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( Source of the document: ICC Digital Library )
I have known John Beechey as a friend and esteemed colleague for many years. We collaborated first when we held responsibilities at the LCIA and then at the ICC, where John took over as President of the Court and where I was and still am a member of the Commission on Arbitration and ADR and the Institute Council as well as an arbitrator in ICC cases. I felt especially honoured when the DIS instituted the biennial Karl-Heinz Böckstiegel Lecture and John agreed to give the inaugural lecture in 2011 with Meg Kinnear, Secretary General of ICSID.
It will be for others to praise John's achievements. Let me simply add here that, despite being a top-level legal practitioner and arbitration specialist of worldwide renown, he never got carried away by his own importance and always kept his matter-of-fact, no-nonsense approach. Personally, he remained a friend with whom I liked to spend time in discussion or drinking a glass of good wine.
The present contribution2 looks at current issues in international arbitration, comparing commercial arbitration with investment arbitration. It considers the circumstances that have led to those issues as they exist today and where they might be leading in the foreseeable future. Although international arbitration has been one of my specializations as head of international business law at the University of Cologne, my comments here will be influenced more by my experience at the Iran-United States Claims Tribunal, the LCIA, the DIS and the United Nations Compensation Commission and by my practice as an arbitrator in many national and international commercial and investment cases.
Although some of my remarks will concern investment arbitration, I will not comment on the many views that have been expressed in the current debate over investor-state dispute settlement (ISDS) and its inclusion in the negotiation of various multilateral free trade agreements. It would be inappropriate for me to plead my cause, especially as I happen to chair the tribunal in the case between Philip Morris and Australia, often cited as a critical example in the ISDS debate, even though the arbitral tribunal has not yet decided on its jurisdiction in that case at the time I write this article.
2. The origins of contemporary international arbitration
Any serious consideration of possible future developments should begin by looking at the past. True though this may be, there is a tendency for circumstances, issues, problems and developments at any given point in time to appear as specific and unique to the observer and even more to the practitioner. Yet, most of the time they are not and can be better understood if seen in the context of what led up to them. Similarly, future developments do not come out of the blue, but are the result of past and present circumstances, both in arbitration itself and in the social, economic and political environment in which disputes are conducted.
Looking first at the national level, let us briefly recall that the origins of arbitration go back to customs of dispute settlement in ancient times, in Europe (especially Greece and Rome) and Asia. The Middle Ages saw a revival of the Roman tradition and some centuries later the French Revolution considered arbitration as a 'droit naturel', with the 1791 Constitution (Article 86) and the Constitution of Year III (Article 210) proclaiming the constitutional right of citizens to resort to arbitration. England at that time already had its 1697 Arbitration Act. Over the years, a number of additions were enacted, leading to the 1889 Arbitration Act, which continued to dominate English arbitration law into the early part of the last century. Thereafter, many substantive changes were made during the course of the century, resulting in the current Arbitration Act of 1996. At the same time many countries on the European continent were developing their own arbitration laws. Although divergent in a number of respects - some stressing the procedural, some the contractual aspect of arbitration - all provided for binding submission to arbitration of future contractual disputes.
Not only in Europe, but also in major trading countries in other parts of the world, legislators have now addressed the demands of the modern international business community for specific and efficient systems of dispute settlement. Appropriate legislation has been enacted, starting with France in the early 1980s and continuing more recently with the adoption of the UNCITRAL Model Law in Germany, effective as of 1998, and in many other countries across the world.
At international level, inter-state conventions on commercial arbitration have at the same time been making constant progress. Early in the last century initial steps were taken with the 1923 Geneva Protocol and the 1927 Geneva Convention. However, the quantum leap came with the 1958 New York Convention, which has now been ratified by the great majority of states throughout the world.
