Treaty provisions on applicable law

There is no consistent approach to the question of applicable law in IIAs. The majority of treaties can be placed in one of four categories with respect to the sources of law that they instruct tribunals to apply: (i) the IIA and applicable international law; (ii) the IIA, applicable international law and host State's domestic laws;

(iii) the law agreed upon by the disputing parties; and (iv) no provision that instructs tribunals on the applicable law. Examples of each are given below.

(i) The treaty and applicable international law

The Energy Charter Treaty (ECT), in Article 26(6), provides that a tribunal “shall decide the issues in dispute in accordance with

141 Piero Foresti et al. v. South Africa, ICSID Case No. ARB(AF)/07/1, Letter Regarding Non-Disputing Parties, 5 October 2009.

142 The procedural law governing the arbitration is primarily drawn from the applicable arbitration rules as complemented or modified by the ISDS provisions in the treaty itself. In addition, the law of the place of arbitration is a relevant source of procedural law in non-ICSID Convention cases. The law of the place of arbitration governs, in particular, imposition of provisional measures (see section II.I) and setting aside the arbitral award by courts at the place of arbitration (see section II.Q.1). In an ICSID Convention case, the Convention itself governs those matters as ICSID Convention arbitrations are de-localized.

this Treaty and applicable rules and principles of international law”. The NAFTA States took the same approach in Article 1131 by referring to the NAFTA itself and applicable rules of international law.¹⁴³ Both the ECT and NAFTA Chapter 11 limit claims made by investors to allegations of violations of substantive protections found in the treaty. The applicable law provisions in each emphasize that the tribunal is limited to deciding those matters.

(ii) The treaty, applicable international law and domestic laws of the host State

This type of provision makes explicit reference to host State law. For example, Article 13(5) of the Azerbaijan-Croatia BIT (2007) provides:

“Dispute[s] shall be resolved in accordance with law, applying the terms of this Agreement, national legislation of the Contracting Party to the dispute, and principles of public international law.” (Emphasis added).

Another example is Article 11(5) of the Nigeria-Turkey BIT (2011):

“The arbitration tribunal shall take its decisions in accordance with the provisions of this Agreement, the laws and regulations of the Contracting Party involved in the dispute on which territory the investment is made (including its rules on the conflict of laws) and the relevant principles of international law as accepted by both Contracting Parties.”

(Emphasis added).

143 This formulation begs the question of what rules are “applicable”. This is left to be determined by an arbitral tribunal adjudicating a specific dispute.

On its face, this type of provision gives greater prominence to host State law. Usually, it goes together with a broad ISDS clause that permits all disputes relating to/connected with the investment to be submitted to arbitration. Host State law may be relevant, for example, if an investor’s claim alleges a violation of domestic law or of an investment contract (which chooses the host State law as the law governing the contract).

Post-2004 IIAs concluded by the United States present an interesting example as they prescribe different applicable laws depending on the claimant’s cause of action: (1) where a claimant alleges a violation of a treaty obligation, the applicable law consists of the treaty and applicable international law; (2) where a claim is based on the alleged violation of an investment authorization or an investment contract, the applicable law is specified by the relevant authorization or contract — but if they do not specify the governing law, then it is the law of the respondent State complemented by applicable rules of international law (e.g., Article 30 of the Uruguay-United States BIT (2005)). These provisions emphasize the link between applicable law and the authority of the tribunal to consider particular claims.

(iii) Law agreed by the disputing parties

Article 10(4) of the China-Netherlands BIT (2004) states:

“The ad hoc tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In absence of such agreement the tribunal shall apply the law of the Contracting Party to the dispute (including its rules on the conflict of laws), the provisions of this Agreement and such rules of international law as may be applicable.” (Emphasis added).

This provision’s approach reflects the frequent practice in international transactions between private parties in which they

choose a law to govern their relations. The same principle of party autonomy manifests itself in contracts concluded between investors and host States. Such contracts may designate the law of the host State, of the investor’s home State, or of a third State, as the governing law. The provision also contains a default choice-of-law regime that applies in the absence of a special agreement between the parties (domestic law of the host State, the treaty and applicable rules of international law), which is helpful in situations where there is no underlying contract between the investor and the host State.

(iv) No provision on applicable law

Some IIAs are silent regarding the applicable law in ISDS cases.

In this situation, the applicable arbitration rules will provide a default solution. For instance, 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. 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.”

The ICSID Convention thus gives primacy to the domestic law of the host State unless the parties otherwise agree. This is typically the case in investment arbitration, where the investment treaty (including its applicable-law clause, if any) represents the law agreed to by the parties.

The UNCITRAL Rules provide that in the absence of agreement between the parties, the tribunal shall apply the law “which it

determines to be appropriate”.¹⁴⁴ The same provision is found in the ICC Rules (Article 17).

The UNCITRAL and ICC rules are used in private commercial disputes as well as in investor-State arbitration. These rules give tribunals more discretion to determine the applicable law, which is often seen as desirable because it is difficult to foresee the appropriate law applicable to all situations in advance.¹⁴⁵ At the same time, arbitral practice to date shows that such broad clauses are unlikely to lead to any significant changes in result, compared with situations governed by Article 42(1) of the ICSID Convention.