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By Catherine Green

 

Part three of a six part series titled ‘the Singapore Mediation Convention: a panacea for trade in the Trans- Pacific Region or just one piece of the puzzle?’

Part One of the series ‘An Introduction’ may be accessed here.

Part Two of the series ‘The “Trans-Pacific” Experience’ may be accessed here.

This is the third instalment of a six part series on the Singapore Mediation Convention in which I have considered the overarching question of whether the Singapore Convention is a panacea for trade in the Trans-Pacific Region or just one piece of the puzzle?

Part One of the series provides an introduction and Part Two of the series considers the ‘Trans-Pacific’ experience and why the question of accession to the Singapore Convention needs to be considered taking into account the specific characteristics of the constituent member states within that region.

Part Three turns now to considerations of the facilitation of trade and investment in the Trans-Pacific.

Many Trans-Pacific states gained their independence in the second half of last century. In the period following decolonisation, those states received official development assistance (ODA) from international sources (including their previous colonisers). This ODA has reduced over time leaving the recipients of that financial support looking for alternative inflows of capital to make up for the loss of foreign aid.[i]

In my view, the improved integration of Trans-Pacific states into the global trading system ought to facilitate greater trade and investment throughout the region and, in particular, increase much desired foreign direct investment (FDI) in those states.

The question is, would accession to either the New York Convention or the Singapore Convention have any tangible (and beneficial) impact on this integration, in turn increasing the incidence of FDI throughout the region?

To evaluate this proposition, I first consider the role of FDI specifically within the Trans-Pacific context. Second, I seek to evaluate how accession to the New York Convention and/or the Singapore Convention might aid or encourage foreign investors to look to the Trans- Pacific for greater investment and economic development opportunities.

Foreign direct investment

FDI occurs when a corporate entity in one jurisdiction (the investor) establishes a commercial operation in another (the host country). This investment in the host country could take place by (a) the investor setting up a wholly owned affiliate in the host country; (b) acquiring a local business; or (c) entering into a joint venture in the host country.[ii]

FDI has played an extensive role in the development of many Trans-Pacific states. Historically, this was largely a by-product of colonisation,[iii] although the presence of natural resources in some island nations has also been a significant driver encouraging FDI for a reasonably extensive period of time, including in particular in Fiji, the Solomon Islands and Papua New Guinea.[iv]

As noted above, small states, many of which are located within the Trans-Pacific region, typically have limited resources available at a local level making FDI a particularly significant economic and developmental boon.

The relative size of those small Trans-Pacific states can be seen, in economic terms, when considering their comparatively low GDP. By way of example, in 2017 Fiji had a recorded GDP of US$5.06 billion; Samoa US$0.86 billion; Tonga US$0.42 billion; and Vanuatu US$0.86 billion. Even Papua New Guinea and the Solomon Islands came in at a mere US$21.9 billion and US$1.30 billion respectively. This can be contrasted with larger Asia-Pacific neighbours such as: New Zealand (US$205.9 billion); Australia (US$1.32 trillion); Indonesia (US$1.016 trillion); the Philippines (US$313.6 billion); and Singapore (US$323.9 billion).[v]

Data published by the World Bank indicates that in 2017, Fiji, Samoa, Tonga and Vanuatu received net inflows of FDI as a percentage of GDP in the amounts of 5.936%, 1.048%, 3.234% and 2.863%. Comparing this to the global statistic cited of 2.361% signals that these small state nations are not far off the world average.[vi] However, as noted above, there is a particular need for greater FDI in small states which suggests that such states perhaps ought to endeavour to exceed the global average for FDI by a clear margin. As the World Bank statistics demonstrate, the Trans-Pacific states are merely “average” participants in the global FDI market, which indicates that participation in international trade and occurrence of FDI to date has been something of a missed opportunity.[vii]

Increase in FDI brings with it many tangible benefits aside from the obvious input of capital. These benefits include access to business skills and knowledge (management, production, product and process technologies), research and development, higher levels of employment and economy of scale efficiencies as well as, more generally, integration within the global trade community with much needed access to both import and export markets.[viii]

FDI is of course not a cure-all for the problem. In fact, research indicates that whilst FDI is associated with higher rates of growth, the impact of FDI in the Trans-Pacific is lower when compared to global data.[ix] In other words, FDI has a positive influence on rates of growth in the Trans-Pacific, however, other factors mean that the rates of growth are less than might be expected when one evaluates the data from the Trans-Pacific Region as against global averages.

