The Interplay Between Investor-State Arbitration and Domestic Courts in the Existing IIA Framework

Abstract

This chapter surveys how the inter-relationship between domestic courts and investor-State arbitration plays out in the current investment treaty framework. It first looks at the allocation of jurisdiction over investment disputes between courts and arbitral tribunals. Because multiple fora, national and international, may be empowered to adjudicate what in substance is one and the same dispute, jurisdictional overlaps are bound to occur and have indeed become more frequent. In order to coordinate national and international proceedings, States have devised several models in their IIAs, which respond to different needs and policies. The diverse solutions contained in IIAs include rules on exhaustion of local remedies, domestic litigation requirements short of exhaustion, fork-in-the-road clauses, and waiver provisions. Despite their potential to address jurisdictional overlaps, these clauses could be improved in order to better capture certain undesirable consequences arising from duplicative proceedings in national and international fora. Significant interactions between domestic courts and international tribunals occur also when courts exercise supervisory functions over investment arbitration proceedings, in particular at annulment and enforcement. In a further facet of the interplay, investor-State tribunals scrutinize the decisions of domestic courts when faced with a claim alleging court misconduct.

3.1 Introduction

The interrelation between investment arbitration and domestic courts is complex and versatile, varying from harmonious co-existence to reinforcing complementation, reciprocal supervision and, occasionally, competition and tension. This chapter provides an overview of the different ways in which the inter-relationship between domestic courts and investor-State arbitration occurs in the current IIA framework. It first looks at the allocation of jurisdiction over investment disputes between courts and arbitral tribunals and reviews the ways in which the current IIA framework seeks to regulate the jurisdictional interaction between domestic and international tribunals (infra at Sect. 3.2). Section 3.3 then reviews the role of national courts in support and control of investment tribunals. Finally, Sect. 3.4 provides an overview of the reciprocal scrutiny of investor-State tribunals over the conduct of domestic courts.

As already noted in the introductory remarks (supra in Chap. 1), the main points of intersection between domestic courts and international investment tribunals examined in this study touch on issues of jurisdiction, admissibility, merits, and procedure. The questions reviewed thus extend over almost all aspects of the law of investment protection, both substantive and procedural. Many of these questions are controversial and have often given rise to splits in the jurisprudence. Given the breadth of the issues, the study’s approach is to focus primarily on State practice as reflected in the conclusion of IIAs and the policies underlying the choices reflected in the treaties. By contrast, the study does not systematically deal with the tools available to arbitral tribunals in seeking to coordinate multiple proceedings, e.g. lis pendens, res judicata, or abuse of process.

3.2 Allocation of Jurisdiction Between Investor-State Tribunals and Domestic Courts

3.2.1 Jurisdictional Overlaps Between National and International Courts

Multiple judicial institutions, national and international, may be authorized to adjudicate—i.e. have jurisdiction over—what in substance is one and the same dispute, namely a disagreement about a State measure that has caused certain harm. These jurisdictional overlaps between domestic courts and international tribunals are not confined to investment law; they also occur in other areas of international law.¹ In the field of investment law, they have, however, given rise to particular difficulties and complexities.

A few examples may illustrate the extent of the jurisdictional interactions between national courts and international tribunals in investment law. A first point of jurisdictional contact and potential tension occurs in the adjudication of contract and treaty claims. A foreign investor may enter into an investment contract with the host State or a State-owned entity to regulate the terms of its cross-border investment in the host State. That contract may be governed by a certain substantive law (often the host State’s law) and, of special relevance here, contain a dispute resolution clause providing for the jurisdiction of the host State’s domestic courts or for commercial arbitration with a seat in the host State.

In SGS v. Philippines, for instance, the contract between the Swiss investor and the Philippines contained a choice in favor of the courts of the Philippines. When the Philippines failed to make certain payments under the contract, the investor filed an ICSID arbitration against the State, relying on the dispute resolution clause contained in the Swiss-Philippines BIT and alleging that the Philippines’ conduct breached the BIT standards. Faced with the respondent’s jurisdictional objection that the dispute was purely contractual and thus subject to the Philippines’ courts in accordance with the contract, the ICSID tribunal determined that “justice would be best served if the Tribunal were to stay the [proceedings before it] pending determination of the amount payable [under the contract], either by agreement between the parties or by the Philippine courts in accordance with [the contract]”.² The SGS v. Pakistan dispute presented a similar situation. Here, the contract provided for domestic arbitration in Pakistan. After Pakistan had commenced contractual arbitration in Islamabad, SGS filed an ICSID arbitration under the Swiss-Pakistan BIT. Pakistan argued that SGS’s claim was essentially a claim for breach of contract, which should be submitted to the exclusive jurisdiction of the arbitrator in Pakistan. The ICSID tribunal found that the forum selection clause in the contract did not affect its jurisdiction to adjudicate treaty breaches based on the BIT.³ These examples show the concurrent jurisdiction of domestic courts or commercial arbitral tribunals under the contract, on the one side, and investment treaty tribunals under the treaty on the other, when both categories of adjudicatory bodies are seized of claims that arise out of substantively the same State conduct.

In a second type of overlapping situation, a foreign investor may seek to vindicate its rights for the same allegedly wrongful conduct by the State under both an IIA and domestic administrative or constitutional law. In the dispute between the Swedish State-owned company Vattenfall and the Federal Republic of Germany arising out of the State’s decision to phase out nuclear energy after Fukushima, for instance, Vattenfall brought an ICSID arbitration against Germany under the ECT, which is still pending at the time of writing.⁴ At the same time, Vattenfall’s German subsidiary brought a constitutional complaint (Verfassungsbeschwerde) before the Federal Constitutional Court of Germany (Bundesverfassungsgericht) alleging that the closure of nuclear plants was tantamount to expropriation and that the lack of compensation for the nuclear phase-out required by the German Atomic Energy Act was inconsistent with German constitutional law. In 2016, the German Constitutional Court held that the German legislative measures were “for the most part compatible with the Basic Law” (the German constitution or Grundgesetz) and did not amount to an expropriation, while certain restrictions contained in the law were contrary to the constitutional right to property as they did not provide for compensation.⁵

In Spain, the changes to the regulatory framework in the solar (photovoltaic) energy sector effected through a series of regulatory and legislative measures enacted between 2010 and 2013 triggered a wave of investor-State arbitrations brought by foreign investors against the Kingdom of Spain under the ECT and have resulted, in certain instances, in findings of liability against the Government.⁶ At the same time, investors and other actors complained that the same measures were contrary to Spanish administrative and constitutional law and seized both the Spanish Supreme Court (Tribunal Supremo) and Constitutional Court (Tribunal Constitucional).⁷ Both the investment treaty tribunals and the Spanish courts have thus passed judgment on claims for alleged violations of similar principles of legal certainty and legitimate expectations. These principles were anchored, however, in different legal regimes, namely international law, specifically an IIA, for the investment claims and domestic law, specifically administrative and constitutional law, for the domestic claims.⁸ In an analogous fashion, Italy’s and the Czech Republic’s repeal of incentives granted to renewable energy operators gave rise to both domestic and investment treaty arbitrations. It appears that in the Italian domestic proceedings, petitioners asserted violations not only of Italian administrative and constitutional law, but also of international law, including the ECT and the ECHR.⁹

These few examples show that a State measure or conduct may potentially violate several sources of laws, each with its own system of remedies, and thus potentially open up multiple avenues for redress to aggrieved investors. As a result, international arbitral tribunals routinely examine domestic measures adopted by national governments under investment law standards, while national courts may review those same measures from the perspective of domestic constitutional, administrative, tax or civil law (and, less frequently, also from the perspective of international law if the latter can be directly invoked by private parties before domestic courts).¹⁰ Cases before the national and international courts are not always brought by the same party, but may be pursued by closely related parties (such as shareholders, subsidiaries, parent companies, etc.), either consecutively or simultaneously.

Despite the fact that the disputes brought before these different fora are distinct and formally independent, because the parties are often non-identical, the “cause of action” or legal basis for the claims is different (domestic law v. IIA), and the remedies sought may be distinct (annulment of a regulation, declaration of constitutionality, monetary compensation), the essence of the dispute is often the same in that it bears on the same set of facts or measures and involves the same economic harm. In practice, the multiplicity of remedies poses potential problems of duplication of proceedings, which implies a waste of resources, risks of conflicting factual and legal determinations, and risks of double or multiple recovery, where compensation is an available remedy in the different sets of proceedings.

