Arbitral Decision-Making: Legal Realism and Law & Economics

Abstract

As the social impact and role of international arbitration receives increasing attention, one central theme in this conundrum gains prominence: how do arbitrators decide cases? What influences arbitral decision-making? With the progressive opening of scholarship in the field to interdisciplinary approaches and studies going beyond doctrinal work, the question often takes the following form: do arbitrators apply the law, or do they make decisions based on something else-personal preferences, political biases, etc? When empirical studies fail to find significant statistical evidence of the role of extra-legal factors in their decision-making, the conclusion is drawn that arbitrators do, indeed, nothing else than apply the law. This article argues that the question so posed is an argumentative fallacy. Using the epistemology of legal realism and a simple methodology of law & economics, this article maintains that arbitrators, like every dispute resolver, are likely to always rely on both legal and extra-legal factors. It focuses on identifying, in the abstract, possible extra-legal factors that may amount to incentives and constraints placed by the current ecosystem of arbitration on arbitral decision-making.

Reasons not to exit? A survey of the effectiveness and spillover effects of international investment arbitration

“…While this concern has yet to be verified empirically, countries, through particular case studies or based on anecdotal evidence, may express doubt about the effectiveness of the current arbitration system, especially if they link observed trends which are significant in the empirical literature (e.g. the investor's likelihood of winning a dispute) to the rationales for systemic bias in international investment arbitration (Harten 2012;Schultz 2015 ) 26 . The next section provides a short discussion on the root of the crisis faced by international investment arbitration given that it is a system of application of the law.…”

EU Investors versus EU States: International Arbitration of Investment Disputes

“…9 About 190 BITs concluded between EU member countries are still in force (Grill and Lukic, 2016), even though the European Commission considers intra-EU BITs to be incompatible with EU single market law. Most of these BITs date back 8 See also Schultz andDupont (2014, p. 1167) who find that 'in the 1998-2010 period, high income countries were 1.7 times more successful in investment arbitrations than low income countries'. focus on political risk as a determinant of the likelihood and frequency of arbitration claims, rather than ISDS outcomes.…”

“…Moreover, successfully fending off compensation claims of investors may involve considerable costs. Considering the high sunk costs of FDI, however, it is debatable whether ISDS suffers from asymmetry or inequality between parties since respondent states can only 'win in defence' (Schultz andDupont, 2014, p. 1153; see also Rogers, 2014 andPelc, 2017). 19 Jurisdiction may be denied, for instance, when the tribunal finds that the investor's asset does not constitute a 'covered investment', that the claimant is not a 'covered investor', or that the dispute arose before the relevant investment treaty entered into force or falls outside the relevant ISDS provisions (UNCTAD, 2016).…”

“…25 However, the influence of arbitrators on ISDS outcomes clearly goes beyond easily measurable characteristics such as experience and appointment bias. For instance, Schultz (2015) argues that the personal preferences and values of arbitrators as well as 'possible incentives, constraints and all manner of other determinants' influence arbitral decision-making. See also for a detailed discussion of the inputs of key actors, including arbitrators, into investment arbitration portrayed as a political system that transforms these inputs into ISDS outcomes.…”

“…In addition, we include several control variables to account for potentially important characteristics of respondent states as well as the home countries of private investors. Specifically, we follow Donaubauer and Nunnenkamp (2018) and account for the respondent state's 33 In a similar vein, Schultz andDupont (2014, p. 1157) argue that 'we only know whether a given case was won and by whom', whereas 'we are ignorant of the benchmark of rightful winners and departures from the benchmark'. These limitations notwithstanding, Schultz and Dupont (2014) regard (descriptive and econometric) examinations of ISDS outcomes to be useful.…”