Bilateral Arbitration Treaties: Are BATs Blind to Existing International Structures and Realities?

by Avani Agarwal

In November 2012, Gary Born proposed the idea of a Bilateral Arbitration Treaty (BAT), in a speech aptly titled “BIT’s, BAT’s and Buts” (available as an essay in the 13th Young Arbitration Review). He suggested developing a system of international treaties whereby countries decide that a particular set of international disputes (such as commercial ones) arising between their respective nationals will be resolved via international arbitration as the default mechanism. Domestic courts in both countries would refuse to hear these disputes and would refer them to arbitration instead. The involved states would determine what procedural rules would be followed in the default arbitration. He qualified his idea by pointing out that the parties actually involved in the dispute could either opt out of the arbitration or alter the procedural mechanism, if they so desire. He based his optimism about the success of such a system on the relative success seen by the International Investment Arbitration framework. 

Unfortunately, this optimism appears to be misplaced. Recently, both investors and countries have been letting go of international arbitration in investment treaties, with countries like India terminating existing agreements and negotiating new ones without Investor State Dispute Settlement (ISDS) mechanisms. More than two hundred lawyers and economists have urged that the USA take similar actions, based on fears that ISDS leads to unaccountability and uncertainty. This movement against investment arbitration appears to be dictated by realities of the existing arbitration and social structures. This post seeks to analyse these concerns and the impact they will have on a network of BATs.

Consent and Party Autonomy. -The consent of the parties is the foundation of any arbitration proceeding, as recognised by courts across the globes. BATs, as previously pointed out, invert the traditional model and do away with this requirement. Born has acknowledged this concern but his response does not seem satisfactory. Giving parties the option to opt out of arbitration is in no way the same thing as requiring them to consent to it. Rather, it is a much lower standard of intent. It is possible to envisage at least some instances where the arbitration will lack active consent from both parties. Courts do uphold pathological clauses but it could be precisely because they reflect the intent of the parties to arbitrate, not the contrary (consider clauses that don’t meet some formal requirements). Moreover, there is an additional level of scrutiny by the arbitration tribunal to ensure that the agreement was valid and the tribunal is competent under the contract to proceed.

The requirement of consent is not a formalistic tool that can be done away with. It reflects real concerns of both the judiciary and commercial entities. It is widely recognized that access to an independent, fair and neutral court is fundamental and necessary. Given that courts are an established and familiar system for most parties, it is possible that they are comfortable with litigation. Further, a fundamental feature of arbitration is that it is final and allows for appeals on very limited factors. A lack of appeals may be seen as grossly unjust by some parties as it implies that they would be helpless against an award they find incorrect or unfair. These two issues were the primary focus of the petition signed by various lawyers and economists against ISDS. Further, in a study conducted in New Zealand, it was shown that a large number of businesses were wary of arbitration. If justice is a subjective idea and parties suspect that arbitration does not do justice, then the necessity of consent serves to ensure that the deeply entrenched ideal of fair trials is not compromised on.

Inequity in Bargaining Positions. – In the structure imagined by a BAT, there are two primary levels of negotiation- states and parties. Arguably, states would be on equal footing and would have the ability to take their particular needs into account. However, some states (such as small and developing countries) need more investments and trade than others. A series of investigative articles highlight how poorer countries have consistently been exploited by foreign businesses via the threat of investment arbitration proceedings.

 Once BATs start being finalized, traders may grow to prefer doing business in countries that offer default arbitration. This means that some states will need BATs more and will thus have a lower bargaining position. Additionally, states don’t really have the freedom to alter BATs to suit the needs of their people. As Born himself notes, “If these BATs are too different from each other, transaction costs will increase and the full potential of efficiency, simplicity, and fairness inherent in the idea of BATs will not be fully realized” (as co-author of a programme paper available here). This means that businesses will prefer countries with similar BATs. Thus countries that need more foreign trade will end up sacrificing other priorities in order to be bound by a model of treaties that may not be the best for them.

At the level of individuals and businesses, the New Zealand Study has found that small and medium sized enterprises, even in a developed country, are inexperienced in arbitration. It is not difficult to imagine transactions between such companies and larger, multinational organizations. In a BAT, it is possible that the disenfranchised party will be forced into arbitration and may even be exploited into agreeing to unfamiliar procedural rules.

Issues with Third-Country Enforcement. – Born has himself stated that universal enforceability is one of the most important benefits of arbitration. It is true that a BAT would streamline enforceability in the contracting states. However, the same cannot be said for third countries.  Currently, the New York Convention is used to guarantee third country enforceability. It requires that an arbitration agreement be in writing. A BAT necessarily does away with this requirement. This creates the possibility of non-contracting states using different standards for enforcing an award. It is impossible to currently predict whether third countries would be willing to apply more liberal requirements to the enforcement of an award (As pointed out by Bruno Guandalini in his article “Bilateral Arbitration Treaties and Efficiency” published in the 38th Issue of Revista Brasileira de Arbitragem (2013)). If and when such enforcement is necessary, parties may have to conclude an arbitration agreement anyway in order to assure it.

Born’s comparisons to BITs are more than just overly optimistic. Insofar as the proposal relies on the Bilateral Investment Treaty (BIT) structure, it fails to note the significant differences that merit a separate analysis of BATs. Most prominently, BITs arose out of a necessity that does not compel a network of BATs and the conceptualisation of constructive consent is drastically different in the two models.

Bilateral Investment Treaties are entered into with the primary goal of creating a favourable environment for international investors, where they are treated fairly and their assets are not expropriated without due process. An undeniable part of such an environment is that there be some accountability if the state does not uphold its side of the bargain. The doctrine of sovereign immunity imposes a natural hurdle in this process. Consequently, states create comprehensive dispute resolution systems and agree in advance to arbitration. Needless to say, such a situation is unlikely to arise in commercial transactions.

In an investment treaty, the state agrees to international arbitration in advance, but only on behalf of itself. Investors make no such promise until a dispute actually arises. At that point, they have the option of pursuing domestic remedies or entering into an arbitration. Thus, both parties to the arbitration have personally displayed their intent to arbitrate before the process begins. On the other hand, a BAT would require that two states give advance consent to arbitration on behalf of their citizens or even individuals who run businesses on their territory. There is a distinct absence of actual intent in this case.

Thus, it appears to be that BATs are inflicted by many of the same issues that affect investment arbitrations, without any of the necessities that have so far justified retaining the BIT structure.

Born concluded his speech by pointing out that BATs should not be rejected merely for being innovative. However, they also cannot be accepted simply because they are innovative. When we consider the costs of negotiating such a massive system of treaties, the existing suspicions against arbitration, the practical restraints posed by the current arbitration framework and the social inequities that such a treaty may reinforce or even exacerbate, novelty is simply not reason enough to try.

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