Texas A&M University School of Law Texas A&M Law Scholarship Faculty Scholarship 3-2013 The Thoughtful Integration of Mediation into Bilateral Investment Treaty Arbitration Nancy A. Welsh Texas A&M University School of Law, [email protected] Andrea Kupfer Schneider Marquette University Follow this and additional works at: https://scholarship.law.tamu.edu/facscholar Part of the Dispute Resolution and Arbitration Commons, and the International Law Commons Recommended Citation Nancy A. Welsh & Andrea K. Schneider, The Thoughtful Integration of Mediation into Bilateral Investment Treaty Arbitration, 18 Harv. Negot. L. Rev. 71 (2013). Available at: https://scholarship.law.tamu.edu/facscholar/939 This Article is brought to you for free and open access by Texas A&M Law Scholarship. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Texas A&M Law Scholarship. For more information, please contact [email protected]. The Thoughtful Integration of Mediation into Bilateral Investment Treaty Arbitrationi Nancy A. Welsh2 and Andrea Kupfer Schneidera ABSTRACT While the current system of investment treaty arbitration has definitely improved upon the "gunboat diplomacy" used at times to address disputes between states and foreign investors, there are signs that reform is needed: states and investors increas- ingly express concerns regarding the costs associated with the arbitration process, some states refuse to comply with arbitral awards, other states hesitate to sign new bilateral investment treaties, and citizens have begun to engage in popular unrest at the prospect of investment treaty arbitration. As a result, both investors and states are advocating for the use of mediation to supplement investor-state arbitration. This Article draws upon 1. This Article extends ideas begun in Nancy A. Welsh, Mandatory Mediation and Its Variations, in U.N. CONFERENCE ON TRADE AND DEV., INVESTOR-STATE DISPUTES: PREVENTION AND ALTERNATIVES TO ARBITRATION II, U.N. Doc. UNCTAD/ WEB/DIAE/IA/2010/8 (Susan Franck and Anna Joubin-Bret, eds., 2011), available at http://www.unctad.orglen/docs/webdiaeia20108-en.pdf [hereinafter INVESTOR-STATE DISPUTES II], Andrea Kupfer Schneider, Using Dispute System Design to Add More Process Choices to Investment Treaty Disputes, in INVESTOR-STATE DISPUTES II and Nancy A. Welsh & Andrea K. Schneider, Becoming "Investor-StateMediation," 1 PENN ST. J. L. & INT'L AFF. 86 (2012). We thank Jack Coe, Susan Franck, Mariana Hernandez Crespo, Anna Joubin-Bret, and Jeswald Salacuse for their careful comments and advice on this Article. We also express thanks for the insights and comments offered by colleagues at Penn State University, Dickinson School of Law, and participants at the colloquium hosted by the Penn State Journal of Law and InternationalAffairs, the University of Minnesota-American Society of International Law Conference on International Economic Law, and the Joint Symposium on International Investment Law and Alternative Dispute Resolution at Washington and Lee University School of Law. Finally, we extend special thanks to Katie Rimpfel, as well as Katie Lonze, Mark McGill, Katherine Parr, Kevin Schock, and Nida Shakir, for their excellent research assistance. Any mistakes are, of course, our own. 2. William Trickett Faculty Scholar and Professor of Law, Penn State Univer- sity, Dickinson School of Law. 3. Professor of Law and Director, Dispute Resolution Program, Marquette Uni- versity Law School. Harvard Negotiation Law Review [Vol. 18:71 dispute system design principles, the socio-psychological re- search and theories regarding procedural justice, and the U.S. experience with court-connected mediation. Using these lens, the article examines the models of mediation that have been shown to be effective, the importance of ensuring that mediation offers something different from the other procedural options available to resolve investor-state disputes, and the mecha- nisms that increase the likelihood that disputing parties and stakeholders will perceive individual outcomes and the larger system as fair. The Article also examines the U.S. domestic ex- perience to identify the elements of the mediation process that can be, and have been, made compulsory and the effects of this choice, as well as different approaches for ensuring the quality of the mediation process and its accountability to the disputing parties and other stakeholders. Ultimately, the Article recom- mends the integration of a default model of mediation into the investor-state context that begins in a facilitative manner, in or- der to increase the likelihood of trust-building and information exchange regarding important underlying interests, but also permits both evaluative interventions by the mediator and dis- cussion