Kyrgyzstan Introduces New Multi-Tier Dispute Settlement Mechanism in Investment Law 2025

On August 12, 2025, Kyrgyzstan adopted a new Law on Investments (№ 198) that introduces reforms to the resolution of investment disputes. A key feature of this legislation is a multi-stage dispute settlement mechanism designed to limit foreign investors’ direct access to international arbitration, a significant change from the previous version of the law, which allowed more immediate recourse to arbitration. Preparations for this law had been underway since 2021, prompted by concerns raised by officials that Kyrgyzstan had not managed to successfully challenge the jurisdiction of any international arbitral tribunal, nor had it won a single case against foreign investors in any international arbitration proceedings. Recent data shows that Kyrgyzstan has either lost or settled around 90% of its ISDS cases. The ISDS proceedings have imposed a considerable burden on the national budget, with estimates in 2020 suggesting the total amount of investment claims brought against Kyrgyzstan ranges between USD $800 million and $1 billion. To put this amount into perspective, Kyrgyzstan’s GDP in 2024 was USD $17.48 billion.

The implementation of a multi-tier dispute resolution mechanism within the domestic legal framework does not guarantee that investors will not find ways to bypass required stages and move directly to arbitration. The precedents suggest that sophisticated investors may still find pathways to international arbitration without going through negotiation, mediation, and domestic court proceedings, potentially undermining the objectives of the new law.

This article examines the new multi-tier approach adopted by the Kyrgyz legislature and argues that, while the new procedural steps create additional hurdles for investors, they are unlikely to be sufficient to achieve the amendments’ intended goal. The analysis proceeds in two parts: first, by assessing the impact of the new domestic law on ISDS claims brought under bilateral investment treaties (“BITs”); and second, by reviewing existing jurisprudence to determine whether procedural requirements can effectively prevent investors from bypassing negotiation, mediation, and domestic court stages and moving directly to international arbitration under the Law on Investments.

Impact of the New Law on ISDS Clauses in Kyrgyzstan’s BITs

The amendments aim to revise the ISDS clauses contained in BITs by introducing changes to domestic investment law. This intent is evident from the wording of Article 23, which states that an investment dispute may be resolved through international arbitration only if an international treaty and/or investment agreement between the investor and the Kyrgyz Republic contains a corresponding and valid arbitration clause, and provided that the dispute has not been resolved through negotiations, mediation, or the judicial bodies of the Kyrgyz Republic.

This approach is unlikely to achieve the intended effect on ISDS clauses in Kyrgyzstan’s BITs unless these clauses are explicitly contingent upon domestic law. The government of Kyrgyzstan is unlikely to succeed in relying on its domestic law provisions to negate its obligations to arbitrate under international treaties. The Alabama principle is a well-established principle under international law that states cannot use their domestic law to negate their international obligations.

The Alabama principle is codified in Article 27 of the Vienna Convention on the Law of Treaties, which provides: “A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty.” Investment tribunals too have recognized this principle. For example, in SGS Société Générale de Surveillance S.A. v. The Republic of Paraguay, the tribunal stated that the respondent could not invoke its domestic law to excuse or ignore its international obligations, reaffirming that international law takes precedence over conflicting domestic provisions. In effect, this means that the government cannot restrict foreign investors’ access to international arbitration if an ISDS clause in a BIT provides for access to international arbitration. Otherwise, states could evade their international obligations simply by introducing changes to their domestic laws.

According to the UNCTAD Investment Policy Hub, Kyrgyzstan currently has 28 BITs in force, each varying in its approach to dispute settlement. A review of Kyrgyzstan’s BITs indicates that none of them make state consent to arbitration contingent upon Kyrgyz domestic law. Each ISDS clause in these treaties establishes its own dispute settlement mechanism. If a dispute arises from a violation of a BIT, investors will have access to the ISDS mechanism provided under the relevant treaty. The only exception is the India – Kyrgyzstan BIT, which explicitly imposes an obligation to exhaust local remedies before resorting to international arbitration. The BIT also removes the Most-Favored-Nation clause, which previously allowed investors to arguably import more favorable dispute settlement provisions from other BITs.

