Oxford University Press's
Academic Insights for the Thinking World

From ad hoc arbitral tribunals to permanent courts: three examples

Should EU-US investment disputes be solved by arbitral tribunals constituted separately for each dispute, as is currently the case under most Bilateral Investment Treaties (BITs), or should a permanent court be established? This is one of the key questions that might kill the efforts for what would be the largest regional free-trade agreement in history, covering 46% of world GDP: the Transatlantic Trade and Investment Partnership (TTIP). Cecilia Malmström, the European Commissioner for Trade, stressed the point again a few days ago.

It isn’t the first time that the question looms large whether certain disputes should be resolved by arbitral tribunals, appointed in an ad hoc manner for each new dispute, or by a permanent court. Let us briefly recall two such earlier debates, and then elaborate a bit on the current situation in the TTIP.

In 1907, the Second Hague Peace Conference, one the world’s most important attempts to reduce war by strengthening the systems available for the pacific settlement of international disputes, had to grapple with exactly that issue: should interstate disputes be resolved by arbitration, as was the case up to then, or by a permanent court? The United States didn’t like arbitration. They thought it was too expensive and prevented the development of a reliable body of case law. The US delegate to the conference argued that the costs of dispute resolution should be split among all nations; after all, peaceful settlement is in the interests of a wider community than the parties to the dispute. The same idea that the court acts on behalf of a wide community, rather than being only the agent of the disputing parties, makes its rulings relevant for the wider community, clarifying the law for the wider community. Each new dispute is an opportunity to advance the law, to improve it and to harness bellicose states even more.

But the resistance to a permanent court was strong. It took 15 years more to create the Permanent Court of International Justice (PCIJ), the predecessor of the International Court of Justice (ICJ). Clearly the World Court has contributed enormously to the development of international law. Few would contend that its creation was a mistake. Yet it isn’t without shortcomings, chief among them being, probably, the less than ideal level of independence of its judges from political powers.

Let us fast forward. Twenty years ago, on the occasion of the 100th anniversary of the London Court of International Arbitration, a proposal was made to create an international court of arbitral awards. This would have been a permanent international court which would replace national courts in dealing with annulment, recognition, and enforcement of awards. Arbitral awards, instead of being challenged in the courts of the seat of each arbitration, would be challenged – and annulled or upheld – before that international court. The party losing the arbitration wouldn’t oppose the recognition or enforcement of the award in the courts of the place where the assets are located that the prevailing party wants to go after. That opposition would take place before the permanent international court. So the idea here was not to replace arbitration by a permanent court, but to replace national courts by a permanent international court.

The resistance to this proposal essentially took the form of what economists and political scientists call satisficing: searching not for the best possible alternative (so-called optimal decision-making), but aiming for a threshold of acceptability. In other words, the current system is not ideal but it is good enough. The additional loss of state control over arbitration, entailed by the proposal for an international court of arbitral awards, wasn’t perceived to be worth the additional improvement of the working of international commercial arbitration.

Now to the question of the judicialization of investment disputes and the TTIP. Why should these disputes not be dealt with by a permanent court? Why should the TTIP not include a dispute settlement provision providing that all disputes between an investor and the host state of the investment shall be resolved by a permanent investment court specific to the treaty?

Satisficing, here, would be a risky argument. To say that the current system of investment arbitration works well enough – reaches a threshold of acceptability – not to warrant the additional complications that the creation of a permanent court would entail, would be a risky argument. True, the criticism and worries expressed by academics and civil society hasn’t caused any meaningful renegotiation of the various treaties that create the investment arbitration system. But that may well be due to the fact that the “backlash” hasn’t yet trickled down to the level of states and public decision-makers. Most states know less than we, who read posts like this, probably think they do.

The idea that we don’t need a sound judicial creation of international investment law wouldn’t be a good argument either. The law that investment arbitral tribunals have created so far is, by mostly every account, too fragmented and inconsistent. But even consistency alone, which theoretically could be achieved with the current system, wouldn’t fix the soundness of the law produced. Consistency isn’t a silver bullet. It is only good if the contents of the law are sound. Consistency isn’t a silver bullet. A forthcoming study by Todd Tucker suggests that investment arbitrators are one of three kinds: either they are investor friendly; or they are “social” and then they award states lower compensation but take decisions on the merits that are effectively investor-friendly; or they are of a managerial type and then they make fact-intensive decisions. In his argument, the result is that the investment law that gets created would either remain fragmented (fact-intensive) or get ever more investor-friendly. A permanent court might be more balanced.

The one count on which a permanent court would probably fare less well than the current arbitral system is independence from political powers. But that, precisely, is what the political powers negotiating the treaty may want dearly.

Featured image credit: Global network concept. (c) braverabbit via iStock.

Recent Comments

There are currently no comments.