Inside the Arbitrator's Mind

• Citation: Vol. 66 No. 5
• Publication year: 2017

Inside the Arbitrator's Mind

Susan D. Franck

INSIDE THE ARBITRATOR'S MIND

Susan D. Franck Anne van Aaken James Freda Chris Guthrie Jeffrey J. Rachlinski^*

Arbitrators are lead actors in global dispute resolution. They are to global dispute resolution what judges are to domestic dispute resolution. Despite this, arbitral decisionmaking is a black box. This Article is the first to use original experimental research to explore how international arbitrators decide cases. We find that arbitrators often make intuitive and impressionistic decisions rather than fully deliberative ones. We also find evidence that casts doubt on the conventional wisdom that arbitrators render "split the baby" decisions. Although direct comparisons are difficult, we find that arbitrators generally perform at least as well as, but never demonstrably worse than, nationaljudges analyzed in earlier research. There may be reasons to prefer judges to international arbitrators, but the quality of judgment and decisionmaking, at least as measured in these experimental studies, is not one of them. Thus, normative debates about global dispute resolution should focus not on

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decisionmaker identity or title but rather on structural safeguards and legal protections to enhance quality rule of law based decisionmaking.

Introduction

Arbitration is an important alternative to litigation in the United States, particularly in consumer, employment, and securities disputes.¹ But arbitration's role in domestic dispute resolution pales in comparison to the role it plays globally. In most international disputes, arbitration is the default dispute resolution method.²

This means that arbitrators are the central actors in international dispute resolution. They play a vital role in the global economy, oversee disputes involving billions of dollars, and make decisions implicating the transnational rule of law.

Despite the outsized role that arbitrators play in international dispute resolution, we know relatively little about how they make decisions. Some commentators sing arbitrators' praises,³ observing that they possess both subject-matter expertise and incentives to resolve disputes according to governing law. Other commentators decry their skill and demand instead that judges resolve disputes.⁴ They question the quality of arbitrator

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decisionmaking,⁵ arguing that arbitrators often ignore applicable law⁶ and generally "split the baby" by making awards that fall halfway between the positions the parties advance.⁷ Whatever perspective they espouse, commentators debate the relative merits of international arbitration in an information vacuum.

In an effort to shed some light on arbitration, this Article reports the results of a first-ever set of experiments involving international arbitrator decisionmaking.⁸ In it, we describe how international arbitrators decide hypothetical cases. When possible, we compare arbitrators' performance to domestic judges. We also explore how the experimental insights we glean might inform adjudicative design.

To do so, we draw on decades of experimental research on the psychology of judgment and decisionmaking. That research shows—contrary to the assumptions of classical economics but consistent with common sense—that

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human beings often make decisions in irrational, but predictable, ways.⁹ Likewise, we draw on more recent research showing that judges, like other human beings, are also prone to predictably irrational decisionmaking.¹⁰ But what about arbitrators?

We might hypothesize that arbitrators make decisions much like judges. Arbitrators, like judges, are human beings; both arbitrators and judges are elite professionals engaged in the task of applying legal principals to facts and have a legal mandate to exercise their judgment in a neutral and objective way. On the other hand, we might hypothesize that arbitrators and judges make decisions differently, as each have different incentives, mandates from different principals,¹¹ different cultures and legal traditions,¹² and different subject matter

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expertise. Judges, as generalists, may be relatively unfamiliar with the facts, law, and context of a case in front of them; arbitrators, by contrast, often have highly relevant domain expertise.¹³

Understanding how arbitrators decide is important because it can inform hotly contested debates over the proper forms of dispute resolution to deploy both international and national disputes. Senator Elizabeth Warren has taken issue with the use of arbitration and objected to the lack of "independent judges"¹⁴ in the Trans-Pacific Partnership.¹⁵ Likewise, the European Parliament expressed a desire to strip arbitrators of jurisdiction in trade agreements¹⁶ with the United States, namely the Trans-Atlantic Trade and Investment Partnership (TTIP), and with Canada, namely, the Comprehensive Economic and Trade Agreement (CETA);¹⁷ instead, the EU demands that judges must resolve

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disputes.¹⁸ There are similar concerns about arbitrators' suitability to decide wholly domestic disputes.¹⁹

This Article—in which we peer inside the arbitral mind—aspires to offer an objective, empirical, and evidence-based approach to these important normative choices about transnational dispute system design. Ultimate design choices are part of a larger puzzle that will inevitably be affected by multiple variables,²⁰ including practical politics, political economy, and norm preferences.²¹ But by focusing on arbitrator cognition and competence, we hope to contribute to these design choices.

