This Chapter first summarizes the criticism voiced against investment treaty arbitration with specific regard to its relationship with domestic courts (infra at Sect. 2.1). It does not seek to discuss all of the multiple concerns raised against investment arbitration, which have already been addressed in the authors’ First CIDS ReportFootnote 1 and are further examined in the UNCITRAL Secretariat’s papers,Footnote 2 among other materials.Footnote 3 Discussing the criticism of investment arbitration vis-à-vis domestic courts requires providing an overview of the main reasons why States created the investment treaty system in the first place (infra at Sect. 2.2) and examining today’s justifications for keeping or putting in place an international system of investment dispute resolution, whether in the form of arbitration or standing adjudicatory bodies (infra at Sect. 2.3). The following sub-sections will in particular ask: What goals were IIAs intended to achieve? In light of those goals, what is the function of international courts and tribunals in the investment law domain, either in their current arbitral configuration or in future constellations such as a MIC? As States are considering questions concerning the institutional design and re-design of the system, it appears important to seek to provide answers to these questions in order to test the continuing validity of the assumptions which underpin the conclusion of investment treaties with international dispute resolution mechanisms.

2.1 Criticism Over Investment Treaty Arbitration in Relation to Domestic Courts

In recent years, a number of States, academics, and members of civil society have increasingly questioned the justification for maintaining in place a dispute resolution system which allows foreign investors to bring direct claims against sovereign States before international arbitral tribunals rather than before the courts of the host State.

Looking at the big picture, there are essentially two inter-related criticisms against investment treaty arbitration vis-à-vis domestic courts. First, it is argued that there is no need to put or maintain in place an international system for the resolution of investment disputes because investors in any event “retain rights under domestic systems” and those systems “are often assumed, but not established, to be inadequate”.Footnote 4 In other words, the current IIA investment arbitration regime does not account for situations in which domestic courts do offer adequate access to justice to a foreign investor.Footnote 5 In a similar vein, critics contend that the IIA framework allows investors to bring claims against sovereigns without having to exhaust local remedies in the host State, regardless of whether those remedies are capable of delivering justice.Footnote 6 In fact, IIAs generally remove the duty to exhaust local remedies even for countries that have mature and advanced legal systems.Footnote 7

Secondly, critics underscore that the procedural right to resort to arbitration against the host State under an IIA is not available to domestic investors (and foreign investors of nationalities not covered by IIAs). If domestic remedies are assumed to be unreliable, why allow only (certain) foreign investors to benefit from an international adjudicative process? In the eyes of those making this criticism, such differential treatment is seen as unfair and illustrative of “the privileges accorded by less developed countries to multilateral corporations at the expense of local investors who are competitively disadvantaged”.Footnote 8

A number of States, including capital-exporters and traditional supporters of the investment treaty system, have recently invoked principles of primacy of domestic courts over international tribunals and of non-discrimination between local and foreign investors in justification of anti-investment arbitration policies. The idea that foreign investors should enjoy no greater rights than domestic investors, including procedural rights,Footnote 9 has been put forward by a range of actors, such as the Australian Government, the European Parliament, and the U.S. Administration under President Trump, among others.Footnote 10 In 2011, for instance, the Australian Government headed by Prime Minister Gillard openly indicated that it would no longer agree to investment arbitration in its treaties based, inter alia, on reasons of equal treatment between foreign and domestic investors.Footnote 11 In its 2015 recommendations to the European Commission on the negotiations of the Transatlantic Trade and Investment Partnership (TTIP), the European Parliament called on the Commission “to ensure that foreign investors are treated in a non-discriminatory fashion and have a fair opportunity to seek and achieve redress of grievances, while benefiting from no greater rights than domestic investors, and to oppose the inclusion of ISDS in the TTIP, as other options to enforce investment protection are available, such as domestic remedies”.Footnote 12 In the context of the recent NAFTA re-negotiations, the U.S. Trade Representative explained to Congress that the U.S. Government was “skeptical about ISDS” inter alia because investor-State arbitration grants “a foreign national […] more rights than Americans have in the American court system”,Footnote 13 and suggested that investors should resort to State-to-State dispute settlement or negotiate arbitration provisions in their contracts as more appropriate alternatives.Footnote 14

Although not always expressly articulated in these terms, these positions appear to question the very premise upon which the system was created. Indeed, it is often argued that the reasons why an international forum for the settlement of investment disputes was established included the need to provide (i) a neutral forum as alternative to domestic courts that were perceived as inadequate, and (ii) a substitute to traditional State-to-State “politicized” mechanisms. These reasons are analyzed in the next chapter on the origins of the investor-State arbitration regime, together with others that were invoked to justify the creation of the investment treaty system (infra at Sect. 2.2).

