Aarna Law ADR Update/I/08
SIMC and ICSID Cooperation Agreement
On 26 March, 2021, the Singapore International Mediation Centre (SIMC) and the International Centre for Settlement of Investment Disputes (ICSID) signed an Agreement on General Arrangements.i The Agreement was entered into by George Lim, Chairman, on behalf of SIMC, and Gonzalo Flores, Deputy Secretary-General of ICSID, on behalf of ICSID. It was signed during an online ceremony, which also included a panel discussion on the opportunities and challenges with respect to investor-state mediation. The Agreement provides for the use of SIMC’s facilities and mediation services to be conducted under the patronage of ICSID. It further provides for the enhanced technical collaboration between the two centres. It strengthens ICSID and SIMC’s commitment to promote mediation as a method of investor- state dispute settlement, both in Asia and around the world.
The event included a panel discussion on the opportunities and challenges in investor-state dispute mediation. The panellists included Wolf von Kumberg, International Arbitrator and Mediator, Prof. Lawrence Boo, a SIMC Board Member, and Anna Holloway, Counsel, ICSID.
What is Investor-State Mediation?
Investor-State Dispute Settlement is largely governed by arbitration. However, in recent years, there has been a rise in concern regarding the arbitration process due to the large amounts awarded, the high arbitration costs the State parties have to incur, and the constraints imposed on the ability of State governments to regulate enterprises within their respective territories. Often, being involved in an arbitration can have a negative impact on a State, especially a developing State, such as a drop in credit ratings or loss of potential foreign investments.
The alternative is Investor-State Mediation (ISM). Mediation is a process of negotiation facilitated by a trusted neutral person. Investor-State Mediation is the settlement of investment disputes using mediation. In recent years, parties have resorted to mediation as a method of dispute resolution due to the benefits of the process.
Benefits of ISM
Cheaper and less time-consuming
A study by Allen & Overyii shows that parties spend about four years from the request stage to the final award. Further, investors and states spend at least US$6 million and US$4.8 million respectively, on representation fees on average in arbitration cases. Additionally, the average cost for a three-member arbitral tribunal amounts to US$920,000.
Success rates for these cases are also quite startling, with claimants winning only about 43% of cases, and respondents winning about 56% of the cases. Troublingly, successful parties are able to recover some part of their costs in only 51% of cases, with investors recovering them at a higher rate (58%) than states (43%). Moreover, there are additional costs involving post-award procedures such as annulment, setting-aside and enforcement proceedings.
Consequently, not only is arbitration time consuming, it is also expensive, demanding resources that States often do not have the ability to dedicate. In mediation, however, as parties have greater control over the contents of settlement, they are also more likely to settle on an amount that is more viable.
One of the great benefits of mediation is its ability to preserve or even improve relationships between parties. This is not necessarily the case in arbitration, where often, when an investor resorts to investment arbitration there can be the risk of the investor alienating the host State. There have been very few instances where the investor has re-invested funds into the host. It is very easy to burn bridges between the investor and the State as a consequence of the arbitration, leading to many missed opportunities.
Whereas investment arbitration has a reputation of “means to liquidate an economic relationship”, investment mediation is beneficial to the preservation of the economic relationship and long-term cooperation between the States and the foreign investors.
Other Considerations Factored
In some cases, investors or states may have other business or sovereign concerns in an arbitration claim, which may not be expressly stated. Mediation takes into consideration other commercial or policy considerations. Accordingly, investment mediation leaves greater room to account for non-legal factors, such as stakeholder demands, diplomatic concerns, socio-economic conditions, politics, and even history.
Concerns over ISM
As of 2019, only 36% of ICSIDiii cases settle or discontinue. Moreover, according to PITAD, of the total number of 1,056 investment cases, only 186 are settled and 104 discontinued. Investor-State Mediation seems to be a perfect solution to both parties, on paper. Despite this, states and investors remain reluctant to use this method due to various concerns.
The most pressing reason is arguably, the lack of a framework to enforce the settlements borne out of a mediation. Parties also remain wary about mediation’s effectiveness due to the lack of an international regulatory framework about issues such as the admissibility of evidence and the enforceability of foreign mediated settlements.
