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

Abstract

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

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

Keywords: investment, arbitration, exhaustion, NAFTA, AUSFTA, Chapter 11

JEL Classification: F21, K33, K41