Who Really Benefits From New Arbitration Laws? Arbitrator Selection and Regulatory Competition in International Arbitration

Oct 1

8 min read

Updated: Oct 7

This post is based on the paper “Arbitrator Selection and Regulatory Competition in International Arbitration Law” by Christopher R. Drahozal, published in *Towards a Science of International Arbitration: Collected Empirical Research*, edited by Christopher R. Drahozal and Richard W. Naimark (Kluwer Law International, 2005), reproduced on SSRN (abstract 1905715). All credit for the research, data analysis and findings goes to Professor Drahozal. This post is a simplified summary for learners, and the data in the paper relates to the year 2000 and the ICC Rules then in force.

Countries around the world have rewritten their arbitration laws to win international arbitration business. Hotels, local lawyers and arbitral institutions all gain when a country becomes a popular seat. But who gains the most? Professor Drahozal asks a sharper question: do local arbitrators benefit, and could they even be the hidden drivers behind new arbitration statutes?

The Big Idea: Regulatory Competition in Arbitration

In corporate law, scholars have long argued that Delaware’s dominant position benefits Delaware lawyers, who therefore support laws that keep it that way. The paper cites a study estimating that Delaware’s status as an incorporation haven produced additional lawyer income of 165 million dollars in 2001.

International arbitration is different, because no single country dominates. Instead, countries compete by enacting arbitration-friendly laws. The paper cites earlier research by the same author finding a statistically significant rise in ICC arbitrations held in a country after it enacted a new or revised arbitration statute. The increase was small in absolute terms, fewer than two extra proceedings a year per country on average, or eight to ten per year in major arbitration countries, but around 18 per cent over the mean in percentage terms.

Beneficiaries include national arbitration institutions, local lawyers and hotels. But the paper quotes a commentator who argues that the main winners are good local arbitrators, and then tests that claim with data.

How International Arbitrators Are Chosen

To understand the data, the paper first explains how arbitrators are picked in ICC arbitration, which it calls the central institution of international commercial arbitration.

Sole arbitrator or three: Under the ICC Rules in force at the time, the default is a sole arbitrator unless the parties agree otherwise or the ICC Court decides that three are needed. In 2000, slightly under half of ICC cases had a sole presiding arbitrator.
Sole arbitrators: In 2000, 77 per cent were appointed on proposals of an ICC National Committee, 19 per cent by agreement of the parties and 4 per cent directly by the ICC Court.
Three-member tribunals: Each party usually nominates one arbitrator, and the two co-arbitrators nominate the presiding arbitrator. In 2000, 96 per cent of co-arbitrators were nominated by the parties, and 58 per cent of presiding arbitrators were nominated by the party-appointed arbitrators or by the parties.
Confirmation: The ICC Court must confirm all nominations.

The paper notes a quote that in international arbitration, the choice of arbitrators may be the most important single task parties face.

What Parties Look For: Party-Appointed Arbitrators

A party-appointed arbitrator must be independent, yet the nominating party naturally wants someone likely to view its position favourably. One practitioner quote in the paper puts it as wanting maximum predisposition towards the client with minimum appearance of bias. Constrained by independence rules and limits on discussing the merits with candidates, parties consider:

Nationality: Often a proxy for legal culture and understanding. Parties may also prefer a national of the seat or of the country whose law governs the dispute, because of their experience with a legal system central to the case.
Experience and training: Authority and expertise determine an arbitrator’s clout within the tribunal.
Professional qualifications: Not required by the ICC Rules, but the vast majority are legal professionals. The paper cites an observation that at least 95 per cent of party-proposed arbitrators are lawyers, professors of law, in-house counsel or other legal professionals.
Language ability: Translating all documents and proceedings greatly raises cost and the risk of mistakes.

What Parties Look For: Presiding Arbitrators

Many factors overlap, but the paper identifies four important differences for presiding arbitrators:

Different nationality: Under the ICC Rules then in force, the sole arbitrator or chair should be of a nationality different from the parties, with narrow exceptions in suitable circumstances. The ICC may also avoid neighbouring countries to avoid any appearance of national bias.
Nationals of the seat are more likely: Because the law of the seat usually governs the arbitration, it is useful for the chair to know local law and procedure. When the ICC Court selects a chair, it ordinarily asks the National Committee of the place of arbitration for proposals. The parties chose the place of arbitration in 82 per cent of cases registered in 2000.
Managerial and consensus-building skills: Complex, hard-fought arbitrations need a chair who can manage the process and lead the co-arbitrators, treading the line between laxity and unreasonable demands.
Legal internationalism: An appreciation of different national legal systems and the different expectations of the parties.

The paper also notes a perception, which it says some dispute, that ICC arbitration is dominated by a small elite of arbitrators.

Three Ways Local Arbitrators Might Benefit From a New Arbitration Law

More cases at home: If a new law brings more arbitrations to the country, more local arbitrators are selected, since parties prefer arbitrators from the seat.
A higher share of local arbitrators in those cases: Local arbitrators may know the new statute earliest, may even have helped draft it, and may know how courts are applying it, since court proceedings related to arbitration often produce no published opinions.
A signalling effect abroad: Successfully lobbying for a modern law could signal managerial and consensus-building skills, making local arbitrators more attractive for arbitrations held in other countries.

