^[1]Arbitration in Ancient Greece was so commonplace that it was referenced in Homer’s Iliad: two parties seeking to bring resolution to a blood debt submitted their dispute to a man “versed in law” and of their mutual choice. He presided over a tribunal of elders, which publicly heard the parties’ claims and decided the dispute in a reasoned oral opinion.^[2]

In many ways, arbitration in Ancient Greece mirrored modern day practice, providing parties with a flexible means to resolve their disputes.^[3] While some disputes were submitted to sole arbitrators, tribunals typically had between three and five party-appointed arbitrators, with one arbitrator acting as presiding member of the tribunal.^[4] Although the arbitrators were in principle expected to follow the law of Ancient Greece, they were not required to do so.^[5] In addition to choosing their arbitrators, the parties were also permitted to choose the applicable law.^[6]

As noted by legal historian Derek Roebuck, whom I would like to acknowledge as the source for much of this information, the major benefit of arbitration was that arbitral awards could not be appealed,^[7] so that arbitration was a means to a final resolution of a dispute and thereby produced certainty and stability for merchants in their commercial relationships.

Summarizing the benefits of commercial arbitration at the time, Demosthenes wrote: “[i]t is lawful for parties who have a dispute with one another about their private obligations, and who wish to choose an arbiter, to select whomever they wish. But when they have together chosen an arbitrator they must abide by his decision and cannot in any way appeal from him to another tribunal: let the arbitrator’s decision be final!”^[8] This sounds as if it could come out of a modern textbook on arbitration.

Arbitration was also known in the city-state of Sparta, although – if we are to take Plutarch’s word for it – it was somewhat less sophisticated than the system in Athens. Plutarch provides an account of two men who appointed the Spartan king to resolve their dispute. The king brought the parties to a remote temple, where he made them first swear in advance that they would accept whatever his award would be. After each party had sworn to comply, the king duly rendered his award: “Right,” he said, “you both stay here till you have made up your quarrel.”^[9] I know that Australia is a particular proponent of Med-Arb, and that it is even explicitly permitted in Section 27D of the NSW Commercial Arbitration Act, but it appears that Med-Arb’s roots go back much further. I also think that asking the parties to swear compliance with the eventual award at the beginning of the case may be a useful technique that we should adopt.

III. Middle Ages

From the Roman Empire through the Middle Ages, arbitration was in regular use across Europe.^[10] In medieval England, there is evidence of arbitration being used more than 500 years before the rise of the common law.^[11] Indeed, according to one account, “arbitration was, perhaps, the habitual mode of settling dispute among the Anglo-Saxons.”^[12] Even Shakespeare made reference in his poem The Rape of Lucrece to arbitrators and mediators.^[13]

In both domestic and international transactions, arbitration became pivotal in medieval England in establishing certainty and stability between local and foreign merchants and enhancing the rule of law within the business community.

Domestically, arbitration was the mandatory dispute resolution system for the English trade guilds. The Men of Ipswich, the Men of Gloucester, the Guild of St. John of Beverly of the Hans House and other English guilds all required their members to submit disputes to a third-party arbitrator as part of a broader effort to promote settlement and peace among the guild members.^[14] Interestingly, the guild arbitration system was entirely self-enforcing: if a member failed to comply with an arbitrator’s award, he would be excluded from the guild and therefore without the means to continue practicing his trade.^[15]

Despite the parallels between medieval and modern arbitration, I would be remiss not to discuss the notable procedural differences between the two eras. For those of us accustomed to conference room catering during hearings, one may wonder if we have something to learn from the Guild Merchants at Yarmouth, where arbitrations were held at community feasts and might be accompanied by: “rost byffe, grene gese, weale,… pyggys, lambe, costard,…good bere and ale … not sparing any dainty fare which might be had for money.”^[16]

Outside the realm of the merchant guilds, arbitration proved an indispensable tool for bringing certainty and efficiency to cross-border mercantile transactions. King Edward I even mandated the use of alternative dispute resolution for foreign businessmen, proclaiming in the Ordinance of 1419 that “[t]he King doth will that no foreign merchant shall be delayed by a long series of pleadings…[and] doth command that the Wardens and Sheriffs shall hear daily the please of such foreigners … [and give them] speedy redress.”^[17] King Edward thus recognized that business should not be distracted by a dispute while awaiting a long court or arbitration process – a plea we regularly hear from businesses today.

In cases involving foreign traders, arbitration also allowed litigants to avoid the technicalities and inconsistencies of the common law, which often perplexed foreign merchants. The proceedings could be heard by bilingual arbitrators who were fluent in the native tongue of the parties.^[18] Arbitration thus offered the business community both an efficient and comprehendible process for dispute resolution, adding certainty and trust in the commercial relationships between local and foreign merchants. While awards could be brought to the courts to be overturned, only in limited circumstances, such as duress, would courts opt to do so.^[19] Rather, outside the context of the trade guilds, courts regularly enforced arbitration awards by requiring losing parties to pay a penal bond if they failed to comply with the terms of the award.^[20] As a general matter, arbitration enjoyed a harmonious and mutually beneficial relationship with the English courts during the medieval period, and the courts helped to maintain arbitration’s place in the business community as an efficient and effective forum for dispute resolution.

IV. 17^th - 20^th century Europe and United States

Despite the growth of arbitration in the Middle Ages and the close ties between the courts and the tribunals during the period, by the turn of the 17^th century, arbitration began to face some resistance across a number of legal systems, including France, the United States, and to a certain extent, England.

In England, although arbitration generally enjoyed a positive relationship with the common law courts, several common-law judges issued opinions that undermined the legitimacy of arbitration agreements. In particular, Vynior’s Case, which was issued by Lord Edward Coke in 1609, has been credited as having hindered the development of arbitration in England and the United States for three hundred years by questioning the ability to enforce pre-dispute arbitration agreements.^[21] According to Coke’s records, the case was brought by Vynior against Wilde for payment of a bond, which secured the parties’ promise to submit the dispute to an arbitrator.^[22] Wilde, in defense, claimed that he had revoked the arbitrator’s authority and therefore should not be subject to payment of the bond.^[23] While Coke ruled in Vynior’s favor and granted him payment of the bond, he seemed to agree with Wilde’s reasoning in part, stating in dicta: “[A]lthough… the defendant was bound in a bond to… observe [the] arbitrament, yet he might countermand it; for a man cannot by his act make such authority… not countermandable, which is by the law and of its own nature countermandable… And therefore… the authority of the arbitrator may be revoked.”^[24]

Nevertheless, arbitration continued to be an active alternative to the courts in England and the United States between the 17^th and 20^th centuries, demonstrating that the business communities in these countries believed arbitration was of critical importance to maintaining business relationships and providing certainty to commercial transactions.

