Applicable Law in International Investment Disputes

APPLICABLE LAW IN INTERNATIONAL INVESTMENT DISPUTES

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

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Table of Contents

ABBREVIATIONS

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INTRODUCTORY NOTE

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ACKNOWLEDGEMENTS

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

1 1 4 6 6 7 8 9 11 13 13 15 15 16 16 17 18 18 19

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

21 24 25 26 27 29 29 32 39 56 56 57 57 59 59 64 66 74 79 80 80 83 84 84 85 85

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(iii) AGIP v. Congo (breach of a stabilization clause leads to unlawfulness of nationalization) (iv) LETCO v. Liberia (in the presence of a stabilization clause nationalization is justified if it meets required criteria) (v) Amoco v. Iran (breach of a stabilization clause does not lead to unlawfulness of nationalization as long as it is not expressly prohibited) c) Concluding remarks 6 Limitations on the Parties’ Freedom to Choose the Applicable Law (a) Relevance of mandatory norms and public policy CHAPTER III: ABSENCE OF AGREED CHOICE OF LAW 1 Methods for Determining the Absence of the Parties’ Agreement on Choice of Law 2 Application of the Residual Rule of Article 42(1) of the ICSID Convention (a) Arbitral practice (i) Amco v. Indonesia (parallel application of the host state’s law and international law) (ii) SOABI v. Senegal (application of the host state’s law only) (iii) Tradex v. Albania (international law used as guidance for the interpretation of the host state’s law) (iv) CDSE v. Costa Rica (in the event of concurrence between the two legal systems international law may be applied only) (b) Concluding Remarks 3 Absence of the Parties’ Agreement on Choice of Law in Other Arbitration Systems (a) Arbitral practice (i) Sapphire v. National Iranian Oil Company (the parties’ intention excludes the application of any national legal system) (ii) Wintershall v. Qatar (application of the closest connection test led to the applicability of the host state’s law only) (iii) The Rakoil Case (a-national law determined as the applicable law)

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91 92 93 96 98 98 103 103 106 107 107 113 116 119 122 123 127 127 133 139

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(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]) (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) (vi) Phelps Dodge Corp. and OPIC v. Iran (international law and the Treaty of Amity apply to the issue of expropriation) (b) Concluding remarks CHAPTER IV: THE ROLE OF INTERNATIONAL LAW AND ITS RELATION TO DOMESTIC LAW CHAPTER V: ISSUES OF ANNULMENT 1 Necessity of the Review Process 2 Annulment Under the ICSID Convention (a) Generally (b) Manifest excess of powers and the Non-application of the proper law (c) Arbitral Practice (i) Klöckner v. Cameroon (failure to rely on specific legal source led to annulment) (ii) Amco v. Indonesia (failure to apply one important provision led to annulment) (iii) MINE v. Guinea (technical error does not warrant annulment) (iv) Wena Hotels v. Egypt (in case of collision between the two legal systems international law prevails) (d) Concluding remarks 3 Setting Aside of Arbitral Awards in Non-ICSID Investment Arbitration (a) Generally on review of non-ICSID arbitral awards (b) Proper law and nullity (c) Arbitral practice (i) The Czech Republic v. CME (decision based on part of applicable law only does not warrant annulment) (ii) Mexico v. Metalclad (a mere reference to the wrong provision of the applicable treaty led to annulment) (iii) Mexico v. Feldman (no reference to the provision of the applicable treaty does not warrant annulment) (d) Concluding remarks

142 149 151 152 155 165 165 166 166 168 169 169 174 178 181 185 187 187 190 192 192 201 207 214

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CHAPTER VI: PROHIBITION OF A NON-LIQUET

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CHAPTER VII: DECISION EX AEQUO ET BONO 1 Generally 2 Amiable Composition or ex aequo et bono 3 Express Agreement on a Decision ex aequo et bono (a) Original agreement (b) Subsequent agreement (c) Possibility of dépeçage 4 No Authorization to decide ex aequo et bono (a) Klöckner v. Cameroon 5 Application of Both Law and Equity (a) Benvenuti & Bonfant v. Congo 6 Equity within the Law 7 Limits on Decision ex aequo et bono 8 Concluding Remarks

219 219 221 222 222 223 223 224 224 226 226 228 229 229

CHAPTER VIII: SUMMARY OF CONCLUSIONS

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TABLE OF CASES

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OFFICIAL DOCUMENTS

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BIBLIOGRAPHY

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Abbreviations

AAA ADRLJ AJIL Arb. Int. Art(s). BIT(s) BYIL Ch. Co. Colum. JIL CSD D.D.C. Doc. ECT ed. e.g. F. Supp. FILJ Harv. ILJ History of the Convention, Vol. I History of the Convention, Vol. II ICC ICCA ICJ ICSID

American Arbitration Association Arbitration and Dispute Resolution Law Journal American Journal of International Law Arbitration International Article(s) Bilateral Investment Treaty(ies) British Year Book of International Law Chapter Company Columbian Journal of International Law Claims Settlement Declaration Federal District Court for the District of Columbia Document Energy Charter Treaty edition exempli gratia (for example) Federal Supplement Foreign Investment Law Journal Harvard International Law Journal Analysis of Documents Concerning the Origin and the Formulation of the ICSID Convention (1970) Documents Concerning the Origin and the Formulation of the ICSID Convention (1968) International Chamber of Commerce International Council for Commercial Arbitration International Court of Justice International Center for Settlement of Investment Disputes

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ILC ILM ILR Ibid. i. e. Iran-U.S. C.T.R. JIA KLI LCIA Ltd. MERCOSUR NAFTA No. OPIC p(p). para(s). PCA PCIJ Prof. Rep. Rev. Sec. Ser. T.I.A.S. UK UN UNCITRAL UNCTAD UNIDROIT UNTS US U.S.T. v. VCLT Vol(s). Y. B. Com. Arb. YBILC

ABBREVIATIONS

International Law Commission International Legal Materials International Law Reports Ibidem (the same) id est (that is to say) Iran-United States Claims Tribunal Reports Journal of International Arbitration Kluwer Law International London Court of International Arbitration Limited Mercado Comun del Sur North American Free Trade Agreement Number Overseas Private Investment Corporation Page(s) Paragraph(s) Permanent Court of Arbitration Permanent Court of International Justice Professor Reports Review Section Series Treaties and other International Acts Series United Kingdom United Nations United Nations Commission on International Trade Law United Nations Conference on Trade and Development International Institute for the Unification of Private Law United Nations Treaty Series United States United States Treaties versus (against) Vienna Convention on the Law of Treaties Volume(s) Yearbook of Commercial Arbitration Yearbook of the International Law Commission

Introductory Note

This study analyzes the issue of applicable substantive law in the context of investor/State arbitration conducted before ICSID tribunals, Additional Facility tribunals1, 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.

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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.

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.

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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. 31-35, 190-270. 2 See generally Delaume, G. R., State Contracts and Transnational Arbitration, 75 AJIL 784 (1981). 3 The ICSID Convention entered into force in 1966. It created the International Center for Settlement of Investment Disputes (ICSID) which administers the conciliation and arbitration

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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 Agreement12 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 http://www.worldbank. 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 http://www.worldbank.org/icsid/amend.htm. 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). 8 1998 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. 643. 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. 399-401. 12 See Arts. 17-18 of the Free Trade Agreement between Columbia, Mexico and Venezuela, at http://www.sice.oas.org/cp_bits/english99/main.asp.

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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 Tribunal14 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 http://www.sice.oas.org/cp_bits/english99/main.asp. 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 http://www.iusct.org/claims-settlement.pdf. 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. 190-270. 14

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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.

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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.21

19

Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at p. 553. 20 575 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

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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 http://www.worldbank.org/icsid/amend.htm.

