Margins of Wrongfulness in Arbitration: Measuring the Tinker in Eiser v. Spain

Margins of Wrongfulness in Arbitration: Measuring the Tinker in Eiser v. Spain

Galo Márquez*

The saga of Spanish investment arbitrations born out of Spain’s decision to disapply incentives in the renewable sector in the face of a financial crisis continues to generate awards on quantum and liability. The recent decision in Eiser v. Spain is one of many that has contributed to a pool of inconsistent arbitral awards. Given the increasing number of decisions, it is not surprising that arbitral tribunals have reached divergent decisions as to the wrongfulness of Spain’s measures. In his Dissent on Liability and Quantum, Prof. Philippe Sands affirms that “[n]o doubt, reasonable folk will question the wisdom of creating a system that allowed so many competing and contradictory awards to flower, and introduce the changes that seem so necessary” (¶ 1). This article addresses some of the inconsistencies arising from how arbitral tribunals have recognized that a state may make regulatory changes. Still, this recognition has not meaningfully impacted the damages awarded to investors.

Nor have the competing views of arbitral tribunals resulted in a uniform application of the law of damages in international arbitration. Typically, when tribunals determine that a state’s measure violates an investment treaty, they award damages for injury attributable to any part of the measure. By reviewing the decision in Eiser v. Spain, this article suggests a different approach. It argues that states should only be liable for the portion of damages attributable to the difference between the injury caused by the measure actually imposed, and the hypothetical injury that would have been caused by a lawful alternative measure. I will refer to this concept as the “Margin of Wrongfulness.”

It must be mentioned that this article builds upon the work of the Academic Forum on Investor-State Dispute Settlement (“ISDS”) before the United Nations Commission on International Trade Law Working Group III (“UNCITRAL”) on matters related to damages. The author is an appointed Member of the Academic Forum on ISDS and a representative observer before Working Group II on Arbitration and Dispute Resolution. However, the views expressed here are mine alone. The benefit of this article is twofold. First, it demonstrates an inconsistency in the way that arbitral tribunals have awarded damages, which the ISDS community has sparingly addressed. Second, by reviewing over a few dozen awards, the article identifies that the concept of ‘legitimate expectations’ in international investment law cannot continue developing as it has in the last few decades without a shift in how damages are awarded.

I. Introduction to the Spanish financial crisis

The Eiser v. Spain case is an old tale with a new twist. Like many other countries, Spain introduced at the end of the 90s a package of regulatory amendments and financial incentives to promote renewable energy in the country. Spain sought to promote a specific type of solar power through state subsidies. The new regulatory regime was an attempt to realize the spirit of the 1992 Framework Convention on Climate Change, the 1994 Energy Charter Treaty, and the 1997 Kyoto Protocol, as well as the 2001 European Union policy for reducing greenhouse gasses by means of developing renewable energy in the region.

Starting in 1998, Spain issued a series of decrees to promote renewable energy by means of a guarantee for long-term supply of energy (Eiser, ¶¶ 105-107). In the long term, however, these incentives were not sustainable. Spain was not left alone in the crusade to advance renewable energy throughout the 90s. In the first weeks of 1991, the Committee on Science and Technology of the European Parliament made an aggressive call to move towards renewable energy on the basis of the results of the Brundtland report—document recounting the world’s critical environmental problems. In the Committee’s view, “[e]very effort should be made to develop the potential for renewable energy which could form the foundation of the global energy structure during the 21st century” (p. 2, ¶ 5).

Answering this call, Spain issued Royal Decree 661/2007. The International Energy Agency viewed the Decree as seeking “[t]o contribute to Spain’s efforts to achieve its 2010 national target for the promotion of electricity from renewable energy under EC Directive 2001/77/CE.” More than an effort, several investors—including Eiser (¶¶ 357-35)—argued that Decree 661/2007 was a public policy creating an attractive environment for investment (Charanne v. Spain, ¶ 515).

This Decree was later retracted by Spain, causing significant harm to energy projects. The rationale behind a state’s incapacity to unreasonably and unfairly backtrack from a commitment is quite logical. In the same way that a person would not purchase a car for a price other than the one advertised, investors expect to receive the benefit of protective guarantees or commitments that the government has made to them. UNCTAD estimates that the Spanish Decree has been at the heart of over 40 investment arbitrations. This  number keeps growing as investors submit new ISDS cases arising from Spain’s retreat from its regulatory commitments to the energy sector (See, WOC v. Spain).

A few years into the application of Decree 661/2007, the Tribunal in Eiser recounts that Spain became concerned due to a “tariff deficit.” The tariff deficit is generally understood as “[t]he financial gap between the costs of subsidies paid to renewable energy producers and revenues derived from energy sales to consumers” (¶ 124). To combat this deficit, in December 2012, the Spanish Parliament imposed a 7% tax on the total value of the energy fed into the national grid. This tax eliminated the subsidies for renewable energy. This mechanism was followed by several other decrees that blunted the financial incentives and subsidies for foreign investors. In June 2014, the government dealt the final blow to Decree RD 661/2007 through a ‘ministerial order’ setting up a whole new regime for existing power plants (the “Disputed Measure”).

The Eiser case arose from a so-called ‘failed’ investment in the solar power sector in Spain (¶¶ 94-95). During the arbitration, Eiser valued its investment through the Discounted Cash Flow (“DCF”) method at €124.3 million (¶ 136). The relevance of damages in investment arbitration is a growing concern in the field. Certain circles claim that arbitral tribunals are awarding increasingly larger claims in favor of the investor. On this, the International Institute for Sustainable Development mentions that its “[r]esearch has found over 50 known cases in which an investor–state tribunal has awarded a foreign investor over USD 100 million in compensation. In at least eight claims, the award reached over USD 1 billion” (¶ 14).

The energy generation mechanism promoted under Decree 661/2007 was allegedly categorized as a renewable source. The new policies materialized in Decree RD 661/2007. The Arbitral Tribunal considered that the Decree contained a myriad of key elements, including: (i) a guaranteed “priority of dispatch” into Spain’s grid subject to certain conditions; and (ii) it allowed energy producers to adopt different tariffs for production in accordance with the specific characteristics of each project (¶ 112).

Eiser brought an investment arbitration under the Energy Charter Treaty as the general partner of a limited partnership, claiming that it invested in reliance on Royal Decree 661/2007 and its stabilization clause¾which restricted Spain from amending its regulatory framework (¶¶ 357-358). Eiser’s business model depends on identifying low-risk investments in public infrastructure.

The State’s decision to retract Decree 661/2007 had a devastating effect on several companies. Although many foreign investors had access to bilateral investment treaties or the Energy Charter Treaty, locals recount that Spain’s decision to retroactively backtrack from the Decree 661/2007 (the Disputed Measures) “[l]ed to […] the total ruin of 62 000 families […] and that their opportunities to file claims before the Spanish Government have been restricted, given that they did not have access to more impartial, international courts.” This was not the case for Eiser, which enjoyed its position as a United Kingdom incorporated company with the capacity to bring an investment arbitration against Spain.

II. The Tribunal’s Award

Against this backdrop, the Eiser Tribunal was tasked with reviewing if the Disputed Measures breached the fair and equitable treatment (“FET”) standard. Embarking on this task, the Arbitral Tribunal had to address the State’s capacity to regulate¾a heavily disputed point in international investment law (Isolux v. Spain, ¶¶ 409-426; Novenergia II v. Spain, ¶ 542-697). Although the nuances to identify a breach of legitimate expectations may be contested, arbitral tribunals have generally considered the following points (¶¶ 369-372):

  • Whether the investor’s expectations were legitimate, reasonable or fair, and not based on subjective considerations.
  • The reliance of the investor on such expectations when making its an investment.
  • The State’s unilateral conduct to the detriment of the legitimate expectation.
  • The existence of a damage to the investor.

Following the steps of Parkerings v. Lithuania, the Tribunal in Eiser departed from the premise that “[a]bsent explicit undertakings directly extended to investors and guaranteeing that States will not change their laws or regulations, investment treaties do not eliminate States’ right to modify their regulatory regimes to meet evolving circumstances and public needs” (¶ 369). Accordingly, FET itself does not paralyze the regulatory powers of the governments.

III. Overlapping principles for determining the margin of wrongfulness

An award on quantum must flow from a prior determination of liability, granted through the same award or in a prior stage. Arbitrators sometimes split their decisions on liability and quantum into different awards, but these components may very well be included in the same award. Several breaches have been claimed in the Spanish arbitrations, but a notable one is the myriad of claims concerning the FET provision. Tribunals have considered that FET may spin off in several protections, including a violation of legitimate expectations, lack of transparency, lack of due process, and arbitrariness (Electrabel v. Hungary I, ¶ 7.74.; PV Investors v. Spain II, ¶ 565; RREEF v. Spain II, ¶ 260; Operafund v. Spain, ¶ 524).

EDF v. Romania, an important case on the analysis of a claimant’s legitimate expectations, explained that a mere regulatory instability does not amount to a breach of a FET provision (¶ 217):

The idea that legitimate expectations, and therefore FET, imply the stability of the legal and business framework, may not be correct if stated in an overly-broad and unqualified formulation. The FET might then mean the virtual freezing of the legal regulation of economic activities, in contrast with the State’s normal regulatory power and the evolutionary character of economic life.

The Eiser Tribunal considered that Spain’s withdrawal of Decree 661/2007 amounted to a breach of the FET standard and the investor’s legitimate expectations. The Tribunal notably awarded full compensation for all losses to the project attributable to Spain’s retraction of Decree 661/2007. By applying a Margin of Wrongfulness, the Tribunal should have discounted from the award losses attributable to the portion of Spain’s measure that would not have amounted to an arbitrary abrogation of Decree 661/2007. In other words, if not all amendments to the regulatory framework are abusive, then the financial gap between the measure that Spain could have taken without breaching FET and the measure that, if applied, would be illegal constitutes the Margin of Wrongfulness.

Reduction of damages in findings where a government disregards an investor’s legitimate expectations is not uncommon. In MTD v. Chile, the Arbitral Tribunal found a breach to the FET standard by considering that Chile had induced a legitimate expectation that a real estate project would be feasible, even when the acquired land could not be developed for commercial purposes (¶ 217). In what has been called a Solomonic decision (Potestà, pp. 38-39), the Tribunal reduced by 50% the damages awarded to the investor due to its failure to conduct an independent assessment of the land.

As such, not all damages need to be compensated. The Margin of Wrongfulness would imply the existence of an ‘unjustified damage’ standard (Muhammad, p. 108) and not a mere reduction in the value of the investor’s investment (Wöss, ¶ 9-10). The Eiser Tribunal unfortunately missed this aspect. Incoherently, it considered that states are not confined to a straitjacket when amending prior legislation, without analyzing the resulting effect on damage quantum. The Eiser Tribunal is not alone in this omission. In the Renergy case, the Tribunal, by majority, invoked “[w]ell-established arbitral case-law” holding “that even in the absence of any specific commitment, Article 10(1) ECT does protect investors against legislative changes that exceed a (wide) acceptable margin” (¶ 642). The recognition of an exceeding acceptable margin might justify the existence of a Margin of Wrongfulness.

