Investor-State Mediation: Are We Prepared? | Global

Among the various types of alternative dispute resolution mechanisms, international arbitration has traditionally been the most popular (if not dominant) forum for high-stake cross-border dispute resolution. That said, with the United Nations Convention on International Settlement Agreements Resulting from Mediation (the “Singapore Convention”) having introduced a new regime for the recognition and enforcement of commercial settlements in 2019, negotiations between disputing parties facilitated by a mediator (ie, mediation) are getting more attention as a viable alternative and/or supplement to the current dominance of arbitration as a dispute resolution system. Nowadays, it is not uncommon to run into a “Med-Arb” or “Arb-Med-Arb” provision which is aimed at preserving the parties’ relationships and/or resolving disputes in an amicable manner. Interestingly, this trend is not only prevalent in the commercial arbitration sphere, but also impacts the investor-state dispute settlement (ISDS) world. In this article, we focus on recent developments in investor-state mediation and discuss the peculiar challenges that arise due to the unique features of ISDS.

Investor-state arbitration allows an investor from one contracting state (to an international investment agreement) to directly bring a claim against another contracting state through the arbitration provision under the international investment agreement. With many investment treaty arbitral awards now being public, we are aware of what these are and how they can impact the investors as well as the states involved. When first introduced to international investment agreements, investor-state arbitration was considered an innovative tool and it was welcomed by many investors (and the developed countries that supported these investors), given that relying on the national courts of the host state to enforce obligations was time-consuming and difficult, if not impossible. However, in recent years, the dispute resolution provisions (including the arbitration provisions) under international investment agreements have been increasingly criticised by the international dispute resolution community, on account of these provisions enabling foreign companies to challenge the public health, environmental and social protection laws of the host states that harm their profits, etc.

It is against this background that the international dispute resolution community has been looking to reform the ISDS mechanism and its systemic problems, with the UNCITRAL Working Group III taking a leading role in attempting to address some of the concerns regarding ISDS. Among the many proposed reform plans, there have been significant efforts to codify or exemplify investor-state mediation (ISM). In fact, ISM has been continuously developed on many fronts throughout the last decade. The International Bar Association published the 2012 IBA Rules for Investor-State Mediation. In 2018, ICSID proposed standalone mediation rules to its member states, although these were not formally adopted by the ICSID Administrative Council. The council also supported the development of the guidelines for participants in investment mediation as discussed by the UNCITRAL Working Group III. ICSID thereafter established the new mediation rules in March 2022, which took effect on 1 July 2022, making them the first institutional mediation rules designed specifically for investment disputes. In parallel, the Energy Charter Conference endorsed the 2016 Guide on Investment Mediation as a helpful, voluntary instrument to facilitate the amicable resolution of investment disputes. Similarly, following years of intense discussions and preparations on potential ways to reform the ISDS mechanism, the UNCITRAL Working Group III adopted (i) the draft provisions of mediation for ISDS, and (ii) the draft UNCITRAL guidelines for investment mediation on 7 July 2023.

Notably, many institutions and users in the community have endorsed ISM on account of its expedited enforceability under the Singapore Convention and its ability to offer creative and/or innovative solutions. ISM also offers several other advantages such as time and cost savings, flexibility, parties’ control over the outcome of the dispute, etc. Turning to the most recent developments – UNCITRAL’s draft mediation provisions for ISDS and its draft guidelines for investment mediation – both seek to encourage the use of mediation for resolving international investment disputes. Specifically, the draft provisions allow parties to exercise control over the mediation process, in the spirit of preserving the parties’ relationship and seeking a tailored outcome. The draft UNCITRAL guidelines also seek to provide practical guidance by listing and describing issues that should be considered during an investment mediation. These guidelines specifically reference the ICSID Mediation Rules, noting the need for an agreed set of rules to govern the investment mediation process.

While ISM has been endorsed by many stakeholders in the ISDS community and has even been proposed as part of the reform plans for ISDS, ISM is not without challenges. Aside from the challenges that can apply to mediation in general (eg, increased cost and duration arising from failed mediation), it is important to understand the interplay between the particular features of the ISDS and mediation. As a matter of fact, the UNCITRAL Working Group III has attempted to identify and address some of these challenges as mentioned below.

