How Counsel Shape Arbitral Outcomes

This is an excerpt from a book, Counsel and Outcomes in Investment Arbitration, forthcoming from Cambridge University Press.

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This article explores the role of key actors in investment treaty arbitrations who are often overlooked: while many point to arbitrators as key decision-makers, I want to highlight the role of counsel in shaping arbitral outcomes. Despite their apparent importance, there has been a surprising paucity of scholarship on their role. The most relevant investigations to date explore the networks between law firms and arbitrators as well as how counsel may influence arbitral outcomes through the process of arbitrator selection. These investigations, however, are quantitative in approach. This allows them to draw (relatively) strong inferences but prevents them from shedding light on how counsel are involved in the arbitral process and, in turn, how counsel influence outcomes. The present study’s approach is qualitative. Leveraging this methodological choice, it provides answers to the unresolved “how” questions.

Based on 48 semi-structured interviews with investment treaty arbitrators and counsel, this study identifies four pathways of potential counsel influence: the establishment of facts and framing of the case; tribunal formation and arbitrator selection; advocacy; and collaboration with expert witnesses on questions of valuation. The goal of this study is not to argue that counsel will exert influence through each of these pathways in every case, nor to measure the size of the effect of these pathways. Instead, it sketches a picture of how counsel can, in principle, influence arbitral outcomes. 

Establishing the facts and framing the case

In investment treaty arbitration, establishing facts and framing a case does not take place in a vacuum or as a matter of course. Rather, players engage in fact-finding processes in a concerted effort to resolve a conflict. Each disputing party’s aim will typically be to advance a narrative favorable to its position. Players who are highly influential in establishing facts and framing the case will significantly affect which issues of legal interpretation will become important and, ultimately, how a case will be decided.

Against this background, this study argues that arbitrators’ role in establishing facts and framing a case is largely limited to two areas. First, they decide upon the appropriate standard of proof and evaluate the evidence before them. Second, where they see fit, they ask parties to clarify arguments or elaborate on the evidence. The importance of both tasks should not be underestimated. The standard of proof determines how arbitrators will assess the evidence. By asking questions, arbitrators indicate points that have not been (properly) made but may convince them to make a certain factual finding.

In turn, the bulk of the responsibility—and thus the influence—in establishing facts and framing a case rests with counsel. This enables counsel to deeply affect the very basis of an eventual award and the outcome of a case. At the very least, counsel must provide sufficient evidence for arbitrators to recognize the existence of an arbitral claim. To do this, they will investigate the factual circumstances leading up to the conflict, request documents from the opposing party, and marshal documentary evidence in support of a case theory. Parties’ cases will typically fail if counsel does not effectively fulfill these tasks. Experienced counsel will profoundly benefit from a better understanding of what documents should exist in either party’s archives and how they may find such documents.

The interview data concerning the importance of counsels’ work with fact witness testimony and cross-examination is ambiguous. Particularly regarding cross-examination, interviewees voiced contradictory views. Some consider this to be counsels’ single most important task, while others doubt the relevance of fact witnesses’ cross-examination altogether. For instance, one interviewee told me: “In the ordinary cause of action when you have a sort of more balanced tribunal … in many cases, not in all cases, but in a significant amount of cases, it comes down to the persuasiveness of fact witnesses under cross-examination,” while another said, “Whatever marginal gains you get in undermining [a witness’] credibility or contradicting them [does] not always outweigh their ability to, to contextualize documents and put forward a persuasive argument for the, for the tribunal.” 

For the time being, it is fair to conclude that while the impact of advocacy in investment treaty arbitrations is potentially significant, its practical impact is often negligible because of inconsistent quality.

Tribunal formation and the strategic selection of arbitrators

Academics and practitioners have long regarded tribunal formation and arbitrator selection as one of the most important early steps in an arbitration. Previous studies have investigated whether and how appointing a predisposed arbitrator to a tribunal may affect arbitral outcomes. To do so, they define arbitrators as either pro-state or pro-investor, based on their appointment records.¹ Where an arbitrator received most of their previous appointments from either class of disputant, they are considered to favor that party. These studies then investigate the decision-making pattern of tribunals on which most arbitrators were either pro-state or pro-investor. They find that tribunals on which pro-investor arbitrators dominated are more likely to affirm a tribunal’s jurisdiction. Conversely, those on which pro-state arbitrators dominated declined jurisdiction more often. Investors were also more likely to win on liability, where more pro-investor than pro-state arbitrators sat on a tribunal. Again, the same applies vice versa to predominantly pro-state tribunals, which are more likely to side with states on questions of liability. Finally, tribunals with more pro-investor than pro-state arbitrators typically awarded a higher-than-average measure of damages. Tribunals where pro-state arbitrators were in the majority, on the other hand, tended to award less than the mean measure of damages.

