Double Hatting: Challenging the International Investment Dispute Resolution Mechanism

By: Divij Jain (Maharashtra National Law University, Mumbai)


INTRODUCTION

International arbitration has become the primary dispute resolution mechanism for international investment disputes between investors and sovereign states. In today’s time, arbitral ‘precedents tend to mould the arbitral reasoning of subsequent cases. However, the prevalence of double-hatting has raised potent questions about its legitimacy. 

Double-hatting occurs when an individual plays the role of both an arbitrator and a legal counsel simultaneously in different cases. The very definition of double-hatting conflicts with the idea of impartiality while deciding on a legal issue. Moreover, the practice is so deeply ingrained at an institutional level that it has caused other ancillary problems such as elitism and arbitrator challenges which, in turn, have raised questions on the lack of diversity and also slowed the arbitral proceedings, thus impairing the main advantage of opting for arbitration rather than litigation.

Lately, Bilateral Investment Treaties (“BITs”) have aimed to resolve this issue by adding a clause that expressly disallows the practice of double-hatting. Moreover, some institutions have paid heed to this crisis and disallowed such practice by adding a clause to that effect in the relevant rules. This seems to be the new normal since a blanket ban seems unthinkable in the near future. However, alternate solutions do exist which have the potential to alleviate the current scenario.

LEGITIMACY CRISIS AND OTHER ANCILlLARY ISSUES

Empirical studies have proved the prevalence of double-hatting. In 47% of the cases of the International Centre for Settlement of Investment Disputes (“ICSID”), the leading institution in resolving investor-state disputes, at least one arbitrator was acting as a legal counsel in another international investment arbitration. Similarly, in 11% of the ICSID cases, at least one legal counsel, of either side, was simultaneously acting as an arbitrator in another international investment arbitration. These numbers have the potential to cause distrust amongst the dispute resolution seekers and turn to the traditional mechanism of litigation. This distrust lies at the root of the legitimacy crisis and stems from the notion of impartiality and neutrality as practiced in the judicial setting of most, if not all, jurisdictions.

The notion of impartiality has raised the problem of ‘issues conflict’. There are many ways in which such conflicts may arise when double-hatting is being practiced. In investment disputes, the primary dispute is regarding the interpretation of the BITs. Since, these BITs do not differ much in substance, the reasoning behind one arbitral award may significantly influence the other. An arbitrator, who acts as a counsel for a party in another case, would reason the award in such a way that it would inevitably support his arguments put forth in the case where he/she acts the counsel. Similarly, the arguments put forth by the counsel in one case would influence the reasoning behind an award in another case. These instances are not merely theoretical. A number of cases like Vivendi v. Argentina and Telekom Malaysia v. Ghana, highlight the practical relevance of these instances. Any reasonable observer would believe that such reasoning was vitiated by self-bias. Moreover, IBA Guidelines on Conflicts of Interest in International Arbitration (“IBA Guidelines”) only require a likelihood of impartiality to preclude the arbitrator from deciding over the matter. These are mere guidelines and do not create any legal obligations. However, with sovereign states involved, interests of multiple actors at stake and the public nature of investment arbitration, any likelihood of impartiality too would have the effect of causing a legitimacy crisis.  

The practice of double-hatting has contributed to other supplementary issues. One of them being the problem of ‘elitism’. Elitism is the practice of rule by a few select individuals. Double-hatting has permitted lawyers to act as counsels and arbitrators simultaneously. This in turn has opened the doors for quick quid pro quos wherein, the arbitrators passing an award in favour of one party are rewarded by a favourable award in another case where the roles of the counsel and the arbitrator have been reversed. Such a practice tends to create a club of arbitrators who juggle between the roles of arbitrator and counsel in a series of cases. Empirical studies have proved that such a ‘club’ exists with a membership of twenty-five individuals called the “power brokers” of which only two are women. These numbers also show the lack of diversity in the status quo. Only one-third of the arbitrators belong to developing countries and the average investment dispute arbitrator is termed as ‘pale, male and stale’.

