SCHOOL OF LAW

Comparative Business Law, LLM Degree Regular Program

COURCE TITLE .COMPARATIVE INVESTEMENT LAW

COURSE CODE.CBL 6041

GROUP ASSIGNMENT

TITLE; DIPLOMATIC PROTECTION USED TO SOLVE INVESTOR-STATE

INVESTEMENT DISPUTE IN ETHIOPIA THE LAW AND THE PRACTICE.

GROUP MEMEBERS

1. SHUMETE WOMAA ID NO ECSU 2301932

2. SOLOMON GEBRE ECSU 2301991
3. MULUKEN DIDU ECSU 2301987
4. SOLOMON BEZABIH ECSU 2301997
5. SIMECHEGN ALEMU ECSU 2301899
6. ADIMASU AKALU ECSU 2302024

Submitted to: TESFAYE ABATE (PHD)

Submission date: 4/1/2024 G.C.

ECSU, Addis Ababa, Ethiopia

List of Abbreviations

BIT Bilateral Investment Treaties

CIL Customary International Law

DP Diplomatic Protection

FDI Foreign Direct Investment

ICSID International Centre for Settlement of Investment Disputes

IIA International Investment Agreements

IL International Law

ITO International Trade Organization

MIT Multilateral Investment Treaties

MFN Most Favoured Nation

NAFTA North American Free Trade Agreement OECD Organisation for Economic

Co-operation and Development

OECD Organization for Economic Co-operation and Development

UNCITRAL United Nations Commission on International Trade Law

UNCTAD United Nations Conference on Trade and Development

VCLT Vienna Convention on the Law of Treaties

WTO World Trade Organization

 CHAPTER ONE

1.1 INTRODUCTION

Diplomatic protection was the usual form to settle investment disputes before the spread of
investor-state arbitration. Investors would involve their home country‘s diplomats to put pressure
on the host state governments. This results in the politicisation of disputes which are not
necessarily political in nature. What is more, the quality of the outcome may depend on issues
entirely irrelevant to the actual dispute, such as any trade-offs between the governments, or the
general quality of bilateral relations. In the worst case, bilateral relations will deteriorate as a
result of what is essentially an issue between an investor and the host State, or, alternatively, in
order for relations to remain intact, governments may decide to play down the dispute and
ultimately fail to resolve it. Both fact patterns occurred frequently before the introduction of the
investor-state dispute resolution system through arbitration clauses in BITs in the late 1950s.

International economic ties and trade between states are essential to national development in
today's globalized world. Over the past few decades, states and citizens around the world have
been connected by the process of globalization as well as significant advancements in technology
and transportation. The expansion of trade and economic ties between states has benefited from
this. These days, nearly all developed and developing nations aim to draw in foreign direct
investment (FDI).

In the past, the home state of the investor had direct responsibility for the protection of its
citizens who invested abroad; this function was a component of foreign policy. Typically, home
states would support the claims of their citizens and work to diplomatically resolve
disagreements with host states. According to earlier studies, this kind of defense came to be
known as diplomatic protection (DP). DP is defined as "a concept of customary international law
whereby a State espouses the claims of its nationals against another State and pursues them in its
own name," according to a recent definition.1

Host states do, in fact, compete to attract foreign direct investment (FDI) for a variety of reasons,
including the potential for job creation, which influences the local economy either directly or
indirectly and opens up new avenues for the advancement of culture, technology, and education.

Powerful states have frequently used DP over the years to safeguard the assets possessed by their
citizens in host nations. Forceful tactics, like "gunboat diplomacy," have been employed when
necessary against a host state, and this strategy was once thought to be a valid and legal way to
settle disputes. Nevertheless, this kind of strategy helped to foster a political environment that
ultimately turned disagreements between investors and states into disputes between states. These
days, it is illegal to use any form of force against another sovereign state, as stated in Article 2
(4) of the UN Charter.

1
ILC Draft Articles on DP (2006
The 18th and 19th centuries saw the height of DP's popularity. This was due to the belief that
states were the exclusive subjects of public international law (IL) during this period.
Consequently, either corporations nor individual investors were able to legally sue a state for
breaking international regulations.2

As a result, disputes involving foreign nationals and host nations became politicized. This
strategy eventually started to negatively affect state-to-state investment relations and had an
effect on other aspects of foreign policy. In the context of DP, a few requirements must be
satisfied for the investor's home state to formally support the investor's claim. The primary
requirement for direct participation (DP) is that the investor must be an actual citizen of the state
that is providing protection. In this context, the term "genuine" is crucial for two reasons: first,
investors may hold or claim multiple nationalities, which complicates the issue of which state
supports a claim; second, investors may change to a different citizenship in order to obtain DP.
Due to these factors, "nationality" issues must be settled by a tribunal that verifies the investors'
actual and true nationality, as was the case in the Nottebohm case.3

The application of the local remedies rule serves as the second prerequisite. This is yet another
crucial prerequisite for DP. If the investor's home state has not yet exhausted local remedies, it is
unable to support its national's claim. The person has to request to resolve the conflict in the host
state through the local courts prior to filing a DP. Using DP thus presents difficulties in the
global sphere, and the investor's claim may not be approved by the home state even after
fulfilling all prerequisites. Additionally, in DP, the investor will not have any control over the
dispute and will have to wait for a resolution even if the individual's home state has asserted a
claim. Investors must thus fulfill various requirements in order to resolve a single investment
issue, and even then, they cannot be certain that their home state will acknowledge claims made
against another state. It may not always be the intention of the investor's home state to provoke
hostilities with another state. DP as a dispute resolution mechanism is not encouraged by these
kinds of requirements, which lead to other issues and discourage investors from using it.

It is a long-standing principle of public international law that States owe duties to other
States to protect their citizens. This is known as the doctrine of diplomatic protection‘.
Effectively, BITs are treaties that acknowledge this principle of public international law,
particular circumstances between two States and develop the protection of investors by
giving them ‗standing‗ to pursue a State directly in investment disputes‗ between an
investor and a State Party in ways that are set out in the BIT .

Diplomacy and investment protection are two closely linked concepts in international relations.
Diplomacy refers to the art of resolving conflicts and building relationships between countries
through negotiation and dialogue, while investment protection refers to the legal and institutional

2
Leonie Timmers, ‘The Protection against Expropriations in Venezuela: A Right to Property in Theory’ in Freya
Baetens (eds) Investment Law within International Law (Cambridge University Press 2013) 138.
3
The Affaire Nottebohm Case (Leichtenstein v Guatemala) ICJ (1955).
frameworks that are put in place to protect foreign investments from political and economic
risks.

The relationship between diplomacy and investment protection is multifaceted. On the one hand,
diplomacy can be used to create a conducive environment for foreign investment by promoting
peace and stability, resolving trade disputes, and negotiating investment agreements. On the
other hand, investment protection can be used as a tool of diplomacy, as countries can use the
threat of withdrawing investments or imposing sanctions as a way to pressure other countries to
change their policies.

In recent years, there has been a growing emphasis on the importance of diplomacy and
investment protection in promoting sustainable development. Foreign investment can be a
powerful engine of economic growth and job creation, but it can also have negative impacts on
the environment and society. Diplomacy can be used to ensure that foreign investments are made
in a responsible manner and that the benefits are shared equitably.

Overall, diplomacy and investment protection are essential tools for promoting peace, prosperity,
and sustainable development in the globalized world.

1.2 THE DEFINATION OF DIPLOMACY

Diplomacy is the practice of conducting negotiations and maintaining relations between nations
or other political entities. It is a key tool in the realm of international relations, and it
encompasses a wide range of activities including dialogue, negotiation, and strategic
communication. Diplomacy is used to manage conflicts, facilitate trade, promote cultural
exchange, and address global issues such as security, human rights, and the environment.

At its core, diplomacy is about the management of international relations and the advancement of
a country's interests through peaceful and cooperative means. It involves the representation of
one's nation or government in dealings with other countries, international organizations, and non-
state actors. Diplomats are the primary practitioners of diplomacy, and they are responsible for
representing their country's interests, conveying official positions, and engaging in negotiations
to resolve disputes or advance common goals. Diplomacy can take many forms, from bilateral
talks between two countries to multilateral negotiations involving numerous parties. It can also
encompass public diplomacy, which involves engaging with foreign publics through cultural,
educational, and informational exchanges. In addition, economic diplomacy focuses on
promoting trade and investment opportunities, while digital diplomacy utilizes technology and
social media to engage with global audiences.

The practice of diplomacy is guided by principles such as international law, mutual respect, and
the pursuit of peaceful resolution of conflicts. Diplomats work to build trust, seek common
ground, and foster understanding between nations. They often serve as mediators, facilitators,
and advocates for peaceful solutions to international disputes. Successful diplomacy requires a
range of skills and attributes, including effective communication, cultural sensitivity, strategic
thinking, negotiation prowess, and a deep understanding of international affairs. Diplomats must
also be adept at building and maintaining networks of contacts, navigating complex political
landscapes, and representing their country with professionalism and integrity.

Diplomacy is crucial for managing the complexities of the globalized world and addressing
transnational challenges. It plays a critical role in conflict prevention and resolution, promoting
economic cooperation, addressing climate change, and advancing human rights. By building
bridges between nations and fostering dialogue, diplomacy seeks to prevent and minimize
conflicts, promote international cooperation, and advance shared interests.

In general diplomacy is the art and practice of managing international relations through dialogue,
negotiation, and strategic engagement. It is a vital tool for promoting peace, resolving conflicts,
and advancing the interests of nations in an interconnected world. Diplomacy encompasses a
wide range of activities and requires a diverse set of skills, all with the goal of fostering
understanding and cooperation among nations.
 CHAPTER TWO

THE HISTORICAL BACK GROUND OF PROTECTING INVESTORS THOUGH

DIPLOMACY

2.1 THE BACKGROUND OF FOREIGN INVESTORS PROTECTION UNDER

CUSTOMARY INTTERNATIONAL LAW

Over the ages, disputes over the protection of foreign investors have arisen frequently; the
problem was first recognized in classical times. Before global accords like the ICSID
Convention or BITs, states' traditional international investor treatment included the
extraterritorial application of domestic laws, the reciprocity principle, and restrictive frameworks
for how foreign nationals were treated under domestic legislation. The definition of the various
components of a state, such as a permanent population, a defined territory, a sovereign
government, and, most importantly, the ability to enter into international agreements, was greatly
advanced by the 1933 Montevideo Convention on the Rights and Duties of States. The narrow
definition of the state as an organization capable of defending its citizens and its territory from
foreign invasions was broken by this convention.

The Calvo Doctrine (1868), the Hull Formula (1938), the United Nations General Assembly
Resolution (XVII) on the Permanent Sovereignty Over Natural Resources (1962), the
International Law Commission (ILC) Draft Articles on the Internationally Wrongful Acts of
States (2001), the ICSID Convention (1966), and other legislative acts contributed to the
broadening of the understanding of state responsibility for the protection of foreign investors.
and Treaties for Bilateral Investment (BITs). To safeguard the international trade regime, the
aforementioned international legal instruments concentrate on preventing states from acting
arbitrarily or unilaterally against foreign investors. Furthermore, these global advancements
encompass the application of diplomacy in addressing "unfair" trade practices. In fact, the goal
of the international legal system has always been to strike a compromise between a state's right
to control foreign investments and the protection of those investments. Finding balance has been
aided by transitional solutions like the Hull formula and the Calvo Doctrine. Despite having little
standing in the international community, the Calvo Doctrine was instrumental in the ILC's draft
conventions and later developments that resulted in the ICSID Convention, the laws of the sea,
and other treaties in the 1960s. The Hull Formula was designed to provide compensation in cases
where property in other states was arbitrarily seized. The UNGA Resolution 1803 (XVII) from
1962 reaffirmed the requirement of paying foreign investors.

In addition, in response to suggestions from the UN, bilateral investment treaties, or BITs, were
created. These treaties contain the concept of suing a state for damages caused by inadequate
protection of foreign investments.

The protection of foreign investors was addressed in the ILC Draft Articles of State
Responsibility in 2001. The scope of state actions that violate international responsibility by
harming the interests of foreign investors is defined in the Draft Articles. Member states are
required by Article 4 of the Draft Articles to act obediently to international law rather than
arbitrarily.

The ILC Draft Articles on the Expulsion of Aliens (2014) will be consulted in order to examine a
state's authority to expel a foreign national from its territory. Article 13 of the ICCPR examined
in relation to expelling foreigners from a state‘s territory and the various conditions must be
fulfilled.

