International Dispatch: Investor-State Disputes

Vol. 20 No. 1

By

If you are a US citizen or you run a US company and you make an investment abroad, you will most likely be protected by an international investment treaty between the United States and the host country of your investment that sets the rules relating to the establishment of your investment. Most important, perhaps, the treaty will also guarantee the protection of your investment and your property rights against political risks such as expropriation, nationalization, or restrictions on the free repatriation of capital and profits.

These treaties allow investors to have direct recourse to international arbitration against the host state. If you have been aggrieved by a measure or an act taken by the host state and you have encountered a damage or a loss, you can go to international arbitration, and you don’t need the diplomatic protection of the government of the United States or a state-state mechanism, as you would in international trade disputes, to settle the conflict.

This direct access to international arbitration constitutes a significant exception to international law. Normally, disputes arising in the territory of a state will be settled by the courts of that state, even if the dispute involves a foreign national. But over the last 50 years, investor-state arbitration has become the cornerstone of international investment dispute settlement mechanisms.

International Investment Disputes

The first treaties providing for arbitration to resolve investment disputes appeared in the 1960s, as part of a broader system to encourage international investment. This system of investment protection was designed to respond to investors’ strong distrust of the local courts of developing countries following the decolonization period, when former colonies nationalized and expropriated foreign investments in natural resources and land.

Since the emergence of the globalized world economy in the mid-1990s, the number of bilateral investment treaties (BITs) for the promotion and protection of investment and of free trade agreements (FTAs) has grown exponentially. More than 3,500 BITs and 350 FTAs have been concluded to date, with the vast majority setting international arbitration as the main option for foreign investors aggrieved by a measure or a decision by the host state of their investment.

Not surprisingly, with the massive increase of investment over the last decade in all countries and regions, a growing number of investor-state disputes have been submitted to international arbitration. The World Bank International Centre for Settlement of Investment Disputes (ICSID), the main institution supporting investor-state arbitration, has registered more than 300 investment-treaty cases in the last 15 years. More than 135 cases have been brought under the rules of UNCITRAL, the United Nations Commission on International Trade Law.

Discontent and Concerns

With the proliferation of investor-state arbitration cases, stakeholders began to look more closely into alternative approaches available under the treaties or proposed by relevant institutions. Investment arbitration has turned out to be a lengthy, costly, and unpredictable process.[1] When a sovereign state is a party, the process can be especially long – and adversarial. Furthermore, enforcement of an arbitral award against a state can prove difficult and time-consuming.

At the same time, states all over the globe seek to attract and promote long-term investment that will help the local economy grow. International arbitration with final awards for monetary compensation, however, destroys the relationship between the host state and the investor. Whether the investment is small, such as a law office or a toll road, or huge, as in Chevron’s investments in Ecuador, the result of an arbitration and award is the same: the investor walks away or becomes persona non grata in the host country, ending the investor’s hope for profit and the country’s hope for sustained growth.

Investor-State Mediation

Commentators and representatives of parties have begun urging increased use of mediation before or during arbitration. However, investor-state mediation (ISM) remains rare because of several obstacles. 

Treaty Language

The first barrier is the presence – or absence – of specific language in many treaties, contracts, and investment codes dealing with the timing and processes for dispute resolution. Most existing bilateral investment treaties typically include a provision encouraging the parties to reach an amicable settlement at the early stage of a dispute. The majority of treaties, however, are silent on the methods or processes that can be used to achieve such settlement. A small number refer specifically to mediation and conciliation as a means for investors to settle their disputes, but the time frame is generally very short, only three to six months, and automatically ends when the arbitration process begins.

A newer generation of treaties has identified mediation as a process available to both investors and states at any stage of the dispute, whether or not arbitration has commenced. For example, the recently released negotiating text of a free trade agreement between Canada and the European Union[2] is the first comprehensive free trade and investment treaty to be negotiated by the EU after receiving a mandate to negotiate such rules. That text includes a specific ISM annex that allows for mediation to continue even through the arbitration process.

In the absence of specific treaty provisions, willing parties always have the option to embark upon the mediation process during the so-called cooling-off or amicable settlement period that generally exists between the submission of the request for arbitration and the commencement of the process. An explicit provision for mediation in the investment treaty, however, offers investors and host states a concrete option for the settlement of their dispute and alleviates government officials’ concerns that if they reach a settlement in mediation, they will be seen as “selling out” to foreign investors.

Experience

A second obstacle to the use of ISM is a lack of experience with mediation on the part of investors, state representatives, and government officials. Several initiatives already address this: Investment promotion agencies are now offering mediation services[3] to investors, and many agencies, such as the Korean trade promotion organization KOTRA and the Egyptian General Authority for Investment GAFI are offering ombuds services[4] that include mediative functions. To prevent investor-state disputes from escalating into an arbitration, states also are introducing Dispute Prevention Policies (DPPs), which frequently feature ISM, in many regions.[5] Finally, mediation is increasingly common in international commercial arbitration. Investor-state dispute settlement mechanisms have been designed to build upon the successful use of international commercial arbitration.

Rules

Another obstacle to greater use of mediation in the investor-state context has been the lack of specific rules to assist the parties. Hoping to address this, in October 2012 the International Bar Association (IBA) adopted a set of rules for investor-state mediation. The drafting process took more than two years and involved representatives from developing and industrialized states, multinational corporations, practitioners, arbitrators, and international arbitration institutions, with several rounds of comments and adoption by relevant IBA committees.[6]

IBA Rules for Investor-State Mediation

The IBA’s rules have a broad scope that applies to the mediation of investment disputes or conflicts involving a state or a state entity and an investor. Parties may consent to mediate in advance under an investment law, treaty, or specific contract with a mediation provision. Mediation can also be an option at any point by mutual agreement of the parties. These are default rules that parties can modify or amend by agreement, which gives everyone flexibility, the chance to tailor the mediation process to their own needs, along with the comfort that comes from knowing that if they can’t agree on the changes, they can always fall back on the IBA’s guidelines. Since the IBA rules on ISM have been adopted they have been used in an ICSID conciliation case at the request of the parties.

