Harnessing the Power of Pre-Arbitration Clauses in International Investment Treaties: The Case for Introducing Mediation
By Carol Khouzami[1]
In 2011, I embarked on my professional journey at IFC, the private sector branch of the World Bank Group. I assumed a pivotal role in spearheading a groundbreaking project focused on the establishment and institutionalizing of commercial mediation practices in Lebanon.
While mediation had already gained traction in resolving domestic commercial disputes – in addition to its successful implementation across diverse sectors like family, labor, and consumer affairs – it had yet to be recognized as a viable option for international commercial disputes, with arbitration remaining the predominant method for settling such disputes.
Prior to joining IFC, I had the privilege of serving as Lebanon’s Chief Negotiator for Bilateral Investment Treaties (BITs) for an extensive period of 15 years. This role enabled me to gain a comprehensive understanding of the landscape surrounding BITs and their implications.
Throughout my tenure, I successfully negotiated more than 65 BITs, aligning with recommended models provided by esteemed international organizations like UNCTAD[2]. These models predominantly emphasized arbitration as the preferred method for resolving both investor-state and state-state disputes. While litigation in the national court of the host party was technically an available avenue, it was often an unattractive option for investors embroiled in disputes, resulting in a tendency to pursue arbitration.
Furthermore, the overwhelming majority of BITs worldwide, including those signed by Lebanon, incorporate a pre-arbitration clause[3]. The language utilized in these clauses tends to be ambiguous and lacks precise definitions; common terms employed include “diplomatic negotiations,” “amicable settlement,” “conciliation,” or “negotiation by a third neutral party,” among others.
Certain regional investment agreements offer more specific and detailed provisions in this regard, underscoring the significance of careful examination and interpretation of specific provisions within each treaty. For instance, the agreement for the promotion, protection, and guarantee of investment among member states of the Organization of the Islamic Conference (1981) contains articles 16 and 17, which do not explicitly mandate diplomatic negotiations.
Instead, if the parties involved in the dispute choose an Alternative Dispute Resolution (ADR) process, precluding recourse to national courts, conciliation becomes a compulsory initial stage. Only if conciliation proves unsuccessful can the dispute proceed to arbitration. Similarly, the Unified Agreement for the Investment of Arab Capital in Arab Countries (1980) also lacks a diplomatic negotiations clause within its dispute resolution section. However, it mandates the utilization of conciliation or arbitration in accordance with the regulations and procedures outlined in the agreement’s annex. Only after conciliation or arbitration has failed can the parties involved resort to “legal action” before the Arab Investment Court, established by the agreement, until the establishment of the Arab Court of Justice.
The interpretation of pre-arbitration clauses in BITs has been also a subject of confusion in international jurisprudence over the years. The lack of consistent legal precedent has contributed to differing perspectives on whether these clauses should be treated as formal or flexible processes, whether their non-application affects jurisdiction or admissibility, and if they should be considered as a pre-condition for arbitration. It is important to acknowledge in all fairness, that the lack of consistent jurisprudence is due to the careful consideration required from arbitrators to the specific language used in each BIT.
Salini v. Morocco
A significant ruling in the Salini v. Morocco case by ICSID in 2001 shed some light on the matter.
The decision stated that the compulsory attempt to reach an amicable settlement, as prescribed by Article 8.2 of the 1990 Italy-Morocco BIT, applies to both the investor and the host state. Thus, the Italian investors were required to make efforts to resolve their dispute with the Kingdom of Morocco through amicable means. However, the decision also introduced nuances by noting that the attempt to achieve an amicable settlement should primarily involve the identification of grounds for complaint and a genuine desire to resolve the issues outside of court. It emphasized that the attempt does not have to be exhaustive or meticulously detailed.
This ruling highlights the flexible nature of the pre-arbitration clause and recognizes that the intent behind it is to encourage parties to explore non-adversarial avenues for resolving their disputes. However, it also underscores that the level of effort invested in seeking an amicable settlement need not be overly stringent or exhaustive.