2.2 A HISTORICAL PROTECTION OF ALIENS ; DIPLOMATIC PROTECTION

Article 1 of the 1933 Montevideo Convention on the Rights and Duties of States, provides the
following:

―The State as a person of international law should possess the following qualifications: (a) a
permanent population; (b) a defined territory; (c) government; and (d) capacity to enter
into relations with other States.‖

It is part of human nature to travel abroad for a variety of reasons, including tourism, business,
education, and investment. When citizens of one nation enter a foreign state, they are sometimes
described as "aliens," which is shorthand for outsiders.1 The word "alien" is derived from the
Latin word alius, meaning "other." This is evidenced by the history of international relations,
which attests to the fact that states can only survive if they are able to protect both their
sovereign territory and their citizens. This means that states see it as their duty to protect both
their land and their citizens on both national and foreign territory. 4 The Latin word alius, which
means "other," is where the word "alien" originates.5 Therefore, an alien is an individual who,
according to the laws of a given state, is not considered its national.6 In previous centuries,
'alien-others' have been treated differently in different jurisdictions.

Historically, one of the four guidelines listed below has allowed foreigners to access local
tribunals:

1. extra territoriality. While the alien is abroad, they may be governed by their own national
laws.7

4
Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer
Law International 2009) 3.
5
Ibid
6
Carmen Tiburcio, The Human Rights of Aliens under International and Comparative Law (Martinus Nijhoff
Publishers 2001) 1.
7
Frank Griffith Dawson, Ivan L Head, and Peter E Herzog, International Law, National Tribunals, and the Rights of
Aliens (Syracuse University Press 1971) 109.
2. Equivalency. when an alien's rights are contingent upon the same rights being accorded to
citizens of the alien's home nation.8These corresponding rights may be enjoyed by an alien if
they are granted diplomatically, legally protected, or merely made available on the basis of
reciprocity.9

3. The Restricted Framework. The foundation for this is the equality of nationals and foreigners.
Although this rule may be declared in theory, there may be numerous significant exceptions that
apply to aliens, enough to negate the value of any guarantees.10

4. Integration or fairness in treatment. The same rights are accorded to foreign nationals as they
are to host state citizens.11

There have been instances where these four guidelines have not been sufficient to handle every
situation involving diplomatic protection. In certain cases, aliens were prohibited from joining
any community except their own under these regulations.12 Many citizens started to feel that they
needed greater protection from their national governments when they traveled or conducted
business abroad as a result of this and other forms of discriminatory treatment. It should be
remembered that in earlier centuries, people were not protected by international law; rather, only
states were, and people were unable to use that legal framework to defend their own rights. The
duty of a state was to defend its people against the rulers and subjects of other nations.

Furthermore, historically, nations have not been required to allow foreigners onto their territory.
However, once a foreign national entered a country, international laws determined that the host
state had a duty to protect the foreign national and/or his property to the extent required by
internationally recognized minimum standards for the treatment of aliens.13

In the event that these principles are not followed, international laws may be broken, putting the
host state at fault.14 "Whoever ill-treats a citizen indirectly injures the state, which must protect
that citizen and the sovereign of the latter should avenge his wrongs, punish the aggressor, and, if
possible, oblige him to make full reparation since otherwise the citizen would not obtain the
great end of the civil association, which is safety," wrote Emil Vattel in 1758, the first definition
of this concept.15

8
Ibid
9
Ibid
10
Ibid
11
Ibid
12
Ibid
13
John Dugard ‘Diplomatic Protection’ in James Crawford, Alain Pellet, and Simon Olleson (eds), Oxford
Commentaries on International Law: The Law of International Responsibility (Oxford University Press 2010) 1051.
14
Ibid
15
Emmerich Vattel, The Law of Nations, or the Principles of Natural Law (Book II Chapter VI, Liberty Fund 1758)
298.
Vattel's idea was widely acknowledged on a global scale as the cornerstone of the diplomatic
protection principle. His primary goals were to safeguard foreign nationals and to rationalize
diplomatic protection as an institution. It should be highlighted, though, that diplomatic
protection has been used since the Middle Ages, if not before.16One of the earliest rights
recognized by international law is diplomatic protection.17 However, it is relatively new when
compared to other international legal frameworks (like the laws of the sea or territorial
claims).18Before the late eighteenth and early nineteenth centuries, diplomatic protection has not
been exercised in any documented cases.19Nevertheless, prior to this, government policies had
long addressed the protection of citizens and their property, much like they did with other
matters like foreign policy, business, and economics. Furthermore, a person's property was
essentially considered the nation's property until recently.20 For example, the British military
invaded Latin America 26 times between 1820 and 1914 to uphold British subjects' rights to
compensation for outrage and harm, or to keep the peace and safeguard their property.21

The British Foreign Secretary, Lord Palmerston, outlined the country's policy regarding
diplomatic protection for bondholders during this time.22

According to him, the government's political judgment, grounded in "sound policy

considerations," alone should be the basis for providing this kind of protection.23

Strong states frequently exploited diplomatic protection against developing nations.

Consequently, attorneys started searching for different dispute resolution procedures and
establishments where investors could reach a just resolution of their disagreements. They came
to the determination that Investors should be urged to resolve their conflicts through arbitration,
mediation, and negotiation. These techniques are now frequently employed by parties engaged
in dispute; they are favored over the diplomatic protection of parties; however, diplomatic
protection still has a place in international law. In the past, politicians have actively participated
in defending their citizens both domestically and internationally. As a result, some political
philosophies have been recognized as legitimate legal theories and given names after their
proponents such as Cordell Hull (The Hull Formula), Luis María Drago (The Drago Doctrine),
and Carlos Calvo (The Calvo Doctrine). These instances demonstrate how crucial it has always

16
Ian Brownlie, Principles of Public International Law (6th Edn, Oxford University Press 2003) 500.
17
Anna Maria Helena Vermeer-Künzli, The Protection of Individuals by Means of Diplomatic Protection:
Diplomatic Protection as a Human Rights Instrument, (D. Phil Thesis, University of Leiden, 2007) 141 available at:
https://openaccess.leidenuniv.nl/bitstream/handle/1887/12538/proefschrift%20vermee
r%20binnenwerk.pdf?sequence=2 last accessed 15 DECEMBER 2014.
18
Chittharanjan Amerasinghe, Diplomatic Protection (Oxford University Press 2008) 8
19
Ibid
20
Supra Vattel (n 15) 302
21
Charles Lipson, Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries
(University of California Press 1985) 54.
22
Micheal Waibel, Sovereign Defaults before International Courts and Tribunals (Cambridge University Press
2011) 23
23
Ibid
been to take nationals' rights and interests into account when making legal decisions that affect
daily life and business across international borders.

2.3 The Calvo Doctrine (1868)

Until the 19th century, Latin American states saw diplomatic protection as a means of enforcing
discriminatory laws rather than as a means of defending their citizens' human rights.24 The
misapplication of diplomatic protection by powerful states against Latin American states and
their citizens gave rise to this opinion. The idea propagated by European states was that Latin
American states' legal systems were slow and ineffective compared to their own, and that when it
came to providing protection for their citizens, Latin American court systems fell short of legal
systems in Europe.25

Moreover, Western nations exerted diplomatic pressure and occasionally militarily intervened in
Latin American developing states to assert pressure. These political desire give the rise to create
more logical, moral and secure legal defenses.In 1868 the Argentine diplomat, jurist, and scholar
Carlos Calvo. According to Calvo, foreigners ought to receive the same treatment as natives of
his nation.

The independence of a nation's territorial jurisdiction and the equality of nations served as the
foundation for his doctrine.26It is noteworthy that proponents of this doctrine do not make the
strict equality claim, since it is evident that foreigners are not always treated equally with locals
in other countries.27In a similar spirit, foreigners would be subject to limitations on the types of
property they may own and activities they engage in, rather than being granted complete political
rights or access to all economic activities.28

It makes sense that America and the states in Europe rejected Calvo's theory. This was because,
as capital-exporting nations, they were able to exert political pressure on developing nations in
order t protect their interests, in addition to making investments abroad national interest.

However, Calvo's ideas gained traction in nations that import capital, particularly in Asia and
Latin America. Calvo's ideas were starting to find their way into agreements these economically
dependent nations made with foreign investors. This approach came to be known as applying the

24
ohn R. Dugard, 'ILC First Report on Diplomatic Protection Agenda’ Item 6 *2000+ UN Doc A/CN.4/506 and
Add.1, 212
25
Horacio A Grigera Naon ‘Arbitration and Latin America: Progress and Setbacks’ in Julian D.M. Lew and Loukas
A Mistelis (eds), Arbitration Insights: Twenty Years of the Annual Lecture of the School of International Arbitration
(Kluwer Law International 2007) 398.
26
Carlos Calvo, Le Droit International Théorie et Pratique (5thedn, A. Rousseau 1896) 350; Donald R Shea, The
Calvo Clause: A Problem of Inter-American and International Law and Diplomacy (University of Minnesota Press
1955) 14.
27
Oscar M Garibaldi, ‘Carlos Calvo Redivivus: The Rediscovery of the Calvo Doctrine in the Era of Investment
Treaties’, (2006) 3 (5) Transnational Dispute Management 18.
28
Ibid
"Calvo Clause." The Calvo Clause's primary goal was to restrict or, if feasible, completely
eliminate diplomatic interposition—something that governments in Latin America had been
unable to do with other strategies.29The clause further stipulated that national law would be used
to settle any disputes. An exploration of international legal practises confirms that diplomatic
protection was exercised before, during and after the development of the Calvo Clause.
International law affirms that a state‘s right to diplomatic protection may not be waived, even
though an entity or individual may waive a personal right to diplomatic
30
protection. Furthermore, not only developed states exercise diplomatic protection.

2.4 The Hull Formula (1938)

Investing overseas is something that investors do at their own risk. The reason for this is that
investors run the risk of having their investments either confiscated, nationalized, or expropriated
by their home state. Many people assume that these three terms have the same meaning.

Legally speaking, though, they are not the same. In legal parlance, confiscation refers to a state
taking away a person's property, whether or not this is done as a form of
punishment.31Nationalization is the process by which a state assumes control over or makes use
of specific resources and goods as a result of enacting new laws affecting property or deciding it
must take action to safeguard the interests of the public or public security.

Nationalization is the process by which a state seizes control of or makes use of specific
resources and goods as a means of implementing new policies that impact property or when the
state determines it must take action to safeguard the interests of the public or public security.32

Expropriation is the process by which the state takes away someone's property; however, unlike
confiscation, expropriation carries no criminal consequences.33Investors are seriously at risk as a
result of these actions. Expropriation had international repercussions before 1917. Dispute
resolution techniques between the expropriating and expropriated nations included government
pressure, diplomatic intervention, and arbitration.34This was especially important during the
1917 Russian Revolution and remained so during the 1930s Mexican nationalization movement.

It would be less risky for investors if they could get ‗prompt, adequate and effective‘
compensation from home states. Achieving these outcomes is one possible solution for investors,
which would avoid or, at least, minimize the risks of being subjected to expropriation by host
states. The terms ‗prompt‘, ‗adequate‘ and ‗effective‘ have different meanings but all can used to
29
Supra 26
30
Majorie M Whiteman, Digest of International Law (1967) 8 Washington, Department of State Publications 918.
31
Saul Litvinoff, ‘Creeping Expropriation’ (1964) 33 (2) Revista Juridica de la Universidad de Puerto Rico 217.
32
Saul Litvinoff, ‘Creeping Expropriation’ (1964) 33 (2) Revista Juridica de la Universidad de Puerto Rico 217.
33
Ibid
34
Nicholas R Doman, ‘Postwar Nationalisation of Foreign Property in Europe’ (1948) 48 (8) Columbia Law Review
1126
support investors. For instance, the term ‗prompt‘ requires paying compensation without
unreasonable delay; ‗adequate‘ means that investors should receive the equivalent to the
fair market value of the expropriated property (as valued immediately before it was
expropriated); whilst ‗effective‘ means that payment must be made in a freely transferable
currency.35 The development of The Hull Formula began with a letter from Secretary Hull to the
Mexican Ambassador in Washington on the 21stof July 1938, about the payment of
compensation to American nationals for agrarian and oil properties that had been taken over by
the Government of Mexico.36Secretary Hull wrote the following:

― The American owners, whose properties have been taken, are left not only without
present payment but also without assurance that payment will be made within any foreseeable
time...‖The taking of property without compensation is not expropriation. It is
confiscation. Governments would be free to take property far beyond their ability or willingness
to pay and the owners thereof would be without recourse. We cannot question the right of
a foreign government to treat its own nationals in this fashion if it so desires. This is a
matter of domestic concern. But we cannot admit that a foreign government may take the
property of American nationals in disregard of the rule of compensation under international law.
Nor can we admit that any government unilaterally and through its municipal legislation can, as
in this instant case, nullify this universally accepted principle of international law based as
it is on reason, equity and justice.‖37

The Mexican Minister of Foreign Affairs responded to this letter on the 3rd of August
1938, stating the following:

