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At the very beginning of this paper, the area of state responsibility for injuries suffered by aliens within its territory was touched upon. Because the issue of individuals' access to international dispute settlement mechanisms has historically arisen out of this area, it is now necessary to focus on it. In particular, although state responsibility may arise out of injuries suffered by aliens which are not of an economic nature, the overwhelming majority of these injuries and of the consequent disputes have been of an economic nature.
It was said that, with the affirmation of the concept of modern and absolute state, self-help was taken away from the individual and replaced by the principle and mechanism of diplomatic protection. The affirmation of diplomatic protection in turn clearly reflected the dominant positivist view that states were the only subjects of international law and individuals were mere objects of international law. As a result, when the national of one state suffered an injury within the territory of another state, on the international law level that injury was regarded as an injury to the former of the two states; in Vattel's famous words: "an injury to a citizen is an injury to the state."[57] Thus, the disputes arising out of these injuries became disputes between states. It is also to be remembered that, as seen, it was only in the late nineteenth century that the first judicial or quasi-judicial machinery for the settlement of such disputes was set up; before that, disputes were settled through purely diplomatic, not to say military, means. In that same period, it also became clear that, as a result of the industrial revolution, cross-border economic activities would increasingly be an important element of any national economy; indeed, it is fair to say that it was the general trial for the twentieth century globalization process.
The customary international law of diplomatic protection was spelled out in a more comprehensive manner by the case law of the PCIJ and the ICJ. As mentioned, both courts, constituting the international dispute settlement mechanism for the League of Nations and the United Nations systems respectively, reflect the positivist view of international law in their structure and procedure, by not opening up to individuals' access. The Mavrommatis Palestine Concessions case,[58] decided by the PCIJ in 1924, is certainly the milestone of this case law. The case was brought against Great Britain by Greece, further to the former' s refusal to recognize, as the sovereign power in Palestine under a mandate assigned by the League of Nations, the contractual rights acquired by Mavrommatis, a Greek national, through agreements signed with the authorities of the Ottoman Empire, the former sovereign power in Palestine. The Court so held:
"It is true that the dispute was at first between a private person and a state...Subsequently, the Greek Government took up the case. The dispute then entered upon a new phase; it entered the domain of international law, and became a dispute between two states... It is an elementary principle of international law that a state is entitled to protect its subjects, when injured by acts contrary to international law committed by another state, from whom they have been unable to obtain satisfaction through the ordinary channels. By taking up the case of one of its subjects and by resorting to diplomatic action or international judicial proceedings on his behalf, a state is in reality asserting its own rights - its right to ensure, in the person of its subjects, respect for the rules of international law. The question, therefore, whether the present dispute originates in an injury to a private interest, which in point of fact is the case in many international disputes, is irrelevant from this standpoint. Once a state has taken up a case on behalf of one of its subjects before an international tribunal, in the eyes of the latter the state is sole claimant."
This case attracts some criticism. First and foremost, it is clear, as Brownlie puts it, that, under the principle of diplomatic protection as defined in the above case, "the subject-matter of the claim is the individual and his property: the claim is that of the state."[59] This result cannot be accepted. As Muchlinski affirms, "this may be regarded as a legal fiction, given that the primary right giving rise to the claim is a right of the individual protected by international law."[60]
Furthermore, the PCIJ clearly embraced the object theory about the status of the individual under international law. Earlier in this paper it was explained why this theory cannot be embraced, especially in the light of the developments of the practice and theory of international law in this century. That criticism can now be strengthened by highlighting the artificial results of the application of the object theory in cases like Mavrommatis, that is, all those cases concerning state's actions or omissions affecting the property rights) of aliens who carry out activities in its territory. These are indeed the relevant cases for the discussion in this part of the paper. For these purposes, no words are better than O'Connell's, perhaps the fiercest opponent of the object theory:
"What, then, was the nature of the dispute before it became one between two states? It certainly was not a dispute in municipal law, because there was no municipal law on the subject. The Court would have to say that the dispute was not a legal one at all, and became such only taken up by the Greek Government. This would be an unacceptable answer when Mavrommatis' whole position was based on the assertion that international law regulated his rights and property. In many similar instances the law officers would advise their governments that Mr. X should be compensated or his claim acknowledged, and their advice is surely in reference to law. The contention that X's claim is no claim in law at all until X's government takes it up is based upon the theory that states alone have capacity in international law and that the "object" of the law has no claim in law. The Mavrommatis approach on these lines demonstrates how artificial is the supposed distinction between the claim when it was a non-legal one and the claim when it became a legal one; it was still the same claim based upon the same legal propositions; the only difference was a change in the formal identity of the claimant."[61]
It may therefore be concluded that, to the extent that the principle of diplomatic protection so closely reflects the positivist view of the individual as an object rather than a subject of international law, view firmly rejected in Part I of this paper, and because of the artificial situation that this principle as a consequence produces, it cannot be accepted as a satisfactory answer to the quest for an adequate, effective, and comprehensive recognition and protection of individuals' rights under international law. For the moment this conclusion should be given on the theoretical level only; further in the present discussion other effects of the application of the principle of diplomatic protection will be considered to show that it is not suitable for protecting the individual's rights. Before getting there, however, it is necessary to provide an overview of the functioning of this principle.
The correct application of the principle of diplomatic protection rests primarily on the nationality of the claim. For the claim to be admissible, the rule of customary international law has indeed constantly been that the claimant state must establish a legal interest in taking up the claim, and that this legal interest is certainly provided by the allegedly injured individual(s) being (a) national(s) of the claimant state. To show a legal interest in cases other than those based on nationality has been traditionally much more difficult; normally this has been possible only when expressly provided under an international treaty.
A comprehensive discussion on the issue of nationality of claims would fall outside the scope of the present paper. However, some aspects need be observed. First, the principle of nationality of claims again reflects a positivist vision of international law and can be considered a consequence of the approach derived from Vattel's words. Indeed, this principle seeks to provide a relatively simple criterion for establishing responsibility and according protection on the international law level, where in the end responsibility and protection are conceived with respect to states as the only subjects of international law. Therefore, the state is held responsible for the harm suffered by aliens within its territory as well as it is accorded legal standing to seek redress for the harm suffered by its nationals abroad. In both these sets of cases, it can be observed that, although nationals, that is, individuals, are responsible for and harmed by these acts or omissions, the positivist vision of sates as the only subjects of international law prevents them from directly enforcing their rights or being held responsible on the international law level; rather, it is for the states of which they are nationals to settle the issue. In the end, it may be said that, even if the nationality of claims rule is consistent with the dominant positivist approach to protection and responsibility under international law, and it helps get out of some difficulties in the implementation of this approach, it nevertheless must be rejected to the extent it reflects the positivist view from which it, as well as the principle of diplomatic protection, derives.
Second, besides the major issue of the nationality of claims in respect of corporations, which will be discussed below, it is important to note that the rules on whose basis the nationality link can be established are rules of both municipal and international law, in the sense that states are free, as an expression of their sovereignty, to set forth the criteria under which they confer nationality (i.e. ius sanguinis or ius soli), but at the same time they may agree to comply with criteria set forth on the international law level through bilateral or multilateral treaties. It has indeed been by means of international agreements that states have progressively abandoned a narrow application of the nationality of claims, in the sense that they now tend to accept that in some circumstances a state can also take up the claim of non-nationals; this trend has proved essential to afford protection to stateless persons.
Third, another important aspect arisen out of the case law of the PCIJ/ICJ on the issue of nationality is that, as concerns the sole nationality of natural persons, there has been a shift from formal to effective nationality, as expressed by the ICJ in the Nottebohm case.[62] The focus is now on the "genuine link" between the person and the state taking up her claim. This shift, however, does not necessarily lead to a more liberal interpretation of the nationality principle; if on the one hand it is true that nationality may be established under the genuine link test even in case of non-fulfillment of the formal criteria applicable under the law of the claimant state, on the other hand fulfillment of such criteria may not be sufficient because the international tribunal may still hold that there is a lack of genuine link.
Furthermore, in the opinion of many scholars and in the practice and the law of many states, there is also a rule of continuity to comply with. Under this rule, the injured person must have the nationality of the claimant state and not have that of the respondent state from the occurrence of the injury to the delivery of the judgment/award. The rationale of this rule is to prevent the injured person from shifting nationality for her own convenience (e.g. from a weak to a powerful state). However, the rule has also rightly attracted some criticism, because, besides the difficulty in defining with precision the two crucial moments, it also causes some inconvenience in all those cases of incidental, involuntary, or de iure changes of nationality; in such cases, the strict application of the rule of continuity would make claims inadmissible. In addition, the nature itself of this rule as a rule of customary international law is questionable.
The second pillar on which the principle and mechanism of diplomatic protection have been built is the principle of exhaustion of local remedies. In short, under this other principle of customary international law, resort to dispute settlement on the international level through diplomatic protection is not admissible until the injured person has exhausted the legal remedies (judicial or administrative proceedings) available in the state allegedly responsible for the injury, unless the application of the rule is dispensed with either by an agreement between the claimant and the responding states, or by estoppel on the part of the latter.
Although it has been argued that this rule is one of substantive law, it is deemed to be more reasonable and consistent with the development of the rule to consider it a rule of procedure related to the admissibility of the claim. It has been rightly observed that this rule, which certainly works as a restriction on the applicability of diplomatic protection, is not the necessary consequence of the system of international law as a whole, but rather it is the consequence of political and practical considerations.[63] As to the former, the ICJ held in the Interhandel case that "the rule requiring the exhaustion of domestic remedies as a condition of the presentation of an international claim is founded upon the principle that the respondent State must first have an opportunity to redress by its own means within the framework of its own domestic legal system the wrong alleged to have been done to the individual."[64] Furthermore, it may be submitted that another policy ground for the application of the rule is that the alien, by conducting activities within the territory of the host state, both enjoys protection and is correspondingly accountable under the laws and before the courts of that state; thus, it may be fair to hold that she should first seek redress under those laws and before those courts. These two arguments seek not to make the international dispute settlement machinery vexatious to states and to accord an high degree of deference to their sovereignty as expressed by the exercise of their jurisdiction. As to the latter, among various practical considerations put forward from time to time, there are some which are worth mentioning, such as: the need to avoid a flood of claims on the international law level, which is undesirable due to the limited resources of international tribunals and to the adverse impact they may have on the delicate relations between states; the fact that domestic courts have often an higher degree of expertise and sophistication than international tribunals; the fact that the determinations made by domestic courts may provide international tribunals with extremely useful if not unique elements for the settlement of the dispute pending before them.
Some remarks on the principle of exhaustion of local remedies are necessary. First and foremost, this principle applies to international dispute settlement between states only if the claim is one of diplomatic protection, that is, if the claimant state has suffered an indirect injury through an injury to its nationals on the part of the responding state, while it does not apply to cases of direct injury, that is, when the injury consists of a direct breach of international law affecting the claimant state entity as such (e.g. injuries to diplomatic and consular personnel). However, the issue whether the claim falls within the former or the latter category is to be left to a case-by-case determination at the stage of admissibility by the relevant international tribunal, since there seems to be no clear cut rule of customary international law addressing the issue in definitive terms. Similarly, it can be observed that some issues arise out of the basic idea that the rule implies seeking redress before a local court. For instance, it may be relevant whether the action is brought for breach of either municipal law or international law or both; moreover, it may be asked whether the local court needs have jurisdiction under either municipal law or international law. However, while again the case law does not provide a definitive answer, it is submitted that the correct approach to this type of issues should be that rather than to the municipal-international law distinction as such, attention should be paid to the essence and the nature of the claim and to the question whether local remedies are available which could protect the set of interests which "correspond as closely as may be and in practical terms"[65] to the interests suitable for protection on the international level.
