Yesterday’s International Arbitration Forum session examined the evolving role of arbitrators in investment arbitration, framed around the arguments presented by Paolo Vargiu of the University of Leicester in his recent monograph. The discussion focused on whether arbitrators are responsible for the perceived legitimacy crisis in investment arbitration, and, crucially, whether they have the authority to resolve it.

Setting the Scene

Paolo opened by situating his work within a period of heightened criticism, particularly between 2016 and 2020, when arbitrators were increasingly blamed for systemic imbalances. The prevailing critique suggested that the system disproportionately protects investors and that arbitrators should correct this by making decisions more balanced.

He challenged this premise directly. His central research question, whether arbitrators can legitimately depart from applicable law to pursue fairness or broader societal interests, led to a clear conclusion: they cannot.

The Limits of Arbitrator Authority

A central theme of the session was the constrained role of arbitrators. Paolo explained that the applicable law binds arbitrators, primarily bilateral investment treaties and public international law. There is no legal basis within arbitration frameworks, including ICSID rules, that permits arbitrators to prioritise fairness, public interest, or human rights unless explicitly mandated. Ethical or moral reasoning, therefore, cannot override treaty obligations.

This leads to an important, if somewhat anti-climactic, conclusion: arbitrators are not agents of reform. Rather, they are functionaries tasked with applying the law as it stands.

System Design vs. Arbitrator Conduct

A key distinction emerged between flaws in the system and the conduct of arbitrators. While critics often attribute problems to arbitrator behaviour, Paolo emphasised that the system is designed to protect investors. This is not a distortion but an intentional feature. Any imbalance stems from treaty design rather than arbitrator misconduct, and arbitrators, in fulfilling their role, are largely acting correctly within their mandate.

Who Is Responsible for Reform?

The discussion repeatedly returned to the role of states. It was noted that states draft and sign investment treaties, often granting extensive protections to investors. They also appoint and repeatedly reappoint arbitrators, including those known for expansive, pro-investor interpretations. Despite growing dissatisfaction with the system, states have been slow to implement meaningful reform.

The implication is clear: responsibility for systemic change lies with states, not arbitrators.

Interpretation and the Shift Towards Commercial Logic

Paolo identified a historical shift in arbitration practice. Early investment arbitration was grounded in public international law, but over time, commercial arbitration principles began to dominate. This shift resulted in broader interpretations of treaty provisions, including expansive readings of standards such as fair and equitable treatment.

This evolution has contributed to current legitimacy concerns, particularly where treaties are treated more like contracts than sovereign agreements.

The “Crisis” Question

Despite longstanding criticism, the system remains active and widely used. Mate highlighted a key paradox: investment arbitration continues to grow, with increasing numbers of cases, yet no viable alternative system has emerged.

This suggests that while imperfect, the current system persists largely because there is no clearly superior replacement.

Arbitrator Powers and Constraints

In response to questions, Paolo clarified that arbitrator powers are limited to deciding disputes based on the claims presented and the applicable law, ensuring procedural fairness and due process, and interpreting treaties within established legal frameworks.

They are not empowered to adjust outcomes based on geopolitical considerations, to balance competing treaty obligations such as human rights and investment protection unless expressly provided for, or to act as policymakers or agents of reform.

Clashing Obligations and Public Interest

The session also explored tensions between investment obligations and other international commitments, such as human rights treaties. Paolo noted that arbitrators generally lack jurisdiction to apply external treaty obligations unless they are directly relevant to the dispute. Conflicts between treaties are typically treated as matters for states rather than arbitral tribunals. Without reform at the treaty level, arbitrators remain constrained in this regard.

Conclusion

The session concluded with a clear, if challenging, message:

• Investment arbitration is functioning as designed.
• Arbitrators are not empowered to fix systemic issues.
• Meaningful reform must originate from states through changes to treaty frameworks.

Until then, arbitration will remain a neutral mechanism operating within a potentially imperfect legal structure.