The project analyzes the rising phenomenon of transnational arbitrations between private economic actors and public law bodies (private-public arbitrations) as a mechanism of global regulatory governance. Breaking with the prevailing view that arbitration is only a means to settle individual disputes, it hypothesizes that arbitrators themselves exercise public authority, mainly in two regards: first, by reviewing government acts as to their legality, and second, by incrementally making the rules that govern public-private relations. This takes place, it is hypothesized, rather independently of specific domestic legal systems and their democratic processes; arbitral tribunals, in other words, become important transnational law-makers. The body of law they develop is what the project designates as “lex mercatoria publica” – in allusion to the a-national law generated by arbitral tribunals in international private-private disputes widely called “lex mercatoria”. Private-public arbitrations constitute a largely overlooked field of global regulatory governance even though it affects questions of central concern for the public interest. It affects states the world over and has an equally transformative effect for public governance as the europeanization and internationalization of public law. Against this background, the project will provide a comprehensive (historic, sociological, political, economic, and legal) perspective on private-public arbitration as governance and its legitimacy. It will describe and analyze the content of the lex mercatoria publica by empirically researching into the modern and historic practice of private-public arbitration and develop – mainly through comparative law research ‑ normative criteria to assess the legitimacy of private-public arbitration in democratic societies that are based on the rule of law. Until December 2014, the Project was hosted by the Max Planck Institute. After the Project's transfer to the University of Amsterdam in January 2015, the Max Planck Institute remains involved as an additional beneficiary.
Background: Globalization, Privatization, and the Legitimacy of Arbitration as a Governance Mechanism
Globalization fundamentally transforms the relationship between states as representatives and fiduciaries of the public interest and economic actors. What was once understood as a hierarchical relationship, characterized by the unilateral exercise of public authority through legislation, administration, and adjudication, increasingly gives way to varying forms of cooperation between the state and private actors, prompted by the privatization of public functions and increases in public-private-partnerships. This “cooperative paradigm” of state-market relations is precipitated not only by the Washington consensus and the voluntary retreat of the state, but by the increasing dependency of public bodies on private finance and expertise when providing public goods in infrastructure, energy, health, education, etc. It is a policy that is deeply enshrined, for example, in the EU, as reflected in the Europe 2020 strategy (see COM(2010)2020 and COM(2010)546). Public-private cooperation is further precipitated by the fact that domestic law and governance themselves become a negotiable commodity that is subject to competition between states in a globalized market. Competition in taxation, corporate law and corporate governance, environmental regulation, or labor standards are but a few examples that illustrate the dependency of states on acceptance by and cooperation with private economic actors.
The cooperative paradigm affects not only public policy- and decision-making through legislation and administration, but also challenges established ideas about adjudicating disputes between the state and private economic actors. Instead of being resolved in domestic courts, such disputes face pressure towards both internationalization and privatization. Thus, since the beginning of the 1990s we witness a considerable rise in alternative methods of dispute settlement, such as mediation and conciliation, but above all arbitration through party-appointed arbitrators who can settle disputes with binding force in place of the otherwise competent domestic courts. Such disputes are based both on international treaties that provide for the settlement of private-public disputes, above all under international investment treaties, but also on arbitration clauses in contracts between states or state entities and private economic actors.
This development is little problematic when arbitrations only involve private commercial actors. By contrast, when disputes between the state or state entities and private economic actors are involved, matters are fundamentally different. In such cases, fundamental principles of constitutional law – above all the principles of democracy and of the rule of law – are affected because government acts are controlled, and the concrete delineation of private rights and public interests is drawn, not by democratically legitimized domestic courts, but by party-appointed one-off arbitral tribunals. Arbitrations against Uruguay and Australia concerning plain packaging of cigarettes, against Germany’s nuclear power phase-out, against Argentina’s emergency legislation enacted to tackle the country’s 2001/2002 financial crisis, or against the United States, Canada, and Mexico concerning environmental or labor standards illustrate the significant public-policy implications of private-public arbitrations.
These public policy implications are all the more significant as arbitration proceedings do not conform to public law safeguards that are in place in public law adjudication at the domestic level, such as transparency of the proceedings, possibilities for third-party participation, limitations on damages as public law remedies, or the need for public law expertise of adjudicators. Instead, arbitration generally follows private law rationales, such as party autonomy and confidentiality of the proceedings. This is critical because arbitral tribunals do not only settle individual disputes, but increasingly become the preferred method of resolving disputes between the state and the private sector in important fields such as energy, public utilities, and infrastructure. Arbitration threatens to replace domestic courts in these matters, posing challenges for the concept of the rule of law. Two interrelated dangers exist: first, that the rise of arbitration results in the loss of jurisprudence and case law, an important public good necessary for legal certainty and legal security; and second, that arbitrations through one-off arbitral tribunals result in incoherent decisions, which equally threatens the predictability of how disputes between the state and private actors would be resolved. Both factors cast central tenets of the concept of the rule of law, and hence the legitimacy of private-public arbitration in general, into question. Furthermore, the rise of arbitration will have the inevitable effect that arbitral tribunals increasingly concretize and develop the normative foundations governing state-market relations. They may even redefine through their dispute settlement activity the relationship between private rights and public interests and bypass public policy choices made by democratically elected public authorities.
Research Questions and Aim of the Project
The rise of transnational private-public arbitration thus raises important issues as to its legitimacy. How are arbitrators in such proceedings legitimized? What powers do they, what powers should they have? What is their proper role when reviewing government acts? How do they actually decide cases and what is the appropriate normative framework to apply? Do they develop a uniform jurisprudence that is predictable or are their decisions incoherent and inconsistent? Is the consent of the disputing parties sufficient to legitimize private-public arbitrations or are farther-reaching transparent and democratic processes necessary as a source of legitimacy? Understanding what arbitrators do, according to which rationales they decide, and how they exercise power over states and state entities – in short: understanding how transnational private-public arbitration functions as a governance mechanism and answering to the legitimacy concerns it raises ‑ will be crucial for many areas of public-private cooperation and thus for the gestalt of the state-market relation and social order in a global market economy more generally.
It is these questions that the research project aims to answer by analyzing private-public arbitrations under investment treaties and public contracts, the substantive and procedural standards applied by arbitral tribunals, by looking in a comparative fashion at the normative framework set up by both domestic and international public law. Ultimately, this is hoped to lead to the formulation of both general principles regarding the conduct of private-public arbitrations as well as a restatement of the rules and principles applied by arbitral tribunals in private-public arbitrations. This analysis of the lex mercatoria publica should enable arbitrators, judges, and other international and national decision-makers to render more predictable, more circumspect, overall better, and fairer decisions concerning private-public arbitration. It will provide solid foundations for enhancing transnational private-public arbitration as an institution of global regulatory governance in the interest of better and more efficient cooperation between states and private economic actors in the global economy.
Until the end of 2014, the Max Planck Institute served as the host institution for the Lex Mercatoria Publica project. Since January 2015, the University of Amsterdam has become the host institution.
Contact: Stephan Schill