APPLICABLE LAW IN INTERNATIONAL INVESTMENT DISPUTES

Transcription

1

2 APPLICABLE LAW IN INTERNATIONAL INVESTMENT DISPUTES

3

4 APPLICABLE LAW IN INTERNATIONAL INVESTMENT DISPUTES by TAIDA BEGIC LL.M. (CEU) Dr. iur. (Vienna University Law School) Center for Interdisciplinary Postgraduate Studies of the University of Sarajevo

5 Published, sold and distributed by Eleven International Publishing P. O. Box AJ Utrecht, the Netherlands Tel.: Fax: Printed on acid-free paper. ISBN Eleven International Publishing This publication is protected by international copyright law. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. Printed in The Netherlands

6 Table of Contents ABBREVIATIONS xi INTRODUCTORY NOTE xiii ACKNOWLEDGEMENTS xv CHAPTER I: INVESTOR/STATE ARBITRATION AND THE APPLICABLE SUBSTANTIVE LAW 1 1 Generally 1 2 Applicable Substantive Law and the ICSID Convention 4 3 Applicable Substantive Law in Context of Other Arbitration Systems 6 (a) Additional Facility arbitration rules 6 (b) UNCITRAL arbitration rules 7 (c) ICC arbitration rules 8 (d) Iran United States Claims Tribunal 9 4 The Methodology Employed by the Arbitral Tribunal 11 CHAPTER II: AGREED CHOICE OF LAW 13 1 The Principle of Party Autonomy 13 2 Choice of Law Modalities 15 (a) Direct agreement between the host state and the investor 15 (i) Law of the host state as the law chosen by the parties 16 (ii) The host state s law subject to a stabilization clause 16 (iii) Law of a third state as the law chosen by the parties 17 (iv) International law alone as the law chosen by the parties 18 (v) The law of the contract as the law chosen by the parties 18 (vi) Compound choice of law clause in the direct contract between the parties 19 v

7 vi TABLE OF CONTENTS AGIP V. CONGO (APPLICATION OF THE HOST STATE S LAW TESTED AGAINST INTERNATIONAL LAW) 21 (vii) Concluding remarks 24 (b) Choice of law in treaties 25 (i) Choice of law clauses in multilateral treaties 26 (ii) Choice of law clauses in BITs 27 (iii) Arbitral practice 29 MAFFEZINI V. SPAIN (APPLICATION OF THE HOST STATE S LAWONLY) 29 ANTOINE GOETZ V. BURUNDI (APPLICATION OF BOTH THE HOST STATE S LAW AND INTERNATIONAL LAW) 32 CME V. THE CZECH REPUBLIC (REFUSAL TO APPLY THE HOST STATE S LAW) 39 (iv) Concluding remarks 56 (c) Choice of law provisions in domestic legislation 56 3 Explicit or Implicit Choice of Law? 57 (a) Expression of implicit choice of law 57 (b) Arbitral practice 59 (i) SPP v. Egypt (reference in the parties agreement (ii) to domestic law as implicit choice of law) 59 LETCO v. Liberia (reference in the parties agreement to domestic law as implicit choice of law) 64 (iii) AAPL v. Sri Lanka (the parties conduct and submissions as proof of an implicit choice of law) 66 (iv) Wena Hotels v. Egypt (the parties conduct and submissions as proof of an implicit choice of law) 74 (c) Concluding remarks 79 4 Subsequent Choice of Law 80 (a) Overview of the arbitral practice 80 (b) Concluding remarks 83 5 Stabilization Clauses 84 a) Meaning and types 84 b) Arbitral practice 85 (i) (ii) TOPCO v. Libya (stabilization clauses valid and binding under international law) 85 AMINOIL v. Kuwait (breach of a stabilization clause does not lead to unlawfulness of nationalization as long as it is not expressly prohibited) 86

8 TABLE OF CONTENTS vii (iii) AGIP v. Congo (breach of a stabilization clause leads to unlawfulness of nationalization) 91 (iv) LETCO v. Liberia (in the presence of a stabilization clause nationalization is justified if it meets required criteria) 92 (v) Amoco v. Iran (breach of a stabilization clause does not lead to unlawfulness of nationalization as long as it is not expressly prohibited) 93 c) Concluding remarks 96 6 Limitations on the Parties Freedom to Choose the Applicable Law 98 (a) Relevance of mandatory norms and public policy 98 CHAPTER III: ABSENCE OF AGREED CHOICE OF LAW Methods for Determining the Absence of the Parties Agreement on Choice of Law Application of the Residual Rule of Article 42(1) of the ICSID Convention 106 (a) Arbitral practice 107 (i) Amco v. Indonesia (parallel application of the (ii) host state s law and international law) 107 SOABI v. Senegal (application of the host state s law only) 113 (iii) Tradex v. Albania (international law used as guidance for the interpretation of the host state s law) 116 (iv) CDSE v. Costa Rica (in the event of concurrence between the two legal systems international law may be applied only) 119 (b) Concluding Remarks Absence of the Parties Agreement on Choice of Law in Other Arbitration Systems 123 (a) Arbitral practice 127 (i) (ii) Sapphire v. National Iranian Oil Company (the parties intention excludes the application of any national legal system) 127 Wintershall v. Qatar (application of the closest connection test led to the applicability of the host state s law only) 133 (iii) The Rakoil Case (a-national law determined as the applicable law) 139

