Introduction
Given the global economic realities, resolution of disputes has become a necessary aspect of commercial negotiations by parties. The outcome of these negotiations would usually culminate in the parties agreeing on the modalities for resolution of their disputes which will inform the fine print of the relevant dispute resolution provisions in their agreement. However, within the context of international arbitration, the provisions on dispute resolution are usually found in instruments of consent such as International Investment Agreements (IIA's) which have adopted arbitration as the preferred dispute resolution mechanism.
Often, embedded in the arbitration clauses of these IIA's is a requirement for parties to engage in preliminary negotiations to resolve the dispute, failure of which necessitates and indeed precedes the commencement of formal rites of dispute resolution, either arbitration or litigation. These preliminaries may include formal demand/request to remedy a perceived wrong and giving time within such demand should be complied with. These important protocols may be contained in the parties' underlying contract or dispute resolution clause. The time limit given by the victim of wrong or as specified in the contract for possible negotiation and amicable settlement prior to filing a claim is referred to as the "cooling-off period".
The concept has over time found its way into various industries and business practices and is now prescribed by various statutes. It has metastasized since its inception, which is relatively unknown. This concept that must be contextually identified in the civil and arbitral processes across many jurisdictions has varying degrees of consequences for non-compliance.
The cooling-off period is akin to a moratorium which is commonly used in the banking industry. A moratorium1 is a temporary suspension of an activity or law until future consideration warrants lifting the suspension, such as when the issues that led to the moratorium have been resolved. A moratorium may be imposed by a government, regulators, or business.
This article aims to examine the significance of observing the cooling-off period within the context of international arbitration and litigation-based civil processes.
Conceptual Clarification
With the origin of the concept unknown and the fact that international arbitration has transcended into more formal dispute resolution process like the various court processes, it would appear that the underlying reason behind the "cooling off period" which was known as "amicable settlement period" in its earliest forms was for parties during this period to actively engage in the resolution of the dispute between them by alternative means which could include mediation, negotiation, any other informal dispute resolution mechanisms.2
As stated above the "Cooling-off period" concept is not restrictive in its application to various industries whether operating locally, regionally, or internationally. However, what has been observed about the concept is that its application is more profound within international jurisprudence, specifically as it relates to investment disputes.
Under Bilateral Investment Treaties (BIT) or Multilateral Investment Treaties (MIT) both of which are species of International Investment Agreements (IIAs), 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.3 To put it differently, "Cooling off periods", also known as 'waiting periods', are a feature of Bilateral Investment Treaty ('BIT') or state-investor arbitration, whereby parties seeking to initiate arbitration proceedings are required to hold off for a specified period, during which an amicable settlement should be attempted.4
It is also estimated that about 90% of IIAs contain a cooling-off period provision requiring both parties to an investment dispute to attempt to settle their differences amicably within a clear time frame, before initiating arbitration (or conciliation).5 This interval of time – during which disputing parties' efforts should aim at an amicable settlement – ranges from two (2)6 to twelve (12) months, depending on the applicable IIA,7 or even eighteen (18) months.8 Arbitral tribunals have diverged on the interpretation of this provision. At times, it has been considered as an optional procedural requirement,9 others, as a condition precedent for tribunals' jurisdiction.10
The Jurisdictional Quagmire
The cooling-off period within the context of international arbitration has been susceptible to various interpretations. Invariably, there is no general approach to how the provisions of the cooling-off clause must be construed. Some of these interpretations have certainly led to conflicting decisions by arbitral tribunals on the subject. However, in these decisions, the exigencies of the case before the tribunal in question were considered in terms of breach of the provisions of the relevant investment agreement or arbitral agreement as it relates to cooling-off periods.
