Mediation of Investment Treaty Disputes: New Steps Forward

By: Tanya Antony (National University of Juridical Sciences, Kolkata)


Investment treaties are formal agreements between two countries, or between a country and a private investor based in another country. A Bilateral Investment Treaty (BIT) usually carries several clauses such as Fair and Equitable Treatment (FET) and Full Protection and Safety (FPS), which set the minimum standard by the host country and aim to protect the interests of the foreign investors by promising to not subject them to undue disadvantages – akin to domestic investors in the same sector. This facilitates a non-hostile agreement between the State and the investor for mutual benefit. For an investor, an investment treaty provides security and confidence and adds incentive by reducing the risk involved in investing in a foreign country. For the State, this incentivization draws more multinational investors, pumping money into the economy and strengthening it. The most important feature of a BIT is that it provides for dispute resolution clauses of arbitration, negotiation, conciliation or mediation which the investor can directly rely upon in case of any dispute without having to involve its government.

 THE NEED FOR MEDIATION IN INVESTMENT TREATY DISPUTES

Arbitration, the currently favoured method of resolving international disputes between Investors and States, has long been criticized for creating situations where even the winners are losers. When it comes to disputes between investors and the State, what is at stake is far more complex than in civil or personal cases. It may be important to move beyond the narrow legal dispute and reach a bargain that benefits both parties. As the arbitral bench noted in Achmea BV v Slovakia, “the black and white solution of a legal decision” where one party wins and the other loses may not always be the optimum outcome. There may be several non-party stakeholders, and in particular matters of political or economic interest, the general public too may consider themselves closely involved, making these proceedings the subjects of media interest and public demonstrations.

At the end of a long arbitral process, the costs incurred by the parties are usually comparable to the award itself – both of which ultimately drain the public exchequer. Statistics show that the median costs for claimants are just over $4 million and $3.5 million for the respondents. It is in this context that despite winning an arbitral award of $17 million in Metalclad Corporation v The United Mexican States, the CEO of Metalclad expressed his regret at the “dissatisfactory” arbitration process and wished that they had pursued other means of dispute resolution.[1] The hostile, confrontational, time-consuming and expensive process of arbitration also makes the parties mutually hostile and impedes future collaborations between the two.

Many countries and non-State actors also view international courts and arbitral bodies as an object of the Western world, with fear of court bias and lack of diversity of members. It is not uncommon for a State to simply refuse to pay out the arbitral award after the entire arbitration process has been complied with. In a case involving American corporation CMS Energy and Argentina arising out of financial tariffs in an economic crisis, the arbitral bench awarded CMS $133 million. Argentina never paid this award, which CMS ultimately wrote off to a subsidiary of the Bank of America that deals with distressed debt. This led to the U.S. government delisting Argentina from general preferential trade treaties, damaging relations between them for years to come. In the long run, such a rudimentary evaluation of complex investment treatment disputes, which hang in their balance not just legal but also social, cultural, ethnic and political interests, does more harm than good and detracts from the reason the parties came together to contract in the first place. Mediation is a dispute resolution method that eliminates most of these problems by allowing the parties to arrive at a mutually beneficial solution together. The confidentiality, procedural flexibility and range of outcome choices make it an attractive choice in matters where several complex aspects must be creatively balanced for the best outcome. It is usually faster and less costly than arbitration. The mediator can help the State and the investor to be realistic about their options. This helps them solve what they are capable and willing to implement. This also alleviates the concern some States have with a private arbitral body adjudicating on a sovereign State’s regulatory measures.

THE CURRENT CHALLENGES IN MEDIATING INVESTMENT TREATIES

In a survey conducted by NUS-CIL to better understand the obstacles to settlement of investor-State disputes, more than seventy per cent of the participants in the survey (all known and respected faces in investor-State arbitration) believed that the State was more hesitant to engage in mediation than the investor. While arbitration is viewed as a formal legal process, mediation is generally deemed a more informal process. Since the State arrives at a voluntary settlement, the acknowledgement of a wrong and payment of a substantial sum to the investor from the public exchequer is more difficult to sell to its constituents than a forced arbitral award. Apart from this, the survey also found that most States may lack the internal structure to carry out the effective discussions necessary to arrive at an agreeable amount for settlement. While these are valid concerns faced by a sovereign State, it is worth noting that mediation and other consensual processes are used fairly regularly to deal with other complex and sensitive issues such as domestic public policy, civil rights et al.

