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The Semantics of Applicable Law Clauses and the Arbitrator
Published online by Cambridge University Press: 21 May 2009
Extract
One of the great achievements of the Asser Instituut, under Voskuil's inspiration, has been the study and documentation of international arbitration. It may be appropriate therefore to present here a chapter on one aspect of arbitration on which documentation is scarce and about which little has been written.
The question we shall consider is the familiar one of applicable law: what is the law governing foreign investments made under an investment treaty? By what law should arbitrators be guided when they deal with international investment disputes? Some of the investment treaties concluded to promote and protect international investments answer these questions, which of course are essentially questions of private international law. The treaty rules on applicable law often refer arbitrators to rules of international law as well as to the national law of the host state (including its private international law). Thus, we are concerned with mat grey zone between public and private international law where it is often difficult to find one's way or to ascertain what rules should be applied: those of municipal law (of which private international law forms part) or those of (public) international law. It is widely held by international lawyers that rules of public international law take precedence over national law and therefore over private international law, whenever a conflict arises between them. This question, however, is controversial; U.S. doctrine, for instance, holds that national (U.S.) laws take precedence over international law if they are expressed in sufficiently clear terms.
- Type
- Research Article
- Information
- Netherlands International Law Review , Volume 39 , Special Issue S1: Law and Reality , October 1992 , pp. 231 - 255
- Copyright
- Copyright © T.M.C. Asser Press 1991
References
1. Cf., Restatement of the Law, Third, The Foreign Relations Law of the United States, § 115: ‘An act of Congress supersedes an earlier rule of international law or a provision of an international agreement as law of the United States if the purpose of the act to supersede … is clear …’.
The precedence of public international law in international cases cortcerning private law relationships is also controversial in the Netherlands. Cf., R. Kotting in his report (in Dutch) on extraterritorial legislation and private international law, Mededelingen van deNederlandse Vereniging voor Internationaal Recht [Reports of the Netherlands International Law Association], No. 90 (1984) p. 114.Google Scholar
The confusion surrounding applicable law in investment contracts is highlighted by SirJennings, Robert in, Bernhardt, R., ed., Encyclopedia of Public International Law, vol. 7 (1984) p. 281Google Scholar: ‘The possible overlap, and even conflation of public international law, private international law and domestic law is inevitably most apparent in respect of legal questions arising from some kinds of agreements made between a government acting for a sovereign State on the one hand, and a foreign corporation on the other. The clause of such an agreement, stating the law by which the agreement is governed or by which an arbitration shall be governed, may on occasion exacerbate this confusion … there are accommodated within the single formula two basically incompatible notions, the whole consequendy hovering indeterminately between international law and a municipal law system’. Similar confusion often exists in investment treaties.
2. Such a situation may arise for instance when a BIT makes no provision for arbitration between host country and investor, but only for arbitration between the two states concerned; a dispute about expropriation of the investment without adequate compensation may then become the subject of an arbitration between home and host country; it may also be that, even though the treaty prescribes arbitration between investor and host country, the latter blocks such proceedings or refuses to abide by the award, in which case the matter may have to be resolved by arbitration between the two states.
3. See the list of220 BITs at the end of mis paper. Not all of these were available at the time when the statistical analyses were made. Most of the statistical information is based on about 180 post-1980 BITs.
4. In the Abu Dhabi Oil arbitration (1951) the arbitrator found that prima facie the concession was governed by Abu Dhabi law but nevertheless excluded it on the ground that ‘it would be fanciful to suggest that in this very primitive region there is any settled body of legal principles applicable to the construction of modem commercial instruments’, 1 ICLQ (1952) p. 247.
5. It may even be the foreign investor and his local partners.
6. Another and quite different distinction that can be made—but with which we are not concerned here—is that between the substantive law, i.e., the law applicable to the merits of the point in question, and the procedural law governing the arbitration proceedings.
7. The BP award of 1973, the Texaco award (on the merits) of 1977 and the Liamco award of 1977. See R.B. von Mehren and P.N. Kourides: the Libyan nationalization cases, in 75 Am. J. Int L. (1981) p. 476.
8. Clause 28: This concession shall be governed by and interpreted in accordance with the principles of the law of Libya common to the principles of international law and, in the absence of such common principles, then by and in accordance with the general principles of law, including such of those principles as may have been applied by international tribunals.
