Mediation in Investment Treaty Disputes: Solution for Trust Issues? – Divyansh Sharma

Mediation in Investment Treaty Disputes: Solution for Trust Issues?

Divyansh Sharma

Introduction

Bilateral investment treaties (BITs) have historically been treated as instruments which safeguard foreign investors and their investments. However, over time, they have generated significant discontent among developing states given their one-sided standards and investor-friendly application by tribunals.[1] Furthering this discontent, concerns related to unpredictability and the perceived lack of transparency and independence of the current arbitration mechanism increasingly impact the negotiation of bilateral treaties. For instance, multiple countries, such as Colombia and The Netherlands, are redrafting their model BITs;[2] and other developing states such as Brazil, Ecuador and India are moving from investor-state dispute settlement (ISDS) to state-state dispute settlement.[3] It is to be noted that the state-state dispute mechanism does not provide the investor with any constructive power to decide the direction of the case.[4] To remedy the problem of rising distrust in ISDS, policymakers and institutions have recently begun to reflect on the idea of a potent shift from arbitration to mediation in investment framework.[5] This article explores how the import of mediation can solve the trust issues involved in the process; and lead to a more sustainable investment environment.

The starting point of understanding the upside of mediation is majorly rooted in objectives of minimising costs, reducing time, and safeguarding long-term relationship prospects. However, a carefully navigated mediation process can also provide the much-needed boost to stakeholder confidence. This article presents and analyses the problems of imprecision and unpredictability that have repelled state parties from choosing arbitration. Following this, it argues how mediation offers an ideal path to resolve this problem.

In the first section, the problems with the existing arbitration framework that call for an immediate revision are analysed. Wherever relevant, contemporary developments are studied to reason why states should actively seek resolution mechanisms outside arbitration. In the second section, a critical analysis of mediation as a mechanism to address these problems is undertaken. This part addresses both the positive and negative effects this practice may bring. This section also presents an analysis on how mediation is different from the already existing practice of conciliation in ISDS.

Arbitration & ‘Standard-Based’ Decision-making: Sowing seeds of Mistrust?

Imprecise BIT standards

The increasing desertion of bilateral investment frameworks by middle income countries closely follows years of irregular decision making by investment tribunals.[6] While it is not the article’s position that the investment treaty jurisprudence is without any clear standards, it is undoubtedly true that the crystallisation of these standards into rigid rules has still not come about. Even so, acknowledging that investment cases are always decided in their specific facts, a need for some substantive rules is increasingly being considered necessary.[7]

This position finds support in scholarly literature. Some proponents believe that investment law is not a simple ‘rule-based’ framework, where violation of a precise rule invites penalisation, but a vague ‘standard-based’ framework.[8] The import of broad standards such as ‘non-arbitrariness’[9] in BITs renders the process as subjective, thus making it extremely difficult for the parties to assess which claims have merit. The inconsistency of application further exacerbates this problem.[10]

Take, for instance, the standard of non-discrimination under the national treatment obligation. Such a provision in the BIT mandates the host state to treat the investor not less favourably than it treats any domestic investors.[11] While no tribunal would contest that the test for this standard would necessarily involve an ‘in like circumstances’ analysis,[12] the application of this concept by different tribunals has shown unexpectedly vast variations even under same arbitral rules. On one hand of the spectrum is SD Myers v Canada, where the Tribunal applied a broad, trade law-based, competitive business approach to understand ‘likeness’, thereby bringing the businesses even loosely in competition under ‘like circumstances’.[13] This is to be contrasted with the opposite, much narrower approach taken in Methanex v United States, where the Tribunal required a foreign entity to be compared with a domestic business that was functioning in the same industry and was similar in ‘all relevant respects’.[14] The inconsistency shown between tribunals was on the extent of likeness required to invite similarity of treatment under the non-discrimination test.