Other important aspects of the rule of exhaustion of local remedies concern the question when such remedies can be deemed available and/or exhausted. On the one hand, reference is to be made to the structure of the relevant proceedings before the local courts. Usually the plaintiff will have to go through all the various (normally no more than three) instances, and rights of actions are afforded even in respect of acts or omissions of the executive power. On the other hand, the international tribunal assessing the admissibility of the claim has to address this question very carefully, because sometimes remedies may prove ineffective even if formally accorded to the injured party. This may be the case when an appeal would be still available, but either because of legislative intervention or because of the stare decisis principle, it would not be effective being the outcome of the claim already set forth. This may also be the case when judicial or administrative proceedings are flawed by interference of the executive power. In these as well as in other cases the de iure or de facto ineffectiveness of the remedy produces the same result as its exhaustion in more traditional forms, and the claim should be admissible before an international forum. Moreover, in some instances, ineffective remedies may also be regarded as somewhat connected to the concept of denial of justice. The difference, however, is that denial of justice is itself considered a ground for state responsibility. Indeed, under the definition provided by the Harvard Research Draft:
"A State is responsible if an injury to an alien results from a denial of justice. Denial of justice exists where there is a denial, unwarranted delay or obstruction of access to courts, gross deficiency in the administration of judicial or remedial process, failure to provide those guarantees which are generally considered indispensable to the proper administration of justice, or a manifestly unjust judgment. An error of a national court which does not produce manifest injustice is not a denial of justice."
From this broad definition it is possible to understand that when denial of justice takes place, the nature and type of acts or omissions at bar make the rule of exhaustion of local remedies meaningless, because denial of justice itself prevents the injured parties from resorting to local remedies. Thus, it would be more appropriate to state that in cases of denial of justice the rule of exhaustion of local remedies cannot apply at all, rather than say that the local remedies have been exhausted because ineffective. To confirm this, it is noteworthy that state practice considers denial of justice by a state a breach of international law causing a direct injury to the claimant state rather than an indirect injury to that same state through the denial of justice to its nationals; under this view, the issue of exhaustion of local remedies does not arise at all.
Finally, the most recent developments of the rule by the ICJ's case law are contained in the ELSI case.[66] One of the major issues arising out of this case, in addition to others which will be analyzed below about the nationality of corporations under international law, was that the case was brought by the US against Italy under their Treaty of Friendship, Commerce and Navigation of 1948. The Treaty provided that disputes between the two states arising from its implementation be brought before the ICJ, but it did not expressly dispensed the parties with complying with the rule of exhaustion of local remedies. While the US interpreted this provision as implicitly dispensing the parties with the application of the rule, the ICJ held that "it finds itself unable to accept that an important principle of customary international law should be held to have been tacitly dispensed with." As Shaw puts it, "in other words, the presumption that local remedies need to be exhausted can only be rebutted by express provision to the contrary."[67] Moreover, and on similar grounds, the Court rejected the US submission that Italy was estopped from invoking the rule by its silence on this issue when it replied to the US diplomatic claim, which expressed the US intention to resort to the ICJ irrespective of the exhaustion of local remedies. The ICJ held that "there are obvious difficulties in construing an estoppel from a mere failure to mention a matter of particular point in somewhat desultory diplomatic exchanges."
The ICJ's deference to the rule went further. The US also argued that the claim was brought as a result of a direct injury suffered by the US itself for breach of the provisions of the FCN Treaty, which amounted to a breach of international law. Had the ICJ accepted this submission by the US, the rule of exhaustion of local remedies would be inapplicable, since the direct injury implies that the resulting dispute is directly one between states on the international law level. The Court, while in principle agreeing on the treatment of direct injury claims, did not regard the US claim as one belonging to this category, on the grounds that it had to look at the substance and nature of the dispute rather than at the relief sought. Therefore, it held that the US claim was not based on a alleged violation of its own rights under the Treaty as distinct from those of the US companies accorded by the Treaty. This was a shift from the Court's previous deference to the relief sought as the factor which determines the type of injury at bar, as held in the Interhandel case.
Similarly, the Court rejected the Italian submission that the remedies under Italian law had not been exhausted, because, in addition to the actions brought before the Italian courts by the trustee in bankruptcy on behalf of ELSI, the US companies owning ELSI could sue on their own behalf for alleged violations of their own rights, but failed to do so. The Court again looked at the substance of the claim, and held that, for the local remedies to be exhausted, it is necessary and sufficient that this substance is litigated before national courts. Therefore, it is of no relevance whether the party litigating that substance on the national law level is the same as the one on behalf of which diplomatic protection is exercised afterwards. The identity of the national and international claims was established by means of the identity of their substance, not of their parties. Moreover, the Court made it clear that it is for the defendant state to prove that the local remedies have not been exhausted and that therefore the international claim is not admissible; in this regard, Italy failed to satisfy its burden of proof.
In conclusion, it may be observed that the rule of exhaustion of local remedies is not necessarily bad, in the sense that its underlying rationale can be deemed sound, and it will be seen that it may also work as a useful, if not necessary, device to filter claims in those mechanisms of international dispute settlement where the injured individual can or should be entitled to directly enforce her rights against the host state before an international forum. In other terms, although so far the link between diplomatic protection and exhaustion of local remedies has been regarded by the practice of international law as non-rescindable, there may be situations where the latter can still make sense and play an important role in ensuring the effectiveness of a dispute settlement mechanism even in the absence of the traditional mechanism of diplomatic protection. However, these pros do not necessarily outweigh the cons of the rule under scrutiny. The main criticism this rule attracts is that it is in its same nature to work against the process of delocalization of international economic disputes. While this aspect goes together with the more general discussion on delocalization carried on below, it may be said for the moment that "the rule emphasizes the contingent nature of diplomatic protection, and the supplementary role that international law in fact plays in the regulation of disputes between individuals, including foreign corporations, and host states."[68]
Having discussed how the principle of diplomatic protection has been working so far, and bearing in mind the criticism of a more theoretical nature which, as seen, this principle attracts to the extent it reflects a positivist view of international law, it is now time to look more specifically at the problems which the application of the principle raises in respect of international economic disputes.
A first major issue concerns the nationality of claims. Indeed, if it is relatively easy to determine the nationality of the injured person in case of natural persons, this determination has proved to be particularly burdensome in case of juridical persons. The reference is here to corporations; as it will be seen below, when it comes to the area of transnational economic activities and related disputes, corporations are certainly much more concerned than natural persons. It is indeed the corporation, in particular, the multinational enterprise, which plays a decisive role in the current and extremely important process of globalization which the world economy is undergoing; a process against which the traditional legal and economic barriers, for centuries identified with the national boundaries, seem to break down, and in any case have lost most, although not all, of their effectiveness and significance.
Going back to the issue of the nationality of corporations, the difficulties faced in determining it are particularly critical if one bears in mind that, under the traditional mechanism of diplomatic protection, the link of nationality is decisive for the claimant state to be entitled to take up the corporation's claim and bring it on the international law level against the allegedly responsible host state. In turn, the determination of the nationality link leads to the determination of which legal system decides as to whether the corporation has autonomous legal personality or not and, if it does, what the exact nature and effects of this personality are. What is striking is that, on the level of both scholars' opinions and state practice, there is an extremely heterogeneous approach. However, notwithstanding the criterion of the place of incorporation would prima facie be the most straightforward, a certain common denominator seems to be that mere incorporation under the laws of one state does not suffice to recognize the corporation as a national of that state. That something more requested is generally defined as a substantial and effective link between the corporation and the claimant state. Therefore, under the laws of many developed countries, emphasis has been placed, although with differences, on the existence of additional links such as a substantial and beneficial interest in the corporation owned by nationals of the claimant state.[69] When the beneficial interest belongs to nationals of the same state as that of incorporation, no particular problem should arise. However, as a matter of fact the corporation tends not to be immediately identified with the state of incorporation because, while the place of incorporation is often chosen for reasons of convenience (e.g. tax benefits, corporate and securities laws more favorable to the interests and the needs of the corporation and, above all, of its management), its various, often cross-border activities, and the heterogeneous and international composition of its shareholding and management are likely to establish stronger ties with states other than that of incorporation. In these cases, which are the majority, the problem arises as to whether the criterion of place of incorporation or that of beneficial interest decides the nationality of the corporation. Furthermore, should the beneficiary interest decide, the next question might be what it is meant for beneficiary interest. There seems to be a trend to regard the controlling interest in the corporation as the factor disposing of the issue. Yet, even this solution may prove unsatisfactory; indeed, most multinationals, above all those shaped according to an Anglo-Saxon model, present the public ownership structure, which means that ownership of the shares is extremely fragmented, so that it is hard to identify a controlling interest. Should this be the case, the determining factor might then be the identification of a substantial rather than a controlling interest; however, in the public corporation model it is likely that there are more than just one shareholder with a substantial interest, and that as a result shareholders of different nationality may have an equally substantial interest in the same corporation. The ultimate result of this process would be that diplomatic protection in respect of a corporation might be exercised by more than one states as long as there are more than one substantial interests owned by persons of different nationality.
The practice of international law has not yet been able to provide a definitive, consistent, and satisfactory answer to the issue of the nationality of corporations, although some of the international dispute settlement mechanisms discussed below propose some innovative solutions. Therefore, all the possible solutions prospected above can be deemed equally applicable. However, some remarks are necessary. First, should the criterion of the place of incorporation decide, in addition to the possibility that the state where the company is incorporated and that or those whose nationals have a substantial and effective beneficial interest in the company are not the same, there is the problem that the corporation may be prevented from enjoying any protection on the international law level in all those cases where the place of incorporation is in the host state allegedly responsible for the injury for which redress is sought. In these cases, in fact, diplomatic protection could not work because the corporation would formally be a national of the state against which it wishes to bring a claim, and it could only seek redress under the laws and procedures of that state.
This scenario is certainly undesirable if the objective is to afford the corporation adequate protection on the international law level, especially because in practice the pattern of international trade and investment is such that many host states require foreign corporations, as a condition for them to operate within their markets, to set up a locally incorporated subsidiary. Some other times this legal form of business presence in a foreign market might more simply be dictated by reasonable and legitimate business considerations. In either case, the result is that, whenever an injury is suffered in the host state, it would be the locally incorporated subsidiary which formally suffers it, and, under the criterion of the place of incorporation, diplomatic protection would not be available because the subsidiary would be a national of the host state. This is a major shortcoming, which together with the fact that, as said above, the criterion of the place of incorporation usually does not reflect the real nature and extent of the economic interests in and of the corporation, may be sufficient to regard the outcome provided by this criterion as unsatisfactory.
It may be argued that the foreign corporation, by establishing a locally incorporated subsidiary in the host state, accepts the consequences deriving from this choice, and therefore submits to the exclusive jurisdiction of that state for protecting its interests. This argument is weak, because it would expose the foreign corporation to an unreasonable and excessive risk of abuse of power on the part of the host state, and it would certainly discourage the flow of trade and investment to that state; this scenario, if considered on a large scale, would be extremely harmful not only to the interests of the single host states, but also and above all to the interests and the dynamics of the wealth-enhancing model of the liberal global economy.