The Study

The author examined 111 countries with an arbitration statute in force at the end of 1999, using ICC statistical data on the nationality of presiding and party-appointed arbitrators selected in 2000. The model controlled for the number of parties from each country, the number of ICC proceedings held there, the number of parties from the region, national income and population. It tested whether having a new or revised statute enacted in 1985 or later, or the UNCITRAL Model Law, changed arbitrator selection. The paper stresses a data limit: the ICC publishes only aggregate numbers by country, not the nationality of arbitrators in individual cases.

What the Data Showed

Finding 1: More cases at home means more local arbitrators. There is a strong relationship between the number of arbitrations held in a country and the number of arbitrators selected from it, so any increase in proceedings after a new law benefits local arbitrators.

Finding 2: A new law increases the rate of local selection. After enactment, each additional arbitration held in the country corresponded with more local arbitrators than before:

Party-appointed arbitrators: About 0.22 to 0.23 additional local arbitrators per extra proceeding before enactment, rising to about 0.48 after.
Presiding arbitrators: About 0.48 to 0.49 before enactment, rising to about 0.86 after. The effect is larger for presiding arbitrators, which fits the expectation that it matters more for the chair to come from the seat.

Finding 3: There is little evidence of a signalling effect abroad. A new law did not appear to raise the rate at which a country’s arbitrators were selected for arbitrations held elsewhere. The one possible exception was presiding arbitrators from countries that enacted the UNCITRAL Model Law, where the evidence was weak and the author says more research is needed. A possible explanation is that expertise under a model law is transferable to other jurisdictions.

Other observations from the results: nationals of smaller countries were more likely to be chosen as presiding arbitrators, perhaps because they are seen as more neutral, and presiding arbitrators were more often selected from other countries in the same region, consistent with the rule against choosing a chair of the parties’ own nationality.

Why This Matters

The author concludes that prospective arbitrators are important beneficiaries of regulatory competition among arbitral venues, and that the supply of new arbitration laws may therefore be driven, at least partly, by arbitrators and not only by legislatures. Local arbitrators gain twice: from the additional cases a law attracts, and from being picked more often in those cases.

The paper also flags limits. It notes a possible causation problem, that countries supplying many arbitrators may be more likely to enact modern laws, and it tries to address this by testing countries that enacted new laws between 1994 and 1999, with results that were only partly consistent. It also relies on one year of ICC data and cannot see other institutions or ad hoc arbitration.

Key Takeaways

New arbitration laws bring modest but real increases in arbitration at the seat, and local arbitrators benefit from them.
Parties strongly prefer presiding arbitrators who know the law of the seat, which is why the seat and the chair’s nationality are linked.
Party-appointed arbitrators are chosen for nationality, experience, legal qualifications and language skills, within limits set by independence rules.
The theory that a new arbitration law signals higher arbitrator quality abroad found little support in the ICC data.
When drafting an arbitration clause, the choice of seat shapes not only the procedural law but also the pool from which the chair is likely to be drawn.

Build a Career in Arbitration

Arbitrator selection, choice of seat and clause drafting are practical skills every arbitration lawyer needs. To learn how arbitration clauses are drafted, how tribunals are constituted and how a matter runs from notice to award, explore the Advanced Certificate Course in Arbitration and Dispute Resolution by Into Legal World.

For daily legal updates, join the Into Legal World WhatsApp Channel.

Frequently Asked Questions

1. What is regulatory competition in international arbitration?

It is competition among countries to attract international arbitration business by enacting arbitration-friendly laws. The paper studies who benefits from this competition, with a focus on arbitrators.

2. How are arbitrators appointed in ICC arbitration?

Under the ICC Rules discussed in the paper, parties can jointly nominate a sole arbitrator or each nominate one co-arbitrator, with the co-arbitrators nominating the chair. The ICC Court confirms nominations and appoints the arbitrator, usually on a National Committee’s proposal, if parties fail to agree.

3. Why are presiding arbitrators often chosen from the country of the seat?

Because the law of the seat usually governs the conduct of the arbitration, so knowledge of local law and procedure is valuable. The ICC Court ordinarily asks the National Committee of the place of arbitration for proposals.

4. Does a new arbitration law make a country’s arbitrators more popular abroad?

The ICC data in the paper did not support this. There was weak evidence only for presiding arbitrators from countries that enacted the UNCITRAL Model Law, and the author says more research is needed.

5. Who benefits most when a country enacts a new arbitration law?

The paper finds that local arbitrators benefit significantly, through more proceedings in the country and a higher rate of local arbitrator selection in them. Arbitral institutions, local lawyers and hotels also gain.

Keywords

Arbitrator selection international arbitration, regulatory competition arbitration law, Christopher Drahozal arbitration, ICC arbitration arbitrator appointment, presiding arbitrator selection, party-appointed arbitrators, UNCITRAL Model Law, choice of seat of arbitration, empirical research international arbitration, arbitration statute enactment, ICC National Committees

Credits and Source

This post is an original summary prepared for educational purposes. All credit for the ideas and analysis goes to:

Author: Christopher R. Drahozal
Title: Arbitrator Selection and Regulatory Competition in International Arbitration Law
Book: Towards a Science of International Arbitration: Collected Empirical Research, edited by Christopher R. Drahozal and Richard W. Naimark (Kluwer Law International, 2005)
Reproduced on SSRN: abstract 1905715, with permission from Kluwer Law International

Readers are encouraged to read the full paper for the model specifications, tables and footnotes.