Dispute boards and conflict prevention in the context of the latin american perspective on foreign investment

13 de marzo de 2022
Por: Anna Karoliny Fonseca Cometti [1] y Daniela Rojas Dager [2]
Historically, foreign investment proved itself to be an engine to the international economy. As ancient as it may be, foreign direct investment (FDI) has been motivating an infinity of economic and trade relations throughout the centuries — although it is well known that its robustness is being constructed with time, as well as its means of conflict resolution. According to the traditional and perhaps outdated division of countries exporters of foreign investment and countries recipient of foreign investment, the Latin American and the Caribbean have usually been considered as the latter.
The flow of FDI in the region is, in 2020, according to the World Investment Report 2021, [3] tantamount to $87.6 billion dollars, which is still an impressive amount, despite the decrease of 45.4% caused by the pandemic — mainly because “many economies on the continent, among the worst affected by the pandemic, are dependent on investment in natural resources and tourism”. Nonetheless, the 5 host economies in LatAm are: (i) Mexico, with $29.1 billion dollars; (ii) Brazil, with $24.8 billion dollars; (iii) Chile, with $8.4 billion dollars; (iv) Colombia, with $7.7 billion dollars; and (v) Argentina, with $4.1 billion dollars.
It is not a secret that COVID-19 posed a challenge for development of FDI, especially for Latin American countries. As a result, it will be necessary in the upcoming years to design strategies to attract focused investments in Latin American countries in the framework of foreign direct investment. This, in order to continue obtaining the benefits of FDI: from a macroeconomic approach, which implies an increase in capital of the receiving economy due to the less volatile financing system that characterizes the FDI; and from a microeconomic one, where the transfer of technology and know-how between the investing enterprises and the receptor countries can help specialize and improve the investment development market.
In this sense, there is no doubt about the importance of foreign investment and foreign capital to the growth of the home economy and to further international cooperation. The question resides, however, in how countries can attract investors to establish these connections. Hallward-Driemeier [4] delved into this subject and concluded that, contrary to common sense, there is “little evidence that Bilateral Investment Treaties have stimulated additional investment”. His main argument was that “those countries that are reforming and already have reasonably strong domestic institutions are most likely to gain from ratifying a treaty”.
Admittedly, the international society recognizes that establishing an investment plan is highly risky by nature. That is precisely the reason behind the “new” generation of bilateral investment treaties and treaties with investment provisions: to provide a stronger legal background and less uncertainty for foreign investors. One of the features of these new treaties is a renewed dispute resolution system — which is eventually and constantly developing itself, through the incentive of UNCITRAL and several international organizations.
Therefore, the purpose of the present paper is to introduce the idea of the suitability of dispute boards as a method of conflict prevention and resolution in investment disputes in Latin America, in order to defend the idea that dispute boards can be a feasible component of the legal background that can help attract investors.
According to the International Chamber of Commerce (ICC) dispute board:
[...] is a standing body composed of one or three DB Members. Typically set up upon the signature or commencement of performance of a mid- or long-term contract, they are used to help parties avoid or overcome any disagreements or disputes that arise during the implementation of the contract.
This method of dispute resolution is increasingly being promoted by domestic and international ADR chambers around the world and it has proven to have benefited the parties with cost reduction (considering the popular amount of money spent before and after an arbitral or judicial proceeding) and time reduction. It has been developed primarily in the United States and was successfully used majorly on civil engineering projects, such as construction. In the United Kingdom, in the beginning of the 70s, “parties to construction projects developed a procedure known as adjudication, in which disputes were submitted to a standing project neutral who would render decisions that were binding upon the parties”.
ICC Rules indicates that Dispute Boards have three basic functions, that are: (i) emphasizing the relevance of informal and formal approaches to the disputes; (ii) intervening with informal assistance to guide the parties resolving the matter by means of an agreement; and (iii) determining the dispute through recommendations or decisions issued after a procedure of formal referral. It is highly noteworthy to mention that the use of DB is recommended because it helps reduce the risks and costs of the termination of parties’ contracts.
Those Rules also make a differentiation between three types of dispute board: (i) Dispute Adjudication Boards (DABs), in which the decisions must be complied with immediately; (ii) Dispute Review Boards (DRBs), where the recommendations are not immediately binding on the parties, but become so if no party objects within 30 days; (iii) Combined Dispute Boards (CDBs), which offer an intermediate solution between DRB and DAB by issuing decisions when a party so requests and no other party objects or the DB so decides on the basis of criteria set out in the Rules.
Dispute Boards stand out among the vast majority of methods of conflict resolution because when parties enter into a contract, they conceive a Dispute Board to integrate the administration of the project, accompanying the performance of the contract. Thus, Dispute Boards deal not only with existing conflicts, but also with imminent conflicts. In addition, a settlement may not be reached by the parties without cooperation, which means that battling and treating each other as adversaries is unproductive. It negatively affects the performance of the contract, while the parties are mutually interested in preserving this performance to minimize the costs of the project, and also suppressing legal costs or reallocating them. The key point is that conflicts are usually treated and solved before they become a dispute through the use of party cooperation and not having to stop the project and its upcoming profits.
The Investment Dispute Settlement Navigator from UNCTAD, concerning 1142 cases, shows that approximately 18% of cases comprise the primary sector, while approximately 13% and 67% comprise the secondary and tertiary sectors respectively. Therefore, the tertiary sector represents most of the cases registered in the database because of its relevance in investment relations. Within those cases, 202 are of electricity, gas, steam and air conditioning supply, while 126 are the result of building construction, civil engineering or specialized construction activities. And despite the success of Dispute Boards in those areas, it may not be limited to them. This method of dispute resolution can create value and generate many benefits to the parties and to the investment itself.
As an example of the case of Latin American countries, a recent study that analyzed the incoming flows of FDI (with the application of dispute boards) in countries of that region (between 2000-2014), showed that the effects of FDI, such as infrastructure improvement, economic and human capital increase, among others, favored the reduction of poverty and disputes in most of Latin American countries. [5]  Part of the explanation of the positive effects of FDI worldwide rests on the functioning and efficiency of the dispute boards, due to it's feasible legal background which ends up attracting investors and increasing the capital of the receiving economy.
In conclusion, foreign investment has been and will be an engine to the international economy, due to the growth of the home economy and the international cooperation it creates. Now, the reason why countries, particularly, Latin American countries, attract investors to establish commercial connections rests in the upcoming new treaties with a renewed dispute resolution system, in which dispute boards play an important role intervening and solving disputes. In Latin American countries and worldwide, this mechanism reduces the risks and costs of the termination of parties’ contracts and favors the reduction of poverty and disputes.