9 viii TABLE OF CONTENTS (iv) Amoco v. Iran (even in case of a contractual choice of domestic law an expropriation claim will be examined under international law only [Including the Treaty of Amity]) 142 (v) Mobil Oil v. Iran (even in case of a contractual choice of domestic law an expropriation claim will be examined under international law only) 149 (vi) Phelps Dodge Corp. and OPIC v. Iran (international law and the Treaty of Amity apply to the issue of expropriation) 151 (b) Concluding remarks 152 CHAPTER IV: THE ROLE OF INTERNATIONAL LAW AND ITS RELATION TO DOMESTIC LAW 155 CHAPTER V: ISSUES OF ANNULMENT Necessity of the Review Process Annulment Under the ICSID Convention 166 (a) Generally 166 (b) Manifest excess of powers and the Non-application of the proper law 168 (c) Arbitral Practice 169 (i) Klöckner v. Cameroon (failure to rely on specific (ii) legal source led to annulment) 169 Amco v. Indonesia (failure to apply one important provision led to annulment) 174 (iii) MINE v. Guinea (technical error does not warrant annulment) 178 (iv) Wena Hotels v. Egypt (in case of collision between the two legal systems international law prevails) 181 (d) Concluding remarks Setting Aside of Arbitral Awards in Non-ICSID Investment Arbitration 187 (a) Generally on review of non-icsid arbitral awards 187 (b) Proper law and nullity 190 (c) Arbitral practice 192 (i) (ii) The Czech Republic v. CME (decision based on part of applicable law only does not warrant annulment) 192 Mexico v. Metalclad (a mere reference to the wrong provision of the applicable treaty led to annulment) 201 (iii) Mexico v. Feldman (no reference to the provision of the applicable treaty does not warrant annulment) 207 (d) Concluding remarks 214

10 TABLE OF CONTENTS ix CHAPTER VI: PROHIBITION OF A NON-LIQUET 217 CHAPTER VII: DECISION EX AEQUO ET BONO Generally Amiable Composition or ex aequo et bono Express Agreement on a Decision ex aequo et bono 222 (a) Original agreement 222 (b) Subsequent agreement 223 (c) Possibility of dépeçage No Authorization to decide ex aequo et bono 224 (a) Klöckner v. Cameroon Application of Both Law and Equity 226 (a) Benvenuti & Bonfant v. Congo Equity within the Law Limits on Decision ex aequo et bono Concluding Remarks 229 CHAPTER VIII: SUMMARY OF CONCLUSIONS 231 TABLE OF CASES 239 OFFICIAL DOCUMENTS 245 BIBLIOGRAPHY 247

11

12 Abbreviations AAA American Arbitration Association ADRLJ Arbitration and Dispute Resolution Law Journal AJIL American Journal of International Law Arb. Int. Arbitration International Art(s). Article(s) BIT(s) Bilateral Investment Treaty(ies) BYIL British Year Book of International Law Ch. Chapter Co. Company Colum. JIL Columbian Journal of International Law CSD Claims Settlement Declaration D.D.C. Federal District Court for the District of Columbia Doc. Document ECT Energy Charter Treaty ed. edition e.g. exempli gratia (for example) F. Supp. Federal Supplement FILJ Foreign Investment Law Journal Harv. ILJ Harvard International Law Journal History of the Analysis of Documents Concerning the Origin and Convention, Vol. I the Formulation of the ICSID Convention (1970) History of the Documents Concerning the Origin and the Convention, Vol. II Formulation of the ICSID Convention (1968) ICC International Chamber of Commerce ICCA International Council for Commercial Arbitration ICJ International Court of Justice ICSID International Center for Settlement of Investment Disputes xi

13 xii ABBREVIATIONS ILC International Law Commission ILM International Legal Materials ILR International Law Reports Ibid. Ibidem (the same) i. e. id est (that is to say) Iran-U.S. C.T.R. Iran-United States Claims Tribunal Reports JIA Journal of International Arbitration KLI Kluwer Law International LCIA London Court of International Arbitration Ltd. Limited MERCOSUR Mercado Comun del Sur NAFTA North American Free Trade Agreement No. Number OPIC Overseas Private Investment Corporation p(p). Page(s) para(s). Paragraph(s) PCA Permanent Court of Arbitration PCIJ Permanent Court of International Justice Prof. Professor Rep. Reports Rev. Review Sec. Section Ser. Series T.I.A.S. Treaties and other International Acts Series UK United Kingdom UN United Nations UNCITRAL United Nations Commission on International Trade Law UNCTAD United Nations Conference on Trade and Development UNIDROIT International Institute for the Unification of Private Law UNTS United Nations Treaty Series US United States U.S.T. United States Treaties v. versus (against) VCLT Vienna Convention on the Law of Treaties Vol(s). Volume(s) Y. B. Com. Arb. Yearbook of Commercial Arbitration YBILC Yearbook of the International Law Commission