It should also not be overlooked that when State measures negatively affect an investment, in addition to investment arbitration based on an IIA, private parties may be entitled to bring a claim before a human rights court (e.g., the ECtHR) alleging the violation of human rights, in particular—as far as relevant here—the right to property under Protocol 1 of the ECHR. In Yukos v. Russia, for instance, the claimants in the ECT investment arbitrations and/or certain related parties brought domestic actions before the Russian courts as well as proceedings in the ECtHR.¹¹

Against this background of multiple litigation opportunities, how does the IIA framework deal with the competing jurisdiction of national and international courts over the same dispute (understood in substantive terms) concerning an investment? As will be seen from the following sub-sections, IIAs seek to regulate the allocation of jurisdiction between domestic courts and investment treaty arbitration in two broad ways. The treaty may offer a choice between domestic courts and international arbitration (“alternative” approach) (infra at Sect. 3.2.2) or it may require that domestic remedies be pursued or even exhausted prior to commencing arbitration proceedings (“sequential” approach) (infra at Sect. 3.2.3). Within those broad categories, States have devised several constellations to cater for different policy concerns. Despite a growing awareness of the jurisdictional overlaps between national and international courts, the rules contained in IIAs do not always appear satisfactory. Indeed, they do not always provide for a clear “division of labor” between domestic courts and international tribunals; often they do not cater for the fact that the legal basis and the parties in the two settings may not be the same; and do not clarify whether one forum may (or even must) consider its counterpart’s decision, ultimately leaving these matters to the best judgment of courts and tribunals.

3.2.2 Domestic Courts and International Arbitration as Alternative Fora

IIAs often offer investors an alternative between domestic courts and international investment arbitration. Among other issues, this option raises the question of whether IIAs can be directly invoked by investors before domestic courts (infra at Sect. 3.2.2.1). Furthermore, where the investor has the choice of submitting its investment dispute before the domestic courts or in international arbitration, some IIAs seek to minimize the risk of duplication of proceedings through fork-in-the-road or waiver clauses (infra at Sect. 3.2.2.2).

3.2.2.1 Domestic Courts as a Possible Forum for Disputes Under the IIA?

Regardless of whether an IIA mentions the host State’s domestic courts as a forum for the adjudication of investment disputes between investors and States, those courts would normally be the default forum. Indeed, under usual choice of court rules, the proper forum would be that of the defendant, i.e. the host State, which also happens to be the place where the investment was made.¹² In fact, although there are no precise figures in this respect,¹³ many disputes relating to an investment are resolved before domestic courts by reference to domestic law standards. Where the investor has the option of taking up an arbitration offer contained in an investment treaty, absent other direct arrangements with the State (e.g., an arbitration clause in a contract) the investor remains free to seize the domestic courts of its investment dispute, until it has taken up that offer. When it accepts the offer and consent to arbitration is perfected, limitations to bring the dispute before domestic courts may come into play depending on the applicable legal framework, for instance as a result of Article 26 of the ICSID Convention (which provides that “[c]onsent of the parties to arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy”), or of provisions contained in an IIA, such as a fork-in-the road or waiver clause (on which see infra at Sect. 3.2.2.2).

It is not uncommon for IIAs to mention expressly that domestic courts are a possible forum alternative to the international arbitration options provided under the treaty. The Switzerland-Tajikistan BIT (2009), for instance, provides that in respect of a “dispute with respect to investments between a Contracting Party and an investor of the other Contracting Party”, “the investor may submit the dispute either to the national jurisdiction of the Contracting Party in whose territory the investment was made or to international arbitration”.¹⁴ Other IIAs provide that disputes “concerning an obligation under the treaty” (or similar formulations) can be brought before domestic courts or international arbitration. As an example, the Switzerland-Trinidad and Tobago BIT (2010) sets out that “the investor may submit the dispute [concerning an obligation under this Agreement] either to the courts or the administrative tribunals of the Contracting Party in whose territory the investment has been made or to international arbitration”.¹⁵

In respect of these IIA formulations presenting domestic courts and investment treaty tribunals as adjudicative alternatives, the question arises whether an investor may invoke the substantive standards contained in the IIA before the local courts, rather than merely litigate its dispute by application of domestic law.¹⁶ Whether there is scope for the application of IIAs by domestic courts depends on the text of the treaty and each domestic legal system.

Treaties (or the domestic instruments accompanying their ratification)¹⁷ rarely specify their own domestic law effects.¹⁸ The answer to the question of whether the provisions of an IIA can be relied upon by private parties before domestic courts (or, in the parlance of certain jurisdictions, whether the treaty provides for a “private right of action” or “private cause of action” before the local courts) is thus left to the legal systems of each treaty party.¹⁹

In the United States, for instance, the U.S. Supreme Court has held that “[e]ven when treaties are self-executing in the sense that they create federal law, the background presumption is that ‘[i]nternational agreements, even those directly benefiting private persons, generally do not create private rights or provide for a private cause of action in domestic courts’”.²⁰ Based on this holding, certain U.S. courts have concluded that a private party has no “standing to sue under the treaty” where the treaty in question had “no express language to rebut a presumption against a private right of action”.²¹

Courts of other States, including Switzerland, have resorted to a number of criteria to determine whether provisions in a treaty can be directly invoked by individuals before the domestic courts. The Swiss Federal Tribunal, for instance, requires the provision at issue to be “sufficiently clear and precise so as to serve as the basis of a decision in a specific case”, and “susceptible of application in court”; be concerned with “rights and obligations of private parties”; and “be addressed to the authorities charged with the application of the law” rather than the legislator.²²

If an IIA were to be invoked before the Swiss courts, it would seem that the very fact that the treaty affords the investor an option to file its treaty claims in the domestic courts of the host State in and of itself implies that the treaty standards are susceptible of being applied by a court, regardless of the criteria just referred to. A contrary conclusion would be difficult to reconcile with the State’s undertaking in the treaty “that the investor may submit the dispute concerning an obligation under the IIA either to the courts of the Contracting Party in whose territory the investment has been made or to international arbitration”. It would also be astonishing that domestic courts could not apply treaty standards, for instance because they would be regarded as insufficiently clear or precise, when the same standards are expected to be applied—and are routinely applied—by arbitral tribunals. Because of the very nature of IIAs, which confer rights on private parties and impose obligations on States vis-à-vis these private parties, the same solution should prevail, i.e. domestic courts should be in a position to apply the IIA, even when the treaty does not expressly provide for the possibility to submit claims arising out of the treaty to national courts.

3.2.2.2 Fork-in-the-Road and Waiver Clauses

IIAs may seek to coordinate domestic and international proceedings in respect of the same investment dispute through so-called “fork-in-the-road” clauses and “waiver”/“no U-turn” provisions.²³

Through a fork-in-the-road clause, States wish to make sure that, where the investor has a choice between domestic courts and international arbitration, the investor’s choice once made is final. In other words, if the fork-in-the-road is triggered, the investor may only continue to pursue its claim in the forum to which it has first turned (electa una via, non datur recursus ad alteram).²⁴ In still other words, once the choice is made, the alternative forum becomes exclusive.

Fork-in-the-road clauses may entail different consequences depending on their wording. Some may make the choice of either domestic courts or international arbitration irreversible, whatever forum is seized first. The Switzerland-Colombia BIT, for instance, provides that “[o]nce the investor has referred the dispute to either a national tribunal or any of the international arbitration mechanisms provided for in paragraph 2 above, the choice of the procedure shall be final”.²⁵ Other treaties prescribe that only the choice of domestic courts is final.²⁶ Alternatively, the investor’s choice between international arbitration and domestic court proceedings may be reversible until the first instance domestic court has issued its judgment, but not later.²⁷

The ECT provides for a choice of several fora, including domestic courts and international arbitration. The treaty offers the Contracting Parties the possibility to opt into the fork-in-the-road clause pursuant to Article 26, para. 3(b)(i), and, specifically, to limit their consent to international arbitration only to disputes which the investor has not previously submitted to the domestic courts (or other previously agreed dispute settlement procedure). A number of Contracting Parties, including the European Union, some of its Member States, and Japan, have availed themselves of this possibility and provided written statements under Article 26, para. 3(b)(ii) of their “policies, practices and conditions” in respect of the application of the fork-in-the-road clause.²⁸ With regard to States such as Switzerland who have made no such statement under Article 26, para. 3(b)(ii), the investor’s prior initiation of domestic court proceedings does not prevent the investor from subsequently launching an international arbitration against that State.²⁹

A different type of approach to the coordination of multiple proceedings before domestic and international fora is to include “waiver” or “no-U-turn” clauses. Unlike fork-in-the-road clauses (which make the choice of forum by the investor final), waiver or no-U-turn provisions permit investors to opt for international arbitration after commencing domestic court proceedings in relation to the same measure. However, if the investor decides to submit a claim to international arbitration under the dispute settlement provision in the IIA, it is required to discontinue domestic court proceedings or waive its right to start new such proceedings.

This type of provisions is typically contained in IIAs entered into by the U.S.³⁰ The Switzerland-China BIT also provides that “[a] dispute that has been submitted, in accordance with paragraph (2), to a competent court of the Contracting Party concerned, may only be submitted to international arbitration after withdrawal by the investor of the case from the domestic court”.³¹

In broad terms, fork-in-the-road and waiver clauses pursue the same objectives: avoiding parallel proceedings, which entail duplication of costs, risks of double recovery and of inconsistent outcomes. Despite their common goals, the two types of clauses imply somewhat different policies and entail advantages and disadvantages. Fork-in-the-road clauses are aimed at avoiding that a dispute is litigated first before domestic courts, and then before an international tribunal (or vice versa). Their effect is to prevent, in principle, any duplication of proceedings and thus of costs, because the trigger of one forum automatically entails the loss of access to the other. They may, however, prompt investors to immediately access the international forum, for fear of otherwise losing that option if domestic proceedings are started. Waiver clauses, on the other hand, do not pre-empt nor discourage investors from seeking redress before national courts first, as they leave the investors’ right to access the international forum intact, if for instance the domestic proceedings are deemed unsatisfactory. This may entail a waste of resources if domestic courts are accessed first and then those proceedings are discontinued once arbitration proceedings are commenced. However, because domestic court proceedings may lead to a satisfactory outcome of the dispute, waiver clauses may have the effect of reducing potential investment arbitration claims.