Indeed, potential litigants even went so far as to use the press to persuade opposing parties to arbitrate. At a recent talk in NY, Nigel Blackaby referred to an advertisement in the 1752 edition of the New York Gazette and Weekly Post Boy in which one party wrote:

I am sorry to hear that the Difference between you and Mr. A is at last like to be brought to a Law-Suit … The Law, my good Friend, I look upon more than any one thing as the proper Punishment of an overhasty & perverse Spirit, as it is a Punishment that follows of a man’s own seeking and chusing. You will not consent perhaps now to submit the Matter in Dispute to Reference; but let me tell you that after you have expended large Sums of Money, and squander’d away a deal of Time & Attendance on your lawyers, and Preparations for Hearings one Term after another, you will probably be of another Mind, and be glad Seven Years hence to leave it to that Arbitration which you now refuse.”^[25]

Over a century later, in 1892, an anonymous letter to the Times in London also appeared to capture the business community’s preference for arbitration during this period: “The mercantile public is not fond of law,” the author observed. “They prefer even the hazardous and mysterious chances of arbitration in which some arbitrator who knows as much of the law as he does of theology, by the application of a rough and ready moral consciousness, or upon the affable principle of dividing the victory equally between both sides, decides intricate questions of law and fact with equal ease.”^[26]

V. State-to-state arbitration

A. Overview

In the same way that private alternative dispute resolution contributed to enhance stability and certainty in commercial relations, the institution of international arbitration has historically played a fundamental role in promoting peaceful relations between nations and has contributed to an international rule of law. As expressed by the Secretary General of the Permanent Court of Arbitration recently before the UN General Assembly, “even the most intractable conflicts involving States can be resolved peacefully through international law”^[27]

B. International Arbitration in Ancient Times and the Middle Ages

Ancient mythology offers examples of divine arbitrations in matters arguably international by then-prevailing standards, such as disputes between Poseidon and Helios over the ownership of Corinth and between Athena and Poseidon over possession of Aegina.^[28]

But deities aside, as Gary Born tells us in his Introduction to International Arbitration, arbitration between states or state-like entities has been used since antiquity, and it has been heralded as “the oldest method for the peaceful settlement of international disputes.”^[29] For example, in 2100 B.C., in the case of Ur v. Lagash, the King of Uruk ordered one city to return territory seized by force from another,^[30] and in 400 B.C. a bitter feud between two Sumerian cities situated near each other on a canal was arbitrated by the King of Kish, who defined the frontier between two states.^[31]

In Ancient Greece, arbitration was also not limited to the resolution of commercial disputes. The Greeks frequently included arbitration clauses in state-to-state treaties to resolve through arbitration future disputes that might arise under the treaty as well as submission agreements regarding existing interstate disputes.^[32] An early example of a treaty of peace including arbitration was the treaty for 50 years between Sparta and Argos in 418 B.C, which provided: “If there should arise a difference between any of the towns of the Peloponnesus or beyond, either as to frontiers or any other object, there shall be an arbitration.”^[33]

C. The Jay Treaty of 1794 and the beginning of a modern era of international arbitration

The popularity of state-to-state arbitration declined significantly during the Middle Ages, but it is worth noting that the 1648 Treaty of Westphalia, which has been recognized as marking the beginning of the modern era of the international political system, included an option to arbitrate over the “controversy touching Lorain.”^[34]

It was the Treaty of Amity, Commerce and Navigation between Britain and the United States of 1794, known as the Jay Treaty, that reawakened interest in international arbitration and ushered in a new era of state-to-state arbitration.

Concluded in 1794 between the United States and Great Britain after the Revolutionary War, the Jay Treaty spawned the creation of three mixed Anglo-American arbitration commissions to resolve different categories of disputes that included boundary disputes and claims by British and American citizens whose property had been damaged or seized during the war.^[35] In determining questions of law, the Maritime Claims Commission considered general principles of international law and authorities “on the law of nations.”^[36] The arbitration commissions decided both state to state disputes and disputes between states and individuals. A border dispute regarding the St. Croix river was decided in a unanimous award,^[37] and between 1798 and 1804, over $11 million dollars were awarded to U.S. claimants, thereby eliminating, for the time being, one of the major lasting tensions between the United States and Great Britain.^[38]

The Jay Treaty was thus an important precursor to international investment treaties and to the investment treaty arbitration system in place today.

Also, importantly, the Jay Treaty led to a renaissance of state-to-state arbitration in the nineteenth century.^[39] In the words of James Brown Scott more than a century ago, the success of the Jay Treaty represented “the firm, and, it is to be hoped, the unalterable conviction … that war, if ever permissible, can only be a last resort, and that it is a crime to draw the sword for the redress of wrongs if peaceful means can be found or devised to settle an international controversy.”^[40] In the hundred years after the Jay Treaty’s first award, there were more than one hundred interstate arbitrations.^[41] Many of these arbitrations were in the form of claims commissions that settled multiple disputes, such as the United-States Mexican Mixed Claims that heard over 2,000 claims between 1871 and 1876,^[42] with claims covering disputes ranging from cattle theft to denial of justice as well as claims arising out of the Mexican Revolution from 1910 to 1920.^[43]

One significant arbitration of the 19^th century was the Alabama arbitration of 1871-1872. The Alabama Claims Arbitration Panel was an ad hoc international tribunal established by the United States and Great Britain in 1871 to decide whether the United Kingdom had violated international law when it permitted British companies to build Confederate ships that contributed to the war efforts of the South against the North during the American Civil War.^[44] The tribunal found that Britain had failed to observe its international obligations as a neutral state and ordered it to pay the United States $15.5 million US dollars, which Britain duly complied with.^[45]

The Alabama arbitration served as a demonstration of the effectiveness of arbitration in the settlement of a major dispute.^[46] It was said that because of the resolution of the Alabama dispute, “a war between two nations, or what would have been worse—a war against the future” had been prevented; that “a hundred thousand Americans and as many Englishmen have to thank this day that they are alive” and that the Alabama Question had been settled “not to the advantage of America, but of justice, not to the injury of England, but for the good of future generations.”^[47]

The success of the Alabama arbitration and others in the nineteenth century contributed to the efforts to construct a general law of arbitration so that states wishing to have recourse to this means of settling disputes could rely on uniform and agreed-upon procedures.^[48]

D. Creation of the Permanent Court of Arbitration and the International Court of Justice

Indeed, across the Atlantic, proposals for permanent state-to-state arbitration began to gain strength, most notably at the 1899 Hague Peace Conference which ultimately produced the Hague Convention of 1899 on the Pacific Settlement of International Disputes.

To understand the context of the 1899 Hague Peace Conference, whose main objective was to discuss disarmament and peaceful settlement of disputes, one needs to appreciate the contemporary concern at the end of the 19^th century about the growing horrors of war and the developing belief that international arbitration, if implemented through the establishment of a permanent court, could serve as vehicle for ending war and promoting peace.^[49]

These principles are captured in the preamble of the Hague Convention of 1899, which established the Permanent Court of Arbitration. “Desirous of extending the empire of law,” the text states, “and of strengthening the appreciation of international justice,” “[the drafters are] convinced that the permanent institution of a Tribunal of Arbitration, accessible to all, in the midst of the independent Powers, will contribute effectively to this result.”^[50]

While the influence of the two Hague Peace Conferences of 1899 and 1907 was clearly hampered by World War I, they nonetheless had lasting effects on the future of international arbitration and interstate peace settlement. Not only did they result in the establishment of a Permanent Court of Arbitration, but they also served as a precursor to the Permanent Court of International Justice and eventually the International Court of Justice.^[51] And more importantly, as observed by the United States Secretary of State at the time, ElihuRoot, “[t]he most valuable result of the Conference of 1899 was that it … justif[ied] the belief that the world ha[d] entered upon an orderly process though which, step by step, in successive conferences, each taking the work of its predecessor as its point of departure, there may be continual progress toward making the practice of civilized nations conform to their peaceful professions.”^[52]

I. Introduction

Thus, today, we have quite a long legacy to uphold.

