Meagan Bachman
Crowell & Moring, Washington, DC

Angus Rankin
Vinson & Elkins, London

Christa Mueller García
Mueller Arbitration, Mexico City

Despite widespread recognition of the benefits of alternative dispute resolution (ADR) in resolving infrastructure disputes, projects involving state entities have proved remarkably resistant to the possibilities that ADR brings. This article explores obstacles to obtaining negotiated or mediated resolutions with sovereigns and thoughts for overcoming them, including: the involvement of independent experts, building capacity within governments and the community of neutrals capable of handling these disputes, as well as other recommendations to facilitate the resolution of disputes involving sovereigns.

Obstacles to sovereign settlements

There are several reasons why governments may be hesitant to settle disputes, ranging from legal restrictions to political considerations. In addition to legal constraints on government entities engaging in settlements, obstacles arising out of political and public perception as well as jeopardy for civil servants responsible for committing to settlements can pose challenges, particularly where a settlement may be viewed as a sign of mismanagement or could otherwise attract criminal or civil liability for government employees and officials.

Perceptions (and misperceptions) about legal impediments to settlements

There is a commonly held perception among practitioners that sovereigns are constrained in reaching compromise agreements by a host of legal requirements which prevent even an attempt at negotiated settlement. However, in the experience of this group at least, the legal requirements surrounding sovereigns’ ability to pursue ADR are neither as extensive as some believe nor the primary impediment to resolving infrastructure disputes.

Some of the misperceptions surrounding limits on sovereigns participating in ADR may arise from historic doubts around the arbitrability of disputes with state-owned entities (SOEs). However, this has largely been resolved through legislation and judicial determination. For example, in Brazil, there was uncertainty as to whether the federal, state and city governments and their entities/bodies – whether government-owned, government-controlled, semi-public or mixed public-private ownership – could submit disputes to arbitration, but this was clarified in the Brazilian Arbitration Act (the BAA).^[1] The BAA provides that parties can use arbitration as a means of resolving disputes regarding ‘freely transferable property rights’. Article 1, section 1 of the law that amended the BAA,^[2] eliminated any remaining confusion by specifically amending the BAA to provide that direct and indirect public administration entities may use arbitration to resolve conflicts regarding freely transferable property rights.

Similarly, although some disputes, including ‘administrative disputes falling within the jurisdiction of the relevant administrative organs’ are not arbitrable,^[3] there are no specific legal restrictions preventing the state or SOEs of the People’s Republic of China from entering into arbitration agreements. While the scope of what constitutes such an administrative dispute is not clear-cut, disputes arising out of public-private partnership (PPP) agreements between SOEs and private entities have generally been found to be civil and not administrative. Indeed, legal impediments to SOEs arbitrating their disputes may be more a matter of perception than reality.

Even where specific laws prevent SOEs from arbitrating disputes, there are often exceptions for construction contracts and PPPs. For example, in the United Arab Emirates, a federal law bans the adoption of arbitration,^[4] and disputes arising out of government procurement must be submitted to UAE courts.^[5] This restriction can only be lifted by a decision of the Cabinet based on a request from the relevant federal entity.^[6] However, the UAE has specifically excepted construction and PPP contracts from application of this restriction.^[7] Cabinet Decision 4/2019 allows Federal Entities to agree to arbitrate,^[8] but mandates that: (1) the arbitration must be seated in the UAE; and (2) the substantive law of the contract and the laws relating to the procedures of the dispute shall be those of the UAE Federal Law No 12 of 2023^[9] which allows for parties’ choice of ‘alternative dispute resolution methods applicable in the state, including mediation, arbitration, and resorting to an expert’ (emphasis added).^[10] Nevertheless, the UAE Public Private Partnership Provisions and Procedure Manual indicates that only arbitration seated in the UAE is permitted.^[11]

The availability of ADR for resolving sovereign disputes has been further clarified by the Singapore Convention on Mediation (the Singapore Convention),^[12] which aims to facilitate the enforcement of international mediated settlement agreements. Fifty-eight countries are currently parties to the Convention, many of which are in the Middle East, Africa, and Latin America.^[13]

Under the Singapore Convention, sovereign signatories endorse the use of mediation to resolve commercial disputes involving SOEs. There are exceptions to its application.^[14] A state party can ‘make reservations for settlement agreements to which it is a party, or to which any governmental agencies or any person acting on behalf of a governmental agency is a party […]’^[15] However, only seven sovereigns have declared exclusions to the mediation of disputes,^[16] and most exclusions are quite limited.^[17] Indeed, there are no exclusions by Saudi Arabia for disputes between SOEs and others for infrastructure or other construction projects.