A more recent development at international level is the emergence of a great number of treaties providing for investment arbitration. Since 1958, several thousand bilateral investment protection treaties (BITs) have been concluded between states all over the world, most of which provide for dispute settlement by arbitration, and they have been used in numerous cases. In addition, although attempts to conclude a worldwide multilateral investment protection treaty have failed, several other multilateral treaties providing for investment arbitration have been made. Examples at worldwide level include the ICSID Convention and the Energy Charter Treaty and at regional level the NAFTA and the CAFTA. All of these have been and are being used to request and conduct international arbitration proceedings. After centuries when the only, and very unsatisfactory, remedy available in international law was through diplomatic protection, it was considered a major achievement when direct access to sue a state was finally provided by human rights treaties for individuals and by investment arbitration for investors.
Thus, the legal apparatus of arbitration as we know it today has been shaped by the practical demands of the business community and particularly international trade and investment. There is no reason to think that this process should not lead to further developments in the future. What those developments are and how they will occur will depend on the demands that emerge from present and future circumstances in society, law, business practice and technology.
3. Controversial issues in commercial and investment arbitration today
Much current discussion around international arbitration fails to distinguish sufficiently between commercial and investment arbitration, and many of those participating in the discussion do not seem to be fully aware of that distinction. As a result, criticism of certain aspects of investment arbitration spills over to commercial arbitration where the issues may well be quite different. Commercial arbitration is based on agreement reached between the parties in their individual contracts. For these parties, confidentiality is a major reason for choosing arbitration. Investment arbitration, on the other hand, is typically based on a treaty between states so the issue of confidentiality versus transparency appears in quite a different light as the public interest is usually involved.
Yet, there are times when the distinction between commercial and investment arbitration may be difficult to make or even misleading. Quite often disputes concern a contract between a corporation created [Page94:] by a foreign investor in a state on one side and a state enterprise on the other side. Such a contract will contain what could be considered a 'normal' arbitration clause referring to a commercial arbitration institution. However, a closer look may show that it is actually an investment dispute. A recent example from my own experience is the publicized ICC case between daughter companies of Exxon Mobil and PDVSA in Venezuela. In that case, as happens frequently nowadays, the investor also started a parallel BIT arbitration, considering this to be a necessary precaution.
Below I look at some topics that are the subject of controversy at the present time.
3.1. Selection of arbitrators
Parties consider the selection of arbitrators to be one of the most important aspects of their cases. It is certainly a subject that generates much debate.
One of main reasons parties generally give for preferring commercial arbitration to national courts is the possibility arbitration offers them of selecting judges of their own choice, in whom they have confidence. Given the diverse branches of commerce - manufacturing, construction, finance, insurance or transport, to name but a few - it is important for the parties to be able to select arbitrators well acquainted with a given sector.
In investment arbitration, the situation is somewhat different. The issues in dispute are usually more limited, reflecting the limited scope of both bilateral and multilateral investment protection treaties, which contain similar protective provisions dealing with expropriation, fair and equitable treatment, discrimination and sometimes contracts covered by umbrella clauses. Consequently, the expertise typically required of arbitrators is knowledge and experience of public international law and particularly its application to such protection.
The result is that many arbitrators who practise commercial arbitration do not feel comfortable or are not chosen by parties for investment arbitrations, and many experts of international law selected for investment arbitrations do not engage in commercial arbitration. Generally, the number of arbitrators active in investment arbitration is much smaller than in commercial arbitration. However, there are a number of arbitrators who do both.
In both commercial and in investment arbitration, conflicts of interest and challenges have grown considerably in number. The IBA Guidelines on Conflicts of Interest in International Arbitration can be helpful in both areas of arbitration. In commercial arbitration conflicts and challenges are typically based on present or former contacts between an arbitrator's law firm and one of the companies involved as a party. While such contacts may also lead to conflicts and challenges in investment arbitration, there the challenges are more often based on an arbitrator's previous appointments. In recent years challenges have [Page95:] tended to focus on candidates who have been appointed frequently by the same party, or more generally either by investors or by states, and are consequently considered as being favourable to one or the other. As far as I can see, challenges based on such multiple appointments have so far not been accepted.
It has been suggested that the answer is to have all three arbitrators appointed by an institution. I do not agree with that proposal. One of the major reasons why parties choose arbitration is the influence they have over the selection of a judge appropriate to the case. It is not possible for an institution to have the same detailed knowledge of the relevant circumstances of the case at the beginning of the procedure.
