The Repeat Appointment Factor: Exploring Decision Patterns of Elite Investment Arbitrators

Daphna Kapeliuk - Radzyner School of Law

Posted in , , , , , , ,

 

Introduction

Scholarship on arbitral behavior and decision making has theorized that, as utility maximizers who wish to increase their chances of reappointment in future disputes, arbitrators will tend to satisfy both parties by rendering compromise awards.  Although empirical studies on arbitral behavior have focused on the arbitrators’ tendency to “split the difference,” the studies have largely overlooked whether repeat arbitrators or newcomers granted the awards in question. Further, these studies have also not focused on decision patterns of arbitrators as a function of their role as presiding arbitrator or as party-appointed arbitrators in three-member tribunals.

This Editorial and the full-length Article on which it is based, offer an analytical study of the decision patterns of repeatedly appointed arbitrators. In line with the existing empirical research, which has focused on specific groups of decision makers, the Article on which this Editorial is based explores arbitral decision making in investment treaty arbitration under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID).

 
I.
Foreign Investment and Investment Arbitration Under the ICSID

Foreign investment has significantly expanded in the past two decades.  One of the major instruments that have affected the investment climate around the world and enabled the rapid flow of foreign capital is the increased number of bilateral investment treaties (“BITs”) for the promotion and protection of investment. BITs include dispute resolution procedures that enable non-State entities—corporate and individual investors—to seek redress against the host state for an alleged breach of its treaty obligations. Most investment treaties have dispute-resolution provisions that attempt to resolve treaty disputes through ICSID arbitration. In light of the rapid growth in the number of BITs, the number of investor-state arbitrations has dramatically escalated.

 
II.
The Judicial Behavior of Arbitrators

The economic approach to arbitral decision making posits that arbitrators are utility maximizers. Because the disputing parties generally select the arbitrators and pay them only when they are appointed to a case, arbitrators compete in the arbitration market for business just as any other service provider. Market forces may lead arbitrators to behave in a way that increases the parties’ satisfaction in the arbitration process, which will increase an arbitrator’s probability of being reappointed in future cases.  One strategy for maximizing party satisfaction is for the arbitrators to “split the difference”—that is, to render compromise awards that give each party a partial victory.

While some literature on arbitral awards has focused on the arbitrators’ purported tendency to split the difference, another line of studies has argued that investment-treaty arbitrators tend to rule in favor of investors.

This Editorial and the full-length Article argue that, although arbitrators might, in theory, display a pro-investor bias or project some image of fairness by strategically choosing to split the difference, they may also simply wish to fulfill the parties’ expectations for a just and accurate decision.  The arbitrators’ professional reputations provide a key incentive for them to remain as impartial and fair as possible.  This is especially true for arbitrators who are repeat players in the arbitration market, for whom the reputation as credible and independent decision makers is a key characteristic for their selection.

 
III.
Existing Empirical Research

The emergence of investment-treaty disputes has generated growing academic interest in investment-treaty arbitrations.  However, empirical research has remained quite limited. Existing empirical studies that evaluate arbitration awards have overlooked three elements necessary to assess arbitral behavior and decision patterns. The first element concerns the relevance of repeat appointment in analyzing arbitral behavior.  Empirical research did not ask whether repeatedly appointed arbitrators or newcomers granted the analyzed awards. The second element concerns the role of the arbitrators in three-member tribunals.  Current research has not explored whether a difference exists between decision patterns of presiding arbitrators and those of party-appointed arbitrators.  The third element concerns the dichotomous coding of the outcomes of arbitration proceedings. According to this scale, a claimant wins if the claimant receives some monetary award, and the respondent wins only if the claimant receives nothing.  However, the binary categorization of outcome fails to reflect the true range of outcomes in arbitration awards and cannot provide accurate information about the winners and losers in arbitrations or about arbitrators’ judicial behavior.

 
IV.
Research Methodology

The full-length Article defines repeatedly appointed arbitrators as arbitrators who received at least four appointments to arbitration cases registered with ICSID between January 1994 and September 30, 2009. Those arbitrators are termed “elite arbitrators.”