2.2 The Origins of Investor-State Arbitration

This chapter starts by describing the pillars on which the existing investment treaty arbitration framework rests, namely the ICSID Convention and the complex network of IIAs, the majority of which include investor-State arbitration clauses (infra at Sect. 2.2.1). It then provides a brief overview of the main reasons that are often put forward for the creation of the investment treaty system (infra at Sect. 2.2.2), namely the need to attract foreign investment (infra at Sect. 2.2.2.1); the desire to “depoliticize” investment disputes (infra at Sect. 2.2.2.2); and the desire to establish a neutral forum on the international plane as an alternative to domestic courts perceived to be inadequate (infra at Sect. 2.2.2.3). Bearing the ongoing reform discussions in mind, it then provides an evaluation of whether today’s world still needs an international system for the resolution of investment disputes (in the form of arbitration or standing adjudicatory bodies) (infra at Sect. 2.3).

2.2.1 The Pillars of the Investment Treaty Arbitration Framework: The ICSID Convention and the IIAs

The existing investor-State arbitration framework emerged in its modern form in the 1960s, with the conclusion of the ICSID Convention and the first BITs.Footnote 15 The investment treaty network has grown since then to comprise more than 3000 IIAs binding a multitude of States worldwide. Switzerland is amongst the 154 Contracting States to the ICSID Convention and has concluded over 110 BITs with its trade partners.Footnote 16 Along with Germany, Switzerland was one of the first countries to develop a BIT program and is today one of the economies with the widest IIA network worldwide.Footnote 17

The ICSID Convention was concluded in 1965 under the aegis of the World Bank and provides for a mechanism for the settlement of investment disputes available to foreign investors and host States in the form of both conciliation and arbitration. More specifically in relation to arbitration,Footnote 18 the ICSID Convention allows a Contracting Party and a national of another Contracting Party (thus, to the exclusion of domestic investors)Footnote 19 to settle their disputes arising out of an investment through arbitration, provided the parties have separately consented to it.Footnote 20 The Convention also provides for an effective regime for the enforcement of arbitral awards rendered under the Convention, whereby Contracting Parties undertake to enforce the pecuniary obligations arising out of the award in their territory as if it were a final judgment of their courts.Footnote 21

ICSID has administered more than 720 arbitrations to date, most of which in the last two decades.Footnote 22 In the majority of cases, the basis for the jurisdiction of the Centre was an IIA incorporating an investor-State arbitration clause. Indeed, from the end of the 1960s,Footnote 23 BITs started to include a standing offer from a Contracting Party to submit disputes with the investors of the other Contracting Party to international arbitration, whether ICSID or other arbitral fora, such as UNCITRAL, Stockholm Chamber of Commerce (SCC), or International Chamber of Commerce (ICC). According to UNCTAD, 90% of the existing IIAs contain advance consent (i.e. by way of a standing offer) to investment arbitration.Footnote 24 In 1990, an ICSID arbitral tribunal recognized for the first time the possibility for an investor to sue a host State on the basis of the offer of consent contained in an IIA,Footnote 25 paving the way for the initiation of hundreds of investment treaty claims in the following decades.Footnote 26

2.2.2 The Reasons for Putting the System in Place

What were the reasons that prompted States to set up the international treaty framework for the protection of foreign investments, including the grant of direct remedies against host States? Three main reasons are usually advanced for the conclusion of IIAs and, more specifically, for the inclusion of investor-State arbitration therein. First, IIAs, including the grant of direct means of enforcement on the international plane, are said to be aimed at attracting foreign direct investment to host States (infra at Sect. 2.2.2.1). Second, investor-State arbitration is said to pursue the objective of “de-politicizing” disputes (infra at Sect. 2.2.2.2). Third, and of direct relevance to the subject matter of this study, IIAs provide international remedies directly to foreign investors with a view to affording foreign investors an alternative to domestic courts which are perceived to be inadequate for the resolution of investment disputes (infra at Sect. 2.2.2.3).