The obvious conclusion should be to embrace the criterion of the controlling/substantial interest as the decisive one. While this is certainly to be preferred to that of the place of incorporation, this preference needs be qualified. First, it was seen above how the application of this criterion may be difficult in practice. Second, it is to be observed that embracing this criterion would clash with a general principle of corporate law adopted by most national legal systems: the principle of the distinct legal personality of the corporation. In short, the distinctive legal character of the limited liability company is that the company is a legal entity separate from its shareholders, with its own rights and obligations under national and (possibly) international law. This separation, usually addressed as the corporate veil, allows the shareholders to avoid liability for the obligations undertaken by the corporation, thus preserving their personal assets and reducing their investment risk to the interest held in the corporation. A logical corollary of this principle would then be that shareholders, as well as do not expose themselves to liability for the corporations' obligations on the grounds that the corporation is a legal entity distinct from them, for the same reasons should not be entitled to enforce the corporation's rights. Under this argument, the criterion of the place of incorporation appears to be more consistent with the principle of distinct legal personality. On the other hand, the criterion of the controlling/substantial interest would certainly clash with it, because it would disregard the distinction, which normally exists in legal terms, although perhaps not in economic terms, between the corporation and its shareholders; it would in other terms lead to the lifting or piercing of the corporate veil. Nonetheless, it is submitted that, if the ultimate objective is to afford adequate diplomatic protection, the shortcomings of determining the nationality of a corporation exclusively through its place of incorporation are such that it is still preferable to adopt the controlling/substantial criterion, also because more in accordance with both the real economic interests at stake and the notion of effective nationality and genuine link adopted in determining the nationality of natural persons under the practice of international law. It will be seen below that a coexistence of these two criteria may also be a valid alternative.
A view contrary to the one here just embraced is that of the ICJ, which has been conservatively maintained for many years, although some interesting and relevant developments have occurred in its more recent case law. The following section focuses on the analysis of the ICJ' s doctrine.
The landmark case on the issue here at bar is certainly the Barcelona Traction case (1970).[70] The case concerned the Barcelona Traction Company, an holding company incorporated under the laws of Canada, but in which an overwhelmingly controlling interest was held by Belgian shareholders. The company carried on extensive business in the electric utility industry in Spain. After World War II, Spain prohibited transfers of foreign currency; these transfers were necessary to service foreign currency bonds issued by Barcelona Traction. This prohibition in turn triggered the company's default as to payment of principal and interest to Spanish bondholders, who thus brought proceedings against the company. Barcelona Traction was ultimately declared bankrupt, and its assets were passed to Spanish interests. The impression was that the various passages of the case, including the proceedings and the conduct of the Spanish courts and administrative authorities, were all part of a plan aiming at transferring the company's Spanish business into Spanish hands. After ineffective diplomatic negotiations, Belgium submitted a claim to the ICJ on the grounds that it was entitled to exercise diplomatic protection on behalf of the Belgian shareholders of the company, who suffered a large loss to be compensated by the Spanish Government. First, the ICJ took the view that the nationality of the company was Canadian, since Canada was its place of incorporation. In particular, the Court so held:
"In allocating corporate entities to states for purposes of diplomatic protection, international law is based, but only to a limited extent, on an analogy with the rules governing the nationality of individuals. The traditional rule attributes the right of diplomatic protection of a corporate entity to the state under the laws of which it is incorporated and in whose territory it has its registered office. These two criteria have been confirmed by long practice and by numerous international instruments. This notwithstanding, further or different links are at times said to be required in order that a right of diplomatic protection should exist. Indeed, it has been the practice of some states to give a company incorporated under their law diplomatic protection solely when it had its seat (siége social) or management or centre of control in their territory, or when a majority or a substantial proportion of the shares has been owned by nationals of the state concerned. Only then, it has been held, does there exists between the corporation and the state in question a genuine connection of the kind familiar from other branches of international law. However, in the particular field of the diplomatic protection of corporate entities, no absolute test of the "genuine connection" has found general acceptance. Such tests as have been applied are of a relative nature, and sometimes links with one state have had to be weighed against those with another. In this connection reference has been made to the Nottebohm case. In fact the parties made frequent reference to it in the course of the proceedings. However, given both the legal and the factual aspects of protection in the present case the Court is of the opinion that there can be no analogy with the issues raised or the decision given in that case."[71]
The reasons why the place of incorporation cannot be accepted as the factor determining the nationality of a company have been already exposed. What the above passage of the Court's decision seems to add is that the Court failed to properly assess the practice of states and the opinion of many scholars which point in a direction different from that taken by the Court; as said, the general orientation is toward the determination of nationality on the basis of that genuine connection between the corporation and a state. As to this genuine connection, it is interesting to observe the contradiction of the Court's reasoning which, after having rejected its relevance in the above passage, in supporting its finding as to the Canadian nationality of the company referred to the "close and permanent connection... (between the company and Canada)..established, fortified by the passage of over half a century."
Furthermore, and perhaps more importantly, it may be submitted that, for the purposes of diplomatic protection, even if it were accepted that the place of incorporation of the company determines its nationality, there might and should well be a right of diplomatic protection of both the state under whose laws the company is incorporated and that with which it maintains a substantial and genuine connection, which is likely to be the state whose nationals have a substantial/controlling interest in the company. In other terms, it is not clear why the two connecting factors must be mutually exclusive. Rather, they could and should coexist. The either/or choice is rejected because, if the notion of distinct legal personality is accepted, then there are two distinct legal entities, the corporation as such and its shareholders, and both should be afforded adequate diplomatic protection through their home states. This aspect is even more important in those cases, like the one under scrutiny, where the home state of the corporation fails to exercise diplomatic protection; in these cases, if only the home state of the corporation were entitled to diplomatic protection, then the shareholders would be left without any protection on the international law level. Why then should they be deprived of diplomatic protection? True, there is a certain overlap or connection between the interests of the corporation and those of its shareholders. However, this is not sufficient to justify the exclusive right of diplomatic protection on the part of the state where the company is incorporated, and it rather sounds as an arbitrary exclusion of an equal right on the part of the national state(s) of shareholders. If the problem is on the procedural level, because it may be argued that there might be too many and competing claims, some form of consolidation and/or multiparty proceedings could be provided. If consolidation is not available, as a second best a first come first served rule could be applied, whereby the state which resorts to diplomatic protection before international tribunals first prevents the other(s) from bringing its (their) claim(s). Besides the procedural aspect, however, it is the notion of distinct legal personality which should itself suffice to afford shareholders diplomatic protection.
However, the Court has quite firmly rejected the possibility to accord shareholders diplomatic protection as a general rule. The ICJ in the Barcelona Traction case dealt with the issue of diplomatic protection in respect of shareholders because this was the ground on which the claim was brought before the Court by Belgium. With a controversial majority judgment, and in a manner allegedly consistent with the above passage laying down the principles for establishing the company's nationality, the Court dismissed the Belgian claim without proceeding to the merits on the grounds that Belgium lacked legal interest and was not entitled to exercise diplomatic protection on behalf of the (controlling) Belgian shareholders of the company. The reasoning was based on the main legal aspects of the model of limited liability company mentioned above and common to most national legal systems. The Court basically embraced the view that a certain symmetry must exist between shareholders' rights and obligations arising from their interest in the company. In other words, so the argument went on, if shareholders benefit from the presence of the corporate veil, that is, from the distinct legal personality of the company, so that they are not liable for the obligations which the company undertakes in its activities, and limit their investment risk to the share of capital owned, it does follow that, on the side of the rights arising from those same activities, the corporation is to be regarded as the only right-holder, while shareholders only have an interest whose satisfaction indirectly depends on the satisfaction of the corporation's rights. Otherwise, the corporate veil would work only when it has to shield shareholders from liability, while it would be pierced when shareholders wish to take full advantage out of the company's rights by enforcing them. The following is the key passage of the Court's reasoning:
"The mere fact that damage is sustained by both the company and shareholders does not imply that both are entitled to claim compensation....Thus whenever a shareholder's interests are harmed by an act done to the company, it is to the latter that he must look to institute appropriate action; for although two separate entities may have suffered from the same wrong, it is only one entity whose rights have been infringed....An act directed against and infringing only the company's rights does not involve responsibility to the shareholders, even if their interests are affected."
Thus, shareholders are not entitled to diplomatic protection as such, but can only rely first on the enforcement of the corporation's rights by the corporation itself under the relevant municipal laws and procedures, and then on the diplomatic protection exercised by the home state of the corporation (in the present case, Canada, as determined under the criteria laid down above), as indirect forms of protection of their mere interests (not rights) in the company. In addition to the argument for piercing the veil in situations other than those (few) recognized by the ICJ, and that for admitting the coexistence of a right of diplomatic protection of both the company and its shareholders, it is not entirely clear why shareholders should be regarded as mere interest-holders and the corporation as the only right-holders; this subtle and formalistic distinction should have been explained in more details, especially because it led to the exclusion of diplomatic protection of shareholders as such. This distinction between interests and rights might well prove to be fictitious in many cases, where it would be sound to hold that shareholders and companies are both right-holders.
The ICJ, however, left the door open to the possibility of piercing the corporate veil and affording shareholders diplomatic protection under some circumstances. First, the Court accepted that states can through bilateral or multilateral agreements agree on affording shareholders diplomatic protection, in which case the corporate veil would be deemed conventionally pierced. Second, when the corporation has ceased to exist, the Court acknowledged that the corporation would be de iure and de facto unable to seek enforcement of its rights under the relevant municipal laws and procedures; in this case, shareholders would be entitled to diplomatic protection as the only representatives of the deceased corporation's rights. On the side of responsibility, the Court acknowledged the existence of another well-established exception provided by the situation where the controlling shareholders of the corporation are nationals of a state at war with the claimant state, even if the corporation itself is a national of a friendly or neutral state. Finally, the ICJ admitted that shareholders might well have direct rights, i.e. rights recognized under general principles of corporate law as belonging to the shareholders against the corporation (e.g. the right to dividends), and that, should these rights be infringed, shareholders would accordingly have independent rights of action. But it stressed that these would be situations different from those affecting the rights of the company, such as expropriation/nationalization, to which its doctrine would continue to apply.
The Court's majority judgment did not go any further, and maintained that, as a general rule of customary international law, the only right of diplomatic protection is that of the home state of the corporation, determined under the formalistic criterion of its place of incorporation. It also failed to address the crucial issue of diplomatic protection when the company is incorporated in the state allegedly responsible for the injury and the shareholders are nationals of another state. The issue was instead dealt with by Judges Fitzmaurice's, Tanaka's, and Jessup's dissenting opinions, which supported the right of diplomatic protection of shareholders in this common type of cases, in order to avoid that shareholders are hindered from enjoying any protection under international law at all. Furthermore, the Court underestimated the relevance of the practice of many states recognizing the right of diplomatic protection by the home state of the company's shareholders; this practice has been widespread both on a bilateral level (i.e. through the Friendship, Navigation, and Commerce Treaties, and their successors, the Bilateral Investment Treaties) and on the multilateral level (e.g. the ICSID Convention). Instead, the ICJ superficially considered this practice a phenomenon of secondary importance and sporadic frequency creating a lex specialis which does not affect the validity of the general principles embraced in its judgment.
As to the coexistence of diplomatic protection of the company and that of its shareholders, which is here embraced as both legally plausible and practically affordable, while Judge Tanaka supported this possibility, the Court' majority judgment rejected it. In particular, it did so not only on the basis of its interpretation of the relationship between the corporation and shareholders, whereby it concluded that only the corporation is entitled to diplomatic protection, but also on the following policy grounds:
"The Court considers that the adoption of the theory of diplomatic protection of shareholders as such, by opening the door to competing diplomatic claims, could create an atmosphere of confusion and insecurity in international economic relations. The danger would be all the greater inasmuch as the shares of companies whose activity is international, are widely scattered and frequently change hands."
