Arbitrator Liability: Reconciling Arbitration and Mandatory Rules

In this Article, Professor Guzman resolves the tension that exists between mandatory legal rules and the widespread use of arbitration. In recent years, U. S. courts have expanded the range of enforceable arbitration agreements to include agreements that cover areas of law previously thought to be within the exclusive domain of courts. Among the disputes that are now deemed arbitrable are those that implicate mandatory rules such as securities and antitrust laws. Under current law, the willingness of courts to enforce arbitration agreements and to uphold the resulting arbitral awards with minimal judicial review makes it possible for the parties to a transaction to avoid mandatory rules of law. Until now, it has generally been believed that the legal system must either restrict the use of arbitration or permit arbitration and accept that doing so turns all mandatory rules into default rules. This Article proposes a mechanism that permits the continued use of arbitration without abandoning the mandatory nature of legal rules. The recommended approach, called arbitrator liability, allows the losing party in an arbitration to sue the arbitrator on the ground that a mandatory rule was ignored. Under existing legal rules, arbitrators have an incentive to ignore mandatory rules of law in favor of the contractual terms agreed to by the parties. Arbitrator liability gives arbitrators an incentive to apply mandatory rules of law. Giving proper incentives to arbitrators will ensure that mandatory rules are enforced, thereby eliminating the incentive for the parties to draft arbitration agreements intended to avoid those rules. The benefits of arbitration can be retained without sacrificing the ability of lawmakers to adopt mandatory rules

International Tribunals: A Rational Choice Analysis

In well-functioning domestic legal systems, courts provide a mechanism through which commitments and obligations are enforced. A party that fails to honor its obligations can be hauled before a court and sanctioned through seizure of person or property. The international arena also has courts or, to expand the category somewhat, tribunals. These institutions, however, lack the enforcement powers of domestic courts. How, then, do they work, and how might they work better or worse? The first objective of this Article is to establish that the role of the tribunal is to promote compliance with some underlying substantive legal rule. This simple yet often overlooked point provides a metric by which to measure the effectiveness of tribunals. But a tribunal does not operate in isolation. The use of a tribunal is one way to resolve a dispute, but reliance on diplomacy and other traditional tools of international relations is another. Furthermore, even if a case is filed with a tribunal, there may be settlement prior to a ruling and, even if there is a ruling the losing party may refuse to comply. To properly understand international tribunals, then, requires consideration of the entire range of possible outcomes to a dispute, including those that do not involve formal litigation. The second goal of the Article is develop a rational choice model of dispute resolution and tribunals that takes this reality into account. The third goal is to explore, based on the above model, various features of international tribunals and identify those that increase effectiveness and those that reduce it. Finally, the article applies the analysis to help us understand two prominent tribunals, the World Trade Organization’s Appellate Body and the United Nations Human Rights Committee

International Soft Law

Although the concept of soft law has existed for years, scholars have not reached consensus on why states use soft law or even whether “soft law” is a coherent analytic category. In part, this confusion reflects a deep diversity in both the types of international agreements and the strategic situations that produce them. In this paper, we advance four complementary explanations for why states use soft law that describe a much broader range of state behavior than has been previously explained. First, and least significantly, states may use soft law to solve straightforward coordination games in which the existence of a focal point is enough to generate compliance. Second, under what we term the loss avoidance theory, moving from soft law to hard law generates higher sanctions that both deter more violations and, because sanctions in the international system are negative sum, increase the net loss to the parties. States will choose soft law when the marginal costs in terms of the expected loss from violations exceed the marginal benefits in terms of deterred violations. Third, under the delegation theory, states choose soft law when they are uncertain about whether the rules they adopt today will be desirable tomorrow and when it is advantageous to allow a particular state or group of states to adjust expectations in the event of changed circumstances. Moving from hard law to soft law makes it easier for such states to renounce existing rules or interpretations of rules and drive the evolution of soft law rules in a way that may be more efficient than formal renegotiation. Fourth, we introduce the concept of international common law (ICL), which we define as a nonbinding gloss that international institutions, such as international tribunals, put on binding legal rules. The theory of ICL is based on the observation that, except occasionally with respect to the facts and parties to the dispute before it, the decisions of international tribunals are nonbinding interpretations of binding legal rules. States grant institutions the authority to make ICL as a way around the requirement that states must consent in order to be bound by legal rules. ICL affects all states subject to the underlying rule, regardless of whether they have consented to the creation of the ICL. As such, ICL provides cooperationminded states with the opportunity to deepen cooperation in exchange for surrendering some measure of control over legal rules. These four explanations of soft law, and in particular the theory of ICL, provide a firm justification for the coherence of soft law as an analytic category. They demonstrate that legal consequences flow from a range of nonbinding international instruments, just as nonbinding documents in the domestic setting, such as legislative committee reports, often have legal consequences when, for example, used to interpret binding rules. Moreover, the theories offered in this paper explain the circumstances under which this quasi-legal characteristic of soft law will be attractive to states

