Volume 43 | Number 3 Summer 2008
The Convergence of Renewed Nationalization, Rising Commodities, and “Americanization” in International Arbitration and the Need for More Rigorous Legal and Procedural Defenses
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I. Introduction
By the end of the 20th century, international arbitration had emerged as the preeminent mechanism to resolve international commercial disputes, particularly disputes between foreign investors and sovereign nations. Indeed, in the 1990s, globalization grew exponentially with previously-closed markets—such as Latin America—opening to foreign investors for the first time in decades. Accompanied with this globalization was often the acceptance of international arbitration, as exemplified by its inclusion in dozens of bilateral investment treaties (“BITs”) and regional trade pacts, such as the North American Free Trade Agreement (“NAFTA”).
However, over the past decade new trends have materialized presenting challenges to international arbitration. First, a rising tide of nationalization emerged in many countries, including some of the countries that welcomed foreign investment and privatization in the 1990s. Second, many of the foreign investments made in the 1990s related to natural resources such as oil, gas, timber, copper, tin, and other minerals;1 and the market price for these commodities, which had bottomed out for many in the 1990s, has now risen to all-time high levels. Accordingly, the monetary consequences of expropriation and breached investment contracts have grown enormously. Finally, arbitration has evolved from a primarily European institution to one reflecting some degree of American-style aggressive tactics. Thus, nations now utilize increasingly hard-line, multi-layered, and novel strategies in defending the arbitral claims they face and improving their leverage with aggrieved investors.
To maintain its position as the standard bearer for fair, cost-effective, and timely resolution of disputes, international arbitration must manage these new challenges with strategies of its own. Part I of this article outlines international arbitration and the trend of “Americanization.” Part II provides a historical perspective on nationalization, from the resolution of significant early arbitral disputes to its current resurgence, along with the development of modern concession agreements. Part III sets forth the use of more sophisticated and aggressive defenses to expropriation claims, particularly substantial and multi-varied counterclaims. Finally, we address the need for procedural changes in arbitral practice—as well as the application of well-established legal principles such as prescription, laches, estoppel, and waiver—so that arbitration can fulfill its primary mission to provide justice through cooperation by focusing and resolving “the central issues of the case.”2
II. Burgeoning International Arbitration
A. Overview of International Arbitration
International commercial arbitration can generally be defined as any private adjudication of a commercial dispute with some international facet.3 This term is sufficiently broad enough to encompass both institutional arbitrations, which are administered by organizations specializing in dispute resolution, and ad hoc arbitrations, which are conducted in a manner specified by the parties. Ideally, international commercial arbitration provides the parties with a private dispute resolution system that is faster and fairer than court proceedings.4
Institutional arbitrations proceed before organizations such as the International Chamber of Commerce,5 the LCIA,6 the International Centre for Dispute Resolution,7 the Permanent Court of Arbitration in The Hague,8 and the Hong Kong International Arbitration Centre.9 Typically, an arbitral institution will have enacted procedural rules setting out the basic framework for the arbitration process, including how to determine whether an agreement to arbitrate exists, procedures for appointing arbitrators and challenging the appointment of arbitrators, determining the location of the arbitration, and even (at some institutes) scrutinizing awards.
Ad hoc arbitrations proceed without the assistance or supervision of an arbitral institution.10 The parties either adopt a set of procedural rules from one of the arbitral institutions (or the rules of the United Nations Commission on International Trade Law)11 or craft their own set of procedural rules. Because of the lack of supervision, administration, and structure provided by a governing body, parties must be more careful in planning an ad hoc arbitration.12
International commercial arbitration grew from the need to find a suitable dispute resolution system for parties in the international trade, commerce, and investment that blossomed after the conclusion of World War II.13 International commercial arbitration allayed three distinct concerns about litigation before local judiciaries: (1) the perception that local courts would be biased in favor of a domestic party; (2) the uncertainties involved in appellate review of a foreign judgment; and (3) the inability to enforce a foreign judgment domestically or abroad.14 If a state or state-controlled entity is a party to the transaction, these concerns are particularly acute.15 Accordingly, the desire of each party to avoid having a dispute determined by a foreign judicial forum fueled the growth of international commercial arbitration.
