BASEBALL ARBITRATION TO RESOLVE INTERNATIONAL LAW DISPUTES: HIT OR MISS?

• Author: Pauwelyn, Joost

1. INTRODUCTION II. THE PARADOX OF INTERNATIONAL ADJUDICATION III. BASEBALL ARBITRATION AND THE 2016 OECD MULTILATERAL TAX CONVENTION A. The Trial of Socrates B. Baseball Salary Arbitration C. Baseball Arbitration in Tax Treaties IV. WHY BASEBALL ARBITRATION MAY BE PARTICULARLY APPROPRIATE TO RESOLVE (AT LEAST SOME) INTERNATIONAL LAW DISPUTES A. Reduced Sovereignty Costs B. Preference for Negotiated Solutions C. Less Chilling Effect on Rulemaking and Broader Relationships D. Speed, Low Cost, and Simplicity V. THE LIMITS OF BASEBALL ARBITRATION A. Baseball Arbitration Works Best for Numerical Questions Between Two Parties B. Concerns about Fairness and Equal Treatment C. Power Asymmetries and Secrecy D. Enforcement VI. CONCRETE PROPOSALS FOR BASEBALL ARBITRATION IN WTO AND INVESTOR-STATE DISPUTE SETTLEMENT A. Baseball Arbitration in WTO Dispute Settlement B. Baseball Arbitration in Investor-State Disputes VII. CONCLUSION I. INTRODUCTION

   States and international tribunals are in a love-hate relationship. States routinely agree to third-party adjudication to settle at least some of their disputes or monitor increasingly vague treaty commitments. At the same time, when international tribunals make decisions, they often upset the losing party or are blamed for overreach ("making law"), with little opportunity for states to engage in "legislative correction" as this normally requires consensus of all state parties involved (including the winning party). The existence of compulsory dispute settlement, with a black or white outcome on what states cannot do, may also have a chilling effect on states positively settling their differences, or updating or negotiating new rules (if rules are enforceable, states think twice before committing).

   Fixes to this tension traditionally involve proposals either to (i) exit from international tribunals altogether (1) or increase state control over tribunals (with the risk of undermining tribunal independence), (2) or (ii) make international tribunals more like domestic courts with public law type guarantees in respect of appointment, transparency, and consistency (with the risk of making tribunals even more powerful). (3)

   This Article assesses a concrete proposal that goes in a different direction. It preserves a crucial role for neutral, third-party adjudication but puts more responsibility on states to work out positive solutions themselves: baseball arbitration, also known as final offer arbitration (FOA), where disputing parties each offer an answer to the dispute (their "final offer") and the adjudicator's task is strictly limited to picking one or the other answer ("hit or miss").

   When carefully calibrated, FOA can, at least for some types of disputes (especially numerical ones between two parties), enhance both efficiency (speed, reduced cost, and complexity) and accuracy (reasonable party offers versus tribunals splitting the difference between extreme demands). In addition, FOA should facilitate, rather than chill, settlement and long-term cooperation, and it puts states rather than tribunals in the driver's seat. FOA can also reduce certain sovereignty costs (no giving reasons or setting precedential value for awards) and may unlock state consent to arbitration where traditionally it is lacking or heavily contested.

   FOA is not new. Long before it was introduced to settle salary disputes between players and their teams in Major League Baseball (MLB) in the 1970s, FOA was practiced in ancient Greece, including during the trial of Socrates. Although FOA would seem to be particularly suited to settling international disputes (where sovereignty costs and suspicion toward tribunals run high), surprisingly, FOA is virtually unknown to international lawyers. Equally unnoticed, however, outside the confines of the tax community, is that, since 2006, U.S. double taxation treaties set out baseball arbitration to settle certain cross-border tax disputes. Shortly after that, both the U.N. and OECD Model Tax Conventions have included the option of baseball arbitration. The recently concluded OECD Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (2016 OECD Multilateral Tax Convention) confirms baseball arbitration as the default arbitration option.

   Ironically, it is also exactly where FOA is now being confirmed in treaty practice that FOA shows its limits. FOA works best in bilateral disputes over a number (e.g., salary figure or intra-company transfer price). FOA struggles in multilateral disputes over threshold questions (e.g., whether there is liability, discrimination, or a permanent establishment in the first place). FOA also raises fundamental questions of equal treatment and practical questions of enforcement.

