When Law Gets Political: Investor-State Mediation as a Form of Diplomacy
Keywords: investor-state mediation, diplomacy, UNCITRAL Working Group III, ISDS
Introduction
The growing interest within the international legal community for the use of investor-state mediation has led to several significant developments in the world of investor-state dispute settlement (ISDS).
Such developments include the creation of investor-state mediation specific rules, guidelines, and clauses within international investment agreements and bilateral investment treaties (BITs), as well as the current Working Group III discussion on ISDS taking place under the auspices of UNCITRAL. These have all contributed to the development of this innovative form of alternative dispute resolution (ADR) which could play a significant role in the field of ISDS, as the world deals with the fallout of Covid-19 and the many disputes that have and will continue to occur.
Although an up-and-coming form of ADR, the scholarship on investor-state mediation[1] has identified several interesting and useful observations regarding its usage. These observations have tended to focus on the transparency of, challenges to, and procedural nature of, investor-state mediation as opposed to situating it within the diplomatic context in which it lies. More specifically, nothing appears to have been written regarding the place of investor-state mediation within the broader context of international relations and diplomatic theory.
This article will analyse investor-state mediation from a diplomatic perspective, by arguing that investor-state mediation is a form of diplomacy that requires a different skill set to that of the traditional commercial mediator.
A Form of Diplomacy?
Although many definitions have been adopted, diplomacy has been described as:
“The means by which states through their formal and other representatives, as well as other actors, articulate, co-ordinate and secure particular or wider interests”[2].
It follows that in its purest sense, investor-state mediation is a form of diplomacy. This is because it involves a direct facilitated negotiation between a state and a foreign investor. The foreign investor being the subject of another state, whether directly or indirectly through a domestic subsidiary. An investor-state mediation can be considered a diplomatic engagement, because in an investor-state mediation a state will, in line with the above definition, try to “co-ordinate and secure particular or wider interests”. Such interests are likely to include carrying out a national policy or a decision that may negatively affect the investor. This lies in direct contrast with the interests of the investor, who will likely challenge that exact policy/decision. Because an investor-state mediation can be a considered a diplomatic engagement, its result could yield political consequences. For example, a failed investor-state mediation could have an impact on future foreign investment towards the host state, particularly if it does not engage appropriately with an investor during the process. Investors may become weary to invest in a hostile environment where diplomatic norms are not adhered to, and the political climate is such that the state is unable to negotiate. It may also affect the diplomatic relations between the investor’s state and the host state. This is particularly the case where there is a clear instance of expropriation that makes headlines internationally.
In some ways, it is not surprising that investor-state mediation raises issues of diplomatic concern. This is because the system of ISDS was formed as a result of states attempting to resolve their differences in a more diplomatic manner than had traditionally been done in the past. In fact, the concept of investment treaties that evolved after World War II was envisaged by states to protect their investments and replace the so called “Gunboat diplomacy”[3] of the 19th century which had its roots in protecting the economic interests that a state had in another often by the use of force. These interventions were meant to be replaced through BITs and the World Bank’s ICSID system to provide a legal recourse that an investor could take against a state that threatened its investment. The origins of the current ISDS system are therefore very much rooted in the art of diplomacy. Investor-state mediation continues this legacy as an innovative form of ADR intended to resolve disputes between states and foreign investors through the process of a facilitated negotiation.
The Anatomy of an Investor-State Mediation
In an investor-state mediation, the investor will be attempting to reach a deal that is suitable and beneficial for their investment, be it renegotiating its terms or being paid adequate compensation for expropriation. The state, on the other hand, will be grappling with a multitude of complex political and social issues which may constrain or limit its ability to be flexible during the negotiation process. Examples of such issues include public opinion, state finances, political pressure, corruption, and bureaucracy. An investor-state mediation therefore involves a complex negotiation with multiple state and non-state actors. The complex nature of an investor-state mediation is reflected in the process requirements which magnify some of the issues dealt with in a more general commercial mediation. The issue of confidentiality is more complex in an investor-state mediation because the matter will involve a public interest that might require any settlement to be made available to the citizens of the state,[4] this may be objected to by the investor. The issue of authority raises considerations in an investor-state mediation as it may not always be clear who the decision maker is on behalf of the state, this might prompt the investor to feel it is not meeting the right people during the process. The language and location of the mediation may also raise potential issues which need to be managed carefully by the mediator in order for the parties to feel comfortable and reassured during the process. [5]
Once the mediation has begun, the mediator will need to manage expectations on both sides and create an environment where both parties feel they are able to negotiate. This is important because it could be argued that there is a significant imbalance between the parties in an investor-state mediation. This is because the state may feel it has a lot more to lose in the negotiation than the investor. The state and its officials also face certain barriers to mediation, which a commercial party does not, such as: a legal framework in which mediation takes place, the lack of internal organisation permitting a state official to negotiate a settlement, lack of clear authority for state officials to mediate a settlement, fear of repercussions and allegations of bribery if a state official settles a case, lack of transparency given that mediation is a confidential process, state budgets alongside the issue of where a settlement payment is to come from.[6] However, this may not always be the case, and sometimes a state may feel it is in a stronger position than the investor because it holds all the cards in the negotiation given it is only dealing with an individual investor and not a formal diplomatic representative of the investor’s home state. There may be the perception that there is less political risk in adopting an inflexible/harsh stance towards the investor in such circumstances.
Because an investor-state mediation is a form of diplomacy, no matter what the state does it may well face criticism both domestically and internationally following the outcome of a particular deal reached through mediation. Investor-state mediation is therefore an extremely complex form of dispute resolution involving highly political considerations. Because of this, the mediator needs a specific skill set to design and implement a process that may enable the state and the investor to settle a dispute.