To further the effectiveness of international arbitration, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention, came into force in 1959.16 The New York Convention requires both the recognition of agreements to arbitrate and reciprocity—that is, the recognition and enforcement of arbitral awards made in other contracting countries.17 At present, 142 of the 192 United Nations member states have ratified the New York Convention.18 Moreover, most developed nations (and many developing ones) have enacted national arbitration legislation that respects the integrity of private arbitration by, among other things, limiting judicial interference in the arbitration process, affirming the parties’ capacity to agree to binding arbitration, and enforcing tribunal orders and awards.19
Consequent to these developments, international arbitration had become (at least since the mid-1980s), and remains today, the preferred method to resolve international commercial disputes:
In this realm of international commercial transactions, arbitration has become the preferred method of dispute resolution. Arbitration is preferred over judicial methods of dispute resolution because 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.20
B. Arbitral Proceedings
As noted above, one of the benefits of arbitration is that unlike litigation, particularly American litigation, arbitration affords the parties considerable freedom, flexibility, and control over the proceedings and is designed to assure that parties from different jurisdictions can have their disputes heard and resolved in an efficient and neutral fashion.21 Arbitration allows the parties to adopt procedures that focus on the heart of the dispute, avoid expensive and time-consuming pre-hearing discovery and motions, and allow for the selection of the arbitrators (including non-lawyers) who are best equipped to resolve the dispute.22
International arbitration practice reflects a merging, or “harmonization,” of the civil law practice of continental Europe and common law practice of England and the United States.23 While the governing rules and procedures can be modified to suit any arbitral proceeding, international arbitration generally adopts the common law traditions of adversarial questioning and the admission of intra-company memoranda, as well as the civil law customs of limited discovery, the allowance of negative inferences based on lack of evidence, and written memorials.24 In addition, unlike litigation before a public court, arbitration enables the parties’ dispute to proceed in confidence, if they so agree. This not only protects from public disclosure any proprietary or sensitive information that may be at issue, but also guards any ongoing relationship between the parties that could be harmed by publication and grandstanding to trade groups, shareholders, or others.25
Arbitration, of course, is not perfect. Its potential weaknesses, including the lack of expeditious interim injunctive relief,26 cost,27 perceived inconsistency among arbitrators,28 absence of meaningful review to correct irrational awards,29 the perceived tendency of arbitrators to “split the baby,”30 and limited discovery31 have been exhaustively examined by numerous commentators.32 Nonetheless, international arbitration continues to expand globally and is a well-settled feature in many bilateral trade agreements and international contracts.33 However, there are concerns that the increasing “Americanizing” of arbitration has the potential to undermine its goals, expansion, and acceptance.
C. “Americanization” of International Arbitration
To appreciate the concerns surrounding the perceived “Americanization” of arbitration, it must first be emphasized that modern international arbitration practice has its roots in the 20th century civil law tradition of sitting arbitral panels and institutions in continental Europe.34 When crafting arbitration agreements in the early- to mid-20th century, commercial parties and their respective counsel focused on two fundamental issues: (1) the neutrality of the arbitration seat and (2) the seat’s local laws affecting arbitral proceedings.35 Tensions during the Cold War between East and West and distrust between developed and developing countries created incentives for parties from these various groups to arbitrate in countries not clearly identified with either faction. Because of the need to identify a neutral site that provided the best local conditions for arbitration to flourish, Switzerland and France were selected as the best alternatives.36 Accordingly, these two civil law jurisdictions became hubs for international arbitration.37
While it cannot be disputed that common law (including American) aspects have become part of international arbitration practice, the relevant inquiry requires an analysis of precisely what “Americanization” is, to what degree it has occurred, and to what extent it has affected the goals of arbitration and the parties’ expectations of the process. As a result, numerous articles,38 texts,39 and symposia have been devoted to the topic.40
Unfortunately, because of the confidential nature of international arbitration, a detailed study on changes in process and outcomes is difficult to perform. Accordingly, claims of the “Americanization” of international arbitration—loosely defined as employing adversarial and legalistic methods—tend to be based largely on anecdotal evidence.41 Most claims of Americanization focus on the procedural aspects of arbitration—large teams of lawyers, procedural disputes, extensive motion practice, jurisdictional objections, evidentiary objections, broadening discovery, aggressive cross examination, and witness preparation42—rather than the award or decision making of the arbitral tribunal (although arbitral awards now appear to be citing previous arbitral decisions, at least as persuasive authority, which is more akin to U.S. litigation than civil law practice).43 Based on the anecdotal data and Professor Susan Karamanian’s review of eighteen awards by the International Centre for Settlement of Investment Disputes (“ICSID”), American-style litigation has had a substantial impact on arbitral practice demonstrated by the use of extensive cross examination, production of documents, and presentation of party witnesses.44
At least two separate events and two major trends may help explain the increased American-style activity in international arbitration: (1) the three Libyan nationalization arbitrations brought by U.S. oil companies who were represented by U.S. lawyers;45 (2) the Iran-United States Claims Tribunal created by the Algiers Declaration46 involving claims by U.S. citizens represented typically by U.S. lawyers against Iran for losses caused by the 1979 Iranian revolution;47 (3) the transition by U.S. businesses to view arbitration as a preferred way of resolving international disputes;48 and (4) the ascendancy of modern international U.S. law firms, of American lawyers as counsel and arbitrators, and of English as the predominant language of international arbitration.49 Because the first two of these precipitators are a matter of historical fact, their mark on international arbitration has already been established. The third and fourth reasons reflect the evolution of U.S. involvement in the global economy and the global legal market over a number of decades—an evolution that appears unlikely to be reversed in the near term. “Just as the United States has been and will be the dominant force in economic globalization, [American] law firms will be the dominant force in international arbitration.”50
Of these four precipitators, it is the involvement of U.S. legal practitioners that carries the most potential for Americanizing international arbitration practice. Some U.S.-based law firms have established international commercial arbitration departments and practice groups, while others provide arbitration services from within their traditional litigation departments.51 In fact, eight of the twelve most active law firms in international arbitration were based in the United States.52 As a simple matter of human nature and training, American lawyers and American-trained foreign lawyers who practice international arbitration will continue to use American litigation techniques and tactics.53 Therefore, as American and American-trained lawyers become active in the governing bodies for international arbitration, it is likely that their experiences, training, and skills will shape the systems and rules that govern arbitral institutions.54 Barring an unforeseen disruption of this trend, American influence on international arbitration will likely expand and further the “Americanization” bemoaned by many.
So long as commercial parties to international transactions believe that American firms give them the best chance for a favorable outcome, Americanization—including aggressive pre-trial discovery, aggressive cross-examination, and presentation of novel and strategic claims—may very well continue and gain increasing acceptance.