9. This does not take away the fact that different applicable laws may be indicated in a treaty or contract to deal with different aspects of the relation between the parties or with different legal questions (so-called dépeçage). This is recognized in Art. 3.1 of the 1980 EC Convention on contractual obligations which provides that the parties, by their choice, ‘can select the law applicable to the whole or a part only of the contract’. A curious example of such multiple choices can be found in different provisions of the Shell Syria oil contract of 1985, 26 ILM (1987) p. 1186. Although multiple choices are permitted and do occur occasionally, the wisdom of creating such complications, even confusion, is doubtful.
The situation indicated in section 2.1 at n. 2 provides a quite different complication. In the BITs there referred to, the designation of applicable law in the clause on intergovernmental arbitration differs from that in the clause on arbitration between host country and investor; if the same question is successively submitted to the two arbitral tribunals, two different awards might be given as a result of different rules of law being applied. Whilst this has probably never happened and is unlikely to happen, it is not a desirable way of organizing the ‘applicable law system’ in a treaty.
10. UNGA Resolution 1262 (XIII).
11. 8 ILM (1969) p. 679.
12. The same question occurs in connection with Art 62 (fundamental change of circumstances) of the 1969 Vienna Convention, where a rational interpretation leads to the view mat an unforeseen change of circumstances may justify the adaptation of a particular provision of a treaty adequate to the circumstances changed, rather than termination of the treaty as a whole. Cf., Verzijl, J.H.W., International Law in Historical Perspective, vol. 6, pp. 359 and 364Google Scholar; also Peters, P. et al. , ‘Removal of Installations in the EEZ’, in NYIL (1984) p. 194.Google Scholar
13. Convention on the Setdement of Investment Disputes between States and Nationals of Other States, 18 March 1965, 575 UNTS 159.
14. There is a discrepancy between the English and French texts of the ICSID Convention: the French text refers to ‘principes de droit international’ while the English text refers to ‘rules’. Broches, A., in 136 Hague Recueil (1972) p. 391Google Scholar comments: ‘The difference is hard to explain … It seems to me in any event that “principles” cannot have been intended or have the effect of excluding specific “rules”’.
15. 19 ILM (1980) p. 1492.
16. There is one much earlier (1963) Sri Lankan BIT with Germany.
17. See the discussion on mistrust in paragraph 2.3 above, following n. 4.
18. BLEU = the Belgo-Luxemburg Economic Union.
19. Korea (1980), Singapore (1980), Sweden (1982), Norway (1985) and China (1986).
20. Ironically, it was BLEU which in 1978 concluded the first BIT with an unadulterated reference to host country law (see above at a 18).
21. The BITs with BLEU (1978) and Sri Lanka (1980) already mentioned and the BIT with China (1985), on the a+b+c pattern.
22. Note the reference to ‘the laws’ instead of ‘the law’; cf., section 2.8 below, at n. 33.
23. See section 2.5.
24. The only exception since 1980 is BLEU/Malta.
25. Viz., 152 out of a sample of 168 post-1980 BITs.
26. Out of 168 post-1980 BITs, 96 rely on the ICSBD Rules, 21 on the UNCTTRAL Rules, 3 on the ICC Rules and 17 on a choice to be made between these Rules and other rules containing applicable law provisions.
27. Viz., the BLEU BITs with China, Poland, Bulgaria, USSR and Czechoslovakia; the French ones with Hungary and Poland; the Italian one with Bulgaria; and the Netherlands BITs with China and Bulgaria.
28. See for examples the texts set out below, taken from the BLEU/China, BLEU/Poland, The Netherlands/China and Italy/Bulgaria BITs.
29. An analysis of the dispute settlement provisions of 33 BITs shows that 5 refer to ‘law’, 21 to ‘international law’, 4 to ‘public international law’ and 3 to ‘general international law’. Reference to the ‘rules’ thereof is made 15x, to the ‘principles’ 22x (11x to ‘rules and principles’), to standards 3x. These expressions are qualified 3x by ‘general’, 1x by ‘basic’, 3x by ‘relevant’, 13x by ‘generally recognized’, 4x by ‘adopted (or “accepted”) by both Contracting Parties’; ‘respect for the law’ occurs 3x; application of the provisions of the BIT itself was required, 28x; application of the provisions of other treaties between the two states, 14x; application of the provisions of the particular investment contract, 5x. The national law of the host country is mentioned, 13x; the corresponding conflict rules, 7x.