This is but one example of the unpredictability of the regime. Some other examples are noteworthy: The Salini test, which requires an investor to prove the existence of an ‘investment’ using the markers such as a long duration of financial interest and an expectation of return has been deemed essential for proving the objective criteria of ‘investment’ by some tribunals,[15] but has been harshly sidelined by others;[16] The Most Favoured Nation (MFN) treatment has been subject to conflicting decisions on the point of import of substantive benefits that were not envisaged in the original BIT from third party treaties;[17] The Fair and Equitable treatment (FET) standard ranges from the customary international law minimum standard in some cases to a higher threshold in others;[18] The police powers doctrine under the law on expropriation has swung between customary powers of blanket non-compensable regulation[19] to mandatory compensation for legality under BIT standards.[20]

Moving away from arbitration

The imprecision of these standards under the bilateral arbitration framework leads to an absence of clear contextualisation. This is required to shape behaviours of parties in line with the prescribed conduct. While arbitral tribunals are ideally expected to streamline their approach to the questions of law in order to create a uniform body of law,[21] there is no denial that the ISDS system has failed to develop any such uniformity in application.[22]

A further issue is the lack of appeal provisions available to the losing party. Under the current regime, ISDS mechanisms only allow for an annulment. This annulment merely entails setting aside the award and not overturning the legal position.[23] In this sense, ISDS in its current form is dealing with challenges of undefined and vague legal standards, where ad hoc arbitrators are not bound by the precedent and thus, free to create their own legal positions which are not subject to appeal.

These reasons may have contributed to the increasing distrust for investment arbitration amongst states. For example, India and Brazil recently devised a novel framework explicitly taking away the rights from investors to initiate arbitration proceedings against host states.[24] The focus has shifted to ‘dispute prevention’ through joint consultations and allowing some form of ‘state-state arbitration’ only upon failure of this early intervention procedure.[25] This is due to the fact that some states feel that such disputes can no longer be resolved at the investor-state level.[26] Such systems of state-state arbitration pose significant threat to the investor since there may be instances where home states may not choose to espouse these claims, thus rendering the investors without any remedy.

Additionally, the preponderance of tribunals adapting a pro-investor approach also adds to the shift towards such protectionism.[27] Arbitration tends to be extremely long and complicated, producing an unnecessary burden on state resources. An average ICSID proceeding lasts for 3-4 years,[28] and such a long period of contentious dispute may degrade the investor-state relationship. Specifically, this reduces cooperative communication and escalates conflict.[29] This is to be contrasted with mediation which is generally less costly and concludes within months with proper professional assistance.[30] Further, the parties in mediation are not bound by a fixed procedural mechanism and enjoy much more flexibility regarding the dispute.[31]

Arbitration further faces several perception-based concerns. For example, a lack of independence and objectivity exists, since the arbitrators in one case may act as counsels in another.[32] The increasing complexity and costs of proceedings have also pushed the parties towards exploring alternative options for funding. One of these is the increasing use of third-party funding, which exacerbates the investor-state imbalance in ISDS. This is concerning as this practice distorts the policy ends of arbitration by introducing an unrelated third party that incentivizes disputes for financial relations, thereby worsening investor-state relations.[33] Mediation and conciliation provide a good alternative vehicle to address these issues, as detailed below.

Making ISDS More Attractive Through Mediation

The failure of conciliation model under BITs

A potential solution for combating the distrust in investor-state arbitration is the exploration of alternatives such as conciliation and mediation. Currently, a majority of BITs provide for a ‘conciliation’ tier over a ‘cooling-off’ period.[34] Conciliation notably differs from mediation as it is more formal and ‘rights-based’.[35] So far, only an small number (12) conciliation cases have been reported under the ICSID Conciliation Rules and Additional Facility Rules.[36] This is to be contrasted with more than 745 arbitration cases registered under the ICSID framework.[37]

The above statistics show that currently, conciliation is not being meaningfully utilised under the ICSID system. While the above statistics are limited only to the ICSID framework, this comparison has been made for two reasons: first, as a general matter, it is statistically true that ICSID is the most availed of format in ISDS cases;[38] and second, because a significant number of BITs do not specify the nature of expected ‘cool off’ period, thereby leading the parties to resort to passivity in most cases.[39] The reasons may include the non-suitability of conciliation as a preferred mode, along with the absence of any structural support towards mediation.

