The Investment Treaty Arbitration Review: Applicable Law in Investment Treaty Arbitration
At a glance, the matter of the law applicable to a dispute – identifying the law that governs the resolution of dispute – seems not to be a complex matter. However, as foreign investment is regulated by international law as well as domestic law, the law applicable to a treaty arbitration is not so simple. Investments involve various transactions under the local laws and regulations of the host state, such as administrative, commercial, corporate, tax, real estate, labour, financial and foreign exchange law, and other legal systems regulating other areas. However, there are several substantive international laws protecting foreign investors. These consist mainly of treaty laws contained in bilateral investment treaties (BITs) and multilateral treaties. Customary international law including various aspects of state responsibility are also relevant. As such, applicable law in investment treaty arbitration has two planes: international law, including the treaty itself, and domestic law of the host state.
In treaty arbitration, the application of both international law and domestic law are often at issue. The Maffezini v. Spain case,2 in which the subject of dispute was the construction of a chemical plant, is a good illustrative example. On the issue of attribution, the tribunal relied on the international law of state responsibility and on the Spanish law on public administration and common administrative procedure to explain the structure and functions of the concerned state entity.3 On the issue of environmental impact assessment, the tribunal applied international law, Spanish legislation, a European Community directive and the BIT.4 Regarding the question of whether a contract had been perfected between the investor and the state entity, the tribunal applied the Spanish Civil Code and the Spanish Commercial Code as well as authoritative commentaries.5 On the issue of a statute of limitation under Spanish legislation, the tribunal found that it did not apply to claims filed under the ICSID Convention.6
This makes it difficult to establish common characteristics within the applicable law when resolving investment treaty arbitration. Potential conflicts may arise in the application of both international law and domestic law.
In this chapter, we delve into some of the basics surrounding applicable law in international arbitration. After discussing the issue of party autonomy, we examine how tribunals can decide on the applicable law in the absence of the parties' agreement. We then look into the sources of law in international treaty arbitration, namely investment treaties, other general international law and domestic law.
II Party autonomy
In principle, the first issue for deciding the applicable law should be whether the parties themselves have chosen a governing law for their dispute. Party autonomy is one of the fundamental principles of international arbitration. Being an arbitration procedure, investment treaty arbitration is no different from international commercial arbitration in that party autonomy is the primary rule governing the arbitration in principle.7 Accordingly, when applicable law has been chosen by the parties, the tribunal shall apply that law and it is only in the absence of a choice by the parties that the tribunal shall examine the applicable law.8
The arbitration rules that usually apply to investment treaty arbitration recognise the parties' autonomy as well. Article 42(1) of the ICSID Convention provides that the tribunal 'shall decide a dispute in accordance with such rules of law as may be agreed by the parties'. Likewise, Article 54(1) of the ICSID Additional Facility Rules provides that the tribunal 'shall apply the rules of law designated by the parties as applicable to the substance of the dispute'. Article 35(1) of the UNCITRAL Arbitration Rules9 stipulates that the 'arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute'. Similarly, Article 27(1) of the Arbitration Rules of the Stockholm Chamber of Commerce10 provides that the 'Arbitral Tribunal shall decide the merits of the dispute on the basis of the law(s) or rules of law agreed upon by the parties' and Article 21(1) of the International Chamber of Commerce Arbitration Rules11 provides that the 'parties shall be free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute'.