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(b) UNCITRAL Arbitration Rules Parties to investment disputes have frequently submitted to international commercial arbitration either institutionalized23 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 33 1. 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

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E.g. the first award in SPP v. Egypt was rendered by an ICC tribunal. 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 http://www.uncitral.org/en-index.htm; 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, 1993. 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). 24

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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, 1998. 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 http://www.iusct.org/claims-settlement.pdf. 28 1998 ICC Arbitration Rules, 36 ILM 1604 (1997) at p. 1612, available also at http://www.iccwbo. org/court/english/arbitration/rules.asp.

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 http://www.iusct.org/claims-settlement.pdf. 32 See also Final Tribunals Rules of Procedure (3 May 1983), reprinted in VIII Y. B. Com. Arb. 234 (1983) at pp. 234-255. 33 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,

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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. 267-268, 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. 115. 37 Ibid, at p. 122.

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.38

4 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).

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 http://www.unidroit.org/ 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

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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 1989. 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 . . .7

2

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. 389. 3 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 313. 4 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, 9-12. 5 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. 141. 6 Texaco Overseas Petroleum Company/California Asiatic Oil Company v. Libya, Award, 19 January 1977, 17 ILM 1 (1978) at pp. 11-14. 7 Texaco Overseas Petroleum Company/California Asiatic Oil Company v. Libya, Award, 19 January 1977, 17 ILM 1 (1978) at p. 11.

AGREED CHOICE OF LAW

15

On the basis of the above, it is possible to conclude that the freedom of the parties to choose the law applicable to the merits of their dispute represents the basic principle governing the law to be applied by tribunals. The agreed choice of law is the subject of the analysis in the next section.

2 Choice of Law Modalities The parties’ freedom of choice of law may be exercised in the following ways: by inserting a clause on applicable law in a direct agreement between the parties (e.g. a concession agreement), through the operation of a treaty (BIT or multilateral) containing a clause on applicable law or through the operation of domestic legislation containing such a clause. In the latter two cases, a choice of law clause is transformed into the parties’ agreement on applicable law upon the investor’s acceptance of the host State’s offer of consent to jurisdiction.

(a) Direct agreement between the host state and the investor The parties can exercise their freedom of choice by direct agreement between them, in other words, by including the clause on applicable law in any investment agreement. Such an explicit choice of law, made in the direct agreement between the host State and the investor, binds the tribunal and represents an essential element of its “terms of reference”. An example for a direct agreement on choice of law can be found in the 1993 ICSID Model Clauses: Clause 10 Any Arbitral Tribunal constituted pursuant to this agreement shall apply specification of system of law [as in force on the date on which this agreement is signed]/[subject to the following modifications: . . . ].8

Another example is provided by the Arbitration Rules of London Court of International Arbitration (LCIA): (iv) The governing law of the contract shall be the substantive law of . . .9

As already mentioned, the parties have great latitude in choosing the law that will govern their relationship. A survey of choice of law clauses stipulated in

8

4 ICSID Reports 364. LCIA Recommended Clauses for Contracts, available at http://www.lcia-arbitration.com/ arb/uk.htm. 9

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parties’ agreements indicates that they are quite different. Accordingly, the possible choices of substantive law are the following: (i)

Law of the host state as the law chosen by the parties

An example of a choice of law clause that refers only to the host State’s law can be found in the Participation Agreement between New Zealand and Mobil Oil NZ which provided for ICSID arbitration and stated the following: 7.7. An Arbitral Tribunal shall apply the law of New Zealand.10

Another example of a clause that expressly referred to the host State’s law as the applicable law is found in the Service Contract of 7 August 1979, between the National Iranian Oil Company (NIOC) and Ultramer Company. It read as follows: Article 25 This Service Contract shall be governed by and interpreted in accordance with the Laws of Iran.11

Clauses with such a straightforward and exclusive stipulation in favor of the host State’s law are rare, in particular, nowadays. The host State will probably insist on the applicability of its own law but, usually, a foreign investor will not agree on such a choice of law clause and would like to subject it to a stabilization clause or to choose the host State’s law together with international law as the law applicable to their relationship.12 (ii) The host state’s law subject to a stabilization clause One of the possibilities that may be employed when drafting a choice of law clause is to choose the host State’s law as the law applicable to the parties’ relationship but to stabilize it as much as possible. Stabilization clauses serve to protect the investor from subsequent changes of the host State’s law that could affect the investment. They were frequently stipulated in older investment agreements.13 Stabilization clauses will be discussed in more detail in a separate section. 10

Attorney-General of New Zealand v. Mobil Oil New Zealand, Decision of the High Court of New Zealand, 1 July 1987, 4 ICSID Reports 123. 11 Quoted in Delaume, G. R., Law and Practice of Transnational Contracts, Ch. I, Booklet 1, Release 88-1, Oceana (1988) at p. 21. 12 See 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 pp. 199, 200; Comeaux, P. E./Kinsella, N. S., in Transnational Contracts (edited by Stewart, C. E.), Commentary I.1., Oceana (1997) at p. 31. 13 See e.g. Texaco Overseas Petroleum Company/California Asiatic Oil Company v. Libya, Award, 19 January 1977, 17 ILM 1(1978); AGIP v. Congo, Award, 30 November 1979, 1 ICSID Reports 313.

AGREED CHOICE OF LAW

17

In Atlantic Triton v. Guinea, the applicability of the host State’s law was subject to a stabilization clause. Article 14 of the parties’ contract of 1981 contained the following clause: Article 14 – Law The term “law” in the present Agreement refers to Guinean law. However, Guinean law will be applicable only insofar as it is not incompatible with the terms of the present Agreement, and where it is not more restrictive than the law in force at the date of entry into force of the present Agreement.14

Therefore, the applicable law in that case was the law of Guinea but only to the extent of its compliance with the parties’ agreement. The last part of the provision is a stabilization clause which provides that any later, restrictive changes of the domestic law i.e. Guinean law will not apply to the parties’ agreement. (iii) Law of a third state as the law chosen by the parties One of the possibilities is to choose the law of a third State or the law of the investor’s home State, but this happens rarely. The host State probably would not agree to this option. Also, normally many elements of the investment agreement will be connected to the law of the host State so that such an option would probably not be practical even for investor. But exceptions can be found in loan contracts. The governing law of a loan relationship is normally the law of the lender’s country. Sometimes the parties may stipulate that the law of an important financial center (e.g. New York) governs their relationship. In any case, loan contracts usually stipulate the domestic law of the third State as the law solely governing the parties’ relationship in contrast to other investor/State contracts, which usually contain references to international law in addition to domestic law.15 Another exception can also be found in some construction contracts where Swiss law appears to be preferred as a “neutral law”.16 In Colt Industries Operating Corporation, Firearms Division v. Government of the Republic of Korea, the clause on applicable law provided for the application of the investor’s home State. That case concerned technical and licensing arrangements that may be most closely connected with the licensor’s home country.17 14

Atlantic Triton v. Guinea, Award, 21 April 1986, 3 ICSID Reports 23. Delaume, G. R., ICSID and the Transnational Financial Community, 1 ICSID Review – FILJ 237 (1986) at p. 243. 16 von Schlabrendorff, F., Choice of Substantive Law in International Long-term Infrastructure Contracts, 9 ADRLJ 3 (2000) at p. 8. 17 Colt Industries Operating Corporation, Firearms Division v. Government of the Republic of Korea (ICSID Case No. ARB/84/2), Settlement, 3 August 1990, Unreported; See 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. 199. 15

