Local-Court Clauses in BITs

Bilateral Investment Treaties (BIT) made between 1990 - 2000 regularly included language on the use of local jurisdictions before bringing the matter to arbitration. These clauses often provided room for interpretation on whether the use of local resources is mandatory or optional before the matter can be brought to an arbitration tribunal. 

This article will look at past decisions regarding these clauses and will find that arbitration tribunals have leaned towards interpreting language short of clearly mandating exhaustion of local remedies as an optional fork in the road clause. 

Here in an example of a BIT agreement between the Republic of Turkey and Turkmenistan entered in 1997:

ARTICLE VII

Settlement of Disputes Between One Party and Investors of the

Other Party

1. Disputes between one of the Parties and one investor of the other

Party, in connection with his investment, shall be notified in writing,

including a detailed information, by the investor to the recipient Party

of the investment. As far as possible, the investor and the concerned

Party shall endeavour to settle these disputes by consultations and

negotiations in good faith.

2. If these disputes cannot be settled in this way within six months

following the date of the written notification mentioned in paragraph

1. the dispute can be submitted, as the investor may choose, to:

(a) The International Center for Settlement of Investment Disputes

(ICSID) set up by the "Convention on Settlement of Investment

Disputes Between States and Nationals of other States”, (in case both Parties become signatories of this Convention.)

(b) an ad hoc court of arbitration laid down under the Arbitration

Rules of Procedure of the United Nations Commission for

International Trade Law (UNCITRAL), (in case both parties are

members of U.N.)

(c) the Court of Arbitration of the Paris International Chamber of

Commerce,

provided that, if the investor concerned has brought the dispute

before the courts of justice of the Party that is a party to the dispute

and a final award has not been rendered within one year.

The question of whether the issue must go to local court and a decision not made within a year before it may proceed to arbitration was discussed by an ICSID tribunal in Case No. ARB/10/1. There the tribunal found that the BIT was additionally signed in Russian where that provision, both in Russian and when directly translated to English from Russian, clearly mandated going to local courts before arbitration became an option.

However, the tribunal provided hesitancy on whether it would have come to the same conclusion if the BIT was only entered into in English. 

Language 

A literal reading of the provision provides that a foreign investor is not required to bring a dispute before local courts prior to initiating arbitration. She may opt to do so but will be barred from bringing the same matter to arbitration unless a year has passed without judgement by the local court.

The issue surrounds the “provided that” language in the last provision of the treaty. In traditional language, “provided that,” creates a condition precedent; “you may go out provided that you have completed your internship application.” This suggests that going out can only occur after completion of the application. 

However, the drafter uses “if” after “provided that.” They could have used language like “provided that, shall” as was used in the first paragraph to mandate voluntary settlement. The use of “if” suggests that bringing the matter before the local court is optional.

This is further supported by the placement of the provision. The provision is preceded by paragraph 1, which mandates voluntary settlement and a waiting period of six months, and paragraph 2, which dictates how arbitration may take place. If the provision to go to local court were mandatory, its placement would be better suited before paragraph 2 or within the arbitration options. 

Legal Considerations

Article 25(1) of the ICSID’s Convention on the Settlement of Investment Disputes between States and Nationals of Other States extends jurisdiction to disputes arising directly out of an investment between a Contracting State and a national of another, provided both have consented in writing.

Paragraph 2 of this Bilateral Trade Agreement extends a conditional offer for arbitration by the State to the investor. This would mean that the decision on jurisdictional competence would belong to the tribunal if the investor chooses to pursue arbitration (ICSID Convention, Art. 41(1); UNCITRAL Model Law, Art. 16(1)). Thus, it is the tribunal that determines whether recourse to local courts is an optional or mandatory precondition to arbitration.

Published decisions suggest that the tribunals applying ICSID Rules or similar are more likely than not to find language not expressly mandating the exhaustion of local remedies to be optional. Article 26 of the ICSID’s Convention states that a Contracting State must expressly state that local remedies must be exhausted. 

An example of this can be found in Mytilineos Holdings SA v Serbia and Montenegro, Partial Award, paras. 218-221. The Respondent stated that local remedies must be exhausted first as per international law principles. The tribunal rejected this argument. It clarified that the trade agreement contained a fork in the road provision stating that the investor “may submit the dispute either to the competent courts of the Contracting Party… or to international arbitration.” The tribunal found this to be a fork in the road provision and its existence would invalidate any language mandating exhaustion of local remedies and any argument relying on it. The tribunals heavily considered Article 26 of ICSID Convention to reach this conclusion.

It is unlikely that the language in the local court provision of this Bilateral Trade Agreement would meet the standard expected in Article 26. There is no express mention of mandated use of local remedies, and the language can be seen to be optional. 

The same reasoning would apply to arbitration under ad hoc tribunals (such as UNCITRAL) or the ICC. These mechanisms, unlike ICSID, do not contain a comparable Article or expectation in their governing conventions, but tribunals operating under them have followed the same principle. An exhaustion of local remedies must be expressly stated in the treaty itself to bar direct access to arbitration. See Yaung Chi Oo Trading Pte Ltd v Government of the Union of Myanmar, ASEAN Case No ARB/01/1, 31 March 2003, 42 ILM 540 (2003).

If it were the case that the local court provision was to be read as non-optional, it would require the investor to go to local court before pursuing any arbitration option. If a judgement is made by local court, the investor may run into issues of res judicata or preclusion that would prevent her from bringing the case to an arbitration tribunal. In effect, if the local court provision is read as non-optional, the only way the investor would be able to arbitrate would be if the local court does not give a judgement within a year. In countries without robust due process or a separated court system, a judgement in favor of the State could always be rendered with little repercussion.

Additional references:

• Rumeli Telekom v. Kazakhstan (ICSID Case No. ARB/05/16)

• Sistem v. Kyrgyz Republic (ICSID Case No. ARB(AF)/06/1)

• Merkouris, P. (2024). Previous exhaustion of local remedies: Investment arbitration. In Max Planck Encyclopedia of International Procedural Law. Oxford University Press.

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