The institution's task will be to appoint the third arbitrator if the parties or the party-appointed arbitrators cannot agree on the appointment. Institutional procedures for appointing the third arbitrator vary in both commercial and investment arbitration. Without going into the detail of these procedures, let it simply be said that in commercial arbitration the pool from which the third arbitrator can be selected is usually wide, whereas in investment arbitration, for reasons already mentioned, the pool of realistic candidates is smaller. Within that limited pool, specific difficulties have come up in recent years in the appointment of third arbitrators to chair ICSID cases, because they have to be appointed from the ICSID list of arbitrators. The persons put forward by member states for this list are often chosen on the basis of political considerations rather than for their professional qualifications. As a result, ICSID considers that many of the individuals on its list lack the necessary experience to be entrusted with the difficult responsibility of chairing an arbitral procedure. I can understand its position, having been involved in the appointment of tribunal chairs in my functions as president of the LCIA and the DIS and as appointing authority for the Permanent Court of Arbitration, where we always felt we had a duty towards the parties to appoint a person with sufficient proven experience. In practice this means that ICSID frequently has difficulty finding a suitable candidate to chair a tribunal, who is able to accept another case on top of the cases he or she already has.
3.2. Confidentiality or transparency
Another controversial issue in current discussions is whether arbitration proceedings should be confidential or transparent.
In commercial arbitration, confidentiality is often mentioned as one of the traditional reasons why parties choose arbitration in preference to national courts. As it still seems to be an important consideration for many private companies, almost all arbitration rules used in commercial arbitration, both institutional and ad hoc, uphold confidentiality and draw little criticism for doing so. Yet this fact would appear to be unknown to many of those participating in the current discussions on ISDS.
[Page96:] The picture is more mixed in investment arbitration. Traditional instruments such as the ICSID Convention and most BITs say little or nothing on whether proceedings and awards should be treated as confidential. In practice, there is little confidentiality in investment arbitration today.
While ICSID still needs and regularly requests the parties' agreement for the publication of awards, almost all awards are somehow published, regardless of the parties' response. The same is true of awards in investment arbitrations administered under the rules of other institutions such as the ICC, the LCIA or national arbitral institutions. They are published on one of the many websites that now provide such material, generally without any identification of their source. One can only speculate that parties, law firms or individuals have provided the information because they consider it serves their interests in some way. I confess that I do not refrain from looking at such websites myself.
There are good reasons for arguing for greater transparency in investment arbitration because it concerns the interests of a state, which in turn represents a society and a community of people. It is understandable that the claims of non-governmental groups within that community to be informed and given an opportunity to provide input should be heard.
Consequently, many modern instruments expressly provide for greater transparency or the parties agree on this at the beginning of the proceedings. When I chaired the very first NAFTA arbitration many years ago, it was conducted in a rather confidential manner, although the media reported on the case and on our award. In my most recent NAFTA case, the hearing in Washington was open to the public and transmitted live to Canada. And in the much cited pending arbitration between Philip Morris and Australia, although the applicable UNCITRAL Arbitration Rules do not provide for transparency, the parties and the tribunal agreed at the very beginning of the proceedings that all memorials submitted by the parties and all procedural and other decisions made by the tribunal should be openly accessible to the public on the website of the administering body, the Permanent Court of Arbitration, except for sections agreed by the parties to contain confidential information.
Subsequent instruments such as the CAFTA Treaty expressly provide for transparency. And, going beyond investment arbitration strictly speaking, the Softwood Lumber Treaty between Canada and the USA, which deals with one of the largest commodities traded between those two states and under which I have chaired three cases between the two governments under the LCIA Rules, provides expressly that all memorials, hearings, procedural orders and awards should be freely accessible to the public. The most recent step in this direction is the new US Model BIT. While it gives parties to arbitration the choice between ICSID, its Additional Facility Rules, the UNCITRAL Rules and [Page97:] the rules of any other arbitral institution on which they agree, it provides in Article 29 that, whatever their choice, all memorials, minutes, orders, hearings and awards will be open to the public.
