Contextualizing Cost-Shifting in Investment Treaty Arbitration
48 Pages Posted: 23 Mar 2018 Last revised: 8 Sep 2020
Date Written: March 22, 2019
Legal scholars devote a great deal of energy to understanding how judges allocate expenses in litigation — rules designed to encourage lawyers to bring cases, to discourage socially excessive litigation, or to sanction undesirable behavior by litigants or their legal counsels. In recent years, the scholarly debate has narrowly focused on empirically evaluating and comparing the American rule (the ‘costs lie where they fall’) and the English rule (the ‘loser pays the costs’). What the debate has missed, however, is a conceptual understanding of the broader factors that influence the choice between them. In other words, scholars have focused on the ‘seed’ (rule) and not on the ‘soil’ (context).
In this Article, I use a discrete area of litigation as an entry point into this debate. Focusing on the uniquely discretionary (or ‘judge-centered’) litigation system of investment arbitration panels, I explore the practice of cost-shifting when dealing with manifestly unmeritorious claims – a setting where the theory unambiguously predicts cost-shifting. What makes this narrow domain particularly interesting is that the theoretical prediction of the application of the English rule sharply contrasts with the actual practice in the field, where the American rule dominates. The contrast between theory and practice can be used to predict some of the factors that may constrain discretion beyond formal rules.
Based on empirical data obtained through descriptive statistics, interviews with arbitrators, case studies, and two survey experiments, I argue against the increasingly narrow debate on litigation costs and for the contextualization of cost-shifting. As I explain, part of the problem is that the current debate over optimal fee-shifting rules very often presumes that adjudicators have no affiliation with the litigating parties, that the rules operate in systems unaffected by social pressures, and a symmetrical scheme in which both parties can bring legal claims. However, many systems of litigation operate outside of this narrow construction, opening the door to a wide variety of context-specific factors that affect the independence, accountability, and transparency of the process of rule application. In investment arbitration — the case at issue — each party nominates one of the adjudicators, who face strong social pressures in a context where only investors are generally entitled to bring claims. These factors, I argue, interact with the current discretionary rule, which could be improved in clear ways to incentivize a more robust case law. At a theoretical level, I advance the argument that optimal fee rules should account for the settings in which the adjudication processes operate and propose a way to think about these factors for future research. In other words, to focus more on the ‘soil’ and less on the ‘seed’.
Keywords: fee shifting, cost-shifting, international arbitration, American rule, English rule, empirical studies, litigation costs
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