Conciliation may not be treated as suitable by all parties since the conciliator tends to retain substantial control over the process, which is in itself only ‘result-oriented’.[40] The process of conciliation gives a conciliator the power to propose a solution to end the conflict, and this is based on their assessment of the strength of the case. Conciliation is a formal procedure complete with rules relating to, inter alia, jurisdictional objections and the gathering of evidence.[41] Given that the main focus of this mechanism is not on future needs or relationship building but only dispute resolution based on facts, it is often identified as ‘non-binding arbitration’.[42]

This is in contrast with an ‘interests-based’ mediation, which is a more informal process of facilitated negotiation. The assistance of a neutral third party is essential to the idea of mediation, as opposed to conciliation, where a conciliator may draw up terms of the agreement based on her own view on what may represent a just compromise in the case.[43] A mediator does not limit herself to the substance of the issues, but pays more attention to the nature of the negotiation process and ensures efficient relationship building.[44] Consent to mediation is not binding, thereby giving it a semblance of it being ‘their own process’.[45] The parties in mediation not concerned with what the arbitrator might rule if the dispute escalates, but are mutually coordinating their broader interests, not limited to the pecuniary ones. This is because the dispute is no longer a contest over the potential damages award, but the process shifts to a proactively collaborative effort to reach a mutual compromise in the best interests of both the parties.[46]

Envisioning mediation in interest of both parties

The impact of contentious arbitration is a concern that has been shared by investors. When asked about Metalclad’s journey through the ground breaking NAFTA arbitration of Metalclad v Mexico,[47] its then CEO claimed to be extremely unsatisfied with the experience, and regretted not exploring informal ‘political options’ involving non-arbitration mechanisms.[48] This has been due to the award of compensation that paled way under their sincerely held expectations based upon the expert evaluation.[49] Further, the resentment that the process is slow, disruptive, contentious, and exceedingly unpredictable are common concerns that dissuade foreign investors.[50]

The inclusion of mediation in investor-state disputes may reinstate this dwindling confidence in resolution at the investor-state level itself, albeit differently. The issues encountered where parties subject themselves to arbitrary awards can be effectively countered by having a tier of mediation in the middle of the process, thereby also buying a real ‘cool-off’ period for the parties to weigh the implications of a tentative arbitral loss.

Further, it must be considered that mediation is also far more critical for investment disputes than commercial ones given the implications of investor-state relationships on foreign relations.[51] Since such conflicts also often shape policymaking, it becomes increasingly essential for the parties to understand the ramifications of a hostile face-off on future policy. The shift in the Indian position post-White Industries, where the country called for renegotiation of all existing BITs, is one such example of undesirable policymaking resulting from contentious arbitration.[52] Adopting mediation has the potential to produce results that are acceptable to both parties. A better control over the dispute would also mean that concerns such as taxpayers’ money and public interest would be taken into account.[53] While an arbitral proceeding involves a considerable burden on the taxpayers’ money through its burdensome awards and high costs, a mediation mechanism helps ensure that the parties can truly reach a middle ground keeping all these concerns in mind. Mediation potentially solves these concerns as these proceedings are shorter, and the parties are in substantial control of the terms of settlement.

