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Amicable Settlement of Investor-State Disputes
Автор: Юна Потемкина, Михаил Солдатенко
Источник: The Ukrainian Journal of Business Law. – Сентябрь 2019 года. – с.18-20
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Investment arbitration is usually con­sidered an effective and major way of resolving investor-state disputes. At the same time, despite its many benefits as any adversarial process it entails certain disadvantages for both investors and States. In light of this, in recent years the tendency to promote amicable settlement in ISDS by means of ADR tools has loomed large.

In this regard, over the past 3 years, the Government of Ukraine has showed its read­iness to reach pre-arbitration settlements in disputes with investors. That said, this arti­cle sheds some light on the benefits of using negotiation and mediation in ISDS with the purpose of achieving a win-win outcome for both parties.

Short introduction to ISDS

Foreign investors, in case a host state violates their rights or interests, have an additional tool in their box compared to do­mestic businesses — Investor State Dispute Settlement (or ISDS).

ISDS means a process of resolving dis­putes between a foreign investor and a host state, where respective investments are lo­cated, generally based on multilateral or bilateral international investment agree­ments concluded by a host state and the in­vestor's home state ("IA"). States conclude those IAs, inter alia, to ensure a certain level of legal protection to their investors abroad, but, at the same time, grant the same level of protection to foreign investments on their own territories. Ukraine is a party to around 70 IAs in force.

IAs generally protect investors from unlawful expropriation of their assets, guar­antee fair and equitable treatment and full protection and security with regard to their investments. In case a state violates an in­vestor's rights under the IA, the investor is entitled to request compensation for this in international investment arbitration.

Investment arbitration has its own deficiencies

At first glance, an opportunity to refer an investment dispute to arbitration looks very attractive for an investor, inter alia, enabling a dispute to be shifted from the domestic legal system to the international plain through resolution by highly-reputa­ble arbitrators.

However, both investors and States should be mindful that, in unison with its benefits, investment arbitration carries a list of disadvantages pertaining to the adversar­ial process. We name some of them below:

(1) It takes long time to resolve a dis­pute — an average of 3 years to only get the final arbitral award. As such, there are pros­pects that justice delayed may end up being justice denied;

(2) Heavy arbitration costs including fees of arbitrators, expenses on high-caliber counsels and experts. As such, investment arbitration is an expensive luxury, which might not be available and a reasonable de­cision for relatively small investments.

(3) Unpredictability — IAs contain pro­visions that are usually susceptible to dif­ferent interpretations, and arbitrators have different opinions on various ISDS issues.

(4) Compulsory enforcement against States may be problematic, since their prop­erty used for public purposes is protected by sovereign immunity. A striking example in this regard is the Yukos case initiated in 2005, where a $50 billion UNCITRAL arbitral award has not been enforced against Russia.

A former CEO of an American landfill management company Metalclad — Grant Kesler — while describing his company's win in the precedential investment arbitration case against Mexico (Metalclad v. Mexico), put it as a "hollow victory" when considering the amount of resources the company put into this dispute. With hindsight, he would prefer amicable resolution of the dispute[1].

That is understandable, since amica­ble settlement of investor-state disputes may, in certain cases, help parties to avoid or at least minimize the above-mentioned disadvantages of arbitration. Below we will explain how.

Benefits that negotiation and mediation can bring to the ISDS table

Negotiations and, in recent years, medi­ation are becoming more and more popular in the ISDS context. The approximate num­ber of settled ICSID cases is 30-40%, which proves that interest-based dispute resolu­tion methods are viable in this sphere[2].

The main advantages of mediation and negotiation are, inter alia:

— Time — it would only depend on the parties and how quickly they can reach a settlement, escaping long-lasting arbitral proceedings.

— Costs — mediation and negotiation are much cheaper procedures. Also, it is sometimes possible to settle some invest­ment claims which, due to their relatively low value, would not end up in arbitration.

— Control over results — the absence of control over results in investment arbitration can be especially frustrating due to its un­predictable nature, when different tribunals may render different decisions in relatively similar circumstances. At the same time, ne­gotiation and mediation give parties control over the outcome and an opportunity to find win-win way-outs from a dispute. However, for government officials it may sometimes be easier to blame "bad arbitrators and counsels" for the negative outcome than for concessions to be made from the side of the state during negotiations. Although it is not always the case, investors and their counsels should be mindful of that.

— Fostering relationships and creating value — robust arbitration battles, as any other adversarial processes, may substan­tially hinder relationships between the par­ties and at best lead to win-lose or at worst to lose-lose results. Negotiation and, more­over, mediation allow parties to think "out of the box", identifying creative solutions acceptable for all stakeholders.