In line with these rules, the choice of law in investment treaties often covers a variety of models. Treaties often state that dispute is to be resolved in accordance with the provisions of the treaty itself. International law and the domestic law of the host state are also referred to in treaties as applicable laws.12
As contracting states are to be distinguished from the parties to the dispute brought to a treaty arbitration, namely one of the contracting states of the treaty and an investor of the other contracting state, a question arises as to whether the laws agreed by the contracting states of a treaty can be viewed as the laws set by the parties to the dispute. In one of the early cases, AAPL v. Sri Lanka,13 the arbitral tribunal seemed to struggle with the notion that a prior choice of law could be effectuated by the contracting state for the benefit of the respective investors.14 However, applicable law in the treaty is deemed to be chosen directly by the parties to the arbitration as the arbitration agreement contained in a treaty is deemed to be stipulated by the contracting state for the benefit of its investors. The parties to the arbitration are presumed to have given their common consent to arbitration at the time the investor accepts the host state's general consent by filing the request for arbitration. This mechanism has been well established today.15 For example, the tribunal of Antoine Goetz v. Burundi rendered the following:
Undoubtedly, the applicable law has not been determined here, strictly speaking, by the parties to this arbitration (Burundi and the investors), but rather by the parties to the Bilateral Treaty (Burundi and Belgium). As was the case with the consent of the parties, the Tribunal deems nevertheless that Burundi accepted the applicable law as determined in the above provision of the Bilateral Treaty by becoming a party to this Treaty, and that claimants did the same by filing their request for arbitration based on the Treaty.16
III Tribunal decision in absence of parties' agreement
In the absence of parties' agreement on applicable law, the determination of applicable law depends on the arbitration rules. Several investment treaties also contain relevant provisions on applicable law.
Article 42(1) of the ICSID Convention provides that 'the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable'. Article 54(1) of the ICSID Additional Facility Rules state that '(a) the law determined by the conflict of laws rules which it considers applicable and (b) such rules of international law as the Tribunal considers applicable' shall be applied.
Most tribunals applying Article 42(1) of the ICSID Convention have examined the issue before them under both international law and the domestic law of the host state. An initial approach widely made on the relationship between international law and domestic law is the doctrine of supplemental and corrective function of international law as regards domestic law.17 Tribunals focused more on the domestic law of the host state, whereas international law was applied only in a corrective or complementary role where there were gaps in the host state's domestic law or it was inconsistent with the fundamental principles of international law. This approach has changed following the annulment decision in the Wena v. Egypt case.18 The rationale underlying the Wena holding is that, on a given issue, international law can be applied as the proper law in the same way as the domestic law of the host state.19 After stating that 'there seems not to be a single answer as to which of these approaches regarding the role of international law is the correct', the annulment committee held that the substantive provisions of international law can be applied independently and in conjunction with the host state's law, even where no lacunae or inadequacy were found in the domestic law.20 However, there are still ongoing debates as to whether it is appropriate to apply international law as substantive law in treaty arbitrations.21
In arbitration conducted under other arbitration rules, tribunals may also apply international law and the domestic law of the host state. Article 35(1) of the UNCITRAL Arbitration Rules refers to 'the law which it determines to be appropriate' and 'any usage of trade applicable to transaction' which the tribunal shall take into account. For arbitration by the International Chamber of Commerce (ICC), the ICC Arbitration Rules provide that 'the Tribunal shall apply the rules of law which it determines to be appropriate' and that 'the Tribunal shall take account of the provisions of the contract, if any, between the parties and of any relevant trade usages'. The Arbitration Rules of the Stockholm Chamber of Commerce state that 'the Arbitral Tribunal shall apply the law or rules of law that it considers most appropriate'. In Occidental v. Ecuador, which was conducted under 1976 UNCITRAL Arbitration Rules, the Tribunal listed a number of sources under host state law and under international law.22
As tribunals may apply both international law and domestic law in the absence of an agreement on the applicable law, it is left to the tribunal to identify the various issues before them to which international law or host state law is to apply.23
IV Investment treaty and international law
Frequently, an investment treaty is applicable in conjunction with the principles of international law or the applicable rules of international law.24 For instance, Chapter 11, Section B of the North Atlantic Free Trade Agreement refers to the treaty itself and 'applicable rules of international law'. Similarly, the European Charter Treaty also provides that 'a tribunal shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law'.
