59. Arbitration and diplomatic protection of investment

10 May

Arbitration and diplomatic protection of investment

1. In the field of international business, private investment abroad has historically enjoyed the diplomatic protection of the State of its nationality. However, today it is considered that such protection does not provide foreign investors sufficient legal guarantees especially when they operate in countries with little legal or political stability or both.

2. However, diplomatic protection remains an essential instrument for the international protection of the individual, essentially in the field of human rights.

3. It is common for companies located abroad, when circumstances so warrant, to seek the protection (or assistance) of the diplomatic and consular missions of the country of origin of the company, or its owners, with regard to investment in the host nation. It should be noted, however, that there generally exist many treaties in this field incorporating direct methods of arbitration that a foreign company or investor can “trigger,” when the circumstances require, against the respective host State. But such treaties may also contain clauses that prevent resort to diplomatic protection.

4. In addition, it must be taken into account that the signatory states of the WTO and free trade agreements can go to arbitration based on procedures they establish. Another mechanism used for settling such disputes is that of the World Bank’s International Centre for Settlement of Investment Disputes.

5. The requirements for the implementation of international action of diplomatic protection are:

a)      Establishment of “the criterion of effective nationality.” A State cannot protect its national if it the national is guilty of wrongdoing. However, a State can make statements on behalf of companies holding the nationality of the applicant.

b)      No action of a State shall be admissible if the individual has not previously exhausted all remedies provided by the laws of the State concerned.

c)      An act that harms the compatriot should be unlawful in relation to international law (denial of justice, unjustified delay in its administration, or judgment against the law). Furthermore, another condition is the “right conduct” (“clean hands”) by the compatriot, i.e., the compatriot has not caused by his own behaviour the alleged damage.

6. With regard to commercial arbitration, it is evident that with rising frequency it is gaining ground as a flexible, fast, reliable and effective resolution of commercial disputes. Progress is evident in this field, especially in the Americas, where arbitration features within the constitution of several countries, through the incorporation of universal and regional treaties relating to arbitration and by the adoption of new laws or reform of existing laws that govern them.

7. This evolutionary process has been instrumental to the point that virtually all Latin American countries have conducted or have gone to international arbitration.

8. The major legal barriers that have traditionally prevented arbitration from becoming the most effective to resolve international commercial disputes in Latin America have now been suppressed. The process has finally found a solution consonant with the legal bodies of countries around the world, especially those most familiar with the practice of this effective dispute settlement procedure.


Editor’s Note: Credits to Amb. Manuel Morales Lama


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