14 Introductory Note This study analyzes the issue of applicable substantive law in the context of investor/state arbitration conducted before ICSID tribunals, Additional Facility tribunals 1, the Iran-United States Claims Tribunal, institutionalized (commercial) arbitration or on ad hoc basis. The relevant issues are grouped into eight, major chapters as follows: The first chapter will offer some general introduction on the issue of applicable substantive law in investor/state arbitration. Interpretation of the relevant provisions on applicable law contained in the tribunals authorizing instruments will be also offered in this chapter, namely, Art. 42 of the ICSID Convention, Art. 54 of the ICSID Additional Facility Arbitration Rules, Art. 33 of the UNCITRAL Arbitration Rules, Art. 17 of the ICC Arbitration Rules and Art. V of the Claims Settlement Declaration. The second chapter will deal with agreed choice of law. The analysis will start with the basic principle governing the law to be applied by tribunals, namely, the principle of party autonomy. After that, the ways of exercising the parties freedom of choice of law will be discussed. Choice of law clauses found in the parties direct investment agreements and in treaties will be illustrated. Particular emphasis is given to the analysis of the arbitral practice that has dealt with combined choice of law clauses. Furthermore, this chapter will discuss the possibility of an implicit choice of law as well as subsequent choice of law. After that the analysis will consider the legal effects and significance of stabilization clauses. Finally, this chapter will end with a discussion of the limits on the parties choice of law. 1 Note: ICSID practice relates only to arbitral decisions rendered under the ICSID Convention. Since the ICSID Convention does not apply to Additional Facility arbitration, the decisions of Additional Facility tribunals are considered as part of non-icsid arbitral practice. xiii

15 xiv INTRODUCTORY NOTE The third chapter will concern the absence of an agreed choice of law. The analysis will distinguish between ICSID and non-icsid arbitral practice. This chapter will first deal with the application of the residual rule of Art. 42(1) of the ICSID Convention. After that, the mechanisms of other arbitration systems for selecting the applicable substantive law in the absence of agreed choice of law will be discussed. The fourth chapter will discuss the role of international law and its relation to domestic law. The fifth chapter will consider issues of annulment in investor/state arbitration. The analysis of arbitral practice that has dealt with excess of powers or excess of mandate for failure to apply the proper law as a ground for annulment or setting aside is the cornerstone of this chapter. The analysis will first refer to annulment under the ICSID Convention and, after that, it will deal with review of non-icsid arbitral awards by national courts. The sixth chapter will briefly explain the prohibition of non-liquet. The seventh chapter will analyze ex aequo et bono decision. Finally, the eight chapter is a summary of the findings and conclusions of the previous chapters. It will emphasize the main points emerging from the practice analyzed in this study.

16 Acknowledgements I would like to thank Prof. Dr. Christoph Schreuer for his generous support and valuable assistance. I would also like to thank Prof. Dr. August Reinisch for his commitment. Many thanks to Denan and my family for their support and patience. xv

17

18 CHAPTER I Investor/State Arbitration and the Applicable Substantive Law 1 Generally In the international environment, various methods of dispute settlement are offered to the parties. In case of investment disputes, forums for dispute settlement available to the parties are: the national courts, conciliation, arbitration (ad hoc or institutional ) and even diplomatic protection. The most characteristic investment disputes are those between the foreign investor and the host state or so-called mixed disputes. The host state would like to restrict the foreign investor to local remedies alone, but in order to gain direct investment it will accept international methods of dispute settlement such as: conciliation and/or arbitration. Today, the most important form of arbitration is mixed international arbitration. 1 Arbitration has proved to be an effective means of settling disputes between States and foreign investors. 2 Nowadays, most countries, either through multilateral or bilateral investment treaties (BITs) or through newly adopted investment codes, give their consent to either institutionalized or ad hoc arbitration. Most of the modern BITs provide for arbitration between the host State and the foreign investor. Direct arbitration between the foreign investor and the host State is provided by the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the ICSID Convention) 3 and a majority of BITs. Investment codes also contain provisions referring to ICSID 1 Collier, J./Lowe, V., The Settlement of Disputes in International Law: Institutions and Procedures, Oxford University Press (1999) at p. 38, see also at pp , See generally Delaume, G. R., State Contracts and Transnational Arbitration, 75 AJIL 784 (1981). 3 The ICSID Convention entered into force in It created the International Center for Settlement of Investment Disputes (ICSID) which administers the conciliation and arbitration 1

19 2 CHAPTER I arbitration. 4 Arbitration under the ICSID Additional Facility Arbitration Rules is available where either the host State or the home State of the investor is not a contracting party to the ICSID Convention. 5 Most modern BITs include references to more than one dispute settlement mechanism. 6 Some BITs refer to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) 7 either alone or together with the references for settlement of investment disputes under the ICSID arbitration, whereas a smaller number of them refer to the International Chamber of Commerce (ICC) arbitration, 8 arbitration of the Stockholm Chamber of Commerce or some other institutionalized arbitration. 9 Provisions for the settlement of investor/state disputes by arbitration can also be found in some regional multilateral treaties dealing with investment such as the North American Free Trade Agreement (NAFTA), 10 the Energy Charter Treaty (ECT), 11 the Cartagena Free Trade Agreement 12 and the of investment disputes under the ICSID Convention. ICSID arbitration is available for legal disputes arising directly out of an investment between a Contracting State and a national of another Contracting State (see Art. 25 of the ICSID Convention)., 575 UNTS 159 (1966), reprinted in ICSID Basic Documents, Doc. ICSID/15 (January 1985), available also at org/icsid/. 4 Obadia, E., ICSID, Investment Treaties and Arbitration: Current and Emerging Issues, News from ICSID, Vol. 18, No. 20 (2001). 5 The Administrative Council of ICSID has adopted the Additional Facility Rules in 1978 authorizing the Secretariat of the Center to administer certain types of proceedings between States and nationals of other States that fall outside the jurisdiction of the ICSID Convention (see Art. 2 of the Additional Facility Rules). Therefore, in case of Additional Facility arbitration the ICSID Convention does not apply (see Art. 3 of the Additional Facility Rules). The amendments of the Additional Facility Rules came into effect on 1 January 2003., ICSID/11/Rev. 1 January 2003, available also at 6 See generally Dolzer, R./Stevens, M., Bilateral Investment Treaties, Martinus Nijhoff Publishers (1995). 7 Decision on UNCITRAL Rules, U.N. Doc. A/CN.9/IX/CRP. 4/Add. 1, amended by U.N. Doc. A/CN.9/SR. 178 (1976), reprinted in 15 ILM 701 (1976) ICC Arbitration Rules, 36 ILM 1604 (1997). 9 See generally Parra, A. R., ICSID and Bilateral Investment Treaties, 17 ICSID Review FILJ 11 (2000). 10 Between Canada, Mexico and the United States. Section B of the Chapter Eleven on Investments refers to the Settlement of Disputes between a Party and an Investor of Another Party. It contains the investment dispute settlement provision which refers to arbitration under the ICSID Convention, under the Additional Facility Rules of ICSID and the UNCITRAL Arbitration Rules as alternatives, 32 ILM 605 (1993) at p The Additional Facility arbitration has become particularly important in the context of investment disputes under the NAFTA Chapter 11. Two NAFTA/Additional Facility decisions will be analyzed in section dealing with setting aside of arbitral awards in non-icsid investment arbitration. 11 Between the European Communities and 49 mostly European States. See Art. 26 of the ECT, 34 ILM 360 (1995) at pp See Arts of the Free Trade Agreement between Columbia, Mexico and Venezuela, at

