’l Disp. Settlement 25 (2010). For a comparative approach to the search for truth in arbitration, see Laurence Shore, Arbitration, Rhetoric, Proof: The Unity of International Arbitration Across Cultures, in Arthur W. Rovine (ed.), Contemporary Issues in International Arbitration and Mediation: The Fordham Papers 2009, at 293 (2010). 109 See, e.g., Niccolò Raselli (a judge at the Swiss Federal Supreme Court), Sachverhaltserkenntnis und Wahrheit; Rechtsanwendung und Gerechtigkeit, in 2008 Zeitschrift für juristische Weiterbildung und Praxis, Heft 3/08, Stämpfli Verlag AG Bern, pp. 67–75. Dr. Rasellli seems to contrast “materielle Wahrheit” (what actually happened) and “formelle Wahrheit” (what the parties proffered by evidence). See also Nathalie Voser, Document Production in International Arbitration: What Does It Have to Do with Discovery, 3 World Arb. & Med. Rev. 481 (2009). Dr. Voser states, “[A]ccording to my civil law background, which is based on inquisitorial traditions, determining the truth has never been my understanding as to the main purpose of a court proceeding. Rather, there is the German saying ‘Recht hat wer Recht beweisen kann,’ which means, ‘the party who can prove that it is right is right.’ ” In other words, the party who holds the evidence to prove its case will win the case.” She continues that if the case cannot be proven with evidence available, then it is “just tough luck”. Id. at 488.

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Admittedly, not many business managers or government administrators beat the drum for bad case management or expensive proceedings. Yet even fewer get excited about losing a big case they should have won based on a fair assessment of the law and the facts.110 Without suggesting that the grumbling amounts to professional pandering, one might question the amount of good which comes from grieving for a lost era of quick and cheerful decision-making. The potential harm lies not in seeking innovative ways of deciding complex economic disputes, but in a general disparagement of modern arbitration that diverts attention from hard choices about procedural dilemmas, many of which implicate finely balanced cost and benefits. Nothing prevents litigants from giving decision-makers the power to decide in amiable composition or ex aequo et bono, thereby dispensing with the need for findings of fact and law. They might even confer the power to flip a coin. The problem arises when they refuse to do so, giving every indication that they want proceedings with full due process leading to a reasoned award based on an accurate view of what happened combined with rigorous legal analysis. 2. The Interaction of Accuracy, Fairness and Efficiency Although a fair search for truth, requiring time and expense, may appear as the enemy of efficiency, the goals of fairness, accuracy and efficiency may ultimately run together in the same harness. Justice too long delayed becomes justice denied. Thus fairness requires some measure of efficiency. Likewise, without fairness an arbitral proceeding would hardly be efficient in the sense of delivering the desired product, which includes a reasonably correct result combined with a sense that the process has been just. Finally, a procedurally deficient award, even if reached in record time, would carry an inherent inefficiency by inviting timeconsuming judicial challenge. To take a culinary analogy, a chef might fail either by making customers wait too long for their meal, or by rapid service of a dish they never ordered. Whether in dining or in arbitration, an experience may be quick and cheap and yet fail to deliver what was expected.

110 To test the hypothesis that speed is what litigants really want, one might imagine management contemplating breach of a joint venture in the following circumstances. The in-house lawyer tells her boss, “We have a good case on the law and the facts.” Moreover, she says, board minutes of the joint venture entity (now controlled by the other side) will prove manipulation of that company’s trading and permit recovery. When the claim is filed, the proceedings go forward with great speed. The tribunal denies pre-trial information exchange (and the joint venture’s minute book remains with the breaching party) on the basis that document production is a waste. The claim is denied, and all parties are wished good fortune in the future. The company gets an end to hostilities at low cost.



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In evaluating the trade-offs in this area, many of us stumble by reacting against our last bad experience, forgetting the specters of other unattractive alternatives. A business manager who emerged victorious in an arbitral proceeding may lament the very existence of judicial review, even if to hear challenges based on alleged procedural defects. Had that same manager lost the case, disappointment would likely have been aimed at the unavailability of full appeal on the legal and factual merits.111 3. Common Sense and Compromise If arbitrators faced only questions with obvious answers, proceedings would go quickly, with little need to hear argument and evidence on matters of substance or procedure. Reality, however, often presents shades of gray. In this connection, pre-hearing information exchange presents a classic battleground in critiques of arbitral efficiency.112 Producing documents implicates time, money and energy. However, losing the case by reason of not getting a key exhibit can be much worse. Some business managers chafe that victory escaped them because the arbitrator refused to order production of critical evidence. Others fulminate against the burden of having to scour files for odd pieces of paper. The arbitrator’s dilemma, of course, lies in the fact that decisions about relevancy and materiality must be made before the case is fully understood. In balancing a search for a right answer against sensitivity on time and cost, hard choices must be made from the very start of the arbitration. In a system where party appointment of arbitrators remains the norm, selecting the right tribunal requires considerable input of time and effort. Yet losing the case due to a bad tribunal is not an attractive alternative.113 The process of choosing the tribunal also can implicate competing goals. The profile of an ideal arbitrator might be described as someone knowledgeable in the substantive field, able to write awards in the relevant language, free of any nationality restrictions, and experienced in conducting complex proceedings. To 111 In international commerce and investment, another blind spot derives from lack of any standard against which to compare arbitral procedures. What seems excessive document production to a Paris lawyer, accustomed to French court practices, may appear as woefully inadequate to the New York attorney who would shoot first and aim later under the Federal Rules of Civil Procedure. 112 For one observer’s expression of concern about arbitral efficiency in the context of “uncontrolled discovery,” see William K. Slate II, Addressing Speed and Cost, 65 Dispute Resolution Journal 1 (No 4, Nov. 2010–Jan. 2011). One might question whether “uncontrolled” is the right word for document production in international arbitration, given the restrictions imposed by the AAA Protocols on Information Exchange and the IBA Rules of Evidence. 113 As “location, location, location” constitute the three keys to real estate value, so “arbitrator, arbitrator, arbitrator” endure as the most critical factors in the integrity of any arbitration.

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this laundry list, a claimant might add availability for hearings in the not too distant future. Yet someone who meets the bill with respect to experience and qualifications may have commitments that interfere with early hearings.114 Challenges for arbitrator bias can also prove disruptive to timetables. Even less attractive, however, would be a system with no mechanism to monitor the arbitrator’s impartiality and independence. Until a challenge has actually been heard, it will not be known whether allegations of bias are valid or simply represent procedural sabotage. One might also explore the following half dozen specific questions which arise after the start of proceedings. Each resists facile analysis and blanket responses, with the efficiency-promoting decision depending on the nature of the case. Bifurcation. Deciding jurisdiction as a preliminary issue adds times and cost. Even less satisfactory would be a system that forces a respondent in all events to present evidence and argument on the merits of a dispute before arbitrators who clearly lack authority.115 Consolidation. Even outside the context of class actions, motions to consolidate claims and proceedings take time to hear. It would be more problematic to ignore the parties’ agreement on the matter, particularly if consolidated hearings would permit cost savings. Applicable Law. Deciding the applicable law takes time. Having an award vacated for refusal to apply the parties’ agreement, or otherwise applicable mandatory norms, however, may be even worse. Summary Judgment. Listening to arguments about whether the tribunal should dispose of a case on summary judgment adds time. Equally unsatisfactory would be a requirement of evidentiary hearings in the absence of any genuine issue of contested fact. Damages. Determining the value of an expropriated company or a lost business opportunity usually calls for sophisticated economic analysis, with written and oral testimony, using time and money. Calculating damages without the help of experts, however, would often be little more than guess work, hardly worthy of an arbitrator who was expected to direct payment of the proper quantum. Reasoned Awards. It takes time to write awards explaining the decision, particularly when three arbitrators disagree on the reasoning. It can be even more unsettling, 114 Although fashionable to blame the presiding arbitrator for difficulty in finding dates or setting speedy timetables, it remains uncontroverted that at least five different schedules must usually be accommodated: each of three arbitrators and the legal teams for claimant and respondent. In international cases, variant vacation practices come into play. Scandinavian companies shut down in July. New Zealanders take holiday in January. Asking the French to work during August triggers protests about violation of international human rights standards. 115 The relative costs and benefits of bifurcation vary according to the facts of each case, with much depending on whether the alleged jurisdictional defect remains so intertwined with the substantive merits of the case so as to make a separate hearing duplicative.



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however, to receive a decision without explanation, or with a minority dissent pointing to flaws that might have been resolved in good-faith deliberations.

An arbitrator addressing these matters will usually find that the search for truth operates in tandem with procedural fairness, but at the expense of adding time and cost. The quickest and cheapest way to decide a case would be simply not to listen to the parties. Such a path, however, would hardly be consistent with the litigants’ shared ex ante expectations when they agreed to arbitrate. Some reasonable middle ground must be found. Absent the parties’ agreement otherwise, the arbitrator’s mission includes consideration of evidence and analytic argument, not gazing into a crystal ball. In making hard choices, compromise and common sense, not dogma or ideology, remain the touchstone for reaching toward an appropriate counterpoise among accuracy, fairness, efficiency and enforceability. E. Vacated Awards The emerging significance of procedural standards does not, of course, mean that all “hard law” questions have been settled. The matter of what to do with vacated awards remains one such unresolved aspect of arbitration’s legal framework. If an award rendered in Geneva is set aside in Switzerland, should it (can it) be given effect against assets in Paris, London or Washington? Different courts take varying positions. Although the French have no difficulty enforcing annulled awards, American and British have tended to say, “Not so fast.” The subject retains considerable sex appeal, continuing to provoke controversy among scholars and practitioners. Some eminent writers suggest a free-floating autonomous legal order for arbitration (un ordre juridique arbitral) distinct from any national legal orders.116 Others are more skeptical on that score.117 The matter was revisited in lively debate about a Dutch court decision granting enforcement of four arbitral awards that had been annulled in Russia, all arising from the much publicized Yukos controversies .118 Some scholars express

116 The theme is further explored in Emmanuel Gaillard, Aspects philosophiques du droit de l’arbitrage international (2008); English version published as Legal Theory of International Arbitration (2010). See also Emmanuel Gaillard, The Representations of International Arbitration, 1 J int’l Disp. Settlement 271 (2010). 117 See, e.g., Albert Jan van den Berg, Enforcement of Annulled Awards?, 9 ICC Int’l Ct. Arb. Bull. 16 (No. 2, 1998). 118 Yukos Capital Sarl v. OAO Rosneft, Court of Appeal of Amsterdam (Enterprise Division), 28 April 2009, LJN BI2451 s. 3.10. The case implicated loan agreements between Yukos Capital as lender and OJSC Yuganskneftgas as borrower concluded at the time when both Yukos Capital and Yuganskneftgas were part of the Yukos group. The underlying dispute derived from a Russian oil company once controlled by Russian oligarch Mikhail Khodorkovsky until imprisoned after a bankruptcy and tax assessment which some commentators suggest was manufactured for political reasons.

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sympathy with enforcement of vacated awards, at least if the annulment was for a “local” standard.119 Others argue that the Dutch case was wrongly decided because an arbitral award has no existence after annulment.120 Each side of the debate seems to invoke the same regard for party intent. If litigants agree to remove a dispute from the courts, why defer to a judicial annulment? On the other hand, the parties often agree to arbitration not in the abstract, but in a specific geographical venue. Thus the prospect of annulment at the arbitral seat forms part of the bargain. A middle position suggests that the soundest policy lies in treating annulment decisions like other foreign money judgments. The annulment should be respected except when reason exists to think that the judgment vacating the award lacked procedural integrity.121 First put forward a dozen years ago,122 this intermediate position has so far received little attention among arbitration aficionados, perhaps due to lack of entertainment value as compared with more extreme alternatives. At least one author, however, takes the view that the Amsterdam court in the Yukos case adopted this position.123 Moreover, the American Law Institute now advances a similar approach, suggesting in commentary that setaside awards may be recognized where there are “justifiable doubts about the integrity or independence of the set-aside court with respect to the judgment in question.”124

119 See, e.g., Jan Paulsson, Enforcing Arbitral Awards Notwithstanding a Local Standard Annulment (LSA), ICC Bulletin, Vol. 9, No. 1, at 14 (1998). 120 Albert Jan van den Berg, Enforcement of Arbitral Awards Annulled in Russia, Case Comment on Court of Appeal of Amsterdam April 28, 2009, 27(2) J. Int’l Arb at 189 (2010). 121 For an illustration of an annulment lacking procedural integrity, one might point to the underlying South African case implicated by the enforcement proceedings in Telecordia Tech. Inc. v. Telkom SA Ltd., 458 F.3d 172 (3d Cir. 2006). An award in an ICC arbitration, rendered in South Africa against a South African company, had been vacated by a South African judge who refused to allow the ICC to appoint a new and neutral tribunal. Instead, the vacating judge constituted a new arbitral tribunal composed of three retired South African judges nominated by the losing South African party. 122 William W. Park, Duty and Discretion in International Arbitration, 93 Am. J. Int’l L. 805 (1999). 123 Lisa Bench Nieuwveld, Yukos v. Rosneft: The Dutch Courts find that Exceptional Circumstances Exist, (11 Feb. 2010), www.kluwerarbitrationblog.com. 124 ALI Restatement (Third) of the U.S. Law of International Commercial Arbitration, § 5–12 Tentative Draft, September 2010. Comment “d” provides, “In extraordinary circumstance, an award that has been set aside may also be recognized or enforced . . . . . when it is shown that the set-aside court knowingly and egregiously departed from the rules governing the set-aside in that jurisdiction [or] substantial and justifiable doubts [exist] about the integrity or independence of the rendering court with respect to the judgment in question.”



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VII. Why Maturity Matters Arbitrators are individuals to whom others entrust their wealth and welfare, often in an international context when neither side wants to end up in the other’s home court. By providing a relatively neutral adjudicatory mechanism, arbitration promotes the type of commercial and investment reliability that strengthens cross-border economic cooperation. Without a trustworthy arbitral process, many transactions will either remain unconsummated or be concluded at higher costs to reflect the absence of an adequate way to vindicate rights. The continued appeal of arbitration, however, depends in large measure on finding a delicate balance among accuracy, fairness and efficiency, while at the same time providing confidence in award enforceability. No easy fix can be expected in the search for a process which is reliable and just, as well as quick and cheap. Yet the quest for balance continues even if a perfect equilibrium remains elusive. The needed spirit of diligence might be illustrated by an incident two hundred thirty years ago on a day when the skies over New England turned inky black right in the middle of the day. Historians differ on its cause, whether a solar eclipse or a volcanic eruption. The people of that time, however, feared the dramatic darkness as a sign that the Day of Judgment had arrived. Some legislators at the Connecticut General Assembly proposed adjournment. One man refused to follow the general panic. Colonel Abraham Davenport, a devout Puritan, admitted he did not know whether or not the world was about to end. He reasoned, however, that only two possibilities presented themselves. If the end of the world had not come, there was no need to close debate. In the alternative, if the Day of Judgment was in fact at hand, then Colonel Davenport wanted his Creator, the Lord Almighty, to find him faithful at his post. So he proposed that someone fetch candles, to bring more light that work might continue. The speech carried the Assembly. That same aspiration, to bring more light that work may continue, commends itself to the study of arbitration today, just as it did to civic life two centuries ago. That ambition advances through lively debate and dedicated scholarship, fostered by the worldwide arbitral community. Step by step, international dispute resolution thus moves forward to an abundant harvest.

Dispositive Motions in International Arbitration and the Role of U.S. Courts James H. Carter1

In search of solutions to perceived problems of increasing cost and delay, the international arbitration community has turned its attention to the possibility of greater use of summary disposition of arbitration claims without full merits hearings.2 Applications for summary disposition—what an American lawyer might call dispositive motions—appear to be increasing, and this presents the question of what standard arbitrators and United States courts should apply to such motions and to challenges to arbitrators’ awards granting them. On occasion, parties agree to the use of dispositive motions on a “friendly” basis. If they concur that a separate and potentially expedited ruling on an issue can dispose of all or a substantial part of a case, perhaps on the basis of a purely legal issue, arbitration laws and arbitral rules ordinarily present no impediment to their doing so. In the more customary situation, however, the motion is “unfriendly” because one party believes the issue or the entire case can be disposed of summarily in its favor but the other party disagrees and seeks to develop the facts through discovery and an evidentiary hearing. Such a preference for “full” proceedings may be entirely well founded; but in some cases it may be based on nothing more than a desire to fish for a defense through discovery and/ or postpone the date of hearing and the eventual reckoning. In any event, the

1 James H. Carter is Senior Counsel in the International Arbitration Practice Group of Wilmer Cutler Pickering Hale and Dorr LLP in New York. He has more than 40 years of experience as arbitrator or counsel in more than 130 arbitration cases involving joint ventures, international trade and investment disputes. Mr. Carter is also a retired partner of Sullivan & Cromwell LLP. 2 E.g., G. Born and K. Beale, “Party Autonomy and Default Roles: Reframing the Debate over Summary Disposition in International Arbitration,” 21(2) ICC Bull. 19 (2010); E. Sussman and S. Ebere, “Reflections on the Use of Dispositive Motions in Arbitration,” 4(1) NY Disp. Res. Law. 28 (2011); J. Gill, “Applications for Early Disposition of Claims in Arbitration Proceedings,” ICCA Cong. Ser. No. 14 at 513 (2009). John Norton Moore (ed.) International Arbitration, pp. 39–45 ©2013 Koninklijke Brill NV, The Netherlands. ISBN 978-90-04-24622-5

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“unfriendly” motion will require an arbitrator to think about when it is appropriate to terminate a case without a full hearing and what a reviewing court will say if he or she does so. Some arbitration statutes and rules now make clear that such “unfriendly” motions may be entertained and disposed of by arbitrators, but they ordinarily are very general and provide no guidance on the standard by which arbitrators should decide such motions or the basis on which courts should review those decisions. Most significantly, Section 15(b) of the Revised Uniform Arbitration Act, now in force in 14 U.S. States and the District of Columbia, provides expressly that “an arbitrator may decide a request for summary disposition of a claim or particular issue.”3 Article 16(3) of the American Arbitration Association International Centre for Dispute Resolution’s International Rules is less direct but to the same effect: it provides that a Tribunal in its discretion may “bifurcate proceedings, exclude cumulative or irrelevant testimony or other evidence and direct the parties to focus their presentation on issues the decision of which could dispose of all or part of the case.”4 Article 20 of those Rules requires an “initial oral hearing” (which may be in the form of a conference call), but Article 16(4) leaves discretion to the arbitrators regarding the type of procedures thereafter, so long as each side has “the right to be heard” and “a fair opportunity to present its case.”5 Nothing bars a summary disposition. The 2010 revisions to the UNCITRAL International Arbitration Rules6 also recognize flexibility in this regard. Article 17(1) requires that “at an appropriate stage” each party be given “a reasonable opportunity of presenting its case.” But Article 17(3) moves in the direction of accommodating summary dispositions by changing the prior requirement that the Tribunal “shall” hold a hearing if requested by any party “at any stage of the proceedings” to a requirement that such a hearing be held on party request only “at an appropriate stage of the proceedings.” The Tribunal retains the right to decide whether such a hearing would be evidentiary or only for oral argument. Most recently, in 2011 the CPR Institute for Dispute Resolution published “Guidelines on Early Disposition of Issues in Arbitration,” which encourage arbitrator initiative in promoting early issue identification and disposition.7 Those Guidelines suggest the following as appropriate possible issues for early dispo-

3 2000 Revised Uniform Arbitration Act, Section 15(b), available at www.law.upenn.edu. 4 AAA International Arbitration Rules Art. 16(3), available at www.adr.org. 5 Id., Art. 16(4), 20. 6 United Nations Commission on International Trade Law Arbitration Rules (2010), Art. 17, available at www.uncitral.org. 7 CPR Guidelines on Early Dispositions of Issues in Arbitration (2011), available at www .cpr.org. The author was a member of the working group that participated in the preparation of the Guidelines.



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sition: jurisdiction and standing; particular claims, defenses or legal theories of recovery that can be decided as a matter of law; claims that may be barred by defenses such as contractual covenants, statutes of limitations, statutes of fraud, release, settlement, res judicata or collateral estoppel; situations “where the claimant cannot demonstrate that it will be able to provide evidence to satisfy a required element of the claim or theory of recovery;” and issues that might significantly limit claimed damages. However, the Guidelines offer no proposed standard for deciding when evidence in support of such a disposition might be sufficient to overcome an argument that a full evidentiary hearing is required. Although they are the exception, some arbitral rules refer expressly to dispositive motions. Rule 27 of the American Arbitration Association’s Employment Arbitration Rules, for example, provides that an arbitrator “may allow the filing of a dispositive motion if the arbitrator determines that the moving party has shown substantial cause that the motion is likely to succeed and dispose of or narrow the issues in the case.”8 A number of reported cases involve application of this rule, but this typically has occurred in situations where a party has defaulted or did not object to the procedure.9 On the other hand, the tradition of a single oral hearing as a key part of arbitration, with presentation of evidence through live witness testimony, remains strong. Parties sometimes argue that the “ethos of arbitration is to proceed to a hearing and to discourage if not prohibit motions to dismiss or summary judgments before claimants have presented their case.”10 There is force to this argument, and there undoubtedly are situations in which it would be premature to decide an issue or issues in isolation from a comprehensive “presentation” of the case at a plenary evidentiary hearing. The language of international arbitration conventions and U.S. statutes has been cited in support of the argument that there is a right to a “full” evidentiary hearing that may permit one party to block any summary disposition. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) states in Article V(1)(b) that recognition and enforcement of an arbitral award may be refused if a party was “unable to

  8 AAA Employment Arbitration Rules, R-27, available at www.adr.org. AAA Construction Industry Arbitration Rule 32(c) provides, more generally, that “the arbitrator may entertain motions, including motions that dispose of all or part of a claim, or that may expedite the proceedings, and may also make preliminary rules and enter interlocutory orders.”   9 E.g., Hodgson v. IAP Readiness Mgt. Support, 2010 WL 3943698 (N.D. Fla. 2010) and opinions available in Westlaw’s “AAA-Arbaward” database. 10 Campbell v. American Family Life Assur. Co. of Columbus, Inc. 613 F.Supp. 2d 1114 (D. Minn. 2009) (rejecting that proposition); Chem-Met Co. v. Metaland Int’l Inc., 1998 WL 35272368 (D.D.C. 1998) (distinguished in Campbell); Prudential Securities v. Dalton, 929 F.Supp. 1411 (N.D. Okla. 1996).

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present his case.”11 The Federal Arbitration Act provides that a court may vacate an award “where the arbitrators were guilty of misconduct in refusing to hear evidence pertinent and material to the controversy . . .”12 Also, some statutes and arbitral rules continue to require a “full” opportunity for each party to present its case.13 In spite of this language, U.S. case law generally has upheld arbitrators’ authority to grant “summary judgment” or other dispositive motions, even in the absence of express statutory or rule authority. The leading case holding that an “evidentiary hearing” is not always required is Sherrock Brothers, Inc. v. Daimler Chrysler Motors Co.,14 in which the Court of Appeals for the Third Circuit stated that “fundamental fairness is not implicated by an arbitration panel’s decision to forego an evidentiary hearing because of its conclusion that there were no genuine issues of material fact in dispute. An evidentiary hearing will not be required just to find out whether real issues surface in a case.” Indeed, one federal district court has gone so far as to state that under AAA arbitral rules, “arbitrators routinely decide motions to dismiss without evidentiary hearings.”15 A New York State court first considered and approved the granting of an arbitral “summary judgment” motion in arbitration in 2011, in a case in which an AAA Commercial Arbitration tribunal awarded unpaid professional fees based on an extensive written record but without an oral hearing.16 The court reviewed the award on the basis of customary deference, even in the face of errors of law or fact, and rejected the argument that any refusal to “hear evidence” was arbitrator misconduct. While the party opposing summary disposition was found to have waived objection to the arbitrators’ procedures, the court pointed first to the facts that the arbitrators “(1) gave the parties time to thoroughly brief the issues and submit evidence; (2) carefully considered the evidence presented; [and] (3) issued a written decision.” Courts and legislators nevertheless remain uneasy with a grant of summary disposition authority to arbitrators, and in some instances they seek to limit it by confining that power to motions based on certain specified issues. For example, the U.S. Financial Industry Regulatory Authority (“FINRA”)’s Code of Arbitration Procedures for Customer Disputes and its Code of Arbitration Procedures for 11 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, Art. V(1)(b), 21 U.S.T. 2517, 330 U.N.T.S. 38. 12 9 U.S.C. § 10(a)(3). 13 E.g., Dubai Arbitration Law of 2008, Art. 25, available at www.difc-lcia.org. 14 260 Fed. Appx. 497 (3d Cir. 2008). 15 AmeriCredit Fin. Servs. v. Oxford Mgmt. Servs. 627 F.Supp. 2d 85, 97 (E.D.N.Y 2008). 16 Brooks v. BDO Seidman, LLP, 917 N.Y.S. 2d 842 (Sup. Ct. N.Y. Co. 2011). See also TIG Ins. Co. v. Global Int’l Reinsurance Co., Ltd., 640 F.Supp. 2d 519, 523 (S.D.N.Y. 2009); McClellan v. Service Corp. Int’l, 2010 WL 476005 (KY App. 2010); Griffin Industries, Inc. v. Petrojam, Ltd., 58 F.Supp. 2d 212, 219 (S.D.N.Y. 1999); Max Marx Color & Chem. Co. Employees’ Profit Sharing Plan v. Barnes, 37 F.Supp. 2d 248 (S.D.N.Y 1999).



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Industry Disputes both do this. Those rules begin by stating that such dispositions “are discouraged in arbitration,” but they do permit motions to dismiss prior to the conclusion of a parties’ case in chief on the basis of either a signed settlement agreement or written release or upon “proof that the moving party was not associated with the account(s), security(ies), or conduct at issue.”17 While there is little case law on the subject, U.S. courts have not found any such limitation of issues to be inherent in arbitrators’ general authority to grant dispositive motions. In a case decided by a Minnesota federal district court in 2009,18 the party opposing summary disposition argued that the remedy should be available in arbitration only “in cases where a claim is deficient on its face,” citing as examples claims barred by res judicata, collateral estoppel, waiver or a statute of limitations. The court rejected that argument, without explanation but apparently on the basis of the general principle that courts leave “procedural issues” for arbitrators to decide. Nor would the “limited issues” approach deal adequately with the hard cases. As a practical matter, arbitrators may face situations in which they have authority to dispose of a contested factual issue on a summary basis, and one party seeks such a resolution, but the other party maintains that it continues to need more discovery and an opportunity to confront witnesses at a plenary evidentiary hearing in order to “present its case.” All that arbitrators can do in such situations is attempt to treat the parties fairly and balance the cost and delay of extended proceedings against the need to “hear” both parties sufficiently. When it is reasonably clear that the party resisting summary disposition has had an appropriate opportunity to be “heard” by presenting whatever evidence it may have on papers or by advocates’ argument, summary disposition should take place. Typically such situations arise after the arbitrators have had a history with the case and the parties and can judge the weight of the arguments that “more” is or is not required before a decision can be made. The arbitrators therefore may be in a better position than a court considering a motion for summary judgment, which could lack a comparable hands-on appreciation of a case. But there is no requirement in any statute or rules that arbitrators be confined to the same legal standard that governs U.S. or other courts in deciding when a summary disposition is appropriate. Judicial standards for summary judgment in contract disputes and other cases that find their way into arbitration have been developed over decades in the context of the U.S. model of a jury trial. Although such trials in fact are relatively infrequent, the rules still contemplate that a court should not take an important issue away from a potential jury, as it

17 FINRA Code of Arbitration Procedure for Customer Disputes, Section 12504, and FINRA Code of Arbitration Procedures for Industry Disputes, Section 13504, available at www .finra.complinet.com. 18 Campbell, supra note 10.

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does in rendering summary judgment, unless a very high standard of certainty can be assured. Appellate courts review such decisions by lower courts carefully, searching the evidence to determine whether a trial court has overstepped its limits in the process. An arbitrator’s situation is different. He or she will be the final decision maker and simply must come to a judgment as to when it is fair and reasonable to make that decision. There is nothing automatic about a plenary evidentiary hearing. If arbitrators have given both parties an effective opportunity to present their arguments and determine that the evidence is sufficiently persuasive to avoid the need for further hearing, they should decide the matter without one. In doing so, they should refrain from using the language of judicial summary judgment, because that is not necessary and could confuse a reviewing court. U.S. courts reviewing arbitrators’ awards do so on a deferential basis. Awards may not be set aside on the basis of errors of law or fact, but only in accordance with the limited statutory and treaty grounds provided by the federal arbitration act, its state law counterparts and the New York Convention.19 The language of some of these provisions is general, and U.S. case law has developed to clarify their application to particular types of situations. It is possible, for example, to argue that a party has not been given an opportunity to present its case if the arbitration has been disposed of without a “full” or at least a sufficiently “full” evidentiary hearing. How dispositive motions will be treated by the courts in relation to these general grounds is an unsettled question. In 1999, a federal district court in Connecticut considered that an arbitration panel’s ruling on a dispositive motion should be reviewed under the same standards that an appellate court would apply in reviewing a trial court’s grant of summary judgment, namely whether there is any “genuine issue of material fact” that requires a “trial.”20 The Connecticut court, applying a “manifest disregard of the law” criterion for setting aside an award—a ground that now has been largely rejected by federal courts21—used this relatively searching standard of review to set aside an award. The court inferred that the arbitrators were required to draw all reasonable inferences from the evidence before them in favor of the party resisting summary disposition, as a court would be required to do, and concluded that they had not done so. This appears to be an improper direction for development of the law. If followed, it would involve U.S. courts in relatively detailed review of arbitral proceedings, and it would be very difficult to apply to U.S. courts’ review of foreign

19 See generally G. Born, International Commercial Arbitration 2730 et seq. (2009). 20 Neary v. Prudential Ins. Co. of America, 63 F.Supp. 2d 208 (D. Conn. 1999). 21 Hall Street Assoc., L.L.C. v. Mattel Inc., 552 U.S. 576 (2008); J. Carter and F. Goal, “Manifest Disregard of Law?” in AAA Yearbook on Arbitration and the Law (23rd ed. 2011).



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arbitral proceedings for procedural regularity at the time of enforcement of foreign arbitral awards. It also would restrict arbitrators’ incentives to grant potentially dispositive motions. Use of judicial summary judgment standards also would move away from harmonization of law internationally under the New York Convention. The laws of other countries apply somewhat different standards for judicial application of summary judgment, and translation of each of those into an arbitral setting is a source of potential confusion.22 It therefore is appropriate that arbitrators should continue to resolve dispositive motions by using general language of fairness and opportunity for both sides to present arguments appropriately and that U.S. courts interpret the general standards for setting aside or enforcing awards as applied to dispositive motions deferentially, according to broad standards of “opportunity to present a case.” Courts typically do this, inquiring into the general fairness of arbitral proceedings without requiring that they fit neatly into the procedural forms that a court itself might apply under its own rules. If arbitrators have given each party a reasonable opportunity to make its views known, whether on papers, by argument or by evidentiary procedures, there are sound reasons why a court should defer.

22 See G. Born and K. Beale, supra note 2, stating (at 26) that “under the English system of summary judgment, cases that will be suitable for disposal by way of summary proceedings are limited to those where the claim is barred as a matter of law . . . or where the factual basis for the claim is, as the House of Lords described it, ‘fanciful.’”

PROBLEMS OF EVIDENCE BEFORE INTERNATIONAL TRIBUNALS Paul S. Reichler1

More than a decade ago, the Eleventh Sokol Colloquium was devoted in its entirety to the problem of Fact-Finding Before International Tribunals. This is a big subject. It has generated major treatises and numerous conferences, and it continues to spark debate among both public and private international law specialists. It would be a giant understatement to say that this subject cannot quickly be addressed. What I will do in this brief paper is introduce the subject, identify some significant issues, and offer some of my own observations based on my nearly forty years of litigating before international courts and arbitral tribunals, as well as before national courts—both federal and state—across the United States. Fact-finding by international tribunals, like fact-finding by national courts, can be divided into three parts: production of evidence; admission or rejection of evidence; and evaluation or interpretation of evidence. While international and national courts differ in the ways they approach all three aspects of fact-finding, in my opinion, the most significant problems for international courts and tribunals involve the production of evidence. Here I will focus my remarks on the problems associated with this aspect of the fact-finding function. The main difference between production of evidence before international courts and national ones, especially in the United States, is that evidence production before international courts is voluntary: it is up to the parties to produce whatever evidence they consider useful to their claims. By contrast, evidence

1 Paul S. Reichler is Partner and Co-Head of the International Litigation and Arbitration Department at Foley Hoag LLP in Washington, DC. Mr. Reichler has specialized for more than 25 years in the representation of sovereign states in disputes with other states, and in disputes with foreign investors. John Norton Moore (ed.) International Arbitration, pp. 47–52 ©2013 Koninklijke Brill NV, The Netherlands. ISBN 978-90-04-24622-5

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production before U.S. courts is both voluntary and involuntary: parties produce what they consider useful, but they are also subject to pre-trial discovery obligations imposed upon them by their adversaries under the applicable rules of procedure, and by production orders by the trial court itself. When evidence production is strictly voluntary, a party is free to produce only the evidence that serves its cause, and withhold from the court anything adverse. It is a rare party that will voluntarily produce to the court key documents in its possession that undermine or contradict its claims or defenses. Unless the same documents are also in the possession of the adverse party, and produced to the court by that party, they are unlikely ever to come to the court’s attention. This is a serious problem not only for the court, but for the whole concept of fairness in international adjudication. How can a court dispense justice if it is prevented from learning all of the key facts on which a just sentence or award depends? Even worse, how can it know in any particular case whether there are key facts that have been concealed from it? It not only cannot know about facts that are not presented to it, but it has no way of knowing whether there are facts that have not been presented to it. This recalls Donald Rumsfeld’s complaints not only about known unknowns in regard to the war in Iraq, but also and especially about what he called the unknown unknowns! It’s the unknown unknowns—the facts that may or may not exist but, if they do, are hidden from the court—that call into question the reliability of international judgments. Absent some confidence that the court had access to all of the pertinent facts, there can be no assurance that its decision was just. The problem affects not only state vs. state litigation, as before the International Court of Justice, for example. It also affects investor/state arbitrations, as before ICSID, the ICC or other arbitral forums. Contrary to what some may think, my own experience has shown that investors, including multinational corporations, are no more likely than states to voluntarily offer up documents from their files that undercut their claims. In the U.S. courts, it would require a rosy view of human nature unjustified by millennia of human experience to presume that the majority of private litigants would feel ethically bound to disclose to the court evidence in their possession antithetical to their claims or defenses, unless they were required to do so by the pre-trial discovery rules or court orders. What can international courts or arbitral tribunals do to reduce the likelihood that key evidence is withheld, and that they have before them the most probative evidence on which a just decision depends? One thing we can be sure they will not do is adopt the pre-trial discovery rules of U.S. courts. From abroad, our discovery process is largely viewed as excessive, expensive, inefficient and frequently abusive. Many American trial lawyers share this view. One of the advantages of arbitration as opposed to litigation is its supposed efficiency, which can be attributed in part to the absence of costly or lengthy discovery procedures. To my knowledge, no prominent expert— academic or practitioner—advocates that international courts should adopt the American system of discovery.



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Yet, these same experts frequently complain about the weaknesses of international tribunals in relation to national ones in regard to the production of evidence. Ironically, the problem is not so much with the lack of power of international courts to assure sufficient evidence production, but their reluctance to use the power at their disposal. Take the ICJ for example. Its longstanding custom is to leave it to each of the parties to decide what evidence to produce in support of its claims or defenses, without intervention by the Court itself. Each party then robustly challenges the other’s factual assertions in both its written and oral pleadings. Because of the very high quality of counsel who generally represent states before the Court, and the diligence with which the individual judges analyze the facts placed before them, the adversarial exchange very frequently permits the Court to do an admirable job of fact-finding. I am sure that not everyone here will agree with me, but as a regular practitioner before the Court, as well as before U.S. courts, I believe that, notwithstanding the obstacles, the ICJ generally does as well as our national courts in finding the facts. A good example is the ICJ’s treatment of the evidence in Argentina v. Uruguay.2 The Court had to review, analyze and weigh a massive amount of scientific and technical evidence, including numerous expert reports, on the effects of a paper pulp mill’s effluents on the water quality of the Uruguay River, a shared international watercourse. The Court’s examination of the evidence was thorough and meticulous. It gave particular weight to the reports of international organizations expert in the subject matter and independent of the parties. Its factual finding that the pulp mill did not pollute the river or adversely affect water quality was subsequently confirmed by both parties which, pursuant to the Court’s Judgment, established a bi-national commission to provide ongoing monitoring of the mill’s effects on the river. There is no doubt, therefore, that the Court got the facts right. To be sure, it is possible to find a few isolated cases in which critics of the Court can say that the Court appears to have viewed the facts through politically-tinted lenses. But as any experienced American trial lawyer will tell you, when a case is highly charged politically, our courts sometimes do the same. Judges are human beings, whatever their nationality. Some of them have strong political or ideological predilections which inevitably affect their appreciation of the circumstances. Exhibit A is Bush v. Gore, in which the U.S. Supreme Court elected George W. Bush President of the United States by a 5–4 party-line vote. In this country, we live in a glass house when it comes to throwing stones at international courts. The problem in the vast majority of cases—both internationally and in the U.S.—is not a politically-skewed view of the facts, or a relative weakness in finding or interpreting the facts, but in assuring, as much as possible, that the most 2 Pulp Mills on the River Uruguay (Argentina v. Uruguay), Judgment, I.C.J. Reports 2010, p. 14.

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probative facts are produced to the Court, rather than withheld. How can international courts and tribunals better address this problem? I believe they can do this by a more assertive use of the powers that they already have. The ICJ, for example, has the power under Article 62(1) of its Rules to “call upon the parties to produce such evidence or to give such explanations as the Court may consider to be necessary for the elucidation of any aspect of the matters in issue, or may itself seek other information for this purpose.” This is a power the Court has been reluctant to exercise by its own initiative. Rather, its practice has been to await a request by one of the parties that the Court obtain certain specific documents or information from the other party. When it received such requests, it acted with good effect. In the ELSI case, the Court agreed to Italy’s request to obtain from the United States a particular financial statement, which proved to be dispositive on certain issues.3 In 2011, Nicaragua invoked Article 62(1) to request and obtain a study conducted by Costa Rican government experts that showed that Nicaragua’s dredging of the San Juan River had no adverse environmental impacts, contrary to Costa Rica’s claim before the Court.4 The document proved important to the Court’s rejection of Costa Rica’s claim. While this approach has been effective in some cases, it suffers from the limitation that the initiative lies with one of the parties, which can only request documents it knows to be in the other party’s possession. The procedure is inadequate as a means of obtaining critical documents unknown to the requesting party. It would be more conducive to development of a full factual record if the Court itself were more proactive in requesting evidence from both parties. The Rules of the ICJ also allow the members of the Court to question the parties’ witnesses and experts, to conduct site visits to obtain evidence, to arrange for expert enquiries and opinions, and to request information from public international organizations—all of which the Court has done, but only rarely. The International Tribunal for the Law of the Sea, which sits in Hamburg, has adopted a somewhat more assertive approach, by advising the parties of the specific points or issues it would like them to address, by posing questions to counsel, witnesses and experts, and by appointing experts to guide the Tribunal through complex technical and scientific fact-finding. It is a much newer court than the ICJ, with much less of a track record. It will be interesting to see over time how the Tribunal fares in finding the facts, especially those of a complex scientific character. Arbitral tribunals have powers similar to those of the ICJ and ITLOS, but also have been generally reluctant to use them as proactively as they might. ICSID Arbitration Rule 34 empowers the arbitral tribunal in Investor/State cases to “call upon the parties to produce documents, witnesses and experts.” And the

3 Elettronica Sicula S.p.A. (ELSI), Judgment, I.C.J. Reports 1989, p. 15. 4 Case Concerning Certain Activities Carried Out by Nicaragua in the Border Area (Costa Rica v. Nicaragua), Provisional Measures, Order of 8 Mar. 2011, p. 7, para. 27.



