APPLICABLE LAW UNDER INTERNATIONAL INVESTMENT TREATIES

Published date01 December 2014
Date01 December 2014

Investment treaty tribunals have adopted different approaches to the question of determining the law applicable to the dispute before them. This article explores the reasons for such variability, examining the significance of different treaty structures and the consequences of the extent to which they refer to the law of the Contracting Parties. It considers the negotiation of Art 42(1) of the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States and how it has been applied in different cases involving different treaty structures.

I. Introduction

1 Every tribunal established to resolve an investment treaty claim must decide the law applicable to the dispute.1 Answering this apparently simple question can turn out to be rather more complicated in practice and it is not susceptible to generalised rules. This article seeks to explain why the approach taken in one case may be quite different from that taken in another.

2 One reason why the issue defies generalisation stems from the variability in drafting of the over 3,000 investment treaties presently in

force.2 Four differences in treaty structures bear upon the applicable law issue. First, States have taken different approaches on the inclusion and expression (or not) of applicable law clauses in their treaties. Second, the treaties vary by the jurisdiction ratione materiae granted to tribunals.3 Third, many treaties give claimants a choice of arbitral rules; those rules do not treat applicable law in identical terms. As a result, tribunals applying the same treaty, but under different arbitration rules, could conceivably decide the applicable law issue differently.4 Fourth, treaties vary by the extent to which they expressly refer to the local law of their Contracting Parties. Some refer to each Party's law concerning the nationality of natural persons when defining who has standing to make a claim. Some will refer to each Contracting Party's law when defining its territory for the purposes of the treaty's territorial application. Some will, for example, refer to each Party's law regarding entitlements to permits or licences which may constitute investments.5 Other treaties are essentially silent on these definitional matters.

3 To these differences in treaty formulation can be added the variability in approaches taken by tribunals on this issue when there is no mandatorily worded express choice of law.6 Given that investment treaty tribunals operate on a “flat” international plane, and that there is no formal doctrine of stare decisis in international law, no tribunal is bound to follow the approach taken by any other tribunal.

4 Choosing the law applicable to a dispute is generally viewed as one of the attributes of the exercise of party autonomy.7 In the

investment treaty context, two types of party autonomy exist: (a) the autonomy of the State Parties exercised when formulating the terms of the treaty (including the arbitration mechanism to which any claimant must adhere when submitting a claim);8 and (b) that of the parties to a specific dispute in agreeing how their dispute will be resolved under the said treaty.9 Choices pertaining to the applicable law generally result from the exercise of the States' autonomy, rather than that of the disputing parties, although some tribunals have relied heavily upon the disputing parties' conception of the applicable law when the State Parties have not designated the applicable law.10

5 Where the State Parties have specified an applicable law clearly, tribunals have had little difficulty in ascertaining and applying it. The problem arises when the treaty is silent on the issue or when multiple

sources of law are stipulated with no ranking of priority. In the former case, the tribunal may either apply a default rule or find an implicit choice of law (usually finding that since the arbitration has been initiated pursuant to an international treaty, public international law applies in whole or in part). In the case of multiple sources of law, the tribunal must discern the Parties' intention; when confronted with these sorts of clauses, tribunals regularly find that the investment treaty takes priority over any other source of applicable law. Some find that the treaty has overriding, almost exclusive importance; others find that the treaty and the host State's law apply.

6 As noted above, the applicable law issue can also be shaped by the subject-matter jurisdiction granted to tribunals. The North American Free Trade Agreement between the Governments of Canada, the United Mexican States and the United States of America11 (“NAFTA”), for example, contains a public international law governing law and NAFTA tribunals have jurisdiction to determine breach of a limited list of treaty obligations (and no more); their jurisdiction does not extend to such matters as deciding breach of contract claims between an investor and a state entity.12 Other treaties grant a broader jurisdiction which may extend to alleged breaches of investor-state contracts. Tribunals established under those treaties have a more expansive jurisdiction than NAFTA tribunals; questions then arise as to the law applicable to the contract over which the tribunal has been granted jurisdiction. Compañiá del Aguas Aconquija SA and Vivendi Universal SA v Argentine Republic,13 a decision of an ICSID ad hoc Annulment Committee, for example, distinguished between the proper law of the contract and the law applicable to alleged breaches of the treaty.

7 Quite apart from the issue of subject-matter jurisdiction is the question of what legal rights and interests are protected by the treaty. When treaties define types of investments they refer to interests derived from rights created by and under municipal law. For example, shares in a company are derived from the company's gaining its legal personality under the law of a State. Concessions are granted pursuant to a State's

legislation. Intellectual property rights, created initially under the laws of one State, will typically be registered and given effect under the law of other States. These all generally fall within treaty definitions of “investment”, leading one naturally to look to the law of the State pursuant to which the legal rights or interests are created in order to understand their nature.

8 This has led Zachary Douglas to formulate no less than 12 separate rules on applicable law in international investment law.14 He observes that the diversity of legal relationships that arise in an investment dispute necessitates the use of different applicable laws, positing the image of a “mosaic of applicable laws” which is quite unlike the classical international law position which, in its strictest formulation, holds that public international law plays an exclusive role in deciding international disputes and questions of municipal law are to be treated as questions of fact.15

9 Whether it is a mosaic or the legal equivalent of a Rubik's Cube, the applicable law issue can generate questions going to the heart of the relationship between municipal and international law and the tribunal's own conception of its role as an international tribunal. While certain basic features of the applicable law question are common to all treaty disputes — the rule that in the event of conflict between a State's law and its international obligations, the latter prevails being a good example — there are many subsidiary issues generated by differences in treaty structures.

10 To attempt to explain how this issue has evolved, it is appropriate to begin with the foundational treaty for much of present-day investment treaty arbitration, the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States16 (“ICSID Convention”). In the early days of investment treaty-making, the International Centre for Settlement of Investment Disputes (“ICSID”) was considered to be the only available forum and many treaties were negotiated with the ICSID Convention's provisions in mind. One such provision is the Convention's applicable law clause, Art 42(1), and one can see that the choices and compromises made in its formulation foreshadowed some of the issues that tribunals encountered after the Convention entered into force and disputes began to be arbitrated.

II. Article 42(1) of the ICSID Convention

11 Article 42(1) provides:

The Tribunal shall decide a dispute in accordance with such rules of law 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.

12 The first sentence of Art 42(1) embraces the role of party autonomy in recognising that the parties' agreement on the applicable law must be applied by the tribunal. It warrants noting that the phrase “such rules of law as may be agreed” is capacious and does not restrict the parties to agreeing on a single law.17

13 The second sentence is a default (or “supplemental”) rule which applies when there is no agreement. In this case the tribunal must apply two sources of law, the law of the host State (unless its conflict of law rules point to the law of some other State) and such rules of

international law as may be applicable.18 The inclusion of two sources of law reflected both the ICSID arbitral process' international character and the Convention's need to encompass all types of investment disputes (not just most of them) that could be submitted to the future Centre.19 Both considerations militated against an exclusively domestic law rule.20

14 While the legal experts consulted in the ICSID Convention's elaboration easily agreed on what became the first sentence of Art 42(1), formulating the second sentence was more controversial. Developing countries' legal experts argued that the host State's...

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