Report No. 260

D. Article 14.3. Exhaustion of local remedies, Notice and Consultation.

(i) Analysis and comment:

5.4.1 Article 14(3)(iv) provides that at least one year must elapse from the issuance of a notice of dispute during which the investor and the respondent State must use their best efforts to try to resolve the dispute amicably through meaningful consultation, negotiation or continued pursuit of any available domestic remedies or solutions.

There is a risk that tribunals may treat this as only a procedural/admissibility requirement. In some cases, the tribunals have either ignored waiting periods or have permitted non-compliance with them or suspended proceedings in order to permit the parties to reach an amicable settlement.90 However there is a divergence in the jurisprudence.91

90 See, for example, SGS Sociedt Generale de Surveillance SA v Islamic Republic of Pakistan, where the tribunal treated 'consultation periods as directory and procedural rather than as mandatory and jurisdictional in nature'. ICSID Case No ARB/01/13, Decision on Jurisdiction (August 6, 2003), p 184, available at:
http://www.italaw.com/sites/default/files/case-documents/ita0779.pdf.

Similarly in Ronald S Lauder v The Czech Republic (UNCITRAL, Final Award, 3 September 2001, p 190 [available at:
http://www.italaw.com/sites/default/files/case-documents/ita0451.pdf),
the tribunal was of the opinion that insistence on the expiry of a waiting period before the commencement of arbitration proceedings would 'amount to an unnecessary, overly formalistic approach which would not serve to protect any legitimate interests of the Parties'.

The tribunal in Bayindir Insaat Turizm Ticaret Ve Sanayi AS v Pakistan (ICSID Case No ARB/03/29, Decision on Jurisdiction (Nov 14, 2005), p 100, available at: http://www.italaw.com/sites/default/files/case-documents/ita0075.pdf), gave the policy reason for not insisting on the expiry of a waiting period by stating that it 'would simply mean that [an investor] would have to file a new request for arbitration and restart the whole proceeding, which would be to no-one's advantage'.

91 For instance, the tribunal in Murphy Exploration and Prod Co Int' v Republic of Ecuador (ICSID Case No ARB/08/4, Award on Jurisdiction (Dec 15, 2010), p 149, available at:
http://www.italaw.com/sites/default/files/case-documents/ita0547.pdf),
held that 'the requirement that the parties should seek to resolve their dispute through consultation and negotiation for a six month period does not constitute, as Claimant and some arbitral tribunals have stated, a procedural rule' or a 'directory and procedural' rule which can or cannot be satisfied by the concerned party. To the contrary, it constitutes a fundamental requirement that Claimant must comply with, compulsorily, before submitting a request for arbitration under the ICSID rules'.

5.4.2 Article 14(3) (v) has been included for this reason, to provide that exhaustion of domestic remedies, providing a proper notice of dispute, and the use of best efforts to resolve the dispute amicably are mandatory and conditions precedent to the submission of the dispute to arbitration. While the language of this provision, by itself, clearly brings out the intention of parties, considering the amount of unnecessary litigation on this issue of whether the pre-arbitration procedures are merely directory, the provision may be slightly redrafted by way of clarification.

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