The interpretation of fork-in-the-road and waiver clauses has occupied arbitral tribunals who have been faced with numerous questions concerning their scope of application. In particular, questions as to whether identity is required between parties, object, and cause of action (so-called “triple identity test” transposed from res judicata and lis pendens requirements) in the domestic and international proceedings, have been invariably raised in investment jurisprudence.³² The supposed requirement for an identity of cause of action has proven particularly problematic where the claims under the treaty were linked to contractual claims that had been made before domestic courts.³³

A careful drafting of the clauses may clarify to the benefit of investors and States a number of uncertainties that have emerged in arbitral practice.³⁴ In particular, States may wish to consider the need to phrase fork-in-the-road and waiver clauses in broader terms than are currently provided in many IIAs, so as to cover concurrent or subsequent litigation by closely related parties (thus: not limited to the “same” party) in relation to the same facts or measures (thus: without regard to the legal basis invoked, which is often necessarily different in the two fora), aimed at achieving comparable remedies. In other words, the IIA language should aim at avoiding the limitations resulting from the application of the (too) narrow “triple identity” test, to the extent those limitations are considered inapposite. Furthermore, if States consider it appropriate, rules on coordination may extend beyond regulating domestic court and investment arbitration proceedings and cover overlaps with other international dispute settlement mechanisms providing for direct remedies to private parties (e.g., human right courts).³⁵ Many of the waiver clauses contained in U.S. treaties already contain language that obliges the relevant party to waive or discontinue proceedings “with respect to the measure” not only “before any administrative tribunal or court under the law of any Party” but also before “other dispute settlement procedures”.³⁶

3.2.3 Prior Recourse to Domestic Courts Before Resorting to Investment Arbitration

A number of treaties coordinate domestic and international remedies through a “sequential” approach, by requiring investors to seize domestic courts before accessing the international forum. IIAs may incorporate the traditional exhaustion of local remedies requirement (infra at Sect. 3.2.3.1) or contain prior domestic litigation requirements short of exhaustion (infra at Sect. 3.2.3.2).

3.2.3.1 Exhaustion of Domestic Remedies

Within the field of diplomatic protection, a State “may not bring an international claim in respect of an injury to a national […] before the injured person has […] exhausted all local remedies”.³⁷ Various justifications have been given for the rule.³⁸ In the Interhandel case, the ICJ observed that the rule serves to ensure that “the State where the violation occurred should have an opportunity to redress it by its own means, within the framework of its own domestic system”.³⁹

The rule requires the investor to exhaust any reasonably available remedy before administrative or judicial courts so long as the remedy is not “obviously futile”.⁴⁰ This normally means obtaining the final judgment of the highest court of the host State.⁴¹ In order to satisfy the exhaustion of local remedies requirement, the domestic and international proceedings should be “designed to obtain the same result”.⁴² The form and the arguments of the claims before the domestic and international tribunal may be different, as long as “the essence of the claim has been brought before the competent tribunals and pursued as far as permitted by local law and procedures, and without success”.⁴³

In addition to the field of diplomatic protection, including inter-State claims under FCN treaties,⁴⁴ the rule continues to be applied to individual complaints of international human rights violations.⁴⁵

The rise of IIAs has changed considerably the role of the exhaustion of local remedies rule in investment protection claims. Because IIAs and their dispute settlement rules provide for a direct right of the investor to bring claims against the host State, they are considered to “abandon or relax the conditions relating to the exercise of diplomatic protection, particularly the rules relating to […] the exhaustion of local remedies”.⁴⁶ As noted in the ILC Draft Articles on Diplomatic Protection, the rules on diplomatic protection do not apply “to the extent they are inconsistent with special rules of international law, such as treaty provisions for the protection of investments”.⁴⁷

Within the framework of the ICSID Convention, Article 26 of the Convention provides that:

Consent of the parties to arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy. A Contracting State may require the exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under this Convention.⁴⁸

Article 26 reverses the situation under customary international law: under the Convention, Contracting States waive the requirement of exhaustion of local remedies unless otherwise stated.⁴⁹ The second sentence of Article 26 clarifies that a State may make the exhaustion of local remedies a condition of its consent to arbitration.⁵⁰

A few States have sought to re-instate the exhaustion requirement when acceding to or ratifying the Convention. According to the ICSID website,⁵¹ Israel,⁵² Costa Rica,⁵³ and Guatemala⁵⁴ have made such declarations.⁵⁵

State practice in concluding IIAs shows a diversity of approaches in respect of the exhaustion of local remedies rule. Broadly speaking, IIAs may (1) require exhaustion of local remedies; (2) waive exhaustion of local remedies; or (3) be silent on whether local remedies need to be exhausted prior to commencing arbitration proceedings.

Starting with the first type of treaties,⁵⁶ the requirement to exhaust domestic remedies before resort to international arbitration can in particular be found in early treaties of the 1970s and 1980s.⁵⁷ By contrast, this feature has not appeared in BITs concluded from 2004 to 2012.⁵⁸ One Swiss BIT conditioning consent to arbitration to exhaustion of local remedies “in accordance with international law” is the treaty with Jamaica of 1990.⁵⁹

More recently, the exhaustion rule has re-appeared in treaties of a few States.⁶⁰ Notably, the new Indian Model BIT and a few of the recent treaties entered into by India modelled thereafter,⁶¹ require “exhaustion” of “all judicial and administrative remedies” for 5 years.⁶² Despite being termed as “exhaustion”, the Indian rule is more akin to a prior litigation requirement (on which see infra at Sect. 3.2.3.2) as it does not require the investor to “exhaust” local remedies until the final instance, but calls for litigation of the dispute before the courts for a 5-year period of time.

For those treaties that expressly require exhaustion as a condition to the commencement of arbitration proceedings, the exceptions to the rule under customary international law are likely to apply, i.e. domestic remedies need not be exhausted where they would be “futile” or provide no “reasonable possibility of effective redress”.⁶³ The treaty may, however, provide for different exceptions. For instance, the Indian Model BIT sets forth that domestic remedies need not be exhausted “if the investor or the locally established enterprise can demonstrate that there are no available domestic legal remedies capable of reasonably providing any relief in respect of the same measure or similar factual matters for which a breach of this Treaty is claimed”.⁶⁴ This has been read as giving “effect to the ‘futility’ exception to the exhaustion of local remedies in international law in a limited sense”.⁶⁵

Certain IIAs require exhaustion of local remedies for breaches of some but not other substantive standards. For instance, the Australia-Hungary BIT and the Australia-Poland BIT specify that the investor need not exhaust local remedies before submitting claims of expropriation and nationalization to international arbitration. However, for disputes in relation to other substantive standards of protection, local remedies must be exhausted first.⁶⁶

A second group of treaties expressly waive the exhaustion rule. Such waiver is for instance included in BITs concluded by Austria,⁶⁷ the Belgium–Luxembourg Economic Union,⁶⁸ as well as Central and Eastern European States, such as Armenia, Bulgaria, Czech Republic, Croatia, Moldova, Montenegro and Serbia.⁶⁹ By specifying that exhaustion does not apply, States remove any uncertainty especially for any non-ICSID arbitration options included in the treaty, for which Article 26 of the ICSID Convention would not be applicable.⁷⁰

Finally, the vast majority of treaties are silent on whether domestic remedies need to be exhausted before resort to international arbitration.⁷¹ Amongst those are the majority of Swiss BITs.⁷²

Where the IIA is silent on exhaustion and provides for ICSID arbitration, tribunals have had no difficulty in finding that the customary international law rule on exhaustion does not apply as a consequence of Article 26 of the ICSID Convention.⁷³ Within the non-ICSID context, investment tribunals under the ASEAN,⁷⁴ NAFTA Chapter 11,⁷⁵ the ECT,⁷⁶ the UNCITRAL Rules⁷⁷ and the SCC Rules,⁷⁸ have held that exhaustion of local remedies is not a condition for bringing an investment claim, unless the treaty provides otherwise. This means that in investment arbitration, no matter what arbitration rules govern the proceedings, the customary international rule on exhaustion of local remedies is reversed: the traditional “applicable unless expressly waived” is replaced with “waived unless required”.⁷⁹ Several reasons are given in support of this proposition.

