ABSTRACT The ability of foreign investors to choose international arbitration as a dispute resolution mechanism can create significant problems. Lack of coherence and discrimination regarding regulation can arise from the resolution of substantive issues, whereas concerns about transparency and fairness to third parties derive from the arbitral proceedings when compared with rights recognized to them in domestic law. However, possible solutions might be equally troublesome. THE BACKGROUND: FOREIGN INVESTMENT DISPUTE RESOLUTION Since the 1965 Washington Convention, a trend toward recognition of foreign investors' right to bring action directly against foreign host states has emerged. This multilateral treaty allowed investors to refer disputes with a state party directly to arbitration or conciliation procedures under the International Centre for the Settlement of Investment Disputes (ICSID), if the consent of both parties was obtained in writing. Blanket consent to the jurisdiction of ICSID or to ad hoc arbitration under United Nations Commission on International Trade Law (UNCITRAL) rules became common in the 1970s, and bilateral investment treaties (BITs) containing these provisions increased dramatically in the 1980s and 1990s. Nowadays, virtually all modern treaties provide for a mechanism to settle investment disputes by reference to institutional or other arbitration rules. BITs are treaties between two states, by which each one promises, on a reciprocal basis, to observe the standards of treatment laid down by the treaty in its dealings with investors from the other contracting state) Since the 1959 Germany-Pakistan BIT, BITs have been made not only between a developed country and a developing country, but also between two developed countries or between two developing countries. BITs are a common feature in free-trade agreements as an investment chapter (e.g., NAFTA's Chapter 11). Basic features of BITs usually include the scope and definition of foreign investment, most-favored-nation (MFN) status, national treatment, fair and equitable treatment, guarantees and compensation in respect of expropriation, warranties of free transfer of funds, capital and profits, subrogation on insurance claims and, notably, dispute settlement provisions. (2) According to the latter, disputes which have not been settled amicably, may, at the investor's choice, be submitted either to the domestic courts of the host state or to international arbitration, mainly to ICSID or using ad hoc arbitration rules such as UNCITRAL Arbitration or International Chamber of Commerce (ICC). Local courts are often not used by foreign investors to address disputes regarding foreign investment, and this happens for different reasons: investor interest in having a non-biased tribunal, an expeditious process, a judgment under a system or language they can understand, or a state's interest in promoting foreign investment or even international accountability. These treaties allow a state to make credible promises to potential foreign investors. As a result, the country is more attractive and probably will receive a larger volume of investment that it would have without the ability to make such arrangements. Therefore, such disputes are usually handled through international arbitration as established in BITs. These choices are not harmless. A selection of an arbitral forum made by a foreign investor can produce a different set of laws applicable to the same type of domestic economic activity, creating lack of uniformity in substantive issues. In addition, the ability of foreign investors to choose the forum in which they will submit an investment dispute has a significant effect not only for the investor itself, but also for third parties directly or indirectly affected by the outcome of that procedure. ONE SUBSTANTIVE ISSUE: ARBITRATORS AS REGULATORS BITs' arbitral tribunals have settled several disputes exercising powers that traditionally belong to the host state as regulator, such as the issuance and operation of radio broadcasting licenses in Ukraine, the annulment of permits to construct an industrial plant in Peru in a protected wetland, the validity of Argentinean legislation after the economic crisis of 2001-2002, the ban on the export of hazardous wastes by Canada, and the creation of an ecological park by a Mexican state. …