Arbitral institutions like to be discreet, and would perhaps be content if it were generally assumed that they perform a merely clerical and administrative function. Such a posture would be untenable. The tasks necessarily allocated to such bodies are central to any assessment of the legitimacy of the arbitral process. Given that commentators those looking for a soapbox seem to find it easy to have categorical opinions about arbitration, with an intensity inversely proportional to their acquaintance with facts, this is a welcome book, dispassionate but critical, which should allows its readers to bring greater discipline to their analysis—whatever may be their ideological predispositions.
Behind a deceptively bland title, Rémy Gerbay provides a conceptual framework which should allow evaluation of the international arbitral mechanism to be conducted with greater seriousness. A French scholar who has particularly cosmopolitan credentials, he holds degrees not only from his native country but also Switzerland, the United States, and the United Kingdom; and practicing licenses in the US and England. Now a lecturer at the School of International Arbitration at Queen Mary University of London, he had previously distinguished himself as a young Deputy Registrar of the London Court of International Arbitration—an experience which allows him to write with authority and meaningful perspectives on this subject.
In the national sphere, consumer arbitration is a salient example of the controversies that arise. Arbitration clauses, some say, is the dark art of unscrupulous corporations seeking to evade responsibility for their products and services by making it nigh on impossible for consumers to seek effective redress. The only thing left to do, in this view, is to treat arbitration clauses as presumptively unconscionable. Yet the school is out on two important questions: is it not possible to police abuse of asymmetrical bargaining power in arbitration clauses, for example by powerful safety valves like the American Arbitration Association’s Due Process Protocol? And is it a foregone conclusion that there is no type of arbitration which actually benefits consumers, despite the contrary conclusion of a number of studies?
International arbitration is criticized as a way of neutralizing sovereignty, displacing public courts with private decision-makers who tend to disregard the public interest. In answer, its defenders point out that especially outside the cleanest and institutionally most mature states, it is very much open to doubt that the court do a better job of looking out for the interests of ordinary citizens. Moreover, they point out that countries must provide credible neutral adjudication of legal rights and obligations, lest suffer from having the cost of all their international dealings augmented by a legal risk premium.
Arbitration constitutes the delegation of decision-making authority to persons who do not hold public office. As Gerbay perceives quite clearly, delegation generally implies some measure of residual control, or the thing would not be the delegation of authority but its simple relinquishment. Contrary to a widely-held belief (see below), arbitrants in the international domain are anything but sanguine about the idea of giving arbitrators free reign in the way they run the arbitral process (as opposed to—and no doubt as a counterpart of—according finality to their decision on the merits, without which arbitration would lose its appeal).
So who exercises this control? Who decides if the tribunals will have three members or only one? Who appoints arbitrators when the parties fail to agree? Who decides whether a candidate nominated by a party is unfit? Who considers petitions to remove arbitrators for misconduct? Who decides what their fees should be? What about selecting the place of arbitration, consolidating claims, joining parties? It would be odd if this had to be national courts, given the asymmetry between international arbitration and national courts; when the arbitrants are of two different nationalities, the involvement of national courts can only be the product of the agreement or voluntary conduct of the parties, and is therefore functionally just a variant of delegation. Above all, each arbitrant is likely to be wary of its adversary’s home courts, and if the parties were attracted by third country courts they might as well have asked them to decide the case as a whole—as some courts in a few countries are willing to do even where they otherwise would not have jurisdiction.
That leaves arbitral institutions. Many of them insist that they fulfill nothing but an administrative function, and vaunt their “hands-off” approach. This is in a sense the fundamental and proper recognition that they have not been chosen by the parties to decide. On the other hand, the appointment and removal of arbitrators may be viewed as a critical function entailing controversial determinations. The modest labelling of the institutional role as “administrative” may seem somewhat like the practice of police detectives using unmarked vehicles in an attempt to blend in with the background, an unremarkable feature of daily routine. The car may be unmarked, but the conduct of the detective, when it affects rights of due process (e.g. the proper gathering of evidence) cannot be so dismissed.
Like it or not, the permanent institutions that administer arbitrations cannot hide behind the fiction that they are providing merely managerial functions; they are to some degree answerable for deficits in the legitimacy of the process. Have they done what they can? More than that one cannot ask, but that much yes.