2.2.2.1 Do Investment Treaties Increase Foreign Investment Flows?

If one looks at the preamble to the ICSID Convention, the very first consideration recorded by States for the conclusion of that Convention is “the need for international cooperation for economic development, and the role of private international investment therein”.Footnote 27 The Report of the Executive Directors of the International Bank for Reconstruction and Development, or World Bank, which accompanies the Convention explains the link between the orderly settlement of investment disputes and the stimulation of private international investments and economic development in the following termsFootnote 28:

9. In submitting the attached Convention to governments, the Executive Directors are prompted by the desire to strengthen the partnership between countries in the cause of economic development. The creation of an institution designed to facilitate the settlement of disputes between States and foreign investors can be a major step toward promoting an atmosphere of mutual confidence and thus stimulating a larger flow of private international capital into those countries which wish to attract it. […]

The Executive Directors believe that private capital will continue to flow to countries offering a favorable climate for attractive and sound investments, even if such countries did not become parties to the Convention or, having joined, did not make use of the facilities of the Centre. On the other hand, adherence to the Convention by a country would provide additional inducement and stimulate a larger flow of private international investment into its territories, which is the primary purpose of the Convention.Footnote 29

Preambles of IIAs, and of BITs in particular, similarly stress the Contracting States’ desire to create favorable conditions for greater investments and often declare that the encouragement and reciprocal protection of investments through an international treaty will be “conducive to the stimulation” of foreign direct investment.Footnote 30 Indeed, these objectives are reflected in the headings of many of these treaties, which were traditionally named agreements “on encouragement [or promotion] and reciprocal protection of investments”.

In recent decades, the question of the impact of IIAs on investment flows has been subject to closer scrutiny. Numerous studies have been conducted with a view to assessing the actual effect on foreign direct investments of (i) IIAs generally and (ii) dispute settlement provisions in IIAs more specifically. Those studies have come to diverging conclusions.Footnote 31

With regard to IIAs in general, according to a 2014 report of the United Nations Conference on Trade and Development (UNCTAD), the majority of the studies reviewed concluded that there was a positive causal relationship between investment treaties and foreign direct investment.Footnote 32 A 2017 review by Bonnitcha, Poulsen, and Waibel of the existing quantitative studies on the effect of investment treaties on FDI concludes that “[a] majority find that investment treaties have a positive and statistically significant impact on inward FDI in at least some circumstances”, whereas “a sizeable minority of studies find that there is no statistically significant effect of BIT adoption on FDI flows”.Footnote 33

The methodological and measurement challenges associated with these empirical studies make it difficult to draw firm conclusions from the existing literature.Footnote 34 As remarked in the UNCTAD report, “an empirical correlation [between the presence of IIAs and FDI] does not necessarily imply causation”, and “[t]he causal relationship between IIAs and FDI might theoretically run in both directions”.Footnote 35 Furthermore, some studies observe that the correlation between BITs and the growth in FDI varies according to the States and the BIT models surveyed and hence conclude that any such positive economic result is not necessarily attributable to BITs.Footnote 36 Market factors and other host country factors,Footnote 37 including institutional qualityFootnote 38 and the level of political risk,Footnote 39 may also be determinative for FDI inflows. Other variables, including the specific content of IIAs, e.g. the incorporation of certain substantive provisions, may also determine the effectiveness of BITs in attracting FDI.Footnote 40

Surveys carried out with investors and other economic actors aimed at testing their awareness of the investment treaty system and in particular at understanding whether the presence of an IIA affects their investment decisions have also led to mixed results.Footnote 41