The ILC Yearbook 1985, vol. II, Part I, §§ 590–606 analyses a miscellany of references to applicable law in treaties, judicial decisions and state practice; some designations not encountered in BITs) are: ‘principles of law’ (§ 596), ‘principles of international comity’ (§ 606) and ‘the law of nations’ (§ 606).
30. Thus H. Mosler, in Bernhardt, R., ed., Encyclopedia of Public International Law, vol. 7, p. 92Google Scholar. Cheng, Bin, General Principles of Law (1953) p. 24Google Scholar, quoting the award in a 1903 Italy/Venezuela arbitration, differs: ‘A rule … is essentially practical and, moreover, binding … while a principle expresses a general truth … the application of which to reality produces a given consequence’.
31. Cf., Art 37(1) of the 1907 Hague Convention for the Pacific Settlement of International Disputes, quoted in paragraph 2.5 sub (b) above. It states that international arbitration has as its object the settlement of disputes between States by Judges of their own choice ‘et sur la base du respect du droit’. The usual translation is ‘respect for law’. The Dutch BITs refer to ‘respect for the law’, but do not presumably intend to change the meaning. H.-J. Schlochauer, commenting on this provision in Bernhardt, R., ed, Encyclopedia of Public International Law, vol. 1, p. 162Google Scholar, states that it allows arbitrators to base their decisions ‘not only on the principles of international law, but also — without special agreement between the parties — upon other legal principles and on equity (ex aequo et bono)’. Whatever the authors of the 1907 Convention (and the 1899 Convention which had the same wording) may have intended, it is doubtful whether the clause in the BITs means to authorize settlement ex aequo et bono.
32. E.g., the Finnish BITs with Egypt, Bulgaria and Hungary; and the Netherlands BITs with the Philippines, Yemen, Hungary, Oman and Bulgaria have been concluded in a single language: English.
33. A reference to ‘the law’ (le droit) includes subsidiary legislation such as rules and regulations, municipal bylaws etc.; while it is unclear whether these are included when reference is made to ‘the laws’ (les lots).
34. E.g., in BLEU/China, BLEU/Poland and Australia/China, see section 2.7 above. Art. 42 of the ICSID Convention also refers to ‘the law’ of the host country.
35. Even in authentic French texts such as that of France/Sri Lanka (1980), Art 9: ‘En ce qui concerne le présent Accord [this appears to be an erroneous translation of “subject to the present treaty”], il est précisé’ que les investissements visés sont réglés par les lois en vigueur sur le territoire [du pays hôte]’;snd France/China (1984), annexe: ‘L'arbitrage [entre investisseur et pays hôte] se fera conformément à la loi du [pays hôte] et conformément aux dispositions du présent Accord.’
36. Mann, F.A., contra, ‘The Theoretical Approach Towards The Law Governing Contracts Between States and Private Foreign Persons’, in Further Studies in International Law (1990) p. 267Google Scholar: ‘a reference to foreign law leads almost everywhere to the application of the foreign law referred to, whether or not it wishes to be applied, as is proven by the fact that in the field of contracts most countries deny any place to the doctrine of renvoi.’
His view is confirmed by the EC Convention of 1980 (referred to in paragraph 2.5(f) above). According to Art 15 of the Convention a choice of law made under Art 3 is a choice of that law without its conflict rules.
37. They are not necessarily part of the country's ‘laws’ (i.e., of the legislation), as few countries have codified this part of their law and much of it is case law.
38. See paragraph 2.6 above.
39. Cf., § 23 of the award in AAPL v. Sri Lanka, in 30 ILM (1991) p. 577 at p. 587 (see section 3.4 below). See also the passage on mistrust in section 2.3 above following n. 4.
40. Cf., Mann, , loc. cit n. 36, pp. 264–269Google Scholar. See also Art 7(1) of the EC Convention on Applicable Law quoted in section 2.5 above.
