Observations on Costs: A Response and Implications for UNCITRAL and ISDS Reforms

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Editor’s Note:  This week, we will be featuring several posts critically examining the UNCITRAL ISDS reform process, which held its latest Working Group III meetings in New York on April 2019.  Monday’s introduction from our Contributing Editor Anthea Roberts and UNCITRAL Academic Forum Chair Malcolm Langford summarized key points of contention raised by States as to the narrower procedural reforms to ISDS as the mandate of UNCITRAL Working Group III.  In Tuesday morning’s post and Tuesday afternoon’s post, Contributing Editor Anthea Roberts and her co-author Taylor St. John address geopolitical and ideological issues that affect ISDS reforms. Today we feature a response post from Academic Forum Member Susan Franck, author of the new 2019 book, Arbitration Costs: Myths and Realities in Investment Treaty Arbitration (OUP, 2019).

We are in the midst of a unique political, legal, and psychological moment. UNCITRAL Working Group III’s effort will have a legacy that affects discourse about international economic dispute settlement for decades to come. It was, therefore, with great interest, that I read the Academic Forum’s submission on EJILTalk! on costs, as costs are at the forefront of the debate.

International arbitration costs are part of what motivated my own research agenda. Whether it was my 2005 article, Legitimacy Crisis in Investment Treaty Arbitration, where I made claims about the costs of investment treaty arbitration (ITA) with a limited set of anecdotal information, or my later articles, Empirically Evaluating Claims and Rationalizing Costs, where I confronted the cold reality that I had not systematically tested my earlier assertions and instead corrected my error by offering data.

As my most recent book, Arbitration Costs, explains that ITA costs are “the dull knife that cuts both ways,” I found the framing of the cost-related mandate to be somewhat unfortunate, namely an exploration of “Excessive Costs and Insufficient Recoverability of Cost Awards.” Students of psychology know that the framing of questions affects the information sought, the processing of derivative information, and subsequent decisions. Rather than focusing on costs and cost recoverability generally—which are important concerns that should be of interest to all stakeholders—the evocative framing creates challenges for balanced and holistic analysis. As Chapter 2 of Arbitration Costs explores cognitive illusions, that likely influence debates about ITA and that my previous experiment with Anne van Aaken and others demonstrated affect arbitrator decision-making, it is vital to acknowledge that illusions of framing, negativity, and confirmation bias, among others could skew both the conversations and derivative choices at a critical inflection point. 

There are undoubtedly many thoughtful aspects of the post.  The most valuable relate to focusing on: (1) raw descriptive arbitration costs, (2) factors tribunals should consider in making cost assessments, and (3) highlighting the importance of security for costs. The observations nevertheless require a degree of caution and may benefit from rebalancing, lest policy reform presumably designed to be helpful nevertheless generate negative externalities.

Descriptive ITA Costs

The EJILTalk! post and the larger concept paper both discuss measures of central tendency (i.e. primarily average costs) for different ITA costs by reference to research from thoughtful practitioners. There is no evidence, however, that the previous research either included inflation-adjustments (to adjust for changes over time) or even standard deviations (to assess the potential degree of error and variance), both of which are critical elements to ensuring scientific integrity to quantitative claims. Failure to address those elements risks numerical figures being tossed about as immutable truths, rather than what they are: namely, historical snapshots that do not reflect the range of potential experience in an equivalent scale that permit an “apples to apples” comparison.

By contrast, Chapter 6 of Arbitration Costs (along with other chapters), explores the variance in the costs of investors’ legal counsel, states’ legal counsel, and the tribunal and administrative expenses. It does so by looking at an historical snapshot (with its own limitations) and adjusting all amounts for a common 2011-based inflation adjusted amount and providing a 2018-based adjustment. More importantly, Arbitration Costs expressly identifies standard variations, medians, and quartiles, so that stakeholders can understand the scope of the risk. Readers will be particularly interested in Figure 6.1 (page 207) which visually demonstrates the raw scope—and variance—of each of these three different arbitration costs, when they are visually lined up together on the same scale.

Yet, where our observations converge—and demonstrate a degree of alignment from the other research conducted over different time periods using different cases, measures, and tests—is that: (1) ITA costs are not insubstantial, and (2) the cost of each team of lawyers is decidedly larger than the cost of tribunals. In my December 2018 submission to ICSID, I explained: “Chapter 6 demonstrated ITA costs were non-trivial and relatively high (particularly counsel cost), creating access to justice and equality of treatment challenges. The combined cost of all parties’ lawyers, arbitrators, and related expenses was roughly [using 2011 inflation-adjusted figures] US$10-11 million on average and a median net cost of around US$6 million. Compared to outcomes in Chapter 5, costs were proportionately large. Yet, despite the scale of fiscal risk in disputes affecting state sovereignty, and in contrast with damage explanations, tribunals regularly failed to particularize basic ITA costs.”  Beyond the expansive discussions in Chapter 6, this publicly available statement, which unfortunately was omitted in both the blog post and the concept paper, was memorialized in Chapter 9 of Arbitration Costs (pages 299-300) along with 2018 inflation-adjustments contained in a footnote.