The above benefits are relevant to both mediation and negotiations. However, a me­diator can, as a third-party neutral, help the parties to overcome deadlocks in negotia­tions by, inter alia:

— Designing and moderating the pro­cess of reaching settlement, and calibrating it to the specific dispute at hand;

— Using and suggesting mediation tech­niques to foster negotiations, like caucus­ing, brainstorming of options appropriate for both parties, etc.

Compliance with settlement agreements

In the vast majority of cases the par­ties voluntarily comply with the settlement agreements, to which they freely agreed in the first place. Also, when a state signs a binding settlement agreement with an in­vestor it might be prejudicial for it to back­pedal on its promise, and the investor may potentially initiate a dispute on compliance with such agreement.

Sometimes, most often when arbitration is pending, in order to ensure enforceability of their settlements the parties request the arbitral tribunal to issue an award on agreed terms fixing the parties' agreement. Such award can be later enforced as any other ar­bitral award based on international treaties, including the New York Convention. Howev­er, this scenario requires pending arbitration, and, as a result, substantial costs and time.

There is a recent development in the sphere of mediation, namely signing of the Singapore Convention[3] by forty-six States, including Ukraine, on 7 August 2019.[4] The Convention is aimed at ensuring enforce­ment of mediated settlement agreements around the globe being the prototype of the New York Convention but for mediation. It is still to be seen whether the Singapore Convention will apply in the investor-State context. However, the ICSID takes the posi­tion that it will, albeit, without no reasoning on this matter.[5] If that happens, it will likely increase the attractiveness of mediation for not only investors, but also States, which can also potentially have some monetary claims against investors under settlement agreements.

Negotiation and mediation not a panacea for all woes

Although reaching amicable settle­ment of investment disputes should be tried whenever possible, to be realistic, often situations arise when the parties would not be able to escape arbitration or even should rather use it. It could be due to different fac­tors, including highly-antagonistic relations between the parties, an insuperable dead­lock in negotiations, a State's need to es­tablish a public policy precedent, for which adjudication is vital, etc.

Disputes involving highly sensitive po­litical issues are hardly settled. As a vivid example, claims by Ukrainian companies against the Russian Federation on compen­sation for the assets expropriated in Crimea are very challenging to settle in the current political context, if at all possible[6].

Settlement of investments disputes in Ukraine

An investment dispute usually starts when an investor sends a notice of dispute to a State describing the relevant factual back­ground of the dispute and alleged breaches of the applicable IA. In Ukraine, such notice shall be sent to the Ministry of Justice of Ukraine, which is responsible for represent­ing Ukraine in investment disputes.[7]

A notice of dispute generally triggers a so-called cooling off period in the applicable IA (usually 3-6 months), after the expiry of which an investor can refer the dispute to ar­bitration.[8] The cooling off period is designed specifically for the negotiation purposes and allows States to rectify their wrongdoing be­fore arbitration is stated. This is usually the best timeframe for reaching a settlement.

Within 5 days of receiving information on an investment dispute, the Ministry of Justice of Ukraine creates an Inter-Agency Working Group ("IAWG") to ensure coordi­nation between interested state bodies in the protection of Ukrainian interests. The frame­work of the IAWG allows investors to conduct negotiations on the matter with the partici­pation of all stakeholders from the State side.

Following negotiations with the inves­tor, the IAWG may issue a recommenda­tion for a relevant state body to terminate the violation of the investor's rights under the IA or to wipe out its consequences. If the dispute is not resolved in such way, the Ukrainian Government and the investor may conclude a binding settlement agreement.

If the dispute is not settled in advance of arbitration, there are still chances to set­tle it during arbitral proceedings. This is one of the great sides of mediation and negotia­tion that the parties can have recourse to it during the entire lifespan of a dispute. Even when an investor has a final award againsta State, which is not willing to comply with it, the parties may settle on the voluntarily enforcement under certain terms.

Recent successful Ukrainian practice

Ukraine has on many occasions settled in ISDS. In the majority of cases settlement was reached when the arbitration was al­ready under way (for example, Western NIS v. Ukraine). There are also at least two recent investment disputes when the pre-arbitra-tion settlement was achieved (Gilead Sci­ences Inc. (USA) v. Ukraine and Philip Morris v. Ukraine). Those settlements took place in the last 3 years, showing that the Ukrainian Government is prone to amicable settlement of ISDS disputes. Below we briefly describe the last Ukrainian settlement in the dispute with Phillip Morris.

