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Introduction by Phil Fleming:
As the Iraq Study Group Report pointed out, international arbitration is a tool that nation states should consider in seeking to contain if not resolve extremely contentious and explosive international conflicts. The Baker-Hamilton Study Group Report suggested, in Recommendation 30 at pages 65-66, as follows:
"Kirkuk. Given the very dangerous situation in Kirkuk, international arbitration is necessary to avert communal violence. Kirkuk's mix of Kurdish, Arab, and Turkmen populations could make it a powder keg. A referendum on the future of Kirkuk (as required by the Iraqi Constitution before the end of 2007) would be explosive and should be delayed. This issue should be placed on the agenda of the International Iraq Support Group as part of the New Diplomatic Offensive."
In view of the importance of arbitration as a form of alternate dispute resolution, we asked Anibal Sabater, a member of the Fulbright Jaworski law firm based in Houston, Texas, and an experienced international arbitration practioner, to prepare a primer describing the process, the underlying treaties – several of which are frequently cited as milestones of contemporary public international law – and the role of public and private international organizations in drafting rules and procedures so that parties who wish to engage in international arbitration have several existing structures and providers to select from in selecting the process and the venue. A major advantage of arbitration is flexibility, as the World Trade Organization has demonstrated since its creation in 1995. International arbitration has helped to avoid an escalation of conflicts, and in some situations, has even prevented the outbreak of war.
That is probably why the Baker-Hamilton Commission made its recommendation to pursue arbitration in dealing with the tinder box that is Kirkuk.
Philip A. Fleming
President, the Lawyers Alliance for World Security
August 29, 2007
International Arbitration and The Making of The World Order
If you ask any American what mechanisms governments use to solve international disputes, the two answers you will likely get are war and diplomacy. This is hardly surprising. In the post- Sept. 11, 2001, era, there has been war in Afghanistan and Iraq, all as part of the fight against terror. However hesitant and indirect, there have also been diplomatic talks involving the United States, Iran and North Korea on the issue of enriched uranium and arms control. Also, last summer, the abduction of two Israeli soldiers by Hezbollah prompted a blitz of violence followed by peace conversations in the Middle East.
Yet, war and diplomacy are neither the only, nor necessarily the best, means to solve international disputes. Somewhere between the harshness of war and the fluctuations of diplomacy, lies a place for arbitration.
Almost unheard of one century ago, international arbitration is usually defined as a method to solve disputes voluntarily chosen by the parties in which an independent panel issues a binding decision adjudicating the dispute.
One of arbitration’s biggest advantages is flexibility. While the dynamics of war and diplomacy have changed little over the last few years, arbitration has evolved enormously. At the same time, arbitration has transformed international relations, first and foremost by bringing in new players.
The late J. K. Galbraith liked to say that “the U.S. Senate is a place where everyone tries to speak but few are ever listened to.” To a degree, the same used to be true of international relations. For centuries, all major international trade decisions were made by governments (sometimes by just a few of them). As recently as ten years ago, a private corporation like Occidental Petroleum could not have sued Ecuador before the World Bank seeking one-billion-plus dollars in damages for termination of contract. And, seven years ago, only one or two foreign companies would have been entitled to bring international law claims against the Morales administration for the nationalization of Bolivian gas (today at least a score of them can do so). “Not so long ago,” an International Monetary Fund report says, “private companies and individuals were voiceless in the international arena. But that is no longer the case.”
The change has not taken place suddenly. Its roots extend back to 1958, when Aaron Broches was appointed the World Bank’s general counsel. A Dutch citizen and an international lawyer, Broches was convinced that the traditional forms of diplomatic protection of investors were obsolete. Investors doing business with governments needed speedy, direct and cost-efficient dispute resolution mechanisms, rather than tortuous state-to-state talks.
