A Collaboration between Washington & Lee University School of Law and the United Nations Conference on Trade and Development (UNCTAD)

International Investment and ADR

Mariana Hernandez Crespo G.

Associate Professor of Law and Executive DirectorUST International ADR Research Network

University of St. ThomasMinneapolis, MN

 I. A Historical Perspective: The Development of

Conflict Management [or Lack of] in International Investment

II. A Paradigm Shift: From Protecting Investor’s Positions to Satisfying Investor-State Interests

III. The Path Ahead: Maximizing Joint Gains through Participatory Dispute and Conflict Management Systems

The Path Ahead for Bilateral Investment Treaties (BITs):

Satisfying Investor-State Interests through Participatory Dispute and Conflict

Management Systems

I. A Historical Perspective: The Development of Conflict Management [or Lack of] in International Investment

The Background Issue: The Need to Protect Foreign Investment

• Historically, foreign investment disputes were resolved either by force, diplomacy, or through the host government’s legal system, where the investor had minimal rights.

• Bilateral Investment Treaties (BITs) appeared in the 1960s. Arbitration clauses quickly became standard.

• Use of BITs surged in the last two decades, which also increased the number of host- government vs. investor disputes arising under the treaties.

Method System Process Result Implementation Mechanisms

So Far Force: Power-Based

Coercion ImposeMeasures

Dominance

Diplomacy:

Positions- Based

Compromise

Agreement

Political Pressure

Arbitration:

Rights- Based

Adjudication

Award Enforcement

MovingAhead

DSD & CMSD:

Interest- Based

Value Creation“Joint Gains”

Sustainable Agreement

“Nearly Self-Enforcing”

The Background Issue: The Need to Protect Foreign Investment

II. A Paradigm Shift: From Protecting Investor’s Positions to Satisfying Investor-State Interests

From To

1. Protection Cooperation

2. Investor’s Positions Investor-State Interests

3. “Bill of Economic Rights”

“Joint Gains Maximization”

4. Arbitration Awards Committees of Implementation, DSD & CMSD

5. Investment Security Investor-State Sustainable Business Relationship through Maximization of Joint Gains

II. A Paradigm Shift: From Protecting Investor’s Positions to Satisfying Investor-State Interests

III. The Path Ahead: Maximizing Joint Gains through Participatory

Dispute and Conflict Management Systems

Arbitration as an adjudicatory process: • Resolves disputes in terms of prevailing rights. • This nearly always guarantees dissatisfaction for at least one

of the parties.

Nonetheless, BIT disputes are currently resolved mainly through arbitration.

Yet the increasing number of disputes suggests that:• while particular cases are being adjudicated and resolved, • the underlying conflicts remain unaddressed, • cycling into more disputes.

1. The Limits of the Arbitration Award:Resolving Disputes and Leaving Conflict Unaddressed, Cycling into More Disputes

2. The Present Issue: How to Close the GapBetween the BITs and the Arbitration Awards

BITs _____________________________Arbitration Awards

Goal: Investor-State Sustainable Business Relationship through Maximization of Joint Gains

2. The Present Issue: How to Close the Gap Between the BITs and the Arbitration Awards

Areas of Strategic Development

1. Committees of Implementation (Consulting/Monitoring)

2. Dispute System Design (Resolving Specific Dispute)

3. Conflict Management System Design

(Managing Underlying Issues)

3. Overarching Goal: Investor-State Sustainable Business Relationship through Maximization of Joint Gains

“Ironically, as negotiations become increasingly global and virtual, it may be the development of all-fashioned relationships that will be found to matter most of all.”

  - Nancy Welsh Perceptions of Fairness, The Negotiator’s Fieldbook

Area of Strategic Development- What?

Function-

Why?

Specific Objective-

How?

1. Committees of Implementation:

Promoting Dynamic Communication and Cultural Understanding

ConsultDecide Monitor

2. Dispute System Design (DSD):

Ensuring parties’ Self- Determination in Investors-State Dispute

Resolve SpecificDispute (Architectural Design,Multi-door Forum)

3. Conflict Management System Design (CMSD):

Promoting Participatory Decision-Making to Foster Investors-State Relationships

Manage Underlying Conflict(Supplement CMSD with Architectural Method, Consensus-Building for State Participation)

3. Overarching Goal: Investor-State Sustainable Business Relationship through Maximization of Joint Gains

Promoting Trust through Dynamic Communication and Cultural Understanding

A. Consulting Mechanisms: “Alternative Approach for Improving Investor–State Relations” - Noriyuki Mita (Japan)

B. Implementation Clause and Committees of Investment:“Implementation and Management of Investment Treaty Obligations and Management of Investment Disputes ” - José Antonio Rivas (Colombia)

