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Abstract and Keywords

This chapter explores the effect of investment treaties and international investment law on the law of diplomatic protection. Specifically, it discusses the articles of International Centre for Settlement of Investment Disputes (ICSID) and the bilateral investment treaty (BIT). ICSID procedures for the settlement of disputes are frequently used in investment disputes and provide an alternative to diplomatic protection favoured by national States and their nationals. BITs incorporate different forms of arbitration for the settlement of investor-State disputes. Several treaties refer to different kinds of arbitration to which parties may agree. They also provide that in the absence of agreement between the parties on this matter the dispute shall be settled by arbitration according to a particular one of the mentioned forms.

Keywords: diplomatic protection, International Convention on the Settlement of Investment Disputes, bilateral investment treaty

The foreigner who does business abroad also now has new and alternative remedies available to him. The Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 1965 ¹ enables natural or juridical persons to seek arbitration in investment disputes against a State party to the convention before the International Centre for Settlement of Investment Disputes, provided both the defendant (host) State and the national State of the person and also the parties to the dispute, ie the host State and the national of the other State, have consented to this procedure. Article 26 of the ICSID Convention waives the application of the rule of local remedies, unless it is incorporated in the arrangements between the host State and the foreigner. Article 27 waives the right of the national State to exercise diplomatic protection until a certain point in the settlement of an investment dispute—the refusal of the host State to honour an award in a dispute given by an ICSID Tribunal. ICSID procedures for the settlement of disputes have been and are frequently used in investment disputes since the inception of ICSID and provide an alternative to diplomatic protection favoured by national States and their nationals.

A phenomenon peculiar to the aftermath of the Second World War is the bilateral investment treaty (BIT). ² Investment treaties may also be multilateral. ³ There have been drafts of model multilateral and bilateral treaties relating to (p. 335) foreign investment in one way or another by, inter alia, the OECD, the AALCC and the UNCTC. ⁴ The modern BIT is European in origin. The first was between the Federal Republic of Germany and Pakistan (1959). In 1967, the OECD finalized a Draft Convention on the protection of Foreign Property. However, the draft was never opened for signature. There are some developed States, such as the US, Switzerland, and Denmark, which have model agreements. To reflect the particular interests of developing States in the face of such activity by developed States, the AALCC produced a model treaty with two variants in 1984.

A trend among BITs is to include several different possible forms of arbitration for the settlement of investor-State disputes. Several treaties refer to different kinds of arbitration to which parties may agree. They also provide that in the absence of agreement between the parties on this matter the dispute shall be settled by arbitration according to a particular one of the mentioned forms. ⁵ Other treaties, for example those concluded by the US, give the host State's advance consent to each of the mentioned forms of arbitration, thus in effect giving the investor the choice. ⁶ References are common to ICSID, to arbitration under the UNCITRAL rules, and, to a lesser extent, ICC arbitration. There is comparatively little uniformity in this particular area of treaty practice. Whi1e the inclusion of an investor-State arbitration clause has become a common feature of BITs, there is variety in the choice of arbitration methods.

Basically, whether an investment treaty (or for that matter any relevant international dispute settlement treaty) includes a waiver, express or implied, of the local remedies rule, where it would otherwise be applicable, is strictly a matter of interpreting the treaty. There is no hard and fast rule that BITs, for instance, by their very nature imply a general waiver of the rule. On the contrary, the correct presumption may be the opposite—that no waiver may have taken place unless express provision is made for it. The view of the ICJ, as pointed out, is that the rule is an important one whose waiver cannot lightly be presumed. Express waivers, total or partial, have appeared in BITs. More difficult is the answer to the question when a waiver may be implied where express provision is not made for it. The issue being addressed relates to the incidence of a waiver of the rule.

