Incentive Design of Investment Treaty Arbitration Procedures

In this paper I analyze the following points from the standpoint of incentives for investors: (a) What functions does arbitration between investors and national governments with regard to investment treaties (investment treaty arbitration) fulfill; and (b) what is the significance of specific system design with regard to arbitration, in particular the allowance of a choice between arbitration and domestic court hearings.



Following the rapid increase in the number of investment treaties in recent years, investment treaty arbitration is attracting attention as a general dispute resolution mechanism for investment treaties. There has, however, been insufficient study with regard to the functions that investment treaty arbitration fulfills and, more specifically, how its procedures should be designed.



In this paper, I focus on two specific aspects of court hearings and arbitration: first, their neutrality; and second, the consistency of judgments and the possibility of predicting them. I analyze how incentives for investors are influenced by the differences between court hearings and arbitration regarding these two factors, and the possibility of choosing between court hearings and arbitration. What this analysis clearly shows is that while it is not always desirable for investors to use arbitration, it is always desirable for investors to be able to choose between arbitration and court hearings, although their usefulness differs from situation to situation. If the situation involves issues implicitly assumed by traditional investment treaties, for example "incompetent and unfair courts, and competent and fair arbitration tribunals," then both will produce desirable results for investors. But at present such an assumption is not necessarily valid. In view of this, it is necessary to reexamine the functions of arbitration itself and the most desirable form of its procedures.