Amsterdam canal Singel with typical dutch houses and houseboats during morning blue hour, Holland, Netherlands. Used toning

On 16 May 2018, Global Arbitration Review published a report on the Netherlands newly published draft model BIT. The news heading was “Radical proposals in draft Netherlands Model BIT“. The radical proposal was the  abandonment of the party-appointment arbitrator system. However, one must not mistake radical with novel because the debate on the elimination of party-appointed arbitrators is at least eight years old.

The heat of the debate started in 2010, when Jan Paulson launched his inaugural lecture as holder of the Michael R. Klein Distinguished Scholar Chair of the University of Miami.[1] Paulson argued that the party-appointed arbitrator system was a moral hazard for international dispute resolution. In Paulson’s view the system affects the legitimacy of international arbitration because users may perceive the system as not being impartial. For Paulson the party-appointed arbitrator opens the door for parties to name arbitrators that “will help them win the case” and, in turn, arbitrators will feel obliged to support the claims of the party that appointed them. This is the moral hazard party-appointed arbitrators represent, according to Paulson.

Paulson argued that there was proof of the existence and effects of such moral hazard. Paulson presented a series of unfortunate and unprofessional examples of party-appointed arbitrators, favoring the interests of the party that appointed them. He also noted that the moral hazard was evident in the lack of unanimity of arbitration decisions. According to two recent studies in international commercial arbitration, Paulson argued, dissenting opinions were written by the arbitrator nominated by the losing party.

Later on, in an article written for the ABA Section of International Law[2], in response to various criticisms to his position towards party-appointed arbitrators, Paulson stated that even if one accepted that unanimity was the rule in arbitration decisions “there are still reasons for grave concern“.[3] To support his statement, Paulson argued that unanimity is not always obtained in principled ways, and that the party-appointed system militated toward compromise. Compromise, Paulson argued, inevitably meant lack of legitimacy for the arbitration system because it affected the perception of coherent and serious legal reasoning that arbitrators must follow to arrive to a decision.

Furthermore, Paulson argued that the rationale that supports the existence of the party-appointed arbitrator is wrong, or at least does not apply anymore. In his lecture, Paulson listed various arguments that supported a system of party-appointed arbitrators and refuted them. For instance, Paulson notes that the belief that a fundamental right to appoint one’s arbitrator is a false belief. There is no such right and, if there were, it would certainly not be fundamental. He states that the reason behind party-appointed arbitrators is the appointment of an arbitrator in which both parties have confidence. Yet, “why would any party have confidence in an arbitrator selected by its unloved opponent?[4] Paulson then turns to the argument which suggests that the party-appointedarbitrator system mitigates cultural divide. Paulson responds that whatever the need may have been, the “clash of cultures” theme is exaggerated nowadays in arbitration. For Paulson, the true concern is parties’ “fear of being treated as an outsider, not so much about the diffusion of cultural particularities.[5] He then concludes that the only defense for unilateral appointments to which he has no defense is that, in practice, there is an inability to trust that arbitration institutions will appoint good arbitrators.

Thus, for Paulson there is no reason in theory to maintain the figure of party-appointed arbitrators. However, he recognizes that in practice his proposal will not get far until the practical problem of illegitimate arbitral institutions is solved.

On the other side of the discussion there are equally influential voices, including Charles Brower’s. Contrary to Paulson’s view, Brower states that party appointments should be maintained in arbitration, and that its elimination, as promoted by Paulson, would rather block the development of the field of international arbitration.[6]

Firstly, in Brower’s opinion there is a right to party-appointed arbitrators, and he even goes as far to state that this right “(…) has become an established principle of law in international arbitration“.[7] For Brower there is more than enough historical background to back up his statement. Starting as early as the Jay Treaty between the United States and Great Brittan in 1794, to most of the recent BIT’s between states, the figure of party-appointed arbitrators has been present in international arbitration.

Additionally, Brower argues that party-appointed arbitrators enhance the perceived legitimacy of the arbitral proceedings. He notes that parties will have greater confidence in a proceeding in which they have invested through the appointment of an arbitrator. In fact, who knows better than the parties themselves which specific knowledge is required to solve the dispute? Brower then adds that a party is less likely to challenge a decision and the decision making process of an arbitral tribunal if the party has had a role in constituting the tribunal. Thus, in Brower’s view, the figure of party-appointed arbitrators promotes the perceived legitimacy of international arbitration.

But what about the moral hazard identified by Paulson? Brower addresses this issue by stating that the system is self-policing. He states that the system’s critics “(…) overlook the internal control that in practice prevent such an impermissible quid pro quo.[8] Brower points out that most of the international arbitration rules provide for regulations which intend to preserve the independence and impartiality of arbitrators. Furthermore, he states that such impermissible quid pro quo is discouraged by the weight of an arbitrator’s reputation. No party will want to nominate a biased arbitrator, in Brower’s view, because users of arbitration are aware that “(…) hired guns do them more harm than good.[9]

Finally, Brower challenges some of Paulson’s proposed alternatives. First, he states that the pre-exiting list approach is undesirable. One of Paulson’s proposals is that there could be a pre-exiting list of arbitrators, from which the party’s could nominate their arbitrators. In Brower’s view, this is undesirable because it unavoidably infuses politics into the system. He argues that this approach incentivizes that arbitrators with close connections with states or with institutions are added to the institutional lists. In contrast, the current system of party-appointed arbitrators provides for a true merit system because arbitrators stand for election by the parties in regards to their knowledge. Secondly, Brower states that party-appointments should be preferred over institutional appointments, because it is highly doubtful “(…) that any institution will achieve a level of user confidence that even approaches that of selections made by sophisticated parties and counsel.[10]

In sum, the newly published Netherlands model BIT is but a reflection of a long standing debate in arbitration. Yet, it is interesting enough to see how the debate has influenced practice. One can only wonder if the Netherlands’ new model BIT, and the European Union’s proposal to create a standing multilateral investment court is the realization of Jan Paulson’s vision expressed in his inaugural lecture. Before presenting his argument against the moral hazard, which he believed unilateral appointments to be, Jan Paulson stated: “What I propose seems to put me in a minority of one, judging by the rather uniform reactions to my occasional public utterances on the topic. But these reactions, I believe, are based on comfort in the status quo – not analysis. So I intend to soldier on, and expect to find myself in the majority well before 2060″. [11]

 

 

[1] Inaugural Lecture as Holder of the Michael R. Klein Distinguished Scholar Chair University of Miami School of Law 29 April 2010.

[2] Jan Paulsson, Must We Live with Unilaterals?, in: Aba Section of International Law, 2013, Volume 1, Issue 1 pp. 5-9.

[3] Jan Paulsson, ibid. p. 6.

[4] Inaugural Lecture as Holder of the Michael R. Klein Distinguished Scholar Chair University of Miami School of Law 29 April 2010.

[5] Inaugural Lecture as Holder of the Michael R. Klein Distinguished Scholar Chair University of Miami School of Law 29 April 2010.

[6] Charles Brower, The (Abbreviated) Case for Party Appointments in International Arbitration, in: Aba Section of International Law, 2013, Volume 1, Issue 1 pp. 10-13.

[7] Charles Brower, ibid. p. 11.

[8] Charles Brower, ibid. p. 11.

[9] Charles Brower, ibid. p. 12.

[10] Charles Brower, ibid. p. 12,

[11] Inaugural Lecture as Holder of the Michael R. Klein Distinguished Scholar Chair University of Miami School of Law 29 April 2010.

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