For instance, the International Centre for Settlement of Investment Disputes (ICSID) through one of its tribunals in SGS v Pakistan11 rejected an objection to its jurisdiction on the grounds that the investor had failed to comply with a 12-month cooling-off period requirement, observing that 'Tribunals have generally tended to treat consultation periods as directory and procedural rather than mandatory and jurisdictional in nature. Compliance with such a requirement is, accordingly, not seen as amounting to a condition precedent for the vesting of jurisdiction.12
However, in Murphy v. Ecuador13, the Tribunal held that it was not possible to ignore the existence of norms contained in the BIT regarding the obligation of the parties to attempt negotiations to resolve their disputes. The tribunal stated that "cooling-off" periods are not "mere formalities", but amount to something more serious: an essential mechanism enshrined in many BITs which compels parties to make a genuine effort to engage in good faith negotiations before resorting to arbitration.14 The tribunal held further that the obligation in this regard is not one of results, but of means, and thus, the parties were required to at least initiate negotiations. On this note, the tribunal declined jurisdiction to hear the claims of the claimant in this case.15
The above positions were recently placed yet before another ICSID tribunal in Nasib Hasanov v. Georgia16 where the tribunal was asked to determine whether compliance with the requirements of a cooling-off period in a BIT was directory or a condition precedent to the commencement of arbitration. The tribunal, in reaching its decision on this point noted that, although the parties are aware, precedents on the point argued by the parties do not bind it and are merely persuasive in nature (see paras 92 & 93). Instead, the tribunal adopted an "interpretative and factual analysis" approach in construing the effect of the six (6) months cooling-off period in Article 9 of Azerbaijan-Georgia BIT17 in reaching its decision. The tribunal held that although the provision was a condition precedent, the parameters for compliance had been satisfied by the investor within the facts and circumstances of the case before it (See paras 112).
The above conundrum and the proliferation of awards and decisions on the subject have led to various propositions on how the provisions of the cooling-off period are to be construed. The first proposition has been stated to be "Aspirational" or "Hortatory", which means that the cooling-off period requirement is not a condition precedent to the commencement of arbitration, they do not oust a party's right to initiate arbitration proceedings or impinge upon a tribunal's competence to hear a dispute.18 According to this proposition, in the event of non-compliance, the aggrieved party in this regard can be compensated by an award of costs on this aspect of the arbitral proceedings.19
The second proposition is to the effect that cooling-off period provisions are conditional to the commencement of arbitration proceedings failing which it will have an adverse effect on the jurisdiction of the tribunal to hear the dispute. Therefore, it imposes a legal obligation upon the parties to attempt negotiations in good faith for the duration of the stipulated period defeasible upon a showing of their futility.20 This notion has also been extended to the requirement of exhausting local remedies before arbitration.21
However, with respect to the exhaustion of local remedies of the host state before proceeding to arbitration, it has been held in Philip Morris v Uruguay22 where the Tribunal expressed disagreement with the claim that the obligation was 'nonsensical' and therefore futile because a domestic court could not have rendered a decision within the time-frame contemplated by the treaty.23 Instead, it urged that 'a finding that domestic litigation would be "futile" must be approached with care and circumspection. Except where this conclusion is justified in the factual circumstances of the case, the domestic litigation requirement may not be ignored or dispensed with as futile in view of its paramount importance for the host State. Its purpose is to offer the State an opportunity to redress alleged violations of the investor's rights under the relevant treaty before the latter may pursue claims in international arbitration.24 Moreover, it observed that such a provision depending on its wording might constitute an admissibility or procedural criterion, rather than a jurisdictional requirement.25
In Occidental Petroleum and Occidental Exploration v Ecuador26, another ICSID tribunal held that the claimant was justified in requesting arbitration before the completion of the cooling-off period for reasons of futility: it had sent letters to the Ecuadorean government rebutting allegations made of it by the latter, and which were the basis of new Ecuadorean measures in violation of the applicable BIT. These communications had gone unheeded, and as a result, the tribunal was satisfied that any attempts to negotiate would likely have been ignored as well.27