Building on these findings, this study elucidates how counsel exert influence on outcomes by appointing arbitrators that are tailor-made for the case at hand. To effectively do this, they must first have a grasp on the facts surrounding the case and identify key issues in the factual matrix. Next, counsel typically use their intuition and their law firm’s internal rosters to short-list potential party-appointed arbitrators. They then scrutinize the candidates on these lists, relying on research tools, law firms’ institutional memory, and publicly available data with a view to ascertaining candidates’ suitability. Last but not least, counsel try to assess how much influence an arbitrator will likely yield within a tribunal. This is no easy feat. When making their appointment, the claimants typically will not know the identity of any of the other arbitrators. The respondents will know whom the claimant appointed but also be in the dark about who will eventually chair the proceedings.

Counsel use a set of broad but seemingly widespread and effective heuristics to assess arbitrators’ likely influence. At the highest level of abstraction, influential arbitrators are those with well-developed interpersonal skills. The second criterion relates to arbitrators’ positioning on pertinent contested points. Counsel here seek to avoid selecting arbitrators who have publicly assumed entrenched positions. Such positions may diminish an arbitrator’s influence on co-arbitrators during deliberations. Influential arbitrators will also work hard and have the legal intellect to convincingly convey their views in the appropriate legal language. If counsel correctly identifies an arbitrator that is tailor-made for their client’s case, they may significantly advance their client’s position.

Moreover, this study theorizes how presiding arbitrators get appointed, paying particular attention to counsels’ role in this process. This is important because where both party-appointed arbitrators have been selected by a disputing party in the hopes of having a friendly voice on the tribunal, the deciding vote frequently falls to the presiding arbitrator. In practice, the selection of a presiding arbitrator usually involves exchanging lists of potential candidates, which may be drawn up by arbitral institutions, party-appointed arbitrators, or the disputing parties themselves. Although the precise mechanism may vary, parties and their counsel generally strike and rank candidates on these lists. Whichever candidate receives the highest average ranking on both parties’ lists will be appointed as presiding arbitrator.

The fact that both parties are involved in this process means that it is considerably more difficult for either party to advance their case through the process of appointing a favorable presiding arbitrator. Rather than looking for a predisposition or jurisprudential outlook, counsel typically seek to advance their party’s position in this process by anticipating collegiate dynamics within the tribunal. Frequently, the aim is to appoint a presiding arbitrator who counsel believes will collaborate better with their party’s party-appointed arbitrator than with the opposing party’s party-appointed arbitrator. Again, if counsels’ judgment is correct, they may significantly advance their client’s case through the process of appointing a presiding arbitrator.

Advocacy

The interview data is contradictory regarding the third pathway of influence, namely, advocacy. The literature on the impact of advocacy on litigation outcomes has long been split. In large part, the rift runs along disciplinary lines, with legal scholars postulating that it is logically inconceivable that advocacy would not matter and political scientists pointing to the lack of empirical evidence for this argument. The literature on the relevance of advocacy in investment treaty arbitration is sparse and anecdotal. 

In this study, I propose advocacy can matter when it is done well, but often it does not due to poor quality. Where written advocacy entices arbitrators to read and targets certain arbitrators, it is more likely to convince them of a certain viewpoint. In practice, however, written pleadings are often excessively long and turgid, which detracts from written advocacy’s relevance. Oral advocacy tends to have a particularly significant impact when it cuts through the fog of written pleadings and exhibits focus and assertiveness. Additionally, questions from the tribunal and cross-examination of witnesses may bring to light novel aspects of a case during a hearing, which may affect outcomes. However, one interview subject told me: “Sometimes hearings could be eliminated … and there would be no difference in the outcome.” Also in this area of advocacy, counsel often miss the opportunity to exert influence. Rather than presenting a focused and assertive argument, they frequently reiterate truncated accounts of all arguments they made in the written submissions. Thus, while advocacy’s potential impact is significant, its practical impact is often limited.

