The Bilateral Arbitration Treaty Proposal: The Way Forward?

This article was originally written as an academic paper and is republished here as a knowledge-sharing resource. It has been lightly formatted; statutory references reflect the law as it stood at the time of writing.

THE “BORN” BILATERAL ARBITRATION TREATY PROPOSAL: THE WAY FORWARD

“Great progress was made when arbitration treaties were concluded in which the contracting powers pledge in advance to submit all conflicts to an arbitration court, treaties which not only specify the composition of the court, but also its procedure.”

• Ludwig Quidde

Abstract

Human kind has been trading since the time immemorial, but after the industrial revolution there has been a phenomenal increase in international trade and the twenty-first century ideas of world peace & free market policies has resulted in globalization of world economy. Today Bilateral Investment Treaties (BITs) between states allowing mutual investment and growth opportunity to both of the contracting states has raised the significance of foreign investment for both developed and developing countries. But investor under BIT have their concerns too and to ensure the protection and security of their investment these investor usually ask to incorporate a compulsory standard arbitration clause as means to solve any dispute in every international commercial contract along with other clauses of fair & equitable national treatment and access to justice through proper dispute settlement mechanisms. Even after all these failsafe’s disputes arise and recent years have witnessed a remarkable increasing spur in the international commercial arbitration. This essay analysis arbitration at international level tracing its origin, development and scope. Further enumerating about the advantages and drawbacks of the arbitration extent of Bilateral Arbitration Treaties (BAT) is deliberated. Further, this essay explains the reason why BAT should be considered as the thing of the future and its impact. Thus, BAT in particular has a unique role to play in the future of arbitration.

KEYWORDS: International Arbitration, History, Scope, Advantages, Bilateral Investment Treaty, Bilateral Arbitration Treaty.

Introduction

Arbitration & Bilateral treaties has been around for a long time now and for many decades’ parties has resolved their differences concerning contractual commitments, treaty interpretation, trade & non-commercial disputes through arbitration. The world has witnessed a phenomenal growth in commercial disputes transcending national borders due to our increasingly interrelated and globalized world economy. Today, no nation, however powerful or endowed with natural resources it may be, can afford to remain economically isolated. Every nation endeavours to make its domestic markets capable of attracting foreign investment, and these foreign investments give rise to various differences. Arbitration has proved its worth in solving these differences in an exceptionally easy, efficient and effective way. History has witnessed many great arbitrators, one of the earliest arbitrator was Solomon. In a book by Elkouri and Elkouri, How Arbitration Works (1960), the authors not only stated that Solomon was an arbitrator, but also noted that the procedure used by him was in many respects similar to that used by arbitrators today. Even the George Washington before the First World War was also an arbitrator. Many people gave their invaluable contribution in shaping the arbitration world as we know it today. But even after all this time none of these eminent personalities ever tried to pursue the arbitration in a bilateral treaty form between transnational contracting parties. It was Mr. Grey Born, one of the today’s most prominent and recognized name in the International Arbitration who engage in arbitration in bilateral treaty form. He is the author of International Commercial Arbitration (2009), International Arbitration: Law and Practice (2013) and numerous other works on international dispute resolution who work as a pioneer in the field of arbitration. He is also the Chair of the International Arbitration Group at Wilmer Cutler Pickering Hale and Dorr LLP and Professor of Law at University of St. Gallen Law School. Mr. Born proposed the idea of a ‘Bilateral Arbitration Treaty’ in his keynote speech on the occasion of the ‘Kiev Arbitration Days’ titled as “BITs, BATs and Buts”. He proposed that the states could establish a regime whereby the commercial contractual disputes between entities and nationals of the signatory states would be submitted to arbitration by default. In his essay he also stated that if international commercial arbitration in appropriate circumstances, utilize the concept of constructive consent, or arbitration without privity, developed in Bilateral Investment Treaties, in the context of a bilateral arbitration treaty, a BAT. A BAT provides for all particular category of commercial disputes between the respective parties (in particular States) shall be resolved only by international commercial arbitration. The category of disputes that would be subjected to this default mechanism of international arbitration would be defined by the parties in their BAT.

We begin this essay with the dialogue on the notion of BAT then we proceed to outline the origin and history of arbitration followed by understanding the scope of international arbitration around the world, afterwards we will be scrutinizing the advantages and disadvantages of arbitration and subsequently this essay is concluded by deliberating over the point– Whether Bilateral Arbitration Treaty is really the way forward? Before we start with the discussion of first sub-topic of this essay, first let us find out the meaning of the terms BAT, to understand this we should be familiar with the meaning of ‘International Commercial Arbitration’. International Commercial Arbitration is a private dispute resolution system which allows parties to resolve their disputes faster, cheaper and within a neutral and confidential setting. It provides parties more flexibility and control over the proceedings and helps eliminate the uncertainties in choice of decision maker, forum and applicable law. International Commercial Arbitration is designed to assure parties from different jurisdictions that their dispute will be settled in a neutral fashion using presumably internationally-neutral procedural rules detached from domestic courts, governmental institutions and without the “cultural biases of either party.”

