Arbitrator appointments in investment arbitration: Why expressed views on points of law should be challengeable
Tony Cole
The aspect of international investment arbitration that is perhaps most consistently condemned by critics of the system is the role played in the resolution of investment disputes by non-permanent tribunals, constituted solely for deciding the case at hand, and consisting of individuals drawn primarily from the world of international commercial arbitration. Such tribunals, it is argued, lack the legitimacy that is possessed by more permanent bodies, and too often reflect the views of the commercial world in which they predominantly make their living.
The routine response to this complaint by arbitration specialists is that it displays a serious misunderstanding of the reality of such tribunals. Each tribunal, it is emphasised, is selected by the parties to the dispute, with the result that both the State and the investor can ensure that the tribunal is both unbiased and expert in international investment law. Use of such a tribunal, it is urged, is considerably fairer than the alternative of requiring the investor to argue its case before a domestic court both initially constituted and currently controlled by the State against which the claim is being brought, and lacking any real expertise in international investment law.
There is no real question that the response by arbitration specialists is fundamentally correct, as a properly-functioning arbitral tribunal constitutes an arguably ideal means for the resolution of international investment disputes. This can only be true, however, where the process of constituting the tribunal is properly designed and enforced. Yet as demonstrated in a recent decision in the arbitration Urbaser S.A. v. Argentina, the current rules governing the appointment of arbitrators remain open to precisely the form of manipulation of the tribunal of which critics have often complained.
On 12 August 2010, an arbitrator challenge decision was handed down in the ICSID case Urbaser S.A. v. Argentina , in which a challenge was denied to the appointment as arbitrator of the highly regarded legal academic Campbell McLachlan, based on general views of law that he had expressed in his academic writings. That is, claimants had challenged McLachlan’s appointment by Argentina not because he possessed any ties to the Argentine government that would bring into question his ability to decide the case fairly, but because he had previously made statements on points of law that will be central in the Urbaser arbitration, and that the claimants argued demonstrated that he would clearly hold for Argentina on those points.
In itself this decision is unremarkable, as there is no prominent arbitral forum or national jurisdiction that currently allows arbitrators to be successfully challenged due to prior statements on general points of law. However, while it is hard to fault the Urbaser decision as a reflection of the currently accepted stance on this question within arbitration, the details of the decision serve well to emphasize the problems the current approach creates. Most problematically, McLachlan was not challenged simply because he had casually espoused an interpretation of a legal point relevant to the Urbaser arbitration. Rather, the Claimants highlighted two specific, considered statements in finalised academic publications in which McLachlan not only presented a considered argument for his position, and not only expressed his view with considerable force, but in one case was writing about the specific bilateral investment treaty at stake in the Urbaser arbitration. As the Claimants argued, McLachlan had basically already stated how he would rule on at least one central issue in the case.
There is certainly nothing unique to arbitration in a party to a dispute being faced with a tribunal that includes a member with known hostility to legal positions the party needs to rely upon. Even judges after all, whether in domestic or international tribunals, will have known positions on points of law, whether from academic publications or from previous decisions. To understand, then, why this situation is more problematic for investment arbitration than for a court system it is essential to understand the method by which arbitrators come to be appointed to cases, as well as the impact this process can have on the way any resulting award is viewed, both by the parties to the arbitration and by a public that is often already sceptical of the propriety of resolving such disputes through arbitration.
While arbitrators are often spoken of as undertaking a judicial function, and the very limited grounds on which international investment awards can be challenged in courts means that arbitrators can quite legitimately be viewed as exercising a form of judicial power by proxy, essential differences between arbitrators and judges exist due to the way the two groups are appointed to cases.
While approaches to the appointment of judges will vary between national judicial systems, the consistent characteristic feature of judicial appointments is its highly institutionalised nature. Parties have the freedom to pick the judicial system within which they wish their case to be heard, such as through choice of forum agreements, or merely by selecting the forum in which to commence litigation, but they never have the ability to select a particular judge to hear their case. Instead, once a judicial system has been selected, a judge will then be appointed to their case through the operation of the system’s standard rules.