A Different Skill Set
As mentioned previously, an investor-state mediation requires a very specific skill set that differs from what is commonly expected of a general commercial mediator. Generally speaking, commercial mediators are applying their experience and expertise within the context of a business dispute. As such, these disputes will require a strong commercial understanding alongside an awareness of the business environment. An investor-state mediation, by contrast, requires a much greater understanding of government and politics, the social situation in a state, alongside a cultural understanding of the host state to fully understand and appreciate the difficulties in a case. A strong commercial background alongside experience in business is likely not going to be enough for an investor-state mediator to fully understand all the issues at stake.
It follows that to provide the best possible service to the parties, investor-state mediators would benefit from a thorough understanding of ISDS alongside detailed knowledge of the political system and social conditions in the state involved, this is particularly relevant because investor- state disputes by their nature will involve a broad range of stakeholders, besides the parties to the investment, including various ministries within the government, state and local governments, communities, unions and workers, NGOs and perhaps other state entities and private actors. All of these are involved in the mediation process whether directly at the table, or at the very least by being informed of the process. If a robust and lasting agreement is to be achieved the process and design aspects that form part of the mediation, must allow for a flexible process to enable these needs to be met. This requires process design skills and political acumen that are beyond those needed by a commercial mediator.
It is therefore useful for an investor-state mediator to have a range of skills in addition to those of a commercial mediator. These combined skills will allow the mediator to get beneath the surface and better understand the dispute and potential solutions. This is not to say that the mediator does not need expertise and specific knowledge of the industry the investment falls under. However, a political, social, and cultural understanding of the state itself may be more important during the process design and mediation phases.
As mentioned earlier, many of the skills required for an investor-state mediation are needed for a commercial mediation but the issues are often magnified and require a more thorough understanding particularly when dealing with confidentiality and authority in relation to the state.
Conclusion
To summarise, investor-state mediation is a form of diplomacy because it involves the direct negotiation between a state and a foreign investor, a negotiation no doubt prompted by claims of unfair treatment/expropriation by the latter. Investor-state mediation is therefore a highly complex form of ADR, requiring mediators to have advanced skills in process design and an understanding of the social conditions existing within the host state. Having said this, I believe the future is bright for this unique form of ADR which appears to be developing internationally with examples of investor-state mediation specific rules having been developed by ICSID, the Beijing Arbitration Commission, and the International Bar Association. ICSID’s recent background paper on the process of investor-state mediation and UNCITRAL Working Group III’s recent draft for the possible reform of ISDS which includes suggestions for mandatory mediation, are further examples of continued development. All of this under the backdrop of the Singapore Convention shows that mediation continues to develop into a more regulated internationally recognised form of ADR.
Joel Evans is a CEDR Accredited Mediator, Harvard Trained Negotiator and Member of the Chartered Institute of Arbitrators. He holds masters’ degrees from King’s College London and Tsinghua University in Beijing.
Preferred Citation: Joel Evans, ‘When Law Gets Political: Investor-State Mediation as a Form of Diplomacy’, (ICAR, 23 Sept., 2021) <https://investmentandcommercialarbitrationreview.com/2021/09/when-law-gets-political-investor-state-mediation-as-a-form-of-diplomacy/>.
ENDNOTES
[1] Please see S F Ali and O G Repousis, “Investor-State Mediation and the Rise of Transparency in International Investment Law: Opportunity or Threat” (2017) 45 Denv. J. Int’l L. & Pol’y 225 <https://digitalcommons.du.edu/cgi/viewcontent.cgi?article=1012&context=djilp>; M R Dahlan and Wolf von Kumberg, “Investor-State Dispute Settlement Reconceptionalized: Regulation of Disputes, Standards and Mediation”, (2018) 18 Pepp. Disp. Resol. L.J. 467 <https://digitalcommons.pepperdine.edu/drlj/vol18/iss3/4>; M. Appel and J.M. Tirado, “Investor-State Mediation – New Tools for Policy Makers” (2020) TDM 2 <www.transnational-dispute-management.com/article.asp?key=2727> and J M. Claxton, “Compelling Parties to Mediate Investor-State Disputes: No Pressure, No Diamonds?”, (2020) 20 Pepp. Disp. Resol. L.J. 78 <https://digitalcommons.pepperdine.edu/drlj/vol20/iss1/4>.
[2] R.P Barston, Modern Diplomacy (5th edn, Routledge 2019)
[3] O. Thomas Jr and Jonathan Gimblett, ‘From Gunboats to BIT’s : The evolution of modern International Investment Law’ in Karl P. Sauvant (ed) Yearbook on International Investment Law & Policy 2010-2011 (OUP 2012).
[4] Interview with Wolf Von Kumberg “Investor-State Mediation: Process Design Considerations” (ICSID, 2018) <https://www.youtube.com/watch?v=c1a75KSfED8>.
[5] Ibid.
[6] Seraphina Chew, Lucy Reed and J Christopher Thomas QC, ‘Report: Survey on Obstacles to Settlement of Investor-State Disputes’ NUS Centre for International Law Working Paper 18/01 (September 2018) <https://cil.nus.edu.sg/wp-content/uploads/2018/09/NUS-CIL-Working-Paper-1801-Report-Survey-on-Obstacles-to-Settlement-of-Investor-State-Disputes.pdf.>.
The views and opinions expressed in the article are those of the Author(s) solely and do not reflect the official position of the institution(s) with which the Author(s) is /are affiliated. Further, the statements of the Author(s) produced herein should not be construed as legal advice.