As a consequence of Broches’ vision, the International Centre for the Settlement of Investment Disputes (ICSID) was established in 1966. As the dispute-settlement arm of the World Bank Group, ICSID provides mediation and arbitration facilities where foreign investors can seek direct redress from states. The awards obtained under the ICSID Convention can only be challenged before an ad hoc ICSID annulment committee for a very limited number of reasons (essentially corruption, lack of jurisdiction and due-process failure). Being literally “supranational,” there is no appeal against those awards before municipal courts (by contrast, regular commercial, non-ICSID awards can usually be challenged before the courts of the jurisdiction where they were rendered). Also important, ICSID Convention awards must be automatically enforced in any of the over 140 ICSID contracting states “as if [they] were a final judgment of a court in that state” (Article 54(1) of the ICSID Convention). Despite some efforts by respondent states to delay the enforcement of unfavorable arbitral decisions, the ad hoc annulment committee in the Repsol v. Petroecuador case noted in February 2006 that, while challenged, ICSID Convention awards shall be enforced immediately, unless the respondent posts an unconditional and irrevocable bond covering the amounts granted to the claimant.
Although already popular during its first two decades of life, ICSID’s heyday began in the 1990s, when hundreds of Bilateral Investment Treaties directed foreign investors and investment-host states to arbitrate their differences before the World Bank. Since then, all doubts have dissipated about the acceptance of private companies within the arena of international relations.
Yet, the impact of international arbitration on the world order does not end here. Recall the trade-wars between the United States and Japan in the 1980s. Such disputes are far less likely now. Since its creation in 1995, the World Trade Organization has been arbitrating these sorts of clashes and cornering the use of trade sanctions and embargoes in the global economy. This is not an exception. As a general matter, international arbitration helps to avoid an escalation of conflicts, and can even prevent the outbreak of war. That was the case in the recently-resumed arbitration to establish boundaries between Ethiopia and Eritrea, and the arbitration between Ecuador and Peru on access to the Amazon River some decades ago.
Similarly sensitive disputes have also been settled by arbitration in the private law field. Think, for instance, of the complex arbitrations twenty years ago between Channel Tunnel Group and Balfour Beatty Construction over the construction of the English Channel Tunnel. More recently, international arbitration was used in the billion-dollar claims of El Paso Corporation against Copel, a regional, government-controlled company in Brazil. These and other cases are helping to establish a new transnational legal and commercial framework.
In particular, international arbitration case-law has significantly defined and developed the standards of protection that governments must fulfill in their dealings with foreign investors. In doing so, arbitration awards have become the most relevant source of information for anyone seeking the content of international economic law. This set of awards has transcended the frontiers between legal cultures to the point that, twenty years ago, some arbitrators started to defend the “necessary synthesis of civil law and common law principles” to create a new world-wide arbitration order. That order is now a reality. It is embodied first in international treaties and second in the arbitration rules of private and public international organizations to which disputing parties frequently submit.
Among the international treaties in the field of arbitration, the 1958 U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (usually known as “the New York Convention”) remains paramount. Brief and clear, the Convention dramatically simplified the steps necessary for the enforcement of arbitral awards abroad. “Let each arbitral award have worldwide effect” seemed to be the implied motto (and the ultimate aspiration) of the drafters of the New York Convention. In due time, their efforts were paid back. Almost fifty years after it was opened for signature, the New York Convention has been adopted in nearly 150 countries, which represent all forms of legal, political and business traditions. Covering most types of commercial awards (except for ICSID awards), the New York Convention is believed to allow for the enforcement of over one thousand arbitral decisions each year. No less remarkable is the fact that the New York Convention has been as widely ratified as (and is more consistently observed than) some of the international treaties which are usually cited as milestones of contemporary public international law, such as the 1968 Nuclear Non-Proliferation Treaty or the 1976 U. N. International Covenant on Civil and Political Rights.
The development of international arbitration can also be largely credited to regional international treaties, such the 1961 European Convention on International Commercial Arbitration (briefly, Geneva Convention) and the 1975 Inter-American Convention on International Commercial Arbitration (or Panama Convention). Those two conventions imported New York Convention principles into Europe and Latin America respectively, while also clarifying and furthering these principles.