The obstacles on the road to mediation

There are certain problems associated with mediation in ISDS, which could be the reason for non-adoption of the practice thus far. These include the lack of any enforcement protocol,[54] looming personal liability of public officials who participate in settlement proceedings,[55] and the constant tension between confidentiality and public interest.[56]

The problem of enforceability of mediation settlements can be solved by incorporating the settlement into an award[57] or making the settlement agreement itself binding. United Nations Commission on International Trade Law (UNCITRAL) is already making attempts in this direction.[58] The United Nations Convention on International Settlement Agreements Resulting from Mediation, also known as the Singapore Convention on Mediation, adopted by the United Nations in 2018, is a promising development in this regard.[59] This Convention can singlehandedly solve the enforceability problems provided it witnesses widespread ratification similar to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. In any case, ISDS can also borrow mediation-arbitration combinations from commercial arbitration,[60] which allow the parties to use mediation at different stages during the ongoing arbitration proceedings.

Regarding public liability, domestic legislation can operate to shield public officials entering the mediation settlements from personal liability, thus encouraging the practice.[61] The last issue of transparency involves balancing the confidentiality interests of the investor and accountability obligations of the host state. This can be solved through media management at the outset of the proceedings via the management conference envisaged in the IBA model rules.[62] Such a mediation management conference allows the parties to discuss the conduct during mediation, provisional timetable and concerns such as privacy and confidentiality.[63] The mediators can also, conditioned upon party agreement, review the press statements on a daily basis.

Conclusion

While states across the globe are jumping to protectionist BITs, they should consider that while anti-investor bilateral regimes might save the state from potential claims, it would also hurt home investors abroad. To balance the interests of outbound investors while allowing sufficient regulatory powers to the states, a solution must be explored within the bilateral treaty framework. Abandoning the regime itself would be counterproductive, as this will invariably discourage foreign investment.

Mediation is an ‘interest-based’ process that promises to substantially reduce the time, resources and money spent on long-drawn and unpredictable arbitration proceedings. Maintaining the trust of the parties in the ISDS system is one of the most important outcomes of a successful mediation proceeding, as opposed to the already available conciliatory procedures. This lack of trust being the result of the highly variable application of these standards in tribunal decisions, it is important to transfer more power in the hands of the parties during the course of the dispute. Mediation can help investor-state relationship-building and is therefore promising for a sustainable rise of foreign investments. While there are certain concerns around enforceability of mediation settlements, the Singapore Convention on Mediation is a step in the right direction. Regulations at the state level may also be necessary to resolve the concerns such as personal liability of the government officers negotiating the mediation settlements.

Since mediation is the parties’ own process, it can be extremely beneficial for investment cases where the parties have long-term interests at stake. Mediation, by providing a one-stop solution to the problems resulting from investment arbitration, can potentially solve some problems associated with the BIT regime.

[1] See Mavluda Sattorova, ‘The Impact of Investment Treaty Law on Host States: Enabling Good Governance?’ (2018) 29 European Journal of International Law 1032 (Sattorova).

[2] Nathalie Bernasconi-Osterwalder, ‘State–State Dispute Settlement in Investment Treaties Best Practices Series’ (International Institute for Sustainable Development, October 2014) <www.iisd.org/sites/default/files/publications/best-practices-state-state-dispute-settlement-investment-treaties.pdf> accessed 17 June 2020; Kabir A N Duggal and Laurens H van de Van, ‘With Rights Come Responsibilities: Sustainable Development and gender empowerment under the 2019 Netherlands Model BIT’ (Kluwer Arbitration, 15 June 2019); accessed 17 June 2020.

[3] See for example, Ashutosh Ray and Kabir Duggal, ‘Dispute Resolution in the India-Brazil BIT: Symbolism or Systemic Reform?’ (Kluwer Arbitration, 9 April 2020) <arbitrationblog.kluwerarbitration.com/2020/04/09/dispute-resolution-in-the-india-brazil-bit-symbolism-or-systemic-reform/> accessed 12 May 2020 (Ray & Duggal); Nicholas Peacock and others, ‘Indian International Arbitration E-Bulletin’ (Herbert Smith Freehills, 3 January 2016) <sites-herbertsmithfreehills.vuturevx.com/33/10790/landing-pages/key-features-of-the-model-bit.asp> accessed 12 May 2020; Javier Jaramillo, ‘New Model BIT proposed by Ecuador: Is the Cure Worse than the Disease?’ (Kluwer Arbitration, 20 July 2018); accessed 17 June 2020.

