The inaugural Charles N. Brower lecture on international dispute resolution was given at 4:00 pm, Friday, April 5. The speaker was V.V. Veeder of Essex Court Chambers, and the moderator was Donald Francis Donovan of Debevoise & Plimpton, LLC.
THE HISTORICAL KEYSTONE TO INTERNATIONAL ARBITRATION: THE PARTY-APPOINTED ARBITRATOR--FROM MIAMI TO GENEVA *
There is a new attack on the system of party-appointed arbitrators in both commercial arbitration but, more particularly, investor-state arbitration. This is not the usual criticism of partisan arbitrators, infected with actual bias or rank prejudice, who will vote mechanically for their appointing parties come hell or high water always, but rather an objection in principle directed at the legitimacy of the traditional system of impartial arbitrators appointed by each disputing party, as opposed to arbitrators all appointed by a neutral appointing authority. We start with Miami, before turning to Geneva.
Three years ago, Professor Jan Paulsson delivered his inaugural lecture at the University of Miami School of Law, entitled "Moral Hazard in International Dispute Resolution." (1) It had been preceded by Professor Albert Jan van den Berg's supportive article, "Dissenting Opinions by Party-Appointed Arbitrators in Investment Arbitration." This article contained a striking statistical schedule showing that no known case exists, in the field of investment arbitration, in which a party-appointed arbitrator has ever dissented against the interests of his or her appointing party. Earlier studies in the field of international commercial arbitration had suggested that almost all dissenting opinions--said to exceed 95% of all such dissents--were written by the arbitrator appointed by the losing party. In brief, these two distinguished scholars then both teaching at Miami, collectively sharing a unique experience in the modern practice of arbitration and, significantly, great advocates for and not against arbitration, severely criticized the current system of party-appointed arbitrators on the grounds of legitimacy. Professor Paulsson proposed, as the only decent solution, that all arbitrators should be appointed jointly by the disputing parties or appointed by a neutral body. Professor van den Berg proposed that investment arbitration would function better and more credibly if party-appointed arbitrators observed the principle of nemine dissentiente. These views influenced many (including this author). Yet the road to Damascus, with the angel of history, is instructive, and I wonder now whether the proposed solutions are not worse than the ailment, if it be an ailment at all.
First, as Professor Paulsson recognized, the genie--a party's traditional right to appoint an arbitrator--cannot easily be put back into the bottle. Second, the Anglo-Saxon legal tradition greatly values a judge's right to dissent from a collegiate decision as imposing an important intellectual discipline on the full tribunal, with dissenting judgments not invariably illuminating future legal thinking. The same is almost true of arbitrators, particularly for investment disputes and disputes between states. Moreover, dissents are not that common in the field of international commercial arbitration; while becoming more frequent in the field of investment arbitration, their known number does not yet reach the statistics available for dissenting judgments in Anglo-Saxon legal systems. Third, as Professor Paulsson also recognized, only a few arbitral institutions can make credible claims to legitimacy. It would be invidious here to name these singular exceptions (nor did he), but it is a fact that, for one reason or other, most arbitral institutions cannot be trusted with arbitral appointments. And even worse, as he rightly concluded, this important arbitral task could never be entrusted to the institutional equivalent of Ali Baba and the Forty Thieves.
Yet both Professors Paulsson and van den Berg raised serious questions about the present system of international arbitration, now echoed by others. Their analyses do not deserve to be left as "voices in the desert," as they feared, and their criticisms require answers to enhance the essential legitimacy of international arbitration, which is increasingly under threat from special interest groups pressing for a new system of permanent international courts. Others have and will have their own analyses, and no complete answer is here proposed, but we can take the first few steps with two well-known arbitrations, by way of illustrating both the suggested problem and, if it be a problem, its possible solutions.
