Conflicted

Can US courts rein in “private judges”? Argentina is testing this proposition in a recent court filing against an investor-state dispute settlement award.

Matthew Slater and Teale Toweill are lawyers for the South American country. Back in July, they filed a petition with the US District Court for DC that asked for an arbitration award against Argentina to be vacated.

The initial arbitration claim was brought in 2003 by a consortium of British, Spanish, and French investors in Buenos Aires’ privatized water utility. After lengthy proceedings at the World Bank’s arbitration arm (ICSID), a trio of arbitrators ruled in April 2015 that Argentina owed the four complaining corporations over $404 million for violations of three different investment treaties.

In the US court filings, Argentina is arguing that one of the three arbitrators had a conflict of interest. Gabrielle Kauffman-Kohler, a Swiss arbitrator, was appointed by the investors at the start of the case in 2003. During the course of the proceedings, she was separately appointed to the executive board of UBS – a major Swiss bank that happened to be the top shareholder in one of investor complainants.

According to Slater and Toweill, the arbitrator received over $300,000 in annual compensation for serving on the board. Half of this came in the form of UBS shares that gave her a direct financial stake in the company’s profitability in Argentina (and elsewhere). For comparison, her compensation for the arbitration case was $3,000 per day. Unless she worked 50 days a year over the course of the case (a doubtful proposition for one of the busiest arbitrators in the business), her UBS stake was probably greater.

The US court claim will be a major test of the willingness of US courts to second guess private arbitrators. Argentina and the investors designated Washington, DC as the “seat of arbitration”, which meant that any subsequent legal appeals would be heard in US courts.

Under the US Federal Arbitration Act, judges are expected to defer to private arbitrators’ reasoning. Yet Argentina is charging that Kaufmann-Kohler had “evident partiality or corruption”, which can be the basis for a judge to set aside the award under FAA rules. While US courts have set aside some private arbitration awards on this basis, I know of no comparable instance under an investment treaty award.

Although national courts have tended to allow this unusual system of private adjudication to go unregulated, two factors may go in Argentina’s favor.

First, the World Bank has been stepping up its disqualification of arbitrators.* Under the Obama-appointed Jim Yong Kim presidency, obvious conflicts of interest can get an arbitrator pushed aside. US judges may take some comfort in being part of a general disciplinary trend.

Second, Kaufmann-Kohler was the tie-breaking vote in the key decisions in the case. Pedro Nikken – a Venezuelan arbitrator appointed by Argentina – dissented at both the jurisdiction and merits stages. This left a two-to-one split, with Kaufmann-Kohler and chairman Jeswald Salacuse against Nikken. Even a marginal conflict of interest could have swung the case.

But some factors go against Argentina. Despite sky-high levels of controversy over “investor-state dispute settlement”, the US Supreme Court announced as recently as last year that it still expects courts to defer to arbitrators – even when they make highly questionable decisions.

The investors have up until September 1 to file their response to Argentina’s petition. Stay tuned for further developments.

* For technical reasons, Argentina is only challenging the portion of the award (nearly $21 million) rendered in favor of the AWG Group – a Cambridgeshire investor. The option of appeal to US courts was only available vis a vis the UK investor. In contrast, Argentina could ask the World Bank for annulment of the portion of the award pertaining to the French and Spanish investors.