[4] See for example, Investment Cooperation and Facilitation Treaty between The Federal Republic of Brazil and The Republic of India, 2020, Arts 18, 19.

[5] See Constain (n31); Kumberg, (n28).

[6] Sattorova (n1) 88.

[7] See Brooke Guven and Lise Johnson, ‘The Policy Implications of Third-Party Funding in Investor-State Dispute Settlement’ (2019) Columbia Centre on Sustainable Investment Working Paper; accessed 5 July 2020. (Guven & Johnson)

[8] Guven & Johnson (n7) 32.

[9] See Thomas Miles and Cass Sunstein, ‘The Real World of Arbitrariness’ (2008) 75 U. Chi. L. Rev. 761.

[10] Guven & Johnson (n7) 34.

[11] Suzy H Nikièma, ‘The Most Favoured Nations Clause in Investment Treaties: IISD Best Practices Series’ (International Institute for Sustainable Development, February 2017); accessed 17 June 2020. (Nikièma).

[12] United Nations Conference on Trade and Development, ‘National Treatment: UNCTAD Series on Issues in International Investment Agreements’ (1999) 26 UNCTAD/ITE/IIT/11 (Vol. IV) 34.

[13] SD Myers v Canada, [2001] 40 ILM 1408, Partial Award, [250]-[51].

[14] Methanex Corporation v United States of America [2005] 44 ILM 1345, Final Award on Jurisdiction and Merits, Part IV(B), [17], [19], [21].

[15] See for example, Joy Mining Machinery Ltd v The Arab Republic of Egypt, [2004] ICSID Case No. ARB/03/11, Decision on Jurisdiction, [50]; Phoenix v Czech Republic, [2009] ICSID Case No. ARB/06/05, Award, [82].

[16] See for example, Malaysian Historical Salvors Sdn, Bhd v Govemment of Malaysia, [2009] ICSID Case No. ARB/05/10, Decision on the Application for Annulment, [62].

[17] Nikièma (n11); Daimler Financial Services AG v The Argentine Republic, [2012] ICSID Case No ARB/05/1, Award, [224]; Emilio Agustín Maffezini v The Kingdom of Spain, [2000] ICSID Case No ARB/97/7, Decision on Jurisdiction, [54]-[55].

[18] See Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (first published 2008, OUP 2012) 142-144.

[19] See for example, Philip Morris v Uruguay, [2016] ICSID Case No. ARB/10/7, Award, [295].

[20] See for example, Compañia del Desarrollo de Santa Elena S.A. v Republic of Costa Rica, [2000] ICSID Case No ARB/96/1, Award, [71].

[21] See Thunderbird Gaming Corporation v The United Mexican States, [2006] IIC 136, Separate Opinion of Thomas Wälde, [15].

[22] Guven & Johnson (n7).

[23]United Nations Conference on Trade and Development, ‘Dispute Settlement: Post Award Remedies and Procedures’ (2003) UNCTAD/EDM/Misc.232/Add.7.

[24] Ray & Duggal (n3); See Arun S., ‘A Court to fix All Investor-State Rows?’ (The Hindu, 29 October 2017); accessed 13 May 2020.

[25] See for example, Investment Cooperation and Facilitation Treaty Between the Federative Republic of Brazil and the Republic of India, January 25, 2020, Art 18.

[26] Trisha Menon and Gladwin Issac, ‘Developing Countries Opposition to an Investment Court: Could State-State Dispute Settlement be an Alternative?’ (Kluwer Arbitration, 17 February 2018); accessed 17 June 2020.

[27] Sattorova (n1).

[28] ‘Proposals for Amendment of the ICSID Rules — Working Paper’ (ICSID, 2 August 2018); accessed 5 July 2020.