Valuing damages

When scholars postulate on the importance of advocacy to legal outcomes, they seem to assume that valuation is a question that is answered on an entirely objective basis. Perhaps because of this perceived objectivity, the literature that engages with the role of valuation experts in investment treaty arbitration is scant. A few studies anecdotally argue that such experts may be influential because many arbitrators are relatively financially illiterate. These studies do not corroborate their claims with empirical evidence and leave counsels’ guiding role in valuation experts’ work aside.

This study shows that far from being wholly objective, discounted cash flow (DCF) analysis—nowadays the predominant valuation method in investment treaty arbitrations—is deeply speculative. In addition, discounted cash flow valuations tend to be immensely complex and lacking in transparency.

Against this background, the interview data confirms that arbitrators frequently struggle to understand and assess these analyses. For instance, one interview subject said: “After reading a lot of [valuation analyses], I understand how a DCF valuation is put together. I could not begin to do one myself, I could not begin to figure out a risk premium … The best I can bring to it is a sort of vague sense that, you know, country X is a risky place, and so maybe it ought to be a little higher.” 

As a result, valuation experts have become influential players in investment treaty arbitrations. This is particularly true where (a) the substance of their analysis is prima facie believable; (b) they are well regarded in the field and ideally have performed well in previous arbitrations, building a reputation of objectivity; and (c) they are able to relay their testimony in a way that is both understandable and interesting to arbitrators. In turn, counsel indirectly influence outcomes on valuation because they pick and instruct valuation experts. Moreover, they may exert significant direct influence in this area through their advocacy, acting as a translator between valuation experts and arbitrators. That said, the study finds that counsel only infrequently manage to exert influence on the valuation of damages through their advocacy. Finally, cross-examination of the opposing party’s valuation expert may affect the valuation outcomes.

Implications

From the above, it follows that counsel are powerful actors in investment treaty arbitrations who may influence arbitral outcomes through four important pathways. This brings some advantages to the investment treaty arbitral system. Even the most able arbitrators are not omniscient. To render well-considered awards, they need effective input. This is particularly true regarding two pathways of influence identified above: 1) establishing facts and framing the case and 2) advocacy. Arbitrators simply do not have the resources to conduct all factual research themselves and think through every possible argument that could be made on the basis of this factual research. Moreover, there is a strong argument to be made that it would be inappropriate for arbitrators to assume this role: arbitrators are appointed by disputing parties to resolve a particular dispute and therefore lack the public legitimacy to act ex officio in cases that have implications for public budgets and regulation. The potential upsides of counsel influence through arbitrator selection and on the valuation of damages are much less clear.

There is a crucial caveat to the systemic advantages deriving from counsels’ influence. Better arbitral decision-making would require better counsel skills on all sides, not only those who can afford it. There is reason for concern that, in practice, counsels’ influence may advantage players who are able and willing to spend more on their legal representatives. Most frequent investment treaty arbitration counsel work in international law firms, which tend to charge high fees sometimes in the magnitude of USD 1000 per hour. As of May 2020, investor-claimants’ party costs – which consist mostly of counsel fees – averaged USD 6.4 million, while state-respondents’ party costs averaged USD 4.7 million. Some (potential) parties to investment treaty arbitrations – particularly developing and least developed states as well as small and medium enterprises—may not be able to carry these significant costs. Moreover, how much a party spent on its counsel may affect case outcomes. According to Susan Franck, “for cases where investors won … claimants’ counsel expended nearly twice as much; whereas for cases where respondents won, investors’ counsel spent roughly half the amount states’ counsel spent.”  

It may not be surprising that the “haves”—often large corporations or highly developed states—also “come out ahead” in investment treaty arbitration. Indeed, the systems’ lack of transparency may have “served to entrench the advantages of insiders over outsiders.” The investment treaty system’s rules—particularly unwritten procedural rules and rules developed through case law—tend to be readily apparent to experienced counsel but difficult or impossible to ascertain for outsiders. In effect, this may have significantly increased the benefits that the “haves” can garner from engaging counsel who have frequently acted in that capacity before. The fact that this imbalance is unsurprising, however, does not detract from the fact that it is deeply troubling. 

