The ability of foreign investors to choose international arbitration as a dispute resolution mechanism can create significant problems. Lack of coherence and discrimination regarding regulation can arise from the resolution of substantive issues, whereas concerns about transparency and fairness to third parties derive from the arbitral proceedings when compared with rights recognized to them in domestic law. However, possible solutions might be equally troublesome.
THE BACKGROUND: FOREIGN INVESTMENT DISPUTE RESOLUTION
Since the 1965 Washington Convention, a trend toward recognition of foreign investors' right to bring action directly against foreign host states has emerged. This multilateral treaty allowed investors to refer disputes with a state party directly to arbitration or conciliation procedures under the International Centre for the Settlement of Investment Disputes (ICSID), if the consent of both parties was obtained in writing. Blanket consent to the jurisdiction of ICSID or to ad hoc arbitration under United Nations Commission on International Trade Law (UNCITRAL) rules became common in the 1970s, and bilateral investment treaties (BITs) containing these provisions increased dramatically in the 1980s and 1990s. Nowadays, virtually all modern treaties provide for a mechanism to settle investment disputes by reference to institutional or other arbitration rules.
BITs are treaties between two states, by which each one promises, on a reciprocal basis, to observe the standards of treatment laid down by the treaty in its dealings with investors from the other contracting state) Since the 1959 Germany-Pakistan BIT, BITs have been made not only between a developed country and a developing country, but also between two developed countries or between two developing countries. BITs are a common feature in free-trade agreements as an investment chapter (e.g., NAFTA's Chapter 11).
Basic features of BITs usually include the scope and definition of foreign investment, most-favored-nation (MFN) status, national treatment, fair and equitable treatment, guarantees and compensation in respect of expropriation, warranties of free transfer of funds, capital and profits, subrogation on insurance claims and, notably, dispute settlement provisions. (2) According to the latter, disputes which have not been settled amicably, may, at the investor's choice, be submitted either to the domestic courts of the host state or to international arbitration, mainly to ICSID or using ad hoc arbitration rules such as UNCITRAL Arbitration or International Chamber of Commerce (ICC).
Local courts are often not used by foreign investors to address disputes regarding foreign investment, and this happens for different reasons: investor interest in having a non-biased tribunal, an expeditious process, a judgment under a...