It is in relation to confidentiality and transparency that commercial and investment arbitration differ most strikingly. While I understand the reasons for increased transparency, in my experience it tends to work against efficiency. If proceedings are open to the public, written submissions and, perhaps even more so, oral presentations in the hearing tend to become public statements, less focused on the professional exchange with the tribunal. I have also observed, as an arbitrator in such public hearings, that my remarks go beyond what I would normally say in addressing counsel, in order to avoid the risk of misunderstanding by the media and members of the public less familiar with the details of the case.
3.3. Case management
Case management has rightly received much attention in recent years in publications and conferences and through the new measures introduced in the latest revisions of leading arbitration rules, such as those of the ICC and the LCIA.
The conduct of arbitral proceedings is of course subject first of all to any mandatory provisions in the applicable arbitration law, be it the national law at the seat of the arbitration in the case commercial arbitration, or the relevant treaty in the case of investment arbitration. However, these instruments normally contain very few and only rather basic rules regarding procedure, such as the principle of due process.
More detailed provisions are found in the applicable arbitration rules. They all cover the necessary procedural steps, in differing depth. Some provide further details, such as Article 22 of the LCIA Rules, which lists additional powers of the tribunal, or the 2010 version of the UNCITRAL Arbitration Rules.
In any event, both applicable law and arbitration rules leave the arbitral tribunal with wide discretion as to how the proceedings are conducted. This is where arbitration comes into its own, insofar as it gives the tribunal the opportunity, and also the duty, to shape the procedure in the way best fitted to the dispute.
Looking at practice in commercial and investment arbitration during recent years, I am struck by a strong tendency towards harmonization. Taking advantage of the discretion they enjoy, arbitrators look to the experience acquired from international commercial arbitrations over many years and put it to use in managing both commercial and investment arbitration proceedings in a rather similar fashion. However, some differences can be observed in practice:
• Arbitrators with a background in commercial arbitration are more inclined to involve the parties and their counsel in discussions before deciding on questions of case management.
• Arbitrators in investment cases, who have no experience in commercial arbitration, may sometimes be unaware of certain procedural options not used at the International Court of Justice, but well established in commercial arbitration.
• The involvement of states, even when represented by a law firm in addition to a ministry, tends to make the proceedings more formal.
• State parties will often request longer periods for submitting their memorials and evidence, because the process of decision-making involving state agencies and counsel may be more complex and time-consuming.
• For the same reason, longer periods may also have to be allowed for comments on procedural questions raised by the tribunal.
• Unfamiliarity with the customary conduct of international arbitration proceedings may raise difficulties. In commercial arbitration this may occur if a party chooses to be represented by its in-house counsel and not to hire outside counsel. Likewise, in investment arbitration, it may occur if the state party is represented by relevant ministries and not by a law firm. If I come across such situations when chairing a case, I normally try to find a way of telling the parties that trying to save on the expense of an experienced law firm may not be in their interest.
• There are exceptions. When I was president of the Iran-US Claims Tribunal, Iran was mostly represented by the 'Bureau' it had set up at The Hague. As almost 4,000 cases were processed over time, the members of the Bureau had greater experience of the procedure than many of the American law firms, which at that time (the 1980s) were still new to international arbitration. More recently I have noticed that Argentina's many investment arbitration cases have given its ministerial team an impressive body of expertise in the process.
• There may also be differences between commercial and investment arbitration when it comes to the collection and production of evidence. In commercial arbitration, the IBA Rules on the Taking of Evidence in International Arbitration, particularly the revised edition of 2010, provide help for most questions that arise. Although reference to the IBA Rules may be useful in investment arbitration, too, and is indeed often found in the initial procedural order on the conduct of the proceedings, specific difficulties are sometimes encountered which Article 9(2)(f) of the IBA Rules (exclusion of 'evidence that has been classified as secret by a government') cannot always answer. For example, it has been known for documents or other evidence to be seized by a government in what it presents as criminal investigations but the investor considers to be intimidation and manipulation of evidence.
3.4. Length and costs of arbitration proceedings
A frequent complaint is that arbitration proceedings today last too long and are too costly.