STORY TILL NOW… - THE HISTORY OF ARBITRATION

Arbitration was not un-known. There has never been a time in history when it was unknown, earlier it was the instrument of maintaining peace and solving disputes. Traces of arbitration is everywhere in the history. Among ancient Greeks, Plato wrote about arbitration. Trading communities of England relied on special tribunals, i.e. the Courts of the Boroughs, of the Fair and of the Staple, in order to solve the controversies arising in the world of local and international trade. However in USA there was some mistrust on arbitration’s capacity to produce fair results in the late nineteenth and early twentieth centuries, but with the enactment of modern state, federal arbitration Acts and the creation of the American Arbitration Association in 1920’s arbitration again started enjoying favourable position. Whereas in France, arbitration always played an important role. The Decree of the Moulins of 1566 made arbitration the sole and obligatory means of dispute resolution for commercial disputes. While in India arbitration is an old practice through which the panchayats in villages would settle disputes between the parties. Thus, if the course of arbitration is traced through the centuries, it will be found in the most primitive society, as well as in modern civilization.

As far as commercial arbitration is concerns it was known to the desert caravans in Marco Polo's time and was a common practice among Phoenician and Greek traders. In the Homeric period, chiefs and elders held regular sittings, in places of assembly, to settle the disputes of all persons who chose to appear before them. International arbitration was also known to the ancient world, in a controversy between Athens and Megara for the possession of the island of Salamis, about 600 B.C., the matter was referred to five Spartan judges who, by arbitration, allotted the island to Athens. A dispute between Corinth and Corcyra for the possession of Leucas (480 B.C.) was settled by Themistocles, as arbitrator. A boundary line in dispute between the Genoese and Viturians was settled by arbitration (117 B.C.), this decision having been recorded upon a bronze tablet unearthed near Genoa. There are also instances in which a third strong power compelled other powers to resort to arbitration. Sometimes the arbitrator was an individual like Themistocles, or an institution such as the Areopagus at Athens, or a state such as Athens. The first authentic case having the application of international arbitration dates about 650 B.C., when Andros and Chalcis disputed the possession of the deserted city of Acanthus and left the decision to the Parians, the Samians, and the Erythraeans. Although one of the first disputes submitted to the earliest known American arbitration tribunal, organized in 1786 by the Chamber of Commerce of New York, involved the wages of seamen.

The modern era of international arbitration properly dates from the Jay Treaty of 1794.During the eighteenth century after the closing of the Napoleonic Wars, nations not only talked a great deal about arbitration, but actually employed it on a very large scale, by the adoption of general claims conventions for the settlement of all outstanding questions. What earlier had the characteristics of peace movement started changing, it was no longer religious, but political, in its aims. Peace societies began to be established early in the nineteenth century all over the globe, the first having been organized in New York in 1815. Their object was to unite all the advocates of peace for concerted action. In the middle decades of the nineteenth century, arbitration became more common than ever before because of Industrial Revolution. Everyday minor and major differences between governments and industrial units were solved through arbitration. Slowly the world started using arbitration as the means to solve most of its disputes. About 1873, efforts were made to bring the subject of arbitration before the legislative bodies of the different countries the first Pan-American conference indicated the road to permanent peace and then the national legislative bodies in the United States, England, Italy, France, and Sweden, passed a general motions in favor of arbitration. Later the First Hague Conference in 1899 lead to the foundation of a Permanent Arbitration Court. In the initial eight years from establishment only four cases were referred to the ‘Permanent Court’ and thus a need for second conference was felt. And then after the Second Hague Conference in 1907 the scope of court was increased and so did the number of cases referred to.

In 1848 a notable article on arbitration was included in the Treaty of Guadalupe Hidalgo. This article amounted to nothing less than a permanent arbitration clause, the first of its kind in history. This marks the commencement of practice of adding arbitration clause in all kind of international treaties, and from here and now most of the international treaty employed a permanent arbitration clause as the initial method to solve disputes rather than approaching a domestic court for litigation.