First, as seen above, many IIAs include a fork-in-the-road provision or require a prior waiver of all domestic proceedings as a condition to access investor-State arbitration. These provisions have the effect opposite to the exhaustion of local remedies rule. The choice-of-forum requirements can only be enforced if read as an implied waiver of the local remedies rule.⁸⁰

Second, it is said that one objective of entering into an arbitration agreement is to re-allocate jurisdiction over a dispute from the local courts to the arbitral tribunal. Hence, unless expressly agreed otherwise, an arbitration agreement should not be read as requiring prior resolution in the courts.⁸¹

Finally, investment arbitration was established as a system of direct access for investors to international adjudication alternative to diplomatic protection.⁸² Therefore, some argue that the diplomatic protection principles developed for the invocation of responsibility by a State should not apply to the prosecution of claims by private parties.⁸³

Providing greater scope for the exhaustion of local remedies rule in IIAs in investment arbitration has both supporters and detractors. Those who advocate for a more meaningful role of local remedies before resort to international arbitration argue that the exhaustion requirement would strengthen the rule of law in the host States.⁸⁴ Along the same lines, it is said that the fostering of well-functioning judicial institutions in host States “may ultimately help to remedy some of the host-State institutional deficiencies which [investment arbitration was] designed to address”,⁸⁵ whereas removing investment disputes from the domestic courts discourages local courts from improving the quality of domestic adjudication,⁸⁶ and prevents them “from deciding increasingly important matters”.⁸⁷ Furthermore, deferring an investor-State claim until after domestic courts have resolved the dispute may allow the arbitrator to “benefit from the courts’ characterization of the relevant domestic law”,⁸⁸ in particular, the existence and scope of the property rights.

On the other hand, requiring investors to pursue domestic remedies has been criticized for causing delay and increasing costs,⁸⁹ especially since in many States it can take several years and layers of judicial review to reach a final judgment. According to some, insisting on exhaustion of local remedies would also carry disadvantages for the host State, as “[p]ublic proceedings in the domestic courts are likely to exacerbate the dispute and may affect the host State’s investment climate”.⁹⁰ Furthermore, “once the host State’s highest court has made a decision, it may be more difficult for the government to accept a compromise or a contrary international judicial decision”.⁹¹ The very idea that an investment tribunal has authority to review the decision of the host State’s highest court may indeed lie uneasy with a number of States.

3.2.3.2 Domestic Litigation Requirements Short of Exhaustion

A minority of BITs⁹² “soften” the exhaustion of local remedies rule by subjecting it to a time limit.⁹³ In other words, instead of being required to “exhaust” local remedies, the investor must pursue domestic proceedings for a specified period before it may initiate investor-State arbitration.⁹⁴ For the purposes of the domestic litigation requirement, local remedies may include domestic arbitration.⁹⁵

A few Swiss BITs with Latin American States include a prior domestic litigation requirement, with some variants from one BIT to the other. The BIT with Argentina requires investors to attempt to settle the dispute before domestic courts for a period of 18 months. If the competent courts do not issue a final judgment (“jugement de dernière instance”) within such time period, the investor is entitled to start arbitration proceedings.⁹⁶ The Swiss BIT with Peru also provides a domestic litigation requirement before arbitration proceedings can be started, and specifies that the investor may commence proceedings if “after a period of 18 months there is no decision on the subject matter by the competent national court, or if, existing such a decision, a party to the dispute takes the view that it infringes a provision of [the BIT]”.⁹⁷ The BITs with Chile and Paraguay are somewhat different in that they offer a choice of forum between domestic courts and investment arbitration, without obliging the investor to pursue the one before the other. However, if the investor has opted for domestic courts, it may commence arbitral proceedings “only if after a period of 18 months there is no decision on the subject matter by the competent national court”.⁹⁸

Similar variations can be observed in BITs entered into by other countries.⁹⁹ The time period during which the investor is required to pursue domestic remedies varies from 3 months¹⁰⁰ to several years.¹⁰¹ Commonly, the investor is required to pursue domestic proceedings for 18 months.¹⁰² Some BITs require pursuit of local remedies without a precise time limitation.¹⁰³

Arbitral tribunals have applied prior domestic litigation requirements on a number of occasions. Where the investor had started arbitration proceedings without complying with the domestic litigation requirement under the treaty, tribunals have taken different views as to whether the investor could dispense with this requirement in circumstances where domestic remedies would have been futile or would not have allowed a decision to be reached within the prescribed time limit.¹⁰⁴

The rationale for the prior domestic litigation requirement is similar to the one underlying the exhaustion of local remedies rule, in that it is aimed at giving the host State an opportunity to redress the wrongful act internally before the dispute is elevated internationally. However, prior domestic litigation requirements have also attracted criticism. For instance, in Plama v. Bulgaria, the tribunal described the requirement to undertake a reasonable effort in domestic courts as “nonsensical from a practical point of view”.¹⁰⁵ Critics of domestic litigation requirements have argued that the established timeframe is normally too short to enable a meaningful outcome before the local courts.¹⁰⁶ Therefore, for the investor, compliance with this requirement is a mere formality that increases the cost and the duration of the dispute settlement.¹⁰⁷

By contrast, others contend that “[r]estoring a local remedies rule that includes a reasonable, but strict time-frame for those remedies to ensue, […] while still maintaining a right for an individual to bring a claim directly should those remedies fail, has the potential to balance the rights of investors against the rights of state parties”.¹⁰⁸

3.2.3.3 Resort to Local Remedies as a Possible Element of Substantive Standards

Resort to local remedies as discussed in the previous two sub-sections is a condition to the jurisdiction of an arbitral tribunal or the admissibility of the claims. It should be distinguished from the situations in which resort to domestic proceedings by a claimant investor has been found to be a condition for the violation of a substantive standard of protection.¹⁰⁹ This point is addressed briefly here for the sake of completeness.

There is consensus that exhaustion of local remedies is a required substantive element of a claim for denial of justice.¹¹⁰ Beyond denial of justice claims, certain arbitral tribunals have required the claimant investor to resort to local courts to establish violations of other standards of protection. In a number of cases, this requirement has been used to preclude claims for indirect expropriation.¹¹¹ In its analysis on expropriation, the tribunal in Generation Ukraine, for instance, observed that:

[…] it is not enough for an investor to seize upon an act of maladministration, no matter how low the level of the relevant governmental authority; to abandon his investment without any effort at overturning the administrative fault; and thus to claim an international delict on the theory that there had been an uncompensated virtual expropriation. In such instances, an international tribunal may deem that the failure to seek redress from national authorities disqualifies the international claim, not because there is a requirement of exhaustion of local remedies but because the very reality of conduct tantamount to expropriation is doubtful in the absence of a reasonable – not necessarily exhaustive - effort by the investor to obtain correction.¹¹²

Certain tribunals have also found resort to local remedies relevant for the analysis under the fair and equitable treatment (FET) and full protection and security standards.¹¹³ In those decisions, the investor was required to show that the host State through its whole process of State function,¹¹⁴ rather than isolated acts, had unfairly denied the investor its right to a properly functioning system presenting adequate remedies.¹¹⁵

Other tribunals have taken a different view and have not required resort to local remedies as a substantive element of alleged breaches other than denial of justice.¹¹⁶ Certain commentators have also been critical of the suggestion that violation of substantive international standards has occurred only after redress has been sought through the local courts.¹¹⁷ The annulment committee in Helnan v. Egypt set aside the holding from the investment tribunal “which, while disclaiming a requirement of exhaustion of local remedies before ICSID arbitral recourse may be implemented, nevertheless accepts that challenge by [the claimant] of the decision to terminate its [contract] in competent Egyptian administrative courts was required in order to demonstrate the substantive validity of its claims”.¹¹⁸ In so doing, it explained that:

A single aberrant decision of a low-level official is unlikely to breach the standard unless the investor can demonstrate that it was part of a pattern of state conduct applicable to the case or that the investor took steps within the administration to achieve redress and was rebuffed in a way which compounded, rather than cured, the unfair treatment.

But it is an entirely different matter to impose upon an investor, as a condition [for an international wrong] a requirement that the decision of a [governmental organ] must in turn be challenged in the local courts.¹¹⁹

For the annulment committee, imposing an effort in domestic courts for the perfection of a substantive breach would introduce “by the back door that which the [ICSID] Convention expressly excludes by the front door”.¹²⁰

3.2.4 Conclusive Remarks

In sum, in seeking to coordinate domestic and international arbitration proceedings, IIAs have essentially followed either a sequential or alternative approach. The sequential approach, implying the prior use or even exhaustion of local remedies, postulates the priority of domestic courts and, according to some, perhaps a belief in the greater effectiveness of national courts in resolving disputes or in the desirability of litigation at the international level after a judicial process has already been pursued or completed at the national level.¹²¹ However, exhaustion or domestic litigation requirements ultimately leave the door open to investment arbitration. By contrast, the alternative approach starts from the idea that domestic courts and investment arbitration are equivalent (at least in theory), leaves the choice of forum to the claimant-investor once the dispute has arisen, and then provides rules to avoid overlaps between the two proceedings.

In spite of these attempts, the lex lata is not always able to capture the complexity of the interactions deriving from the fact that, although identical in substance as well as in economic terms, the dispute before the two fora is often not the “same” in strict legal terms (the parties sometimes and most often the legal basis of the claims being different). Hence, de lege ferenda and to the extent that States consider it their policy to discourage multiple proceedings about the same measure, fork-in-the-road and waiver clauses should be phrased more broadly and cater for these situations.

