LAW, JUSTICE and Development week 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT November 14-17, 2011 Washington DC

LAW, JUSTICE AND DEVELOPMENT WEEK 2011

INNOVATION AND EMPOWERMENTFOR DEVELOPMENT

November 14-17, 2011 Washington DC

LJD LAWJUSTICE andDEVELOPMENT

“Promoting the Use of ADR in Investor-State Treaty Disputes”

November 15, 2011

Mark Clodfelter, Partner

2LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT

Background International investment agreements (‘IIAs”) include:

– Treaties entered into by two States to promote and protect foreign investments in order to induce more foreign investment (“BITs”);

– Multilateral investment treaties, like the Energy Charter Treaty, with provisions similar to BITs

– Free trade agreements, whether bilateral or multilateral, with provisions on investment similar to BITs.

Contain substantive standards of conduct by States (e.g., expropriation, national treatment, FET)

Provide for arbitration of claims of violation Can result in enforceable awards against States, including

monetary awards and injunctions)

LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT 3

Dimensions of treaty arbitration

More than 2,800 IIAs concluded Almost 400 investor-State arbitration cases

have been brought, most of them under IAAs

Cases have involved 87 different States More than 80% of have been filed in the last

eight years


Implications of arbitration High costs - attorney and arbitrator fees, and administrative

costs. Disruptive of ongoing relationships between foreign

investors and the States in which they operate Awards against a State can be large:

“[A] host country faces the risk of having to pay a substantial arbitration award in an amount that, in relation to the country’s budget and financial resources, may prove onerous. Whereas the average award in an ordinary international commercial arbitration is less than a million dollars, an award in an investor-State arbitration is usually many times that.” (Salacuse, 2007: 142)

Prospect of awards can have a chilling effect on public policy initiatives


Amicable settlements in investor-State cases High percentage of private commercial arbitration cases settle

amicably– E.g., as UNCTAD observed, “approximately two-thirds of all arbitration

cases filed with the Court of Arbitration of the International Chamber of Commerce are settled by negotiation before an arbitral award is rendered.”

In contrast, it appears that a much smaller percentage of investor-State cases settle amicably– ICSID statistics show that less than 40% of registered ICSID cases are

discontinued without a final award– Many of these are unilateral discontinuances– One estimate is that only 30 percent of ICSID cases are settled through

negotiations (Coe, 2005: 35)– UNCTAD reports that as few as 15% (55 of the 357) investor-State

arbitration cases known by 2010 “were settled”


What kinds of investor-State cases settle amicably?

Little is known is why some disputes settle and the others do not

A careful study of the discontinued cases at ICSID and elsewhere is needed

Cases with one or more of the following factors are more likely to be settled amicably than others:– Contractual breaches, rather than broader government policies, i.e.,

commercial behavior rather than governmental behavior;– Measures by the State that affected only one or a few investors, as

opposed to a class of investors; and – Ongoing, long-term relationships of interaction between the investor and

the government or a government entity.– Cases has advanced deep into arbitration process


Reasons why more investor-State cases don’t settle

Diffused State decision-making authority – multiple government agencies involved; internal conflicts over who controls strategy

Budgetary constraints – differences over which agency pays; special legislation may be needed

Avoidance of responsibility/political accountability – reluctance of some government officials to take responsibility for making concessions to foreign investor

Precedential implications – May implicate situations of multiple foreign investors; may encourage other investors to arbitrate

Public policy measures at stake – concessions can be seen as infringements on sovereignty; public policy interests at stake

Inability to assess Litigation Risks – Unpredictability of likely outcomes on legal and factual issues


Public policy nature of issues in treaty cases

The public nature of the State as a party Measures at issue are often public interest

measures Claims based on alleged violations of international

legal obligations Many investor claims implicate the reputation of

the nation and its citizens


Unpredictability of outcomes due to divergent decisions

Pre-conditions to consent Existence of a covered “investment” Expropriation standards Fair and equitable treatment Full protection and security Most favored nation treatment Umbrella clauses Essential security exceptions


Use of ADR in investor-State treaty cases

ADR mechanisms are seldom employed in treaty cases– UNCTAD reports that “[d]espite the existence of rules and facilities dealing

with conciliation and mediation procedures, their application in the investor-State context has to date been minimal”

Only six cases have ever been commenced under the ICSID Conciliation Rules, even after nearly thirty years of existence– None of them have involved a dispute under an IIA

Neither ICDR or LCIA report any mediations of investor-State cases


Why isn’t ADR used more often in investor-State cases?

Contrary to interests of the arbitration bar Lack of access to qualified mediators Perception that ADR is ineffective Perception that ADR delays resolution Concern about wasted costs if unsuccessful Lack of transparency Ignorance about mediation and conciliation procedures Lack of rules in which parties can have confidence


Benefits of using ADR in investor-State cases Assistance with assessing litigation risk Increased understanding of costs of arbitration Can lead to creative solutions Assistance in presenting result to public Providing political cover for negotiated result Speedier resolution Enhancing compliance/satisfaction Preserving working relationships Providing greater protection of confidentiality Avoiding setting legal precedent


How Some IIA’s Expressly Encourage Use of ADR

Article VI(2) of 1985 Turkey–US BIT: “If … consultations and negotiations are unsuccessful, the

dispute may be settled through the use of a non-binding third party procedures upon which such national or company and the Party mutually agree. If the dispute cannot be resolved through the foregoing procedures, the dispute shall be submitted for settlement in accordance with any previously agreed, applicable dispute settlement procedures.”


How Some IIA’s Expressly Encourage Use of ADR

Article 9(2) of the 2000 India-Sweden BIT: “If such a dispute has not been amicably settled within a period of six months the

Investor that is a party to the dispute may submit the dispute for resolution according to the following provisions:

(a) to the courts or administrative tribunals of the Contracting Party that is a party to the dispute; or

(b) in accordance with any applicable, previously agreed dispute settlement procedure; or

(c) to international conciliation under the Rules of the United Nations Commission on International Trade Law (hereinafter referred to as “UNCITRAL”).

3. … [W]here the conciliation proceedings under Article 2 (c) of the paragraph are terminated other than by the signing of a settlement agreement, the dispute shall be referred to binding international arbitration according to the following provisions …”


A Duty To Make Genuine Efforts To Settle?“154. … [The six-month waiting period] amounts to something

much more serious: an essential mechanism enshrined in many bilateral investment treaties, which compels the parties to make a genuine effort to engage in good faith negotiations before resorting to arbitration.

155. Of course, this Tribunal does not ignore the fact that if both parties cling obstinately to their positions, the possibilities for having a successful negotiation become null. However, there have been many cases in which parties with seemingly irreconcilable points of view at first, manage to reach amicable solutions. To find out if it is possible, they must first try it.”

Murphy Exploration and Production Company International v. Republic of Ecuador (ICSID Case No. ARB/08/4), Award of December 15, 2010


Thank you!


Documents

LAW, JUSTICE and Development week 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT November 14-17, 2011 Washington DC