SYNOPSIS SUBMISSION

Exhaustion of Local Remedies in Investor-State Dispute

Settlement

THIS SYNOPSIS IS SUBMITTED IN FULFILMENT OF THE ACADEMIC REQUIREMENTS

FOR THE SEMINAR PAPER

DISPUTE SETTLEMENT IN INTERNATIONAL

TRADE AND INVESTMENT

SUBMITTED BY: SUBMITTED TO:

RAJAT ARORA DR. K. PARAMESWARAN

11B109 ASSOCIATE PROF OF LAW

SEM XTH GNLU

EXHAUSTION OF LOCAL REMEDIES IN INVESTOR- STATE DISPUTE SETTLEMENT

INTRODUCTION

The customary international law rule of exhaustion of local remedies aims at safeguarding
state sovereignty by requiring individuals to seek redress for any harm allegedly caused by a
state within its domestic legal system before pursuing international proceedings against that
state. In international investment law, this rule has in large part been dispensed with, as states
conclude investment treaties and chapters under which they give advance consent to
international arbitration with foreign investors- a practice that was understood to mean that
the investor could initiate a claim without prior recourse to the host states administrative or
judicial courts. Even under treaties lacking an explicit or implicit waiver of the exhaustion
rule, arbitral tribunals- ruling on their own jurisdiction- have generally allowed foreign
investors to bypass local remedies.

In recent years there have been critiques to the established system of Investor-State dispute
settlement and there has been a call for an increased role of domestic courts. Australia,
following the conclusion and ratification of the AUSFTA has excluded the traditional
investor- State dispute settlement mechanism from the free trade agreement it signed with the
United States. This same approach is adopted in the recent Closer Economic Relation (CER)
Investment Protocol that Australia signed with New Zealand in 16 February 2011. Australia
also has announced that this exclusion will also apply with its future negotiations with
developing countries.1

Some Latin American countries have recently jumped into the radar of the international
investment community. Ecuador and Bolivia have both denounced the ICSID Convention,
eliminating the access to ICSID tribunals for investors seeking protection for their
investments. Ecuador has further declared the signing of treaties that give jurisdiction to
international tribunals as unconstitutional, resulting in the denunciation of several BITs.
Argentinas failure to satisfy the more than 40 awards rendered against it also represents a
blow to ICSID and international arbitration.

1
http://www.buyusa.gov/australia/en/fta.html#_section14.

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South Africa, in response to an ICSID claim, brought against its Black Economic
Empowerment program by two Italian investors is seriously reconsidering the terms of
existing treaties, in particular the investor-State arbitration dispute settlement regime.2

A group of renowned academics also issued a public statement attacking the fairness of the
international investment regime and its dispute settlement mechanism, thus calling on States,
International organizations, international business communities and civil societies to join
hands and bring about change in the system.3 Supporters of ISDS contend that foreign
investors might nonetheless receive inadequate protection in domestic courts.4 Whether these
trends will have a domino effect is yet to be seen.

RESEARCH PROBLEM

Some countries have recently revised their policy relating to the conclusion of IIAs by
excluding investor-State arbitration for the settlement of disputes (Australia), calling for a
greater involvement of the host country domestic courts. This has occurred as an attempt to
protect their public policies from investors claims (South Africa) or by denunciating the
ICSID convention (Ecuador and Bolivia). Investors are reluctant to submit their disputes to
host-State courts on the assumption that they are biased, lack expertise in the area of
international investment law, or that they will only apply national laws.

Under traditional international law, the rule that local remedies must be exhausted before
international proceedings may be instituted has been considered to be customary and the term
local remedies as used in this context refers to any redress available from the governmental
apparatus in the host State, including relief that may be available from a court, administrative
agency or other authority.

However, the advent of direct arbitration between the host state and the foreign investor over
settlement of investment disputes, has generally led to the assumption that where consent has
been given to investor-state arbitration, there is no need to exhaust local remedies.