Whether or not these fees are “excessive” or should result in transferring adjudication to alternative forums, however, is a different matter. Both the post and concept paper state that “For the respondent State, however, these costs will normally be higher than if the dispute had been processed through its national courts only.” Yet neither source contains authority for that assertion. If lawyers will be required to bring and defend claims irrespective of forum, and their costs represent the outsized risk on the costs front, there is no explanation for why switching forum would directly lead to materially different costs. It may be that litigation costs in some national courts could be cheaper, but it also might be that other national courts might be more expensive. It may depend, entirely, on the national court examined. There was no comprehensive assessment to explain variation among national court systems on cost data to permit such direct assertions, to say nothing of how different practices, whether discovery breadth, case management opportunities, settlement incentives, or structural certainty about the meaning of legal concepts, may be the real cost drivers. Moreover, it is possible that procedural practices of domestic civil procedure systems may not be available to international investment adjudication, possibly making the analogy inapt.

One might also observe other examples (admittedly potentially unrepresentative) that provide alternative cost baselines. For example, Arbitration Costs recalls that, in U.S.-based tobacco litigation, the cost of counsel was originally US$8 billion but subsequently reduced to US$1.5 billion. Or, in another U.S.-based example, where investigations of arguably problematic government conduct launched probes worthy of public attention and expenditure of funds, the Washington Post explained, “Justice Department documents . . . show the [Mueller] investigation has cost $16.7 million through the first 10½ months of the investigation, considerably less than the $47.4 million spent investigating the Iran-contra affair or the $69 million spent on the independent counsel investigation of President Bill Clinton from 1994 to 2002.”

The better course is therefore to first identify the actual descriptive costs associated with ITA, and then reframe that baseline against various potential adjudication systems for comparison and identify the most apt analogy. Doctrinally, it may be that international economic law dispute settlement “cousins,” like the WTO (where two scholars estimated counsel litigation that reflected amounts lower than ITA) may be the most appropriate cost comparator, but even then, the scholars observed data is difficult to locate and required using “back-of-the-envelope calculations.” By offering a set of direct comparators, this would offer states a more balanced perspective to facilitate how to choose among the options in their choice matrix.

Standards for Cost Shifting

One of the most intriguing aspects of both the blog post and concept paper was its willingness to explore opportunities for decreasing the time to settlement disputes and tribunals’ standards for cost shifting. I applaud the efforts to decrease time to resolution, as it was the only variable tied to all ITA costs; but there is also a potential trade-off that comes with shorter time periods and other procedural curtailment. It may well be a trade worth making, but parties—particularly states drafting terms—should be fully conscious of the restrictions they may be taking on board.

The blog post thoughtfully wrestles with ICSID’s reform efforts on the factors affecting cost-shifting which, for the first time, would require ICSID tribunals to brief costs, to include costs in the award, and to articulate the legal reasoning justifying the costs assessment. See March 2019 proposed ICSID Rules Rule 47 (defining ITA costs); Rule 49 (requiring submissions on costs); Rule 50 (articulating procedures and factors for making cost assessments); Rule 58 (defining required content of awards, including a reasoned decision on the allocation of costs).

The blog and concept paper both observe that ICSID proposes consideration of core factors, namely: “‘(a) the outcome of the proceeding or any part of it; (b) the parties’ conduct during the proceeding, including the extent to which they acted in an expeditious and cost-effective manner; (c) the complexity of the issues; (d) the reasonableness of the costs claimed; and (e) all other relevant circumstances.’” The critique is that an additional factor is necessary, namely the “reasonableness of amount claimed.” This factor is, however, unnecessary as it is already functionally implicit in one of the express factors. The ICSID proposal, as the post mentions, does require tribunals to focus on “the outcome of the proceeding or any part of it”.  Outcome, or individual subcomponents (i.e. determinative phases or specific petitions to tribunals, including disclosure disputes), are thereby fundamental aspects that tribunals must consider, lest they violate their own duties to conduct the proceedings in good faith. Put simply, outcome can and does involve relative success and the efficacy of investors’ claims. Adding a “new” variable in this regard is superfluous, duplicative, and potentially injects confusion into the process of adjudicating costs.

