Chamber of Ombudsman for Mediating Disputes between Foreign Investors
And Government Authorities (Ukraine’s Experience)
By Dr. Irina Paliashvili
January 17, 2001
The idea of creating a body of ombudsmen to mediate disputes between foreign investors and government authorities is quite well known in international business practice, mostly in relation to countries with overregulated business environments, unstable legal systems and weak judiciaries. This idea takes different forms in different countries, but the essence remains the same: this is an opportunity for foreign investors to bring their claims and complaints against government authorities to a body of ombudsmen created by a higher government authority (the President, Prime Minister, etc.), which then uses its power to assist the investors in resolving their problems.
In Ukraine, this idea of a body of ombudsmen was implemented in May 1997 and took the form of the Chamber of Independent Experts on Issues of Foreign Investment under the President of Ukraine (“the Chamber”). Below is a brief overview of the status and activities of the Chamber, of which I am a founding member.
The Chamber was established by the respective Presidential Decree of May 14, 1997, which incorporated the Statute for the Chamber and its original list of members. Later, the Chamber adopted a number of internal organizational documents, such as the Rules of Procedure, tariffs for its services, etc. (“Organizational Documents”).
The Chamber’s status is described in the Presidential Decree as “a permanent consultative-advisory body under the President of Ukraine”, and its tasks are two-fold: (1) reviewing disputes between investors and government authorities and submitting to the parties recommendations for the out-of-court resolution of such disputes; and (ii) elaborating recommendations to the President on amending legislation in order to improve the investment climate. In this paper we will concentrate on the first task.
It is clear from the above that the Chamber’s jurisdiction extends only to disputes between foreign investors and government authorities, and that it cannot, for example, review disputes between foreign investors and their local partners. The Chamber cannot issue mandatory decisions, but, at the same time, government authorities are required to participate in the dispute review, which makes the process of reviewing a dispute by the Chamber a sort of mandatory mediation.
The Chamber consists of 24 members (“Experts”), who should be prominent experts in various business fields and primarily, but not necessarily, lawyers. There should be an equal number of “foreign” and “domestic” experts.
The Chairman of the Chamber is a high-level government official appointed by the President whose functions are mostly organizational and who cannot take part in reviewing the disputes and cannot influence the review process. The Chamber also has a permanent secretariat.
The Chamber may create permanent and temporary committees, expert groups, etc., for working on various tasks. For example, since a large number of disputes arise with the customs authorities, the Chamber has created a permanent Customs Working Group with the task of elaborating recommendations to improve the customs regime.
According to the Chamber’s Organizational Documents, full meetings of the Chamber must be conducted every three months. In practice, however, the Chamber meets once or twice a year.
In order to review particular disputes, a panel of three (or, in special cases, five) experts is created for each dispute. Two experts are chosen by the parties and then these two chosen members of the panel appoint the third member. If a party fails to choose an expert, the appointment is made by the Chairman of the Chamber.
The procedure for resolving disputes corresponds to the Chamber’s status as a permanent mandatory mediation body. All of the initial organizational tasks, including notifications, decisions on jurisdiction (which may be appealed to the Chairman), collecting initial documents, collecting registration and expert fees, etc., are performed by the Secretariat.
After the panel is created, it reviews the dispute and issues a decision by a majority of votes. The decision is final.
During its almost four years of existence, the Chamber has reviewed a relatively small number of cases (about five disputes per year), although some of them have been high-profile and highly-publicized disputes between multinational companies and various government authorities (for example, a P&G dispute with Derzhstandard, the state agency responsible for the certification of imported products).
Although the Chamber’s decisions are not mandatory, the authorities have usually (especially in the first couple of years) taken them quite seriously, and in many cases have tried to comply. In one case, the Chamber got involved when a court case was already pending, and although the Chamber’s decision did not resolve the dispute, it did help the parties to reach an out-of-court settlement. It should also be noted that the majority of disputes have been resolved in favor of foreign investors.
In sum, decisions of the Chamber, although not mandatory, have usually had a serious positive impact on the resolution of disputes in favor of foreign investors.
Unfortunately, the problem with government-sponsored bodies of ombudsmen is that if they lose the government’s backing their effectiveness weakens. In Ukraine, for example, the President seems to have lost his interest in the Chamber over the years, and in the absence of his strong support government authorities are now taking the Chamber’s decisions less seriously.
Based on the above, it is possible to conclude that the existence of a body of ombudsmen similar to the Chamber is well justified during the transition years (i.e., before the general investment climate and the legal and judicial systems improve), but only provided that it enjoys the strong and ongoing support of the host government.