3.3 Domestic Courts in Support and Control of Investor-State Arbitral Tribunals

Once an investor has started or intends to start arbitration proceedings, courts can have important supervisory functions over the arbitration process or, otherwise said, they can support or control the arbitration in multiple ways. In this context, a significant distinction exists between an investment arbitration conducted under the ICSID Convention (herein below, “ICSID arbitration” for brevity) and one conducted under any other rules, such as the ICSID Additional Facility (AF), UNCITRAL, ICC, SCC Rules, and others (“non-ICSID arbitration”). In the case of ICSID arbitration, the Washington Convention establishes a “delocalized” procedural framework,¹²² governed exclusively by public international law. In ICSID arbitration, the arbitration law of the seat (or lex arbitri) plays no role and national courts have no jurisdiction in aid or control of the arbitration. In other words, the “self-contained” process which States designed under the ICSID Convention is geared towards making arbitration independent of domestic courts.¹²³ This entails that any aspects of the arbitral process (appointment of arbitrators, challenges, annulment, revision, etc.) is addressed within the machinery of the Centre established by the ICSID Convention.

By contrast, non-ICSID investor-State arbitrations do not benefit from this “delocalization” and, like international commercial arbitrations, are subject to a national lex arbitri. For non-ICSID arbitrations, the role of courts in support and control of investment arbitrations is thus potentially much more significant. Non-ICSID arbitrations seated in Switzerland are governed by Chapter 12 of the Swiss Federal Private International Law Act (PILA)¹²⁴ and subject to the jurisdiction of the courts of the seat as juge d’appui and of the Swiss Federal Tribunal for annulment actions. They are thus submitted to the same regime as international commercial arbitrations with a seat in Switzerland.

As mentioned at the outset of this study (see supra in Chap. 1), Switzerland has been traditionally one of the most chosen seats for international arbitration in general, including non-ICSID investment arbitrations, due to, inter alia, the country’s reputation for neutrality and stability as well as the legislation’s and the judiciary’s pro-arbitration approach. In the last few years, there has been an increase in Swiss-seated investment treaty arbitrations, a trend which may well continue especially for intra-EU disputes as a result of the uncertainties arising from the judgment by the CJEU in Achmea.¹²⁵ An increase of Swiss-seated arbitrations means, in turn, a potentially greater involvement of the Swiss Federal Tribunal with investment matters, as can already be observed from the growing number of set aside applications of investment awards brought before the Swiss Federal Tribunal (see infra Table 3.1, at Sect. 3.3.4, Annulment proceedings of investment awards).

Table 3.1 Annulment proceedings of investment awards before the Swiss Federal Tribunal (Tribunal Fédéral or “TF”)

The following sections provide an overview of the situations in which domestic courts may rule on investment arbitration matters.

3.3.1 Enforcement of Arbitration Agreement

In a first type of situation, a party may submit a dispute to a domestic court notwithstanding the existence of an agreement between the parties to submit such dispute to investment arbitration. It is most likely that the defendant in the domestic court proceedings will then raise a defense of lack of jurisdiction on the basis of the arbitration agreement, or exceptio arbitri.

In non-ICSID investment arbitrations, domestic courts of State Parties to the New York Convention (NYC)¹²⁶ have a duty to decline jurisdiction, in accordance with Article II, para. 3, of the Convention, which provides that “the court of a Contracting State, when seized of an action in a matter in respect of which the parties have made a [valid arbitration] agreement, shall, at the request of one of the parties, refer the parties to arbitration unless it finds that the said agreement is null and void, inoperative or incapable of being performed”. Article 7 of the PILA provides for a similar rule.¹²⁷

An analogous result is reached in ICSID arbitrations by operation of the exclusivity rule contained in Article 26 of the ICSID Convention. As explained by George Delaume:

[…] If a court in a Contracting State [to the ICSID Convention] becomes aware of the fact that a claim before it may call for adjudication under ICSID, the court should refer the parties to ICSID to seek a ruling on the subject. Until such a ruling is made, if the possibility exists that the claim may fall within the jurisdiction of ICSID, the court must stay the proceedings pending proper determination of the issue by ICSID.¹²⁸

Courts of a number of countries, including Swiss courts, have recognized these rules when seized of disputes for which an investment arbitration clause was operative.¹²⁹ In MINE v. Guinea, for instance, in the context of attachment proceedings of an arbitral award rendered under the aegis of the American Arbitration Association, notwithstanding the parties’ agreement to refer their disputes to ICSID arbitration, the Swiss Federal Tribunal acknowledged the exclusivity of ICSID proceedings by virtue of Article 26 of the ICSID Convention.¹³⁰ In the subsequent proceedings before the Geneva Court of First Instance, the Court also affirmed the exclusive character of consent to ICSID arbitration in the following terms:

According to the [contract], the parties agreed to submit their differences to ICSID. Proceedings initiated by MINE on 7 May 1984 are now pending before the ICSID Arbitral Tribunal. According to Article 26 of the [ICSID Convention], the consent of the parties to arbitration under the Convention is, unless otherwise agreed, considered as implying a waiver of all other remedies. As Switzerland has ratified the Convention it is now part of Swiss law. It should be recognized that, in referring to this Court, the applicant is not acting in conformity with Article 26 of the Convention. […] Since the request which MINE has filed with the Court is contrary to the exclusive nature of ICSID arbitration as provided in Article 26 of the Washington Convention of 18 March 1965, MINE cannot appear before this Court.¹³¹

The subsequent decision by the Supervisory Authority of the Office des Poursuites for the Enforcement of Debts and Bankruptcy of Geneva also relied on Article 26 of the ICSID Convention when rejecting MINE’s attempt to maintain the attachments.¹³²

In other cases, domestic courts were asked to enjoin parties from instituting or continuing ICSID proceedings notwithstanding a prima facie valid consent to ICSID arbitration. In those instances, where a prima facie valid consent to arbitration exists, it would not be permissible for a court to enjoin a party from pursuing the investment arbitration. In Attorney-General v. Mobil Oil NZ Ltd, for instance, the New Zealand Government commenced proceedings in its courts to seek to enjoin the investor from continuing to refer the dispute to ICSID in accordance with the agreement entered into by the parties. The High Court of New Zealand found that under the contract, either party was entitled to refer the dispute to ICSID and stayed the domestic proceedings until the ICSID tribunal had determined its jurisdiction.¹³³ This being so, domestic courts do not always pay deference to Article 26 of the ICSID Convention in this fashion. For instance, in the dispute between SGS and Pakistan, Pakistan commenced domestic arbitration proceedings in Pakistan pursuant to the dispute settlement clause contained in the contract, while SGS subsequently started ICSID proceedings under the Swiss-Pakistan BIT.¹³⁴ Each party then applied to the Pakistani courts for injunctions to restrain the other party from pursuing their chosen arbitration option.¹³⁵ The Supreme Court of Pakistan ultimately granted Pakistan’s request to proceed with the contract arbitration and “restrain[ed] [SGS] from pursuing or participating in the ICSID arbitration”.¹³⁶

It should also be noted that in several instances where a domestic court has been seized by a party in an attempt to circumvent investment arbitration proceedings, investment tribunals have been requested to issue provisional measures to restrain that party from initiating or continuing proceedings in another forum, be they arbitration, civil, criminal, bankruptcy, or enforcement proceedings.¹³⁷

There is abundant practice of arbitral tribunals granting interim relief to enjoin parallel domestic litigation. A study of all the known provisional measures decisions issued by ICSID tribunals between 1972 and 2009 shows that over 50% of those decisions concerned a request to enjoin parties from pursuing parallel domestic proceedings.¹³⁸ Provisional measures seeking to restrain a party from commencing or continuing parallel domestic litigation are usually requested by the investor, although in certain cases they have also been sought by the State.¹³⁹ In essence, investment tribunals have found justification for the issuance of interim relief (sometimes in the form of an “anti-suit injunction”),¹⁴⁰ in the exclusive remedy rule of Article 26 of the ICSID Convention (where such provision was applicable), and/or in the need to protect the tribunal’s jurisdiction, the integrity of the arbitration proceedings, or in the prohibition of aggravating the dispute.¹⁴¹

To limit the discussion to two examples in relation to the court proceedings mentioned above, in the dispute between MINE and Guinea,¹⁴² the ICSID tribunal recommended that MINE terminate any proceedings in connection with the dispute and any attachment and provisional measures pending in national courts.¹⁴³ Both the Geneva Court of First Instance and the Geneva Bankruptcy Supervision Authority referred to the provisional measures issued by the ICSID tribunal in their decisions giving precedence to ICSID arbitration based on Article 26 of the ICSID Convention.¹⁴⁴

