Canada holds a losing hand in the arbitration game

Posted on February 21, 2011 in Debates, Policy Context

Source: — Authors: – Business/Commentary
Published Monday, Feb. 21, 2011.   Barrie Mckenna

The London Court of International Arbitration.

The name alone evokes images of judges in black gowns and horsehair wigs – dour and beyond reproach. Not quite. The LCIA isn’t a court at all. It’s a corporation. At times, it seems more like a private club.

The LCIA is overseen by a not-for-profit company, headed by a well-connected American law professor – William “Rusty” Park of Boston University – and run by a board composed mainly of European arbitration lawyers. The court rents out its services to companies and governments around the world.

Unlike a traditional court, there are fewer built-in safeguards to protect the organization’s independence, such as secure tenure for judges and prohibitions on earning outside income. Its judges are paid by the parties who use the court, and they’re assigned at the discretion of the court, rather than by lottery or rotation.

The court also happens to be the venue Canada and the United States picked to settle disputes arising out of the 2006 softwood lumber agreement, which limits Canada’s exports to the United States.

Three times now, the U.S. has hauled Canada before the court for alleged violations of the 2006 softwood lumber deal.

And twice already Washington has emerged victorious, costing Canada a total of $128-million in penalties. In a third complaint filed last month, the U.S. is expected to seek as much as a half-billion dollars in damages.

Are the odds stacked against Canada? Critics say the court’s structure serves the interests of the international arbitration business first and defendants such as Canada second. As a result, the court might not be the friendliest venue in which to duke it out with the United States, which accounts for roughly half of all arbitration cases.

The United States and the major European countries exert subtle influence over the court because they steer large volumes of business to the LCIA and its roster of arbitrators, argues Gus Van Harten, an associate professor at Osgoode Hall Law School in Toronto. It’s not unreasonable that the court would “kowtow to major companies and major states,” says Prof. Van Harten, an expert in international arbitration.

“I am genuinely concerned about an apparent lack of outside scrutiny of the practices and record of the arbitration industry, and the implications of a lack of institutionalized independence for a player like Canada.”

Lawyers at the Department of Foreign Affairs and International Trade acknowledge privately that Canada may have made a tactical mistake when it bowed to U.S. demands and subcontracted all lumber disputes to the court back in 2006.

Lumber cases are heard by a three-member arbitration panel. Each country selects one arbitrator. The third is named by the court.

With a half a billion dollars on the line in the next case, none of this is particularly reassuring for Canada’s lumber industry.

“Canada is a convenient country to lose because it has deep pockets, will pay awards and won’t complain much,” Prof. Van Harten says. “And it has comparatively little clout in the arbitration world.”

The arbitration community is a tight-knit coterie of lawyers and judges, based in London, Paris, Geneva, New York and Washington. The same lawyers who sit as judges and panelists on the court also benefit from a steady stream of outside work from some of the same governments and multinational companies that tap LCIA’s services.

Canada isn’t entirely without influence. Lawyer Pierre Bienvenu of Ogilvy Renault is one of seven LCIA vice-presidents and Ogilvy Renault chairman Yves Fortier is an honorary vice-president.

The court’s constitution states only that “due regard shall be given to a balanced international representation.” Mr. Bienvenu and Mr. Fortier don’t represent the Canadian government.

There isn’t enough of a track record to suggest a pattern in the recent lumber decisions.

But Canada’s record of success in the private arbitration world is cause for concern. Chapter 11 of the North American free-trade agreement allows private parties to sue governments – a process adjudicated by many of the same arbitrators who ply their trade at the LCIA. Canadian companies are 0-15 in those cases. And Ottawa has lost half the Chapter 11 challenges it has faced.

Undeterred, Ottawa is entrusting more disputes to international arbitration, including individual-to-government tax cases under its tax treaty with the U.S., as well as investment disputes in the proposed Canada-Europe trade deal.

Ottawa might be better served steering trade and investment disputes to other venues, including the World Trade Organization or NAFTA’s direct state-to-state dispute settlement regime, where Canada enjoys a far better winning percentage.

A better long-term strategy would be to push for an international investment court, answerable to governments and their citizens, not to the gatekeepers who run the arbitration system.

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