41. BLEU/China, protocol; Italy/China, protocol; Italy/Sri Lanka; Italy/Kuwait.
42. Netherlands/Bulgaria, protocol; Netherlands/China. Slightly different terms are used in two Italian BITs: ‘principles of general international law recognized by the Contracting Parties' (Italy/Bulgaria, Italy/Hungary).
43. Netherlands/Bulgaria refers to ‘the universally accepted principles of international law’ in Art. 6 on intergovernmental arbitration and to ‘the principles of international law accepted by both Contracting Parties’ in a provision of the Annex on arbitration between the host country and the investor. Presumably the same principles are meant.
44. ‘Universal’ acceptance need not be interpreted as unanimity, in the sense that one state's rejection of a rule disqualifies it A more flexible interpretation would insist on adherence by states from all parts of the globe, without giving any one state blocking power. Cf., the flexible definition of ‘consensus’ in the 1982 Law of the Sea Convention, Art 161(8).
45. Series A Nos. 20/21, p. 124. Cf., Cheng, Bin, op. cit n. 30, p. 299.Google Scholar
46. The eight countries are: Italy (5x), China (3x). Bulgaria and the Netherlands (each 2x) and BLEU, Hungary, Kuwait and Sri Lanka (each 1x). The seven BITs are identified in nn. 41 and 42.
47. Note mat, contrary to Art. 42( 1) of the ICSID Convention, he excluded Libyan conflict of laws.
48. Cf., Von Mehren, et al. , loc. cit. (a 7 above), pp. 497–500.Google Scholar
49. ICSID Rev.—FILJ (1986) p. 90. After the annulment the case was re-submitted to ICSID arbitration and a second award was rendered in 1988. A second claim for annulment was rejected in 1990. The second award and the second decision on annulment have not been published so far.
50. The tribunal had found that ‘only that part of Cameroonian law that is based on French law should be applied’.
51. ICSID Rev.—FILJ, loc. cit a 49, p. 111.
52. Cf., nn. 14 and 30 above.
53. ICSJD Rev.—FILJ, loc. cit. a 49, p. 112.
54. 26 ILM (1987) p. 647.
55. The use of the terms ‘rules’ and ‘principles’ as though they are interchangeable is surprising. Cf., a 14 above.
56. 26 ILM (1987) p. 658.
57. 30 ILM (1991) p. 577.
58. Art 8 contains the standard British ICSID clause, in which each state ‘consents to the submission to ICSID or any legal dispute with an investor which had not been resolved within 3 months through pursuit of local remedies or otherwise.
Art. 4 on compensation for losses provides that an investor whose investment suffers losses owing to armed conflict, revolution or similar causes shall be accorded treatment no less favourable than that which the host country accords to its own nationals or to investors of any third state.
59. The word Parties, although written with capital P, obviously refers to the parties to the dispute, and not to the Contracting Parties of the BIT.
60. Presumably this should be understood as aref erence to general and customary international law.
61. Art 3 of the BIT accords most-favoured-nation treatment to the investor, as does Art 4 (see n. 58) more specifically with regard to compensation for losses. It is interesting to note mat the tribunal bases its finding on these sources of law not on Art. 42 of the ICSID Convention, but on the ingenious argument that these sources apply under other BITs concluded by Sri Lanka and therefore apply at one remove (by implication) to a U.K. investor by virtue of bis right to most-favoured-nation treatment. This assumes that application of these sources (including domestic law) is more favourable to the investor, an assumption which is not at all obvious.
62. 30 ILM (1991) p. 628.
63. Art 157 is an unusual constitutional provision specifically relevant to BITs. It provides that any BIT approved by Parliament with the requisite qualified majority shall have force of law in Sri Lanka and, otherwise than in the interests of national security, no law shall be enacted and no executive or administrative action shall be taken in contravention of the provisions of that BIT.
64. Apart from diplomatic protection given by the investor's home country, but that does not usually or primarily rely on the legal merits of the case; such protection often is more a question of a political and economic (sometimes military) tug-of-war.
65. There is an exception, for instance, if the BIT only allows expropriation if the measure is not discriminatory or if it is not contrary to a specific undertaking; the host country is precluded then from adopting expropriatory laws discriininaring against investments made by investors of one particular country or from taking measures which are contrary to a specific undertaking.