However, if arbitration has become a more accessible dispute resolution mechanism, then that has been largely due to public and private international organizations, some of which offer arbitration rules and case-administration facilities to parties in commercial or investment disputes. In addition to ICSID, this is done, for instance, by the Paris-based International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), the Inter-American Commercial Arbitration Commission (IACAC), and, a leader in this continent, the American Arbitration Association (AAA) and its international division, the International Centre for Dispute Resolution (ICDR). Without actually administering or managing disputes, a second group of international organizations has drafted rules under which the parties can choose to arbitrate their disputes. Rules of this nature include the 1976 Arbitration Rules prepared by the United Nations Commission on International Trade Law (UNCITRAL).
Also noteworthy are the Code of Ethics for Arbitrators in Commercial Disputes, and the Rules on the Taking of Evidence in International Commercial Arbitration: both have been drafted by the International Bar Association (IBA) and cover only certain aspects of the arbitral process. With varying degrees of flexibility, the rules of all the above organizations set out a number of dispute resolution processes, from which the parties can choose the one which best fits their needs.
Despite its growing popularity, arbitration is still facing severe threats and obstacles, especially from governments around the world. Traditionally, some of those obstacles have consisted of governmental attempts to interfere with the outcome of the arbitration, capricious repudiation of agreements to arbitrate and the failure to ratify international conventions on arbitration or to enact pro-arbitration legislation. In recent times, two more obstacles to arbitration have also been added to the list.
The first of those obstacles is the unwillingness of some states to surrender their immunity from attachment. Without an express immunity waiver, the chances of enforcing arbitral awards (even ICSID awards) against sovereigns are slim; unless the state voluntarily complies with the award (which is not always the case), claimants are at best only able to attach those assets of the respondent state which are not involved in the performance of public or governmental duties. The recent (much analyzed) fortunes and misfortunes of Svenska Petroleum when trying to enforce an award against Lithuania in England are a case in point.
From a U.S. perspective, the Foreign Sovereign Immunity Act (FSIA) contemplates the attachment of all assets of foreign governments on U.S. soil, provided those states have not paid the enforceable awards rendered against them and waive their immunity from attachment. There is nothing, however, the FSIA can do to encourage foreign sovereigns to waive their immunity. Rather than a legal issue, that is a matter of international policy; certain nations still need to understand that the long-term consequences of their failure to comply with adverse arbitral awards (discredit of their financial reputation, discouragement of foreign investment, etc.) often outweigh the short-term economic and political benefits they can obtain from that conduct.
The second obstacle to arbitration is the tendency of some countries to adopt rules aimed at transforming arbitration into just a regular form of court litigation by filling it with formalities or subjecting it to terms and conditions usually reserved for processes before the judiciary. In this respect, what not so long ago was the exception is now close to becoming the rule. Take, for instance, the purported “transparency” of arbitration proceedings. A few years ago, public hearings and third party intervention (usually from NGOs and/or environmental organizations) could almost only be seen in the moderately unusual investor-to-state arbitration cases conducted under the North American Free Trade Agreement (NAFTA). Since the ICSID Arbitration Rules were modified in April 2006, however, all ICSID arbitral proceedings have also become public and the submission of amici curiae briefs has been expressly allowed in certain circumstances. These efforts for greater transparency make sense in the realm of public international law arbitration involving states only or states and investors. They may not be all that appropriate, however, when it comes to purely commercial arbitration. Although commercial arbitration proceedings are not confidential by definition, they are seldom reported or accessible to third parties. This is consistent with the very nature of those proceedings and the disputes involved therein, which usually concern only the parties in question (for relatively exceptional commercial cases in which third parties, such as subcontractors, might have an interest in the outcome of the dispute, some arbitration rules contemplate that those parties can be joined to the arbitral proceedings).
In the context of commercial arbitration, opening the proceedings to the public or allowing for third party intervention (as has recently happened on at least two occasions) threatens the very essence of the dispute resolution mechanism which the parties chose; if allowed, the parties may suddenly find themselves in dispute resolution proceedings which look suspiciously similar to the court litigation they tried to avoid by choosing arbitration.
In the current situation, in which arbitration has already shown its benefits but remains to be developed in certain areas, the U.S. Government would do well to insist, as it has timidly attempted in NAFTA and its Central American counterpart, CAFTA, that free-trade benefits afforded to other countries be conditional upon these countries’ accepting and promoting arbitration. It is not just a matter of free-trade. It is also a matter of security and stability in the international community.
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