Social Capital and Arbitral Decision Making

Daphna Kapeliuk is a Senior Lecturer at Radzyner Law School, IDC Herzliya. Her research interest focuses on international arbitration in general and on arbitral behavior in particular and on private international law.

In his brilliant article “Social Capital in the Arbitration Market”, Sergio Puig seeks to map the social arrangements that result from interactions among ICSID arbitrators, as part of the social dynamics of international arbitration. Using data of all appointments of ICSID arbitrators made between 1972 and 2014 and applying a social network analysis methodology, Sergio sets out to understand the role of social capital in investment arbitration by relying upon proxy measures for social connectivity.

The sophisticated maps of the interactions among ICSID arbitrators represent a picture of the social landscape of the arbitration market. These maps are of great importance, especially since ICSID tribunals are composed of three arbitrators, and the dynamics between the arbitrators within the panels are important to understand the outcome of disputes. Sergio’s article joins prior scholarship that has claimed that ICSID arbitrations are handled by a closed group of arbitrators, sometimes referred to as “grand old men”, or “blue chip men”, who are being repeatedly appointed to decide large scale investment disputes. He argues that the network analysis of ICSID arbitrators “provides important evidence of a dense network”, in which a limited number of prestigious arbitrators increase in prestige, while the others remain in the periphery.

Sergio’s major contribution to understanding the interconnections among these arbitrators is presented in figures 4 and 6. Figure 4 focuses on the inside and outside of core ties and common cases of the 25 most central arbitrators, and figure 6 represents a sociogram of appointments of arbitrators (as presiding arbitrators) by other arbitrators to the same panels. These figures clearly show the strong ties between the central arbitrators within arbitration panels.
While the main objective of the article is to map the social dynamics of ICSID arbitrators, Sergio argues that the network analysis provides evidence that the dense network of arbitrators “reinforces prevailing norms and behavior and insulates its most important members from outside influence”. Although the social landscape presented in the article supports the claim that the core of the prominent ICSID arbitrators is small, that the article does not analyze how this network might reinforce prevailing norms and behavior. It does not define or analyze these terms. The remainder of this comment offers one possible mechanism for how the social structure might lead to the postulated outcome.
There is no doubt that the entry barriers to the investment arbitration market are extremely high. An arbitrator who wishes to be admitted to the core of the prestigious network, and thus repeatedly appointed, must establish a reputation that justifies a “membership” in the “club”. It is through his connections, behavior and decision making that he can establish such reputation. Sergio’s article focuses on the interconnections among arbitrators, but not on their behavior or decision making.

The process of arbitral decision making in collegial panels is composed of two intertwined phases: the first, individual, concerns each arbitrator; the second, collegial, relates to the dynamics between the panel members. In the individual phase, each arbitrator hears the parties’ arguments and examines the evidence presented to the tribunal in order to reach an individual decision on the dispute. In the collegial phase, the arbitrators deliberate and engage in bargaining regarding the outcome of the dispute. Bargaining within a collegial panel is not a trivial game. From an economic perspective, each arbitrator has to weigh the costs and benefits that his decision might engender. As a rational utility maximizer, an arbitrator has to choose a voting strategy that will increase his utility. He may adopt a decision pattern based on his status in the arbitration market in general and in the panel in particular. For example, an arbitrator who is part of a closed group of arbitrators, who are repeatedly appointed and appoint each other to sit on panels, may have a strong sense of commitment to peers, which may affect his decision making, and as a consequence the outcome of the dispute. In this respect, it is no surprise that the number of dissenting opinions in ICSID arbitrations is marginal.

Legal decisions are affected by social interactions, among other factors. Sergio’s excellent article is the first building block to understanding the effect of the social architecture of ICSID arbitrators on the outcome of investment disputes.