TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, May 10, 2018

Baseball (Final Offer) Arbitration To Resolve International Law Disputes

Florida Tax Review (2018)Joost Pauwelyn (Georgetown), Baseball Arbitration to Resolve International Law Disputes: Hit or Miss?, 22 Fla. Tax Rev. ___ (2018):

States and international tribunals are in a love-hate relationship. States routinely agree to third-party adjudication. But when international tribunals make decisions they often upset the losing party or are blamed for over-reach (“making law”). The existence of compulsory dispute settlement may also have a chilling effect on states positively settling their differences, or updating or negotiating new rules.

Fixes to this tension traditionally involve proposals to either (i) exit from international tribunals altogether or increase state control over tribunals (with the risk of undermining tribunal independence), or (ii) make international tribunals more like domestic courts with public law type guarantees in respect of appointment, transparency and consistency (with the risk of making tribunals even more powerful).

This paper assesses a concrete proposal that goes in a different direction. It preserves a crucial role for neutral, third-party adjudication but puts more responsibility on states to work out positive solutions themselves: baseball or final offer arbitration (FOA) where disputing parties each offer an answer to the dispute (their “final offer”) and the adjudicator’s task is strictly limited to picking one or the other answer (“hit or miss”).

When carefully calibrated, FOA can, at least for some types of disputes (especially numerical ones between two parties), enhance both efficiency (speed, reduced cost and complexity) and accuracy (reasonable party offers versus tribunals “splitting the difference” between extreme demands). In addition, FOA should facilitate, rather than chill, settlement and long-term cooperation, and puts states rather than tribunals in the driving seat. FOA can also reduce certain sovereignty costs (no reason-giving or precedential value for awards) and may unlock state consent to arbitration where traditionally it is lacking or heavily contested.

Although FOA would seem to be particularly suited to settling international disputes (where sovereignty costs and suspicion toward tribunals run high), surprisingly, FOA is virtually unknown to international lawyers.

Ironically, it is also exactly where FOA is now being confirmed in treaty practice – to settle international tax disputes – that FOA shows its limits. FOA works best in bilateral disputes over a number (e.g. salary figure or intra-company transfer price). Modern tax disputes are increasingly about threshold questions and multilateral, income-based rather than bilateral, transaction-based. The practice of keeping procedures and awards secret also creates asymmetries of information, hampers clarification of increasingly ambiguous tax rules and is not likely acceptable to the broader public. In other settings where FOA is not currently practiced, such as certain trade or investment disputes, FOA has great potential: it can make dispute settlement (e.g. over retaliation, damages or interest amounts, the length of implementation periods or how to split a tariff rate quota or “divorce bill” between the EU and the UK following Brexit) more efficient and accurate while boosting settlement and reducing the chilling effect on negotiations and broader relationships that comes with conventional arbitration. Moreover, where no binding dispute settlement currently exists (think of water or fish stock sharing disputes between two countries or even disputes on how to divide inflows of refugees between two nations), FOA, with its reduced sovereignty costs, may enable third party adjudication where so far states could not agree to it.

Neither “hit” nor “miss”, the choice should, in most cases, not be between opting into either reasoned arbitration or baseball arbitration. An optimal dispute resolution mechanism is likely a combination of both reasoned arbitration (on threshold issues), and FOA (on numerical questions).

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