2
Bilateral Investment Treaty Policy Framework Review, Government Position Paper Department of Trade and
Industry of RSA, (June 2009), pp. 45-46.
3
http://www.osgoode.yorku.ca/public_statement/documents/Public%20Statement.pdf.
4
See, e.g., Eur. Commn, FAQ on the EU-US Transatlantic Trade and Investment Partnership, EUR. COMMN
9 (June 17, 2013), http://trade.ec.europa.eu/doclib/docs/2013/may/tradoc_151351.pdf

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In the context of these challenges to the Investor-State dispute settlement system, several
authors have written about improving the system of international arbitration, particularly in
the context of ICSID institutional reform. This paper will focus on a rarely explored
alternative: Can host-State courts play a better role in settling investment disputes? Should
the return of Calvo doctrine be praised or is it a blowback to the domain of investment
dispute mechanism?

RESEARCH OBJECTIVE

Among the many issues that remain unsettled in the relatively young field of international
investment arbitration, the relevance of local remedies is perhaps the most important and
controversial.

In this context, this paper seeks to explore the current role and future potential of domestic
courts in investment dispute resolution. Consequently, the paper has sought to identify any
existing practice on international treaty application (IIA and non-investment related) by
domestic courts. Where direct IIA application was not present, there was an attempt to
explore the feasibility and permissibility by analyzing general direct treaty application.

Accordingly, a theoretical foundation on the role of domestic courts, superseded by a country

specific empirical analysis of different legal systems in the following Sections will help draw
a conclusion as to whether domestic courts are feasible alternatives to investor-State
arbitration.

SCOPE OF THE STUDY

In order to assess the possibility of domestic courts applying IIAs, the research has gone
through the legal structure, BIT framework, and legal practice of five countries selected to
offer a diverse view at different legal regimes. The first finding is that so far, there has been
little practice in regards to application and interpretation of IIAs by domestic courts. Indeed,
few countries have been faced with questions of interpretation and/or application of IIAs and
their domestic courts have either evaded the question, or have adopted a lackadaisical
approach to the matter. This paper found a very diverse country practice; many jurisdictions
do not have the power to interpret or apply IIAs, others readily interpret and apply BITs, and
others have not considered the question.

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This dissertation has suggested that the outcome is dependent on the legal system of the
country concerned, for example whether it is a monist or dualist system. Another factor that
plays a significant role is the type of dispute settlement clauses. In general, dispute settlement
clauses restrict the role that local courts can have. Many of them give a role to domestic
courts, but in most cases international arbitration is always an option. Relatively few IIA
contain dispute settlement clauses which give domestic courts a strong role in investment
dispute resolution. The role of domestic courts could be significantly increased by redrafting
the dispute settlement clauses in BITs, giving them a more significant role. Nevertheless this
cannot happen in isolation. Arbitral tribunals also have to do their part by interpreting fork-
in-the-road clauses, for example, in a more restrictive way.

This research has made clear that no universal formula can be laid down: every countrys
legal system and its relation with international law should be carefully assessed. Even when
there was a lack of conclusive and homogenous findings, this paper does point to the
possibility of domestic courts directly applying IIAs. This can have important implications
for the future of international investment law.

LIMITATION OF THE STUDY

This work has its limitations. While ICSID cases are largely publicized, investor-state
arbitration under the UNCITRAL Rules is not as readily available due to various publicity
requirements and the fact that different institutions administer cases under the UNCITRAL
Rules. The result of this is that the interaction between some those tribunals and domestic
courts is not captured in this study. No interaction has been done with the investment law
experts to learn about their perspective on the effectiveness of the domestic legal system in
investment disputes. This study is also by no means exhaustive of the topics and possible
issues that relate to the relationship of domestic courts and international investment
arbitration tribunals.

RESEARCH HYPOTHESIS

This dissertation is based on the hypothesis that the law of exhaustion of local remedy in the
field of investment law is a tricky and complicated terrain. This rule cannot be applied
universally and requires an analysis for each state depending upon its judicial systems
capability. If the emphasis on local remedies is weighed too much, it would unduly hinder
original rationale of investment treaty regime. Likewise, if local remedies are ignored, the

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criticism about current investment treaty regime will persist and hosting states regulation of
foreign investors would be futile.

