Roles of the different sources of applicable law

It follows from the above typologies that IIAs and the applicable arbitration rules identify three main sources of substantive law relevant for the adjudication of ISDS cases:

x the applicable IIA itself;

x general international law; and x domestic law of the host State.

It is likely that all three sources of law will play some role in resolving an investment treaty dispute. Thus, decisions regarding choice-of-law based on applicable-law clauses in IIAs have not been very different from choices made in the absence of such clauses.

This is not to suggest that the application of different rules of law (e.g., national vs. international) might not make a difference in the

144 Article 35(1) of the UNCITRAL 2010 Rules; Article 33(1) of the UNCITRAL 1976 Rules directs the tribunal to apply the choice-of-law rules it considers applicable.

145 For an attempt to distill principles relating to applicable law in different situations, see Douglas, 2009, pp. 39–133.

outcome of any given case; it can and it has.¹⁴⁶ The relevance and role of each source of law is examined in turn.

(i) Investment treaty

Some IIAs permit investors only to bring claims that a State has failed to abide by the substantive protections it promised in the treaty.¹⁴⁷ Even if the ISDS provision is wider than that and permits, for example, “any dispute relating to an investment” to be submitted to arbitration, allegations of violations of IIA obligations typically form the crux of the investor’s claim against the host State. In such cases, a tribunal is required to assess whether the respondent State’s conduct is consistent with the relevant treaty provisions. Thus, the treaty itself serves as the primary source of applicable substantive law.

(ii) Applicable rules and principles of international law Each investment treaty is part of international law and thus the application and interpretation of IIAs is further affected by international law, including general principles of international law and customary international law. These encompass various issues such as the attribution of conduct to a State, denial of justice, the minimum standard of treatment of aliens, circumstances precluding wrongfulness of State conduct, the calculation of compensation, etc.

Importantly, the customary international rules on treaty interpretation, codified in the Vienna Convention on the Law of

146 The application of domestic rather than international law was decisive in Libananco v. Turkey, in which the Turkish property law concept of

“teslim” determined whether the shares have been validly transferred to Libananco. Under Turkish law, which the tribunal applied, the answer was no, while under international law the transfer might well have been yes.

See Libananco v. Turkey, ICSID Case No. ARB/06/8, Award, 2 September 2011, paras. 133–173.

147 On the scope-of-ISDS clauses, see section II.B.

Treaties, serve as a guide to interpreting the provisions of the relevant IIA.

When an IIA refers to other international treaties, for example the ICSID Convention, the New York Convention, the WTO Agreements (e.g., the GATT, GATS or TRIMs), or the Articles of Agreement of the International Monetary Fund, such conventions are also incorporated into the IIA by reference.

(iii) Domestic law of the host State

Some IIA substantive provisions themselves refer to the domestic law of the host State. For instance, IIAs often contain a requirement for covered investments to be made in accordance with the law of the host State; an obligation on States to admit investments in accordance with its laws and regulations; and a requirement that an expropriation be carried out in accordance with domestic legal procedures. In such cases, the application of IIA provisions mandates consideration of host State law regardless of whether the IIA in question indicates that domestic law is one of the sources of applicable law.

Even when domestic law is not expressly mentioned anywhere in the IIA, it is quite likely to play a role in the decision. For example, there is no international law of property; to the extent that

“shares” are an investment, domestic law defines what shares are and how they can be legally transferred.

In addition, as previously mentioned, some IIAs contain broad ISDS clauses that allow for arbitration of any disputes “related to an investment”, “in connection with an investment” or other similar formulations. Where such a broad ISDS provision is complemented by an applicable-law provision allowing for the application of host State law, this is likely to mean that an investor may bring a claim which is partially or fully based on the host State’s alleged violations of its own domestic laws (as opposed to violation of the

IIA). To date, however, ISDS claims have almost invariably been based on alleged violations of IIAs.

Some IIAs permit investors to submit claims arising out of investment contracts, or contain umbrella clauses that might elevate breach of contract claims to the treaty level. In those instances, the host State's domestic law will likely be the basis for the tribunal’s decision, as investment contracts often select it as the law governing the contract.

Finally, investors are subject to all of the laws and regulations of the host State. In this regard, corporate law, tax law, administrative law and practice, labour law, and many other relevant areas of law will apply to the investor and to the investment. The failure of an investor to comply with applicable domestic laws and regulations could justify State acts and generally play a significant role in determining the extent of State liability. In the event that counterclaims are permissible, an investor’s failure to comply with domestic law can serve as a ground for a respondent State’s counterclaim (see section II.K).