  • [1]
    Law undergraduate student at Federal University of Espírito Santo (Brazil). Research Assistant in Private International Law and International Commercial Arbitration. Coordinator of the International Arbitral Awards Observatory of LABCODEX. Researcher in International Economic Law, conducting academic research in investor-State dispute settlement, with FAPES scholarship. Member Young ICSID, YMG CIArb Brazil branch, ICC YAF, ICDR Y&I, CAM-CCBC New Gen and CAMARB Alumni. We are grateful to ACTA International Dispute Resolution for the valuable insights.
  • [2]
    Law undergraduate student at Los Andes University`s Faculty of Law with an academic option in Sociology, taking subjects from the Master's Degree in Intellectual Property at the same University. She is a fellow with honors from Giessen University in Germany and Marquette University in the United States to study International Economic Law and Economic Transactions and International Intellectual Property. Currently, working as a prosecutor specialist on intellectual property issues.
  • [3]
    United Nations Conference on Trade and Development. World Investment Report 2021. Available at: https://unctad.org/system/files/official-document/wir2021_en.pdf. Accessed 23 February 2022.
  • [4]
    HALLWARD-DRIEMEIER, Mary. Do Bilateral Investment Treaties Attract Foreign Direct Investment? Only a bit…and they could bite. Policy Research Working Paper 3121. The World Bank Development Research Group. Investment Climate. 2003.
  • [5]
    Quiñonez, P., Sáenz, J., & Solórzano, J. (2018). Does foreign direct investment reduce poverty? The case of Latin America in the twenty-first century. Business and Economic Horizons, 14(3), 488–500.
[Bibliographical References]

Universidad de los Andes | Vigilada Mineducación
Reconocimiento como Universidad: Decreto 1297 del 30 de mayo de 1964.
Reconocimiento personería jurídica: Resolución 28 del 23 de febrero de 1949 Minjusticia.