[This article has been authored by Aryan Tulsyan and Mayannk Sharma, third-year law students from JGLS]
Keywords: Mandatory Mediation, ISDS, Investor-State Mediation, BITs, COMESA
Mediation can be understood as a structured negotiation process assisted by a neutral person, who assists disputant parties to reach a mutually satisfactory settlement of a dispute. Investor-State Dispute Settlement (“ISDS”) is the customary mechanism to resolve disputes between foreign investors and the respective host states. The dispute resolution clauses of investment treaties such as Bilateral Investment Treaties (“BIT”) or Multilateral Investment Treaties (“MIT”) lay out the forum or mechanism to which the parties can resort for the settlement of disputes. The most commonly used approach by parties is to resort to investor-state arbitration for settling disputes. However, there has been a trend recently where parties are making use of investment mediation to resolve disputes. In this context, this article will analyse mandatory mediation with respect to ISDS. First, the article will see how mediation can function within ISDS, and then the article will analyse how and why mediation could be mandatory in ISDS. The article then explores the existence of mandatory mediation provisions within existing investment treaties and the obstacles that may arise in making mediation mandatory in ISDS.
What is Mediation in ISDS?
Mediation emerges as a promising avenue for dispute settlement and conflict prevention by laying considerable emphasis on harmony and achieving mutually satisfying results for the disputants. It offers the disputants a high degree of flexibility and autonomy with the intent to reach creative solutions by taking into account their common needs and interests. Mediation has long been considered an efficient tool to resolve cross-border commercial disputes and is now being recognised as a tool for settling international investment disputes as well. However, despite the overall flexibility that the mediation process offers to the disputing parties, investment treaties at large, do not include mediation clauses.
Mediation is facilitated by a neutral third-party/mediator and is often characterised by multiple variations based on each party’s flexibility and intent to resolve disputes. It goes to say that the process is highly voluntary in nature instead of a coercive one and the parties are accountable for the outcome of the entire mediation process. The mediator, who presides over the mediation, acts as a guide for the disputing parties by facilitating communication between the parties and explaining the ground rules for the entire process. More specifically in ISDS, the mediator’s role is paramount in terms of employing “advanced knowledge of negotiation and communication theory to defuse hardball tactics” to limit the power imbalance that is bound to arise when a private entity engages in mediation with a nation-state.
How and Why should Mediation be mandatory in ISDS?
The waning interest in the conventional dispute resolution mechanism of arbitration in investor-state disputes is inter alia characterised by a losing party’s refusal to comply with an arbitral award, particularly when such a party is a State. As parties try to avoid acrimonious arbitration proceedings, mediation emerges as a possible alternative to the same. Not only does mediation alleviate the dissatisfaction of parties in investor-state arbitration, but it is also marked by higher settlement rates. Additionally, mediation emerges as a speedier and lesser expensive form of dispute resolution mechanism as opposed to arbitration.
According to an expert report, a comparative analysis of the costs involved between investor-state arbitration and investor-state mediation revealed that the average length and costs of arbitration proceedings were 4 years, and 4 months with a median cost of USD $4 million for both parties. An example of the exorbitant legal costs involved in investor-state arbitration includes the landmark case of Plasma Consortium v. Bulgaria where the Claimant’s legal costs were $4.6 million, as opposed to the Respondent, who had to bear $13.2 million in legal costs. Interestingly, the proceedings lasted more than 6 years after which the Arbitral Tribunal issued an award in favour of the Respondent and ordered the Claimant to pay USD $7.4 million to the Respondent, which was much less than the amount spent by the Respondent on legal costs alone. Most importantly, arbitration forecloses the possibility of reconciliation of parties, whereas mediation has the potential to preserve or re-establish business relations frayed in the process by emphasising a collaborative, rather than an adversarial approach.