The Dangerous Extraterritoriality of American Securities Law

The capital markets within the United States are among the larg- est in the world. Today, the combined volume of the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) and Nasdaq market system reaches approximately $4 trillion dollars annually.\u27 With the size of the U.S. markets has come an understandable pride in the success of the American regulatory system.2 Possessing one of the most complex and intricate of regimes, the regulatory system in the United States, as administered and monitored by the Securities and Exchange Commission (SEC), is often praised.3 Not surprisingly, perhaps, the United States has frequently attempted to extend the reach of its regime. Through international negotiations, for example, the United States has successfully exported portions of its insider trading prohibitions - at least formally - to Japan and Switzerland in recent years.4 More directly, the United States often applies its own domes- tic laws extraterritorially to transactions in other countries, justifying its actions as necessary to protect American investors and the integrity of U.S. capital markets

International Common Law: The Soft Law of International Tribunals

Rising legalization in the international community has lead to greater use of international tribunals and soft law. This paper explores the intersection of these instruments. The decision of an international tribunal interprets binding legal obligations but is not itself legally binding except, in some instances, as between the parties. The broader, and often more important function of a tribunal\u27s decision - its influence on state behavior beyond the particular case and its impact on perceptions regarding legal obligations - is best characterized as a form of soft law. Despite its inability to bind states, a tribunal can influence state behavior by implicating a state\u27s reputation for compliance with international law, by bolstering the reciprocity underlying an agreement, or by triggering retaliation. In this sense the rulings of a tribunal influences states through the same mechanisms as does binding international law. Because tribunal rulings are soft law, however, they avoid the need for unanimity among states, thereby making it easier for the legal system (including the non-binding aspects of that system) to adapt to changing circumstances and conditions. By establishing a tribunal to interpret legal obligations in a way that gives rise to a soft law jurisprudence, therefore, states are able to expand the tribunal\u27s influence beyond those states that submit to the tribunal\u27s jurisdiction. In effect, all states subject to the underlying legal obligation come to be subject to the soft law impact of the tribunal, regardless of whether they have formally submitted to the tribunal\u27s jurisdiction. In this way tribunals create what can be called an international common law able to evolve without formal agreement from states

The Dangerous Extraterritoriality of American Securities Law

The capital markets within the United States are among the larg- est in the world. Today, the combined volume of the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) and Nasdaq market system reaches approximately $4 trillion dollars annually.\u27 With the size of the U.S. markets has come an understandable pride in the success of the American regulatory system.2 Possessing one of the most complex and intricate of regimes, the regulatory system in the United States, as administered and monitored by the Securities and Exchange Commission (SEC), is often praised.3 Not surprisingly, perhaps, the United States has frequently attempted to extend the reach of its regime. Through international negotiations, for example, the United States has successfully exported portions of its insider trading prohibitions - at least formally - to Japan and Switzerland in recent years.4 More directly, the United States often applies its own domes- tic laws extraterritorially to transactions in other countries, justifying its actions as necessary to protect American investors and the integrity of U.S. capital markets