The third proposition is more of an academic discourse in the international arbitration community. It postulates that cooling-off periods should be treated as a contractual obligation to negotiate. Consequently, if a failure to comply with this requirement does not affect the tribunal's jurisdiction, it nonetheless creates a possibility for the investor to be liable for damages or for the damages claimed by the investor to be reduced in the award.28
However, there are difficulties in shoehorning this policy-driven reasoning into the structure of a contractual bargain. The first difficulty relates particularly to BIT arbitrations: insofar as a cooling-off provision is a 'bargain', it is a bargain between states. The investor was not a party to the 'contract', even if it is privy to it in the fashion of a third-party beneficiary. Given that a contract cannot create duties for third parties, it would be improper to hold them 'liable' under its terms.29 The second difficulty is broader and draws upon the self-same reasons supporting the first, proposition above. While reading cooling-off provisions as conditions precedent is possible where precise drafting sets out the steps the parties must take to negotiate in good faith, the problem of nebulousness persists with the 'cooling-off provisions as contractual obligations' approach regarding the calculation of damages.30 As Lord Denning MR once observed in arguing against the recognition of contracts to negotiate, 'No court could estimate the damages [resulting from breach of a contract to negotiate] because no one can tell whether the negotiations would be successful or would fall through; or if successful, what the result would be.31
Notwithstanding the above, the usefulness of the cooling-off period clauses in international arbitrations cannot be underestimated. Some of the purposes of the period include the benefit of resolving the dispute between the parties without resorting to formal arbitration. Given the above decisions, the provisions of the cooling-off period are generally mandatory, and it would be useful to comply to avoid jurisdictional objections on this ground.32
Although it is difficult to ascertain the number of disputes that have been averted due to compliance with the cooling-off period provisions in the relevant agreement, statistics from the United Nations Conference on Trade and Development (UNCTAD) by the end of 2018, almost a quarter out of the 602 known concluded cases were settled.33 Similarly, the ICSID statistics also revealed that 35 per cent of its concluded cases as of 2019 were settled (or otherwise discontinued).34 Invariably, the cooling-off period provisions within the ambit of international arbitration serve a useful purpose.
Comparative Analysis of the Cooling-off Period under the Nigerian Legal System
While the concept is mainly applicable to the resolution of disputes on various IIA's as already discussed above, we can draw an analogy of same with various legislations in Nigeria that make similar provisions for the resolution of disputes. For example, no action shall be maintained against the Federal Airport Authority of Nigeria before the expiration of a period of three months after written notice of intention to commence the suit shall have been served upon the Authority by the intending plaintiff or his agent; and the notice shall clearly and explicitly state the cause of action, the particulars of the claim, the name and place of abode of the intending plaintiff and the relief which he claims.35 This provision is also in pari materia with the provisions of Section 83 (2) of the Nigerian Railway Corporation Act.
Typically, the notice period before commencing an action against most agencies of the Federal government in Nigeria is one month or 30 days as the case may be.36 Unfortunately, these legislations do not specify what should be done during or prior to these waiting periods and the courts have held them to be in some cases fundamental "condition precedents" before jurisdiction can be properly vested on the court to adjudicate over disputes that are subjects of these waiting periods and in some other case may be treated as a mere irregularity.37 Furthermore, the courts have also noted and/or presumed that what is expected of the parties during these periods is to explore the possibility of an amicable settlement of the dispute.38
Thus, while the requirement to explore other means of resolving the dispute is prevalent in most IIA's and there is therefore no need for a presumption in this regard by the investment tribunal, the same cannot be said for so many legislative enactments in Nigeria. The implication of this is that in Nigeria the government agency has no obligation to act or take any steps with a view to resolving the potential disputes against them.
However, when juxtaposing the provisions of section 2 of the Public Officers' Protection Act with the above enactments, we will find that there is a conflict of statutes. On the one hand, there is a cooling off period of three (3) months before an action is commenced while on the other hand, there is a mandatory requirement to commence an action against the concerned officer or agency within a three (3) month period.
