Investor-State Dispute Settlement between Developed Countries: Reflections on the Australia-United States Free Trade Agreement

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Free trade agreements between developed countries now frequently contain provisions on investor protection, but the resolution of disputes remains problematic. Chapter 11 of the North American Free Trade Agreement (NAFTA) allows investors to bring direct claims against a host state before an international tribunal without exhausting domestic remedies. This has resulted in a number of claims against the United States by Canadian investors and against Canada by U.S. investors. Chapter 11 of the Australia-United States Free Trade Agreement (AUSFTA) does not permit direct claims, relying instead on a state-to-state dispute resolution mechanism.

This Article reviews the evolution of investment-dispute resolution from diplomatic protection to NAFTA and A USFTA. It suggests that because developed countries have developed legal systems capable of resolving investment disputes expeditiously and without bias, it should be possible to marry the advantages of direct claims with those of the local remedies rule, allowing investors to enforce their own rights under a treaty but requiring them to do so in domestic courts first.


     A. Diplomatic Protection
     B. Direct Claims
     C. Treaties
     A. The Advantages of Direct Claims
     B. Requiring Exhaustion of Local Remedies
        1. Preserving Sovereignty
        2. Allowing Appeals
        3. Providing a Single Forum
        4. Responses to Some Anticipated

As Sherlock Holmes knew, sometimes the best clue is the dog that doesn't bark. (1) In the case of the Australia-United States Free Trade Agreement (AUSFTA), (2) that dog is the mechanism for settling investor-state disputes. Chapter 11 of AUSFTA, like its North American Free Trade Agreement (NAFTA) (3) counterpart and the investment chapters of other recent free trade agreements (FTAs), contains substantial protections for nationals of one signatory country who invest in the other. (4) In contrast to these other agreements, however, Chapter 11 of AUSFTA does not allow investors to bring claims directly against a host government before a panel of arbitrators. The Australian Department of Foreign Affairs and Trade explains that "[t]his outcome recognises the fact that both countries have robust and sophisticated domestic legal systems that provide adequate scope for investors, both domestic and foreign, to pursue concerns about government actions." (5) Foreign investors may not submit their AUSFTA claims to these "robust and sophisticated domestic legal systems," however, for in neither the United States nor Australia may private parties bring suits to enforce AUSFTA. (6) Thus, the only way of enforcing the agreement's investment provisions is through Chapter 21's state-to-state dispute settlement provisions, (7) a throwback to the era of diplomatic protection.

The likely reason for the absence of investor-state dispute settlement provisions in AUSFTA is a desire to avoid the experiences of the United States and Canada under NAFTA Chapter 11. NAFTA Chapter 11 allows investors of one NAFTA party to bring claims directly against the government of another NAFTA party before an international panel of arbitrators. (8) Moreover, because NAFTA Article 1121 waives the local remedies rule, investors are not required to exhaust their remedies in domestic court before filing Chapter 11 claims. (9) Although both the United States and Canada had entered bilateral investment treaties (BITs) providing for immediate, direct claims by investors before NAFTA, such treaties had always been with less developed countries that made few investments in their more developed partners. (10) The obligations of such treaties are reciprocal in theory but not in fact, for it is generally only the less developed country that bears the risk of being sued. …