20 INVESTOR/STATE ARBITRATION AND THE APPLICABLE SUBSTANTIVE LAW 3 Colonia and Buenos Aires Investment Protocols of the Common Market of the Southern Cone (MERCOSUR). 13 Not all international tribunals are accessible to private investors. They have access to ICSID arbitral tribunals, Additional Facility tribunals, the Permanent Court of Arbitration (PCA), the Iran United States Claims Tribunal 14 as well as international commercial arbitration either institutionalized or ad hoc. 15 Investor/State arbitration is based, like any other arbitration, on an agreement between the disputing parties. The parties may stipulate a dispute settlement provision in a direct contract between them. Alternatively, investor/state arbitration can find its basis in a BIT or multilateral treaty or through the operation of domestic legislation. In such a case, consent to arbitration is also result of an agreement between the parties. The dispute settlement provision contained in the treaty or domestic legislation constitutes a standing offer to the foreign investor. The investor, by accepting this offer, concludes the arbitration agreement with the host State. This offer of consent contained in the treaty or domestic legislation may be accepted by the investor simply by instituting arbitration proceedings. The arbitration agreement represents the tribunal s terms of reference from which the arbitrators derive their authority and competence. The issue of applicable substantive law represents one of the questions that must be resolved by the arbitral tribunal. In contrast to the procedural law that governs the arbitration proceedings, the substantive law determines the rules of law that should be applied to the merits of the dispute. The importance of the choice of the law applicable to the substance of the dispute lies in the fact that it determines the rules which are applicable to, for example: the interpretation of the parties agreement, its performance, and the consequences of breach. 16 Accordingly, the arbitral tribunal must first determine the law applicable to the merits of a dispute in order to resolve all legal issues and decide the case. In investor/state arbitration, the issue of applicable substantive law has some 13 See Art. 9 of the Colonia Protocol, at 14 The Iran US Claims Tribunal is established in 1981 pursuant to the Algiers Accords which consist of two documents: the General Declaration and the Claims Settlement Declaration. The latter established the Tribunal for the purpose of deciding claims of United States nationals against Iran and of Iranian nationals against the United States, which arise out of contracts, debts, expropriations or other measures affecting property rights. Furthermore, the Tribunal has jurisdiction over official claims between the two Governments arising out of contractual arrangements between them for the purchase and sale of goods and services. And, finally its jurisdiction extends over any disputes between the two Governments concerning the interpretation or performance of the Algiers Declarations and over certain claims between banking institutions of the two States., see Claims Settlement Declaration, 19 January 1981, 20 ILM 230 (1981), available also at 15 See Seidl-Hohenveldern, I., International Economic Law (2nd revisited ed.), Martinus Nijhoff Publishers (1992) at p. 163; Various mixed arbitral commissions existed before and between the two World Wars (e.g., American Mexican Mixed Claims Commission). 16 See Collier, J./Lowe, V., The Settlement of Disputes in International Law: Institutions and Procedures, Oxford University Press (1999) at pp

21 4 CHAPTER I specific features. Therefore the ways of dealing with this issue are somewhat different from that of international commercial arbitration or inter-state arbitration. The character of the parties to investment disputes as well as the circumstances of the case itself give the issue of applicable law in investor/state arbitration some unique characteristics that will be discussed throughout the present study. The parties may agree on the applicable law in their arbitration agreement. If the parties agree on the applicable law such a choice of law clause represents an essential element of the arbitration agreement and the tribunal is obliged to observe it. If the tribunal goes beyond the parties agreement on applicable law it may commit an excess of powers which may lead to the nullity of the award. Arbitral practice confirms this finding and will be discussed below. An examination of arbitral practice shows that arbitration agreements frequently contain choice of law clauses. But this is not standard. For instance, clauses on applicable law can be found in some BITs, while others do not contain them. The same is the case with multilateral treaties and domestic legislation. On some occasions, it is difficult to determine whether the parties have reached an express or implicit agreement on choice of law. In case of a direct agreement on applicable law between a State and a private investor, the choice of one or several systems of law is possible. 17 For instance, different parts of the contractual arrangement may be governed by different rules of law. 18 Investment cases often involve so-called compound choice of law clauses which can consist of the host State s law, BIT rules, a special investment agreement and customary or general international law. The ICSID Convention contains a compound choice of law rule in the second sentence of Art. 42(1) providing for the application of both the host State s law and international law. These combined choice of law clauses will be discussed in great detail as the more common types of clauses on applicable law in investment cases. Issues of the relationship between domestic law and international law arise in the context of such clauses. Parties are also free to authorize the tribunal to decide on the basis of equity. These and other issues that arise in the context of applicable law in investor/state disputes will be analyzed below. 2 Applicable Substantive Law and the ICSID Convention In determining the applicable law, the arbitral tribunals are subject to quite different provisions in their authorizing instruments. These provisions provide 17 Henkin, L./Pugh, C.R./Schachter, O./Smith, H., International Law: Cases and Materials, 3rd ed., American Case Book Series, West Publishing Co. (1993) at p. 740; See also Böckstiegel, K. H., States in the International Arbitral Process, 2 Arbitration International No.1 (1986). 18 Henkin, L./Pugh, C.R./Schachter, O./Smith, H., International Law: Cases and Materials, 3rd ed., American Case Book Series, West Publishing Co. (1993) at p. 740.