Regarding concurrent arbitration proceedings, in SGS v. Pakistan, SGS requested the ICSID arbitral tribunal to recommend “that the Islamabad-based arbitration pending between SGS and Pakistan be stayed”.¹⁴⁵ Finding that SGS had “a prima facie right to seek access to international adjudication under the ICSID Convention”,¹⁴⁶ the tribunal considered it its “duty to protect this right”.¹⁴⁷ It thus recommended that Pakistan inform all the relevant domestic courts of the current standing of the ICSID arbitration and ensure that no action be taken to hold SGS in contempt of court. In parallel, the tribunal also recommended that local arbitration proceedings be stayed until the tribunal decided on its jurisdiction.¹⁴⁸ By contrast, it rejected a broader request for an injunction refraining Pakistan from commencing or participating in proceedings relating in any manner to the ICSID arbitration. This latter request was deemed to restrain the ordinary exercise of Pakistan’s normal process of justice.¹⁴⁹

These types of incidents of court- and tribunal-issued injunctions display a tangible tension between international tribunals and domestic courts where both adjudicative institutions purport to assert jurisdiction over matters relating to the dispute. If these matters are the merits of the investment dispute and there is a valid (or prima facie valid) investor-State arbitration agreement, then the jurisdiction of the investment tribunal should prevail. This is not necessarily correct when the matters at issue are merely ancillary to the dispute, such as provisional or interim relief. Article 26 of the ICSID Convention will, in principle, bar the jurisdiction of domestic courts also in this context.¹⁵⁰ The position in non-ICSID arbitrations will depend on any specific IIA provision, the lex arbitri, or the applicable arbitration rules. Be that as it may, the issuance of an antisuit injunction always requires careful balancing of a number of principles at play, including the principle of competence-competence of courts and tribunals, which is a general principle of procedure,¹⁵¹ and the States’ sovereignty to exercise their powers to conduct national proceedings within their territory.¹⁵² The latter is particularly pertinent when the local proceedings which are sought to be enjoined are criminal proceedings.¹⁵³

3.3.2 Assistance with the Arbitral Process (Appointment of Arbitrators, Decision on Challenges, etc.)

Difficulties may arise in the course of the arbitration proceedings if, for instance, a party fails to perform certain steps, such as appointing its arbitrator. Due to its insulated nature, ICSID arbitration does not require assistance from the courts. Rather, any difficulties in the course of the proceedings are resolved by the Centre, which may be called upon to assist with the appointment of arbitrators, rule on proposals for disqualification, and the like.

In non-ICSID arbitrations which are subject to a national lex arbitri, courts have, at least in theory, a greater role to play in these matters. Most national arbitration laws provide that the parties or the arbitral tribunal may request the assistance of the courts in the event of difficulties. Under Swiss law as well as other legal systems (notably, France),¹⁵⁴ the court called upon to act in this capacity is often referred to as juge d’appui, emphasizing that the court acts in support of the arbitration.¹⁵⁵ Assistance may be required in connection with the constitution of the arbitral tribunal if a party refuses to appoint an arbitrator or to participate in the appointment of a sole arbitrator, if the two parties cannot agree on a sole arbitrator or if the two party-appointed arbitrators cannot agree on the tribunal’s president. Support from the judge at the seat may also be required in respect of resolving a challenge to arbitrators and other types of actions. Swiss law provides for such assistance in Articles 179, para. 2, and 180, para. 3, PILA.

In practice, however, courts rarely have to step in to assist disputing parties with the matters just referred to. Most non-ICSID arbitrations are conducted pursuant to institutional (e.g., ICC or SCC) or non-institutional (e.g., UNCITRAL) arbitration rules that entrust either an arbitral institution or another appointing authority with support functions. By submitting to arbitration under those rules, parties agree to resort to that arbitral institution or appointing authority for support. As a result, the rules contained in the arbitration laws of most countries providing for the court’s role as juge d’appui, which apply only in the absence of party agreement, are not triggered. To give an example, in an investment treaty arbitration conducted under the UNCITRAL Rules, difficulties arising with the constitution of the tribunal and challenges to arbitrators will be resolved by an appointing authority chosen by the parties or, in the absence of such a choice, designated by the PCA.¹⁵⁶ The PCA’s practice in investment cases appears to be to designate individuals as appointing authorities.¹⁵⁷ Although rare in practice, the appointing authority chosen by the parties or designated by the designating authority could in theory also be a domestic court.¹⁵⁸

In addition to matters concerning the appointment and replacement of arbitrators, the assistance of the courts may be requested whenever a compulsory order is required in connection with the conduct of the proceedings (Article 185 PILA), in particular with respect to the taking of evidence (Article 184, para. 2 PILA), for instance to summon a witness who refuses to appear before the arbitral tribunal or to compel a third party to produce documents (section 1782 of Title 28 of the United States Code).

3.3.3 Provisional Measures Issued by Courts

There may be instances where a party wishes to seek interim relief from domestic courts, for example if the tribunal is not yet constituted or if it is constituted but has no jurisdiction to grant the requested measures, or when a measure is directed at a third party, or a court-ordered measure is deemed more efficient.¹⁵⁹

In the ICSID context, as already mentioned, Article 26 of the Convention provides that, unless otherwise stated, consent to ICSID arbitration is given to the exclusion of any other remedy.¹⁶⁰ It was initially debated whether this exclusion applied to interim relief which a party would request before domestic courts.¹⁶¹

In 1984, Arbitration Rule 39, para. 6 (formerly Rule 39, para. 5) was introduced to clarify that, except when otherwise stipulated, the parties waive their right to seek interim measures of protection in domestic courts, whether before or after the institution of the ICSID proceedings. For this rule not to apply, the parties must have stipulated so in the agreement recording their consent, namely in the arbitration clause, be it in a contract,¹⁶² national legislation, or a treaty. An illustration of such a stipulation in an IIA can be found in NAFTA Article 1121.¹⁶³ Arbitration Rule 39, para. 6 is a further illustration of the insulated nature of ICSID proceedings.

By contrast to the Arbitration Rules for arbitrations under the ICSID Convention, Article 46 of the ICSID AF Arbitration Rules expressly authorizes the parties to request assistance from local courts to obtain interim relief. Article 46, para. 4 specifies that, by doing so, the parties are not infringing upon the agreement to arbitrate or affecting the powers of the arbitral tribunal. This feature is explained by the absence of an insulated mechanism in the AF Rules and the fact that AF arbitration is generally subject to a national legal order.¹⁶⁴ Similarly, in the UNCITRAL context, Article 26, para. 3 of the 1976 Arbitration Rules and Article 26, para. 9 of the 2010 Arbitration Rules allow the parties to seek interim relief from domestic courts. Such action is not seen as a breach or waiver of the agreement to arbitrate.

3.3.4 Annulment Proceedings

Annulment of awards is another area where there is a remarkable difference between ICSID and non-ICSID arbitration. The ICSID Convention offers its own self-contained system of review of awards, whereby an ad hoc annulment committee reviews awards based on the grounds for annulment listed in Article 52 of the Convention. Thus, any role for national courts in the annulment of ICSID awards is excluded by the Convention.

Awards rendered in non-ICSID arbitrations, by contrast, are subject to the post-award remedies provided by the law of the seat of the arbitration.¹⁶⁵ Annulment (or set aside or vacatur) is thus the area which perhaps showcases the most important role for domestic courts in respect of non-ICSID arbitrations. National arbitration laws follow a variety of approaches in setting out the grounds upon which an arbitral award can be set aside, the standard of review to be followed by the domestic courts, the number of layers of review (one, two, and in certain States even three instances) and the courts competent to review annulment applications. Generally speaking, a comparative analysis of the most important arbitration laws of the world shows that challenges against arbitral awards may only be brought on the basis of a few, narrowly defined grounds of an essentially procedural nature, which include lack of jurisdiction, irregular constitution of the tribunal and lack of impartiality and independence of its members, breach of due process, and public policy (which is the only ground allowing a limited review of the merits). In other words, annulment is concerned with the integrity of the proceedings and not the correctness of the decision.

In Switzerland, non-ICSID arbitral awards can be set aside based on one of the grounds listed in Article 190 of the PILA by the Swiss Federal Tribunal.¹⁶⁶ As a result of the growing importance of Switzerland (in particular, Geneva) as a seat of investment arbitrations, the Swiss Federal Tribunal has been seized with a good number of applications for the set aside of investment awards in the last 20 years. In line with the approach followed in other jurisdictions, the Swiss Federal Tribunal admits challenges against non-ICSID awards rendered in disputes arising under investment treaties, when the conditions set out in Chapter 12 of the PILA are fulfilled and according to Article 77 of the Federal Tribunal Act.¹⁶⁷

Swiss law allows parties to waive their right to seek the annulment of the award, provided the parties lack any territorial connection with Switzerland and the expression of their intent to exclude annulment proceedings meets certain form requirements.¹⁶⁸ According to the Swiss Federal Tribunal, the parties must clearly and unambiguously state their intent to waive the right to challenge the award in accordance with Article 190, para. 2 PILA.¹⁶⁹ In a decision dealing with the award on jurisdiction in Saluka v. The Czech Republic, the Swiss Federal Tribunal had an opportunity to discuss an alleged waiver in a BIT, specifically in Article 8, para. 7 of the Dutch-Czech BIT. That provision stipulates that the decision of the arbitral tribunal “shall be final and binding upon the parties to the dispute”.¹⁷⁰ In reliance on the interpretation rules in the Vienna Convention on the Law of Treaties (“VCLT”) as codification of customary international law because it was not directly applicable, the Court came to the same result as in commercial arbitrations with similar wording and held that the waiver was invalid.¹⁷¹ It considered that the “final and binding” language did not rule out a remedy such as annulment which was said to be limited to “the most severe defects”.¹⁷² It also found support in Article 53, para. 1 of the ICSID Convention, which provides that ICSID awards are “binding on the parties”, a characteristic that does not rule out the availability of an annulment mechanism. While it is conceivable that the parties may contractually waive their right to seek annulment of the award in terms that fulfil the form requirements of Article 192, para. 1 of the PILA,¹⁷³ IIAs do normally not contain such express language and thus the application of Article 192, para. 1 PILA to non-ICSID investment arbitrations appears limited.