In addition, a number of studies have specifically focused on the possible effect of investment treaty arbitration provisions on FDI flows.Footnote 42 Certain studies have found that there is weak evidence of a relationship between the international dispute settlement provisions included in IIAs and FDI,Footnote 43 and that investment treaties that provide advance consent to arbitration are no more effective in attracting FDI than those that do not.Footnote 44 In a 2010 report, Australia’s Productivity Commission referred to some of these studiesFootnote 45 as one of the bases for its recommendation that Australia no longer include investment arbitration in its future IIAs.Footnote 46

By contrast, a different line of research identifies a positive impact of IIAs on FDI inflows, particularly when treaties include investment arbitration mechanisms.Footnote 47 Some scholars suggest that, among the various IIA provisions, investor-State arbitration clauses matter the most for foreign direct investment flows.Footnote 48 A 2016 research report conducted by the Asian Development Bank concluded that “BITs specifically granting access to [investor-State arbitration] have large, positive, and statistically significant effects on FDI”.Footnote 49 A 2017 study covering a large number of countries and surveying different types of dispute settlement clauses similarly concludes that “stronger international dispute settlement provisions in BITs are indeed associated with more FDI activity”.Footnote 50

In conclusion, the empirical literature, based both on econometric and survey data, is not entirely conclusive on the extent to which IIAs in general and investor-State arbitration provisions in particular result in increased FDI.

2.2.2.2 De-Politicizing Disputes

“De-politicization” is often mentioned as one of the reasons for the establishment of the investment arbitration regime and celebrated as one of its central achievements.Footnote 51 When discussing de-politicization in this context, investor-State arbitration is contrasted with diplomatic protection which, in the pre-investment treaty era, was a common means for investors to secure protection of their foreign investments and obtain reparation for the wrongful act inflicted by host States.Footnote 52 “De-politicization” more specifically is understood to refer to the removal of investment disputes from the realm of diplomatic protection in favor of a judicial forum subject to legal rules and a pre-formulated dispute settlement process.Footnote 53

Although the views on de-politicization as a desirable feature of investor-State arbitration are not unanimously shared,Footnote 54 and opinions diverge as to whether the rise of investor-State arbitration has actually de-politicized disputes,Footnote 55 it can hardly be doubted that the shift from diplomatic protection to investment arbitration has entailed important consequences for investors, host States, and home States.

From the viewpoint of investors, access to an international judicial mechanism removes two major shortcomings associated with diplomatic protection. First, under the traditional conception, the right to exercise diplomatic protection belongs to the home State of the injured national,Footnote 56 and the State enjoys full discretion to pursue the claim or not.Footnote 57 The home State can decide not to exercise diplomatic protection for reasons unrelated to the merits of the claim, for instance, if making a claim would compromise its “diplomatic, military or geo-political objectives”.Footnote 58 It also retains full control over the process (including the possibility to settle the claim) and any remedy awarded as a result of the exercise. Second, as a rule, “[a] State may not present an international claim in respect of an injury to a national or other person […] before the injured person has […] exhausted all local remedies”.Footnote 59 The situation is markedly different in investor-State arbitration, where the aggrieved investor enjoys direct access to an international judicial forum, without depending on the intervention of its home State, has control of the process, directly benefits from any remedy awarded, and normally need not exhaust all local remedies.

The shift from diplomatic protection to investor-State arbitration is also said to benefit both the host State and the home State. Host States potentially avoid the risk of confrontations with the investor’s home State.Footnote 60 For their part, home States may distance themselves from the investment dispute as the investor is able to litigate its claim directly without engaging the political organs of the two governments.Footnote 61

While the objective of depoliticizing disputes is not easy to trace in the development of the IIA programs of many States,Footnote 62 “de-politicization was clearly on the minds of the architects of ICSID”.Footnote 63 Aron Broches, the then General Counsel of the World Bank and principal architect of the Convention, repeatedly stressed that one of the primary goals of the Convention was “to remove investment disputes from the intergovernmental political sphere”Footnote 64 and presented the Convention as offering “a means of settling directly, on the legal plane, investment disputes between the State and foreign investor, [which] would insulate such disputes from the realm of politics and diplomacy”.Footnote 65 The Convention further eliminated the requirement for the exhaustion of local remedies, unless otherwise agreed (Article 26) and significantly curtailed the possible exercise of diplomatic protection by the investor’s home State (Article 27), thereby providing the host State with “the assurance that it will not be exposed to an international claim by the investor’s home State, as long as it abides by the award”.Footnote 66 These features were described during the negotiations of the ICSID Convention as “significant” and “important” innovations.Footnote 67

