‘Oriental experience’ for resolving investor-state disputes

By Madhav Kumar, CIETAC Hong Kong
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解决投资者-国家争端的‘东方经验’-‘Oriental-experience’-for-resolving-investor-state-disputes

Oriental experience” or “Chinese experience” are distinctive words used to describe an uncanny dispute-resolution mechanism, which combines two well-known processes of alternative dispute resolution, namely arbitration and conciliation (or mediation). Under this mechanism, disputing parties can use conciliation within the ambit of an ongoing arbitration proceeding. As it is seen as an unusual practice, it is not extensively used worldwide (for reasons we will not cover here). Still, this mechanism is popular in arbitration in China and has been significantly successful. Almost every arbitral institution in China has integrated the mechanism in arbitration rules and has also made its way into the 1994 Arbitration Law of the People’s Republic of China and also into the Hong Kong Arbitration Ordinance (Cap 609).

Madhav Kumar
Madhav Kumar

Case of adopting ‘oriental experience’ to resolve investment disputes. There are abundant opportunities today for investments inside and outside China. Foreign companies are investing in China for access to the country’s consumer market and Chinese firms are trying to diversify businesses overseas. As a result, it is not surprising that China is already involved in a few investor-state disputes (eight in total; three as respondent state and five as home state of claimant). There is a good chance that many more my follow soon.

In anticipation, and to ensure efficient resolutions of investment disputes, the China International and Economic Arbitration Commission (CIETAC) introduced the CIETAC International Investment Arbitration Rules (the CIETAC Investment Arbitration Rules or the rules) in 2017. CIETAC is the first Chinese arbitral institution to do so. One of the noticeable features of the rules is the inclusion of the provision permitting the combination of conciliation with investment arbitration.

Article 43 of the rules stipulates that the arbitral tribunal has the authority to conciliate the investment dispute within the arbitration proceeding after seeking the consent of the parties. This approach of incorporating a conciliation within an ongoing investment arbitration is fairly novel. The approach has found significant success in resolving commercial disputes and it will be interesting to see how it fares in dealing with investment disputes.

Adopting the practice of conciliation as a means to resolve disputes stemming from foreign investments is not a recent development. Conciliation has long been available to disputing investors and states. In the past, various institutions had formulated rules on conciliation that exclusively dealt with investment disputes.

For instance, the International Bar Association (IBA) released its Investor-State Mediation Rules in 2012, the International Centre for Settlement of Investment Disputes (ICSID) introduced its Rules for Conciliation Proceedings in 2006, and the UNCITRAL formulated its Conciliation Rules in 1980.

Moreover, certain investment agreements and bilateral investment treaties between states also provide that the investment disputes shall be resolved through conciliation or mediation. One example is the investment agreement between the mainland and Hong Kong SAR as part of the Closer Economic Partnership Arrangement (CEPA). Articles 19 and 20 of the said investment agreement stipulate mediation as one of the means to settle investment disputes.

So, it is evident that conciliation has been integrated into the Investor-State Dispute Settlement (ISDS) system (but not as extensively as arbitration) and, as such, it is also probable that a combination of conciliation with arbitration can be integrated within the system. An analysis of the benefits and challenges of doing the same may provide a clearer understanding.

BENEFITS

The following are the benefits of combining conciliation with arbitration for resolving investment disputes.

Flexibility: Combining conciliation with investment arbitrations may provide additional flexibility to the process and be a solution to the critique of the current ISDS system being rigid. Tribunals conducting investment arbitrations are seemingly adopting less-flexible approaches to support complex long-term relations.

Integrating conciliation with arbitration may well give parties that chance to take a more active role in settling disputes and can accordingly make the conciliation process more party oriented. This process helps when the parties intend to have a long-term relationship with each other. Even if no settlement is reached or is forthcoming and arbitration is resumed, the conciliation process can help to refine or narrow the issues to be addressed in the arbitral proceedings.

Cost effective: Discontinuing the arbitration and resolving the disputes through conciliation can be a rather cost-effective option. It is a known fact that investor-state arbitrations have become significantly expensive, with disputes lasting for years and, ultimately, costing millions in legal fees and expenses. Conciliating disputes will, most likely, take lesser time and, accordingly, may incur fewer costs.

Enforceable settlement agreements: One of the main reasons for the success in combining conciliation with arbitration in commercial disputes is the enforceability of the settlement agreement. The settlement agreement resulting from the conciliation can be rendered in the form of an arbitral award with the help of the arbitral tribunal. Subsequently, the award may become enforceable due to international instruments like the New York Convention. The same may also apply to investment arbitration awards, which have been rendered, based on a settlement agreement.

Confidentiality: Generally, conciliation is seen as being more confidential than arbitration, helping parties to be more confident to talk openly about their underlying interests, motivations and concerns. In investment disputes that usually involve sensitive topics relating to state policies and investors’ reputations, a confidential process becomes highly important. However, this feature will also create a challenge that will be dealt with in the following section.

THE CHALLENGES

The following are the challenges of combining conciliation with arbitration to resolve investment disputes.

Involvement of unique stakeholders in dispute: Investment disputes are more often the consequence of a state’s decision and most likely involves numerous stakeholders. The involvement of diverse players may affect the process of reaching a settlement during conciliation. It can be a herculean task to align the interests and different motives of the diverse parties in an attempt to settle the dispute amicably.

Confidentiality of process: As already mentioned earlier, the confidential feature of conciliation can be a challenge, too. One of the main criticisms of investment arbitration is its private and confidential nature. The public has called for the system to be made more transparent since it may involve decisions relating to state policies. With disputes getting settled privately through conciliation, we can expect louder cries for transparency.

Will not result in ‘jurisprudential growth’: Subsequent tribunals cannot rely on an award rendered, based on a settlement agreement, or a dispute settled through conciliation due to the lack of reasons provided. This stands to be a cause of concern as tribunals may find it difficult to find a consistent approach of decision making without the reliance of earlier rulings.

CONCLUDING COMMENTS

If adopted, the “oriental experience” can be useful for resolving investment disputes and it may change the way the ISDS system is currently perceived. However, since the mechanism is not popular and is at play in only a few jurisdictions, extensive development and promotion is required before integrating it in the ISDS system. However, despite the challenges involved in adopting the mechanism, initiatives by institutions, such as CIETAC, to provide more flexible options to resolve investment disputes is a welcome move and may set a new trend in ISDS practice.

Madhav Kumar is a counsel at CIETAC Hong Kong