WORLD TRADE  
ORGANIZATION  WT/WGTI/W/134 
7 August 2002 
 (02-4350) 
Working Group on the Relationship  
between Trade and Investment  
 
 
 
CONSULTATION AND THE SETTLEMENT OF DISPUTES BETWEEN MEMBERS 
 
Note by the Secretariat  
 
 
    
 
 
EXECUTIVE SUMMARY 
 
 "Consultation and settlement of disputes between  Members" is one of the seven topics listed 
in Paragraph 22 of the Doha Ministerial Declarati on that is to be clarified by the Working Group on 
the Relationship between Trade and Investment.   
  The WTO's Understanding on Rules and Procedures for the Settlement of Disputes (DSU) establishes an integrated dispute settlement system for all matters arising from the interpretation or 
application of the Marrakesh Agreement Establ ishing the WTO and its Annexes 1 and 2.  It 
emphasizes the importance of consultations in securi ng dispute resolution and, when a dispute cannot 
be resolved through consultations, it provides Member s with the right to the establishment of a panel; 
it also sets out detailed procedures and deadlines for the different stages of the panel process.  Where 
a measure is found to be inconsistent with a WTO Agreement, a panel shall recommend that the 
Member concerned bring the measure into conformity  with WTO rules.  A key feature of the DSU is 
the provision for an appellate review, whereby the standing Appellate Body can uphold, modify or 
reverse a panel's finding.  The DSU establishes fu rther provisions for multilateral surveillance of 
implementation of the Dispute Settlement Body's  (DSB) recommendations, as well as the possibility 
of compensation and suspension of concessions and ob ligations in the event of non-implementation.  
Prior authorization from the DSB is required befo re suspension of concessions and obligations is 
applied against a non-complying Member, as unilatera l measures are not permitted under the DSU.   
 
 International investment agreements (IIAs)
1 – bilateral, regional and multilateral- normally 
contain two types of dispute settlement mechanisms:  (i) State-to-State, which is available only among 
the State parties to an agreement, and (ii) invest or-State, whereby an investor can submit a claim 
against a host State to international arbitration.   Although the Doha Declaration refers only to 
consultation and dispute settlement between Members , given that most IIAs provide for investor-State 
arbitration, in order to be comprehensive this Note will address both types of dispute resolution 
provisions.  Under both mechanisms, the disputing parties are required to attempt to settle their 
                                                      
1 This Note focuses on "modern" investment agreements such as bilateral investment treaties and those 
bilateral or regional economic integration or free trade agreements containing an investment chapter.  It does not address older Friendship, Commerce and Navigation (FCN) treaties that generally provide for dispute settlement 
through recourse to the International Court of Justice.  This document has been prepa red under the Secretariat's own 
responsibility and without prejudice to the positions of Members and to their rights and obligations under the WTO WT/WGTI/W/134 
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 dispute amicably (through consultati ons or negotiations in the case of  State-to-State disputes), before 
instituting formal proceedings.     Provisions relating to disputes between States normally call for settlement through ad hoc  
arbitration.  Some bilateral and regional treaties provide for instituti onal arrangements of their own.  
In practice, however, these provisions are relatively st andard.  There is little variation in the way  IIAs 
approach the issue of the constitution of arbitral tr ibunals.  As regards procedural rules, aside from 
stipulating that decisions are to be taken by majo rity vote and that they shall be final and binding, 
most IIAs leave it up to the tribunals to determine th eir own procedures.  There is less uniformity with 
respect to the applicable substantive law.  While many IIAs are silent on this issue, some of them 
include a clause stipulating the law to be applied to the dispute.  In such cases, reference is generally 
made to the provisions of the IIA, supplemented by other rules of international law and sometimes by 
other agreements concluded between the Parties.  Normally, IIAs provide that arbitral awards are final 
and binding, but they are often silent on the issue of  compliance.  In addition, IIAs frequently include 
provisions governing the apportionment of the arbitration costs between the Parties. 
 
 While earlier bilateral investment treaties (BITs) only provided for ad hoc  arbitration of State-
to-State disputes, today virtually all IIAs contain provisions for investor-State arbitration, either 
through institutional or other pre-existing arbitral regimes.  The vast majority of IIAs refer such 
disputes to arbitration under the 1966 Convention on the Settlement of Investment Disputes between 
States and Nationals of Other States (ICSID Conve ntion) or its Additional Facility.  However, a 
considerable number of IIAs refer to arbitrati on under the UNCITRAL Rules, the International 
Chamber of Commerce (ICC) or other private arbitra tion institutions.  In fact, the recent trend is for 
IIAs to provide for a choice between different arbitral regimes.  Under certain  IIAs, resort to investor-
State arbitration is subject to the exhaustion of local remedies, although most modern  IIAs do not 
contain such requirement.  Where recourse to lo cal remedies is envisaged, it is normally not 
mandatory but is only one of several options availa ble to the disputing parties.  The choice as to 
whether to resort to local remedies or to internationa l arbitration is normally final.  Similarly, resort to 
investor-State arbitration may, under some IIAs, prec lude recourse to State-to-State dispute settlement 
for the same dispute.    An important feature of investor-State arbitra tion is that it provides for the award of monetary 
damages.  Arbitral tribunals, however, are not empower ed to order a host State to revoke or modify an 
inconsistent measure.  Arbitral awards are nor mally final and binding, but their validity may be 
challenged on several grounds before local courts, except in the case of ICSID awards which are not 
subject to appeal or any other remedy except tho se provided for under the Convention.  In order to 
ensure enforcement by local courts of arbitral awards, many IIAs refer to certain international 
conventions that provide for the mandatory enforcem ent of foreign arbitral awards, such as the 1958 
New York Convention and the ICSID Convention itsel f.  In case of non-compliance of an award, 
some IIAs allow the investor's home State to br ing a claim under the inter-State dispute resolution 
mechanism of the treaty.  Under the ICSID Conven tion, non-compliance reactivates the right of the 
home State to extend diplomatic protection or to bri ng an international claim against the host State.  
Failure to abide by an arbitral award may lead to the international responsibility of the defaulting 
State, in which case the home State may resort to the remedies available under international law for 
breach of a treaty obligation.    There are a number of fundamental differenc es between dispute resolution under IIAs and 
under the WTO's DSU.  With respect to State-to-State dispute resolution, one important difference 
relates to the applicable law:  whereas the WTO dispute settlement system is limited to disputes 
concerning rights and obligations under the covered agreements, the scope of State-to-State dispute 
resolution under IIAs seems to be much broader.  This  is because, in addition to the provisions of the 
treaty, IIAs often refer to other rules of interna tional law (both in their specific dispute settlement 
provisions and in their "treatment" articles) as well as  to other agreements entered into by the Parties  WT/WGTI/W/134 
 Page 3 
 
 
 and sometimes to commitments made w ith respect to specific investments.  Another important 
difference concerns the issue of compliance of dispute settlement awards, with most  IIAs being silent on the issue, while the DSU establishes its own syst em of surveillance of compliance and remedies.  
  As regards investor-State arbitration, the ma in differences with the DSU are the following.  
Under IIAs the investor has direct access to an inte rnational tribunal to pursue a claim against a host 
State, while in the WTO access to di spute settlement is reserved to Member States.  Arbitral tribunals 
may order the award of monetary damages, but not th e revocation of an inconsistent measure, whereas 
WTO panels and the Appellate Body must recomme nd that a measure be brought into conformity 
with WTO rules, but it is generally understood that they may not award damages.  In the event of non-
compliance of an arbitral award by a host State, th e investor's home State can resort to the remedies 
available under international law.  By contrast, in case of non-implementa tion of a panel and/or 
Appellate Body decision, the prevailing WTO Member may, subject to prior authorization, avail itself 
of the temporary remedy of suspension of concessions  or obligations as provided for under the DSU.   
 
 In discussions in the Working Group concerning the type of dispute settlement provisions that 
might apply to a multilateral framework on investment , the following key questions have been raised: 
 
• Whether the WTO dispute settlement system should apply to disputes arising in the context of a 
multilateral framework on investment. 
• If so, whether the DSU should apply as it currently stands or whether some changes would be 
needed for its application in this context. 
• How the dispute settlement provisions of a WTO framework on investment would relate to the 
dispute resolution procedures contained in IIAs, in cluding with respect to investor-State dispute 
settlement.  
 
_______________ 
 
 I. INTRODUCTION 
1. Paragraph 22 of the Doha Declaration mandate s the Working Group to clarify "consultation 
and the settlement of disputes between Members".  This Note briefly summarises the discussions in 
the Working Group, describes some of the main fe atures of the WTO dispute settlement system and 
the State-to-State and investor-State dispute resolu tion provisions contained in  IIAs, and highlights 
some of the differences between dispute settlement in IIAs and in the WTO.   
II. DISCUSSIONS IN THE WORKING GROUP 
2 
2. The existence of dispute settlement provisions, in cluding for the resolution of investor-State 
disputes, has been identified by Members of the Working Group as a common feature in many IIAs, 
notwithstanding the fact that the manner in  which they are crafted is not uniform. 
3. In considering what type of dispute settleme nt mechanism might be included in a possible 
WTO framework on investment, a nu mber of questions have been raised in discussions in the 
Working Group.  One is whether the existing WT O dispute settlement mechanism should apply to 
investment disputes among parties to a multilateral framework, or whether some changes would be 
                                                      
2 References to this topic in reports of the Working Group can be found in WT/WGTI/M/4, paras. 46 
and 48;  M/5, paras. 28, 29, 64 and 65;  M/8, paras. 83, 84, 86 and 88;  M/9, paras. 42 and 44;  M/11, paras. 41, 47 and 49;  M/12, para. 68;  M/15, paras. 57 and 61;  M/17, paras. 50, 89 and 140.  Reference to this topic in 
Members' written submissions can be found in WT/WGTI/W/67 and W/68. WT/WGTI/W/134 
Page 4  
 
 needed for its application in this context.  A furthe r question raised by some is what standing, if any, 
investors should have in dispute settlement procedures.   
4. One view is that, since the essential function of dispute settlement is to eliminate or modify 
measures found to be inconsistent with agreed ru les, the WTO dispute settlement system could be 
applied to investment disputes without the need to  make major adjustments.  However, if the WTO 
dispute settlement mechanism were to apply to a prospective framework on investment, an important 
question was whether its provisions on compensation and suspension of concessions (Article 22 of the 
DSU) should apply to investment disputes.  In th is regard, it has been noted that account should be 
taken of the fact that these provisions are already applicable to investment-related disputes under the 
GATS and the TRIMs Agreement.   
5. It has also been suggested that attention s hould be given to the relationship between the 
application of WTO dispute settlement procedures  in the context of a multilateral investment 
framework, on the one hand, and the application of  dispute settlement provisions contained in the 
numerous existing bilateral and regi onal investment agreements, on the other hand.  Some Members 
have pointed out that the use of WTO procedur es should not preclude recourse to provisions of 
bilateral or regional investment agreem ents if the parties to a dispute so  decided.  In this respect, it has 
been suggested that there might be a need to design specific rules to avoid inefficiency and 
duplication.  
6. The possibility to rely on the existing WTO dis pute settlement mechanism has been identified 
by some as one of the important advantages of adop ting a multilateral approach to investment rules.  
According to one view, as compared to bilateral tr eaties where the dispute settlement process may be 
easily influenced by the nature of the dispute or the relationship between the two countries, 
supervision through a multilateral system would ensu re the fairness and transparency of a dispute 
settlement process.  A different view is that one of  the costs of adopting multilateral rules in this area 
would be the possibility of undul y favouring multinational enterprises vis-à-vis  host countries, 
especially through the dispute settlement system.  Mo re generally, the point has been made that 
dispute settlement under WTO investment rules would benefit only home countries. 
7. Regarding investor-State dispute resolution provisions, a number of  delegations have 
indicated that possible WTO rules on investment should not provide for a right of individual investors to have recourse to international dispute settlement pr ocedures.  It was also pointed out that, given the 
intergovernmental nature of the WTO, the issue of investor-State dispute settlement in the WTO 
required careful examination.  However, it was sugg ested that there could be rules requiring domestic 
judicial review. 
8. In describing their individual experiences with  IIAs, some Members have pointed to the 
existence of investor-State disputes settlement provisions  in such agreements.  In this context, certain 
limitations to the scope of the investor-State dis pute mechanism have been mentioned, for example, 
its non-applicability to disputes involving "potential" investors. 
9. The issue of dispute settlement h as also been raised in connec tion with other elements of a 
possible WTO agreement on investment.  For exam ple, as regards the definition of investment, 
support has been expressed for a definition that is  clear with respect to any prospective dispute 
settlement facilities.  The point has also been made  that the dispute settlement mechanism would have 
a fundamental impact on the question of coverage.  In relation to transparen cy, it has been suggested 
that any WTO rules on transparency in the area of investment should be binding and subject to dispute 
settlement.  Another view is that it is not clear how WTO dispute settlement procedures would operate 
in relation to transparency obligatio ns regarding investment measures.  WT/WGTI/W/134 
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 III. THE WTO DISPUTE SETTLEMENT SYSTEM 
A. SCOPE OF APPLICATION  
10. The dispute settlement system of the WTO is based on Articles XXII and XXIII of the GATT 
1994, Articles XXII and XXIII of the GATS and on the Understanding on Rules and Procedures 
Governing the Settlement of Disputes, as set out in  Annex 2 of the Marrakesh Agreement Establishing 
the WTO.3  The DSU establishes an integrated dispute settlement system applicable to the "covered 
agreements" defined to include the Agreemen t Establishing the WTO and the multilateral and 
plurilateral trade agreements set out in Appendi x 1 of the DSU, although under some agreements 
special rules and procedures are applicable (Appendi x 2).  The DSU also covers disputes concerning 
rights and obligations under the DSU itself.  The Dispute Settlement Body, composed of 
representatives of all WTO Members, is responsible fo r the administration of the DSU.  All decisions 
of the DSB can only be taken by consensus.   
B. CONSULTATIONS  
11. The DSU emphasizes the importance of consultations in securing dispute resolution, by 
requiring a Member to enter into negotiations within 30 days of a request for consultations by another 
Member (Article 4).  If consultations fail to settle  a dispute within 60 days, the complaining Member 
may request the establishment of a panel.  The DSU provides for alternative means of dispute 
settlement to which the parties may voluntarily agree such as good offices, conciliation and mediation 
(Article 5).    
C. ESTABLISHMENT AND COMPOSITION OF PANELS  
12. Where a dispute cannot be settled through cons ultations, upon request by the complaining 
Member a panel shall be established, at the latest, at the meeting of the DSB following that at which 
the request is made, unless the DSB decides by con sensus not to establish the panel (Article 6).  The 
DSU sets forth specific rules and deadlines concerni ng the terms of reference (Article 7) and the 
composition of panels (Article 8).  St andard terms of reference will apply4, unless the parties agree to 
special terms within 20 days of the panel's establis hment.  Panels normally consist of three persons 
proposed by the Secretariat from a roster of qualifie d experts and agreed upon by the parties.  In the 
event the parties do not agree to the composition of  the panel within the same 20-day period, any 
party may request the Director-General to appoint th e panelists.  The DSU sets forth detailed rules and 
deadlines for the different stages of the pa nel procedures (Article  12 and Appendix 3). 
D. PANEL REPORTS  
13. A panel shall submit its findings and recommendati ons in the form of a written report to the 
DSB.  If a panel finds a complaint is justified,  its report will normally recommend that the offending 
Member brings the measure into conformity with WT O rules.  It may also su ggest ways in which the 
recommendations can be implemented.   Panel reports should normally be  issued within six months, or 
in cases of urgency or for disputes involving allegati ons of export subsidy, within three months of the 
establishment of the panel.  A panel report shall ge nerally be adopted within 60 days of its issuance, 
                                                      
3 The text of the DSU is reproduced in The Re sults of the Uruguay Round of Multilateral Trade 
Negotiations. The Legal Texts , GATT, Geneva (1994). 
4 Article 7.1 of the DSU establishes the following st andard terms of reference (absent agreement to the 
contrary):  "To examine, in light of the relevant provis ions in (name of the covere d agreement(s) cited by the 
parties to the dispute), the matter referred to the DSB by (name of party) in document … and to make such findings as will assist the DSB in making recommendations or in giving the rulings provided for in that/those 
agreement(s)." WT/WGTI/W/134 
Page 6  
 
 unless the DSB decides by consensus not to adopt it or one of the parties notifies the DSB of its 
intention to appeal.  
E. A
PPELLATE REVIEW  
14. An important feature of the DSU is its provision for the appeal of panel decisions (Article 17). 
A standing Appellate Body composed of seven members (three of whom will serve on any one case) 
will hear the appeals.  The appellate review is limi ted to issues of law covered in the panel report and 
legal interpretations developed by the panel.  Appellate proceedings are to be completed within 60 
days and in any event they shall not exceed 90 days .  The ensuing Appellate Body report, together 
with the related panel report as upheld , amended or reversed, is adopted by the DSB within 30 days of 
its circulation to Members, unless there is consen sus to the contrary, and shall be unconditionally 
accepted by the parties. 
F. IMPLEMENTATION OF ADOPTED RECOMMENDATIONS  
15. After a panel report or an Appellate Body report is adopted, the respondent Member is 
required to notify the DSB on how it intends to  implement the adopted recommendations.  If 
immediate implementation is not practicable, the Member concerned shall be given a reasonable 
period of time to comply.  This period may be set by agreement of the disputing parties or, in the 
absence of agreement, by arbitration, and it should  normally not exceed 15 months (Article 21.3).   
16. At the expiry of the reasonable period of time,  in the event of a disagreement between the 
parties as to whether the measure taken by the concerned Member to implement the DSB recommendations is compatible with the WTO, the matter must be taken back to the WTO dispute 
settlement mechanism (Article 21.5) pursuant to an accelerated procedure before the original panel.  
This multilateral surveillance is such as to prohib it Members from relying on any form of unilateral 
determinations of WTO compliance (Articles 21, 22 and 23). 
G. C
OMPENSATION AND SUSPENSION OF CONCESSIONS  
17. In the event of non-implementation, the prev ailing Member may seek compensation or the 
authorization to suspend concessions and obligations  (Article 22), pending for the full implementation 
of the DSB recommendations.  First, the contending parties can enter into negotiations to agree on 
mutually acceptable compensation.  Compensation is  voluntary and it will normally take the form of 
other trade concessions.  If within the specified time-period for implementation no agreement is 
reached on compensation, the prevailing Member may request authorization from the DSB to suspend 
concessions or other obligations with respect to the non-compliant party.  Such authorization will be 
granted within 30 days after it is requested, provi ded that the prior DSU requirements have been 
respected.  Disagreements over the proposed level of suspension may be referred to arbitration.  The 
general principle is that concessions should be susp ended in the same sector as that at issue in the 
panel case.  If this is not practical or effective,  the concessions may be suspended in other sectors of 
the same agreement.  Lastly, if this is not practical  or effective, or if the circumstances are serious 
enough, the suspension can be made under another c overed agreement.  Compensation and suspension 
of concessions and obligations are considered as "temporary measures" and they are not to be 
preferred to full implementation of  recommendati ons.  During the arbitration process resort to 
countermeasures is strictly prohibited.  Indeed , a key provision requires Members not to make 
determinations of violations or suspend concessi ons unilaterally, but to resort to the rules and 
procedures of the DSU (Article 23).  WT/WGTI/W/134 
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 H. DEVELOPING COUNTRIES  
18. The DSU includes a number of provisions on speci al and differential treatment for developing 
and least-developed countries.  Generally speaking, th ese provisions call for attention to be paid to the 
specific interests of developing-country Members in  various stages of the dispute settlement process 
(i.e., consultation, implementation of recommendations), to the impact of the measures complained of 
on their economies, and to the need to provide extended time-frames and technical assistance to 
developing countries involved in a dispute.  In additi on, particular consideration is to be given to the 
special situation of least-developed country Members.   
I. OTHER PROVISIONS  
19. The DSU contains special rules for the settlement  of disputes which do not involve a violation 
of the covered agreements but where a Member be lieves, nevertheless, that benefits are being 
nullified or impaired (Article 26).  It also provid es for arbitration as an alternative means of dispute 
settlement, subject to the mutual agreement of the dis puting parties, which shall also agree to abide by 
the arbitration award (Article 25). 
20. In accordance with the Doha Ministerial Declaration (WT/MIN(01)/DEC/W/1), negotiations 
are currently taking place on improvements and clarifications on a number of provisions of the DSU.  
The negotiations are expected to conc lude by May 2003 with the view to giving effect to the results as 
soon as possible (Doha Declaration, para. 30).   
21. Two other features of the DSU are worth menti oning here because they are relevant to the 
comparison between dispute settlement in the WTO and in IIAs.  One is that under the DSU there is 
no requirement to exhaust local reme dies before instituting dispute settlement proceedings.  The other 
is that resort to the WTO dispute settlement process is free of charge, albeit each party must cover its 
own representation costs. 
IV. CONSULTATION AND DISPUTE SETTLEMENT PROVISIONS IN 
INTERNATIONAL INVESTMENT AGREEMENTS5 
22. Virtually all IIAs – bilateral, regional or multila teral – contain provisions for the settlement of 
disputes.  The basic purpose of these provisions is to ensure that the IIA's substantive obligations are 
effectively implemented and enforced, thus contribu ting to secure and stable international investment 
relations.  There are two main types of dispute settlement provisions in IIAs:  those regulating disputes between the State contracting parties (State -to-State dispute resolution), and those governing 
disputes between a State party and an investor of another State party (investor-State dispute 
settlement).
6  Most modern IIAs incorporate both types of provisions, albeit in separate articles, as 
they have different purposes and functions.  It should be noted that, in the context of bilateral/regional 
free trade or economic integration agreements cont aining an investment chapter, disputes between 
States over investment matters are normally covere d under the general inter-State dispute settlement 
provisions of such agreements, while disputes betwee n private investors and host States are dealt with 
under the provisions for investor-State arbitrati on usually set out in the investment chapter.  
                                                      
5 This section draws partly on UNCTAD, B ilateral Investment Treaties in the Mid-1990s , United 
Nations, New York and Geneva (1998), and on R. Dolzer and M. Stevens, Bilateral Investment Treaties , The 
Hague, Boston, London, Martinus Nijhoff Publishers, (1995). 
 6 Investment disputes may also arise between privat e investors.  These disputes are usually settled 
through the local courts of the State that has jurisdiction in accordance with private international law rules or 
through international commercial arbitration (this type of disputes will not be discussed in this note).   WT/WGTI/W/134 
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 A. STATE-TO-STATE
 DISPUTE  RESOLUTION 
23. Most IIAs, in particular almost all BITs, provi de for the settlement of inter-State disputes 
through ad hoc  arbitration (i.e. non-institutional arbitration) under a set of rules specially designed for 
that purpose and set forth in the agreement.  These pr ovisions are relatively standard in treaty practice.  
In the case of investment chapters included in b ilateral or regional economi c integration agreements, 
the common practice is to provide for institutiona l arrangements for the settlement of inter-State 
disputes.    
1. Scope of application 
24. State-to-State dispute settlement provisions in IIA s typically contain a clause stipulating that 
they apply to disputes between the contracting par ties over the interpretation or application of the 
IIA.7  Inter-State disputes may also develop from c oncrete situations involving investments or 
investors covered under an IIA that have been aff ected by a measure taken by the host country.  To 
the extent that such measure is inconsistent with th e provisions of an IIA, it can give rise to a State-to-
State dispute, where provisions for the settlement of investor-State disputes are not available.  
25. It should be noted that in some IIAs, the s ubmission of a dispute under the Investor-State 
dispute settlement mechanism precludes its submi ssion to the State-to-State dispute resolution 
provision, subject to certain exceptions.  One such exception is where the arbitral tribunal determines 
that it has no jurisdiction over the dispute;  another is where the host State refuses to comply with the 
award.  
26. It should also be pointed out that State-to-State  dispute settlement clauses in  IIAs generally 
do not explicitly require exhaustion of local re medies as a condition of resort to arbitration.8 
2. Consultations and negotiations 
27. As a first step in State-to-State dispute resolu tion, most  IIAs require that the parties seek to 
resolve the matter amicably through consultations, negotiations or other dipl omatic channels.  The 
intention is to provide the disputing parties with an opportunity to reach agreement before instituting 
arbitral proceedings.  Relevant clauses may stipulate that a certain time-period must elapse between 
the date on which a dispute arises and the date on which it may be submitted to arbitration.  Usually, 
the prescribed period is six months9, but it can be as short as three months or as long as one year.  In 
some instances, IIAs do not specify the length of the time-period but merely stipulate that diplomatic negotiations should take place within a "reasonable lapse of time".
10  Other  IIAs omit any reference 
to a time-period, although they do encourage negot iations between the disputing parties as a first 
                                                      
 7 This is the case, for example, of  the Model investment agreements of Chile, China, France, Germany, 
Mauritius, Peru, South Africa, Switzerland, the United Ki ngdom and the United States (as revised in 1998). 
These agreements are reproduced in UNCTAD, International Investment Instruments: A Compendium , (1996-
2002), Vol. III, pp. 143-206, Vol. VI, pp. 493-511, Vol. VIII, pp. 273-280, and Vol. IX, pp. 295-302.   
8 A leading interpretation of the International Court of Justice concerning the exhaustion of local 
remedies is found in the 1989 Elettronica Sicula S.p.A . (ELSI ) case between the United States and Italy.  The 
question was whether local remedies had to be exhausted in the context of a bilateral treaty that provided for State-to-State arbitration but made no mention to the ne ed to exhaust local remedies.  The Court held that the 
exhaustion of remedies was such an important principle of international law that it would apply even where a 
treaty did not expressly refer to it.  ELSI  (Elettronica Sicula S.p.A.) Case (US v. Italy), ICJ Rep. 1989, 15.  
 
9 See, for example, the Model investment agreements of Chile, China, France, Mauritius, Peru, 
South Africa, Switzerland and Turkey, Ibid., Vol. III, pp. 148, 154, 163, 181;  Vol. VI, p. 498;  Vol. VIII, pp. 
277 and 284;  and Vol. IX, p. 300.      
10 This is the formulation used in the Model investment agreement of the Netherlands (as revised in 
1997), Ibid.,  Vol. V, pp. 333-338 (337).  WT/WGTI/W/134 
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 step.11  Where negotiations fail, most IIAs allow fo r the submission of the dispute to third-party 
arbitration, at the request of either contracting party. 
3. Arbitration 
(a) Composition of tribunals 
28. As noted, State-to-State disputes are normally submitted to arbitration by ad hoc  tribunals, 
that is, tribunals specifically constituted to hear the dispute in question.  Most IIAs provide for a 
standard procedure for the constitution of arbitral tribunals:  each party selects one arbitrator and a 
third, presiding arbitrator is appointed by agreement of the parties or by the two-appointed arbitrators.  In the absence of agreement, the responsibility fo r appointing the presiding arbitrator is often 
conferred to a designated appointing authority, such  as the President of the International Court of 
Justice, the Secretary-General of the United Nations  or the Secretary-General of the International 
Centre for Settlement of Investment Disputes (ICSID).  It is usually required that the presiding arbitrator not be a national of either of the two disputing parties.  Most  IIAs establish deadlines for the constitution of arbitral tribunals.  Two months generally are allowed for the selection of the party-
appointed arbitrators and an additional two months for the selection of the president of the tribunal.
12  
However, some IIAs provide for longer time-limit s for one or both of these periods, which may range 
from three to six months. 
(b) The tribunal procedure 
29. The majority of IIAs do not establish detailed pr ocedural rules for the conduct of proceedings 
in State-to-State arbitration.  Thus, aside from setti ng forth the fundamental rules that decisions are to 
be taken by majority vote and that they shall be binding, most IIAs provide for the tribunal to 
determine its own procedure.13  Some IIAs, however, stipulate that a specific set of rules be adopted.  
For example, the 1994 U.S. Model BIT (as revise d in 1998) requires that in the absence of an 
agreement by the disputing parties to the contra ry, the arbitration rules of the United Nations 
Commission on International Trade Law (UNCITRAL) shall apply, except to the extent these rules 
are modified by the Parties or the arbitrators and neither Party objects to the modification.14  In certain 
IIAs, the tribunal's ability to determine its own pr ocedure is conditioned upo n the agreement of the 
disputing parties.15  In a few instances, IIAs stipulate a time- period for the completion of the arbitral 
proceedings.16  
(c) The applicable substantive law 30. Many IIAs do not stipulate the law to be applied by  the arbitral tribunal to the merits of inter-
State disputes, i.e., the applicable substantive law.  However, some IIAs do contain a clause 
                                                     
 
 11 See the Model investment agreements of  the United Kingdom and the United States, Ibid., Vol. III, 
p. 191 and Vol. VI, p. 508. 
 12 See, for example, the Model investment agreements  of  Mauritius, South Africa, Switzerland, Turkey 
and the U.K., Ibid., Vol. III, pp. 181-182 and 191;  Vol. VIII, pp. 277 and 285;  and Vol. IX, p. 300. 
 13 This approach is followed in the Model BITs  of Chile, China, France, Germany, Mauritius, 
Switzerland, the U.K and South Africa, see Ibid., Vol. III, pp. 148, 154, 164, 172, 182 and 191;  Vol. VIII, 
p. 277;  and Vol. IX, p. 300. 
 14 See U.S. Model investment agreement, Ibid., Vol. VI, p. 508. 
 15 Such is the case in the BITs between Chile an d Denmark and between Ghana and Switzerland, cited 
in UNCTAD, Bilateral Investment Treaties in the Mid-1990s , (1998), p. 101. 
16 For example, the U.S. Model BIT requires that all submissions be made and hearing completed 
within six months of the date of the selection of the th ird arbitrator and th at the arbitral decision be rendered 
within two months of the date of the final submission or the date of the closing of hearings, whichever is later. 
UNCTAD, International Investment Instruments:  A Compendium , (1996-2002), Vol. VI, p. 508. WT/WGTI/W/134 
Page 10  
 
 establishing that the tribunal shall apply the prov isions of the agreement and the rules and/or 
principles of international law.
17  In certain cases, reference to other agreements concluded between 
the contracting parties is also made.18  In U.S. treaty practice, State-to-State investment disputes 
submitted to arbitration are to be decided "in accord ance with applicable rules of international law".19  
A few IIAs take a different approach as regards th e applicable law.  For example, it may be provided 
that the law of the host country be taken into account , or even that the dispute be decided ex aequo et 
bono (i.e., according to extra-legal principles of ju stice and fairness), if the parties so agree.20  The 
fact that many IIAs do not contain a provision on the applicable law for the arbitration of State-to-State disputes may be partly explained by the ge nerally recognized assumption that international 
agreements are governed by international law.  In any event, since most IIAs require that investments 
be accorded treatment consistent with that accord ed under international law, they implicitly require 
tribunals to apply international law to State- to-State disputes concerning the treatment of 
investments.
21  Thus, the scope of State-to-State arbitr ation under IIAs seems to be considerably 
broadened, as a result not only of references to ru les of international law in the specific dispute 
settlement provisions but also of references to inte rnational law rules in the "treatment" clauses. 
(d) Nature and effect of the arbitral decision  
31. The majority of IIAs provide that the decisions of  ad hoc arbitral tribunals shall be taken by 
majority vote and that they shall be fi nal and binding upon the parties to the dispute.22  Nevertheless, 
it should be noted that most IIAs are silent with resp ect to the nature of the steps to be taken by the 
defaulting State to conform with an arbitral awar d.  Similarly, they often omit reference to the 
possibility of the prevailing State of applying counter measures in the event on non-compliance.  Some 
IIAs do, however, address this issue.  For example, Chapter 20 of the NAFTA provides for 
compensation or suspension of equivalent benef its in case of non-implementation of a panel report.23  
(e) The costs of arbitration  32. IIAs frequently include provisions concerning the apportionment of the arbitration costs 
between the disputing State parties.  The standard a pproach is to establish that each contracting party 
shall bear the costs of the arbitrator it appoints and of its representation in the arbitral proceedings.  
The costs of the presiding arbitrator and the remain ing expenses of the tribunal are to be divided in 
equal parts between the contracting parties.
24  Another approach is to provide that each contracting 
party bear the cost of its own representation and th at all the tribunal's costs, including those of the 
                                                      
17 See, for example, the South African Model BIT, Ibid., Vol. VIII, p. 277.  The Chinese Model BIT 
requires that the principles of international la w be recognized by both Contracting Parties, Ibid., Vol. III, p. 155. 
18 This is the case in the 1992 Norway-Lit huania BIT, cited in Dolzer and Stevens  (1995), p. 128. 
19 An example is provided by Art. VIII (1) of the U.S.-Argentina BIT, cited in Ibid., p. 129.  
20 For example, Article 12.5 of the Model investment agreement of the Netherlands allows for the 
settlement of the dispute ex aequo et bono  if the Parties so agree.  UNCTAD, International Investment 
Instruments:  A Compendium , (1996-2002), Vol. V, p. 337. 
21 UNCTAD, Bilateral Investment Treaties in the Mid-1990s , (1998), p. 102. 
22 See the Revised Draft of Model Agreements for the Promotion and Protection of Investments of the 
Asian-African Legal Consultative Committee, and the Mode l investment agreements of Chile, China, France, 
Germany, Mauritius, Switzerland, the U.K. and the U.S.  UNCTAD, International Investment Instruments:  
A Compendium , (1996-2002), Vol. III, pp. 122, 148, 155, 164, 172, 182, 191;  Vol. VI, p. 508;  and Vol. IX, 
p. 300. 
23 See Articles 2018 and 2019 of the North American  Free Trade Agreement (N AFTA).  The full text 
of the agreement is reproduced in 32 ILM 605 (1993).  
24 See, for example, the Model investment agr eements of Chile, China and Mauritius, UNCTAD, 
International Investment Instruments:  A Compendium , (1996-2002), Vol. III, pp. 148 and 155; Vol. IX, p. 301.  WT/WGTI/W/134 
 Page 11 
 
 
 arbitrators, be paid for equally by the contracting parties.25  Presumably, the latter formula would best 
ensure the neutrality of the proceed ings, since there would be no direct financial connection between a 
contracting party and the arbitrator whom it appoi nts.  Notwithstanding the arrangements mentioned 
above, most IIAs allow the tribunal discretion to determine the apportionment of costs between the 
disputing parties according to any other formula or to decide that a higher proportion of the costs be 
paid by one of the parties.26  
B. INVESTOR-STATE  DISPUTE  SETTLEMENT 
33. Before the inclusion of investor-State disput e settlement provisions in IIAs became a widely 
accepted practice, a foreign investor who felt that his legal rights under an investment agreement had 
been infringed had two remedies available:  (i) to submit a claim before the local courts of the host 
State, or (ii) to request the diplomatic protection of his home State.  However, under customary 
international law a home country generally may not  exercise diplomatic protection unless the investor 
has first exhausted the local reme dies available in the host State.27  Therefore, at least in a first stage, 
domestic courts were the only forum at which an investor could seek redress.  
34. Foreign investors, however, might not fully trust the impartiality of the host State's courts or 
the diligence with which they pro ceed.  Moreover, local courts may deny jurisdiction over the dispute 
on the grounds of sovereign immunity.28  In such cases, or where the investor received no adequate 
remedy from local courts, he could invoke the diploma tic protection of his own State, that is, he could 
request his home country to espouse his claim against the host State.29  This avenue, however, also 
presented certain deficiencies from the point of view of  the investor.  First, no home State is under the 
obligation to espouse a claim from an aggrieved national.   It may choose not to do so if, for example, 
espousing the claim could undermine its international relations with the host State.  Second, if it 
decides to espouse the claim, the home State may settle it at less than its true value, or it may simply 
choose not to return any compensa tion paid to its national.    
35. To address these problems, today virtually a ll modern IIAs contain provisions allowing 
foreign investors direct access to international tribunals  to settle their disputes with host States, either 
by reference to institutional arbitration or to other pr e-existing arbitration rules.  The vast majority of  
IIAs call for the submission of disputes to the Inte rnational Centre for Settlement of Investment 
Disputes, but a considerable number refers to  arbitration under the UNCITRAL Rules, the 
International Chamber of Commerce or other priv ate arbitration institutions.  Furthermore, many 
recent IIAs give investors the freedom to choo se between different arbitral regimes.   
1. Scope of application  
36. In the majority of IIAs, the scope of appli cation of the investor-State dispute settlement 
provision is defined in quite broad terms, requiring only that the disput e be related to an investment, 
regardless of whether there is an alleged breach of a specific provision of the IIA.  Formulations commonly used stipulate that such provision applies to disputes "in connection with", "concerning" or 
                                                     
 
25 An example of this approach is found in th e Model investment agreements of Peru and the 
United States, Ibid., Vol. VI, pp. 498 and 508. 
26 See the Model investment agreements of Fran ce, Germany, the U.K. and the United States, Ibid., 
Vol. III, pp. 164, 172 and 191, and Vol. VI, p. 508. 
27 Peter Malanczuk, Akehurst's Modern  Introduction to International Law , (seventh edition), Routledge, 
London and New York, (1997), pp. xxii-449 (267-268). 
28 According to the international law doctrine of so vereign immunity, the courts of one State, as a 
principle, may not assume jurisdiction over the acts of another State.  Malanczuk (1997), pp. 118-121. 
29 Under customary international law, a State may exerci se its right of "diplomatic protection" to assert 
a claim against another State which has caused injury to one of its nationals in order to obtain compensation or 
some other form of redress.  Malanczuk (1997), pp. 256-257.  WT/WGTI/W/134 
Page 12  
 
 "relating to" an investment.  This approach h as been followed in sever al European bilateral 
investment treaties.
30  
37. Some IIAs define the scope of application of  the investor-State dispute mechanism in 
narrower terms, stipulating that the dispute involve a provision of the agreement.  For example, an  
IIA may provide that the investor-State disput e mechanism applies to disputes relating to the 
provisions of the agreement (e.g., the MERCOSUR Colonia Protocol)31, or concerning an obligation 
of the host State under the agreement (UK Model BIT).32  In a few instances, the scope of application 
is limited to disputes relating only to certain provi sions of the IIA.  For example, the Chinese Model 
BIT limits resort to investor-State arbitration to  disputes involving the amount of compensation to be 
paid for expropriation.33   
38. A third, alternative formulation is found in US  BITs.  In these treaties, the investor-State 
dispute settlement mechanism applies to disputes  relating to an investment authorization or 
agreement, or an alleged breach of a treaty obligation.34  While this formulation requires that the 
dispute should involve some kind of legal obligatio n, it does not only refer to obligations under the 
BIT but also to those under any investment agre ement concluded between the investor and the host 
State.  A further formulation requires that the inv estor or his investment mu st have incurred loss or 
damage by reason of the alleged breach in order to be able to submit a claim to arbitration.  Examples of this approach are found in the investment chapters of several regional/bilateral free trade 
agreements.
35  
39. It should be noted that the scope of the invest or-State dispute resolution mechanism in an IIA 
is largely determined by the definitions of key concepts in the agreement such as "investment" and 
"investor".  The definition of "investment" will n ecessarily circumscribe the subject matters that may 
be submitted to arbitration under such mechanism.  Equally important are the provisions defining who 
may be considered as an "investor" and thus as a potential claimant.36  Clearly, the investments and  
investors not included in those definitions will fall outside the scope of the respective investor-State 
dispute resolution mechanism. 
40. Some IIAs set forth exclusions or exceptions from the application of the investor-State 
dispute settlement provisions.  Aside from the us ual exceptions on national security grounds, specific 
exclusions from dispute settlement for reserved sector s or measures may be established in the text of 
the agreement or in its annexes.  In some instances, the decisions by the competent authorities of the 
                                                      
30 See, for example, the Model investment agreements of Fran ce, Germany, Switzerland and the 
Netherlands.  UNCTAD, International Investment Instruments:  A Compendium , (1996-2002), Vol. III, pp. 163, 
172 and 181, and Vol. V, p. 336.  
31 The 1994 Colonia Protocol on Reciprocal Promotion and Protection of Investments within 
MERCOSUR was concluded by Argentina, Brazil, Uruguay and Paraguay, Ibid., Vol. II, pp. 513-521 (518). 
32 Ibid., Vol. III, p. 190. 
33 Ibid., Vol. III, p. 155. 
34 The relevant provision of the U.S. Model investment treaty reads as follows:  "For purposes of this 
Treaty, an investment dispute is a dispute between a Party and a national or company of the other Party arising 
out of or relating to an investment authorization, an investment agreement or an alleged breach of any right 
conferred, created or recognized  by this Treaty with respect to a covered investment."  Ibid., Vol. VI, p. 506. 
35 Some examples include the investment chapters of the NAFTA, the Free Trade Agreement between 
Mexico and Costa Rica, The Treaty on Free Trade betw een Colombia, Venezuela and Mexico (the "G-3 
Treaty") and the Canada-Chile Free Trade Agreemen t. NAFTA's Chapter 11 is reproduced in UNCTAD, 
International Investment Instruments:  A Compendium , (1996-2002), Vol. III, pp. 73-99.  The relevant excerpts 
of the other agreements can be found in Ibid., Vol. V, pp. 43-105. 
36 Many IIAs contain a provision dealing with the status of enterprises that are owned or controlled by 
investors of one Party but which are incorporated under the laws of the host State, in order to ensure that such 
enterprises have standing under the investor-State arbitration mechanism.  See also infra , para. 51.    WT/WGTI/W/134 
 Page 13 
 
 
 host State whether or not to permit the acquisition of certain investments subject to review procedures 
are also excluded from dispute settlement.37  In other cases, the dispute resolution provisions are not 
applicable to potential investors or investment s, i.e., they only apply to actual investments.38   
2. Consultations/Negotiations 
41. As with State-to-State disputes, virtually all IIAs require the investor and the host State to 
seek to settle the dispute amicably through cons ultations or negotiations before resorting to 
international arbitration or any other means of disput e resolution envisaged in the agreement.  In order 
to provide an opportunity for negotia tions to take place, a substantia l number of IIAs establish that a 
dispute may only be submitted to arbitration afte r a certain period of time has elapsed since the 
dispute arose.  In most cases the specified time-period is six months, but its length may vary.  For 
example, the Energy Charter Treaty prov ides for a period of only three months.39  
3. Exhaustion of local remedies 
42. In certain cases, resort to investor-State arbitr ation may be subject to the exhaustion of local 
remedies.  For example, a number of the earlier BITs  only permitted recourse to arbitration after the 
investor had exhausted any remedies available before the courts or ad ministrative tribunals of the host 
State.  Some of these treaties prescribed that the investor should seek redress before domestic courts 
for a specified period of time, which could range from three to two years.40  Should the result obtained 
through a court decision not be satisfactory to the investor or should the local proceedings not be 
concluded within the prescribed time-period, the inve stor would then be allowed to submit the claim 
to arbitration under the investor-State  dispute settlement mechanism.   
43. Today, many IIAs omit any reference to the exhaustion of local remedies, since this 
requirement is implicitly waived by virtue of the State Parties' advance consent to submit disputes 
with foreign investors to international arbitration.41  Where IIAs envisage recourse to the competent 
courts of the host State, such recourse is usually not mandatory but is only one of several options of 
dispute resolution available to the investor.42  In a few cases, resort to domestic tribunals is the only 
option available, except for disputes concerning the amount of compensation to be paid for 
expropriation which can be submitted to ad hoc  international arbitration, provided that no recourse to 
local courts has been made.43   
                                                      
37 See, for example, NAFTA Article 1138 and Annex 1138.2, and Article G-39 and Annex G-39.2 of 
the Canada-Chile Free Trade Agreement. 
38 E.g.,  under the Revised Draft of Model Agreements for the Promotion and Protection of Investments 
of the Asian-African Legal Consultative Committee, investor -State arbitration is available only with respect to 
"investments made".  Potential investors are also exclud ed from the investor-State dispute settlement procedure 
of the FTA between Mexico and Costa Rica (WT/WGTI/W/68).  
39 Relevant excerpts of the Energy Charter Tr eaty are reproduced in UNCTAD, International 
Investment Instruments:  A Compendium , (1996-2002), Vol. II, pp. 539-577 (568). 
40 For example, earlier BITs signed by Argentina with  Germany and the U.K. pr ovide for an eighteen-
month period during which the investor  must seek redress before the local courts. See Horacio A. Grigera 
Naón, The Settlement of Investment Disputes between States and Private Parties – An Overview from the 
Perspective of the ICC, 1 The Journal of World Investment  1, July 2000, pp. 59-103 (65). 
41 This approach is used in the modern prototype BITs of several developed countries, such as France, 
Germany, the Netherlands, Switzerland, Sweden and the U.K.  It is also fo und in regional free trade agreements 
such as NAFTA, the G-3 Treaty, and the Agreement on Investment and Trade in Services among Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, UNCTAD, International Investment Instruments: A 
Compendium , (1996-2002), Vol. III, pp. 163, 172, 181, 190;  Vol. V. pp. 69, 336;  and Vol. IX, pp. 46, 113. 
42 See, the Model investment agreements of  Chile and Peru, Ibid., Vol. III, p. 147 and Vol. VI, p. 497.  
See also the Mercosur Colonia Protoc ol and the Energy Charter Treaty, Ibid., Vol. II, pp. 518 and 568-569.   
43 See Model investment agreements of China and Mauritius, Ibid. Vol. III, p. 155 and Vol. IX, p. 299. WT/WGTI/W/134 
Page 14  
 
 44. Normally, the investor's choice to use the local remedies or to submit to international 
arbitration is final, i.e. it precludes resort to the excluded option at a later stage.  For example, under 
the Energy Charter Treaty and the Mercosur Col onia Protocol recourse to other remedies precludes 
the right to submit a claim to arbitration.
44  Under the ICSID Convention, consent to arbitration is 
deemed consent to the exclusion of an y other remedy, unless otherwise stated.45  Sometimes, the 
options available do not exclude each other entirely.  For example, under Chapter 11 of the NAFTA, 
while resorting to arbitration requires the investor to waive the right to initiate or continue domestic 
legal proceedings, it does not prevent him from seek ing injunctive declaratory or other relief not 
involving the payment of damages before a local ad ministrative tribunal or court.  Besides, prior 
recourse to local remedies does not exclude resort to  NAFTA arbitration, provided that the investor 
surrenders the right to cont inue such proceedings.  
4. ICSID arbitration clauses 
45. The Convention on the Settlement of Investme nt Disputes between States and Nationals of 
Other States (ICSID Convention) came into fo rce in 1966 under the aegis of the World Bank.46  It 
provides facilities for the conciliation and arbitration of investment disputes between foreign investors 
and host States.  In addition, the International Centre for the Settlement of Investment Disputes, 
established under the Convention, offers the dispu ting parties a range of administrative services for 
the conduct of the proceedings.  
46. By providing an independent arbitration mechanism, whereby an investor could pursue a 
claim against a host State before an international tribunal without the intervention of his home State, 
the ICSID Convention set the basis for future IIAs to include a clause referring to ICSID arbitration.47  
Today, the overwhelming majority of IIAs contain such a clause, while many States have adhered to 
the ICSID Convention.48   
47. ICSID's jurisdiction, as defined in Article 25(1) of the Convention, extends to legal disputes 
arising directly out of an investment between  a Contracting State and a national of another 
Contracting State, where both the investor and the host country have consente d to submit to ICSID's 
arbitration.  The written consent of both disputi ng parties is a fundamental condition for  ICSID's 
jurisdiction.  It need not be expressed in a singl e instrument:  the host State may include its advance 
consent in an IIA or in its national law, and the i nvestor can give its consent by simply instituting the 
arbitral proceedings.   
48. Many modern IIAs clearly set forth the advance consent of the State parties to submit to 
arbitration under the ICSID Convention (or under any other arbitral regime).   An example of this 
approach is provided by the Model BIT of the Neth erlands, which in the relevant provision reads as 
follows: 
"Each Contracting party hereby consents to  submit any legal dispute arising between 
that Contracting party and a national of the other Contracting Party concerning an 
                                                      
44 Ibid. Vol. II, pp. 518 and 568-569.  
45 Article 26 of the ICSID Convention, see infra , note 46. 
46 The text of the ICSID Convention and its rules and regulations are reproduced in ICSID Basic 
Documents , ICSID/15 (1985).  For an in-depth analysis of the ICSID Convention see Aaron Broches, "The 
Convention on the Settlement of Investment Disputes between States and Nationals of Other States" in 
Aaron Broches, Selected Essays, World Bank, ICSID and other Subjects of Public and Private International 
Law, Martinus Nijhoff Publishers (1995), pp. 188-239.  See also I.F.I. Shihata and A. Parra, "The Experience of 
the International Centre for the Settlement of Investment Disputes", 14 ICSID Review  FILJ 299 (1999). 
47 The first bilateral investment treaty to incorpor ate an ICSID clause was the BIT signed between the 
Netherlands and Indonesia in 1968. Dolzer and Stevens (1995), p. 130. 
48 As of June 2002, 134 countries were Contracting States to the ICSID Convention.  WT/WGTI/W/134 
 Page 15 
 
 
 investment of that national in the territo ry of the former Contracting Party to the 
International Centre for Settlement of Investment Disputes for settlement by 
conciliation or arbitration under the Con vention on the Settlement of Investment 
Disputes between States and Nationals of other States, open for signature at 
Washington on 18 March 1965 […]" 49 
49. In some IIAs the consent of the host State is given in an implicit manner by leaving it up to 
the investor to submit a dispute to ICSID arbitration if no amicable solution can be reached within a specified period of time.
50  However, not every clause in an IIA referring to ICSID necessarily 
constitutes an advance consent of the State parties to  submit to arbitration.  For example, some IIAs 
provide that resort to arbitration be subject to th e "agreement" of the disputing parties, which means 
that the host State may or may not give its consent.   Other  IIAs stipulate that the host State "shall 
consent" to ICSID arbitration, or that it "shall assent" to any such demand by the investor, suggesting 
that the host State's consent would need to be obtaine d in respect of each dispute.  While none of these 
formulations implies an automatic right for the invest or to submit a dispute to arbitration, a failure by 
the host State to give its consent would presumabl y constitute a breach of the IIA, which would in 
turn need to be settled through the State-to-State dispute settlement provisions of the agreement.   
50. Certain IIAs include consents to submit to ICSI D arbitration even where one or more of the 
contracting parties are not signatories to the ICSI D Convention.  In such cases, the consent can only 
take effect until both the host State and the home State of the investor become parties to the Convention.
51  In order to address these situations, in 1978 ICSID adopted a set of alternative rules 
called the "Additional Facility", providing for arb itration and conciliation of investment disputes 
where either the host country or the investor's home country, but not both, is not an ICSID 
Contracting State.52  Taking advantage of this, recent IIAs usually combine consen ts to arbitration 
under the Additional Facility with consents to arb itration under the ICSID Convention in anticipation 
of an eventual accession of the States concerned to the Conventi on.  Many bilateral and regional 
investment treaties have followed this approach.  
51. Another important aspect of  ICSID's jurisdicti on concerns the nationality of the investor, in 
particular where the investor is a juridical person.   The basic assumption under the Convention is that 
the nationality of a company is to be determined ac cording to the place of its incorporation or the 
location of its seat.53  Therefore, a company that is incorporated under the law of the host State would 
technically be considered as a national of that State even though it is owned by individuals of another 
Contracting State.  This situation would prevent that company from submitting a claim to arbitration 
since ICSID's jurisdiction does not extend to dis putes between a host State and its own nationals.  
Article 25(2)(b) of the Convention addresses this probl em by providing that the parties may agree to 
treat a company that has the nationality of the host St ate as "a national of another Contracting State" 
if, prior to the dispute54, that company was owned or controlled by nationals of that other State.  Many 
                                                      
49 UNCTAD, International Investment Instruments:  A Compendium , Vol. V, p. 336.  See also the 
preferred alternative for the investor-State dispute provision of the U.K. Model BIT, Ibid., Vol. III, p. 189. 
50 See the Model investment agreements of  Chile and Germany, Ibid., Vol. III, pp. 147 and 172. 
51 This approach was used in NAFT A's Chapter 11, where the option to resort to arbitration under the 
ICSID Convention will not be available until either Canada, or Mexico, or both adhere to ICSID. 
52 ICSID's Additional Facility Rules can be found in ICSID Basic Documents , ICSID/11 (1979). 
53 A. Broches, (1995), p. 206.  
54 The foreign control or ownership is to be appraised prior to the event giving rise to the dispute, so 
that if an act of expropriation is at the origin of the dispute, this will not prevent the expropriated company from 
submitting a claim to arbitration.   WT/WGTI/W/134 
Page 16  
 
 IIAs, particularly bilateral investment treaties, in clude a similar clause to ensure that foreign-owned 
locally incorporated firms fall within the scope  of Article 25(2) (b) of the ICSID Convention.
55   
52. A key provision of the ICSID Convention is that  once a dispute has been submitted to ICSID 
arbitration, the investor's home State may not exte nd diplomatic protection or  bring an international 
claim in respect of that dispute, unless the host State fails to comply with the award rendered under 
the Convention (Article 27(1)).  However, it has be en suggested that this provision does not preclude 
a State-to-Sate arbitration on issues of treaty implementation or application which are related to the investor-State dispute, so long as this does not amou nt to the espousal of the investor's claim by the 
home State.
56  
5. The choice of alternative arbitration rules 
53. While in the past IIAs referred almost exclus ively to ICSID arbitration, nowadays many 
investment treaties provide for a choice among several arbitration mechanisms.  In addition to 
references to the ICSID Convention and its Additional Facility, they also refer to other arbitration 
rules or institutions.  The rules most frequently referred to are the Arbitration Rules of the United 
Nations Commission on International Trade Law.57  As for the institutions, references to arbitration 
under the International Chamber of Commerce a nd the Stockholm Chamber of Commerce are the 
most common.58  Sometimes, reference to regional ar bitration institutions is also made.59  The choice 
of alternative arbitration regimes may prove to be  particularly useful in situations where the 
requirements of ICSID's jurisdiction prevent the application of this system.   
54. A number of IIAs provide for purely ad hoc  arbitration for investor-State disputes.60  In such 
cases, they stipulate the rules that will apply for the appointment of arbitrators and often include a 
provision entrusting the Secretary-General of ICSID with the responsibility to appoint the arbitrators 
where the disputing parties fail to agree on the com position of the tribunal after a specified period of 
time. 
55. Normally, IIAs setting forth several alternative arbitration forms also provide for the State 
parties' consent to each of those forms, by explic itly authorizing the investor to choose the mechanism 
to which the dispute will be submitted.  Some II As use a different formulation stating that the 
disputing parties may agree on the arbitration mechanis m to be used, provided that if no agreement is 
reached, the dispute shall be submitted to one of th e arbitration forms mentioned in the agreement.  
Even when an IIA omits to mention how the arbitral regime is to be chosen, in practice, the investor 
will still retain the power to decide the matter by sel ectively withholding his consent.  This is because 
                                                      
55 Such a proposition is included, for example, in the Model investment agreements of Chile, 
Switzerland, the U.K. (preferred alternative) and th e United States.  UNCTAD, International Investment 
Instruments:  A Compendium , (1996-2002), Vol. III, pp. 147, 181, 189 and Vol. VI, p. 508.   
56 Peter Malanczuk, State-State and investor-State  Dispute Settlement in the OECD Draft Multilateral 
Investment Agreement, Journal of International Economic Law  (2000), pp. 417-439 (436). 
57 The UNCITRAL Arbitration Rules are reprinted in UNCTAD, International Investment Instruments:  
A Compendium , (1996-2002), Vol. I, pp. 71-87.  See also 15 I.L.M. 701 (1976). 
58 An example of this approach is found in the second alternative of the investor-State dispute provision 
of the U.K. Model BIT, which provides that the parties may agree to refer the disput e to:  (a) the ICSID or its 
Additional Facility, (b) the ICC, or (c) an ad hoc  tribunal under UNCITRAL Arbitration Rules.  See Ibid., 
Vol. III, p. 190. 
59 For example, the ASEAN Agreement for the Promotion and Protection of  Investments, refers to the 
Regional Centre for Arbitration in Kuala Lumpur or any other regional centre for arbitration in ASEAN, in 
addition to ICSID and UNCITRAL arbitration, Ibid., Vol. II, p. 297-298.  
60 For example, the Chinese Model investment agreement provides only for ad hoc  arbitration and that 
exclusively with respect to disputes involving the amount to be paid for compensation. Ibid., Vol. III, p. 155.    WT/WGTI/W/134 
 Page 17 
 
 
 in order to initiate an investor-State arbitral pr oceeding the consent of both disputing parties is 
required.61  
6. The applicable substantive law 
56. Arbitral tribunals normally give effect to the parties' own choice regarding the substantive law 
to be applied to their dispute,  whenever this choice is clear.   For example , a clause designating the 
applicable law may be included in an investment c ontract concluded between the investor and the host 
State.  Where the applicable law is  not specified, the tribunals are le ft with the task of determining 
whether national law or international law will apply, or  even whether either of them will be applicable 
to specific issues of the dispute. 
57. IIAs often contain an applicable law clause in th e investor-State dispute settlement provisions.  
A number of them indicate that the IIA's provisions, the laws of the host State, the provisions of the 
investment contract and the principles of interna tional law shall apply.  For example, the Chinese 
Model BIT provides that the tribunal shall adjudicat e in accordance with the law of the host State, 
including its rules on the conflict-of-law, the pr ovisions of the BIT and the generally recognized 
principles of international law accepted by both State Parties.62  In other cases, preference is given to 
the provisions of the IIA and the principles of interna tional law, while the law of the host State is to be 
applied only in a suppletory manner.63  Other IIAs refer exclusively to the provisions of the treaty and 
to the applicable rules of international law, omitting any reference to the law of the State party.  This 
approach is followed, for example, in NAFTA's  Chapter 11 and in the Energy Charter Treaty.64  
58. Where a dispute is referred to ICSID, Article 42 of the Convention provides that in the 
absence of agreement by the parties on the applicab le law, the tribunal shall decide the dispute in 
accordance with the law of the host State and such ru les of international law as may be applicable.  
This provision accords primacy to the parties freed om to agree on the applicable law, while also 
providing guidance to the tribunal as to how this law should be chosen in the absence of agreement by 
the parties.   
59. The arbitration rules of UNCITRAL and the ICC also recognize the autonomy of the parties 
to choose the applicable law.  Th e UNCITRAL Rules, for example, provide that the arbitral tribunal 
shall apply the law designated by the parties and, failing such designation, the law determined by the 
conflict-of-law rules which it considers applicable.  In line with commercial arbitration practice, the 
UNCITRAL rules emphasize the governing force of the investment agreement between the parties, by 
requiring that, in all cases, the tribunal shall decide  the dispute in accordance with the terms of the 
contract and shall take into account the u sages of trade applicable to the transaction.65   
7. The nature and effect of the arbitral award 
60. An important feature of the investor-State dis pute settlement mechanism is that it provides for 
the award of damages.  Thus, if a host State is found to be in breach of an obligation, the tribunal may 
order that the investor be awarded monetary damages,  including applicable interest.  It may also order 
restitution in kind, in which case monetary awar ds may normally be paid in lieu of restitution.66  
Arbitral tribunals, however, are not empowered to  order a host State to revoke or modify an 
                                                      
61 UNCTAD, Bilateral Investment Treaties in the Mid-1990s , (1998), p. 96. 
62 UNCTAD, International Investment Instruments:  A Compendium , (1996-2002), Vol. III, 
pp. 155-156. 
63 See, for example, the FTA between Mexico an d Costa Rica and the Agreement on Investment and 
Trade in Services among Central American countries. Ibid., Vol. V, p. 58 and  Vol. IX, p. 53.  
64 NAFTA Article 1131(1). See also Article  26(6) of the Energy Charter Treaty, Ibid., Vol. II, p. 570. 
65 Article 33 of the UNCITRAL Arbitration Rules, Ibid., Vol. I, p. 84.  
66 See, for example, NA FTA Article 1135(1). WT/WGTI/W/134 
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 inconsistent  measure or policy.  The underlying rationale for this lim itation is to avoid situations in 
which a host State would be bound to change its legisla tion or to adopt measures contrary to its courts 
decisions in order not to incur international responsibility should it not abide by the award.   
61. In accordance with the general rule of intern ational arbitration, awards rendered under the 
investor-State mechanism are binding and final.  Howe ver, if an international arbitral award does not 
comply with the fundamental requirements of due process and fairness, its validity may be challenged 
before the courts of the place of arbitration and thus  be denied recognition by the courts of the State 
where enforcement is sought. 
62. The ICSID Convention differs from other arbitra tion regimes in that it prevents the parties 
from challenging an award rendered by an ICSID tribunal before municipal courts.  Instead, the 
Convention provides for several alternative remedi es of its own:  either party can request the 
interpretation, the revision or the annulment of an arbitral award.
67  Requests for annulment can be 
made on several grounds, inter alia , that the tribunal manifestly exceed ed its powers; that there was a 
serious departure from a fundamental rule of procedure;   or that the tribunal failed to state the reasons 
on which the award was based.  Such requests are heard by an Ad hoc  Committee appointed by the 
Chairman of ICSID's  Administrative Council. 
8. Enforcement and recognition of an arbitral award 
63. Since, under customary international law, States are not required to enforce foreign arbitral 
awards, many IIAs contain provisions aimed at ensu ring the enforcement by local courts of the 
awards rendered under their investor-State arbitrati on provisions.  This is normally done by reference 
to certain international conventions that provide fo r the mandatory enforcement of arbitral awards.  
The most important convention of this kind is th e 1958 New York Convention on the Recognition and 
Enforcement of Foreign Arbitral Awards68, concluded under the aegis of the United Nations, and to 
which many countries have adhered.  One regiona l example is the 1975 Inter-American Convention 
on International Commercial Arbitration.  Neverthe less, even under these treaties, a State may still 
refuse enforcement of a foreign award on a number of grounds, notably, where the matter of the 
difference is not capable of settlement by arbitration under that State's domestic law, or if the award is 
contrary to its public policy.69   
64. Another limitation to enforcement is the f act that under New York Convention the State 
parties are entitled to refuse to enforce arbitral awards  made in the territory of a State not party to the 
Convention.  So, in order to ensure that this does not preclude enforcemen t of awards rendered under 
the investor-State dispute resolution provisions, a numb er of IIAs require that awards be made in the 
territory of a country that is a party to the New York Convention. 
65. The above problems do not arise in the context of the ICSID Convention, which requires 
every Contracting State (not only those concerned by the dispute) to recognize the arbitral awards rendered by ICSID's tribunals and to enforce them as if they were final decisions of a local court (Article 54(1)).  Here, again, ICSID arbitration differs from other arbitral regimes, such as 
UNCITRAL and ICC arbitration, which rely on the above-mentioned conventions to ensure effective 
enforcement of arbitral awards.  It should be not ed, however, that under the ICSID Convention as well 
as under the New York Convention, enforcement agai nst the respondent State may still be refused on 
                                                     
 
67 See Articles 50-52 of the ICSID Convention. 
68The text of the 1958 New York Convention is available at UNCITRAL's website:  
www.uncitral.org/english/texts/arbconc/58conv. 
69 See, for example, Article V of the 1958 New York Convention.  WT/WGTI/W/134 
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 the basis of the principle of "sovereign immunity fr om execution" or the Act-of-State doctrine, both of 
which are preserved in these instruments.70 
66. Where a State party to an IIA is not a si gnatory to any treaty such as the New York 
Convention or the ICSID Convention, then, it is not le gally bound to enforce a foreign arbitral award.  
That is why some IIAs stipulate that each State pa rty shall enforce or provide for the enforcement in 
its territory of awards rendered under the investor-S tate dispute settlement provisions of the IIA.  An 
example of this formulation is provided by th e 1992 BIT between the Russian Federation and the 
United States.71 
67. In case of non-compliance by a host State of an arbitral award, some IIAs provide that the 
investor's home State may bring the claim under the inter-State dispute settlement procedures of the 
agreement.72  Under NAFTA, for example, if a disputing State fails to comply with a final award, the 
home State of the investor may request the NAFTA  Free Trade Commission to establish a panel under 
the inter-State procedures of the agreement.  In  such proceedings, the requesting State may seek a 
determination that the failure to comply with the award is inconsistent with  NAFTA obligations and a 
recommendation that the defaulting State complies with the award.73  Failure to do so may lead to the 
international responsibility of the defaulting State under public international law.  Under the ICSID 
Convention, non-compliance with an arbitral award r eactivates the right of the home State to extend 
diplomatic protection to the investor.74  The home State may also bring a claim against the non-
compliant State at the International Court of Jus tice in accordance with the provisions of the ICSID 
Convention.  Moreover, the home State of the invest or may have recourse to all the other remedies 
available under public international law for breach of an international treaty obligation.75  
9. The costs of arbitration 
68. As is the case with State-to-State arbitra tion, IIAs normally contain provisions concerning 
how the costs of the arbitral proceedings are to be determined.  There is no standard practice on how to approach this, however, the possible options include:  equal sharing of costs among the parties, the "loser pays" formulation, or else, the determin ation is left to the tribunal's discretion.   
V. MAIN DIFFERENCES BETWEEN THE DISPUTE SETTLEMENT PROVISIONS IN 
IIAS AND THE DISPUTE SETTLEMENT SYSTEM OF THE WTO 
69. There are a number of important differences between the dispute resolution mechanisms 
provided for in IIAs and the WTO dispute settlement system.  
70. With respect to State-to-State dispute resolution, as noted before, IIAs normally provide for 
ad hoc  arbitration, i.e., through a mechanism that do es not automatically provide specific procedural 
                                                     
 
70 Simply put, under international law, sovereign immunity from execution concerns the exemption of a 
foreign State from enforcement measures against its stat e property resulting from a municipal court decision or 
an arbitral award.  Under the Act-of -State doctrine, closely related to the principle of sovereign immunity, the 
acts of a State carried out within its own territory ca nnot be challenged in the courts of other States.  
Consequently if a municipal court considers that the aw ard for which enforcement is sought is contrary to the 
above-mentioned principles, it may refuse to enforce the award. Malanczuk (1997), pp. 118-123.   
71 Cited in UNCTAD, Bilateral Investment treaties in the Mid-1990s , (1998), p. 98.  
72 See for example the NAFTA, the FTA between Mexico and Costa Rica and the G-3 Treaty.  
73 NAFTA Article 1136(5). 
74 It is recalled that the ICSID Convention prevents a home State from extending diplomatic protection 
or bring an international claim in respect of a dispute which one of its nationals and a host State have consented 
to submit to ICSID arbitration, unless the host State fails  to comply with the tribuna l's award (Artic le 27(1)).  
75 See for example Article 60 of the 1969 Vienna Conv ention on the Law of Treaties, which allows for 
termination or suspension of a tr eaty as a consequence of its breach. WT/WGTI/W/134 
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 rules and where it is usually left to the tribunals to  determine their own procedures.  In contrast, the 
WTO provides for an institutional dispute resolution system with ad hoc  panelists for each dispute 
and a quasi-permanent Appellate Body, and with deta iled procedural rules for the different phases of 
the settlement process.  It should be recalled, howev er, that some IIAs, particularly at the regional 
level, do establish institutional arrangements fo r the settlement of inter-State disputes.  
71. A significant difference between State-to-State  dispute settlement in IIAs and in the WTO 
relates to the applicable law.  Whereas the scope  of WTO dispute settlement is circumscribed to 
disputes involving rights and obligations under the c overed agreements, the scope of State-to-State 
dispute settlement under IIAs seems to be much broade r.  This is because, in addition to their own 
provisions, IIAs often refer to other rules of in ternational law not only in  the specific dispute 
settlement articles but also in the "treatment" articles.   Besides, they also include references to other 
agreements concluded by the parties as well as to co mmitments entered into with respect to specific 
investments. 
72. Probably one of the most important differences between State-to-State dispute resolution in 
IIAs and in the DSU concerns the issue of complia nce with dispute settlement awards.  On the one 
hand, most IIAs, and almost all BITs, do not deal with the issue, but in case of non-compliance, the 
prevailing State is free to resort to the remedies available under the customary law of State responsibility (including unilateral c ountermeasures and the suspension of the operation of the treaty).  
It should be noted, however, that some IIAs, na mely bilateral and regi onal economic integration 
agreements, do contain their own systems of sanctions  in case of non-compliance.  On the other hand, 
the DSU establishes a self-contained system of reme dies in the event of non-compliance, which can 
take the form of temporary compensation or susp ension of concessions or obligations.  The adoption 
of countermeasures by the prevailing Member is onl y permitted on the basis of prior authorization and 
under certain conditions.  Unilateral action is not allowed under the WTO system.  
73. There are also fundamental differences between the investor-State dispute settlement 
provisions contained in IIAs and the WTO dispute settlement system.  Some of these differences, 
which reflect the diverse purposes and functions of th ese two types of mechanisms, are the following.   
74. First, as noted before, an outstanding feature of the investor-State mechanism is that it allows 
the private investor direct access to an internationa l tribunal to pursue a claim against the host State 
without requiring the diplomatic protection or the intervention of his home State.  Investor-State 
arbitration is considered as one of the most im portant means of investor protection in IIAs, 
particularly in those whose main purpose is to  protect the investor's rights against unlawful 
expropriation or discriminatory treatment.  Clearly, this represents a fundamental difference with 
respect to the WTO dispute settlement system, where non-governmental actors are prevented from 
submitting disputes under the DSU and where only Member  States, if they wish  to espouse the claims 
of their nationals, can initiate the dispute se ttlement process against other Member States. 
75. A second important difference relates to the kind of legal remedies available under each of 
these types of dispute settlement.  It is recalled that under investor-State arbitration, if a host State is 
found to be in breach, the tribunal is generally em powered to order that the investor be awarded 
monetary damages and/or restitution of property with applicable interest.  The arbitral tribunal cannot, 
however, order a host State to revoke or modify an  inconsistent measure or policy.  Again, this 
situation differs fundamentally from the WTO dispute settlement system, where it is generally understood that neither the panels  nor the Appellate Body can recommend the payment of monetary 
damages.  Instead, if a violation of a WTO Agr eement is found, the Dispute Settlement Body shall 
recommend that the offending Member bring the inc onsistent measure into conformity with its WTO 
obligations.   WT/WGTI/W/134 
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 76. There is also a significant difference as regards review procedures.  Under ad hoc  investor-
State arbitration, the arbitral awards are normally  final, although a losing State may request that an 
award be set aside or annulled on procedural  grounds before municipal courts.  The ICSID 
Convention goes beyond ad hoc  regimes, by requiring that ICSID awards not be subject to any appeal 
or to any other remedy except those provided for in the Convention.  Under the WTO system, on the 
other hand, the DSU allows the disputing Members to  request for an appellate review of the panel 
report concerning issues of law and the le gal interpretations made by the panel.76  The main difference 
between ICSID's annulment procedures and the WTO a ppellate review is that, while under the former 
an award can only be annulled on the narrow proced ural grounds set forth in the Convention and the 
parties are thus free to submit the dispute to a ne w tribunal, the WTO's Appellate Body can not only 
nullify a panel decision for procedural defects, but it can also modify or reverse the legal findings and 
conclusions of a panel and s ubstitute its own decision for the panel's recommendations.77   
77. Another important difference between the two types of systems concerns the issue of 
enforcement.  Under investor-State arbitration the enforcement of arbitral awards is normally 
achieved by reference to certain in ternational conventions providing for the enforcement of foreign 
arbitral awards, such as the 1958 New York Conven tion and the ICSID Convention.  Where a State 
fails to comply with an arbitral award, under some  IIAs the investor's home State may bring the claim 
under the State-to-Sate dispute settlement procedures of  the agreement, or, if it is an ICSID award, 
under the relevant provisions of the ICSID Convention.   As a last resort, the investor's home State 
may use the remedies available under customary inte rnational law of State responsibility for breaches 
of an international treaty.  On the other hand, as noted above, under the dispute settlement system of 
the WTO, in case of non-compliance, the affected Me mber is entitled to seek compensation or, if this 
is not possible, the authorizati on to suspend equivalent concessions  to the non-compliant Member.  
78. Finally, it should be mentioned that, while under the investor-State dispute settlement 
mechanism the costs of arbitration are to be borne dir ectly by the disputing parties, this is not the case 
under the WTO dispute settlement system.   
__________ 
 
 
                                                      
76 It should be noted, however, that  if the arbitration procedure of Ar ticle 25 of the DSU is used, the 
arbitration report cannot be appealed. 
77 UNCTAD, Dispute Settlement (Investor-State), UNCTAD Series on issues in international 
investment agreements (forthcoming).