‘Dispute Prevention’ under the India-Brazil BIT

[Vishal Hablani is a 4th year B.A.L.L.B. Hons. Student at the West Bengal National University of Juridical Sciences, Kolkata]    

On January 25, 2020, India inked the Investment Cooperation and Facilitation Treaty with Brazil. Effectively, it is a bilateral investment treaty (BIT) between the two countries. The newly signed BIT garnered worldwide attention owing to the unique clause it contained for dispute resolution, which puts forth the idea of ‘dispute prevention’ instead of ‘dispute resolution’. It provides for a shift from the age-old practice of ‘investor-state dispute settlement’ to ‘state-to-state dispute settlement’. Under the concerned practice, the foreign investor cannot file claims against the country in which the investment is undertaken. Instead, it is only the state (to which the investor belongs) that can file claim against the other state on behalf of the investor. In addition, it sets aside arbitration, an adversarial form of dispute resolution, as a primary method for settlement of disputes. Instead, it provides for resolution of disputes in an ‘amicable manner’ that paves for the application of non-conventional methods like mediation and conciliation.

Owing to the political nature of disputes, amicable methods like mediation take a setback when it comes to resolution of investment treaty disputes. In this post, I argue that the newly introduced mechanism provided under the India-Brazil BIT is an effective method to deal with political barriers that majorly the hinder adoption of mediation as a preferred method for resolution of concerned disputes.

Increasing Interest in Mediation of Investment Treaty Disputes

Over time, arbitration has emerged as a preferred method of for resolution of investment treaty disputes, as compared to other methods like mediation, conciliation and negotiation. However, the use of arbitration in the context of investor-state dispute settlement (ISDS) is fraught with challenges such as multiplication of interlocutory proceedings, high monetary costs, impartiality of arbitrators owing to repeated appointments and increasing similarity with litigation. Mediation, on the other hand, is usually faster, less expensive, and more effective in preservation of relationship between the disputing parties.

Consequently, a shift is being witnessed, and mediation is emerging as an alternative to arbitration. This can be evidenced by the introduction of instruments, including the Singapore Convention on Mediation (an international agreement for recognition of mediated settlements), Directive 2008/52/EC of the European Parliament and of the Council (EU Mediation Directive), the EU-Canada Comprehensive Economic and Trade Agreement (providing for mediation of investment treaty disputes arising out of the trade agreement), the Guide on Investment Mediation adopted by Energy Charter Conference and the IBA Rules for Investor-State Mediation. Adoption of mediation for resolution of investment treaty disputes faces resistance owing to structural and political barriers. Though the instruments enumerated above provide guidance to deal with the structural barriers, they are not well equipped to deal with political barriers.

What are the Political Barriers?

In September 2016, the National University of Singapore’s Centre for International Law undertook a survey to understand the obstacles that prevent settlement of investor-state disputes. The survey report was published in September 2018. The report observed that it is usually the state party that is reluctant to come to a settlement. State parties conveniently defer the responsibility of dispute settlement to third party adjudicators, which is against the idea of mediation, as it requires active participation by the disputing parties to determine the terms of settlement.

The reasons for adoption of such an attitude by the state parties were found to be primarily political in nature. Investor-state disputes attract a lot of media coverage that further inflames the dispute politically, and pressurizes the state party to take a rigid stance. Negotiation for a settlement confers the state party with the risk of allegations of corruption, and possible prosecution for the offence in future. The fear of corruption allegation is coupled with fear of criticism from the public, comprising of non-governmental organizations, political groups, among others, that might brand the State as the “puppet of foreign interests”. In addition, the State is also fearful of coming to a settlement, as it might set a precedent for other investors, who might also pursue suits of similar nature for obtaining compensation.

Political factors involved in the mediation of investor-state disputes are more of a concern as compared to structural barriers. This is because, even if the mechanisms to address the structural barriers are introduced, they cannot effectively deal with the underlying bias of the state parties, which is based on the political nature of the dispute. All the obstacles coupled together result in setting up unreasonable expectations that severely affects the relationship shared by the disputing parties.

Mechanism of ‘Dispute Prevention’ under the India-Brazil BIT – A Method to Answer the Political Barriers

Mechanism of Dispute Prevention

As stated earlier, the mechanism of ‘dispute prevention’ under the India-Brazil BIT provides for a shift from the age-old practice of ‘investor-state dispute settlement’ to ‘state-to-state dispute settlement’. Even though the State represents the interests of the native investor before the host State, in substance, the dispute still exists between the investor and the host state. The new mechanism only changes the form of its resolution.

The procedure for dispute prevention is laid down under Article 18 of the BIT. It provides for the interested party to submit a written request to the other party, specifying the measure adopted by the party that resulted in alleged breach of the Treaty. The ‘Joint Committee for the Administration of the Treaty’ is required to meet within a period of 90 days from the date of filing of request. The concerned Joint Committee is constituted in accordance with Article 13 of the BIT. The Joint Committee is to be comprised of government officials of both the countries. One of the functions of the Joint Committee is to resolve disputes in an ‘amicable manner’ as against the conventional approach of resolution of investor-state dispute(s) by way of arbitration. If any of the dispute is not resolved by application of amicable methods, it can be submitted before arbitration (Article 18). However, the arbitral tribunal can only address issues regarding interpretation of treaty and observance of the terms by the party. It does not have the power to award compensation.

‘Amicable Manner’ of Dispute Resolution

The term ‘amicable manner’ has not been defined in the BIT agreement, and usually suggests something that is friendly, sociable or peaceful. The BIT does not specifically advocate the use of mediation. However, the phrase “amicable manner” squarely suggests practices like mediation, conciliation and negotiation. Assuming mediation is relied upon as one of the methods for dispute resolution in an amicable manner, as the trends suggest, it is argued that the new mechanism of ‘state-to-state dispute settlement’ can effectively address political barriers faced in mediation of investment treaty disputes.

Answering the Political Barriers

As discussed earlier, political complexities pose a stumbling block before the state parties to arrive at a settlement. It is suggested that if the State represents the interest of the native investors before the host State (as has been contemplated), the dispute resolution would take the form of diplomatic protection under the international law. Mediation provides a conducive environment to the disputing parties to undertake dispute resolution in the form of diplomatic exchange, thereby facilitating the process of negotiating a settlement.

In addition, as mediation is a more confidential process, without attracting much media coverage, it is assumed that the host state party would be disinclined to take a rigid stance. This would help in addressing the political barrier that is a result of fear relating to corruption allegations and public criticism among the host State parties to arbitration. Further, the parties will not be at the liberty to defer the responsibility of dispute settlement to third party adjudicators, as is usually done in case of arbitration. This is because, in accordance with Article 19.2 of the Treaty, the arbitral tribunal is barred from awarding the compensation, which would ensure that the parties take an active interest for dispute resolution in an amicable manner. Moreover, if parties arrive at a settlement in an amicable manner, it would set a good precedent in the eyes of the public, as the State would save large sum of money that is wasted in pursuing or defending arbitral claims against the investor. The situation is even worsened if the arbitral award is given against the State.   

Conclusion

The dispute prevention mechanism introduced under the India-Brazil BIT is a building block in the right direction for addressing the political barriers relating to mediation of investment treaty disputes. This holds special significance in today’s scenario, when we are witnessing large scale privatization of public services, with huge foreign investments being attracted into developing countries. Adopting amicable methods like mediation for dispute resolution would go a long way in preserving a healthy relationship between the investor and the host state, thereby resulting in mutual growth and prosperity. 

Vishal Hablani

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