The Eiser case is also enlightening as to the impact that a fact witness might have on damages. In most awards, the decision on quantum is driven by the technical viewpoints of experts. In Eiser, the Tribunal reflected that during the arbitration hearing, representatives of the investor opined on the weight that the Disputed Measure had on the investment:

In response to the Tribunal’s question at the Hearing, Mr. Meissner, a founding partner of Eiser, drew a distinction between the changes in Spain’s regulatory regime and other regulatory situations where regulators might “tinker a little bit with the returns.” In contrast, he deposed that “here we had a complete value destruction. We lost all value in this particular project.”

The factual witness’ statement suggests that “tinker[ing] a little bit with the returns”—i.e., the Margin of Wrongfulness—would be acceptable. This implies an additional layer of analysis that exceeds the scope of this article, where the Margin of Wrongfulness might also be justified since an investor is expected to value its investment considering the risks of the project. This is relevant, because under several methods to quantify damages in arbitration a discount rate needs to be applied to the future cash flows that an investor might expect. The ICCA Task Force on Damages considers than an investor’s “[u]nbiased cash flows are expected (average) cash flows—not the cash flows that investors may hope for if everything goes well”.

The Margin of Wrongfulness does put into question some of the premises on which the law of state reparation has been built. Through state responsibility doctrine, investors expect to receive compensation after a violation of international law, which “[s]hould reflect all financially assessable damages” (Marboe, ¶ 3.289). This principle is derived from the acclaimed Factory at Chorzów case, where the Permanent Court of International Justice settled that “[r]eparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed” (Chorzów, PCIJ 1927, p. 47). The decision in Chorzów has become a cornerstone of the law on damages and is widely cited by tribunals, including in the Eiser case (Eiser, ¶ 421). The Margin of Wrongfulness brings to light some potential deficiencies in the development of damages in ISDS since the Chorzów case.

While the Margin of Wrongfulness questions the legality of the Disputed Measure, it could also be applied by questioning the legitimate expectation of the investor to receive damages. Reparation as understood in Chorzów is built on two premises: (i) the existence of an illegal act, and (ii) the reestablishment of the situation had the act never been committed (Amoco v. Iran, ¶ 191-195). The first premise is compatible with the Margin of Wrongfulness since it implicitly recognizes that damages cannot be awarded for a lawful act, subject to certain nuances on the type of breach committed (e.g., lawful expropriation still requires compensation). The second premise, however, is more questionable. Compensation should restore the injured party not to their pre-breach position, but to the position they would have arrived at had a ‘lawful’ measure been enacted. Restoring the injured party to the pre-breach position presumes that the State’s measure is unlawful in its entirety—but this may not necessarily be true. Arguably, the Tribunal’s recognition of the Margin of Wrongfulness and the Chorzów case invites discussion on how the premises of international damages should be reconsidered or disregarded by future arbitrators in cases such as Eiser v. Spain.

If the Margin of Wrongfulness is accepted as a legal premise then the arbitrators would need to identify the lawful-scenario of the State’s measure. This would require tribunals to heavily engage in hypothetical factual and financial situations, which ISDS tribunals are familiar with. Most investment arbitrations necessitate that arbitrators identify a “but-for” scenario, derived from the principle of causation in international damages. According to the Brattle Group, one of the most active quantum experts in ISDS cases, “[c]ausation requires the careful construction of a counterfactual or ‘but-for’ world that eliminates only the conduct at issue but retains all relevant features of the actual world. The construction of the but-for world is necessarily hypothetical and must remain internally consistent”.

Assessing the Margin of Wrongfulness by considering a potential hypothetical scenario is then inherent to the ordinary course of damages identification conducted by tribunals. This alternative factual situations are also grounded as a matter of law. In the 1987 Amoco decision before the Iran-US Claims Tribunal, Judge Bower separately opined that once liability is found with a degree of certainty, then quantification may be performed with “[t]he best available evidence, even though this process be inherently speculative” (n. 142, ¶ 26). An alternative evaluation of the Margin of Wrongfulness would then be compatible with the perspective taken by some stakeholders.

IV. Conclusion

Eiser v. Spain underscores the intricate nature of investment disputes and the importance of balancing a state’s regulatory authority with investor protections. Recognizing the Margin of Wrongfulness and considering how this concept impacts damages may contribute to a more nuanced approach in future arbitration cases, fostering a fair and equitable resolution for all parties involved. It would also incentivize uniformity in cases where a state, such as Spain, is faced with a wave of investment claims. Moreover, achieving certainty as to the standard on which an investment tribunal should award damages might also function as a prevent mechanism of control for States when enacting amendments to their international commitments.


*Galo Márquez is an Associate in the International Arbitration practice at Creel, García-Cuellar, Aiza y Enríquez, and a Member of the Academic Forum on ISDS before UNCITRAL. He is also a Business Law Professor at Tec de Monterrey.


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The Civil Liability of Arbitrators: A Transition from Absolute to Qualified Immunity in the United States

The Civil Liability of Arbitrators: A Transition from Absolute to Qualified Immunity in the United States

José Ramón Villarreal Martínez*

I. Introduction

Several jurisdictions have recorded a rise in lawsuits against international arbitrators and arbitral institutions in national courts (p.13).[1] These cases are occasionally unfounded and may be initiated by disgruntled parties who are dissatisfied with the outcome of an award. They may attempt to file their claims as breaches of public policy or acts of bad faith. This trend has caused a reputational crisis for international arbitration.

The issue is significant because the UNCITRAL Model Law does not specifically cover the matter of arbitrator liability. As a result, each jurisdiction has taken a different approach addressing this issue. In common law countries,[2] arbitrators are granted the same immunity as judges.

In contrast, in jurisdictions that follow a civil law tradition, the role of the arbitrator is considered sui generis. This is because the arbitrator is seen as both a professional service provider and as someone who performs a jurisdictional function akin to a judge. As a result, the arbitrator has certain contractual rights and obligations towards the parties involved. Additionally, the arbitrators are protected by a system of qualified immunity, meaning that they can only be held liable in serious cases, such as when there is gross negligence, fraud, or bad faith.

Nevertheless, even within common law jurisdictions, there is a lack of consistency in the degree of immunity granted. For instance, in the U.S., the arbitrator enjoys absolute immunity, thereby shielding them from civil responsibility claims, even in instances involving fraud, carelessness, or bad faith. In contrast, in England, the arbitrator’s immunity is not absolute: it does not apply if the arbitrator acts in bad faith.

The problem gained significance after a recent news event where the Paris Court of Appeals annulled an award after it was discovered that an arbitrator had publicly acknowledged a personal acquaintance with one of the lawyers involved in the arbitration process, in a eulogy he published in the prestigious French publication Dalloz. The annulment occurred because of a breach of disclosure, which led to concerns about the arbitrator’s impartiality and independence. In qualified immunity jurisdictions,[3] the violation of contractual obligations (failure to deliver a timely award, breaches of the duty of disclosure, and excluding an arbitrator from the deliberations) has been ground to impose liability on the arbitrator.[4]

In contrast, in Grupo Unidos por el Canal S.A. et al. v. Autoridad del Canal de Panama, the U.S. Court of Appeals for the Eleventh Circuit, while analyzing the possibility to vacate an award due to an alleged breach of the duty of disclosure by the arbitrators, stated that “[it] is little wonder, and of little concern, that elite members of the small international arbitration community cross paths in their work . . .  [w]e refuse to grant vacatur simply because these people worked together elsewhere.”

An argument can be made that absolute immunity is a potential solution to avoid frivolous claims from being brought against arbitrators. However, this legal doctrine fails to provide arbitrators with the motivation to perform their duties diligently and cautiously. This has resulted in arbitrators avoiding liability, even in cases where they have acted negligently, to the detriment of the parties and the reputation of arbitration.

From my perspective, the United States must shift from absolute to qualified immunity. This move is crucial because it safeguards the arbitrator’s position in making decisions and offers a recourse for parties involved in situations when the arbitrator acts dishonestly, engages in fraudulent behavior, or displays gross negligence. This transition would establish a liability framework that protects the arbitrator’s judicial function and, at the same time, protects parties against arbitrators’ wrongdoing.

The experience in jurisdictions that have implemented qualified immunity shows that only a few successful cases where arbitrators have been held accountable have been reported. For this reason, an acknowledgment of some level of liability of arbitrators contributes to the high standards of quality that are expected from an arbitration procedure.

II. Arbitrator Liability Regimes

The doctrine of judicial immunity, which originated in England in the 17th century in the cases of Floyd v. Barker and The Marshalsea, has been adopted by common law jurisdictions. However, the degree of immunity adopted by each of them is different.

The doctrine of judicial immunity states that judges are not legally liable for any potential harm resulting from their judgments. The purpose of this doctrine is to uphold the reliability of the judicial system by allowing judges to render decisions without undue pressure by the parties. In the U.S., arbitrators are granted absolute immunity; in England, this immunity allows an exception in cases of bad faith.

In contrast, civil law countries acknowledge that arbitrators carry out their role through a contract, functioning as professional service providers. To safeguard the arbitrator, these jurisdictions have established a sui generis approach[5] that acknowledges both the judicial role of the arbitrator and his contractual duties.

The sui generis approach has established a form of qualified immunity, whereby the arbitrator is protected from liability for his jurisdictional role, while also safeguarding the parties involved from any unjustified infringements that arbitrators may commit, which could be considered as contractual violations.

III. The Liability of Arbitrators in the U.S.

Within legal systems based on common law, the principle of judicial immunity extends to arbitrators and other individuals who carry out adjudicatory duties. In the U.S., the doctrine of absolute immunity for arbitrators was initially acknowledged in Jones v Brown and further affirmed by the Supreme Court in Butz v Economou. This doctrine provides arbitrators with absolute immunity from legal claims, even in situations of extreme carelessness, and intentional dishonesty.

While the rationale for granting absolute immunity to arbitrators is based on their adjudicatory role, it is indisputable that there are more disparities than similarities between judges and arbitrators, as Pierre Lalive suggests:

One should hesitate to assimilate the position of the arbitrator to that of a judge. In any case, the reasons seem obvious to exclude an assimilation, and even an analogy, between a judge and arbitrator. First a judge is in no way chosen by the agreement of the parties (…) Secondly, when exercising their judicial function, State judges exercise power authority conferred by the State and in its own name.

To sum up, the differences between the function, activity, position and status of a judge on the one hand, and those of an arbitrator on the other, are so great that no sufficient analogy can be drawn between the two which can possibly justify the immunity of the arbitrator.

Consequently, arbitrators bear a closer resemblance to professional service providers rather than judges. For this reason, an absolute degree of immunity fails to motivate arbitrators to adhere to the utmost standards of care and thoroughness.

The absolute immunity approach is problematic for its failure to acknowledge the contractual nature of the arbitrator’s role. Also, it disregards that professionals from analogous fields may be held accountable for civil liability if they incur in a breach of contract.

