Abstract

A backlash against the investor-state dispute settlement (ISDS) system and the resulting degrading role of investment arbitration requires a consideration of alternative methods to resolve investment disputes.  In this context, investment mediation is gaining increased attention from institutional bodies. This article serves to provide a high-level overview of investment mediation. First, the authors elaborate on the nature and growing importance of investment mediation and its differences from arbitration. Next, the benefits and pitfalls of investment mediation are discussed. Lastly, an overview of the process of mediation and alternatives for enforcement of mediated settlements is provided.

Introduction

The tide is turning. After long resistance against investor-state dispute settlement (ISDS) in the European Union (EU), on 16 June 2022, a Stockholm Chamber of Commerce tribunal hearing an Energy Charter Treaty (ECT) dispute in Green Power Partners K/S and SCE Solar don Benito v. Spain declined jurisdiction based on the intra-EU objection.[i] This is the first known intra-EU arbitration that followed the anti-arbitration stance of the Court of Justice of the European Union in its Achmea and in Komstroy rulings, which declared the very existence of arbitrations under intra-EU bilateral investment treaties (BITs) and the ECT to be incompatible with the EU law.[ii] While this award might spell the ultimate end of intra-EU arbitration, it now raises the questions: what is the alternative for investors to access adequate legal protection in a post-Achmea scenario? Are potentially biased[iii] and malfunctioning[iv] domestic courts, the European Court of Human Rights with lengthy waiting periods,[v] and overly politicized state-to-state dispute settlement mechanisms of the World Trade Organization and the International Court of Justice[vi] the only options that investors are left with?

The post-Achmea landscape requires us to reconsider the viability of investment mediation for investment disputes. Mediation has already been referred to as a “new hope in a post-Achmea judgment era”[vii] and has been endorsed by the European Commission through the introduction of the “facilitated settlements” framework in Article 9 of the Termination Agreement of intra-EU BITs.[viii] In this respect, this article serves to provide an account of the nature and conduct of a mediation, its growing importance in the field of foreign direct investment, its advantages and disadvantages, as well as the enforcement of mediated settlements.

What is mediation and how does it differ from arbitration?

Mediation is a conflict resolution process in which a mutually selected third party, who has no authority to make binding decisions for disputants, intervenes in a conflict or dispute to assist parties in reaching a voluntary and mutually acceptable understanding and agreement on an issue. The essential element of mediation is that the parties assume full control of the dispute. Rather than being subject to the final say of an arbitrator or a judge, parties in mediation aim towards reaching the best outcome that fits their interests and redefines their relationship. In order to reach this outcome, all stakeholders – parties, mediators, and counsel – engage in a collaborative process aimed at detecting common ground and shared interests.

Without any authority to make a binding ruling, mediators are generally expected to assist parties to improve their relationship, enhance communication, and use effective problem-solving and negotiation procedures.[ix] The contribution of the mediator in maintaining the effectiveness of communication is determinative for generating a more positive sum outcome for parties.[x] Throughout proceedings, mediators tend to pursue closeness with parties by attempting to build rapport, engender confidence, and encourage candor. This is different from the role of the arbitrator, who maintains a distance from the parties and decides on a dispute relying on the evidence presented.[xi]

The role of counsel in mediation is also different than in arbitration. Counsel in mediation is not expected to deploy an adversarial approach in their positions, but rather to take on the role of the negotiator.[xii] Counsel’s role is characterized by rigorous preparation of the case and of the client before the process begins, an ongoing search for opportunities to pursue rapport building with the mediator, and efforts to suggest deadlock-breaking maneuvers and adjustments in proposed terms of settlement.[xiii]

Why investment mediation now?

Historically, while investment arbitration enjoyed widespread acceptance by states in BITs and other economic agreements, investment mediation has remained a mere soft law approach due to its non-binding nature. At the same time, confidentially of the mediations that were conducted largely prevented the development of scholarship on the precise use and value of mediation. Furthermore, a lack of institutional capacity precluded mediation from adequately responding to the volume and array of international disputes.[xiv] As such, mediation has been referred to as a “sleeping beauty” in the field of dispute resolution.[xv]

There is an ever-growing interest in promoting investment mediation. In light of the legitimacy crisis of investment arbitration, mediation was included on the agenda of the multilateral ISDS reform by the UNCITRAL Working Group III as a potential method for resolving investment disputes.[xvi] Additionally, the procedural rules that parties can deploy in mediation have broadened in the last decade with the adoption of the International Bar Association (IBA) Rules for Investor-State Mediation (2012)[xvii], the ECT Guide on Investment Mediation (2016),[xviii] the UNCITRAL Mediation Rules (2021)[xix], the VIAC Rules of Investment Arbitration and Mediation (2021),[xx] and the recent International Centre for Settlement of Investment Disputes (ICSID) Mediation Rules (2022)[xxi].

