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Transnational Private-Public Arbitration as Global Regulatory Governance: Charting and Codifying the Lex Mercatoria Publica

Final Report Summary - LEXMERCPUB (Transnational Private-Public Arbitration as Global Regulatory Governance: Charting and Codifying the Lex Mercatoria Publica)

The LexMercPub project has looked at the growing practice of settling disputes between states and state entities, on the one hand, and private economic actors, on the other hand, not in domestic courts, but through arbitration. Such private-public arbitrations are a common practice to resolve disputes both under contracts between private actors and public entities as well as under international investment agreements and often concern questions that touch on the relationship between private and public interests. The LexMercPub project has shown that private-public arbitration does not only function so as to resolve individual disputes; rather, it operates as a system of transnational governance in which arbitrators, in important regards, function as law-makers. Arbitrators not only apply concrete, pre-existing standards that are contained in contracts or treaties, but also – given the presence of numerous general principles of law governing private-public relations, such as the principle of good faith, the principle of fair and equitable treatment, or the principle of respect for public interest – further develop the applicable law to private-public relationships in a manner that overarches specific legal systems. In that sense, arbitrators in private-public arbitrations should be considered as exercising transnational public authority.
As the LexMercPub project has further shown, the exercise of this authority can create tensions with core constitutional principles, such as the principle of democracy, the rule of law, and the protection of human and fundamental rights. This exposes private-public arbitration to challenges of legitimacy that must be resolved if private-public arbitration is to be used as a means of dispute resolution. The project has shown that a comparative constitutional approach to these legitimacy challenges suggests that private-public arbitrations cannot be considered per se to be illegitimate and contrary to the public interest. Instead, most domestic legal systems accept that private-public disputes can be arbitrated. In fact, the LexMercPub project found that the arbitration of private-public disputes can contribute, under certain circumstances, to certain principles of constitutional rank, such as access to justice, dispute resolution in accordance with the rule of law, and the contribution towards the sustainable development of the involved states, in particular when there are problems with the rule of law domestically. At the same time, in order to be legitimate, procedural and substantive safeguards must exist to ensure that private-public arbitration respects, and does not undermine, legitimate public interests. This includes, inter alia, the need for arbitrators to respect states’ right to regulate and other competing non-economic public concerns, the need for procedures to be transparent and open to affected third-parties, and the need for control mechanisms to exist, both as concerns remedies against arbitral awards, and in respect of the enforcement of awards.
Yet, the comparative constitutional framework the LexMercPub project has developed for private-public arbitration is not only relevant for arbitration; it can also be used in the current debates about the reform of investor-state dispute settlement under international investment agreements to divise dispute settlement design that meets the demands of constitutional principles, such as the principle of democracy, the rule of law, and the protection of human and fundamental rights.