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Sometimes, parties’ agreements may provide for the application of the law of the third State if that is a practical and desirable solution in the circumstances of the case.18 In such a case, the parties should explicitly stipulate that such a choice of law is actually made.19 (iv) International law alone as the law chosen by the parties The parties may choose to completely internationalize their relationship by reference to international law only.20 These clauses can be also found in some multilateral treaties and will be discussed in a section dealing with the choice of clauses found in such treaties. This option is, generally, not advisable due to the fact that certain matters of investment activity would be connected to different technical provisions of the host State’s law and logically be governed by that law (e.g. the employment of local staff, customs and exchange regulations etc.). Therefore, such a choice of law would not be realistic.21 (v) The law of the contract as the law chosen by the parties Another inadvisable option is to choose the law of the contract itself as the applicable law to the parties’ relationship.22 Such a choice of law could create practical problems because it possibly could not answer all the questions and it is not the best method to avoid the application of e.g. host State’s law if it is 18

One of the recommended clauses stipulates a neutral body of law such as New York law as a governing law: “This Agreement and all documents executed in connection with this Agreement, and their validity, enforcement, and interpretation, and all disputes arising under any such document, shall be governed by the substantive laws of the State of New York (without regard to any conflict of laws principles)”, Comeaux, P. E./Kinsella, N. S., in Transnational Contracts (edited by Stewart, C. E.), Commentary I.1., Oceana (1997) at p. 31. 19 Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at p. 562. 20 Although it did not refer to international law alone, the Agreement of 1962 between the Republic of Vietnam and foreign oil companies (quoted by Delaume G. R., in State Contracts and Transnational Arbitration, 75 AJIL 784 (1981) at p. 797, provided the following clause on applicable law: “The arbitrators shall base their decision on equity and the principles of international law”. Furthermore, “internationalization clauses may refer to such norms as those provided by the general principles of law, the principles of law recognized by civilized nations and/or applied by international tribunals, the principles of law common to the host State and the country of the investor or similar formulas the precise connotation of which is not always as evident as the motivations of the draftsman”, in Delaume G. R., How to Draft an ICSID Arbitration Clause, 7 ICSID Review – FILJ 168 (1992) at p. 185. 21 Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 563-564. 22 Bowett, D. W., State Contracts with Aliens: Contemporary Developments on Compensation for Termination or Breach , 59 BYIL 49 (1988) at p. 50.

AGREED CHOICE OF LAW

19

wanted.23 If the contract does not provide an answer to some question the arbitral tribunal can treat it as an absence of agreement on the applicable law concerning that particular question. In accordance with the prohibition on a finding of non liquet, which is generally accepted in international adjudication, the tribunal cannot refuse to answer some questions. Consequently, it may decide to fill gaps by applying domestic law or general principles of law. Realistically, a choice of law clause of this type should be supplemented by reference to domestic law or international law. In the Amoco case, the Khemco Agreement of 1966 concluded between Amoco and the National Petrochemical Company (the company controlled by the Government of Iran)24 contained a provision on “Applicable Law” in the following terms: Article 30 “Applicable Law” 1. This Agreement shall be construed and interpreted in accordance with the plain meaning of its terms, but subject thereto, shall be governed and construed in accordance with the laws of Iran. 2. The provisions of any current laws and regulations which may be wholly or partially inconsistent with the provisions of this Agreement shall, to the extent of any such inconsistency, be of no effect in respect of the provisions of this Agreement.25

By this provision the parties agreed, first, on the agreement itself as the law applicable to their relationship but supplemented by Iranian law. Under the paragraph 2, the terms of the agreement are binding on the parties even if they are found to be inconsistent with the law of Iran. This is the way the Iran–United States Claims Tribunal interpreted the above provision. (vi) Compound choice of law clause in the direct contract between the parties Another possibility is to choose both the host State’s law and international law as the law governing the contractual relations. Such combined choice of law clauses are frequently stipulated in direct agreements between a host State and an investor and prove to be realistic. The investment will take place in the host State and it will be closely linked to the law of that State and normally subject 23

Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at. pp. 564-565. 24 The Tribunal found that the Government was not party to this Agreement since NPC acted only for itself when it concluded the Khemco Agreement. The Concurring Opinion of Judge Brower disagreed with this conclusion because of the fact that the Agreement was approved and ratified by the Government and consequently Iran was bound by it. The case is discussed in a section dealing with stabilization clauses., Amoco International Finance Corporation v. Islamic Republic of Iran, Partial Award, 14 July 1987, 27 ILM 1314 (1988). 25 At p. 1353.

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to its rules. At the same time, the applicability of international law secures the foreign investor if the host State’s law violates the international minimum standards. Therefore, such a clause on applicable law agreed by parties would be the most acceptable solution and in the interest of both parties. These combined clauses on applicable law can be found not only in recent investor/State agreements but also in some older agreements. An example is a choice of law clause contained in the Deeds of Concession concluded between two American companies and the Government of Libya which stipulated the following: (7) 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.26

This clause refers to the Libyan principles of law that are common to the international law principles. In the absence of such concurrence, the tribunal must apply the general principles of law. Another example is a clause contained in the parties’ Agreement of 1969, in the Kaiser Bauxite v. Jamaica case: (3) In determining any dispute submitted to arbitration as aforesaid, the Arbitration Tribunal shall apply the law of Jamaica and such rules of international law as may be applicable excluding however any enactments passed or brought into force in Jamaica subsequent to the date of this agreement which may modify or affect the rights of the parties under the Principal Agreement or this Agreement and excluding also any law or rule which could throw doubt upon the authority or ability of the Government to enter into the Principal Agreement and this Agreement.27

This clause contains reference to both the host State’s law and international law as the applicable law to the parties’ dispute. A stabilization clause is also part of it, protecting the agreement from subsequent changes in the law of the host State. In addition, it also aims to exclude any law which could throw doubt upon the authority of the Government to enter into the agreement. ICSID tribunals have dealt with combined clauses under both the first and second sentence of Art. 42(1) of the ICSID Convention. In the case analyzed below, the ICSID Tribunal dealt with a combined choice of law stipulated in the direct agreement between the parties. The treatment of such a clause by the Tribunal is a subject of the discussion on the next pages.

26

Texaco Overseas Petroleum Company/California Asiatic Oil Company v. Libya, Award, 19 January 1977, 17 ILM 1 (1978) at p. 11; The same choice of law clause was found in two other oil concession agreements, see British Petroleum (BP) v. Libya, 10 October 1973, 53 ILR 297 (1979); LIAMCO v. Libya, Award, 12 April 1977, 20 ILM 1 (1981). 27 Kaiser Bauxite v. Jamaica, Decision on Jurisdiction, 6 July 1975, 1 ICSID Reports 301.

AGREED CHOICE OF LAW

21

AGIP v. Congo (application of the host state’s law tested against international law) In AGIP v. Congo28 a dispute arose out of the nationalization by Congo of a company, AGIP SA, in which Congo was a shareholder. In 1974 the Government nationalized the entire oil distribution industry in Congo except this company. Shortly thereafter, the Government and AGIP concluded the Agreement according to which AGIP transferred to the Government shares representing 50% of the company’s capital. The Government failed to comply with the obligations agreed to in the 1974 Agreement, which included the following: the Government’s replacement of AGIP as guarantor of 50% of the loans granted to the company; obligation concerning the markets reserved to the company; settlement by the state corporations of their debts to the company and stabilization of the company’s legal status. The Government by its Order No. 6/75 promulgated in 1975, nationalized the Company and transferred its assets to the State oil corporation. AGIP instituted ICSID arbitration proceedings claiming damages. The Parties’ Agreement of 2 January 1974 contained a clause on applicable law which provided as follows: Article 15(2) The law of the Congo, supplemented if need be by any principles of international law, will be applicable.29

Before examining the merits of the case, the Tribunal entered into a discussion on the applicable law. It noted that the case was submitted to the Tribunal by virtue of a direct agreement of the parties.30 The Tribunal noted that the Respondent proposed to the Tribunal to act as amiable compositeur deciding ex aequo et bono, but since the Claimant had not agreed on that, the Tribunal was obliged to decide in accordance with the provision on the applicable law as set out in Art. 15(2) of the Agreement. The Tribunal pointed out that this clause had the force of law for the Tribunal by virtue of the first sentence of Art. 42(1) of the ICSID Convention.31 Accordingly, the applicable law was the law of Congo, supplemented by international law principles. After determining the applicable law, the Tribunal turned to analyzing the content of the Congolese law. It noted that: 45. Congolese law, as it relates to civil and commercial matters, applies French law as it was in force at the time of the accession of the country to independence (1960). This body of rules, and in particular the French Civil Code, has the force of law by virtue of Article 23 of the French Decree of 28 September 1897.32 28 29 30 31 32

AGIP v. Congo, Award, 30 November 1979, 1 ICSID Reports 306. At p. 313. At p. 318, para. 43. At p. 318, para. 44. At p. 318.

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The Tribunal referred to the Constitution of Congo of 1973 and the Fundamental Act of the Military Committee of the Party of 1977 which, to a certain extent, modified the Constitution. In particular it cited Arts. 33 and 55 of the Constitution which provide guarantees for private property and state that expropriation may occur only in accordance with law. The Tribunal also found that these two provisions are preserved in Art. 3 of the Fundamental Act.33 After identifying the legal framework under which it must operate, the Tribunal turned to the merits of the case. The case involved not only the issue of nationalization but also a number of the Government’s repudiations of its contractual obligations. The Tribunal started its analysis of the merits by asking itself whether Ordinance No. 6/75 of 12 April 1975 constituted a violation of the Protocol of Agreement which guaranteed the stabilization of the juridical status of the Company.34 It referred to the stabilization clauses contained in separate articles in articles of Agreement. Article 4 of the Agreement provided that the Government of Congo should not apply certain ordinances and decrees as well as “all other ordinances or subsequent decrees the object of which is to change the private joint-stock character of the Company”.35 Article 11 additionally declared that “in the event of modifications being made to the Company laws, appropriate provisions would be enacted to ensure that these modifications did not affect the structure and composition of the organs of the Company provided for in the Agreement and the Articles of Association of the latter, which provide a duration for the Company of 99 years”.36 The Tribunal proceeded first to examine the nationalization measures under Congolese law. It said that only after examining the status under the host State’s law would it ask itself whether the question must also be viewed from the point of view of international law.37 The Tribunal proceeded to apply, on the one hand, the Constitution of Congo and, on the other hand, the rules of civil and commercial law.38 It referred to both Arts. 33 and 55 of the Constitution and said: 72 . . . From the point of view of constitutional law, the fact that private property is guaranteed by Article 33 of the Constitution cannot be considered of a nature to deprive the Congolese State of the right which it possesses as a sovereign State to nationalize, since the same Article provides equally that “limitations on private ownership may, when the general interest requires, be determined by an act of State”, Art. 55 of the Constitution adding: “within the province of the law are . . . the nationalization of concerns and the transfer of the property of concerns.39 33 34 35 36 37 38 39

At p. 318, para. 47. At p. 321, para. 68. At p. 321, para. 69. At pp. 321-322, para. 70. At p. 322, para. 71. At p. 322, para. 72. At p. 322. Emphasis original.

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On that basis it found that the measures taken were in compliance with the Constitution.40 At this point the Claimant argued that the Government’s measures did not satisfy the basic requirement that the nationalization should be in the general interest.41 The Tribunal rejected this argument holding that “the capacity as shareholder of the State which carries out the nationalization of a company, cannot therefore, of itself, allow the conclusion that the measure is not taken in the general interest”.42 But it also said that the Respondent was under a contract with the Claimant which, under the law of Congo, obliged the Respondent not to modify the status of the company unilaterally.43 The Tribunal referred to Art. 1134 of the French Civil Code which provides a juridical basis for the parties’ agreement and held that “it is undeniable that the measures taken by the above-cited Ordinance repudiated the obligation of the Contracting State to perform the contract”.44 It also referred to Art. 1871 of the Civil Code according to which the Government was under the obligation to respect the legal procedure which was binding upon it.45 Finally it concluded that 79 . . . The breach of Congolese Law by the acts of nationalization prescribed in Ordinance No. 6/75 has, in the opinion of the Tribunal, been established. One must in fact emphasize that in this case all unilateral modification of the status of the Company was prohibited in the Agreement. If the Government had the power to reduce this contractual obligation to nothing by nationalizing the Company when it wished, this would constitute a condition depending purely on the will of one of the parties to the contract, a purely protestative condition, considered void by Article 1174 of the French Civil Code.46

Therefore, the nationalization as such was in conformity with Congolese law but the act of nationalization was incompatible with the contract concluded freely between the State and the investor and therefore in breach of the host State’s law. But the Tribunal did not stop here. It proceeded to examine the acts of nationalization in relation to international law as authorized by Art. 15 of the parties’ agreement. As regards the word “supplemented” the Tribunal rejected the Claimant’s position that this word meant the subordination of Congolese law to international law, but that “the use of the word supplemented signifies at the very least that recourse to principles of international law can be made either to fill a lacuna in Congolese law, or to make any necessary

40 41 42 43 44 45 46

At p. 322, para. 73. At p. 322, para. 74. At p. 322, para. 75. At pp. 322-323, para. 76. At p. 323, para. 77. At p. 323, para. 78. At p. 323.

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additions to it”.47 The Tribunal proceeded to examine the compatibility of the nationalization with international law on stabilization clauses. It said: 88. It is indeed in connection with these clauses that the principles of international law are used to complete the rules of Congolese Law. The reference made to international law suffices to demonstrate the irregular nature, from the point of view of this law, of the acts of nationalization carried out in the present case.48

Therefore, the Tribunal used the international law principles in order to complete the rules of Congolese law. It found that the dissolution by unilateral means decided upon by the Ordinance was not in conformity with international law on the stabilization clauses. Therefore, the examination of international law led to the same conclusion as that of Congolese law, i.e. the acts of nationalization were not in compliance with both Congolese law and international law. As illustrated above, the Tribunal decided to discuss the issue of applicable law before examining the merits of the case. This is the appropriate and logical course of proceeding. As will be seen later, some decisions unfortunately lack this preliminary discussion of the applicable law. In AGIP the Tribunal’s analysis of the law applicable to the dispute before it was completely in compliance with the parties’ agreement on choice of law. It was specifically noted that the choice of law as agreed by the parties was binding upon the Tribunal by virtue of the first sentence of Art. 42(1) of the ICSID Convention and therefore constituted an essential element of the Tribunal’s “terms of reference”. The Tribunal proceeded to examine the merits in accordance with the choice of law clause under which it operated. Such an explicit choice of law obliged the Tribunal to examine the relevant questions first of all from the perspective of Congolese law and, afterwards, if need be, in relation to international law. The Tribunal proceeded to act in this manner. Since both the Ordinance and the stabilization clauses were valid under Congolese law, it was indeed necessary to make reference to international law and demonstrate the irregular nature of the nationalization measures. (vii) Concluding remarks The analysis of the choice of law clauses found in direct agreements between the host State and the investor shows that they are not uniform. Nor is the language employed by the parties and the drafting technique uniform. To agree on a detail such as the applicable substantive law is not an easy process. The character of the parties to investment disputes as well as the circumstances of the case itself make this process even more difficult since the interests of the 47 48

At pp. 323-324, paras. 83-84. At p. 324.

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parties are often divergent. It is suggested that the parties should avail themselves of the possibility to choose the law or rules of law that will govern their relationship by express, precisely worded contractual stipulation of the applicable law. Considering the wide range of possibilities open to the parties when exercising their freedom of choice of law it is not easy to propose “a most desirable” option. To combine both the host State’s law and international law as the applicable law appears to be the most appropriate option in most investment disputes (with some exceptions e.g. loan and licensing agreements). As indicated above, such a choice of law clause balances the interests of both parties and proves to be the most practical solution. The arbitral tribunals, when operating under such clauses, are bound to examine and apply both legal systems.

(b) Choice of law in treaties Another method by which the parties’ freedom to choose the applicable law to their relationship may be exercised relates to treaties containing a clause on applicable law. Consent to investor/State arbitration through BITs has become widely accepted practice.49 These dispute settlement clauses in BITs refer to various arbitration institutions such as ICSID (either under the ICSID Convention or the ICSID Additional Facility Rules), ICC, the Arbitration Institute of the International Chamber of Commerce in Stockholm, the LCIA, or to ad hoc UNCITRAL arbitration. The same applies to consent through multilateral treaties. An offer of consent contained in a multilateral treaty or a BIT may be accepted by an investor simply by instituting an arbitration proceedings. In cases where a treaty is the basis for the arbitral jurisdiction, its own clause on applicable law becomes a choice of law agreed by the parties.50 Such a clause is transformed into an agreement on applicable law between the parties upon the investor’s acceptance of the host State’s offer of consent to jurisdiction. Therefore, the parties can rely on a clause on applicable law contained in the treaty. As already mentioned above, many, but not all, BITs and some multilateral treaties contain clauses on applicable law.51 The types of choice of law clauses in multilateral treaties and BITs are the subject of the 49 In fact, most of the pending cases before ICSID are brought under BITs, see Parra, A. R., ICSID and Bilateral Investment Treaties, 17 ICSID Review – FILJ 11 (2000); See generally Dolzer, R./Stevens, M., Bilateral Investment Treaties, Martinus Nijhoff Publishers (1995); See e.g. AAPL v. Sri Lanka (Award, 27 June 1990, 4 ICSID Reports 251) where the ICSID’s jurisdiction where the ICSID’s jurisdiction was based on the consent clause contained in the UK–Sri Lanka BIT of 1980; See also Fedax v. Venezuela, Decision on Jurisdiction, 11 June 1997, 37 ILM 1378 (1998) at p. 1384. 50 Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at p. 560. 51 See Gaillard, E./Banifatemi, Y., The Meaning of “and” in Article 42(1), Second Sentence, of the Washington Convention: The Role of International Law in the ICSID Choice of Law

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analysis on the following pages as well as the arbitral practice that has dealt with a choice of law made through BITs. (i)

Choice of law clauses in multilateral treaties

Certain multilateral treaties providing for investor/State arbitration, such as the NAFTA, the ECT, the Colonia Investment Protocol of MERCOSUR and the Cartagena Free Trade Agreement contain clauses on applicable law.52 One type of choice of law clauses refers only to the respective treaty and to the rules of international law. Therefore, the tribunal acting under such a clause is obliged to decide a case on the basis of the multilateral treaty itself and international law in general. These clauses read as follows: Article 26(6) of the ECT provides: A tribunal established under paragraph (4) shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law.53

Article 1131 of the NAFTA provides: 1. A Tribunal established under this Section shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law.54

Articles 17-20 of the Cartagena Free Trade Agreement states: Any tribunal constituted under Section B (Settlement of Disputes between a Party and an Investor of Another Party) shall decide the disputes submitted for its review in accordance with this Agreement and the applicable rules of international law.55

Another type of choice of law clauses is found in Art. 9(5) of the Colonia Investment Protocol of MERCOSUR which provides: The arbitral tribunal shall decide the dispute in accordance with the provisions of the Protocol, with reference to the laws of the Contracting Party involved in Process, 18 ICSID Review – FILJ 375 (2003) at pp. 376-379; Gaillard, E., The Extent of Review of the Applicable Law in Investment Treaty Arbitration (in Annulment of ICSID Awards, edited by Gaillard, E./Banifatemi, Y), 223 (2004) at pp. 226-228; Parra, A. R., Provisions on the Settlement of Investment Disputes in Modern Investment Laws, Bilateral Investment Treaties and Multilateral Instruments on Investment, 12 ICSID Review – FILJ 287 (1997) at p. 332; Parra, A. R., Applicable Substantive Law in ICSID Arbitration Initiated Under Investment Treaties, 16 ICSID Review – FILJ 20 (2001); See e.g. Art. 1131 of the NAFTA; Art. 8 of the 1991 France/Argentine BIT. 52 See Parra, A. R., Provisions on the Settlement of Investment Disputes in Modern Investment Laws, Bilateral Treaties and Multilateral Instruments on Investment, 12 ICSID Review – FILJ 287 (1997) at p. 347. 53 34 ILM 360 (1995) at p. 400. 54 32 ILM 605 (1993) at p. 645. 55 At http://www.sice.oas.org/cp_bits/english99/main.asp.

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the dispute, the terms of any specific agreement concluded in relation to such an investment and principles of international law.56

This is a typical example for a combined clause on applicable law that refers to the provisions of the Protocol itself, to the host State’s law, to the special investment agreement (if any) concluded between the parties and to the principles of international law. The ICSID Convention also contains a combined choice of law clause in its second sentence of Art. 42(1) but will be discussed in the chapter dealing with the absence of the parties’ agreement on choice of law. (ii) Choice of law clauses in BITs Some BITs contain choice of law clauses,57 others not.58 Even the most recently concluded BITs do not always contain a choice of law clause.59 Some of the cases in investor/State arbitration have involved BITs that included clauses on applicable law. The clauses on applicable law contained in BITs are not uniform. Some of them refer to the host State’s law, the BIT itself, special investment agreements and rules of international law. The following survey looks into the types of choice of law clauses found in BITs. After that, some of the cases which involved a choice of law that had been made through a BIT will be analyzed. The first type of these clauses covers combined choice of law clauses. But these clauses can be additionally differentiated on the basis of the legal sources listed in the BIT provisions. The first type of these clauses refers to the host State’s law (including its conflict of laws rules), to the BIT itself, to the rules and principles of international law and to any special investment agreement concluded between the host State and the investor. An example is 56

At http://www.sice.oas.org/cp_bits/english99/main.asp. E.g. Romania/Sri Lanka BIT of 1981; Argentina/United Kingdom BIT of 1990; France/ Argentina BIT of 1991; Netherlands and the Czech and Slovak Federal Republic BIT of 1991; Egypt/Sri Lanka BIT of 1996; Chile/Turkey BIT of 1998; See Investment Treaties, loose-leaf Collection (ICSID ed.) in respect of all references to the BITs. 58 E.g. Netherlands/Soviet Union BIT of 1989; Albania/Greece BIT of 1991; Argentina/USA BIT of 1991; Netherlands/Paraguay BIT of 1992; Netherlands/Nigeria BIT of 1992; Albania/Egypt BIT of 1993; Albania/Croatia BIT of 1993; Czech Republic/Egypt BIT of 1993; Czech Republic/Hungary BIT of 1993; Egypt/Greece BIT of 1993; Bolivia/Peru BIT of 1993; Barbados/Venezuela BIT of 1994; Trinidad and Tobago/United States BIT of 1994; Netherlands/Slovenia BIT of 1996; Germany/Kenya BIT of 1996; Austria/Chile BIT of 1997; Czech Republic/Vietnam BIT of 1997; Philippines/Switzerland BIT of 1997; Bosnia and Herzegovina/Netherlands BIT of 1998; Bulgaria/Czech Republic BIT of 1999; Bahrain/Jordan BIT of 2000; See Gaillard, E., The Extent of Review of the Applicable Law in Investment Treaty Arbitration (in Annulment of ICSID Awards, edited by Gaillard, E./Banifatemi, Y ), 223 (2004) at p. 228. 59 E.g. Austria/Federal Republic of Yugoslavia (now Serbia and Montenegro) BIT of 2001. 57

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a clause on applicable law stipulated in the France/Argentina BIT of 1991, which provides: Article 8 4. The arbitration body shall decide on the basis of the provisions of this agreement, the law of the Contracting Party which is a party to the dispute – including its conflict of law rules – and the terms of possible specific agreements concluded in relation to the investment, as well as the principles of international law on the subject-matter.60

An identical clause is found in the Argentina/United Kingdom BIT of 1990 in Art. 8(4), the Argentina/Sweden BIT of 1991 and the Chile/Turkey BIT of 1998 in Art. XI (4).61 Another example for a compound clause is found in e.g. the Albania/China BIT of 1993. Article 8 of the BIT provides for investor/State arbitration and in paragraph 7 stipulates the following clause on applicable law: The tribunal shall adjudicate in accordance with the law of the Contracting State to the dispute accepting the investment including its rules on conflict of laws, the provisions of this Agreement as well as the generally recognized principles of international law accepted by both Contracting States.62

Here the choice of law clause refers to the host State’s law (including its rules on conflict of laws), the BIT itself and international law. It contains no reference to an investment agreement concluded directly between the parties. A similar example for such a clause is found in Art. 8(3) of the Egypt/ Sri Lanka BIT of 1996. It reads as follows: The arbitral tribunal shall decide in accordance with: – The provisions of this Agreement; – The national law of the Contracting Party in whose territory the investment was made, and – Principles of International Law.63

This provision contains no reference to the host State’s conflict of laws rules or to an investment agreement concluded directly between the parties. Therefore, there is a presumption that only the substantive provisions of the host State’s law would apply and the tribunal would not have to look into the host State’s own rules on the conflict of laws. 60

Agreement between the Government of the Argentine Republic and the Government of the Republic of France for Reciprocal Protection and Promotion of Investments of 3 July 1991, entered into force 3 March 1993, UNTS, Vol. 1728, at p. 298; See also Art. 10(7) of the Argentina/Netherlands BIT of 1992; Art. 9(5) of the Netherlands/Venezuela BIT of 1991; Art. 10(5) of the Argentina/Spain BIT of 1991. 61 See also Chile/Ecuador BIT of 1993; Paraguay/Peru BIT of 1994; Argentina/Jamaica BIT of 1994; Brazil/Chile BIT of 1994. 62 Albania/China BIT of 1993. 63 See also Art. 8(7) of the China/Slovenia BIT of 1993.

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The second type of choice of law clauses contained in the BITs refers only to the application of the host State’s laws. An example is a clause contained in Art. 10 of the Romania/Sri Lanka BIT of 1981 which reads as follows: Application of National Laws All investments made by the investor of one Contracting Party in the territory of the other Contracting Party shall, subject to this Agreement, be governed by the laws in force in the territory of the Contracting Party in which such investments are made.64

The above examples of choice of law clauses found in the BITs demonstrate that they are quite different i.e. the legal sources listed in them are not identical. Although most of them refer to both domestic and international law, some of these clauses contain references only to the host State’s law. The arbitral tribunals are bound to observe the parties’ agreement on applicable law made through the BIT. In particular, compound choice of law clauses must be carefully observed since they refer to different sources that must be examined and applied by the tribunal. In this sense the next section will consider the arbitral practice that has dealt with a choice of law made through a BIT. (iii) Arbitral practice Maffezini v. Spain (application of the host state’s law only) In Maffezini v. Spain, jurisdiction was based on the Argentina/Spain BIT of 1991.65 A dispute arose out of treatment allegedly received by the investor, Mr. Maffezini, from a Spanish entity (SODIGA) regarding his investment in a corporation for the production of chemical products (EAMSA) in Galicia, Spain. Article 10(5) of the BIT stipulates the applicable law. It provides: 5. The Arbitral Tribunal shall decide the dispute in accordance with the provisions of this Agreement, the terms of other Agreements concluded between the parties [the host State and the investor], the law of the Contracting Party in whose territory the investment was made, including its rules on conflict of laws, and general principles of international law.

This is a typical example of compound choice of law clause that refers to the BIT itself, to other investment agreements concluded between the host State and the investor, to the host State’s law (including its rules on conflict of laws) as well as to international law.

64

See also Sri Lanka/France BIT of 1980; Sri Lanka/Singapore BIT of 1980; Sri Lanka/Norway BIT of 1985. 65 Emilio Agustin Maffezini v. The Kingdom of Spain, Decision on Jurisdiction, 25 January 2000, 16 ICSID Review – FILJ 212 (2001).

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The Tribunal in its Award of 13 November 2000 did not discuss the issue of applicable law.66 It simply proceeded to apply the host State’s law (e.g. the Spanish Constitution, the Spanish Law on Public Administration and Common Administrative Procedure, the Spanish Civil Code, the Spanish Commercial Code and environmental legislation) to the issues before it. One of the claims concerned the responsibility of the Spanish entity (SODIGA) for the additional costs of the project resulting from an Environmental Impact Assessment (EIA) procedure. The Claimant argued that EAMSA was pressured to proceed with the investment before the process of EIA was finished and before its implications were known.67 The Respondent argued that the Claimant was fully informed on the EIA requirements applicable in Spain and the EEC and that he decided on his own to start with the construction work without the EIA approval and against the advice of his employees and consultants.68 The Tribunal started its analysis by emphasizing that the EIA procedure is basic for adequate environmental protection “not only under Spanish and EEC law, but also increasingly so under international law”.69 With respect to the position of international law regarding the EIA procedure the Tribunal referred in a footnote to the Convention on Environmental Impact Assessment in a Transboundary Context of 1991 and to one scholarly writing (Philippe Sands: Principles of International Environmental Law).70 In order to find support in the legislation of the host State the Tribunal first referred to the Spanish Constitution and cited its Art. 45 which mandates the State, Autonomous Communities as well as Municipalities to ensure the protection of the environment.71 It also mentioned specific legislation enacted to fulfill these requirements e.g. the Law on Toxic and Hazardous Waste.72 In particular, the Tribunal referred to the EIA legislation. It cited the EEC Directive 85/337 of June 27, 1985 and Spain’s Royal Legislative Decree No. 1302 of 1986.73 Based on these sources the Tribunal found that the EAMSA project undoubtedly required an EIA and that, according to the submitted record, the Claimant was fully aware of that.74 Finally, it concluded that Spain only followed the requirements of its own law and of EEC law applicable to the chemical industry and said: . . . It follows that Spain cannot be held responsible for the decisions taken by the Claimant with regard to the EIA. Furthermore, the Kingdom of Spain’s

66

Award, 13 November 2000, http://www.worldbank.org/icsid/cases/emilio_Awardofthe Tribunal.pdf. 67 Paras. 44, 65. 68 Paras. 45, 66. 69 Para. 67. 70 See footnote 17 in para. 67. 71 Para. 68. 72 Para. 68. 73 Para. 69. 74 Para. 70.

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action is fully consistent with Article 2(1) of the Argentine–Spain Bilateral Investment Treaty, which calls for the promotion of investment in compliance with national legislation.75

Accordingly, the claim was dismissed. In Maffezini the Tribunal operated under a combined choice of law clause contained in the BIT. The Award lacks a preliminary discussion on the applicable law. To identify the legal framework under which the Tribunal has to operate is especially necessary and helpful in case of such a combined choice of law clauses. The Tribunal simply proceeded to apply the host State’s law together with EEC law to the relevant issues. The question that could be raised is whether the Tribunal may restrict itself to applying one of several sources listed in the clause on applicable law under which it operates. The clause on applicable law in the BIT became a choice of law agreed by the parties to the arbitration and, therefore, the Tribunal is bound to carry out their agreement on the applicable law i.e. to examine and apply all listed sources. The Maffezini Award would suggest that the Tribunal operating under the BIT which contains a combined choice of law clause may apply only the host State’s law and base its decision on that law only. The question is whether it was under an obligation to find support for its findings in the BIT and in general international law as well. It is suggested that when the dispute is governed by both legal systems the relevant questions must be examined first in light of the host State’s law and then, the result should be tested against international law. This is the view of some commentators as well.76 In Maffezini, the Tribunal justified its course of action at the very beginning of its analysis on the EIA when it noted that the EIA procedure was required also by international law and supported that statement by reference to the Convention on Environmental Impact Assessment in a Transboundary Context, which stipulates the obligations of the Parties to assess the environmental impact of certain activities at the project level of the proposed activity,77 as well as to one authorative scholarly writing. Since this is a relatively young branch of public international law these references were sufficient to demonstrate the obligatory nature of the EIA under international law. And since this particular question was regulated in detail by the host State’s law and EEC law the Tribunal logically proceeded to apply Spanish law and EEC law. Finally, the Tribunal supported its finding by reference to Art. 2(1) of the Argentina/Spain BIT “which calls for the promotion of investment in compliance with national legislation”. Therefore, it is possible to conclude that the Tribunal acted in compliance with the parties’ agreement on the applicable law. The application of 75

Para. 71. Broches, A., The Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 136 Recueil des Cours (1972-II) at pp. 331, 392. 77 The Espoo Convention of 1991 is available at http://www.unece.org/env/eia/eia.htm. 76

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the host State’s law only was not in contravention of international law, including the BIT. Antoine Goetz v. Burundi (application of both the host state’s law and international law) In contrast to the above case, in Antoine Goetz v. Burundi78 the Tribunal entered into an extensive theoretical discussion on the substantive law applicable to the dispute. In this case jurisdiction was based on the Belgium–Luxemburg Economic Union/Burundi BIT of 1989. The choice of law clause stipulated in Art. 8(5) of that BIT reads as follows: The arbitral body decides on the basis of: – the domestic law of the contracting party to the dispute, on the territory of which the investment is located, including its rules relating to the conflict of laws; – the provisions of the present Treaty; – the terms of the particular agreement which might have taken place regarding the investment; – the generally admitted rules and principles of international law.79

The Tribunal first referred to Art. 42(1) of the ICSID Convention and noted that the case before it had to be decided in accordance with that provision. It confirmed that a clause on applicable law contained in a BIT is transformed into an agreement on applicable law between the parties upon the investor’s acceptance of the jurisdiction which may be expressed simply by instituting the arbitration proceedings. It stated: Without doubt the determination of the applicable law is not, in its true sense, made by the parties to the present dispute (Burundi and the claimant investors) but by the parties to the Investment Treaty (Burundi and Belgium). As that was a case for the parties’ consent, the Tribunal considers however that the Republic of Burundi decided in favour of the applicable law as it is determined in the already cited provision of the Belgium–Burundi Investment Treaty in becoming a party to this treaty and that the claimant investors have effected a similar choice in lodging their claim for arbitration based on the said treaty. If this is not the first time, as we have noted, that the jurisdiction of the centre results directly from a bilateral treaty for the protection of investments, and not from a distinct agreement between the host State and the investor, it is one of the first times, it seems, that an ICSID Tribunal is called to apply the law as directly determined by such a treaty.80

78

Antoine Goetz v. Burundi, Award, 10 February 1999, 15 ICSID Review – FILJ 457 (2000). The Award was rendered in French. 79 Para. 94. 80 Para. 94. Footnote omitted.

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The Tribunal read Art. 8(5) in conjunction with Art. 7,81 concerning the content of the obligations entered into by the parties under the BIT and concluded that the rules applicable to the dispute were a combination of domestic and international law.82 It grouped the legal sources listed in Art. 8(5) into two: Burundian law, on one hand, and international law, on other hand. The “specific obligations” were related to the Free Trade Zone (FTZ) established by Burundian legislation. The BIT provisions were part of the “rules and principles of international law”. After that, the Tribunal entered into a discussion on the relationship between the two systems of law, i.e. domestic and international law. With respect to this issue and the case before it the Tribunal noted that a relation of complementarity should prevail i.e. domestic law and international law each having its own sphere of application.83 But it also said that it had to apply Burundian law in any case since that law was listed first in Art. 8(6) of the BIT. The Tribunal provided also the reasons for the application of international law in the case before it in the following terms: As regards international law, its application is obligatory for two reasons. First, because, according to the indications furnished to the Tribunal by the claimants, Burundian law seems to incorporate international law and thus to render it directly applicable; by reason of the non-appearance of the defendant, the Tribunal is not however in a position to reach a definite conclusion on this point. Furthermore, because the Republic of Burundi is bound by the international law obligations which it freely assumed under the Treaty for the protection of investments, just as it can benefit from the rights conferred on it under the Treaty, and more especially, we shall see, of that conferred on it by Article 4 of the Treaty, in order to take, under certain conditions and limitations, measures depriving of or restricting property rights or similar measures as regards investments situated on its territory. To that is added the fact that the international obligations assumed by Burundi under the investment treaty refer in several places to the legitimacy of the conduct of the State as regards its domestic law, although one also finds oneself in the presence of joint references to domestic Burundian law and to international law – more especially to the rights and obligations laid down by the investment treaty – and to international law and domestic Burundian law.84

81

Para. 95; Art. 7(1) states: The present Treaty does not affect: a) laws, rules, practices or administrative procedures, or judicial or administrative decisions of either Contracting Party; b) international legal obligations; c) obligations entered into by either Contracting Party, including the obligations under a specific investment agreement or licence which exists either before or after.

82 83 84

Para. 95. Para. 98. Para. 98.

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Therefore, international law was applicable first because of its incorporation into Burundian law and second, because Burundi was bound by international obligations that it freely entered into under the BIT. The Tribunal also pointed out that the validity of acts of a State did not necessarily lead to identical results under the two legal systems. Because of that, the Tribunal took into account the provision of Art. 7(2) of the BIT which provides for the application of the rules which are more favorable to the investor.85 In accordance with that provision the Tribunal finally concluded that it was under the obligation to examine the case in light of both legal systems simultaneously: “each must reign in its own sphere of application, and in case of conflict between the two it is, by common accord of the parties, the provisions which are more favourable to the investors which must be applied”.86 Indeed, the Tribunal proceeded to analyze the merits of the case first in the light of Burundian law and then, in the light of international law. With respect to Burundian law the Claimant argued that the decision of the Council of Ministers of 29 May 1995 revoking the Free Trade Zone License was in violation of that law.87 It based its claim on certain principles of administrative law, in particular on the theory of revocation of administrative acts, on the hierarchy of legislative acts and on the so-called liability of the State Legislator finding that these principles are inspired by the principles in application in France and Belgium.88 Since the Respondent had not defended its case, the Tribunal disposed only of information provided by the Claimant concerning Burundian administrative law. With respect to that the Tribunal noted that the revocation of the Free Trade Zone License was not to be considered as the revocation of administrative acts in the sense of the French theory but only as “a simple abrogation or revocation of the agreement” since the benefits granted to the investor before 29 May 1995 were only withdrawn for the future.89 Furthermore, it pointed out that the Burundian government was clear concerning the reasons for its decision i.e. due to the recent changes in the relevant domestic legislation it decided to terminate the future benefit of the Free Trade Zone License.90 Because of that, the Government’s decision could only be treated as unlawful under the host State’s law in the following situations: if the decision was itself flawed or if it was invalid because the Ministerial Order of the same day on which the decision was based was itself invalid.91 The Claimant argued that both situations occurred and, accordingly, the Tribunal proceeded to analyze the 85 86 87 88 89 90 91

Para. 99. Para. 99. Para. 101. Para. 101. Para. 102. Para. 103. Para. 104.