Moreover, the seemingly unrecognized fact is that users want international arbitral institutions to be hands-on. Gerbay reports that a survey of in-house counsel in 2013 found that more than 70% of the respondents wanted a “hands-on” rather than “hands-off” approach to case management by institutions. Less than 5% wanted the opposite. (One quarter were undecided, perhaps because they would have said “that depends on the institution.”) More hands-on means more accountable. Gerbay quotes the Olympian personnage of Pierre Lalive, the Swiss maître-penseur of international arbitration whose seminal publications dominated the field in the 1970s and 1980s; he once wrote of the “legal schizophrenia” of arbitral institutions who claim to exercise “simultaneously a quasi-judicial mission” so as to justify their immunity and a “purely administrative mission” so as to avoid being held to the duty to ensure due process. (P. 191.)
Challenges to institutional decision-making have led to a number of judicial pronouncements, especially by the courts of France where the best-known international institute is located, namely the International Court of Arbitration of the International Chamber of Commerce. The very first in the digest provided by Gerbay is instructive. It is known by the name of the losing (and objecting) party, Appareils Dragon. It wound its way up to the Court of Cassation in 1983. The question was simple: given that the default rule of the French arbitration statute required awards to be rendered within six months, and that the ICC Rules provided that the institution could extend that deadline, was an award rendered by arbitrators following such an extension subject to annulment because the institution had not given reasons for its “administrative” decision? Surely a losing argument, we might immediately say—and the highest French Court agreed. But one can hardly be satisfied by the essential passage of its judgment (in Gerbay’s translation), referring to the ICC in the following terms: “lacking the quality of arbitrator, [it] was not bound to provide reasons for its decision of prolongation, which did not have a jurisdictional character.” (P. 127.)
The nature of a decision implying the exercise of a “jurisdictional” function is hardly self-defining. Imagine a case pending before an unknown arbitration institute in a country far down on the Transparency International corruption index. After the commencement of arbitration, the institute takes no steps to constitute the tribunal but periodically extends the limit for proceedings. Years pass. This may suit the respondent just fine, as arbitral litispendence on the face of it prevents alternative pursuits of remedies. Justice is denied to the claimant, who suspects collusion. Surely there comes a point when courts elsewhere will no longer accept that the institution is merely administering the case, but consider that conduct is equivalent to depriving the claimant of the right of legal redress.
Gerbay does not propose detailed prescriptions; nor could he produce a formula, given the infinite variety of situations in which the legitimacy of the process may be tested. His important conclusion is an overarching one: arbitral institutions are not mere managers; they are what he calls “ancillary participants in the adjudicative process.” (P.185.) Will this conception bring about a dangerous blurring of the line between the arbitral and institutional functions, and subject institutions to costly and endless disputation initiated by unscrupulous respondents? Gerbay’s study, admirably well-documented with respect both to practice and commentary, answers this question in the negative. The fact that some dispositions made by institutions are difficult to distinguish from substantive adjudication is no excuse for seeking to hide the fact that they may materially affect the outcome — and will ultimately fool no one. In the long run, institutions must attend to the fundamental and well-known criteria of institutional legitimacy: striving for transparency, and striving against capture, cronyism, and entrenchment. If they do so, and fully assimilate the importance of observable fairness as they make indispensable determinations on the periphery of the core decision-making function reserved to arbitrators, they need not fear accountability, but may comfortably embrace it.
The trouble with the amiable practice of collections of essays in honor of admired scholars is that they are so often published in a stand-alone volume rather than in journals of record, with the result that they may be lost to all but initiates who happen to know of its existence. In the just-published Festschrift for Professor Ahmed Kosheri, the preeminent Egyptian international lawyer of his generation, this pearl of an essay deserves a better fate. It addresses fundamental issues with respect to the degree of legal stability to which a foreign investment is entitled from a host state in light of the instruments applicable to its entry, and suggests broad guidelines to resolve the hesitations of the caselaw to date.