What are the advantages of mediation?

1. Mediation serves to preserve the relationships of parties.

The majority of investment disputes arise out of matters involving information, communication, and supply of energy resources,[xxii] and such activities are of utmost importance to both parties, namely the foreign investor and the state. Mediation, being a process leading to a mutually acceptable solution, helps parties to preserve their ongoing relationships which accordingly carries economic benefits for both.[xxiii]

2. Mediation decreases the risk of unpredictable outcomes.

Investor-state arbitration tribunals are bedeviled for rendering unpredictable awards.[xxiv] It might be said that some degree of inconsistency in the outcome of investment disputes is inevitable since the system of international investment law has evolved on the basis of more than 2000 BITs[xxv] or other treaties with investment provisions, each containing differing definitions of substantive standards. Arbitral tribunals are bound to make their decisions based on these respective treaties.

However, parties to an investment dispute – both the investor and the state alike – might prefer to avoid any kind of risk, especially when there is a question of damages worth billions of dollars involved. Mediation, being a voluntary endeavor of both parties, might be a lot less risky than arbitration in the sense that it offers a self-tailored outcome based on the structured negotiation of the parties. In mediation, parties may craft an outcome to the dispute that may very well depart from the disputed law and facts by considering non-legal issues, shared interests, and acceptable accommodations.[xxvi] This helps parties not only to mitigate the financial risk of an unpredictable award but also enlarges the value of the outcome to each.

3. Mediation is quicker and cheaper than arbitration.

On average, ICSID cases take approximately 3.6 years.[xxvii] As regards costs, the average amount spent is approximately USD 5.6 million for claimants and USD 4.9 million for respondents.[xxviii] These factors often represent a big burden for investors and states alike.

In the case of Metalclad Corp. v. The United Mexican States, after winning a nearly USD 17 million ICSID arbitral award against Mexico, the Chief Executive Officer of Metalclad expressed regret at having resorted to this mechanism. In order to resolve the dispute, Mexico and the investor had to go through approximately five years of arbitration proceedings and simultaneously were engaged in a fight before domestic courts. The claimant’s side alone incurred an estimated USD 4 million dollars in direct and indirect costs.[xxix] In this context, resorting to mediation may not have led to the same extent of time and financial losses for both parties. Since mediation is not as pleadings-intensive or dependent on adducing full proof, it tends to be less expensive and less time-consuming than arbitration.[xxx]

What are the obstacles to mediation?

Despite the advantages of mediation, certain drawbacks prevent states and investors from seeing it as a preferred means of dispute resolution:[xxxi]

• Lack of domestic legal frameworks on mediation: The absence of policies or regulations at the domestic level regarding mediation creates uncertainty for state officials on how to approach mediation. For example, it is difficult for state officials to decide whether they should settle or not, and even if they do, there are issues related to delegation of authority – i.e. who is responsible for negotiating or settling as well as obtainment a budget for mediation.
• Psychological barriers of state officials against mediation: A survey on Obstacles to Settlement of Investor-State Disputes conducted by the Centre for International Law of the National University of Singapore listed the following psychological obstacles causing states to be reluctant to choose mediation:
• Willingness to avoid accountability for settlement: State officials are far better off complying with an award imposed by an arbitral tribunal rather than taking responsibility for a settlement;
• Fear of public criticism for accepting fault: Democratic governments rely on the support of the public in elections. In case the government decides to side with an investor who, for example, is notorious for running a business that harms the environment, it may provoke a negative attitude of the public towards the current administration;
• Fear of potential allegations of corruption by future administrations: There is a possibility that government officials would be prosecuted for recommending mediation to resolve a dispute with terms that are disadvantageous to the state;
• Fear of setting a precedent: Settling a dispute might be seen as inviting more claims from other investors.[xxxii]
• Lack of awareness of mediation: Despite its advantages, mediation remains an unpopular option for resolving disputes. In fact, at the time of writing of this article, out of all cases that ICSID received, only 1.5% were conciliation cases.[xxxiii]

How is mediation conducted?