As Lorena Malintoppi declares:

There is no question that arbitrators and arbitral institutions should be held liable if they commit gross negligence, or act in bad faith. Needless to say, arbitrators are bound to act fairly, to respect due process and the integrity of the proceedings, to ensure the efficiency of the process, and avoid delays. It is also universally accepted that arbitrators have the duty to be impartial and independent and to disclose for the duration of the arbitral proceedings any facts or circumstances that may put into question their capacity to decide a dispute independently and impartially.

Furthermore, “[n]ot only does absolute immunity yield bad results as a matter of policy, but the doctrine also rests on shaky legal foundations . . . [d]espite its dubiousness, the doctrine or arbitral immunity has gone largely unquestioned.” Notwithstanding these concerns, most courts in the U.S. have blindly adhered to it.

From my perspective, it is necessary for the U.S. to transition from the absolute immunity doctrine to qualified immunity. Under this approach, the arbitrator would be allowed absolute immunity for his adjudicatory role but would also be considered a professional service provider who may be held accountable for negligence, bad faith, or misconduct.

IV. The Transition to Qualified Immunity

Although the idea of absolute immunity of arbitrators has been widely accepted in the U.S., the California Court of Appeal in Baar v Tigerman deviated from this doctrine and refused to apply it to an arbitrator, who had failed to deliver a timely award.

While the absolute immunity doctrine is unquestioningly implemented in the U.S., this was the first instance where a court specifically highlighted that arbitrators are immune from liability in their jurisdictional role, and that the refusal to issue an award is separate from the decision-making process. While American case law has firmly established the application of the absolute immunity doctrine for arbitrators, this precedent has sparked research and debate over the possibility to transition from absolute to qualified immunity, a discussion that has been abandoned in recent years.

In addition, debate over arbitrators’ civil liability is crucial for effective arbitration, since absolute immunity may hinder diligence and good faith. It is also a bad policy to shield people who willfully engage in bad faith or gross negligence, such as not delivering a timely award or disclosing conflicts of interest. As Susan Frank suggests, “[o]verly broad immunity fails to create an incentive for arbitrators to be responsible for their actions, to the parties who are paying fees, or to the integrity of the international arbitration system.”

For that reason, other common law countries such as England have transitioned from the absolute immunity doctrine towards a qualified approach, by recognizing in Section 29 (1) of the Arbitration Act of 1996 that “[a]n arbitrator is not liable for anything done or omitted in the discharge or purported discharge of his functions as arbitrator unless the act or omission is shown to have been in bad faith.” Also, in England, an arbitrator is immune in all the activities that involve a judicial function; however, “this immunity . . . [does not] have anything like the same force when applied to professional men when they are not fulfilling a judicial function.

Although absolute immunity is conceded to arbitrators as a public policy measure, absolute immunity should not protect arbitrators when they voluntarily engage in bad faith or other misconduct. The reason for concern lies not only in its impact on the arbitration’s outcome, but also in its detrimental effect on the reputation of arbitration as a viable alternative to court litigation.

V. Reasons to Advocate for Qualified Immunity

Even though other common law jurisdictions have transitioned to qualified immunity, I view Baar v Tigerman as a precedent that has the potential to ignite the discussion on qualified immunity. This is because qualified immunity acknowledges the contractual nature of an arbitrator’s appointment, wherein the arbitrator assumes rights and responsibilities by consenting to deliver a fair and enforceable award. Additionally, qualified immunity also safeguards arbitrators when they carry out judicial duties, while ensuring that they are held responsible for their lack of care in fulfilling their contractual obligations.

There is a concern that if qualified immunity is adopted as a matter of public policy, because arbitrators, unlike judges, are vulnerable to “(1) unhappy parties [that] might threaten arbitrators, or (2) arbitrators might not make principled decisions if they are concerned about being sued,” nevertheless, these policy justifications are insufficient to support absolute immunity; however, there is evidence in that qualified immunity will not threat the impartiality or independence of arbitrators, since “the number of successful cases brought against arbitrators and institutions is limited. A French study (…) identified five cases since 1804 where arbitrators were found liable by the French courts: one for untimely resignation, twice for lack of independence and impartiality, and twice for excessive delays.

In England, since the Arbitration Act of 1996 “there have been no reported English cases which have interpreted the bad faith requirement in Section 29 . . . Bad faith is a deliberately high threshold, and this carve-out seeks to strike the balance between immunity and permissible recourse for parties in respect of egregious arbitrator behaviour.”

Thus, based on the experience of France and England, it can be inferred that qualified immunity does not pose a risk to the impartiality and independence of arbitrators; rather, it supports these qualities because it imposes a “balance that addresses the courts’ dual concerns: protecting the public from possible arbitrator abuse and providing arbitrators with immunity to ensure independent decision making . . . [q]ualified immunity would hold arbitrators accountable when arbitrator.”

VI. Conclusion

The advantage of transitioning from absolute to qualified immunity is that the latter recognizes the sui generis legal relationship that exists between the arbitrator and the parties, where the arbitrator is chosen by a contract to perform an adjudicatory function. In addition, qualified immunity safeguards arbitrators when they carry out judicial duties, while also ensuring that they are held responsible for any wrongdoing committed in bad faith or negligence.

A flaw of the absolute immunity approach is that it ignores that the parties, when they chose an arbitrator, have a reasonable expectation that the arbitrator will remain impartial, independent and that he will fulfil his duties (contractual and adjudicatory) in good faith. Moreover, “their acceptance of the arbitral risk did not cover the case of fraud, of corruption, nor (it would seem), cases of gross and inexcusable negligence. But it did cover, or include the possibility of mistakes in law and legal procedure . . . there is no justification for the immunity of the arbitrators, especially when it is based on the misconceived assimilation to the status of judges.”

Another critique of absolute immunity is that it grants protection to arbitrators based on a misunderstood policy argument to protect them from undue pressure from the parties, and to provide them legal certainty that they will be immune from civil liability claims. Even when the reason behind this argument is true, and that it is undeniable that without some degree of immunity fewer professionals would accept to be appointed as an arbitrator, there is no justification to shield arbitrators in cases of bad faith or gross negligence.

As Dario Alessi suggests:

No law of contract would allow the gross unfairness of exempting a party to a contract from liability because of some policy argument. In particular, the independence of arbitrators may not be obtained at the expense of fairness, producing impunity for breach of obligations that the arbitrators have freely assumed. (…) The unpleasant effects of liability of arbitrators which may occur, such as a risk of vexatious litigation, collateral disputes or harassing lawsuits, cannot as such justify the denial of the right to enforce the promises of arbitrators.

In addition, it is also a good policy to provide the parties of an arbitration a remedy in case that the arbitrator acts in bad faith (such as deliberatively not disclosing conflicts of interest) or in cases of fraud or gross negligence. At the international stage the trend is to improve the current standards about impartiality and independence applicable to arbitrators, evidence of this tendency is the recent publication of the IBA Guidelines of Conflicts of Interest in International Arbitration 2024, that was updated to incorporate “the best current international practice . . . [t]he General Standards and the Application Lists are based upon statutes, practices, and case law and other decisions in a cross-section of jurisdictions, and upon the judgment and experience of the main participants in international arbitration.”

While international arbitration is imposing stricter standards to arbitrators, the U.S. lags behind the international trend by granting explicitly immunity to arbitrators that fail to disclose conflicts of interests, as it is recognized in Section 14 of the Uniform Arbitration Act. There current approach in the U.S. towards the liability of the arbitrator fails to  “balance the various interests of parties, counsel, arbitrators, and arbitration institutions, all of whom have a responsibility for ensuring the integrity, reputation, and efficiency of international arbitration.

To promote the adoption of qualified immunity in the U.S., I consider it necessary to adopt qualified immunity through legislation at state level, and to implement it in the Uniform Arbitration Act, since it does not seem likely[6] that the U.S. Supreme Court will hear a case that modifies the existing status quo.[7] As M. Rasmussen says, “because large sophisticated parties would not forego their access to national courts without carefully exploring the advantages and disadvantages of the process, they must perceive that the advantages of arbitration outweigh the disadvantages.”

In addition, the transition to “contractual liability, would increase transparency, accountability, independence, impartiality, and integrity in the arbitral process. Henceforth, international arbitration would enjoy greater recognition and public confidence,” a transition to qualified immunity will help arbitration to overcome its actual reputational crisis.


*Facultad Libre de Derecho de Monterrey (LLB), Escuela Libre de Derecho (LLM), University of Southern California, Gould School of Law (LLM), Harvard Extension School (ALM Government candidate). The author specializes in civil, commercial litigation, and commercial arbitration in Mexico. I’m grateful to Roberto Cuchí Olabuenaga for his comments in early drafts, and to the members of the editorial board of the HILJ-HIALSA for their work in preparing this piece for publication. All errors are my own.

[1] The report found that “…The multiplication of parallel or subsequent litigation in arbitration proceedings, some of which is directed against arbitrators, is a recent trend that reflects a break from consensus. It therefore appeared necessary for the authors of this report to draw up the current state of arbitrators disciplinary, civil and criminal liability…”

[2] Such as England and the United States. As one pair of authors have commented, “…The immunity of arbitrators is predicted upon the generally accepted proposition that they enjoy quasi-judicial status. It has its basis in the fact that the functions performed by arbitrators, who are chosen by the parties, can be compared to the acts performed by judges…”(p.951).

[3] E.g. France and Spain. Article 21.1. of the Spanish Act 60/2003 of 23 December on Arbitration, declares that “[a]cceptance requires arbitrators and, as appropriate, the tribunal institution, to comply with their commission in good faith. If they fail to do so, they will be liable for any damages resulting from bad faith, recklessness or mens rea. In arbitration commissioned from an institution, the damaged party may file suit directly against it, irrespective of any action for indemnity lodged against arbitrators.”

[4] Thomas Clay, El Árbitro [The Arbitrator] 123 (Grupo Ed. Ibañez, Claudia Patricia Cáceres Cáceres Trans. 2012).

[5] Gary B. Born, Rights and Duties of International Arbitrators, in International Commercial Arbitration (3rd ed. 2021) (updated online only 2024). For this author, “…The proper analysis is to treat the arbitrator´s contract as a sui generis agreement. That is in part because this characterization accords with the specialized and distinct nature of the arbitrator´s mandate . . . differs in fundamental ways from the provision of many other services and consists in the performance of a relatively sui generis adjudicatory function…”

[6] Due to the actual composition of the Supreme Court.

[7] On March 25th 2024, the United States Supreme Court denied certiorari in Grupo Unidos, et al. v. Autoridad del Canal de Panama.


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Crimes Against International Humanitarian Law in Myanmar: Will the Philippines Impose Universal Jurisdiction on behalf of Burmese Refugees?

Crimes Against International Humanitarian Law in Myanmar: Will the Philippines Impose Universal Jurisdiction on behalf of Burmese Refugees?

Lorenz Dantes

I. Introduction

On October 25, 2023, a first-of-its-kind legal effort began in the Philippines. The “Philippine Act on Crimes Against International Humanitarian Law, Genocide, and Other Crimes Against Humanity,” Republic Act (RA) No. 9851, was invoked as a means of prosecuting and achieving justice for atrocities that occurred outside of the Philippines. Burmese refugees who fled to the Philippines initiated criminal proceedings against members of the ruling junta regime in Myanmar for violations of International Humanitarian Law before the Philippine Department of Justice.  According to one Burmese refugee, “[w]e can’t find justice in our own country[,] and we are expecting that the Philippines is the place where we can find some form of justice from the atrocities we have suffered.” Philippine prosecutors must first determine the existence of “probable cause” before the case can proceed to court.