For millennia, businesses and states have relied on arbitration to resolve disputes, and arbitration has created and enforced a rule of law. Arbitration has created certainty that commercial transactions could be upheld; it has provided a mechanism for private persons to bring claims against governments; and it has even avoided war between states.

Now, early in the 21^st Century, the success of the system has caused some stresses, and some have even said that the system itself is threatened. It is incumbent on those of us who practice in the field to preserve the system of international arbitration to enforce the rule of law.

II. Commercial arbitration

That arbitration has become the dispute resolution method of choice in international commercial contracts is not surprising. The combination of the wildly successful New York Convention, the development of sophisticated arbitral institutions, and the passage of arbitration-friendly national legislation has made international arbitration an extremely attractive option.

Today, an agreement by two business partners to arbitrate future disputes is a binding contract enforceable in courts around the world. And arbitration is not merely a private affair. Virtually every state in the world has now committed to placing the coercive authority of its national courts behind a valid arbitral award.

The exponential growth in the number of arbitrations speaks for itself. The ICC’s annual caseload in 1955, when I was born, was 33. By the 1990s, it was around 300 cases per year, ^[53] and now it is close to 800.^[54] The caseloads of other arbitrations across the globe, like the LCIA, SCC, SIAC and AAA ICDR, have doubled or better just in the last decade.^[55]

Ultimately, the success of this transnational justice system is best measured not by the number of disputes brought but rather by the countless contracts that call for binding arbitration of all future disputes. A 2008 study conducted by PricewaterhouseCoopers found that 88% of the counsel who responded to the survey reported that their company was engaged in international arbitration.^[56]

The New York Convention: The 1958 New York Convention has without doubt been the single greatest contributor in our field to the rule of law. The NY Convention has reinforced this parallel system to national courts. The system is so effective that the vast majority of awards are paid without any court involvement at all.

There is an interesting ongoing debate in the scholarly literature about the precise nature of the relationship between international arbitral tribunals and national courts. While some scholars (most notably Emmanuel Gaillard) argue that a “transnational system of justice” or an “arbitral legal order” has emerged,^[57] others (such as Michael Reisman) emphasize that the system’s “operation and effectiveness is inextricably linked to prescribed actions by national courts” and depends on “the availability of public power to compel compliance” with arbitration agreements.^[58]

Both sides can agree, however, that the system of international arbitration, supported by the strong structure of the NY Convention, has succeeded in creating security and predictability in international commercial relationships.

The New York Convention’s success is particularly astonishing when contrasted with the repeated (and so far unsuccessful) attempts to conclude an international convention on the enforcement of foreign judgments. While a Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters was concluded in 1971, only Albania, Cyprus, Netherlands, Portugal and Kuwait have signed on to it.^[59]

At the suggestion of the United States, the Hague Conference on Private International Law again prepared a preliminary draft Convention on Jurisdiction and Foreign Judgments in Civil and Commercial Matters in the late 1990s.^[60] Unfortunately, these efforts, in which I had the honor to participate, also did not result in a general convention on recognition and enforcement.

The one notable exception to this sorry history is of course the Brussels and Lugano Conventions and now the European Union’s Council Regulation No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.^[61] As a general rule, any judgment given in an EU country must be recognized in another EU country without any special procedure being required. The exceptional nature of this regime rather proves the rule, although efforts have been made (and some conventions successfully ratified) in Latin America and the Middle East.^[62] Given the special nature of the EU, in particular its presumption of equivalence of laws and their administration between the member states and principle of mutual recognition, it is hard to see the regulation forming a basis for developments elsewhere.

It is interesting to consider why we have had so much more success with a convention on recognition of arbitral awards than a judgments convention. One reason that states are unwilling to commit to enforcement of another court’s judgments relates to differences in political and legal tradition between the countries. Nevertheless, countries have consented to enforce awards rendered by arbitration tribunals applying different laws and procedures, a point forcefully brought home by the fact that, at the height of the Cold War, the NY Convention was in force in the Soviet Union, United States, Cuba and a swathe of developed and developing countries from all four corners of the globe.^[63]

It even proved impossible to conclude a bilateral judgments treaty between the UK and US, two countries with a shared common law history. When a draft convention was published in 1977, the reaction in the UK was “overwhelmingly negative.” The English bar and the insurance industry were appalled at the idea that “all judgments of courts of the United States would be required to be enforced, including ‘excessive’ jury verdicts, treble damage antitrust judgments, class actions, and judgments rendered on the basis of long-arm jurisdiction.” Negotiations fell apart following the UK delegation’s proposal that all tort judgments might be excluded from the scope of the agreement.^[64]

The success of the NY Convention and the failure to create a global judgments convention highlight two additional advantages to the system of international arbitration: Countries enforcing arbitral awards have less reason to fear corruption of the decision-maker or bias in favor of a party on his home turf.

Andreas Lowenfeld has suggested a couple of interesting theories for the difference in treatment: First, that “judgments of courts are based on a wide variety of jurisdictional bases, only one of which depends on the consent of the judgment debtor; arbitral awards, in contrast, are virtually always based on consent to jurisdiction.” He suggests that the finality of arbitral awards, even at the seat of the arbitration, also cuts in favor of their general enforceability.^[65]

The success of the NY Convention reflects states’ trust in the international arbitration marketplace. States trust in the quality and independence of awards emanating from a tribunal picked by the parties, or at least, perhaps, they are happy to respect the resolution of the dispute within a forum that enjoys both parties’ active consent. On the other hand, there is apparently not enough trust between national courts, at least at a global level. One thing is clear: in the absence of a global judgments convention, an international arbitral award is considerably more valuable than most foreign court judgments.

This contrast reflects the enduring contribution of arbitration to the rule of law. It means that international commerce depends on an effective and efficient system of international arbitration. Together, the New York Convention and pro-arbitration national legislation facilitate trade by providing certainty to businesses in their relationships with one another. Indeed, certainty is the hallmark of the New York Convention, which requires that courts enforce all valid awards, even if the tribunal committed a clear error of law.

Before leaving commercial arbitration, I should discuss for a moment one way in which international commercial arbitration does not contribute to the rule of law. Because one of the key attractions of resolving disputes through commercial arbitration is its confidentiality,^[66] these awards are generally not published. Potentially useful awards from which relevant knowledge and experience could be drawn are unavailable to participants in other arbitral proceedings. This is also detrimental to the development of the law itself, particularly in common law systems where the growth of a body of law such as commercial law requires the continuous evolution of case law.

As a result, there is substantial debate today about whether more commercial arbitration awards should be published, with appropriate redactions to keep the parties private. I personally feel that the drawbacks of greater publication outweigh its potential advantages. I worry that if awards are published with the names of the arbitrators, they will feel compelled to write awards that do more than resolve the commercial dispute between them, whether to try to develop the law or to demonstrate their abilities as an arbitrator to future appointers. Unlike investment treaty arbitration and sports arbitration, where public awards are necessary to create standards of conduct and to interpret binding documents with standard provisions, as I will discuss momentarily, parties do not need arbitration awards to understand what New York or English or New South Wales law requires of them. Similarly, arbitrators do not need other arbitral awards to inform them of these laws, because there are so many other sources. Thus, there is much less benefit to make up for the disadvantages of publication.