RESEARCH METHODOLOGY:

The research methodology employed is deductive in nature. A conclusion is arrived at based

on the acquired understanding on the topic. Further, since suggestions have been provided as
to how to improve the existing framework, this dissertation can also be said to have a
doctrinal by component. The tools used for the purposes of the said research are mainly
books and journals. The author will employ the aid of case laws and awards by various
national and international judicial systems and arbitral tribunals such as the International
Chamber of Commerce, the SCC and ICSID decisions as well as opinions of learned scholars
and experts in the field of investment arbitration.

TENTATIVE CHAPTERISATION

I. Introduction
II. Role of domestic courts in the application of international investment agreement
A. Monoism- dualism epilogue
B. Application of international investment agreements before domestic courts.
a. Exhaustion of local remedies
b. Requirement to use domestic remedies for a certain period of time
c. Resort to domestic court as a substantive requirement for an international
claim to mature
d. Fork in the Road
e. Types of Clauses
f. Pros and Cons of Domestic Courts Involvement in ISDS
g. Investor-State arbitration v. local remedies
III. Country Review
A. Australia
B. Ecuador
C. United Kingdom
D. United States of America
E. India
IV. Recommendations
V. Conclusion

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VI. Bibliography (Review of literature)

A. Primary Sources
1. Treaties and BITs
a. Vienna Convention on the Law of Treaties 1155 UNTS 331 (entered into
force on 27 January 1980), art 31
b. International Law Commission Draft Article of Responsibility of State for
Internationally Wrongful Act, 2001
c. Convention on the Settlement of Investment Disputes Between States and
Nationals of Other States 575 UNTS 159 (entry into force on October 14,
1996)

2. Cases
a. Interhandel Case (Switzerland v United States of America) (Preliminary
Objection) (1959) ICJ Rep 6
b. Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v
Democratic Republic of Congo) (2007) ICJ Rep 639

B. Secondary Sources
1. Books Referred:
a. C. F. Amerasinghe, Local Remedies in International Law, (2nd Edition,
Cambridge Studies in International and Comparative Law, CUP, 2004)

The author records that the local remedies rule originally developed as a
limitation on the right of reprisal, well before the rise of the modern system of
international law. Although the significance of local remedies rule has reduced
in the current system of international investment law, it is not irrelevant. The
central function of the local remedies rule is to protect the sphere of
sovereignty that States are entitled to under international law.

IIAs basically provide for waiver of this general requirement by giving

investors the right to directly bring suits before an international tribunal. The
rule remains an important principle of customary international law and is
applied both in diplomatic protection cases and in international human rights
law.

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b. Schreuer, The ICSID convention: a commentary, (Cambridge: CUP, 2009)

Schreuer is of the view that even where there is doubt as to an investors

choice under the clause, a more plausible choice would be a determination that
the investor has made a choice of international arbitration rather than litigation
before the domestic courts of the host state. This, according to him, is because
the investor may encounter injustices, delays and other real or perceived
setbacks associated with resolving disputes between foreign investors and host
states in the domestic courts of the host state.

2. Articles Referred:
a. Tom Ginsburg (2005), International Substitutes for Domestic Institutions:
Bilateral Investment Treaties and Governance, 25 International Review
of Law and Economics 107-123

Tom Ginsburg notes that the decision to bypass domestic courts may reduce
courts incentives to improve performance by depriving key actors from a
need to invest in institutional improvement. In the same vein, he notes that the
effect of investment treaties on the judicial systems of host states impacts
human development and governance in those developing countries can find
themselves in a trap of low quality institutions wherein no political coalition
can form to support institutional improvement. Indeed, the presence of
international alternatives to adjudicatory or regulatory bodies may reduce local
institutional quality under certain conditions.

b. Susan Franck (2006), Foreign Direct Investment, Investment Treaty

Arbitration and the Rule of Law (FDI, ITA and the Rule of Law), 19
Pacific McGeorge Global Business and Development Law Journal, 337, p.
366

Susan Frank suggests that litigation of investment disputes in domestic courts

instead of before an international arbitration tribunal might build the capacity
of local courts by:
- providing domestic courts with an opportunity to articulate relevant
principles of domestic law;

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- increasing the transparency of the system; and

- giving notice to future investors of the relevant domestic legal standards
and their application.

She has the view that in promoting the rule of law, a symbiotic relationship
exists between investment treaty arbitration and domestic courts.

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