TPP negotiations and the IBA’s Draft Rules on Investor-State Mediation

As NZ lawyer Daniel Kalderimis points out recently, concerns about treaty-based investor-state arbitration (ISA) have been:

stirred up by the release of an “Open Letter from Lawyers to the Negotiators of the Trans-Pacific Partnership Urging the Rejection of Investor-State Dispute Settlement” on 8 May 2012. The letter is backed by well-meaning, and several well-known, signatories; most of whom are not especially well-informed about investor-state arbitration. The fact of the letter is welcome, as the issues are important. But the letter itself contains several overstatements and does not make a balanced contribution to the debate.

Another oddity about the “Open Letter” is that it refers generically to “Investor-State Dispute Settlement” (ISDS) and ends by calling on “all governments engaged in the TPP [Trans-Pacific Partnership FTA] negotiations to follow Australia’s example by rejecting the Investor-State dispute mechanism and reasserting the integrity of our domestic legal processes”. ISDS incorporates both ISA (where the parties agree to be bound by the arbitrators’ decision) and investor-state mediation (“ISM”) or conciliation procedures (where the parties agree to negotiate a settlement but are not obliged to accept any proposals made by the third-party neutral mediator). At least the rest of the “Open Letter” indicates that the primary objection is to binding ISA.
By contrast, the “Gillard Government Trade Policy Statement” (April 2011) simply eschews ISDS in Australia’s future treaties, including the TPP. Perhaps the Statement meant only ISA, which allows greater inroads into host state sovereignty, given that overall it draws on the Productivity Commission’s recommendations from a 2010 Trade Policy Review report. But, by seemingly eschewing all forms of ISA, the Statement seems to go beyond the Commission’s recommendation on ISA itself.
Hopefully the Australian government, other states involved in FTA negotiations (such as the TPP) and those who wish to improve the ISA system (such as myself) or abandon it altogether (as do some signatories to the Open Letter) will not simply transpose their objections over to ISM too. There is significant scope for mediating investor-state disputes, and indeed the Draft Rules on ISM published recently by the International Bar Association (IBA) are a valuable guide to conducting mediation more effectively. Below I set out some preliminary analysis of those Draft Rules, prepared for the Law Council of Australia but representing my own personal views – particularly regarding the scope for arbitrators to adopt them as a means of settling ISA claims earlier and more effectively (ie ‘Arb-Med‘). A fully-footnoted version of my views is available on request, and I encourage feedback.

