Resolving Investor State Dispute Settlement's Legitimacy Crisis: The Case for Reinstating the Requirement to Exhaust Local Remedies

AuthorSebastian Timothy Whitefoord Curtis
PositionLLM (LSE) '22. LLB '21 at the University of Bristol
Resolving Investor State Dispute Settlement’s Legitimacy Crisis
Resolving Investor State Dispute Settlement’s Legitimacy
Crisis: The Case for Reinstating the Requirement to
Exhaust Local Remedies
Sebastian Timothy Whitefoord Curtis*
This article dissects a variety of structural issues that contribute to the ‘legitimacy crisis’
currently faced by Investor State Dispute Settlement (ISDS) and in particular, treaty-based
Investor-State Arbitration (ISA). Primarily, it addresses issues of jurisdictional overlap with
domestic courts, and the inability of ISA to engender ‘good governance’ norms and the rule of
law in responde nt states. By examining these structural issues and their relationship with the
difficult, and at times inflammatory r elationship between the international investmen t
protection regime and domestic governments and judiciaries, it contends that further
internationalization, or ‘systemic reform’ in lieu of the proposals made by the European Union
is not adequate for resolving the legitimacy crisis. Rather, it proposes that a more radical,
reintegration of domestic courts is necessary through the reinstatement of a traditional
requirement of customary international law, the requirement to exhaust local remedies before
commencing arbitral proceedings.
* LLM (LSE) ’22. LLB ’21 at the University of Bristol. The author would like to thank Dr
Joshua Paine for his guidance and supervision o f the author's undergraduate thesis,
without which this work would not have been possible.’
LSE Law Review!
Vol. VII
In 2015, during the height of negotiations over the controversial
Transatlantic Trade and Investment Partnership, Celia Malmström, the EU
Commissioner on Trade, decried a ‘fundamental and widespread lack of trust by
the public in the fairness and impartiality of the old ISDS model’.1 This
statement reflected mounting criticism from both academic commentators and
the general public directed towards what would become a major stumbling
block in the ultimately failed negotiations.2 At the heart of the controversy was
Investor-State Arbitration (ISA), a mechanism of international investment
protection enshrined in the ‘vast m ajority’ of international investment treaties
around the world.3 This mechanism is often described as creating a ‘unique legal
and political position for international investors’, in that it provides private
foreign investors with a direct and exclusive right of standing to sue States for
compensatory damages before an international tribunal.4 As a direct right, unlike
in other comparable international fora, ISA does not require the exhaustion of
local remedies prior to instigating arbitration.5 Furthermore, these tribunals are
not public courts but consist of private, ad-hoc arbitrators whose judgements
are nevertheless binding on states,6 via the New York Convention.7 The
dramatic increase in critical literature over the last 10 years, alongside increased
public awareness and activism, and the formation of public-interest groups
1 Cecilia Malmström, ‘Proposing an Investment Court System’ (European Commission Blog,
16 September 2015) <https://wayback.archive- ission/commissioners/2014-
2019/malmstrom/blog/proposing-investment-court-system_en> accessed 20 April
2 Thomas Dietz, Marius Dotzauer and Edward S. Cohen ‘The Legitimacy Crisis of
Investor-State Arbitration and the N ew EU Investment Court System’ (2019) 26 R eview
of International Political Economy 749, 750.
3 Yannick Radi, Rules and Practices of International Investment Law and Arbitration (1st edn,
Cambridge University Press 2020) 26.
4 Jonathan Bonnitcha, Lauge N Skovgaard Poulsen and Michael Waibel, The Political
Economy of the Investment Treaty Regime (1st edn, Oxford University Press 2017) 21.
5 Convention on the Settlement of International Disputes Between States and Nationals
of Other States (adopted 18 March 1965, entered into force 14 October 1966) art 26.
6 Dietz, Dotzauer and Cohen (n 2) 751.
7 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (adopted
3 My 1956, entered into force 7 June 1959) 330 UNTS 3 (New York Convention) art 3.
Resolving Investor State Dispute Settlement’s Legitimacy Crisis
dedicated to dismantling Investor-State Dispute Settlement (ISDS) in its current
form,8 has been characterised by several authors as an ongoing ‘legitimacy
Amid mounting scrutiny, several different reformist movements have
emerged, each spearheaded by a variety of different actors and targeting
different contested elements of the investment protection regime. UNCITRAL
Working Group III, established in 2017, has served as a multilateral forum to
facilitate this process, equ ipped with a ‘bro ad mandate’ to identify concerns and
recommend potential solutions to the UNCITRAL Commission whilst utilising
the ‘widest possible breadth of available expertise from all stakeholders’, and
have invited submissions from a variety of different sources including
governments, universities and arbitral associations.10 Other states, however,
have progressed their own reform agenda through direct action. The European
Union for example, has been key proponents of ‘systemic reform’ through the
establishment of a standing multilateral investment court to entirely replace
ISA,11 and have included provisions related to its future creation in recent
bilateral investment treaties (BITs) with Canada, Vietnam, Singapore and
Mexico.12 On the other hand, ‘paradigm shifters’ like India, South Africa and
Brazil; united by their scepticism of any system that allows investors to make
international claims directly against States, have often acted unilaterally. 13 One
example of this kind of action is South Africa’s controversial decision to
unilaterally terminate several BITs in 2015, and ‘pull out’ of the established
8 Stop ISDS (Website) <> accessed 27 April 2021.
9 Dietz, Dotzauer and Cohen (n 2) 752.
10 UNCITRAL, ‘Report of Working Group III (Investor-State Dispute Settlement
Reform) on the work of its thirty-fourth session’ (19 December 2017) 34th Session (2017)
UN Doc A/CN.9/930/Rev.1 3.
11 Issam Hallak, ‘Multilateral Investment Court’ (European Parliamentary Research Service,
January 2020) 8
020)646147_EN.pdf> accessed 15 March 2022.
12 Anthea Roberts, ‘Incremental, Systemic, and Paradigmatic Reform of Investor-State
Arbitration’ (2018) 112(3) American Journal of International Law 410, 410.
13 ibid.

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