Table 3.1 summarizes all the known investment treaty arbitrations for which an action to set aside has been brought before the Swiss Federal Tribunal.¹⁷⁴ None of the cases decided thus far concerned a Swiss BIT (and thus, a Swiss party), which is unsurprising given that the seat is often chosen as a neutral venue between the disputing parties. Thus far, the Swiss Federal Tribunal has never upheld an application to annul an investment award, which is in line with its pro-arbitration attitude.

3.3.5 Enforcement

The last situation in which a domestic court may be faced with investment arbitration matters is in connection with a request to enforce an arbitral award.¹⁷⁵ Once again, the role of courts in the enforcement of ICSID and non-ICSID awards must be distinguished.

Pecuniary obligations imposed by awards issued in ICSID arbitrations benefit from a special treatment in the sense that they require no enforcement under the NYC (on which see below). Indeed, pursuant to Article 54, para. 1 of the ICSID Convention, ICSID Contracting States, including Switzerland, are committed to enforce the award “as if it were a final judgment of a court in that State”.¹⁷⁶ This means that a domestic court or authority before which execution (as opposed to enforcement) of an ICSID award is sought is restricted to ascertaining the award’s authenticity¹⁷⁷ and to any execution requirements and defenses under national law (e.g. the defense of prior payment of the award). This is yet another feature of the “self-contained” ICSID Convention system.

Enforcement of non-ICSID awards is governed by the national law of the State where enforcement is sought and by the NYC.

In Switzerland, one must distinguish between awards rendered in and outside of Switzerland. For the former, the position under Swiss law is quite unique in comparative law terms, given that arbitral awards rendered in Switzerland are assimilated to court judgments without any further formalities.¹⁷⁸ Where the parties have validly waived the right to challenge the award in accordance with Article 192, para. 1 PILA (which is an unlikely scenario in investment treaty arbitration, as observed above), the losing party will be able to rely on the grounds for refusal of enforcement under Article V of the NYC, in accordance with Article 192, para. 2 PILA.

On the other hand, enforcement in Switzerland of non-ICSID awards rendered outside of Switzerland is subject to the NYC. By providing that “the recognition and enforcement of foreign arbitral awards are governed by the New York Convention of 10 June 1958 on the recognition and enforcement of foreign arbitral awards” (Article 194 of the PILA), and withdrawing its reciprocity reservation, Switzerland made the recognition and enforcement of all awards rendered outside of Switzerland subject to the NYC, even when they were rendered in a country that is not a Contracting State of the NYC.¹⁷⁹

To be enforceable under the NYC, the decision at issue must be an arbitral award within the meaning of the NYC and, in particular, it must be “foreign”, i.e. “made in the territory of a State other than the State where the recognition and enforcement […] are sought” (Article I, para. 1, NYC). From the point of view of Swiss law, an arbitral award is “foreign” if it emanates from a tribunal whose seat was outside Switzerland.¹⁸⁰ There will thus normally be no difficulty for courts in determining that non-ICSID investment awards rendered in arbitration seated abroad fulfil this requirement. For the avoidance of doubts, certain IIAs specify that a disputing party may seek enforcement of an arbitration award rendered on the basis of the IIA “under […] the New York Convention”.¹⁸¹ Treaties may further stipulate that “[a] claim that is submitted to arbitration under [the IIA] shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention”,¹⁸² which specification is made in light of the fact that Article I, para. 3, of the Convention allows States to make a declaration to the effect that they “will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration”.¹⁸³

In reviewing an investment award under the NYC, domestic courts, including Swiss courts, will be bound by the exclusive grounds for non-recognition and non-enforcement listed in Article V of the Convention. Article V NYC includes grounds that relate to the tribunal’s jurisdiction, namely the validity of the arbitration agreement, including arbitrability, form, and the parties’ capacity to submit to arbitration, as well as grounds covering the fundamental principles of procedure, irregularities in the tribunal’s composition, ultra petita awards, and public policy.

Finally, domestic courts may be faced with the application of the rules on immunity of States from execution, which are left intact in the enforcement of both non-ICSID and ICSID awards.¹⁸⁴ Issues of immunity often arise when alleged State assets located in Switzerland are attached in order to satisfy the award.

Generally speaking, a Swiss court seized with an application to execute an investment treaty award against sovereign States would grant the application if three requirements are met: (1) the State has not acted as a sovereign (“iure imperii”) in the legal relationship which underlies the claim giving rise to the award, but has acted as the holder of private rights (“iure gestionis”); (2) the assets targeted by the execution measures are not to be assigned to tasks which are part of the foreign State’s duty as a public authority, and are thus not excluded from execution proceedings pursuant to Article 92, para. 1 of the Federal Act on Debt Collection and Insolvency (DEBA); and (3) the transaction out of which the claim against the foreign State arises must have a sufficient connection to Switzerland (in German: “Binnenbeziehung”; in French “rattachement suffisant”).¹⁸⁵

In the ICSID AF case of Sistem Muhendislik Insaat Sanayi ve Ticaret A.S. v. Kyrgyz Republic, the claimant sought to attach claims held by the International Air Transport Association (IATA), seated in Geneva, against the respondent State for charges for surveillance of national airspace. In a decision of 2011, the Swiss Federal Tribunal rejected an appeal against the lower court’s decision that had refused execution on the grounds that the surveillance of national airspace was a sovereign task, and hence de iure imperii. Charges levied for this task were thus exempted from attachments pursuant to Article 92 DEBA.¹⁸⁶

The Swiss Federal Tribunal’s decision of 7 September 2018 concerning the enforcement of an UNCITRAL investment treaty award against Uzbekistan marks a rare instance of the application of the Binnenbeziehung doctrine to an investment treaty award.¹⁸⁷ In application of this doctrine, the Swiss Federal Tribunal declined to enforce the award against the Republic of Uzbekistan, on the grounds that the underlying dispute presented no “substantial link” with Switzerland.¹⁸⁸ The Court considered that the requirement was a “rule of procedure” imposed by Swiss law, and observed that Article III of the NYC makes it clear that “each signatory state permits arbitral awards to be enforced in line with the procedural requirements of the sovereign territory in which enforcement of the arbitral award is being sought”.¹⁸⁹ The decision of the Federal Tribunal should be viewed in light of the limited scope of review available to it in the attachment proceedings at issue.¹⁹⁰ Indeed, the Federal Tribunal expressly left open “what findings [it] would reach if it was called to rule upon an appeal from a res judicata decision on the recognition and enforcement of a foreign arbitral award made against a foreign state without limiting the power to review”.¹⁹¹ Be that as it may, where enforcement of a foreign award is governed by a treaty such as the NYC, the application of a “substantial link” requirement appears, in the authors’ view, incompatible with Switzerland’s international obligations under the Convention, which makes no provision for this requirement. Article III NYC deals with procedure in the strict sense of the word and does not allow to add requirements (such as the “substantial link” requirement) which ultimately result in expanding the exhaustive list of grounds contained in Article V.¹⁹²

3.4 State Liability: Investment Tribunals Reviewing Domestic Court Conduct

This chapter provides an overview of the main instances in which investment tribunals review the conduct of domestic courts for the purposes of establishing a violation of international law.¹⁹³

A State can be held liable for violations of international law incurred as a result of a decision of a national court. Pursuant to Article 4, para. 1, of the ILC Draft Articles on State Responsibility, courts are organs of the State as are its parliament and the government:

The conduct of any State organ shall be considered an act of that State under international law, whether the organ exercises legislative, executive, judicial or any other functions, whatever position it holds in the organization of the State, and whatever its character as an organ of the central Government or of a territorial unit of the State.

Thus, in principle, it is possible for investment treaty tribunals to review whether conduct by State courts can violate international law and specifically the treaty standards contained in the IIA. They do so under the main heading of “denial of justice” (infra at Sect. 3.4.1) as well as under other treaty guarantees (infra at Sect. 3.4.2). One area that has given rise to a number of awards recently deals with court decisions in the field of commercial arbitration (infra a Sect. 3.4.3).