of relevant legal norms. The Article further concludes that if stakeholders' input is sought and considered regarding mechanisms for the referral of disputes to mediation, some ele- ments of mediation could be made compulsory. More specifi- cally, the dispute resolution clauses in investment treaties could require the parties to participate in an initial meeting to discuss the potential use of mediation or other consensual procedures, with the parties themselves then choosing whether to proceed further, when, and with what process. Finally, the Article rec- ommends the establishment of a small pool of well-known and well-respected investment treaty mediators who will offer a rea- sonably strong and pragmatic guarantee of quality in the short- term and engender a heightened perception of trust in the pro- cess. These mediators should also possess the temperament and skills to provide the default model of mediation. In the long term, however, evaluation and mentoring must be put into place to permit thoughtful cultivation of both the model of mediation that is best suited for the investor-state context and the next generation of mediators. CONTENTS Introduction .......................................... 74 II. The Current State of Investor-State Arbitration and Concerns About Mediation ....................... 78 Spring 2013] Bilateral Investment Treaty Arbitration A. The Emergence of Problems in Investor-State Arbitration ....................................... 78 B. Adding Mediation to the Mix ..................... 82 C. Critiques of Mediation-and the Challenges to be M et ........................................... 84 III. Dispute System Design and Procedural Justice ....... 91 A. Dispute System Design ........................... 91 B. Procedural Justice ................................ 95 IV. The Mediation Process, Referral Schemes and Quality Control Mechanisms ......................... 105 A. The Mediation Process ............................ 105 1. Basic Differences Between Mediation and Arbitration ................................... 105 2. A More Nuanced Appreciation of the Relationships Among Models of Mediation, Arbitration, and Other Processes .............. 108 3. Recommended "Default" Model of Mediation for the Investor-State Context ................ 116 4. The Relationship Between the "Default" Model and States' Preventative Initiatives .... 117 B. Mediation Referral Schemes ...................... 120 1. Scope of Compulsory Mediation ............... 123 2. Degree of Intrusiveness of Compulsory Elem ents ..................................... 124 3. Parties' Input Within Compulsory Systems .... 126 4. Mixed Compulsory and Voluntary Elements... 127 5. The Effects of Compulsory Mediation ......... 128 6. Recommended Compulsory Elements in the Investor-State Context ........................ 132 C. Mediation Quality Assurance/Accountability M echanism s ...................................... 133 1. Accountability of the Parties to the Court and Each Other ............................... 134 2. Accountability of the Mediators to the Court and Parties ................................... 135 3. Accountability of the Courts to the Parties and the Public ................................ 137 4. Recommendation for the Investor-State Context ....................................... 139 V . Conclusion ........................................... 142 Harvard Negotiation Law Review [Vol. 18:71 I. INTRODUCTION Investment treaty arbitration has evolved over time to encourage and protect foreign investment. Historically, companies that in- vested money in foreign countries hoped that their governments would step in and protect them if the host government did not treat them well. In some instances, this "gunboat diplomacy" not only pro- tected investment but also resulted in violent confrontation. As part of the effort to move away from such power-based relations among states and toward cooperation within international organizations, member governments of the World Bank ratified the Convention on the Settlement of Investment Disputes Between States and Nation- als of Other States in 1965 and established the International Center for the Settlement of Investment Disputes ("ICSID").4 While the multiple attempts since then to create a multilateral treaty to govern international investment have resulted in failure, the bilateral in- vestment treaty ("BIT") model has thrived.5 Patterned after friendship, commerce, and navigation treaties (FCNs), BITs were originally designed to provide for the protection of foreign investment in each country and for treatment that is no dif- ferent from that experienced by host country investors.6 BITs also now provide for arbitration under the rules of ICSID or the United