This is especially true considering the stakes in these disputes. Investment treaty arbitrations can have a significant financial impact. Matthew Hodgson, Yarik Kryvoi, and Daniel Hrcka find that tribunals awarded a mean of USD 315.3 million and a median of USD 40 million in damages between June 2017 and May 2020. According to Jonathan Bonnitcha, Malcolm Langford, José Manuel Alvarez-Zarate, and Daniel Behn, the average amount of damages between 2010 and 2019 was between USD 513.7 million and USD 597.3 million. Adjusted for the outsized Yukos awards, the average remained between USD 207.6 million and USD 246.1 million. The median for the same period was between USD 27.8 million and USD 38.9 million. Indeed, there are instances in which the compensation awarded by investment treaty tribunals may have a crippling effect on state budgets. Seemingly as a result of the high stakes in these cases, investment treaty arbitration counselling has become a hugely profitable business, creating a  “collective financial stake for the international bar [of] roughly 1-2 billion USD per year.” 

Additionally, states face potentially cascading claims following a single adverse investment treaty award, as well as gaining a reputation of being hostile towards foreign investment, thus becoming less attractive for foreign investors in the future. On the investor side, initiating a claim against a state may force an investor to cease operations in that state. A recent study finds that 69 percent of investors who bring an investment treaty claim neither retain investment in the host state during the proceedings, nor return investment later.

There are at least two factors that may help the “have-nots” access expert investment treaty arbitration counsel. If effective, these may limit the advantage that the “haves” can gain from engaging experienced counsel.

First, poorer (potential) parties to investment treaty arbitrations may sometimes benefit from discounted counsel rates. In the context of United States Supreme Court litigation, Richard Lazarus has argued that “to some extent, market forces, the significant professional prestige closely associated with Supreme Court advocacy, and the personal commitment of some attorneys … afford some of the incentive necessary to close the advocacy gap.” To a significant degree, one can extend his reasoning to investment treaty arbitration. Much like representing parties in Supreme Court litigation, acting as counsel in investment treaty arbitrations carries significant professional prestige. The practice has also become hugely profitable for insiders. Simultaneously, investment treaty arbitrations are relatively limited in number. Between 2002 and 2022, ICSID – the most frequently used investment treaty arbitral institution – registered an average of just under 39 cases yearly. In no single year were there more than 66 cases. Counsel wishing to break into the inner circle of investment treaty arbitration practice may need to become creative about how to do so. This may include seeking out traditionally underrepresented clients and potentially compromising on rates in early cases. Additionally, for some counsel, investment treaty arbitration may be an area of legal practice they consider particularly interesting or otherwise personally rewarding. Particularly on the state side, these factors have allegedly led some firms to offer their services in investment treaty arbitrations “at heavily discounted rates.” 

Second, some poorer parties may potentially close the gap in counsel expertise by relying on third-party funding. Different funding models are available to investors and states. Some have proposed that investors may arrange commercial third-party funding. This typically takes the form of a contract with a party without a direct relationship to the dispute. The latter party provides resources to finance a legal dispute. In turn, it becomes entitled to a payout dependent on how the legal dispute progresses. There is a case to be made in favour of such funding. On the one hand, it would require limited or no public resources. On the other hand, prima facie, it seems that commercial funding may be relatively effective in helping investors with fewer resources access quality counsel.

That said, empirical evidence shows that poor investors are unlikely to benefit from commercial third-party funding in practice as investors’ claims may be too small to attract commercial funding. A recent study finds that funders generally look for claims of at least USD 50 million. Smaller claims – even where prima facie meritorious – typically will not receive funding. Their small potential payouts simply do not justify the investment. Rather than putting economically weak investors on equal footing, commercial third-party funding may help economically strong investors to finance their corporate activities, to, according to the study, “take the cost of a claim off the corporate balance sheet,” or to “spread the risk” of bringing a large legal claim.

Commercial third-party funding in investment treaty arbitration is generally unavailable to states. Except for the limited instances in which tribunals admitted counterclaims, states will not receive damages as the result of an investment treaty arbitration. The economic argument for investing in a case, however, generally only holds if the party may receive damages. The closest functional equivalent to commercial third-party funding for respondents is insurance, though important structural differences between funding and insurance exist. 