Further research has also identified concerns regarding whether FDI is complementary to, or displacing of, domestic credit. The data analysed shows a distinction between different Trans-Pacific states, with findings made that, in some cases,[x] the interaction between the two is complementary and, in others,[xi] recommendations are given that steps should be taken to minimise the displacement of domestic credit with FDI[xii]

Nevertheless, the net effect of FDI appears positive and, as such, the encouragement of trade and investment within the Trans-Pacific Region is generally a useful and advantageous goal.

This brings us to the question of how greater FDI can be encouraged by better meeting the needs of foreign investors looking to engage in business with entities domiciled in states within the Trans-Pacific Region.

As with any commercial activity, before investing cross-border, a foreign counterparty will undertake a detailed risk assessment to ascertain whether or not the investment is viable.

Although commercial risk is a natural part of doing business, particularly within the international arena, commercial parties will always seek to minimise and mitigate their business risks as much as possible. An essential element of this risk mitigation exercise is to ensure that there are credible and effective dispute resolution processes in place to determine the parties’ respective rights and obligations should a dispute arise out of the commercial arrangement that is proposed.[xiii]

Trans-Pacific states are often characterised as having particular problems when it comes to satisfying international investors and commercial counterparties that any rights and obligations will be enforced and disputes resolved effectively and in accordance with the rule of law. To put it bluntly, foreign investors do not have confidence in the local courts to perform this function.[xiv] Moreover, even where a litigating party obtains a judgment in its favour, it may then need to take steps to enforce the judgment in another jurisdiction which is often problematic. This is where both the New York Convention and Singapore Convention come into their own.

How can the New York Convention aid foreign direct investment?

With respect to international commercial arbitration, and within the context of the New York Convention, four primary benefits have been identified, namely: (a) obtaining a final and binding award which is readily enforceable under the New York Convention; (b) the resolution of commercial disputes by highly skilled and neutral arbitrators; (c) minimising pressure on often over subscribed dockets in local court registries; and (d) providing local lawyers with exposure to international commercial arbitration and the opportunity to engage with legal professionals from more developed legal jurisdictions (thereby aiding the development of those local lawyers).[xv]

The first two of the four benefits identified above are advantageous to the foreign investor (as well as the host country commercial counterparty) and, therefore, are likely to have a positive impact on encouraging FDI.

The third and fourth points identify more wide-reaching benefits to the host country rather than a potential foreign investor into that host country (and therefore are not directly pertinent to an evaluation of how acceding to the New York Convention might facilitate greater trade and investment). Nevertheless, they bear passing mention here as they are also important factors in the wider evaluation of whether the New York Convention is a beneficial instrument for Trans- Pacific states to accede to.

The first of the points identifies one of the central objectives of the New York Convention, which provides for the simple enforcement of arbitral awards in states which are contracting parties to that Convention.

The importance placed on recognition and enforceability (as well as avoidance of specific legal systems or national courts, which to some extent is a corollary of enforceability) can be seen in the results of the 2018 Queen Mary Survey[xvi] which records the three most valuable characteristics of international arbitration to be: enforceability of awards (64%); avoiding specific legal systems/national courts (60%); and flexibility (40%).[xvii]

A strong emphasis on the central importance of enforceability was also placed by Kofi Annan in his address at the New York Convention Day on 10 June 1998:[xviii]

…entities investing or doing business in [states which are not parties to the New York Convention] lack the legal certainty afforded by the Convention, and businesses cannot be confident that commercial obligations can be enforced. This increases the level of risk, meaning that additional security may be required, that negotiations are likely to be more complex and protracted, and that transaction costs will rise. Such risks can adversely affect international trade.

For commercial entities, an enforceable award or settlement agreement is much preferred to a judgment of the domestic courts. This is for one simple reason: it is significantly easier to enforce an arbitral award under the New York Convention than to enforce a foreign judgment.