I understand, however, the concern that having so many important commercial disputes decided in private may hinder the development of the common law. The solution is perhaps to ensure that courts offer a more attractive alternative, in terms of speed, quality and enforceability. The English courts provide an excellent example of this, as 80% of recent cases before the English Commercial Court involved one party from outside the jurisdiction, and in 52% of such cases, neither party was from the UK. Efforts to create better commercial courts here in Australia, New York and elsewhere (such as the court at the Dubai International Financial Centre) can enhance this possibility.

III. Investment arbitration

Over the last couple of decades we have witnessed some astonishing developments in investor-state arbitration. Investment arbitration, despite the fact that it is estimated to comprise less than five per cent of international arbitration cases,^[67] has had a profound impact not only on the development of public international law but also on the development of national law.

Investor-state arbitration is of course an entirely different animal than traditional commercial arbitration since these disputes involve sovereign states rather than just private parties. There is simply much more at stake here. In this context, we are concerned not only about certainty but also about legitimacy. We care far more about tribunals “getting it right” because the awards involve public goods and public money.

Benefits Over the Old System: Despite its faults, I think we can all agree that the current investment arbitration regime is much more effective than the diplomatic intervention system it replaced.

The ICSID Convention specifically provides, in Article 27, that it is meant to replace the traditional system of diplomatic protection.^[68] In the words of Ibrahim Shihata, the former Secretary General of ICSID, ICSID has helped “depoliticize” the settlement of investment disputes.^[69]

Rather than having to rely on their own governments for relief (a process that is likely to be unpredictable and profoundly political), investors themselves have standing to bring claims, effectively removing (or at least checking) the power of the states to act unilaterally, arbitrarily and with impunity or to negotiate bilaterally around the consequences of each contractual breach.^[70] In other words, the rule of law depends not on the political choices that may determine whether a diplomatic protection claim is brought or how it is resolved, but instead on the enforcement of defined rights and obligations through neutral decision-making by independent arbitrators.

Furthermore, the diplomatic protection system did not contribute to the creation of a rule of law, because it provided investors with neither substantive nor procedural rights. There were no published decisions on which private parties and States could base their conduct. Nor was there any certainty or predictability. Instead it was grounded in the rights and responsibilities of states vis-à-vis each other and was, at its heart, a political process.^[71]

The Numbers: The growth in the number of investment treaties and investor-state arbitrations has been quite staggering. Many reasons have been given for this growth, including simply the greater importance of cross-border trade and investment. My own personal view is that the Czech Republic’s compliance with the $350 million CME award in the early 2000s showed how effective these treaties could be.

UNCTAD reports that at the end of 2011, there were 2,833 BITs in existence.^[72] Some states, including Germany and China, are parties to over 100 BITs each.^[73]

At least 46 new treaty-based investment arbitration cases were initiated in 2011, bringing the total of known cases filed to 450 by the end of that year.^[74] ICSID is the forum for most of these arbitrations. As of June 30, 2012, ICSID had registered 390 cases, almost all of them in the last decade.^[75]

The Growth of International Trade: The explosion in the number of investment treaties has been matched by the growth in international trade.

While studies have found it difficult to determine, as an empirical matter, whether there is a causal relationship between the proliferation of investment treaties and the growth of foreign investment,^[76] the existence of bilateral investment treaties, including the dispute resolution mechanisms they provide, is certainly a factor (if only one of many) in investment decisions.^[77] Governments recognize the need for investors to be comfortable that their investments will be protected and that there will be an effective dispute resolution system. The FT reported recently, for example, that the Saudi government hopes to establish a special arbitration center in London to hear claims involving Saudi parties, such as Aramco, in order to promote more investment there.^[78]

That being said, it is clear that the availability of investment arbitration is by not by itself necessary for robust foreign direct investment. While Brazil has liberalized its economy considerably and receives massive foreign investment, it has yet to sign the ICSID Convention and has not ratified any of the small handful of BITs it has signed.^[79] Brazil’s immense size and resources may explain why it has not needed BITs. However, as the BRIC and other countries become more central to the global economy and become capital exporters, their outlook and use of BIT arbitration mechanisms will change. When Petrobras was effectively expropriated by Bolivia, it had to consider bringing a claim through the Dutch-Bolivia treaty.

China is another interesting case study. China is now second only to Germany in terms of the number of BITs.^[80] However, now that it is increasingly a capital exporter, its BITs will be seen as a source of protection for Chinese companies. Just a couple of months ago, Ping An, a Chinese financial services company, filed an arbitration against Belgium arising from that government’s banking sector bailout.^[81]

The Development of Substantive Standards: This proliferation of BITs and FTAs, and the interpretation of these treaties by arbitral tribunals, has inevitably reshaped international law governing the treatment of foreign investment.^[82]

Most BITs and FTA investment chapters share similar, and often identical, substantive and procedural protections: national treatment; most-favored nation; fair and equitable treatment; recourse to international arbitration; no expropriation without compensation.

Of course, case law governing state obligations in relation to expropriation of a foreign investor’s assets pre-dates the advent of the BIT regime. For example, in the Chorzów case, the PCIJ found that Poland had acted in breach of its treaty obligations because by expropriating a factory belonging to a German investor without indemnification, there was a failure to accord the investment “treatment recognized by generally accepted principles of international law.”^[83] A later judgment on damages contained one of the most famous judicial pronouncements in international law: “it is a principle of international law, and even a general conception of law, that any breach of an engagement involves an obligation to make reparation.”^[84] Interestingly, the Court also referred to the “jurisprudence of arbitral tribunals,” when stating that the damage suffered by the investor “is therefore equivalent to the total value – but to that total only – of the property rights and interests of this [investor] in [the investment], without deducting liabilities.”^[85]

Virtually all BITs contain similar language “allow[ing] States to expropriate investments as long as the taking is effected for a public purpose, in a non-discriminatory manner, under due process of law and against the payment of compensation.”^[86] Arbitral decisions have helped to flesh out the meaning of these conditions and the extent of compensation required to make an investor whole. Much of the recent activity in this area has focused on indirect expropriation, and tribunals have been key in fleshing out which actions can constitute an indirect taking, including: the failure to reimburse VAT (Occidental v. Ecuador I),^[87] arrest or deportation of key officers/managers (Biloune v. Ghana),^[88] or the forced modification of corporate-contractual arrangements (CME v. Czech Republic).^[89]

Likewise, the vast majority of BITs require states to accord “fair and equitable treatment” to foreign investors, although the wording of specific provisions may differ, sometimes significantly. For example, Art. II of the US-Argentina BIT states that “Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by international law,”^[90] whereas Article 5 of the more recent BIT with Rwanda provides that “Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security.”^[91] Tribunals have not always been consistent in the threshold that they apply when assessing investors’ FET claims, and one of the biggest splits may reflect this distinction between FET provisions that refer to customary international law and those that do not. Indeed, in the recent NAFTA Award in Merrill & Ring v. Canada, the Tribunal analyzed the FET claim through the prism of a “comparatively low” threshold, and a higher one under which the state’s conduct must be “sufficiently serious as to be readily distinguishable from an ordinary effect of otherwise acceptable regulatory measures.”^[92]

I do think, however, that tribunals are gradually reaching a certain level of consensus at least with regard to the minimum standard of treatment that FET requires. NAFTA jurisprudence has been particularly fruitful in this regard. While both the US and Canada have pushed tribunals to establish a very high threshold before state conduct can be found to breach the standard – in some cases going so far as to argue that it remains the same today as it was in 1926 when the US-Mexican Claims Commission issued the Neer award – on the whole, tribunals have resisted the notion that the standard has not developed over the past 100 years.