22 INVESTOR/STATE ARBITRATION AND THE APPLICABLE SUBSTANTIVE LAW 5 a mechanism for how the tribunals have to select the appropriate rules of law for the particular dispute i.e. they simply provide guidance to the tribunal when it has to decide on the issue of applicable substantive law. After determining the applicable law to the particular dispute the tribunal has to examine and apply it in order to settle the merits of the case. The very specific framework of Art. 42 of the ICSID Convention offers great flexibility as well as certainty to the parties. 19 It provides: Article 42 (1) The Tribunal shall decide a dispute in accordance with such rules as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply 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. (2) The Tribunal may not bring in a finding of non liquet on the ground of silence or obscurity of law. (3) The provisions of paragraphs (1) and (2) shall not prejudice the power of the Tribunal to decide a dispute ex aequo et bono if the parties so agree. 20 Under the first sentence of Art. 42(1) of the ICSID Convention, the parties are free to agree on the applicable law. This freedom of choice of law is generally accepted in doctrine and practice and will be discussed in a separate section. In accordance with this principle the parties are free to choose either domestic or international law, both domestic and international law as well as to choose different rules of law for different parts of their contractual relationship. In the absence of the parties agreement, the ICSID Convention provides its own choice of law clause. The second sentence of Art. 42(1) contains a compound choice of law rule providing for the application of both the host State s law and international law. With respect to the application of the host State s law the issue of its rules on the conflict of laws could arise before the tribunal. Article 42(1), second sentence, explicitly refers to the conflict of laws rules of the host State s law which means that the tribunal is obliged to check these rules before applying the law of the host State. But with respect of the first sentence of Art. 42(1) the assumption is that parties intended to refer only to the substantive rules of the chosen law Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at p UNTS 159, reprinted in ICSID Basic Documents, Doc. ICSID/15 (Jan. 1985). 21 Delaume, G. R., Law and Practice of Transnational Contracts, Ch. IV, Booklet 1, Release 88-1, Oceana (1988) at p. 115; Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at p. 570; Art. 15 of the 1980 European Convention on the Law Applicable to Contractual Obligations excludes the renvoi, 19 ILM 1492 (1980); Art. 28(1) of the UNCITRAL Model Law states: Any designation of the law or legal system of a given State shall be construed, unless otherwise expressed, as directly referring to the substantive law of that State and not to its conflict of laws rules ; But see also Broches, A., The

23 6 CHAPTER I Under paragraph 2 the tribunal may not bring a finding of non liquet on the ground that the law is not sufficiently clear. Paragraph 3 is an extension of the principle of party autonomy. It stipulates that the parties may also authorize the tribunal to decide on the basis of equity. 3. Applicable Substantive Law in Context of Other Arbitration Systems (a) Additional Facility Arbitration Rules By contrast to the ICSID Convention, the ICSID Additional Facility Arbitration Rules provide: Article 54 (1) The Tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the Tribunal shall apply (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. (2) The Tribunal may decide ex aequo et bono if the parties have expressly authorized it to do so and if the law applicable to the arbitration so permits. 22 Paragraph 1 first refers to party agreement on applicable law. In the absence of such agreement, the second sentence of paragraph 1 prescribes a method for finding it. Therefore, by contrast to Art. 42(1) of the ICSID Convention, Art. 54(1) of the Additional Facility Arbitration Rules follows the traditional formula for selecting the applicable law. In the absence of the parties agreement on the applicable law, they refer to applicable conflict of laws rules and, in addition, to international law rules as the tribunal considers applicable. Paragraph 2 refers to a decision ex aequo et bono. Again, by contrast to the ICSID Convention, under the Additional Facility Arbitration Rules the tribunal may decide on the basis of equity only if two conditions are satisfied i.e. if the parties have expressly authorized the tribunal to do so and if the applicable procedural law allows such arbitration. Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 136 Recueil des Cours 331 (1972-II) at p. 390, with regard to the question whether the agreed choice of law of a certain country would exclude that country s conflict rules, he answered in the negative. The reason for a negative answer to this question lies in the fact that the first sentence refers to rules of law which may not be the rules of the domestic legal system at all. Therefore, in his view, the parties choice of the domestic legal system does not necessarily exclude its conflict of laws rules. 22 ICSID/11/Rev. 1, January 2003, available also at