Bayindir v. Pakistan
In the Bayindir v. Pakistan case (2003), the ICSID tribunal took a notable stance by stating that the notice requirement outlined in Article 7 of the 1995 Turkey-Pakistan BIT should not be considered a precondition for jurisdiction. The tribunal argued that enforcing a six-month consultation period would unnecessarily adopt a formalistic approach that fails to serve any legitimate interest of the parties involved. Contrarily, in the Enron v. Argentina case (2004), the ICSID arbitral tribunal deviated from previous jurisprudence and opined in obiter dictum that a failure to comply with the requirement to respect the six-month consultation period would lead to a lack of jurisdiction.
In the more recent Tulip Real Estate Investment & Development Netherlands v. Turkey ICSID decision of 2013, the tribunal concluded that a “compromissory” provision such as Article 8(2) of the BIT serves four functions.
Firstly, it notifies the respondent state about the existence and scope of the dispute.
Secondly, it enables the parties to seek a settlement.
Thirdly, it clarifies the limits of consent provided by states by necessitating prior resort to negotiations or peaceful dispute settlement methods.
Lastly, it serves a policy function by allowing the state to address the issue before resorting to an international arbitral procedure. The tribunal affirmed the mandatory nature of the provisions outlined in Article 8(2) of the BIT.
Jurisprudence Incoherence
Jurisprudence incoherence was well analyzed in the 2015 paper[4] on pre-arbitration procedural requirements of Gary Born and Marija Šćekić that highlight the challenges arising from the interpretation and application of pre-arbitration clauses by arbitral tribunals. They recognize that these provisions aim to enhance the efficiency of the arbitral process by promoting amicable dispute resolution and avoiding unnecessary proceedings and expenses.
However, they also underscore that these provisions have led to frequent disputes, inconsistent results, and a confusing landscape for parties and tribunals. The uncertainty surrounding these requirements has resulted in wasted time and resources on disputes related to pre-arbitration procedural matters. In some cases, non-compliance with such requirements has even led to the annulment or non-recognition of otherwise valid arbitral awards, exacerbating the waste of time and expense.
Born and Šćekić argue that overall, the divergent approaches and inconsistent outcomes in addressing pre-arbitration procedural requirements have created a challenging environment for foreign direct investments (FDIs) and related disputes, leading to significant uncertainty and inefficiency within the arbitral process. The disputes and uncertainties arising from pre-arbitration procedural requirements are inconsistent with the fundamental objectives and aspirations of the arbitral process, as well as the parties’ desire for prompt, binding, and neutral means of resolving their disputes. These requirements should not hinder access to efficient dispute resolution.
Born and Šćekić suggest that requirements to negotiate or conciliate should be treated as invalid or unenforceable in many cases. Even when valid, such requirements should generally be considered non-mandatory and aspirational, unless clear language states otherwise. They propose that pre-arbitration procedural requirements should not bar the initiation of arbitral proceedings but should be treated as matters of admissibility or procedure that can be cured, without precluding resort to arbitration. They conclude that contrary approaches to pre-arbitration procedural requirements transform these provisions from tools for efficient dispute resolution into instruments of delay, inefficiency, and, ultimately, denials of justice.
I concur with Born and Šćekić’s assessment of the challenges presented by pre-arbitration procedural requirements. Nevertheless, from an investor’s standpoint, I firmly believe that adopting a business-oriented approach is the most pertinent way to tackle these issues. The ultimate objective of these clauses is to provide a cooling-off period for parties to reflect and potentially avoid lengthy and costly procedures, whether through arbitration or national courts.
Mediation as a Solution
This initial stage of dispute resolution demands serious consideration, necessitating meaningful actions to conserve time and financial resources for investors who seek to avoid protracted legal disputes. With this perspective in mind, mediation appears to be a highly suitable means for resolving disputes efficiently, as it is cost-effective, fast, and preserves the relationship between parties, unlike arbitration.