In fact, the development of the FET standard can be viewed as the prime example of the role that BIT awards play in the development of international law. A tribunal deciding an FET claim will often cite to other awards, usually decided under FET provisions contained in different treaties, to justify their own articulation of the standard.

Of course, this development of substantive international law standards under the BIT regime gives rise to many key questions that have far-reaching implications for the rule of law. The first is: what do arbitral awards do? Are they a source of law? If we conclude that they are, are they sufficiently consistent to fulfill this precedent function adequately?

On the first question, the arbitration awards created by the BIT system have changed our normative expectations of how a government should behave towards a foreign investor. The proliferation of tribunals and awards has inevitably contributed to the gradual emergence of a body of supranational law and the creation of standards for sovereign behavior that prevent them from exercising power in an arbitrary fashion.^[93]

Formally, of course, “judicial decisions,” including arbitration awards, are only a subsidiary means for the determination of rules of law, with international conventions, custom and general principles of law taking precedence under Article 38 of the Statute of the ICJ. I could fill this entire speech with a scholarly treatise on the interpretation of Article 38 and the manner in which it has been applied, sometimes inconsistently, by the ICJ and arbitration tribunals. I think it is simply worth noting that, as Jan Paulsson has said, “It is pointless to resist the observation that precedents generate norms of international law. It is a fact of life before international courts and tribunals.”^[94]

Gabrielle Kaufmann-Kohler has applied Lon Fuller’s concept of inner morality of the law to reason that, in the international investment law context, where few rules are explicitly stated in the treaties, decision-makers actually create law through dispute resolution.^[95]

Rosalyn Higgins has famously applied similar reasoning to the international law context more generally. For Higgins, international law is a continuing process of authoritative decisions, i.e. decisions made by authorized persons in appropriate forums, within the framework of established practices and norms.^[96] Seen in this light, there can be no doubt that arbitrators are creating law in the international investment context.

As the Saipem tribunal recognized, tribunals consequently have “a duty to seek to contribute to the harmonious development of investment law and thereby to meet the legitimate expectations of the community of States and investors towards certainty of the rule of law.”^[97] Gabrielle Kaufmann-Kohler has expressed this as arbitrators’ “moral obligation to follow precedents so as to foster a normative environment that is predictable.”^[98]

I want to stop here for a moment to consider this notion of precedent. When we speak of precedent, it is important to bear in mind that we do not mean binding precedent, as in common law systems. I do not think that this is how Gabrielle or Jan used the term, nor is it the function of arbitral awards in the international sphere.^[99]

Instead, we are talking about precedent in the sense of providing guidance to subsequent decision-makers. That sense of precedent exists even in civil law systems. Indeed, Gabrielle Kaufmann-Kohler has convincingly argued that, “the precedential value of cases may be weaker than in common law countries, though it is nonetheless well established there. Indeed, civil law countries have such notions as arrêt de principe, jurisprudence constante, which are similar to stare decisis except that they do not require adherence to a legal principle that has been applied only once before.^[100] Courts in France and Switzerland will apply relevant case law unless there is good reason not to. If you open up the French Civil Code, each provision is followed by a brief description of the key cases. In Ecuador and in other Latin American countries, a principle is binding in its courts if it has been adopted three times by the Supreme Court.

Even in common law systems, we do not blindly adhere to all judicial decisions. In the US context, for example, the very well-respected Judge Gerald Lynch (who sits on the federal court of appeals in New York) recently noted at an event in New York that, while he views US Supreme Court decisions and other decisions from his own court as law, he views decisions from other courts as “interesting” with about as much precedential value as a law review article.

So perhaps what we are looking at is a spectrum. At one end, you have the deference that US courts will pay to decisions of the Supreme Court: those decisions are the law of the land that must be applied. Decisions of arbitral tribunals, on the other hand, are followed when other tribunals respect their reasoning, and this is not very different from what courts do. When I first started as an associate, I knew that if a decision had been written by Judge Henry Friendly, I should specifically note that fact in the case citation, because his views were so well-respected. As I have already mentioned, the PCIJ in 1928 referred to the “jurisprudence of arbitral tribunals” in the Chorzow decision. ^[101]

The question then is, are arbitration awards sufficiently consistent to build effectively a body of precedent, albeit non-binding. It cannot be denied that there are discrepancies and contradictions in the practice of investment tribunals. Investment treaties generally do not establish well-defined rules, but rather a broad set of ideals, which arbitrators then need to interpret. They may sometimes assign different or even conflicting meanings to these provisions.

By way of example, tribunals have taken differing approaches when determining whether an economic activity constitutes an “investment,” whether this analysis is done strictly on the consenting instrument in the case of an UNCITRAL arbitration or also under Article 25 in the case of an ICSID arbitration. While some tribunals give the utmost discretion to how the parties defined the term “investment” in the consenting instrument, other tribunals have imported objective criteria into the relevant definition.

However, perfect coherence and consistency are impossible to achieve. In international arbitration, as in domestic courts, only the “hard” cases, where reasonable people might disagree about the outcome, require adjudication.

Inconsistency is a feature of any national judicial system. Speaking again about the US, there will often be a “split” between federal courts in different parts of the country, with each applying case law that is fundamentally inconsistent. The Supreme Court does not resolve all of these splits. It does not mean that one of the strands of case law is right or wrong, and it has not undermined the US system of binding precedent. Inconsistency is just a fact of life, and it is not fatal.

In any event, perfect consistency may prevent courts and tribunals from doing justice on the basis of the case before them. The fact that there is some inconsistency does not prevent the creation of a body of precedent – especially if arbitrators follow the “moral obligation” articulated by Gabrielle and apply relevant awards unless there is a good reason to do otherwise. In fact, I would argue that international arbitration may be more inclined to the creation of consistent case law than national courts. In the market-place of ideas, the awards that are the best reasoned have greater influence and are followed more often. Similarly, the arbitrators who provide the best-reasoned awards receive a greater number of appointments – thus enabling them to render consistent decisions in a broad range of cases.

In substantive terms, the fact that arbitral awards contribute to public international law and in particular to standards that are binding on states and that impact their ability to regulate requires that the law thus developed be fair and just both to the parties before the tribunal and to the broader constituencies that may be impacted by the decision.

Effects on National Law: The effect of investment arbitration is not limited to international law; it affects national law as well.^[102] While restrictive measures have become more common in recent years,^[103] “[t]he overall policy trend towards continuous liberalization and promotion of investment” continues.^[104] In 2011, close to 80 percent of foreign investment policy measures adopted by states were favorable of foreign investment.^[105]

The system of international treaties and international dispute settlement creates “a powerful incentive for the host state to live by the rules of an investment-friendly climate.”^[106] Any government interested in attracting foreign investment must recognize these principles.