The charges against the junta primarily involve violations of RA 9851’s Section 4(b)(1), Section 4(c)(2), Section 4(c)(7) and  Section 4(c)(10). RA 9851 is often referred to as the Philippine version of the 1998 Rome Statute and was enacted in 2009 to enable the Philippines to prosecute “serious crimes of concern to the international community” such as genocide, crimes against humanity, and war crimes, especially since it is not a member of the International Criminal Court (“ICC”). Section 4(b)(1) covers situations of non-international armed conflicts wherein “serious violations of common Article 3 to the four Geneva Conventions of 12 August 1949” occurred, through the infliction of violent acts against persons taking no active part in the hostilities. Sections 4(c)(2), 4(c)(7), and 4(c)(10), on the other hand, penalize “serious violations of the laws and customs applicable in armed conflict.” This includes intentional attacks on civilian (non-military) objectives, bombardment of undefended towns, and attacks on buildings dedicated to “religion, education, art, science or charitable purposes, historic monuments, hospitals and places where the sick and wounded are collected.”

One main feature of RA 9851 that Burmese refugees sought to use is Section 17, which states that jurisdiction can be exercised:

[O]ver persons, whether military or civilian, suspected or accused of a crime defined and penalized in this Act, regardless of where the crime is committed, provided, any one of the following conditions is met:

(a) The accused is a Filipino citizen;

(b) The accused, regardless of citizenship or residence, is present in the Philippines; or

(c) The accused has committed the said crime against a Filipino citizen.

In assessing its applicability, it is important to remember that the accused, in this case, are the members of the military junta. The complaint includes Dr. Vung Suang Thang (Chief Minister of the State of Chin), Lt. Gen. Min Naing (chair of the Cyclone Mocha Emergency Response in the State of Chin), Lt. Gen. Tay Zar Kyaw (chief of the Bureau of Special Operations), Maj. Gen. Phyo Thant and Than Htike, Brig. Gen.  Myo Htut Hlaing, Col. Saw Tun, Lt. Col. Myo Zin Tun, and Maj. Nay Myo Oo. Notably, it also includes Gen. Min Aung Hlaing, the overall head of the ruling military junta and the commander in chief of the Tatmadaw, the military forces of Myanmar.

The Burmese refugees stated in their complaint that these members of the military junta bear criminal liability for the murder of civilians and the torching of houses in Myanmar’s Chin state, one of the least developed regions in Myanmar. They also narrated that following a clash between the Tatmadaw and rebel groups that resulted in the deaths of 30 Tatmadaw soldiers, the Tatmadaw took revenge on the residents of the town of Thantlang by burning their houses and firing on villagers and members of a Baptist church group delivering medical supplies and putting out the fires. This violence then produced a massive forced displacement of the town’s villagers into neighboring India’s Mizoram state. To support these factual allegations, the complaint cites a report dated February 25, 2022, from the United Nations High Commissioner of Human Rights, which states that the Tatmadaw Light Infantry Brigade burned down over 900 buildings in Thantlang through at least 23 successive attacks on churches, houses, schools, churches, and offices of non-governmental organizations.

According to the Filipino lawyers of the Burmese refugees, RA 9851 is sufficient to provide the Philippine legal system with universal jurisdiction over these incidents. They contend that “universal jurisdiction means that any state can prosecute a crime … This is not an ordinary crime. It’s considered a crime against the entire international community.” The lawyers also argued that since the military junta “do not represent the legitimate government of the people of Myanmar under international law,” they cannot invoke sovereign or diplomatic immunity. Coincidentally, this complaint also corroborates the damning evidence released last August by a group of investigators from the United Nations known as the Investigative Mechanism for Myanmar, which indicates that the Tatmadaw deliberately targeted civilians with bombs and carried out mass executions of detained people during its operations. This includes dropping fuel-air explosives on a village in the Sagaing region that resulted in the deaths of numerous children.

With the filing of this case, the Philippines has now become the fifth country after Germany, Turkey, Indonesia, and Argentina where legal cases have been sought to be initiated over the crimes committed by the Tatmadaw against a number of civilian population groups in Myanmar. In addition, proceedings are also ongoing at the ICC and at the International Court of Justice (“ICJ”). The lawyers of the Burmese refugees in the Philippines note, however, that the combination of the Philippines having its own domestic law over crimes against International Humanitarian Law as well as being geographically conducive towards getting testimony from witnesses in Myanmar makes it a crucial legal jurisdiction for pursuing international justice over the crimes committed in Myanmar.

It remains unclear whether the existing domestic legal framework in the Philippines is sufficient to pursue international justice over the alleged atrocities committed in Myanmar. To answer this question, we must examine relevant legal and policy considerations.

II. Relevant Philippine Legal Framework

As early as 1952, the Philippines had already ratified the Fourth Geneva Convention on the Protection of Civilian Persons in Time of War. As such, Article 146 of the Fourth Geneva Convention, which has been described as an explicit reference to universal jurisdiction, has the force and effect of a domestic statute within the Philippine jurisdiction. According to this provision, “[e]ach High Contracting Party shall be under the obligation to search for persons alleged to have committed, or to have ordered to be committed” grave breaches of the convention, as well as to “bring such persons, regardless of their nationality, before its own courts.”

In the case of Bayan Muna v. Romulo, the Philippine Supreme Court (“The Court”) described the relationship between “jus cogens crimes” and universal jurisdiction. According to the Court, jus cogens crimes are so fundamental to the existence of a just international legal order that

[A]ny state may exercise jurisdiction over an individual who commits certain heinous and widely condemned offenses, even when no other recognized basis for jurisdiction exists. The rationale behind this principle is that the crime committed is so egregious that it is considered to be committed against all members of the international community and thus granting every State jurisdiction over the crime.

Thus, the Court concluded that even if a particular country does not have domestic legislation on crimes against humanity and war crimes, it would still have jurisdiction to try these crimes due to the principle of universality. According to the Court, this is even more so in countries that adhere to the doctrine of incorporation or those that “recognize [ ] international law as part of the law of the land, necessarily including international crimes, even without any local statute,” since international legal principles on genocide, war crimes, and crimes against humanity have already attained the status of customary international law (“CIL”). Through this pronouncement, therefore, the Court recognized that universal jurisdiction can indeed be utilized within the Philippines’ domestic legal system.

However, a right to try does not mean a duty or obligation to do so, especially for an accused that is in absentia. As stated by the Court in another case, “notwithstanding an array of General Assembly resolutions calling for the prosecution of crimes against humanity and the strong policy arguments warranting such a rule, the practice of states does not yet support the present existence of an obligation to prosecute international crimes.” Moreover, the Court added that an invocation of the concept of erga omnes obligations, or those obligations which are “owed by States towards the community of states as a whole,” will not alter this analysis because it cannot be shown yet that the duty to prosecute perpetrators of international crimes is an erga omnes obligation.

Fittingly, the Court has thus described universal jurisdiction as being an “accepted” concept in international law, but only applying in special circumstances, rather than absolutely or unconditionally. Accordingly, before Section 17 of RA 9851 can give rise to universal jurisdiction within the Philippine domestic legal framework, it must first comply with the conditions set forth therein. In the case of the Myanmar junta, these conditions can never be satisfied as long as they are in absentia (outside the Philippines). As stated by the Court, universal jurisdiction confers authority unto the forum only after physical custody of the perpetrator of offenses considered particularly heinous and harmful to humanity is obtained.

Considering the above, both Section 17 of RA 9851 and the Philippine Supreme Court’s pronouncements on universal jurisdiction constitute a significant hurdle to the exercise of jurisdiction by Philippine courts as the perpetrators, the Myanmar junta, are outside the Philippines. Theoretically, it may be true, as one legal observer pointed out, that R.A. 9851 also states that the provisions of the Geneva Convention and the rules and principles of CIL are also to be considered in the application and interpretation of RA 9851. Nonetheless, it is also arguable that the limited enumeration of instances under the law where jurisdiction can be exercised operates to preclude any notion of an expansive grant of universal jurisdiction under the interpretative legal maxim of Expressio unius est exclusio alterius. Moreover, even if the supplementary application of the principles of the Geneva Convention and CIL are interpreted as granting an implied universal jurisdiction to Philippine courts beyond what Section 17(b) provides, it would still not solve the quandary of the lack of obligation to assume jurisdiction and try a case against persons who are in absentia. As mentioned in the commentary provided by the International Committee of the Red Cross on the Geneva Convention, the “decision whether or not to prosecute an alleged perpetrator should be taken by competent authorities in line with national legal requirements.” According to the commentary, the words “bring such persons, regardless of their nationality, before its own courts,” which can be found in both Article 49 of the First Geneva Convention and Article 146 of the Fourth Geneva Convention, conceivably “does not imply an absolute duty to prosecute or to punish.” While the principle of Aut Dedere Aut Judicare may provide an important argument in favor of the obligation to assume jurisdiction over the case, doubts about the consistent and widespread state practice of this principle, in the absence of treaty obligations, raise uncertainty and debates over its status as CIL. It is worth remembering the observation made by the former President of the ICJ, Gilbert Guillaume, in a Separate Opinion that “Universal jurisdiction in absentia […] is unknown to international law.”

III. Foreign Comparisons?

Curiously, the filing of this criminal complaint is also being compared to the prosecution and sentencing by Senegal of former Chad leader Hissène Habré. While universal jurisdiction was also invoked in that case, the similarities are more surface level. Senegal had to institute “constitutional and legal amendments that removed the obstacles to holding Hissène Habré’s trial in Senegal, as well as to the establishment of the Extraordinary African Chambers within the Senegalese judicial system to judge Hissène Habré.” Senegal likewise signed a judicial cooperation agreement with Chad to facilitate investigations in Chad. None of these circumstances are present here. As highlighted by one observer, “the Habré case was made possible by different movements, both political and judicial, key of which was the African Union supporting the creation and funding of a special court, then pushing Senegal to amend its law so they could clearly obtain universal jurisdiction.” Moreover, even taking into account the ruling of the ICJ in Belgium v. Senegal, the comparison would still not square with the legal action in the Philippines. In Belgium v. Senegal, Belgium submitted that Senegal failed to prosecute the former President of Chad, Mr. Hissène Habré, for large-scale human rights violations that he allegedly committed during his presidency in Chad.  At that time, Mr. Habré was already a resident of Senegal. The ICJ then ruled that Senegal breached its obligations under Article 6(2) and  Article 7 (1) of the Convention Against Torture (“CAT”).  Article 6(2) requires Senegal to “immediately make a preliminary inquiry into the facts” against “a person alleged to have committed acts of torture” that is within its territory. Article 7 (1), on the other hand,  requires Senegal to “submit the case to its competent authorities for the purpose of prosecution.”