Another perceived problem with mediation is that the agreements are unenforceable. A recent development in dispute resolution in law that serves to change this is the Singapore Convention on Mediation (the Convention) which seeks to make enforceable settlement agreements that have come into effect following the eligibility requirements as laid down by Article 4 and Article 5 of the Convention. This requires that the settlement agreement must be signed by both parties; there must be adequate proof that the agreement resulted from the formal process of mediation and it should not come under any of the grounds specified in Article 5 of the Singapore Convention. This is expected to make the same change in mediation as was made in arbitration by the New York Convention in 1958. Although the Singapore Convention applies to “commercial” disputes, the Convention intentionally never defines “commercial”, leaving open the possibility of using it to enforce settlement agreements arising out of investor-State mediation. Moreover, ICSID assumes that the “convention will apply to settlements reached in the context of investment disputes”.[2] However, despite this, mediation is viewed as an informal system that the existing legal system is not equipped to accommodate. Despite already existing as alternate remedies in the clauses of several Model BITs and multilateral treaties, few choose to opt for it. Although Article 32 of the UN Charter includes mediation among the several options for the pacific settlement of disputes, arbitration is strongly preferred in treaties. This is because of its easy enforceability and familiarity. To project mediation as the preferred option in dealing with investment treaty dispute resolution it is essential to structure “model” mediation.

A NEW INTEGRATED MODEL OF DISPUTE RESOLUTION

The reason for the widespread success of arbitration as a means to settle investment treaty disputes is the fact that it has a formal structure and widespread international recognition and legitimacy. But since it is a rights-based adjudication, it does not allow the adjudicators freedom in resolving the full array of problems that arise in complex investor-State disputes. Mediation has the capability to do this but lacks power, institutional capacity and authority. To popularize mediation, it may be essential to include some level of compulsion in the treaties themselves. Such compulsion could merely be to conduct a mediation session or a pre-mediation meeting at the instance of one of the parties or to hold a minimum number of sessions of mediation in the “cooling-off” period, after which the choice is left to the parties. Research has shown that the simple requirement to participate in mediation knowledgeable generates a high number of settlements.[3]

To get effective solutions in the long run from mediation, the quality of mediation must be regulated. Several BITs and multilateral treaties provide for a list from which the mediators may be selected, something similar could be done by the ICSID Secretariat. Research indicates that when parties interact in a way that seems procedurally just, a joint outcome is more likely to be reached. In the investor-State context, the establishment of a small pool of well-known and well-respected investment treaty mediators may help provide the best results with the mediation process. This pool could specialize in dealing with investment disputes and mentor its successors, creating a self-sustaining system. Integrating aspects of mediation and arbitration would provide a multi-faceted approach to deal with complex problems in investment law. Such a measure has found a place in the third Working Paper on the ICSID published by the ICSID Secretariat. It says that if the parties reach a favourable settlement through mediation during arbitration as provided in the ICSID Convention, the Tribunal may record the settlement in the form of an award under Rule 54(2) of the Arbitration Rules for the ICSID Convention. It would hence be able to avail the delocalized enforcement mechanism unique to the ICSID Convention. Such integration could give birth to a coherent and effective dispute resolution system.

CONCLUSION

Mediation provides an optimum platform to resolve the disputes arising thereof in ways that benefit both parties and provide for sustained long-term relations. This is especially important in investor-State disputes where both parties may desire to contract again in the future and incur minimum costs. Rapid ratification of the Singapore Convention and the normalization of mediation as the preferred course to resolve ITDs will require proactive steps but will ultimately prove to be beneficial when mediation is done within an institutionalized framework with quality control and thoughtful participation by the parties.

[1] Stephen J. Spurr, The Duration of Litigation, 19 LAW & POL’Y 285, 305 (1997).

[2] ICSID Secretariat, Annex E, Proposals for Amendment of ICSID Rules – Working Paper, ¶1318 Volume 3 (August 2, 2018).

[3] Jack J. Coe, Jr., “Towards a Complementary Use of Conciliation in Investor-State Disputes—A Preliminary Sketch”, 12 University of California, Davis7 (2015), pp. 8-10.


(The author is a Third-year Student at National University of Juridical Sciences, Kolkata. She has a keen interest in international arbitration and IP law. She welcomes any feedback at tanya218093@nujs.edu.)

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