Investor-State Mediation: A New Way to Deal With Old Problems

Similar to commercial arbitration, a large proportion of treaty-based investor-state disputes involve construction issues. In the International Centre for the Settlement of Investment Disputes’ (ICSID) 2021 Annual Report, construction was the second-largest economic sector involved in ICSID proceedings, accounting for 16% of ICSID’s new caseload. Historically, the extractives and energy sectors have accounted for the largest share of cases, and this trend continued in 2021. Twenty-nine percent of new cases involved the oil, gas and mining industry, and 14% related to electric power and other energy sources. Given the frequent overlap between these sectors and construction, it is fair to assume that construction-related disputes account for an even bigger proportion of ICSID cases.

The overall cost of an investor-state arbitration can be considerably more expensive than an equivalent commercial arbitration, with average party costs of approximately US$4.7 million for respondent states and US$6.4 million for investors, as well as tribunal costs of about US$1 million. These costs rise if annulment proceedings are pursued: US$1.3 million for an applicant and US$1.4 million for a respondent state.[1]

It also may take longer to conclude an investor-state dispute. On average, ICSID proceedings last approximately four years and eight months. Generally, the higher the amount in dispute, the longer the proceedings will take. Indeed, claims in excess of US$1 billion last an average of almost eight years.[2]

Considering the cost and time to resolve investor-state disputes and the fact that most tribunals continue to significantly reduce the amount of damages claimed by investors, it is no wonder that investors are becoming increasing open to mediation as an effective and timely alternative dispute resolution mechanism for their conflicts.

During the last 10 years, leading international dispute organizations, including the ICSID, the United Nations Commission on International Trade Law (UNCITRAL) and the Energy Charter Conference (ECC), have focused on the investor-state dispute settlement needs of the global community. These organizations have responded with a host of investor-state mediation initiatives. For example, ICSID recently published new mediation rules and the ICSID Background Paper on Investment Mediation.

Why Mediate?

Key reasons for considering mediation for investor-state disputes include the following:

■ Internal and external cost savings: The cost of mediation is a fraction of the roughly US$15 million it costs for the average investor-state arbitration, in addition to the internal costs for the state and the investor, including lost opportunity costs and the potential loss of foreign direct investment (FDI). Where the key issue in dispute is quantum, mediation serves parties by expanding the perspective beyond sums and allowing the identification of a quantum range and similarly valued nonmonetary remedies.

■ The opportunity to reach a relatively quick, and early, settlement: The estimated duration of mediation is six to nine months, based on previous international commercial mediations. Mediation should be a component of the parties’ investment grievance resolution process so that disagreements don’t become disputes.

■ The chance to reach an amicable settlement that preserves the parties’ ongoing relationship: Mediation is particularly well suited for cases in which both the investor and the state have an interest in maintaining an ongoing relationship and a general willingness to engage in negotiations.

■ The value of an independent, impartial third-party providing feedback on claims, roadblocks to settlement and possible avenues for resolution: An experienced mediator is able to reality check the position of the parties and to suggest alternative solutions to promote settlement

■ Flexibility: When utilized early, mediation provides a more flexible avenue for exploring critical relationship management issues, such as working with a particular subcontractor.

■ Confidentiality: Mediation as a confidential and private process provides a safe opportunity to discuss extracontractual issues impacting the investment relationship (e.g., changes in the economic, environmental or sociopolitical climate) and negotiate acceptable solutions.

■ Maintaining FDI opportunities: Mediation can be good for FDI initiatives being established by states, as it demonstrates a proactive conflict management environment to investors, thereby reducing dispute risks.

■ Helping to provide greater clarity on each party’s view on the issues in dispute: This provides a better basis for reaching a negotiated settlement.

■ The ability of the parties to craft the outcome: Mediation is helpful where there is a desire to keep control of the process and the outcome, particularly in cases where solutions extend beyond purely monetary relief.

Practical Considerations

The practical considerations in investor-state mediations require a balanced approach regarding the following issues:

■ Authority to negotiate and recommend settlement: Authority issues are particularly important in investor-state mediations. Multiple agencies may be involved, so having persons present with the authority to negotiate is critical to eventual ratification. There also should be a representative present with authority to recommend any settlement to the ratification body.

■ Multiple disputes with similar issues: The potential impact of any negotiated settlement on other existing or potential claims should be considered.

■ Stakeholder mapping and inclusion: Mediation presents an opportunity to engage parties critical to reaching a sustainable settlement; these might include community, environmental, labor or other noncontractual interests.

■ Selection of co-mediators: Given the complexity of investor-state disputes, co-mediators are often appointed, by agreement of the parties, to work together to mediate the dispute.

■ Information disclosure vs. confidentiality: The need and the statutory requirements for public access/information should be addressed, even while maintaining the confidentiality essential to mediation and effective negotiation.

■ Recognition of settlement agreements: Early consideration should be given to the availability of various enforcement mechanisms, including applicability and requirements of the local jurisdiction and the relatively new United Nations Convention on the Enforcement of International Settlement Agreements Resulting from Mediation (Singapore Convention). It should be noted that whereas a settlement agreement is the product of an agreement between the parties, enforcement proceedings are invariably not required in practice.

Final Thoughts

There appears to be a growing desire among investors and states alike to find a better way to resolve disputes. This is being driven by the changing global investment climate. There are more tools available than ever before to facilitate the use of investment mediation. As parties gain greater awareness and knowledge of those tools and the benefits of their use, they will be more likely to pursue investment mediation to resolve their disputes.

Joe Tirado is based in New York and London and is an international mediator and arbitrator with JAMS. He is also the global co-head of international arbitration partner and solicitor-advocate of Garrigues UK LLP based in London.

[1] British Institute of International and Comparative Law and Allen & Overy 2021 Empirical Study: Cost, Damages and Duration in Investor-State Arbitration.

[2] Ibid.