At first glance, the ICJ's fears are justifiable, but the policy grounds on which shareholders' diplomatic protection is to be afforded seem to outweigh such fears. In particular, if the Court's view is accepted, shareholders would often be without any protection on the international law level, as it was seen. Finally, it is worth remembering that consolidation of the claims and/or multiparty proceedings would overcome the problems feared by the ICJ.
Overall, the ICJ's position seriously damaged the interests of shareholders; it failed to reflect the economic reality underlying the legal structure of multinational corporations, and to afford that level of protection on the international law level which is crucial to promote and enhance an higher flow of international trade and investment. Furthermore, the Court paid too much deference to municipal law and failed to consider the peculiar and autonomous function of international law as to the protection of foreign investment and shareholders in particular. This deference was justified on the grounds that:
"If the Court were to decide the case in disregard of the relevant institutions of municipal law it would, without justification, invite serious legal difficulties. It would lose touch with reality, for there are no corresponding institutions of international law to which the Court could resort. Thus the Court has, as indicated, not only to take cognizance of municipal law but also to refer to it...In referring to such municipal rules, the Court cannot modify, still less deform them."
While the concerns expressed by the Court are reasonable, it must be observed that its approach in addressing them failed to recognize the proper role of the Court itself and, more in general, of international law. International law would be meaningless if it ended up being a mere Xerox copy of municipal law. Rather, its proper role is to go beyond the limits of municipal law, and take the initiative in developing new approaches to unsettled issues, like the ones here at bar. To seek a continuous correspondence with municipal law would also be wrong if one bears in mind that the reality of international law may well be, and indeed often is, very different from that of municipal law, with its own unique features, issues, and solutions. As to the issue of shareholders' diplomatic protection, Judge Tanaka's dissenting opinion is enlightening and shows how international law may differ from municipal law:
"The concept of juridical personality mainly governs private law relationships. It cannot be made an obstacle to diplomatic protection of shareholders. Concerning diplomatic protection, international law looks into the substance of matters instead of legal form or technique; it pays more consideration to ascertaining where real interest exists, disregarding legal concepts. International law in this respect is realistic and therefore flexible."
A significant departure from the harsh doctrine enunciated in Barcelona Traction occurred in the ELSI case. [73] It is necessary to point out the differences between this case and Barcelona; the situation represented by the ELSI case was indeed different from that in Barcelona in many crucial aspects. To start with, ELSI was a company incorporated under the laws of Italy, the host state of the US investment, and above all the respondent state in the claim before the ICJ. This situation, which did not occur in Barcelona, is very common, because, as said above, it is often the case that either the host state requires the foreign investment to take the legal form of a locally incorporated subsidiary or the investor decides that this may be the best option for business purposes. In all these cases, under the traditional principles of diplomatic protection, the local subsidiary has the nationality of the host state and as such would lack any diplomatic protection on the international law level. When this is considered together with the rigid principles of customary international law enunciated by the ICJ in Barcelona, since shareholders (foreign investors) cannot enjoy diplomatic protection by means of their national state, and since they cannot rely on the diplomatic protection of the national state of the corporation (the only one entitled to exercise diplomatic protection under Barcelona) due to the fact that this state is the state against which at the same time the claim should be directed, the result would be that shareholders are left without any protection under international law and forced to rely exclusively on the laws and procedures of the host state, with all the risks and uncertainties that follow. In Barcelona, the ICJ declined to address this frequent situation in the light of the principles therein enunciated, on the grounds that nothing like that emerged from the facts of the case.
Another major difference is that in ELSI the claim was on a bilateral rather than trilateral level, because the only claimant state was and could be the US, the national state of the two corporations of which ELSI was the wholly owned subsidiary, while in the Barcelona case the national state of the parent corporation (Canada) was different from that of its controlling shareholders (Belgium). The ICJ itself recognized in its majority judgment in Barcelona that its conclusions might have been different and Belgium might have been accorded legal standing, had the company and its shareholders possessed the same nationality; indeed, the distinction between the corporation and its shareholders would lose most of its significance, since no allocation of the right of diplomatic protection between two or more claimant states would be needed.
Finally, the ELSI case was governed by the US-Italy FCN Treaty, and in particular by its provisions on the protection of foreign investment. Therefore, it cannot be technically submitted that this case affected or overruled the principles of customary international law enunciated in Barcelona; rather it would be a case where the lex specialis of the Treaty applied. Nevertheless, the conclusions reached by the ICJ cannot be underestimated, because they clearly show more willingness on the part of the Court to address the interests of foreign investors and to afford them adequate protection on the international law level. To this extent, the shift occurred with ELSI was a major one and must be welcomed.
As to the relationship between the two cases, it is quite surprising that the ICJ did not openly make reference to the authority of its Barcelona ruling, either to support or to overrule it. It is submitted that this silence can be interpreted as implying a shift in the approach taken as to protection of foreign investment, and a refusal of the formalistic and rigid distinction between the corporation and its shareholders. Had the Court followed an approach similar to that in the Barcelona ruling, it would not be able to provide that flexible and liberal interpretation of the FCN Treaty which proved essential to afford foreign investment adequate protection. On the other hand, this silence certainly did not provide that clarity of judgments which is so important to ensure legal certainty and the effectiveness of the rule of law.
Without going into the substantive issues of the case, what is relevant for the purposes of the present discussion is the issue of the legal standing of the US, the claimant state. From the facts of the case, it was clear that the US was exercising diplomatic protection on behalf of the two US companies which were the controlling (actually, the sole) shareholders of ELSI, the Italian company they took over and transformed in their wholly owned subsidiary. The key question was therefore whether the US was entitled to exercise diplomatic protection on behalf of its nationals which were shareholders of the Italian company against which the alleged violations of the FCN treaty were committed. At a first glance, this possibility would be excluded under the authority of the Barcelona ruling, which did not recognize shareholders' rights of action under international law for acts committed against the corporation. However, this was not the conclusion that the ICJ reached in ELSI.
Italy put forward arguments under the rules of customary international law enunciated in Barcelona. Indeed, it argued that the claim was inadmissible because the rights at stake in the case were those of ELSI, an Italian company, not of its US parent companies. The alleged violations of the FCN Treaty, so the argument went on, were committed by the Italian authorities against the Italian company, which was not a beneficiary under the Treaty, while its shareholders could only enjoy diplomatic protection in respect of their own direct rights, not also in respect of those of the corporation, which had a legally distinct personality from its shareholders. In his concurring opinion, Judge Oda embraced this view, and stressed the importance and validity of the distinction between the legal personality of the corporation and that of its shareholders, from which two different sets of rights arise. Shareholders could have direct rights conferred under the Treaty; however, both the Treaty and shareholders' direct rights were to be interpreted narrowly. However, Judge Oda recognized that the a treaty could confer on shareholders rights of action in respect of acts committed against their corporation, and that indeed the Treaty under scrutiny did so in some provisions, but the US failed to ground its claim on those provisions. Italy instead submitted that no such rights were conferred under the Treaty.
The US counter-arguments were grounded on the relevant provisions of the Treaty. These provisions were interpreted as protecting foreign investment even when in the form of an interest in a locally incorporated company; thus, shareholders were afforded protection as to the rights of control, management, use and dispose of their property, that is, of their local subsidiary. The US also submitted that, even if the FCN Treaty were read as letting customary international law apply according to the Barcelona ruling, its provisions could nevertheless be meant to accord shareholders direct rights for the violations of which diplomatic protection was admissible.
The ICJ rejected Italy's arguments and embraced the US' ones, but it did so ambiguously. In other terms, rather than directly address the Barcelona ruling on which the Italian view was based, the Court did so indirectly by rejecting the Italian traditional view, and did not consider the argument of the distinct legal personality crucial. By focusing on the provisions of the Treaty dealing with foreign investment, the ICJ held that, in respect of acts committed against the corporation, such provisions conferred rights on shareholders as well. Its interpretative approach was quite liberal and consisted of looking at and taking into account the "meaning and the purpose" of the Treaty in promoting the flow of foreign investment between the two states; it led to the conclusion that foreign investment was to be protected in its direct and indirect forms. Therefore, there was a rejection, though only implicit, of the formalistic distinction between the corporation and its shareholders, and of the consequent distinction between the rights of the former and the mere interests of the latter. Indeed, the Court did not expressly address these distinctions and did not indicate which rights belonged to the corporation and which to its shareholders.
However, at the same time these distinctions became less significant, as also proved by the fact that shareholders' interests were accorded full legal protection and not regarded as being something less than rights; even terminologically, the two words were indifferently used to indicate the same situation. Instead, what mattered was the adequate protection of the investment as the substance prevailing over the form. The Treaty created rights, like that to organize control and manage, "to make economic interests rather than legal relationship the operative basis for protection."[74] Under these premises, strengthened by the language of the specific provisions at bar, the ICJ tended to identify the corporation with its shareholders. Therefore, the requisition might be an act of impairment of the investors' interests, even if it was addressed to the company and its assets. The right to organize, control and manage a corporation was not just that of ELSI in respect of its property, but also and above all that of shareholders in respect of the company. Similarly, shareholders also had the right to acquire, own and dispose of immovable property, because ELSI's immovable property was indirectly owned by its shareholders through their interest in the company. The Court was less clear as to the contents of the concept of property. Indeed, while interests in immovable property were expressly protected by the Treaty in the same way as the immovable property, the more general provision on property did not expressly confer such a protection on shareholders. The ICJ did not determine whether shareholders' property consists of their shares only, or also of the corporation and its assets, as submitted by the US, which held that ELSI itself was the property of its shareholders. The Treaty expressly admitted the US conclusion only in case of liquidation of the company and distribution of the remaining assets; however, the Court's reasoning appeared inclined to share the US view.
The ICJ's approach in ELSI was a big step forward on the road toward a more comprehensive, adequate, and effective protection of foreign investment on the international law level. Although the US lost the case because of factual findings against which it was unable to provide sufficient evidence, it was able to obtain the recognition of the right of the national state of shareholders to exercise diplomatic protection on their behalf, in the frequent case where the company in which the interest is held is a national (because incorporated in) the respondent state. Yet, it cannot go unnoticed that there is still a major issue outstanding: does the ELSI case, rather than overrule the rules of customary international law enunciated in the Barcelona case, appear quite paradoxically to be in accordance with it, because it falls within the category of the exceptions to those rules which were acknowledged by the Barcelona ruling itself? Indeed, the lifting of the corporate veil was expressly allowed in Barcelona, as an exception to the rule of distinct legal personality between the corporation and its shareholders, when the corporation has ceased to exist, when there is a Treaty which expressly provides the bases for such a lifting, and, in the case of a corporation incorporated in the respondent state, the ICJ's left the door open to the possibility to accord its shareholders diplomatic protection on equity bases, although did not expressly admitted this other exception. Now, it is evident that the ELSI case falls within each of the three exceptions: the company had ceased to exist when the claim was brought, its shareholders were accorded diplomatic protection through the FCN Treaty, and the corporation was a national of the respondent state. Thus, it might be argued that after ELSI the rules of customary international law are still those of the Barcelona ruling, but the exceptions are now better defined.
On the other hand, as already mentioned, the ICJ followed an approach which was far more flexible than that in Barcelona: substance prevailed over form, the adequate protection of interests of foreign investors was the main concern, and, above all, as Stern puts it, "la réalité économique doit l'emporter sur le structures juridiques."[75] Unfortunately, the Court's silence on the relationship between the two judgments does not allow to affirm that this shift has radically changed the traditional distinction between the corporation and its shareholders, in the sense of making it irrelevant for the purposes of conferring the right of diplomatic protection on the national state of shareholders. While this conclusion would certainly be more in accordance with the more recent developments in international law as to foreign investment protection, and it is the one embraced here, it must be concluded that the issue is still unsettled, and requires additional, clear, and outspoken pronouncements by the ICJ as well as multilateral conventional regulation.
However, the development of the customary international law of diplomatic protection of corporation is not limited to the ICJ's case law. Indeed, more recent state practice and some considerations about the phenomenon of multinational enterprises must also be taken into account, especially because they have gone beyond the limits of the ICJ's doctrine. As to state practice, it must be observed that states are now much more willing to afford foreign investment adequate, effective, and comprehensive legal protection. The strong ideological tensions which, especially at an economic level, have split the international community in two groups of states in continuous conflict, the capital exporting countries of the rich North and the capital importing countries of the poor South, for most of this century, are today a memory of the past. There is now a widespread adhesion to the doctrine of economic liberalism applied to international trade and investment, which states see as a mandatory step to benefit from the global economy. This process has had an enormous impact on the legal framework in which cross-border economic activities take place. The basic assumption is that economic interests need be adequately protected irrespective of their nationality, because the creation of a friendly legal environment for international trade and investments is a conditio sine qua non for their effective promotion and growth. On these grounds, there have been several attempts to provide an investment and trade friendly regulatory environment under international law, on both:
(i) the bilateral level, mainly in the field of foreign investment, through the Bilateral Investment Treaties or BITs, successors to the Friendship, Commerce, and Navigation Treaties and certainly of wider application than the latter;
and
(ii) the multilateral one, e.g. the whole process of liberalization of international trade through the General Agreement on Tariffs and Trade (GATT) leading to the recent creation of the World Trade Organization (WTO), and the first significant regulation of investment within the context of the WTO itself - such as the Agreement on Trade Related Investment Measures (TRIMS) and the General Agreement on Trade in Services (GATS) - and/or that of an earlier date in multilateral forums such as the World Bank - e.g. through the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for the Settlement of Investment Disputes (ICSID) - and the Organization for Economic Cooperation and Development (OECD) - e.g. through the Guidelines on Multinational Enterprises and the forthcoming Multilateral Agreement on Investment.
Leaving apart for the moment the issue of diplomatic protection in international trade disputes, what these various expressions of state practice indicate quite clearly as to diplomatic protection in the field of foreign investment is that the distinction between the rights and interests of the corporation and those of its shareholders, and the consequent effects of this distinction as to diplomatic protection on the international law level, have lost most of their importance. In other terms, while diplomatic protection may still be considered an essential tool for protecting foreign investment on the international law level, the right to exercise such a protection is now more liberally accorded because what all these treaties look at is the investment itself rather than the company or the shareholders making the investment. This is one of the latest results of the trend to let substance prevail over form, where substance may be defined as the economic interests behind the investment, and form as the legal device through which these interests are expressed in the investment. Investment is broadly defined as comprising direct as well as indirect forms, all equally enjoying legal protection. The most likely outcome of this process should therefore be and often is to recognize the right of diplomatic protection of the national state of shareholders, being shareholders the ultimate holders of the underlying economic interests in an investment made through a corporation. Thus, state practice on the bilateral as well the multilateral levels has already gone beyond the limits and the gaps of the ICJ's doctrine.
But the most significant and radical attack to the traditional model of diplomatic protection in the field of international economic disputes comes from the phenomenon of multinational enterprises (MNEs), to which the next section is dedicated.
Multinationals, by far the principal players in international trade and investment transactions, (i) tend not to have any nationality link with any one state, so that the identification of their national state would be burdensome and perhaps arbitrary, and (ii) could and should not rely on diplomatic protection.
The determination of the nationality of a corporation is per se a difficult task; as seen above, the place of incorporation as the linking factor is inadequate due to its failure to reflect on the law level what the real and substantial links of a corporation with several constituencies may be or actually are. This is another case where the law has failed to catch up with the underlying economic and social reality it seeks to regulate. This unsatisfactory situation is worsened in the case of multinationals. To start with, the definition of multinationals highlights the problem:
"Multinational enterprises usually comprise companies or other entities whose ownership is private, state or mixed, established in different countries and so linked that one or more of them may be able to exercise a significant influence over the activities of others, and, in particular, to share knowledge and resources with the others."[76]
A detailed discussion on the various elements of this definition would fall outside the scope of the present paper. However, it is submitted that the best comment as to its ultimate meaning is provided by Muchlinski, whose vision of multinationals is here shared. As the eminent British author puts it:
"Though in many respects they resemble various types of uninational companies, MNEs differ in their capacity to locate productive facilities across national borders, to exploit local factors inputs thereby, to trade across frontiers in factor inputs between affiliates, to it, and to organize their managerial structure globally according the most suitable mix of divisional lines of authority. These factors permit MNEs to affect the international allocation of productive resources, and thereby to create distinct problems in the development of economic policy in the states where they operate. Consequently, MNEs can and should be treated as a distinct type of business enterprise for the purposes of economic regulation."[77]
On the basis of these words, which effectively highlight the principal economic features and the rationale of multinationals, the legal determination of the nationality of such a type of companies appears virtually impossible, or at least confirms what was acknowledged by the ICJ in the Barcelona case as a premise to the Court's reasoning on the issue at bar, that is, "the corporation is not a thing, is a method...that corporations have a nationality is a legal fiction."[78] Indeed, with a structure like the one outlined above, how can the multinational be brought under the nationality of one rather than any of the other states where it carries out its activities? It has been rightly observed[79] that it could be argued both that the multinational has multiple nationality due to its equally strong links with several states, and that, for the same reasons, it has none. The reason of this apparent paradox is that nationality is traditionally based on a high degree of exclusiveness of the links between the person and the state, while a multinational would almost by definition lack such exclusiveness.
This reasoning does not change that much when attention is focused on the allegedly special link between the multinational and its home state, meant to be that of incorporation of the parent and/or with which the parent has the strongest links. First and foremost, this special link would exist only in the traditional equity structure of multinationals, better known as hierarchical or pyramidal, that is, where there is a parent on the apex of the pyramid, usually an holding company, and all the other units/subsidiaries are wholly or partially controlled through equity interest along purely vertical and centralized lines, which create a kind of cascade effect. However, although by far the most common, this is not always the case, because many times it is not even possible to identify the parent; the multinational may well result either from contractual relationships or from complicated networks of small cross-shareholdings combined with tight managerial coordination, like the Japanese Keiretsu. Nor is the pyramidal model as such always able to provide satisfactory explanations of the complex set of relationships between the parent and its several subsidiaries. Second, this focus on the parent would break up the unity of the multinational, in the sense that a similar special link should then be found as between each of the subsidiaries and its state of incorporation, and this certainly does not help. Third:
"Even though the links of a transnational enterprise with its home country are most often closer and stronger than those with each of the host countries, they remain - at least in a great number of cases - weaker than the entire complex of links with other countries. From the point of view of the decision makers in TNEs, the interests of the principal and original establishment in the home country are subordinated to those of the entire enterprise. It follows that the home country's interests, as well, are normally subordinated to those of the complex of external interests that are brought to bear on the enterprise as a whole. The concept of nationality is therefore inappropriate....It should be evident that trying to unravel a TNE's worldwide connections and multiple identities in order to link it somehow with a particular country and thus being it under the mantle of the latter's diplomatic protection is an exercise much resembling the endless search for epicycles in the Ptolemaic system if astronomy."[80]
It is therefore to be concluded that the difficulties in determining the nationality of the multinational cannot be overcome in a satisfactory way, because these difficulties are an unavoidable result of the peculiar structure and rationale of the multinational itself. In turn, this conclusion leads to the submission that diplomatic protection as a whole is not the most effective way to afford multinationals adequate legal protection, due to the key importance of establishing the nationality link for the purposes of diplomatic protection. Furthermore, not only is diplomatic protection of multinationals not technically feasible, but it is also to be determined whether it is desirable. The argument is here that the recognition of a direct right of action of the multinational on the international law level is to be preferred, because, and here the second of the two statements made at the opening of this section comes into question, multinationals do not need diplomatic protection, or better, they could and should protect their rights and interests more effectively without resort to diplomatic protection. Once again, this argument derives from and is supported by a closer look at the reality of international economic activities. As a matter of fact, multinationals are the key participants in these activities. Moreover, as Friedmann put it, "they are...comparable in concept, and often in their economic and political power, to states and to public international organizations."[81] Indeed, it is often the case that multinationals' revenues account for more than the GDP of a small state, and certainly for more than many international organizations. This reinforces on the practical and prescriptive level the conclusion reached on a more purely theoretical level on the issue of the recognition of physical and juridical persons as subjects of international law.
It is not certainly just because of their economic size and power that multinationals should be accorded the status of subjects of substantive and procedural rights and duties under international law. However, they represent a reality which cannot be disregarded, and international law might deal with such reality much more effectively if it were regulated in a way that takes in due account the peculiar features of this phenomenon, in particular its transnational nature, activities, links, and interests. This would be an ideal outcome not just for the multinational but for all the participants in the arena of the global economy. An adequate and comprehensive regulation of multinationals means not only recognition of their rights and procedural capacity under international law, but also and correspondingly that of their duties and procedural responsibility. This would be helpful for and in the interests of the host state where the MNE does business as well as the MNE's home state (assuming, contrary to the view here embraced, that there is a home state). Indeed, if the system of diplomatic protection were left in place as it is, it would produce a series of dangerous and undesirable side effects.
To start with, from the point of view of host states, especially the developing or less developed ones, now that their ideological opposition to the presence of MNEs is (almost) over, it has become essential to attract foreign investment and promote international trade. Both mainly depend on MNEs, and MNEs are very careful when determining whether to do business in a certain state or not. A fundamental importance is given to the legal environment offered by the potential host state. The more this environment is considered hostile, the more unlikely it is that MNEs will enter that state. When it comes to issues of adequate protection of MNEs' rights and interests, the fact that diplomatic protection is the only mechanism available to enjoy a certain degree of protection on the international law level is not regarded as a desirable prospective, because of the many practical and procedural difficulties faced in triggering the mechanism in respect of claims involving MNEs. Moreover, there would be the risk that, in the frequent event that diplomatic protection could not work, MNEs may be forced to rely on the protection of the laws and procedures of the host state, a situation which would expose them to possible arbitrary treatment by the host states. Although the general trend is now radically more pro-MNEs, the historical record shows that host states have often been willing to disregard MNEs' rights and interests for a mixture of various economic, political, and above all, ideological reasons. Therefore, if there were an adequate set of substantive and procedural rights available to MNEs under international law, they would feel more comfortable: the presence of this safe harbor would make them more willing to do business in certain countries. This would work as an extraordinary incentive for the promotion of international trade and investment, and the consequent wealth-enhancing effects on the world welfare.