The above obviously is another conundrum that makes compliance with either provision of the above statutes culminate in the breach of the other. Thus, are there extenuating or special circumstances that may obviate the need for compliance with these provisions? One of the ways to, perhaps, look at the issue is to treat this statutory requirement as a waivable right notwithstanding that it is a mandatory requirement. Thus, the party in whom this right inures for its benefit may be said to have waived this right where fresh steps have been taken by him in the proceedings in which he ought to challenge jurisdiction of the court at the earliest opportunity.39
More importantly, none of the above enactments stipulate any requirement of "parties' consent" to submit the dispute to the court or any other adjudicatory body. What is usually obtainable is a community reading of the provisions of the relevant statute, and the nature of the government agency involved vis a vis the provisions of the 1999 Constitution of the Federal Republic of Nigeria which are enough to imply the consent of the parties involved and the court with the requisite jurisdictions. However, the concept of "parties' consent" to the submission of the dispute to the arbitral tribunal works differently in international/investment arbitration in particular and arbitration in general.
While the concept of implied consent is not strange to international/investment arbitration, it is also commonplace for there to be a requirement of parties to consent to the arbitration proceedings once initiated by the other party. For example, the New York Convention40 stipulates that state parties must recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen, or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.
Under the ICSID Convention,41 there is also a requirement that parties consent to arbitral proceedings where there is a dispute. However, once the consent is granted, no party may unilaterally withdraw same. But more importantly, the convention stipulates that the Consent of the parties to arbitration under the Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy. A Contracting State may require the exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under this Convention.
The requirement of compliance with administrative remedy as a condition for consent under the Convention is to facilitate pre-arbitration negotiations between the parties during the cooling-off period. This position has been held to be fundamental in some cases. In Kiliç vs Turkmenistan42 the tribunal observed that the consent of the host state (Turkmenistan/Respondent) was predicated and could therefore be only triggered when the parties have in the first instance engaged in good faith negotiations to resolve the dispute within a period of 6 months and in the second submit the dispute to the courts of the host state and a decision must be rendered within one (1) year failing which the tribunal lacked jurisdiction over the arbitration.
In another decision relating to the consent of parties to arbitrate, a Federal Court of Justice in Germany took the position43 that 'any athlete wishing to participate in organized competition under the control of a sports federation whose rules provide for recourse to arbitration will not have any choice but to accept the arbitral clause.'
Ultimately, the requirement for consent of parties in international arbitration appears to be one that will be determined on a case-by-case basis by relevant courts and arbitration tribunals. The rationale for this is predicated on the rights of the states to agree on the terms of their respective BIT' and how they wish for any dispute arising therefrom to be resolved.44 What has been observed thus far, is that consent may be inferred, implied, or automatic which is entirely dependent on the circumstances of its challenge, the case, and the construction of the consent provisions by the courts or the arbitral tribunal as the case may be.
Must a party wait out the cooling period?
The more pertinent issue is whether a claimant must wait or see out the cooling-off period before taking further action in relation to the dispute. What has been observed is that most cooling-off period clauses in international arbitration tend to outline or provide for what is to be done during that period thereby creating a condition precedent to arbitration.
For instance, where all necessary components of the said period have been complied with such as good faith negotiations within the cooling-off period or exhaustion of local remedies in the local courts of the host state in investment arbitration, if the Claimant feels that the entire process may end in futility then such Claimant may proceed to refer the dispute to arbitration as was the case in Occidental Petroleum and Occidental Exploration v Ecuador (Supra). However, the Claimant runs the risk of having to prove that it was futile to comply with the relevant condition precedent to the arbitration if an objection is raised by the Respondent. This is a huge burden!
In Nigeria, most of the statutory provisions or rules of court providing for various cooling off periods only suggest that there is an implied obligation on a Defendant in most cases to, upon receipt of the Claimant's process, initiate discussions towards a possible settlement which in most cases never happen. This is for obvious reasons because most statutory provisions do not stipulate what is to be done during this period and rather it is the courts that have provided this context. However, this is not to say that all Nigerian legislations in this category have the potential of truncating the case of a Claimant in the event of non-compliance. Another area of concern bothers on where there is an urgent need to protect certain rights of a Claimant during the cooling-off period. As stated earlier, the cooling-off period in BITs has also been construed to place an obligation on parties to explore settlement before resorting to arbitration. Therefore, making an application for interim relief at this stage may be inimical to discussions towards settlement or in breach of the cooling-off provisions.