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UNCITRAL Rules enable the arbitral tribunal, at any time during the proceedings, to “require the parties to produce documents, exhibits or other evidence . . .”5 These powers should be sufficient to enable the tribunal to assure itself of obtaining the most probative evidence in the possession of the parties. But, like the ICJ, there appears to be a reluctance to obtain evidence propio motu. Like the Court, most arbitral tribunals have preferred to wait until they are requested by a party to obtain evidence from the other party. And generally, requests from a party must be limited to specific, known documents in the possession of the other party; broader requests for categories of documents that might exist are usually frowned on. This is a practice that needs to be reexamined, in the interests of fuller disclosure of probative evidence. There are a number of reasons for the reluctance of international courts and arbitral tribunals to take a more proactive approach in obtaining evidence from the parties. One of them is an understandable deference to the parties in a proceeding that can only take place with their consent; there is a concern that they might be less willing to consent to an international court’s jurisdiction or to arbitrate their disputes if by doing so they surrender control over access to their confidential or private files. Courts are also reluctant, properly so in my opinion, to act in ways that diminish a State’s sovereign rights or discretion. There is also a cultural difference between civil law and common law judges and practitioners, with the former characteristically taking less intrusive approaches to seeking evidence from the parties. Where the parties want to encourage more assertiveness by an international court or arbitral tribunal in obtaining or producing evidence, there is little to prevent them. While the procedure has not been attempted before the ICJ, there does not appear to be anything in the Court’s rules to prevent the parties from agreeing between themselves on a form of mutual document production, or on jointly requesting the Court pursuant to Article 62(1) of the Rules to obtain designated categories of documents from each of them. In international arbitration, there are more examples of the parties agreeing to limited discovery, especially in regard to documents, and incorporating their agreement into the rules of procedure adopted for the specific arbitration. There is no reason why such an agreement cannot also extend to depositions of witnesses. The use of limited discovery in international arbitration, at least in regard to production of documents, has been greatly facilitated by the International Bar Association, through its promulgation of the Rules on the Taking of Evidence in International Arbitration, which parties and arbitral tribunals are free to adopt as part of their agreed rules of procedure. These Rules, first introduced in 1999 and revised in 2010, expressly permit the parties to exchange “Requests to Produce” for what are referred to as “narrow and specific” categories of documents that

5 UNCITRAL Arbitration Rules (2010), Art. 27(3).

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are reasonably believed to exist.6 This represents a careful extension beyond the practice of allowing a party to request only specific and known individual documents, without enabling fishing expeditions or other types of time-consuming, inefficient or abusive impositions by one party upon another. The IBA’s Rules are encountering more and more frequent incorporation into the rules of procedure for international arbitrations. There is much more that can be said about production of evidence before international tribunals, but due to time constraints, I will limit myself to one more point which, especially as a litigator I find particularly interesting. This concerns a provision of U.S. law, 28 U.S.C. § 1782, which allows parties to a case before an international court, and in many instances parties to an international arbitration, to take discovery from non-parties located in the United States. Section 1782 authorizes the U.S. district courts to order any person found in their judicial districts to give testimony or produce documents for use in a foreign or international proceeding, on the application of any interested person. This provision has been used increasingly by parties to international arbitrations to obtain probative evidence possessed by third parties located in this country, which they then use in the arbitration itself. To this extent, at least, U.S. discovery practices have begun to infiltrate international court or arbitral proceedings. I do not think much further infiltration is likely or desirable. But maintaining the status quo is not the only alternative. A better approach would be for international courts and arbitral tribunals to do a better job of balancing between deference to the parties’ right to present their evidence in the manner they themselves decide, and the interest in obtaining not just the truth, but the whole truth, through a more robust management of the evidence production process—not by acquisition of any new powers, but by the prudent exercise of the powers they already have under their own governing rules.

6 IBA Rules on the Taking of Evidence in International Arbitration (2010), Art. 3 (Documents).

Arbitration of Private Law Matters

Valuation in Investor-State Arbitration: Toward A More Exact Science Joshua B. Simmons1

I. Introduction The stakes of international arbitration are rising. In cases between investors and states,2 at least seven arbitral awards have topped one hundred million dollars in the past five years,3 while several pending cases involve claims for billions of dollars.4 The arbitrators who preside over these high-stakes cases typically

1 Josh Simmons is an Associate at Covington & Burling LLP. The views expressed in this Article are his own; they do not represent the views of Covington or its clients. Thanks to Professor John Norton Moore for the invitation to present this article at the Sokol Colloquium held on April 5, 2011, at the University of Virginia School of Law. 2 Arbitration between foreign investors and host states (“investor-state arbitration” or “international investment arbitration”) is distinct from international commercial arbitration between two private parties. 3 See Chevron Corp. v. Ecuador, Partial Award (UNCITRAL Mar. 30, 2010) ($698 million); BG Grp. PLC v. Argentina, Final Award (UNCITRAL Dec. 24, 2008) [hereinafter BG Group v. Argentina] ($185 million); Rumeli Telecom AS v. Kazakhstan, ICSID Case No. ARB/05/16, Award ( July 21, 2008) [hereinafter Rumeli Award] ($125 million); Sempra Energy Int’l v. Argentina, ICSID Case No. ARB/02/16, Award (Sept. 18, 2007) [hereinafter Sempra v. Argentina] ($128 million); Compañía de Aguas del Aconquija S.A. v. Argentina, ICSID Case No. ARB/97/3, Award (Aug. 3, 2007) [hereinafter Compañía de Aguas v. Argentina] ($105 million); Enron Corp. v. Argentina, ICSID Case No. ARB/01/3, Award (May 22, 2007) [hereinafter Enron v. Argentina] ($106 million); Siemens A.G. v. Argentina, ICSID Case No. ARB/02/8, Award (Feb. 6, 2007) [hereinafter Siemens v. Argentina] ($218 million); Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Award (July 14, 2006) [hereinafter Azurix v. Argentina Award] ($165 million). 4 Shareholders in the former Yukos oil company are seeking an estimated $100 billion in damages from the Russian government. See Andrew E. Kramer, A Victory for Holders of Yukos, N.Y. Times, Dec. 1, 2009, at B1. A recent case brought against Turkey involves a claim of over $19 billion. See Luke Eric Peterson, Turkey Prevails in Uzan-Related $19 Billion Arbitration Claim, Inv. Arbitration Reporter, July 19, 2010, http://www.iareporter. John Norton Moore (ed.) International Arbitration, pp. 55–114 Copyright © Berkeley Journal of International Law 2013, where this article was originally published (30 Berkeley J. Int’l L 196). It is reprinted here with permission.

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confront complex and divergent calculations of damages, which they may be illequipped to reconcile. A long-standing refrain for determining damages is that it is not an “exact science,”5 but, more than ever, the legitimacy of international arbitration depends on the well-explained and financially sound resolution of valuation disputes. The damages phase of investor-state arbitration presents a variety of challenges, particularly when fair market value applies as the standard for calculating damages. Under customary international law, a fundamental principle of reparation is to “wipe out all the consequences of the illegal act.”6 This Article focuses on compensation of fair market value as a means of achieving such reparation, as opposed to restitution,7 contractual formulas,8 or moral

com/articles/20100802. Two cases pending against Venezuela reportedly involve claims of at least $7 billion and $20 billion. See, e.g., Venezuela Sees Oil Arbitration Rulings 2011–12, REUTERS, Nov. 2, 2010, http://www.reuters.com/article/2010/11/03/venezuelaarbitration-idUSN0225824020101103. 5 See, e.g., Compañía de Aguas v. Argentina, supra note 3, paragraph 8.3.16 (“[T]he settling of damages is not an exact science.”); see also Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Annulment Proceeding, paragraph 351 (Sept. 1, 2009); ADC Affiliate Ltd. v. Hungary, ICSID Case No. ARB/03/16, Final Award, paragraph 521 (Sept. 27, 2006) [hereinafter ADC v. Hungary]; Himpurna Cal. Energy Ltd. v. PT (Persero) Persusahaan Listruik Negara (Indon.), Final Award, paragraph 374 (UNCITRAL May 4, 1999), 25 Y.B. Comm. Arb. 13 (2000) [hereinafter Himpurna v. PLN]; Sapphire Int’l Petroleum Ltd. v. Nat’l Iranian Oil Co., Arbitral Award (Mar. 15, 1963), 35 I.L.R. 136, 187–88; Marjorie M. Whiteman, Damages in International Law 1694, 1699 (1943) (quoting Delagoa Bay & E. African Ry. Co. (U.S. v. Port.) (1900)). 6 Factory at Chorzów (Ger. v. Pol.), 1928 P.C.I.J. (ser. A) No. 17 at 47 (Sept. 13). “The Chorzów Factory decision is the authority most frequently cited by international tribunals in investor-state disputes involving matters of compensation.” Sergey Ripinsky & Kevin Williams, Damages in International Investment Law 35 (2008); see also Pierre Bienvenu & Martin J. Valasek, Compensation for Unlawful Expropriation, and Other Recent Manifestations of the Principle of Full Reparation in International Investment Law, in 50 Years of the New York Convention 231–37 (Albert Jan van den Berg ed. 2009) (“One of the bedrock principles in international law is full reparation.”). 7 See Draft Articles on Responsibility of States for Internationally Wrongful Acts, in Report of the International Law Commission on the Work of its Fifty-Third Session 56 U.N. GAOR Supp. (No. 10) at art. 35, U.N. Doc. A/56/10 (2001) [hereinafter ILC Articles on State Responsibility] (“A State responsible for an internationally wrongful act is under an obligation to make restitution, that is, to re-establish the situation which existed before the wrongful act was committed, provided and to the extent that restitution: (a) is not materially impossible; (b) does not involve a burden out of all proportion to the benefit deriving from restitution instead of compensation.”). In the event that restitution cannot be made, a state is responsible to compensate for the damage caused by its internationally wrongful act. See id. at art. 36. 8 Damages in many international commercial arbitration cases are determined pursuant to a provision in the underlying contract. Still, the challenges of determining damages in international commercial disputes are often analogous to those addressed in this Article,



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damages.9 That is, the focus is on determining “the price that a willing buyer would pay to a willing seller in circumstances in which each had good information, each desired to maximize his financial gain, and neither was under duress or threat.”10 The question of fair market value poses notable challenges for arbitrators because it relates more closely to finance than law. These challenges loom large because arbitrators frequently must determine fair market value in investorstate arbitration.11 The negative consequences of inaccurate and opaque valuations can extend to the entire arbitral system, beginning with lost confidence in awards and unreliable expectations about future cases. For example, unexplained large awards may strain the budget of a developing country and give rise to significant domestic political opposition.12 When facing inconsistent damages awards across similar arbitrations, state governments may also “find themselves in an untenable position of explaining to taxpayers why they are subject to damage awards for hundreds of millions of U.S. dollars in one case but not another.”13 Conversely, investors would not submit claims to arbitration if they could not expect an because international law allows for the recovery of lost profits in breach of contract cases. See infra nn. 150–153 and accompanying text; see also John Y. Gotanda, Recovering Lost Profits in International Disputes, 36 Geo. J. Int’l L. 61, 63, 86, 94 n. 180 (2004) [hereinafter Gotanda, Lost Profits].   9 The question of moral damages has recently been a hot topic in international arbitration. See, e.g., Patrick Dumberry, Compensation for Moral Damages in Investor-State Arbitration Disputes, 27 J. Int’l Arb. 247 (2010). By virtue of their inherently equitable nature, moral damages contrast starkly with fair market valuation. 10 Starrett Hous. Corp. v. Iran, 16 Iran-U.S. Cl. Trib. Rep. 201 (1987) [hereinafter Starrett Hous. Corp. v. Iran]; see also World Bank, Guidelines on the Treatment of Foreign Direct Investment, Guideline IV, sec. 5 (1992). The principle of fair market value requires that the value not include any diminution because of the state’s unlawful measures. 11 In the past five years, fair market value has been a significant basis of compensation in roughly half of the investor-state decisions that involve damages analysis. See infra Part III.B. General principles of international law and nearly all investment treaties invoke the standard of fair market value. See ILC Articles on State Responsibility, supra note 7, art. 36, cmt. 22 n. 550 (“Compensation reflecting the capital value of property taken or destroyed as the result of an internationally wrongful act is generally assessed on the basis of the ‘fair market value’ of the property lost.”); see also Abby Cohen Smutny, Some Observations on the Principles Relating to Compensation in the Investment Treaty Context, 22 ICSID Rev.—For. Inv. L.J. 1, 9 (2007). This Article does not address the important questions of whether and when fair market value is the appropriate standard of compensation. 12 See, e.g., CME Czech B.V. v. Czech, Final Award, paragraphs 77–78 (UNCITRAL Mar. 14, 2003) (separate opinion of Ian Brownlie). 13 Susan D. Franck, The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions, 73 Fordham L. Rev. 1521, 1558 (2005) [hereinafter Franck, Legitimacy Crisis]; see also Thomas W. Wälde, Procedural Challenges in Investment Arbitration Under the Shadow of the Dual Role of the State: Asymmetries and Tribunals’ Duty to Ensure, Pro-actively, the Equality of Arms, 26 Arb.

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outcome worth the risk and the costs of pursuing arbitration.14 Without reasonable investor confidence in the system, the benefits of investor-state arbitration would begin to disappear. Predictable, accurate valuations are necessary not only for the confidence of parties in arbitration proceedings, but also for the efficiency of international investment law. Before adopting measures that harm an investment, states should be able to weigh the benefits of such measures against their expected costs. Compensation of fair market value deters inefficient state actions.15 By the same logic, states would have an incentive for “efficient breaches” only if investors do not receive more than fair market value.16 An expropriation will be efficient only if the state (and its people) gain more from the taking than the cost of fully compensating for the value of the expropriated investment.17 Scholarly guidance regarding the calculation of damages in arbitration has developed quickly in recent years,18 highlighting the growing awareness of “one

Int’l 3, 19 (2010) (noting that, for states, losing in an international arbitration dispute can be “politically very embarrassing”). 14 The costs of investor-state arbitration are often substantial, including attorneys’ and administrative fees, as well as the potential loss of political and social capital in a country. Investors must weigh these costs against the expected value of an award before choosing the arbitration route. 15 See, e.g., Bienvenu & Valasek, supra note 6, at 237. This deterrent effect can also “distinguish the consequences of lawful and unlawful State [expropriation].” Id. This Article does not confront that distinction, because accurate and legitimate valuations are important in both lawful and unlawful expropriation cases (and sometimes for drawing the line between the two, see id. at 255–57). 16 This assumes that “efficient breaches” would be desirable in some circumstances. For an argument in support of that position, see Louis Wells, Double Dipping in Arbitration Awards? An Economist Questions Damages Awarded to Karaha Bodas Company in Indonesia, 19 Arb. Int’l 471, 478 n. 23 (2003) (“[E]xcessive awards discourage government takings, or breach of contract, when such actions are in fact efficient and thus desirable.”) (citing Richard A. Posner, Economic Analysis of Law (3d ed. 1986)). Such “efficiency” concerns are particularly important when states do not have greater protections of property under domestic law than under international law. 17 In other words, Pareto optimality depends on arbitrators accurately determining (and states paying) the fair market value of an expropriated investment. See Wells, supra note 16, at 473, 480. Admittedly, the value of a state’s “gain” may be more difficult to predict than the costs of compensation. But the more accurately a state predicts costs, the more able it will be to act efficiently. States’ actual payment of damages awarded in international arbitration is outside the scope of this Article. 18 As recently as 2005, an arbitrator might find relatively limited guidance on damages in treatises, and damages were said to be the “neglected aspect.” See Geoffrey Beresford Hartwell et al., Assessing Damages—Are Arbitrators Good At It? Should They Be Assisted by Experts? Should They Be Entitled to Decide ex aequo et bono? Some War Stories, 6 J. World Inv. & Trade 7, 17 (2005) (comments by Serge Lazareff); see also Thomas R. Stauffer, Valuation of Assets in International Takings, 17 Energy L.J. 459, 460 (1996) (noting that the “economic dimension—the ‘quantification of the quantum’—[had been]



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of the least understood and most unpredictable areas of international investment law.”19 The emerging literature has principally addressed the mechanics of quantifying damages, rather than the effect of damages determinations on the perceived legitimacy of international arbitration. Likewise, the literature regarding the legitimacy of international arbitration has not targeted the issue of valuation.20 This Article begins to fill this gap in the literature. In doing so, the Article takes on what has been described as the “urgent matter” of “encouraging the convergence of methods of calculating awards toward uniform and appropriate methods.”21 Part II sets forth the framework of challenges facing investor-state arbitration, within the context of its continuing expansion. Part III links those challenges to questions about the legitimacy of valuation. The limited financial and economic experience of most arbitrators plants a seed of doubt regarding valuation. That doubt grows because of perceptions that arbitrators merely “split the baby” between the parties’ proposed valuations, particularly when awards are poorly explained. This Article’s study of recently published decisions involving valuation corroborates those perceptions, because the ratio of the amount awarded to the amount claimed usually falls within the range of one-fifth to one-half. In addition, several annulment petitions demonstrate parties’ frustrations with opaque (“black box”) determinations of fair market value. Part IV addresses two fundamental aspects of valuation. First, it discusses the issue of awarding interest. The recent trend toward awarding compound interest illustrates how convergence on damages methodologies furthers the legitimacy of arbitral awards. Second, Part IV describes perhaps the most prominent method of determining fair market value: discounted cash flow (DCF) analysis. Despite theoretical agreement on the DCF method of valuation, some tribunals exhibit lingering reluctance to apply the DCF method in practice. given short shrift”). In the few years since then, three books have been published on the subject of damages in international arbitration. See Irmgard Marboe, Calculation of Compensation and Damages in International Investment Law (2009); Mark Kantor, Valuation for Arbitration (2008); Ripinsky & Williams, supra note 6. The increasing focus on damages includes a “new interest in interest.” John Y. Gotanda, A Study of Interest, in Interest, Auxiliary and Alternative Remedies In International Arbitration, Dossier V of the ICC Institute of World Business Law 169 (ICC Publication No. 684, 2008). 19 Noah Rubins & Norman Kinsella, International Investment Political Risk and Dispute Resolution: A Practitioner’s Guide 258 (2005). 20 See, e.g., Franck, Legitimacy Crisis, supra note 13, at 1586–87 nn. 326–29 (summarizing scholarship regarding the larger problem of “the ability to determine with certainty the respective rights and obligations of investors and Sovereigns in a given situation”). One complaint lodged against investor-state arbitration is that awards are “unpredictable . . . and extremely generous to foreign corporations.” Asha Kaushal, Revisiting History: How the Past Matters for the Present Backlash Against the Foreign Investment Regime, 50 Harv. Int’l L.J. 491, 510 (2009). 21 Wells, supra note 16, at 479.

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Part V suggests that tribunals should not reject a well-pleaded DCF analysis simply on the basis of “uncertainty,” “speculation,” and “going concern” tests. Several components of DCF analysis can address uncertainty and allow for transparent resolution of the parties’ competing positions. In connection with more frequent usage of the DCF method, tribunals should be more willing to appoint an independent financial expert. As a few recent decisions show, tribunal-appointed experts are helpful guides for valuation and can augment the accuracy and transparency of arbitral awards. When billions of dollars are at stake, it is worth the cost of an independent financial expert to enhance the legitimacy of investorstate arbitration. II. Framework of the Legitimacy Debate The past decade has witnessed a well-documented growth spurt of international investment arbitration. States typically consent to such arbitration through investment treaties, which designate the rules that will govern dispute resolution. Empowered by thousands of investment treaties—mostly in the form of bilateral investment treaties (BITs)—investors have increasingly submitted disputes against states to arbitration. By the end of 2010, the number of total known investor-state disputes submitted to arbitration was 390, at least twenty-five more than the year before.22 Most recent, publicly available awards in investor-state disputes have been decided under the auspices of the International Centre for Settlement of Investment Disputes (ICSID).23 ICSID has witnessed a particularly sharp increase in filings over the past decade,24 spreading across most regions of the world and economic sectors.25 Investor-state arbitration has grown under many other rule systems as well, although growth is difficult to measure because, unlike in ICSID

22 See United Nations Conference on Trade and Development, Latest Developments in Investor-State Dispute Settlement, at 1 (2010). For a graph showing the steady, continuing rise of investment treaty arbitrations, see id. at 2. Note, however, that the pace slowed slightly in the past few years. 23 ICSID cases constituted 245 of the 390 known disputes by the end of 2010. See id. at 1–2; see also Jeffrey P. Commission, A Citation Analysis of Developing Jurisprudence, 24 J. Int’l Arb. 129, 130 n. 10 (2007). 24 See ICSID—International Centre for Settlement of Investment Disputes, The ICSID Caseload—Statistics 7 (2011) [hereinafter ICSID Caseload Statistics] (showing the number of cases registered each year). From a mere handful of cases in the 1970s, 1980s, and early 1990s, over 250 cases have been filed in just the past ten years. Although ICSID filings seemed to peak in 2007 (37 cases registered), the number of filings has remained steadily above twenty per year since then. 25 See id. at 11–12.



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cases, the existence of such arbitrations may remain confidential and unknown to the public.26 A consequence of this growth is an increased scrutiny of the legitimacy of international investment arbitration.27 The numerous cases brought against Argentina have been a source of criticism,28 and the recent withdrawals of Ecuador and Bolivia from the ICSID Convention demonstrate further concern about the system.29 Challenges to legitimacy include inconsistent decisions, preferential treatment of foreign investors over domestic investors, bias toward investors, arbitrator independence, and intrusions on the regulatory sovereignty of states.30 Despite these challenges, the pace of investor-state arbitration has shown little sign of slowing. 26 Other arbitral institutions with independent rule systems include the United Nations Commission on International Trade Law (UNCITRAL), the International Chamber of Commerce (ICC), the International Centre for Dispute Resolution of the American Arbitration Association (AAA/ICDR), the London Court of International Arbitration (LCIA), and the Stockholm Chamber of Commerce (SCC). 27 See, e.g., Franck, Legitimacy Crisis, supra note 13; William W. Burke-White & Andreas von Staden, Private Litigation in a Public Law Sphere: The Standard of Review in InvestorState Arbitrations, 35 Yale J. Int’l L. 283, 344 (2010) (“As states react to the extraordinary awards against Argentina, consider the troubled jurisprudence of many ICSID tribunals, and watch the growing number of arbitrations that challenge public regulations, the legitimacy of ICSID and the future of investor-state arbitration are being called into question.”); Joachim Karl, International Investment Arbitration: A Threat to State Sovereignty, in Redefining Sovereignty in International Economic Law 225, 232–33 (Wenhua Shan et al. eds., 2008); Carlos G. Garcia, All the Other Dirty Little Secrets: Investment Treaties, Latin America, and the Necessary Evil of Investor-State Arbitration, 16 Fla. J. Int’l L. 301, 306–08, 338 (2004). 28 See, e.g., Burke-White & von Staden, supra note 27, at 284–85, 297–301 (“The divergent decisions in these cases, their often strained legal reasoning, and the exceptional sums awarded to claimants against Argentina have called into question, at least in the eyes of some states, the legitimacy of the ICSID system.”); Kathryn Khamsi, Compensation for Non-Expropriatory Investment Treaty Breaches in the Argentina Gas Sector Cases: Issues and Implications, in The Backlash against Investment Arbitration 165 (Michael Waibel et al., eds., 2010). 29 Bolivia withdrew from ICSID in 2007; Ecuador in 2010. UNCTAD—United Nations Conference on Trade and Development, Denunciation of the ICSID Convention and BITs: Impact on Investor-State Claims 1, 1 (2010); see also Ignacio A. Vincentelli, The Uncertain Future of ICSID in Latin America, 16 Law & Bus. Rev. Am. 409, 410 (2010). 30 See, e.g., Jason W. Yackee, Pacta Sunt Servanda and State Promises to Foreign Investors Before Bilateral Investment Treaties: Myth and Reality, 32 Fordham Int’l L.J. 1550, 1556 (2008); Karl, supra note 27, at 232–37; Franck, The Legitimacy Crisis, supra note 13; Charles N. Brower, A Crisis of Legitimacy, 26 Nat’l L.J. 7 (2002); Charles H. Brower, Investor-State Disputes under NAFTA: The Empire Strikes Back, 40 Colum. J. Transnat’l L. 43, 45–46 (2001) (noting allegations of the “ ‘aggressive’ use of investor-state arbitration as an ‘offensive’ weapon that has ‘chilled’ the exercise of regulatory authority and caused an ‘alarming’ loss of sovereignty”).

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A. The Endurance of Investor-State Arbitration States and investors both stand to benefit from international arbitration. For states, the benefits of investment treaties have differed historically between developed and developing nations.31 Developed, capital-exporting nations can secure protection for their investors and avoid the challenges of diplomatic protection by ensuring that their investors have a private right of action to arbitration.32 Thanks in part to the enforcement mechanism of arbitration, investment treaties also contribute to broad-scale liberalization.33 At the domestic level, investment treaties support liberalization because their protections limit government interference in markets.34 Similarly, by protecting property rights and providing mechanisms of dispute resolution, investment treaties can substitute for poor institutional quality and a weak rule of law in a host state.35 To the extent such advances limit state sovereignty, they may prove controversial and ultimately require states to pay an unpredictable price to exercise their sovereignty.36 31 The geo-political implications of those differences have been a source of much debate. See, e.g., Jeswald W. Salacuse, The Emerging Global Regime for Investment, 51 Harv. Int’l L.J. 427, 434–35 (2010); Garcia, supra note 27, at 314–17. In the 1960s and 1970s, developing countries took a strong position against the Hull Rule (the requirement of “prompt, adequate, and effective” compensation for a taking of property) such that it could no longer be relied on as customary international law. See Andrew T. Guzman, Why LDCs Sign Treaties that Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, 38 Va. J. Int’l L. 639, 646–51 (1998). Paradoxically, by entering into investment treaties that require prompt, adequate, and effective compensation, developing countries have reestablished the fundamental principle of the Hull Rule. See id. at 666–69; see also Kaushal, supra note 20, at 501. 32 See, e.g., Salacuse, supra note 31, at 439–40, 459–60; see also id. at 462–63 (“Prior to the institution of investor-state arbitration, governments had to deal with their nationals seeking diplomatic protection and other forms of interventions [which] entailed significant diplomatic, political, and economic costs for home governments. . . .”). 33 See UNCTAD–United Nations Conference on Trade and Development, The Role of International Investment Agreements in Attracting Foreign Direct Investment in Developing Countries 1, 20–23 (2009) [hereinafter UNCTAD, Attracting FDI], (explaining that some investment treaties “confirm and lock in the already existing degree of openness to foreign investment” and others “actually result in new liberalization”); Jeswald W. Salacuse & Nicolas P. Sullivan, Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain, 46 Harv. Int’l L.J. 67, 94–95 (2005). 34 See Salacuse & Sullivan, supra note 33, at 92–94. 35 UNCTAD, Attracting FDI, supra note 33, at 16–17. Investment treaties “may contribute to the coherence, transparency, predictability and stability of the investment frameworks of host countries.” Id. at 25–26; see also Kaushal, supra note 20, at 517 (describing how “the international nudges the national toward convergence on a high level of investment protection”). 36 See Tai-Heng Cheng, Power, Authority and International Investment Law, 20 Am. U. Int’l L. Rev. 465, 496 et seq. (2005); cf. Susan D. Franck, Empirically Evaluating Claims about Investment Treaty Arbitration, 86 N.C. L. Rev. 1, 63 (2007) [hereinafter Franck, Empirically



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Developing countries agree to these limitations because they reasonably believe that investment treaty protections signal to foreign investors that the country will provide a measure of stability and protection. Econometric studies suggest that such signaling has promoted foreign investment, although the evidence is somewhat mixed.37 Regardless of the actual effectiveness of BITs, developing countries seek to attract foreign investment when they enter into investment treaties.38 For example, developing nations may perceive that investment treaties are necessary for making credible commitments to investors, particularly in light of growing competition for foreign direct investment among developing nations.39 Developing countries enhance the credibility of their commitments by consenting in investment treaties to arbitration of their disputes with foreign investors, and by establishing fair market value as a standard of compensation. As a result of this international bargain, investors have gained standing to pursue arbitration against states. Setting aside the nuanced question of investors’ considerations when deciding whether to invest in a particular state, the growing number of arbitration claims shows that investors are becoming more savvy to the possibility of international arbitration.40 Evidence of investors’ heightened awareness of international arbitration can also be seen in the growing and

Evaluating] (“[W]hen governments assess the costs and benefits of entering into or renewing investment treaties, they may be unable to make reliable assessments of their financial exposure.”). Another criticism of limiting state sovereignty through investment treaties (and arbitration) is the trumping of “public” concepts with private interests. See, e.g., Kaushal, supra note 20, at 518–19. 37 “Whereas the findings of early empirical studies on the impact of BITs on [foreign direct investment (FDI)] flows were ambiguous, with some showing weak or considerable impact (and one or two no impact at all), more recent studies published between 2004 and 2008—based on much larger data samples, improved econometric models and more tests—have shifted the balance towards concurring that BITs appear to have an impact on FDI inflows from developed countries into developing countries.” UNCTAD, Attracting FDI, supra note 33, at 29–55; see also Jason W. Yackee, Do Bilateral Investment Treaties Promote Foreign Direct Investment? Some Hints from Alternative Evidence, 51 Va. J. Int’l L. 397, 405–14 (2010) (describing reasons why “analysts have had great difficulty reliably demonstrating a statistically significant, substantively meaningful correlation between BITs and FDI”); Susan D. Franck, Empiricism and International Law: Insights for Investment Treaty Dispute Resolution, 48 Va. J. Int’l L. 793 n. 116 (2008); Salacuse & Sullivan, supra note 33, at 96, 111–12; Kenneth J. Vandevelde, The Economics of Bilateral Investment Treaties, 41 Harv. Int’l L.J. 469, 489, 498 (2000). 38 See UNCTAD, Attracting FDI, supra note 33, at 29 (“Developing countries have concluded BITs as part of their desire to improve their policy framework in order to attract more FDI and benefit from it.”). 39 See Guzman, supra note 31, at 669–71. 40 For a summary of “signs that investor awareness about BITs is increasing,” see UNCTAD, Attracting FDI, supra note 33, at 53.

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accepted practice of restructuring an investment in order to acquire investment treaty protection.41 Today, if a government measure harms a foreign investment, a foreign investor will likely have greater confidence in international arbitration than in domestic courts of the host state.42 Yet the confidence of investors in international arbitration cannot be taken for granted. A recent survey suggests that major corporations are skeptical about the protections provided by investment treaties.43 Particularly with respect to compensation, investors may have a growing sense that international arbitration is unlikely to result in adequate compensation for the harms caused by host states.44 B. Determinacy, Transparency, and Consistency The legitimacy of international arbitration depends in large part on investors and states having reliable expectations and confidence in the resolution of their disputes through arbitration. That confidence can develop or deteriorate in a variety of ways. Two critical factors are the determinacy and coherence of investment arbitration decisions, which help ensure that the rules governing arbitration

41 See Barton Legum, Defining Investment and Investor: Who Is Entitled To Claim?, ICSID, OECD, UNCTAD Symposium on Making The Most Of International Investment Agreements (Dec. 12, 2005), at 5 (“[T]he emergence of th[e] [BIT-shopping] industry suggests that, perhaps for the first time, BITs really are beginning to encourage and promote foreign investment in the way they were intended to do.”); see also Anthony Sinclair, ICSID’s Nationality Requirements, in Investment Treaty Arbitration and International Law 85, 116 (T.J. Weiler ed., 2008). 42 Two principal reasons for this confidence are the belief in a (more) fair proceeding and the enforceability of an award in international arbitration. Under the ICSID Convention, for example, awards become immediately enforceable in the host state’s courts. See Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, art. 54(1) (Mar. 18, 1965) 17 U.S.T. 1270, 575 U.N.T.S. 159 [hereinafter ICSID Convention] (“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.”). 43 Jason W. Yackee conducted a survey of the general counsels of the top 200 U.S. corporations on the Fortune 500 list. The results of the survey “indicate a low level of familiarity with BITs, a pessimistic view of their ability to protect against adverse host state actions, and a low level of influence over FDI decisions.” Yackee, supra note 37, at 429; see also id. at 429–30 (reporting that representatives of major corporations “did not view BITs as particularly effect at protections against expropriation” and had “skepticism about the ability of BITs to protect against regulatory change”); Salacuse & Sullivan, supra note 33, at 96 (“Local economic conditions and government policies are probably more important than BITs in influencing the investment decision.”). 44 See infra Part III; Yackee, supra note 37, at 434–35; Franck, Empirically Evaluating, supra note 36, at 49–50.



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“convey clear and transparent expectations” to the parties.45 Arbitral tribunals should be consistent in their interpretation and application of those rules.46 Before turning to the detrimental impact of inconsistencies, the overarching trend of convergence should be explained. Investment treaties do not provide substantial determinacy; they typically set forth only brief and basic rules.47 For example, most investment treaties say nothing at all about the appropriate damages for nonexpropriatory treaty violations.48 The standard of compensation for expropriation—while referring to the payment of fair market value—also lacks detail in most investment treaties.49 A common provision for lawful compensation is payment of “prompt, adequate, and effective” compensation of “fair market value.”50 That sample provision includes no instruction on numerous calculation issues, including the appropriate methodology for determining fair market value or whether to compound interest. Despite the indeterminacy of investment treaties, the publication of more and more investment arbitration decisions has furthered transparency and improved the reliability of parties’ expectations. Transparency can come in a number of forms.51 The parties in investor-state arbitration usually consent at least to the publication of decisions, which are available on a number of websites.52 When

45 See Franck, The Legitimacy Crisis, supra note 13, at 1584 (“Legitimacy depends in large part upon factors such as determinacy and coherence, which can in turn beget predictability and reliability.”) (citing Thomas M. Franck, The Power of Legitimacy Among Nations 49 (1990)). 46 See Karl, supra note 27, at 236–37; Franck, The Legitimacy Crisis, supra note 13, at 1585. 47 See Franck, The Legitimacy Crisis, supra note 13, at 1584–85; Garcia, supra note 27, at 340, 347 (including the phrase “just compensation” in investment treaties). 48 See, e.g., LG&E Energy Corp. et al. v. Argentina, ICSID Case No. ARB/02/1, Award, paragraph 39 ( July 25, 2007) [LG&E v. Argentina] (“The Tribunal notes, however, that when addressing the question of the absence of applicable treaty compensation standards for breaches other than expropriation, recent tribunals have opted to apply FMV. Yet, their decisions were grounded on the correspondence between the situation under analysis and expropriation.”); see also Ripinsky & Williams, supra note 6, at 23, 25. 49 See Ripinsky & Williams, supra note 6, at 22–23, 79–80 (noting the number of phrases that treaties include to require compensation of fair market value); see also id. annex IV (collecting treaty provisions). 50 See, e.g., United States Model Bilateral Investment Treaty, arts. 6(1)(c), 6(2)(b) (2004). 51 Examples include public decisions, public hearings, and public involvement in the proceedings. See Jack J. Coe, Jr., Transparency in the Resolution of Investor-State Disputes— Adoption, Adaptation, and NAFTA Leadership, 54 U. Kan. L. Rev. 1339, 1355–64 (2006). For example, a recent hearing was made public via live Internet video, in the case of Pac Rim Cayman L.L.C. v. Republic of El Salvador, ICSID Case No. ARB/09/12), available at mms://wbmswebcast1.worldbank.org/ICS/2010-05-31/ICSID_En.asf. 52 Investment arbitration awards can be found, among other places at (1) http://icsid. worldbank.org/ICSID/FrontServlet?requestType=CasesRH&reqFrom=Main&action Val=OnlineAward (ICSID website), (2) http://www.investmentclaims.com (Oxford

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a state is a party to arbitration, the public has a strong interest and expectation of transparency.53 The trend toward publishing awards in investor-state arbitration (and particularly ICSID arbitration) is therefore well-established—and has enabled international lawyers and academics to contribute to the development of international investment law.54 The swell in publicly available decisions has contributed to the influence of precedent as a de facto reality in international arbitration. As a matter of law, arbitral tribunals are not bound by prior decisions, and international arbitration is not a system of common law.55 Yet parties frequently cite to, and arbitrators often rely on, previously published decisions.56 This has led to the emergence of “case law” and “jurisprudence” in international investment law,57 as well as to the characterization that investment treaties constitute an international “regime.”58 As Jeffrey Commission explains, “[g]iven that international investment law now principally develops through case law, the precedential value of each decision, award, and order, is, rightly or wrongly, tremendously significant.”59 International arbitration therefore serves as an accelerated, if disaggregated, forum for international investment law. A recognized goal of that forum is to build a coherent body of law.60

University Press), and (3) http://ita.law.uvic.ca/alphabetical_list.htm (Investment Treaty Arbitration). See also 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, 74, n. 105 (2005). Even when awards are not made public, a number of online reporters uncover and disclose the core holdings of cases. See, e.g., Investment Arbitration Reporter, http://www.iareporter.com (last visited Oct. 30, 2011). 53 See Coe, Jr., supra note 51, at 1353. 54 See, e.g., Salacuse, supra note 31, at 466–67; Franck, Legitimacy Crisis, supra note 13, at 1614–16; see also Coe, Jr., supra note 51, at 1356–57; J. Anthony VanDuzer, Enhancing Procedural Legitimacy of Investor-State Arbitration through Transparency and Amicus Curiae Participation, 52 McGill L.J. 681, 706–08 (2007). 55 See, e.g., El Paso Energy Int’l Co. v. Argentine Republic, ICSID Case No. ARB/03/15, Decision on Jurisdiction, paragraph 39 (Apr. 27, 2006) (stating there is “no provision, either in the [ICSID] Convention or in the BIT, establishing an obligation of stare decisis”). 56 See Commission, supra note 23, at 142–43, 149–50. 57 See Alec Stone Sweet, Investor-State Arbitration: Proportionality’s New Frontier, 4 Law & Ethics Hum. Rts. 47, 60–61 (2010); Commission, supra note 23, at 129; see also W. Mark C. Weidemaier, Toward A Theory of Precedent in Arbitration, 51 Wm. & Mary L. Rev. 1895, 1908 (2010) (“Through this engagement with past awards, ICSID tribunals have gradually fashioned what has been called an investment treaty ‘case law or jurisprudence.’ ”). 58 See Salacuse, supra note 31, at 436 (“[L]awyers and arbitrators . . . implicitly treat investment treaties as constituting a regime in that they regularly refer to prior decisions applying one treaty in order to interpret a wholly separate treaty.”). 59 See Commission, supra note 23, at 131. 60 See M.C.I. Power Group L.C. et al. v. Ecuador, ICSID Case No. ARB/03/6, Decision on Annulment, paragraph 24 (Oct. 19, 2009) (“The responsibility for ensuring consistency



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Notwithstanding the influence of precedent, tribunals have reached conclusions that conflict directly with prior decisions. Criticisms of inconsistency have focused on the most-favored-nation principle, the excuse of necessity, and regulatory takings.61 In the context of damages, there have been fewer studies of inconsistencies, despite a “common perception [of] a lack of a coherent systematic approach to compensation issues.”62 As discussed in Part IV, one prominent inconsistency in the realm of damages is the appropriate methodology for valuation. Inconsistent decisions can be debilitating to the legitimacy of investor-state arbitration. As Susan Franck has explained, “[i]nconsistency tends to signal errors, lends itself to suggestions of unfairness, creates inefficiencies, and generates difficulties related to coherence, most notably a lack of predictability, reliability, and clarity.”63 In the words of Nigel Blackaby, the co-existence of “diametrically opposed decisions . . . shock[s] the sense of rule of law or fairness.”64 Despite those potentially dire consequences, it seems a stretch to claim that “chaos reign[s]” in investor-state arbitration because of inconsistent decisions.65 A more accurate understanding is that, despite several conflicting decisions, international investment law is converging around the growing body of precedent reflected in public

in the jurisprudence and for building a coherent body of law rests primarily with the investment tribunals.”). Such a body of law would “establish a predictable, stable legal framework for investments. . . .” Salacuse, supra note 31, at 461 (citing Saipem v. Bangladesh, ICSID Case No. ARB/05/07, Decision on Jurisdiction, paragraph 67 (Mar. 21, 2007)). In international law, judicial decisions constitute “subsidiary means for the determination of rules of law.” Statute of the International Court of Justice, art. 38, June 26, 1945, 59 Stat. 1055, 33 U.N.T.S. 993; see also Commission, supra note 23, at 134–35. 61 See, e.g., Karl, supra note 27, at 236–37; Gabriel Egli, Don’t Get Bit: Addressing ICSID’s Inconsistent Application of Most-Favored-Nation Clauses to Dispute Resolution Provisions, 34 Pepp. L. Rev. 1045 (2007); Franck, The Legitimacy Crisis, supra note 13, 1559–82 (describing inconsistencies in the Lauder arbitration, the SGS cases, and three NAFTA cases); see also Burke-White & von Staden, supra note 28, at 297 (“ICSID arbitrations have generated a contradictory jurisprudence that lacks theoretical coherence and remains tied to the private law origins of international arbitration. The Argentine cases are illustrative of the problematic jurisprudence to date.”). 62 Ripinsky & Williams, supra note 6, at xxxv (noting that the lack of coherence “contributes to the uncertainty of the legal environment and the unpredictability of outcomes of disputes”). As another commentator put it, there “appears to be strikingly little uniformity in the calculations of awards in international arbitrations.” Wells, supra note 16, at 478. 63 Franck, Do Investment Treaties Have a Bright Future, supra note 52, at 63–67 (citations omitted). See also Karl, supra note 27, at 236–37; Franck, The Legitimacy Crisis, supra note 13, at 1558 (“Inconsistency creates uncertainty and damages the legitimate expectations of investors and Sovereigns.”). 64 Franck, The Legitimacy Crisis, supra note 13, 1583 (quoting Nigel Blackaby of Freshfields Bruckhaus Deringer). 65 Garcia, supra note 27, at 350–51.