Evidently, the legal ruling in Belgium v. Senegal relates more specifically to the interpretation of the provisions of the CAT rather than on crimes against humanity and war crimes. More importantly, Mr. Habré was present in the territorial jurisdiction of Senegal at that time, while General Min Aung Hlaing and the members of the Myanmar junta are not within Philippine territory, nor will they be in the foreseeable future. This is essentially the same reason why the requirement under Section 17(b) of RA 9851 for the presence of the accused within Philippine territory is so important. While universal jurisdiction can present an important tool for pursuing international justice and accountability, RA 9851’s conditional view of it asserts that it cannot come at the expense of the accused’s fundamental due process rights. Even in Germany, a country that has been frequently described as a model of universal jurisdiction through its Code of Crimes against International Law (Völkerstrafgesetzbuch – VStGB), it has been noted that “a trial can never be initiated without the accused being before the court” because it is a “mandatory requirement for a lawful process that defendants have the chance to defend themselves against the accusations brought against them.”

Relevantly, it was reported in 2014 that Spain moved away from absolute, unconditional universal jurisdiction by enacting reform legislation that adopted a restrictive model of universal jurisdiction, just like the Philippines’ RA 9851. This reform legislation thus excluded the possibility of conducting investigations, prosecutions, and trials in absentia, and limited “the exercise of universal jurisdiction to the circumstance that the suspect is present in the territory of Spain.” When this change was questioned before the Supreme Court of Spain, the Spanish Supreme Court rejected the challenge by stating that an absolute and unconditional exercise of universal jurisdiction is not mandated by international law, whether through international treaties such as the Geneva Conventions or by CIL. This ruling from the Supreme Court of Spain is persuasive authority within the Philippine legal jurisdiction, and there is a strong possibility that Philippine prosecutors and courts may interpret Section 17 of RA 9851 similarly to the Spanish Court.

Concomitantly, RA 9851 also provides that the relevant Philippine authorities may dispense with the assumption of jurisdiction if another court or international tribunal is already conducting such an investigation or undertaking the prosecution. As noted previously, legal proceedings over atrocities in Myanmar have been initiated in Argentina, Turkey, Indonesia, and Germany and also in the ICC and the ICJ. While some of these cases may deal with completely different egregious acts committed by the Myanmar military, such as those against the Rohingyas, the possibility of an overlap and connection between these cases can present another challenge to any assumption of jurisdiction by Philippine authorities.

IV. Policy Considerations

Under the Philippine legal system, it is the executive branch, through the Secretary of Justice and the prosecutors, that first determines the existence of probable cause before the case can proceed in court, akin to grand juries in the American legal system. As an executive function, it would be hardly surprising if other factors beyond just the legal questions are also investigated by Philippine executive officials in making their determination. Current Philippine foreign policy, for example, may increase the hesitancy of Philippine authorities to assume jurisdiction on behalf Burmese refugees. The Philippines, as a member of the Association of Southeast Asian Nations, or ASEAN, is expected to observe the long-standing principle of non-interference in the internal affairs of other member countries. While this principle has not stopped the Philippines from issuing and supporting critical statements on the atrocities in Myanmar, allowing criminal proceedings to progress and possibly result in Philippine courts issuing arrest warrants for the members of the ruling junta regime can altogether become a step too far for the Philippines in terms of non-interference. Two years ago, it was essentially this very same principle that prevented the Philippines from even joining the call made by the United Nations’ Human Rights Council that the military junta should release detained Myanmar leader Aung San Suu Kyi.

Additionally, an executive determination by the Philippine Department of Justice must also consider any potential reprisals by the ruling Junta regime against the Filipino population in Myanmar. For instance,  it was reported previously that the arrest of a British national in Myanmar was possibly made in retaliation to the imposition of sanctions by the United Kingdom on Myanmar. Since the welfare of Filipino nationals overseas continues to play a significant and primary role in the country’s foreign policy dealings with other states, any executive decision on the Myanmar cases would therefore have to take into account its potential ramifications for the Filipino nationals that are residing in Myanmar.

V. Conclusion

While not entirely implausible, there are a number of legal and policy obstacles to the Philippines assuming universal jurisdiction over the case filed by the Burmese refugees. These obstacles could impede possible investigations and court hearings conducted by relevant Philippine authorities. As such we should not expect the existing legal framework in the Philippines to become the go-to destination for pursuing international justice over atrocities committed in Myanmar anytime soon.

However, the Philippine domestic legal framework may still be useful to the pursuit of justice by the Burmese refugees. Even if no criminal cases are tried in the Philippines, officials can assist Burmese refugees in the gathering of evidence. This is akin to structural investigations conducted in Germany, whereby investigations are “led irrespective of whether it is foreseeable that investigation proceedings on specific cases will arise.” In this manner, evidence is gathered merely for purposes of submitting it later on to a foreign or international jurisdiction that wants to assume jurisdiction over the case.


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Petersen v. Argentina and the Drawbacks of U.S. Litigation Against Foreign Sovereigns

Petersen v. Argentina and the Drawbacks of U.S. Litigation Against Foreign Sovereigns

Matei Alexianu*

In September 2023, a U.S. district court issued its judgment in Petersen v. Argentina. The court ordered Argentina to pay $16 billion—the largest ever judgment against a country in U.S. court—to two former private investors in YPF, a state-controlled oil company. The award was the result of a breach of contract related to Argentina’s 2012 nationalization of a controlling stake in the firm. The case has already drawn comparisons with investment-treaty arbitration and calls for investors to consider bringing suits against foreign states in U.S. courts.

The YPF judgment is not the first large contract-based lawsuit against a foreign state, of course. Argentina itself has faced many such cases, such as the seminal Weltover v. Republic of Argentina case decided by the U.S. Supreme Court. But this case, decided three decades after Weltover, illustrates how sovereign protections in U.S. courts have eroded over time, leaving states exposed to more U.S. civil litigation in commercial disputes. And while the main alternative, investor-state dispute settlement (ISDS), has been heavily criticized along multiple dimensions in recent years (see, e.g., Behn, Fauchald, & Langford, eds.; UNCTAD), litigation is likely to perform as badly or worse along many of those dimensions. In particular, U.S. federal court litigation is arguably less competent, legitimate, and adaptable to the evolving needs of states and investors—thus threatening the principles of international comity and sovereign equality that motivate immunities.

Sovereign immunity and the commercial exception

When a government breaches its contractual obligations, an affected investor may, depending on the contract, seek recovery in two ways. First, the investor might sue the sovereign for breach of contract, either in a local court or another jurisdiction. This, of course, is what happened in the YPF case. Second, the investor might initiate an ISDS proceeding under a bilateral or multilateral investment treaty. (Although not all contract violations by a sovereign state amount to treaty breaches, many will give rise to plausible treaty claims, especially under the fair and equitable treatment standard.) Indeed, following the YPF nationalization, the company’s majority shareholder Repsol launched an ISDS proceeding against Argentina, which settled for $5 billion in 2014.

Historically, one of the main barriers to bringing contract-based suits in national courts has been sovereign immunity. Under customary international law, sovereign states are entitled to immunity from jurisdiction and enforcement in other countries’ courts. The United Nations Convention on Jurisdictional Immunities of States and Their Property—which is not in force but which observers consider to codify customary law in this area (see, e.g., Jones v. Saudi Arabia ¶ 47)—describes the exceptions, including waiver, commercial activity claims, tort claims, and arbitral agreements. In the United States, these sovereign protections have been codified in the Foreign Sovereign Immunities Act (FSIA). As a result, the success of investor claims in U.S. courts often hinges on whether the investor can prove that one of the exceptions to sovereign immunity, usually either the commercial activity or waiver exception, applies to the government defendant.

Given the broad protections that sovereign immunity provides, investors have often opted for ISDS instead. States do not have immunity—from jurisdiction, at least—in ISDS because they waive those protections when they sign an investment agreement. (An alternative view is that sovereign immunity does not apply to international arbitration to begin with since the process is not a public court proceeding.) The idea that an investment treaty waives immunity makes sense not only as a matter of treaty interpretation, but also when considering the function of the treaty. At its core, an investment treaty is an agreement between two or more states exercising their sovereign treaty-making powers to grant rights to each other and commit to a certain method of dispute resolution. This stands in contrast to investment contracts, which involve one state acting on the domestic plane to create certain rights, and which typically do not address the state’s international rights and obligations. Some contracts waive sovereign immunity, explicitly or implicitly, but many do not. Notably, the YPF by-laws were silent as to immunity.

The eroding protections of the Foreign Sovereign Immunities Act

However, the immunity-based distinction between litigation and ISDS is eroding as U.S. courts expand the scope of the FSIA commercial exception over time. This narrowing of sovereign immunity is not new: it dates back at least to the U.S. State Department’s 1952 Tate Letter, which adopted a restrictive view of immunity recognizing key exceptions to sovereign protections. In terms of the FSIA’s commercial exception, the most important development came in the U.S. Supreme Court’s 1992 Weltover decision. In that case (p. 614), the Court held that only the nature, not the purpose, of state activities determines whether they are commercial. And, according to the Court, commercial activities are those that a private party could perform. As one scholar recently put it, this definition was “as expansive as the statute would allow.” Weltover paved the way for the lower courts: since the decision, U.S. courts have applied its test to find commercial activities in conduct ranging from the Vatican’s religious and pastoral services to Taiwan’s not-for-profit cultural tours. But Weltover did not address how to classify otherwise commercial conduct that is shaped by, and that flows directly from, a sovereign act, such as expropriation. The case focused on whether the sovereign acted in the “manner of a private player” but left open the status of an act that a private player could perform but that was nevertheless accomplished in a manner exclusive to the sovereign. Confronted with this issue, the district and appellate court opinions in the YPF case illustrate how U.S. courts continue to expand the scope of the commercial exception.

Much of the YPF litigation, in both the district court and the court of appeals, focused on the applicability of the commercial exception. The key question was whether the case was based on (a) the sovereign act of expropriation of YPF’s shareholders (as Argentina argued), or (b) the commercial act of a breach of the YPF by-laws (as Petersen claimed). Argentina and YPF argued that any contractual breach was “inextricably intertwined” with the Expropriation Law and Argentina’s sovereign decision to expropriate 51% of YPF’s shares (i.e., those of Repsol). But both the district court and the Second Circuit held that the crux of the suit was Argentina’s failure to issue a tender offer to the minority shareholders—not the earlier expropriation, which was probably a sovereign act. Even if Argentina’s claimed purpose for reneging on its contractual duties was to facilitate a sovereign act of expropriation, the “nature” of a breach of contract as a commercial activity was determinative. The Second Circuit noted that nothing in the Expropriation Law prohibited Argentina from complying with its contractual obligations.

This conclusion appears to further expand the scope of the commercial exception to cover commercial conduct that is closely related to a sovereign act. The Second Circuit’s opinion—which comports with the Ninth Circuit’s approach but may conflict with the D.C. Circuits—compels courts to construe the government’s conduct as narrowly as possible when determining its nature. The Second Circuit’s approach, then, opens the doors of U.S. federal courts to contractual claims that are intimately connected with, but factually distinguishable from, sovereign conduct by foreign states. The opinion also elevates the importance of certain policy choices made by foreign states. For example, the Second Circuit’s opinion suggests that sovereign immunity would have applied if Argentina’s expropriation law explicitly prohibited its government from compensating the plaintiffs for their shares. This kind of legislative choice, which Argentina’s lawmakers likely did not know would open the country to litigation overseas, is now subject to scrutiny by U.S. courts.