In short, while legal and regulatory requirements for ADR do apply to SOEs, they are often not the obstacle to sovereign participation in ADR – or especially to achieving a settlement – that they are often perceived to be.

Assuring public confidence in the result

When considering the true impediments to achieving settlements with sovereigns, it is important to bear in mind that projects that involve SOEs are likely to be mega- or giga-projects that attract a high level of public attention or political interest. Given the impact on the public fiscal resources, there will be greater scrutiny, particularly when things go wrong and disputes arise; and given the impact on the surrounding environment and communities, such projects are already very much in the public eye. And some projects may be the darling of one political party and the target of condemnation by another, raising the stakes for those involved when disputes arise and the public is watching for an appropriate outcome for the state.

The dispute resolution process involving sovereign parties must be demonstrably fair and reasonable and defensible to the public. This is doubly so for disputes that are settled by agreement rather than by arbitrators or courts.

Bridging the gap: building confidence on the part of government officials as to suitability of the process and result

Is it therefore possible to encourage SOEs to come to the table in order to resolve their disputes? Yes. Government officials often want to settle disputes quickly and efficiently, but they – and the civil servants responsible for signing off on the compromise – need assurance that the ADR process will be reliable and fair. Most of all, the process must produce a defensible result that will not lead to retribution for those involved in approving it.

Public officials fear accountability when a decision goes against them, possibly resulting in fines, sanctions, debarment from office. Where a SOE is involved in a dispute, there is typically intense bureaucratic scrutiny from auditors, oversight bodies and regulators, causing officials to be hesitant in their decision making. There is a lack of trust in a decision maker who is not a judge, or an arbitrator, and a decision-making process that does not have a win/lose outcome. Building trust in the process of negotiation and the credibility of mediators and conciliators is part of this journey to increasing the use of ADR by SOEs.

There is no single solution that fits the needs of every unique sovereign, but there are several ADR tools which have proved effective in amicably resolving disputes involving SOEs.

Using reliable, government-approved ADR processes

Government officials are more likely to be confident in a system that they know and understand or – better still – a process endorsed by their government. The broad acceptance of arbitration to adjudicate offers an encouraging model. Governments routinely place their trust in well-established arbitral institutions such as: the International Court of Arbitration (ICC), Singapore International Arbitration Centre (SIAC), London Court of International Arbitration (LCIA), and others.^[18] This suggests an openness to other forms of ADR, such as mediation and conciliation, particularly if administered by an established institution.

Mediation, wherein the parties meet with a mutually selected neutral who assists them in the negotiation of their differences, is among the most common forms of ADR and is offered by some of the leading arbitral institutions.^[19] Some sovereigns are now including mediation as a pre-arbitral step in the dispute resolution process. For example, while the effectiveness of the 2023 Indian Mediation Act are to be tested in June 2024,^[20] guidelines have been issued to limit arbitration to lower-value disputes,^[21] and encourage parties to public sector contracts instead to resolve disputes via mediation or negotiated settlements.^[22] For higher-value disputes, India’s government bodies are empowered to constitute high-level committees, consisting of retired judges or other high-ranking officers or technical experts, to conduct mediations and reviews of proposed settlement terms.^[23] India’s new law then goes one step further: mediated settlement agreements endorsed by the mediator are final and binding on the parties and have the same enforceability as a judgment.^[24]

Conciliation is another route to a compromise which can demonstrate that an objectively fair process has been pursued and result achieved. Conciliation is a form of ADR in which disputes are evaluated by an independent third party – a ‘conciliator’, who is often a judge. The conciliator can provide suggestions and develop proposals to help parties reach agreement, and unlike a mediator, a conciliator typically provides a non-binding settlement proposal for the parties to consider.^[25] Like mediation, however, conciliation is gaining the trust of sovereigns, with more countries enacting a legal framework for conciliation of disputes, including the United Kingdom, Singapore, and India, among others.^[26]

