Financial and economic disputes between states and nationals of other states

In the absence of an agreement to the contrary between the foreign investor and the host government, an investment is subject to the laws of that government (local law); and the redress of grievances which the investor may seek by direct access to that government is equally determined by local law. If the investor feels aggrieved by actions of the host government he may invoke the diplomatic protection of his national State or he may request his national State to espouse his case and bring a claim before an international tribunal. In some countries, the foreign investor may, as a condition of entry, be required to waive diplomatic protection; and even if the national State is willing to espouse the investor's case, the host government may be unwilling to submit to the jurisdiction of an international tribunal.

However, even in the absence of these obstacles, the present situation may be regarded as unsatisfactory because of the investor's inability to proceed with an international claim directly against the host government. The necessity of espousal of his case by his national government before an international claim can be lodged introduces a political element. An investor may well find that his national government refuses to espouse a meritorious case because it fears that to do so would be regarded as an unfriendly act by the host government. And this consideration is even more likely to cause the national government to refrain from acting if the merits of the investor's case are not wholly clear in its view, thus withholding from the investor an opportunity to have his case judged by an impartial tribunal. In an attempt to overcome these difficulties, some investors, mostly large corporations (especially in the field of extractive industry), have been able to negotiate arbitration agreements with host governments, providing for detailed rules regarding the selection of arbitrators, the arbitration procedure and, in some cases, the law to be applied by the arbitration tribunal. It is quite clear that only a few investors can be in a position to negotiate such agreements. Moreover, the validity of such agreements is sometimes questioned. If the government refused to proceed with the arbitration, the investor's remedy would once again be either a request to his national State for diplomatic intervention or for an espousal of his case before an international tribunal.

The absence of adequate machinery for international conciliation and arbitration often frustrates attempts to agree on an appropriate mode of settlement of disputes. Tribunals set up by private organizations, such as the International Chamber of Commerce, are frequently unacceptable to governments and the only public international arbitral tribunal (the Permanent Court of Arbitration) is not open to private claimants.