Firstly, in the context of ISDS, a conflict arises between the requirement for confidentiality inherent to mediation and the need for transparency required for investor-state disputes. At the least, the parties to the ISM and their counsel should be keenly aware of this issue, its impact on the overall mediation process and how these competing interests can be managed without jeopardising the mediation process.

Confidentiality plays an important role in ensuring the efficacy of mediation, as it allows (and encourages) parties to freely express their positions and interests. However, when it comes to the ISDS, transparency is equally important, as public interests are involved and citizens tend to have a keen interest in the outcome of such disputes, as well as how such outcome was attained. At the end of the day, the outcome of the investor-state dispute is subject to public scrutiny. In this regard, many domestic laws, for example legislations applicable to public-private partnerships, public financial management regulations, budget transparency legislation and/or freedom of information legislation, could have affirmative disclosure requirements mandating transparency of investor-state disputes.

Against this backdrop, balancing the requirements of public disclosure while conducting the mediation in a sufficiently confidential and workable manner can prove to be quite challenging. Conscious of such constraints, various rules in ISM attempt to regulate the conflict between confidentiality and transparency issues. That said, different sets of rules regulate the balance between confidentiality and transparency to varying degrees (eg, the IBA Rules for Investor-State Mediation and the ICSID Mediation Rules and Regulations), while providing differing ideas and opinions on what should (or should not) be disclosed in principle. To be more specific, these bodies have set different default rules on whether the dispute that the parties are mediating, or will mediate, should or should not be confidential. Prior to participating in the mediation process, the investor as well as the state should assess these requirements and delicately adjust the ground rules so that the mediation can progress in a co-operative and productive manner.

Secondly, with multiple state agencies frequently involved in investor-state disputes, consideration should be given to who will be the final decision-maker on the host state’s end. For an efficient and successful mediation (or negotiation) to occur, it is critical to have persons with decision-making authority present at the mediation table.

As stated above, since multiple state agencies could be involved in an investor-state dispute, if the governance structure is unclear, this can pose a real challenge in maintaining the efficacy and successful outcome of a mediation. The Model Instrument on Management of Investment Disputes (released by the Energy Charter Secretariat), as well as the draft UNCITRAL guidelines on investment mediation, attempt to address these issues by either suggesting a centralised responsible body to serve as a focal point with exclusive authority for the resolution of disputes or having organisational changes to minimise structural or policy impediments. Given the variety of domestic regulations and governance structures among host states, parties should be careful in setting up the mediation process from the outset, assessing the limitations, pitfalls and/or possible remedies that could arise from a successful mediation.

Thirdly, unlike commercial parties, governments have policy considerations that cannot be overlooked. Thus, several external non-commercial and/or policy factors need to be considered by the adjudicator of the dispute to successfully resolve the conflict. This requires the mediator in ISM to take into account the government’s concerns arising from such non-commercial matters and considerations and factor them into the negotiation process. For example, governments cannot neglect public perception of the state internationally, including whether the mediated settlement or award projects the state in an investor-unfriendly light (thereby reducing future foreign investment) or as a weak state that can be regularly litigated against (increasing the number of disputes and encouraging investors not to co-operate with the state to settle the dispute).

In connection with this, there are other impediments to using mediation as a dispute resolution mechanism from a government’s point of view. Mediated settlements often require the state to bear the costs, meaning any award or settlement could result in taxpayers' money being reallocated to pay the foreign investor, which may not be viewed favourably by the citizens of the state. States therefore prefer to use contentious mechanisms (eg, arbitration) to justify the payment, as opposed to a voluntary decision by the government to settle the dispute with the foreign investor(s).

Understanding these delicate but important interests will allow the mediator in the ISM to better communicate the issues, and it will help investors as well as the state to find a middle ground. This explains why many institutions offer training courses for mediators tailored specifically to ISM.

Following years of intense discussions and efforts, a step has been taken towards reforming ISDS by adopting the draft provisions and guidelines on mediation, and the ISM is now one of the core supplements to the current system. That said, mediation is still at an early stage, and is relatively less widespread than arbitration. While both investors and states view mediation as a better way to resolve disputes, there are still practical challenges. Noting the unique features of the ISDS and the implications of this, careful consideration should be given to constructing the mediation setting in a way that facilitates the use of investment mediation in an efficient manner.