Despite the increasing prevalence of legislation, the uptake of ADR is strikingly limited. Mexico offers a rare example of how to encourage SOEs to adopt ADR, even for complex disputes concerning major infrastructure projects. In 2016, Mexico issued a Decree allowing SOEs to conduct an analysis of the risk, feasibility and appropriateness of conciliating a dispute. That same year, PEMEX, Mexico’s state-owned petroleum corporation, issued Guidelines for Implementing Alternative Dispute Resolution Mechanisms for PEMEX and its State-Owned Subsidiaries.^[27] When a dispute concerning the Etileno XXI petrochemical plant arose, an infrastructure project for which the EPC contract alone was worth more than US$2.7bn,^[28] PEMEX was empowered to use ADR to resolve it in a process which took months, rather than years. Under this framework, conciliation, or settlements provided by law as alternative means of dispute resolution are justified in cases where objective evaluative elements forecast an adverse outcome in litigation or dispute. These objective elements include:

• a legal technical report – a feasibility study by internal lawyers on whether ADR can generate savings versus litigation or arbitration. This report is reviewed by the Ministry of Public Administration. If the use of ADR would not confer liability on public officials, the use of ADR is approved;

• a budgetary report – prepared by the Corporate Finance Department. If there is insufficient budget, ADR is refused;

• authorisation by the Legal Department – an official will submit the authorisation to the head of PEMEX; and

• execution – conciliations or settlements are resolved once the agreement is signed.

Ecuador is an extraordinary example of how, by introducing a more robust legal framework and specialised mediators to assist with ADR, a nation can boost negotiations and mediation when appropriate. In this regard, Ecuador updated its Arbitration and Mediation Law in 2021.^[29] There is now precedent for a codified set of guidelines which establishes accountability that has been tried and tested. Whether other nations follow Mexico’s and Ecuador’s lead remains to be seen.

Building ADR into government contracts

Dispute resolution clauses are often poorly negotiated and drafted, but a good ADR provision can give government officials the authority to participate in amicable dispute resolution and achieve an effective settlement.

Multi-tiered dispute resolution clauses can take many forms, but typically they feature progressively formalised steps involving increasingly senior party representatives, to promote a quick and efficient resolution where possible. Example steps may include a meeting between project-level management, followed by an executive level meeting, then mediation or conciliation, and finally arbitration or litigation. The clause may specify particular institutions, rules, jurisdictions, and other details that govern the dispute resolution processes.

A well-drafted dispute resolution clause may not only encourage, but require, active participation by a sovereign in ADR. Multi-tiered dispute resolution clauses, by mandating a series of steps before either party can resort to arbitration or litigation, can build in the time required to consult with decision-making authorities within governments – and even mandate the involvement of such authorities – which can empower project-level leadership with a contractual basis to pull government officials into the resolution process when they might otherwise be less available or inclined to participate.

However, these pre-arbitral steps must be proportionate to the scale and cost of the project and the dispute, and be appropriate for the particular sovereign. For example, a robust multi-step process is likely to be appropriate for resolving disputes arising on a billion-dollar megaproject, but the time and expense of that process may not be justified for the presumably smaller scale disputes arising on a US$10m project.

Deploying independent experts to promote fair outcomes

In addition to having trust in the ADR processes and institutions that administer them, sovereigns often require some assurance that any settlement outcome is fair such that it reasonably can be accepted on behalf of the government and public. Involving independent industry experts in the process can add a layer of protection that promotes the actual and perceived fairness of ADR proceedings. Independent experts help steer discussions towards the most critical issues and offer objective assessments of the relative strengths and weaknesses of the parties’ positions on these issues. In this role, experts help sovereigns assess their claims or exposure and aid government officials in explaining the justification for a negotiated settlement.

The independence of these experts is paramount. As opposed to ‘hired gun’ experts, a truly objective and independent expert helps to ensure that the evidence a government presents represents an objective view of the merits of its position.^[30] An independent assessment of claims is ultimately a strength in any dispute. A partisan expert’s take on the technical, delay, and quantum issues is generally less helpful in addressing the ultimate needs and concerns of a sovereign than an independent expert capable of saying, for example, ‘the position your Engineer has been taking on the causes of delay during those six months is not defensible’. That candid analysis allows the sovereign and its legal team to take a hard look at that claim.