The authors are a father-son team of French authors, each exceptionally erudite and polyglot. Florian, the son, holds degrees from three major law faculties (Paris, Humboldt, and Cambridge). In 2007, he presented a thesis for joint recognition by Paris (Panthéon-Assas) and Humboldt which is of direct relevance to this joint contribution, entitled La protection de l’attente légitime des parties au contrat – Étude de droit international des investissements à la lumière du droit comparé. Pierre-Marie has for long been one of the bright stars on the firmament of international legal scholars and prominent among the lawyers who practice before the International Court of Justice. He has also served as arbitrator on tribunals deciding important disputes between states and foreign investors arising under bilateral investment treaties and thus applying the law referred to in their title.
This is precisely the kind of writing that attracts those of us who like to spend our lives indolently ruminating on fundamental (and thus never-resolved) questions, criticizing legislators and judges who stumble around in the land of Ad Hoc, and leaving our more industrious colleagues to “analyze,” “synthesize” and “restate” the indigestible torrent of rules produced by our rulers.
The central basic questions here asked by the Dupuys is whether a “subjective hope” could ever be a legally enforceable right. Is it nothing but a possibly relevant criterion for examining the performance of an obligation to act in good faith? Is the expression at all useful?
As a matter of legal philosophy, legitimate expectations can be seen as the ultimate fundament of law. A morally neutral legal system can be of significant value to its subjects; an amoral but predictable dictator may be preferable to chaos. And so the respect for legitimate expectations may be a requirement for a rule of decision to qualify under a conception of law, but this is not the authors’ subject, which is at one level lower of abstraction: are we looking at a meaningful rule of decision? If not, it can only lead to confusion.
International arbitrations involving claims brought by foreign investors under treaties is a phenomenon of recent vintage — its origin less than three decades in the past. The cases often involve the tension between a state’s insistence on its authority to adapt its rules to the public interest and an investor’s insistence on a right to rely on a regime which induced it to invest (and was perhaps specifically implemented to have that effect).
As the authors say, one should eschew the use of the expression in a tautological sense; to say that an investor has a legitimate expectation to “fair and equitable treatment” is as useless as saying that all citizens have such an expectation to the performance of contracts. One is already explicitly articulated in a treaty, the other in national law. “The doctrine of ‘legitimate expectations’ is about what the investor is concretely entitled to expect from the host state under the specific circumstances of a case, not about reiterating the state’s general obligations flowing from the terms of the applicable treaty.” (P. 275.)
If the reasonableness of expectations are given weight in the application of a rule of decision, it must be because it is derived from a “social environment.” The diamond market in Antwep, one reasonably supposes, is different from the souk in Casablanca. More broadly, general commercial usages may differ depending on the institutional maturity and orderliness of any national community. Do shared expectations exist in a field as broad as that of the “community” of actors who have a stake in the network of several thousand investment treaties? Or does each treaty constitute its own environment?
Looking first at comparative law (a discipline with which the Dupuys are well conversant, notwithstanding the primary association of their name with international law), the authors note that the need for limits on the revocability of administrative acts have been broadly recognized, often in ways that parallel the notion familiar to the common law principle of estoppel; the expectation must have been generated by a public authority, the change in policy must have been unpredictable, there must have been detrimental reliance, and the expectations must not compromise a compelling public interest (this last qualification being true for all areas of law but most directly in the center of debates about acts of public administration).
Some national legal systems have developed complex (and more or less useful) conceptual frameworks for the state’s liability for particular detrimental consequences of regulatory change on economic actors, designed in the French expression to achieve an approximation of l’égalité devant les charges publiques. Compared to the body of law and scholarship that have emerged from generations of struggles with the intricate tensions that emerge from the infinite variety of acts of administration, the corresponding state of the “international investment law” referred to in the authors’ title, the latter may seem embarrassingly rudimentary. That should be not be surprising, and not only so because it is in statu nascendi; it is inconceivable that an international consensus would coalesce around detailed solutions derived by one system of national law.
Moreover, we have no world parliament to draft planetary federal regulations. Treaties tend to be expressed in general terms. It is exceedingly rare for the ICJ to be seized of an investor/state dispute à la Barcelona Traction. We must look to the reasoning and the outcomes produced by international arbitral tribunals. The first generation of awards was a mixed bag, as the Dupuys show.