In view of the advantages that investor-state mediation accrues to the disputants, an argument can be made out for mandating mediation before the parties formally engage in arbitration. This underexplored aspect of alternative dispute resolution was considered by the United Nations Commission On International Trade Law (“UNCITRAL”) in its Working Paper which sought to analyse the possibility of including mandatory mediation to resolve disputes. The Working Group recommended the utilisation of the ‘cool-off’ period during the pre-dispute settlement stage which could accommodate the mediation process within a specified period of time. Failing which, litigation would commence, like an escalation clause. However, the Working Group cautioned that the entire mediation process should be completed within a reasonable and specified time period.
Existence of Mandatory Mediation in ISDS
A few BITs have already provided for mandating mediation as a precursor to arbitration or other dispute resolution mechanisms in the case of investor-state disputes. Making such procedures mandatory takes place through:
(i) imposing an obligation on both disputing parties to undertake mediation,
(ii) requiring a designated procedure to have taken place before an arbitration can be initiated, or
(iii) making participation in the designated amicable dispute resolution procedure mandatory for the investor, at the State’s election.
An example of a draft mandatory mediation clause in ISDS can be found here.
Article 26 of the COMESA Investment Agreement requires the disputing parties to resolve their disputes in a six-month settlement period, where mediation would be the governing dispute resolution tool. Other investment treaties, such as Australia-Indonesia CEPA (Article 14.23), Indonesia-Korea CEPA, Mauritius-UAE BIT (Article 10(3)), Armenia-UAE BIT etc. also provide that the disputing parties must mandatorily attempt to resolve their disputes through amicable avenues (such as mediation). However, since these investment treaties do not provide that ‘mediation’ must be the amicable dispute settlement mechanism, disputing parties have the option to choose other avenues such as conciliation. Notwithstanding the above, it is evident that mandatory mediation clauses in investment treaties exist already.
Obstacles related to Mandatory Mediation in ISDS
An analysis of the incorporation of mandatory mediation into ISDS frameworks would be incomplete without looking into the obstacles that exist between mediation and ISDS. Firstly, mandatory mediation may not reap its benefits if there is an improper legal framework bolstering its incorporation. Most mediation clauses do not apply for an obligation of good faith settlement upon the parties, either explicitly or implicitly. Such poorly drafted mediation clauses can give rise to issues pertaining to jurisdiction and admissibility in subsequent arbitrations. Due to the lack of a well-defined legal framework, the disputant parties do not have sufficient respect and confidence in mediation as a means to resolve their disputes.
Secondly, one of the most significant obstacles to making mediation mandatory in ISDS is that parties have the desire to shift the responsibility of making a decision to a third party. This is deeply motivated by institutional and political factors. Voluntary decisions taken by officials of host states during mediation might be held against them, but if the same is rendered in the form of an arbitral award by an impartial tribunal, it would be more beneficial for them. Therefore, parties have a tendency to shift responsibilities to a third party so that they do not have to make decisions that are material to the dispute; rather the decisions made by the third party enjoy official sanction and indemnify the host state from allegations of bias.
Thirdly, inexperience and unfamiliarity with the mediation process act as crucial obstacles. Since both disputant parties are more familiarised with arbitration as the paramount dispute resolution system, both parties lack sufficient resources to engage in mediation and appoint appropriate mediators. Unfamiliarity and inexperience in mediation stem from its fundamentally confidential nature. This also restricts knowledge about how many actual mediations do take place between host states and investors. Many lawyers also see mediation as an attack on their revenue, as it is a much more expedited process than arbitration. This makes them tend to advise the disputant parties to avoid mediation.
Therefore, Investor-State mediation remains an underexplored aspect of ISDS despite its apparent advantages over arbitration in terms of legal costs and reconciliation between parties. Even though a few BITs have mandatory mediation in place, arbitration still remains a preferred mode of dispute resolution between the parties. The idea of mandatory mediation in ISDS remains at a nascent stage and further working group reports by the UNCITRAL would clarify the mode and method of engaging in mandatory mediation. However, a cursory comparison between the existing dispute resolution mechanisms makes a compelling case for mandatory mediation before engaging in formal arbitration proceedings in view of the reasons highlighted above.