In the Phillip Morris case, Phillip Mor­ris was excused from import duties and taxes on materials used in processing cigarettes in Ukraine for re-export. Later, the tax authori­ties, as a result of a tax inspection, obliged Philip Morris to pay the very taxes from which the company was earlier exempted. On top of that, the tax service fined the investor for non­payment. The authorities reportedly demand­ed around USD 22 million in taxes and pen­alties. Philip Morris challenged the demand made by tax authorities, inter alia, in Ukrainian courts. In parallel, at the beginning of 2018, the investor commenced the ISDS process, no­tifying Ukraine about alleged violations of the USA-Ukraine and Switzerland-Ukraine BITs.

Following negotiations between Ukraine and Phillip Morris, the Ukrainian Government approved a draft settlement agreement with Philip Morris companies on 5 December 2018, which was subsequently signed on 31 January 2019.[9] The Govern­ment explained this move by its desire to show to foreign partners and investors that Ukraine complies with its obligations under international treaties.

On 22 March 2019, the State Fiscal Ser­vice of Ukraine withdrew its tax demands against Phillip Morris pursuant to the set­tlement agreement, and the Second Admin­istrative Court of Appeal closed the pro­ceedings on the matter accordingly.[10] This case clearly shows how effective and benefi­cial amicable settlement in ISDS can be.

Conclusive remarks

Although arbitration is a great method of resolving investor-state disputes, it is ad­visable for both investors and States to try amicable settlement whenever possible be­fore commencing arbitration. Even during arbitration, the parties should keep in mind that the settlement may still be possible. That would help the parties to avoid getting into "Russian roulette" pertinent to adver­sarial procedures like arbitration.

Arbitration practitioners should con­sider suggesting their clients a strategy for an amicable settlement of investor-state disputes, whenever reasonable and appro­priate. In fact, such expertise in the law­yers' tool box can help them to successfully manage client expectations and promote a unique value proposition to their clients.

On a final note, these words said by Abraham Lincoln when he was a practic­ing attorney succinctly convey this arti­cle's main message: "Discourage litigation. Persuade your neighbors to compromise whenever you can. Point to them how the nominal winner is always a loser in fees, expenses, and waste of time. As a peace­maker, a lawyer has a superior opportunity of being a good man. There is still be busi­ness enough[11]."



[1] Jack J. Coe, Jr, Should Mediation of Investment Disputes be Encouraged, and, If so, by Whom and How? in Arthur W. Rovine (ed.), Contemporary Issues in International Arbitration and Mediation, The Fordham Papers, (2010) at 339-340.

[2] Edna Sussman, Investor-State Dispute Mediation: The Benefits and Obstacles, in Arthur W. Rovine (ed.), Con­temporary Issues in International Arbitration and Media­tion, The Fordham Papers (2010) at 325.

[3] United Nations Convention on International Settlement Agreements Arising From Mediation.

[4] "Ukraine joined the Singapore Convention on media­tion", a press release on the Ministry of Juctice's web site (available at the https://minjust.gov.ua/news/ministry/ ukraina-priednalasya-do-singapurskoi-konventsii-schodo-mediatsii).

[5] Proposals for Amendment of the ICSID Rules — Work­ing Paper, ICSID Secretariat, Volume 3, 2 August 2018, para. 1318 (available at https://icsid.worldbank.orgen Documents/X.Amendments_Vol_3_AFMR.pdf).

[6] See more on these cases in Mykhaylo Soldatenko, Ongoing Territorial Challenges in Crimea Cases: Put­ting Everest v. Russia in Context, Kluwer Arbitration Blog, (2018), http://arbitrationblog.kluwerarbitration. com/2018/11/05/territorial-challenges-expected-in-crimea-case s-putting-everest-v-russia-in-context/

[7] See the Procedure on the protection of rights and inter­ests of Ukraine in disputes with foreign persons enacted by the Decree of the President of Ukraine No. 581 dated 25 June 2002.

[8] The issue of whether the cooling off period is always mandatory is debatable.

[9] Order of the Cabinet of Ministers of Ukraine 5 Decem­ber 2018 No. 946-p (available at https://www.kmu.gov. ua/ua/npas/pro-pidpisannya-mirorris-global-brends-ink-spolucheni-shtati-ameriki-filip-morris-brends-sarl-shvejcarska-konfederadya-prat-filip-morris-ukrayina-ukrayinata-ukrayinoyu).

[10] Resolution of the Second Administrative Court of Ap­peal dated 12 April 2019 in Case No. 820/4931/16 (avail­able at http://reyestr.court.gov.ua/Review/81238770).

[11] Thomas J. Stipanowich, Lincolns Lessons for lawyers, https://law.pepperdine.edu/parrisinstitute/app/content/ stipanowich-lincoln-article.pdf.