The adoption of the Judgments Convention[xix] this year makes some progress although with only one state having signed the instrument to date, it is yet to be seen whether this Convention will have any impact in practice.

In light of the recognised benefits to be attained in adopting arbitration as the process of choice for the resolution of international commercial disputes, work is currently underway within the Trans-Pacific to encourage wider adoption of the UNCITRAL Model Law and accession to the New York Convention with the specific stated purpose of addressing the barrier militating against trade and investment by external parties into the region.

In particular, on 12-13 February 2018, the inaugural South Pacific International Arbitration Conference (organised by the ADB, the Government of Fiji, and the UNCITRAL Regional Centre for Asia and the Pacific) took place in Nadi, Fiji.

The purpose of that conference was to bring together government officials, legal practitioners, members of the judiciary, private sector representatives, and other stakeholders from nations across the Pacific to discuss solutions to existing barriers to FDI and cross-border trade, including the reduction of risk through the adoption of arbitration as a dispute resolution mechanism for cross-border commercial disputes.

During the course of that conference, it was explicitly acknowledged that:[xx]

Data and experience from around the world clearly shows that companies engaged in cross-border trade and investment assign a high degree of risk to developing countries with weak or uncertain dispute resolution systems, and that efficient and effective arbitration frameworks increase confidence and encourage cross-border investment and trade.

More recently, on 25-26 March 2019, the 2nd South Pacific International Arbitration Conference took place in Port Moresby, Papua New Guinea. The same messages were imparted again – to encourage trade, you need to minimise the risks and international arbitration under the New York Convention is to be encouraged.[xxi]

The overwhelming message from potential investors appears clear. To encourage FDI, those investors must be satisfied that their commercial risks can be adequately managed. From their perspective, the availability of arbitration under the New York Convention will go a long way to meeting this need.

What impact could the Singapore Convention have?

In light of how well the New York Convention is able to meet the needs of potential investors to manage their risks, what role then might mediation and the Singapore Convention play in the Trans-Pacific Region?

The results of a short survey undertaken by the International Mediation Institute in October and November 2014 reported that 92.9% of respondents said they would be either “probably” or “much more likely” “to mediate a dispute with a party from another country if [they] knew that country ratified a UN Convention on the Enforcement of Mediated Settlements and that consequently any settlement could easily be enforced there”; 87.8% of the respondents said that “the existence of a widely-ratified Enforcement Convention” would “possibly” or “definitely” “make it easier for commercial parties to come to mediation in the first place”; and 90.5% of respondents said that “the absence of any kind of international enforcement mechanism for mediated settlements” presents a “major impediment” or is “one deterring factor” in “the growth of mediation as a mechanism for resolving cross-border disputes”.[xxii]

This would certainly intimate that mediation might be well received by potential parties to an international commercial dispute once the question of enforcement is adequately addressed.

However, this begs the question: how can a party rely on the enforcement mechanism provided for by the Singapore Convention to enforce the mediated settlement agreement if the mediation process does not result in any settlement at all? The issue of uncertainty would remain.

Although it is difficult to assess with any degree of accuracy, it has been reported that there seems to be a high success rate “in terms of the proportion of cases in which an agreement is reached between the parties”[xxiii] where they elect to mediate their dispute. Nevertheless, even the existence of a high success rate does not provide the certainty sought, certainly not to the same extent as arbitration can under the New York Convention.

In my view, it is unlikely that the Singapore Convention would have any significant additional impact on the facilitation of trade and investment in the Trans-Pacific Region when compared to the New York Convention. As a standalone piece of law, it provides less reassurance to a potential investor in terms of certainty of outcome than the New York Convention already would.

However, although the facilitation of trade and investment and consequent increase in FDI is a much-lauded objective, it is only one aspect of the overall picture.

So far, careful consideration has been given to the needs of the external investor looking to engage and contract with local commercial enterprises. However, in evaluating the relative merits of international commercial arbitration and international commercial mediation as dispute resolution processes, one must not only consider the needs of those foreign investors but also the needs of the host country counterparties with whom the foreign investor seeks to trade.