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decisions.66 The legitimacy critiques arising from inconsistencies are a healthy sign of pressure toward continuing harmonization. Such convergence is critical in the area of valuation, given the notable challenges that valuation presents in investor-state arbitration. III. The Legitimacy Challenges of Valuation Multiple valuation challenges threaten to undermine the legitimacy of investorstate arbitration, including the financial competency of arbitrators, awards perceived to “split the baby,” and poorly explained and inconsistent methodologies. By entering into treaties that give foreign investors a private right of action and establish fair market value as a basis for compensation, host states arguably have accepted that economics will prevail over politics in matters of compensation.67 Arbitrators seeking to determine fair market value in investor-state cases do not have the unfettered discretion to decide damages ex aequo et bono—on equitable principles.68 They must engage in the task of valuation. A. The Financial Competency of Arbitrators The perceived competency of arbitrators impacts the legitimacy of their conclusions. For most challenging issues raised in investor-state arbitration, arbitrators are among the most experienced and adept persons in the world at settling the 66 See Karl, supra note 27, at 237 (“[A]s case law develops, future arbitration tribunals will have more precedents at hand, which should have a certain harmonising effect.”); Salacuse, supra note 31, at 467 (“Despite the decentralized and private decisionmaking processes of the [international investment] regime, the resulting decisions by arbitral tribunals demonstrate a surprisingly high degree of uniformity and consistency.”); Weidemaier, supra note 57, at 1944 (“[T]he system of precedent can be understood as a response by arbitrators to external critics whose objections threatened ICSID’s viability as a forum for resolving investment disputes,” and “ICSID arbitrators are remarkably well positioned to foster norms concerning their role as producers of law.”). 67 This can be viewed as part of a move in the international order in which “economics replac[es] politics as law’s sidekick and nemesis.” See Burke-White & von Staden, supra note 27, at n. 14 (quoting David Kennedy, The International Style in Postwar Law and Policy, 1994 Utah L. Rev. 7, 63 (1994)). The measure of fair market value will nonetheless rarely limit a state’s freedom to exercise its sovereignty. See, e.g., id. at 288–89. The payment of fair market value could affect sovereignty if it pushed a state toward bankruptcy. See supra note 11; Ripinsky & Williams, supra note 6, at 356. Of course, states remain free to opt out of value-based compensation standards (or to revise investment treaties accordingly). 68 “The term ‘value’ is an ‘objective concept with an economic content’ and . . . therefore, where the law prescribes compensation to be equivalent to the value of the asset taken, there is little room for the exercise of an equitable discretion.” Ripinsky & Williams, supra note 6, at 128 (quoting E. Lauterpacht); see also Hartwell et al., supra note 18, at 21 (comments of B. Hanotiau).



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parties’ disputes.69 Arbitral tribunals decide, for example, on complex and dispositive questions of jurisdiction, liability, and standards of compensation. These legal issues are the bread and butter of international arbitrators. If a tribunal proceeds past those questions—that is, concludes that it has jurisdiction, that the state is liable, and that the appropriate standard of compensation is fair market value—then the tribunal must determine the value (or diminished value) of the investment in question. For many arbitrators, this is the “harder part”70 and “dangerous territory.”71 In most modern investor-state arbitration proceedings, the complexity of valuation is beyond the traditional legal training of arbitrators.72 Nearly all arbitrators in investor-state proceedings hail from legal backgrounds, whether in private practice, government, or academia.73 A survey of the publicly available biographies of leading arbitrators reveals, for example, that none of those arbitrators have post-graduate degrees in the fields of finance, economics, or mathematics.74 Because of their backgrounds, arbitrators may be understandably reluctant to immerse themselves in the detailed formulas and spreadsheets submitted by the parties. Legal training and analysis do not align well with the task of assessing 69 Many commentators have remarked upon the small, elite pool of arbitrators who preside over major international investment disputes. See, e.g., Weidemaier, supra note 57, at 1950 (describing ICSID arbitrators as an “elite group”); Commission, supra note 23, at 137–38. 70 Markham Ball, Assessing Damages in Claims by Investors Against States, 16 ICSID Rev.— For. Inv. L.J. 408, 417 (2001); see also Christer Söderlund et al., The Valuation of Lost Profits—Finding it Right, 6 J. World Inv. & Trade 23, 31 (2005) (“Damages are one of the most challenging topics in arbitration.”). 71 RosInvest Co. U.K. Ltd. v. Russian Federation, SCC Case No. 075/2009, Final Award, paragraph 669 (Sept. 12, 2010) [hereinafter RosInvest v. Russia] (“[T]he tribunal might steer into dangerous territory by attempting to enter its own economic valuation into the findings of the respective economic experts’ opinions. . . .”). 72 The existence of an early investor-state decision with apparent “flawed economic reasoning” has not helped the case of arbitrators. See Ripinsky & Williams, supra note 6, at 208–10 (summarizing criticisms of the valuation analysis in Amoco Int’l Fin. Corp. v. Iran, Partial Award, 15 Iran-U.S. Cl. Trib. Rep. 189 (1987)); see also id. at 190 (“Valuation can be a sophisticated exercise going beyond the expertise of the legal profession.”). 73 See Burke-White & von Staden, supra note 27, at 330, n. 239; see also Salacuse, supra note 31, at 467 (“[A]rbitrators are very much a part of an international epistemic community with similar training and, in many cases, comparable backgrounds.”). 74 Biographies of arbitrators are published, among other places, on the website of the International Arbitration Institute (http://www.iaiparis.com). The nineteen leading arbitrators considered are Gabrielle Kaufmann-Kohler, L. Yves Fortier, Marc Lalonde, V.V. Veeder, Francisco Orrego Vicuña, Piero Bernardini, Charles N. Brower, Ahmed Sadek El-Kosheri, Brigitte Stern, Albert Jan van den Berg, Henri C. Alvarez, Bernardo M. Cremades, Pedro Nikken, Karl-Heinz Böckstiegel, James R. Crawford, Pierre-Marie Dupuy, W. Michael Reisman, Francisco Rezek, and Pierre Tercier. Jeffrey Commission identified this esteemed group as the most frequently selected arbitrators in pending ICSID cases as of 2007. Commission, supra note 23, at 137–39.

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fair market value.75 Even if arbitrators were fully able to acquire the necessary financial competency,76 they could not overcome the fact that they are neither economists nor financial analysts. Arbitrators’ legal backgrounds lead to tainted perceptions of the quality of some damages awards. In other words: Whether or not modern arbitrators are good at assessing damages is not, I suggest, the point. The question is whether parties can have confidence that the person assessing damages is properly qualified to do so, and I suggest that in general, with the very greatest respect to all my friends, the modern legal arbitrator is not so qualified for self-evident reasons. Legal and economic reasoning are different.77

Perceptions of arbitrators’ limited skills with respect to valuation are likely to persist, particularly if arbitrators do not properly apply and explain appropriate valuation methodologies. B. The Perception of “Splitting the Baby” Imagine a simple formula to resolve a disputed fair market value in international arbitration. The investor claims a valuation of X (hundreds of millions) dollars. The state asserts that Y (near-zero) dollars would be an appropriate award. The arbitral tribunal applies the following formula: Damages = (X + Y) / 2. Such a “split

75 See infra Part V.B; Hartwell et al., supra note 18, at 11–12 (comments by Nicolas Ulmer) (“Are [a]rbitrators [g]ood at [a]ssessing [d]amages? Answer: no. . . . [W]hat lawyers like particularly, and what they are trained to like, is putting damages in categories, cutting them out, and deciding whether they are allowable, which is not the same thing as assessing them.”); see also J. Brian Casey et al., Arbitration and the Valuator, J. Bus. Valuation 105, 112–13 (2007). 76 Legal backgrounds in no way foreclose arbitrators from having significant expertise in deciding valuation disputes. Experienced arbitrators have likely confronted a wide array of damages calculations, set forth in well-argued briefs and detailed expert reports. That experience could be as important as formal education. In addition, economics is far from a stranger to law, and arbitrators may well have studied economics because of the growing connection between the fields. For example, of the surveyed prominent arbitrators, at least one taught “business law and economics” (Lalonde) and another has a Ph.D. in international law from the London School of Economics (Orrego Vicuña). See International Arbitration Institute, http://www.iaiparis.com (last visited Oct. 21, 2011). There is also little doubt as to the capacity of arbitrators, over time, to learn what is needed for calculating damages in a given case. Yet parties to an arbitration might object to the efficiency of such on-the-job learning. 77 Hartwell et al., supra note 18, at 8 (comments by Hartwell); see also, e.g., Thierry J. Sénéchal & John Y. Gotanda, Interest as Damages, 47 Colum. J. Transnat’l L. 491, 494 (2009) (describing arbitral tribunals as “unfamiliar with modern economic and financial principles”). If arbitrators can be criticized as “lack[ing] critical expertise in public law adjudication,” see Burke-White & von Staden, supra note 27, at 286, 330, parties have all the more justification for questioning arbitrators’ relative inexperience with modern principles of finance.



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the baby”78 approach would be consistent and predictable but would wholly fail to inspire confidence. Fair market value is a fact-intensive (and often unique) determination, so the parties do not expect formulaic awards.79 Rather, parties expect consistent, well-founded methodologies and accurate valuations. Yet baby-splitting is perceived as the reality in international arbitration.80 As explained below, evidence of this perception can be seen in parties’ failure to converge on valuation, and in the gulf between states’ nonquantified or zerodamages positions and investors’ claims.81 One reason for this perception is the competency of arbitrators: “Given that assessment of damages . . . may be a complex exercise requiring knowledge of financial analysis and economic models, ‘splitting the baby’ may offer itself as an attractive option when tribunals get lost in the intricacies of valuation techniques.”82 Such a simplistic approach to valuation shows how the competency of arbitrators might cast doubt on the enterprise of valuation and undermine the legitimacy of tribunals’ awards.

78 The phrase “split the baby” is an awkward fit to damages determinations. It is based on the Old Testament story of King Solomon threatening to split a baby to identify the true mother of a child. See Christopher R. Drahozal, Busting Arbitration Myths, 56 U. Kan. L. Rev. 663, 673 (2007) (citing 1 Kings 3:16–28). The typical task of arbitrators is determining fair market value of property that has been taken by a state, not who gets to keep the property. Despite the imperfect fit, “splitting the baby” is a well-recognized characterization of tribunals seeking a middle ground between the positions of the parties. 79 See Franck, Do Investment Treaties Have a Bright Future, supra note 52, at 78. 80 See, e.g., Ripinsky & Williams, supra note 6, at 122, 191; Kevin T. Jacobs & Matthew G. Paulson, The Convergence of Renewed Nationalization, Rising Commodities, and “Americanization” in International Arbitration and the Need for More Rigorous Legal and Procedural Defenses, 43 Tex. Int’l L.J. 359, 365 (2007) (noting a “perceived tendency of arbitrators to ‘split the baby’ ”) (quoting Robert B. von Mehren, An International Arbitrator’s Point of View, 10 Am. Rev. Int’l Arb. 203, 208 (1999)); Ball, supra note 70, at 425–27. Whether tribunals actually “split the baby” is a matter of important debate. The focus of empirical studies thus far has been on commercial arbitration, rather than investor-state arbitration. See Stephanie E. Keer & Richard W. Naimark, Arbitrators Do Not “Split the Baby”: Empirical Evidence from International Business Arbitrations, 18 J. Int’l Arb. 573 (2001) (studying cases awarded through the American Arbitration Association from 1995–2000); Drahozal, supra note 78, at 673–77. 81 In theory, a check on this type of divergence is the weighting of opposing damages figures by their plausibility. See Richard Posner, An Economic Approach to the Law of Evidence, 51 Stan. L. Rev. 1477, 1539 (1999). Of course, that check depends on a good understanding of the plausibility of damages figures. Another proposal for limiting such divergence is for states to “put cost-shifting guidelines into investment treaties to reward investors whose claimed damages are in line with the ultimate award or provide deterrence for inflating claimed damages.” Franck, Empirically Evaluating, supra note 36, at 63. 82 Ripinsky & Williams, supra note 6, at 122 (citing Ball, supra note 70, at 425–27). Compromise between arbitrators is another reason why awards might seem to “split the baby.” Such compromise awards can also undermine the legitimacy of valuations, because an award “not supported by articulated reasons does disservice to the credibility of the outcome.” Ball, supra note 70, at 427.

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Assuming for a moment that tribunals in fact applied the formula above (Damages = (X + Y) / 2), recent published decisions suggest that the denominator should be higher than two.83 From mid-2006 to mid-2011, there were fifteen published investor-state decisions in which a determination of fair market value comprised a large portion of the tribunal’s damages analysis.84 Those fifteen cases are drawn from approximately thirty decisions published during that time in which tribunals reached the damages phase of the proceedings.85 This is a significant body of awards, given that tribunals awarded damages in only twenty-one such cases between 1990 and June 2006.86 The average claimed valuation in the fifteen fair-market-value cases was $203 million.87 The respondents in these cases

83 Canvassing awards prior to June 1, 2006, Susan D. Franck observed that the ratio of average amounts awarded to average amounts claimed was less than one-tenth. See Franck, Empirically Evaluating, supra note 36, at 58–60 (stating that, in twenty-one cases prior to June 1, 2006, in which tribunals awarded cash to an investor, the average amount awarded was $25.6 million and the average amount claimed was $345.5 million). That fraction does not distinguish between cases based on fair market value versus other forms of damages. Franck’s study also includes cases in which tribunals were not actually required to quantify damages, thus not addressing tribunals’ calculation of damages. See id. at 24–25, 58 (stating that, of the fifty-two cases she studied, there were thirty-one in which tribunals awarded investors nothing). 84 The decisions are Azurix v. Argentina Award, supra note 3; ADC v. Hungary, supra note 5; Siemens v. Argentina, supra note 3; Enron v. Argentina, supra note 3; Vivendi v. Argentina; Sempra v. Argentina, supra note 3; BG Group v. Argentina, supra note 3; Biwater Gauff (Tanz.) Ltd. v. Tanzania, ICSID Case No. ARB/05/22, Award (July 18, 2008) [hereinafter Biwater v. Tanzania]; Rumeli Award, supra note 3; Nat’l Grid P.L.C. v. Argentina, Award (UNCITRAL Nov. 3, 2008) [hereinafter Nat’l Grid v. Argentina]; Siag and Vecchi. v. Egypt, ICSID Case No. ARB/05/15, Award (May 1, 2009) [hereinafter Siag v. Egypt]; Walter Bau v. Thailand, Award (UNCITRAL July 1, 2009) [hereinafter Walter Bau v. Thailand]; Kardassopoulos v. Georgia, ICSID Case Nos. ARB/05/18, ARB/07/15, Award (Feb. 28, 2010) (a revision proceeding is currently pending); RosInvest v. Russia, supra note 71; Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Award (Oct. 20, 2010) [hereinafter Alpha v. Ukraine]. 85 The selection of a case as a “fair market value” case required the exercise of discretion in some instances. This discretion was necessary because some decisions do not indicate whether the tribunal was determining fair market value. In addition, a few cases involving the valuation of a fungible asset or of real property have not been included. 86 See supra note 82; Franck, Empirically Evaluating, supra note 36, at 58. 87 For some cases, the average amount claimed is based on the mean of multiple claims, because investors used different valuation approaches and economic models to propose a range of valuations. See, e.g., Enron v. Argentina, supra note 3, paragraphs 348–51. Where investors proposed valuations at different dates, the higher amount claimed was used. If decisions clearly delineated damages based on fair market value from other damages (such as historical losses, interest, and costs), the average amounts claimed and awarded are based only on the fair market value portion. See, e.g., Siag v. Egypt, supra note 84, paragraphs 519, 584. The highest and lowest amounts claimed were, respectively, $553 million (in Azurix v. Argentina) and $9 million (in Alpha v. Ukraine). The median amount claimed was $183 million (in RosInvest Co. v. Russia).



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challenged the claimed valuations but rarely put forward quantifiable countervaluations.88 The average valuation awarded was $80 million, roughly two-fifths the average amount claimed.89 Averages serve as “blunt statistical instrument[s]”90 and hide important outliers. For example, in ADC v. Hungary and Kardassopoulos v. Georgia, the tribunals awarded exactly or almost exactly the amount claimed by the investors.91 In BG Group v. Argentina and Rumeli Telecom v. Kazakhstan, the tribunals awarded over half of the valuation amount claimed. Yet in RosInvest v. Russia and Biwater v. Tanzania, the tribunals awarded little to nothing compared to the amounts claimed.92

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Fair Market Value in Recent Investor-State Cases: Amounts Awarded as a Percentage of Amounts Claimed93 88 Two exceptions are Kardassopoulos v. Georgia and RosInvest Co. v. Russia. Notably, the tribunal in RosInvest Co. v. Russia arrived at a valuation equal to the highest amount proposed by Russia. See RosInvest v. Russia, supra note 71, paragraphs 657, 660, 675–76. 89 This average does not include the interest or costs and fees awarded in each case. The median amount awarded was $76 million (in ADC v. Hungary). The highest and lowest amounts awarded were, respectively, $199 million (in Siemens v. Argentina) and zero (in Biwater v. Tanzania). 90 See Franck, Empirically Evaluating, supra note 36, at 60. 91 The amounts awarded were $76 million (in ADC v. Hungary) and $30 million (in Kardassopoulos v. Georgia). The tribunal in ADC v. Hungary declined to award certain lost development opportunities, seemingly because the claimants did not put forward a quantification of their value. See infra note 228. 92 The amounts claimed were $183 million (in RosInvest v. Russia) and $20 million (in Biwater v. Tanzania). 93 As explained above, the data underlying this chart isolates the valuation component of each award and does not include other, potentially significant sources of compensation, such as interest, costs, and fees.

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Still, in nine of the fifteen cases studied, tribunals awarded between one-fifth and one-half of the amounts claimed. This elementary empirical evidence corroborates the perception that arbitrators continue to “split the baby,” which is difficult to refute without published decisions that reveal a rigorous quantification of fair market value. The results are summarized in the chart below. C. The Failure to Explain Calculations Arbitrators bolster the legitimacy of their awards by thoroughly explaining their resolution of complex issues of valuation. By contrast, vague and ambiguous decisions invite criticism and undermine the legitimacy of an award. Parties will rarely be satisfied with the excuse of valuation being “inherently uncertain.”94 Valuation may not be an “exact science,”95 but it can nonetheless be described with precision. Well-reasoned decisions benefit the parties, other arbitrators, and third parties. Potential benefits include promotion of settlement between the parties and broader jurisprudential development.96 From all perspectives, international arbitration is more legitimate when parties and nonparties understand the issues and reasoning underlying a decision. Because awards against states require the use of public funds, tribunals may have an added responsibility to quantify damages transparently.97 Investors, too, will benefit from detailed, publicly available explanations that “neutralize the repeat player advantage” of states and alert investors

94 Rumeli Telecom v. Kazakhstan, ICSID Case No. ARB/05/16, Decision of the Ad Hoc Committee on the Application for Annulment, paragraph 142 (Mar. 25 2010) [hereinafter Rumeli Annulment]. 95 See supra note 4. 96 See, e.g., Weidemaier, supra note 57, at 1908. Those benefits will not be realized, however, from decisions that have flawed or incomplete reasoning. Such flaws may well lead to annulment of an award. See Christoph Schreuer, The ICSID Convention: A Commentary 997 (2d ed. 2009) (“No doubt frivolous, perfunctory or absurd arguments by a tribunal would not amount to ‘reasons’ ” for purposes of annulment). Because of the many sources that arbitrators may rely on for their decisions, detailed (and of course intellectually honest) reasoning is critical to legitimacy. See Garcia, supra note 27, at 342. 97 H. Perezcano Diaz, Damages in Investor-State Arbitration: Applicable Law and Burden of Proof, in Evaluation of Damages in International Arbitration 129 (Yves Derains & Richard H. Kreindler eds., 2006). Those explanations are critical because, if a state does not perceive a damages award to be legitimate, it will be less likely to voluntarily comply with the award. See Weidemaier, supra note 57, at 1918–19 (“Whether the reputational costs of noncompliance provide a substantial inducement to pay depends in part on whether parties in a position to impose these costs—perhaps including investors, international financial institutions, and even the borrower’s own citizens— perceive the award and the arbitration process that produced it as legitimate.”).



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to the practices of states with respect to foreign investors.98 Arbitrators also have self-interest in publishing well-reasoned decisions—those decisions support the arbitral system99 and an arbitrator’s personal reputation, both of which are necessary for future appointments. In short, “[a] reasoned judgment contributes to ensuring not only that justice is done but that it is perceived to be done.”100 Although investor-state decisions are moving toward better explanations of valuation,101 deficient discussions of specific calculations remain a common exception to the trend. The failure to explain calculations in detail is perhaps justified in rare cases in which investors claim relatively small amounts.102 In most cases, however, the failure to explain valuation adequately hints at a failure to address the issue methodically, thus exposing an award to greater skepticism.103  98 Coe, Jr., supra note 51, at 1358–59, n. 108; see also Franck, Do Investment Treaties Have a Bright Future, supra note 52, at 86–88 (discussing the importance of “the equality of arms”).   99 See Weidemaier, supra note 57, at 1946 (“[A]rbitrators may use the award to communicate information to appease ICSID’s many critics. For example, the award may discuss past awards explicitly and in depth. . . . This kind of direct engagement signals that the decision resulted from a deliberative, systematic process, rather than from an ad hoc balancing of the equities in a particular case.”). 100 See Schreuer, supra note 96, at 996 (citing Lucchetti v. Peru, ICSID Case No. ARB/03/4, Decision on Annulment, paragraph 98 (Aug. 13, 2007)). 101 See infra Part V.2; Ripinsky & Williams, supra note 6, at 191 (listing “examples of awards where arbitral tribunals treated valuation matters quite thoroughly”). Fifteen years ago, by contrast, one commentator explained that “[m]ost . . . tribunal awards are parsimonious in the economic detail which is presented. Whatever financial data is offered by the court has been filtered through a jurist’s prism and typically is not amenable to economic analysis. The terminology is either too casual—confusing income with cash flow, for example—or the pieces of the financial puzzle are too few.” Stauffer, supra note 18, at 480. 102 See, e.g., Funnekotter v. Zimbabwe, ICSID Case No. ARB/05/6, Award, paragraphs 128, 135 (Apr. 22, 2009) [hereinafter Funnekotter v. Zimbabwe]; Bogdanov v. Moldova, SCC Case No V/114/2009, Award, paragraphs 84–86 (Sept. 22, 2005) (the tribunal devoted no more than a couple sentences to its “estimate” of damages, which was in the $100,000 range). 103 Taking an example from international commercial arbitration, the decision in Karaha Bodas v. Pertamina has been attacked in part because the final damages figure looks as if it “was pulled out of the air.” See Wells, supra note 16, at 476; Kantor, supra note 18, at 82–87, n. 281 (explaining that a reader could not “recreate the calculation” of the tribunal in Karaha Bodas and that “[t]he ambiguity in the panel’s computation of damages has invited criticism by commentators”). A similar criticism has been lodged against awards of lost future profits “by a rough assessment.” See CME Czech Republic B.V. v. Czech Republic, Final Award (UNCITRAL Mar. 14, 2003) [hereinafter CME v. Czech Republic] (separate opinion of Ian Brownlie); see also Cheng, supra note 36, at 497; Wells, supra note 16, at 473 (finding it “frustratingly difficult to determine exactly how the arbitrators calculated [lost] profits”). The copying and pasting of the parties’ arguments is also no substitute for providing detailed analysis, particularly with respect to damages. For example, in Rumeli Award, the tribunal laid out the parties’ arguments in detail but devoted only a few paragraphs to its determination of the

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At a minimum, tribunals in ICSID arbitration must state the reasons for their decision to protect awards from annulment under the ICSID Convention.104 Annulment is a limited exception to the principle of finality of ICSID awards.105 It should not be confused with an appellate procedure in the United States, in part because of the limited, non-substantive scope of annulment.106 Annulment seeks to balance concerns of correctness and finality, with a thumb on the scale of finality.107 In principle, the “failure to state reasons” annulment standard is a bulwark for legitimacy.108 The annulment decision in MINE v. Guinea serves as an early example of how this standard deters arbitrators from poorly explained valuations.109 In that case, the annulment committee upheld a challenge to the tribunal’s failure to state reasons with respect to its calculation of lost profits.110 The claimant in MINE had proposed two methodologies for calculating lost profits (theories “Y” and “Z”). The tribunal rejected those proposals because their results were too speculative, and instead used a third method that it found more realistic.111

actual amount to be awarded. Compare Rumeli Award, paragraphs 752–784 with id. paragraphs 805–818. The inadequate explanation in the decision surely contributed to the state’s decision to seek annulment, as discussed below. 104 See ICSID Convention, art. 52(1)(e) (listing as a ground for annulment “that the award has failed to state the reasons on which it is based”). The failure to state reasons has been a common ground for challenging the damages portions of awards. See infra n. 117. 105 Schreuer, supra note 96, at 899. 106 As compared to a U.S. appeal, “annulment is only concerned with the legitimacy of the process of the decision: it is not concerned with its substantive correctness.” Id. at 901. This distinction also applies with respect to damages. See, e.g., Azurix Annulment, infra note 117, paragraph 362 (“The Committee recalls that it is not a court of appeal, and that it is not the function of the Committee to pass judgment upon the substance of the Tribunal’s decision with respect to the quantum of damages.”). 107 See Schreuer, supra note 96, at 903 (“In international arbitration the principle of finality is often seen to take precedence over the principle of correctness.”); see also Franck, The Legitimacy Crisis, supra note 13, at 1548 (“Ultimately, because legal errors cannot be corrected in ICSID awards, the possibility of inconsistent awards is an accepted reality at ICSID, and the correctness of decisions has been sacrificed for the sake of finality.”). For a criticism of the limited scope of ICSID annulment, see Garcia, supra note 27, at 344–45. 108 As one annulment committee explained, this standard “aims at ensuring the parties’ right to ascertain whether or to what extent a tribunal’s findings are sufficiently based on the law and on a proper evaluation of relevant facts.” Lucchetti v. Peru, ICSID Case No. ARB/03/4, Decision on Annulment, paragraph 98 (Aug. 13, 2007). 109 Mar. Int’l Nominees Establishment (MINE) v. Guinea, ICSID Case No. ARB/84/4, Decision on Annulment, paragraphs 6.83–.92, 6.108 (Dec. 22, 1989), [hereinafter MINE v. Guinea Annulment]. 110 Id. paragraph 6.107. 111 Id.; See also Mar. Int’l Nominees Establishment (MINE) v. Guinea, ICSID Case No. ARB/84/4, Award ( Jan. 6, 1988), 4 ICSID Rep. 54, 75–76 (1997).



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The annulment committee held that “[h]aving concluded that theories ‘Y’ and ‘Z’ were unusable because of their speculative character, the Tribunal could not, without contradicting itself, adopt a ‘damages theory’ which disregarded the real situation and relied on hypotheses which the Tribunal itself had rejected as a basis for the calculation of damages.”112 The annulment decision in MINE demonstrates how poorly explained valuations can lead parties (and others) to challenge the legitimacy of an award.113 The annulment in MINE v. Guinea is an exception, however, because the “failure to state reasons” standard has not been used in any other case to overturn a decision based on an inadequate explanation of valuation. The standard may have become watered down by its repetitive invocation: the “failure to state reasons” has been an alleged ground for annulment in every publicly available annulment decision.114 Annulment committees, while sometimes criticizing decisions’ opaque rationales, have generally accepted “implicit” reasoning and given deference to tribunals’ modest explanations.115 Parties have also infrequently pursued annulment of ICSID awards: out of one hundred twenty-seven awards rendered, parties sought annulment of thirty-two awards and prevailed in eleven of those cases.116 Moreover, parties typically pursue annulment on a wide variety of grounds, such that the “failure to state reasons” for valuation is rarely a standalone challenge. For those reasons, avoidance of annulment, while important, is an insufficient and sub-optimal incentive for more thoroughly explained valuations in international arbitration. Decisions can survive an annulment proceeding with a bare explanation of damages,117 which undermines the confidence of parties and stifles the legitimacy-building effect of greater transparency.

112 MINE v. Guinea Annulment, supra note 109, paragraph 6.107. This decision has proved controversial with respect to the appropriate application of the “failure to state reasons” standard for annulment. See Schreuer, supra note 96, at 1012–13 (“The ad hoc Committee’s arguments on this point are not convincing and have been criticized by several commentators.”). 113 As one prominent scholar stated, “[t]he only possible criticism that may be levelled against the Tribunal is that the Award could have explained in more detail why it found the method for the calculation of damages that it adopted more realistic than the theories that it dismissed.” See Schreuer, supra note 96, at 1013. 114 Id. at 998. 115 Id. at 999–1003 (noting numerous instances of annulment committees “reconstructing reasoning” that was not apparent in the tribunal’s award). 116 ICSID Caseload Statistics, supra note 24, at 15. 117 States have challenged damages for “failure to state reasons” in a number of cases, including: Duke Energy Int’l Peru Invs. No. 1, Ltd. v. Peru, ICSID Case No. ARB/03/28, Decision of the Ad Hoc Committee, paragraph 258 (Feb. 28, 2011) [hereinafter Duke Energy v. Peru]; Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Decision on Application for Annulment (Sept. 1, 2009) [hereinafter Azurix Annulment]; MTD Equity Sdn. Bhd. v. Chile, ICSID Case No. ARB/01/7, Decision on Annulment, paragraphs 102–06 (Feb. 16, 2007) (denying annulment even though “the reasons given by Tribunal for [one] aspect

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Nevertheless, parties continue to pursue annulment challenges because of inadequate analyses of damages. A clear, recent example is the annulment proceeding in Rumeli Telekom et al. v. Kazakhstan. In Rumeli, the state challenged the Award of the arbitral tribunal principally because its “decision to award damages of $125 million was inexplicable, being based on inconsistent, illogical or nonexistent reasons.”118 The state put forward a laundry list of complaints about the tribunal’s determination of damages. One basis for the state’s challenge was “that the DCF approach required an actual calculation, not a ‘shot in the dark.’”119 In other words, “when a tribunal adopted a DCF analysis, it was required to provide full reasons for its decision to reject or adopt certain factors. . . .”120 The state’s challenge essentially was that the tribunal needed to show its math: [I]f that [$125 million] figure was reached as the product of a DCF analysis, it was not possible to see how the figure was reached. No inputs were given by the Tribunal, and the methodology was not described. Rather than being “extremely succinct,” the [state] contended that the reasons were nonexistent and that tribunals are obliged to properly reason their awards to avoid deciding ex aequo et bono.121

The Annulment Committee denied the state’s challenge even though the “[t]he figure of US$125 million is baldly stated in the Award, without an explanation of the mathematical calculation undertaken by the Tribunal in arriving at it.”122 Similarly, in Azurix v. Argentina, the tribunal stated without much support that only “a fraction” of the claimed value was recoverable, and therefore concluded that the value should be $60 million.123 The state sought to annul the award for many reasons, including that the tribunal had come up with a damages value without providing “any formulae or principles in the Award as to how that figure was calculated or otherwise obtained.”124 The investor countered that “[i]t is not necessary to prove the exact damage suffered in order to award damages; determining damages is not an exact science, and a certain amount of independent judgment is required.”125 The Annulment Committee seemed to agree. It held that the tribunal’s limited discussion overcame the “failure to state reasons” threshold: “Although the Tribunal in this case may not have said so expressly, the Committee of its quantum decision were extremely succinct”); Wena Hotels Ltd. v. Egypt, ICSID Case No. ARB/98/4, Decision on Annulment Application, paragraphs 87–93 (Feb. 5, 2002) [hereinafter Wena Hotels v. Egypt]. Those annulment applications were rejected. 118 Rumeli Telecom AS et al. v. Kazakhstan, ICSID Case No. ARB/05/16, Decision of the Ad Hoc Committee on the Application for Annulment, paragraph 118 (Mar. 25, 2010). 119 Id. paragraph 124. 120 Id. paragraph 126. 121 Id. paragraph 129. 122 Rumeli Annulment, supra note 94, paragraph 178. 123 Azurix v. Argentina Award, supra note 3, paragraph 429. 124 Azurix Annulment, supra note 117, paragraph 297(j). 125 Id. paragraph 298(h). The investor also argued that tribunals have broad discretion in calculating damages. Id. paragraph 298(g, m).



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considers it clear from the Award that the figure of USD 60 million was an approximation that the Tribunal considered to be fair in all the circumstances.”126 But the state obviously did not agree. These annulment petitions are more than thorough advocacy; they show that the states were frustrated with tribunals’ discussions of quantum. Indeed, annulment petitions premised on damages highlight the central role of damages for the legitimacy of international arbitration. If an arbitrator awarding damages to an investor wanted to draft an “annulment-proof ” decision, the arbitrator would rightly seek to explain all the building blocks for the award, such as jurisdiction and liability. Yet the arbitrator must also focus on the pinnacle of the award—the amount of compensation due. IV. Convergence around Compound Interest and the DCF Method Jurisprudential convergence provides parties with more accurate expectations. The developing international investment law on awards of interest shows the benefits of such convergence, as it enables parties to better predict the damages at stake. By contrast, parties will be uncertain in many cases about which methodologies a tribunal will endorse for valuation. That uncertainty, as explained above, can be debilitating to the investor-state arbitration system. While there has been promising convergence around the DCF method in theory, inconsistencies persist with respect to tribunals’ application of the DCF method in practice. This is particularly true in cases involving limited evidence.127 A. The Trend in Interest The trend toward compound interest demonstrates the benefits of convergence. This convergence has significant consequences, because interest awards may involve stakes as high as valuation itself. The basic principle of awarding interest is well-settled.128 As stated in the Draft Articles on State Responsibility, “[i]nterest on any principal sum . . . shall be payable when necessary in order to ensure full reparation. The interest rate and mode of calculation shall be set so as to achieve

126 Id. paragraph 351. 127 The following discussion assumes that investors, in seeking to satisfy the burden of proving their case, will adequately develop and argue for the appropriate methodology. That assumption is reasonable in light of the increasing stakes of investor-state arbitration and the sophistication of most lawyers and party-appointed experts involved. 128 See Sénéchal & Gotanda, supra note 77, at 495; Ripinsky & Williams, supra note 6, at 362–64; John Y. Gotanda, Compounding Interest in Interest: The Global Economy, Deflation and Interest, in Contemporary Issues in International Arbitration and Mediation: The Fordham Papers (2009) 263 (Arthur W. Rovine ed., 2010) [hereinafter Gotanda, Compounding Interest] (citing Vivendi v. Argentina, paragraph 9.2.3).

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that result.”129 This established principle of international law is consistent with principles of finance—the time value of money means that full compensation requires an award of interest to compensate for the loss of the use of money between the time of the alleged harm and the award.130 Despite widespread acceptance of interest as generally appropriate, the amount of interest to award had long been in a state of flux.131 Two fundamental questions for determining interest are (1) whether to apply simple or compound interest; and (2) which rate of interest to apply. This Article focuses on the former question, because it is the clearest example of convergence.132 1. Convergence Around Compound Interest The monetary difference between simple and compound interest can be substantial for high-stakes claims in investment arbitration, particularly because of the increasingly long periods of time between harmful state action and an award.133 Simple interest is calculated only on the principal owed and is never added to the principal. Compound interest is “interest on interest”—meaning that interest is added to the principal.134 Under compound interest, therefore, the amount of

129 ILC Articles on State Responsibility, supra note 7, art. 38(1); see also Sénéchal & Gotanda, supra note 77, at 508, n. 73, 516. 130 See Sénéchal & Gotanda, supra note 77, at 495–96, n. 15 (explaining that awards of interest also prevent unjust enrichment and promote efficiency). 131 See, e.g., Ripinsky & Williams, supra note 6, at 361, n. 1 (“International investment tribunals have routinely awarded interest, although frequently without much consistency or even explanation.”); Gotanda, Compounding Interest, supra note 128, at 261 (“In recent years, perhaps no area of private international law has undergone more significant changes than the awarding of interest.”); Sénéchal & Gotanda, supra note 77, at 493. 132 There has also arguably been some convergence with respect to rates of interest in recent years. In exercising their typically wide discretion in determining the rate of interest, see Ripinsky & Williams, supra note 6, at 366–67, tribunals tend to be shifting away from “fair” approximations and toward the “investment alternatives” approach to interest, based on floating market rates (i.e. U.S. Treasury Bills and the London Inter Bank Offer Rate (LIBOR)). See Aaron Xavier Fellmeth, Below-Market Interest in International Claims Against States, 13 J. Int’l Econ. L. 423, 431–37 (2010); Sénéchal & Gotanda, supra note 77, at 493–94, 508, n. 72 (listing cases); Gotanda, Compounding Interest, supra note 128, at 278–79, 282. 133 See Sénéchal & Gotanda, supra note 77, at 532–33 (“[C]ompounding will have greater impact for high interest rates and longer periods of time.”); Ripinsky & Williams, supra note 6, at 380. As with valuation, determinations of interest often involve millions of dollars, sometimes as large as the principal claim itself. See id. at 492–93, n. 2. 134 See Sénéchal & Gotanda, supra note 77, at 504, n. 59 (“Compound interest is calculated through the use of the following formula: FV = PV (1+i)ⁿ, where FV is the future value of the total award, including interest, PV is the present value of the award (i.e., not including interest), i is the interest rate per compounding period, and n is the number of compounding periods.”).



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interest in later periods will be higher than the amount of interest in earlier periods. Despite the potentially large impact of the simple versus compound interest distinction, that binary question is left unanswered under most instruments of international law and applicable treaty provisions.135 Throughout most of the twentieth century, simple interest was the norm in international arbitration. According to a leading mid-century treatise, “there are few rules within the scope of the subject of damages in international law that are better settled than the one that compound interest is not allowable.”136 That rule eroded in subsequent decades.137 In 2000, the tribunal in Santa Elena v. Costa Rica issued a seminal decision awarding compound interest and noting the shifting jurisprudence from simple to compound interest.138 Still, as late as 2001, one scholar observed that “[w]hile there is little consensus on approaches to awarding interest generally in international arbitration, the issue of compound interest is especially problematic.”139 In other words, the arbitration community began converging around compound interest, but it had not yet been firmly established. Ten years later, little to no uncertainty remains with respect to awarding compound interest in investor-state arbitration. Tribunals in the vast majority of published investor-state cases of the past decade have applied compound interest.140 Indeed, claimants have used empirical data to support the frequent application of

135 Ripinsky & Williams, supra note 6, at 365, n. 12 (stating that the ILC Articles of State Responsibility, by “refraining from setting out specific rules on the award of interest,” confirmed that as of 2001 there was an “absence of any consistent practice on the matter”). 136 Marjorie M. Whiteman, Damages in International Law 1997 (1943); Ripinsky & Williams, supra note 6, at 382; but see Natasha Affolder, Awarding Compound Interest in International Arbitration, 12 Am. Rev. Int’l Arb. 45, 71–73 (2001) (“The authorities cited by Ms. Whiteman . . . fail to support the existence of a general principle of international law against the awarding of compound interest. At most, it can be said that the question of whether compound interest can be awarded is an unsettled question before international tribunals.”). 137 See Starrett Hous. Corp. v. Iran, supra note 10, at 237 (Holtzmann, J., concurring); F.A. Mann, Compound Interest as an Item of Damage in International Law, in Further Studies in International Law 381 (F.A. Mann ed., 1990) (noting that “the general principles of law recognized by civilized nations do not yield an unequivocal guidance” on the question of compound interest); see also Ripinsky & Williams, supra note 6, at 383–84 (surveying criticisms of the simple interest rule). 138 See Compañía del Desarrollo de Santa Elena S.A. v. Costa Rica, ICSID Case No. ARB/96/1, Final Award, paragraphs 96–107 (Feb. 17, 2000) (“[W]hile simple interest tends to be awarded more frequently than compound, compound interest certainly is not unknown or excluded in international law.”). 139 Affolder, supra note 136, at 45; see id. at 46 (“This lack of uniformity mean[t] that it may be entirely impossible to predict in advance whether an arbitral tribunal will award compound interest.”). 140 See, e.g., Ripinsky & Williams, supra note 6, at 384–87; Sénéchal & Gotanda, supra note 77, at 508–09.