Scope Of International Arbitration Around The World

International Arbitration is essentially between or among transnational actors (i.e. states or multinational corporations). Then the question here is why arbitration is preferred by these transnational actors over domestic litigation and other dispute resolution mechanism like approaching International Court of Justice (ICJ) or opting for mediation? And why does these disputes arise in the first place? Arbitration is preferred over other dispute resolution mechanism because in arbitration the parties have considerable freedom and flexibility with regard to choice of arbitrators, location of the arbitration, procedural rules for the arbitration, and the substantive law that will govern the relationship and rights of the parties. A recent study by Richard Naimark and Stephaine Keer suggested that, privacy and or confidentiality is not one of the most valued aspects of international commercial arbitration. Other attributes, such as a fair and just result, a monetary award, the finality of the decision, arbitrator expertise, neutral forum with experts, time saving, are equally as important. Whereas answer to the second question is that dispute arises because of following problems namely: issues with the interpretation of agreements and practices, differences in custom, language, culture and religion further fuel conflicts and disagreements between commercial players. Thus to overcome these problems, international arbitration work as the most efficient and effective dispute resolution mechanism.

International Commercial Arbitration can either be Ad hoc or Institutional. Parties are entitled to choose the form of arbitration, which they deem appropriate in the facts and circumstances of their dispute. This necessarily involves the consideration & evaluation of the various features of both forms of arbitration.Ad hoc Arbitration are conducted by parties without the assistance or supervision of an arbitral institution. The parties are required to determine all aspects of the arbitration like the number of arbitrators, manner of their appointment, and procedure for conducting the arbitration, among others. Whereas an Institutional Arbitration is one in which a specialized institution with a permanent character intervenes and assumes the functions of aiding and administering the arbitral process, as provided by the rules of that institution. Transnational parties usually opt for Ad hoc Arbitration rather than Institutional Arbitration because of following attributes:

The Agreement to Arbitrate

As International Commercial Arbitration is founded on mutual consent of the parties, question regarding jurisdiction of the arbitration panel and authority to decide are eliminated.

The Choice of Arbitrator

The parties have the choice in appointing their own arbitrators, who may be experts in international arbitration and or persons with requisite trade or industrial experience in the subject matter of dispute. Any award giving by such arbitrator is final and binding.

The Enforcement of Award

Arbitral awards are enforceable like court judgments. Where a losing party defaults in satisfying an award, the victorious party can enforce it in the court of the country, where the losing party has its assets located. Arbitral awards can be enforced internationally under the New York Convention. This makes international commercial arbitration attractive to the international business community.

Today every international contract & treaty contain an arbitration clause making it the new surrogate for civil ligation. It also helps in avoiding the costly time-consuming court trials. The ability of users to tailor processes to serve particular needs in arbitration is the key main difference between arbitration and litigation which is the reason it is so much preferred around the world. In business contracts, arbitration provision has become a long a sine qua non, parties must henceforth affirmatively either elect arbitration or go to court. Conventional wisdom suggests that businesses choose binding arbitration mainly because it is perceived to be different from litigation. Parties look for some or all of the following: cost savings, shorter resolution times, a more satisfactory process, expert decision makers, privacy and confidentiality, and relative finality. It is not surprising, therefore, that today arbitration provisions are utilized in all kinds of contracts, making arbitration a wide-ranging surrogate for civil trial. These are the few reasons which explain its unprecedented growth in recent years. Arbitration differs from mediation in that the arbitrator imposes a resolution, unlike a mediated settlement which must be agreed to by the parties. Arbitration differs from litigation because it is informal: arbitration occurs in a conference room rather than a courtroom, the rules of procedure and evidence are loosely applied, and both discovery and motion practice are limited.

Arbitration is always seen as a means of avoiding the “needless contention that [is] incidental to the atmosphere of trials in court.” In twentieth century arbitration was popularly touted as a more efficient, less costly, and more final method for resolving disputes; there was little or no discovery, motion practice, judicial review, or other trappings of litigation. But by the beginning of the twenty-first century, arbitration became more “judicialized,” formal, costly, time-consuming, and subject to hardball advocacy.Major factors which is subjecting arbitration processes to unprecedented stress and strain, and criticism are:

First, it appears that today arbitration is assume with the burden of resolving virtually every kind of civil dispute, thus it has taken on more and more features of a court trial.

Second, this trend of binding arbitration provisions in every contracts that govern employment relationships and consumer transactions is distressing the relationship in addition to pressure that is placed on arbitration by referring every petty disagreement.

Third, since arbitration processes took over the greater part of litigation territory, it undertook many characteristic changes in order to grapple effectively a wide range of business disputes, including many large, complex cases, thus making arbitration procedures to be longer and more detailed and costlier and lawyers bring to bear the same tools of zealous advocacy they employ in litigation.