As mentioned earlier, while mediation has long been used for domestic commercial disputes, it has only recently become an option for international commercial disputes. This change is due to the recent evolvement of the enabling environment that addresses the main obstacles to systematic and efficient mediation for international commercial disputes. These obstacles include uncertainty surrounding the cross-border execution of mediation agreements and a lack of clear and workable mediation rules.
Cross-Border Execution of Mediation Agreements
The adoption of the UN Convention on International Settlement Agreement Resulting from Mediation (the Singapore Convention) in 2019 is a significant development that solves the first obstacle. Similar to the New York Convention of 1958 for international arbitrations, the Singapore Convention ensures that the outcome of a mediation process is enforceable, and will not remain ink on paper. Another stakeholders concern about mediation – whether domestic or cross-border – is that the other party engages in bad faith behavior during mediation, resulting in dragging the mediation process only to gain time.
However, mediation is designed to provide safeguards against such behavior. If a party engages in bad faith behavior, such as intentionally delaying or obstructing the process, the mediator has the authority and responsibility to intervene and address the issue. The mediator can engage in separate discussions with each party, remind them of their commitments to good faith participation, and if necessary, suspend or terminate the mediation. Unlike litigation or arbitration, where procedural objections and delays can prolong the process, mediation offers a more dynamic and flexible environment.
The mediator’s active involvement and ability to overview the process can minimize the impact of bad faith behavior and prevent unnecessary waste of time and resources. By having a skilled mediator who understands the dynamics of the dispute and can navigate challenging situations, stakeholders can have confidence that bad faith behavior will be addressed promptly and effectively. This further supports the value of incorporating mediation into the pre-arbitration clause as a means to resolve disputes efficiently and maintain positive business relationships.
Clear and Workable Investor-State Mediation Rules
The second obstacle mentioned above, i.e clear and workable investor-state mediation rules, was already tackled a decade ago by the International Bar Association (IBA) that adopted the investor-state mediation rules in 2012. Few years later, the Energy Charter issued in 2016, the Investment Mediation Guide. More recently, in the wave of the Singapore Convention, ICSID has developed institutional instruments[5], such as the Standalone Mediation Rules of 2022, to institutionalize mediation in investor-state dispute settlements (ISDS). The Center also made available to the States tools to prepare for ISDS through introduction courses, dispute prevention models, and checklist on how to prepare for mediation. Moreover, the UNCTAD Working Group III on Investor-State Dispute Settlement (ISDS) reform is currently drafting provisions and guidelines to encourage the use of mediation in ISDS.
Conclusion
In conclusion, introducing a clear mediation clause as a first step prior to arbitration or national court proceedings can significantly expedite the settlement of investor-state disputes while preserving the investor’s business interests and the host country’s reputation as an investment-friendly destination. This approach allows for the wise use of the cooling-off period provided by mediation. However, it should be noted that proposing mediation in the pre-arbitration clause does not exclude the possibility of resorting to mediation at any stage of arbitration or for specific points of the dispute that are suitable for this method of settlement.
[1] Carol Khouzami: Former Lebanon Chief Negotiator for BITs; currently, a CEDR-certified mediator, and an Advocate, and Policy Consultant.
[2] L’arbitrage dans les accords de promotion et de protection des investissements signés par le Liban – Carol Khouzami, La Revue Libanaise de l’Arbitrage, 2002, N. 23, p 6
[3] Insights from my presentation during the ICC-YAAF Conference on ‘Pre Arbitration Steps: Challenges and Pitfalls. All you need to know’, Doha (Qatar), March 2023, sponsored by Boustany Law Firm.
[4] ‘Pre-arbitration procedural requirements – a dismal swamp’, Gary Born and Marija Šćekić, 2015
[5] As mentioned by Meg Kinnear, Secretary General of the WBG International Center for Settlement of Investment Disputes (ICSID), during a podcast hosted by James South, Chief Executive of the prominent UK-based Center for Effective Dispute Resolution (CEDR). https://podcasters.spotify.com/pod/show/betterconflicts/episodes/Investor-State-Disputes—Making-Mediation-Mainstream-epvme4/a-a4i5e9k