As my own research on outcomes reveals, understanding the variable of “outcome” requires an appreciation of different potential definitions.  One way of understanding an “outcome” involves the blunt assessment of: which party is required to pay any money at all? Another method of assessing outcome is: what is the amount awarded? Yet, the preferable term, as it considers both an initial claim and ultimate tribunal output, is: what was the claimant’s relative success. As such, relative success – which expressly requires an assessment both of the amount claimed and the extent that figure matches the ultimate result – is a measure of outcome that inevitably embeds initial claim reasonableness as an integral element of cost assessment. This is why scholars of cost shifting, including Lars Welamson, have for decades encouraged tribunals to explore relative success in assessing costs and costs shifting.

Similar to what I originally found in 2011 and as replicated in Arbitration Costs, the data reflected that some of the most fundamental variables influencing tribunals’ rationale of cost assessments were outcome-related and relative success was a fundamental element of assessment. In Arbitration Costs, parties’ relative success was one of the two most dominant characteristics in undermining tribunals’ cost assessments. In other words, the very reasonableness of amounts claimed, even without a rule reform, has been imbedded into the assessment of many investment arbitration cases.  If what is desired is a regulation of amounts claimed to prevent unmeritorious claims, the better course involves regulating pleading directly, perhaps requiring investors provide preliminary expert damage assessments when submitting a request for arbitration.

When it comes to factors for cost shifting, the better question is: what is not necessarily a regular feature of tribunals’ decision-making and is not currently part of the rule reform process but nevertheless involves an area where incentivizing behavior could prove normatively useful. To that end, I would – much like my 2011 analysis and advocacy in Arbitration Costs – encourage those re-drafting rules or creating procedural frameworks to consider other elements, particularly those related to justice. There generally has been minimal tribunal focus upon factors like party equality of arms or party settlement efforts.  Those strike me, at least, as fruitful areas for potential reform, and they are based upon data.

Security for Costs

Choosing to focus on Third Party Funding (TPF), the blog discusses security for costs in two sentences. I leave conversations about TPF to experts in that field or those with better data about and experience with TPF, to enable a more thoughtful and balanced conversation and note the concept paper contains more helpful details about security for costs, including how it might vary in options for structural reform.

One of the two sentences in the blog about security for costs calls for “more detailed rules or guidelines on examining the requests for security for costs should be included in arbitral rules to prevent the abuse of that tool and avoid the undue increase of the overall costs of proceedings.” The larger concept paper is well worth reading, as it includes more information on ITA cases and notes that, although most treaties do not include express assessments, several creative treaties have begun to address security for costs directly, including the EU-Vietnam FTA. There is also a brief nod to the proposed ICSID Rules, although it fails to discuss the substantial evolution of the Proposed Rule 51 during the consultation period.

Initially ICSID’s August 2018 recommendation on security for cost formalized tribunals’ express discretion to order security for costs (and distinguished it from other forms of pre-judgment security). There is also a detailed commentary and discussion, in pages 229-36 of the August proposal, that sets out ICSID precedent and policy considerations justifying security for costs, which is essential reading for anyone interested in the topic. Yet, the grounds for a tribunal exercising its discretion to order security were highly limited, only considering a “party’s ability to comply with an adverse decision on costs and any other relevant circumstances.” Perhaps in response to criticism by myself and others, in the March 2019 draft, ICSID made fundamental and helpful changes to its proposed Rule 51 to expand this list of criteria to include: willingness to comply with an adverse decision on costs, the effect of providing security on the ability to pursue a claim or counterclaim, and conduct of the parties. This list of criteria is a welcome clarification of factors that, at least at ICSID, can be used to guide and constrain arbitrator discretion. And to the extent that states wish to tighten the criteria further by including provisions in underlying investment treaties, they are free to do so. 

These observations beg a fundamental question, namely: what is the best regulatory method for addressing security for costs in investment dispute settlement? One legitimate argument is that procedural rules—whether from an arbitral institution or an investment court—should not attempt to regulate security for costs. Rather, such regulation should be left directly within the prerogatives and control of states, which are in the best position to immediately define and identify the matters most important to states in regulating and delineating the content and variables required to secure security for costs. Alternatively, one might say that this is only a procedural matter which affects the costs of proceedings, which is uniquely a function of the administration of each case; and as such a housekeeping measure to ensure the efficacy of the underlying dispute resolution, falls purely within the mandate of institutions. A third way, however, suggests that stakeholders might benefit from a hybrid approach. Namely, there is value in letting institutions like ICSID revise their rules to assess how tribunals respond to the parameters and then also provide more direct treaty guidance as a corrective and exercise of sovereignty.

At the end of the day, the submission by the academic forum is a thoughtful place to start, but like many academic projects, is the beginning of conversation designed to create enhancements in systems of international justice and dispute settlement.

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