Conscious or unconscious, bias is almost always strongly condemned. Article 57 of the ICSID Convention (“Convention”) provides for a party’s right to propose the disqualification of an arbitrator. However, the disqualification must be based on incapacity or manifest lack of moral and/or professional qualities as provided under Article 14 of the Convention. When an arbitrator in a case practices double-hatting, a party may propose to disqualify that arbitrator on grounds enunciated under Article 14 of the Convention. This entire process affects the speedy disposition of cases which is every arbitration institution’s prized possession.

The practice of double-hatting, therefore, is not only responsible for the questions raised on legitimacy but also for other subsidiary issues like elitism, lack of diversity and the slower disposition of cases.

CONTEMPORARY ATTEMPTS AT CURBING DOUBLE-HATTING AND THE WAY FORWARD

At present, arbitrator challenges have been the primary mechanism aimed at curbing double-hatting by the affected party. However, empirical studies suggest that these challenges are largely ineffective. The ineffectiveness can be traced back to Article 14 of the Convention which requires ‘manifest’ lack of moral character, thus maintaining a threshold higher than likelihood of doubt enunciated in the IBA Guidelines. Moreover, arbitrator challenges merely highlight and not address the larger question of the legitimacy issue.

On the contrary, some institutions have made amendments to the relevant clauses and eradicated the practice of double-hatting. The International Court of Justice (“ICJ”) has issued directions according to which practicing the role of a judge and a counsel simultaneously is incompatible and further states that such practice is against the sound administration of justice.  Court of Arbitration for Sports (“CAS”) followed suit by adding amendments which expressly bar the practice of double-hatting. However, these bars exist only within the confines of that particular institution and in no way compel other institutions to follow their footsteps.

With ICSID’s inaction towards the problem, parties have taken the matter into their own hands. Recent developments indicate that clauses barring double-hatting will be commonplace in the drafting of BITs. A striking example of this is section 8.30.1 of the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union. Similarly, the Netherlands Draft BIT contains a provision barring the practice of double-hatting in addition to a bar on party-appointed arbitrators. Unless developments occur at an institutional level, such an approach seems to be the new normal.

Another potential solution to this problem could be institutional appointment of arbitrators along with a bar to the practice of double-hatting. Over the years, investment arbitration has gained traction and is now touted to be the de facto judiciary in international investment disputes. The law, in majority of the nations, bars a judge from acting as a legal counsel. Moreover, parties do not have the autonomy to appoint judges but have to appear before the judge allotted the matter by the administration. This same practice, if adopted by the ICSID, can curtail the problem of elitism and bias, since the power brokers can be included in the judges’ roaster making double-hatting impermissible. Further, institutional appointment of even one arbitrator may alleviate the current scenario since it is the few power brokers that practice most of the double-hatting.

Thus with the recent developments in BITs and amendments made by individual institutions along with the potential of institution-appointed arbitrators becoming a reality, double-hatting may soon be an evil of the past.

CONCLUSION

The problems arising out of the practice of double-hatting must be taken seriously since they pose questions capable of affecting the bedrock of justice: impartiality. With this problem, numerous other issues have cropped up which in turn have furthered the primary problem of issue conflict. The public nature of international investment disputes make it all the more imperative to eradicate double-hatting.

Clauses disallowing double-hatting in new BITs suggest the sovereign states’ view-point on the issue of double-hatting and they certainly place neutrality while adjudication at the highest pedestal. Other institutions like the CAS and ICJ have also banned double-hatting for the same problems. More institutions may follow suit but this remains uncertain. In this void, institution-appointed arbitrators can effectively curb the issues in the short-run. However, an express bar to the practice of double-hatting across institutions seems the most plausible solution to eradicate the same from its roots.


(Divij is currently a third year B.A., LL.B (Hons.) student at Maharashtra National Law University, Mumbai with a keen interest in Arbitration. He can be reached at divijjain1303@gmail.com).

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