24 INVESTOR/STATE ARBITRATION AND THE APPLICABLE SUBSTANTIVE LAW 7 (b) UNCITRAL Arbitration Rules Parties to investment disputes have frequently submitted to international commercial arbitration either institutionalized 23 or ad hoc. 24 Although these mechanisms are mainly designed to deal with commercial disputes between private parties, they are also open to disputes between states and private parties. Both older and recent investment agreements provided for settlement of a dispute before ad hoc tribunals using the UNCITRAL Arbitration Rules. The authorizing instruments of these arbitration systems give much discretion to the tribunal in determining the applicable law. UNCITRAL Arbitration Rules of 1976 provide: Article The arbitral tribunal shall apply the law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable. 2. The arbitral tribunal shall decide as amiable compositeur or ex aequo et bono only if the parties expressly authorized the arbitral tribunal to do so and if the law applicable to the arbitral procedure permits such arbitration. 3. In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction. 25 This provision follows the traditional, open-ended formula for designating the applicable substantive law. It refers to an agreement between the parties on the applicable law and, in case of absence of such agreement, prescribes a method for finding it. Therefore, under the first sentence of paragraph 1 the tribunal is bound by the choice of law as agreed by the parties. However, the choice of conflict of laws rules that will determine the applicable substantive law in the absence of such agreement on applicable law is at the tribunal s discretion. This means that the tribunal is not bound by any national conflict of laws rules. This approach is confirmed 23 E.g. the first award in SPP v. Egypt was rendered by an ICC tribunal. 24 E.g. Texaco Overseas Petroleum Company/California Asiatic (Calasiatic) Oil Company v. The Government of the Libyan Arab Republic, Award, 19 January 1977, 17 ILM 1 (1978); Libyan American Oil Company v. The Government of the Libyan Arab Republic, 12 April 1977, 20 ILM 1 (1981); American Independent Oil Company v. The Government of the State of Kuwait, 24 March 1982, 21 ILM 976 (1982). 25 At See also Art. 33 of the PCA Optional Rules for Arbitrating Disputes between Two Parties of Which Only One Is a State, Effective 6 July, These Rules superseded the 1962 Rules of Arbitration and Conciliation for Settlement of International Disputes between Two Parties of Which Only One is a State. They are based on the UNCITRAL Arbitration Rules., PCA Basic Documents: Conventions, Rules, Model Clauses and Guidelines, The Hague (1998).

25 8 CHAPTER I by international arbitral conventions as well as by the decisions of the arbitral tribunals. 26 The parties are also free to authorize the tribunal to decide as amiable compositeur or ex aequo et bono but only if two conditions are satisfied i.e. if there is an express authorization by the parties and if the applicable procedural law allows such arbitration. The last paragraph is similar to the last part of Art. V of the Claims Settlement Declaration. 27 It expressly states that in all cases the tribunal must decide in accordance with the contract provisions while the trade usages will be taken into account depending on the circumstances of the case. (c) ICC Arbitration Rules The current Arbitration Rules of the ICC came into effect on January 1, The previous Rules followed the UNCITRAL approach. Today, the provision on Applicable Rules of Law reads as follows: Article 17 Applicable Rules of Law 1. 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 the absence of any such agreement, the Arbitral Tribunal shall apply the rules of law which it determines to be appropriate. 2. In all cases the Arbitral Tribunal shall take account of the provisions of the contract and the relevant trade usages. 3. The Arbitral Tribunal shall assume the powers of an amiable compositeur or decide ex aequo et bono only if the parties have agreed to give it such powers. 28 The new ICC Arbitration Rules give more discretion to the arbitral tribunal than the former ones. The first sentence of paragraph 1 grants the freedom of choice of law to the parties. In the second sentence of paragraph 1, which deals with the absence of the parties agreement on applicable law, there is no reference to the conflict of laws rules. In this sense, the new rules went beyond the former rules which required designation of the proper law by a conflict of 26 E.g. Art. 7(1) of the European Convention on International Commercial Arbitration provides that in the absence of the parties agreement on applicable law the arbitrators shall apply the proper law under the rule of conflict that the arbitrators deem applicable..., 484 UNTS 364 (1961). 27 Declaration of the Government of the Democratic and Popular Republic of Algeria Concerning the Settlement of Claims by the Government of the United States of America and the Government of the Islamic Republic of Iran, 19 January 1981, 20 ILM 230 (1981), available also at ICC Arbitration Rules, 36 ILM 1604 (1997) at p. 1612, available also at org/court/english/arbitration/rules.asp.