An investment treaty provides substantive protection to the investor. It is seen as the primary source of substantive law in investment arbitration, supplemented by general international law and the domestic law of the host state.25 Because of the specific role that the underlying treaty generally has in investment treaty arbitration, the treaty is considered to be the primary source of law, even if it does not contain self-reference as seen above.26
When investment treaty conflicts with the relevant domestic law, in principle the underlying treaty shall prevail. It is well established that states cannot invoke domestic law as justification for their failure to uphold a treaty or comply with international law.27
However, treaties rarely contain a comprehensive set of rules governing all relevant aspect of a dispute. The tribunal in AAPL v. Sri Lanka determined that a treaty:
is not a self-contained closed legal system limited to provide for substantive material rules of direct applicability, but it has to be envisaged within a wider juridical context in which rules from other sources are integrated through implied incorporation methods, or by direct reference to certain supplementary rules, whether of international law character or of domestic law nature.28
Similar conclusions have been reached by other tribunals.29
It is understood that the reference to international law should cover the full range of its sources, as specified in Article 38(1) of the Statute of the International Court of Justice. These include (1) international conventions, whether general or particular, establishing rules expressly recognised by the contesting states, (2) international custom, as evidence of a general practice accepted as law, (3) the general principles of law recognised by civilised nations, and (4) judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.
V Domestic law of the host state
It is not common to explicitly state domestic law as an applicable law in a treaty. Even when it is stated, domestic law is usually included as a choice of law provision alongside international law. However, even if there is no reference to domestic law in a treaty, domestic law applies to the extent required or necessary for certain issues. The absence of a reference to domestic law of the host state in treaty clauses is particularly conspicuous where jurisdiction is not limited to claims based on the treaty's standards but extends to any dispute concerning questions of host state law.30
The most obvious situation arises where there is a dispute about the existence of rights that the investor seeks to protect. These rights are typically established by virtue of a domestic legal system.31 Therefore, the preliminary question of the existence of the disputed rights cannot be answered without resorting to domestic law.32
Moreover, when a treaty requires that the operation of the investor must be in accordance with the host state's law to qualify as an investment, domestic law may apply to determine the investment's legality. In Metal-Tech v. Uzbekistan, the tribunal applied the domestic law as follows:
[T]he Tribunal comes to the conclusion that corruption is established to an extent sufficient to violate Uzbekistan law in connection with the establishment of the Claimant's investment in Uzbekistan. As a consequence, the investment has not been “implemented in accordance with the laws and regulations of the Contracting Party in those territory the investment is made” as required by Article 1(1) of the BIT.33
In such cases, the legality of investment is assessed under the domestic law of the host state. In this regard, tribunals have held that questions of jurisdiction are not subject to the law applicable to the merits of the case. In CMS v. Argentina, for instance, the tribunal stated:
Article 42 [of the ICSID Convention] is mainly designed for the resolution of disputes on the merits and, as such, it is in principle independent from the decision on jurisdiction, governed solely by Article 25 of the Convention and those other provisions of the consent instrument which might be applicable, in the instant case the Treaty provisions.34
In addition, to invoke the protection under an investment treaty, the investor needs to have the nationality of the other state party to the treaty. The issue of nationality must also be resolved with reference to domestic law of the state.
Applicable law starts from party autonomy in international arbitration. In accordance with the relevant arbitration rules, tribunals shall first apply the laws chosen by the parties. Tribunals may apply both international law and domestic law in the absence of an agreement on the applicable law. In doing so, although tribunals have wide discretion to consider sources of law, they should give due regard to the parties' position and should not surprise the parties with any legal theory that was not subject to debate during the proceedings.35
As various international and domestic laws can be applied in investment treaty arbitration, careful examination of relevant international and domestic laws is necessary and critical for both investors planning to initiate an arbitration and respondent states.
1 Yun Jae Baek and Jae Hyong Woo are partners at Yulchon LLC.
2 Emilio Agustín Maffezini v. The Kingdom of Spain Award, ICSID Case No. ARB/97/7 (13 Nov. 2000) (Maffezini v. Spain Award).
3 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Second Edition, Oxford University Press, 2012), p. 291: Maffezini v. Spain Award (op. cit. note 2, above), paras. 47–49.
4 Dolzer and Schreuer .(op. cit. note 2, above); Maffezini v. Spain Award (op. cit. note 2, above), paras. 67–71.
5 Dolzer and Schreuer .(op. cit. note 2, above); Maffezini v. Spain Award (op. cit. note 2, above), paras. 89, 90.
6 Dolzer and Schreuer .(op. cit. note 2, above); Maffezini v. Spain Award (op. cit. note 2, above), paras. 92, 93; Convention on the Settlement of Investment Disputes between States and Nationals of Other States, open for signature on 18 March 1965, entered into force on 14 October 1966.
