ABOUT THE AUTHOR: Daniel Boon, Associate at Stephenson Harwood LLP and Aleksander Kalisz, Associate at the Centre of Construction Law & Dispute Resolution
Introduction and background
While arbitral tribunals are usually formed to resolve one dispute only, it is not uncommon in investor-State dispute settlement (“ISDS“) for an individual to sit as an arbitrator on one day and a party representative or expert on another. This phenomenon is known as double-hatting. This raises particular concern in ISDS because ISDS cases are usually more public than private. Further, because ISDS cases usually involve sovereign States and domestic public policy, there is an argument that arbitrators must display greater neutrality.
Stemming from the fear of a conflict of interest between arbitrators’ overlapping responsibilities, there are two broad objections to double-hatting in ISDS.
First, double-hatting may undermine arbitrators’ independence and impartiality, as demonstrated by ICS Inspection and Control Services v Argentina. Here, the respondent successfully objected to the arbitrator’s law firm acting as counsel for the same investor in another parallel arbitration against the same respondent. Beyond this textbook example, the big question is: where do we draw the line? After all, the difficult objective of regulating double-hatting to eliminate actual and perceived bias is made harder by the subjectiveness of what amounts to bias.
Secondly, by putting arbitrators’ ethical priorities into question, double-hatting undermines the ISDS reputation. This plays into the criticism of poor consistency of ISDS decisions caused by the lack of a system of precedent. This gives rise to a concern that decisions of the individuals who double-hat may be influenced by their own agenda.
In an effort to address double-hatting, the United Nations General Assembly passed a resolution, requesting UNCITRAL and ICSID to collaborate on a regulatory solution. The product is the Draft Code of Conduct for Adjudicators in International Investment Disputes, the third version of which was released in September 2021 (the “Third Draft Code“). This article considers whether the Third Draft Code may be effective in addressing the double-hatting issue.
Key takeaways – Draft Code of Conduct for Adjudicators in International Investment Disputes
Article 4 of the Third Draft Code sets out the limitation placed on “Adjudicators” taking on “multiple roles“. Notably, while the earlier draft Code only provided for an absolute prohibition, the modified Article 4 offers three potential solutions.
The first option is a total ban on double-hatting (the “Full Prohibition Option“). The narrower suggestion is to prohibit arbitrators from taking on multiple roles in “another International Investment Dispute case“. The broader alternative wording prohibits acting in “any other proceeding relating to the application or interpretation of [an][the same] investment treaty“. This may cover proceedings outside the investment dispute itself, such as enforcement proceedings. Nevertheless, in both cases, parties to the dispute can consent to an arbitrator wearing two hats.
The second option provides for a middle ground (the “Modified Prohibition Option“). Under the Modified Prohibition Option, without party consent, an adjudicator is not permitted to take on multiple roles in proceedings involving: (i) the same measures; (ii) the same legal issues; (iii) one of the same disputing parties or a related party; (iv) the same treaty. Whether the criteria are cumulative (“and”) or independent (“or”) is still open for discussion. It seems unlikely that the factors will be cumulative, as this would effectively render the prohibition near-impossible to be triggered. The list also appears to be exhaustive, providing legal certainty to all.
The third and last option is the most lenient. It simply requires adjudicators to disclose whether they are taking on multiple roles in cases involving the same or related parties, the same measures, the same legal issues (or, alternatively, “substantially” the same legal issues) (the “Full Disclosure Option“).
Evaluating the Third Draft Code
The Full Prohibition Option appears best placed to solve the problem of double-hatting as it addresses the root of the problem. However, this option raises other concerns, as explored below.
In terms of the remaining options, it seems that the Full Disclosure Option is unlikely to resolve the issue. Without obligating further actions, the mere disclosure of multiple roles is unlikely to address concerns of arbitrators’ independence and impartiality as well as the ISDS’s legitimacy crisis.
Proffering the middle ground, the Modified Prohibition Option attempts to afford some flexibility while retaining the prohibition element. Its effectiveness, however, depends on how the four criteria therein are defined. The authors expect that ICSID and UNCITRAL would clarify this Option in upcoming drafts of the Code.
