Harshita Sharma and Tanisha Taneja
Introduction
The 21st century world can undoubtedly be categorised as a borderless economy. With the advent of liberalisation and globalisation, there is an unrestricted flow of capital in and out of the economy. In this dynamic landscape of international investment, it is readily perceived that disputes are bound to arise between investors and states. The jurisdictional boundaries still remain apparent in this borderless world, creating complications in investor-state dispute where parties may find it rigorous to approach the national courts of a particular jurisdiction.
While traditional arbitration has been the primary recourse for settling such disputes, they tend to be time-consuming, costly and adversarial in nature. Therefore, other mechanisms such as Alternative Dispute Resolution (ADR) are gaining recognition. Investor-state mediation, governed by UNCITRAL Rules has emerged as a promising avenue for resolving these disputes in a more efficient, collaborative, and cost-effective manner.
In recent years, India has become a hub for foreign investment, making it imperative to understand the efficacy of Pre-Arbitral Steps in resolving investment disputes. This article will analyse their effectiveness, implementation, and potential impact on settlement rates in India. Further, it also aims to evaluate the degree to which these pre-arbitral procedures align with the Indian legal framework and larger goals in creating a conducive environment for increasing future investment and resolving disputes.
Understanding Investor-State Dispute
With free flow of capital, comes in new economic opportunities that promotes growth in international trade and investment. This is facilitated by specialised International Investment Agreements (IIAs) that seek to regulate disputes arising from foreign investment. Traditionally these disputes were common among investing states, but with the rise of private commercial activities, even individuals and corporations engage in international investment. Within the course of such transaction there are circumstances such as state action, change in policy or interpretation of rights of either party. These circumstances directly impact the Foreign Direct Investment (FDI) leading to intricate disputes.
In contemporary international investment, arbitration has established itself as the optimal way through which investors can pursue their claims against host states. Provision for investor-state dispute settlement are present in IIAs. This is done to ensure adjudicative neutrality, promote independence and depoliticise investment disputes. This adds an additional layer of legitimacy and ensures that awards are enforceable.
The special nature of this dispute between the investor and the state, also carries a few drawbacks such as severance of the long-term relationship between both the parties, the huge financial stake which is at risk, general concerns about legitimacy, increase in time frame and apprehensions regarding baseless claims. The primary goal of such arbitration procedure is to determine the cost of compensation, rather than working on the relationship between both the parties.
As per UNCTAD, there has a been consistent increase in investor state disputes, therefore with the perceived disadvantages and rising cases, there is a need to explore other avenues to investment treaty arbitration such as negotiation, conciliation or mediation. These alternatives approaches offer the possibility to find amicable solutions, permitting parties to continue a working relationship. ADR can be used without affecting the rights of the party to resort to other means of dispute resolution, while being less costly and faster. IIAs often specify a cooling period before parties can initiate formal arbitration procedures to provide opportunity to negotiate and this is often incorporated in the agreements.
Arbitration remains the predominant mechanism of resolving disputes, but with changing nature of investment and independent relationships it is important to promote specific encouragement of the use of ADR, where many institutes as United Nations Commission on International Trade Law (UNCITRAL), International Centre for the Settlement of Investment Disputes (ICSID), the International Chamber of Commerce (ICC), provide procedural guidance on the use of ADR techniques
Navigating the Nature of ADR First Clauses in India
Pre arbitral dispute resolution clauses have been on the forefront of evolving jurisprudence in India with a host of interpretations by the Apex Court. It had been decided by the court in the Nirman Scindia judgment that whenever a special method for dispute resolution has been agreed upon by the parties to a contract, they are compulsorily bound to comply with such prescribed modes. The parties are not at the liberty to directly exhaust the arbitration clause, making the ADR-first clause characterized as time-limited mandates requiring amicable discussion between the parties, mandatory and enforceable. If the mandatory nature of the clause is established then noncompliance with the requisite steps ousts the jurisdiction of the tribunal. Hence, while assessing if noncompliance with procedural pre requisites could be a ground to set aside an arbitral award, the Supreme Court observed the essential nature of such requirements and mandated that they have to be strictly adhered to.
However, as the courts started to recognise the importance of party autonomy that arbitration procedures embody, the interpretation of the ADR first clause became more liberal. In the case of Demerara Distilleries, Parties were obligated by the clause’s phrasing to partake in amicable dispute resolution followed by mediation and both parties had the choice to take their problems to arbitration if there wasn’t a resolution. The court held that the nature of the clause was not mandatory and it did not warrant any serious consideration with regards to the dispute being arbitrable. A similar stance has been taken by various High Courts in holding that these clauses are only directory and not mandatory. Tribunals across the world have held ADR-First clauses to be directory in nature. They have been held to be mere agreements to negotiate expressing pious hope rather than conferring any mandatory obligations. Therefore, recognising party autonomy, the courts have leaned towards the non-mandatory nature of these clauses.
