Under a bilateral investment treaty (BIT), when a dispute arises, there is an opportunity for investors and host states to avoid arbitration altogether by making use of the cooling-off period. Major disputes that can arise in international investments can be resolved during this period through negotiations or consultations or, in some instances, conciliation or mediation.
Whether or not a specific approach is required by the BIT in question, it is in the interests of both investors and host states to engage actively during the cooling-off period.
In this context, what is a cooling-off period?
Ninety percent of all BITs contain a cooling-off period, often referred to as a "waiting period". It is a feature of the investor-state arbitration mechanism in a BIT whereby an investor seeking to initiate arbitration proceedings is required to hold off for a specified period, during which an amicable resolution of the dispute should be attempted.
The length of the cooling-off period can vary significantly. The most commonly stipulated period is six months, but many BITs set a shorter period of three, four or five months. Longer periods, such as seven, twelve and eighteen months, also exist.
Resolving a dispute during the cooling-off period – what is involved?
Often the BIT will mandate what is required of the disputing parties during the cooling-off period. Many BITs merely require the disputing parties to attempt to settle the dispute "amicably". Other treaties are more specific and provide that settlement through "negotiations" or "consultations" be attempted. Other methods of settlement such as conciliation and mediation are also mentioned in some BITs, albeit rarely.
The cooling-off period should be initiated by a "trigger letter" from the investor to the host state in sufficient detail to put the host state on notice of the investor's claims. It is in the interests of both the investor and the host state for the letter to be as specific as possible regarding the government action (or inaction) that is alleged to have harmed the investment. It is also important to ensure that the trigger letter is sent to the proper organ of the host state, which might be a specific agency tasked with administering foreign investment or a government ministry (foreign affairs, trade, justice, etc.) depending on the particular host state.
Once the cooling-off period has begun to run, both the investor and the host state should engage with each other in a good faith effort to resolve the dispute. In this sense, the terms cooling-off period and waiting period are misnomers, as they suggest passivity during this time. Active engagement is the better strategy. What nature this engagement should take in a particular case will vary depending on the specific facts that have given rise to the dispute, the nature and history of the particular investment and the requirements of the BIT.
During the cooling-off period (as at all other times during the life of the investment), both investors and host states are advised to document their interactions diligently. An accurate record can help to resolve the dispute early, avoiding arbitration. If the dispute is not resolved during the cooling-off period, the record could end up before an arbitral tribunal judging the parties' conduct during this period.
Finally, both investors and host states should consider degree to which publicizing the dispute during the cooling-off period might help to achieve their objectives. A carefully considered media strategy, developed in consultation with experienced investment treaty arbitration counsel, can be effective at the local, national, regional and international levels. In other cases, keeping the dispute out of the public eye will be the wiser course.