Second, parties may wish to avoid taking responsibility for a settlement, and often prefer a terrible outcome imposed upon them instead. It paints a better picture for one’s reputation if one can transfer the blame of a disadvantageous award onto a third-party (arbitrator), rather than a settlement in which one is an active participant.
Third, they may find it easier to obtain a budgetary approval for a binding award compared to a voluntary settlement. On the same line as the aforementioned point, it is easier to explain the cost of an award imposed, than a settlement arrived at.
Further, they may be unwilling to publicly accept guilt for previous State actions that ran afoul of agreements or treaties. Mediation is voluntary process that implies an admission of guilt on either side, as opposed to arbitration, wherein a party need not admit guilt.
Lastly, the lack of administrative framework, put in place before the dispute arises, to address any possible dispute via mediation, or the lack of adequate knowledge about such processes on the part of officials or investors, may prevent parties from agreeing to mediation.
However, to tackle the first concern, after the matter is settled through mediation, the terms of the settlement can be made into an arbitral award (known as a ‘consent award’), to get international recognition and enforceability. Hence, it is possible to enforce a mediated settlement and that should not be a major concern.
One of the suggestions strongly advocated by Dr Lawrence Booiv to encourage more parties to agree to mediation is providing parties with a window in the arbitration schedule wherein they may decide to settle the dispute via mediation. Another solution suggested by Dr Boo is the inclusion of a provision for mediation in Bilateral Investment Treaties (BITs) between countries. This inclusion may be in the form of a suggestion, but one that encourages parties to settle disputes via mediation.
ISM in India
In India, arbitration is the preferred dispute resolution mechanism to resolve investor-state disputes. However, mediation is becoming more popular in many circles and was also proposed by the High-Level Committee on Arbitration in 2017. Former Chief Justice of India, Justice SA Bobde has also advocated for mediation, believing that it can turn out to be viable, helping resolve both commercial and investment disputes. He is quoted as saying- “An ounce of mediation is worth a pound of arbitration and a ton of litigation!” In spite of garnering support from various sources, mediation is yet to be given statutory validation, and was excluded from the dispute settlement clause in India’s Model Bilateral Investment Treaty, introduced in 2015, as well as from the recent Bilateral Investment Treaties entered into with Belarus and Kyrgyzstan.v In 2020, the Finance Ministry published a 40-page draft proposal that provides for the appointment of mediators and the setting up of fast-track courts to resolve disputes with foreign investors.vi
Investor-State Mediation has many benefits including a lower drain on resources, maintaining relations between parties, and providing consideration to factors that are not apparent. Encouraging the growth of Investor-State Mediation in India includes highlighting the benefits of this method of dispute resolution, creating a legal framework to support mediation in Investor-State Disputes, and agreeing to settle via mediation in as many cases as possible.
ii Hodgson, Matthew. “Investment Treaty Arbitration: cost, duration and size of claims all show steady increase”, Allen and Overy, 14th December 2017, (https://www.allenovery.com/en-gb/global/news-and-insights/publications/investment-treaty-arbitration- cost-duration-and-size-of-claims-all-show-steady-increase)
iii Weinstein, Daniel. “Making Mediation More Attractive For Investor-State Disputes”, Kluwer Arbitration Blog, 26 March 2019 (http://arbitrationblog.kluwerarbitration.com/2019/03/26/making-mediation-more-attractive-for-investor-state-disputes/)
iv International Centre for Settlement of Investment Disputes. “SIMC and ICSID conclude cooperation agreement”, 31st March 2021 (https://www.youtube.com/watch?v=w6TL3GI1keI).
v Hazarika, Angshuman. “Choice of Mediation: Can the Singapore Convention be an Ice-breaker?”, RGNUL Student Research Review, 17th September 2020 (http://rsrr.in/2020/09/17/mediation-of-international- investmentdisputes/#:~:text=In%20the%20Indian%20context%2C%20taking,new%20generation%20of%20bilateral%20investmen t).
vi Sanklecha, Jay Manoj. “It’s time for govt to rethink the investor-State dispute regime”, The New Indian Express, 19th January 2020 (https://economictimes.indiatimes.com/news/economy/policy/view-its-time-for-govt-to-rethink-the-investor-state-dispute- regime/articleshow/73393435.cms?from=mdr).