Independent experts may present their analysis in many forms in addition to the submission of formal expert reports – for example, by way of pre-mediation conference workshops, presentations, preliminary expert reports, and/or during expert ‘hot-tubbing’ at a mediation conference.^[31] This involvement by independent experts at all stages of a dispute resolution process helps to build the case for fairness of a compromise resolution.

Not only does independent, objective analysis help support a defensible outcome, it also is more likely to save the sovereign expense in the long run. If the sovereign receives honest feedback early in the dispute resolution process that a claim or defence is unsupportable, it can decide to drop that claim or defence before further resources are expended and, in turn, focus remaining resources on developing its strongest arguments.

Soliciting mediator ‘fairness statements’

Another way to promote confidence among sovereigns in the fairness of settlement outcomes is to ask the mediator to issue a ‘fairness statement’ at the conclusion of the proceedings. While some mediators may not want to express a formal opinion on the merits of the dispute, they are often willing to offer a written statement that the proceedings were conducted in a neutral and fair manner that allowed both parties (including the sovereign) a fair opportunity to present their positions and engage in discussions leading to a mutually agreed upon settlement. This fairness statement provides government authorities a more formalised assurance that the process leading to the settlement was fair such that the settlement itself is fair and reasonable under the circumstances.

A mediator’s fairness statement can carry significant weight among government authorities because mediators themselves are required to demonstrate their impartiality and neutrality. The rules published by various arbitral organisations typically require that the mediator provide some form of statement of impartiality and independence prior to their appointment. For example, the ICC Mediation Rules mandate that:

‘[b]efore appointment or confirmation, a prospective Mediator shall sign a statement of acceptance, availability, impartiality and independence. The prospective Mediator shall disclose in writing to the Centre any facts or circumstances which might be of such a nature as to call into question the Mediator’s independence in the eyes of the parties, as well as any circumstances that could give rise to reasonable doubts as to the Mediator’s impartiality.’^[32]

A fairness statement issued by such a demonstrably impartial mediator can offer a sovereign the assurances it needs that a negotiated settlement is fair.

The road ahead: capacity building for state-specific solutions

Sovereigns are willing to participate in alternative dispute resolution. Bringing governments to the negotiating table (and keeping them there through an amicable resolution) is most certainly possible, but requires careful planning – including at the beginning of projects – and investments in developing an ADR infrastructure that meets the needs of sovereigns.

Every sovereign is unique, and ultimately a state-by-state approach will be required to promote understanding of ADR and building confidence in it. Some states will want greater public accountability, and others will want confidentiality to avoid public admissions of liability. Some will want a speedy resolution, and others will want more thorough proceedings. Certain governments may favour informal commercial diplomacy as a precursor to mediation and other ADR steps. Each state’s requirements will vary, and developing appropriate ADR processes will require the close involvement of the local bar, who will offer a more nuanced understanding of local practice and industry standards, including local law and regulations as well as unwritten practical and political considerations.

Just as sovereigns are educated on the benefits of ADR, so too must mediators and conciliators be educated on the dispute resolution requirements of sovereigns. To this end, there is ample opportunity for capacity building to establish a corps of mediators and conciliators capable of serving in disputes involving governments and state-owned entities.

With continued investment in ADR processes designed to meet the needs of sovereigns, and thoughtful planning and execution, alternative dispute resolution truly can be fit for a queen.

Meagan Bachman, Crowell & Moring; Angus Rankin, Vinson & Elkins; and Christa Mueller García, Mueller Arbitration. This article was developed from an International Construction Projects panel presentation at the IBA Annual Conference in Mexico City, 2024 by Meagan Bachman, Crowell & Moring, Christa Mueller García, Mueller Arbitration, Jaime Gray, NPG Abogados, and Angus Rankin, Vinson & Elkins and chaired by Professor Janet Walker CM, Osgoode Hall Law School together with Tony Dymond, Debevoise & Plimpton. The panel addressed challenges to and solutions for bringing sovereigns to the table to resolve infrastructure disputes consensually. Special thanks also go to Joshua Lindsay, Edmund Northcott and Lily Geyer of Crowell & Moring for their contributions to this article.