The practical effect of an unclear definition can be illustrated by the Telecom Malaysia v Ghana case, where the late Professor Emmanuel Gaillard‘s role as arbitrator was challenged by the respondent. He was acting as counsel in another investment arbitration (Consortium RFCC v Morocco), where he sought the annulment of an award on which Ghana was relying in the Telecom Malaysia case. Based on a cursory review of the criteria set out in the Modified Prohibition Option, it is unclear which would apply: the measures sought were not the same; the disputing parties were not related; the treaties involved were different. It may be that because there were “substantially the same legal issues” concerning the award for which annulment was sought or relied on, but this requires further guidance on the extent of “substantially“.
Article 11 provides for the enforcement of the Third Draft Code. It relies primarily on voluntary compliance and, if that fails, on the disqualification and removal procedures in the applicable rules or treaties. Therefore, the success of enforcement of Article 4 depends on the success of the underlying rules and treaties. This might lead to diverging interpretations and deepen the legitimacy crisis.
The above also means that in non-ICSID disputes, which have a seat, some of the enforcement might rest with domestic courts (as was eventually the case in Telecom Malaysia v Ghana). In this scenario, interpretation of Article 4 would depend on domestic legal categorisation and, coupled with the reliance on voluntary compliance, the entire Draft Code risks being reduced to a mere soft law solution.
The reference by Article 11 to applicable rules would also increase the role of arbitral institutions in deciding disqualifications. Parties could trigger a “challenge the arbitrator” mechanism where double-hatting is one of the arguable grounds for disqualification. However, such challenges were rarely successful in the past and, in the authors’ view, the soft law solutions of the Draft Code are unlikely to prove more robust (see, e.g., 2018 ICSID Annual Report). Therefore, the lack of harder enforcement mechanisms in the Third Draft Code might weaken its deterrence effect.
- Practical considerations
Hard-lined restrictions on double-hatting also raise practical considerations. At the outset – the problem stems from the very nature of arbitration. Given the upward trend in ICSID cases since the 1990s, the solution may come too late, and double-hatting could have already been institutionalised in ISDS practice. Perhaps the only solution is to reinvent the wheel altogether, rather than internal reform of ISDS. The establishment of a permanent court dedicated to ISDS, such as the Multilateral Investment Court currently debated by UNCITRAL, might be one such solution.
Further, practitioners rarely commence full-time arbitrator careers overnight. It is often a slow appointment-by-appointment process. This fuels the ISDS problem of poor diversity of arbitrators, discussed empirically, for instance, by Langford and others. Other commentators add that absolute prohibition of double-hatting might stifle diversity and exclude junior practitioners completely. It, therefore, seems that the Full Prohibition Option is a double-edged sword, trading diversity for some legitimacy. The authors do not consider that this is a price worth paying. While absolute prohibition of double-hatting might enhance tribunal neutrality, restricting diversity would worsen the legitimacy crisis of ISDS. Most ISDS arbitrators tend to be Western European or Northern American, while a significant portion of respondent States are either African, Asian, or South American (see ICSID 2021-2022 caseload statistics).
The authors observe that a degree of double-hatting is unavoidable in arbitration. It is a by-product of privatising dispute resolution and transferring decision-making to non-permanent tribunals. The effectiveness of the Full Prohibition Option is outweighed by other considerations. Its rigidity might raise questions concerning enforcement (particularly in non-ICSID cases) on who should wield the authority to dismiss arbitrators. Secondly, it would have severe practical implications, impacting the diversity of the pool of arbitrators.
The authors’ view is that the Full Disclosure Option affords too wide a margin for interpretation. It prompts the arbitrators themselves to decide what to disclose and the parties to exercise judgement about the disclosure. Such subjectivity might end before domestic courts in non-ICSID cases.
That leaves the Modified Prohibition Option. Although it does not entirely avoid the downfalls of its cousins, it appears concrete enough to send a clear, exhaustive, and arguably more certain message as to what constitutes impermissible double-hatting. The fact that it contains an exhaustive list of conduct suggests a greater ease in enforcement and ensures some legal clarity for the parties. Nonetheless, the authors agree with the Third Draft Code’s explanation of changes at paragraph 61, which recognises that the criterion listed by the Modified Prohibition Option should be better defined before implementation.
About The Authors
Daniel Boon is an associate at Stephenson Harwood LLP in London. He specialises in international commercial arbitration, and has a particular interest in investor-state dispute resolution.
Aleksander Kalisz is a research associate at the Centre of Construction Law & Dispute Resolution at the Dickson Poon School of Law, King’s College London. His research focuses on construction law, arbitration and international economic law. Aleksander previously worked as a paralegal at Stephenson Harwood LLP in the commercial litigation team.