The effects are not only felt by foreign investors, however. Once a government agrees to certain minimum standards of treatment by signing a BIT or a FTA, nationals start to expect the same, and in the words of Jose Alvarez, “it may be too politically costly to explain to local constituencies why only foreigners are entitled to property rights, the rule of law or politically neutral dispute settlement.”^[107]

IV. State-to-state arbitration

There has also been a resurgence in state-to-state arbitration. While the Permanent Court of Arbitration (“PCA”) has been in existence for more than a century, it is only recently that it has been fully utilized. The case load has expanded from a single case in the late 1990s to a current docket of 65 pending cases, which includes state-to-state arbitrations as well as arbitrations between states and non-state actors.^[108] These cases address a variety of vital issues for states, including boundary disputes and disputes concerning sovereignty over maritime resources, water rights, and the environment.^[109]

Perhaps the most notable recent example of the PCA’s potential to promote the rule of law is the Abyei Arbitration of 2009, which was an intra-state dispute between the Government of Sudan and the Sudan People’s Liberation Movement/Army. The PCA was actually able to play an effective role in resolving a serious armed conflict within the boundaries of a single State.^[110] This is an impressive accomplishment. I hope that in the future state to state arbitration can play a greater role in settling controversies between states.

The extent to which state-to-state arbitration can complement the BIT/ICSID arbitration system by providing a forum for resolving disputes concerning the scope of investment protections remains to be seen, however. Despite the fact that BITs generally include interstate dispute settlement clauses, these “have so far been largely ignored.”^[111] A couple of recent cases suggest, however, that state-to-state arbitration may be on the rise in this area as well.

In two awards issued in 2005 and 2008, but only recently made public, an ad hoc tribunal heard a dispute between Italy and Cuba arising from sixteen different investment disputes between Italian investors and the Cuban state or state-owned entities.^[112] In other words, instead of initiating investor-state arbitrations, Italy actually arbitrated directly with Cuba. Italy claimed a “double standing,” in the arbitration; it claimed to be acting both on its own behalf and on the behalf of its nationals (within the framework of diplomatic protection). While the tribunal ultimately dismissed Italy’s claims on the merits, it did hold in Italy’s favor on jurisdiction so other states might follow suit.

This arbitration marks an important milestone “because it is the first publicly known instance where an arbitral tribunal has rendered an award in an interstate dispute arising under a BIT when investor-state arbitration would have been an alternative option according to the treaty.”^[113]

A more recent decision came to a slightly different conclusion, although in the context of a different type of claim. In Ecuador v. U.S., Ecuador brought claims on its own behalf and sought an interpretation of Article II(7) of the U.S.-Ecuador BIT, which states that each nation shall “provide effective means of asserting claims and enforcing rights” with respect to investments. While the award has not yet been made public, it has been reported that the tribunal has dismissed the arbitration on jurisdictional grounds, because there was no “concrete case” to be decided since the United States has not yet taken a position on the interpretation of the Article.^[114]

And besides these cases, it is also worth noting that Spain threatened its own action against Argentina after the nationalization of Repsol.

V. CAS ARBITRATION

Investment treaty arbitration is not the only area in which arbitration awards have played an important role in defining standards of conduct. The arbitration awards issued by the Court of Arbitration for Sport have been critical in interpreting documents of broad application, such as the World Anti-Doping Code and the rules of international federations. And because, like BIT awards, the CAS awards are public, they have defined the bounds of conduct that must be followed by athletes, federations and others in the sports world.

As a result, CAS panels review prior CAS precedents and seek to adhere to them in order to provide predictability and certainty to those who must follow these rules. The award in Andrea Anderson et al. v. International Olympic Committee is illustrative. It stated:

116. “On the issue of the precedential value of CAS awards, the Panel shares the view of other CAS panels. In the case CAS 97/176 UCI v. Jogert & NCF, award of 15 January 1998, the panel rightly stated as follows:

«in arbitration there is no stare decisis. Nevertheless, the Panel feels that CAS rulings form a valuable body of case law and can contribute to strengthen legal predictability in international sports law. Therefore, although not binding, previous CAS decisions can, and should, be taken into attentive consideration by subsequent CAS panels, in order to help developing legitimate expectations among sports bodies and athletes» (at para. 40).

117. Similarly, in the case CAS 2004/A/628 IAAF v. USA Track & Field and Jerome Young, award of 28 June 2004, the panel stated as follows:

«In CAS jurisprudence there is no principle of binding precedent, or stare decisis. However, a CAS Panel will obviously try, if the evidence permits, to come to the same conclusion on matters of law as a previous CAS Panel» (at para. 73).

118. Therefore, although a CAS panel in principle might end up deciding differently from a previous panel, it must accord to previous CAS awards a substantial precedential value and it is up to the party advocating a jurisprudential change to submit persuasive arguments and evidence to that effect. Accordingly, the CAS 2004/A/725 award is a very important precedent and the Panel will draw some significant guidance from it.”^[115]

This last point is important, both in investment treaty cases and CAS awards. It is important for tribunals to consider and draw guidance from the prior precedents and to seek to achieve consistency and predictability. That does not mean, however, slavish adherence to the precedents, as the facts and issues may vary from case to case.

I. Introduction

So we have come a long way from the Spartan temples and Anglo-Saxon buffets.

The increasing use of arbitration to resolve state-to-state and, more prevalently, investor-state disputes has caused something of an evolution within the system. It is no exaggeration to say that a single arbitration award can today impact many millions of people, in many different ways.

In light of the tensions, criticisms and difficulties which arise out of this, Iwould like to look to the future and ask how we can make sure that the BIT system will continue contributing to the development of the Rule of Law in the international sphere. In answering this question, I would like to look in some more detail at the functioning of the BIT system.

II. Investment arbitration: private or public?

How we characterize international investment disputes is more than just an academic question. It defines the roles and responsibilities of all participants in the system. If we view a dispute as a private contractual matter between two parties, there is a strong case for the tribunal to focus very narrowly on the interests of the two parties in relation to the dispute.

Investor-state arbitration was originally viewed as an offshoot of the traditional closed-door model of international commercial arbitration,^[116] but that has changed. Investor-state arbitrations go beyond private business interests and implicate the host state’s public policies, and the rights of many of its domestic constituencies.^[117] There are a number of reasons for this shift:

First, the subject matter of recent investment disputes has highlighted the public law aspects of investor-state arbitration. From sovereign debt restructuring in Abaclat,^[118] to regulations touching on cigarette packaging in Philip Morris,^[119] and Native American lands and the environment in Glamis Gold,^[120] we have come a long way from the classic paradigm of a direct discriminatory expropriation of a foreign investor’s property without payment of adequate compensation.

As Toby Landau pointed out in last year’s Freshfields lecture, not only are these issues of public law, going to the heart of a state’s prerogative to regulate conduct in its territory in the general public interest, they are issues that would be subject to broad judicial deference in national courts.^[121]

Second, increasingly large damages awards have highlighted that this money must usually come from the public purse of the host state, though this debate, like many, has two sides. As I am sure many of you know, on October 5, 2012, an ICSID tribunal awarded approximately $2.3 billion (including interest) to our client Occidental Petroleum for its claims against Ecuador in respect of the unlawful termination of Occidental’s Participation Contract to produce oil from an area known as Block 15 in Ecuador. While Ecuador has sought to stress the impact of this award on the country’s budget,^[122] I would simply note that the government-owned oil company in Ecuador is reported to have earned revenues in the order of $14 billion between 2007 and the first quarter of 2012, much of which would have come from the block that Ecuador illegally expropriated.^[123]

Third, government moves to protect the exercise of regulatory powers from review by investment arbitration tribunals have highlighted the extent to which a tribunal’s mandate can impinge upon a sovereign’s ability to regulate in the general interests of the state. Of course, the Rule of Law always restricts the sovereignty of states by requiring that they exercise power in a lawful, non-arbitrary manner.