The provisions of the ICSID Arbitration Rules do not appear to make any provisions for pre-arbitration measures, what is contained in these rules is "provisional measures"45 which depending on their application may be deployed during the cooling-off period in an investment dispute. However, a Tribunal must be duly constituted before any decision can be made on an application of this nature. A party may also request any judicial or other authority to order provisional measures if such recourse is permitted by the instrument recording the parties' consent to arbitration.46 The implication of this is that, if the parties to the arbitration have no prior agreement in place to approach the local courts to obtain provisional measures, then an application made in breach of this requirement may be deemed incompetent if challenged.
With the advent of the Arbitration and Mediation Act 2023 in Nigeria, the party has two options, the first is to approach the local courts to obtain pre-emptive relief and the second is to make an application to the arbitral body or institution which will then appoint an emergency arbitrator for the purpose of hearing and determining applicable emergency measures pending arbitration. In the case of litigation, a party can make the relevant application for pre-emptive measures to the court.47
While it seems plausible from the relevant arbitral rules, it is apparent that the rules have not made any specific reference to whether these applications can be made in breach of the cooling-off provisions. It remains to be seen what position the tribunal will take when this becomes an issue.
Conclusion
In this piece, we examined the concept of cooling-off period within the context of international arbitration and its various interpretations as to whether it is directory or mandatory. We have also tried to juxtapose the concept with what is obtainable in Nigeria for the purpose of appreciation.
The concept, it would seem, is intended to facilitate the possibility of resolving disputes by parties independent of any formal channels such as litigation which is generally time-consuming for jurisdictions like Nigeria or arbitration which in recent years has also become more time-consuming and expensive depending on the jurisdiction.
Furthermore, we also considered whether the concept was sacrosanct in its application or whether there are instances where partial compliance would suffice or whether it can be totally dispensed with bearing the exigencies of the case. The totality of our exposition on this concept is that it is the provisions of the cooling-off clause in the relevant agreement, facts, and circumstances of the case that will determine the extent and scope of application of the concept and the effects thereof.
Footnotes
1 https://www.investopedia.com/terms/m/moratorium.asp#:~:text=A%20moratorium%20is%20a%20temporary,regulators%2C%20or%20by%20a%20business visited on 15th May 2023.
2 https://icsid.worldbank.org/sites/default/files/publications/Overview_Mediation_in_Treaties.pdf accessed on 15th May 2023.
3 https://www.withersworldwide.com/en-gb/insight/read/cooling-off-periods-under-bilateral-investment-treaties-opportunity-to-resolve-disputes-amicably accessed 15th May 2023.
4 Ganesh Aravind, 'Cooling Off Period (Investment Arbitration)" (2017) Max Planck Institute Luxembourg for International, European and Regulatory Procedural Law, MPILux Working Paper 7, page 2. https://www.mpi.lu/fileadmin/mpi/medien/research/MPEiPro/WPS7_2017_Ganesh_Cooling_Off_Period__Investment_Arbitration_.pdf accessed 15th May 2023.
5 https://utrechtjournal.org/articles/10.5334/ujiel.523#xrn9 accessed 12th 2023.
6 See article 14 (2) of Austria - Nigeria BIT (2013).
7 https://utrechtjournal.org/articles/10.5334/ujiel.523#xrn1 accessed 15th May 2023. See also Article VI (3) US-Ecuador BIT (1993) which provides for a waiting period of 6 months.
8 Austria-Kuwait BIT (1996).
9 Biwater Gauff v Tanzania, ICSID Case NO. ARB/05/22, Award, 24 July 2008, para 343 https://www.italaw.com/sites/default/files/case documents/ita0095.pdf accessed 15th May 2023.