Should diplomatic protection be the only mechanism available, another undesirable scenario would be that the bargaining process between MNEs and host states could be adversely affected, since the MNE would be more likely to resort to non-legal methods to protect their interests than they would if there were effective legal remedies available under international law. History has unequivocally proved how much harmful for the democratic life and stability of an host state the illegal interference of MNEs through their economic leverage in their own political affairs may be, especially for those host states in a weak bargaining position. Notwithstanding this scenario is not automatically avoided through the establishment of an adequate regulatory framework for MNEs in international law, this step would certainly limit the risk of its occurrence.
Home states would also be better off if diplomatic protection could be avoided and replaced by a more neutral and comprehensive regime of protection under international law. Besides the arbitrary character of any determination of the home state based on nationality, which would never reflect the underlying economic reality of MNEs, the exercise of diplomatic protection by a state on behalf of an MNE would lead to a situation of reciprocal interference. MNEs would invariably tend to play an active role in the political life of their home state, in order to ensure that the party and the people in power are those willing to listen to its claims and protect their interests. On the other hand, the home state, in return for the support given, would feel entitled to interfere in the decision making process of MNEs, which would then be disturbed by issues of a political nature which would per se have nothing to do with their business interests and goals. Furthermore, diplomatic protection implies a certain identification of the MNE with its home state, which may prove counter-effective for the MNE in terms of reputation/goodwill and business opportunities in a broad sense, because it is often the case that such home state (usually a western developed country) faces hostility in some of the states where the MNE operates. Finally, it is hard to understand why home states should be involved so extensively in international economic disputes which could be settled without their intervention, especially if one weighs the adverse impact these disputes between states may have on the crucial stability and goodness of international economic relations.
This set of arguments would not be complete if the more general ineffectiveness of diplomatic protection were not considered. It must be noted that the home state of the MNE is accorded discretion as to the exercise of diplomatic protection on behalf of the MNE. Discretion means that the MNE has to go through an extremely time and resource consuming process, whereby its claim has to be submitted to the Foreign Office or other competent national authority, and then this authority enjoys a wide discretion as to the assessment of the claim and the consequent decision as to its enforcement before international tribunals. Although some ad hoc procedures are usually provided, the whole process often, if not always, takes up a prevailing political character, and it lacks an adequate level of transparency and certainty. Moreover, there are many factors to be weighed, including the necessary assessment of the impact of the claim on the international relations of the claimant state. These factors are often given a decisive importance, and claims are not pursued because of foreign policy or other political concerns. Even when the home state exercises diplomatic protection, the resulting dispute is likely to take time before it can be settled; for instance, the International Court of Justice is famous, among other things, for the endless length of its proceedings. Once the dispute is settled, the relief eventually obtained by the claimant state, which the state has not the legal but just the moral obligation to pass on to the injured MNE, is unlikely to amount to a full recovery from the loss suffered.
This mechanism is extremely inefficient, and is far from satisfying the needs of MNEs. The path of the global economy is such that disputes must be settled under the rule of law, as provided by a rule-oriented system consisting of transparency, certainty, prompt and effective remedies and relieves, and competent and impartial tribunals. Certainly, these elements are scarcely if at all present in the current system of diplomatic protection, which rather appears very rudimentary and outdated, clearly showing how far behind the reality and the developments of the world economy the law, in particular international law, which should regulate this reality still is. It is only by relying on the rule of law that MNEs as well as uninational corporations will have an incentive to keep expanding their international business. Therefore, adequate structure and contents of the regulatory framework in which international economic activities take place are crucial for promoting the growth of the global economy and enhance the world welfare. A discussion of this regulatory framework is now necessary, and will take place in the following section.
International economic activities are subject to regulation on three different law levels: national, regional, and international. It comes natural to submit that it is on the international law level that these activities could be better regulated. Indeed, national and regional legal systems have proved unable to regulate these activities, and in particular the phenomenon of MNEs, due to the problem of extraterritoriality, that is, the unilateral exercise of jurisdiction by a state outside its territorial boundaries. This has often been the case in fields such as antitrust, torts, environmental law, taxation, trade sanctions, disclosure and discovery, etc. The grounds for this extraterritorial exercise of jurisdiction include nationality links, protection of national interests, objective territoriality, the effects doctrine, links of ownership and control. However, the territorial boundaries of the state or a regional bloc still make a lawful exercise of jurisdiction outside those boundaries extremely difficult, because territoriality, although related to the old fashioned concept of sovereign state, still provides the only grounds on which exercise of jurisdiction is clearly lawful and not overreaching. The problem of extraterritoriality is the most powerful evidence of the unavoidable failure by national and regional legal systems to comprise the intrinsically transnational and global nature and pattern of the contemporary world economy.
On the other hand, the limits of regulation on the national and regional levels in areas such as the ones mentioned above have also highlighted some key concepts. One of the most important is certainly the definition of the MNE as a group entity for the purposes of imposing group liability on it. This concept is of fundamental importance because it goes beyond the traditional separation of the legal personality of the various units of the MNE along national lines, determined according to the place of incorporation of the parent and its subsidiaries. The corporate veil was first lifted as an exception to the rule of corporate separation in extraordinary circumstances. However, there has been a trend to identify the various units as members of the same group entity, due to the economic integration between them, not just as an exception, but as a rule. Step by step this trend is gaining consensus, and is leading toward a model which disregards the traditional concept of corporation and reflects more closely the transnational nature of the MNE's activities and structure.
The definitive acceptance of this concept, together with the undesirable and overreaching effects of extraterritoriality, contribute to support the view that the level where the group entity can be properly regulated is that of international law. Moreover, the fact that this trend toward an international dimension of the regulation of international economic activities is taking place on the side of group liability should also be sufficient to clarify that, under international law, not only multinationals would enjoy a better protection but would also be more effectively made accountable for their liabilities.
Having earlier concluded that the system of diplomatic protection is not suitable for affording adequate protection of the rights and interests involved in international economic activities, alternative models need be assessed. The one which is here embraced is that of a multilateral regulation which might and should take place through the forums of international economic organizations and treaties. Multilateral forums have often proved more suitable because they may provide for a comprehensive regulation of international economic activities beyond the traditional and tight limits of national and sometimes regional jurisdictions. In particular, it may be submitted that the more the decision making process of these forums is organized according to a transparent, democratic , and rule-oriented model, the more successful the efforts of multilateral regulation will be. Indeed, it is natural that countries with different economic and social policies and goals tend to prefer different types of regulation, each emphasizing a different set of issues. However, forums such as the WTO allow them to strike reasonable compromises at the end of a process where the differences in bargaining power are somewhat reduced through procedural devices (e.g. one state one vote rule, and qualified majority vote).
Although regulation on a multilateral level unavoidably presents a getting to yes situation, where the most likely outcomes are win-win or "take and give" ones, and at first glance this may look like a diminution of the single state's own policies and goals, it nevertheless is a fair price to pay in return for avoiding all the undesirable effects of unilateral regulation and enjoying the benefits of the participation in the global economy. Furthermore, the present status of international relations is such that the strong ideological tensions of this century are substantially reduced if not eliminated, although others equally dangerous and undesirable may soon emerge. These tensions used to paralyze any serious attempt to regulate international economic activities, a field where ideological clashes were frequent and hardly avoidable. The UN has been the main battlefield for such ideological crusades and clashes. Today, there is an overall convergence toward a common set of values and principles, although a certain degree of disagreement still exists between developed (mainly capital exporting) and developing/less developed (mainly capital importing) countries. Even in respect of these outstanding differences, however, multilateral forums provide an effective tool for the composition of conflicts of interests, certainly more effective than a bilateral confrontation between a developed country and a developing country, where the latter might be worse off due to the imbalance of the bargaining positions.
The values and principles which today prevail are those of a free-market, liberal economy. If it must be noted that a liberal economy model certainly produces serious and undesirable side effects, it cannot be denied that it is the one which so far has proved more successful in enhancing the world welfare. A striking example of this success has been the trade liberalization process, occurred in the context of a multilateral form of regulation like the GATT and now the WTO. A process which is rapidly expanding to include, in addition to trade in goods, trade in services and investments, as recently confirmed by the Agreement on Telecommunications, and those forthcoming on information technology products and services and financial services. Equally important steps have been made in the context of the IMF, and, in particular, of the World Bank, which has assumed a leading role in the promotion of a multilateral and stable legal framework for the protection of foreign investment. On the regional level, besides the unique achievements of the European Union, other important forums have been the NAFTA and the OECD.
The multilateral regulation of international economic activities could never be comprehensive and effective if it failed to properly address the issues arising from dispute settlement. Substantive and procedural rules are two sides of the same coin, and the key requirements of legal certainty and predictability would not be fulfilled if there were no adequate dispute settlement mechanisms. As seen, most substantive rights recognized on the international law level need an adequate mechanism for their enforcement by their holders. It is also worth remembering that the disputes here at bar are international economic disputes, and that in this context an increasingly prevalent role is played by private parties. In particular, the focus is on those disputes which arise when it is alleged that the international economic activities of private parties are adversely affected by the state(s) where such activities are carried on. In respect of these disputes, international law has taken a significant time to confer on private parties the role and the procedural rights they deserve. The most relevant evidence in this regard is provided by the shortcomings of the model of diplomatic protection, which has long been the only one available to protect economic rights and interests of private parties on the international law level, and has not yet been abandoned. Today, the status of individuals has enormously improved from this viewpoint, due to the presence of some significant mechanisms affording individuals access to international economic dispute settlement. While these mechanisms will be discussed in the next Part of the present paper, it is now important to conclude this part with a discussion on a key element for the success of those dispute settlement mechanisms according access of individuals: delocalization. And delocalization has indeed provided the rationale underlying the structure of these dispute settlement mechanisms.
Delocalization is usually understood as the process whereby an international dispute is settled before an international ad hoc or institutional tribunal and under a set of procedural and substantive rules agreed by the parties to the dispute (and/or provided by the relevant institution in case of institutional arbitration), which may but must not necessarily include reference to international law. In particular, a dispute is delocalized when it is not submitted to the laws and the courts of any particular state. These general features need be qualified. Above all, in the case of disputes between host states and alien private parties (i.e. MNEs), delocalization prevents the dispute from being submitted to the laws and the courts of the host state; rather, the dispute is brought before a neutral forum and settled under a neutral substantive law. Delocalization may also apply to disputes between private parties of different nationality, where a certain neutrality of the dispute settlement mechanism and of the governing law of the dispute may be necessary for avoiding that any of the parties can gain an unfair advantage over the other. At the same time, the extent to which the links with national laws and courts are maintained or severed, that is, the extent of delocalization, depends upon the degree of sophistication, articulation, and completeness of the international dispute settlement mechanism selected or set up by the parties. Moreover, the delocalized international dispute settlement mechanism might coexist with the local remedies, because of the applicability of the rule of exhaustion of the latter before resorting to the former.
At first glance, delocalization appears desirable only for the private party, while it might well be against the interest of the host state in maintaining control over the dispute. This first impression needs be scrutinized more into depth. As to the alien private party, in the discussion on the limits of diplomatic protection it was emphasized that it tends to perceive the prospect of settling its dispute with the host state before the courts and under the laws of that same state as a serious threat to its rights and interests. It is unquestionable that both theory and practice show that this concern is justified, because the administrative and judicial authorities of the host state might well be responsive to the interests that state has at stake in the dispute, either as a matter of spontaneous attitude or as a result of interference in various forms by the executive power. In other terms, in all those cases where the alien is left with no remedies other than the local ones, there would be the risk that its rights and interests might be arbitrarily disregarded and discriminated to the advantage of domestic competitors. True, in theory there might still be diplomatic protection available to the foreign companies. On the other hand, it was seen how problematic and inadequate diplomatic protection may be, assuming that it is made available.
The risks connected to local remedies tend to be extremely high in those capital importing countries adopting protectionist and nationalist economic policies against foreign companies operating in their market. However, as a matter of fact, there have been several cases where developed and capital exporting countries, nominally committed to the liberalization of international trade and investment, have themselves adopted a protectionist and nationalist attitude against the presence of foreign companies in their domestic markets. Additionally, international ad hoc or institutional forums are more likely to possess adequate expertise and sophistication as to the dispute at stake than local courts; the complexity of the legal issues arising out of the relationship between the host state and the foreign company is not easy to deal with. Furthermore, in respect of the substantive law to be applied, there is a strong interest on the part of the foreign company in not subjecting the dispute to the national law of the host state. Indeed, this law may reflect a certain hostility and discrimination against foreign companies, and/or more simply it may have gaps and inconsistencies which do not allow adequate protection of the rights of such companies. Thus, it would be better to subject the dispute to a different substantive law, which may well be international law, since it usually provides international minimum standards of protection higher than those accorded by many host states.
It is evident that the foreign company has a major disincentive to do business in an host state which does not allow any delocalization of disputes. Therefore, that host state is very likely to suffer a drastic reduction of the flow of inward foreign investment and imports, a scenario which nowadays is unanimously considered seriously harmful for both the national economy of that state and the pattern of the global economy, especially when this scenario were to take place on a larger scale in many states. Furthermore, it was mentioned above that the absence of a delocalized international dispute settlement mechanism, and the consequent exclusive reliance on local remedies and diplomatic protection, have been a major cause of unlawful and dangerous interference by multinational within the political and institutional affairs of both host and home states, with incredibly disruptive effects for their democratic order and collective good.
These prospects should themselves be sufficient for the states to accept delocalization of their disputes with foreign companies, because it is clear that not do so would certainly go against their interests in the medium and long term in attracting foreign investment and imports. Yet, states wish to retain control over their disputes with foreign companies. Beyond considerations of sovereignty, this desire derives from the will to retain a strong bargaining power in their relationship with the foreign company. That same bargaining power which the foreign corporation sees as likely to be abused in the absence of delocalization is usually considered by the host state (in particular small developing and less developed countries) necessary to counterbalance the economic might and the consequently significant bargaining power of multinationals. This is per se a reasonable concern. But delocalization itself is the best way to address this concern. Indeed, while promoting foreign investment and international trade, delocalization of both laws and procedures governing dispute settlement may be structured in a way which also addresses the needs of the host state. First, the rule of exhaustion of local remedies can be retained, so that only at a later stage the delocalized dispute settlement mechanism is triggered. Second, this mechanism can be structured as to provide an equal bargaining power to the parties to the dispute, e.g. through the right to appoint the arbitrators/members of the tribunal, and the deference to the national law of the host state as part of the governing law of the dispute, or the right of the host state to limit delocalization to certain classes of disputes.
It is crucial to note that this balanced and effective delocalization has proved possible above all when the international dispute mechanism is set up within a multilateral and institutionalized context. The multilateral forum permits developed and developing/less developed countries to settle their conflicts of interests as to the protection of foreign investment and international trade ex ante, and to strike an acceptable compromise. Thus, when a dispute actually arises, it will be settled according to a model already defined and accepted by the parties as satisfying the various interests at stake. In particular, legal certainty and predictability will be enhanced. At the procedural level, the existence of some guarantees and a rule-oriented mechanism will protect the weaker party against the risk of abuse of power by the stronger one, being the weaker party the multinational or the host state; the qualifications of the members of the tribunals will ensure their expertise and sophistication, and the procedure for their appointment will ensure either impartiality vis-à-vis the parties or equal representation of the parties' conflicting interests. As to the substantive law, a minimum standard of protection may be agreed without repealing the basic policy goals and sovereignty of the host state.
Delocalization also and perhaps more importantly leads to the full recognition of private parties' procedural rights on the international law level. As seen, this procedural capacity and responsibility is a necessary element of these parties' status as subjects of international law; should it be absent, the recognition of substantive rights and duties under international law would lose most of its significance, because these rights and duties could not be effectively enforced. In this way, delocalization seems to take into due account the reality of international economic activities and the transnational dimension of the participants in these activities. The limits and the shortcomings outlined above as to both a model of dispute settlement on the sole national or regional level and that of diplomatic protection on the international level would be avoided. This is important also because exercise of extraterritorial jurisdiction and of diplomatic protection often cause a souring of international relations which is always undesirable and counter-effective.
Having highlighted the grounds on which delocalization must be supported as the principle shaping international economic dispute settlement mechanisms, it is now necessary to see in which forms delocalization can occur. This will be done with reference to arbitration, by far the most widely used method of international economic dispute settlement, as proved by the mechanisms existing on the international law level.
First, the parties to the dispute might resort to ad hoc arbitration, extremely common in case of disputes arising out of international business transactions between private parties. This type of arbitration presents an extremely high degree of flexibility, an aspect which is both the main strength and the main weakness of the model. Indeed, on the one hand the parties, requested to make all the arrangements as to the procedure, the appointment of arbitrators, etc., are able to shape a dispute settlement mechanism which matches their specific needs in the specific dispute at bar. On the other hand, the success of ad hoc arbitration depends on the level of sophistication, expertise, and, above all, on the spirit of cooperation of the parties. Thus, there is a serious risk that the procedure may contain several gaps and inconsistencies, perhaps simply because the parties have not been able to predict and regulate in advance all the possible developments and outcomes of their dispute, and/or that the proceedings are disrupted by the recalcitrant or hostile conduct of the parties, whose cooperation is essential. These major shortcomings could seriously affect some key issues, such as the appointment of qualified arbitrators, the choice of the applicable substantive law, and the recognition and enforcement of the award, all issues which become even more important when a state is one of the parties. Moreover, should there be an imbalance in the bargaining power of the parties, as it is often the case, this would be reflected in the shaping of the ad hoc arbitration, where the strongest party could impose its preferences on the weaker one; indeed, the process would unavoidably be power-oriented rather than rule-oriented. After balancing the pros and cons of ad hoc arbitration, it is submitted that, at least as concerns disputes between host states and foreign companies, this model is not the ideal because its structure would per se be unable to provide legal certainty and predictability, and to address the inequalities in the bargaining power of the parties.
It is because of the shortcomings of the ad hoc arbitration model outlined above that institutional arbitration was introduced and has become more and more popular. This model may be defined as rule-oriented since its underlying rationale is that a comprehensive and detailed procedure is to be provided ex ante by the relevant arbitral institution, while the parties retain a certain control over the dispute, thanks to a significant degree of flexibility of that same procedure. This ensures that, once the parties have given their consent and submitted their dispute to this type of arbitration, the proceedings will go through. In particular, even if the parties control some key aspects of the procedure, such as the appointment of arbitrators or the governing law of the dispute, the mechanism seeks to avoid any risk of gaps and inconsistencies, and to afford parties an equal bargaining power. This means that, when for instance the parties fail to agree on the appointment of arbitrators, the governing law of the dispute, or more generally when they fail to collaborate and undermine the expeditious settlement of the dispute, the proceedings would nevertheless be unaffected, because the procedure provides for the dispute to go ahead in any case, by triggering apposite powers of intervention by the organs of the institution. Another two key features of institutional arbitration are the high level of sophistication and expertise and the high likelihood of recognition and enforcement of the arbitral award before municipal courts which it guarantees. All these fundamental pros make this model of arbitration clearly preferable to an ad hoc one. Indeed, an institutionalized arbitration model strikes an ideal compromise between legal certainty and predictability, on the one hand, and flexibility, and equal bargaining position of the parties on the other hand. This represents the ideal balance for the parties in order to satisfy their needs, while ad hoc arbitration overemphasizes flexibility to the disadvantage of the other equally fundamental elements. It is true that, being cooperation the main cause of problems with ad hoc arbitration, "if such cooperation is forthcoming, the difference between ad hoc and institutional arbitration is like the difference between a tailor-made suit and one which is bought off-the-peg."[82] On the other hand, in ad hoc arbitration, in addition to the additional problems which may arise from the lack of expertise and sophistication of the parties, in practice failure to cooperate has proved an obstacle very difficult to overcome.
An option that is somewhat intermediate between the two models described so far is provided by the UNCITRAL Arbitration Rules 1976 and the UNCITRAL Model Law on International Commercial Arbitration 1985. The former were introduced with the noble aim to supplement and integrate the often incomplete procedure chosen by the parties to an ad hoc arbitration; this result was sought by providing a consistent and complete set of rules derived from the main legal and business cultures, so that all the conflicting needs could be satisfied. These rules certainly have filled most of the gaps and avoided most of the inconsistencies typical of ad hoc arbitration. However, they have not achieved the level of certainty, predictability, and efficiency of institutional arbitration. Parties are still left with a great deal of discretion, and the crucial passage of recognition and enforcement of the arbitral award is not adequately guaranteed. The latter was instead introduced for a different, though equally important, purpose, that is, the harmonization of domestic arbitral laws and procedures. It proposes a certain set of arbitral rules which may be adopted by each state as part of its national law. The adoption of these rules by many states has had an important impact on the settlement of international economic disputes, because they are rules affording adequate procedural guarantees to foreign companies, and therefore contribute to make the national legal system of the host state more friendly to and better accepted by them. Moreover, the adoption of these rules on a large scale allows harmonization in the direction of adequate international standards, which in turn promotes international economic activities. The successful impact of the Model Law has been seen as a viable alternative to delocalization, because if the national legal system of the host state becomes sufficiently sensitive to the concerns of foreign companies the rationale of delocalization would lose most of its significance.[83]
Two concluding remarks on delocalization are still necessary. First, so far delocalization has been discussed as an arbitration-like alternative (a valid and preferable one) to local courts and laws of the host state; however, it is important to observe that resort to arbitration does not per se imply delocalization. In short, it is to be remembered that arbitration between host states and foreign companies, and more generally international commercial arbitration, has long been subjected to the lex loci arbitri. Should this be the case, the procedure would be governed by the national law on arbitration of the state place of the arbitration and subject to frequent interference by its national courts, while the substantive law would be determined under its conflict of laws rules. Therefore, if the host state party to the dispute is also the place of arbitration, the procedure would be governed by its national law; moreover, under traditional and common rules of conflict of laws, the governing substantive law would be that of the state with which the transaction has the closest connection, which is likely to be the host state. In any case, the lex loci arbitri strongly limits the parties' autonomy as to chose the procedure and the substantive law which best suit their needs. This outcome would certainly make arbitration very similar to a dispute settled under the local remedies and laws of the host state; therefore, the same risks and undesirable effects, especially for the foreign company, would be produced. Under these circumstances, delocalization has also been understood to refer to a form of arbitration where the parties to the dispute could exercise their autonomy and avoid the restraints of the lex loci arbitri. It is to this form of arbitration that the above discussion referred.
It is true that the parties could select a state place of their arbitration bearing in mind the effects that under the traditional view just expressed this choice will have on the procedural and substantive regulation of their dispute. On the other hand, beyond the possibility to overcome the difficulties deriving from the traditional view, it is on more theoretical terms that the argument for such a relevant impact of the lex loci arbitri cannot be accepted. This argument has been grounded on the higher degree of certainty that its acceptance would provide, especially as to the crucial moment of recognition and enforcement, and on ambiguously defined public policy concerns whereby the binding nature of the award would derive from the national legal system of the place of arbitration which has a prevailing interest in regulating the arbitration taking place therein.
It is evident that the reality and the practice of international law have departed from this set of arguments. Why should arbitration proceedings be governed by the lex loci arbitri as a matter of public policy? Is not this the most outspoken denial of parties' autonomy, which arbitration should instead express to the full? Aware of these limits of the traditional view, there has been a departure from it and the prevailing trend is toward the firm recognition of the priority of the principle of parties' autonomy. Today, the law of the place of arbitration applies only to the extent that the parties have determined to do so. The prevailing view also provides that, should the parties fail to chose any procedural law (e.g. that of a national system, an institutional system, or a mixture of more systems), it would be for arbitrators to make this choice, although their discretion cannot amount to arbitrariness; in case of institutional arbitration, the institution would provide the rules for such determination, although it does normally have its own applicable procedure.[84]
In addition to the disposing principle of parties' autonomy, there are no convincing reasons to support an interest of the law of the state place of arbitration in controlling the procedure, especially because it is often, if not always, the case that this state does not have any connection at all with the dispute. In the worst scenario, if its vital interests or public policy are at stake, there may be the nuclear weapon of the mandatory rules of the loci arbitri to trigger. Besides this case of limited but generally admitted application, party autonomy must be respected, otherwise the necessary flexibility and the neutrality of the forum could not be provided. Therefore, for delocalization to be an effective and viable alternative, arbitration must be delocalized vis-à-vis the loci arbitri. This approach raises concerns as to the recognition and enforcement of the arbitral award, since a delocalized one might seem not to fall within the scope of the definition of foreign award under the New York Convention on the Recognition and Enforcement of Foreign Awards. However, the prevailing interpretation is that a delocalized award is a foreign award. Moreover, and more importantly, it has been rightly observed that the ultimate result of delocalization is that the moment of judicial control is simply postponed to when recognition and enforcement are sought, which implies that the courts of the state(s) where recognition and enforcement are sought will exercise this control, rather than those of the state where the arbitration takes place. This shift is also appropriate, because it is only when recognition and enforcement are sought that judicial control becomes relevant; until that moment the award only affects the interests of the parties. And it should be remembered that it is likely that parties do not intend to and will not seek recognition and enforcement at all, in which case no concern should exist.
The procedural delocalization of arbitration is accompanied by its substantive delocalization, that is, the delocalization of the applicable substantive law, which has been admitted without particular opposition as an expression of the parties' autonomy. On the same grounds as the ones adopted for embracing procedural delocalization, the notion that the conflict of laws rules of the loci arbitri must determine the substantive law governing the dispute must be rejected. It is for the parties to determine which substantive law applies, and today this determination is usually made without any reference to conflict of laws rules, but rather through a straightforward indication of a substantive law. However, as to disputes between host states and foreign companies arising out of investment agreements, there is an hot theoretical debate on the relationship between delocalization of substantive law and stabilization of the contract. Coverage of the debate would fall outside the scope of the present work. However, it is worth highlighting that there is no consistent approach to the issue. Beyond the general agreement as to the need to comply with the choice of law eventually made by the parties, and the particular rules which may be provided by institutional dispute settlement mechanisms when applicable, scholars' and the arbitrators' preferences are heterogeneous, and include the necessity to link the contract to a national legal system (normally that of the host state, which, if not integrated or supplemented by other legal systems, would not produce any delocalization at all), the reference to international law, that to general principles of law, that to the lex mercatoria, that to the exclusive regulation of the dispute by the provisions of the contract. In practice, the most likely outcome seems to be the combination, in various forms, of these various systems of law, as a compromise between the conflicting interests which each of them tends to favor; for instance, the exclusive choice of the national law of the host state would be unwelcome by the foreign investor, especially if that legal system has an ambiguous or hostile attitude vis-à-vis foreign investors.
Second, this discussion on delocalization could not be complete if it did not consider a warning. This warning concerns the risk that institutional arbitration, here regarded as the best form of delocalized dispute settlement, can exacerbate "the tendency towards ever more formal and inflexible arbitral procedures....a number of eminent commentators have expressed concern that arbitration will lose its very raison d'étre if it continues to become more and more like the appellate court adjudication."[85] The risk of institutional arbitration assuming too a court-like shape is serious. Should this happen, the rationale for arbitration would disappear. However, while this risk must certainly be taken into due account, it cannot outweigh the many pros of institutional arbitration. The solution of the problem, already offered by the most authoritative arbitral institutions, is to strike a balance between the various instances, that is, while institutional arbitration can and must afford the necessary procedural guarantees, it must always stress those aspects which are both the real strengths of international arbitration and the reasons why it has been so popular and successful: "speed, the neutrality of the forum, the informality and flexibility of the proceedings, the confidentiality of the proceedings, the ability to choose the arbitrator (especially if experts are required), the need for a process which encourages the bringing forth of new information, and the desire to promote a conciliatory atmosphere conducive to continuing business relations."[86]
As a matter of fact, the risk is likely to be a constant one, because it will be difficult to strike an acceptable balance in any one case. This tension is summarized in the enlightening words of Redfern and Hunter:
"Properly used, arbitration is an effective method of resolving disputes. Its growing international popularity is all to the good. Yet there are risks. Unskilled (or unimaginative) practitioners may allow arbitrations to become mere copies of proceedings in court, so wasting the flexibility offered by the arbitral process. Equally, the adaptability of international commercial arbitration will be lost if it becomes excessively institutionalized by the use of rigid rules or customs."[87]
This warning must be borne in mind, even if it must not misunderstood, in the sense that it does not amount to a sharp opposition to a rule-oriented approach to international dispute settlement, but rather it reminds the need to afford the parties a certain degree of flexibility. The discussion now moves on to the comparative analysis of those international dispute settlement mechanisms which are open to access of private parties, and it will also consider, among the various issues, the different extent and type of delocalization each of these mechanisms provides.
[57] VATTEL, supra note 5.
[58] P.C.I.J. Ser. A, No.2 , p. 11-12.
[59] BROWNLIE, supra note 21 at 67.
[60] MUCHLINSKI, MULTINATIONAL ENTERPRISES AND THE LAW (1995).
[61] O'CONNELL, supra note 12 at 112.
[62] ICJ Reports (1955), 22-3.
[63] BROWNLIE, supra note 21 at 435.
[64] ICJ Reports (1959), 27.
[65] The Finnish Ships Arbitration Case, RIAA iii. 1484 at 1535.
[66] ICJ Reports, 1989, pp. 15, 42.
[67] SHAW, INTERNATIONAL LAW (3rd. ed., 1991).
[68] MUCHLINSKI, supra note 52 at 535.
[69] For example, this is the case of the US, the UK, and Italy.
[70] ICJ Reports (1970).
[71] Id. at 42.
[72] On this case, see the enlightening comments of: MURPHY, The ELSI Case: An Investment Dispute at the International Court of Justice, 16 YALE J. INT'L LAW 391 (1991); SEIDL-HOHENVELDERN, ELSI and Badger The Two Raytheon Cases, 26 RIVISTA DI DIRITTO INTERNAZIONALE PRIVATO E PROCESSUALE 260 (1991); KUBIATOWSKI, The Case of Elettronica Sicula: Toward Greater Protection of Shareholders' Rights in Foreign Investment, 29 COL. J. TRANS'L LAW 215 (1991); DIXON, Case Concerning Elettronica Sicula SpA, 41 ICLQ 701 (1992); HAMROCK, Definition of Arbitrary Conduct, 27 TEXAS INT'L L. J. 837 (1992); FA MANN, Foreign Investment in the International Court of Justice: the ELSI Case, 86 AJIL 90 (1992); STERN, La Protection Diplomatique des Investissements Internationaux, De Barcelona Traction à Elettronica Sicula ou les glisserments progressifs de l'analyse, 117 JOURNAL DU DROIT INTERNATIONAL 897 (1990).
[73] See supra, note 58. The case was brought against Italy by the US under the Treaty of Friendship, Commerce, and Navigation signed by the two states in 1948 and its 1951 Supplement. The alleged violations by Italy regarded those provisions of the Treaty dealing with the protection that each of the two contracting states undertook to afford investors of the other. In particular, the case was brought on behalf of two US companies, Raytheon and Machlett, which had gradually acquired complete ownership of Elettronica Sicula (ELSI), a company manufacturing electronic components for the defense industry. The Sicilian company had performed quite poorly and had not been able to service its debt and meet other obligations. In 1968, after fruitless attempts by the US parent companies to obtain financial aid by the Italian Government and to find an Italian partner, a liquidation plan was set forth and executed in order to reduce losses. This plan included halting of production and dismissal of many employees, two causes of major concern for the local economy and authorities as well as the Italian Government. To prevent the plan from going further, the Mayor of Palermo issued an order of requisition of the plant and other related assets, which was successfully appealed by the company to the Prefect. However, the Prefect's annulment of the order arrived too late, because ELSI became insolvent while the appeal was pending. Indeed, ELSI filed a bankruptcy petition before the Tribunal of Palermo by submitting that the requisition prevented it from pursuing an orderly liquidation since it could not control the operation of the plant and obtain the funds necessary to meet its obligations. The decree of bankruptcy was issued; the subsequent proceedings only partially satisfied the creditors, and the two US parents were left with no surplus. The trustee appointed under the bankruptcy proceedings successfully brought actions against the Mayor of Palermo and the Minister of the Interior before the Court of Appeal of Palermo, but the only loss recovered was that of the use of the plant in the requisition period. The two US companies did not sue on their own behalf before the Italian courts. This phase lasted until the early 70s, when diplomatic contacts started between the US and the Italian governments. In 1987, the US, after many years of fruitless attempts to settle the outstanding issues through negotiations, filed the unilateral application on behalf of the two US companies and brought the claim before the ICJ, as provided by the FCN Treaty with Italy. The US alleged that Italy, through the acts and omissions of its administrative and judicial authorities, had violated the companies' rights under various provisions of the Treaty, and was accordingly liable for damages suffered. The claim was rejected on the factual basis that the US failed to show that ELSI was solvent at the time of the requisition; as a result, it could not be held that the US companies were deprived of their rights of control and management (accorded under the FCN Treaty) by the requisition, because ELSI was deemed already insolvent before the order was issued, and there could be no rights of control and management to be deprived of when the company is already insolvent. Furthermore, the ICJ held that the acts of the Italian administrative authorities were not arbitrary and discriminatory under international law (although were so held by the Italian courts under Italian law), and that Italy did whatever was appropriate in the particular circumstances of the case to afford ELSI the most constant protection and security. Thus, Italy did not violate the relevant provisions of the Treaty.
[74] MURPHY, supra note 64 at 419.
[75] STERN, supra note 64 at 933.
[76] OECD Guidelines on Multinational Enterprises (1976).
[77] MUCHKINSKI, supra note 52 at 15.
[78] FATOUROS, Transnational Enterprise in the law of State Responsibility, in LILLICH, INTERNATIONAL LAW OF STATE RESPONSIBILITY 367 (1983).
[79] Id. at 368.
[80] Id. at 368
[81] FRIEDMANN, supra note 9 at 233.
[82] REDFERN AND HUNTER, INTERNATIONAL COMMERCIAL ARBITRATION 57 (1991).
[83] See, in this sense, MUCHLINSKI, supra note 52 at 540.
[84] TOOPE, MIXED INTERNATIONAL ARBITRATION 42 (1990).
[85] Id. at 7.
[86] Id. at 8.
[87] REDFERN AND HUNTER, supra note 74 at 120.
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