The full-length Article explores elite arbitrators’ decision patterns on three levels: the tribunal level, the appointment-status level, and the individual level.  On the tribunal level, this research explores the decision patterns of all publicly available awards on the merits that  arbitration tribunals consisting of at least one elite arbitrator granted.  On the appointment-status level, the Article assesses the decision pattern of elite arbitrators as a function of their role in the arbitration tribunal (that is, as presiding arbitrators or as party-appointed arbitrators).  On the individual level, the Article analyzes the decision pattern of individual elite arbitrators over time.

 
V.
Database Overview

Elite arbitrators represent 15% of the population of arbitrators who served in ICSID tribunals. While the percentage of elite arbitrators seems low, their frequent presence in cases is impressive.  Parties appointed at least one elite arbitrator in 80% of the cases.

 
VI.
Research Results—Decision Patterns of Elite Arbitrators

 
A.     The Tribunal Level: What is the Decision Pattern of Elite Arbitration Awards on the Merits?

Of the publicly available awards, 60.5% denied the claimant any recovery and 7% awarded the claimant 100% of the claimed amount.  The claimant received some monetary award in the remaining awards.  Interestingly, only one award split the difference by awarding the claimant a sum ranging between 40% and 60% of the claimed amount.  The results show that arbitration tribunals involving elite arbitrators do not have a tendency to render compromise awards.  Moreover, because most awards dismissed all investors’ claims and more than 80% of all decisions rendered an award of less than 40% of the claimed amount, the results clearly do not support the claim that investment arbitration tribunals display a tendency to rule in favor of investors.

 
B.     The Appointment Status Level: What is the Decision Pattern of Elite Arbitrators as a Function on Their Role in the Tribunal?

ICSID arbitrations are generally heard by three-member tribunals.  The results show that elite presiding arbitrators tend to dismiss all claims (64.7%) more often than elite arbitrators that claimants appoint (43.8%) or that respondents appoint (57.9%).  The results also show that only elite presiding arbitrators have awarded claimants 100% of the claimed amount.  As to the partially accepted claims, the results show that elite arbitrators that claimants appoint tend to accept part of the claims (56.4%) more than elite arbitrators that respondents appoint (42.1%) and more than elite presiding arbitrators (26.4%).

Interestingly, while one might expect that presiding arbitrators may be more inclined than party-appointed arbitrators to satisfy both parties by rendering compromise awards and by avoiding extreme decisions, the results show the opposite.  Presiding arbitrators dismiss all claims or accept all claims more than party-appointed arbitrators and, therefore, appear less averse to extreme outcomes than party-appointed arbitrators.

 
C.     The Individual Level—The Decision Pattern of Individual Arbitrators on a Timeline

Arbitrators who compete in the arbitration market might act strategically by signaling their judicial attitudes to prospective parties.  Awards are strong signals, and, as such, they might affect the disputing parties’ choice whether or not to select a specific arbitrator. By exploring the arbitrators’ decision history, the parties gain more insight into each arbitrator’s judicial behavior and decision patterns.

The results show that if one individually examines the arbitrators’ decision records,the decisions do not always display a tendency towards a balanced decision pattern. Although in some cases an individual arbitrator’s decision may imply favoritism of one side over the other, the results display different decision patterns for each individual elite arbitrator.  However, the results clearly show that elite individual arbitrators do not tend to split the difference, and that, with the exception of one arbitrator, they do not have a tendency to rule in favor of investors.

 

Conclusion

This Editorial and the full-length Article on which it is based present clear evidence that arbitration tribunals involving elite arbitrators do not have a tendency to render compromise awards.  The results of the research also clearly defy any claim that investment arbitration tribunals tend to rule in favor of investors.

My claim is that the arbitrators’ valuable professional reputation is a key incentive for them to remain impartial.  To promote their reputation, arbitrators may choose to increase accuracy and to counter any real or perceived biases, rather than cater to any particular interests.  This tendency rings especially true for repeat arbitrators in the arbitration market, whose most valuable trait may be their reputation as credible and independent decision makers.

Acknowledgements:

Daphna Kapeliuk is a Lecturer at the Radzyner School of Law, the Interdisciplinary Center, Herzliya.

This Legal Workshop Editorial is based on Ms. Kapeliuk’s Article:  Daphna Kapeliuk, The Repeat Appointment Factor: Exploring Decision Patterns of Elite Investment Arbitrators, 96 CORNELL L. REV. ___ (forthcoming 2010).

Copyright © 2010 Cornell Law Review.


Post a Comment (all fields are required)

You must be logged in to post a comment.