3.4.1 Denial of Justice

Typically, domestic court conduct may be reviewed under the “denial of justice” standard, an old institution of customary international law, which is concerned specifically with the conduct of courts. There is general consensus that denial of justice is one of the sub-elements of the FET standard contained in most IIAs.¹⁹⁴

A claim for denial of justice may be asserted only after all available means offered by the State’s judiciary have been exhausted. The rationale for requiring exhaustion of remedies as a substantive element of a denial of justice is that as long as the domestic legal system is still reviewing the case (within a reasonable timeframe), justice cannot yet be regarded as denied.¹⁹⁵ Typically, investment tribunals set a demanding test for a showing of denial of justice. So for instance, the ICSID tribunal in Philip Morris v. Uruguay:

As held by one decision, “[a] denial of justice implies the failure of a national system as a whole to satisfy minimum standards.” The high standard required for establishing this claim in international law means that it is not enough to have an erroneous decision or an incompetent judicial procedure, arbitral tribunals not being courts of appeal. For a denial of justice to exist under international law there must be “clear evidence of … an outrageous failure of the judicial system” or a demonstration of “systemic injustice” or that “the impugned decision was clearly improper and discreditable.”¹⁹⁶

Thus, investment treaty tribunals do not acts as an additional appeal level reviewing domestic court rulings on the merits.¹⁹⁷ Their function “is not to correct errors of domestic procedural or substantive law which may have been committed by the national courts”.¹⁹⁸ To succeed with a claim that the host State courts have denied an investor justice, the investor needs to demonstrate that “the relevant courts refuse[d] to entertain suit, […] subject[ed] it to undue delay, or […] administer[ed] justice in a seriously inadequate way”.¹⁹⁹ A misapplication of the law will not suffice, unless it can be shown that such misapplication was “clear and malicious”.²⁰⁰

3.4.2 Other International Standards of Protection

Denial of justice is not the only international law standard that can be breached by domestic courts. IIAs recognize that the State can commit other breaches through its courts that do not amount to denial of justice and for which less stringent criteria apply.²⁰¹ For instance, recent treaties concluded by the EU, such as the CETA, specifically recognize that a fundamental breach of due process in judicial proceedings, manifest arbitrariness and targeted discrimination are wrongful acts independent from denial of justice.²⁰²

Investment tribunals have entertained claims relating to alleged wrongs committed by domestic courts under a number of different IIA standards. Unlike for denial of justice, a breach of other international IIA obligations does not require exhaustion of local remedies,²⁰³ unless expressly provided otherwise. Therefore, even the judicial act of a first instance court may give rise to a treaty breach.²⁰⁴

In a number of cases, investment tribunals have found that the FET standard protects investors from wrongful treatment by the judiciary aside from cases of denial of justice.²⁰⁵ Situations of this kind have included disrespect of due process and procedural propriety, arbitrariness, and obstruction of the investment through abusive proceedings.²⁰⁶ In Deutsche Bank v. Sri Lanka, for instance, the ICSID tribunal found that a Supreme Court decision constituted a breach of FET as it was contrary to due process and “issued for political reasons”.²⁰⁷

Protection against unlawful expropriation has also sometimes been found to cover misconduct by domestic courts. Although, as noted in Tatneft v. Ukraine, the prohibition of unlawful expropriation is mainly concerned with the protection of property rights against the government abusing its legislative or executive power and is thus mostly related to administrative and legislative acts, “the issue of whether in addition an act of expropriation can also originate in the judiciary [is] not in principle excluded under interactional law and BIT protection”.²⁰⁸ The tribunal in Eli Lilly v. Canada also noted that “[a]s a matter of broad proposition, […] it is possible to contemplate circumstances in which a judicial act (or omission) may engage questions of expropriation under NAFTA Article 1110, such as, perhaps, in circumstances in which a judicial decision crystallizes a taking alleged to be contrary to NAFTA Article 1110”.²⁰⁹ In Middle East Cement v. Egypt, the tribunal found that “though normally, a seizure and auction ordered by the national courts does not qualify as a taking, they can be a ‘measure the effects of which would be tantamount to expropriation’ if they are not taken ‘under due process of law’”.²¹⁰ The tribunal in Garanti Koza v. Turkmenistan Award held that “a seizure of property by a court as the result of normal domestic legal process does not amount to an expropriation under international law unless there was an element of serious and fundamental impropriety about the legal process”.²¹¹

A few tribunals have also examined whether the “full protection and security” standard could encompass protection from domestic courts’ misconduct. In Frontier Petroleum v. Czech Republic, the tribunal held that in respect of the acts of the judiciary “full protection and security” means that the State is under an obligation to make a functioning system of courts and legal remedies available to the investor. It observed, however, that “not every failure to obtain redress is a violation of the principle of full protection and security” and “[e]ven a decision that in the eyes of an outside observer, such as an international tribunal, is ‘wrong’ would not automatically lead to State responsibility as long as the courts have acted in good faith and have reached decisions that are reasonably tenable”.²¹²

Finally, a few IIAs contain a so-called “effective means standard” clause. As noted by the Chevron v. Ecuador I tribunal, provisions of this type are relatively rare.²¹³ One such example is Article 10, para. 12, of the ECT, to which Switzerland is a party, which provides as follows:

Each Contracting Party shall ensure that its domestic law provides effective means for the assertion of claims and the enforcement of rights with respect to Investments, investment agreements, and investment authorisations.

According to the Amto v. Ukraine tribunal, the “fundamental criterion” of an “effective means” for the assertion of claims and the enforcement of rights within the meaning of Article 10, para. 12, of the ECT, is “law and the rule of law”; “[t]here must be legislation for the recognition and enforcement of property and contractual rights”; “[a]n effective means of the assertion of claims and the enforcement of rights also requires secondary rules of procedure so that the principles and objectives of the legislation can be translated by the investor into effective action in the domestic tribunals”.²¹⁴ The effective means standard was further discussed in the White Industries v. India award, which is addressed infra.

3.4.3 Domestic Court Decisions on Commercial Arbitration

One particular area in which investment arbitration has been used as a forum for the adjudication of disputes arising out of domestic courts’ alleged misconduct concerns national court decisions about the enforcement of arbitration agreements and the annulment or enforcement of arbitral awards in commercial matters under the NYC.²¹⁵ In these instances, investment tribunals have exercised a sort of “super-supervisory” role over domestic courts’ conduct relating to commercial arbitration.²¹⁶ These cases further highlight the complex interaction between various dispute resolution mechanisms that may have a bearing on a private party’s investment and involve commercial arbitration, domestic courts, and investment arbitration.

As an illustration, in the dispute between Frontier Petroleum and the Czech Republic mentioned earlier, the investment tribunal assessed whether a national court’s refusal to enforce an arbitral award under the NYC for reasons of incompatibility with international public policy breached the applicable IIA. The tribunal dismissed the respondent’s argument that an investment arbitration tribunal lacks power to review a national court’s decision rendered under the NYC. It considered that its role was “to determine whether the refusal of the Czech courts to recognize and enforce the Final Award in full violate[d] Article III(1) of the BIT, i.e., the fair and equitable treatment standard”.²¹⁷ It went on to say that “in order to answer this question the tribunal must ask whether the Czech courts’ refusal amounts to an abuse of rights contrary to the international principle of good faith”.²¹⁸ Recognizing that “States enjoy a certain margin of appreciation in determining what their own conception of international public policy is”,²¹⁹ the question, in the tribunal’s view, was whether “the decision by the Czech courts [was] reasonably tenable and made in good faith”.²²⁰

Saipem v. Bangladesh involved the conduct of domestic courts relating to an ICC arbitration seated in the respondent’s capital, Dhaka.²²¹ During the ICC arbitration, the Bangladeshi courts intervened in several ways, including issuing an injunction restraining Saipem from continuing with the ICC arbitration and revoking the authority of the ICC tribunal. Once the ICC tribunal had nevertheless rendered its award, the courts ruled that, because of the revocation of authority, there “was no award in the eye of the law” which could either be set aside or enforced.²²² Saipem then initiated ICSID proceedings under the Italy-Bangladesh BIT. The ICSID tribunal held that the Bangladeshi courts had taken measures amounting to unlawful expropriation.²²³ The measures also constituted an abuse of rights under international law²²⁴ and breached the NYC.²²⁵

The UNCITRAL award in White Industries v. India provides a further example of an investment tribunal’s review of a decision of national courts relating to a commercial arbitration award.²²⁶ The investor initially sought enforcement of an ICC award in India. After 9 years of complex litigation involving enforcement and setting aside proceedings (none of which resulted in a determination), White Industries initiated an investment arbitration invoking the Australia-India BIT.²²⁷ The investment treaty tribunal dismissed the claims of expropriation,²²⁸ FET²²⁹ and denial of justice.²³⁰ However, it found that the duration of the enforcement proceedings (which included more than 5 years on the docket of the Supreme Court) amounted to a breach of India’s obligation to provide “effective means of asserting claims and enforcing rights”.²³¹

In sum, these and other cases²³² involving review by investment tribunals of national court decisions in relation to commercial arbitration matters show that States, through their courts, enjoy a level of discretion in the application and interpretation of the applicable legal framework, which is most often the NYC. Most mistakes made in this exercise of application and interpretation of the law will trigger no international responsibility. It is only when the national court’s mistake reaches the high threshold of an egregious misconduct that redress may be sought from an international dispute resolution body.²³³