Since mediation is identified by principles of voluntariness and flexibility, parties are not obliged to follow a pre-set procedural framework. Thereby, parties are free to modify and adapt the established mediation rules according to their preferences.[xxxiv] Despite the lack of a universal procedure for mediation, typically, investment mediation is conducted in the following manner:[xxxv]

Initial session: At the outset, the mediator describes the characteristics of mediation – that is, that the mediation is voluntary and flexible, and that the mediator’s position is neutral.

After the mediator’s introduction, the parties have an opportunity to present their views on disputed issues and the mediation procedure without interruption. The mediator may then ask questions and request clarifications on legal and/or factual issues with the aim of better understanding each party’s needs and concerns.

Private sessions: If necessary, the mediator may split the parties into separate rooms (caucuses) where they can share new information not likely to be exposed in a joint session. These meetings enable each party to raise their thoughts on the weaknesses and strengths of the case with the mediator. The mediator will then elaborate on the reality of the party’s position and the possible outcome.

The information communicated by parties to the mediator in separate sessions may remain confidential.

Facilitated dialogue: At this point, the parties start formulating ideas and proposals that meet their core interests. The function of the mediator at this stage is to facilitate negotiations with all parties in the same or in separate rooms by gathering their ideas, proposals, and counter-proposals.

Settlement agreement/termination of mediation: If the parties reach a consensus regarding the solution, the mediator will write up a draft agreement. It should be noted that reaching a settlement agreement might not always be the case after the end of the first day of mediation. Resolving a dispute by mediation may take days, weeks, or months.  If the parties do not reach a settlement, they may terminate the mediation.

How is a mediated settlement (settlement agreement) enforced?

An international instrument governing the enforcement of settlement agreements is the United Nations Convention on International Settlement Agreements Resulting from Mediation (2020) (Singapore Convention on Mediation). However, with only 55 signatories and 10 states who have ratified the Convention, it has not yet gained widespread acceptance like the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention) has with regards to international arbitral awards. Thus, parties may not be able to rely on the Singapore Convention on Mediation to enforce mediated settlements in many states.

There are, however, viable alternatives for enforcing mediated settlements:

Reliance on contract law: Since settlement agreements are usually made in writing and duly signed by both parties, they are subject to the law of contracts and enforceable by domestic courts of governing jurisdictions. Even if enforcement of the settlement agreement before a domestic court is an added burden for parties, empirical analysis suggests that parties are more accepting of a consensual solution rather than an imposed decision.[xxxvi]

Complementary arbitration model: Parties may also take advantage of effective enforcement under the New York Convention and have their settlement reflected in an arbitral award on agreed terms, also known as a “consent award.” A consent award is different from a “normal” arbitration award as the dispute is not considered on the merits but reflects the mutually agreed settlement terms of the parties. A consent award has the same status as an arbitral award.[xxxvii]

When including their settlement in an arbitral award for enforcement purposes, caution is required from parties regarding the risk of challenge of the award on public policy grounds. As mentioned above, mediation is identified by the vast exercise of party autonomy which allows parties to diverge from the black letter law and reach a settlement reflecting their interests. In this context, substantial deviation from legal principles in the arbitral award might result in a court setting aside or refusing to enforce an award based on public policy exception.[xxxviii]

Conclusion

Due to the growing anti-arbitration stance for investment disputes in Europe, there is a heightened interest in mediation as an option to resolve such disputes. Offering a structured negotiatory approach, mediation might be an attractive alternative for investors due to its efficiency in terms of cost and time, the absence of the risk of unpredictable outcomes, and its potential to preserve the relationship between the investor and the state.

Mediation does not, however, offer a one-size-fits-all solution for investors, as disputes are always dependent on the individual context. For example, when a conflict has led to the relationship between the parties turning sour, sitting at a mediation table with a neutral third party may not always be a viable option. In this situation, parties may be better off pursuing adjudicatory options (e.g., before domestic courts). Moreover, there are factors such as a lack of awareness about mediation in general, a lack of domestic legal frameworks on mediation, and psychological barriers of state officials against mediation that can preclude the parties from choosing mediation.

In any case, mediation has a promising future in the investment dispute context. As pro-mediation initiatives increase, it will likely gain more importance and popularity in the coming years.