26 INVESTOR/STATE ARBITRATION AND THE APPLICABLE SUBSTANTIVE LAW 9 laws analysis. 29 Under the new rules, the tribunal enjoys the freedom to apply any rules of law it determines to be appropriate for a particular case. It follows that the ICC tribunal is authorized to determine the applicable substantive law directly, without considering any conflict of laws rules. 30 Additionally, in both situations, either under the first either under the first or second sentence of paragraph 1, the tribunal must take into account the contract provisions and trade usages. The last paragraph of Art. 17 refers to the decision on the basis of equity. Such a decision is conditioned upon the parties express authorization given to the tribunal. This provision follows the approach of the ICSID Convention. (d) Iran United States Claims Tribunal In accordance with Art. V of the Claims Settlement Declaration (CSD), 31 the Iran US Claims Tribunal shall decide all cases on the basis of respect for law, applying such choice of law rules and principles of commercial and international law as the Tribunal determines to be applicable, taking into account relevant usages of the trade, contract provisions and changed circumstances. 32 This broad provision gives much discretion to the Tribunal in determining the appropriate rules of law. It provides a multi-system applicable law regime which is consistent with the political and practical circumstances under which this Tribunal operates and with the needs of the Tribunal while examining various types of claims before it. 33 It does not contain any explicit reference to the parties freedom of choice of law and in this context Art. V of the CSD may be considered as an exception to similar provisions found in e.g. the ICSID Convention, the Additional Facility Arbitration Rules, the UNCITRAL Arbitration Rules or the ICC Arbitration Rules. Although it is impossible to 29 The previous Rules (of 1975 and of 1988) in Art. 13(3) provided the following: The parties shall be free to determine the law to be applied by the arbitrator on the merits of the dispute. In the absence of any indication by the parties as to the applicable law, the arbitrator shall apply the law designated as the proper law by the rule of conflict which he deems appropriate, 15 ILM 395 (1976); 28 ILM 231 (1989). 30 See more in the chapter on the absence of agreed choice of law. 31 As noted, the Claims Settlement Declaration established the Iran United States Claims Tribunal., Declaration of the Government of the Democratic and Popular Republic of Algeria Concerning the Settlement of Claims by the Government of the United States of America and the Government of the Islamic Republic of Iran, 19 January 1981, 20 ILM 230 (1981), available also at 32 See also Final Tribunals Rules of Procedure (3 May 1983), reprinted in VIII Y. B. Com. Arb. 234 (1983) at pp See Mohebi, M., The International Character of the Iran United States Claims Tribunal, Kluwer Law International (1999) at p. 112; See CMI International, Inc. v. Iran,

27 10 CHAPTER I conclude that this Tribunal is not obliged to recognize an agreed choice of law, on occasions the practice of the Tribunal indicated that it has disregarded or rather avoided the parties agreement on applicable law. 34 The first part of Art. V mandates the Tribunal to examine and decide the case on the basis of law. 35 The Tribunal has several possibilities to select the proper law. It has been said that in the context of investor/state contract, Art. V of the Claims Settlement Declaration is an example of internationalizing the substantive rules. 36 This implies that in the first instance the international law rules and principles would be applicable to the particular case. The Tribunal is free to apply choice of law rules it determines to be applicable i.e. it is not bound by any national choice of law rules. This approach is widely accepted in the context of international arbitration. According to the commentators and practice of the Tribunal, the reference to the rules and principles of commercial and international law is understood as a package referring to the general principles of law. 37 The last part of the provision refers to the so-called secondary factors that should be taken into account when examining and deciding a particular case. It refers to: trade usages, contract provisions and changed circumstances. Award, 27 December 1983, 4 Iran U.S. C.T.R., at pp , where the Tribunal discussed Art. V of the CSD in the following terms: It is difficult to conceive of a choice of law provision that would give the Tribunal greater freedom in determining case by case the law relevant to the issues before it. Such freedom is consistent with, and perhaps almost essential to, the scope of the tasks confronting the Tribunal, which include not only claims of a commercial nature such as the one involved in the present case, but also claims involving alleged expropriations or other public acts, claims between the two Governments, certain claims between banking institutions, and issues of interpretation and implementation of the Algiers Declarations. Thus, the Tribunal may often find it necessary to interpret and apply treaties, customary international law, general principles of law and national laws, taking into account relevant usages of the trade, contract provisions and changed circumstances, as Art. V directs. 34 See e.g. American Bell International, Inc. v. Iran, Interlocutory Award, 11 June 1984, 6 Iran U.S. C.T.R. 74; According to Hanessian, G., General Principles of Law in the Iran United States Claims Tribunal, 27 Colum. JIL (1989) at p. 309 (as quoted in Mohebi, M., The International Character of the Iran United States Claims Tribunal, at p. 311) American negotiators are believed to have favored choice of law language sufficiently broad to permit the Tribunal to avoid application of Iranian law, as stipulated in many contracts expected to give rise to claims before the Tribunal ; See also Interlocutory Award in Anaconda-Iran, Inc. v. Iran, Interlocutory Award, 10 December 1986, 13 Iran U.S. C.T.R. at p. 232, where the Tribunal said: The Tribunal is of course required to take seriously into consideration the pertinent contractual choice of law rules, but it is not obliged to apply these if it considers it has good reasons not to do so. 35 See also Art. 33 of the Iran US Claims Tribunal Rules which provides in para. 2 the following: The arbitral tribunal shall decide ex aequo et bono only if the arbitrating parties have expressly and in writing authorized it to do so (3 May 1983), reprinted in VIII Y. B. Com. Arb. 234 (1983). 36 Mohebi, M., The International Character of the Iran United States Claims Tribunal, Kluwer Law International (1999) at p Ibid, at p. 122.