THE LOEWEN ARBITRATION
The first was cited by Professor Paulsson in support of his thesis: it is the Loewen arbitration finally decided by the tribunal in August 2004, following an award made in June 2003. In this NAFTA dispute between two Canadian investors and the United States, the investors complained of unlawful treatment by the state courts of Mississippi. The corporate investor had been held liable by a local jury for US$500 million, which included US$400 million as punitive damages, and it was unable to appeal from that verdict because the local law required the posting of a supersedeas bond equal to 125% of the judgment, an impossible burden for a small foreign corporation facing imminent bankruptcy. The award of the NAFTA tribunal and its subsequent clarification were made unanimously by the three arbitrators, two of whom had been appointed by the parties. The Canadian investors thereby lost the NAFTA arbitration, for reasons which were and remain much discussed academically, but these need not concern us now.
After the NAFTA arbitration, in December 2004, the American arbitrator took part in an academic symposium in New York where he spoke publicly about his experience as an arbitrator appointed by the United States in the Loewen case. Professor Paulsson said this in his lecture:
The symposium happened to be recorded, and the tenor of his remarks was notably made public in a law review in 2009, in a footnote that could easily be traced back to retrieve astonishing verbatim remarks. This included the revelation that the arbitrator had met with officials of the U.S. Department of Justice prior to accepting the appointment, and that they had told him: "You know, judge, if we lose this case we could lose NAFTA." He remembered his answer as having been: "Well, if you want to put pressure on me, then that does it." The American arbitrator, Judge Abner Mikva, was a senior legal figure with extensive experience in the judicial, legislative, and executive branches of the United States. Professor Paulsson castigated this arbitrator's conduct and, still more so, the officials from the U.S. Department of Justice who sought during this interview to pressure him, as an arbitrator appointed by the United States, into supporting a favorable decision for the United States in the NAFTA arbitration.
Leaving aside the wisdom of any arbitrator ever disclosing at a public symposium the unknown workings of a recent arbitration (particularly here when ancillary legal proceedings were to begin on December 13, 2004, to vacate the award), does this incident in fact support the criticism leveled at the system of party-appointed arbitrators? We know that pre-appointment arbitral interviews do take place between a party's lawyers and a putative arbitrator. This procedure is not new: for decades, it has been informally regulated by the well-known "Aksen Rules," and also for some more recently by the guidelines established by the Chartered Institute of Arbitrators. It is a procedure practiced by many users in international commercial arbitration, and there is no reason to treat differently state parties to an investment arbitration. Professor Paulsson did not suggest that the American arbitrator, after his appointment, had any improper discussion with the Department of Justice, and Professor Paulsson did not cite it as a case of an illicit ex parte communication between one party and one member of an arbitration tribunal in regard to the tribunal's award. As for the content of the interview, was the putative American arbitrator improperly subjected to pressure by his appointing party? Many of us not remotely involved in the Loewen case knew at the time that this arbitration was a significant case for the United States and for Chapter 11 of the NAFTA, and, simply from reading newspapers, we knew also that this same perception was shared by many legislators on Capitol Hill and not a few journalists. It may therefore be doubted that the American arbitrator was told anything that he could not already have learned as an informed member of the general public. As for the American arbitrator's quoted response: "Well, if you want to put pressure on me, then that does it," that statement, by itself, seems insufficient to impute a commitment by that arbitrator to make improper decisions in favor of the United States as his appointing party. As cited, Professor Paulsson took his brief quotation from an article published in 2010 by Professor Schneiderman. In its full context, taken from the audio tape-recording of the symposium, there was clearly no such commitment.
With hindsight, of course, it would have been wiser for the American arbitrator and the Department of Justice to disclose the fact of this pre-arbitral interview to his co-arbitrators and to the Canadian investors, but at the time such interviews were not regarded as matters requiring formal disclosure. Even now, the ethical position remains unclear. Of course, it should not be so--but it was. It is therefore unfortunate that this incident is now entering the mythology of arbitration, being cited by even distinguished scholars as a classic example of misconduct by a party-appointed arbitrator and his appointing party to the detriment of investment arbitration generally. We must remember that the...