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compound interest. In Siag & Vecchi v. Egypt, for example, the claimants “submitted that since 2000, no less than 15 out of 16 tribunals have awarded compound interest on damages in investment disputes.”141 Commentators have described this trend as compound interest “com[ing] to be treated as the default solution.”142 In sum, international investment law has converged around the principle of compound interest. 2. The Benefits of Convergence Before the convergence around compound interest, parties had limited ability to predict the amount of interest that would be awarded. The negative consequences of that uncertainty included reduced chances of settlement, unnecessary delay in proceedings, and increased litigation costs.143 Parties also had reason to doubt the competence of arbitrators with respect to interest determinations.144 Now, however, parties have little doubt with respect to compounding. The convergence around compound interest leads to a more predictable jurisprudence, largely because tribunals turn to arbitral precedent when determining interest. Parties considering settlement, for example, can reliably expect that adequate compensation will include interest at a compound rate. Over time, parties may even avoid incurring the costs of disputing whether interest should be simple or compound.145

141 Siag v. Egypt, ICSID Case No. ARB/05/15, Award, paragraph 595 (May 11, 2009). 142 Ripinsky & Williams, supra note 6, at 387. 143 See Affolder, supra note 136, at 46 (“Uncertainty as to whether compound interest will be awarded is problematic. The fact that parties are unable to ascertain their liabilities (or the amount they may possibly gain) may reduce chances of settlement. Parties may further delay the arbitral process if they believe the cost of interest which they will eventually pay is below the market rate. This lack of uniformity means that parties in similar situations are treated differently so that considerable resources are spent in litigating interest issues.”); see also David J. Branson & Richard E. Wallace Jr., Awarding Interest in International Commercial Arbitration: Establishing a Uniform Approach, 28 Va. J. Int’l L. 919, 921 (1988). 144 See Fellmeth, supra note 132, at 435. 145 Of course, as with all damages issues, the convergence around interest does not mean that tribunals will necessarily take up the issue on their own accord. As illustrated by Enron v. Argentina, a tribunal faces the concern of exceeding its powers if it were to award interest that the claimant has not specifically requested. Enron v. Argentina, ICSID Case No. ARB/01/3, Decision on Claimants’ Request for Rectification and/ or Supplementary Decision of the Award, paragraphs 41–42, 56 (Oct. 3, 2007). That remains true notwithstanding an “extensive arbitration practice” of awarding interest to update compensation in light of the time value of money. Id. paragraph 41. But see Wena Hotels v. Egypt, supra note 117 (awarding compound interest at a rate of 9% even though the claimant claimed interest “but neither specified a rate nor whether interest should be compounded).



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A broader legitimizing benefit of the trend toward awarding compound interest is that it aligns with economic reality.146 As one tribunal explained, quoting Gotanda, “almost all financing and investment vehicles involve compound interest. . . . If the claimant could have received compound interest merely by placing its money in a readily available and commonly used investment vehicle, it is neither logical nor equitable to award the claimant only simple interest.”147 Simply put, “compound interest is a closer measure to the actual value lost by an investor.”148 The convergence around compound interest is therefore consistent with the principle of full reparation under international law. B. The Prominence of the DCF Method The fundamentals of DCF analysis are well-established and well-known in the investment arbitration community. In short, the value of an enterprise is determined by forecasting and discounting the cash flows generated by that enterprise. Cash flows in the future are worth less than cash flows today.149 Accordingly, “forecasted cash flows are discounted to obtain present value. The appropriate discount rate is the opportunity cost of capital, that is, the expected rate of return from investing in other assets of equivalent risk. . . .”150 The principal grounds of dispute regarding a DCF valuation are the amount of projected cash flows and the appropriate discount rate. The future cash flows valued in a DCF analysis are akin to “lost profits,” but it is important to distinguish the two concepts. In breach of contract cases, lost profits (lucrum cessans) are the future gains that a party would have earned if not for the actions of the other party, as opposed to actual losses suffered

146 See Sénéchal & Gotanda, supra note 77, at 505 (explaining “that a loss of value incurred by a company, active in normal trading operations, implies the loss of use of that value”); see also Affolder, supra note 136, at 90–91. Alignment with economic reality also reinforces the convergence around compound interest, because it provides “strong theoretical support.” Ripinsky & Williams, supra note 6, at 387. 147 Wena Hotels v. Egypt, supra note 117, paragraph 129. 148 Siemens v. Argentina, supra note 3, paragraph 399. 149 See Richard A. Brealey et al., Principles of Corporate Finance 16 (8th ed. 2006) (“The first basic principle of finance is that a dollar today is worth more than a dollar tomorrow, because the dollar today can be invested to start earning interest immediately. Financial managers refer to this as the time value of money.”). 150 Ball, supra note 70, at 419 (quoting Report of Stewart C. Myers in Phillips Petroleum Co. v. Iran); see also Brealey et al., supra note 149, at 16 (“To calculate present value, we discount expected payoffs by the rate of return offered by equivalent investment alternatives in the capital market. This rate of return is the discount rate, hurdle rate, or opportunity cost of capital.”). For a more detailed explanation of how the DCF method operates in the context of investor-state arbitration, see William H. Knull et al., Accounting for Uncertainty in Discounted Cash Flow Valuation of Upstream Oil and Gas Investments, 25 J. Energy & Nat. Res. L. 268 (2007).

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(damnum emergens).151 Awarding damnum emergens is more straightforward and less controversial than awarding lucrum cessans.152 DCF, as a method of determining fair market value, is analytically distinct from lucrum cessans, which is a component of damages.153 Despite their differences, both the DCF method and “lost profits” analysis involve similar evidentiary challenges that require a look into the future.154 1. Other Valuation Methods Tribunals employ a variety of methodologies to determine fair market value, including the DCF method, comparable transactions, book value, and amount invested. Tribunals in investor-state arbitration have encouraged the application of multiple methodologies to corroborate their results.155 The analysis of comparable transactions is widely accepted, because such transactions indicate what a willing buyer has in fact paid a willing seller for an investment similar

151 Gotanda, Lost Profits, supra note 8, at 65–66. “Where the claimant seeks both damnum emergens and the lucrum cessans, [tribunals] need to be careful to avoid double counting” when applying the DCF method. Id. at 111. Note that an award of interest “compensates for the same general class of injury” as lost profits. See Fellmeth, supra note 132, at 427. 152 See Ripinsky & Williams, supra note 6, at 107 (“Tribunals rarely have a problem in awarding damnum emergens because this is a loss that has already occurred and is relatively easy to establish and quantify,” but lucrum cessans claims “are de factor much more difficult to sustain, primarily due to a degree of uncertainty inherent in future profits.”); see also Gotanda, Lost Profits, supra note 8, at 62 (stating that lost profits is “arguably the most complicated issues for a tribunal deciding a transnational contracting dispute”). 153 For a more detailed explanation of this distinction and an overview of its implications, see Ripinsky & Williams, supra note 6, at 294–98. See also Söderlund et al., supra note 70, at 36 (“Cash flow is not the same as profit.”). 154 The general principle of international law is simply that “compensation shall cover any financially assessable damages including loss of profits insofar as it is established.” ILC Articles of State Responsibility, supra note 7, art. 36(2). Both lost profits and DCF analysis tend to involve complex financial models that generate discomfort for arbitrators. Because of the complexity, John Gotanda has observed that, in international commercial arbitration, the calculation of future profits often results in “different approaches and seemingly arbitrary awards.” Gotanda, Lost Profits, supra note 8, at 88. The following sections show that the same is true with respect to the DCF method in investor-state arbitration. 155 See, e.g., Nat’l Grid v. Argentina, supra note 84, paragraph 285; Vivendi v. Argentina, paragraph 8.1.4; see also Kantor, supra note 18, at 26–30; Jack Coe, Jr. & Noah Rubins, Regulatory Expropriation and the Tecmed Case: Context and Contributions, in Inter­ national Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law 597, 629 (Todd Weiler ed., 2005).



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to the one at issue in the arbitration (that is the “comparable”).156 Still, using comparable transactions involves its own share of controversy, as exemplified by debates about the relative similarity of the assets or interests at issue.157 Perhaps the greatest difficulty with respect to comparables is their availability—because many investor-state arbitrations involve unique investments, comparable transactions are typically limited or non-existent.158 Two other methodologies, book value and amount invested, can be helpful in some contexts, but come up short as systematic approaches to valuation. By definition, book value is not fair market value.159 Nor is the amount invested equal to fair market value, even though it can be appealing as an easy approximation of value for recent investments, since it might show what a willing buyer paid to a willing seller for the interests in question.160 Yet the amount invested has the potential to overvalue or undervalue an investment.161 Notwithstanding those limitations, valuations based on book value or the amount invested can corroborate valuations based on comparable transactions and DCF analysis. Only in rare cases, however, will book value or the amount invested be appropriate as the 156 Kantor, supra note 18, at 18 (“The best evidence of fair market value may be the price agreed between a willing buyer and a willing seller, each with knowledge of the relevant facts, in a recent arm’s length transaction.”). 157 Kantor, supra note 18, at 125–30 (providing a checklist of comparability issues). 158 See Kardassopoulos v. Georgia, supra note 84, paragraph 598 (“It is not common in investment treaty arbitrations that a Tribunal has available to it three arm’s-length, contemporaneous transactions (or potential transactions) to assist in valuing an investment, much less three that converge in a narrow range of value. . . .”); see also Paul D. Friedland & Eleanor Wong, Measuring Damages for the Deprivation of IncomeProducing Assets: ICSID Case Studies, 6 ICSID Rev.—For. Inv. L.J. 400, 404–05 (1991). 159 “Net Book Value” equals the assets minus the liabilities of a company, as recorded in accounting books. Book value tends to undervalue an investment because, inter alia, it does not take into account reasonably expected future profits. See generally Kantor, supra note 17, at 231–49; Ripinsky & Williams, supra note 6, at 221–22. That tendency is particularly notable in periods of inflation. See James Crawford, The International Law Commission’s Articles on State Responsibility: Introduction, Text and Commentaries 255 (2002). Book value can also be difficult to calculate because of its reliance on nuanced accounting methods. See Kantor, supra note 18, at 232–33. For a defense of the book value methodology, particularly as compared to the DCF method, see Stauffer, supra note 18, at 485–88. 160 See Kantor, supra note 18, at 49–51; Ripinsky & Williams, supra note 6, at 229–31. An interesting question for future study is whether the “amount invested” should prevail over other valuation methods simply because an investor made a “speculative investment.” See RosInvest v. Russia, supra note 71, paragraphs 668–71. 161 “If one starts with investment as a measure of FMV, however, one must be willing to ask whether there are reasons why the market value might differ substantially from the amount spent, and make appropriate adjustments. There are indeed reasons that might justify modifications.” Wells, supra note 16, at 474–75 (explaining the complications and weaknesses of the “amount invested” approach).

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exclusive methodology for determining fair market value. By contrast, the DCF method can serve as an appropriate stand-alone methodology, particularly when comparable transactions are not available. 2. Theoretical Convergence Around the DCF Method In the business and financial spheres, the DCF method is standard practice. Of the many valuation methods, it is the “most conceptually correct method because it captures the driving principle of valuation: value is the present worth of future benefits.”162 Financial analysts therefore begin the task of valuation by calculating DCF.163 Tribunals have followed suit, accepting decades ago the DCF method as a matter of theory and applying it to determine fair market value.164 Yet the method was described even in 2001 as “relatively new in the history of international arbitration.”165 The novelty has worn away by now. Recent investor-state arbitration awards demonstrate theoretical convergence around the DCF method. Tribunals have recognized that the “DCF method is widely endorsed, both by financial institutions and international jurists.”166 Indeed, “DCF techniques have been universally adopted, including by numerous arbitral tribunals, as an appropriate method for valuing business assets,”167 because they form “[t]he only method which can accurately track value through time. . . .”168 As stated by one expert in the field:

162 Kantor, supra note 18, at 132–33 n. 411 (quoting Shannon Pratt, The Lawyer’s Business Valuation Handbook: Understanding Financial Statements, Appraisal Reports, and Expert Testimony 105 (2002)); see also, e.g., Friedland & Wong, supra note 158, at 407 (noting in 1991 that, in “the business and academic communities, the DCF method is frequently regarded as the most appropriate method of valuing an income-producing asset”). 163 See Ball, supra note 70, at 419 (“The DCF method is a real-world method that businessmen and financiers apply every day in deciding how much to invest in a business.”); see also Wells, supra note 16, at 473 (“In calculating the FMV of commercial property, or an ongoing business, analysts are likely to begin with the net present value (NPV) of the expected future stream of cash flow from the project as a measure.”). 164 Starrett Hous. Corp. v. Iran, supra note 10, at 157–58. 165 Ball, supra note 70, at 419–21 (“It took some decades for the cases to establish that lucrum cessans (lost future profits) is an allowable element of compensation for expropriation. The next step—developing techniques for calculating the value of the lost profits and convincing tribunals of the validity of this method—is a relatively late method.”); see also Cambell McLachlan et al., International Investment Arbitration 331 (2007) (“The view of these authors is that the DCF approach is becoming so widely accepted because it is, put simply, the best method for valuing lost profits.”). 166 Enron v. Argentina, supra note 3, paragraph 385, n. 118. 167 CMS Gas Transmission Co. v. Argentina, ICSID Case No. ARB/01/8, Award, paragraph 416 (May 12, 2005) [hereinafter CMS v. Argentina]. 168 Walter Bau v. Thailand, supra note 84, paragraph 14.12. Another tribunal stated that valuation based on future lost profits “theoretically . . . may even be the preferred method of



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The DCF is the most common methodology used in valuation analyses. First, it is widely supported by the professional literature, and its workings are well understood. Indeed, most investors rely on a DCF analysis to determine whether or not to undertake a particular project. Second, the DCF approach is widely accepted by international agencies, such as the World Bank, as a valid method to estimate damages and fair market valuations in international disputes.169

Parties’ arguments in arbitration proceedings confirm the broad acceptance of DCF analysis. Some claimants have asserted, for example, that DCF is the most “widely accepted and highly regarded methodology used to calculate the value of cash flows being generated by a business.”170 Respondent states also increasingly accept that DCF is proper as a matter of theory.171 Accordingly, experts for respondent states have submitted their own DCF analyses in order to counter the valuations submitted by investors.172 The use of DCF analysis by state governments and state-owned entities supports the proposition that parties are moving away from theoretical challenges to the DCF method of valuation.173 3. Arbitrators’ Lingering Reluctance Despite its growing acceptance, the DCF method continues to face inconsistent and hesitant application in investor-state arbitration. In some cases, tribunals avoid DCF analysis for legal reasons, for example, by finding that fair market calculating damages in cases involving the expropriation of or fundamental impairment of going concerns.” Compañía de Aguas v. Argentina, supra note 3, paragraph 8.3.3. 169 Manuel A. Abdala, Key Damage Compensation Issues in Oil and Gas International Arbitration Cases, 24 Am. U. Int’l L. Rev. 539, 548–49 (2009); see also Ball, supra note 70, at 427 (“[T]he DCF method is recognized increasingly as a valid valuation method, even in cases in which tribunals have found the evidence insufficient to support a DCF analysis.”). 170 Rumeli Award, supra note 3, paragraph 722; see also Compañía de Aguas v. Argentina, supra note 3, paragraph 8.3.1 (“Claimants contend that a DCF analysis is recognised as the preferred approach to valuation in modern practice where projected cash flows are reasonably capable of determination and are not speculative.”). 171 Compare Rumeli Award, supra note 3, paragraph 726, and CMS v. Argentina, supra note 167, paragraph 417 (the experts from both sides agreed “that DCF was the proper method in this case for determining losses that extend through a prolonged period of time”), with Rumeli Annulment, supra note 94, paragraphs 124–26, and CMS v. Argentina, supra note 167, paragraph 398 (“The Respondent also asserts that the DCF method is not appropriate and that it has resulted in gross overvaluation of the shares.”). See also Enron v. Argentina, supra note 3, paragraph 355 (“The Respondent objects to the use of DCF to calculate the value of equity damage as a matter of principle and formulates specific objections to the results obtained by the Claimants.”). For a now dated example of a respondent state’s more theoretical criticisms of the method, see S. Pac. Props. (Middle East) Ltd. v. Egypt, ICSID Case No. ARB/84/3, Award, paragraphs 186–87 (May 20, 1992) [hereinafter SPP v. Egypt]. 172 See, e.g., Sempra v. Argentina, supra note 3, paragraph 407; CME v. Czech Republic, supra note 103, paragraphs 563–64. 173 See Kantor, supra note 18, at 135 n. 416.

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value is not the appropriate standard of compensation in a non-expropriation case.174 More important is arbitrators’ possible avoidance of the DCF method for evidentiary or subjective reasons. Tribunals rejected the DCF method for such reasons in Metalclad v. Mexico, Wena Hotels v. Egypt, Tecmed v. Mexico, SPP v. Egypt, and Amoco International Finance v. Iran.175 More recently, tribunals rejected DCF analyses in four of the past twelve public decisions in which investors proposed a fair market valuation principally based on the DCF method.176 To understand this persistent and sometimes puzzling reluctance toward accepting the DCF method,177 an analysis of the four recent cases in which the DCF method was rejected is necessary. Siemens v. Argentina. In Siemens, the claimant presented an unusual argument that compensation should be calculated based in part on book value and in part on “discounting an estimate of profits” that were expected from the investment.178 Commenting on that proposal, the tribunal stated that “the DCF method is applied to ongoing concerns based on the historical data of their revenues and

174 This legal question has also reflected tribunals’ inconsistent approach to valuation. See Khamsi, supra note 28, at 175–78, 183. In LG&E v. Argentina, for example the tribunal rejected the DCF method because, while appropriate in expropriation and “total loss of investment” cases, DCF (as a measure of asset value) was not appropriate for the nonexpropriation breaches in question. See LG&E v. Argentina, supra note 48, paragraphs 35–39; see also PSEG Global Inc. v. Turkey ICSID Case No. ARB/02/5, Award, paragraph 309 ( June 4, 2004) (“The Tribunal accordingly finds that the fair market value shall not be retained as the measure for compensation in this case and hence it will also not discuss the many technical aspects raised by the parties in connection with the factors that were taken into account for assigning a value to the claim and the appropriate method for its calculation.”) [hereinafter PSEG v. Turkey]. The typical posture of the parties was reversed in LG&E v. Argentina. The claimants did not propose the DCF method and instead relied on the sale price of their publicly-traded shares in the investment and comparables. LG&E v. Argentina, supra note 48, paragraphs 13–15. The respondent’s expert proposed “the use of DCF as a more appropriate and rigorous method to value the investments,” as compared to the claimants’ stock-price method. Id. paragraph 23. Yet, interestingly, the respondent did not conduct a calculation based on the DCF method. Id. paragraph 34. 175 See Ripinsky & Williams, supra note 6, at 205–10 (summarizing six cases in which tribunals rejected the DCF method). See also Kantor, supra note 18, at 136 n. 421 (listing early investor-state cases in which tribunals declined to award lost profits). 176 The twelve cases considered are Alpha v. Ukraine, Walter Bau v. Thailand, Siag v. Egypt, Nat’l Grid v. Argentina, Rumeli Award, Biwater v. Tanzania, BG Grp. v. Argentina, Sempra v. Argentina, Compañía de Aguas v. Argentina, Enron v. Argentina, Siemens v. Argentina, and ADC v. Hungary. The claimant in Kardassopoulos v. Georgia also implicitly supported DCF analysis through its proposed analysis of comparable transactions. 177 Coe & Rubins, supra note 155, at 659 (“[I]t is one of the puzzling aspects of contemporary investment arbitration practice that tribunals have repeatedly resisted a method nearly universally recognized in the economics community as the most reliable way to estimate the fair market value of ongoing concerns.”). 178 Siemens v. Argentina, supra note 3, paragraphs 355–57.



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profits; otherwise, it is considered that the data is too speculative to calculate future profits.”179 The tribunal accepted the book value approach, but rejected the DCF value of lost profits as “very unlikely to have ever materialized” for five reasons: (1) the “excessive” amount of profit assumed by the claimant needed to be reduced; (2) that reduced amount included a value added tax that needed to be subtracted; (3) a discount rate of thirteen percent needed to be applied; (4) the profits depended on uncertain assumptions about possible contract extension; and (5) the profits would have been subject to a corporate profits tax.180 The tribunal’s analysis illustrates both quantified and unquantified explanations of the DCF method. For its first two stated reasons, the tribunal gave exact numerical reductions that should have been applied to the proposed DCF analysis (resulting in profits before taxes of AR$81 million). For its next three stated reasons, the tribunal did not quantify how any of those three reasons could reduce the admitted value of AR$81 million (over US$20 million)181 to zero. The tribunal’s failure to explain the specific adjustments of the DCF analysis that resulted in a zero or negative value gives rise to doubt about whether the tribunal undertook to perform a complete DCF analysis. Vivendi v. Argentina. In Vivendi, the claimant used the DCF method to value over twenty-seven years of lost profits.182 The respondent challenged the use of that method, and the claimant provided no alternative in response.183 The tribunal held that the claimants “failed to establish with a sufficient degree of certainty” that the investment in question would have been profitable.184 The tribunal explained that “the net present value provided by a DCF analysis is not always appropriate and becomes less so as the assumptions and projections become increasingly speculative.”185 While the tribunal acknowledged that “the absence of a history of demonstrated profitability does not absolutely preclude the use of DCF valuation methodology,” it stated that, “to overcome the hurdle of its absence, a claimant must lead convincing evidence of its ability to produce profits in the particular circumstances it faced.”186 Under that “convincing

179 Id. 180 Id. paragraphs 379–84. 181 See id. paragraph 381. 182 Compañía de Aguas v. Argentina, supra note 3, paragraphs 8.1.2, 8.3.1. 183 Id. paragraphs 8.1.3–8.1.4, 8.3.2 (according to the respondent, the DCF method was inappropriate because the investment “was never a genuine going concern, there was no proven record of profitability and . . . Claimants’ approach entirely ignore[d] the substantial risk associated with privatization by wrongly assuming the Concession Agreement’s income stream to be a minimum, rather than a maximum.”). The tribunal denied the claimants’ attempt after the hearing to submit evidence for alternative valuation methodologies. Id. paragraphs 8.1.6–8.1.9. 184 Id. paragraph 8.3.5. 185 Id. paragraph 8.3.3. 186 Id. paragraph 8.3.8.

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evidence” standard, the tribunal found the “claimants’ evidence deficient.”187 The tribunal therefore found that it was unnecessary to further analyze the claimants’ valuation based on the DCF method.188 BG Group v. Argentina. In BG Group, the claimant’s damages expert applied the DCF method to determine the reduction in value of its investment.189 With little discussion, the tribunal concluded that the DCF analysis led “to a result which is uncertain and speculative.”190 The tribunal did not address the specifics of the claimant’s proposed DCF methodology, such as the projected future cash flows or the discount rate. Instead, the tribunal relied exclusively on two transactions related to the investment in question.191 The tribunal’s discussion begs the question, at least for non-parties, of why the proposed DCF valuation was “uncertain and speculative.” Similarly, the award leaves one to wonder why the proposed DCF valuation was not a helpful cross-check for the implied values of the other transactions. Siag and Vecchi v. Egypt. In Siag and Vecchi, the claimant submitted three methodologies for calculating the fair market value of an expropriated investment: comparable transactions, residual land valuation, and DCF.192 Egypt countered that only an analysis of comparables was appropriate.193 The tribunal found that the investment did not “lend itself to a robust DCF analysis”194 and based its valuation exclusively on the comparables analysis.195 The tribunal expressed unease with the DCF method because of its “numerous ‘moving parts’ . . . whether at the front end in terms of building up the model of revenue and operating costs and capital expenditure, or in terms of the Weighted Average Cost of Capital (WACC) used to discount future cash flows back to a present value.”196 With respect to the discount rate, the tribunal stated that it was “not necessary to attempt the

187 Id.; see also id. paragraph 8.3.10 (“A claimant which cannot rely on a record of demonstrated profitability requires to present a thoroughly prepared record of its (or others) successes, based on first hand experience (its own or that of qualified experts) or corporate records which establish on the balance of the probabilities it would have produced profits from the concession in question in the face of the particular risks involved, other than those of Treaty violation. This approach was not taken here.”). 188 Id. paragraph 8.3.11. 189 BG Grp. v. Argentina, supra note 3, paragraphs 415, 438. 190 Id. paragraph 439. 191 Id. paragraphs 440–44. 192 Siag v. Egypt, supra note 84, paragraphs 519, 549–52. Perhaps reading cues from the tribunal, the claimants shifted their focus to the comparables analysis by the time of closing submissions in the proceeding. Id. paragraph 571. 193 Id. paragraphs 526–28. 194 Id. paragraph 566. 195 Id. paragraphs 572–73.The tribunal’s preference for valuation based on comparables seemed to derive from its appreciation of the expert who presented that analysis. See id. 196 Id. paragraph 568 (describing the cost projections of the DCF analysis as “necessarily a sketch or rough estimate”).



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impossible exercise of determining which figure is ‘right’ to realise that the DCF analysis in such a case is attended by considerable uncertainty.”197 Accordingly, the tribunal agreed with the wisdom in the established reluctance of tribunals . . . to utilise DCF analyses for ‘young’ businesses lacking a long track record of established trading. In all probability that reluctance ought to be even more pronounced in cases such as the present where the business is still in its relatively early development phase and has no trading history at all.198

The four decisions discussed above reflect two common, interrelated circumstances that lead arbitrators to reject DCF as a method of determining fair market value. First, arbitrators seem more willing to reject the DCF method when there is clear, reliable evidence of comparable transactions. That approach, while reasonable in some cases, overlooks the benefit that the DCF method provides as a cross-check for valuations based on comparable transactions. For example, in CME v. Czech Republic, the tribunal used an “adjusted DCF calculation”—which the tribunal had explained in great, numerical detail—”as a confirmation of the Tribunal’s findings” based on a comparable transaction.199 Second, and more troubling, arbitrators reject the DCF method outright when there is a basis for deeming it uncertain and speculative.200 The degree of speculation and uncertainty varies in every case,201 but tribunals often fail to explain such variances

197 Id. paragraph 569 (emphases added). 198 Id. paragraph 570 (emphasis added). 199 CME v. Czech Republic, supra note 103, paragraph 604. The DCF method is a particularly helpful tool for corroborating the value suggested by comparable transactions, because the parties involved in those transactions likely utilized DCF analysis for their purchase and sale decisions. See id. paragraphs 514–17 (explaining how the potential purchases in a comparable transaction had relied on the “budget numbers” of the seller and adjusted “projections for market growth” and other factors). 200 See Thomas Wälde & Borzu Sabahi, Compensation, Damages, and Valuation, in The Oxford Handbook of International Investment Law 1075 (Peter Muchlinski et al. eds., 2008) (“Almost every tribunal now repeats the mantra that ‘speculative profits’ or ‘speculative elements’ should be discounted in valuation.”); see also Ripinsky & Williams, supra note 6, at 210 (stating that a tribunal’s “skepticism of DCF calculations owing to their speculative character . . . is not a sensible basis for rejecting the DCF method as a valuation technique.”); Rubins & Kinsella, supra note 19, at 248 (“Any sensible determination of value, however, must inquire into the future.”). The desire to avoid “speculative” awards can also be seen in determinations of interest rates. For example, in PSEG v. Turkey, the tribunal rejected with no explanation the claimants’ argument for interest based on lost opportunity cost because such a rate would have been speculative. PSEG v. Turkey, supra note 174, paragraphs 341–45; see also Sénéchal & Gotanda, supra note 77, at 511. 201 See Schreuer, supra note 96, at 1012 (“The speculative character of damages theories in the calculation of lost profits is a matter of degree.”).

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when dismissing DCF calculations. It is therefore hard to reconcile theoretical convergence around the DCF method with arbitrators’ reluctance to apply it.202 The confused standard of evidence helps explain this inconsistency toward the DCF method.203 Tribunals have broad discretion to decide the evidentiary threshold for future cash flows204 and they “are split on what constitutes sufficient evidence.”205 Some tribunals employ a “certainty” standard in DCF analysis that seems stricter than the more common “reasonable certainty” standard for proving damages.206 For example, several investor-state decisions suggest that arbitrators have applied a “certainty” requirement to not only the showing of damages per se, but also to the amount of damages.207 Yet, in general, “it is well

202 See, e.g., Ripinsky & Williams, supra note 6, at 201 nn. 71–72 (citing seven cases in which the DCF method was applied and seven cases in which it was rejected); Rubins & Kinsella, supra note 19, at 249 et seq.; Cheng, supra note 36, at 497 (noting the inconsistency between the willingness to make a “rough assessment” of lost profits in CME v. Czech Republic and the refusal to award compensation “for the earning capacity of an expropriated license in the absence of ‘proof of concrete contracts missed and of the profits lost from them’ ” in SPP v. Egypt). 203 Ball, supra note 70, at 422; Nigel Blackaby et al., Arbitration under Investment Treaties, in Redfern and Hunter on International Arbitration paragraph 8.116 (2009); Henry Weisburg & Christopher Ryan, Means to Be Made Whole: Damages in the Context of International Investment Arbitration, in Evaluation of Damages in International Arbitration 165, 174–77 (Yves Derains & Richard H. Kreindler eds., 2006) (discussing Tecmed v. Mexico and Aucoven v. Venezuela); cf. Zeevi Holdings v. Bulgaria et al., Final Award, paragraphs 1161–1162 (UNCITRAL Oct. 25, 2006). 204 See ILC Articles on State Responsibility, supra note 7, art. 36(2). Investment treaties and applicable arbitral rules provide little to no guidance on the standard of evidence. 205 Weisburg & Ryan, supra note 203, at 175–77; see also Kathryn Khamsi, Compensation for Non-expropriatory Breaches in the Argentina Gas Sector Cases: Issues and Implications, in The Backlash against Investment Arbitration 183 (Michael Waibel et al. eds., 2010) (explaining the divergent approaches to compensation in cases against Argentina, and particularly “the divergent approaches to certainty”). 206 Kantor, supra note 18, at 77 (noting a “somewhat stricter test” in international investment law); see also id. at 80 (“[A] tendency on the part of tribunals to decline to award future-looking damages on the basis of insufficient certainty often shows up in claims by investors against States—claimants face a high burden of proof requirement [as compared to] U.S. breach of contract cases. . . .”); Gotanda, Lost Profits, supra note 8, at 87 (“In general, the claimant must prove lost profits with reasonable certainty. In many countries, though, the certainty rule applies only the fact that the breach resulted in claimant’s loss of future revenues and not to the amount of profits it lost. The UNIDROIT Principles require that lost profits be established with a reasonable degree of certainty.”). 207 See, e.g., LG&E v. Argentina, supra note 48, paragraph 51 (“[L]ost future profits . . . . have only been awarded when ‘an anticipated income stream has attained sufficient attributes to be considered legally protected interests of sufficient certainty to be compensable.’ Or, in the words of the Draft Articles, ‘in so far as it is established’. The question is one of ‘certainty’. ‘Tribunals have been reluctant to provide compensation for claims with inherently speculative elements.’ ”) (citations omitted); PSEG v. Turkey, supra note 174,



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settled that the fact that damages cannot be assessed with certainty is no reason not to award damages when a loss has been incurred.”208 The standard of evidence is particularly important for entities with little to no track record. Such entities are not “going concerns,”209 a categorization that arbitrators frequently employ when rejecting a DCF analysis.210 The “going concern” label thus serves as states’ primary weapon for opposing DCF valuations.211 Whether a company satisfies the definition of a “going concern” is essentially an evidentiary question paragraphs 310–15 (listing cases in which tribunals “required a record of profits and a performance record” or “refused to consider profits that were too speculative or uncertain”); Tecnicas Medioambientales Tecmed S.A. v. Mexico, ICSID Case No. ARB(AF)/00/2, Award, paragraph 186 (May 29, 2003); Autopista Concesionada de Venezuela, C.A. v. Venezuela, ICSID Case No. ARB/00/5, Award, paragraph 355 (Sept. 27, 2001); see also Sénéchal & Gotanda, supra note 77, at 520. An example of a high evidentiary bar is a requirement of “proof of concrete contracts missed and of the profits lost from them.” Middle East Shipping & Handling Co. v. Egypt, ICSID Case No. ARB/99/6, Award, paragraph 128 (Apr. 12, 2002); see also Archer Daniels Midland Co. et al. v. Mexico, ICSID Case No. ARB(AF)/04/05, Award and Separate Opinion, paragraph 285 (Sept. 26, 2007) (“In the Tribunal’s view, lost profits are allowable insofar as the Claimants prove that the alleged damage is not speculative or uncertain—i.e., that the profits anticipated were probable or reasonably anticipated and not merely possible.”). 208 SPP v. Egypt, supra note 171, paragraph 215; see also Ripinsky & Williams, supra note 6, at 121. This has been the case under United States law, where courts’ traditional hesitance in awarding lost profits for new businesses has been replaced by a trend of not requiring certain proof of the amount of lost profits. See Gotanda, Lost Profits, supra note 8, at 71–72 (citing, inter alia, Robert I. Abrams et al., Stillborn Enterprises: Calculating Expectation Damages Using Forensic Economics, 57 Ohio St. L.J. 809 (1996)); Kantor, supra note 18, at 91; see also Kyocera Corp. v. Prudential-Bache Trade Serv., Inc., 299 F.3d 769, 790 (9th Cir. 2002). The same is true in other common law countries. See Gotanda, Lost Profits, supra note 8, at 71. By contrast, some civil law countries impose a higher standard of proof for recovery of lost profits. See id. at 77–78. 209 As defined under the World Bank Guidelines on the Treatment of Foreign Direct Investment, a “going concern” is “an enterprise consisting of income producing assets which has been in operation for a sufficient period of time to generate the data required for the calculation of future income and which could have been expected with reasonable certainty, if the taking had not occurred. . . .” World Bank, Guidelines on the Treatment of Foreign Direct Investment, § 6 (1992) (emphasis added). That definition is “widely recognized” and a “well respected statement of the modern practice.” Rumeli Award, supra note 3, paragraphs 803–04; see also Compañía de Aguas v. Argentina, supra note 3, paragraph 8.3.6 (defining a “going concern” as “a business enterprise with demonstrable future earning power”). 210 See Metalclad Corp. v. Mexico, ICSID Case No. ARB(AF)/97/1, Award, paragraphs 119– 21 (Aug. 30, 2000); Wena Hotels v. Egypt, supra note 117, paragraphs 123–124; see also Andrew Newcombe & Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment 388 (2009). 211 See, e.g., Compañía de Aguas v. Argentina, supra note 3, paragraph 8.3.2 (“Respondent argued strongly against the appropriateness of a DCF valuation” in part because the investment in question “was never a genuine going concern” and had “no proven record of profitability.”).

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of the certainty of cash flows.212 Business plans also demonstrate tribunals’ division on evidence of future cash flows. For example, one tribunal has stated that “[i]t is always difficult to assess lost profits. One cannot simply rely on a business plan.”213 By contrast, another tribunal recognized that business plans “constitute the best evidence before the Tribunal of the expectations of the parties at the time of expropriation for the expected stream of cash flows.”214 Such evidentiary disagreements suggest a deeper cause of inconsistency. The varying competence and unease of arbitrators with respect to the DCF method is critical. Some arbitrators and commentators have made clear their discomfort with DCF’s requirements of forecasting and detailed financial analysis.215 More generally, tribunals have insisted that DCF “be used with caution,”216 or even “great caution.”217 The ILC Articles on State Responsibility disparage the DCF method as relying on “a wide range of inherently speculative elements, some of which have a significant impact upon the outcome (for example discount rates, currency fluctuations, inflation figures, commodity prices, interest

212 Mark Kantor explains that “[t]ribunals employing the term ‘going concern’ are in reality worried about establishing forward-looking compensation with ‘reasonable certainty.’ ” Kantor, supra note 18, at 95, 102. 213 Eastern Sugar B.V. v. Czech Republic, SCC No. 088/2004, Partial Award, paragraph 355 (UNCITRAL Mar. 27, 2007). 214 ADC v. Hungary, supra note 5, paragraph 507; see also Walter Bau v. Thailand, supra note 84, paragraph 14.21; CME v. Czech Republic, supra note 103, paragraph 59 (separate opinion of Ian Brownlie) (stating that a business plan was “a reliable guide to the business expectations of the investors”). 215 See, e.g., Söderlund et al., supra note 70, at 24 (“The forward-projecting assessment methods . . . strike us as being very uncertain, very speculative, and not agreeable at all to apply.”) (emphasis added); Thomas Wälde, Introductory Note to SVEA Court of Appeals: Czech Republic v. CME Czech Republic B.V., 42 I.L.M. 915, 918 (2003) (“Damages in complex businesses relying on calculations of future cash flows (quite speculative) discounted to present value by applying a specific discount rate (itself very uncertain as the risk factor added to the risk-free discount rate is inevitably highly subjective) can be reasonably and plausibly determined within a very wide range.”); see also supra Part III.A. This discomfort has been highlighted by some in the arbitral community who find the DCF method to be “extremely difficult.” See Weisburg & Ryan, supra note 203, at 174; see also, e.g., Wälde & Sabahi, supra note 200, at 1073 (“The difficulty with [the DCF] method . . . is that while it may look objective and scientific when presented by experts using spreadsheet models, it does not provide objective and predictable outcomes. The DCF method is in essence a speculation about the future dressed up in the appearance of mathematical equations.”); Wells, supra note 16, at 474–75; Cheng, supra note 36, at 497. 216 Enron v. Argentina, supra note 3, paragraph 385. 217 ADC v. Hungary, supra note 5, paragraph 502 (noting “the Respondent’s admonishment that ‘international tribunals have exercised great caution in using the [DCF] method due to its inherently speculative nature’ ”).



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rates and other commercial risks).”218 Tribunals appear to appreciate an easier, more certain method of calculating damages.219 Another possible reason for arbitrators’ rejection of the DCF method is political sensitivity to large awards against states and a perception of the DCF method “as putting too much of a burden on the respondent state.”220 That sensitivity might give arbitrators considerable pause when an award based on fair market value would “entail catastrophic repercussions for the livelihood and economic wellbeing” of a state’s population.221 Regardless of the validity of these considerations, if political or equitable factors in fact drive a tribunal’s award, the tribunal should not purport to be awarding damages based solely on an accurate valuation. Nor should the relative uncertainty of the DCF method be a scapegoat for arbitrators who seek to avoid fair market valuation for political or equitable reasons. V. Recommendations for a More Exact Science Arbitrators could enhance the legitimacy of valuation in investor-state arbitration through more consistent willingness to apply the DCF method and more frequent appointments of independent valuation experts. Those two beneficial shifts would face few obstacles. Most investment treaties and arbitral rule systems give tribunals broad discretion to employ the DCF method and enlist tribunalappointed experts. Parties will likely continue to propose the DCF method and are not likely to oppose a tribunal’s appointment of an expert. Indeed, particularly in high-stakes cases, parties may welcome the involvement of such experts,

218 ILC Articles on State Responsibility, supra note 7, art. 36, paragraph 26. 219 See Siag v. Egypt, supra note 84, paragraph 583 (“[T]he Tribunal prefers to apply a simple analysis to what is on its face a fairly simple contractual term.”); Azurix Award, supra note 3, paragraph 425 (“[The Claimant] has asserted in addition that the argument in support of using actual investment is compelling as the investment is recent and highly ascertainable. The Tribunal agrees that the actual investment method is a valid one in this instance.”). 220 Ripinsky & Williams, supra note 6, at 231. Sergey Ripinsky provided this explanation in a presentation to the Investment Treaty Forum of the British Institute of International and Comparative Law. See Kantor, supra note 18, at 137. He argued that tribunals are “reverse engineering” outcomes to avoid large awards—“first the ‘fair’ outcome, then the reasoning to match that outcome.” Id. As Mark Kantor explains, “international investment law cases like LG&E and PSEG betray a noticeable desire on the part of the arbitrators to look for means of minimizing the compensation payable by the breaching host State.” Id. at 80. 221 See CME v. Czech Republic, supra note 103, paragraphs 77–78 (separate opinion of Ian Brownlie); see also Olivia Chung, Note, The Lopsided International Investment Law Regime and Its Effect on the Future of Investor-State Arbitration, 47 Va. J. Int’l L. 953, 965–66 (2007).

