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Moving beyond arbitration to resolve trade disputes

Aug 25, 2010

Historically, international arbitration has been viewed as the potential instrument to protect foreign investments in international investment agreements. However, the latest report by UNCTAD, Investor–State Disputes: Prevention and Alternatives to Arbitration, highlights how the negotiations are disadvantageous for the developing economies and attempts to find alternatives to the process.


Investor–State Disputes: Prevention and Alternatives to Arbitration

Published  by: UNCTAD, 2010

In contemporary international investment law, international arbitration has established itself as the main option through which foreign investors can pursue claims that they have against a host State resulting from an investment dispute. Provisions on investor–State dispute settlement (ISDS) are enshrined in almost all contemporary international investment agreements (IIAs).

To provide in IIAs that arbitration and not litigation in national courts should constitute the main method to resolve investment disputes is considered as an important element of investment protection.

International arbitration has long been seen as the optimal way to address and resolve disputes between investors and States, and is to some extent still considered as such today. It depoliticises investment disputes, assures judicative neutrality and independence, and was often perceived as a swift, cheap, flexible and familiar procedure.

Moreover, international arbitration is seen to be offering the parties a possibility to exercise a substantial amount of control over the litigation procedure. It further assures that awards are enforceable and creates a sense of legitimacy.

However, there are several disadvantages that come with international arbitration in practice, which could potentially reduce the benefits that IIAs can bring to developing economies. An important source of these disadvantages is the special nature of international investment arbitration, involving a sovereign as a defendant and challenging acts and measures taken by a sovereign State.

The international arbitration procedure also differs from litigation in domestic courts in that the dispute is governed by international law and based on the violation of an international treaty, where arbitration is the main option made available to investors.

Another peculiarity is that the nature of the relationship between the investor and the State involves a long-term engagement; hence a dispute resolved by international arbitration and resulting in an award of damages will generally lead to a severance of this link.

Moreover, the financial amounts at stake in investor–State disputes are often very high. Resulting from these unique attributes, the disadvantages of international investment arbitration are found to be the large costs involved, the increase in the time frame for claims to be settled, the fact that ISDS cases are increasingly difficult to manage, the fears about frivolous and vexatious claims, the general concerns about the legitimacy of the system of investment arbitration as it affects measures of a sovereign State, and the fact that arbitration is focused entirely on the payment of compensation and not on maintaining a working relationship between the parties.

Given these perceived disadvantages, coupled with the realisation that the amount of investor–State disputes has increased dramatically in recent years, this study seeks to explore alternatives to investment treaty arbitration.

A key differentiation is made between two types of such alternative approaches or alternative means:

•    Methods of alternative dispute resolution (ADR) that seek to resolve existing disputes through negotiation or amicable settlement such as international conciliation or mediation.

•    Dispute prevention policies (DPPs) that attempt to prevent conflicts between investors and States from emerging and escalating into formal investment disputes, for example by establishing inter-institutional alert mechanisms within States or encouraging information sharing among government entities.

The advantages of these alternative approaches are the flexibility offered by these approaches, including the possibility to find amicable grounds for settlement between investors and States, permitting the parties to continue a working relationship. The settlement process is also faster and less costly.

ADR can be without prejudice to the right of the parties to resort to other forms of dispute resolution. Finally, alternative approaches can improve good governance and other regulatory practices of States.

Nevertheless, there are also challenges to the use of alternative approaches. They are non-binding to the parties, and parties often lack familiarity and experience with the techniques involved.

Alternative approaches could also be considered as a waste of time and funds if they are not conducted successfully, and they may not be suitable for all investment disputes. States with their unique attributes as parties to a dispute may face specific difficulties in using alternative approaches effectively.

For  example, their flexibility in finding compromise solutions is limited by the boundaries established through existing laws and regulations. Similarly, .government officials may not always be given the necessary authority and powers to use alternative approaches effectively.

Moreover, some IIA provisions are by nature also not conducive to alternative approaches and do not allow for the use of ADR techniques. Finally, DPPs could potentially generate inter-institutional conflicts.

Source : UNCTAD
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