2.2.2.3 An International Forum Alternative to Domestic Courts

A third reason that is normally said to justify the existence of an international remedy in favor of foreign investors is the need to offer an alternative to domestic courts.Footnote 68 Under usual choice of court rules, domestic courts would normally be the default forum for the settlement of investment disputes.Footnote 69 However, domestic courts are often considered inadequate for the settlement of investment disputes, due in particular to their perceived inefficiency, delays, actual or apparent bias to foreign investors, lack of independence from the host State, which is inevitably the respondent in the dispute, and lack of expertise to apply international law.Footnote 70

Upon review of the travaux of the ICSID Convention, the purpose of establishing an international mechanism to provide an alternative to domestic courts appears to have played a relatively less important role compared to other goals (for instance the mentioned de-politicization of disputes). Nevertheless, the relationship between the envisaged dispute resolution machinery and domestic courts was raised on a number of occasions. Certain government delegates, especially from Latin American States, opposed the very idea of allowing a foreign investor direct access to an international forum.Footnote 71 At a meeting in Santiago, for instance, the Argentine and Brazilian delegates observed that the draft Convention would unacceptably confer to an international organization “powers belonging to national institutions” and grant foreign investors “a legally privileged position, in violation of the principle of full equality before the law”.Footnote 72 In a similar vein, the expert-delegate from Jordan noted that “the present Convention seemed to […] place a foreign investor in a better position than the local investor”.Footnote 73 Sporadically, the point was also made that domestic courts were not inadequate to resolve investment disputes.Footnote 74

Broches responded to some of these doubts by explaining that “the proposed new machinery should not be a substitute for local courts and local law”.Footnote 75 In his words:

International proceedings became important in the abnormal case, where the normal ways of dealing with disputes proved unsatisfactory, perhaps because of a lack of governmental or judicial stability; perhaps because new legal relationships were being created for which there was as yet no appropriate or competent local forum. Implicit in the convention was the thought that it would be used only in these and other “appropriate cases”.Footnote 76

The same idea was then reflected in the Convention’s preamble, which reads as follows:

Bearing in mind the possibility that from time to time disputes may arise in connection with such investment between Contracting States and nationals of other Contracting States;

Recognizing that while such disputes would usually be subject to national legal processes, international methods of settlement may be appropriate in certain cases […].Footnote 77

Thus, the Convention was not intended to displace dispute resolution before domestic courts; rather, it was conceived to provide an alternative dispute resolution mechanism to be used in appropriate circumstances, where the host State and the investor agreed to it.Footnote 78 However, once the parties consent to arbitration under the Convention, such consent shall exclude “any other remedy”,Footnote 79 including domestic courts.Footnote 80 Furthermore, the exhaustion of local remedies is not a condition for resort to arbitration under the Convention unless it is specifically required by the host State.Footnote 81

2.3 Outlook: Does Investment Law Still Need an International Dispute Resolution System?

With the UNCITRAL WGIII reform process underway, questions on the continued desirability of international mechanisms for the resolution of investment disputes are likely to resurface. These questions are expected to be raised in respect of any method in which individuals are allowed to bring international claims against States in their own name, be it investment arbitration, improved through targeted reforms or supplemented with an AM, or a MIC, all of which grant or would grant individuals standing before an international forum.

As States debate different reform proposals, they should in particular consider what function international tribunals are to serve and what alternatives foreign investors will have in the absence of an international mechanism. The answers to these questions may vary depending on the emphasis that each State places on its various roles as capital exporter, capital importer, protector of its nationals investing abroad, and potential respondent against claims brought by foreign investors.Footnote 82 The answer for each State may also depend on the particular treaty partner it faces in a specific IIA negotiation, as issues may be viewed differently depending on whether or not the negotiating States share common legal traditions and comparable cultural histories,Footnote 83 and/or place mutual trust in each other’s institutions and in particular the judiciary.

