Originally from the American Review of International Arbitration

ABSTRACT

Exhaustion of local remedies is a well-recognized rule of customary international law on diplomatic protection. In the context of investor-State arbitration, it refers to the obligation to obtain a final, unappealable judgment from the domestic courts and administrative bodies of the State that a foreign investor wants to bring a claim against. In light of the dissatisfaction with the current investor-State arbitration system, there has been a renewed interest in requiring investors to exhaust local remedies before allowing them to pursue investor-State arbitration. However, this paper argues that simply adding a provision to an international investment agreement (IIA) stating that investors need to exhaust local remedies before bringing an investor-State arbitration claim would not be an effective reform option by itself. In addition to having an explicit exhaustion rule in the IIA, States need to address the problems with how tribunals have interpreted exhaustion in the past. This paper argues that States can do this by having clearer treaty language that does not give tribunals leeway to make interpretations that go beyond State parties’ consent. It lays out the biggest issues with its interpretation by providing an overview of relevant treaty language and cases. In light of the issues identified, this paper makes recommendations on changes to the treaty language and provides model language that can serve as a starting point for future IIA negotiations.

iNTRODUCTION

Consider this: in the realm of public international law, which is premised on State consent, two States agree on the terms of a treaty and thus consent to be bound by the treaty only in the way they have drafted it. The treaty in question includes provisions that allow private parties that are nationals of the treaty parties to bring claims against one of the contracting States before an international tribunal, but only if certain conditions in the treaty are satisfied. Imagine that such a private party nevertheless brings an international claim despite not having fulfilled these conditions. The international tribunal, instead of declining to exercise its jurisdiction in light of these unsatisfied conditions,  retains jurisdiction because it deems the condition a “curious requirement” that is “nonsensical.”  Alternatively, the tribunal regards this condition as “unfavorable” to the private party and uses the Most Favored Nation (MFN) clause in the treaty to avoid upholding that condition and imports a procedural scheme from a different treaty.

As unusual as these scenarios may sound, they have occurred many times in the context of the requirement in international investment agreements (IIAs) for investors to exhaust local remedies.  Exhaustion of local remedies refers to the obligation to obtain a final, unappealable judgment from the domestic courts and administrative bodies of the State the investor wants to bring a claim against.  Tribunals in many investor-State arbitrations have bent over backward to exempt investors from having to exhaust local remedies, despite an explicit requirement to do so that was enshrined in the applicable IIA in question. As a result, investors have been successful in bringing investor-State arbitration claims against States that have not consented to the conditions under which such claims are entertained. Considering that State consent to investor-State arbitration is what opens the doors to investors in the first place and there is no such thing as compulsory jurisdiction in investor-State arbitration, this practice turns the system on its head. 

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This paper argues that simply adding a provision to an IIA stating that investors need to exhaust local remedies before bringing an investor-State arbitration claim would not be an effective reform option by itself. In addition to having an explicit exhaustion rule in the IIA, States need to address the problems with how tribunals have interpreted exhaustion. States can do this by having clearer treaty language that does not give tribunals leeway to make interpretations that go beyond State parties’ consent. This paper will first give background information on what exhaustion of local remedies entails. Then, it will lay out the biggest issues with its interpretation by providing an overview of relevant treaty language and cases. In light of the issues identified, the paper will make recommendations on changes to the treaty language and provide model language that can serve as a starting point for future IIA negotiations.