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who would likely contribute to financially sound, well-explained, and thus legitimate valuations. A. Utilize the DCF Method to Address Uncertainty The general trend in favor of the DCF method is consistent with principles of modern finance. Yet tribunals and commentators have continued to decry the complexity and inexact components of DCF analysis. Except in cases of notably deficient evidence, tribunals should not dismiss a detailed DCF analysis of fair market value with the magic wands of “uncertainty,” “speculation,” and “not a going concern.” This is not to say that “uncertainty” or “speculation” do not exist. Rather, to the extent that “uncertainty” and “speculation” have become legal bars that limit the precision of damages awards, those legal bars should be abandoned.222 Arbitrators should employ the DCF method as a tool to help pinpoint and reduce sources of uncertainty and speculation. At least three related benefits would result from this usage of the DCF method: closer alignment with accepted business practices, increased transparency, and an unbiased approach to valuation. 1. Alignment with Established Business Practices Unlike arbitral tribunals, analysts in the modern business world are very unlikely to reject the DCF method simply because of “uncertainty” or “speculation.” Because tribunals are seeking to determine market value, their decisions should be informed by the real-world practices of willing buyers and willing sellers. Such an approach would be consistent with the legitimate expectations of investors.223 Even where there are questions related to the historical data of a company, “a DCF valuation would likely have formed one of the measures which would have informed a discussion between a willing seller and a willing buyer. . . .”224 In 222 See Ripinsky & Williams, supra note 6, at 211 (“[T]he true contradiction may be said to be between the two key legal principles in the law of damages: (a) the principle of prohibiting the award of speculative damages, and (b) the principle requiring the award of the ‘fair market value’ of the investment. If one really wishes to estimate the market value of an investment, then one should use most common and accepted methods to reach that value, and the DCF method is an appropriate method. Speculation and uncertainty, inherent in any DCF analysis, can be dealt with by taking conservative estimates of cash flow projections and application of a higher discount rate.”). 223 See, e.g., Walter Bau v. Thailand, supra note 84, paragraph 14.22 (“If value and damages must be computed on the basis of what was legitimately expected at any given time, then the DCF method is the most reasonable one to apply.”). 224 Rumeli Award, supra note 3, paragraph 810 (“But the discussion would certainly not have ended there. It is well known that DCF values are to a greater or lesser extent sensitive to the validity of the data on which they are based, such as the inflation rate, the discount rate, the assumptions underlying the predicted cash flows. Claimants’ expert’s report contains a number of sensitivity analyses which demonstrate that quite small changes in input can materially affect the outcome. . . . The Tribunal is aware that the sensitivity analyses are used as a cross check on the figure adopted by the expert,



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other words, even when lost profits are “very unlikely to have ever materialized,”225 those lost profits have a value. Perhaps that value will be minimal, but it will not be zero. If there is any probability of future profits, a willing buyer can determine a price at which it would purchase the rights to those profits. Financial analysts account for uncertainty in their forecasts by adjusting inputs to their models and evaluating a range of outcomes.226 Arbitrators would benefit from doing the same. The DCF method can help weed out claims that have no evidentiary basis (as opposed to general “uncertainty”). The DCF method “has the advantage of forcing the parties to articulate the various factors which enter into their calculations and, where some individual items are too speculative to properly constitute damages, they may be excluded on an item-by-item basis.”227 For example, in ADC v. Hungary, the tribunal accepted the DCF method for the bulk of the claim, but the tribunal rejected a portion of the claim for future opportunities because “the Claimants had no firm contractual rights to those possible projects.”228 Like financial analysts, arbitrators will of course be called upon to make reasonable approximations, particularly regarding projected cash flows. These approximations are all the more necessary and acceptable when evidence is limited or the projections extend far into the future.229 But approximation does not undermine the validity of a tribunal’s application of the DCF method.230 As one tribunal explained: There is no reason to apologise for the fact that [the modified DCF] approach involves approximations; they are inherent and inevitable. Nor can it be criticised

and not to invalidate the figure. Nevertheless, they demonstrate that the method must be understood as an approximation which is dependent on the validity of the assumptions, and not as a mechanical calculation which will yield a value whose validity is not open to question.”). Another tribunal, while rejecting the claimant’s proposed DCF approach, explained that “implicit in the valuation of ” comparable transactions “is an expectation of cash flow to equity.” BG Grp. v. Argentina, supra note 3, paragraph 452. 225 Siemens v. Argentina, supra note 3, paragraph 379. 226 Brealey et al., supra note 149, at 248–57 (describing sensitivity analysis, scenario analysis, and Monte Carlo simulation as methods of accounting for uncertainty). 227 Christopher Dugan et al., Investor-State Arbitration 586 (2008); see also McLachlan et al., supra note 165, at 331–32. In addition, the discount rate accounts for much of the macroeconomic risk or “uncertainty” that tribunals fear. As explained two decades ago but still under-appreciated, “[t]hrough the risk factor in the discount rate, the DCF method explicitly recognizes the uncertainty which is inherent in valuing an income-producing asset.” Friedland & Wong, supra note 158, at 408 (emphasis added). 228 ADC v. Hungary, supra note 5, paragraph 515 (noting that the claimants were “unable to quantify, with any fair degree of precision, the damages that would have resulted from the loss of those alleged opportunities”). 229 See Ripinsky & Williams, supra note 6, at 121–22, 170–72. 230 “[A]pproximations are inevitable; the settling of damages is not an exact science.” Compañía de Aguas v. Argentina, supra note 3, paragraph 8.3.16.

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joshua b. simmons as unrealistic or unbusinesslike; it is precisely how business executives must, and do, proceed when they evaluate a going concern. The fact that they use ranges and estimates does not imply abandonment of the discipline of economic analysis; nor, when adopted by arbitrators, does this method imply abandonment of the discipline of assessing the evidence before them.231

The challenges of forecasting are most acute for investments with limited track records,232 including enterprises that would not be characterized as “going concerns” for purposes of investor-state arbitration. In such cases, it may be particularly appropriate to corroborate and supplement a DCF analysis with other valuation methods.233 Yet arbitrators should abandon the practice of dismissing the DCF method simply because an entity being valued is not a “going concern.” Financial analysts employ the method even for enterprises that arbitral tribunals would not deem “going concerns.” One reason for this disconnect is terminology. Arbitrators’ usage of “going concern” incorporates the evidentiary question of demonstrable future earning power.234 By contrast, in the business community, a “going concern” is “a business enterprise that is expected to continue to operate into the future,”235 without requiring evidence of future earnings. Mark Kantor aptly suggests avoiding the phrase “going concern” and points to the example of Google Inc.: the current “going concern” test in international arbitration would not have valued the expected future cash flows of Google in 2004, even though Google’s stock market capitalization was over $50 billion after an initial public offering in 2004.236 That valuation depended on “uncertain” and “speculative” future cash flows based in part on conjectural sources of revenue.237 John Gotanda similarly recommended in the context of international commercial arbitration that “[t]he rule prohibiting the recovery of lost profits whenever the injured business is not a going concern

231 Himpurna v. PLN, supra note 5, paragraph 376; see also Sénéchal & Gotanda, supra note 77, at 521. 232 S.D. Myers, Inc. v. Canada, Second Partial Award, paragraph 173 (UNCITRAL Oct. 21, 2002) [hereinafter S.D. Myers, Inc. v. Canada]. 233 Cf. Wells, supra note 16, at 473–74 (“Projecting the stream of earnings for 30 years requires some heroic assumptions, especially for a project that has not yet been completed and thus has no track record; in some cases, such projections are essential, as uncertain as they might be; but there are advantages in seeking another approach when another is feasible.”). 234 See Weisburg & Ryan, supra note 203, at 172. 235 Kantor, supra note 18, at 95 (quoting International Glossary of Business Valuation Terms). 236 Kantor, supra note 18, at 100, 102; see also Weisburg & Ryan, supra note 203, at 175 (“[T]he DCF method can be applied to value both new and established going concerns.”). 237 See Ben Eglin, Google: A $50 Billion ‘One-Trick Pony’?, Business Week, March 3, 2005, www.businessweek.com/magazine/content/05_11/b3924047_mz011.htm.



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is inappropriate and should be discarded.”238 The same is true in investor-state arbitration. Just as a party in a breach of contract case is entitled to the benefit of its bargain,239 investors in arbitrations against states are entitled to full reparation. In order to “wipe out” the consequences of unlawful state action, arbitrators will often be required to determine the fair market value of an investment. When a tribunal denies an accepted method for valuation simply because of uncertainty, justice is impeded.240 For financial analysts, the DCF method is hardly a “fig leaf ” or an “illusion of scientific analysis [masking] the reality of subjective approximations.”241 The opposite is true: the DCF method removes the fig leaf and the illusion, revealing the approximations inherent in valuation. To realize that benefit, it is paramount that tribunals thoroughly explain their application of the DCF method. 2. Increasing Transparency: Getting Outside the Black Box Advances in computer technology have enabled unprecedented precision and clarity for valuations, including better explanations of the adjustments made in determining fair market value. Tribunals increasingly have provided detailed, line-item summations of damages, often based on Excel spreadsheets provided by the parties.242 DCF analysis has undoubtedly benefited from these technology advances. Before today’s ubiquitous spreadsheets, tribunals might explain their consideration of a party’s inputs to a DCF analysis, but fail to quantify any of their

238 See Gotanda, Lost Profits, supra note 8, at 100; Ripinsky & Williams, supra note 6, at 283 (“The approach of rejecting lost profits in respect of enterprises which at the time of breach were not going concerns with a profitable record has been criticized as leaving the injured party less than whole and failing to achieve the goal of full compensation.”). 239 See Gotanda, Lost Profits, supra note 8, at 101 (“Denying lost profits simply because the injured business is new would leave the injured claimant less than whole and would fail to achieve the goal of full compensation.”). 240 Himpurna v. PLN, supra note 5, paragraph 237 (“In this case as in so many others, it is impossible to establish damages as a matter of scientific certainty. This does not, however, impede the course of justice.”). 241 Id. paragraph 373. 242 See, e.g., S.D. Myers, Inc. v. Canada, supra note 232, paragraph 175 (UNCITRAL Oct. 21, 2002) (“[T]he accounting experts provided to the Tribunal spreadsheets which stated amounts claimed by categories. The Tribunal found the spreadsheets to be a useful tool, which assisted its analysis.”). Still, only the “courageous arbitrator” is likely request such computerized financial models. Kantor, supra note 18, at 301. Indeed, the failure to submit a spreadsheet has been found to indicate a failure of proof. See BG Grp. v. Argentina, supra note 3, paragraph 448 (finding no support for a claim of historical losses in part because a spreadsheet “used as a source for . . . calculations [was] not on the record”); Zhinvali v. Georgia, ICSID Case No. ARB/00/1, Award, paragraphs 35–37 ( Jan. 24, 2003) (finding that if an electronic version of the claimant’s financial model was not produced, the tribunal would not take the model into account in determining damages).

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adjustments, resulting in a non-verifiable award.243 Of course, the mere involvement of spreadsheets and the DCF method will not guarantee a transparent decision. As discussed above, the attempted annulment of the black-box award in Rumeli Telecom v. Kazakhstan shows that the inputs to DCF analysis should be explained.244 The DCF method is amenable to transparent explanations because it has two readily observable components: projected cash flows and a discount rate. Tribunals may also adjust the period of projected cash flows to be valued. If a tribunal explains those inputs, then both parties and nonparties will be in a good position to understand the tribunal’s valuation. The analysis of the tribunal in Alpha v. Ukraine is illustrative. In that case, the claimant’s expert submitted a spreadsheet setting forth the basis for its calculation of the NPV components of the damages claim.245 The tribunal accepted several inputs from the claimant’s expert, such as the discount rate,246 and explained the precise portions of the spreadsheet that it used in quantifying damages.247 Computerized financial models do not solve the challenges of forecasting in DCF analysis. Rather, because the DCF method makes clear the effects of adjustments to the projections proposed by parties, arbitrators should use it to evaluate those projections and to exercise their discretion. Arbitrators should also heed the principles of business and finance underlying the method, such as accounting for certain risks by adjusting forecasted cash flows instead of arbitrarily increasing the discount rate.248 243 An early and prominent investor-state decision involving DCF analysis and such rough adjustments is Phillips Petroleum v. Iran. See Ripinsky & Williams, supra note 6, at 205 (noting the tribunal’s “lengthy examination of the variables affecting the claimant’s proposed DCF valuation” but the lack of any indication of the “precise quantitative effect” of each of those variables). This has also been true in national courts. See, e.g., Kantor, supra note 18, at 91 n. 295 (“Once financial advisors had access to the computational power of such programs as EXCEL to develop future earnings forecasts, courts in the U.S. soon followed suit.”). 244 See supra Part III.C; Rumeli Award, supra note 3, paragraphs 724–36. Ironically, the tribunal in the Rumeli Award provided a good explanation of the DCF method’s role in valuation and took the claimants’ DCF base case valuation as its starting point. Id. paragraphs 810, 813. The tribunal then explained why it moved from that starting point (US$227 million) to the valuation awarded (US$125 million)—for example, because of the value of shares implied by the subsequent purchase of the entity (US$210 million). Id. paragraphs 813–14. The tribunal failed, however, to quantify or even mention how the DCF “starting point” was modified because of those reasons. If it had, Kazakhstan would have had little basis for pursuing annulment of that portion of the award for “failure to state reasons.” See id. 245 Alpha v. Ukraine, supra note 84, paragraph 78. 246 Id. paragraphs 482–83. 247 Id. paragraphs 489–90. 248 Brealey et al., supra note 149, at 223–24. Some commentators have confused this point. See, e.g., Smutny, supra note 11, at 13 (“Where there is a high degree of uncertainty



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3. An Unbiased and Fair Method Arbitrators’ more frequent and improved application of DCF analysis does not favor investors or states at the expense of the other. The typical posture of a case involves an investor proposing the DCF method and a state opposing it, which suggests that the DCF method is more likely to benefit investors than states.249 On the one hand, this perception is correct because rejection of the DCF method can work to the advantage of respondent states in several ways. First, if investors rely exclusively on the DCF method in support of their valuations, tribunals might have no other evidentiary basis for awarding fair market value. Second, if denial of the DCF method results in denial of full market value, arbitration awards would not adequately deter against states breaching their obligations under international law. Third, because some of the “uncertainty” of the DCF method stems from the allegedly unlawful actions of a respondent state (for example, because of expropriation), states have an incentive to limit investors’ ability to put forward a well-documented valuation based on the DCF method.250 On the other hand, the DCF method is not a tool for inflating claims. It is a tool for determining and corroborating accurate valuations. Even if parties use the DCF method to compute “vastly different damages amounts,”251 the DCF method is not to blame for the divergent calculations. Parties will usually employ whatever tools are available to put forward a damages amount in their favor. The DCF method has the advantage of clarifying whether and how the parties have inflated or deflated valuations, such that arbitrators can adjust the assumptions and calculations as they deem appropriate.

as to what future revenues and costs would be, the discounted cash flow method simply calls for application of a higher discount rate factor to reflect the greater risk that the predicted level of profits in fact would be achieved.”); Weisburg & Ryan, supra note 203, at 178. 249 Coe & Rubins, supra note 155, at 629 (noting that respondent states “may push for a method based upon ‘book value’ or ‘sunk costs,’ which tend to yield a lower result than DCF”); Stauffer, supra note 18, at 478 (discussing the possibility of a “Cinderella effect” by which investors use the DCF method to overvalue assets for purposes of their claims in arbitration). 250 See Funnekotter v. Zimbabwe, supra note 102, paragraph 124 (“[U]nder general international law as well as under the BIT, investors have a right to indemnities corresponding to the value of their investment, independently of the origin and past success of their investment, as well as of the number and aim of the expropriations done”); see also Gotanda, Lost Profits, supra note 8, at 102 (“[B]ecause the respondent’s wrongful act caused the difficulty in proving damages with certainty, from a policy standpoint, the respondent should not be able to escape liability on the ground that lost profits are inappropriate because they are uncertain.”). 251 See Weisburg & Ryan, supra note 203, at 174; Ripinsky & Williams, supra note 6, at 201 (discussing the tendency of experts using DCF analysis to arrive at diverging results).

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Several arbitration decisions demonstrate the neutrality of the DCF method. For example, in CMS v. Argentina and Enron v. Argentina, tribunals employed the DCF method and step-by-step explanations of the relevant inputs to reduce the amount of the valuation proposed by investors.252 Another example is Biwater Gauff v. Tanzania. In that case, the parties’ positions on the DCF method defied the norm. The claimant asserted that the DCF approach was “too speculative on the facts” because no profits had been made as of the date of expropriation.253 Tanzania countered that the net present value of future cash flows from the claimant’s investment was negative.254 In other words, Tanzania argued, “[n]o prospective purchaser would have been credulous enough to pay anything for [the claimant’s] investment” as of the valuation date.255 The tribunal agreed with Tanzania and held that the fair market value of the expropriated investment “was nil.”256 The DCF method thus worked in favor of the state. B. Enlist An Independent Financial Expert Given the enormous stakes and complicated valuations in many investor-state cases, one might expect that arbitral tribunals frequently turn to independent experts, or perhaps that parties would recommend that tribunals do so. Yet this practice has not been commonplace. Although tribunals have long had the authority to appoint independent experts under nearly all existing arbitration rules,257 their use of financial experts has been quite rare. For example, the IranU.S. Claims Tribunal appointed an independent expert in less than 1% of the claims brought before it.258 Some commentators have suggested that there is

252 See, e.g., CMS v. Argentina, supra note 167, paragraphs 434–67 (applying “a number of changes to [the] assumptions” of the claimant’s expert’s evaluation of damages); Enron v. Argentina, supra note 3, paragraphs 405–07 (finding that “a number of variables [in the DCF analysis proposed by the claimants] require adjustment”); see also Ripinsky & Williams, supra note 6, at 334, 337. 253 Biwater v. Tanzania, supra note 84, paragraph 749. 254 Id. paragraph 766. 255 Id. Of course, aside from political motivations, this argument begs the question of why Tanzania seized the assets at issue if they had no economic value. 256 Id. paragraphs 793–97. 257 See Meg N. Kinnear et al., Investment Disputes under NAFTA: An Annotated Guide to NAFTA Chapter 11, 1133–1–2 (Supp. No. 1 2008) (noting that, although arbitral tribunals have the authority, no tribunal had appointed its own expert in NAFTA arbitration); Claus von Wobeser, The Arbitral Tribunal-Appointed Expert, in International Arbitration 2006: Back to Basics? 801, 803 n. 10 (Albert Jan van den Berg ed., 2007). 258 See Richard C. Allison & Howard M. Holtzmann, The Tribunal’s Use of Experts, in The Iran-United States Claims Tribunal and the Process of International Claims Resolution 269, 269 (David D. Caron et al. eds., 2000) (noting that, “[o]f more than 1,000 large claims . . . brought before the Tribunal, it has appointed experts in only eight cases”).



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also a trend away from tribunal-appointed experts in international arbitration.259 Despite a growing body of literature on the mechanics of using tribunal-appointed experts,260 there has been little commentary regarding whether tribunals should appoint an expert on damages.261 The circumstances of many recent investorstate arbitrations indicate that tribunals should appoint valuation experts more often. 1. The Results of Recent Appointments The rare cases in which tribunals have appointed an independent financial expert demonstrate the potential benefits of the practice. Four recent decisions are exemplary: CMS v. Argentina, Sempra Energy v. Argentina, Enron v. Argentina, and National Grid v. Argentina. CMS v. Argentina. In CMS, the tribunal enlisted, and “was ably assisted” by, its own experts.262 Perhaps because of this expert assistance, the tribunal explained its decisions regarding numerous approaches to the DCF analysis well, including the proper capital structure and whether to use “the indirect equity value” or the “direct equity value.”263 More impressively, the tribunal “built its own model” for

259 See Franz T. Schwarz & Christian W. Konrad, The Vienna Rules: A Commentary on INternational Arbitration in Austria paragraph 21–006 (2009); see also Gary B. Born, International Commercial Arbitration 1860 (2009) (noting that in international commercial arbitration “arbitral tribunals only rarely appoint experts to address technical issues which the parties have already addressed through partyappointed experts”); Ball, supra note 70, at 427 (observing that arbitrators “will doubtless remain constitutionally skeptical of experts”). 260 See Kantor, supra note 18, at 304–14; von Wobeser, supra note 257, at 803 n. 10; Nathalie Voser & Anna Katharina Mueller, Appointment of Experts by the Arbitral Tribunal: The Civil Law Perpsective, 7 Bus. L. Int’l 73 (2006); Alexandra Weiss & Karin Bürgli Locatelli, Der vom Schiedsgericht bestellte Experte—ein Überblick aus Sicht eines Internationalen Schiedsgerichts mit Sitz in der Schweiz, 22 ASA Bulletin 479 (2004); Allison & Holtzmann, supra note 258; Michael E. Schneider, Technical Experts in International Arbitration, 11 ASA Bulletin 446 (1993). For a discussion of tribunal-appointed experts under Swiss Rules of International Arbitration, see Tobias Zuberbühler et al., Swiss Rules of International Arbitration: Commentary 241–51 (2005). 261 John Gotanda noted briefly in the context of commercial arbitration that tribunals “may consider a greater use of experts to assist in evaluating claims for lost profits” in part because of “the complexities involved in calculating damages” and the possibility of “a more reasoned decision.” Gotanda, Lost Profits supra note 8, at 110. Allison and Holtzmann observed in the context of the Iran-U.S. Claims Tribunal that “the parties’ confidence factor in the arbitrators’ ultimate award can be greatly enhanced by the belief that crucial issues have been given the benefit of exposure and analysis by an independent expert.” See Allison & Holtzmann, supra note 258, at 282. In the context of U.S. rules of evidence, Judge Richard Posner has expressed hesitance with respect to neutral experts on damages. Posner, supra note 81, at 1539. 262 CMS v. Argentina, supra note 167, paragraph 418. 263 Id. paragraphs 424–33.

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DCF analysis with the help of its experts.264 With that model in hand, the tribunal was able to systematically modify the assumptions of the claimant’s expert.265 Sempra Energy v. Argentina. The tribunal in Sempra Energy also presented a thorough, number-intensive explanation of its valuation.266 Although the decision does not reveal the extent to which the tribunal relied on its appointed financial expert, the careful reasoning of the decision suggests that the expert played an important role.267 Enron v. Argentina. In Enron, the tribunal-appointed expert helped the tribunal address the parties’ competing positions. The tribunal accepted the expert’s recommendations and explanations regarding the tariff base,268 the discount rate,269 and the basis for attributing earnings.270 It is not surprising that the tribunal found the approach of its expert to be “more balanced and realistic” than the approaches of the parties’ experts, given that the tribunal’s expert had a nonpartisan role.271 One commentator used the tribunal’s decision as an example of how the DCF method is properly applied in investor-state arbitration.272 National Grid v. Argentina. Most recently, in National Grid, the tribunal appointed an independent expert pursuant to criteria provided by the parties.273 Appointing an expert was particularly useful in this case because the tribunal did not have the benefit of a competing valuation from the state.274 Roughly four months after his appointment, the independent expert submitted his final report to the parties and the tribunal, which included the expert’s identification of “manifest errors.”275 In its decision, the tribunal expressed its gratitude to all of the experts “for their contribution to [the tribunal’s] understanding of this matter.”276 The tribunal followed several recommendations by its appointed expert, including (i) recourse to comparable transactions (as a check on DCF)277 and (ii) an increase in the discount rate proposed by the claimant’s expert.278 264 Id. paragraph 435. 265 Id. paragraphs 439–63. 266 See Sempra v. Argentina, supra note 3, paragraphs 407–82. 267 The decision notes that the expert produced two reports, and that the tribunal gave “due consideration” to the parties’ comments on those reports. Id. paragraph 399. 268 Enron v. Argentina, supra note 3, paragraphs 408–10. 269 Id. paragraphs 411–12. 270 Id. paragraphs 418–19. 271 Id. paragraph 435. 272 Ripinsky & Williams, supra note 6, at 203–04. 273 Nat’l Grid v. Argentina, supra note 84, paragraph 46. 274 Id. paragraph 267 (“The Respondent did not present its own model or methodology attempting to evaluate [damages], submitting instead an expert report purporting to show at least four serious conceptual errors and four methodological errors in the analysis presented by Claimant’s expert.”). 275 Id. paragraphs 47–49. 276 Id. paragraph 271. 277 Id. paragraph 285. 278 Id. paragraph 289.



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In contrast to the positive examples in those four cases, there has been one clear statement that demonstrates the detriment to legitimacy that might result from not appointing an independent expert. An arbitrator wrote separately in Siemens v. Argentina about the tribunal’s refusal to appoint an expert: It should be noted that the present case comprises complex valuation and financial issues, which were amply argued and discussed by the parties and their respective experts, with very complicated opinions and data. In light of the above, a report from an independent expert is necessary in order to calculate and fully support the amount of damages to be awarded, for all of which I find reasonable the request of its appointment and unjustified its refusal, as such a request never seemed impertinent or untimely to me, but rather reasonable, which acceptance would not have implied any inconveniences.279

The tribunal’s decision not to appoint an independent expert in the face of that arbitrator’s clear desire and need for such assistance does not inspire confidence. Even if only a subset of arbitrators on a tribunal would benefit from a tribunalappointed expert, such an appointment could bolster the legitimacy of the tribunal’s awarded valuation. 2. The Benefits of Tribunal-Appointed Experts As the cases above show, tribunal-appointed experts can serve as guides to arbitrators, both in understanding and adjusting financial models and in explaining how those adjustments result in the ultimate award.280 Independent expert guidance thus helps alleviate concerns that arbitrators lack financial expertise. Over time, the involvement of independent financial experts might also serve an educational function for individual arbitrators and more generally for the proper application of the DCF method.281 At the very least, financial experts lend the technical ability to understand and analyze complex valuation formulas and programs.282

279 Siemens v. Argentina, supra, note 3, paragraphs 4–5 (separate opinion of Domingo Bello Janeiro). 280 The cases therefore confirm the general observation of Ripinsky and Williams that such experts “can assist the tribunal in evaluating the reports of the parties’ experts, in understanding complicated financial models and, ultimately, to be able to render a well-reasoned decision.” Ripinsky & Williams, supra note 6, at 176. 281 See id. at 177–78 (explaining that the reports of independent experts may “be useful in developing the law relating to the award of damages where a tribunal endorses an expert’s findings and conclusions on the assessment of compensation,” largely because “judicial endorsement of valuation techniques used in circumstances that arise frequently can provide useful guidance to parties and their experts in valuing similar claims”). 282 Such benefits of expert assistance were recognized two decades ago, in connection with the rising importance of computerized expert evidence. Arthur L. Marriott, Evidence in International Arbitration, 5 Arb. Int’l 280, 284 (1989).

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Thanks to rapidly advancing technology, today’s financial models are often far beyond the traditional training of arbitrators.283 These complexities are perhaps most pressing in the context of DCF analysis.284 When valuing a sophisticated enterprise, the DCF method requires technical skills akin to other” scientific” areas.285 Billions of dollars can hinge on the many interlinked formulas typically embedded in an expert’s computerized financial model.286 In most investor-state cases, the models “are a riot of numbers, value, and shorthand identifiers for computer calculations, where each printed spreadsheet page (itself highly complex) represents many hidden underlying, inter-linked equations.”287 For example, a thorough valuation might require multiple simulations to evaluate a broad distribution of expected future cash flow outcomes.288 In addition to serving as guides, tribunal-appointed experts provide a useful independent voice in the typical investor-state case in which the parties submit detailed but widely divergent expert reports on damages. The “battle of experts”

283 See supra Part III.A; see also Kantor, supra note 18, at 302 (noting that “arbitrators are often unfamiliar with the intricacies of manipulating EXCEL spreadsheets or the detailed building blocks of an Income-Based [e.g., DCF] forecast” and that “[a]rbitrators cannot intuit these relationships”). 284 Of course, tribunal-appointed experts can aid tribunals in any method of determining fair market value. For example, if the parties argue only on the basis of book value, expertise in “the application of ‘complex accounting principles to determine the quantum of damages to be awarded’ . . . . ensures that the arbitral tribunal has a proper understanding of the facts and their relation to the applicable law, and increases the prospects that decisions regarding liability and damages will be fully informed, accurate, and, most of all, just.” David D. Caron et al., The UNCITRAL Arbitration Rules 665–66 (2006). 285 There are indications of more willingness to use tribunal-appointed experts in “scientific” fields than in finance. For example, the U.S. Model BIT explicitly considers tribunal-appointed experts on “any factual issue concerning environmental, health, safety, or other scientific matters,” but does not mention the possibility of tribunal-appointed experts on damages issues. See U.S. Model BIT, art. 32; but see id. art. 20(3)(c)(i), 20(5) (encouraging parties in disputes related to financial services to “take appropriate steps to ensure that the tribunal has expertise or experience in financial services law or practice”). 286 See Kantor, supra note 18, at 302. Financial experts would likely identify and address mistakes in such models that arbitrators would not catch. See id. 287 Id. at 133; see also, e.g., Duke Energy v. Peru, supra note 117, paragraphs 463–64 (noting that the claimant’s expert had constructed a financial model that covered over 6,000 assets and had 23 steps accounting for the annual cash flow impact of the government measures in question). 288 Brealey et al., supra note 149, at 253–57; see also Knull et al., supra note 150, at 24–25. For such complex simulation models, even business managers “may delegate the task of constructing the model to management scientists or consultants.” Brealey et al., supra note 149, at 257. There are nonetheless practical limits to the complexity of a model prepared by an expert, including the ability of the decision maker to understand the model. See id.



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has become the norm, and the battle can be hardest to judge when the experts submit drastically different valuations.289 The parties’ experts often take instructions from counsel and therefore are perceived to have questionable independence.290 Even if the parties’ experts are independent, in many cases they will be subject to cross-examinations that seek simply to undermine their credibility and obfuscate the relevant issues.291 Moreover, as commentators have noted, there is an “unwillingness of experts on opposing sides of a dispute to reach any meaningful consensus in many cases. . . .”292 The problem has also been described as “two ships passing in the night,” based on the perception of expert evidence as “highly-paid advocacy from a credentialed witness.”293 Although some commentators are skeptical that tribunal-appointed experts will assist in solving the battle of the experts,294 other methods of managing opposing experts come up short compared to independent experts. Expert conferencing,

289 See Weisburg & Ryan, supra note 203, at 174; Michael Straus, The Practice of the IranU.S. Claims Tribunal in Receiving Evidence from Parties and from Experts, 3 J. Int’l Arb. 57, 63–67 (1986). 290 See J. Martin Hunter, Expert Conferencing and New Methods, in International Arbitration 2006: Back to Basics? 820, 821–24 (Albert Jan van den Berg ed., 2007); Kantor, supra note 18, at 298. 291 See Kantor, supra note 18, at 134 (“[A]rbitrators are regularly left with two widely different valuations, each having suffered heavy damage to its credibility from litigation artillery duels.”). 292 Jacobs & Paulson, supra note 80, at 399. There is a risk that a tribunal-appointed expert will be just another opinion that does not help the tribunal decide between the parties. See, e.g., Act II: Pre-Hearing Advocacy, 21 Arb. Int’l 561, 569 (2005) (comment by Rob Smit). That risk will likely be minor (or at least a risk worth taking) with respect to the complex valuations at issue in investor-state arbitration. 293 See Frances P. Kao et al., Into the Hot Tub . . . A Practical Guide to Alternative Witness Procedures in International Arbitration, 44 Int’l Law 1035, 1035–36 (2010) (describing in particular the issues of expert evidence in United State litigation, and stating that international arbitration “frequently looks like the usual morass found in the U.S. courts, particularly where American lawyers are involved. . . . This posture may result in polarized, intractable positions between the parties’ experts. Most importantly, lawyer control over the examination process means that the important questions—typically the thorniest ones—can go unanswered or are glossed over, either because they are intentionally sidestepped or because counsel does not have sufficient facility with the particular topics at issue to elicit clear, relevant testimony.”). 294 See Caron et al., supra note 284, at 668 (arguing against the use of tribunal-appointed experts because of avoiding a “battle of experts” in which the parties feel “compelled to seek expert advice for purposes of evaluating and possibly challenging the conclusions of the tribunal-appointed expert); Allison & Holtzmann, supra note 258, at 281 (“[A]n economic analysis of such matters as the future level of prices for a given commodity or the prospects for a particular trade or business may, perhaps, be as readily determined by the application of common sense and careful analysis by the arbitrators of the evidence before them as by an expert opinion will, predictably, be subjected to attached leveled against it by other experts marshaled by the parties.”).

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for example, has become one popular practice in the battle of the experts. Also referred to as “hot-tubbing,” such conferencing involves experts from opposing sides sitting together for questions from the tribunal and, in some instances, the parties. These “hot tubs” can yield benefits such as reducing tensions, highlighting differences in opinion, and exploring those differences and the credibility of the experts.295 However, several factors limit the effectiveness of hot-tubbing, including the tendency of experts to focus solely on avoiding hurting their party’s case, rather than genuinely seeking agreement or guiding the arbitrators.296 Having an independent expert join the hot tub could help overcome these limitations by, for example, moderating the competing experts’ positions and helping identify common ground. One might therefore think of independent experts as specialized ad hoc scholars on expert valuation battles: they enter the fray, offer analysis, and provide clarity.297 3. The Costs of Tribunal-Appointed Experts Two principal objections to a tribunal’s appointment of an expert are cost and overreliance on (or delegation to) the expert. The parties are responsible for paying the direct costs of a tribunal-appointed expert,298 and will likely incur even greater costs in reviewing and potentially challenging the conclusions of such an expert.299 The parties therefore may believe that a tribunal-appointed expert will only delay and increase the costs of the arbitration.300 That would likely be true when the parties’ experts have submitted calculations that are within a close

295 See Kao et al., supra note 293, at 1042–43. 296 The hot tub might place undue emphasis on the general appeal of an expert, rather than the solidity of the positions he or she is endorsing. See id. at 1044 (listing the important traits of an expert for the hot-tubbing process, including teaching ability, likeability, and skills with “cross-examining” the opposing expert); Kantor, supra note 18, at 300–01. 297 Cf. Franck, The Legitimacy Crisis, supra note 13, at 1615, 1582 n. 450. 298 See, e.g., International Bar Association Rules on the Taking of Evidence in International Arbitration art. 6(8) (“The fees and expenses of a Tribunal-Appointed Expert, to be funded in a manner determined by the Arbitral Tribunal, shall form part of the costs of the arbitration.”) [hereinafter IBA Rules]. The financial burden of a tribunal-appointed expert will be typically be relatively less imposing for states than for investors. See Wälde, supra note 13, at 23. Yet, because tribunal-appointed experts are most appropriate in high-stakes cases, it is reasonable to expect that in those cases investors will have adequate funds to cover the costs of a tribunal-appointed expert. 299 Allison & Holtzmann, supra note 258, at 281 (noting that an independent expert’s “opinion will, predictably, be subjected to attached leveled against it by other experts marshaled by the parties”). 300 See Hunter, supra note 290; see also Hartwell et al., supra note 18, at 20 (comments of B. Hanotiau).



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range of, or that rely on, similar methodologies and present detailed, comparable analysis.301 Arbitrators must therefore consider the amount at stake and complexity of the valuation dispute in deciding whether to appoint an expert.302 There will be relatively small or simple cases in which the costs of a tribunal-appointed expert will not be justified.303 The trend in investor-state arbitration is not, however, toward small and simple disputes. Rather, the high stakes of recent investor-state cases involve complex valuations and require several years to resolve. A pressing reality of this trend is that parties will continue to submit calculations with such drastic differences that arbitrators will face great difficulty in reconciling them.304 Arbitrators will face similar difficulty in resolving disputed valuations when investors submit detailed expert reports, but respondent states do not provide such detail.305 One perhaps counterintuitive method for limiting the monetary costs associated with a tribunal-appointed expert is to raise the issue early in the proceedings. As one commentator observed, “as soon as the arbitral tribunal realizes the importance or necessity of appointing an expert, it should initiate the appropriate steps

301 See, e.g., Walter Bau v. Thailand, supra note 84, paragraphs 14.5, 14.23–14.24. An ideal outcome is that both sides’ experts submit damages calculations that “reflect a high degree of professionalism, clarity, integrity and independence,” such that those calculations can be weighed without requiring supplemental financial analysis. See ADC v. Hungary, supra note 5, paragraph 516. 302 See Michael McIlwrath & John Savage, The Conduct of Arbitration, in International Arbitration and Mediation: A Practical Guide paragraph 5–222 (2010) (“Whether a tribunal will choose to appoint an expert will depend on a variety of factors: the technical complexity of the dispute, the existence of relevant expertise within the tribunal, the assistance provided by the parties’ experts [if any are appointed], and the amount at stake. A tribunal that counts lawyers among its members will be unlikely to appoint an expert to assist it on issues of law.”); Allison & Holtzmann, supra note 258, at 271 (“[T]he [Iran-U.S. Claims] Tribunal generally has focused upon two considerations when deciding on the appointment of an expert: (1) complexity of an issue, including complexity arising from differing opinions of party-appointed experts; and (2) whether appointing an expert is expedient under the circumstances of the case.”). 303 See, e.g., Funnekotter v. Zimbabwe, supra note 102, paragraph 128 (“Although the valuations advanced by the parties are very different [approximately $10 million versus $1 million], the Tribunal does not deem it necessary to have recourse to further expertise, which, in the circumstances of the case, would most probably not provide more useful information.”); see also Caron et al., supra note 284, at 667; Allison & Holtzmann, supra note 258, at 272. 304 Cf. Casey et al., supra note 75, at 110 (“[I]n appropriate cases, [a tribunal-appointed expert] can considerably reduce the time otherwise spent during the arbitration creating and deflating exaggerated claims or theories proposed by experts who have perceived their role to be merely that of a ‘hired gun.’ ”). 305 See Ball, supra note 70, at 425.