For example, this year, the US government issued a new model BIT that maintained the 2004 Model’s “carefully calibrated balance between providing strong investor protections and preserving the government’s ability to regulate in the public interest.”^[124] The new Model BIT contains a number of provisions that are deferential to the host government, such as an expansive and “arguably self-judging” essential security clause, exceptions for state regulations in the fiscal sphere and a provision expressly limiting the scope of liability for indirect expropriations.^[125]

The Model BIT also limits a tribunal’s ability to interpret broadly the fair and equitable treatment standard, and accords foreign investors only the treatment that they would have been accorded under the customary international law minimum standard of treatment of aliens. This is consistent with the “interpretation” issued by the NAFTA Parties in 2001 of the FET provision in the investment chapter of that treaty, which sought to limit it to the customary international law minimum standard.^[126]

Of course, the Australian government has gone further in protecting its ability to regulate from the judgment of arbitral tribunals, as indicated in last year’s Gillard Government Trade Policy Statement:

“The Gillard Government […] will [not] support [dispute resolution] provisions that would constrain the ability of Australian governments to make laws on social, environmental and economic matters in circumstances where those laws do not discriminate between domestic and foreign businesses. The Government has not and will not accept provisions that limit its capacity to put health warnings or plain packaging requirements on tobacco products or its ability to continue the Pharmaceutical Benefits Scheme^[127].”

A number of arbitral tribunals have responded to these concerns by recognizing the need for a balance (including in their application of the FET standard) between the investor’s legitimate and reasonable expectations on the one hand and the state’s legitimate regulatory interests on the other.^[128]

III. Criticisms of the investment arbitration system

This evolution has created its own tensions as an initially private form of dispute resolution struggles to deal with its increasingly public implications. Many have described a “backlash” against investor state-arbitration, viewing it as an illegitimate process through which laws and policies are made and unmade, threatening the rule of law by imposing norms, allocating public funds, and constraining the actions of those bestowed with a direct democratic mandate, through a procedure that is beyond public scrutiny and in which the public has no say.^[129]

There are two points that I would like to make before looking at the most prominent criticisms of the BIT system:

First, we need to keep in mind the goals that we have set for investment arbitration: the formal Rule of Law goals of predictability and stability and the substantive goals of increasing trade and investment flows and economic development.

Second, we need to bear in mind the alternatives. Without some form of independent international forum for resolving foreign investment disputes, investors will be forced to resort to petitioning their home states to intervene on their behalf, or to the national courts of the host state. Neither system is conducive to the creation of an international Rule of Law.

Third, BITs are based on a fundamental bargain: The States give up some portion of their sovereignty – by binding themselves to adhere to certain principles, by agreeing that independent arbitrators may decide whether or not the States have met those standards, and by agreeing to comply with the decisions of those arbitrators – in return for encouraging greater foreign investment into their countries. Having received the benefits of those bargains, States should not renege on the associated burdens.

We might also ask ourselves: why do we care whether or not the BIT system adequately contributes to the Rule of Law on the international plane? So long as the claimant and respondent to a particular dispute are satisfied, why should we care about the rule of law, or anything else beyond the interests of the parties? I think the answer here is legitimacy. If the BIT system fails to provide predictability or stability, or if it fails to recognize and promote the goals that are important to its users, it will lose legitimacy. States and investors must be able to count on predictability and consistency so that they can base their conduct on the interpretations of the treaty obligations that have gained a resonance in the authorities.

Keeping these thoughts in mind, I turn to discuss briefly some of the chief criticisms raised against the international investment arbitration system. I do not discuss all the concerns that have been raised about investment treaty arbitration, or all the benefits. Time does not permit that. However, I think that some examples can help us continue to focus on fostering the Rule of Law through BIT arbitration.

A. Structural Criticisms of Investment Arbitration

Perhaps the most fundamental set of objections against investment arbitration is the structural critique: that the system of investment arbitration is a device imposed by powerful countries on weaker countries and that investment arbitration favors capital-exporting states and the interests of their investors.

I would simply point out here that today this view of the system appears to be untenable. ICSID’s statistics demonstrate that governments succeed in defeating claims roughly half the time, and that even when investors win, they often receive only a small portion of the amounts sought. Many capital-exporting countries have also given up part of their sovereignty by agreeing to abide by certain treaty obligations or the decisions of international tribunals; indeed, all treaties involve a release of some sovereignty. Thus, decisions that are legal domestically, such as the imposition of certain trade barriers or quotas, may not be legal under that country’s international obligations.

B. Composition of Tribunals

Nevertheless, we need to be sensitive to that concern and make sure that those making the decisions in BIT arbitrations understand the perspectives of the host nations as well as the investors. A common critique directed at international arbitrators is that we are drawn from an elite group with backgrounds in commercial law. This is perceived to be problematic for a number of reasons:

We are perceived to be unsympathetic to non-commercial interests,^[130] and therefore unwilling to take account of such interests even when faced with the type of broad public dispute involved in a treaty claim. Alternatively, we may be seen as simply lacking the right kind of expertise to assess adequately those competing non-commercial interests. As a result, it is argued that investment arbitration fails to take into account relevant perspectives, including host states’ international law obligations and responsibilities outside investment treaties.^[131] To deal with this concern, it may be necessary to think beyond the traditional 2-party model that still dominates investment treaty arbitration. Tribunals should be more open to hearing from amici, as I will discuss in a minute.

A related concern may be the lack of diversity in the narrow pool of arbitrators who have sufficient standing in the community to be considered for such important disputes. When Toby Landau spoke to you three years ago, he gave the example of the Pakistani Supreme Court questioning the ability of three foreigners in London to decide about “issues of corruption and bribery” that “go to the very core of the constitution of Pakistan.”^[132]

In fact, the issue is broader than that; if arbitrators are deciding disputes of public import, and if they are creating law, then we want the arbitrators to be diverse and to represent all of us. We need to improve our efforts at expanding the number and the diversity of the arbitrators sitting on such cases. Certainly, Meg Kinnear’s efforts in seeking to have parties agree to arbitrators outside the ICSID roster have been helpful in this regard.

Inclusivity / Transparency: BIT arbitration has also been criticized for lacking transparency and inclusivity. Because investment arbitration is modeled on private commercial arbitration, where the only relevant interests are those of the parties, investor-State arbitration does not generally allow for: (i) the disclosure of information prior to the delivery of the award, including public access to hearings and written documents in the proceedings; and (ii) the right to participate in proceedings as a non-party.^[133]

In the public law sphere, decisions can have a serious impact on third parties’ interests. A system that does not allow for these parties to be heard is vulnerable to serious criticism. Moreover, because an award may eventually have to be paid from a public Treasury, the more the public knows about the decision the government made, its reasons, and the government’s obligations under the treaty, the more likely it is that the public will eventually accept compliance with that award. There can be no questions that greater transparency better promotes the Rule of Law.

