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

“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 DEVELOPMENT3

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 LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT4

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 LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT5

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” LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT6

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 LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT7

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 LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT8

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 LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT9

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 LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT10

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 LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT11

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 LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT12

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 LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT13

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.” LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT14

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 …” LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT15

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 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 LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT16

Thank you! LJD WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT17