Relevance of Local Remedies in Investment Treaty Arbitration

Exhaustion of local remedies provides that before international claims or proceedings are made, the remedies provided by a local state should have been exhausted. Modern investment treaty regimes including the NAFTA Chapter 11, most bilateral investment treaties (BITs), and ICSID Convention have eliminated the exhaustion of the local remedies rule in arbitrations. However, notable numbers of recent investment arbitration tribunals have ruled that the claimants had not adequately tried hosting state’s local remedies. In the agreements of NAFTA member countries did not explicitly waive local remedies. In Loewen, even though the tribunal did not recognize the futility or unavailability of a domestic remedy it highlighted importance of local remedies. In Saipem and Waste Management, arbitration tribunal reminded the elements of local remedies in finding the claims. Observing the Local Remedies Rule gives the best advantage to the host state for the preservation of the sovereignty. If an investor had failed to invoke domestic remedies including a right of appeal, the investor could not claim a prima facie case of expropriation because the possibility of just compensation had never been verified. In addition, denial of justice entails an element of finality which requires the claimant to appeal the alleged injustice to the highest domestic court before bringing an international claim. This emerging trend in local remedies has important implications for Korea. Facing 85 FTAs and BITs, Korea should continuously improve its domestic systems, both in government administration and domestic legal systems in addition to sound preparation for international arbitration. However, even though local remedies are relevant to a given investment treaty, international tribunal should never suggest investors to pursue them an unreasonable length, so the very essence of arbitration of promptness in rendering a decision should not be lost. Flexible application of local remedies will better balance between investor protection and sovereignty of host states.