Where the BIT incorporates ICSID arbitration either as the only dispute settlement procedure ⁷ or as one alternative, ⁸ and says no more, it is clear that by virtue of Article 26 of the ICSID Convention the rule of local remedies is waived (p. 336) where it otherwise would apply in circumstances where ICSID arbitration is the relevant means of dispute settlement. A reference to ICSID arbitration as such would involve a waiver of the rule subject to an express and appropriate statement or acceptance of its applicability.

Sometimes the BIT may specifically invoke the local remedies rule or a modified form of it, even where ICSID arbitration is the arbitration procedure chosen. In that case, the provisions of Article 26 are expressly excepted, a possibility which Article 26 itself contemplates. An example of such an occurrence is the provision in Article 9 of the BIT between the Netherlands and Jamaica (1991) which states:

1. 2. If such a dispute has not been settled amicably within a period of three months from the date on which either party to the dispute requested amicable settlement, either party may pursue local remedies for the settlement of that dispute.

2. 3. If the dispute has not been settled within a period of eighteen months from its submission to a competent body for the purpose of pursuing local remedies, then for the purpose of Article 36 of the Convention on the Settlement of Investment Disputes between States and Nationals of other States opened for signature at Washington on 18 March 1965 (the Convention) the Contracting Party hereby gives its consent to the submission of the dispute to arbitration under that Article.

The provision retains an obligation on the part of the investor to accept a reference to local remedies within limits before ICSID arbitration is invoked. ⁹

BITs which incorporate other arbitration procedures, such as ad hoc arbitration, whether under the UNCITRAL Rules or not, or ICC arbitration, and exclusively so as an alternative, sometimes make no reference at all to the exhaustion or invocation of local remedies as a pre-condition for arbitration. This is the case with such BITs as that between Switzerland and Lithuania of 1992 (Article 9). In such circumstances, the question whether the rule of local remedies has been impliedly waived becomes one of construction of the BIT. The answer is not crystal clear. It is arguable that, because the host State has agreed to arbitration which is international, being under a treaty, the procedure provided for is in effect the exercise of diplomatic protection by the investor's national State; therefore, in keeping with the established line of authority discussed earlier, even though the investor is given standing per se before the international forum, he has such standing by virtue of the treaty, and the local remedies rule applies in the absence of express waiver. The contrary argument is that because the host State has agreed to arbitration, even though it is set up by an act of the host State and the investor and not by a direct act of the host State and the investor's national State (the other party to the BIT) and although the arbitration flows from an international treaty, it is to be compared to such private arbitrations as took place in the LIAMCO and Elf Aquitaine arbitrations which imply the exclusion of the rule's application as being substitutes for remedies at the national level. It may (p. 337) be observed that the argument flowing from the conception of the arbitration procedure as one instituted in the exercise of diplomatic protection has considerable force. However, both arguments referred to above are still to be tested in circumstances where, in an arbitration set up by the host State and the investor under the BIT, the objection to admissibility is raised based on the rule of local remedies.

A situation may arise where the BIT provides for the rule of local remedies by the investor as an alternative to or prior to the institution of arbitration under the treaty. An example of this is the provision in the BIT of 1991 between Argentina and the US which states:

1. 2. In the event of an investment dispute, the parties to the dispute should initially seek a resolution through consultation and negotiation. If the dispute cannot be settled amicably, the national or company concerned may choose to submit the dispute for resolution:

1. (a) to the courts or administrative tribunals of the Party that is a party to the dispute; or

2. (b) in accordance with any applicable, previously agreed dispute settlement procedures; or

3. (c) in accordance with the terms of paragraph 3.

2. 3. (a) Provided that the national or company concerned has not submitted the dispute for resolution under paragraph 2(a) or (b) and that six months have elapsed from the date on which the dispute arose, the national or company concerned may choose to consent in writing to the submission of the dispute for settlement by binding arbitration …

It is clear that it is the investor who is given the option of resorting to local remedies. Once this option is exercised, the import of the provision would seem to be that local remedies must be exhausted. Failure to exhaust them would then certainly result in the inadmissibility of an international claim based on diplomatic protection, if such a claim were made. Whether such a claim is available is not clear at all from the express terms of the treaty but there is no reason why it should not be.