[i] Joost Pauwelyn, ‘ECT Tribunal Upholds Spain’s Intra-EU Objection and Declines Jurisdiction over Renewable Energy Claim’ (Twitter, 22 June 2022) https://twitter.com/JoostPauwelyn/status/1539598284444127234 accessed 27 June 2022.

[ii] There have been more than 50 arbitrations that upheld jurisdiction after Achmea denying intra-EU objections. ‘The Latest Chapter Of The Intra-EU Investment Arbitration Saga: What It Entails For The Protection Of Intra-EU Investments And Enforcement Of Intra-EU Arbitral Awards’ (Gibson Dunn, 2022) https://www.gibsondunn.com/the-latest-chapter-of-the-intra-eu-investment-arbitration-saga-what-it-entails-for-the-protection-of-intra-eu-investments-and-enforcement-of-intra-eu-arbitral-awards/#_ftn3  accessed 10 August 2022.

[iii] Bias is commonly perceived as a pitfall of domestic courts in investor-state disputes. Dmitriy Kochenov, Nikos Lavranos ‘Rule of Law and the Fatal Mistake of Achmea: Could the Intra-EU BITs Have Been the Last Hope for Justice in Captured Illiberal Member States?’ (Reconnect, 2020) 18; Szilárd Gáspár-Szilágyi, ‘Foreign Investors, Domestic Courts and Investment Treaty Arbitration’ in Daniel Behn, Ole Kristian Fauchald and Malcolm Langford (eds), The Legitimacy of Investment Arbitration: Empirical Perspectives. (Cambridge University Press 2022) 177 citing Van Harten (n. 1), Section IV.B; Mavluda Sattorova, ‘Return to the Local Remedies Rule in European BITs? Power (Inequalities), Dispute Settlement, and Change in Investment Treaty Law’ (2012) 39(2) Legal Issues of Economic Integration 223, 226–30.

[iv] According to Bronckers, a third of the domestic courts in the EU Member States are perceived to perform badly. Marco Bronckers, ‘Is Investor-State Dispute Settlement (ISDS) Superior to Litigation before Domestic Courts? An EU View on Bilateral Trade Agreements’ (2015) 18 Journal of International Economic Law 655, 672.

[v] For example, at the end of 2020, ECHR had 62,000 pending applications which in principle would require any new application to go through two or three years of waiting period before reaching the court. ECHR, Annual Report 2020 (provisional edn) 149.

[vi] Bringing an investment dispute before WTO or ICJ is perceived to bring the issue to a political level. Sergio Puig and Gregory Shaffer, ‘Imperfect Alternatives: Institutional Choice and The Reform of Investment Law’ (2018) AJIL 361, 394.

[vii]Josep Galvez, ‘Investment Arbitrations Against Spain In A Post-Achmea Scenario: A New Hope For Mediation?’ (Linkedin.com, 2022) https://www.linkedin.com/pulse/investment-arbitrations-against-spain-post-achmea-scenario-g%C3%A1lvez/  accessed 10 August 2022.

[viii] ‘The Agreement for the Termination of Bilateral Investment Treaties Between the Member States of the European Union’ (2020).

[ix]  Christopher W. Moore, The Mediation Process: Practical Strategies for Resolving Conflict (4^th edn, John Wiley & Sons 2014) 8-9.

[x] Charlie Woods, ‘Revisiting Game Theory And Mediation – Kluwer Mediation Blog’ (Kluwer Mediation Blog, 2022) http://mediationblog.kluwerarbitration.com/2021/10/08/revisiting-game-theory-and-mediation/  accessed 10 August 2022.

[xi] Jack J. Coe Jr., ‘Chapter 4: Settlement of Investor-State Disputes Through Mediation – Preliminary Remarks on Processes, Problems and Prospects’ in R. Doak Bishop (ed.), Enforcement of Arbitral Awards Against Sovereigns (New York, JurisNet, LLC, 2009), 82.

[xii] International Centre for Settlement of Investment Disputes, ‘Investment Mediation Insights: Investment Mediation—From the State’s Perspective’ (Youtube, March, 2022) (271) Investment Mediation Insights: Investment Mediation—From the State’s Perspective – YouTube accessed 27 July 2022.

[xiii] Coe (n xi), 84.

[xiv] Anna Spain, ‘Integration Matters: Rethinking the Architecture of International Dispute Resolution’, (2010) 13 U. Pa. J. Int’l L. 19.

[xv] Giuseppe De Palo and Romina Canessa, ‘Sleeping? Comatose? Only Mandatory Consideration Of Mediation Can Awake Sleeping Beauty In The European Union’ (2014) 16 Cardozo J. of Conflict Resolution.