Draft IBA Rules for Investor-State Mediation: Preliminary Feedback from Australia
1. These draft IBA Rules for Investor-State Mediation (ISM) are well thought out and drafted, generally balancing various private (investor) and public (state) interests very effectively. Accordingly they should be supported by the Australian legal profession. However, particularly from an Australian perspective, the following feedback identifies a few points where minor redrafting or clarification (in the final Rules or official commentary) might be useful.
2. Furthermore, such Rules cannot be incorporated at all into any future investment treaties concluded by Australia. This is because the “Gillard Government Trade Policy Statement” (TPS) seemingly eschews all treaty-based “investor-state dispute settlement” (ISDS) provisions, not just investor-state arbitration (ISA).
3. However, interested parties may seek clarification or a reversal of this policy shift at least regarding ISM. In that case, the Australian Government should consider including in future treaties the IBA Rules as another dispute settlement option for investor-state disputes. At least, it could add a provision urging disputing parties to consider adopting them even after disputes arise. After all, ISM is less disturbing for host state sovereignty concerns than ISA because mediation does not involve a binding decision; parties are free not to agree on a settlement or withdraw from proceedings (draft IBA Rules Art 11).
4. Anyway, even under the TPS, the IBA Rules could already be usefully adopted by disputing parties on a one-off basis, either:
a. prior to disputes arising, if the Australian government agrees with the foreign investor to offer ISM as a dispute resolution option in an underlying investment contract (the TPS only seems to be directed at ISDS provisions in treaties); or
b. after disputes arise, under existing investment treaties (seemingly undisturbed by the TPS) even once ISA proceedings have been initiated.
5. Situation (b) is covered by the IBA Rules (Arts 1.1(a) and 2.4) and is known as “Arb-Med” – arbitrators actively facilitating settlement during pre-commenced arbitral proceedings. It seems that (i) when parties agree to an arbitrator engaging in mediation under the IBA Rules, they can (ii) either simultaneously or after failed settlement attempts, “expressly agree” to the person (mediator) continuing on or reverting to acting as arbitrator in order to issue binding awards (Art 8.5). It might be better to reword this as requiring parties to “agree in writing” (and, more generally, to add a definition of what is meant by “in writing”, which appears several times throughout the Rules). But this is a better solution, more in accord with common practice in international arbitration, than eg s27D(2)(b) of the Commercial Arbitration Act 2010 (NSW). That always requires a second agreement between the parties before arbitral proceedings can be resumed by the same arbitrator after his or her attempts at Arb-Med have failed.
6. Arb-Med has become more widely-accepted, not just in continental European legal systems and in parts of Asia, but also (to a lesser extent) in common law jurisdictions. Arb-Med can significantly shorten and reduce costs of arbitral proceedings. But if settlement fails and “pure” arbitral proceedings resume, there may be challenges that that the arbitrators now lack impartiality or have not given parties “equal treatment” – usually mandatory provisions of the applicable arbitration law. These concerns are particularly acute when there is “caucusing” (ex parte meetings with each party) by the arbitrator(s) engaged in Arb-Med. Accordingly, the starting point for the recently agreed “CEDR Rules for the Facilitation of Settlement in International Arbitration” is to not allow caucusing at all. Arb-Med instead must generally be conducted with all parties present, which is often nonetheless quite effective at least in international commercial arbitration proceedings.
7. By contrast, the IBA Rules state that “the mediator can conduct meetings with one party only” (Art 7.1). Given the extra risks involved, especially in light of greater public interests involved in investor-state disputes than commercial disputes between private parties, it seems advisable at least to require a separate “agreement in writing” before caucusing is allowed. In addition, perhaps this extra agreement should only be allowed after the Arb-Med proceedings have already started,.
8. There is anyway the possibility that caucusing in Arb-Med may directly conflict with a mandatory provision of the applicable background arbitration legislation or treaty regime. Admittedly, the IBA Rules do disclaim that if any of its provisions “is in conflict with a provision of the law from which the parties or a party cannot derogate, that provision prevails” (Art 1.3). But the risks involved in caucusing during Arb-Med, even once parties agree to adopt the IBA Rules, should be highlighted at least in official IBA commentary on these Rules.
9. Another problem relating to caucusing will arise anyway when the IBA Rules are adopted to allow Arb-Med, if the arbitral proceedings are governed by the UNCITRAL Model Law – eg if the seat is Australia, pursuant to Part III of the International Arbitration Act (Cth) 1974 as amended in 2010 (IAA). Model Law Art 24(3) is arguably also mandatory, requiring all “information supplied to the tribunal by one party to be communicated to the other party”. This probably will significantly undermine the usual perceived benefit of caucusing, namely the capacity for frank and confidential communications between the party meeting ex parte with the third party neutral attempting to facilitate settlement.
10. Another issue could arise in such arbitration proceedings, relating to disclosures of information, if the arbitral seat is Australia and the IBA Rules are superimposed to facilitate Arb-Med. The IAA only provides confidentiality if the parties opt in to the regime set out in s23C. It remains unclear whether the legislative intention was to allow parties to alter (especially, to extend) the scope of confidentiality by further party agreement (eg requiring each party to impose on its witnesses a similar confidentiality obligation, as under ACICA Arbitration Rule 18.4). If this was the legislative intention and the parties have adopted the ACICA Arbitration Rules as well as the IBA Rules (eg under an investment contract), any different ACICA Rules confidentiality obligations presumably trump those contained in the IBA Rules (due to Art 1.2 of the latter as well as the proviso to Art 10.2).
11. So what are the IBA Rules obligations of confidentiality? They apply on an opt-out basis relating to documents and communications made in connection with the (Arb-Med) proceedings (Art 10.2). This does seem advisable because it should help frank discussions and create more scope for early settlement. However, this Art 10.2 obligation is subject to any contrary party agreement, or if the information is of certain types. For example, under Art 10.3 confidentiality does not automatically apply regarding (a) the fact of mediation and whether a settlement was reached, (b) the terms of any settlement, (c) documents or communications “prepared by a disclosing party in connection with the mediation if they don not contain information by any party or the mediator”, etc. The type (c) exception means that one party can later freely disclose to third parties some of its pleadings or evidence produced to the mediator. This may go too far and risk undermining the effectiveness of the mediation process. If Arb-Med is conducted say under ACICA Arbitration Rules together with the IBA Rules, however, ACICA Rule 18.2’s broader confidentiality provision theoretically should prevail – and that may well promote more chance of settlement.
12. The IBA Rules provide a helpful list of “qualifications for mediators” (Appendix B) that parties may consider when mediators (Art 4.5). If they cannot agree, they must appoint a Designating Authority to nominate the mediator(s) (Art 4.6), and in accordance with Appendix C the Authority “shall take into account, but not be bound by” the Appendix B qualifications. Given the importance of “framing” emphasised by social psychologists, the Appendix B list should be drafted expansively. One further qualification for this list could therefore be: “experience in international or comparative investment law or dispute resolution education”.
13. If the parties cannot even agree on a Designating Authority, the IBA Rule default is the Secretary-General of the Permanent Court of Arbitration. However, the PCA traditionally dealt with (very few) inter-state arbitrations under public international law. It has only recently started to administer significant numbers of investor-state arbitrations, thereby gaining more experience about commercial parties and possibly even aspects of domestic law. Located in The Hague, the PCA also historically has not had many close institutional links with the Asian region. It may therefore be appropriate to add to the draft IBA Rules that the PCA should first consult with any relevant regional arbitration groups which include considerable commercial experience (such as, especially if both parties and the investment are located in that region, before making the default nomination of the mediator.
14. Finally, the draft IBA Rules should consider stating up-front overarching goals or principles to be followed by the parties and mediators throughout such proceedings. One formulation could be ACICA Expedited Arbitration Rule 3.1: to provide a process “that is quick, cost-effective and fair, considering especially the amounts in dispute and complexity of issues or facts involved”. By contrast, IBA Rule Art 8.5 mentions “the overall goal of a cost-effective and timely settlement” in relation only to mediator conduct, while the parties’ obligation is to cooperate “in good faith to advance the mediation as expeditiously as possible” and only in relation to actual conduct of the mediation (emphasis added).

Author: Luke Nottage

Prof Luke Nottage (BCA, LLB, PhD VUW, LLM LLD Kyoto) is founding co-director of the Australian Network for Japanese Law (ANJeL), Associate Director (Japan) of the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS), and Professor of Comparative and Transnational Business Law at Sydney Law School. He specialises in international dispute resolution, foreign investment law, contract and consumer (product safety) law.