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and inform the parties as soon as possible in order to receive their perspectives.”306 In an ICSID arbitration, for example, tribunals will often learn from the request for arbitration that a complex valuation is likely to ensue. Accordingly, a tribunal could pose to the parties the question of whether to appoint an expert at the first procedural session.307 While unlikely, the parties may even agree that a single, tribunal-appointed expert would be preferable to the high costs of engaging competing party-appointed experts.308 The second potential disadvantage of a tribunal-appointed expert is that arbitrators could defer too much of their authority to such experts, or that a perception of such deference would undermine parties’ confidence in an award. Arbitral rule systems and general principles of international arbitration provide an important defense against such deference. It is the tribunal’s responsibility to determine the final damages amount. As stated in the IBA Rules, “[a]ny Expert Report made by a Tribunal-Appointed Expert and its conclusions shall be assessed by the Arbitral Tribunal with due regard to all circumstances of the case.”309 Tribunal-appointed experts also may not investigate and develop the underlying facts, which would aid a party in proving its case.310 Despite such established principles, parties might still view arbitrators as dependent on their experts’ analyses.311 Ironically, one reason for doubting a tribunal’s independence in assessing damages might be the same limited financial

306 See von Wobeser, supra note 257, at 806; cf. Ripinsky & Williams, supra note 6, at 236 (“The quantum proceedings would be significantly facilitated if guidance on . . . important drivers of valuation was provided by arbitrators as early as practicable.”). 307 See ICSID Arbitration Rules 20(1) (“As early as possible after the constitution of a Tribunal, its President shall endeavor to ascertain the views of the parties regarding questions of procedure.”). 308 See International Chamber of Commerce, Techniques for Controlling Time and Costs in Arbitration, paragraph 71 (2007); Harold S. Crowter & Anthony G.V. Tobin, Ensuring that Arbitration Remains a Preferred Option for International Dispute Resolution—Some Practical Considerations, 19 J. Int’l Arb. 301, 304–05 (2002). 309 IBA Rules art. 6(7); see also Starrett Hous. Corp. v. Iran, supra note 10, at 197. 310 See von Wobeser, supra note 257, at 805 (“[I]t does not serve to liberate either of the parties from the burden of proving its case.”). Such an expansion of a tribunalappointed expert’s role will prove controversial, as illustrated by Behring International, Inc. v. Islamic Republic Iranian Air Force. In that case, one arbitrator dissented to the decision in part because he perceived that the tribunal’s expert was “in reality aiding one Party to engage in what amounts to a ‘fishing expedition.’” Behring Int’l, Inc. v. Islamic Republic Iranian Air Force, 15 Iran-U.S. Cl. Trib. Rep. 89, 93–95 (Richard M. Mosk dissenting). 311 See, e.g., Smutny, supra note 11, at 23 (“[M]any parties would object to a tribunal hiring a ‘neutral’ expert to perform the necessary calculations, as it may be seen as too great a delegation of the arbitrators’ decision-making authority. . . .”); Hartwell et al., supra note 18, at 18 (comments of Serge Lazareff ) (“It is very difficult for a tribunal not to follow the expert it has itself appointed. It then must find technical reasons to go



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competency that makes a tribunal-appointed expert advisable. There is an important distinction, however, between useful reliance on an expert’s guidance and complete deference. For example, if an independent expert submits a report that is “whole, meticulous and comprehensive,”312 it is reasonable for a tribunal to rely on that report. In each of the positive examples discussed in this Article, the tribunals followed the guidance of their experts, but also undertook their own analysis.313 Perceptions of over-reliance on an independent expert are more likely to arise from parties with common law backgrounds because of their relatively limited familiarity with independent experts.314 In contrast to adversarial common law practices, civil law systems might not even grant arbitrators the task of “decid[ing] between the opinions of two conflicting technical experts.”315 It is thus all the more critical that parties from common law traditions have full opportunities to question a tribunal-appointed expert, under the tribunal’s procedural oversight. 4. The Procedures for Tribunal-Appointed Experts Tribunal-appointed experts must be selected and managed with care. Tribunals should ensure that they appoint an expert who is well suited for the task

against its own expert, and I think it becomes sort of vicious.”); id. at 9 (comments of G. Hartwell). 312 Starrett Hous. Corp. v. Iran, supra note 10, paragraphs 265–73. 313 See supra Part IV.B.1. In National Grid, for example, the tribunal selected a discount rate that was closer to the Claimant’s proposed rate than to the high end of the tribunal-appointed expert’s range of proposed rates. Nat’l Grid v. Argentina, supra note 84, paragraph 289. 314 See Voser & Mueller, supra note 260, at 73–74, 80; Jane Jenkins & James Stebbings, International Construction Arbitration Law 204 (2006) (“While certain parties [particularly those from civil law jurisdictions, who are accustomed to inquisitorialstyle proceedings] may be comfortable with this arrangement, most parties from common law jurisdictions are not.”); Ruth Fenton, A Civil Matter for a Common Expert: How Should Parties and Tribunals Use Experts in International Commercial Arbitration, 6 Pepp. Disp. Resol. L.J. 279, 288–91 (2006); Yves Derains & Eric A. Schwartz, Guide to the ICC Rules of Arbitration 278 (2005) (“[T]he practice of appointing such experts in ICC arbitration is still much more prevalent among civil law lawyers than their common law counterparts, who are more accustomed to weighing expert evidence presented by each of the parties.”); Garcia, supra note 27, at 362–63; Allison & Holtzmann, supra note 258, at 270 (explaining the distinct approaches to experts in civil law and common law traditions, and noting that certain arbitral rules “incorporate and meld the characteristics of both systems”). 315 See Robert Briner, Domestic Arbitration: Practice in Continental Europe and its Lessons for Arbitration in England, 13 Arb. Int’l 155, 163 (1997). Yet the expert does not “become a decision-maker on the same level as arbitrators, but only a finder of facts under the supervision and scrutiny of the parties and the arbitrator.” Id. at 164.

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and unlikely to be challenged.316 While the parties are unlikely to agree on who should serve as an independent expert,317 tribunals might turn to the partyappointed experts in seeking consensus.318 Four essential qualifications for a tribunal-appointed expert are: (1) requisite level of expertise in the relevant field; (2) independence and impartiality; (3) availability; and (4) an ability to perform the necessary function within the financial constraints imposed by the arbitral tribunal.319 Consistent with these suggested requirements, the recently revised IBA Rules on the Taking of Evidence in International Arbitration require that a tribunal-appointed expert submit to the tribunal and the parties not only a statement of independence, but also “a description of his or her qualifications.”320 Once appointed, an expert may be challenged under the IBA Rules only for “reasons of which the Party becomes aware after the appointment has been made.”321 Creating a single list of qualified experts on valuation would be unnecessary and potentially counterproductive. Rather than artificially limiting available experts,322 tribunals should utilize their own experience with experts and seek the recommendations and approval of the parties. Over time, the arbitration community will likely establish an unofficial set of tribunal-appointed “repeat player” experts. There is already a pool of qualified experts who have offered opinions on behalf of both investors and states in a variety of cases. For example, published investor-state decisions from the past five years reveal that Brent Kaczmarek of Navigant Consulting has worked with states in at least two cases (Walter Bau v. Thailand and Rumeli Telecom v. Kazakhstan) and with investors in at least three (Duke Energy v. Ecuador, Duke Energy v. Peru, and Pey Casado v. Chile). Such experts have begun to represent a “cottage industry” in international arbitration,

316 See von Wobeser, supra note 257, at 806–07. Tribunals may employ a variety of procedures for such appointment. See, e.g., Allison & Holtzmann, supra note 258, at 275. Those procedural details are outside the scope of this Article. Some arbitral rule systems require that an arbitral tribunal consult with the parties before appointing an expert. International Chamber of Commerce Rules of Arbitration art. 20(4). 317 See Allison & Holtzmann, supra note 258, at 275 (noting that the parties reached such an agreement in only one case before the Iran-U.S. Claims Tribunal). 318 See Posner, supra note 81, at 1539 n. 138. 319 See Allison & Holtzmann, supra note 258, at 275–77; see also Hartwell et al., supra note 18, at 9 (comments of G. Hartwell) (noting the importance of independent experts keeping “an open mind that the tribunal has always learned to have. . . .”). 320 IBA Rules art. 6.2. The revised IBA Rules also add a requirement that tribunalappointed experts submit a statement of independence from the parties’ “legal advisors,” as well as from the parties. Id. 321 Id. 322 For a brief statement in favor of such a list, see Hartwell et al., supra note 18, at 9 (comments of G. Hartwell) (“[M]ore work [should] be done—and this could be done by institutions of various kinds—to inculcate the necessary judicial or quasi-judicial skills in those experts who wish to serve tribunals. Then, perhaps gradually, over the years, the barriers between lawyers and experts might disappear.”).



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which reinforces the importance of an expert’s reputation.323 Just as an “esprit de corps” has developed among arbitrators,324 the same is beginning to develop among financial experts in international investment arbitration. After selecting an appropriate expert, tribunals must “precisely define the scope of the functions entrusted. . . .”325 A number of commentators have provided guidance on how tribunals should handle terms of reference and the management of tribunal-appointed experts.326 For independent financial experts, the terms of reference should at a minimum assign the task of analyzing the valuations proposed by the party-appointed experts. In some cases, arbitrators might be justified in requesting that an independent expert prepare a separate financial model. Whatever the scope of an independent expert’s involvement, tribunals should ensure that there are adequate procedural restraints. The 1999 version of the IBA Rules outlined the basic procedures for tribunal-appointed experts, including requesting relevant information from the parties, submitting a report in writing to the tribunal, and answering questions from the tribunal and the parties.327 The revised 2010 version of the IBA Rules keeps these provisions intact and makes several noteworthy additions. For example, the revised IBA Rules set forth a more detailed rubric for written reports by a tribunal-appointed expert, including “a statement of the facts on which he or she is basing his or her expert opinions and conclusions,” “a description of the methods, evidence and information used in arriving at the conclusions,” and the submission of “[d]ocuments on which the Tribunal-Appointed Expert relies that have not already been submitted.”328 These procedural steps give parties an opportunity to test an independent expert—a process that contributes to the legitimacy of the expert’s analysis. VI. Conclusion The jurisprudence of investor-state arbitration is evolving quickly. In 1992, Professor Amerasinghe observed that “the assessment of full compensation is at the present time filled with variables and is certainly not a very scientific process.”329

323 See Jacobs & Paulson, supra note 80, at 383 n. 128. 324 See Commission, supra note 23, at 135 (noting arbitrators’ similar “backgrounds, qualifications, experiences in international law and their regular interactions, both professionally and otherwise”). 325 See von Wobeser, supra note 257, at 807. 326 See Jacobs & Paulson, supra note 80, at 399; von Wobeser, supra note 257, at 801; Schneider, supra note 260, at 448–64; Allison & Holtzmann, supra note 258, at 273–74. 327 IBA Rules art. 6(1)–(6). 328 Id. art. 6(4). 329 See C.F. Amerasinghe, Issues of Compensation for the Taking of Alien Property in the Light of Recent Cases and Practice, 41 Int’l & Comp. L.Q. 22, 63 (1992) (emphasis added).

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Much has changed. As the stakes of investor-state arbitration have risen, so too has the “scientific” precision of valuation. Yet several roadblocks stand in the way of further progress toward a more exact science. Poorly explained valuations are at the root of many challenges, including persistent perceptions that arbitrators lack the competence required for valuation and continue to “split the baby.” Arbitrators can also retreat to the legal safe havens of uncertainty and speculation to avoid DCF analysis, even in circumstances where financial analysts would readily employ the DCF method to evaluate and explain uncertainty. To sidestep those roadblocks, tribunals should appoint an independent financial expert. The benefits of such experts outweigh their costs in these high-stakes cases. The experts would help arbitrators make valuation a more exact science, and that is critical for the legitimacy of investor-state arbitration.

Human Rights and Investment Arbitration: A Brief Note on Some Methodological Problems Ruth Wedgwood1

Of late, it has become fashionable to remark upon the “fragmentation” of international law—the rise of scholarly and legal practice communities that are largely segregated from the substantive work of other legal métiers. The lawyers who inhabit a specialized trade may not see much advantage in seeking to test its jurisprudence against the tenets of other communities of thought. The problem has intensified with the rise of the regulatory state, the economic pressures and commercial ambition of the hyper-specialization of private law practice, and the sad end of the age of the generalist. In principle, academic lawyers still enjoy a leisure and liberty to explore the underbrush of many more fields of law, but the recruitment of the professoriate at younger ages (eschewing law practice as somehow deforming) has brought the separate defect of an absence of any practical experience, and certainly a lack of familiarity with the “lived” sociology of various lawmaking organs. Such segregation also separates the worlds of international human rights law and international investment law. Geneva and Strasbourg are a long distance, in mood and materiel, from the activities of the ICC and ICSID in Paris and Washington. This writer’s recent experience in a norm-setting organ of international human rights law in Geneva may thus serve to cast some light on particular difficulties likely to arise in the reconciliation of these two practice communities and academic specialties. In particular, the application of the standards of investment law—in guaranteeing fair and equitable treatment and protection against

1 Ruth Wedgwood is the Edward B. Burling Professor of International Law and Diplomacy, and Director of the Program on International Law and Organizations, at the School of Advanced International Studies, Johns Hopkins University. From 2003 to 2009, she was the U.S. member of the United Nations Human Rights Committee, charged with interpretation and application of the International Covenant on Civil and Political Rights. In 2011, she was named to the rosters of arbitrators and conciliators of the World Bank’s International Centre for the Settlement of Investment Disputes. John Norton Moore (ed.) International Arbitration, pp. 115–119 ©2013 Koninklijke Brill NV, The Netherlands. ISBN 978-90-04-24622-5

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expropriation for foreign investors—may be affected by some of the less obvious practices in the development of human rights law. At the level of abstraction, various writers have suggested that international human rights law—framed in regional or United Nations treaties and through customary legal norms—may lay claim to a role in the interpretation of investment norms. On the positive side, there is a right to private property protected by several human rights treaties, including Protocol I of the European Convention on Human Rights and the American Convention on Human Rights. However, the advent of the Cold War soon after the close of World War Two determined that “property” as such would not be protected in binding United Nations instruments, since the collectivization of property in the Soviet Bloc was still a fact of life, and the revolutionary movements in former colonies of the global south were not then interested in attracting foreign investors. While the Universal Declaration of Human Rights of 1948 did enunciate a right to “own property alone as well as in association with others” and a right against arbitrary deprivation of property, this was a General Assembly resolution and not a binding treaty. The International Covenant on Economic, Social and Cultural Rights, negotiated in its final form in 1966 and entering into force in 1976, also sidesteps the question of private property by admitting only a right to enjoy “an adequate standard of living,” and the International Covenant on Civil and Political Rights avoids both topics. This lacuna may seem irrelevant in light of the self-sufficiency of modern international investment law. A modern bilateral investment treaty or “BIT” staunchly promises to foreign investors protection of their private property and capital projects, even over a long time horizon, by pledging both “national treatment” and “fair and equitable” treatment of the investment. With a guarantee of “national treatment,” there can be no discrimination against the foreign investor. And with “fair and equitable treatment,” a foreign investor is protected, at least in principle, from the turns of political fortune that may tempt a host government to traduce the expectations of both foreign and domestic investors alike. In other words, there is an absolute floor below which the host state cannot go, even if the measures are nondiscriminatory. So, too, in each modern BIT, there is a guarantee of private property and private investment against any uncompensated expropriation. This is the international equivalent of American “takings” law—the feature of the Fifth Amendment of the U.S. Constitution that forbids the government from taking private property except for a public purpose and with the provision of just compensation. The constitutional jurisprudence of “takings” recognizes that expropriation can occur directly or indirectly, either by the outright seizure of property, or by regulatory restrictions that are unanticipated and deprive property of any viable use. Modern international investment law provides standards that are much the same. But the seeming simplicity of these investment guarantees may be affected by arguments offered in the language of international human rights law. In particular, though no host government could credibly defend actions that discriminate



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against international investors—without harvesting the proper disdain of capital markets—one can also imagine claims by more respectable regimes that the measure of “fair and equitable” treatment should take account of fundamental government responsibilities to its own population. A major instrument of reference in such claims is likely to be the International Covenant on Economic, Social and Cultural Rights—itself a treaty signed (though not ratified) by the United States in 1976, accompanied by a declaration that the treaty guarantees are to be deemed “non-self-executing”—that is, not directly incorporated in American law without further legislative action by the Congress. Because the Economic, Social and Cultural Rights Covenant has not yet gained the advice and consent of the U.S. Senate, it is not legally binding on the United States as a formal treaty. Nonetheless, a signatory to a treaty—even before ratification—is still obliged to refrain from any action inconsistent with the “object and purpose” of the pact. What is more, the absence of a particular country’s ratification is not likely to deter an international court or tribunal from consulting the standards of the Economic, Social and Cultural Rights Covenant in interpreting the terms of investment treaties more generally. Some might argue that each BIT could be seen to have a separate and distinct meaning to be determined in light of the other treaty commitments of the particular states parties. But there is a countervailing tendency to read the identical language of “standard form” treaties in an identical way, and this may include the construal of “fair and equitable treatment” and what constitutes a de facto “expropriation.” What does this mean in practice for investors and human rights practitioners? First, like other U.N. human rights pacts, the International Covenant on Economic, Social and Cultural Rights is equipped with a rather active group of cobblers offering dynamic interpretations. A monitoring “treaty body”—composed of diplomats, academic lawyers, and other specialists elected by signatory states— convenes two or more times per year, and requires governments to “report” in writing and through oral examinations on their practices and policies as measured against the Covenant. Country reports with the U.N. committee are to be filed at intervals of three to five years. The vast majority of states parties are tardy in these reports, and many never report at all, but there are always enough state parties at hand to fill the docket. Each country examination is followed in U.N. protocol by the treaty monitoring body’s published statement of “concluding observations,” and though these documents are focused on each state’s particular facts and circumstances, often they also seek, de facto, to “develop” or extend the “jurisprudence” of the particular treaty. One fact that may escape an innocent reader is that the states parties do not consistently consider these observations to be binding. Rather, as noted in the parallel circumstance of the Human Rights Committee administering the U.N. Civil and Political Rights Covenant, the concluding observations are received as

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good faith opinions that the states parties should consider, but are not binding. In political terms, this may be a distinction without a difference. But as a matter of jurisprudence, it is the difference between advice and command. In addition, as the predicate for questions posed to national governments, U.N. treaty bodies will routinely cite to particular articles of a human rights pact. But the content of the questions may rely on a rather muscular reading of the treaty text. There is no court to rule whether a particular question or treaty interpretation is out of order or erroneous. Second, the Economic, Social and Cultural Rights Covenant is interpreted with a self-administered dynamic called “progressive development” of the law. For example, the economic assistance that a state must afford to individuals for education, housing, or health may depend upon the level of economic prosperity.2 In practice, this means there is no financial floor or ceiling to government demands for revenue, through taxation or regulation, that may be made based on human rights treaty requirements. This may present a conundrum for giving a stable meaning to the “fair and equitable” treatment of foreign investments, insofar as investment tribunals seek to consider a state’s most urgent needs in judging what taxes are confiscatory or what regulations are too harsh. As a state’s economy improves, so may the levies upon foreign investment. Third, there is now an optional protocol to the Covenant that permits individuals as well as non-governmental human rights organizations to bring complaints to the monitoring U.N. treaty committee. This allows an agenda to be set by autonomous parties in pushing for new interpretations or extensions of economic or social rights, which is not necessarily a bad thing in itself, but one that adds another degree of unpredictability to extent of a foreign investor’s exposure to tax or social obligations. To be sure, an investor may be properly burdened with government levies are reasonable and anticipated, but the whole dynamic of progressive development and the complaint system may make it substantially harder to predict future economic costs. The only possible prediction, over the duration of a long-term project, may be that tax and social levies will be unpredictable. The discipline of the capital market will discourage excessive claims by states that wish to have continued access to external sources of funds. But the purpose of investment arbitration is to protect not only the state, but as well, the particular investor who has risked a long-term and large-scale commitment. Fourth, the composition of a decision-making body in treaty interpretation can be crucial in the tenor and reference points of its findings. There has been a developing practice of permitting the filing of amicus briefs on environmental 2 Under article 2(1) of the Covenant, a state must “take steps”—both “individually and through international assistance and cooperation, especially economic and technical, to the maximum of its available resources, with a view to achieving progressively the full realization of the rights recognized in the present Covenant by all appropriate means . . .”



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issues before World Bank ICSID investment tribunals. It remains an open question whether amicus briefs on human rights questions should be permitted as well, to help inform what types of regulations or levies should be considered “fair and equitable.” Investment arbitral panels might also be strengthened by members with first-hand expertise in both investment law and human rights law. But by the same token, it may be asked whether a U.N. human rights body can assay practical standards for economic and social rights, if it lacks any elected treaty body members with direct professional experience or background in the work of business or government, not only human rights work. And since many of the human rights complaints brought to Geneva are further investigated and developed by career staff, indeed, sometimes suggesting pleading amendments to the complainant, the same expansion of views may be required in the recruitment of professional staff. One may also question whether the United Nations errs in failing to separate the professional secretariat staff that helps to develop the complaints on behalf of private proponents (called, in the practice of Palais Wilson, the complaining ‘victims’), from the staff that serves as primary authors of the adjudicatory opinions adopted by the treaty body committees. Some formal separation of function, between complainant and shadow adjudicator, would be required in any national court system or arbitral system. The effective “defragmentation” of international law may require binocular rather than monocular vision—developing professional staff as well as rosters of arbitrators, human rights decision-makers, and scholars who understand both communities of interest and concern. The effective realization of human rights requires the creation of economic value. And a wealthy economy would be hollow without the robust enforcement of human rights. Realizing both aims may require double-jointed expertise.

Arbitration of Public Law Matters

Arbitration and the Law of the Sea: A Comparison of Dispute Resolution Procedures Rüdiger Wolfrum1

I. Introduction It is a well known fact that international courts and tribunals are in competition with arbitral tribunals. This is particularly true for cases concerning the delimitation of marine spaces—the respective jurisprudence, so far, was established by the International Court of Justice (ICJ)2 and arbitral tribunals.3 Arbitral tribunals

1 Rüdiger Wolfrum is a judge at the International Tribunal for the Law of the Sea (ITLOS). He is also the director of the Max Planck Institute for Comparative Public Law and International Law (Heidelberg) and is a Professor of International Law at the University of Heidelberg. He is a former President of ITLOS. 2 North Sea Continental Shelf Cases, Judgment, ICJ Reports 1969, p.3; Continental Shelf (Tunisia/Libyan ArabJamahiriya), Judgment, ICJ Reports 1982, p. 18; Delimitation of the Maritime Boundary in the Gulf of Maine Area (Canada/United States of America), Judgment, ICJ Reports 1984, p. 246; Continental Shelf (Libyan Arab Jamahiriya/Malta), Judgment, ICJ Reports 1985, p. 13; Maritime Delimitation in the area between Greenland and Jan Mayen (Denmark/Norway), Judgment, ICJ Reports 1993, p. 38; Maritime Delimitation and Territorial Questions between Qatar and Bahrain, Judgment, ICJ Reports 2001, p. 40; Land and Maritime Boundary between Cameroon and Nigeria (Cameroon v. Nigeria: Equatorial Guinea Intervening), Judgment, ICJ Reports 2002, p. 303; Territorial and Maritime Dispute between Nicaragua and Honduras in the Caribbean Sea (Nicaragua/ Honduras), Judgment, ICJ Reports 2007, p. 659; Maritime Delimitation in the Black Sea, (Romania v. United Kingdom), Judgment, ICJ Reports 2009, p. 61. 3 Award Delimitation of the Maritime Boundary between Guinea and Guinea-Bissau, Award (14 February 1985) ILR vol. 77, p. 635 ; Decision of the Arbitral Tribunal concerning the Maritime Boundary between Barbados and the Republic of Trinidad and Tobago of 11 April 2006, Reports of International Arbitral Awards, vol. XXVII, p.147; Award of the Arbitral Tribunal between Guyana and Suriname (17 September 2007) at ; Award between the Government of the State of Eritrea and the Government of the Republic of Yemen (Second Stage: Maritime Delimitation) (17 December 1999) Reports of International Arbitral Awards, vol. XXII, p. 335. John Norton Moore (ed.) International Arbitration, pp. 123–134 ©2013 Koninklijke Brill NV, The Netherlands. ISBN 978-90-04-24622-5

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are considered to have, from the point of view of potential parties, several advantages. One of the perceived advantage is that that the parties can influence the composition of the bench—although this ‘advantage’ may be more psychological than real. Other perceived advantages of arbitral tribunals are the smaller number of judges involved and the influences parties have on the Rules of Procedure. Finally, it is believed that smaller benches are more predictable as far as the judgment or award is concerned. A definitive disadvantage of arbitral tribunals are the higher costs compared to the cost of a case before the ICJ or the International Tribunal for the Law of the Sea (ITLOS). To accommodate interest in a smaller bench the ICJ and ITLOS have opened the possibility of establishing ad hoc chambers to deal with a particular case. Account has to be taken of the fact, though, that the parties have made less use of this procedural option than expected. This may be due to the fact that such ad hoc chambers still are too closely linked to the international court or tribunal to which they belong or, in other words, do not offer the parties the influence concerning the composition of the bench as desired. I shall not assess the pros and cons of arbitration in general but rather deal with the procedural differences between the ITLOS ad hoc chambers and arbitral tribunals. To deal with the procedural differences between ITLOS ad hoc chambers and arbitral tribunals it is necessary first to make some at least superficial remarks on ad hoc chambers of the ICJ since the ICJ has developed some practice to that extent whereas the practice of ITLOS is more limited. II. Ad hoc chambers of the ICJ In 1970, preceding the Gulf of Maine case,4 voices representing politics and the academic world advocated that greater use should be made of chambers of the ICJ.5 The reasons given to justify such proposals were twofold and interrelated. It was considered that parties to a dispute were more likely to have recourse to institutional international dispute settlement if they were not to face a body composed of too many judges some of them coming from States pursuing different political objectives and having a different legal culture than the parties to the dispute. Apart from that it was felt to be desirable if the parties to the dispute could have some influence on the composition of the dispute settlement body. 4 Delimitation of the Maritime Boundary in the Gulf of Maine Area (Canada/United States of America), Constitution of Chamber, Order of 20 January 1982, ICJ Reports 1982, 3. 5 See for example Hyde, A Special Chamber of the International Court of Justice—An Alternative to Ad hoc Arbitration, 62 AJIL 439–441 (1968); on Chambers of International Courts and Tribunals see, in particular R. Mackenzie, International Courts and Tribunals, Chambers, in: Max Planck Encyclopedia of Public International Law (R. Wolfrum, ed.), 2011, at .



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Reacting to such recommendations, the ICJ changed its Rules in 1972 to facilitate the formation of chambers and to encourage States to use this procedure.6 In 1978, the Rules of the International Court of Justice were changed again.7 These changes were discussed controversially. In 1981 Canada and the United States agreed to the establishment of the first ad hoc chamber of the ICJ. The Treaty to Submit to Binding Dispute Settlement the Delimitation of the Maritime Boundary in the Gulf of Maine Area8 made it quite clear that the parties to the dispute wanted to control the composition of the chamber. By majority vote the Court acceded to this request. The practice was criticized by dissenting opinions of the Judges Morozov and El-Khani to the Order constituting the Chamber.9 In a declaration appended to that Order Judge Oda critically observed: ‘[I]t should in my view have been made known that the Court, for reasons best known for itself, has approved the composition of the Chamber entirely in accordance with the latest wishes of the parties as ascertained pursuant to Article 26, paragraph 2, of the Statute and Article 17, paragraph 2, of the Rules of the Court.’10 Despite the changes of its Rules in 1972 and 1978 and despite the fact that several cases11 have been decided by ad hoc chambers of the ICJ it is still discussed controversially which degree of control the parties to a dispute may exercise over the composition of an ad hoc chamber of the ICJ. This is due to the wording of Article 17, paragraphs 1 to 3, and Article 18 of the ICJ Rules.12 These constitute a  6 See the statement of the then President of the ICJ E. Jiminez de Arechaga, The Amendments to the Rules of Procedure of the International Court of Justice, 67 AJIL 1–22 (1973).  7 ICJ ‘Rules of Court’ (10 May 1972) reprinted in 11 ILM 903 (1972).  8 Reprinted in 20 ILM 1373 (1981).  9 Delimitation of the Maritime Boundary in the Gulf of Maine Area (Canada/United States of America), Constitution of Chamber, Order of 20 January 1982, Dissenting Opinion of Judge Mozorov and Judge El-Khani, ICJ Reports 1982, pp. 11–12. 10 Delimitation of the Maritime Boundary in the Gulf of Maine Area (Canada/United States of America), Constitution of Chamber, Order of 20 January 1982, Declaration of Judge Oda, ICJ Reports 1982, p. 10.  11 Six cases have, so far, been decided in ad hoc Chambers: The Gulf of Maine case, the case concerning the Frontier Dispute (Burkina Faso/Republic of Mali), Judgment, ICJ Reports 1986, p. 554; The case concerning Land, Island and Maritime Frontier Dispute (El Salvador/Honduras: Nicaragua Intervening), Judgment, ICJ Reports 1992, p. 351; the case concerning Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy), ICJ Reports 1989, p. 15; the case concerning the Frontier Dispute (Benin/Niger), ICJ Reports 2005, 90 and the case Application for Revision of the Judgment of 11 September 1992 in the case concerning the Land, Island and Maritime Frontier Dispute (El Salvador/ Honduras), ICJ Reports 2003, p. 392. 12 (1) At the request for the formation of a Chamber to deal with a particular case, as provided for in Article 26, paragraph 2, of the Statute may be filed at any time until the closure of the written proceedings. Upon the request made by one party the President shall ascertain whether the other party assents.   

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compromise among those who wanted to accept the parties having a decisive influence on the composition of ad hoc chambers and those who insisted on preserving the dominant influence of the ICJ in this respect. Taken literally these Rules provide that the parties to a conflict both have to agree to the establishment of an ad hoc chamber. If they agree the Court has to accede to their request. The parties of the dispute also have to agree to the number of judges who shall form a chamber. These two provisions make it very clear that the establishment of an ad hoc chamber serves the interest of the parties rather the one of the Court in dealing more efficiently with its caseload. However, the members of the ad hoc chamber are elected by the Court;13 the President is only obliged ‘to ascertain their views [of the parties] regarding the composition of the chamber’.14 Legally their views do not bind the Court when electing the members of a chamber. In fact, the rules provide that the parties to a conflict control the first two stages of establishing an ad hoc chamber whereas the last stage is ultimately under the control of the Court. Nevertheless, E. Jiménez de Aréchaga stated that ‘[F]rom a practical point of view, it is difficult to conceive that in normal circumstances those members who have been suggested by the parties would not be elected.’15 This is certainly a correct statement; however it is doubtful whether parties to a dispute would consider the good will expressed therein to be sufficient. Formally, the judges of the ICJ when selecting the members of an ad hoc chamber have to have regard to Article 26, paragraph 1, of the ICJ Statute (special knowledge or experience shall be taken into consideration). However, Article 9 of the ICJ

(2) When the parties have agreed, the President shall ascertain their views regarding the composition of the Chamber, and shall report to the Court accordingly. He shall also take such steps as may be necessary to give effect to the provisions of Article 31, paragraph 4, of the Statute. (3) When the Court has determined, with the approval of the parties, the number of its Members who are to constitute the Chamber, it shall proceed to their election, in accordance with the provisions of Article 18, paragraph 1, of these Rules. The same procedure shall be followed as regards the filing of any vacancy that may occur on the Chamber. See S. Rosenne, The Law and Practice of the International Court, 1920–1996, 3rd. ed., 1997, p. 1121. 13 See Article 18, paragraph 1 of the Rules of the ICJ; on the question who is entitled to participate in the vote see P. Palchetti, Article 26 in: The Statute of the International Court of Justice: A Commentary, (A. Zimmermann, C. Tomuschat, K. Oellers-Frahm, eds, 2006) at para. 12. 14 Article 17, paragraph 2, of the Rules of the Court. 15 Jiminez de Arechaga (note 6), at 3; see also S.M. Schwebel, Ad Hoc Chambers of the International Court of Justice, 81 AJIL 831–854 (1987); M. Lachs, Some Comments on Ad Hoc Chambers of the International Court of Justice, Humanité et droit international: mélanges Rene-Jean Dupuy, 1991, 203–210; E. Valencia-Ospina, The Use of Chambers of the International Court of Justice, in: V. Lowe, M. Fitzmaurice (eds), Fifty Years of the International Court of Justice: Essays in Honor of Sir Robert Jennings, 1996, 503–527.



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Statute requiring to ensure the representation of the principal legal systems of the world does not apply. It is important to note that the parties have a further option to influence the composition of an ad hoc chamber. The rules concerning ad hoc judges (Article 31 of the ICJ Statute) applies to ad hoc chambers. Parties have the right to appoint ad hoc judges where there is no judge of their nationality on the Court. In the Gulf of Maine case, for example, Judge Ruda was elected to the Chamber, but was under Article 31, paragraph 4, ICJ Statute requested to give up his place for a judge chosen by the government of Canada.16 Finally, it should be mentioned that once elected as a member to an ad hoc chamber a judge continues to sit in all phases of the case before the chamber even if his/her term of office has expired.17 III. Arbitration, in particular under Annex VII of the UN Convention on the Law of the Sea The starting point for dealing with arbitration, or more generally with the settlement of disputes under the UN Convention on the Law of the Sea, is Article 287 of the UN Convention on the Law of the Sea (Convention) which provides that States may choose between the Tribunal, the ICJ and Arbitration as means for the settlement of disputes. In this context it should be remembered that according to Article 286 of the Convention, any dispute concerning the interpretation or application of the Convention shall, where no settlement has been reached by recourse to section 1, be submitted at the request of any party to the dispute to the court or tribunal having jurisdiction under section 2 of Annex VI of the Convention. Hence, the first step is to establish whether the parties have chosen the same means. If not, arbitration is the fall back position. The procedure for establishing an arbitral tribunal is set out in Articles 1 and 3 of Annex VII of the Convention. What is important in this context is that there is a strong connection between arbitration and ITLOS, or—to put it differently—it is not always clear at the beginning whether a case will be decided by an arbitral tribunal established under Annex VII of the Convention or ITLOS. The party instituting proceedings must submit a written notification accompanied by a statement of the claim and the ground on which it is based and appoints the first arbitrator (Article 3 lit.b Annex VII). The Respondent has to appoint the second arbitrator within 30 days; otherwise the appointment will take place through the President of ITLOS or any other person agreed upon by the parties. The parties have 60 days to appoint the remaining three arbitrators if they cannot agree the appointment will take place upon the initiative of one 16 See R. Mackenzie (note 5) at para. 15. 17 Article 17, paragraph 4, ICJ Rules.

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party by the President of ITLOS. The President may only choose from a list of arbitrators and he/she has 30 days to take a decision. The parties have no such limitation.18 However, the President’s practice in the last two cases where he had to appoint arbitrators showed some flexibility on his part—certainly with the consent of the parties. What does that mean in practice? If the State instituting the arbitral proceedings appoints a member from the ITLOS the parties may still agree to bring the case to the Tribunal—this is what happed in the Bangladesh/Myanmar case—or to an ad hoc chamber. If the responding party appoints somebody from outside, this option is still open but rather unlikely but there would be still the option of establishing an ad hoc chamber of the Tribunal. The President of the Tribunal may, at the end tilt this establishment into the direction of an ad hoc chamber (Pacific Swordfish case)19 or may not succeed to do so as was the case in the dispute Bangladesh v. India where the chairman of the arbitral tribunal is from ITLOS as well as one further arbitrator. The situation is even more pronounced in the legal dispute concerning the ‘Marine Protected Area’ related to the Chagos Archipelago (Mauritius v. United Kingdom) where three of the five members of the arbitral tribunal are from the Tribunal as arbitrators and, nevertheless, this arbitral tribunal remains independent from ITLOS. At the end it all depends upon the consent of the parties concerned. Let me now turn to the procedural particularities namely replacement of arbitrators, challenging of arbitrators, the possibility of preliminary objections, the possibility of provisional measures, intervention and confidentiality of the hearings and of the written pleadings. I will use the Optional Rules for Arbitrating Disputes between Two States (Optional Rules)20 of the Permanent Court of Arbitration (PCA) rather than considering the Rules of Procedure of each single arbitral tribunal. The need to replace an arbitrator may be due to death, retirement or successful challenge. There is also the possibility that an arbitrator may be de facto incapable to perform his or her functions. In all these situations the Optional Rules provide that such arbitrator will be replaced in the same way as he or she was chosen.21 Articles 9 to 12 of the Optional Rules deal with the challenge of arbitrators. This procedure is reflected in some but not all rules of procedure of the arbitral tribunals under the auspices of the PCA. For example, it was missing from

18 It is to be noted that in the case Mauritius v. United Kingdom the arbitrators chosen by the parties as well as those chosen by the President of ITLOS were from the list of arbitrators. 19 Conservation and Sustainable Exploitation of Swordfish Stocks in the South-Eastern Pacific Ocean (Chile/European Community), Order, ITLOS Case No 7 (20 December 2000). 20 Permanent Court of Arbitration, Optional Rules for Arbitrating Disputes between Two States (20 October 1992) at . 21 Article 13 of the Optional Rules of Procedure of the PCA.



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the draft rules of procedure of the dispute concerning the ‘Marine Protected Area’ Related to the Chagos Archipelago (Mauritius v. United Kingdom). Nevertheless, a challenge procedure was initiated and, on the basis of an agreement among the parties, the four remaining judges heard and decided on the challenge.22 According to the rules on the challenge procedure as provided for in the Optional Rules a potential arbitrator is under an obligation to disclose to those who approach him/her in connection with his/her possible appointment any circumstances likely to give rise to justifiable doubts as to his/her impartiality or independence. The same obligation arises with respect to an appointed arbitrator vis-à-vis all parties. According to Article 10 of the Optional Rules any arbitrator may be challenged if circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence. No such explicit procedure exists for the ICJ or the ITLOS although Articles 16, paragraph 1, 17, paragraph 2, and Article 24 of the ICJ Statute set out some restrictions for judges so as to ensure their impartiality and independence.23 Two challenge procedures have taken place before the ICJ both, however, were unsuccessful.24 In the legal dispute concerning the ‘Marine Protected Area’ related to the Chagos Archipelago the four remaining members of the Arbitral Tribunal actually invoked these rules of the ICJ Statute and of the ITLOS Statute respectively arguing that arbitral tribunals under Annex VII of the UN Convention on the Law of the Sea were an alternative to the ICJ and the ITLOS and therefore the rules concerning a challenge should be the same for an arbitral tribunal. The Optional Rules provide for the possibility of preliminary objections25 and for interim measures.26 They do not provide for interventions. Hearings are held in camera, unless the parties decided otherwise;27 the award which is final and binding will be made public if the parties so agree.

22 Decision of 30 November 2011 at . 23 See the commentaries of P. Couvreur, Article 16 and Article 17 in: The Statute of the International Court of Justice: A Commentary (A. Zimmermann, C. Tomuschat, K. Oellers-Frahm, eds, 2006). 24 Judge Zafrulla Khan was challenged in the second phase of the South-West Africa case since he was considered an opponent of the South Africa regime. The ICJ, however, did not disqualify him (Order of 18 March 1965, ICJ Reports 1965, pp. 3–4). He later withdrew from the case upon recommendation of the President of the ICJ. Judge Elaraby was challenged in the proceedings concerning the Advisory Opinion on the Legal Consequences of the Wall in the Occupied Palestinian Territory. However, in its Order of 30 January 2004 the ICJ decided that the conditions set out in Article 17, paragraph 2, of the Statute were not met (ICJ Reports 2004, p. 3). 25 Article 20. 26 Article 26. 27 Article 25 (4).

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In general one may argue that arbitral tribunals have their focus on the settlement of a concrete legal dispute whereas their contribution to the development due to the varying composition of the tribunals and to the limited publicity is somewhat reduced. IV. Ad hoc Chambers under the Statute and the Rules of ITLOS According to Article 15, paragraph 2, of its Statute ITLOS is empowered to form an ad hoc chamber for dealing with ‘a particular dispute’ submitted to it, if the parties so request. This rule of the Statute is supplemented by Articles 30 and 31 of the ITLOS Rules.28 They deal with the time-limit in which an ad hoc chamber is to be established after a request has been filed and its composition. The only ad hoc chamber formed by the Tribunal so far was in the Pacific Swordfish case between Chile and the European Community. No judgment was delivered. Since the parties agreed to settle the case amongst themselves the Chamber decided to remove the case from the list of cases.29 Article 30 of the ITLOS Rules corresponds to Article 17 of the Rules of the ICJ, with modifications in relation to the time-limit within which a request for the formation of an ad hoc chamber is required to be made, the manner of determining the members who are to constitute the chamber and the quorum required for meetings of the chamber. The Statute empowers the Tribunal to form an ad hoc chamber whenever the parties so request.30 Article 30, paragraph 1, of the ITLOS Rules prescribes a timelimit within which a request for the formation of a special chamber ought to be made. It provides that such a request has to be made within two months from

28 Article 30 (1) A request for the formation of a special chamber to deal with a particular dispute, as provided for in article 15, paragraph 2, of the Statute, shall be made within two months from the date of the institution of proceedings. Upon receipt of a request made by one party, the President of the Tribunal shall ascertain whether the other party assents. (2) When the parties have agreed, the President of the Tribunal shall ascertain their views regarding the composition of the chamber and shall report to the Tribunal accordingly. (3) The Tribunal shall determine, with the approval of the parties, the Members who are to constitute the chamber. The same procedure shall be followed in filling any vacancy. The Tribunal shall also determine the quorum for meetings of the chamber. (4) Members of a chamber formed under this article who have been replaced, in accordance with article 5 of the Statute, following the expiration of their terms of office, shall continue to sit in all phases of the case, whatever the stage it has then reached. 29 Order of 16 December 2009. 30 See Article 15, paragraph 2.