ADR First Clauses: Enhancing Efficiency or an Impediment to Swift Dispute Resolution
The mandatory nature of pre-arbitration clauses is often debatable in IIAs given the issue of jurisdiction, admissibility and the complex relationship between investor and state. There being lack of legal precedent to understand whether these clauses should be treated as flexible or formal and if they should mandatorily be considered as a pre-condition for arbitration. There have been various rulings such as Salini v. Morocco highlighting the importance of pre-arbitration clauses and encouraging non-adversarial avenues for resolving disputes. Although an investor may have a reasonable basis for initiating a formal arbitration proceeding, it is usually desirable to try to reach an amicable settlement.
This is why most IIAs provide for a cooling-off period which firstly, offers the flexibility to the parties to explore creative solutions rather than prescribing to the provisions of treaty or rules of arbitral tribunals. In ADR solutions are not solely based on legal rights or obligations but focus on finding mutually acceptable resolutions. This provides the parties a room to renegotiate contracts, re-evaluate project returns or even require government to reassess problematic measures. This flexibility allows parties to diverge from strict legal interpretation while fostering a lasting relationship. Secondly, ADR can be a faster and less costly mechanism for settlement, allowing the problem to be resolved at the early stage instead of spending hours on fact finding, witness interrogation and document exchange. Thirdly, it offers the much-needed confidentiality and privacy, unlike arbitration where an arbitral award can establish a legal precedent ultimately encouraging other foreign investors to challenge similar governmental measures or regulations. By opting for ADR, the host countries can maintain a more conducive investment climate while avoiding the risk of hampering potential investments in the country. Lastly, unlike arbitration which involves a binding decision, these mechanisms can be utilised without prejudicing the right of the parties to initiate a formal arbitration or to approach national courts. These methods complement investor state arbitration and can even be conducted simultaneously.
However, these amicable solutions have their own shortcomings, firstly the result of mediation, conciliation or negotiation is not binding on the parties and cannot be enforced. Secondly, this might result in waste of time and effort when either party is not making commitment in good-faith with the sole intention of initiating arbitration at a later stage and is only fulfilling a mere contractual necessity. Thirdly, there is scarcity of neutrals with expertise in both ADR and investment law. Investor-state disputes involve various complexities such as treaty interpretation and knowledge on investment law, therefore parties will likely prefer someone who has deep knowledge of the law while extensive experience in the area of resolution techniques. Lastly, ADR may not be suitable for all kinds of investor-state disputes such as those involving policies by the government on environmental, social or public interest laws. A sovereign state cannot negotiate exceptions to general policies which solely benefit foreign investors.
Navigating New Waters: The Case for Mandatory ADR First Clauses
The nature of investor state disputes give rise to the question of whether the ADR first clauses should be made mandatory or not. The state being one of the parties makes it tricky for any kind of legal proceedings to progress without disrupting the flow of capital from such investors. The scale of these disputes are very large and impact not just the two individuals who are a party to the contract but the common man as well. Hence, it becomes very essential that disputes are resolved efficiently without hampering the economy. With an emphasis on mutually agreeable outcomes, the cooling-off period in International Investment Agreements (IIAs) provides freedom for innovative solutions outside of treaty terms or tribunal regulations. Alternative Dispute Resolution preserves a favorable investment climate without jeopardizing formal arbitration or court proceedings. It is quicker, less expensive, and confidential, like the authors have illustrated above.
However, the authors have also encountered potential problems with enforcing the ADR First clause. In order to tackle the issues, the authors suggest that while making the ADR first clause enforceable, the following factor should be looked into. It needs to be assessed whether there is scope for amicable settlement between the parties and the pre-arbitration steps like engaging in mediation or negotiation are not mere empty legal formalities to the stakeholders. To address this issue, the Supreme Court in the Visa International Judgement has laid down a two-tier test to determine whether a claim for arbitration is premature in nature. It has to be assessed whether there is a scope for amicable settlements if both parties have taken a rigid stand and whether the correspondence show that attempts were made for amicable settlement. If this standard is enforced while making the ADR First clause mandatory in nature, then the downsides of using ADR mechanisms like mediation and negotiation would be effectively dealt with.
In conclusion, encouraging a more cooperative and effective resolution process can be achieved by requiring ADR-first clauses in investor-state conflicts. Hence, digressing from the prevalent jurisprudence in India surrounding the mandatory nature of ADR first clauses, a case should be made out for the mandatory nature of ADR First clauses in Investor State Disputes. It is more likely to maintain long-term relationships, keep costs down, and expedite resolution timeframes when parties are required to participate in pre-arbitral processes like negotiation, mediation, or conciliation. By offering an organized framework for discussing mutually agreeable alternatives, these clauses lessen the hostile atmosphere that is sometimes connected to conventional arbitration procedures. Furthermore, by endorsing alternative dispute resolution (ADR) as the primary method of resolution, nations can demonstrate their dedication to upholding a favourable investment environment while guaranteeing just and equal results for all parties concerned. Ultimately, in a more interconnected global economy, encouraging friendly investor-state relations and sustainable economic development are goals that are aligned with the strict enforcement of ADR-first clauses.
The authors are fourth-year law students at Maharashtra National Law University, Mumbai.
NUALS Law Journal 