7 Yas Banifatemi, 'The Law Applicable in Investment Treaty Arbitration' in Katia Yannaca-Small (ed.), Arbitration under International Investment Agreements: A Guide to the Key Issues (Oxford University Press, 2010), p. 192.
8 ibid, p. 191.
9 United Nations Commission on the International Trade Law Arbitration Rules, adopted in 1976, as revised in 2010 and 2013.
10 Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce, adopted in 2017.
11 Rules of Arbitration of the International Chamber of Commerce, adopted in 2012, as amended in 2017 and 2021.
12 Dafina Atanasova, 'Applicable Law Provisions in Investment Treaties: Forever Midnight Clauses?', Journal of International Dispute Settlement (2019), Volume 10, Issue 3, pp. 409–10.
13 Asian Agricultural Products Ltd. v. Sri Lanka, Award of 27 Jun. 1990, paras. 19–20.
14 Yas Banifatemi (op. cit. note 7, above), p. 193.
15 Dolzer and Schreuer (op. cit. note 3, above), p. 289.
16 Antoine Goetz et al. v. Republic of Burundi (10 Feb. 1999), para. 94, English translation in XXVI Yearbook Commercial Arbitration (2001), pp. 24, 36.
17 Klöckner v. Cameroon, Award (21 Oct. 1983), 2 ICSID Reports 9, at p. 63; Duke Energy v. Peru, Award (18 Aug. 2008), paras. 144–61; Aguaytia v. Peru, Award (11 Dec. 2008), paras. 71–74.
18 Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Decision (Annulment Proceeding) (5 Feb. 2002), paras. 37–46.
19 Yas Banifatemi (op. cit. note 7, above), p. 203.
20 Stefan Riegler, Dalibor Valinčić and Borna Dejanović, 'Applicable Law in Investment Treaty Arbitration', The Guide to Investment Treaty Protection and Enforcement (First Edition, Global Arbitration Review), at https://globalarbitrationreview.com/guide/the-guide-investment-treaty-protection-and-enforcement/first-edition/article/applicable-law-in-investment-treaty-arbitration#footnote-050 (last accessed 14 Mar. 2022).
21 Emmanuel Gaillard and Yas Banifatemi, 'The Meaning of “and” in Article 42(1), Second Sentence, of the Washington Convention: The Role of International Law in the ICSID Choice of Law Process', 18 ICSID Rev. 375 (2003).
22 Occidental Exploration and Production Company v. The Republic of Ecuador, Final Award (1 Jul. 2004), para. 93.
23 Dolzer and Schreuer (op. cit. note 3, above), p. 293.
24 Yas Banifatemi (op. cit. note 7, above), p. 197.
25 Atanasova (op. cit. note 13, above), p. 400.
26 Riegler, Valinčić and Dejanović (op. cit. note 21, above).
27 id.; Wena v. Egypt, ICSID Case No. ARB/98/4, Award (8 Dec. 2000), para. 107; LG&E v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability (3 Oct. 2006), para. 94.
28 Asian Agricultural Products Ltd. v. Sri Lanka, Award of 27 June 1990, para. 21.
29 Riegler, Valinčić and Dejanović (op. cit. note 21, above); Azurix v. Argentina, ICSID Case No. ARB/01/12, Award (14 Jul. 2006), paras. 65–68; LG&E v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability (3 Oct. 2006), paras. 85–87.
30 Christoph Schreuer, 'Jurisdiction and Applicable Law in Investment Treaty Arbitration', McGill Journal of Dispute Resolution (2014), Vol. 1:1, p. 17.
31 ibid., p. 17
32 ibid., pp. 17–18.
33 Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award (4 Oct. 2013), para. 372.
34 CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Decision on Jurisdiction (17 Jul. 2003), para. 88.
35 Riegler, Valinčić and Dejanović (op. cit. note 21, above).