[29] Wolf von Kumberg and others, ‘Enabling Early Settlement in Investor–State Arbitration- The Time to Introduce Mediation Has Come’ (2014) 1 ICSID Rev. 29, 133–141 (Kumberg).

[30] ibid (n 29).

[31] ibid (n 29).

[32] Silvia Constain, ‘Mediation in Investor–State Dispute Settlement: Government Policy and the Changing Landscape’ (2014) 1 ICSID Rev. 29, 25-40. (Constain)

[33] Guven & Johnson (n 7) reasoning that third-party funding allows investors to bring strategic claims and leads to an undue ‘regulatory chill’ on states.

[34] Emma Lindsay, ‘Cooling-Off Periods Under Bilateral Investment Treaties Provide an Opportunity to Resolve Disputes Amicably’ (Withers Worldwide, 24 October 2018); accessed 13 May 2020 (Lindsay).

[35] See Kumberg (n 29).

[36] ‘The ICSID Caseload-Statistics: Issue 2020-1’ (ICSID, 16 February 2020); accessed 13 May 2020. (ICSID Caseload Statistics)

[37] ICSID Caseload Statistics (n36) 9.

[38] ‘ICSID Annual Report’ (ICISD, 9 September 2019); accessed 5 July 2020.

[39] See Lindsay (n 34).

[40] United Nations Conference on Trade and Development, ‘Prevention and Alternatives to Arbitration: UNCTAD Series on International Investment Policies for Development’ (2010) 27 UNCTAD/DIAE/IA/2009/11. (UNCTAD)

[41] UNCTAD (n 40) 25; O’Connell M.E., International Dispute Settlement (2003 ed.); Reif LC, ‘Conciliation as a Mechanism for the Resolution of International Economic and Business Disputes’ (1991) 14 Ford. Int’l Law Journal 578–638.

[42] UNCTAD (n 40) 26.

[43] UNCTAD (n 40) 26; Redfern A. and Hunter M., Law and Practice of International Commercial Arbitration (first published 1986, fourth edition 2004).

[44] See Kumberg (n 29); Constain (n 32).

[45] See for example, International Bar Association Mediation Committee State Mediation Subcommittee, IBA Rules for Investor-State Mediation, October 4, 2012, Art 9(4) (IBA Rules).

[46] UNCTAD (n 40).

[47] Metalclad Corporation v Mexico, (1997) ICSID Case No ARB(A/F)/97/1, Decision on a Request by the Respondent for an Order Prohibiting the Claimant from revealing Information.

[48] Jack J Coe, ‘Should Mediation of Investment Disputes Be Encouraged, And, If So, By Whom and How?’ in Contemporary Issues in International Arbitration and Mediation: The Fordham Papers (2008 ed.) 339 (Coe).

[49] ibid.

[50] Jack J Coe, ‘Toward A Complementary Use Of Conciliation In Investor-State Disputes—A Preliminary Sketch’ (Transnational Dispute Management, 1 February 2007); accessed 13 May 2020.

[51] See Kshama Loya Modani, ‘A Call For Mediation In Investment Treaty Disputes!’ (Nishith Desai, 23 August 2019); accessed 13 May 2020.

[52] Prabhash Ranjan, ‘The White Industries Arbitration: Implications for India’s Investment Treaty Program’ (International Centre on Sustainable Investment, 13 April 2012); accessed 13 May 2020.

[53] See UNCTAD (n 40); Kumberg (n 29); Constain (n 32).

[54] Constain (n 32) 37.

[55] Kumberg (n 29) 134.

[56] Kumberg (n 29) 138.

[57] ICSID Arbitration Rule 43(2).

[58] Singapore Convention; accessed 17 June 2020; Chua, (n 59) 7.

[59] Singapore Convention on Mediation; accessed 17 June 2020.

[60] Eunice Chua, ‘A Contribution to the Conversation on Mixing the Modes of Mediation and Arbitration: Of Definitional Consistency and Process Structure’ (Transnational Dispute Management, 1 August 2018); accessed 13 May 2020 (Chua).