The Investor-State Dispute Settlement (ISDS) mechanism is the avenue where an increasing number of investor-State disputes are being settled through international arbitration. It is seen that mostly the large amounts of some resulting arbitration awards, the cost to host countries of the arbitral process, and the constraints imposed thereby on the ability of governments to regulate enterprises in their territories have raised questions as to whether means other than arbitration and litigation can be found to resolve treaty-based, investor-State disputes. In short, are there supplementary mechanisms other than international arbitration to resolve at least some investor-State disputes? Can mediation and conciliation be the supplement to investor-State arbitrations?
The Nature of Investor-State Disputes and Relationships
Underlying the dispute is an intended long-term investment relationship: A complex connection, which amounts to a state of interdependence between the investor and the host country. In such cases, the host country is dependent on the continued provision by the investor of the needed public service and at least in the short run has no other option but to continue to deal with the investor. Similarly, the investor, having committed substantial capital to the privatized enterprise, is dependent on the host country for continued revenues and at least in the short run, has few options with respect to selling its investment.
On the other hand, the costs of investor-State disputes are high and they place a financial hardship on the host country. The potential costs of an investor-State arbitration are basically threefold. First, a host country faces the risk of having to pay awards that, in relation to its budget and financial resources, may prove extremely burdensome. Second, the host country must bear the substantial costs, both direct and indirect, of conducting the arbitration itself. Third, the “policy cost” of investor-State arbitration is that a substantial award to the investor may require the host country to repeal or modify measures that were implemented for the public good.
Uneventful Tours of Investor-State Dispute Settlement System
The current investment arbitration system is viable only if states voluntarily comply with, and enforce the arbitral award. Nonetheless, such compliance cannot be presumed when the awards are adverse to the nations’ interests. Moreover, arbitration in many circumstances may lead the host government to repeal or modify such measures in order to avoid similar arbitration claims from other foreign investors. It is because of these reasons, neither the aim nor the consequence of arbitration may be effective dispute resolution.
Particularly noteworthy have been the comments made by Grant Kesler, the Chief Executive Officer of Metalclad, after the company won a 17 million dollar arbitral award against Mexico. In hindsight, and despite being victorious, the arbitration had been so dissatisfying that they wished the company had relied on other options to resolve the dispute. The proceedings had spanned approximately five years, involved a battle in domestic courts, and the Claimants side alone had an estimated $4 million in direct and indirect costs. No doubt there were considerable costs endured by Mexico as well. These views may be shared by others: about the process, the snail-like movement, costs, and the unpredictability. India’s episode of the ISDS with the White Industries’ in White Industries Australia Limited v. The Republic of India is one of the prime example of parties’ unpleasant experience.
Therefore, a consideration of procedures and a system that could reduce the likelihood of an investor-State dispute is necessary or at least, if once they have arisen, it is only indispensable to first channel such disputes into forums that encourage communication and the development of consensual solutions. In the investment treaty context, it is important for the parties to maintain or improve ongoing relationships, collaborate on the implementation of any agreement, and acknowledge volatile political situations to enable representatives (and their constituencies) to embrace effective solutions.
Investor-State Mediations/Conciliations supplementing Investor-State Arbitrations
The settlement of investment disputes using mediation or conciliation with a view to creating an atmosphere conducive to foreign investment has great merit and deserves the support of the Law Commission of India and the Government of India. This is primarily because it is only justified that all possible tools and combinations should be left open for high value disputes relating to investments: (a) mediation (b) conciliation, (c) arbitration, (c) mediation/conciliation with subsequent or parallel arbitration or (d) other combinations. With the 260th Report of the Law Commission of India on the Draft Model of Indian Bilateral Treaty blindsiding Investor-State Mediations/Conciliations, it seems as if the ISDS mechanism is an arm.
Investor-State Mediations/Conciliations deserve further exploration and establishment in the context of India’s Model Bilateral Investment Treaty and the ISDS mechanism. This is true for many reasons. For instance, Mediation/Conciliation would seem preferable to arbitration because they do not in any way infringe or appear to infringe upon a country’s sovereignty. It is true that arbitration, if freely accepted, is not an infringement of sovereignty either, but an award against the country might be interpreted as a curtailment of their sovereignty. Mediation/Conciliation as supplementary additions to arbitration, is likely to make the ISDS mechanism more effective. The shift from adjudicating legal issues to identifying shared interests and acceptable accommodations would allow the parties to possibly transform a legal dispute into a restructured relationship, enlarging the value of the relationship.
Investor-State Arbitration is a difficult process to be bound to if the country knows that any foreign investor in the future might, in effect, sue it outside of the national courts in connection with a dispute arising in the future. Plus, governments sometimes face a situation in which they cannot carry out commitments undertaken by the previous governments. Here and elsewhere, mediation/conciliation enables a government to save face. Sometimes a government is convinced of the merits of the foreign investor’s claim, but be politically unable to act upon that conviction. The intervention of a neutral, impartial mediation/conciliator, whose opinion is unbiased, is tremendously effective in helping to persuade the government that the claim must be settled.
Similarly, it is also understood that managers in public companies sometimes express a preference for imposed outcomes against the circumstances that can create allegations against the management for their decisions in negotiations that compromise financial or shareholders’ expectations. It is more difficult to blame a company’s board for the award of arbitrators than for their affirmative decision to settle a claim on what may appear to an outsider to be unsatisfactory terms. A similar force is at work in governments where people may be at risk and where various outside stake-holders (such as NGOs, news media) may be unwilling to let the fact of settlement pass without negative fanfare. Both of these deterrents to mediation/conciliation can be addressed by insisting on certain claims to be adjudicated while certain appropriate claims may be mediated/conciliated.
As indicated in the outset, the object of this paper is to promote further discussion. Numerous architectural details and policy implications remain to be considered if this is to become a natural part of the ISDS mechanism in India or elsewhere.
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