It will, of course, be possible for any party to challenge the judge appointed, but the standards on which such challenges can be made will be very limited, and generally restricted to instances in which a judge has a personal interest in the proceedings, or a personal bias against a party to the case. This limitation on the ability to challenge a judge is a reflection of the highly institutionalised nature of the judicial role. Not only are judges appointed through the operation of institutional rules, but their decisions are delivered within an institutional context of review by higher courts, a professional obligation to cooperate with other courts in the creation of a coherent body of law, and a recognition of the role of a judge as an agent of the State, rather than as an employee of the parties in the case over which the judge is presiding.
By contrast, the procedure governing the appointment of arbitrators within investment arbitration reflects a fundamentally different institutional structure. Or more accurately, a structure in which there is no institution. Under this approach, each party to the dispute has the right to appoint one arbitrator to the panel of three arbitrators that will preside over the dispute. A third individual, the Chair of the panel, will then be appointed through agreement of the two party-nominated arbitrators, and ideally the parties as well.
The obvious difference between this procedure and the procedure by which judges are appointed to preside over a case is, of course, the extent of party involvement in the selection of arbitrators. While, as noted above, parties in a litigation are restricted to choosing the forum in which they wish their case to be heard, parties to an arbitration can choose the specific arbitrators who will preside over their case. Moreover, while the classical view of arbitration is that both parties will have agreed to arbitrate under each member of the tribunal, the reality of contemporary international investment arbitration is that each party has almost complete control over the appointment of one arbitrator. That is, each party will have appointed its preferred arbitrator, with only the Chair being the subject of any form of consensus.
In addition, while any judge appointed to preside over a litigation will be drawn from a small pool of individuals serving in a long-term institutional role, there are no real restrictions on the individuals who can serve as arbitrators in international investment arbitrations, beyond the easily-satisfied constraint in the ICSID system that arbitrators must have “recognized competence in the fields of law, commerce, industry or finance.”
The impact of this process is important to recognise, as while a properly functioning litigation will result in a decision delivered by an independently-appointed judge, impartially applying the applicable law, a decision even in a properly functioning contemporary international investment arbitration will be delivered by a tribunal that has been constituted through a process in which both parties have reason to be suspicious that the appointment made by the other party was an attempt to appoint an individual likely to hold in its favour, rather than to decide the case fairly and objectively.
It is in this adversarial context that the procedure for challenging arbitrators has been developed. Because the central role of parties in the appointment system raises an obvious risk that parties will attempt to appoint individuals certain to decide in their favour, each party is given the right to object to any nominated arbitrator. While the specific standards to be applied in evaluating a challenge to a nominated arbitrator vary depending on the rules and laws under which the arbitration is held, such standards revolve around two broad concepts, “independence” and “impartiality”. In broad terms, the requirement for “independence” relates to objective elements regarding ties between the arbitrator and the parties, while “impartiality” refers to subjective elements of the nominated arbitrator’s state of mind.
Thus, for example, the requirement of “independence” prevents a party nominating an attorney who regularly performs work for the nominating party, and who thus may find in favour of that party primarily to ensure further work in the future. Similarly, the requirement for “impartiality” precludes the appointment of any arbitrator who can be demonstrated to have already reached a decision regarding which party should win the dispute.
The procedure for arbitrator challenges, then, is designed to ensure acceptable levels of fairness within an appointment context that in itself is highly open to party manipulation.
Challenges based on generalised statements of law, however, as in the Urbaser decision, create a particular difficulty for the arbitrator challenge system. The justification for allowing parties to select their own arbitrator, after all, is that they will thereby ensure that at least one arbitrator on the tribunal understands their perspective, and can advance their arguments in any deliberations between the arbitrators.
That is, while parties are not allowed to select arbitrators predisposed to rule in their favour, no matter what facts or arguments are presented in the course of the arbitration, the entire point of party selection of arbitrators would be undermined if parties could not consider an arbitrator’s substantive views on principles of law relevant to the arbitration.
Recognition of this fact is reflected in the distinction standardly made in arbitral practice and scholarship between a challenge to an arbitrator who has previously expressed her views on the case to which she has been appointed, and one who has merely expressed her views on general topics of law that will be central to the case. A challenge based on the former situation has a strong likelihood of succeeding, while one based on the latter will certainly fail.