It is debatable whether the Second Circuit’s application of the commercial exception is compatible with the FSIA or Supreme Court precedent. In any event, the Second Circuit’s ruling—which the Supreme Court declined to disturb—is now the law within its jurisdiction, including in the global financial center of New York. Weltover’s commercial “nature” test seems to have reached new heights.

The limited power of the act of state doctrine

Historically, the “act of state” doctrine has also shielded states from liability in U.S. courts. That doctrine, which dates back to the 1890s, holds that U.S. courts will not question the validity of public acts performed by other states within their borders. The doctrine is a creature of U.S. federal common law, not international law, and it stems from comity and separation of powers principles.

Argentina invoked the doctrine in this case, claiming that the plaintiffs’ argument would require a U.S. court to “sit in judgment” of the validity of Argentina’s sovereign act of expropriation. The district court disagreed, holding that the case turned instead on the operation of YPF’s bylaws in light of Argentina’s decision to expropriate. And Argentina’s official act of expropriation neither compelled it to renege on its obligation to issue a tender offer nor absolved it from its contractual obligations under the bylaws. The district court therefore declined to apply the doctrine, applying much the same logic as for the commercial exception: the expropriation and breach of contract were factually and legally distinct acts. (The Second Circuit declined to consider this issue on appeal.) The district court’s decision suggests that the act of the state doctrine may rise and fall along with the FSIA analysis in cases involving both sovereign and commercial activities.

U.S. civil litigation: less predictable and adaptable

As the legal landscape leaves sovereign states increasingly susceptible to being hauled into U.S. courts, investors may be emboldened to choose civil litigation over ISDS. This is a concerning prospect. Notwithstanding the critiques of ISDS—many of which have substantial force—the mechanism arguably has at least three benefits over U.S. civil litigation in the sovereign context.

The first is institutional competence. U.S. federal judges are generalists who are typically unfamiliar with foreign law and the sector-specific subject matter of sovereign contract cases.  While many cases involving foreign states so far have centered on a few major issues such as bond repayments, other cases have run the gamut from energy infrastructure to defense contracts.  In ISDS, parties can choose (at least one of) the arbitrators, allowing them to consider the technical and legal expertise of their adjudicators. Perhaps more importantly, ISDS cases usually turn on the interpretation of relatively standardized international treaties, while contract disputes are much more heterogeneous, often incorporating an array of foreign law. Where this is the case, judges will need to rely on the parties’ submissions. But the Supreme Court’s holding in Animal Science Products that U.S. courts need only afford “respectful consideration” to foreign states’ interpretations of their own laws—but are not bound by them—will give little comfort to sovereign defendants that their laws will be applied correctly in such suits. In contrast, when interpreting domestic laws, investor-state tribunals have historically looked to foreign domestic courts for assistance, acknowledging (¶ 176) that they are “likely to be of great help.” And, recently, investment treaties such as the EU-Canada Comprehensive Economic and Trade Agreement (Article 8.31(2)) have provided for mandatory arbitral tribunal deference to domestic court interpretations of foreign law.

Second, ISDS will often have more perceived legitimacy as a dispute resolution mechanism than U.S. litigation. This statement might seem surprising given recent pronouncements about the “legitimacy crisis” of investment arbitration. But investment arbitration is almost always explicitly authorized by treaty, contract, or national legislation, which grounds the procedure in state consent, a central principle of international law. In contrast, many contracts are silent on the issue of dispute resolution. The YPF by-laws, for example, contained no forum selection clause. If anything, the evidence suggested that Argentina had ruled out litigation in foreign courts: in the district court, Argentina’s lawyers pointed out that the 1993 prospectus promoting investment in YPF provided for exclusive jurisdiction in Argentinian courts. The fact that foreign sovereigns may face litigation abroad even where they have seemingly withheld consent undermines the legitimacy of the litigation process. Moreover, party appointment of arbitrators can shore up trust in the arbitration process and ensure that the state’s perspective is heard (Brekoulakis & Howard; Carter). Litigation before a U.S. federal judge, while arguably more impartial, lacks this guarantee of representation.

Third, ISDS agreements are more adaptable to states’ needs than investment contracts, especially when the latter are enforced through foreign litigation. Again, this might seem counterintuitive given the criticism of ISDS as an inflexible regime that unfairly advantages investors. But investment agreements help centralize both investor rights and carve-outs for sovereign regulatory authority, thus focusing drafters’ attention on these provisions and enabling recent reform efforts (see, e.g., Baltag, Joshi & Duggal; Broude, Haftel & Thompson). Investment contracts, on the other hand, tend to be much more fragmented and operate within a complex patchwork of local law. Of course, states can standardize those contracts, adding regulatory exceptions and forum selection clauses, and explicitly incorporating protective local laws. Indeed, an effort to reform investment contracts is currently underway. But this will be a slow process given the number and heterogeneity of contracts and the need to negotiate with individual investors, many with outsized bargaining power. And, as discussed above, there is no guarantee that U.S. courts will understand and apply these updated contracts and local laws as intended.

None of this is meant to deny important critical perspectives on ISDS. These include analyses showing that the regime lacks transparency, suffers from arbitrator bias and conflicts of interest, lacks consistency absent appellate review, impedes climate change reform, curtails state sovereignty, favors rich countries, and overwhelmingly benefits large investors—just to list a few. But as the discussion above shows, U.S. litigation is likely to fare worse along many of these dimensions. And reform of the U.S. judiciary is largely out of foreign states’ hands, in contrast to ISDS where states can, and do, push for reform.

These drawbacks to U.S. civil litigation risk generating tension between the U.S. and other states and encourage retaliation through reciprocal jurisdiction over U.S. firms in other countries. This is precisely the risk that the modern doctrines of sovereign immunity and act of state were designed to avoid. As recently as 2021 in Federal Republic of Germany v. Philipp (p.12), the U.S. Supreme Court emphasized that:

“We have recognized that United States law governs domestically but does not rule the world. We interpret the FSIA as we do other statutes affecting international relations: to avoid, where possible, producing friction in our relations with [other] nations and leading some to reciprocate by granting their courts permission to embroil the United States in expensive and difficult litigation.”

Until recently, these principles have meant that it was, in one commentator’s words, “almost impossible to sue a foreign government in U.S. courts.” That is no longer the case, at least for many contract-based disputes.

***

One scholar has aptly described ISDS as a system that “grafts public international law (as a matter of substance) onto international commercial arbitration (as a matter of procedure).”  Weltover and its progeny, including Petersen v. Argentina, encourage investors to pursue a system that grafts foreign commercial law onto U.S. civil litigation. This essay has sought to demonstrate why these developments are likely to be problematic for foreign states and, in turn, the U.S. government. If the impending tide of U.S. cases against foreign states materializes, Congress and the U.S. Supreme Court might decide to tighten the scope of the FSIA’s commercial exception. In the meantime, states and investors should pay close attention to how they draft their agreements.


*Matei Alexianu earned a J.D. from Yale Law School in 2023. He thanks Ali Hakim for his thoughtful feedback on this essay. All errors are his own.


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In Defence of the Impartiality of Barristers and Door Tenants in ISDS: A Call for Departure from Hrvatska Elektroprivreda d.d. v. Republic of Slovenia

In Defence of the Impartiality of Barristers and Door Tenants in ISDS: A Call for Departure from Hrvatska Elektroprivreda d.d. v. Republic of Slovenia

*Batuhan Betin

To venture so brazenly as to critique an order promulgated by the most distinguished of tribunals, comprised of Jan Paulsson, Charles N. Brower, and David A. R. Williams QC (as he was then), presiding, may be comparable to an act of sacrilege. Alas, heresy is precisely what the tribunal’s Order, dated May 6th, 2008, in Hrvatska Elektroprivreda d.d. v. Republic of Slovenia provokes. In classrooms, misinformed articulations of the case garner polarizing responses from students. It prompts those educated in the institutions of the British Isles (and equally, the Commonwealth) to react viscerally, raising their hands in hopes of being called upon to clarify the particularities of the seemingly alien system of barristers’ chambers—much to the amusement of their contemporaries hailing from “enlightened” civil law jurisdictions who stubbornly refuse to distinguish barristers from the lawyers of their native lands.

Despite its notoriety, the case has attracted limited academic commentary.

At the crux of Hrvatska Elektroprivreda d.d. v. Republic of Slovenia was a list communicated on April 25th, 2008, tabulating the members of the Respondent’s representatives who would be attending the  inaugural arbitral hearing scheduled a fortnight from then (¶ 3). Amongst the constituents of the list was Mr. David Mildon QC (as he was then) (¶ 3). Mr. Mildon KC (as he is now) was, and still is, a barrister operating out of Essex Court Chambers, in London (¶ 3). Mr. Williams KC (as he is now) was, at the time, a “door tenant” operating out of the very same set of chambers (¶ 3). The Claimant’s representatives declared that they had not been aware of Mr. Mildon KC’s retainer before the above-mentioned letter (¶¶ 4-5). They promptly requested disclosure of Mr. Mildon KC’s affiliations with the presiding arbitrator (¶ 5), and subsequently petitioned for Mr. Mildon KC to be removed on grounds that Mr. Williams KC could not ‘be relied upon to “judge fairly”’ (¶ 15).

The tribunal evaluated the interrelationship between Mr. Mildon KC and Mr. Williams KC and found that there was justifiable “apprehension of partiality” (¶ 31).  It ordered that “Mr. David Mildon QC may not participate further as counsel in this case” (Ruling). The Tribunal’s decision to order the removal of Mr. Mildon KC was inspired by a medley of considerations. The seemingly most decisive and foundational consideration was the Tribunal’s finding that there was a justifiable “apprehension of partiality” because “the London Chambers system is wholly foreign to” the Claimant (¶ 31). Admittedly, this was bolstered by the tardy timing of the disclosure of Mr. Mildon KC’s retainer (only two weeks prior to the first hearing). Without reserving a firm position as to whether this case was wrongly decided, this article seeks to challenge the precedential value of this Order vis-à-vis future cases where members of the same chambers are appointed as arbitrators and counsel. Even the most authoritative of arbitral treatises, much (presumably) to their editors’ chagrin, cautiously cite this Order as a persuasive authority that the presence of both members serves as a basis for a serious risk of impropriety (Redfern and Hunter on International Arbitration (7th Edition), ¶ 4.138).

This article seeks to deconstruct two critical features of the Order. First, it shall seek to prove that, in hindsight, the Tribunal applied an erroneous subjective standard in discerning whether there was a risk of an appearance of partiality in contradiction to Article 14(1) of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. Secondly, it advocates that the Tribunal could have more precisely characterized and investigated the interrelationship between Mr. Mildon KC and Mr. Williams KC. In particular, it seeks to demonstrate that the position of “door tenant” may be distinguished from that of a traditionally tenanted member of chambers. Consequently, the particularities of the former may mandate that in future disputes, tribunals should be cautious when applying principles generally applicable to “inter-barrister” relationships mutatis mutandis to “barrister-door tenant” relationships. To this extent, it seeks to discourage blanket recourse to the present Order.