―There is in international law no rule universally accepted in theory nor carried out in practice,
which makes obligatory, the payment of immediate compensation nor even of deferred
compensation, for expropriations of a general and impersonal character like those, which
Mexico has carried out for the purpose of redistribution of the land.‖38However, at the end of
the letter, the Mexican official admits that, in obedience to Mexico‘s laws, they were
indeed under an obligation to indemnify to American nationals in an adequate manner, but they
stressed that the manner of such payments must be determined by their own laws.39On the
13April 1940, Secretary Hull wrote a note back to the Mexican Ambassador in Washington,
stating the following: ―The Government of the United States readily recognises the right of
a sovereign state to expropriate property for public purposes. […] The right to expropriate
property is coupled with and conditioned on the obligation to make adequate, effective and
35
Frank G Dawson and Burns H Weston, ‘Prompt, Adequate and Effective: A Universal Standard of Compensation’
(1962) 30 Fordham Law Review 737-738; Borzu Sabahi, Compensation and Restitution in Investor-State
Arbitration: Principles and Practice (Oxford University Press 2011) 93.
36
Green Haywood Hackworth, Digest of International Law (Vol.3 Chapters IX-XI, Washington D.C. United States
Government Printing Office 1942) 655
37
Ibid
38
Ibid
39
Ibid
prompt compensation. The legality of an expropriation is in fact dependent upon the observance
of this requirement.‖40 These letters reveal that American policy was to protect its
investors abroad. For the United States of America (USA), expropriation, nationalisation and
confiscation can only be legal if the investor obtains ‗prompt, adequate and effective
compensation‘. Nevertheless, it is worth mentioning that questions about awarding
compensation to the owners of expropriated property and abolishing vested rights have been
raised for thousands of years.41

Less developed countries (LDCs) began collaborating with the UN in order to achieve complete
economic independence; however, early attempts in this area by less industrialized nations were
unsuccessful. However, the UN adopted the "Declaration on Permanent Sovereignty over
Natural Resources" in 1962 as part of General Assembly Resolution 1803 (XVII), which was
widely endorsed for the first time in both the developed and developing worlds. 42This resolution
mandated that in the event of expropriation, sovereign states provide "appropriate"
compensation. This resolution mandated that in the event of expropriation, sovereign
governments provide "appropriate" compensation. At the time this resolution was approved, the
UN was seeing an increase in collective opposition to The Hull Formula.43

Developing nations started to sign Bilateral Investment Treaties (BITs) with wealthier nations
about the same time.

2.5 The International Law Commission [ILC] Draft Articles on Diplomatic Protection,2006

ILC document is the Draft Articles on Diplomatic Protection (2006). When these Articles were
drafted, diplomatic protection was still generally perceived as being closely related to state
responsibility. The first Special Rapporteur, Carcia Amador, included a number of draft articles
relating to diplomatic protection in his report.44The ILC decided to work on these special
inter-linked topics separately. Thus, many of the principles contained in the Articles on State
Responsibility for Internationally Wrongful Acts are not repeated in the Draft Articles on
Diplomatic Protection.45The ILC‘s work on diplomatic protection begins by defining the
principles of diplomatic protection in Article 1 as follows:

―Diplomatic protection consists of the invocation by a State, through diplomatic action or other
means of peaceful settlement, of the responsibility of another State for an injury caused by an

40
Ibid
41
Ibid
42
Noah Rubins and N. Stephan Kinsella, ‘International Investment, Political Risk and Dispute Resolution: A
Practitioner’s Guide’ (Oceana Publications 2005) 167.
43
Zachary Elkins, Andrew T. Guzman and Beth Simmons, ‘Competing for Capital: The Diffusion of Bilateral
Investment Treaties, 1960-2000’ in Micheal Weibel and Asha Kaushal et al. (eds), The Backlash against Investment
Arbitration: Perceptions and Reality (Kluwer Law International, 2010) 493
44
Dugard (n 13) p. 1052
45
International Law Commission, 'Report on the Work of its 58th Session' [2006] 10 A/61/10 New York 22
internationally wrongful act of that State to a natural or legal person that is a national of the
former State with a view to the implementation of such responsibility.‖46

Interestingly, Article 1 does not provide a complete definition of diplomatic protection, rather, it
describes the characteristics and features of diplomatic protection. The reason for this might be
that if Article 1 had provided a precise definition, this would create difficulties in practise in the
future. Additionally, if the ILC narrowed down or drew a defined scope of diplomatic protection,
this might result in disagreement between states, which may delay the ILC‘s work on diplomatic
protection. As in the past, according to the Draft Articles on Diplomatic Protection, diplomatic
protection can only be exercised where certain circumstances are met.

2.6 The Necessity of Diplomatic Protection

In 1975, the scholar Lillich stated the following:

―Hence, pending the establishment of international machinery guaranteeing third-party

determination of disputes between alien claimants and states, it is in the interest of all
international lawyers not only to support the doctrine (of diplomatic protection), but to oppose
vigorously any effort to cripple or destroy it.‖47

Before the Second World War, only countries and states were the subjects of international law.
The only opportunity held by individuals to protect their rights abroad was via the use of
diplomatic protection. However, after the Universal Declaration of Human Rights (1948), the
situation changed and individuals became the subjects of international law. This meant that
individuals could now enforce their human rights at an international level.

The institution of diplomatic protection as a procedural device has undergone change, by recent
legislations made in the area of human rights.48However, it has not disappeared, nor have any
human rights declarations prohibited diplomatic protection as a dispute settlement mechanism.
What all this means is that for individuals, diplomatic protection can provide a similar
protection mechanism system to human rights declarations, because persons can now seek
to defend themselves against national states. In short, an individual‘s rights are better protected
by modern international law. Nevertheless, states still ―own‖ international law. diplomatic
protection will survive as an institution, based on the theory that the state owns rights in
international law, and not the individual.

ICSID Convention, investors are permitted to initiate settlement procedures directly against
host states, without any intervention by national states. This is classed as one of the
46
ILC Draft Articles on Diplomatic Protection [2006] Article 1.
47
R. B. Lillich, ‘The Diplomatic Protection of Nationals Abroad: An Elementary Principle of International Law
under Attack’ (1975) 69 (2) The American Journal of International Law 359.
48
Wilhelm Karl Geck, 'Diplomatic Protection' (1987) in Rudolf Bernhardt (eds), Encyclopaedia of Public
International Law (published under the auspices of the Max Planck Institute for Comparative Public Law
and International Law) 1046.
successes of the Convention. It is believed that the Convention, with its prohibition of
diplomatic protection, simply de-politicises investor-state disputes. When the ICSID
Convention was drafted, the exclusion of diplomatic protection was explained in terms of the
obligation to abide by the agreement to arbitrate, in order to avoid a multiplicity of claims and
claimants, and to remove disputes from the realm of politics and diplomacy into the realm of
law.49However, when the Convention was approved, it was on the basis that, under
certain circumstances, diplomatic protection could not be exercised until the enforcement stage
of the investor-state procedures was reached.50In this respect, Article 27 of the Convention states
the following:

―(1) No Contracting State shall give diplomatic protection, or bring an international claim, in
respect of a dispute which one of its nationals and another Contracting State shall have
consented to submit or shall have submitted to arbitration under this Convention, unless such
other Contracting State shall have failed to abide by and comply with the award rendered in such
dispute.

(2) Diplomatic protection, for the purposes of paragraph (1), shall not include informal
diplomatic exchanges for the sole purpose of facilitating a settlement of the dispute.‖51

Thus, Article 27 (1) of the Convention prohibits the exercise of diplomatic protection by
the investor‘s national state if the parties have consented to arbitration, unless the host
state has failed to abide by and comply with an award. However, it does not mean that
parties to the ICSID Convention are automatically prevented from exercising diplomatic
protection overinvestment disputes involving their own nationals vis-à-vis other contracting
parties.52They are prevented from doing so only if the parties have consented to or have
actually initiated arbitration under the ICSID Convention.53However, it should be noted that
‗consent‘ to ICSID arbitration by the investor cannot be construed as a valid waiver of
diplomatic protection.54This means that, even under the ICSID Convention, diplomatic
protection will be revived if the host state fails to abide by and comply with the award. Lastly, it
is worth mentioning that diplomatic protection is not only triggered when the enforcement of an
arbitral award is needed. In some rare cases, it can be exercised by the home state against
a host country for the purpose of avoiding future disputes.

2.7 Conditions for Exercising Diplomatic Protection

49 nd
Schreuer H Christoph et al., The ICSID Convention Commentary (2 Edn, Cambridge University Press 2009)
50
R. Doak Bishop, Enforcement of Arbitral Awards against Sovereigns (JurisNet LLC 2009) 26
51
ICSID Conventions [1965], Article 27.
52
August Reinisch and Loretta Malintoppi, ‘Methods of Dispute Resolution’ in Peter Muchlinski , Federico Ortino
and Christoph Schreuer et al. (eds), The Oxford Handbook of International Investment Law (Oxford University
Press, 2008) 714.
53
Ibid
54
Ibid
The exercise of diplomatic protection is based on meeting certain conditions. When certain
conditions are met, diplomatic protection is legally exercisable for national states. Some
conditions that need to be met for the exercise of diplomatic protection. First of all, a person
must have the nationality of a state. This means, in most cases, only nationals are under the
protection of their governments. this nationality requirement is the most significant formal
pre-requisite for diplomatic protection. This is because without the connecting factor of
nationality, normally there cannot be any diplomatic protection.55 Secondly, the right of
diplomatic protection can only arise if the ‗injured‘ person has exhausted all local remedies
available in the host state. Lastly, the alien (the investor) has to be injured by the host state's
wrongful act.

2.8 The Nationality of Individuals

People are the most important elements of states. This is because, nationhood does not
require statehood, but there can be no statehood without a nation, which comprises nationals and
territorial sovereignty.56National entities in a certain territory determine the existence of states
and the formation of nation-state relationships. This relationship is a, ‗historicbiological‘
idea based on the, ―subjective corporate sentiment of unity members of a specific group‖ who
make up a race or a nation.57

Nowadays, this concept is usually linked to a political or legal structure, but this link
was not made in the past. Historically, only states could be the principal subjects of
international law, but under contemporary international law, individuals are included also.
Interestingly, before the independence of the United States of America, and during British
colonial times, ‗nationals‘ were classed as ‗subjects‘.58

2.9 Nationality and Diplomatic Protection

Nationality was defined as a legal and political link between the state and the individual. In
this state-individual relationship, it is not sufficient for the individual to consider himself or
herself a national of a state, and instead the state in question must expressly recognize an
individual as a national. This requirement is important because only according to this kind of
state-individual connection can diplomatic protection (DP) be exercised. In other words, if
rights of protection are given according to the lawful administration of the territory, then it

55
Guy I F Leigh, ‘Nationality and Diplomatic Protection’ (1971) 20 International and Comparative Law
Quarterly 453.
56
Kay Hailbronner ‘Nationality in Public International Law and European Law’ in Rainer Bauböck, Eva Ersboll, Kees
Groenendjik and Harald Waldrauch (eds) Acquistion and Loss of Nationality, Volume I: Policies and Trends in 15
European Countries (Amsterdam University Press 2006) 35.
57
O’Leary Siofra, The Evolving Concept of Community Citizenship: From the Free Movement of Persons to
Union Citizenhip (Kluwer Law International 1996) 6.
58
Maximilian Koessler, ‘Subject’, ‘Citizen’, ‘National’, and ‘Permanent Allegiance’ (1946) 56 (1) The Yale Law
Journal 60.
might be said that nationality arise from the fact of the rights of protection. The two ideas are
interlinked. In addition, scholars have interpreted the exercise of DP differently. For some
scholars, the question of ‗nationality‘ is of international importance.59Others are interested in
the benefits of nationality in respect of the area of international law.60

2.10 Nationality under the ICSID Convention

As with other international Conventions, the ICSID Convention sets out its own jurisdiction.
Article 25 of the Convention clearly states the conditions and requirements under which the
Convention is applicable. Article 25 requires that: (a) dispute must be a legal dispute; (b) it must
arise out of an investment; (c) one party must be a contracting state (or any constituent sub-
division or agency of a contracting state designated as such to the Centre, by that state),and the
other party must be a foreign national of a member state; and, (d) both parties must have
consented, in writing, to have recourse to the Centre.‖ 61 It should be noted that
ratification of the ICSID Convention by a contracting state signifies only that the state
consents to being bound by the ICSID. It does not mean that the state consents to undergo
arbitration in respect of disputes with foreign investors.62

This demonstrates that the idea of the 'consent' of the parties concerned is, ―the cornerstone of
the jurisdiction of the Centre.‖63Articles 25 (2) (a) and (b). It will begin by examining the
following: how to define a ‗national of another contracting state‘; the nationality of ‗natural
persons‘ as referred to in Article 25 (2) (a); and the nationality of ‗juridical persons ‗of other
contracting states as noted in Article 25 (2) (b). The importance of nationality from the
perspective of DP, and it was concluded that nationality is a crucial requirement for exercising
DP. In public international law, the question of nationality has developed primarily in the
context of DP.64

However, in respect of The ICSID Convention, the issue of nationality has taken a different path,
and one that does not give nationality the same level of importance it had under the rules of DP.
It should be noted that the meaning of the term ‗nationality‘ in the context of The ICSID
Convention is not identical to the meaning it has under the laws of DP. 65In the field of DP, the

59
I. A. Shrear, Starke's International Law (Buttersworths, 1994) 309
60
Annemarieke Vermeer-Künzli, ‘Nationality and Diplomatic Protection: A Reappraisal’ in Alessandra Annoni
and Serena Forlati, The Changing Role of Nationality in International Law (Routledge 2013) 76.
61
The ICSID Convention [1965] Article 25.
62
Georges R. Dealume, ‘ICSID Arbitration: Practical Considerations’ (1984) I (2) Journal of International
Arbitration 104
63
Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States
and Nationals of Other States [1965] International Bank for Reconstruction and Development [23] available at
https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc_en-archive/ICSID_English.pdf, (last accessed November
2023).
64
Christoph H. Schreuer with Loretta Malintoppi et al. The ICSID Convention: A Commentary (2 nd edn, Cambridge
University Press, 2009) 267.
65
C.F. Amerasinghe, ‘The Jurisdiction of the International Centre for the Settlement of Investment Disputes’
purpose of ‗nationality‘ is to establish an adequate link between the private party and the state
giving protection, in order to enable the latter to espouse a claim.66

Nationality remains a significant factor in explaining the relationship of an investor with

a state. A textual and contextual analysis of Article 27 of the ICSID Convention reveals that,
invoking diplomatic protection for foreign investments remains an exceptional remedy, and can
only be applied after fulfilling certain conditions. The fundamental focus of these conditions is
the failure of the contracting state to protect foreign investments and the exhaustion of available
local remedies. The concept of nationality remains one of the most significant factors that can
trigger the process of diplomatic protection in relation to foreign investments in accordance with
ICSID norms.