However, the tenuousness of this distinction is not difficult to highlight. Consider a case in which a Claimant has commenced an investment arbitration against State X, based on a contractual dispute between the two parties. State X has never directly agreed to arbitrate with the Claimant, but has entered into a bilateral investment treaty with the State from which the Claimant comes. In that treaty State has X agreed to arbitrate directly with investors from the other State any claims alleging violations of the treaty. In addition, the treaty also includes what has come to be called an “umbrella clause”, in which State X has agreed to respect any agreements into which it enters with investors from the other State. Whether an umbrella clause would allow the Claimant to commence an arbitration, alleging that State X’s violation of its contract with the Claimant also constitutes a violation of the treaty, is a highly disputed topic in contemporary investment law.
Aware of this difficulty, and in the knowledge that unless it is successful on this issue it will fail entirely in its claim, Claimant nominates to the tribunal Professor Jones, famous for his strong endorsement of the view that umbrella clauses do indeed give investors access to arbitration for violations of contracts with the State.
Under the current approach to arbitrator challenges, Professor Jones’ strong views on the topic of umbrella clauses would give State X no ground on which to challenge his appointment, even though his decision on this central point of the arbitration is effectively predetermined. Indeed, this would be true even if only a month before his nomination to the arbitral panel Professor Jones reiterated in an interview his view on umbrella clauses, stating that there was in his opinion simply no uncertainty regarding how such issues should be resolved.
By contrast, however, if in that interview he also mentioned rumours of a pending arbitration to be brought by the Claimant, and stated that the umbrella clause in the treaty should definitely give the Claimant access to arbitration, State X could use this specific reference to the case between Claimant and State X as a means of preventing Professor Jones’ appointment to the tribunal.
Yet from the perspective of State X surely this distinction makes absolutely no difference. In both cases Professor Jones has been appointed to the tribunal to achieve a specific goal, rather than to ensure a fair arbitration, and in both cases his ultimate decision is equally certain. To assert that State X has no legitimate ground for complaint so long as Professor Jones’ decision results from a fair-minded application of legal principle, rather than bias against State X, is to ignore the context of the appointment. This was, after all, not a judge appointed by an independent judicial system, who just happens to have views unfavourable to one party. Rather, this arbitrator’s appointment was a specific part of the trial manoeuvring of the other party.
This issue ultimately gets to the heart of why arbitrator challenges are allowed, and what arbitration is attempting to be. If the goal is simply to stop arbitrators being appointed who will be biased against one of the parties, then the decision regarding Professor Jones, and that in the Urbaser case, are perfectly justifiable. However, if the concern is instead that the final decision in an arbitration should be something other than the result of a game of “let’s stack the tribunal in our favour”, then the distinction embodied in the Jones decision and the Urbaser case simply doesn’t suffice.
There are, of course, significant complications in any attempt to develop a standard for allowing challenges based solely on expressed points of view on general questions of law. The Urbaser case is convenient in that it presents a stark example of the problem being described, but in most cases the question will be far more difficult, and parties will take every opportunity to challenge their opponent’s nominee, as part of their own trial manoeuvring.
Nonetheless, the difficulty involved in finding a workable standard should not suffice as a justification to do nothing about a clear problem. After all, if a party has its preferred arbitrator disqualified because of such a challenge it is unclear how they have been harmed. They retain the power to another arbitrator, and this arbitrator will no doubt be willing to listen to that party’s arguments with an open mind. They are, that is, simply forced to arbitrate in front of an unbiased tribunal, just as they originally agreed to do. By contrast, if the arbitrator challenge is rejected, the challenging party is forced to arbitrate in front of a tribunal at least one member of which is simply not going to rule in its favour on one or more central issues in the case, no matter how fair-mindedly he approaches his job.
The question ultimately is what an arbitral tribunal is meant to be and to do, and whether international investment arbitration is a genuine attempt at fair dispute resolution, or the illegitimate game its strongest critics argue it to be. No-one familiar with the individuals who serve on international investment arbitration tribunals would question the seriousness with which they approach their roles, but unless the problem highlighted by the Urbaser decision is addressed, there should be little surprise when the legitimacy of such tribunals is challenged.
Author: Tony Cole is Assistant Professor at the University of Warwick’s School of Law. Previously, Tony was an associate in the litigation department and the international commercial arbitration group at White & Case in New York.