[xvi] United Nations Commission on International Trade Law Working Group III (Investor-State Dispute

Settlement Reform) Thirty-ninth session New York, 30 March–3 April 2020. Paras 30-31.

[xvii] International Bar Association, ‘Rules for Investor-State Mediation’ (2012).

[xviii] Energy Charter Secretariat, ‘Guide on Investment Mediation’ (2016).

[xix] United Nations Commission on International Trade Law, ‘UNCITRAL Mediation Rules’ (2021).

[xx] Vienna International Arbitral Centre, ‘VIAC Rules of Investment Arbitration and Mediation’ (2021).

[xxi] International Centre for Settlement of Investment Disputes, ‘ICSID Mediation Rules’ (2022).

[xxii] Fact Sheet on Investor-State Dispute Settlement Cases in 2018 [IIA Issues Note, No. 2, 2019] 3.

[xxiii] Ting-Kwok IU, ‘Is Investor-State Mediation An Emerging Practice? A Practitioner’s Perspective – Kluwer Mediation Blog’ (Kluwer Mediation Blog, 2022) http://mediationblog.kluwerarbitration.com/2019/10/16/is-investor-state-mediation-an-emerging-practice-a-practitioners-perspective/  accessed 10 August 2022.

[xxiv] Brower, II, Charles H. ‘Mitsubishi, Investor-State Arbitration, and the Law of State Immunity.’ (2005) 20 (5) AM. U. INT’L L. REV. 907, 921-922.

[xxv] Agreement on the Termination of the intra-EU BITs has been signed only by 23 Member states of the EU except Austria, Finland, Sweden and Ireland. Thus, there are still intra-EU BITs in force that give the right to the EU investor to bring the dispute before arbitration. For database of BITs, refer to: ‘International Investment Agreements Navigator | UNCTAD Investment Policy Hub’ (Investmentpolicy.unctad.org, 2022) https://investmentpolicy.unctad.org/international-investment-agreements/by-economy  accessed 10 August 2022.

[xxvi] Coe (n xi), 86.

[xxvii] Inna Uchkunova, ‘ICSID: Curious Facts’ (Kluwer Arbitration Blog, 2022) http://arbitrationblog.kluwerarbitration.com/2012/10/25/icsid-curious-facts/  accessed 10 August 2022.

[xxviii] Jeffery Commission, The Duration And Costs Of ICSID And UNCITRAL Investment Treaty Arbitrations (2022) 8.

[xxix] Kun Fan, ‘Mediation of Investor–State Disputes: A Treaty Survey’ (2020) 2 JOURNAL OF DISPUTE RESOLUTION 327.

[xxx] Coe (n xi) 86.

[xxxi] Investment Mediation Insights: Investment Mediation—From the State’s Perspective (n xii).

[xxxii] Center for International Law, National University of Singapore, ‘Report: Survey on Obstacles to Settlement of Investor-State Disputes’ (26 May 2017) 11-13.

[xxxiii] This paper uses terms conciliation and mediation interchangeably. International Centre for Settlement of Investment Disputes, The ICSID Caseload- Statistics (2022-1) 9.

[xxxiv] David Ng, ISDS Reform Conference: Mapping the Way Forward Discussion Paper for the Session on Investment Mediation 23.

[xxxv] International Centre for Settlement of Investment Disputes, Background Paper on Investment Mediation (July 2021) 3; ‘The Mediation Process And Dispute Resolution’ (PON – Program on Negotiation at Harvard Law School, 2022) https://www.pon.harvard.edu/daily/mediation/dispute-resolution-how-mediation-unfolds/  accessed 11 August 2022.

[xxxvi] Craig A McEwen & Richard J. Maiman, ‘Small Claims Mediation in Maine: An Empirical Assessment’ (1981) 33 ME. L. REV. 237, 237.

[xxxvii] Yaraslau Kryvoi and Dmitry Davydenko, ‘Consent Awards in International Arbitration: From Settlement to Enforcement’ (2015) 40 (3) BROOK. J. INT’L L. 828, 832.

[xxxviii] Ellen E. Deason, ‘Procedural Rules for Complementary Systems of Litigation and Mediation – Worldwide’ (2004) 80 Notre Dame Law Review 44-45.

This article was first published in Dispute Resolution International, Vol 15 No 2, October 2021, and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.