States may benefit from non-commercial third-party funding. For cases arising under the auspices of the Permanent Court of Arbitration, a fund already exists to help states meet the costs of an arbitration. To qualify for assistance from the fund, a state must be part of one of the Permanent Court of Arbitration’s founding conventions and included in the OECD’s DAC List of Aid Recipients. In principle, the fund may cover fees of arbitrators, agents, counsel, experts, or witnesses, operational as well as administrative expenses, and even the costs of implementing an award. The fund receives financial resources through voluntary contributions. A board of trustees decides upon requests for funding. Its decision-making process is strictly confidential and is not subject to appeal. As a result, it is difficult to assess the impact of the fund. The only information available in the Annual Report of the Permanent Court of Arbitration is that since its establishment in 1994, the fund has received financial contributions from nine states. In turn, it covered eight states’ arbitration costs, though it is unclear whether in part or whole. This starkly contrasts with the over 1200 investment treaty arbitrations filed until May 2020. Thus, the fund’s impact seems extremely limited in its current form. In large part, this is likely due to a lack of funding.

One may contemplate expanding the assistance available to economically weaker states in terms of parties that may request resources, conflicts for which such resources are available, and, most importantly, the volume of such resources. Subsidising the cost of hiring counsel in this manner may significantly help poorer states in investment treaty arbitrations access expert counsel. This would require minimal institutional structure, which could help keep costs low. That said, private investment treaty arbitration counsel can be extremely expensive. Thus, creating such a fund would entail using potentially significant public funds to pay private lawyers who work in a system under significant legitimacy constraints. Some already regard these lawyers as  “ambulance chasers” who “profit from injustice.” Devoting public funds to their practice may further incentivise these lawyers to aggressively pursue new clients and cases. While public funding of this kind may offset differences deriving from access to expert counsel, we should be cautious regarding this approach and carefully weigh the trade-offs it entails.

Policy proposals for curbing counsel influence

Reduced rates and third-party funding may mitigate some discrepancies in legal representation in investment treaty arbitrations. In their current, ad hoc form, however, they cannot be considered systemic or systematic solutions. Thus, this study’s findings call for policy intervention. First, we may increase legal capacity internally or externally. Second, we may adopt treaty provisions to curb counsel influence in specific areas, which may be more achievable in the short to mid-term. The following provides a brief overview of these policy interventions.

Increasing legal capacity

Developing some level of internal capacity is essential for investors and states to be able to effectively participate in investment treaty arbitrations. Compared to investors, states are more likely to be repeat players in investment treaty arbitrations. This raises two questions: under what circumstances should states consider building internal expertise; and how should states go about doing so?

1. Public-private partnerships can help. Government lawyers working alongside external counsel from law firms or barrister’s chambers—as Canada and Egypt have done—can build expertise over time. 
2. Public-public partnerships may also help. Pooling legal capacity across states allows for access to internal, specialized counsel, potentially without imposing undue costs. 
3. An advisory center could subsidize access to specialized external counsel. Representatives at UNCITRAL Working Group III have agreed on the establishment of such a center in principle. That said, major stumbling blocks persist, first and foremost the financing. The center’s current mandate would also exclude investors. This would seriously limit its efficacy for small and medium enterprises. If sufficiently financed, an advisory center would, however, likely be beneficial to poorer respondent states. 

Curbing counsel influence on arbitrator selection

Three proposals of varying ambition would curtail counsel influence through arbitrator selection:

1. Eliminating investor-state arbitration. States such as Brazil and South Africa believe that investors should not have the right to sue a state at the international level. Thus, they propose not only to eradicate the unilateral appointment of arbitrators but investment treaty arbitration altogether. Obviously, this would “curb” counsels’ influence.
2. Establishing a standing investment court. The EU has spearheaded a campaign to establish a two-tier standing mechanism to resolve investment disputes at the international level. While a fully-fledged multilateral investment court seems unlikely to materialize, the Union has successfully pushed for the inclusion of a standing mechanism in recent bilateral treaties. Under these agreements, investors maintain their standing but must bring their claims before a permanent international tribunal, a division of which will hear and adjudicate the case. Thus, they do away with the contemporary system of arbitrator selection.
3. Limiting choice to pre-designated rosters. This would not do away with counsel influence through arbitrator selection, but it would severely restrict this pathway of influence.

