The Evolution of Cost Rationalization—Explaining Cost Assessments

Earlier research identified that, although tribunals rarely cited legal authority and provided only minimal rationalization of their decisions, like the factor-dependent model, tribunals’ approaches varied. To facilitate an evidence-based dialogue about whether those findings persisted, Chapter 7 explores tribunals’ rationalization of cost decisions. It first assesses how many awards contained any rationalization for costs and identifies material gaps between non-final and final awards. Second, it conducts content analysis of tribunals’ costs rationalizations. Third, it explores whether tribunals’ ability to explain their cost decisions changed over time. While there was some evidence that tribunals improved in their cost rationalization, material gaps remained. Tribunals tended to focus upon parties’ relative success, perceived equity and reasonableness, and tribunal discretion, with part conduct during proceedings being of secondary consideration. Meanwhile, concerns involving public justice norms were rarely, if ever, used.

ITA Expansion, Time, and Costs

Chapter 4 initially provides data about the growth of ITA as well as offering a series of frames against which to understand its evolution, including a sociological perspective analyzing changes in ITA’s caseload against Professor Everett’s theory of diffusion of innovations. It next explores other elements of time, namely case length and deliberative delays, by offering descriptive data and testing whether case length has reliably increased over time or whether resolution times vary on the basis of institutions resolving disputes. It then turns to exploring temporal elements related to bifurcation and separate opinions. After providing an explanation of the fiscal costs data particularly related to parties’ legal costs as well as tribunal costs and expenses (and conducting a variety of tests to explore the potential impact of missing data), the last section identifies the reliable relationship between the costs of dispute resolution and the time required to resolve the dispute.

Introduction to the Data and Basic Demographics

Chapter 3 seeks to contextualize data and cost-related variables at the heart of the book. Initially, it demarcates among data from complete cases, individual awards, and separate opinions. It does so largely because costs—within a single case—could be assessed in multiple awards. Separate opinions are explored, as subsequent chapters explore their cost implications. Chapter 3 also focuses on core descriptive variables, both to identify paradigmatic characteristics of ITA disputes and to set the stage for mapping ITA costs. It explores party identity, including investors (one of the most under-explored elements of ITA) and state identity (including development status). It then offers descriptive information about other stakeholders, including non-disputing parties and counsel, with a particular focus on law firms that are repeat players. It then offers core information about industries and institutions administering ITA cases. These descriptive elements are used to assess and predict arbitration costs in subsequent chapters.

Introduction to Investment Treaty Arbitration (ITA) and Framing the Debate

Chapter 1 introduces the contents of the book by framing the context of international investment more broadly, contextualizing investment-related conflict management, identifying the issues related to cost, and exploring how cognitive psychology and data-driven analysis can offer a frame for considering the relative value of normative reform. After the initial framing, Chapter 1 provides an overview of international investment, with a historic context and a matrix for understanding the current dispute resolution options to set the stage for consideration of alternatives. It then describes ITA’s doctrinal foundation to explore the debate about the costs and benefits of ITA. The final section addresses the need to appreciate the relative value of policy options to make grounded, evidence-based normative choices for investment treaty dispute resolution.

Cognitive Psychology and Empirical Insights for ITA

Cognitive psychology affects information gathering, analysis, and decision-making. There is no evidence that international investment law is immune from those influences, yet the influence of psychology has been remarkably under-scrutinized. To bridge the divide, Chapter 2 explores the roots of law and psychology and considers how cognition errors could influence international investment law. It then describes the literature on cognitive illusions, including illusions involving information accessibility (i.e., availability, representativeness, primacy, and recency), information presentation (i.e., framing, loss aversion, and anchoring), and self-assessments (i.e., confirmation bias, egocentrism, and bias blind spots). It then preliminarily explores how these phenomena might affect debates about international investment dispute settlement. The final section explores debiasing opportunities deriving from quality empiricism.

The Potential Drivers—Predicting ITA Costs

Many variables could, in theory, be linked to ITA costs. Chapter 8 explores various possibilities with an eye toward explaining ITA costs for potential prediction. While modeling ITA costs involves a trade-off, namely an under-specification of non-identifiable costs that are challenging to measure reliably, it focuses on direct, tangible fiscal elements to aid risk management for parties, counsel, and other stakeholders. As there has never before been any explanatory modeling of ITA costs, the chapter offers a novel perspective. It first sets the stage by identifying the tight (perhaps expected) link between costs of parties’ counsel and the tribunal. Second, it explores cost linkages to the starting and end points of ITA, namely amounts claimed and outcomes. It then focuses on core demographics from earlier chapters to identify non-significant and significant cost predictors. Finally, it offers a descriptive model that partially explains the variance of the distinct ITA costs.

Costs—Risks and Reality

This chapter addresses ITA costs by initially exploring normative reasons for taking costs seriously and reviewing the doctrine underpinning cost assessments, including the pay-your-own-way, loser-pays, and factor-based approaches. It then tests conventional wisdom about costs by offering basic descriptive information, including when tribunals addressed costs, core fiscal exposure from parties’ legal costs (PLC) and tribunal costs, and whether fiscal costs changed over time, and offering alternative baselines to understand ITA costs. It then tests the conventional wisdom about tribunals’ “traditional” approach on cost-shifting noting, while the “pay-your-own-way” remained dominant, winning investors were reliably more likely to benefit from the “loser-pays” approach compared to winning states. The chapter then explores percentages and dollar amounts shifted by tribunals and changes in proportions shifted over time. While many cost elements were relatively stable, only when comparing the oldest cases with the most recent cases was it revealed that the amount of PLC shifted had meaningfully increased.

Claims and Outcomes in ITA

ITA is no longer a theoretical risk but a practical reality. Data offers a key debiasing tool to prevent cognitive illusions from skewing debates about the reality of realized risk. Chapter 5 uses direct, objective measures to assess outcomes that, in combination with costs, permits parties to undertake evidence-based cost-benefit assessment of an ITA’s net value. It initially explores ultimate outcomes by identifying whether tribunals awarded any damages or an equivalent remedy (i.e., an investor win), whether there was no damage award (i.e., a state win), or whether parties settled or otherwise discontinued the case. To nuance so as to understand outcomes on a phase-by-phase basis, it explores tribunals’ determinations for dispositive elements involving jurisdiction, merits, and damages. It then explores ultimate outcomes through two other alternative lenses, namely actual amounts awarded, which includes amounts from settlements, and investors’ relative success as compared to amounts claimed.

The Way Forward

To synthesize preceding chapters and point the way forward, Chapter 9 first identifies the need for enhanced transparency on costs and rationalization, particularly in early stages of disputes to manage expectations and create efficiencies. Second, it identifies relative costs and benefits of ITA, arguing an increased focus on non-adjudicative dispute resolution is warranted while acknowledging those mechanisms only work effectively when legitimate adjudication permits parties to negotiate “in the shadow of the law.” Third, the chapter explores ICSID’s proposals to foster a dialogue about costs. Fourth, it advocates changing cost-shifting norms toward a factor-dependent model. Recalling potential limitations, it concludes that for international investment dispute resolution to foster rule-of-law adjudication that is efficient, fair, reliable, and rationalized, stakeholders should implement structural safeguards to focus on appropriate dispute resolution to promote cost containment, predictability, and sustainable dispute resolution in an era of re-emerging nationalization and a backlash against international law.