The Bilateral Arbitration Treaty Regime: Some ‘BUTs’ for Thought

By: Tania Singla

Gary Born, one of the world’s most renowned names in international commercial arbitration, has brought a rather radical idea to the arbitration table. In a recent series of speeches titled, BITs, BATs and BUTs: Reflections on International Arbitration’, he proposed borrowing the idea of bilateral treaties from the investment treaty regime and incorporating it within the fabric of the international commercial arbitration in the form of Bilateral Arbitration Treaties (BATs). His proposal envisages a bilateral agreement between two states whereby a default mechanism of international commercial arbitration (ICA) is legislatively provided for all business disputes between corporate entities belonging to these two states. These BATs would work in an “opt-out” fashion; the parties are free to contract out of the application of the treaty if they so desire. He envisions a minimalistic framework provided within the text of the treaty that is optimally limited to the choice of Arbitral Institution Rules, which would then naturally become a part of the treaty itself, similar to an ordinary arbitration agreement. The Arbitral Institution Rules (preferably the UNCITRAL Rules), in his opinion, are self-sufficient for dealing with the “uncertainties” of the process of international commercial arbitration – the seat, the choice of law, the arbitral tribunal et al. Given those multinational entities across the globe are increasingly choosing ICA as the favoured mode of dispute resolution in international business contracts, this proposal will, in all probability, gain traction over time. Recently, a model BAT was even released for public comment.

If you have heard or read the speech, you would have found that Mr. Gary Born indeed makes a very persuasive case as he deals with every ‘BUT’ that you and I could possibly have.  Nonetheless, there are two important ‘BUTs’ that deserve our time and attention viz. party autonomy in the BAT regime, and exclusion of the ordinary remedies in national courts.

Party Autonomy in the BAT regime

Party autonomy and consent to arbitration is the grundnorm of the arbitration framework. Quite evidently, the idea of two states choosing ICA and the accompanying Rules as the default dispute resolution mechanism for their national corporate entities strikes at the heart of this grundnorm. Mr. Born addresses this in his lecture and suggests that “consent, especially in the context of arbitration comes in a variety of different shades”. He points to the idea of “constructed consent” underlying the Bilateral Investment Treaty (BIT) where the treaty provides a standing offer for arbitration to any investor of the other state party who accepts it. It is certainly a compelling argument but when one delves deeper, it is actually a flawed comparison. The BIT preserves the idea of “party autonomy” because the treaty is negotiated by at least one of the future parties to the arbitration, who agrees to extend a standing offer for arbitration. Admittedly, the investor does not get an opportunity to negotiate the modalities of the arbitration framework but since he is the one who takes the call to initiate the arbitration, it seems quite fair to say that he, at the very least, gives his consent to the choice of arbitration as the dispute resolution mechanism. Thus, the BIT attempts to strike a balance by taking into account the consent of both parties and this renders the BIT quite unique in its form. A prime factor for the spike in the number of investment treaty arbitrations is that investors find an arbitral tribunal more neutral and impartial against the state party as compared to the national courts of the said state. Whether the BAT regime can actually borrow from the BIT regime and yet preserve the core idea of party autonomy remains doubtful. In the case of a BAT, the two states, i.e. non-parties to any future arbitration, negotiate the treaty to bind their domestic corporate entities to utilizing arbitration as a default mechanism, thus eroding the opportunity for these companies – who are the actual parties –  to consciously exercise the choice for arbitration and customize the modalities of the arbitration to suit the needs of the individual company rather than the dominant interests of the corporate sector that the state will take into account. Unlike the BIT where investors needed arbitration over national courts where they were victims of a strong pro-state bias and there was no other reliable alternative, companies do not face the same conundrum. Therefore, the same acute need to find a “betwixt and between” alternative that drove the BIT does not support the BAT. So, is the opt-out provision sufficient to preserve party autonomy? This could not be the case because the idea of arbitration envisages party consent to get into arbitration and undergo the process out of their own volition, not to get out of it. The charm of arbitration is its element of consent and the moment it becomes something that parties are compelled to choose, it will lose its charm just like litigation.

Exclusion of the Ordinary Remedies in National Courts

Another important legal hurdle that needs to be tackled by BATs is with respect to their legal validity. Access to the courts is recognized as an important right within the legal framework of a vast majority of states. When states agree to create a default arbitration mechanism for all business disputes between corporate entities within their territory, their governments are, in effect, closing the doors of their domestic courts for these entities who are juristic persons entitled to these rights (unless of course these entities opt-out of the treaty and expressly choose to arbitrate in some other way or else litigate). Unlike ordinary arbitration agreements where parties expressly agree to waive their rights to litigate (only if there is local arbitration legislation that allows them to do so), the situation in BATs is characteristically different. Here, the states foreclose the right to litigate where the parties have not expressly agreed to a dispute resolution mechanism. This has greater implications. The BATs would have to be backed by legislation emanating from the domestic parliaments in all states that seek to enter into BATs and even then, in several states, such legislation may be vulnerable to legal challenge. Things have never been so uncertain with arbitration because until now, states have only facilitated arbitration through their local arbitration legislation and not mandated it in any form. There is no dispute that the right to access courts is a right capable of waiver but it is for parties to waive these rights, and not their states.

(Tania is a student at National Law University, Delhi.)

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