Each of these proposals has broader systemic consequences that should be fully considered, but all would reduce the advantage richer parties gain from strategic arbitrator selection.

Curbing counsel influence on valuation

Counsels’ and experts’ influence on valuation raises concerns on two levels. First, richer parties may be particularly advantaged in this area. In addition to counsel, parties need to engage expert witnesses to advance their case on valuation as much as possible. In extraordinary cases, experts may even be more expensive than counsel. Second, arbitrators are rendering legally binding decisions that have implications for public budgets without understanding the subject matter on which they are deciding. The (international) legal community’s outrage would presumably be enormous if legal decision-makers were rendering decisions without understanding the law.

There are at least five possible policy interventions to eradicate inequities resulting from the influence counsel exert through valuation experts.

1. Encouraging expert exchanges. Expert exchanges could limit counsel/expert influence on valuation in two ways. First, joint expert statements would directly highlight and narrow disagreements. Second, expert exchanges might reveal to arbitrators the assumptions driving valuation reports—assumptions currently shaped by counsels’ instructions and often buried in complex reports. Tribunal-dictated instructions and assumptions could improve arbitrators’ understanding while reducing counsel influence.
2. Encouraging the use of tribunal-appointed experts. While it is general practice for each disputing party to put forward a valuation expert, this is by no means a foregone conclusion. Rather than disputing parties and their counsel, arbitrators could appoint and select experts. This would likely limit the arbitrators’ reliance on party-appointed valuation experts and thus limit the influence of valuation experts and counsel.
3. Regulating valuation methods. In significant part, counsel and valuation experts’ influence is predicated on the use of complex, speculative valuation methods, especially DCF analysis. That said, it is by no means clear that the widespread use of DCF analysis in contemporary arbitral practice is appropriate. The inherently speculative and uncertain nature of the cashflow forecasts on which DCF analyses build may, in fact, make them inappropriate valuation methods in most legal disputes. Additionally, asset-based approaches and net book valuations would be easier for arbitrators to follow and evaluate.
4. Training arbitrators in financial methods. As a result of their widespread financial illiteracy, arbitrators rely on valuation methods that are inappropriate under the circumstances and misapply valuation methods once chosen. Financially trained arbitrators would likely choose more appropriate valuation methods and apply them more appropriately. Thus, training arbitrators in financial valuation methods might be a worthwhile policy. 
5. Appointing distinct legally and financially trained arbitrators. Arbitral proceedings could be split, with different arbitrators hearing different parts of a case. The first part might focus on issues of jurisdiction and liability, heard by conventional, typically legally trained, investment treaty arbitrators. The second part might focus on the valuation of damages, heard by arbitrators with financial expertise. Legal and financial arbitrators could be members of permanent tribunals, listed in rosters of eligible arbitrators, or appointed ad hoc. Regardless of the mode of appointment, this ambitious proposal may lead to faster more accurate valuation of damages, less guided by counsel.²

In closing, it bears repeating that there is reason for concern that, currently, counsels’ influence on outcomes in investment treaty arbitrations may advantage players who are able and willing to spend more on their legal representatives. Policymakers should harness the current impetus for investment treaty reform to minimise or eradicate resulting inequities between richer and poorer parties. For a more in-depth explanation of how counsel influence arbitral outcomes—and what to do about it—see Counsel and Outcomes in Investment Arbitration, forthcoming from Cambridge University Press.

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Tobias Traxler is Postdoctoral Fellow at Harvard Law School’s Center on the Legal Profession. Using qualitative methods, he studies what international lawyers do, how they do it, and how their actions (may) affect legal outcomes. His first monograph Counsel and Outcomes in Investment Arbitration is forthcoming with Cambridge University Press.

Before joining the Center, Tobi was a Postdoc at NUS Centre for International Law, and a Researcher at the European University Institute (EUI), where he earned his Ph.D. During his time at the EUI, he was a visiting scholar at New York University and the University of Vienna. Tobi also holds LL.M. degrees from the EUI and the University of Amsterdam. He received his undergraduate degree from Amsterdam University College. 

1. Arbitrators may also be neither pro-state nor pro-investor. This would be the case where most of their appointments were as presiding arbitrator or they were appointed an equal number of times by states and investors. [↩]
2. Toby Landau kindly shared this idea at the SIAC-CIL Academic Practitioner Colloquium. [↩]