Some tribunals yielded to the impulse to demonstrate their mastery of the obvious, for example in stating that a remedy will not be provided for the “mere frustration of hopes.” But then when does treaty protection of foreign investment begin? The cases include such unhelpful pronouncements as the notion that what is required is the “active inducement of a quasi-contractual expectation.” This suffers from the double flaw of mysteriousness and incoherence with the fundamental idea of investment-protection treaties: (i) “quasi-contract” is not a term known to international law, nor indeed to many national legal systems, and (ii) the very notion of requiring a contractual foundation for causes of actions seems to be a reversion to a past epoch when international tribunals competent to deal with investor claims were, apart from instances of home-State espousal of claims via diplomatic protection, those arising under “state contracts” directly concluded between State and the few private investors who had the wherewithal to enter into a bilateral relationship at that level.
The authors have little difficulty demonstrating that the early decisions included some awards which had more bark than bite, as though arbitrators first settled on concrete outcomes which may have been perfectly justifiable, but then yielded to the temptation of adorning them with unreliably over-broad general pronouncements, e.g. suggesting without qualification that the stability of the legal regime prior to the entry of a foreign investment is an essential component of the familiar treaty promise of “fair and equitable treatment.” This in turn encouraged some investors to make over-ambitious claims, and some states to tremble that they would succeed. But soon enough the mirage of such obiter dicta was dissolved by proper holdings which made clear that the stability of the investment regime, though a legitimate and important objective, was not necessarily decisive in establishing obligations under the treaty; the countervailing interest of the respondent state to make adaptations in the public interest may prevail.
And so investors failed, for example, to convince arbitrators that a respondent state was without more liable for (a) for changes in caselaw, (b) failing to freeze specific laws and regulations affecting investments, and even (c) enacting fundamental reforms provided they are not “arbitrary or grossly unfair or discriminatory.”
The starting point for anyone coming new to these debates and wishing quickly to separate the intellectual wheat from the chaff will do well to press “fast forward” and take as a starting point the decision handed down in 2008 by a unanimous tribunal headed by Sir Arthur Watts QC (who served as a legal adviser in the British Legal Office from 1956 to 1991 — ending up as its chief — and among whose weighty scholarly contributions was his co-authorship with Sir Robert Jennings, a former President of the ICJ, of the ninth edition of Oppenheim’s International Law) in the case brought by the Nomura banking group in response to the Czech Republic’s treatment of its investment in that country’s third largest bank. The award was in favor of Nomura (more precisely its investment vehicle, named Saluka) in the circumstances of the case, and led to a substantial payment by the State without the need for measures of compulsory execution, but its general account of relevant principles were measured and cautious, as in this prominent passage quoted by the Dupuys:
“No investor may reasonably expect that the circumstances prevailing at the time the investment is made remain totally unchanged. In order to determine whether frustration of the foreign investor’s expectations was justified and reasonable the host State’s legitimate right subsequently to regulate domestic matters in the public interest must be taken into consideration as well.” [Saluka Investments B.V. v. Czech Republic, ¶ 305, UNCITRAL Award (2006). Disclosure: the present author was, alongside Professor James Crawford SC, now a judge at the ICJ, one of Saluka’s advocates.]
In the wake of this decision, as the authors show, further cases have made established that BITs do not prevent their signatories from amending legislation to adapt to change in the “normal exercise” of their prerogatives.
Where does this leave the balance, since the preceding sentence obviously does not have the effect of rendering thousands of BITs so many words writ on water? The proposition that expectations of stability are “protected to the extent that the investor has been led to believe that specific regulations would remain unchanged for a certain period of time” (p.291) leaves many questions unresolved by the body of decided cases. In particular, can states “create legitimate expectations without explicit promises”? Who bears the risk of ambiguities in the wording of governmental declarations which may have created expectations in the minds of investors? Must such representations have been made directly to the claimant? Is a claimant’s own conduct relevant to the assessment of the legitimacy of its expectations?
The authors suggest three criteria as critical in weighing the consequences of expectations of stability: the presence of explicit commitments to stable rules, the severity of the imperatives of public policy which motivate subsequent regulatory change, and the degree of alteration of the relevant legal framework thereby caused.
They suggest a number of important “grey areas” that will continue to pose challenges. For example, while there can be no expectation of the absolute stability of the legal framework, and investors may held to a level of understanding and due diligence with respect to the prospects of legislative change in a given environment, there comes a point where the magnitude of the particular detriment caused to the investor makes it intolerable for the change to the imposed without compensation.
