Part II – Exhaustion of Local Remedies: A Missed Opportunity for Meaningful Engagement

The discussion of exhaustion of local remedies (draft provision 14) illustrated many of the challenges currently facing WGIII. The version presented in Working Paper 244 was notably weaker than an earlier draft in Working Paper 231. Rather than proposing a clear requirement for investors to pursue domestic remedies before initiating ISDS claims, it merely encouraged parties to consider doing so—something investors are already free to do under current rules.

The Chair opened the discussion by indicating that it was “clear that including mandatory exhaustion would not achieve consensus.” While this may have reflected prior conversations, it deterred the possibility of deeper engagement on the proposal, which many delegations had been prepared to discuss. As the European Union representative observed, “we question the effect of the provision—what is the added value?” It’s a fair question. The draft includes no obligation, incentive, or enforcement mechanism to promote the use of domestic courts or administrative bodies. Yet, the EU added that “this is indeed a compromise, and we share the spirit of compromise.” However, the text as drafted offered little indication of compromise: it is difficult to identify what, if anything, has been traded. Unfortunately, the provision risked reinforcing the status quo under the appearance of reform.

A broad range of countries—including Brazil, Côte d’Ivoire, Ghana, Kenya, Lesotho, Namibia, Nigeria, Sierra Leone, Thailand, and Zimbabwe—expressed support for a stronger exhaustion requirement. Yet those opposing it framed the current “encouraging” text as a reasonable middle ground. This group included the delegations of Canada, Japan, Switzerland, the United Kingdom, and industry observer, CCIAG—but also the Dominican Republic, India, and Iraq. In our intervention, we highlighted the sharp divergence in views, emphasizing that exhaustion of local remedies is critical for rebalancing ISDS and strengthening domestic institutions for many in the room. However, we also pointed out that other reform proposals—like the appellate or standing mechanism—are advancing on an opt-in basis and suggested that the same approach could apply here. This would allow those States prioritizing local remedies to adopt stronger commitments, without making consensus a barrier.

Sierra Leone proposed a revised text that introduced a two-paragraph approach: one voluntary paragraph encouraging use of local remedies, and another allowing for a 36-month extension to the statute of limitations if such remedies were pursued. While this proposal garnered some interest, it also generated much confusion. Viet Nam, for example, raised a valid concern: what incentive would an investor have to pursue local remedies if doing so only served to extend the limitation period? There were also familiar interventions questioning the reliability of domestic courts. CCIAG, in a sweeping generalization, remarked, “I have been around too many courts in the world, it’s not realistic to get local courts to make a decision in 36 months.” The discussion did not fully clarify where consensus stood.

The Chair sought to bring the discussion to a quick close, aiming to identify broad agreement on the new language, but several States that had just expressed support for a mandatory requirement were never asked to indicate whether they had shifted from that position. The so-called compromise was introduced abruptly and with little clarity, leaving many delegations without a meaningful opportunity to engage. The result was a draft that many see as providing minimal change, despite strong support for a more ambitious approach. The provisional text currently reads:

1. Prior to submitting a claim to the tribunal, a party may initiate proceedings before a court or competent authority of a Contracting Party where available.
2. Where a claim is submitted for resolution in [local adjudicatory proceedings] [before a court or competent authority] of a Contracting Party, the limitation period [in draft provision 16] shall begin:
   1. after the claimant has obtained a final decision of the court of last resort of that Contracting Party, or
   2. 36 months following the initiation of local adjudicatory proceedings if no final decision is reached [within] [after the lapse of] that period, [whichever is earlier].

For many States, exhaustion of local remedies is a foundational component of ISDS reform—both to ensure respect for domestic institutions and to reduce unnecessary recourse to international arbitration. The inability to adopt even an opt-in model suggests an ongoing reluctance to challenge entrenched interests—and a persistent deference to a status quo that many view as ineffective and imbalanced.

The draft provision could have required exhaustion of local remedies as a mandatory step. Under the current two conditions—either obtaining a final decision or waiting 36 months without resolution—investors would still retain access to ISDS, meaning the basic right to arbitrate would be preserved. This is what a real compromise would have looked like, i.e., one that balances investor access with the sovereign right—and responsibility—of States to have their domestic institutions adjudicate disputes. It is critical to give these institutions the opportunity to function in investor-State disputes, as it is the only meaningful way to strengthen their rule of law frameworks and improve institutional capacity. After all, the perceived weakness of domestic legal systems in developing countries is often cited by foreign investors and their Home States as justification for bypassing them altogether.

See Part III – The Denial of Benefits Provision: A Test Case for Real Reform

Back to Part I – ISDS Reform Without Remedy: A Report from the 51st Session of UNCITRAL WGIII