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Predictability Versus Flexibility: Secrecy in International Investment Arbitration

Abstract

There is heated debate over the wisdom and effect of secrecy in international negotiations. This debate has become central to the process of foreign investment arbitration because parties to disputes nearly always can choose to hide arbitral outcomes from public view. Working with a new database of disputes at the world's largest investor-state arbitral institution, the World Bank's International Centre for Settlement of Investment Disputes, the authors examine the incentives of firms and governments to keep the details of their disputes secret. The authors argue that secrecy in the context of investment arbitration works like a flexibility-enhancing device, similar to the way escape clauses function in the context of international trade. To attract and preserve investment, governments make contractual and treaty-based promises to submit to binding arbitration in the event of a dispute. They may prefer secrecy in cases when they are under strong political pressure to adopt policies that violate international legal norms designed to protect investor interests. Investors favor secrecy when managing politically sensitive disputes over assets they will continue to own and manage in host countries long after the particular dispute has passed. Although governments prefer secrecy to help facilitate politically difficult bargaining, secrecy diminishes one of the central purposes of arbitration: to allow governments to signal publicly their general commitment to investor-friendly policies. Understanding the incentives for keeping the details of dispute resolution secret may help future scholars explain more accurately the observed patterns of wins and losses from investor-state arbitration as well as patterns of investment.

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* We thank Ken Abbot, Alan Alexandroff, Todd Allee, John James Barcelo III, Marc Busch, Tim Buthe, Donald Childress, Christina Davis, Cédric Dupont, Judy Goldstein, Leslie Johns, Robert Keohane, Andrew Kerner, Mark Fathi Massoud, Saray Maxey, Helen Milner, Andrew Moravcsik, Martijn Mos, Clint Peinhardt, Krzysztof Pelc, Lauge Poulsen, Peter Rosendorff, Chris Rudolf, Ken Shultz, Thomas Schultz, Alexander Thompson, and Nicole Weygandt, as well as participants in panels and lecture seminars at the American Political Science Association, International Studies Association, Cornell, McGill, Stanford, ucla, ucsd, and Yale, for helpful comments on this article; Thomas Baranga, Scott Desposato, Gordon Hanson, Thad Kousser, and especially Andy Brownback, for advice on methodology; Sergio Puig for advice on the legal aspects of the International Centre for Settlement of Investment Disputes, detailed comments on several drafts, and collaboration on a related project on settlement of investment disputes; and Susan Franck, Meg Kinnear, and Antonio Parra for important preliminary discussions as we began the project. Thanks also to Shu Shang and especially Linda Wong for research assistance. The Laboratory on International Law and Regulation is funded by the School of Global Policy and Strategy at the University of California, San Diego; BP plc; the Electric Power Research Institute; and the Norwegian Research Foundation.

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World Politics
  • ISSN: 0043-8871
  • EISSN: 1086-3338
  • URL: /core/journals/world-politics
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