2.11 The Exhaustion of Local Remedies

The ‗exhaustion of local remedies‘ rule in relation to the protection of foreign investments,
which is a second essential condition for invoking diplomatic protection as a remedy. In
investment disputes, a foreign investor can contend that local remedies have not been effective
due to the reluctance of the contracting state to provide access, or that the remedies available
were not adequate. Where remedies are inadequate for the purposes of justice, an
aggrieved foreign investor has the right to invoke international jurisdiction. However, it is
essential to establish if the contracting state is at fault, or directly or indirectly involved in
denying justice to foreign investors. Article 44 (b) of the ILC Draft Articles on the Responsibility
of States for Internationally Wrongful Acts (2001), explains that state responsibility is not
invoked where the exhaustion of local remedies rule is applicable, and where there is an effective
local remedy that a claimant has not exhausted. Foreign investors bear some responsibility for
invoking diplomatic protection, and this responsibility includes respect for the sovereignty of the
contracting state, providing adequate time for the host state for redress, avoiding the premature
exercise of diplomatic protection, and any kind of abuse of diplomatic protection. The
ILC Draft Articles clarify the use of the exhaustion of local remedies rule when: there is no
adequate or effective redress available; where undue delay in redressing a grievance has
occurred; where foreign investors have been excluded from exercising their rights in local
systems of redress; and where adequate remedy has not been provided. Furthermore, invoking
diplomatic immunity requires proving the state‘s part in the denial of local justice. However, it
might not always be possible to claim that corrupt practices have been involved in the
judicial or executive branch of a state. The exhaustion of local remedies rule remains
fundamental to resolving international disputes, but modern ICSID Convention takes a
lenient view on this condition.

(1979) 19 Indian Journal of International Law 198

66
Ibid
The exhaustion of local remedies rule in investment treaty arbitration is subject to customary
international law. The ICSID and related international legal frameworks try to resolve issues
under the local jurisdiction of the contracting state. Article 26 of the ICSID Convention Provides
an option for international arbitration with consent. The exhaustion of local remedies rule,
keeping in mind various BITs and multilateral agreements, regional agreements such as the
North American Free Trade Agreement (NAFTA). ICSID has eased the conditions of the
rule, and available case law shows that an international investor can go to an
international tribunal without strictly exhausting all available national remedies. This flexibility
has been introduced in response to the existence of under-developed remedial systems in various
countries. The modern international legal interface for resolving international investor
disputes calls for mutual agreement on using international methods of settlement

2.12 The Exhaustion of Local Remedies under Customary International Law

The second prerequisite for the exercise of diplomatic protection is that a claimant is required to
have exhausted all local remedies. The term ‗local remedies‘ defines any legal remedies
available (whether ordinary or special) in the state alleged to be responsible for causing the
injury.67These remedies should be open to the injured person, and offered by local judicial or
administrative courts or bodies.68Originating in Europe in the Middle-Ages, before the birth of
the modern nation state, this requirement evolved as part of customary international law. 69It can
be traced back to the ancient practice of reprisals.70However, it was only in the 19th and 20th
centuries, that this requirement became firmly established in international law in relation to
diplomatic protection.71

In 1803, Chief Justice Marshall asserted that the British Government was, ―a government of
laws and not of men…if the laws furnish no remedy for the violation of a vested legal
right.‖72This view was soon articulated in the Calvo Doctrineof 1868, which deemed that
foreigners should be subject to the local laws of the state where the offence occurred, and must
submit any disputes to its courts.73

The gist of the idea of local exhaustion is intended to apply to aliens, who must exhaust all
domestic remedies available under the law of the host state. By way of explanation, an alien can
seek reparation for the wrongful acts of the host state under the host state‘s national laws. This

67
ILC Draft Articles on Diplomatic Protection with Commentaries [2006] Article, 14 (2) 70
68
Ibid
69
Chittharanjan Amerasinghe, Local Remedies in International Law (2ndedn, Cambridge University Press 2004) 22
70
A A Cançado Trindade, ‘Origin and Historical Development of the Rule of Exhaustion of Local Remedies in
International Law’ *1976+ 2 RBDI 501
71
Amerasinghe (n 3) p.28
72
Marbury v Madison [1803] 5 U.S. 137 163.
73
Nsongurua J. Udombana, ‘So Far, So Fair: The Local Remedies Rule in the Jurisprudence of the African
Commission on Human and Peoples’ Rights’ (2003) 97 (1) The American Journal of International Law 4
gives the host state the opportunity to redress alleged wrongs within the framework of its own
domestic legal system, before international responsibility can be invoked.74

Bochard explains that DP is limited for the following reasons:

1) A person going abroad is presumed to take into account the means furnished by local
laws for the redress of wrongs.

2) The rights of sovereignty and independence support the demands of the local state for
freedom from interference in its courts, on the assumption that they are capable of doing justice.

3) The home government should have the opportunity offer justice to the injured party in its own
regular way, thus avoiding international scrutiny.

4) If an individual or minor official committed the injury, the exhaustion of local remedies is
necessary to discover that the wrongful act or denial of justice was or was not a deliberate act of
the state.

5) If the act was a deliberate act of the state, this rule provides an opportunity to ascertain
whether the state wishes to leave the wrong un-righted.75

Amerasinghe criticises these arguments and asks what would happen if a state was unwilling to
repair a wrong even after local remedies have been exhausted.76

In addition, Amerasing he questions what remedies must be exhausted in order to satisfy the
requirements of the rule, particularly with respect to extraordinary remedies.77

However, these questions remain unanswered. Indeed, Jessup argues that the rule of
exhaustion of local remedies is, ―well established‖ but ―inadequately‖ because, ―the alien
must exhaust his local remedies before a diplomatic claim is made.‖78

Even though the rule of local exhaustion divides the views of scholars, the rule still continues to
be used in modern international law. Article 44 (b) of the ILC Draft Articles on the
Responsibility of States for Internationally Wrongful Acts (2001) explains that a state‘s
responsibility is not invoked where the exhaustion of local remedies rule is applicable, and where
there is an effective local remedy that the claimant has not exhausted. Roberto Ago argues that,

74
A.A. Cançado Trindade, The Application of the Rule of Exhaustion of Local Remedies in International Law:
Its Rationale in the International Protection of Individual Rights (Cambridge University Press, 1983) 1.
75
Edwin M Bochard, The Diplomatic Protection of Citizens Abroad or the Law of International Claims (The
Banks Law Publishing Co., 1916) 817.
76
Chittharanjan Amerasinghe, State Responsibility for Injuries to Aliens (Clarendon Press, 1967) 171.
77
Chittharanjan Amerasinghe, Diplomatic Protection (Oxford University Press, 2008) 144
78
Philip C Jessup, A Modern Law Of Nations (1st edition Macmillan 1948) 104
according to Article 44, the principle of the ‗exhaustion of local remedies‘ is an essential and
absolute condition for the determination of the existence of an internationally wrongful act. 79

The purpose of this Article is to cover any case in which the exhaustion of local remedies rule
applies, whether this is under treaty or general international law, or in spheres that are
not necessarily limited to diplomatic protection.80A similar view on the exhaustion of local
remedies can be found in Article 14 of the International Law Commission [ILC] Draft Articles
on Diplomatic Protection (2006). According to Article 14 of this legislation, those
required to exhaust all local remedies include the following: natural persons, legal persons,
foreign companies or parties mainly financed by public capital, non nationals, and in
exceptional circumstances, refugees and stateless persons (Article 8).81However, injured
aliens can exhaust only those remedies which might result in a binding decision.82

Local remedies are relevant to the settlement of certain international disputes involving
states but this is applicable only in cases where a state is not directly aggrieved.83

This means that the law is not applicable between states, and the rule is not relevant if there is a
direct breach of international law against to another state, for instance, when the injuries are
against diplomatic or consular staff. In other words, heads of state, ministries, diplomatic
agents, or consular agents who are already enjoying ‗special international protection‘ in a
foreign territory do not need to exhaust local remedies.84The main idea behind this exception is
that these people are classed as state organs, and they are accepted as a foreign state in itself.85

For this reason, the rule is not applicable to them. Foreign companies who are mainly or partly
financed by public capital are not outside the scope of this rule, and in these
circumstances public funds cannot be used as grounds not to exhaust local remedies.

2.13 The Exhaustion of Local Remedies in Investment Treaty Arbitration

Under CIL, national courts play a significant role in the mechanism of the rule, but under the
ICSID Convention different principles apply. The purpose of the ICSID is to encourage
parties away from dealing with national courts in order to de-politicise disputes. In the
preamble of the Convention it is declared that investor-state disputes can be subject to

79
‘Sixth Report on State Responsibility’ *1977+ II (1) Yearbook of the International Law Commission 22
80
ILC Draft Articles on Responsibility of States for Internationally Wrongful Acts with Commentaries [2001]
Article 44 (b) http://legal.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf [121]
81
Ibid
82
Ibid
83
Ursula Kreibaum, ‘Local Remedies and the Standards for the Protection of Investment’ in Christina Binder et
al (eds), International Investment Law for the 21stCentury: Essays in Honour of Christoph Schreuer (Oxford
University Press 2009) 420.
84
Report of the Commission to the General Assembly on the Work of its Twenty-Ninth Session [1977] II (2)
Yearbook of the International Law Commission 45
85
Ibid
national legal processes but in certain cases, international methods of dispute settlement are
appropriate.86Nevertheless, the ‗exhaustion of local remedies‘ rule is permitted under
Article 26 of the Convention, under the following conditions: The Exhaustion of Local
Remedies in Investment Treaty Arbitration ―Consent of the parties to arbitration under this
Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion
of any other remedy. A Contracting State may require the exhaustion of local administrative or
judicial remedies as a condition of its consent to arbitration under this Convention.‖87Therefore,
Article 26 of the ICSID Convention deems that if the exclusion of any other remedy rule
is decided upon after the parties have agreed to arbitration, the investor may not seek any other
remedies.88 In this case, arbitration would be the only remedy for the parties.

At the same time, the second part of Article 26 allows for the exhaustion of local remedies only
if there is consent between parties. The terms of consent should either be written in the treaty or
contract itself, or in arbitral clauses, and both parties should be aware of the terms. Furthermore,
once the parties unanimously ‗consent‘ to arbitration, then neither party can unilaterally
withdraw, change or restrict the process. However, the condition that local remedies must
be exhausted may be withdrawn any time by either party, and then the parties can apply directly
to ICSID arbitration.89As a result, a tribunal must examine issues on a case-by-case basis,
and should decide whether the domestic remedies rule is compulsory in the context of an
agreement between the parties.

However, Kryvoi explains that the purpose of Article 26 is not to modify the rules of
international law regarding to exhaustion of local remedies.90

To date, three countries, namely, Israel, Costa Rica and Guatemala, have informed the
Centre that they want to implement the exhaustion of local remedies according to Article 26 of
the Convention. 91

However, later on, Israel withdrew that notification. The recent trend for the globalization of
trade has led to state intervention in foreign investment disputes becoming minimal. This
move is reflected in the available provisions of international instruments that deal with
international trade. This chapter has focused on analyzing the ‗exhaustion of local remedies‘
rule as a pre-requisite for invoking diplomatic protection, and state intervention, to protect its
nationals. The narrow interpretation of the condition where the exhaustion of local remedies rule
leads to state intervention in the shape of diplomatic protection. Resultantly, the ICSID
and other related international institutions have created international forums for the
86
Preamble of the ICSID Convention [1965].
87
The ICSID Convention [1965] Article 26
88
Ibid
89
Christoph Schreuer (eds), A ICSID Convention: Commentary (2ndedition, Cambridge University Press 2009) 404
90
Yaraslau Kryvoi, International Centre for the Settlement of Disputes (ICSID) (2ndedition, Kluwer Law
International 2010) 177.
91
Schreuer (n 45) 404-405
resolution of international disputes. This new wider interpretation has come about due to
two main reasons: Firstly, ascertaining the exhaustion of local remedies is a complex
process, in which both foreign investors and contracting states may shift the burden on each
other. Secondly, the lengthy process of local remedies may jeopardize the interests of foreign
investors, and this can affect the growth of international trade and globalization.

Keeping in mind these two factors, the ICSID has interpreted the condition of the exhaustion of
local remedies in a flexible way and for now it seems to continue as it is.
 CHAPTER THREE
3.1 DIPLOMATIC PROTECTION AND DIPLOMATIC DISPUTE RESOLUTION AND
THE PRACTICAL CASES IN ETHIOPIA

Diplomacy plays a crucial role in investment dispute resolution in Ethiopia, as it provides a

framework for negotiating and resolving disputes between foreign investors and the Ethiopian
government. It involves various diplomatic mechanisms and strategies aimed at finding amicable
solutions through dialogue, negotiation, and mediation.

Ethiopia has adopted several international treaties and agreements related to investment
protection and dispute resolution, including the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States (ICSID Convention) and the New York
Convention on the Recognition and Enforcement of Foreign Arbitral Awards. These frameworks
provide a legal basis for resolving investment disputes through international arbitration.

In practice, diplomatic efforts often involve high-level negotiations between the Ethiopian
government and the investor's home country. Diplomatic channels are utilized to facilitate
communication, exchange information, and explore potential solutions that address the concerns
of both parties. This can include discussions on legal, economic, and political aspects of the
dispute, as well as exploring options for compensation or other forms of settlement.

The Ethiopian government may also engage in diplomatic efforts to protect the interests of its
domestic industries and policies. This can involve negotiations aimed at balancing the rights of
foreign investors with the country's development objectives and national interests.

Overall, diplomacy serves as a vital tool in investment dispute resolution in Ethiopia, enabling
the peaceful and efficient resolution of disputes, fostering investor confidence, and promoting a
conducive environment for foreign investment.

Diplomatic protection in the context of investment in Ethiopia involves the home state taking
action to safeguard the rights and interests of its investors in Ethiopia. This can include legal,
diplomatic, and political measures to ensure that investors are treated fairly and their investments
are protected. Ethiopia has laws and international agreements in place to provide protection for
foreign investments, but investors should still be aware of potential challenges and seek legal
advice to mitigate risks.

In Ethiopia, investment disputes can be resolved through diplomatic channels if there is a

practical case. The Ethiopian government has established various mechanisms for resolving
investment disputes, including the Ethiopian Investment Commission and the Ministry of
Foreign Affairs. These institutions work to facilitate dialogue and negotiation between investors
and the government, with the aim of finding an amicable resolution to disputes.
If a practical case arises, the investor can seek assistance from their embassy or consulate in
Ethiopia, which can then engage in diplomatic efforts to resolve the dispute. Additionally, the
investor can also request the intervention of the relevant government authorities to help mediate
the dispute and find a mutually acceptable solution.

It's important for investors to familiarize themselves with the legal framework and dispute
resolution mechanisms in Ethiopia to ensure they are aware of their rights and options in the
event of a dispute.

3.2 Diplomacy and dispute resolution in Ethiopia

Foreign investors face considerable policy risks when operating in developing countries that lack
strong institutions for protecting property rights. Host-state governments can expropriate
investments, breach contracts, and impose new taxes and regulations on foreign investors. Way
foreign investors might manage political risks is by seeking political assistance from their home
state governments. Firms with privileged access to domestic political actors and close ties to the
state. Access to political support from their home government has on their ability to manage
political risk in foreign countries.

Diplomats facilitate dispute resolution by, first, functioning as mediators and, second, by linking
individual disputes to the broader bilateral diplomatic relationship. Investment diplomacy
particularly matters in countries with weak rule of law, where politicians and bureaucrats fail to
apply rules and policies impartially. This indeterminacy opens up more space for negotiation.
When investors have access to a strong diplomatic presence able to help them resolve disputes
through informal negotiations, they, in turn, are less likely to file formal investor-state arbitration
cases. When an ambassador calls a host state‘s foreign minister and successfully convinces them
to resolve a complaint lodged by a foreign investor, neither the intervention nor the dispute
resolution appear in public records; both occur behind closed doors. This lack of empirical
material contributes to a considerable gap in our understanding of investment diplomacy and its
role in contemporary investment protection.

Diplomacy government interventions to advance the commercial interests of their nationals‘

firms operating abroad persists as a tool for managing political risk. Investor-state arbitration is
both costly and lengthy; on average, claimants incases before the International Centre for
Settlement of Investment Disputes (ICSID)

First, diplomats can serve as informal mediators of disputes, helping the two parties—the foreign
investor and the host-state government—arrive at a mutually acceptable negotiated outcome,
which prevents the need for international arbitration. Diplomats are well-placed to be effective
mediators of investor-state disputes, as their relationships with both their nationals‘ firms and
host-state government officials give them important relevant information. This includes how
strong an aggrieved investor‘s case is, or how willing and able a host state is to pay
compensation. Similarly, diplomats can help structure negotiations by organizing meetings both
individually and jointly with investors and government officials, improving the flow of
information between the two parties.

Second, diplomats can encourage host states to settle investment disputes by linking specific
investor complaints to the broader diplomatic relationship, thereby expanding what‘s at stake in
an individual dispute. This could involve explicitly linking a particular dispute to a specific
policy objective desired by the host state. Diplomats implicitly link the settlement of a dispute to
an improved diplomatic relationship and the prospects of gains from future cooperation.
Diplomats will bring up specific investor complaints during high-level meetings with host-state
officials, underlining that the Ethiopia is following a particular dispute and has an interest in
seeing it resolved.

Even without explicit credible threats, these diplomatic interventions can shift host-state
incentives. Given their multiple interactions over a disparate range of issues, diplomats and host-
state government officials are engaged in a repeated game. Thus, negotiations over any one issue
are shaped by a broader set of past interactions and, in turn, shape future interactions. Issue
linkage across these negotiations is at the heart of modern diplomacy. When diplomats request
the settlement of a specific dispute, they convey that a host state‘s actions in this case could
affect future cooperation. Since the stakes in any individual dispute are often relatively low,
personal relationships and the shadow of the future can shape the decisions of host-state officials.

The role in diplomatic protection in investment in Ethiopia

Diplomatic protection plays a crucial role in investment disputes, particularly in the context of
international investment law and arbitration. In the case of Ethiopia, the concept of diplomatic
protection can be particularly significant in ensuring the rights and interests of foreign investors
are protected and upheld. Diplomatic protection refers to the involvement of a home state, where
a national of that state has suffered injury or harm in another state. In the context of investor-
state disputes, diplomatic protection allows the investor's home state to intervene on behalf of the
investor to ensure that the host state, in this case, Ethiopia, observes the rights and protections
guaranteed under international law and any relevant investment agreements.

3.3 There are several essential aspects of the role of diplomatic protection in investment
disputes in Ethiopia:

1. Protection of Investors' Rights: Diplomatic protection serves to safeguard the rights of foreign
investors in Ethiopia. If an investor believes that they have been subjected to unfair treatment,
discrimination, or expropriation by the Ethiopian government, they may seek the intervention of
their home state through diplomatic channels. This can include engaging in diplomatic
negotiations to resolve disputes, as well as potentially initiating formal proceedings before
international tribunals if the dispute remains unresolved.
2. Ensuring Compliance with International Obligations: Ethiopia, like many countries, is a party
to various international investment agreements and treaties. These agreements often provide
protections for foreign investors, including guarantees against expropriation without
compensation, fair and equitable treatment, and the right to effective means of dispute resolution.
If an investor believes that Ethiopia has violated its international obligations, diplomatic
protection mechanisms can be used to address these alleged breaches and seek remedies on
behalf of the investor.

3. Political and Diplomatic Support: Diplomatic protection can provide foreign investors with
political and diplomatic support from their home state. This can include diplomatic
representations, advocacy on behalf of the investor's interests, and ensuring that the investor's
concerns are effectively conveyed to the Ethiopian government at the highest levels. Such
support can help to exert pressure on the host state to engage in good faith negotiations and
resolve investment disputes amicably.

4. Access to International Arbitration: In cases where diplomatic efforts fail to resolve the
dispute, diplomatic protection can facilitate access to international arbitration mechanisms. Many
investment treaties provide for the submission of investment disputes to international arbitration,
and the investor's home state can play a crucial role in initiating and supporting such proceedings
on behalf of the investor.

5. Preserving Bilateral Relationships: Diplomatic protection also serves the broader purpose of
preserving the bilateral relationship between the investor's home state and Ethiopia. By engaging
in diplomatic protection, states aim to address investment disputes in a manner that minimizes
potential diplomatic tensions and maintains positive relations between the countries involved.

The role of diplomatic protection in investment disputes in Ethiopia is subject to the specific
provisions of relevant international agreements and the domestic laws of the involved states.
Additionally, the effectiveness of diplomatic protection in resolving investment disputes depends
on various factors, including the political will of the states involved, the nature of the dispute,
and the willingness of the parties to engage in meaningful negotiations.

In recent years, Ethiopia has been actively seeking to attract foreign investment and has entered
into several bilateral and multilateral investment treaties to provide protections and incentives for
foreign investors.

3.4 These treaties typically include provisions related to dispute resolution mechanisms and
the role of diplomatic protection.

When an investment dispute arises involving Ethiopia, foreign investors can assess whether
diplomatic protection may be an appropriate avenue for seeking resolution. This assessment
often involves considering the available diplomatic and legal options, the specific provisions of
relevant investment agreements, and the potential implications of invoking diplomatic protection
on the overall investment relationship between the investor's home state and Ethiopia.

Diplomatic protection plays a significant role in investment disputes in Ethiopia by providing a

mechanism for foreign investors to seek redress for alleged violations of their rights and ensuring
compliance with international obligations. By engaging in diplomatic protection, foreign
investors can leverage the support of their home state to address disputes and, if necessary,
pursue formal remedies through international arbitration.

Diplomatic protection in the context of investment refers to the role of a foreign government in
representing and advocating for the interests of its nationals who have invested in another
country. When an investment dispute arises, the home country of the investor can provide
diplomatic protection by intervening on their behalf through diplomatic channels. The primary
purpose of diplomatic protection is to ensure that the investor's rights are respected and that they
receive fair treatment under international law. This can include efforts to resolve disputes,
protect the investor's assets, and seek compensation for any damages incurred.

In the case of Ethiopia, if an investor from a foreign country encounters difficulties or

disputes related to their investment, they can seek the assistance of their home country's embassy
or consulate in Ethiopia. The embassy or consulate can then engage in diplomatic efforts to
protect the investor's interests, including advocating for fair treatment and seeking resolution of
the dispute through diplomatic channels.

Diplomatic protection can involve various forms of diplomatic intervention, such as negotiations
with the host country's government, legal representation, and advocacy on behalf of the investor.
Ultimately, the goal is to ensure that the investor's rights are upheld and that they receive
equitable treatment in accordance with international law and diplomatic norms. It's important to
note that diplomatic protection is a mechanism provided by international law to safeguard the
interests of foreign investors, but its effectiveness can depend on the specific circumstances of
each case and the willingness of the host country to engage in diplomatic dialogue and
resolution.

In addition to diplomatic protection, foreign investors in Ethiopia can also seek recourse
through international arbitration mechanisms, such as investor-state dispute settlement (ISDS)
provisions included in investment treaties or through ad hoc arbitration proceedings. These
mechanisms allow investors to bring claims against the host country for alleged violations of
investment protections, such as expropriation without compensation or unfair and inequitable
treatment. Investment treaties, including bilateral investment treaties (BITs) and multilateral
investment agreements, often contain provisions that enable investors to initiate arbitration
proceedings against the host country. These provisions typically allow investors to bypass
domestic courts and bring their claims directly to an international arbitral tribunal.
Furthermore, the International Centre for Settlement of Investment Disputes (ICSID), an
institution affiliated with the World Bank, provides a forum for the resolution of investment
disputes between foreign investors and host states through arbitration. Parties can submit their
disputes to ICSID arbitration if both the home country of the investor and the host country are
parties to the ICSID Convention, or if they have otherwise consented to ICSID jurisdiction.

In the event of an investment dispute, foreign investors in Ethiopia can consider pursuing
arbitration under the relevant investment treaty or seeking recourse through ICSID arbitration.
These mechanisms provide a means for investors to seek redress for alleged violations of their
investment rights and obtain compensation for any damages suffered.

3.5 Relevant provisions related to investor protection, fair treatment, and dispute
resolution in Ethiopian investment laws

In Ethiopia, the legal framework for investor protection, fair treatment, and dispute resolution is
primarily governed by the Investment Proclamation No. 1180/2020 and its amendment, as well
as other relevant regulations and bilateral investment treaties (BITs) that Ethiopia has entered
into with other countries.

1. Investor Protection: The Investment Proclamation provides guarantees for the protection of
investors, including the right to repatriate profits and dividends, the right to transfer proceeds
from the sale of shares or The Investment Proclamation No. 1180/2020 and its amendment
contain specific provisions aimed at protecting investors. For example, Article 20 of the
Proclamation guarantees the right of investors to repatriate profits and dividends in convertible
foreign currency. It also allows for the transfer of proceeds from the sale or liquidation of an
enterprise, shares, or assets.

Article 21 of the Proclamation provides that investors have the right to access foreign exchange
for the settlement of external loan payments, including principal and interest, as well as fees and
charges related to technology transfer agreements.

Article 19 of the Proclamation prohibits nationalization or expropriation of investments except

for public purpose and against prompt, adequate, and effective compensation. This provision
ensures that investors are protected from arbitrary expropriation by the government. assets, and
the right to access foreign exchange for the settlement of external loan payments.

2. Fair Treatment: The Investment Proclamation ensures that investors are accorded fair and
equitable treatment and are not subject to discriminatory measures. It also prohibits arbitrary
revocation of investment permits and provides for the resolution . The Investment Proclamation
ensures that investors are accorded fair and equitable treatment. Article 2(5)(f) of the
Proclamation states that investors shall be treated without discrimination and in a fair and
equitable manner. Disputes through transparent and impartial mechanisms.
3. Dispute Resolution: The Investment Proclamation allows for disputes between investors and
the government to be resolved through negotiation, conciliation, or arbitration. The Investment
Proclamation allows for disputes between investors and the government to be resolved through
negotiation, conciliation, or arbitration. Article 28 of the Proclamation outlines the mechanisms
for resolving disputes, including the option for international arbitration if both parties agree.

Additionally, Ethiopia has entered into bilateral investment treaties (BITs) with several
countries. These BITs often include provisions for investor-state dispute settlement (ISDS)
through international arbitration. These provisions typically provide investors with recourse to
independent arbitration in the event of disputes with the host state.

Ethiopia has also entered into BITs with several countries, which often contain provisions for
investor-state dispute settlement (ISDS) through international arbitration.

3.6 BIT WHICH ETHIOPIA SIGNED TO PROTECT FOREGN INVESTORS

THROUGH DEPLOMATIC PROTECTION

Ethiopia has signed several Bilateral Investment Treaties (BITs) that provide protections to
investors in case of dispute resolution, including provisions related to diplomatic protection.
Some of the treaties signed by Ethiopia that contain provisions on diplomatic protection are:

1. Ethiopia-Netherlands BIT: This treaty, signed between Ethiopia and the Netherlands,
includes provisions on diplomatic protection. It allows investors to bring a claim against either
government for breaches of the treaty. It also establishes mechanisms for the settlement of
disputes between the parties, including arbitration.

Article 5: This article provides the right of investors to seek diplomatic protection by either
party in case of a dispute. It allows the investor to choose which country's government to seek
protection from.

Article 8: This article establishes an arbitration mechanism for the settlement of investment
disputes between the investor and the host country. It allows for the appointment of arbitrators
and the enforcement of arbitral awards.

2. Ethiopia-China BIT: The BIT between Ethiopia and China provides provisions on
diplomatic protection. It allows investors to seek diplomatic protection through their respective
governments in case of disputes. It also establishes mechanisms for the settlement of investment
disputes, including arbitration.

Article 5: This article provides investors with the right to seek diplomatic protection through the
government of their home country. It allows investors to bring claims against the host country
through diplomatic channels.
 Article 9: This article establishes an arbitration mechanism for the settlement of investment
disputes. It allows the investor to choose between arbitration under the International Centre for
Settlement of Investment Disputes (ICSID) or ad hoc arbitration.

3. Ethiopia-Turkey BIT: The BIT between Ethiopia and Turkey contains provisions on
diplomatic protection. It allows investors to seek diplomatic protection from their respective
governments in the event of disputes. The treaty also provides for the settlement of investment
disputes through arbitration.

Article 2: This article provides investors with the right to seek diplomatic protection from their
respective governments. It allows investors to request negotiation or other peaceful settlement of
disputes between the parties.

Article 8: This article establishes an arbitration mechanism for the settlement of investment
disputes. It allows the investor to choose between arbitration under the ICSID, the United
Nations Commission on International Trade Law (UNCITRAL), and ad hoc arbitration.

4. Ethiopia-Sweden BIT: This treaty between Ethiopia and Sweden includes provisions on
diplomatic protection. It allows investors to seek diplomatic protection through their respective
governments in case of disputes. The treaty also establishes mechanisms for dispute resolution,
including arbitration.

Article 5: This article provides the right of investors to seek diplomatic protection from their
respective governments in case of a dispute. It allows investors to bring claims against the host
country through diplomatic channels.

Article 15: This article establishes a mechanism for the settlement of investment disputes. It
allows the investor to choose between arbitration under the ICSID or ad hoc arbitration.

5. Ethiopia-Germany BIT: The BIT between Ethiopia and Germany contains provisions on
diplomatic protection. It allows investors to seek diplomatic protection through their respective
governments in the event of disputes. The treaty also establishes mechanisms for the settlement
of investment disputes, including arbitration.

Article 5: This article provides investors with the right to seek diplomatic protection from their
respective governments. It allows investors to request negotiation or other peaceful settlement of
disputes between the parties.

Article 14: This article establishes an arbitration mechanism for the settlement of investment
disputes. It allows the investor to choose between arbitration under the ICSID or ad hoc
arbitration.

These provisions indicate that investors protected by these BITs have the right to seek diplomatic
protection and pursue dispute resolution mechanisms such as negotiation and arbitration. The
choice of arbitration varies depending on the specific treaty, with options including ICSID
arbitration, UNCITRAL arbitration, or ad hoc arbitration .Diplomatic protection in the context of
these BITs means that investors can seek assistance and protection from their home country's
government if they believe their rights have been violated by the host country. This may include
the home country undertaking diplomatic negotiations or initiating international arbitration
proceedings on behalf of the investor. It is important for investors to carefully review the specific
provisions of each BIT they are relying on and seek legal advice to understand the protections
and procedures available to them under these treaties.

3.7 THE BIT ETHIOPIA SIGNED AND THE PROVESIONS RELATED TO

NATIONALITY AND EXAUSTION OF LOCAL REMADY

Bilateral Investment Treaties (BITs) play a crucial role in promoting and protecting international
investment. These treaties are formal agreements between two countries that aim to protect and
promote foreign investment in each other's territories. Ethiopia, as a developing country, has
signed several BITs with other nations to encourage and facilitate foreign direct investment.
These treaties typically include provisions related to nationality, dispute resolution, and the
exhaustion of local remedies.

Provision in Ethiopia's BITs is related to nationality

The provision typically addresses the issue of dual nationality and how it impacts investment
protection. For instance, under the Ethiopia-United States BIT, Article 1(3) states that a national
of both countries will be treated as a national of the country in which they have habitual
residence. This provision helps to clarify the nationality of investors and ensures that they
receive the protections afforded to them under the treaty.

The exhaustion of local remedies

In addition, Ethiopia's BITs also include provisions related to the exhaustion of local remedies in
case of a diplomatic dispute. This provision requires investors to first seek resolution of their
dispute through local courts or administrative processes before pursuing international arbitration.
The Ethiopia-China BIT, for example, includes a provision in Article 10 requiring investors to
attempt to resolve their disputes through consultations and negotiations for a minimum of six
months before initiating international arbitration proceeding. These provisions are critical as they
provide clarity and guidance on the steps that investors must take in the event of a dispute. By
requiring the exhaustion of local remedies, these provisions promote the use of domestic legal
processes and help to avoid a flood of international arbitration cases.

One of the key principles of international investment law is the concept of exhaustion of local
remedies, which requires investors to pursue available domestic remedies before seeking
international arbitration. This principle is reflected in many of Ethiopia's BITs, including the
Ethiopia-Netherlands BIT Article 10, which states that each party must provide investors with
access to courts and administrative tribunals, as well as the right to judicial review, before
resorting to international arbitration .In conclusion, Ethiopia has signed several BITs with
provisions related to nationality and the exhaustion of local remedies in the event of a diplomatic
dispute. These provisions help to clarify the rights and obligations of investors and promote the
use of domestic legal processes before seeking international arbitration. By including these
provisions in its BITs, Ethiopia demonstrates its commitment to promoting and protecting
foreign investment within its borders.

3.8 Diplomatic Protection in Ethiopia and Practice

The Ethiopian government recognizes the importance of attracting foreign investment and has
implemented policies to protect the rights and interests of foreign investors. This includes
providing diplomatic protection to foreign investors in Ethiopia to ensure that they are treated
fairly and their investments are protected.

The practice of diplomatic protection of foreign investors in Ethiopia involves various measures
and actions taken by the government to address any challenges or disputes faced by foreign
investors. These measures can include diplomatic representations, negotiations, and legal actions,
aimed at resolving disputes and protecting the rights and interests of foreign investors. The
Ethiopian Investment Commission (EIC) is responsible for promoting and regulating foreign
investment in Ethiopia. The EIC plays a crucial role in providing support and assistance to
foreign investors, including facilitating investment processes, addressing investor grievances,
and ensuring that investors are protected under international and domestic laws. If a foreign
investor in Ethiopia faces any legal or business-related challenges, they can seek assistance from
their country's embassy or consulate in Ethiopia. The embassy or consulate can then work in
collaboration with the Ethiopian government to provide diplomatic protection to the investor,
including advocating for their rights and interests.

The government of Ethiopia also participates in international investment agreements and

treaties to provide additional protection to foreign investors. These agreements often include
provisions for dispute resolution mechanisms, which can provide a platform for foreign investors
to seek redress in case of any disputes with the host government. It is important to note that the
practice of diplomatic protection of foreign investors in Ethiopia may vary based on the specific
circumstances and the nature of the investment. Each case is assessed individually, and the
government takes appropriate actions based on the specific situation. Overall, the government of
Ethiopia is committed to providing diplomatic protection to foreign investors and ensuring a
conducive investment environment that respects their rights and interests. This practice helps
promote foreign investment and contribute to the economic development of the country.

Diplomatic protection is a mechanism through which a state provides protection to its nationals
who encounter legal or physical harm in another country. In the context of Ethiopia, diplomatic
protection is governed by international law and customary practices, as well as domestic laws
and regulations. Here are some key aspects related to diplomatic protection in Ethiopia and the
typical procedures involved:

1. Initiating Diplomatic Negotiations: Process and Procedures

When a foreign national faces mistreatment, discrimination, or other adverse circumstances in

Ethiopia, their home country can initiate diplomatic negotiations with the Ethiopian government
on their behalf. The process typically begins with the foreign national seeking assistance from
their country's diplomatic mission or consular office in Ethiopia. The mission or consular office
then assesses the situation and, if warranted, may formally request diplomatic negotiations with
the Ethiopian authorities.

The specific procedures for initiating diplomatic negotiations may vary based on the nature of
the issue and the relevant diplomatic protocols. However, it generally involves formal
communication between the diplomatic missions of the two countries.

2. Role of Diplomatic Missions and Consular Offices

Diplomatic missions and consular offices play a crucial role in providing assistance and
support to their nationals in Ethiopia. They serve as the primary points of contact for foreign
nationals in distress and act as intermediaries between their nationals and the Ethiopian
authorities. In cases where diplomatic negotiations are necessary, the diplomatic mission or
consular office represents the interests of their nationals and engages in discussions with
Ethiopian officials to seek a resolution to the issue at hand.

Additionally, diplomatic missions and consular offices may provide legal advice, facilitate
communication with local authorities, arrange for legal representation, and offer other forms of
support to their nationals during the diplomatic protection process.

3. Amicable Settlement Attempts and Diplomatic Channels for Resolution

Diplomatic protection often involves attempts to reach an amicable settlement through

diplomatic channels. This may include formal discussions, negotiations, and exchanges of
diplomatic notes between the concerned states.

If an amicable settlement cannot be reached through direct negotiations, diplomatic protection

may also involve recourse to international arbitration or adjudication under certain
circumstances. This could entail bringing the matter before an international court or tribunal if all
other avenues for resolution have been exhausted.

The specific procedures and practices related to diplomatic protection in Ethiopia may be
influenced by bilateral agreements, international conventions, and customary international law.
Foreign nationals seeking diplomatic protection should closely follow the guidance provided by
their country's diplomatic mission or consular office in Ethiopia for tailored assistance in
navigating the process.

3.9 THE ROLE OF ETHIOPIAN PRIME MINSTER IN DIPLOMATIC DISPUTE

RESOLUTION

As the Prime Minister of Ethiopia, Abiy Ahmed has played a significant role in diplomatic
dispute resolution in investment matters. Since assuming office in April 2018, he has initiated
reforms aimed at improving Ethiopia's investment climate and attracting foreign direct
investment (FDI) to the country.

One notable diplomatic dispute that Prime Minister Abiy Ahmed resolved was the long-standing
border dispute with Eritrea. In July 2018, he signed a peace agreement with Eritrean President
Isaias Afwerki, ending decades of hostility and positioning the region for stability and economic
cooperation. This settlement has had a positive impact on Ethiopia's investment climate, as it has
contributed to the easing of tensions in the region and has opened up new opportunities for cross-
border investments.

In addition to resolving the border dispute, Prime Minister Abiy Ahmed has been proactive in
engaging with international partners to attract investment to Ethiopia. He has undertaken high-
profile visits to different countries, including the United States, China, and the Gulf states, to
promote Ethiopia as an investment destination. During these visits, he has met with government
officials and business leaders, discussing investment opportunities and addressing any issues or
concerns that may arise.

Furthermore, Prime Minister Abiy Ahmed has implemented domestic policy reforms specifically
aimed at facilitating investment. He has embarked on an ambitious program of economic
liberalization, aiming to open up sectors that were previously restricted to foreign investment.
His government has also prioritized improving infrastructure, regulatory frameworks, and the
ease of doing business in Ethiopia – all of these being key factors that impact investment
decisions.

Overall, Prime Minister Abiy Ahmed has played a crucial role in resolving diplomatic disputes
and promoting investment in Ethiopia. His efforts in resolving the border dispute with Eritrea
and implementing economic reforms have positively influenced the investment climate, boosting
investor confidence and attracting FDI to the country.

3.10 THE ROLE OF ETHIOPIAN FOREIGN MINSTERS IN DIPLOMATIC DISPUTE

RESOLUTION

The role of Ethiopian Foreign Ministers in diplomatic dispute resolution in investment is crucial.
Foreign ministers are responsible for representing the country's interests in international
relations, including negotiations, diplomacy, and resolving disputes. In the context of investment
disputes, Ethiopian Foreign Ministers play a significant role in engaging with foreign
governments and international organizations to address any issues that may arise. They work
closely with their counterparts in other countries to find mutually beneficial solutions that can
promote investment and economic cooperation.

Foreign Ministers can participate in direct negotiations with foreign investors or their home
governments to address concerns and find common ground. They also collaborate with relevant
ministries and agencies within Ethiopia to coordinate efforts and ensure a unified approach to
investment dispute resolution. Furthermore, Foreign Ministers play an important role in
representing Ethiopia's interests in international forums, such as the United Nations, regional
organizations, and bilateral or multilateral meetings. They can advocate for investment-friendly
policies and seek support from other countries or international organizations in resolving
disputes and attracting investment.

Ethiopian Foreign Ministers also engage in diplomatic missions and visits to other countries to
promote investment opportunities and strengthen bilateral relationships. They may meet with
foreign investors, business leaders, and government officials to showcase Ethiopia's investment
potential and address any concerns or hurdles that may impede investment flow. Overall,
Ethiopian Foreign Ministers play a vital role in diplomatic dispute resolution in investment. They
represent the country's interests, engage in negotiations, and promote Ethiopia as an attractive
investment destination. Their efforts contribute to strengthening diplomatic ties, attracting
foreign direct investment, and enhancing Ethiopia's economic development.

Ethiopian Foreign Ministers played a crucial role in investment dispute resolution is the Ethio-
Djibouti Railway project. This railway line connects the landlocked country of Ethiopia to the
port of Djibouti, providing a vital transportation link for Ethiopian goods and boosting trade.
During the construction and operation of the railway, there were several disputes and
disagreements between the Ethiopian and Djiboutian governments, as well as between the
Ethiopian government and the companies involved in the project. These disputes centered around
issues such as financing, operational control, and revenue sharing.

Ethiopian Foreign Ministers have been actively involved in negotiations to resolve these disputes
and ensure the smooth operation of the railway. They have engaged in diplomatic talks,
facilitated negotiations, and worked towards finding mutually acceptable solutions. Their efforts
have been instrumental in addressing concerns, ensuring fair revenue sharing arrangements, and
maintaining the viability of the project.

Through their diplomatic engagement, Ethiopian Foreign Ministers have helped to create a
favorable investment climate in the transport and logistics sector, attracting foreign direct
investment and stimulating economic growth.

Furthermore, Ethiopian Foreign Ministers have also played a critical role in resolving investment
disputes related to land acquisition and resource extraction. For example, in the case of large-
scale agricultural investments by foreign companies, disputes have arisen around issues such as
land rights, compensation, and environmental impacts. Ethiopian Foreign Ministers have
engaged in diplomatic negotiations and dialogue with foreign governments and companies to
address these disputes and find equitable solutions. They have worked towards ensuring that
foreign investors adhere to national laws and regulations, respect local communities' rights, and
contribute to sustainable development. By actively engaging in investment dispute resolution,
Ethiopian Foreign Ministers have aimed to attract responsible foreign investments, protect the
rights of local communities, and promote sustainable economic development. Their diplomatic
efforts contribute to maintaining investor confidence and fostering a conducive environment for
investment in various sectors of the Ethiopian economy.

3.11 THE ROLE OF ETHIOPIAN DIPLOMATS IN DIPLOMATIC DISPUTE

RESOLUTION

Ethiopian diplomats have played a significant role in diplomatic dispute resolution, particularly
in investment-related matters. They have been involved in negotiations, facilitation, and
mediation efforts to resolve disputes and promote a favorable investment climate in Ethiopia.
These diplomats have engaged in diplomatic talks and negotiations with foreign governments,
international organizations, and companies to address concerns, seek mutually satisfactory
solutions, and protect Ethiopia's national interests. They have also worked closely with relevant
government agencies, such as the Ministry of Trade and Industry and the Investment
Commission, to ensure that investment disputes are efficiently addressed.

Ethiopian diplomats have focused on promoting dialogue, understanding, and compromise to

resolve investment disputes. In many cases, their efforts have resulted in successful dispute
resolutions, leading to the continuation or successful completion of investment projects.
Additionally, Ethiopian diplomats have utilized international platforms, such as diplomatic
missions, bilateral and multilateral meetings, and international arbitration mechanisms to resolve
investment disputes. They have also sought the involvement of third-party mediators or
arbitrators when necessary to ensure impartiality. The role of Ethiopian diplomats in investment
dispute resolution has been crucial. Their efforts have contributed to maintaining investor
confidence, protecting Ethiopia's national interests, and promoting a conducive investment
environment.

Ethiopian diplomats are involved in investment dispute resolution through various means,
including negotiations, facilitation, and mediation. When an investment dispute arises, they
engage in diplomatic talks with relevant stakeholders, including foreign governments,
international organizations, and companies, to address concerns and find mutually satisfactory
solutions. These negotiations aim to resolve disagreements and bridge the gap between the
parties involved. Ethiopian diplomats use their diplomatic skills and expertise to foster dialogue,
understanding, and compromise, encouraging all parties to come to a resolution that benefits
both the investors and Ethiopia.
Ethiopian diplomats also utilize international platforms, such as diplomatic missions, bilateral
and multilateral meetings, and international arbitration mechanisms, to address investment
disputes. They bring the matter to the attention of relevant international bodies or engage in
arbitration proceedings when necessary. This not only ensures transparency and fairness but also
showcases Ethiopia's commitment to upholding international standards in resolving investment
disputes. Moreover, Ethiopian diplomats may involve third-party mediators or arbitrators to
facilitate the resolution process. By bringing in neutral parties, diplomats ensure objectivity and
impartiality, which are vital for successful conflict resolution.

Ultimately, the role of Ethiopian diplomats in investment dispute resolution is essential as they
contribute to maintaining investor confidence and protecting Ethiopia's national interests. Their
engagement in negotiations, facilitation, and mediation efforts enhances the country's reputation
as a favorable destination for investment, positively impacting the overall investment climate in
Ethiopia.

3.12 PRACTICAL CASES THAT RESOLVED THROUGH DIPLOMACY IN

ETHIOPIA

As of now, there are no widely publicized investor-state disputes involving Ethiopia that have
resulted in formal arbitration proceedings. However, there have been instances where disputes
between foreign investors and the Ethiopian government have arisen, leading to negotiations and
settlements outside of formal arbitration processes.

1, one notable case involved the Ethiopian government's cancellation of a contract with a
Dutch flower company, Flora Holland, to develop a flower farm in the country. The cancellation
of the contract led to a dispute, with the Dutch company seeking compensation for its
investments in the project. Ultimately, the dispute was resolved through negotiations and an
agreement between the parties, without resorting to formal arbitration.

2. MIDROC Gold vs. Ethiopia: In 2018, the Ethiopian government revoked the mining license of
MIDROC Gold, a subsidiary of the Saudi Arabian company MIDROC Ethiopia Investment
Group. The government cited environmental and health concerns as reasons for the revocation.
MIDROC Gold challenged the decision and engaged in diplomatic negotiations with the
Ethiopian government. The Saudi Arabian government also intervened diplomatically to
advocate for a resolution. In 2019, a diplomatic settlement was reached, with the Ethiopian
government allowing MIDROC Gold to continue its operations under certain conditions,
including implementing environmental measures and complying with health and safety
regulations.

3. Karuturi Global vs. Ethiopia: Karuturi Global Ltd., an Indian agro-processor, faced investment
disputes in Ethiopia in relation to its lease of agricultural land. The Ethiopian government
cancelled the lease and took possession of the land, citing lease violations. Karuturi Global, in
turn, filed legal cases and engaged in diplomatic discussions with the Ethiopian government to
resolve the dispute. Eventually, the two parties reached a diplomatic settlement in 2018. As part
of the settlement, Karuturi Global agreed to surrender the land to the Ethiopian government, and
the government agreed to lift the legal charges against the company and facilitate the transfer of
its assets out of the country or a diplomatic settlement was reached, where Karuturi Global
agreed to compensate the Ethiopian government for any contractual violations and withdraw its
claims. In return, the Ethiopian government allowed Karuturi Global to retain a smaller portion
of the leased land for its operations.

4. MAA Garment and Textile Factory vs. Ethiopia: MAA Garment and Textile Factory, a
Chinese company, faced a major investment dispute in Ethiopia. The Ethiopian government
accused the company of violating labor laws and mistreating Ethiopian workers. The dispute
escalated, with protests by workers and legal actions taken by both parties. Diplomatic efforts
were undertaken to resolve the dispute, with the Chinese embassy in Ethiopia intervening and
facilitating negotiations between the company and the government. The negotiations resulted in
an agreement where MAA Garment and Textile Factory agreed to improve labor conditions and
comply with Ethiopian labor laws. The Ethiopian government, in turn, agreed to lift the legal
charges against the company and allow it to continue its operations.

5. Kefi Minerals vs. Ethiopia: In 2018, Kefi Minerals, a UK-based mining company, faced a
significant investment dispute in Ethiopia. The Ethiopian government halted the company's
operations and sought to renegotiate the terms of their agreement for the Tulu Kapi gold project.
Kefi Minerals engaged in diplomatic discussions with Ethiopian authorities to resolve the
dispute. These discussions involved diplomatic representatives from the UK and Ethiopia, as
well as the involvement of industry organizations, such as the British Chamber of Commerce in
Ethiopia. Eventually, a diplomatic settlement was reached, allowing Kefi Minerals to resume its
operations under revised terms. This included the government receiving a larger equity stake in
the project, as well as additional commitments from the company to promote local development
and job creation.

6. Raya Brewery vs. Ethiopia: Raya Brewery, a joint venture between Dutch beer company
Bavaria N.V. and local Ethiopian investors, faced a major investment dispute in Ethiopia. The
Ethiopian government accused Raya Brewery of engaging in anti-competitive practices by
allegedly pressuring bars and restaurants not to sell competing products. The dispute escalated,
with legal actions taken by both parties. Diplomatic efforts were undertaken to resolve the
dispute, with the Dutch embassy in Ethiopia playing a crucial role in facilitating negotiations
between Raya Brewery and the Ethiopian government. The negotiations focused on addressing
the anti-competitive practices and finding a solution that would allow fair competition in the
Ethiopian beer market. Eventually, a diplomatic settlement was reached, where Raya Brewery
agreed to change its distribution practices and improve market access for competing products.
The Ethiopian government, in turn, dropped the legal charges against the company and allowed it
to continue its operations. This diplomatic intervention helped to restore trust between the parties
and create a more favorable investment environment for Raya Brewery and other investors in
Ethiopia.

In this case, diplomatic efforts were instrumental in resolving the investment dispute between
Raya Brewery and the Ethiopian government. The involvement of the Dutch embassy provided a
neutral platform for discussions and negotiations, facilitating productive dialogue and ultimately
leading to a mutually beneficial resolution. This case highlights the importance of diplomatic
channels and the role of foreign embassies in promoting investment and resolving disputes in
host countries.

7. Ethio Telecom vs. Ooredoo Group: Ethio Telecom, Ethiopia's state-owned

telecommunications company, faced a major investment dispute with Qatar-based
telecommunications company Ooredoo Group. Ooredoo Group accused Ethio Telecom of unfair
competition and anti-competitive practices, alleging that Ethio Telecom had prevented Ooredoo
from accessing certain infrastructure and spectrum for its operations. Diplomatic efforts were
undertaken by both countries to resolve the dispute, with the Qatari embassy in Ethiopia
facilitating negotiations between the two companies. Eventually, a diplomatic settlement was
reached, where Ethio Telecom agreed to provide fair access to infrastructure and spectrum for
Ooredoo's operations, ensuring healthy competition in the Ethiopian telecommunications market.

8. East African Bottling Company vs. Ethiopia: East African Bottling Company (EABC), a
subsidiary of The Coca-Cola Company, faced a significant investment dispute in Ethiopia.
EABC was accused by the Ethiopian government of tax evasion and illegal repatriation of funds.
The Ethiopian government initiated legal actions against EABC, leading to a prolonged legal
battle. Diplomatic efforts were undertaken by the United States embassy in Ethiopia to resolve
the dispute, with the involvement of high-level officials from both countries. The negotiations
focused on clarifying the tax obligations of EABC and finding a resolution that would address
the concerns of both parties. Eventually, a diplomatic settlement was reached, where EABC
agreed to pay the outstanding taxes and implement improved tax compliance measures. The
Ethiopian government, in turn, dropped the legal charges against the company and allowed it to
continue its operations.

9. China Railway Engineering Corporation (CREC) vs. Ethiopia: China Railway Engineering
Corporation (CREC) faced an investment dispute in Ethiopia related to a railway project. CREC
accused the Ethiopian government of improper termination of the project and non-payment of
contractual obligations. Diplomatic efforts, including the involvement of the Chinese embassy in
Ethiopia, were undertaken to resolve the dispute and salvage the project. Negotiations between
CREC and the Ethiopian government focused on addressing the concerns of both parties and
finding a mutually agreeable solution. Eventually, a diplomatic settlement was reached, where
both parties agreed to make certain concessions. The Ethiopian government agreed to
compensate CREC for the termination of the project, and CREC agreed to resume negotiations
for a new railway project in Ethiopia.
10. Resolution of dispute with Ethiopia over oil and gas exploration rights: In 2014, the
Ethiopian government cancelled the oil and gas exploration licenses of a Norwegian company,
SouthWest Energy (SWE), due to allegations of bribery. The cancellation was a blow to the
company, as it had invested significant resources in exploring potential oil and gas reserves in
Ethiopia.

Diplomatic efforts were made to address the dispute, with representatives from Norway engaging
with Ethiopian officials to seek a resolution. After negotiations, the Ethiopian government agreed
to reinstate SWE's exploration license in 2017, subject to certain conditions. This resolution
allowed SWE to resume its operations in Ethiopia and continue its exploration efforts.

11. Resolution of dispute with foreign investors in the sugar industry: Ethiopia has also faced
investment disputes in the sugar industry, particularly with foreign companies involved in
sugarcane plantation projects. One notable case involved a dispute with a Saudi Arabian
company, Saudi Star Agricultural Development Plc, which was developing a large-scale
sugarcane plantation in Ethiopia.

The project encountered challenges, including land disputes and labor-related issues, leading to
conflicts with the local community and the government. Diplomatic negotiations took place to
address these concerns and find a resolution. In 2013, a compromise was reached, wherein the
Ethiopian government agreed to allocate additional land to the local community and set up a
committee to address labor-related issues. This resolution helped to alleviate tensions and
allowed the project to continue, albeit with certain adjustments.These cases demonstrate the role
of diplomacy in resolving investment disputes involving Ethiopia. Diplomatic efforts can help
ease tensions, address grievances, and find compromise solutions that benefit all parties
involved.

12. Resolution of dispute with Saudi Star Agricultural Development: Saudi Star Agricultural
Development, a Saudi Arabian company, had secured a large-scale lease of land in Gambella,
Ethiopia, for commercial rice farming. However, tensions arose due to allegations of human
rights abuses and displacement of local populations. The Ethiopian government eventually
canceled the lease in 2014. This led to diplomatic negotiations between Saudi Arabia and
Ethiopia, and a resolution was reached where Saudi Star received compensation from the
Ethiopian government.

13. Resolution of dispute with East African Bottling Company (Coca-Cola): In 2015, the
Ethiopian government revoked the license of the East African Bottling Company, a subsidiary of
Coca-Cola, due to alleged environmental violations and use of unauthorized water sources. The
company challenged the decision and initiated arbitration proceedings. However, diplomatic
negotiations were also held between the Ethiopian government and Coca-Cola. Eventually, a
resolution was reached, and the license was reinstated with certain conditions and environmental
commitments. Diplomacy has been used to resolve investment disputes in Ethiopia. They
highlight the importance of engaging in dialogue and negotiation to find mutually beneficial
solutions and uphold the interests of both parties involved. It is worth noting that investment
disputes can have complex legal and political dimensions, and each case may require a tailored
approach to resolution.

14. Agreement between the Ethiopian government and Dutch flower farms: In 2018, a dispute
arose between the Ethiopian government and Dutch flower farms following the government's
decision to cancel lease contracts for flower farms near Lake Ziway, citing environmental
concerns. The Dutch flower farms argued that the cancellation violated their investment
agreements and sought resolution through diplomatic channels. Eventually, a resolution was
reached through diplomatic negotiations, with the government compensating the affected flower
farms and allowing them to continue operations under certain conditions.

15. Resolution of dispute with Dutch flower companies: In 2013, several Dutch flower
companies, including Sher Ethiopia PLC and Sher Carib Flower PLC, faced investment disputes
with the Ethiopian government. The government accused the companies of violating their lease
agreements and failing to fulfill their financial commitments. Through diplomatic negotiations, a
resolution was reached in 2014. The Ethiopian government agreed to allow the Dutch flower
companies to continue their operations while addressing the concerns raised. This resolution
provided a framework for cooperation and helped to protect foreign investment in the Ethiopian
flower industry. Diplomatic efforts in resolving investment disputes and maintaining a favorable
investment environment. Diplomatic negotiations can help find compromises, protect the rights
of all parties involved, and foster stronger economic relations between countries.

16. Resolution of dispute with Tullow Oil: In 2015, the Ethiopian government faced a dispute
with Tullow Oil, a British oil company, over the termination of its exploration license. Tullow
Oil claimed that the termination was unlawful and sought compensation.

Diplomatic efforts were made between the British and Ethiopian governments to resolve the
dispute. In 2017, a settlement agreement was reached, wherein Tullow Oil agreed to withdraw its
arbitration claim and the Ethiopian government allowed the company to retain its assets in the
country. This resolution helped to maintain investor confidence and fostered positive relations
between Ethiopia and the United Kingdom.

17. Resolution of dispute with Ethio Telecom: In 2019, the Ethiopian government faced a dispute
with telecom operators Ethio Telecom and South Africa's MTN Group over unpaid fees and tax
disputes. The companies claimed that the government's demands were excessive and threatened
to withdraw their investments. Diplomatic negotiations took place between the Ethiopian
government and the companies to find a resolution. In 2020, an agreement was reached, wherein
the government agreed to reduce the tax and other financial obligations of the telecom operators.
This resolution helped to ease tensions and protect the telecom investments in Ethiopia.
18. Resolution of dispute with China Communications Construction Company (CCCC): In 2020,
the Ethiopian government faced a dispute with CCCC, a Chinese state-owned company, over the
termination of a contract for the construction of a major expressway. CCCC claimed that the
termination was unjustified and sought compensation.

Diplomatic efforts were made between the Chinese and Ethiopian governments to resolve the
dispute. In 2021, a settlement agreement was reached, wherein CCCC agreed to resume the
construction work and the Ethiopian government provided certain concessions. This resolution
helped to maintain the bilateral relations between China and Ethiopia and protected foreign
investment in the country.

Diplomatic negotiations can help minimize conflicts, protect the interests of all parties involved,
and strengthen economic ties between countries.

While formal investor-state disputes in Ethiopia have not been extensively documented, it is
important to note that diplomatic protection can play a significant role in resolving such disputes
if they arise. Diplomatic protection refers to the legal principles and mechanisms through which
a state may espouse the claims of its nationals against another state. In the context of investor-
state disputes, diplomatic protection can be invoked by the home state of the investor to protect
the investor's rights and seek redress for any alleged violations by the host state.

In the absence of specific case studies involving Ethiopia, it is essential for foreign investors
operating in Ethiopia to be aware of the potential role of diplomatic protection and to consider
the provisions of relevant bilateral investment treaties (BITs) or other international agreements
that may govern the protection of their investments. Understanding the interplay between
diplomatic protection and investor-state dispute resolution mechanisms can help investors
navigate potential disputes and seek remedies in accordance with international law and relevant
treaty provisions.
CONCLUSION

Investment treaty arbitration is a mechanism used to resolve disputes between foreign investors
and host states. It allows investors to bring claims against the government of a host state for
alleged violations of their rights under international investment agreements, such as bilateral or
multilateral investment treaties. One key principle that is often included in these investment
agreements is the exhaustion of local remedies rule. This principle requires foreign investors to
first pursue and exhaust their available remedies within the domestic legal system of the host
state before initiating international arbitration proceedings.

The rationale behind this rule is to give the host state's domestic legal system an opportunity to
rectify any alleged wrongs or violations before resorting to international arbitration. It promotes
the idea that domestic legal processes should be given a fair chance to address and resolve
investment disputes. The role of national courts is crucial in the application of this rule. It is
expected that investors should make use of the domestic courts to seek redress for any harm they
have suffered. If they fail to do so, it may result in the dismissal of their claims in international
arbitration. The International Centre for Settlement of Investment Disputes (ICSID) plays a
significant role in enforcing the exhaustion of local remedies rule. ICSID, which is a specialized
dispute settlement institution, requires investors to provide proof that they have exhausted local
remedies or demonstrate that local remedies are ineffective or unreasonably prolonged.

In addition to the use of domestic legal processes, diplomatic efforts and diplomatic protection
can also be utilized to resolve investment disputes. Diplomatic efforts involve negotiation and
communication between the investor's home state and the host state to seek a resolution to the
dispute. Diplomatic protection involves the home state taking action on behalf of its national to
defend their rights and seek redress.

Ultimately, the exhaustion of local remedies rule serves as a safeguard to encourage the
resolution of investment disputes at the domestic level, thereby promoting respect for national
sovereignty and the rule of law. It also helps to ensure that international arbitration is used as a
last resort when all other avenues have been exhausted.

Investment treaty arbitration is a complex and crucial mechanism for resolving disputes between
foreign investors and host states. It provides a method for investors to seek redress for alleged
violations of their rights under international investment agreements. One significant principle
that is often included in these agreements is the exhaustion of local remedies rule, which requires
foreign investors to first pursue and exhaust their available remedies within the domestic legal
system of the host state before initiating international arbitration proceedings. The rationale
behind this rule is to allow the host state's domestic legal system the opportunity to rectify any
alleged wrongs or violations before resorting to international arbitration. It emphasizes the
importance of giving domestic legal processes a fair chance to address and resolve investment
disputes. The national courts play a crucial role in the application of this rule, as investors are
expected to utilize the domestic courts to seek redress for any harm suffered. Failure to do so
may result in the dismissal of their claims in international arbitration. The International Centre
for Settlement of Investment Disputes (ICSID) is instrumental in enforcing the exhaustion of
local remedies rule. It requires investors to provide proof that they have exhausted local remedies
or demonstrate that local remedies are ineffective or unreasonably prolonged.

In addition to the use of domestic legal processes, diplomatic efforts and diplomatic protection
can also be utilized to resolve investment disputes. Diplomatic efforts involve negotiation and
communication between the investor's home state and the host state to seek a resolution to the
dispute. Diplomatic protection involves the home state taking action on behalf of its nationals to
defend their rights and seek redress. Ultimately, the exhaustion of local remedies rule serves as a
safeguard to encourage the resolution of investment disputes at the domestic level, promoting
respect for national sovereignty and the rule of law. It also ensures that international arbitration is
used as a last resort when all other avenues have been exhausted. This principle contributes to
the fairness and effectiveness of investment treaty arbitration as a mechanism for resolving
disputes between foreign investors and host states.

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