   This Article proceeds as follows. Part II elaborates on the current tensions between states and international tribunals and describes today's paradox of international adjudication. Part III introduces the concept of baseball arbitration and describes it especially in the context of the recently concluded OECD Multilateral Tax Convention. Part IV discusses the reasons why baseball arbitration may be particularly appropriate to resolve at least some international law disputes. Part V warns about important caveats, including reservations that may make baseball arbitration inappropriate to solve certain modern tax treaty disputes. Part VI illustrates where and how baseball arbitration could be successfully used to resolve disputes where FOA is currently not in use, especially certain trade and investor-state dispute questions. While this Article focuses on international economic law, FOA could also be considered to settle other types of international law disputes that are numerical and between two parties. Damage calculation, including before the International Court of Justice (ICJ), is one example. A recent ICJ case involving environmental damage caused by Nicaragua on Costa Rican territory highlights the challenges involved in reasoned arbitration. (4) FOA could also be used for water or fish stock sharing disputes between two countries or even disputes on how to divide inflows of refugees between two nations. Part VII concludes.

   Neither "hit" nor "miss," the choice should, in most cases, not be between opting into either reasoned arbitration or baseball arbitration, the way the OECD Multilateral Tax Convention currently presents it. An optimal dispute resolution mechanism is likely a combination of both reasoned arbitration (on threshold issues) and FOA (on numerical questions).

2. THE PARADOX OF INTERNATIONAL ADJUDICATION

   The relationship between international courts and tribunals and the states that created them is going through a rough patch. If the 1990s was the golden age, (5) today, the pendulum has swung. China refused to participate in the South China Sea Arbitration and called the 2016 award, issued under the U.N. Convention on the Law of the Sea, a "political farce." (6) For the first time in the history of the 23-years old World Trade Organization (WTO), the United States has blocked the reappointment of a member of the WTO Appellate Body (7) and, more recently, refused to even start the selection process for new Appellate Body members which, according to some commentators, "risks killing the WTO from inside." (8) African nations have orchestrated a backlash against both the International Criminal Court (9) and a number of regional economic courts. (10) Investor-state dispute settlement (ISDS) has been attacked from many corners, prompting some countries to exit from it and others, like the EU, to propose major reforms. (11) Countries, as diverse as the UK (in respect of voting rights for prisoners) and Russia (relating to conflicts with Georgia and the Ukraine), have threatened to leave the European Court of Human Rights system. (12)

   That relations between tribunals and the states challenged before these tribunals are tense is nothing new, or surprising. Still, a paradox has emerged. On the one hand, in a multi-polar world, with more interactions and diversity between states, treaties or other commitments are more difficult to conclude or to update. (13) The resulting vagueness of treaties (requiring constructive ambiguity to find agreement in the first place) and outdatedness of treaties (adaptation to changing developments requires consensus) has increased the scope for disagreements and likelihood of disputes. On the other hand, as treaties address ever more sensitive issues (yesterday, trade; today, tax), third-party adjudication, as between more diverse states (with less chance to engage in "legislative correction" of "wrongly" decided tribunal decisions), has become more controversial. States hesitate to delegate power to international tribunals. Tribunals, in turn, may shy away from making controversial decisions. In sum, in this "paradox of international adjudication," (14) the increased scope for disputes is met with a reduced supply in third-party adjudication.

   The response or remedy proposed to deal with these tribunal-state tensions often goes in two diametrically opposed directions. One calls for more state control, urging tribunals to be strict "agents" of the principals-states or to reject third-party adjudication altogether and reclaim state sovereignty. (15) Another calls for more power to tribunals as the only way to meet adjudication demand, with professional, public law-type judges, uncontrolled by states and de facto bound by precedent (to enhance consistency), acting as "trustees" of the system. (16)

   This Article explores a different path, one where tribunals and states are not pitted against each other in a zero-sum game, but complement each other; an approach where unconventional forms of third-party adjudication promote the disclosure of information and preferences, and facilitate (rather than chill) agreement and settlement. If the paradox of international...