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the date of the institution of proceedings,31 in order to enable the Tribunal to deal with a case as quickly as possible. Upon receipt of such a request, the President is required to ascertain whether the other party assents. Further steps may follow only if the other party assents to the formation of an ad hoc chamber. No specific time-limit is fixed for the other party to convey its assent, although it is presumed that this will be done at the earliest possible time and, in any event, before the Tribunal fixes time-limits for the completion of further steps in the proceedings. When the parties have agreed to the formation of an ad hoc chamber, Article 15, paragraph 2, of the ITLOS Statute requires the Tribunal to determine the composition of such a chamber with the approval of the parties. Article 30, paragraph 2, of the ITLOS Rules imposes a duty on the President to ascertain first the views of the parties regarding the composition of the chamber and then to report to the Tribunal accordingly. Under article 30, paragraph 3, of the ITLOS Rules the Tribunal determines, with the approval of the parties, the Members of the Tribunal who are to constitute the chamber. Whereas article 30, paragraph 2, of the ITLOS Rules refers to the ascertainment of the views of the parties regarding ‘the composition of the chamber’ in general, paragraph 3 refers to the determination, with the approval of the parties, of ‘the Members who are to constitute the chamber’. This wording makes it quite clear that the Tribunal may only select those persons as members of an ad hoc chamber agreed upon by the parties. The word ‘determine’ used in paragraph 2 of Article 30 ITLOS Rules, however, formally preserves the powers of the Tribunal to constitute the chamber. First and foremost the system of ad hoc chambers is designed to enable the parties to choose, from among judges of the Tribunal, those whom they want to sit in their case.32 De facto the members of the Tribunal constitute a list of persons from which the parties may choose those to decide their case. Accordingly, one may appropriately speak of a system of arbitration within the Tribunal. However, the parties are not restricted to choose from the judges of ITLOS. As indicated by Article 17, paragraph 4, of the ITLOS Statute the rules for ad hoc judges apply in respect of ad hoc chambers,33 albeit with some modification. If an ad hoc chamber does not have a member of the nationality of one of the parties that party may choose a person not being a member of the full Tribunal. This is even the case if the full Tribunal (as distinct from the ad hoc chamber) has on the bench a member of the nationality of that party. These judges not selected from

31 On institution of proceedings, see Article 24 of the ITLOS Statute and Article 107 of the ITLOS Rules. 32 See also Article 26, paragraph 2, of the Statute of the ICJ, read in conjunction with Article 17, paragraph 2, of the Rules of the ICJ. 33 Different P. Chandrasekhara Rao, ITLOS: The First Six Years, 6 MaxPlanckUNYB, 183– 288 (2002), at pp. 193–194.

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among the members of the Tribunal are referred to as judges ad hoc. In a dispute among two parties two judges may be ad hoc judges. Therefore, a five member ad hoc chamber under article 15, paragraph 2, ITLOS Statute may be constituted of three members of the Tribunal and two members from outside. The possibility to select an ad hoc judge was made use of in the case of the one ad hoc chamber established by ITLOS. Since the European Community had chosen a judge of the Tribunal who was of the nationality of a member State of that international organization to participate as a member of the ad hoc Chamber, Chile chose a judge ad hoc to participate as a member of the Chamber.34 Once an ad hoc chamber is established its composition is independent from the one of the full Tribunal. According to Article 30, paragraph 4, of the ITLOS Rules, members of the Tribunal whose term of office expires and who are also a member of an ad hoc chamber continue to sit in the chamber in all phases of the case ‘whatever the stage it has then reached.’ Therefore they are in the same position as if they were members of an arbitral tribunal. The composition of ad hoc chambers deviates from one of the structural principles on which the ITLOS Statute is based upon. It requires that the Tribunal as a whole represents the principal legal systems of the world and that the equitable geographical distribution is assured.35 A similar requirement is provided for in the selection of the members of the Seabed Disputes Chamber.36 While there is no equivalent requirement in relation to the composition of an ad hoc chamber or the chamber on summary procedure, the Tribunal adheres to the principle underlying such requirement as far as possible. Even the ad hoc chamber dealing with the Swordfish case reflected—to a certain extent—the principle of equal geographical distribution being composed by two members from Latin America, and one from Western Europe, Eastern Europe and Asia each. However, this composition was neither required under the Statute or the Rules of ITLOS nor does this composition constitute a precedent on which one may rely on in the future. It is not even to be excluded and may reflect the wishes of the parties to a conflict that in future the members of an ad hoc chamber all come from the same geographical region. This is to be considered an additional advantage of an ad hoc chamber vis-à-vis ITLOS as a whole. Since the approval of the parties is crucial in respect of all aspects of the composition of an ad hoc chamber it is a matter of consequence that vacancies that may occur in an ad hoc chamber may be filled only with the approval of the parties. The same system applies to arbitral tribunals except in the case arbitrators 34 See Conservation and Sustainable Exploitation of Swordfish Stocks (Chile/European Community), Order of 20 December 2000, ITLOS Reports 2000, p. 148. See also article 22, paragraph 3, of the Rules. 35 See Article 2, paragraph 2, of the Statute. 36 See Article 35, paragraph 2, of the Statute.



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have been appointed by the President of ITLOS as has been indicated above. This means the parties have more influence on the composition of ad hoc chambers then they have on arbitral tribunals under Annex VII. But it may be more difficult for them to agree on the composition of the ad hoc chamber in the first place. Also the Tribunal is empowered to determine the quorum for meetings of an ad hoc chamber only with the approval of the parties to the formation of such a chamber.37 According to Article 31 of the Rules the President of ITLOS or, if he is not a member of the ad hoc chamber, the Vice-President will be presiding over the ad hoc chamber. If neither of them is member of the ad hoc chamber the chamber will elect a president. The president has the same functions as far as the dealing with the case is concerned as the President of ITLOS. The jurisdiction of the chambers provided for in Article 15 of the Statute is consensual.38 States may also confer jurisdiction on the Tribunal, including ad hoc chambers, through international agreements. Such a provision conferring jurisdiction on the Tribunal could also be included in bilateral agreements. This may add another element of flexibility to the settlement of disputes through ad hoc chambers. Finally, parties may even propose particular modifications or additions to the Rules which an ad hoc chamber may apply.39 Judgments rendered by ad hoc chambers are considered judgments of the Tribunal and are not subject to review by the full Tribunal. It is a matter of speculation whether arbitral awards are considered to have the same standing as judgments of institutionalized courts. At least as far as the delimitation of maritime spaces are concerned arbitral awards have contributed to the shaping of the respective jurisprudence. By virtue of Article 19 of the ITLOS Statute, the expenses of the Tribunal are borne by the States Parties and by the International Seabed Authority on such terms and in such a manner as shall be decided at meetings of the States Parties. Article 19 further provides that when an entity other than a State Party or the International Seabed Authority is a party to a case submitted to it, the Tribunal shall fix the amount which that party is to contribute towards the expenses of the Tribunal. The Tribunal is engaged in the task of evolving general criteria which could help in fixing the amount payable by an entity other than a State Party towards the expenses of the Tribunal when a case to which it is a party is submitted to the Tribunal.

37 See Article 30, paragraph 3, of the Rules. 38 Article 15, paragraph 4, of the Statute. 39 See Article 48 of the ITLOS Rules; in the Conservation and Sustainable Exploitation of Swordfish Stocks (Chile/European Community), Order of 20 December 2000, ITLOS Reports 2000, p. 148, the Tribunal made modifications to its Rules as proposed by the parties.

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V. Conclusions In its recent resolution on ocean affairs the UN General Assembly has encouraged States to make use of ad hoc chambers of the International Tribunal for the Law of the Sea and of the International Court of Justice. The consideration of the General Assembly was to highlight this flexible mechanism for the settlement of international disputes. An ad hoc chamber under Article 15, paragraph 2, of the ITLOS Statute should be of particular interest to parties who are considering arbitration. As in arbitration, in respect of an ad hoc chamber the parties are given substantial freedom to choose the judges of the Tribunal who are to sit in such a chamber. If the establishment of an ad hoc chamber is agreed upon in an international agreement the parties have the possibility to tailor the jurisdiction of that chamber to their needs. In the ad hoc chamber system, the parties can enjoy all the benefits of ordinary arbitration, without having to bear the expenses of the chamber. There is also the added advantage that a judgment given by an ad hoc chamber, like the one given by any other special chamber, is considered to have been rendered by the full Tribunal.

ARBITRATION UNDER THE LAW OF THE SEA CONVENTION J. Ashley Roach1

I. Introduction This paper summarizes the provisions of the Law of the Sea Convention on compulsory dispute settlement with binding results by the two means of arbitration, how States have responded to the options for dispute settlement in favor of arbitration, and the cases that have been submitted by States to arbitration under Annex VII of the Convention as of March 2012.2 Of the 162 States Parties to the Law of the Sea (LOS) Convention, only nine have specifically chosen arbitration under article 287(1), while 36 have chosen one or both of the other procedures.3 On the other hand, 117 Parties have not made a declaration under article 287 and therefore have effectively chosen arbitration under the default provisions of article 287(3). Nevertheless, as is evident

1 Captain, JAGC, USN (ret.), Office of the Legal Adviser, U.S. State Department (ret.). The views expressed herein are those of the author and do not represent the views of any department or agency of the U.S. Government. The author wishes to thank Barbara Kwiatkowska and Dr. Robert W. Smith for the information they provided on the Southern Bluefin Tuna and Bangladesh v. India arbitrations, respectively. 2 This paper will not summarize the other dispute settlement provisions of the LOS Convention, or their precursors, i.e., the International Court of Justice (ICJ) and the International Tribunal for the Law of the Sea (ITLOS), as they are available elsewhere. See, e.g., Klein, Dispute Settlement in the UN Convention on the Law of the Sea (Cambridge 2005). The negotiating history of Part XV and Annexes V–VIII is set out in Rosenne and Sohn (eds.), V United Nations Convention on the Law of the Sea: A Commentary (Dordrecht: Martinus Nijhoff 1989). The official records of the Third Conference are available at http://untreaty.un.org/cod/diplomaticconferences/lawofthesea-1982/lawofthesea-1982.html. 3 See the table at http://www.un.org/Depts/los/settlement_of_disputes/choice_procedure .htm. The choice of procedure does not affect the jurisdiction of the Seabed Disputes Chamber of ITLOS, established by Annex VI, article 14 and section 4. John Norton Moore (ed.) International Arbitration, pp. 135–146 ©2013 Koninklijke Brill NV, The Netherlands. ISBN 978-90-04-24622-5

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from Table 1, 22 Parties have chosen arbitration in specific cases, none of which had previously chosen arbitration pursuant to article 287(1). The United States has indicated that on accession to the 1982 Law of the Sea Convention it will exercise its option under article 287(1) to settle disputes regarding the interpretation or application of the Convention with binding results by means of arbitration or special arbitration.4 The U.S. Commentary to the LOS Convention, accompanying the Secretary of State’s submittal of the Convention to the President in 1994 summarized the rules concerning the arbitration procedures in Annexes VII and VIII, as follows: Arbitration under Annex VII Annex VII sets forth detailed rules concerning the procedure governing arbitration under this Annex: • The list of potential arbitrators is maintained by the Secretary‑General of the United Nations; each Party may nominate up to four arbitrators to appear on the list. • An arbitral panel generally consists of five members. Each party to the dispute appoints one member; the other three members are appointed by agreement between the parties. Annex VII provides a mechanism for appointments, should the parties be unable to agree on members; in general, the President of the International Tribunal for the Law of the Sea makes the necessary appointments. • The arbitral tribunal determines its own procedure. • Decisions of the tribunal are to be by majority vote. • Arbitral awards are final and without appeal (unless otherwise agreed) and are to be complied with by the parties to the dispute. Special Arbitration under Annex VIII Annex VIII contains somewhat different rules concerning the procedure governing arbitration of disputes concerning the interpretation or application of articles of the Convention relating to (1) fisheries; (2) protection and preservation of the marine environment; (3) marine scientific research; and (4) navigation, including pollution from vessels and by dumping: • States Parties may nominate two experts in each of these fields, whose names shall appear on lists of experts to be established and maintained. • A special arbitral panel generally consists of five members, preferably appointed from the relevant list. Each party to the dispute appoints two members; the other member is appointed by agreement between the parties. Annex VIII provides a mechanism for appointments, should the parties be unable to agree on a fifth member; in general, the Secretary General of the United Nations is to make the necessary appointments. • The provisions for arbitration under Annex VII shall otherwise apply. • In addition, the parties to a dispute may agree to request the special arbitral tribunal to carry out an inquiry and establish the facts giving rise to the dispute and, if the parties further agree, to formulate recommendations which shall constitute a basis for review by the parties.5

4 Resolution of advice and consent, Senate Executive Report 110-9, at 19 (2007), available at http://www.virginia.edu/colp/pdf/UNCLOS-Sen-Exec-Rpt-110-9.pdf. 5 Senate Treaty Document 103–39, at 87–88 (1994), available through link at http://www .foreign.senate.gov/treaties/details/103-39. See also Permanent Court of Arbitration,



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II. Arbitrations Under Annex VII Eleven arbitrations been instituted pursuant to Annex VII. No special arbitrations have been instituted pursuant to Annex VIII. Awards have been issued in three of the cases. In another case the tribunal found that it lacked jurisdiction. Four other cases were submitted to ITLOS shortly after arbitration proceedings were instituted. One case was terminated as a result of proceedings in another forum. Two cases are pending. In all but the first, second and most recent cases the Permanent Court of Arbitration in The Hague acted as the Registrar. See Table 1. Table 1 Annex VII Arbitration Cases 8 Parties

Date

St. Vincent & the Filed Dec. 22, 1997 Grenadines v. Agreement Feb. 20, 19986 Guinea (M/V Saiga) Australia & New Filed July 15, 1999 Zealand v. Japan Decision Aug. 7, 20008 (Southern Bluefin Tuna Case)

Arbitral Decision Other Disposition

Lacks jurisdiction

Submitted to ITLOS by agreement7

“Ad hoc Arbitration Under Annex VII of the United Nations Convention on the Law of the Sea,” available at http://www.pca-cpa.org/showpage.asp?pag_id=1288. 6 St. Vincent and the Grenadines v. Guinea (M/V Saiga No. 2), ITLOS Case No. 2, Order of Provisional Measures, paras. 12–14, March 11, 1998, available at http://www.itlos.org/ fileadmin/itlos/documents/cases/case_no_2/provisional_measures/order_110398_eng .pdf, 37 ILM 360 (1997), and Judgment on the Merits, July 1, 1999, 39 ILM 1323 (1999), available at http://www.itlos.org/fileadmin/itlos/documents/cases/case_no_2/merits/ Judgment.01.07.99.E.pdf. The judgment is reviewed in Oxman and Bantz, International Decisions, 24 Am. J. Int’l L. 140–150 (2000). Neither judgment identifies which Register was involved in the arbitration. 7 See Declaration of Judge Treves, para. 7, infra n. 29. 8 Southern Bluefin Tuna Case (Australia and New Zealand v. Japan), 39 ILM 1359 (2000), XXVIII RIAA 1–57 (2006), available at http://untreaty.un.org/cod/riaa/cases/vol_XXIII/ 1-57.pdf. The arbitration docket with links is available at http://icsid.worldbank.org/ ICSID/FrontServlet?requestType=CasesRH&actionVal=OpenPage&PageType=Announ cementsFrame&FromPage=NewsReleases&pageName=Archive_%20Announcement7. These cases have generated considerable scholarly examination. See, e.g., Kwiatkowska, International Decisions, 95 Am. J. Int’l L. 162–171 (2001); id., The Australia and New Zealand v. Japan Southern Bluefin Tuna ( Jurisdiction and Admissibility) Award of the First LOSC Annex VII Arbitral Tribunal, 16 IJMCL 239–294 (2001), as revised and updated June 15, 2006, available at http://www.uu.nl/faculty/leg/NL/organisatie/departementen/departementrechtsgeleerdheid/organisatie/onderdelen/NetherlandsInstitutefortheLawoftheSea/publications/onlinepapers/Documents/BLUEFIN140606.pdf. The arbitral decision was severely criticized in Boyle, The Southern Bluefin Tuna Arbitration, 50 ICLQ 447–452 (2001). The arbitral decision on jurisdiction and earlier ITLOS decision on provisional measures are examined in Bialek, Australia and New Zealand v. Japan: Southern Bluefin Tuna Case, 1 Melbourne Journal Int’l L. 8 (2000), available at http://www.austlii.edu .au/au/journals/MelbJIL/2000/8.html; and Romano, The Southern Bluefin Tuna Dispute:

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Table 1 (cont.) Parties Chile v. European Commission (Conservation and Sustainable Exploitation of Swordfish Stocks) Guyana v. Suriname

Date Instituted summer 2000 after EC filed WTO case9

Filed Feb. 24, 2004 Decision Sept. 17, 200711 Barbados v. Trinidad Filed Feb. 16, 2004 and Tobago Decision April 11, 200612 Malaysia v. Singapore Filed July 4, 2003 (Land Reclamation) Decision Sept. 1, 200513

  9

10 11

12

13

Arbitral Decision Other Disposition Submitted to ITLOS Chamber December 2000 by agreement10 Award Award Award on Agreed Terms

Hints of a World to Come . . . Like It or Not, 32 ODIL 313–348 (2001), available at http:// class.lls.edu/spring2007/intlenviron-romano/documents/SouthernBluefinTuna.pdf. The ITLOS proceedings on provisional measures, Cases No. 3 & 4, are available at http:// www.itlos.org/index.php?id=62. The ITLOS decision was examined in Marr, The Southern Bluefin Tuna Cases: The Precautionary Approach and Conservation and Management of Fish Resources, II EJIL 815–831 (2000), available at http://ejil.oxfordjournals.org/ content/11/4/815.full.pdf. Stoll and Vöneky, The Swordfish Case: Law of the Sea vs. Trade, 62 Heidelberg J. Int’l L. 22 (Max-Planck-Institut für ausländisches öffentliches Recht und Völkerrecht 2002), available at http://www.zaoerv.de/62_2002/62_2002_1_a_21_36.pdf and http://www.hjil .de/62_2002/62_2002_1_a_21_36.pdf. See Declaration of Judge Treves, para. 8, infra n. 29. The orders of ITLOS in this case are available at http://www.itlos.org/index.php?id=99. Guyana v. Suriname, 46 ILM 166 (2008); Report 3–10, V International Maritime Boundaries 3601 (Leiden: Martinus Nijhoff 2005); Report 3–10 (Add. 1), VI id. 4236– 4247 (2011). The docket with links is available at http://www.pca-cpa.org/showpage. asp?pag_id=1147. This award was reviewed in Fietta, International Decisions, 102 Am. J. Int’l L. 119–128 (2008). Barbados v. Trinidad and Tobago, 45 ILM 800 (2006), XXVII RIAA 147–251 (2008), available at http://untreaty.un.org/cod/riaa/cases/vol_XXVII/147–251.pdf; Report 2–26, V International Maritime Boundaries 3577; Report 2–26 (Add. 1), VI id. 4187–4200. The docket with links is available at http://www.pca-cpa.org/showpage.asp?pag_id=1152. The award was reviewed in Oxman, The Barbados/Trinidad & Tobago Arbitration: The Law of Maritime Delimitation: Back to the Future, available at http://www.law.miami. edu/facadmin/pdf/oxman-barbados-trinidad-arbitration.pdf; and Kwiatkowska, International Decisions, 101 Am. J. Int’l L. 149–157 (2007). Land Reclamation Case (Malaysia v. Singapore), XXVII RIAA 133–145 (2008), available at http://untreaty.un.org/cod/riaa/cases/vol_XXVII/133–145.pdf. The docket with links is available at http://www.pca-cpa.org/showpage.asp?pag_id=1154. Documents in the ITLOS provisional measures case no. 12 are available at http://www.itlos.org/index .php?id=104. Both phases are reviewed in Koh and Lin, The Land Reclamation Case:



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Table 1 (cont.) Parties Ireland v. UK (MOX Plant Case) Bangladesh v. India Bangladesh v. Myanmar (Burma)

14

15 16

17

Date Filed Nov. 2001 Decision June 6, 200814 Filed Oct. 8, 200915 Filed Oct. 8, 2009 ITLOS decision March 14, 201216

Arbitral Decision Other Disposition Terminated by Tribunal order Submitted to ITLOS by special agreement17

Thoughts and Reflections, 10 Singapore Y.B. Int’l L. 1–7 (2006), available at http://law .nus.edu.sg/sybil/downloads/articles/SYBIL-2006/SYBIL-2006-1.pdf. Ireland v. United Kingdom (MOX Plant Case) PCA docket with links is available at http://www.pca-cpa.org/showpage.asp?pag_id=1148. The ITLOS proceedings on request for preliminary measures, Case No. 10, are available through links at http://www.itlos. org/index.php?id=102; the decision also appears at 41 ILM 405 (2002), and was reviewed by Forster, The Mox Plant Case—Provisional Measures in the International Tribunal for the Law of the Sea, 16 Leiden J. Int’l L. 611–619 (2003). The 2003 final OSPAR arbitral award appears at 42 ILM 1118 (2003) and XXIII RIAA 59–151 (2006), available at http:// untreaty.un.org/cod/riaa/cases/vol_XXIII/59-151.pdf. See also Churchill and Scott, The MOX Plant Litigation: The First Half Life, 53 ICLQ 643–676 (2004) and Volbeda, The MOX Plant Case: The Question of “Supplemental Jurisdiction” in International Environmental Claims Under UNCLOS, 42 Texas Int’l L.J. 211 (2006), available at http://www .tilj.org/docs/J42-211_Volbeda.pdf. Commission of the European Communities v. Ireland, Case C-459/03, European Court of Justice (Grand Chamber) (May 30, 2006), OECJ C 7/24 (2004), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELE X:62003CJ0459:EN:HTML, was reviewed in Gao, Comments on Commission of the European Communities v. Ireland, 7 Chinese J. Int’l L. 417–427 (2008), available at http:// chinesejil.oxfordjournals.org/content/7/2/417.full.pdf+html. The Bangladesh v. India docket is available at http://www.pca-cpa.org/showpage .asp?pag_id=1376. The case was pending as of April 4, 2012. Bangladesh v. Myanmar (Burma) arbitration documents are available at http://www .itlos.org/fileadmin/itlos/documents/cases/case_no_16/Notification_Bangladesh_ 14.12.09.pdf. Initiation of the two arbitrations by Bangladesh was reviewed in two articles in the ITSSD Journal on the Law of the Sea Convention, Oct. 9, 2009, available at http://itssdjournalunclos-lost.blogspot.com/2009/10/bangladesh-invokes-unclosdispute.html. Documents in this ITLOS Case No. 16 are available through links at http:// www.itlos.org/index.php?id=108. See Declaration of Judge Treves, para. 11, infra n. 29.

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Table 1 (cont.) Parties

Date

Mauritius v. UK Filed Dec, 20, 201018 (Chagos Archipelago) Panama v. GuineaFiled June 3, 201119 Bissau (Virginia G case)

Arbitral Decision Other Disposition

Submitted to ITLOS by special agreement20

III. Arbitrators The list of Annex VII arbitrators nominated by States Parties is maintained by the UN Secretary-General pursuant to article 2(1).21 There are four lists of arbitrators nominated by States Parties pursuant to article 2 of Annex VIII; the lists are drawn up and maintained as follows: • In the field of fisheries by the Food and Agricultural Organization;22 • In the field of protection and preservation of the marine environment by the UN Environment Program;23 • In the field of marine scientific research by the Intergovernmental Oceanographic Commission of UNESCO;24 and

18 The Mauritius v. United Kingdom docket with links is available at http://www.pca-cpa. org/showpage.asp?pag_id=1429. Institution of the case was reviewed in Prows, Mauritius Brings UNCLOS Arbitration Against The United Kingdom Over The Chagos Archipelago, 15 ASIL Insights, issue 8 (April 5, 2011), available at http://www.asil.org/pdfs/ insights/insight110405.pdf. The Reasoned Decision on Challenge to Justice Greenwood is available at http://www.pca-cpa.org/upload/files/Reasoned%20Decision%20on%20 Challenge.PDF. 19 Panama v. Guinea Bissau (MT Virginia G) arbitration documents are available at http:// www.itlos.org/fileadmin/itlos/documents/cases/case_no.19/Notification_submitted_ by_Panama.pdf. Other documents in this ITLOS Case No. 19 are available at http:// www.itlos.org/index.php?id=171. 20 See Declaration of Judge Treves, para. 9, infra n. 29. 21 See the list of conciliators and arbitrators at http://treaties.un.org/pages/ViewDetailsIII. aspx?&src=UNTSONLINE&mtdsg_no=XXI~6&chapter=21&Temp=mtdsg3&lang=en#Pa rticipants. 22 See http://www.un.org/Depts/los/settlement_of_disputes/expertsunclosVIIIsept2001fao .pdf (list communicated Sept. 27, 2001). 23 See http://www.un.org/Depts/los/settlement_of_disputes/expertsunclosVIIInov2002unep .pdf (list communicated Nov. 8, 2002). 24 See http://www.un.org/Depts/los/settlement_of_disputes/expertsunclosVIIImay2011iocunesco.pdf, http://ioc.unesco.org/oceansciences/unclos/ABE-LOS%20II%20eng/Arbitrage%20Special%20list.doc (as at May 20, 2011), and UN. LOS BULL. No 76 (2012) at 45–50.



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• In the field of navigation, including pollution from vessels and by dumping, the International Maritime Organization.25 It will be noted that only the lists maintained by the IOC and the IMO are relatively current. The lists maintained by the FAO and UNEP appear not to have been updated for a decade, presumptively because Parties have not done so. As summarized above, article 3 of Annex VII provides how the five arbitrators are to be appointed in each case. Articles 3(b) and 3(c) provide that each party is to appoint one person. Article 3(d) provides for the parties to agree on the remaining three persons within a strict timeline. Failing that, article 3(e) provides that the President of the International Tribunal for the Law of the Sea shall appoint them and the President of the panel. Article 3(g) provides that two or more parties with the same interest in a case appoint only one person. Twenty nine persons have been appointed as arbitrator in nine of the cases submitted to Annex VII arbitration. Seven of those persons have been appointed as arbitrator in more than one of the cases (Schwebel—2; Shearer—4; Hossain—2; Lowe—3; Watts—2; Mensah—2; Wolfrum—2). See Table 2. In three of the cases, the parties were able to agree on the three persons not selected by them pursuant to article 3(d) of Annex VII (i.e., Southern Bluefin Tuna, Barbados v. Trinidad and Tobago, and MOX Plant). In four cases the parties were unable to agree on the three persons and the ITLOS President appointed them and the tribunals’ Presidents, pursuant to article 3(e) of Annex VII (i.e., Guyana v. Suriname, Land Reclamation, Bangladesh v. India, and Mauritius v. the United Kingdom). See Table 2. In one case the appointment of an arbitrator was challenged (Justice Greenwood by Mauritius). Two cases were submitted to ITLOS before a full complement of arbitrators could be appointed.26 Table 2 Arbitrators Name Stephen Schwebel

Cases

Position on Panel

Southern Bluefin Tuna President Barbados v. Trinidad and Tobago

President

Regular Employment ICJ President 1997–2000 Former ICJ justice

Appointed by agreement under article 3(d) agreement under article 3(d)

25 See http://www.un.org/Depts/los/settlement_of_disputes/expertsunclosVIIIimo.pdf (as at Oct. 7, 2011). 26 M/V Saiga and Swordfish cases. See Annual Report of ITLOS for 1998, SPLOS/35, March 31, 1999, para. 16, available at http://daccess-dds-ny.un.org/doc/UNDOC/GEN/ N99/091/13/PDF/N9909113.pdf?OpenElement, and Panama’s notification of initiation of arbitration proceeding, June 3, 2011, at 3, para. (c) (appointment of Judge Cot) and 3–4 (proposing submitting the dispute to ITLOS), available at http://www.itlos.org/fileadmin/itlos/documents/cases/case_no.19/Notification_submitted_by_Panama.pdf.

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Table 2 (cont.) Name

Cases

Position on Panel

Florentino Feliciano

Southern Bluefin Tuna Member

Sir Kenneth Keith

Southern Bluefin Tuna Member

Per Tresseit

Southern Bluefin Tuna Member

Chusei Yamada Dolliver Nelson Thomas Franck Hans Smit Ivan Shearer

Southern Bluefin Tuna Member

Kamal Hossain

Appointed by agreement under article 3(d)

Guyana v. Suriname

President

Member Appellate Body WTO Judge NZ Court of Appeal 1996–2003 Judge, Court of Justice of EFTA Professor; ILC Chairman ITLOS Judge

Guyana v. Suriname

Member

Professor

Guyana

Guyana v. Suriname Guyana v. Suriname

Member Member (replacing late Allan Phillip) Member Member President Member

Professor Professor

Suriname ITLOS President

Land reclamation Bangladesh v. India Mauritius v. UK Guyana v. Suriname

Land Reclamation Barbados v. Trinidad and Tobago Vaughan Lowe Barbados v. Trinidad and Tobago Bangladesh v. India Bangladesh v. Myanmar (Burma) Barbados v. Trinidad Francisco and Tobago Orrego Vicuña Sir Arthur Barbados v. Trinidad Watts and Tobago MOX Plant Case

Ian Brownlie

M.C.W. Pinto

Regular Employment

Land Reclamation

Australia and New Zealand pursuant to article 3(g) agreement under article 3(d) Japan ITLOS President

ITLOS President ITLOS President ITLOS President

Member Member

Professor

Member

Professor

Malaysia Trinidad and Tobago Barbados

Member Member

Professor Professor

Bangladesh Bangladesh

Member

Professor

agreement under article 3(d)

Member

Barrister

agreement under article 3(d) UK

Member Ditto (deceased Nov. 16, 2007) President SecretaryGeneral Iranian-US Claims Tribunal

ITLOS President



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Table 2 (cont.) Name

Cases

Position on Panel

Bernard Oxman Land Reclamation Thomas MOX Plant Case Mensah Bangladesh v. India James MOX Plant Case Crawford Yves Fortier MOX Plant Case

Member President

Gerhard Hafner Lord Mustill Rüdiger Wolfrum Pemmaraju Sreenivasa Rao Tullio Treves P. Chandrasekhara Rao Christopher Greenwood Albert Hoffman James Kateka Jean-Pierre Cot

Regular Employment

Appointed by

Member Member

Professor ITLOS Judge 1996–2005 Ditto Barrister

Singapore agreement under article 3(d) ITLOS President Ireland

Member

Barrister

MOX Plant Case

Member

Professor

MOX Plant Case Bangladesh v. India

Replace Watts PC President Professor, ITLOS Judge Member Ditto Member Former member of ILC Member ITLOS Judge Member ITLOS Judge

agreement under article 3(d) agreement under article 3(d) UK ITLOS President

Mauritius v. UK Bangladesh v. India Bangladesh v. India Bangladesh v. Myanmar (Burma)

Mauritius India ITLOS President Burma

Mauritius v. UK

Member

ICJ Judge

UK

Mauritius v. UK Mauritius v. UK Panama v. GuineaBissau

Member Member Member

ITLOS Judge ITLOS President ITLOS Judge ITLOS President ITLOS Judge Panama

IV. Disputes Subject to Compulsory Dispute Resolution with Binding Results In those situations where States Parties which are parties to a dispute concerning the interpretation or application of the LOS Convention have failed to reach a settlement, the dispute may be brought to one of the four fora mentioned in article 287(1), subject to the limitations and optional exceptions set out in articles 297 and 298, respectively, of Section 3 of Part XV. A number of States Parties have exercised their options under article 298(1) as illustrated in Table 3.27

27 See UN, Multilateral Treaties Deposited with the Secretary-General: Status, available at http://treaties.un.org/pages/Participation/Status.aspx (Chapter XXI). Exceptions were taken on consenting to be bound by the Convention except where noted otherwise.

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Table 3 Exercises of Optional Exceptions to Applicability of Section 2 of Part XV Sea Boundary Delimitation; Historic Bays or Titles (article 298(1)(a)) Angola Argentina Australia (2002) Canada Chile China (2006) Equatorial Guinea (2002) France Gabon (2009) Ghana Italy Montenegro Mexico Palau (2006) (delimitation; interpretation of maritime boundaries) Portugal Republic of Korea (2006) Russian Federation Spain (2002) Thailand Trinidad and Tobago (2009) Tunisia Ukraine

USA on accession

Military Activities; Law Enforcement Activities (article 298(1)(b))

UN Security Council seized with the issue (article 298(1)(c))

Argentina

Argentina

Belarus Canada Cape Verde Chile China (2006)

Belarus Canada Chile China (2006)

France

France

Mexico

Portugal Republic of Korea (2006) Russian Federation

Portugal Republic of Korea (2006) Russian Federation

Thailand

Thailand

Tunisia Ukraine (military activities) United Kingdom (2003) Uruguay (law enforcement activities) USA on accession

Tunisia United Kingdom (2003) USA on accession

V. Jurisdiction As noted above four cases were initiated as arbitrations but subsequently transferred to the jurisdiction of the Tribunal.28 In a declaration filed in the Bangladesh/Myanmar case,29 ITLOS Judge Treves lamented the failure of the judgment to express clearly the view of the Tribunal on the basis of its jurisdiction: 28 The M/V Saiga Case, the Swordfish Case, Bangladesh/Myanmar, and the M/V Virginia G. 29 Text is available at http://www.itlos.org/fileadmin/itlos/documents/cases/case_no_16/5C16.decl.Treves.orig.E.pdf.



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in light of the persistent uncertainty of the jurisprudence of the Tribunal when confronted with the question of establishing its jurisdiction in cases in which an agreement of the parties was reached after submission to adjudication had been effected under the compulsory jurisdiction provisions of articles 286 and 287 of the Convention.

After reviewing the procedural aspects of these four cases in moving from arbitration to the Tribunal, Judge Treves observed: These cases also show, however, that after unilateral submission to adjudication, and in light of the fact that there is no way to avoid adjudication, the common will of the parties may intervene in various ways to replace the adjudicating body initially called to exercise jurisdiction with another. The cases examined show that this may be done by agreements to transfer the case from one adjudicating body to another or to cancel the previously commenced proceedings and to institute new proceedings. Interpretation questions may remain open as to whether the agreements concluded for transferring jurisdiction from one adjudicating body to another amount to a new submission by special agreement or to a simple transfer of the case to the other adjudicating body without any change.

While noting that it made no difference in the case before it, Judge Treves noted that “determination of the basis of jurisdiction [may be] relevant for deciding a question submitted to the Tribunal”: the most relevant of which seems to concern the applicability to the dispute of the limitations and exceptions to jurisdiction set out in articles 297 and 298 of the Convention. These limitations and exceptions undoubtedly apply to disputes submitted to adjudication under section 2 of Part XV of the Convention (namely, on the basis of the compulsory jurisdiction of the courts and tribunals mentioned therein) as they are included in section 3, entitled “Limitations and exceptions to applicability of section 2”. They do not, however, apply to cases submitted by the agreement of the parties on the basis of section 1.

Judge Treves concluded his declaration by suggesting that “[t]his difference alone seems to warrant close attention by the Tribunal in future cases.” VI. Conclusions Since the Convention entered into force on November 16, 1994, about 30 contentious cases involving law of the sea issues have been instituted. As noted above, eleven arbitrations have been instituted under Annex VII and none have been instituted under Annex VIII. Almost 20 cases have been instituted before ITLOS since its first case was inscribed in 1997, half of which were prompt release cases for which ITLOS has jurisdiction in the absence of agreement between the parties.30

30 Article 292(1). In addition the Seabed Disputes Chamber has issued an advisory opinion in Case No. 17, and the full tribunal has dealt with three requests for provisional measures (Case Nos. 3 & 4, 10 and 12).

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While during that same period the ICJ has entered on its list of contentious cases five new cases involving law of the sea issues.31 Perhaps maritime boundary cases are those with more common elements than other types of cases capable of being decided by the dispute settlement fora listed in the LOS Convention. With the Bangladesh/Myanmar case, each forum with jurisdiction now has had at least one maritime boundary case. See Table 4. Whether ITLOS will see more maritime boundary cases may well turn on how it dealt with its first such case, given that its costs to the parties are less than arbitration and that it has the ability to hear the cases more quickly than the ICJ. Finally, future parties should pay close attention to Judge Treves’ observations that in moving from arbitration to a court they should be clear in what they write about the applicability to the dispute of the limitations and exceptions to jurisdiction in articles 297 and 298 jurisdiction under section 2 of Part XV as opposed to section 1 where they do not apply. Table 4 Maritime Boundary Cases 1994–2012 Arbitration Guyana v. Suriname (2007) Barbados v. Trinidad and Tobago (2006) Bangladesh v. India (pending)

ITLOS

ICJ

Bangladesh v. Myanmar Black Sea (2009) (2012) Peru v. Chile (pending) Nicaragua v. Colombia (pending) Nicaragua v. Honduras (2007)

31 Territorial and Maritime Dispute between Nicaragua and Honduras in the Caribbean Sea (Nicaragua v. Honduras) (1999); Territorial and Maritime Dispute (Nicaragua v. Colombia) (2001); Maritime Delimitation in the Black Sea (Romania v. Ukraine) (2004); Maritime Dispute (Peru v. Chile) (2007); and Whaling in the Antarctic (Australia v. Japan) (2010), available at http://www.icj-cij.org/docket/index.php?p1=3&p2=2.