Since its creation in 1923, The ICC International Court of Arbitration has administered more than 20,000 disputes involving parties and arbitrators from some 200 countries and independent territories. The question here is how did BAT came into picture? The answer to this is the Bilateral Investment Treaty (BIT). The growth of corporations and technology in the mid-nineteenth century led to the advent of foreign investment and thus BIT came into picture in 1959 when Germany signed the very first BIT with the Pakistan. Bilateral investment Treaties (BITs) are agreements between two Countries (States) for the reciprocal promotion and protection of investments in each other's territories by individuals and companies situated in either State. Some of the essential clauses covered under BITs are:

Applicability

Relates to the application of BIT, the general trend is that the BIT applies to existing and future investment from the date on which it was entered.

Fair and Equitable Treatment and Full Protection & Security

This principle creates minimum standards of treatment which has to be followed by the host state i.e. protection of legitimate expectations of investors, transparency and stability, non -denial of justice and prohibition of coercion and harassment along with the protection from physical violence.

National treatment and Most-Favoured - Nation treatment

It ensures that a foreign investor is treated at par with the domestic investor and is not subject to any unfair treatment.

Expropriation

A legal expropriation should satisfy the following conditions: (1) It must have a public purpose; (2) It should be not be discriminatory or arbitrary; (3) It must be conducted in accordance with due process and; (4) It must be accompanied by adequate compensation.

Dispute settlement mechanisms

The most important factor that makes BIT very important in the eyes of investors is that under a BIT an investor can directly initiate arbitral proceeding against a State without approaching its own government.

BITs encourage foreign investors to invest in a State and there by contributing towards overall developments and advancements of the economy. And this dispute resolution mechanism directly affects the Foreign Direct Investment (FDI) in a nation. There has been some suggestion that dispute resolution provisions are one of the strongest investor protections in investment treaties. The former U.S. Treasury Secretary, John Snow, has also suggested that focusing “attention on a dispute resolution process [is] a way to facilitate foreign direct investment.” A potential investor considers numerous factors before signing a BIT with a country these factor include: (1) obtaining immediate commercial profit, which might be implicated in a jurisdiction’s tax regime or the stability of internal regulation; (2) gaining a foothold in an emerging market in the hopes of securing future profits; (3) engaging in institutional copying by entering a new market or seeking to gain a competitive advantage over competitors in the same market; (4) fostering existing relationships with individuals or government; and (5) taking into account the sophistication and experience of investors and their attorneys.

Investment treaty arbitration is a hybrid or “mixed” system — a system that grafts a traditionally private dispute resolution system onto an international treaty between Sovereigns. It is a method to depoliticized dispute resolution process. The basic concept of BAT is similar to any other treaty between two nation states providing that all of a particular category of disputes between the respective nationals shall be resolved - as a default mechanism - by international commercial arbitration. The advantage of BAT is that the contracting parties can decide all the factors that govern the treaty. The category of disputes that would be subjected to this default mechanism of international arbitration would be defined by the States in their BAT. Ordinarily BAT may exclude the non-commercial disputes, and be focused entirely on commercial business disputes. Thus it is the discretion of the contracting state parties to decide all the factors related to the BAT which includes rules by which the arbitration proceeding will be governed, qualification and number of arbitrator, place and type of arbitration proceeding, matters that will be referred under BAT and enforcement of arbitral award.

Thus we can carve out the advantages of BAT in details. First, discretion of deciding the category of disputes that will be referred under the BAT i.e. jurisdiction of BAT. Second, the parties can decide the definition of different terms of treaty (for ex. Definition of ‘investor’, ‘host state’, ’dispute’ etc.). Third wide freedom of choice on the qualification and number of arbitrator to be appointed for a particular dispute. Fourth Flexibility in choosing the manner of arbitration proceeding.

Whether Bilateral Arbitration Treaties Are The Future?

International disputes can be settled using two methods which are known as amicable methods and non-amicable method. The amicable methods are negotiation, mediation and arbitration, while the non-amicable method include war and other similar hostile, unfriendly methods. International Arbitration is rapidly becoming a mainstream method of resolving legal disputes and as courts and contracting parties have thrust arbitration into a primary adjudicative role arbitration has taken on increasingly more characteristics of litigation. Although this evolution is understandable has ‘legalized’ itself. This growth of international arbitration has resulted in evolution of new concept known as BAT, which is the future of the international arbitration. To sum it all, if we are to make any progress in the world, we must set up some sort of standard or ideal mechanism that will define the dispute resolution system and the best answer to this is BAT. It has all the features that we need or desire today to solve the commercial disputes in this global economy world.