Similarly, the nature of implicit representations made to the investor may be “considered equivalent to a promise in the light of the circumstances”; consistency in the conduct of state organs is “an important element of the protection of legitimate expectations” (p. 293). Thus, in the case of Arif v Moldova, ICISD Case No. ARB/11/23, Award (2013), the invalidation of a lease to operate an airport duty-free concession was considered to have been unfair given that the lease had been concluded and approved by competent administrative authorities and the investor was allowed for a significant period of time to make the necessary investments and thereafter to operate the shops. And in Gold Reserve Inc. v Venezuela, ICSID Case No. ARB/04/01, Award (2014), in which the tribunal, on which Pierre-Marie Dupuy served as the Respondent’s nominee, awarded some $740m to the investor, the grant of a series of certificates of compliance and the continued failure to object to the investor’s activities were held to be incompatible with the sudden withdrawal of mining rights on the purely formal ground of a long-past failure to comply with time limits under the mining law.
The degree of clarity of the state’s representations is also a matter with respect to which it is difficult to generalize. If such representations were made in the context of incomplete information given by the investor, the latter is likely to have only itself to blame. But consider the award in Ioan Micula et al v Romania, ICSID Case No. ARB/05/20, Award (2013), where a number of incentives were retracted on the grounds that they were contrary to EU state aid law notwithstanding so-called permanent investor certificates that inter alia authorized those incentives for a stated duration. As might be expected, the difficult issue (with respect to which the arbitrators were divided, though not as to the outcome of the case) was whether a general tax incentive scheme was transformed into a commitment to the particular investor by dint of the certificate.
Finally, the potential significance of a lack of diligence on the part of the investor was illustrated by MTD Equity Sdn. Bhd. et al v Chile, ICSID Case No. ARB/01/7, Award (2004), where although the Government investment authority had triggered the government’s liability by authorizing a project which later was annulled because the land selected for the investment was zoned exclusively for agricultural use, the Tribunal reduced recovery by 50% on account of the investor’s failure to have conducted any investigations of its own.
All of this leads to a general conclusion that the notion of legitimate expectations, while not susceptible of serving as the basis of an autonomous cause of action, remains of great significance as a means of assessing compliance with the standard of fair and equitable treatment.
In this concise contribution, the Dupuys have exhorted us to organize our thinking and suggested a conceptual roadmap. Their essay does not so much inform us as it makes us reflect on the prospects of a more granular international consensus. Meanwhile, we might reflect that arbitrators earn their keep precisely by the quality of their reflection, and have no reason to follow unpersuasive precedents.
Cite as: Jan Paulsson, Can “Legitimate Expectations” Ever be “Rights”?
(April 19, 2016) (reviewing Florian Dupuy & Pierre-Marie Dupuy, What to Expect from Legitimate Expectations? A Critical Appraisal and Look into the Future of the ‘Legitimate Expectations’ Doctrine in International Investment Law
, in Festschrift Ahmed Sadek El-Kosheri: From the Arab World to the Globalization of International Law
273-298 (Mohamed Abdel Raouf, Philippe Leboulanger, & Nassib G. Ziadé eds., Kluwer 2015)), https://lex.jotwell.com/can-legitimate-expectations-ever-be-rights/
Although its publication may come a bit late for our summer reading, Professor Michael Reisman’s Herch Lauterpacht Memorial Lectures have finally (with the co-authorship of Christina Skinner) been released by CUP in the form of a long-awaited 222-page monograph, including a detailed and valuable index. Occasionally the passage of a decade (in this case somewhat more) between the spoken word and its reformulations in print leads to an attenuation of the bluntness of the message. Innocents whose sensibilities with respect to the realities of international adjudication may have been assaulted in the course of those three wintry evenings in Cambridge can now verify that the carryings-on reviewed by the authors are still captured with uncompromising directness, as the subtitle suggests. Given the essentially consensual nature of all international adjudication, this study should be given concerned attention in relation not only to permanent courts but also to arbitrators whose mandate is limited to a single case.
On one view, we really shouldn’t be the least shocked. After all, States repeatedly find it legitimate to put their own soldiers in harm’s way, and presumably think the slaughter of young people from neighboring countries is justified, in order to secure territorial ambitions or to maintain what they think of as their “credibility”. What then is a bit of forged evidence (or even a case entirely based on it) among urbane friends, when used for the same purpose but on the legal battlefield?