The question of the function of international tribunals in the area of investment law is linked to whether IIAs and their dispute resolution provisions result in an increase in foreign investment. If one were to conclude that no such positive effect can be observed, it could be argued that the costs for States of keeping in place such a system exceed the benefits. In addition, absent a sound economic rationale, the “double procedural track” for foreign and domestic investors would be more difficult to justify as the modern eye generally disfavors discriminations and the two categories of investors may not always be seen to be in sufficiently different situations to warrant different treatment.

In light of the current uncertainty in the research on these matters and the perhaps insurmountable methodological and measurement challenges associated with it, some scholars underscore that it is unrealistic to expect that IIAs and/or dispute settlement provisions granting investors direct rights can alone result in increased FDI in the States that sign those treaties.Footnote 84 It is rather more likely that several factors influence an investor’s decision to commit resources in a foreign country (including the prospects for profits, tax regime, and general investment climate). However, to the extent that investors take into account the stability of the legal framework, the presence of IIAs and especially the availability of treaty-based mechanisms that stand outside the judicial system of the host State are likely to play a role in their decision to invest.

Seen from this perspective, the presence of an international mechanism for dispute resolution may serve as an important “confidence and credibility-inspiring signal”Footnote 85 to foreign investors and would enable host States to be credible when making commitments vis-à-vis foreign investors.Footnote 86 To the extent that foreign investors view international dispute settlement mechanisms as part of a stable legal framework, it cannot be excluded that the absence of such a mechanism may result in decisions not to invest. This was acknowledged, for instance, by the Australian government in its policy statement announcing its intention to do away with investor-State arbitration in the following terms: “If Australian businesses are concerned about sovereign risk in Australian trading partner countries, they will need to make their own assessments about whether they want to commit to investing in those countries”.Footnote 87 In a similar vein, it is also possible that companies may restructure their investments in countries where international dispute settlement mechanism remain available in their treaties, which may entail the removal of those investors from the regulatory and taxation regimes of their “real” home States.Footnote 88

When assessing the stability of the legal framework before investing in a country, investors may value the presence of IIAs and of an international dispute settlement method not only for the direct remedy it affords them against the host State, but also for the likely influence which the existence of such substantive and procedural guarantees may exercise on the State’s decision-making processes when dealing with foreign investments. Although there is no comprehensive empirical data showing this correlation so far and there is debate amongst scholars as to whether investment treaty law can have a transformative impact on governmental conduct and domestic legal and bureaucratic culture,Footnote 89 it is likely that authorities at least in States with a robust governance do assess the risks of international litigation and responsibility when designing measures that may affect foreign investments. This does not necessarily mean that State initiatives in the area will be frozen in a so-called regulatory chill, but rather that they would be shaped in such a manner as to conform to the State’s international obligations. If this is so, it is likely that the availability of an international remedy may end up preventing the occurrence of situations giving rise to disputes.

In its recent Opinion 1/17 on the compatibility of the investor-State dispute settlement mechanisms included in the CETA with EU law, the CJEU also viewed access to international tribunals as a tool aimed at “giv[ing] complete confidence” to investors of one Contracting Party “that they will be treated, with respect to their investments in the territory of the other Party, on an equal footing with the enterprises and natural persons of that other Party, and that their investments in the territory of that other Party will be secure”.Footnote 90 The Court was notably unconvinced by the argument that CETA would create inequality between foreign (in that case, Canadian) and domestic (in that case, EU) investors, reasoning that the two situations are not comparable because domestic investors do not make “international” investments.Footnote 91 Far from considering access to an international remedy as an unfair advantage for foreign investors, the Court appeared to view the grant of preferential procedural rights as a means of leveling the playing field between foreign and domestic investors.Footnote 92 Importantly, the Court also held that “the independence of the envisaged tribunals from the host State and the access to those tribunals for foreign investors are inextricably linked to the objective of free and fair trade” encapsulated in both the EU treaties and the CETA.Footnote 93

In assessing whether it is appropriate to maintain in place or create new international tribunals for the adjudication of investment disputes, States are also likely to consider what the alternatives would be.