I think this is one area where the arbitration community has already made great strides.

The NAFTA Parties have been at the forefront of initiatives promoting transparency in arbitration proceedings over recent years. Reflecting Model BIT provisions,^[134] the NAFTA Free Trade Commission’s Notes of Interpretation of Certain Chapter Eleven Provisions now provide for NAFTA parties to “make available to the public in a timely manner all documents submitted to, or issued by, a Chapter Eleven Tribunal”^[135] subject to redactions of confidential or otherwise protected information. When we argued the Mobil v Canada case, the entire hearing was open for viewing through closed circuit in another room in the World Bank offices. We were able to close them when certain confidential information was being discussed. Australia has likewise entered into treaties requiring transparency of proceedings.^[136]

A number of tribunals have recognized the importance of including third parties in the BIT arbitration process where important interests are at stake:

Take Suez v Argentina for example:^[137] while the ICSID Rules did not permit a group of five NGOs to attend and participate in the hearings,^[138] the Tribunal nevertheless authorized the petitioners to apply for leave to make amicus curiae submissions. The Tribunal recognized that the case was not “simply a contract dispute between private parties where nonparties attempting to intervene as friends of the court might be seen as officious intermeddlers.”^[139] The Tribunal acknowledged that “[g]iven the public interest in the subject matter of this case, it is possible that appropriate nonparties may be able to afford the Tribunal perspectives, arguments, and expertise that will help it arrive at a correct decision.^[140]”

In 2004, the NAFTA parties issued a Statement explicitly recognizing that nothing in the NAFTA “limits a Tribunal’s discretion to accept written submissions from a person or entity that is not a disputing party (a ‘non-disputing party’).” They recognized that such submissions could “assist the Tribunal in the determination of a factual or legal issue related to the arbitration by bringing a perspective, particular knowledge or insight that is different from that of the disputing parties.”^[141]

Most importantly, the UNCITRAL Second Working Group is nearly finished in its preparation of a legal standard and draft Rules on Transparency in investment treaty arbitration.^[142]

As the draft Rules currently stand, information regarding the names of the disputing parties, the economic sector involved, and the treaty under which the claim is being made would be communicated to the public once the notice of arbitration is received by the respondent. The notice of arbitration (and the response) would be published after the constitution of the arbitral tribunal.^[143] This early disclosure of information will permit and encourage early public engagement with the dispute, allowing the public to better understand the dispute and the basis for awards.

It is proposed that, for investment treaties concluded after the entry into force of the Rules on Transparency, a reference to the UNCITRAL Arbitration Rules would incorporate a reference to the Rules on Transparency unless agreed otherwise.^[144] The parties to the dispute would not be able to derogate from the rules unless permitted to do so by the treaty,^[145] though the Tribunal would retain some discretion in its application of the Rules,^[146] taking into account, among other things, the need to balance the public interest in transparency and the disputing parties’ interest in fair and efficient resolution of their dispute.^[147]

Once finalized, these Rules on Transparency will help to ensure that investor-State arbitration is no longer perceived as taking place behind closed doors, as the rules will undoubtedly influence investment treaty arbitrations even where they do not specifically apply. By institutionalizing transparency – making it the norm rather than the exception – transparency rules can only bolster investment arbitration’s ability to strengthen the Rule of Law.

C. Absence of an Appeal Mechanism

The absence of an appeal system is another oft-repeated concern about investment treaty arbitration. While awards issued under the ICSID Convention are subject to annulment proceedings, the grounds are limited and mostly procedural.^[148] In any event, annulment panels are ad hoc and (unlike the WTO, for example) there is no permanent body established for this purpose. Moreover, as Gabrielle Kaufmann-Kohler has noted, “because of the relatively narrow scope of the annulment grounds, it is unlikely to produce consistent outcomes on the merits.”^[149]

Likewise, national courts have limited jurisdiction to review and to vacate awards under the New York Convention.^[150]

The absence of an appeal system has given rise to two key criticisms:

First, there is the coherence and consistency issue that I mentioned earlier. For some, this is the necessary result of a system built on ad hoc appointments to non-permanent tribunals. Members of a Tribunal often hail from different legal systems, have different experience and different methods of determining disputes. Moreover, even those from similar backgrounds may take very different philosophical approaches to the importance of consistency to arbitration.^[151]

Second, in terms of legitimacy and accountability, as Johnny Veeder has paraphrased the criticism: “the concept … that an arbitrator is a super-judge, that an arbitral tribunal can operate above any international law with a discretion not given to state courts, a lack of accountability for its conduct and an absence of transparency not afforded to any other comparable professional activity in the world, except, possibly, secret policemen.”^[152]

Proposals for an appellate body have been floated on a number of occasions, for example, in the 2004 U.S. Model BIT and other U.S. treaties. The ICSID Secretariat proposed establishment of an appellate mechanism in 2004, but dropped the proposal shortly thereafter because it was held to conflict with Article 53 of the Convention, which provides that an award shall not be subject to any remedy except those provided for in the Convention.

However, I feel that an appellate mechanism would raise at least as many problems as it would solve. First, of course, creating an appellate body is only the answer if it is available for all investment arbitrations, whether filed at ICSID or another institution or under UNCITRAL Rules. Otherwise inconsistency will persist.

Second, given the likely volume of cases, and in the interest of not bestowing too much power in the hands of a small number of individuals, the appellate body would have to include more than just a handful of judges. There would then be no guarantee of consistency between the decisions of different judges or panels.

Third and most importantly, I worry that the selection of the appellate panelists would be overwhelmed by political considerations. How many judges could be appointed from capital-exporting countries or developing countries? How would Brazil and China count in that calculus? It is most likely that quality and experience would not be the overwhelming factors in making these selections.

The ad hoc, party appointment system currently in place for investment arbitration leaves these issues to the market place and probably leads to better results. Parties want to appoint arbitrators whose views will be influential in the tribunal’s deliberations. Arbitrators of insufficient quality or who have become too associated with the perspective of one side or another will ultimately be appointed less often. So will arbitrators whose schedules are so full that they cannot meet the time and efficiency demands of the parties.

Rather than create an appeal mechanism that will simply create its own problems, once again the burden is on us, the arbitration community, to address concerns related to inconsistency. We must continue to build a system of soft precedent, while allowing room to take account of fact-specific aspects of the case and other values such as fairness. Arbitrators should be both generating well-reasoned awards that lend themselves to application in other cases, and respecting precedent unless there is a compelling reason not to do so.

IV. Concluding remarks

I thank you for your attention to these remarks, and I hope that you have found them to be useful. We can have no doubt that the system of international arbitration has substantially contributed to the rule of law throughout the ages. However, for it to continue to do so, we need to focus on the criticisms that have justly been raised and to deal with them. As I have argued many times, international commercial arbitration needs to become more efficient and sensitive to the needs of businesses in the fast paced 21^st Century. We also need to be sensitive to the criticisms that have been brought against investment arbitration. And as I argued at the beginning, in working to improve the process, we should always keep our eye on the need to preserve international arbitration’s impact on the Rule of Law. I am confident that, as arbitrators, counsel, and institutions working together, we can do so.