Authors: Wei Shen* and Yilu Zhang**
Published: September 2021
Exhaustion of Local Remedies
Investor-State Dispute Settlement (ISDS)
The exhaustion of the local remedy requirement without time limitation in investment treaties may be construed as a mandatory jurisdictional prerequisite to the host state’s consent to arbitration, while the local remedy requirement with a certain period of time is jurisdictional according to the treaty provisions. In the vast majority of cases where investment treaties are silent on the local remedy requirement, the host states are viewed to have waived the requirement unless explicitly demanded in treaties. Without an explicit stipulation, investors may not avail themselves of the concept of denial of justice to circumvent domestic proceedings required in treaties. Some investment treaties insert a fork-in-the-road clause to prevent parallel proceedings of domestic adjudication and international arbitration, yet the invocation of this clause is dependent on “the triple identity test” or “the fundamental basis test” in determining whether the cases submitted before two fora are identical. Due to the uncertain effect caused by inconsistent interpretations of fork-in-the-road provisions, it is advisable to waive certain settlement mechanisms unambiguously in investment treaties or contracts to avoid parallel proceedings. Non-compliance with such a waiver is more likely to be classified as a jurisdictional issue in investment arbitration.
This article aims at investigating treaty interpretations and tribunals’ characterisations of dispute resolution clauses with a domestic proceeding requirement. By seeking a pattern in a series of investment arbitration cases, this analysis may contribute to the clarity and consistency of treaty-making under heterogenous policy considerations. In addition, rational predictions of the decision of preliminary questions in the Hela case will be provided along with case studies.
In Section II this article continues with a detailed examination of the explicit and implied mandatory exhaustion of the local remedies requirement in investment treaties, which is construed as a jurisdictional issue in the majority of cases, while only exceptional occurrences—such as in the denial of justice—could exempt investors from having to comply with this requirement. The article will then proceed in Section III to circumstances where local remedies are optional under fork-in-the-road provisions, the invocation of which is challenged by the doctrinal approach to decide the “same” dispute in different proceedings to avoid parallel cases. Section IV briefly highlights the waiver provisions in investment treaties or contracts which effectively avoid a multiplicity of proceedings. Section V concludes the article.
* Wei Shen is a KoGuan Distinguished Professor of Law at Shanghai Jiao Tong University Law School.
** Yilu Zhang is a member of the Jinchen Tongda & Neal Law Firm.