The Tribunal applied erroneous standards in assessing the appearance of partiality. As previously mentioned, it articulated firstly, and seemingly decisively, that the Claimant had a justifiable “apprehension of partiality” because “the London Chambers system is wholly foreign to” them (¶ 31) (emphasis added). This assessment is problematic in that it endorses a subjective evaluation of the arbitrator’s partiality. It essentially adopts the position articulated by the Claimant’s representatives, that whereas the interrelationship “may not be cause for concern in London . . . [v]iewed from the Claimant’s cultural perspective, such concerns are justified” (¶ 10) (emphasis added). However, the prevailing view amongst ICSID tribunals today is that the independence of an arbitrator must be assessed, objectively, on the basis of “whether a reasonable third party, with knowledge of all the facts, would consider that there were reasonable grounds for doubting that an arbitrator possessed the requisite qualities of independence and impartiality” (Schreuer’s Commentary to the ICSID Convention p.1570 (emphasis added); see also Suez and Vivendi v Argentina ¶ 78; EDF v Argentina ¶¶ 109-111). A negative formulation of the test can also be articulated as follows: “a reasonable and informed third party would find it highly likely that the arbitrator’ lacked independence and impartiality” (p.1591; see also Caratube and Hourani v Kazakhstan ¶ 90). The Tribunal deviates from objectivity in that it assesses partiality exclusively from the subjective eyes of the particular Claimant to the dispute, as opposed to the objective lenses of the reasonable third party.

The Tribunal also failed to consider whether the Claimant could have become familiar with this purportedly ‘wholly foreign’ system through knowledge of all the relevant facts. Indeed, this is perplexing given that the Tribunal unequivocally acknowledged earlier in the Order that “[b]arristers are sole practitioners . . . [t]heir Chambers are not law firms” (¶ 17) (emphasis added). Whereas the Tribunal did caveat this statement by cautioning that “th[e] practice [of barristers] is not universally understood,” (¶ 18) it nonetheless tacitly acknowledged how readily accessible this information was. For instance, it pointed to the website of Essex Court Chambers in which unambiguous wording declared, “Chambers is not a firm, nor are members partners or employees. Rather, Chambers contains the separate, self-contained offices of individual barristers each self-employed and working separately” (¶ 17) (emphasis added).

Nowadays there is even greater transparency regarding this phenomenon. The Bar Council of England and Wales’ 2014 Information Note, and its recent 2022 Brochure, underscore that “barristers practicing from traditional sets of chambers are self-employed and are not [emphasis added] in partnership,” and “[b]arristers in the same chambers are fully independent of each other,” respectively. Similar disclaimers are customarily promulgated on the websites of Chambers. In the increasingly globalized world of arbitration, where the participation of barristers is ever-increasing, there is no sound reason precluding the representatives of opposing parties from explaining the realities of this system to their clients.

The tribunal also sought to caveat its earlier statement on the basis that the practice was not “universally agreed” (¶ 18). This proposition is hardly palatable. The independence of barristers is one of the Ten Core Duties promulgated by the Bar Standards Board (BSB) (the body responsible for the ethical regulation of the profession). It is imbued in various rules codified in the readily and publicly accessible BSB Code of Conduct, which, inter alia, underscores that “[m]embers of chambers are not in partnership but are independent of one another and are not responsible for the conduct of other members” (BSB Handbook v. 4.7, gC131). Even the failure to explain to “unsophisticated lay clients [emphasis added]” that “members of the chamber are, in fact, self-employed individuals who are not responsible for one another’s work,” is itself considered a breach of this Code of Conduct (gC56) (emphasis added). Consequently, any arbitrary attempt to doubt the legitimacy of this inviolable and fundamental principle must be readily rejected by future tribunals.

The Tribunal ought to have more precisely characterized the interrelationship between “door tenants” and barristers.

Even the most widely cited of treatises characterize the present matter as a conflict of interest between two barristers who are members of the same chambers. However, Mr. Williams KC was not a traditional member of Essex Court Chambers, nor did he practice as a litigator therein. In relation to Essex Court Chambers, his capacity was that of a “door tenant” (¶ 3). He appears to have retained his practicing certificate from the Bar of New Zealand where he was a traditional tenant of Bankside Chambers. In the absence of knowledge as to the extent and nature of his relationship with the English set, this article does not, per se, reserve a position as to whether the Tribunal erred in treating Mr. Williams KC akin to a traditional member of chambers. Indeed, as elaborated in detail below, there may be circumstances where such treatment may be justified.

The purpose of this Part is to acknowledge that, and identify why, the Tribunal conflated the roles/capacities of traditional members of chambers and that of their door tenants. It seeks then to dissuade other tribunals from blindly conflating the two, in future disputes, in prospective reliance of the current Order.

The Tribunal’s reluctance to distinguish between traditional members of chambers and door tenants should be attributed to the Background Information section of the 2004 IBA Guidelines on Conflicts of Interest in International Arbitration.  Therein, it is asserted (without much elaboration) that for all relevant intents and purposes, the term “members of chambers” shall, because it is “proper,” include door tenants (pp.456-457). However, the Background Information fails to provide any reason as to why the conflation is necessary or proper.

In practice, the relationship of a door tenant vis-à-vis a traditional member operating out of a set of chambers is not, per se, similar to the latter’s relationship with their contemporaries. One set of construction law barristers distinguishes the former as follows: “A number of individuals who are classed as ‘door tenants’ of Chambers also use the clerking and administrative services of ACL. Door tenants are not members, but the courtesy of displaying their name at the entrance to Chambers has been extended to them” (emphasis added).

Door tenants will likely have other permanent occupations. They may be career academics; they may be “affiliated to, and practice out of, another chamber”; they may even have vocations as lawyers employed full-time in traditional law firms operating out of “foreign” jurisdictions. The roles of a door tenant may also be vastly different vis-à-vis traditional members. Some may perform purely consultative functions. Whereas, admittedly, others will take on casework. One regional set of chambers describes the function of their door tenants as follows: “door tenants . . . are available . . . as advisers and consultants and they take on casework which is particular to their field of expertise.” Evidently, one must not blindly conflate the two. Assessment must be made on a case-by-case basis, having regard to the specific nature and extent of the door tenant’s affiliation. Otherwise, one risks arbitrarily mischaracterizing the probability of partiality.

In finding a justifiable appearance of partiality, the Tribunal placed great emphasis on the basis that the promotional materials disseminated by English chambers created a real sense of partnership and collective association amongst their traditional members (¶¶ 17-18). To this end, the Tribunal opined, it was appropriate to treat barristers, in respect of their perception by litigants, akin to solicitors employed in traditional law firms (¶ 19). However, surely, this litmus test can have a countervailing effect. The proactive efforts by chambers to distinguish between permanent members and door tenants (as exemplified for instance by the abovementioned quote from Atkin Chambers) creates a line of delimitation between the two types of tenants. It distances the latter from the former and conveys an unambiguous message that the character of the latter’s affiliation with chambers is likely to be fundamentally different from that of the former.

This is not to say that a “barrister-door tenant” relationship may never warrant disclosure. For instance, where a career academic (Professor A), who is also a door tenant, receives extensive appointments via chambers, their relationship vis-à-vis an ordinary tenanted member may be more akin to a traditional “barrister-barrister” relationship. There, mutatis mutandis application of principles governing the latter may be entirely warranted. However, it is submitted, that due regard must also be had to the secondary nature of a door tenant’s relationship to chambers. Traditionally, a barrister’s principal, if not exclusive, line of business is his self-employed vocation as a litigator, who operates out of the relevant set of chambers. On the contrary, a door tenant has a principal employer or vocation (which may be their primary source of material income). If the same hypothetical Professor A was instead a “hobby arbitrator,” instructed in less than half a handful of cases per annum, it would surely be less persuasive to treat them as if they were any other tenanted barrister.

The failure to distinguish door tenants from traditional barristers also results in certain perplexing outcomes under the 2014 IBA Guidelines on Conflict of Interests in International Arbitration. Professor A who is a door tenant at Chambers B, but a tenured member of the faculty at University C, would be expected to disclose their relationship with Counsel Y who is a junior tenant at Chambers B (¶ 3.3.2). Nonetheless, they would be exempt from disclosing their relationship with Counsel X who is also a tenured member of the faculty at University C (¶ 4.3.3). In light of Professor A’s financial independence from Counsel Y, it is unclear why the risk of bias in favor of Counsel Y is deemed inherently higher than that vis-à-vis Counsel X. Surely, in this hypothetical, the risk of bias should be greater vis-à-vis Counsel X, as a favorable award could bolster the reputation of the faculty, which may in turn indirectly benefit Professor A.

In the modern age, where information is publicly and readily accessible, no reasonable observer armed with the requisite information pertaining to the ethical regulation of barristers should have a good reason for believing that a door tenant is likely to be partial towards counsel hailing from a shared set of chambers by that connection alone. Hrvatska Elektroprivreda d.d. v. Republic of Slovenia must not be interpreted as promulgating a presumption applicable indiscriminately, and capable of producing dispositive outcomes without consideration of the specificities of each prospective conflict. This case also illustrates the desirability of expanding the 2014 IBA Guidelines on Conflict of Interests in International Arbitration such as to provide greater elucidation as to the susceptibility of door tenants (specifically) towards certain biases, with special attention being held to the secondary nature of their vocational relationship with the set. Future tribunals should and must not rely on the present Order as legitimizing the indiscriminate conflation of the two, potentially vastly different, roles.

Skepticism vis-à-vis the Order has started to emerge outside of the investment arbitration context. In 2012, the London Court of International Arbitration (“LCIA”) Court engaged in perhaps the most “sober” interpretation of the Order. In its Challenge Decision No. LCIA81116 the Court unequivocally found that the mere fact that counsel and arbitrator operate out of the same set of chambers cannot serve as “a [decisive] basis to impose upon him an obligation to disclose the activities of other barristers in his chambers; therefore, non-disclosure of such activities does not give rise to ‘justifiable doubts’” (¶48). It rejected any contention that the collective marketing or promotion of members of chambers could ever usurp this presumption (¶47).  Nonetheless, it cautioned, that the presumption of impartiality amongst barristers is neither inviolable nor irrefutable. On each occasion, it is paramount that one conducts a “fact-based enquiry” into whether that particular relationship, between those two members of the same set of chambers, meets the requisite threshold for an appearance of partiality (¶48). This is a most welcome development. Admittedly, this skepticism may stem from the reality that the LCIA is an inherently English institution. The LCIA Court is constituted predominately of English and common law qualified practitioners (or of those intimately familiar with the English legal system). Nonetheless, the author hopes to see the LCIA Court’s sobering approach proliferate and prevail amongst its more transnational investment arbitration contemporaries.


*Batuhan Betin holds an LL.M from Queen Mary University of London where he graduated first overall in his cohort. He extends his sincerest gratitude to his good friend Ms. María Rosario Tejada for bringing the HILJ-HIALSA Collaboration on International Arbitration to his attention.