28 INVESTOR/STATE ARBITRATION AND THE APPLICABLE SUBSTANTIVE LAW 11 The provisions of a contract are treated by the Tribunal as one of the most important source when examining and deciding particular case The Methodology Employed by the Arbitral Tribunal The following methodology should be employed by the tribunal in order to determine the applicable substantive law to the particular case. First, in accordance with the principle of party autonomy, the tribunal should determine whether the parties have reached an agreement on applicable law. If the answer is positive then the tribunal should simply proceed to examine and apply the law (or rules of law) agreed by the parties. If the tribunal does not observe the parties agreement on choice of law, it exceeds its powers which in turn may lead to the nullity of the award. This issue will be discussed in a separate section. Furthermore, sometimes it is not so easy to identify whether the parties have made an agreement on the applicable law. In these cases the tribunal may search for an implicit agreement. If the tribunal finds that the parties did not agree on the applicable law, it will refer to the residual rule of the authorizing instruments. Under the ICSID Convention it will apply both the host State s law and international law. By contrast, the ICSID Additional Facility Arbitration Rules only prescribe a method for finding the applicable law. The UNICTRAL Arbitration Rules require a system of conflict of laws to be employed. The tribunal may apply any substantive rules it chooses in accordance with the Art. 17(1) of the ICC Arbitration Rules. The present study follows the methodology as outlined above. This means that the analysis distinguishes between agreed and non-agreed choice of law. In addition, the study considers some specific issues arising in the context of applicable law. Although, at first sight, the process of selecting the proper law for a particular case appears to be simple, in practice it may create some problems. The problems may arise not only in the context of finding the proper law. Also, once the applicable law is determined, its practical application may give rise to ambiguity. The issues that may arise in this context will also be discussed. For instance, the relationship of domestic law and international law, issues of annulment, decision ex aequo et bono etc. All these issues will be elaborated in light of both ICSID and non-icsid arbitral practice. It should be noted that the greater part of this research relies on ICSID case law. Decisions of other arbitral tribunals are analyzed to the extent that they relate to the applicable substantive law in the context of investment disputes. 38 See e.g. Amoco International Finance Corporation v. Islamic Republic of Iran, Partial Award, 14 July 1987, 27 ILM 1314 (1988).

29

30 CHAPTER II Agreed Choice of Law 1 The Principle of Party Autonomy It is widely accepted that parties are free to choose the law (or rules of law) applicable to their contractual relationship. All major international instruments acknowledge this freedom of choice of law. For example, the first sentence of Art. 42(1) of the ICSID Convention grants such a freedom to the parties. The same provisions can be found in the 1976 UNCITRAL Arbitration Rules, the Additional Facility Arbitration Rules and the 1998 International Chamber of Commerce Arbitration Rules. 1 Therefore, the parties freedom to choose the law governing their relationship is generally accepted and the arbitral tribunal is bound by the parties agreement on applicable law. Since the parties freedom of choice of law is widely recognized the next question would be which law or rules of law can be chosen by the parties. As will be illustrated in the next section, the parties can choose domestic law or 1 UNCITRAL Arbitration Rules, Art. 33(1); UNCITRAL Model Law, Art. 28(1); ICC Arbitration Rules, Art. 17(1); Additional Facility Arbitration Rules, Art. 54(1); Permanent Court of Arbitration, Art. 33(1); Art. 1.1 of the UNIDROIT Principles, at english/principles/contents.htm; Art. 7(1) of the European Convention on International Commercial Arbitration; See also Shihata, I. F. I./Parra, A. R., Applicable Substantive Law in Disputes Between States and Private Parties: The Case of Arbitration Under the ICSID Convention, 9 ICSID Review FILJ 183 (1994) at p. 188; It is appropriate to note that Art. V of the Claims Settlement Declaration is untypical in the sense that it contains no reference to the principle of party autonomy and as such is in contrast to other provisions which explicitly authorize the tribunal to apply the law (or rules of law) as agreed by the parties. The wording of Art. V of the CSD is understandable taking into account very difficult and specific circumstances under which it was agreed upon. 13

31 14 CHAPTER II international law or a combination of both. 2 Combined clauses on applicable law are common in the parties agreements. 3 The parties are free to choose different rules of law for different parts of their contractual relationship i.e. to employ a well-known technique named dépeçage. 4 This is confirmed in the Resolution adopted by the Institute of International Law in Article 6 of the Resolution states: Article 6 The parties have full autonomy to determine the procedural and substantive rules and principles that are to apply in the arbitration. In particular, (1) a different source may be chosen for the rules and principles applicable to each issue that arises and (2) these rules and principles may be derived from different national legal systems as well as from non-national sources such as principles of international law, general principles of law, and the usages of international commerce. 5 The parties have frequently exercised their freedom of choice of law. Since the arbitral tribunals derive their authority from the parties agreement they are obliged to recognize and uphold the parties agreement on choice of law. Such recognition may be illustrated by the words of R. J. Dupuy, the sole arbitrator in TOPCO v. Libya case who discussed whether the parties have the right to choose the law or the system of law which was to govern their contract. 6 He said: 25. The answer to this first question is beyond any doubt: all legal systems, whatever they are, apply the principle of the autonomy of the will of the parties to international contracts. As regards the merits, all legal systems confirm this principle which appears therefore as universally accepted, even though it may not always have the same meaning or the same scope Broches, A., The Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 136 Recueil des Cours 331 (1972-II) at p See e.g. Texaco Overseas Petroleum Company/California Asiatic Oil Company v. Libya, Award, 19 January 1977, 17 ILM 1 (1978) at p. 11; AGIP v. Congo, Award, 30 November 1979, 1 ICSID Reports Shihata, I. F. I./Parra, A. R., Applicable Substantive Law in Disputes Between States and Private Parties: The Case of Arbitration Under the ICSID Convention, 9 ICSID Review FILJ 183 (1994) at p. 189; Delaume, G. R., Law and Practice of Transnational Contracts, Ch. I, Booklet 1, Release 88-1, Oceana (1988) at pp. 2, Institute of International Law, Resolution on Arbitration Between States, State Enterprises or State Entities, and Foreign Enterprises, 12 September 1989, 5 ICSID Review FILJ 139 (1990) at p Texaco Overseas Petroleum Company/California Asiatic Oil Company v. Libya, Award, 19 January 1977, 17 ILM 1 (1978) at pp Texaco Overseas Petroleum Company/California Asiatic Oil Company v. Libya, Award, 19 January 1977, 17 ILM 1 (1978) at p. 11.