Arbitration Innovations in Recent U.S. Investment Treaties Gary H. Sampliner1

Since the promulgation of the Trade Promotion Authority (TPA) legislation in 2002,2 the United States has negotiated a series of Free Trade Agreement (FTA) investment chapters and Bilateral Investment Treaties (BITs) with substantially expanded provisions from prior U.S. investment treaties. Although the post-2002 versions of these BITs and FTA investment chapters, referred to together as International Investment Agreements (IIAs), contain a number of revised or clarified substantive provisions, the bulk of the changes between the newer IIAs and the older BITs in particular relate to the investor-state arbitration provisions of the agreements, building on the precedent of the North American Free Trade Agreement (NAFTA). This article will focus on the investor-state arbitration provisions of the newest generation of U.S. IIAs, describing some of the key differences between the recent and former provisions of the U.S. agreements, as well as some key differences with some of the other approaches we see in other countries’ agreements. The agreements that will be discussed here include FTAs with Singapore, Chile, Morocco, CAFTA-DR, Oman, Peru, Panama, Colombia, and Korea, as well as the 2004 and 2012 Model BITs and the BITs with Uruguay and Rwanda.3

1 Senior Counsel, Office of Assistant General Counsel (International Affairs), U.S. Department of the Treasury and member of the District of Columbia Bar. This article is based on a presentation given at the Twenty-Fourth Sokol Colloquium on Private International Law at the University of Virginia School of Law, on April 5, 2011. The views presented here, based on public information, are presented in the author’s personal capacity and do not necessarily reflect the views of the U.S. government or the Department of the Treasury. 2 Trade Act of 2002, Pub. L. 107–210 (107th Cong., 2d Sess.). 3 The text of all of the concluded agreements can be found at www.ustr.gov/trade-agreements. As of the time this article was submitted, all of these IIAs except the FTA with Panama had entered into force. John Norton Moore (ed.) International Arbitration, pp. 147–164 ©2013 Koninklijke Brill NV, The Netherlands. ISBN 978-90-04-24622-5

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As will be described below, the innovations in the expanded arbitration provisions under recent U.S. IIAs include: – greater clarity in delineating the scope of matters subject to arbitration under our treaties; – forum selection provisions to allow investors to utilize arbitration, national courts or tribunals, and in certain defined cases, both; – greater transparency and public participation in the arbitration process; – greater efficiency in conduct of arbitration; and – a mechanism for review of awards. I. Permitted scope of arbitration The newest generation of IIAs, like previous U.S. BITs, provides for consent to investor-state arbitration to breaches of the agreements’ core substantive provisions, as well as breaches of “investment agreements” and “investment authorizations,” the latter of which are defined terms. Under the early U.S. BITs that were negotiated in the 1980s and early 1990s, investors could submit a claim to investor-state arbitration to resolve any “investment dispute,” which included disputes involving “(a) the interpretation or application of an investment agreement between a Party and a national or company of the other Party, (b) the interpretation or application of an investment authorization granted by [a Party’s] foreign investment authority to such national or company, or (c) an alleged breach of any right conferred or created by [the] Treaty with respect to an investment.”4 The terms “investment agreement” and “investment authorization” were not given any further definition in the treaty text. The early U.S. BITs also contained the so-called “umbrella clause,” which stated that “Each party shall observe any obligation it may have entered into with regard to investment of nationals or companies of the other Party.”5 The umbrella clause, in the form used in these U.S. BITs or in minor variations thereof, has a long history of use in many countries’ BITs, going back to the initial conceptualization

4 See, e.g., U.S.-Panama BIT, Article VII(1). This definition of “investment dispute,” setting forth the scope of claims that could be subject of investor-state arbitration under the BITs, was uniformly followed in all U.S. BITs negotiated prior to 2002, except for the BITs with Egypt and Morocco, which did not include “investment authorizations.” However, as one of the U.S. negotiators of those agreements has noted, because the unqualified term “investment agreements” was considered to be broad enough to encompass authorizations, the deletion of the latter term was thought “to have no practical significance.” Kenneth J. Vandevelde, United States Investment Treaties: Policy and Practice 172–73 (1992). 5 See, e.g., U.S.-Panama BIT, Article II(2).

arbitration innovations in recent u.s. investment treaties 149 of bilateral investment treaties.6 The clause could be read on its face, and in fact has been read by some tribunals, to elevate breaches of contracts between foreign investors and states into breaches of the pertinent treaty.7 In disputes arising under the various BITs’ umbrella clauses decided since 2003, investor-state tribunals have reached divergent conclusions as to the intended scope of the clauses.8 The United States deleted the umbrella clause in its 1994 model BIT and subsequent BITs that were based on this model.9 The 1994 model BIT also provided a definition of “investment agreement,” to mean “a written agreement between the national authorities of a Party and a covered investment or a national or company of the other Party that (1) grants rights with respect to natural resources or other assets controlled by the national authorities and (2) the investment, national or company relies upon in establishing or acquiring a covered investment.” The Administration’s Letters of Submittal to Congress for the BITs based on the 1994 model noted the following in explaining the anticipated practical effect of this new definition: “This definition thus excludes agreements with subnational authorities (including U.S. States) as well as agreements arising from various types of regulatory activities of the national government, including, in the tax area, rulings, closing agreements, and advance pricing agreements.”10 Indeed, the goal of the U.S. approach, which permitted only breaches of investment agreements, authorizations, and treaty breaches to be subject to dispute settlement under the BITs, had always been in part “to prevent foreign investors in the United States from using the investor-to-state arbitration provision to thwart federal business regulation,” as well as “to exclude ordinary commercial disputes, such as an action to recover payment for sale of a good or service.”11

 6 See A.C. Sinclair, “The Origins of the Umbrella Clause in the International Law of Investment Protection,” 20 Arbitration International 411 (2004). Many other countries’ BITs have utilized a clause modeled after Article 25(1) of ICSID Convention, permitting “any legal dispute arising directly out of an investment” to be the subject of a BIT arbitration, which may have a similar effect to the umbrella clause on the breadth of matters that can be brought to investor-state arbitration under BITs. See, e.g., NorwayLithuania BIT, Article 9; Switzerland-Philippines BIT, Article 8.   7 See, e.g., Noble Ventures v. Romania, ICSID Case No. ARB/01/11, para. 53 (Oct. 12, 2005), available at http://ita.uvic.ca/documents/Noble.pdf.  8 See Katia Yannaca-Small, “Interpretation of the Umbrella Clause in Investment Agreements,” OECD Working Papers on International Investment, 2006/03, available at http:// www.oecd-ilibrary.org/finance-and-investment/interpretation-of-the-umbrella-clausein-investment-agreements_415453814578 .  9 These include BITs with Azerbaijan, Bahrain, Bolivia, Croatia, Georgia, Honduras, Jordan, Mozambique, and Trinidad & Tobago. 10 See, e.g., Letter of Submittal for Georgia BIT, available at http://tcc.export.gov/Trade_ Agreements/All_Trade_Agreements/exp_005342.asp.  11 Vandevelde, supra note 4, at 164.

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The definition of “investment agreement” was gradually clarified and narrowed in the post-2002 FTAs in various ways, until the United States arrived at the definition contained in the 2004 model BIT, which has been utilized in U.S. IIAs negotiated since 2004. The U.S.-Singapore FTA, for example, provided a definition of “national authority” for each country, naming which entities could enter into an investment agreement.12 The U.S.-Chile FTA also added a definition of “written agreement,” clarified in later IIAs to exclude instruments that evidence unilateral governmental acts such as grants of regulatory permits, administrative actions, or consent judgments.13 In addition, the U.S.-Chile FTA added the “governing law” provision from ICSID Article 42(1) to apply to breaches of investment agreements and authorizations, which says, among other things, that national law will be applied if specified in the investment agreement or authorization.14 Starting with the CAFTA-DR and Morocco FTAs, the United States also fixed a potential anomaly by adding that the investor has to have relied upon the investment agreement in establishing a covered investment “other than the agreement itself ” (since the agreement itself might qualify as an “investment”).15 12 U.S.-Singapore FTA, n. 15–6. 13 The definition of written agreement used in recent IIAs and the 2004 model BIT says: “’Written agreement’ refers to an agreement in writing, executed by both parties, whether in a single instrument or in multiple instruments, that creates an exchange of rights and obligations, binding on both parties under the law applicable under Article 30[Governing Law] (2). For greater certainty, (a) a unilateral act of an administrative or judicial authority, such as a permit, license, or authorization issued by a Party solely in its regulatory capacity, or a decree, order, or judgment, standing alone; and (b) an administrative or judicial consent decree or order, shall not be considered a written agreement.” 14 The provision supplements the general “Governing Law” provision in Article 30 of the 2004 Model BIT, which provides that claims for a violation of IIA provisions will be governed “in accordance with this Treaty and applicable rules of international law.” Article 30 goes on to state that when an investor claims a breach of an investment agreement or an investment authorization, “the tribunal shall apply: (a) the rules of law specified in the pertinent investment authorization or investment agreement, or as the disputing parties may otherwise agree; or (b) if the rules of law have not been specified or otherwise agreed: (i) the law of the respondent, including its rules on the conflict of laws; and (ii) such rules of international law as may be applicable.” 15 The CAFTA-DR, as well as the FTAs with Chile, Morocco, and Panama, also contain temporal limitations on the coverage of investment agreements in their respective definitions of this term. The U.S.-Chile FTA only covers investment agreements that took effect at least two years after the date of entry into force of the FTA, while the other three FTAs only cover investment agreements that took effect after the date of entry into force of each FTA. These temporal limitations have not been included in any previously or subsequently negotiated U.S. IIAs. The U.S.-Panama FTA, officially called a Trade Promotion Agreement (TPA), also contains an offsetting provision in Article 1.3(3)(b), providing that the previous U.S.-Panama BIT, the dispute settlement provisions of which will be largely suspended upon entry into force of the FTA, will still

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Finally, for the 2004 model BIT and subsequent IIAs, the United States defined three specific kinds of investment agreements—certain natural resources concession agreements, public utility, and infrastructure projects—as included within the meaning of the term.16 The 2004 model and subsequent IIAs also added language to the so-called “gateway to arbitration” article, permitting a claim for breach of an investment agreement only if the subject matter of the claim and the claimed damages directly relate to the covered investment that was established or acquired, or sought to be established or acquired, in reliance on the relevant investment agreement.17 The United States has negotiated the existing U.S. model language on investment agreements in most of the post-2002 IIAs. But in two FTAs, with Chile and Peru, the U.S. negotiated annexes that permit certain contracts for foreign investors in each country that provide special benefits—primarily guaranteed tax rates—to be adjudicated exclusively under the provisions of those contracts in specified situations. In Chile, these have been under so-called “DL 600,” while the Peru FTA covers specified “Stability Agreements” in the form provided in the annex.18 In sum, the coverage of breaches of contract in recent U.S. IIAs occupies a middle ground between the very broad coverage found in the older U.S. BITs and European BITs, containing an umbrella clause and/or a compromissory clause that grants consent for any investment dispute to go to investor-state arbitration,

be operative after entry into force of the FTA with respect to disputes arising under investment agreements in effect before the FTA enters into force. 16 Since the 2004 Model BIT, the definition of “investment agreement” in IIAs concluded by the U.S. has been: “investment agreement” means a written agreement between a national authority of a Party and a covered investment or an investor of the other Party, on which the covered investment or the investor relies in establishing or acquiring a covered investment other than the written agreement itself, that grants rights to the covered investment or investor: (a) with respect to natural resources that a national authority controls, such as for their exploration, extraction, refining, transportation, distribution, or sale; (b) to supply services to the public on behalf of the Party, such as power generation or distribution, water treatment or distribution, or telecommunications; or (c) to undertake infrastructure projects, such as the construction of roads, bridges, canals, dams, or pipelines, that are not for the exclusive or predominant use and benefit of the government. See, e.g., 2004 model BIT, Article 1, available at http://www.state.gov/documents/organization/117601.pdf (footnotes omitted). 17 See, e.g., 2004 model BIT, Article 24 (1). 18 See U.S.-Chile FTA, Annex 10–F; U.S.-Peru Trade Promotion Agreement (TPA), annex 10–H. The U.S.-Panama TPA adds one special feature for claims for alleged breaches of investment agreements by the Panama Canal Authority, requiring investors to submit such claims to the Canal Authority at least three months before they file a claim under the FTA. See U.S.-Panama-TPA, Annex 10-F, para. 3.

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and some of the newer treaties entered into by other countries (e.g., in ASEAN) that permit arbitration only of substantive treaty breaches.19 The other type of non-treaty breach that can be subject to investor-state arbitration under U.S. IIAs is a breach of an investment authorization. The term “investment authorization” has been defined since the 1994 model BITs to mean: “an authorization that the foreign investment authority of a Party grants to a covered investment or an investor of the other Party.”20 The term has been understood to cover authorizations from countries that have a national or federal authority that authorizes investments after performing a screening function. It also would not cover an authorization issued by a government agency not specifically charged with responsibility for investment matters—for example, a consent order that authorizes a merger. Because the United States has no federal investment authority and does not authorize foreign investments, the provision has not been considered to apply to the United States.21 Some of the United States’s recent FTA partners (Chile, Korea, Columbia, Peru, and Panama) also have no such national screening authority for investments. The U.S. has agreed to a footnote in its FTAs with these countries which states that as of the date of signature or entry into force of the FTAs, neither Party has a foreign investment authority that grants investment authorizations.22 II. Forum selection provisions Since the time of the earliest U.S. BITs, the U.S. has included provisions that provide choices for investors but also impose restrictions on them in their choice of forum for bringing an investment dispute. The interests that such provisions have sought to promote included: giving investors a choice of neutral fora for their disputes; limiting multiple claims; and more recently, encouraging the use of courts. The early U.S. BITs presented investors with a so-called “fork in the road” structure. If a dispute that was arbitrable under the treaty could not be settled amicably, investors could choose to submit it to: (a) The courts or administrative tribunals of the host country; (b) In accordance with any applicable, previously agreed dispute-settlement procedures; or

19 See, e.g., ASEAN-Australia-New Zealand Free Trade Agreement, chapter 11, Article 18(1), available at http://www.asean.fta.govt.nz/chapter-11–investment/. 20 See, e.g., U.S.-Chile FTA, Article 10.27. In the BITs based on the 1994 model, the term “national or company” was used rather than the term “investor” in this definition. See, e.g., U.S.-Georgia BIT, Article I(g). 21 Vandevelde, supra n. 4, at 164. 22 See, e.g., U.S.-Chile FTA, Article 10–27, n. 14.

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(c) To investor-state arbitration in accordance with the treaty (to ICSID, the ICSID Additional Facility, under the UNCITRAL Arbitration Rules, or to any other mutually agreed institution or in accordance with any other mutually agreed set of rules).23

Under this structure, if the investor chose to submit the dispute to domestic courts or administrative tribunals of the host country, or in accordance with a previously agreed arbitration clause or other dispute settlement procedure, its choice was definitive, and it could not submit that dispute for arbitration under the BIT.24 In NAFTA and post-2002 IIAs, the approach changed to what has been called the “no U-turn” structure. Under this approach, investors could seek arbitration under the Agreement at any time within the three-year statute of limitations period provided under the agreement (running from the time the alleged breach and the incurrence of damages arising therefrom was known or should have been known), so long as the claimant (the investor, if the claim is made on the investor’s own behalf, and/or the enterprise the investor owns or controls, if the claim is being made on behalf of the enterprise) waives the right to initiate or continue, before any court, administrative tribunal or other dispute settlement procedures, any proceedings with respect to the same measures.25 The “no U-turn” approach (given this nickname because the investor can proceed from other dispute settlement procedures to treaty arbitration, but cannot turn back after initiating a treaty arbitration) offers the investor and the host country the opportunity to have the dispute heard by a local court and/or administrative tribunal without the investor losing the right to proceed to arbitration, so long as it does so within the three-year statute of limitations period. Both NAFTA and some of the more recent IIAs include a special limited “fork in the road” clause in addition to the “no U-turn” waiver provision, prohibiting an investor from presenting a claim under the Agreement if it or an enterprise it owns or controls alleges a breach of the Agreement in the domestic courts or administrative tribunals of one of the Parties.26 This is because some countries (Chile, CAFTA-DR, Uruguay, Colombia, Peru, Korea) permit a private cause of

23 See, e.g., U.S.-Ecuador BIT, Article VI (2–3). 24 Indeed, under the earliest BITs, investors were required to submit their disputes to any previously agreed dispute settlement procedures that existed, and arbitration under the treaty was only permitted in the event the dispute was not resolved in accordance with the previously agreed dispute settlement procedures. See, e.g., U.S.-Egypt BIT, Article VII(2–3(a)); U.S.-Senegal BIT, Article VII(2–3(a)). 25 See, e.g., NAFTA, Articles 1116(2), 1117(2), and 1121. 26 U.S.-Chile FTA, Annex 10-E and similar annexes in the U.S.-Panama, U.S.-Peru, U.S.Colombia, and U.S.-Korea FTAs and U.S.-Uruguay BIT. All of these annexes only apply to claims by U.S. investors against the other country Parties. Unlike the other annexes, the annex in the U.S.-Chile FTA also prohibits the investor from filing a claim for arbitration under the Agreement for a breach of an investment agreement or investment

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action in domestic courts for treaty violations, and they did not want investors to have “two bites at the apple” for treaty violations. The U.S.-Morocco FTA has a different supplemental annex, saying that if any US investor takes its dispute to domestic court, it must wait at least one year after filing suit before going to arbitration.27 The meaning and application of the “fork in the road” and “no U-turn” provisions have already been subject to dispute in a number of arbitrations under BITs and FTAs. In cases under the fork in the road provisions, governments generally have not been successful in preventing claims from going to arbitration, because the legal issues raised under domestic law in the local court or administrative tribunal have been different than the issues raised under the treaty in the arbitration,28 or the party who raised the claim in the local court or administrative tribunal was not the same party that brought the claim to arbitration.29 Unlike the “fork in the road” treaty clause in the earlier U.S. BITs (which requires the investor to make a choice of forum with respect to a particular “investment dispute”), the “no U-turn” provision requires the claimant, plus any enterprise the claimant owns or controls if the claimant brings a claim on the enterprise’s behalf, to waive the right to initiate or continue “any proceeding with respect to any measure alleged to constitute a breach” that can be referred to in the claim.30 Thus, under IIAs that adopt the no U-turn approach, a claimant could not continue to challenge any proceeding under domestic law in domestic courts that challenges a measure alleged to violate the IIA, once it files for arbitration under authorization if it or an enterprise it owned or controlled filed a claim for such a breach in a local court or administrative tribunal. 27 U.S.-Morocco FTA, Annex 10-E. 28 See, e.g., Occidental Exploration and Production Co. vs. Republic of Ecuador, London Court of International Arbitration, Case No. UN 3467, Final Award (1 July 2004), paras. 57–58, available at http://www.asil.org/ilib/OEPC-Ecuador. pdf, where the filing of four lawsuits by the claimant challenging Ecuador’s refusal to refund certain value added taxes (VAT) was not held to bar the tribunal from hearing its BIT claim, primarily because the legal issues under the U.S.-Ecuador BIT were different from those in the court claims under Ecuadorian tax law. 29 Enron v. Argentina, ICSID Case No. ARB/01/3, Decision on Jurisdiction (14 January 2004), paras. 96–98, available at http://www.asil.org/ilib/Enron.pdf (joint venture brought local court challenge, minority shareholder brought arbitration); LG&E v. Argentina, ICSID Case No. ARB/02/01, Decision on Objections to Jurisdiction (30 April 2004), paras. 76–78, available at http://ita.law.uvic.ca/documents/LGE-Decision on Jurisdiction-English.pdf (same). But see Pantechniki S.A. v. Albania, ICSID Case No. ARB/07/21, Award (30 July 2009), paras. 63–68 (contract-based treaty claims precluded by fork-in-the-road provision when they had been previously litigated in local courts). 30 This wording can be found in the “Conditions and Limitations on Consent of Each Party” article of each of the post-2002 BITs and FTAs (see, e.g., U.S.-Singapore FTA, article 15.17(2)(b)), with a slight variation in the U.S.-Chile FTA, article 10.17(2)(b), which requires the waiver to cover “any proceeding with respect to the events alleged to give rise to the claimed breach.”

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the IIA, while such parallel proceedings may be possible for disputes under the earlier BITs that adopt the “fork in the road” approach. In cases under the “no U-turn” provisions of NAFTA and CAFTA-DR, the key issue to have been adjudicated by tribunals to date has been whether the continued pursuit or existence of a proceeding before a different tribunal, after the investor has waived the right to initiate or continue any such proceedings when it filed its investor-state claim, violated these provisions. In Waste Management (I) v. Mexico, the tribunal dismissed a NAFTA arbitration claim because even though the claimant submitted the required waiver, the claimant’s Mexican subsidiary on whose behalf the NAFTA claim was filed continued to pursue two domestic court proceedings and an arbitration claim against Mexican government-controlled entities under Mexican law, challenging one of the same measures at issue in the NAFTA claim.31 After the claimant dismissed the parallel Mexican proceedings and refiled its NAFTA claim, however, a second NAFTA tribunal permitted the new claim to proceed to arbitration.32 In Railroad Development Corp. v. Republic of Guatemala, the tribunal found that certain government measures that were at issue in two local arbitrations that continued after a CAFTA-DR arbitration was filed could not be considered as part of that CAFTA-DR arbitration, but that the waiver submitted by the claimant was valid, and the CAFTA-DR arbitration could proceed, with respect to other subsequent government measures that were not at issue in the local arbitrations.33 In Commerce Group Corp. and San Sebastian Gold Mines, Inc. v. Republic of El Salvador, the tribunal dismissed an arbitration claim filed under the CAFTA-DR because the claimant had not dismissed its pending case against the government of El Salvador, premised on the same measures at issue in the CAFTA-DR arbitration, by the time it filed its CAFTA-DR arbitration—even though the claimant took no action in the domestic court proceedings after its CAFTA-DR arbitration claim was filed and simply was awaiting the decision of the court.34 Finally, in Pac Rim Cayman LLC v. Republic of El Salvador, the respondent sought to have a claim under El Salvador’s domestic investment law (which consents to ICSID jurisdiction for claims alleging its violation) that was filed as part of a CAFTA-DR arbitration dismissed because the waiver proferred by the claimant allegedly renounced the right to file such a claim, which constituted

31 Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/98/2, Award ( June 2, 2000). 32 Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Decision on Jurisdiction ( June 26, 2002). 33 Railroad Development Corp. v. Republic of Guatemala, ICSID Case No. ARB/07/23, Decision on Objections to Jurisdiction (Nov. 17, 2008) and Second Decision on Objections to Jurisdiction (May 18, 2010). 34 Commerce Group Corp. and San Sebastian Gold Mines, Inc. v. Republic of El Salvador, ICSID Case No. ARB/09/17, Award (March 14, 2011).

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a separate “dispute settlement procedure” than the CAFTA-DR claim.35 The tribunal rejected this request, finding that the claim under El Salvador’s domestic law in the same ICSID arbitration was part of the same “indivisible” arbitration proceeding and that there was no good reason not to permit the domestic law and CAFTA-DR-based claims from proceeding in the same arbitration.36 III. Transparency and public participation Prior to the enactment of the TPA legislation in 2002, among the most frequently raised concerns about the investor-state arbitration process under U.S. IIAs was that the process resulted in the adjudication of challenges to measures of great public importance by secret tribunals, behind closed doors, without any public participation.37 In NAFTA, the Parties’ Free Trade Commission took the first formal step to address the concern by issuing an interpretation on July 31, 2001, which stated in part that nothing precludes the NAFTA Parties from offering public access to documents submitted in arbitrations, and agreeing to make arbitration documents public, subject to redactions for confidential business and privileged information.38 The NAFTA Parties followed up with a Joint Statement in October 2003, stating that nothing in NAFTA precluded arbitral tribunals from accepting statements from non-disputing entities, and agreed on a set of recommended guidelines for tribunals to use for any amicus curiae submissions.39 At the same time, the U.S. and Canada submitted separate statements that each country “will consent, and will request the consent of disputing investors and, as applicable, tribunals, that hearings in Chapter Eleven disputes to which it is a party be open to the public, except to ensure the protection of confidential information, . . . .”40

35 Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Preliminary Objections under CAFTA-DR Articles 10.20.4 and 10.20.5 (August 2, 2010). 36 Id., para. 253. 37 See, e.g., “Nafta’s Powerful Little Secret; Obscure Tribunals Settle Disputes, but Go Too Far, Critics Say,” New York Times, March 13, 2001 (available at http://www.nytimes. com/2001/03/11/business/nafta-s-powerful-little-secret-obscure-tribunals-settle-disputes-but-go-too-far.html?scp=1&sq=NAFTA%27s+Powerful+Little+Secret&st=nyt). 38 See Notes of Interpretation of Certain Chapter 11 Provisions (NAFTA Free Trade Commission, July 31, 2001) (available at http://www.international.gc.ca/trade-agreementsaccords-commerciaux/disp-diff/nafta-interpr.aspx?lang=en&view=d). 39 See Statement of the Free Trade Commission on Non-Party Participation, Oct. 7, 2003 (available at http://www.sice.oas.org/tpd/nafta/Commission/Nondispute_e.pdf ). 40 See http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/ nafta-alena/open-hearing.aspx?lang=eng&view=d.

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Because Congress took a strong view that investor-state arbitration under our FTAs should be accessible to the public, an important part of the negotiating objectives under the 2002 TPA legislation included the following: Ensuring the fullest measure of transparency in the dispute settlement mechanism, to the extent consistent with the need to protect information that is classified or business confidential, by— (i) ensuring that all requests for dispute settlement, submissions, findings, and decisions are promptly made public; (ii) ensuring that all hearings are open to the public; and (iii) establishing a mechanism for acceptance of amicus curiae submissions from businesses, unions, and nongovernmental organizations.41

Post-2002 BITs and FTAs entered into by the U.S. have fulfilled each of these negotiating objectives. Each of these IIAs has required that the following documents be made available to the non-disputing Party(ies) and the public: the notice of intent to submit a claim to arbitration; the notice of arbitration; pleadings, memorials, and briefs submitted to the tribunal by any disputing party, non-disputing Party, or amicus curiae; minutes or transcripts of hearings of the tribunal, where available; and orders, awards, and decisions of the tribunal. 42 This obligation is subject to specified procedures, however, to protect from disclosure certain confidential business information or information that is privileged or otherwise protected from disclosure under a Party’s law, defined as “protected information.”43 Each of these IIAs has also required, subject to provisions that permit nondisclosure of protected information, that “The tribunal shall conduct hearings open to the public and shall determine, in consultation with the disputing parties, the appropriate logistical arrangements.”44 In addition, each of these IIAs provides for the tribunal to “have the authority to accept and consider amicus curiae submissions from a person or entity that is not a disputing party,” although some of them contain some minor qualifications. For example, the Chile, Colombia and Peru FTAs require each amicus submission to identify the author and any person or entity that has provided, or will provide, any financial or other assistance in preparing the submission, while the Chile FTA requires that amicus submissions be provided in both Spanish and English.45 Similar transparency and public participation provisions to those of recent U.S. IIAs can be found in Canada’s model Foreign Investment Protection Agreement,

41 Trade Act of 2002, Sec. 2102(b)(3)(H), 19 U.S.C.A. 3802(b)(3)(H). 42 See, e.g., Chile FTA, Articles 10.20(1), (3–5). 43 Id. 44 See, e.g., id., Article 10.20(2). 45 Id., Article 10.19(3); U.S. Colombia FTA, Article 10.20(3); U.S.-Peru TPA, Article 10.20(3).

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issued in 2003.46 In 2006, the members of ICSID agreed on revisions to its Arbitration Rules, which adopt some but not all of the recent U.S. provisions. For example, they permit tribunals to accept amicus briefs from interested members of the public, but add criteria for tribunals to apply in determining whether to accept them.47 The revised ICSID Arbitration Rules also permit tribunals to allow members of the public “to attend or observe all or part of the hearings, subject to appropriate logistical arrangements,” but only if neither disputing party objects.48 Finally, the revised ICSID Rules require ICSID to publish excerpts of legal reasoning of the tribunal from each new arbitral award, but still do not permit the publication of awards without the consent of both disputing parties, and do not require that any submissions by the disputing parties to the tribunal be made public.49 More recently, the members of the United Nations Commission on International Trade Law (UNCITRAL) assigned a Working Group to prepare legal standards on transparency in treaty-based investor-State arbitration, which could supplement the UNCITRAL Arbitration Rules, most recently revised in 2010. These standards were hoped to provide a greater degree of transparency and public participation than had been required by the previous UNCITRAL Arbitration Rules, or even by the revised ICSID Arbitration Rules—for example, to require that submissions by the disputing parties to the tribunal be made public and that neither disputing party be permitted to refuse public access to hearings if the tribunal deems open hearings to be appropriate.50 As of the time this article went to press, UNCITRAL members had not yet agreed on these standards. Because most of the innovations in transparency and public participation in the recent U.S. IIAs have been in use in NAFTA (and more recently, CAFTA-DR) proceedings for close to ten years, the U.S. has now developed an extensive track record in the areas covered in these IIAs—and its experience has been good. Submissions in NAFTA and CAFTA-DR cases, as well as awards, can be found on the websites of the respondent countries. Hearings have been made public, either by closed-circuit TV or, more recently, webcast, with minimal disruptions. Moreover, no flood of amicus briefs has swamped any proceeding. Non-disputing parties 46 See Canada’s model Foreign Investment Protection Agreement, articles 38–39 (available at http://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/ pdfs/2004-FIPA-model-en.pdf). 47 See ICSID Rules of Procedure for Arbitration Proceedings (Arbitration Rules), Rule 37(2). The language of this ICSID Rule has been utilized in one U.S. FTA, the KoreaU.S. FTA, Article 11.20(5). 48 ICSID Arbitration Rules, Rule 32(2). 49 Id., Rule 48(4). 50 See, e.g., UNCITRAL, Report of Working Group II (Arbitration and Conciliation) on the work of its fifty-fifth session (Vienna, 3–7 October, 2011), UN Doc. No. A/CN.9/736 (Oct. 17, 2011), available at http://daccess-dds-ny.un.org/doc/UNDOC/GEN/V11/864/96/PDF/ V1186496.pdf?OpenElement.

arbitration innovations in recent u.s. investment treaties 159 with the same interest have tended to collaborate on individual submissions, so that in only one case have as many as three such briefs been submitted—while in most cases where amicus briefs have been submitted at all, only one or two amicus briefs at most have been filed.51 IV. New Provisions to Improve Efficiency of Arbitrations The 2002 TPA negotiating objectives also included a provision stating that the United States should: Seek to improve mechanisms used to resolve disputes between an investor and a government through— (i) mechanisms to eliminate frivolous claims and to deter the filing of frivolous claims; (ii) procedures to ensure the efficient selection of arbitrators and the expeditious disposition of claims.52

Starting with the Chile and Singapore FTAs, and continuing with the 2004 model BIT and subsequent agreements, U.S. IIA text has included provisions aimed at fulfilling these objectives. First, it provides for an expeditious procedure to dispose of claims where as a matter of law, the factual allegations are insufficient to permit an award to be made in favor of the claimant—a provision modeled after Rule 12(b)(6) of the U.S. Federal Rules of Civil Procedure.53 This provision came about after the U.S. objected to the admissibility of various claims on this ground in some earlier NAFTA cases, but the tribunal had to deal with the objections as part of its disposition of the claims on the merits, because the only objections that could be resolved earlier under the existing arbitral rules were jurisdictional objections. For example, in ADF Group Inc. v. United States, the U.S. objected to a claim that Buy America restrictions incorporated in a procurement by the state of Virginia violated NAFTA’s national treatment obligation, noting that under NAFTA’s chapter 11, the national treatment article does not apply to “government procurement.”54 The tribunal upheld this objection and dismissed the claim, but could not do so until its award on the merits, more than two years after the arbitration was filed.55 Similarly, in the Methanex arbitration, the tribunal did not rule on the U.S.’s objection that claims were inadmissible 51 Party and amicus submissions, or links to such submissions, as well as awards, in NAFTA and CAFTA-DR cases where the U.S. has played a role can be found at http:// www.state.gov/s/l/c33165.htm. The only case where three amicus briefs have been submitted to date was Glamis Gold, Inc. v. United States. 52 Trade Act of 2002, Sec. 2102(b)(3)(G)(i–ii), 19 U.S.C.A. 3802(b)(3)(G)(i–ii). 53 See, e.g., 2004 U.S. Model BIT, Article 28(4). 54 See NAFTA, Article 1108(7). 55 See ADF Group Inc. v. United States of America, Case No. ARB(AF)/00/1, Award (Jan. 9, 2003), available at www.state.gov/documents/organization/16586.pdf.

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based on a lack of proximate causation until its final award, nearly six years after the original Notice of Arbitration had been filed.56 Under Article 28(4) of the 2004 U.S. model BIT, tribunals are required to address as a preliminary question any objection of insufficiency of claims as a matter of law, as long as such objections are raised prior to the deadline for the submission of the counter-memorial. Once such an objection has been made, tribunals must suspend their proceedings on the merits and issue a decision or award on the objection. Article 28(5) of the model BIT gives respondents the option of requesting a decision based an objection of inadmissibility under Article 28(4) or lack of jurisdiction on an expedited basis, provided that the request is made no later than 45 days after the tribunal is constituted. The tribunal must issue its decision on the objection within 150 days of the request, which may be extended another 30 days if a disputing party requests a hearing on the objection and no more than another 30 days “on a showing of extraordinary cause.”57 The recent U.S. provisions on expeditious disposition of meritless claims are similar to the provision adopted in ICSID’s amended rules in 2006. Under Article 41(5) of the amended ICSID Arbitration Rules, a party may request expeditious consideration of any objection that a claim is “manifestly without legal merit” no later than 30 days after the constitution of the tribunal, unless the parties have agreed to another procedure for expediting preliminary objections. Other recent provisions of U.S. IIAs that are aimed at deterring the filing of frivolous claims and enhancing the efficiency of arbitrations include: •  A provision that permits the award of attorneys’ fees to the winning party in any such claims that are expeditiously dismissed pursuant to Articles 28(4) or 28(5);58 •  Provisions to speed up the formation of panels by requiring claimants to name an arbitrator or give the ICSID Secretary-General consent to appoint an arbitrator with the notice of arbitration59 and have otherwise shorter time frames for convening panels;60 •  An article that provides more flexible mechanisms than NAFTA to permit consolidation of claims that bear on the same subject matter.61

56 See Methanex Corp. v. United States of America, Final Award on Jurisdiction and Merits, Aug. 5, 2005, available at www.state.gov/documents/organization/51052.pdf. 57 Identical provisions are found in recent U.S. FTAs. See, e.g., U.S.-Chile FTA, Article 10.19(4–5). 58 See 2004 U.S. model BIT, Article 28(6); U.S.-Chile FTA, Article 10.19(6). 59 See 2004 U.S. model BIT, Article 24(6); U.S.-Chile FTA, Article 10.15(8). 60 See 2004 U.S. model BIT, Article 27(3) and U.S.-Chile FTA, Article 10.18(3) (requiring that the Secretary-General of ICSID appoint, on the request of a disputing party, the arbitrator or arbitrators not yet appointed within 75 days of the submission of a claim); compare, e.g., NAFTA Article 1124(2) (permitting ICSID Secretary-General to appoint arbitrators not yet appointed if tribunal not constituted within 90 days of the submission of a claim). 61 See 2004 U.S. model BIT, Article 33 and U.S.-Chile FTA, Article 10.24 (providing, unlike the comparable Article 1126 in NAFTA, that the Secretary-General of ICSID can decline

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As of the time this article went to press, decisions have been rendered in three cases, filed under CAFTA-DR, with the new procedures for expeditious dismissal of claims. In two of these cases, the Railroad Development Corp. and PacRim Cayman LLC cases discussed above, the panel rejected the requests to dismiss the case, and further proceedings have continued.62 In the Commerce Group case discussed above, however, the panel dismissed the claim based on the investor’s failure to effectively waive its right to proceed with a claim based on the same measures at issue in a domestic court.63 Because El Salvador presented its objection to jurisdiction under Article 10.20.5, with its specified timetables for expeditious disposition of these objections, the case was dismissed within seven months of the constitution of the tribunal, after being fully briefed and subject to a hearing—considerably less time than the average for most investor-state arbitrations. V. New Review Procedures Another TPA negotiating objective was to provide for “an appellate body or similar mechanism to provide coherence to the interpretations of investment provisions in trade agreements.”64 The Senate Finance Committee that initially approved this negotiating objective expressed the following rationale for it: As the United States enters into more investment agreements and the number of investor-state disputes grows, the need for consistency of interpretation of common terms—such as expropriation and fair and equitable treatment—will grow. Absent such consistency, key terms may be given different meanings depending on which arbitrators are appointed to interpret them. This will detract from the predictability of rights conferred under investment agreements. A single appellate mechanism to review the decisions of arbitral panels under various investment agreements should help to address this issue and minimize the risk of aberrant interpretations.65

Although the concept of an appellate mechanism, and its potential to enhance the predictability and consistency of arbitral decisions while reducing the likelihood of “rogue” decisions, is at least superficially attractive, the implementation of an effective appellate mechanism is fraught with legal and political difficulties. Among the issues that must be addressed include the complexities of structuring one or more appellate bodies to deal with numerous investment agreements containing different obligations; setting an appropriate standard of review for to establish a consolidation tribunal if the request for consolidation is “manifestly unfounded,” and which permits either an original tribunal that had heard a claim or a consolidation tribunal to hear a consolidated claim). 62 See notes 33–34, supra, and accompanying text. 63 See n. 35, supra, and accompanying text. 64 Trade Act of 2002, Sec. 2102(b)(3)(G)(iv), 19 U.S.C.A. 3802(b)(3)(G)(iv). 65 S. Rep. No. 107–139 (107th Cong., 2d Sess.) 16 (2002).

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legal and factual determinations; the relationship of the appellate mechanism to existing review mechanisms under the ICSID Convention and national courts; the power of the new mechanism to confirm, modify, set aside, or remand awards; and the structure, staffing, and administration of an appellate mechanism. Even if all of these issues could be resolved and the structure of an appellate mechanism agreed upon by negotiators from interested member states, the ratification of amendments to the various relevant IIAs that would require the use of an agreed appellate mechanism under all of them would entail a complex and difficult process. And even if this process could be undertaken, questions remained as to whether the benefits to the system of more coherent interpretations by tribunals were outweighed by the additional delays and legal costs entailed from adding an additional layer of appellate review.66 Many of these difficulties came to be appreciated more after the Secretariat of ICSID issued a Discussion Paper in October 2004, on “Possible Improvements of the Framework for ICSID Arbitration,” which included a section on a new appellate mechanism, in addition to various other improvements.67 Although some of the suggested improvements, such as those discussed above relating to transparency, third party participation, and expedited disposition of meritless claims, were ultimately implemented in the 2006 revisions to the ICSID Arbitration Rules, ICSID announced in a May 2005 update to its paper that the proposal for an appellate mechanism was dropped because most ICSID members “considered that it would be premature to establish such an ICSID mechanism at this stage, particularly in view of the difficult technical and policy issues raised in the Discussion Paper.”68 Since that time, neither the United States nor other countries have taken further steps to include a separate appellate mechanism in their IIAs. Although the U.S. has not provided for an appellate body in any of its recent BITs or FTAs,69 these agreements have provided for at least one similar mecha-

66 For discussions of the issues in need of resolution before an effective appellate mechanism could be implemented, see, e.g., Karl A. Sauvant (ed.), Appeals Mechanism in International Investment Disputes (2008) (articles by Katia Yannica-Small, Barton Legum, Jan Paulsson, and Asif Qureshi and Shandana Gulzar Khan); David A. Gantz, “An Appellate Mechanism for Review of Arbitral Decisions in Investor-State Disputes: Prospects and Challenges,” 39 Vanderbilt J. Transnat’l L. 1 (2006). 67 The paper can be found at Annex 3 of Sauvant (ed.), supra n. 66. 68 See “Suggested Changes to the ICSID Rules and Regulations: Working Paper of the ICSID Secretariat” (May 22, 2005), available at http://icsid.worldbank.org/ICSID/Fron tServlet?requestType=ICSIDPublicationsRH&actionVal=ViewAnnouncePDF&Announc ementType=archive&AnnounceNo=22_1.pdf. 69 One recent FTA, the CAFTA-DR, called for the Parties’ Free Trade Commission to establish a Negotiating Group within three months of the date of entry into force of the Agreement to develop an appellate body or similar mechanism to review awards rendered by tribunals under the Investment chapter. See CAFTA-DR, Annex 10-F. However, no appellate body under that Agreement has yet been announced.

arbitration innovations in recent u.s. investment treaties 163 nism—an interim review mechanism, under which, before issuing a decision or award on liability, •  at the request of a disputing party, a tribunal must transmit a draft award to the parties and non-disputing Party; •  the disputing parties may submit comments within 60 days of the request; and •  the tribunal shall consider any comments and issue a final award within 45 days.70

At the time this article went to press, the interim review mechanism had not been utilized. However, it is hoped that this system, if approached in good faith, will promote better crafted awards, increased levels of disputant satisfaction, and increased rates of settlement—without the additional complications entailed in establishing a different appellate body.71 Recent U.S. IIAs also contain provisions under which the Parties will strive to agree to join any multilateral agreement that provides for an appellate body to review investor-state awards that result from investment disputes,72 and consider whether to establish a bilateral appellate body within three years of the agreement.73 However, neither the United States nor any other countries have made any significant movement along either of these lines as yet. VI. The 2012 Model BIT In February 2009, the Obama Administration initiated a review of the U.S. 2004 model BIT to ensure that it was consistent with the public interest and the Administration’s overall economic agenda. In the course of its review, it sought and received extensive input from Congress, companies, business associations, labor groups, environmental and other non-governmental organizations, and academics.74 It completed this review in April 2012.75 Although the 2012 model makes substantive changes from the 2004 model in areas such as enhancement of transparency and public participation, domestic

70 See, e.g., 2004 U.S. model BIT, Article 28(9) and U.S.-Chile FTA, Article 10.19(9). 71 For a detailed analysis of this interim review mechanism, see Jack J. Coe, Jr., “An Examination of the Draft Award Circulation Provision of the US Model BIT of 2004,” in Catherine A. Rogers and Roger P. Alford (eds.), The Future of Investment Arbitration (2009) 107. 72 See, e.g., 2004 U.S. model BIT, Article 28(10) and U.S.-Chile FTA, Article 10.19(10). 73 See, e.g., 2004 U.S. model BIT, Annex D and U.S.-Chile FTA, Annex 10-H. 74 Among other things, the State Department appointed a Subcommittee on Investment of the Advisory Committee on International Economic Policy, a diverse group of investment experts from business, academia, labor and environmental NGOs, and the legal profession, to formulate recommendations. The report of this Subcommittee can be found at http://www.state.gov/e/eb/rls/othr/2009/131098.htm. 75 The joint State Department-USTR statement announcing the completion of the review is at http://www.state.gov/r/pa/prs/ps/2012/04/188198.htm.

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standard-setting, performance requirements in technology, and labor and the environment, it left the investor-state arbitration provisions essentially intact.76 The only substantive change it made in this area was the elimination of Annex D, which would have had the Parties consider whether to establish a bilateral appellate body within three years of the agreement, and new language relating to appellate mechanisms developed under other institutional arrangements, stating that the Parties shall strive to ensure that any such appellate mechanism has transparency provisions similar to those in the BIT that govern investor-state arbitrations.77 The lack of any additional substantive changes to the investor-state arbitration provisions of the 2012 model BIT suggests a general satisfaction in the U.S. Executive Branch with the innovations to these provisions in the 2004 model BIT and recent FTAs.

76 The 2012 model BIT text is at http://www.state.gov/documents/organization/188371. pdf. 77 Id., Article 28(10).