In Part I of the Article, we introduce international arbitration and behavioral psychology. In Part II, we identify our hypotheses and experimental

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methodology. In Part III, we report experimental results showing that arbitrators, like judges, are prone to intuitive decisionmaking and the influence of well-known cognitive illusions like anchoring, framing, representativeness, and egocentrism. In Part IV, we interpret the results, acknowledge the limitations of our study, and offer normative assessments. Recognizing that intuition influences adjudicative determinations irrespective of an adjudicator's title or mandate, we argue that dispute system designers should not focus on whether judges or arbitrators should decide disputes. Rather, system designers should focus on structural and procedural reforms to decrease the risk of error and to promote quality decisionmaking in international economic dispute settlement.

I. International Arbitration

Arbitration is a ubiquitous method of dispute settlement used in both domestic²² and international disputes.²³ This section explores the prevalence and vitality of international arbitration. It introduces international commercial arbitration (ICA) and international treaty arbitration (ITA), explains arbitral procedures, and discusses arbitral decisionmaking.

A. A Doctrinal Primer

Parties involved in global economic activity require reliable dispute resolution. Although parties can use informal processes—like negotiation or mediation—these methods operate in the "shadow of the law."²⁴ International

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arbitration offers formal adjudication to provide a final and binding assessment of legal rights and "has achieved a level of legitimacy to which other [types of international] disciplines can only aspire."²⁵

There are multiple reasons international arbitration enjoys this stature, including historic pedigree,²⁶ adaptability to new contexts and the flexibility of the process,²⁷ the capacity to provide neutrality while avoiding fears that locals will be favored over foreigners,²⁸ expertise, and a strong enforcement record.²⁹ Moreover, in low-capacity environments where court systems may be weak, international arbitration fills a crucial developmental gap.³⁰

Two core areas of modern international arbitration are ICA and ITA.³¹ ICA is a traditional form of arbitration where parties resolve transnational disputes under national law.³² ICA covers a broad range of disputes, including contract breach, business torts, and antitrust violations.³³ It typically involves commercial disputes between two businesses, but it can also encompass contract disputes between investors and states under national law related to commercial

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ventures or infrastructure projects.³⁴ Arbitrators use existing commercial law—whether codified in national statutes, case law, or otherwise—to adjudicate claims and finally resolve disputes.³⁵

ICA is common and growing.³⁶ International arbitration centers report that hundreds of cases are filed annually.³⁷ Commentators identified over 2700 disputes involved in institutional arbitration in one year and "major claims" involving billions of dollars.³⁸ In its 2015 analysis, the American Lawyer identified over 125 cases with billion-dollar claims.³⁹

ITA, or arbitration devolving from international law-based treaty rights states grant to investors, also has deep roots. It arose from international law mixed-claims commissions where states created sui generis opportunities for private individuals or entities to bring claims against states for economic harm.

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Early arbitrations addressed disputes under the 1794 Jay Treaty,⁴⁰ involving claims about wartime debts owed to British merchants and which owes its origin to the advocacy of Alexander Hamilton,⁴¹ and the Alabama Claims Commission, where arbitrators adjudicated disputes involving destroyed U.S. commercial vessels.⁴²

ITA is the method of dispute resolution embedded in more than 3000 bilateral and multilateral investment treaties. These treaties grant foreign investors substantive rights and provide ex ante consent to arbitration.⁴³ Parties resolve disputes arising under the treaties, including claims of improper discrimination, failure to provide proper compensation for expropriation, and breaches of promises to provide "fair and equitable" treatment.⁴⁴ Only qualifying investors can sue, and...