It is obvious that one of the first tasks in case management is to set a timetable for the proceedings and some of the recently updated institutional rules make this a mandatory requirement. Although there is general agreement on the need for a speedy procedure, this is easier said than done. Depending on the size and complexity of the dispute, counsel may request long periods for the submission of their parties' principal memorials, together with exhibits, witness statements and expert reports. As mentioned above, this is particularly frequent in cases involving governments, which depend on complicated internal decision-making processes.
There is also a risk that attempts by the tribunal to speed up the procedure and press for shorter periods may backfire. If the timetable is unrealistic, requests for extensions are bound to follow, which will endanger later parts of the timetable, including the hearing dates.
More time inevitably means more cost. When I see the cost claims submitted by parties at the end of an arbitration, I can only agree that they have grown excessively and, in large cases, reach exorbitant amounts. However, the discussion often goes into the wrong direction. At a 2011 conference on costs organized by the International Federation of Commercial Arbitration Institutions (IFCAI), several reports found that in the great majority of cases an average of 90% of the costs claimed are the expenses of the parties, their lawyers and support staff, witnesses and experts, while the costs charged by the arbitral institution are in the range of 2% to 5%, and the fees and expenses of the arbitrators 4% to 7%. Therefore, if costs are to be reduced, a reduction in the latter two categories would have relatively little impact whereas a considerable change could be achieved if the parties' own costs were reduced. Again, that is easier said than done. Although counsel understandably will wish to leave no stone unturned for their clients, it may be argued that the mass of documents and the host of witnesses and experts marshalled for this purpose should be reduced. But, beyond persuasion, there is not much even a pro-active tribunal can do in this regard without being accused of limiting a party's right to due process.
3.5. Predictability and consistency of decisions
The predictability and consistency of decisions, also a subject of much discussion, is closely connected with the issue of transparency.
The traditional confidentiality of proceedings and awards in commercial arbitration has often led to the complaint that this deprives the legal community of the possibility of knowing how arbitral tribunals have decided on issues arising in disputes and of thereby establishing a body of arbitral jurisprudence. It is clear that before initiating proceedings parties and their lawyers ideally like to have an idea of how the issues might be decided, in order to assess their chances of success. The legal community has a long tradition of collecting and classifying judgments of national counts, regardless of the differing significance attached to such judgments in the common law system, based on precedent, and the civil law system, where earlier judgments are taken into consideration but do not normally have any binding effect.
Institutions like the ICC have tried to improve the situation by publishing or permitting the publication of procedural decisions and awards after removing the names of parties and any other details that could allow the case to be identified. The LCIA has recently even allowed the publication of decisions on conflicts and challenges of arbitrators. However, other than that, the decisions in commercial arbitration continue to be kept as inside knowledge and their publication remains an exception.
In investment arbitration the situation is quite different. As described above, almost all awards are published, with or without the authorization of the parties and the institution, and this provides a vast volume of jurisprudence on which parties and their lawyers can rely when preparing and evaluating their chances in new cases. Parties' memorials regularly refer the tribunal to earlier decisions of other tribunals on similar factual and legal issues.
Arbitrators will of course be cautious when taking up such references and, if appropriate, look for further decisions of relevance. There have been a number of publications on the question of whether a system of precedent now exists in international arbitration. My own view is that, although arbitral tribunals should and do take account of earlier decisions on similar issues, this does not amount to a system of precedent, not even among ICSID cases. However, as a practical matter, I would feel that if a tribunal finds out that a previous tribunal or perhaps even several previous tribunals have come to a certain conclusion, it should reach a different conclusion only after carefully considering the arguments in the previous cases and explaining why it does not find them convincing.
At the 50th anniversary conference of ICCA in Geneva in 2011 there was an extensive discussion on how investment arbitration should and does contribute to the further development of international law. Some esteemed colleagues felt strongly that arbitral tribunals should make efforts in this direction when writing their awards. I expressed [Page101:] the opinion, which I still hold today, that we should not forget that arbitral tribunals receive their authority and mandate from the parties and institutions that appoint them, and that mandate is to decide on the relief sought and to consider all factual and legal issues relevant to that decision - no less, but also no more. When I ventured to simplify this approach by saying 'there are too many professors in arbitration', my words did not go down well with a number of those present. It is true that my simplification was not quite accurate, because I also see eminent partners of law firms falling into the same temptation of expounding on international law when such a digression is of little or no relevance to the decision to be reached.