Other BITs provide for multi-tier dispute settlement mechanisms. However, this is not the same thing as the requirement to exhaust local remedies. International tribunals typically treat multi-tier dispute settlement mechanisms as “cooling-off” periods of sorts, after which cases may proceed to international arbitration regardless of domestic outcomes, focusing more on ensuring that domestic systems receive consideration rather than requiring complete exhaustion.

Multi-Tier Dispute Settlement Mechanism in Investment Law in Article 23

Based on the above, it appears that Article 23 will not prevent an investor from accessing international arbitration if they have a right to do so under a BIT. However, the question remains whether the multi-tier dispute settlement approach can prevent an investor from accessing international arbitration when their claim depends on domestic law.

Approximately 35% of cases brought against Kyrgyzstan were based on provisions of the domestic investment law, rather than on BITs. From this perspective, the primary aim of the new amendments, i.e., to resolve investor claims domestically before they escalate to international arbitration, would only address about one-third of the total ISDS cases brought against Kyrgyzstan.

However, even in these cases, investors may still be able to bypass the requirements of negotiation, mediation, and domestic court proceedings, and directly access international arbitration.

The arbitral practice in this regard has not been uniform: some tribunals have held that requirements to satisfy all procedural steps constitute impediments to a tribunal’s jurisdiction, while others have held that such requirements are issues of admissibility and would not prevent cases from proceeding to arbitration.

Investment tribunal jurisprudence demonstrates that mandatory domestic law preconditions, including requirements for prior negotiations, mediation periods, and recourse to domestic courts, have been treated as admissibility issues rather than jurisdictional obstacles. This distinction is critical to understanding the enforceability of such requirements: when a procedural requirement is characterized as an admissibility issue, it may potentially be waived, modified, or cured through the course of proceedings or by investor conduct; by contrast, a jurisdictional defect constitutes a fundamental impediment to the tribunal's authority and cannot be overcome or remedied.

The tribunals in Kılıç v. Turkmenistan and İçkale İnşaat Limited Şirketi v. Turkmenistan demonstrate divergent approaches to requirements for pursuing domestic procedures before initiating international arbitral proceedings. In Kılıç v. Turkmenistan, the tribunal held that fulfillment of the mandatory domestic litigation requirement in the Turkey – Turkmenistan BIT was a matter of jurisdiction. The tribunal concluded in paragraph 11.1(c) that:

“the meaning and effect of Article VII.2 of the BIT is that a concerned investor is required to submit its dispute to the courts of the Contracting Party with which a dispute has arisen, and must not have received a final award within one year from the date of submission of its case to the local courts, before it can institute arbitration proceedings.”

However, in İçkale İnşaat Limited Şirketi v. Turkmenistan, the tribunal disagreed and ruled that fulfillment of the mandatory domestic litigation requirement in the same BIT was a matter of admissibility rather than jurisdiction. The reasoning behind this approach is that Article VII(2) is not a condition to submit a state party to the jurisdiction of international arbitration. In other words, the requirement to pursue domestic litigation is not a condition of the state’s consent to arbitrate under the BIT. The tribunal noted that the BIT provision defines “how” the state’s consent can be invoked by an investor, not “whether” the state has given its consent. Hence, it is a matter of procedure, not an element of the state’s consent.

Conclusion

This analysis of Kyrgyzstan’s new multi-tier dispute settlement mechanism reveals the fundamental tension between domestic legislative attempts to control international arbitration access and established principles of international law. While Article 23 of the Law on Investments creates additional procedural hurdles requiring investors to navigate negotiations, mediation, and domestic courts before accessing international arbitration, these measures will likely prove insufficient to achieve the government’s objective of effectively limiting direct access to international arbitration.