Minimal Formalities

Article 2 of the rules provides for the commencement of the mediation process with a minimal requirement of formalism and timing constraints. Mediation may take place before arbitration or litigation, after arbitration has begun, or while a case is pending case before the domestic courts of the state party. 

Pre-Mediation Conference

To allow for process organization and an early assessment of the dispute and the interests of the parties, the rules provide for a mediation management conference, which is an opportunity for the parties to clarify important issues such as the authority or mandate for both parties to negotiate, the language, timetable, and format of the proceedings and communication between the parties and the mediator. Through this management conference, the parties and the mediator can adapt the process to their own needs.

Co-mediation

These disputes often involve parties who do not speak a common language, do not come from the same legal tradition, have cultural and background differences, and most important, are politicians or civil servants who represent the sovereign state. Being able to use co-mediators, which is permitted under the rules, can help bridge cultural and language gaps. The drafters felt that this feature could make it easier for state representatives to “buy into” the mediation process.

Party Control

The rules also make clear the role and involvement of the parties in the conduct of the mediation process and the decision. The parties control the process at all times. The mediator may make procedural decisions after consultation with the parties, but the parties retain control over the process at all times.

Institutional Support

The rules allow recourse to an arbitration and mediation institution to support and facilitate the meetings, logistics, and venue for the mediation. The drafters felt that the informal and ad-hoc character of a mediation could be an obstacle for state parties and that the availability of services by an institution could generate additional confidence in the process. Under the IBA rules, ISM can be administered by any arbitration institution.

Confidentiality and Transparency

The rules provide for privacy of the process and the communication of information to the mediator and set a default rule of confidentiality for all information prepared or exchanged during the mediation. This confidentiality and transparency is important, given the participation of a sovereign state and implications on public funds and governance. In the last decade, various stakeholders have criticized arbitration for its confidential character, and arbitration rules have been amended to accommodate requirements of transparency. Drafters of the IBA Mediation Rules addressed both issues specifically and opted not to leave them to the parties. Confidentiality, however, does not extend to the fact that a mediation is taking place or to the outcome of the mediation, unless the parties specifically agree to keep this information confidential. 

Conclusion

These new Investor-State Mediation Rules dispel the idea that investor-state disputes cannot be mediated. The timing of the rules is auspicious, as they come along at the same time as a new generation of treaties that explicitly refer to mediation as a means of settling investment disputes, including as a parallel process to an ongoing arbitration. They also come at a time when the idea of using mediation for commercial and civil disputes is gaining momentum. Government officials and representatives of investors, having learned about mediation, are becoming increasingly interested in the process.

Several challenges remain, including a shortage of specialized mediators. Initiatives are under way, but it will take time for investment mediators to be as available and as experienced as investment arbitrators. Similarly, awareness and capacity-building efforts are needed to spread information and knowledge about mediation, mediation techniques, and processes. Government agencies, universities, and international organizations are working on developing and training ISM mediators. Concrete outputs such as user’s manuals and supporting guidelines are in the works. These combined and systematic efforts will no doubt facilitate the use of mediation to address disputes that should not go to arbitration, either because the amounts at stake do not warrant it or because the parties are interested in continuing to work together to achieve their common goals.

Anna Joubin-Bret is an Avocat à la Court and international investment practitioner in Paris, France. She can be reached at ajb@joubin-bret.com or www.joubin-bret.com.

 

[1] For further discussion, please refer to UNCTAD, Investor-State Disputes: Prevention and Alternatives to Arbitration,  UNCTAD/DIAE/IA/2009/11, U.N. Sales No. E.10.II.D.11 (2010), available at http://unctad.org/en/Docs/diaeia200911_en.pdf; UNCTAD, Investor-State Disputes: Prevention and Alternatives to Arbitration II, UNCTAD/WEB/DIAE/IA/2010/8 (Susan D. Franck & Anna Joubin-Bret eds., 2011), available at http://unctad.org/en/Docs/webdiaeia20108_en.pdf.

[2] See Canada-European Union: Comprehensive Economic and Trade Agreement (CETA) Negotiations, Government of Canada, http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/eu-ue/negotiations-negociations.aspx (last visited Oct. 8, 2013).

[3] See also, e.g., Procuraduría General del Estado Ecuador, http://www.pge.gob.ec/es/centro-mediacion/centro-de-mediacion.html (last visited Oct. 8, 2013) (Mediation Centre at the Procuraduría General del Estado in Ecuador).

[4] See Office of the Foreign Investment Ombudsman, http://www.i-ombudsman.or.kr/eng/au/index.jsp (last visited Oct. 8, 2013) (South Korea). 

[5] See UNCTAD, Reform of Investor-State Dispute Settlement: In Search of a Roadmap, UNCTAD/WEB/DIAE/PCB/2013/4, at 5-6 (June 26, 2013), available at http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d4_en.pdf.

[6] IBA Rules for Investor-State Mediation (Int’l Bar Ass’n 2012), available at http://www.ibanet.org/Document/Default.aspx?DocumentUid=C74CE2C9-7E9E-4BCA-8988-2A4DF573192C.

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