Three significant additional benefits can be readily identified as being likely to flow should mediation within the ambit of the Singapore Convention be an option for disputing parties, namely the ability to: (a) better meet the diverse cultural needs of stakeholders operating within the Trans-Pacific Region; (b) obtain more flexible and creative solutions to commercial disputes; and (c) improve access to fair, effective, prompt and cost proportionate dispute resolution options that have the capacity to generate binding, recognisable and enforceable outcomes.

Look out for Part Four of this series: ‘Addressing Diversity and Culture’

References

[i] T K Jayaraman and Chee-Keong Choong “Foreign direct investment in the South Pacific Island Countries: a case study of Fiji” (2006) 2 (4) World Review of Entrepreneurship Management and Sustainable Development 309 at 310.

[ii] Theodore  Moran  “Foreign  direct  investment”  in  The  Wiley-Blackwell  Encyclopaedia  of  Globalization

(Blackwell Publishing Ltd, 2016) at 1.

[iii] Peter Svedberg “Colonialism and Foreign Direct Investment Profitability” in John Black J and John Dunning (eds) International Capital Movements: Papers of the Fifth Annual Conference of the International Economics Study Group (Palgrave Macmillan, London, 1982) at 172-194.

[iv] Thomas G Parry “Foreign Investment and Industry in the Pacific Islands” (1988) 22 (3) The Journal of Developing Areas at 381 at 381.

[v] The World Bank “Countries and Economies” < https://data.worldbank.org/country/>.

[vi] The World Bank “Foreign direct investment, net inflows (% of GDP)” < https://data.worldbank.org>.

[vii] Robert Picciotto “The Pacific Islands: New Priorities for a New Development Era” (2018) 4 (4) JAPSS 527 at 538.

[viii] Parry (above) at 389. Simon Feeny, Sasi Iamsiraroj and Mark McGillivray “Growth and Foreign Direct Investment in the Pacific Island countries” (2014) 37 Economic Modelling 332.

[ix] Feeny (above) at 333.

[x] Samoa, Solomon Islands and Vanuatu.

[xi] Fiji, Papua New Guinea and Tonga.

[xii] Hong Chen and Baljeet Singh “Output impacts of the interaction between foreign direct investment and domestic credit: Case study of Pacific Island countries” in Studies in Economics and Finance (2017) 34 (3) Studies in Economics and Finance 331.

[xiii] Gary Born “Integration and Dispute Resolution in Small States” in Petra Butler, Eva Lein, and Rhonson Salim (eds) Integration and International Dispute Resolution in Small States (Springer, Switzerland, 2018).

[xiv] David Weiss and Michael Griffith “Report on International Mediation and Enforcement Mechanisms” (paper presented to UNCITRAL Working Group II (Dispute Settlement) 67th Session) at 2.

[xv] Born (above) at 223.

[xvi] 2018 Queen Mary Survey.

[xvii] Ibid at 7-8.

[xviii] Kofi Annan “Opening address commemorating the successful conclusion of the 1958 United Nations Conference on International Commercial Arbitration” (paper presented to New York Convention Day Colloquium, United Nations Headquarters, New York, 10 June 1958) at 2.

[xix] The Hague Conference 2019 Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters.

[xx] Asian Development Bank “International Arbitration Reform Needed to Improve Pacific’s Access to International Markets, Investment” (12 February 2018) < www.adb.org>.

[xxi] Following that conference, Papua New Guinea has announced that it has now become the 160th State to accede to the New York Convention having deposit the instrument of accession on 17 July 2019.

[xxii] International Mediation Institute “IMI survey results overview: How Users View the Proposal for a UN Convention on the Enforcement of Mediated Settlements” <www.imimediation.org>.

[xxiii] Petra Butler “Conference on ‘Integration and International Dispute Resolution in Small States’ (2017) 3 Euro Rev Priv L 683 at 689.

About the Author

Catherine GreenCatherine Green

Catherine is the Executive Director of the New Zealand International Arbitration Centre (NZIAC) as well as its related domestic registry services which cover a full spectrum of commercial, building and construction, and family and relationship disputes. She also has her own private practice as an arbitrator, adjudicator, and mediator taking appointments with respect to both commercial and construction disputes.