Where the investor does not exercise the option of referring the dispute to the local courts, it would appear to be implied that arbitration instituted by the investor and the host State under the provision would not be subject to the prior exhaustion of local remedies. Unless this interpretation were given to the text, the provision would not make consistent sense. ¹⁰

There are BITs which provide for submission to arbitration after the investor has exercised an option available to him to have recourse to the local courts. For example, the BIT of 1992 between Switzerland and Paraguay provides in Article 9(2) and (3) that:

1. (2) Si estas consultas no permitieran solucionar la controversia en un plazo de seis meses, a partir de la fecha de solicitud de arreglo de la diferencia, el inversionista puede sorneter (p. 338) la disputa tanto a la jurisdiccion nacional de la Parte Contratante, en cuyo territorio se realizo la inversion o al arbitraje internacional. En este ultimo caso el inversionista tiene las siguientes opciones:

1. (a) el Centro Internacional de Arreglo de Diferencias Relativas a Inversiones (CIADI), creado por la Convención relativa al arreglo de diferencias entre Estados y nacionales de otros Estados, abierto a la firma en Washington, DC, el 18 de marzo de 1965;

2. (b) un tribunal ad hoc, que salvo otro paracer acordado entre las partes de la controversia, será establecido bajo las reglas de arbitraje de la Comisión de las Nacionas Unidas sobre Derecho Mercantil Internacional (CNUDMI).

2. (3) En caso de que el inversionaita haya sometido la divergencia a la jurisdicción nacional, él no puede apelar a uno de los tribunales arbitrales mencionados en el párrafo (2) del presente Artículo, salvo en el caso que luego de un período de 18 meses no haya una sentencia final del tribunal nacional competente. ¹¹

Firstly it is clear that the rule of local remedies as such has impliedly been supplanted by different rules expressly referred to in the treaty. Secondly, while local remedies are relevant, and even then only if the investor chooses to submit to them, resort to them as a prior condition for arbitration is subject to the express terms of paragraph (3) of the Article. These terms either do not necessarily require an exhaustion of local remedies as such or local remedies are to be regarded as inadequate and ineffective on the basis of undue delay in their implementation.

Provisions which clearly imply a waiver of the rule of local remedies in relation to the arbitration provided for are to be found in such BITs as the 1989 treaty between France and Bulgaria which states in Article 8:

1. 1. Tout différend entre l'une des Parties contractantes et un investisseur de l'autre Partie contractante relatif aux investissements est autant que possible réglé a l'amiable entre les deux parties au différend.

2. 2. Si un tel différend n'a pas pu être réglé dans un délai de six mois partir du moment où il a été soulevé par l'une ou l'autre des Parties au différend, il peut ètre soumis aux juridictions compétentes de la Partie contractante qui est partie au différend et sur la territoire ou dans les zones maritimes de laquelle l'investissement est réalisé. ¹²

It is noteworthy that three important international instruments which concern foreign investment and offer models for dispute settlement, though they are not binding treaties, do not jettison the rule of local remedies. Surprisingly, perhaps, the OECD Draft Convention on the Protection of Foreign Property of 1967 uses language in Article 7 (b) which preserves the exhaustion of local remedies as a condition precedent to arbitration insofar as it states:

1. (b) A national of a Party claiming that he has been injured by measures in breach of this Convention may, without prejudice to any right or obligation he may have to (p. 339) resort to another tribunal, national or international, institute proceedings against any other Party responsible for such measures before the Arbitral Tribunal referred to in paragraph (a) … ¹³

One of the two 1984 AALCC Model Draft Agreements for Promotion and Protection of Investments provides clearly in Articles 9 and 10 for the requirement of exhaustion of local remedies, whether before diplomatic protection is exercised or before arbitration is instituted at the request of the host State. Those Articles state: