Scope of Mediation in Investment, Private Equity & Project Finance

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Mediation is an alternative dispute resolution (ADR) mechanism whereby a third party (mediator) assists the parties in dispute to amicably solve their conflict.[1] This Article discusses the scope of mediation in three areas: Investments, Project Finance and Private Equity.

Foreign investments involve highly complex transactions. It is a fact that Arbitration was the most preferred mode of settling disputes that arise in international investments. However, it is now criticized by various public policy groups on the ground that it lacks transparency, adds complexity and is excessively costly.[2] This has prompted the search for alternatives to arbitration. Investment Mediations should develop as it least affects the investment relationship between the parties and consumes less time and money when compared to its counterparts. The process provides investors and states with the potential to resolve their disputes themselves. It can even help in building trust between the parties if they are wiling to exchange important information, including their most important needs or interests. There may arise legal issues related to the structuring of the foreign investment and also issues in the host country. In fact, there is a move towards promoting mediation to resolve investor-state disputes. The International Bar Association’s Mediation Committee has created a State Mediation Committee in October 2007 whose main purpose is to propose concrete measures to promote the use of mediation for investor-State disputes.[3]

Government policies such as the ‘Make in India’ is aimed at seriously attracting investors to invest in India. This contributes heavily to the national economic growth. However, the investment climate is dependent on several considerations which the investors look at. Ease of dispute resolution is one major factor. It is suggested that the Government establish a ‘Mediation Center for Investment’ for dealing with disputes relating to investment. This can increase legal certainty for the potential investors. Good and effective dispute resolution systems will itself promote increase in investments in the country. Investment Agreements should provide for a clause which prescribes mediation as the dispute settlement mechanism.

Regarding foreign investments in developing countries, there is a probability that civil society stakeholder groups might suffer. Mediation in such circumstances is an apt mechanism since it is more accessible and affordable to such stakeholders for expressing their grievances when compared to litigation.[4]

Project finance “generally involves lending significant amounts of money to a thinly capitalized company whose primary assets consists of contracts and licences …”[5] Each project may have legal, economic, technical and political risks. Moreover, international projects involve many participants. A number of contracts will be entered into between these various participants. Their underlying interests may be varied, thus resulting in disagreements or misunderstandings or disputes. Since all the contracts are related to the same project, a dispute over one will have an impact on the whole setting. This is why it is very important on the part of international financiers to include dispute resolution clauses in their contracts.

When private firms finance a public project in India, they are required to comply with certain Public-Private regulatory regimes. Furthermore, the source of finance may range from bank loans to capital markets instruments etc. thus resulting in different procedural mechanisms which the investor has to comply.

A mediation clause in a project contract is so beneficial that it even attracts project finance/investment. Delays in the resolution of project disputes can negatively affect project economics, through lower project revenues and higher project expenses. In terms of costs, working relationship etc. mediation is highly efficient and encourages collaborative working.

Even though the major goals of the Private Equity industry are growth and profit maximization, it a huge contributor to economic development. When a Private Equity is approached by or seeks investment in a company, the first stage is the execution of a basic document such as the Memorandum of Understanding between the investor and the company which serves as the framework of the investment. After necessary due diligence, the next stage of documentation is of share subscription and shareholders’ agreements.

Private Equity investment activity may be affected by volatility in the credit and stock markets and uncertainty in the global economy. Some issues which are subject to frequent disputes include breaches of warranties and representations, working capital adjustments etc.

Regarding all corporate related disputes, it is advisable that companies should adopt certain measures for highlighting the effectiveness of mediation as an effective settlement tool. They may publish a conflict resolution policy prescribing a layered procedure wherein negotiation and mediation should be attempted before litigation. Internal training programmes can also be conducted to enhance awareness about the benefits of mediation.

[1] Ray Gaitan and Brian H. Kleiner, ‘How to conduct mediation effectively’ (1999) 5/6 Equal Opportunities International 18 <http://dx.doi.org/10.1108/02610159910786014&gt; accessed 22 July 2016.

[2] ‘The rise of Investment Mediation’ <http://www.corporatedisputesmagazine.com/the-rise-of-investment-mediation/&gt; accessed 22 July 2016.

[3] ibid.

[4] David Collins, ‘Alternative Dispute Resolution for Stakeholders in International Investment Law’ (2011) 15.3 Journal of International Economic Law.

[5] Phillip Fletcher and Aled Davies, ‘The Art of Getting a Project Finance Deal Through’ (2014) Law Business Research Ltd. <https://www.milbank.com/images/content/1/7/17713/Getting-the-Deal-Through-Project-Finance-2015.pdf&gt; accessed 22 July 2016.

ABOUT THE AUTHOR

Rizwin Kochery is a Mediator certified by the Indian Institute of Corporate Affairs (IICA). He  is an associate in Kochery & Partners LLP, an international law firm having offices in Doha (Qatar) and Kochi (India). His areas of practice include advising local and international clients on general corporate and commercial matters, legal due diligence, joint ventures, incorporation of companies, international commercial arbitration and mediation, construction and engineering, migration and employment laws as well as a broad variety of civil and commercial litigation. He is a Member of the Bar Council of Kerala, India and is qualified to practice in Indian courts. He has a Masters in Law in Arbitration and Dispute Resolution from University of Dubai, United Arab Emirates (UAE).

For more information on the 40 hours training program on commercial mediation and negotiation by IICA, Ministry of Corporate Affairs, visit mediationiica.in or email us at mediation.iica@gmail.com.

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