10 Enron v Argentina, ICSID Case No. ARB/01/3, Decision on Jurisdiction, 14 January 2004, para. 88 https://www.italaw.com/sites/default/files/case-documents/ita0290.pdf accessed 15th May 2023.
11 SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13 at (para 184)
12 ibid
13 Muphy Exploration and Production Company International v Republic of Ecuador (ICSID Case No ARB/08/4).
14 https://hsfnotes.com/arbitration/2011/02/08/investment-treaty-failure-to-observe-treatys-cooling-off-period-results-in-tribunal-declining-jurisdiction/ accessed on 5th June 2023.
15 Ibid.
16 ICSID Case No. ARB/20/44 (See the tribunal's analysis from paras 84 – 112).
17 Agreement between the Government of Georgia and the Government of the Republic of Azerbaijan on the Encouragement and Reciprocal Protection of Investments, which entered into force on July 10, 1996.
18 Ibid n. 9.
19 Ethyl Corporation v. The Government of Canada, UNCITRAL.
20 Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3.
21 Kiliç Ĭnşaat Ĭthalat Ĭhracat Sanayi Ve Ticaret Anonim Şirketi v. Turkmenistan, ICSID Case No. ARB/10/1.
22 Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7 (formerly FTR Holding SA, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay).
23 Ibid at para 137.
24 Ibid.
25 Ibid at para 138.
26 Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador, ICSID Case No. ARB/06/11.
27 Ibid at paras 19, 93.
28 https://jusmundi.com/en/document/publication/en-cooling-off-periods accessed on 5 June 2023.
29 Ibid n. 4 at page 9.
30 Ibid at page 10
31 Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 W.L.R. 297 (28 November 1974).
32 For more on the concept please see: Utrecht Journal of International and European Law "Theorizing the Cooling-Off Provision as an Additional Standard of Investment Protection" by Danilo Di Bella https://utrechtjournal.org/articles/10.5334/ujiel.523#xrn13 accessed on 5 June 2023.
33 Fact Sheet on Investor-State Dispute Settlement Cases in 2018 [IIA Issues Note, No. 2, 2019] (UNCTAD/DIAE/PCB/INF/2019/4), 4. https://unctad.org/en/PublicationsLibrary/diaepcbinf2019d4_en.pdf accessed 6 July 2023.
34 The ICSID Caseload – Statistics (Issue 2020–1) 13, https://icsid.worldbank.org/en/Documents/resources/The%20ICSID%20Caseload%20Statistics%202020-1%20Edition-ENG.pdf accessed 6 July 2023.
35 Section (2) of the Federal Airports Authority of Nigeria Act.
36 See section 17 (1) of the Companies and Allied Matters Act (2020) and See section 308 of the Petroleum Industry Act (2021).
37 Ntiero v. NPA (2008) 10 NWLR (Pt.1094) 129
38 Ibid
39 CBN v. INTERSTELLA COMMUNICATIONS LTD & ORS (2017) LPELR-43940(SC).
40 See Article 2 of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958).
41 Article 25(1) ICSID Convention.
42 Ibid footnote 21.
43 See the case of Az. KZR 6/15, Pechstein v. International Skating Union, 7 June 2016.
44 For more on consent in arbitration please see https://arbitrationblog.kluwerarbitration.com/2019/02/12/relooking-at-consent-in-arbitration/ and https://arbitrationblog.kluwerarbitration.com/2023/01/13/consent-in-investment-arbitration-a-few-remarks/. Visited on 10th August 2023.
45 ICSID Arbitration Rule – Rule 47.
46 Ibid Rule 47 (7).
47 Please refer to our article on emergency measures in arbitration at https://www.topeadebayolp.com/insights/display/70/PRE-ARBITRATION-EMERGENCY-MEASURES-UNDER-THE-ARBITRATION-AND-MEDIATION-BILL-2022. Accessed 7th June 2023.
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