First, as skeptics of the existing system have noted,Footnote 94 even in the absence of treaty-based mechanisms it would of course be open to investors to seek to negotiate that their preferred dispute resolution clauses (for instance arbitration) be incorporated in their contracts. However, it is possible that only investors with strong bargaining power vis-à-vis the host State will succeed in obtaining their preferred options, whereas small and medium size investors will not. This would create inequalities between different categories of foreign investors.Footnote 95

A second option would be to resort to the traditional inter-State mechanisms that were available in the pre-investment treaty era, based on diplomatic protection.Footnote 96 However, concerns have been expressed by a number of scholars over the re-politicization of disputes which would ensue as a result of a whole-sale shift to inter-State mechanisms.Footnote 97 It has been argued that “[a]s these cases are not actually located at the inter-state level, they should not be framed as disputes between states”.Footnote 98 In addition, investors would face the known drawbacks linked to diplomatic protection which is “sporadic, arbitrary in its incidence and prone to politicisation, as there is no control over the process or any form of remedy for the individual whose claim is espoused”.Footnote 99 Moreover, “[d]iplomatic relations can only tolerate a limited number of intergovernmental disputes” and many disputes concerning in particular “small and medium-sized enterprises (SMEs) and non-governmental organizations (NGOs), will never be selected for a politicized state-to-state dispute”.Footnote 100 In other words, it is likely that only powerful economic actors, with leverage over their governments, would be able to obtain intervention from their home State,Footnote 101 which would create further instances of inequalities.

Put another way, the grant of an international forum to foreign investors (in the form of arbitration or standing adjudicatory bodies, such as a MIC) by way of treaty levels the playing field between foreign investors that qualify under that treaty, irrespective of their individual leverage vis-à-vis the host State (when seeking to negotiate an international dispute settlement option in a contract) or their home State (when seeking to obtain diplomatic espousal).

Third, serious concerns have also been expressed about the complete removal of access to international mechanisms for foreign investors such that foreign investors would only have access to domestic remedies.

In this respect, States should carefully weigh the costs and benefits of entrusting disputes regarding cross-border investments solely to domestic courts. A thorough comparison between international remedies and domestic remedies should be carried out based on a number of possible parameters, such as costs, duration, efficiency, and independence/neutrality.Footnote 102 Of particular concern to States assessing whether to forfeit entirely recourse to international remedies for investors in favor of domestic courts is likely to be judicial independence, risk of government interference, and neutrality. Annual studies produced by various institutions show that courts in a large number of States still face significant problems with respect to judicial independence or at least with the perceptions of independence.Footnote 103

Furthermore, it has been highlighted that problems of delays and even due process are seen in both developed and developing countries, as is shown by the human rights breaches that are not infrequently found by the various regional human rights courts, for instance the European Court of Human Rights (ECtHR) under Article 6 of the European Convention on Human Rights (ECHR).

Finally, if investment disputes are entrusted solely to domestic courts, it should not be underestimated that in many cases disputes will only be capable of being settled by reference to domestic law, not international law, as in a number of countries IIAs cannot be invoked directly before the local courts.Footnote 104 This means that in the absence of an international dispute resolution mechanism before which the substantive standards contained in IIAs may be invoked, in those countries in which IIAs cannot be directly invoked these standards would become a dead letter.

Two final points should be made. First, despite the fact that investment arbitrations have often made the headlines in the media, it should not be overlooked that the vast majority of disputes between foreign investors and host States are resolved in national courts, rather than before international tribunals.Footnote 105 Thus, continuing to make international dispute settlement available is unlikely to change this fact. Second, acknowledging that there may be continuing reasons to maintain or establish international remedies for investors (whether in the form of arbitral tribunals, with or without an AM, or a standing MIC) in no way prevents States from recalibrating the interplay between domestic courts and international mechanisms as they deem appropriate based on their policy preferences and perceived needs. This is examined in the next sections, which review the interactions between domestic courts and the international mechanisms in the existing system (infra at Chap. 3), and explore the possible interplay in future dispute resolution frameworks (infra at Chap. 4).