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Arbitrating Human Rights of Third Parties to ISDS Cases

Arbitrating Human Rights of Third Parties to ISDS Cases

Sebastian Sauter Odio*

I. Introduction

Investor-state dispute settlement (“ISDS”) is a mechanism for foreign investors to claim alleged damages caused by host states, primarily based on standards set by international investment agreements (“IIA”). The ISDS regime has been mostly analyzed from the perspective of the investor or the state, setting aside third parties affected by the investment projects. Beyond the investor-state relationship international investment law (“IIL”) implies a complex relationship with other stakeholders, thus obliging the reconciliation of commercial interests with social justice and environmental protection—areas related to human rights (“HR”).

HR of local communities, including indigenous peoples, workers, and consumers can be undermined by a foreign investment project, particularly concerning the extractives industry, the energy sector, and other large-scale projects. Forced displacement and material dispossession violate HR of third parties to an ISDS claim, including the right to housing, food, water, sanitation, education, and a healthy environment, as well as cultural human rights (see Bangladesh Accord Arbitrations, Bhopal Gas Case (Union Carbide Corp. v. Union of India), Myanmar Yadana Gas Field (Unocal Corp.), Nike Child Labor, Shell v. Nigeria, Philip Morris v. Uruguay, Philip Morris v. Australia, Lone Pine Inc. v. Canada, Vattenfall v. Germany, Spence v. Costa Rica, Methanex v. USA). More importantly, third parties affected by such projects are often unaware of the ISDS claims that impact their rights and thus unable to exercise such rights, including access to justice and public participation.

Even though third-party rightsholders can bring HR claims to domestic and international courts,  arbitral tribunals have indirectly ruled on HR matters, especially in cases referring to climate change and the environment (see Urbaser v. Argentina, Bear Creek v. Peru, Allard v. BarbadosBurlington Resources v. Ecuador, Cortec Mining v. Kenya, S.D. Myers v. Canada, Perenco v. Ecuador, Biwater v. Tanzania). Thus, in this article, I explore the possibility of arbitrating HR in an ISDS procedure, thus providing third parties directly affected by an investment project with an ADR mechanism currently reserved for foreign investors.

II. A Systematic Approach to IIL

As Jean-Baptiste Racine observes in Arbitrage et droits de l’homme (2021), arbitration, as a creation of contract, is normally associated with business and trading, whilst HR pertain to humanistic, universal, and progressive values.[1] Commonly considered opposite areas of the law in the private-public spectrum, arbitrating a HR dispute may be regarded as incompatible. HR duties are, however, not only assigned to the state but also to private parties. Arbitration itself is a case of a private party making binding decisions between conflicting individuals, a power belonging to the right to justice that is generally reserved to state-court litigation. As such, arbitral tribunals shall comply with the public order and HR related to a private-led dispute resolution mechanism.

On this basis, businesses, including foreign investors, are more aware than ever of the HR implications of their operations and of their corporate social responsibility. They have adopted four main efforts to review substantive and procedural standards of IIAs from a holistic and systematic approach of the law. These efforts include incorporating provisions on sustainable development, environmental, health policy and national security in IIAs.

Firstly, the Business and Human Rights (“BHR”) movement addresses business-related HR abuses based on three main pillars that incorporate the United Nations Guiding Principles on Business and Human Rights (“UNGP”): the state’s duty to respect, protect, and fulfil HR, the role of businesses and their duty to respect HR, and the right to access to remedy of those affected by BHR violations.

Secondly, The Hague Rules on Business and Human Rights Arbitration (“The Hague Rules”) is a soft law instrument based on the UNCITRAL Arbitration Rules and the UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration that attempts to “lower barriers to access to remedy” by establishing procedural rules that respond to the unique nature of the interests involved in BHR disputes.

Moreover, the UNCITRAL Working Group III’s discussions on the reform of ISDS rules have considered a greater role for HR provisions in IIL, including the right to access to justice and its corresponding rights to trial and to due process. UNCTAD’S Work Program on IIAs also addresses the rulemaking of IIA by advising stakeholders to include sustainable development and inclusive growth provisions in IIAs.

Within this framework of increasing consciousness of the interconnectedness of the law, providing access to third-party rightsholders to bring their HR claims to ISDS arbitral tribunals would not only be compliant with recent efforts regarding the normative review of IIAs, but also address power imbalances in ISDS of investors with regards to third parties—especially the privilege of overpassing local state courts.

III.  Addressing ISDS Disparities

ISDS provides investors a dispute settlement mechanism to claim reparations from breaches of IIA standards by host states, including non-compliance of most-favored nation treatment, fair and equitable treatment, and prohibitions to expropriation provisions. Meanwhile, affected third parties, including those whose HR have been violated by foreign investors themselves, must exhaust internal state mechanisms—for example, obtaining a court ruling with the effects of res judicata—prior to resorting to a standing international HR court. ISDS therefore affords foreign investors a privileged dispute resolution mechanism, to such an extent they can “bypass local courts” and directly resort to an international ad-hoc tribunal, whilst affected third parties must follow the cumbersome procedure of first exhausting internal state mechanisms. This restricts their right to access to justice in relation to the ISDS claim filed by the foreign investor.

In this sense, providing access to ISDS to affected HR third parties would not only rebalance the asymmetries this mechanism has in respect to the investor claimant and third-party rightsholders, but also reinforce their right to access to justice, in accordance with SDG Goal 16. Furthermore, the flexibility of arbitration as an ADR mechanism could enhance the parties’ procedural rights. For instance, if the tribunal is seated in the jurisdiction the HR violation took place, the affected party—usually being local communities—, the foreign investor, and local authorities relevant to the claim may have more access to the knowledge and the functioning of social and cultural relations of local communities, or even receive support from local organizations, and thus enjoy more equal access to communication and effective remedy adjusted to the particularities of the affected party’s reality.

That said, HR claims brought to ISDS cases shall at least comply with particular procedural standards, given the nature of HR and according to the recent normative reviews set forth in section II of this article.

IV. HR Arbitration

Provided the nature and the governing principles of universality, interdependence, indivisibility, and equality of HR, IIA must include special provisions for an ISDS to rule on HR. First and most importantly, parties must agree in good faith to an arbitration clause established in the IIA and/or eventually agree on a side-agreement once the dispute arises. As a product of contract, a dispute may be arbitrable only if the parties have reached such an agreement. Given that a HR dispute relates to fundamental rights, special consideration should be given to the will of the investor and the host state to resolve HR disputes through arbitration. In any case, to be arbitrable, the event that gives origin to the HR violation must be caused by the foreign state and relate to its duties set forth in the IIA.

That said, HR claims should be brought before an ISDS tribunal only if its members have specialized knowledge to interpret and rule on HR. Most ISDS cases are filed before the International Centre for the Settlement of Investment Disputes (ICSID), the Permanent Court of Arbitration, the International Chamber of Commerce, the London Court of International Arbitration, and the Stockholm Chamber of Commerce. Filing ISDS cases before unspecialized HR tribunals may result in investment and HR claims being heard separately by different tribunals, thus, fragmenting dispute settlement proceedings. For instance, local activists often file HR claims before national courts or international HR organizations, which are ruled separately from the investment claim.

Concerning transparency and publicity, the IIA shall include provisions that ensure public access to the award, hence, complying with the state’s international HR obligations regarding the respect, protection, and fulfilment of HR. Current efforts to improve the transparency and neutrality of ISDS include: (1) the creation of the Multilateral Investment Court, a permanent court of standing suggested by the E.U.; and, (2) the Mauritius Convention on Transparency, which provides parties to IIA executed prior to April 1st, 2014, to consent on the application of the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, setting procedural rules for making publicly available information on ISDS. Amici participation (non-party submissions), public hearings, allowance of observers, as well as the publication of the hearing recordings and transcripts, are other aspects that should be taken into account to guarantee the transparency and neutrality of an ISDS HR procedure.

In terms of remedies, ISDS focuses on economic reparations (compensation), whilst HR requires a broader set of reparations beyond compensation. HR requires, for instance, protective measures for the victim, restitution, rehabilitation, satisfaction and guarantees of non-repetition, as well as collective reparations, or even transitional justice.

On the other hand, the absence of precedent and of an appellate body in arbitration may threaten HR awards and the right to appeal of the parties to the claim. Although an arbitral award is final and binding on the parties (res judicata), it does not set a precedent applicable to other cases. This generates difficulty in predicting outcomes, added to the fact that ISDS tribunals have ruled differently on similar IIA provisions. Moreover, the lack of an appellate body also adds difficulty to the predictability and interpretation of the IIA, insofar as the review of awards sets rules on correcting first instance rulings and provides legal certainty.

Furthermore, the enforcement of an HR award will ultimately depend on the local jurisdiction of and the applicable law to the arbitration agreement. Despite awards being practically enforceable worldwide following the 1958 New York Convention (“NYC”), according to Article 1.3, State Parties may use reservations and hence limit the application of the NYC to commercial matters. As long as HR claims are not defined as commercial matters, states are free to exclude HR disputes from the scope of the application of the NYC and therefore reserve HR claims to domestic courts; as such, the enforcement of an HR award is often a matter of politics.

Even when IIAs respond to the matters mentioned above, the absence of precedent and of an appellate court, compounded by issues regarding the enforcement of the award and specialization of the ISDS tribunal, challenge the possibility of arbitrating HR of affected third parties to ISDS claims.

IV. Conclusion

While ISDS was initially created to protect foreign investors against arbitrary state measures, the increasing awareness of businesses of their corporate and social responsibilities, including HR violations caused by foreign investors, have resulted in exploring alternative ways of providing affected third parties with an ADR mechanism that corresponds to the privilege ISDS entails for foreign investors.

Arbitrating HR of local communities, workers, and consumers breached by foreign investors would not only conform to the systematic approach IIL demands and to the efforts on the normative review of IIAs (including UNGP, The Hague Rules, and UNCITRAL Working Group III and UNCTAD’S Work Program’ discussions), but also enhance the state’s international HR duties and the parties’ right to access to justice.

In this regard, arbitrating HR of third parties to ISDS cases can be feasible if (1) the investor and the host states have executed a valid arbitration agreement; (2) the tribunal is specialized in HR; (3) the publicity and/or transparency of the arbitration proceedings are guaranteed; and (4) the awards are enforceable in that they provide appropriate remedies to the claimant. If the arbitration procedure complies with these requirements, arbitral tribunals should be able to rule on HR claims. However, the absence of precedent and of an appellate tribunal remain tangible challenges to arbitrating HR of third parties to ISDS cases.


*Sebastian Sauter Odio is a Costa Rican associate attorney and editor-in-chief of the Costa Rican Journal of International Law. In 2022 he obtained his Licenciatura en Derecho (J.D. equivalent) with honors from the University of Costa Rica. He has special interests in Private and Public International Law, Human Rights, politics, and environmental matters.

[1] Jean-Baptiste Racine, Lecture presented at The Hague Academy of International Law Online Summer Course on Private International Law on “Arbitrage et Droits de L’Homme” (2021).


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