Let it not be misunderstood, I of course agree that arbitral awards contribute to the further development of the law insofar as they are taken into consideration by the parties, their lawyers and subsequent tribunals. And I would hope that my own awards are persuasive enough to convince later tribunals to follow a similar path. But that effect should come from the reasoning pursued by the tribunal in reaching its decision on the relief sought, not from considerations and obiter dicta for which it has no mandate.
It has been suggested that more predictability and consistency could be achieved, at least in the field of investment arbitration, through the creation of permanent tribunals or a higher appeal body. Both ideas were floated some years ago when ICSID consulted its member states on possible improvements to the system. The vast majority of states rejected both ideas and I share that position. However, I am also aware that these issues have again surfaced in the present debate on what kind of dispute settlement mechanism should be included in free trade agreements currently being negotiated in various parts of the world.
Parties, counsel and institutions already make great efforts to find the best candidates for selection as arbitrators. It is hard to see how a permanent tribunal could be composed of even better judges. One can imagine that those who would be attracted by a permanent full-time appointment to such a body would not be at the top of the list of candidates considered by parties and institutions.
The idea of an appeal mechanism has not been taken up in practice either. One of the reasons why parties choose arbitration is that it leads to a decision as fast as possible, unlike national court procedures with two or three different levels of judgment which may delay a decision for years. This argument still holds true, even though, as mentioned above, arbitration proceedings today often last too long. If a tribunal makes an important mistake in procedure or substance, national arbitration laws and the New York Convention provide a means of corrective action in commercial arbitration and mechanisms such as annulment proceedings under the ICSID Convention in investment arbitration. Although details may be improved, the existing mechanisms, which allow very few grounds for revision, are all we need and all we should have. Indeed, many feel that the scope for review has already been widened too far in practice.
4. Perspectives for the future
Looking forward from today's situation as I have tried to outline it, the dynamic development of both commercial and investment arbitration in the recent past makes any prediction speculative.
As far as commercial arbitration is concerned, there is still room for improvements in the domestic arbitration laws of many countries, especially those which have only recently become major players in international trade. However, developing the law is not enough. Practice in many jurisdictions shows that the much more difficult task is to make the national court systems fit to implement the New York Convention and deal with modern arbitration. Institutional rules used for commercial arbitration have been regularly revised to take into account experience acquired from their use. This process will necessarily continue. Finally, I would expect that, whether we like it or not, modern online media will lead to increased transparency in commercial arbitration.
The continuing growth in worldwide investments is likely to lead to a growth in investment arbitration, too, perhaps administered under a wider range of arbitration rules and institutions. States will continue to need and seek foreign investment and they will be more successful in obtaining it if they can provide some legal security for such investments, including the option of arbitration in the event of disputes.
At the same time, some of the criticism of recent years can be expected to continue and lead to change. Investment arbitration is much more exposed to movements in the national and international political environment. Changes of government or political structures will understandably lead to conflicts with foreign investors and then to disputes and arbitrations. As in commercial arbitration, parties who have been on the losing side in investment arbitrations will sometimes see the fault in the system rather than in their own conduct.
A change of approach may occur for other reasons, too. As is well known, Germany is the country that has concluded the largest number of BITs worldwide. German companies have been relying on ISDS in cases where they felt their investments had been expropriated or otherwise affected by a breach of a BIT. However, when, in the Vattenfall case, Germany became a respondent for the first time, many non-governmental organizations, the media, and the German government took a new look at ISDS. A number of other governments and the European Union have entered the discussion, which is also being pursued in other regions of the world where free trade agreements are being negotiated. However, for the reasons mentioned at the beginning of this article, I will neither enter into that discussion nor venture to predict the final outcome.
Independent arbitrator; emeritus professor of international business law at the University of Cologne, Germany; past president and current honorary president of the German Institution of Arbitration; email@example.com.
This article is based on a lecture given on 10 June 2015 at the Max Planck Institute Luxembourg for International, European and Regulatory Procedural Law.