Public international tribunals are notoriously poor fact-finders, and the larger their membership the greater their fecklessness. Naturally this deficit reveals itself when the factual inquiry involves allegations of forged evidence. And some of the causes of paralysis in such instances are common to the more general pattern of inadequacy: the absence of effective powers of compulsion, the stubborn disinclination to hear witnesses or even to engage neutral experts versed in matters of which the putative fact-finders are at best amateurs, and indeed the frequent selection of judges and arbitrators whose career paths as lawyers never required them to venture outside the realms of high abstraction. But something far more sinister is at work here, namely the implicit acceptance that la raison d’Etat sanctifies everything, and the implicit sub rosa code that the international community should turn a blind eye to “practices that would be condemned in developed national legal systems but have hitherto been ignored by international tribunals and international scholarship”. The legal profession’s reaction has been “baffling”, the authors write, and identify the stakes as follows:
… cases of fraudulent evidence which have been practiced on public international courts and tribunals … mar the noble vision and ennobling practice of sovereign States voluntarily submitting their disputes to courts and tribunals for peaceful resolution in accordance with international law; in raising doubts about the accuracy of international decision, they diminish the future willingness of States to resort to tribunals. Moreover, corruption of the truth often extends beyond the hearing room of a single case: in an interdependent world, lies which manage to distort judicial or arbitral decision in one case can contaminate many others. Judge Schwebel, to whom this book is respectfully dedicated, put it concisely: “they undermine the essence of the judicial function.”
The authors examine in detail a number of incidents before international fora, some of them very familiar cases which their research reveals as having had somber undersides. The culpable States are a motley crew, including some usually thought of as enjoying a high degree of institutional maturity. Their brazenness and cynicism in many of these instances are startling, but less so than the studied indifference of many judges, arbitrators, diplomats, and (for all their verbosity in pronouncing on the logic and doctrinal orthodoxy of judgments and awards) commentators.
One understands the impulse behind invocations of la raison d’Etat: a public objective the pursuit of which is said to be so indispensable as to justify unsavory means. The terrible problem is that expediency and hypocrisy are habit-forming, and before you know it the indispensable public end becomes anything which suits the purposes of officials who adorn themselves with the raiments of the State. Needless to say, they undermine the stance of legions of highly principled public servants who understand that must is lost when such behavior is condoned or ignored: trust in the institutions charged with ensuring the rule of law in the international community.
Reisman and Skinner are telling us that we have a serious problem, not how to solve it. They would clearly have preferred an international system in which adjudicators do not sidestep the inconvenient discovery of fraudulent behavior by disputants by allowing them to plead their cases on alternative grounds which do not rely on the discredited evidence. This practice means that there is little disincentive for unscrupulous attempts to deceive the decision-maker, but such has been the (low) road taken and the authors do not suggest that the dynamics of the process leave grounds to hope for a change. They note proposals for regulating the conduct of international advocates, but for various reasons do not find them realistic. The dynamics of the international processes and the divided loyalties they create (often resolved against the notion of a duty of candor to the tribunal) are described in ways of which this brief note cannot give a substantive account, but only affirm that this is previously unexplored and disturbing territory.
Public international adjudication it but one form of international dispute resolution in which the decision-makers’ authority is ultimately and necessarily based on the consent of the disputants. One must therefore wonder what aspects of these “dirty stories” tend to replicate themselves in the much larger field of international arbitrations involving private parties, and whether this question posed by the authors could be posed replacing the word “states” with the generic “parties”:
Are we entitled to conclude that from the perspective of international tribunals, they have no ancillary duty to police the honesty of states and their representatives but rather to rely on the cleansing dynamic of the adversarial process, to work through the evidence, as best they can, and to reach the right conclusion?
Some will answer as Judge Stephen Schwebel did in Nicaragua v United States:
Deliberate misrepresentations by the representatives of a government party to a case before this Court cannot be accepted because they undermine the essence of the judicial function. This is particularly true where, as here, such misrepresentations are of facts that arguably are essential, and incontestably are material, to the Court’s judgment.
All of us are left to ponder how the international community could find effective ways to reject what “cannot be accepted”, if that phrase is to covey anything more than a noble sentiment.