1. Consulting Mechanisms, Implementation Clause and Committees of Investment:

“Diagnosis for Appropriateness of Mediation in Investment Disputes”

- Lawrence Boulle (Australia/ South Africa)

“Challenges Facing Investment Disputes: Reconsidering Dispute resolution

in International Investment Agreements” - Susan D. Franck (USA)

2. Dispute System Design (DSD): Ensuring Parties’ Self-Determination in Resolving Specific Disputes in Investors-State Relationships

Professor Frank Sander of Harvard Law School, in a forthcoming piece, explores the potential of his original concept (the multi-door courthouse) so as to enhance the self-determination in dispute system design. Brazilian policy makers took the concept and replaced the word “courthouse” with “forum,” in order to adapt it to their context.

A Multi-Door Forum:

Opens up the spectrum of options for dispute resolution and offers a variety of options for the selection of the forum, according to the specific context, needs, and interests of each of the parties involved in a particular dispute.

This form of dispute system design, such as the multi-door courthouse, potentially emphasizes the party’s right of self-determination.

The enhancement of self-determination can increase the level of party satisfaction, and therefore the sustainability of the agreement, in this case the BIT.

Multi-door Forum (MDF):An Effective Architectural Dispute System Design

“Creating Options for the Future: The Importance of Incorporating Conflict Management System Design Principles Early, Often and Across the Board” Cathy Costantino (USA)

3. Conflict Management System: Promoting Participatory Decision-Making to Foster Investor-State Relationships

The Nature of the Actors: State (Public) and Investor (Private)

• Given the public nature of one of the actors, in order to ensure full participation of the different stakeholders that the state represents with a delegated power, the consensus-building method designed by Professor Lawrence Susskind, MIT-Harvard, could prove to be an effective architectural conflict management design method.

• To achieve public participation is critical to include representatives of all stakeholders.

• Effective participation requires basic ADR and cross-culture communication training for all.

• The consensus-building approach of Larry Susskind is not about achieving unanimity, but crafting an agreement that addresses all interests.

Consensus- Building Process (CBP):An Effective Architectural Conflict Management System Design Method for Public Participation

A Ladder of Citizen Participation (Sherry Arnstein)

Consensus- Building Process (CBP):An Effective Architectural Conflict Management System Design Method for Public Participation

Consensus-Building Essential Features: • The CBP needs to be lead by third party experts in order to maximize joint gain for all stakeholders. • Each group of stakeholders decides who will represent them. Even unorganized groups should be represented. • The CBP is an informal process that supplements the formal legal structure and must be linked to it. (Forthcoming “Emerging Practices and the Incomplete Legal Framework for Citizen and Stakeholder Voice”, Lisa B. Bingham arguing for legal reform)• The results of the CBP are “nearly self-enforcing agreements” because at the core is the fact that any agreement must be better than no agreement.

- “Breaking Robert’s Rules” by Susskind and Cruikshank, 2006.

The Five Steps of the Consensus-Building Process:

1) Convening2) Assigning roles and responsibilities3) Facilitating group problem solving4) Reaching agreement5) Holding people to their commitments

- “Breaking Robert’s Rules” by Susskind and Cruikshank, 2006.

Consensus- Building Process (CBP):An Effective Architectural Conflict Management System Design Method for Public Participation

The Consensus-Building Process can ensure that in the state-investor relationship the representation of the state’s interests is full and accurate.

Therefore, CBP can help to ensure that the “Six Critical Components of Conflict Management System Design” are met with regard to the public side of the equation.

1. Participation: Ensure representatives of all stakeholders are included and develop ADR and cross-culture capacity in order to prevent unanimity, instead crafting agreements that addresses all stakeholders’ interests.

Consensus- Building Process (CBP):An Effective Architectural Conflict Management System Design Method for Public Participation

2. Fluidity: CBP ensures agreements that identify mechanisms for dispute resolution and addressing change.

3. Sustainability: The success of CBP rests on whether having an agreement proves to be better for all stakeholders than under no agreement at all (“nearly self-enforcing agreement”).

4. Suitability: CBP assures that the appropriate method for the specific disputes are selected by the stakeholders through the DR clause.

5. Permeability: CBP guarantees that it is permeable because stakeholders have the decision-making power, rather than being imposed from outside.

6.  Accountability: CBP promotes accountability through the ratification and monitoring processes.

Consensus- Building Process (CBP):An Effective Architectural Conflict Management System Design Method for Public Participation

Challenges for Knowledge Building:

1. Broadening the Perspective2. Capitalizing on Failure3. Incentives for an Effective Learning Model

- “Teaching Smart People How to Learn”; Chris Argyris, Harvard Business Review, 1991

Framework for Sustainable Implementation: Knowledge Building as an Overarching Principle