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problem in light of these two situations. According to the Claimant the Ministerial Order of 29 May 1995 was invalid since it affected a right acquired by a private party by way of a legislative act.92 The Tribunal did not accept that argument since it could not find any contradiction between the legislative act and the Ministerial Order. It referred to the respective legislative act (Legislative Decree of 31 August 1992) finding that it did not specifically indicate which activities were eligible for granting the Free Trade Zone but it empowered the Minister of Trade and Industry to define such activities. And correspondingly, the Ministerial Order 750/415 of 28 September 1992 provided a list of eligible activities and, furthermore, expressly stated that the list could be further modified in the same way as well as that the eligibility of each mineral can be dependent on certain conditions.93 On that basis, the Tribunal found that both the Order of 28 September 1992, which did not exclude the eligibility of minerals to the FTZ regime, and the Order of 29 May 1995, which modified the former, were execution measures of the Legislative Decree of 31 August 1992 and as such were in conformity with it.94 The Tribunal also rejected the Claimant’s contention that the Order of 25 May 1995 was invalid, because the termination of eligibility of minerals to the FTZ regime was decided with respect to AFFIMET (Claimant’s company) only. The Tribunal noted that one other company was also affected by a similar measure taken under the same provision.95 After that, the Tribunal turned to the Claimant’s second contention i.e. that the decision was itself flawed. The Claimant relied on the principles of parallel forms according to which the decision revoking the License should follow the same formalities as those granting the License i.e. consultation of the Consultative Commission of the Free Trade Zone.96 According to the Tribunal those formalities would had been useless since the decision to revoke the License was only a consequence of removing minerals from the list of eligible activities by the Order of the same day.97 The Tribunal also did not accept the Claimant’s argument that no offence had occurred in accordance with Arts. 32 and 33 of the Legislative Decree of 1992 which could justify the revocation of License.98 It noted that the License had been revoked not because the company did not respect legislative conditions or any other conditions nor was the revocation a sanction against the investor. The revocation simply occurred as a consequence of the executive measure of 1995 terminating the eligibility of minerals to the FTZ regime with no retroactive effect.99 92 93 94 95 96 97 98 99

Para. 105. Para. 106. Paras. 106-107. Para. 108. Para. 110. Para. 110. Para. 111. Paras. 111-112.

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The Claimant argued that beside the decision itself, the Burundian administration had committed some other irregularities. For example, it claimed that the provision declaring the minerals ineligible for the FTZ regime did not cover the operation related to precious metal, in particular gold.100 Again the Tribunal refused to accept that argument. It offered a number of examples (reports, communications) illustrating that precious metals were considered to be a part of the minerals in applying the FTZ regime as established by the law of Burundi.101 After establishing that there was no irregularity of the decision in question leading to the State’s responsibility, the Tribunal looked into the non-tortious liability in relation to the investor: From the examination of the legitimacy of the decision of 29 May 1995 putting an end to the certification of AFFIMET as a free business it appears that the illegality of this decision in relation to Burundian law has not been established. This conclusion entails another, on the issue of the liability of the Burundian State. It stems from principle, in effect, that a legal administrative decision cannot be regarded as entailing that the party making it is at fault and is therefore not capable of making the State liable on the grounds of fault. However, it is not on these grounds that the claimants are basing themselves to claims that the Burundian State should be made liable in Burundian law, but on that of strict liability, more specifically on the liability of a State as legislator.102

The Claimant specified that a compensation for the damage caused by a law or legal administrative measure was not explicitly granted to an individual under Burundian law but it “is however imposed by the academic writings, the case-law and the general principles of law of the countries whose legal system derives from the Napoleonic code”.103 The Claimant referred to the jurisprudence of the French Conseil d’Etat. The Tribunal turned to that jurisprudence holding that: . . . even if one was to suppose that Burundian law allowed for the strict liability of the State for legal administrative decisions within the same conditions and limits as French administrative law, compensation for injury suffered by the claimants stemming from the Ministerial order of 29 May 1995 and from the decision applying it would be excluded. Taking account of this conclusion, the Tribunal considers it useless to pronounce on the existence and the contours of such a theory in Burundian law.104

Therefore, even the Tribunal’s analysis of non-tortious liability of the State vis-à-vis investor led to the identical conclusion as the analysis of the tortius

100

Para. 113. Paras. 114-116. 102 Para. 117. 103 Para. 118. 104 Para. 118. 101

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liability, i.e. under Burundian law the decision revoking the FTZ license was not invalid and the State had not incurred responsibility.105 After examining the issue in light of Burundian law the Tribunal turned to international law by saying that its “role is not limited to examining the legitimacy and the legal consequences of the disputed decision in relation to Burundian law, but that it must necessarily extend to examining the legitimacy and the legal consequences of the disputed decision in relation to the international rights and obligations of the Burundian State”.106 Accordingly, it referred to the Belgium–Luxemburg Economic Union/Burundi BIT of 1989. It noted that Burundi had not violated its obligation to “encourage investments” under Art. 2 of the BIT since it indeed had introduced a FTZ regime into its legislation with an aim to encourage and promote foreign investments and everything it did was according to its legislation as required by the BIT.107 Then, the Tribunal proceeded to examine Art. 4 of the BIT dealing with “Measure depriving of and restricting property”. According to this provision the Burundi Republic had committed itself to: “not take any measure depriving of or restricting property, or any other measure having a similar effect”.108 Such a measure can be taken when “the imperatives of public needs, security, or the national interest demand it to an exceptional extent” providing that required conditions are met. According to the Claimant, the License’s revocation forced him to stop all activities and deprived the investor of the expected advantages from the investments. Therefore, the Tribunal treated the measure as “a measure having a similar effect” to a restrictive or depriving property measure in accordance with Art. 4 of the BIT.109 Then, the Tribunal turned to the conditions that must be met in case of lawful expropriation. According to the BIT the first condition relates to public utility, national security or national interest. The Tribunal noted that this condition must be evaluated under Burundian law and on that basis it found that the first condition was met.110 The second condition, that measures are taken “in accordance with a lawful procedure”, was also found to be met.111 The condition that the measure must not be discriminatory, nor conflicting with a particular agreement was also met.112 Finally, the last condition related to the payment of adequate and effective compensation in case of such measures. The Tribunal found that the last condition was not met since the revocation

105

Para. 119. Para. 120. 107 Para. 123. 108 Para. 124. 109 Para. 124. 110 Para. 126. 111 Para. 127. 112 Para. 128. 106

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of the FTZ License of 1995 did not provide for adequate and effective compensation.113 But it also said: . . . The Tribunal does not however consider that this circumstance suffices to taint this measure as illegal under international law. The Treaty requires an adequate and effective indemnity; unlike certain domestic rights as regards expropriation, it does not require prior compensation.114 All this means that the legality of the decision of 29 May 1995 under international law remains in the balance. There could be one of two results, in effect. Either the Republic of Burundi satisfies the condition of an adequate and effective indemnity within a reasonable period by allowing an indemnity fulfilling the requirements and criteria of paragraph 2 of Article 4 of the Treaty. In that case, the conformity of the decision of 29 May 1995 with international law will be found to have been definitively established. Or the Republic of Burundi does not satisfy this ultimate condition of the conformity of this decision with international law within a reasonable period. In such a case, it will have violated the international obligation, assumed by it in the Belgium–Burundi Investment Treaty to which it subscribed in the full and free exercise of its international sovereignty, to “not take any measure depriving of or restricting of property, nor any other measure having similar effect in regard to investments situated on its territory” without respecting certain conditions. The international responsibility of the Burundian State would therefore be triggered both for the violation of the obligation, set out in Article 4, to abstain from taking any measure having similar effect to a measure depriving of or restricting property and for violation of the obligation, set out in Article 3, to assure Belgian investments on its territory “constant security and . . . protection”.115

Therefore, according to the Tribunal, Burundi was under the obligation to meet the compensation requirement within reasonable time failing which it would regarded the revocation of the License as invalid under international law. Furthermore, the Tribunal pointed out that Burundi also had another choice i.e. to give back the FTZ license to AFFIMET. In such a case no compensation for such damages was required due to the fact that the license’s termination was not invalid under the law of Burundi and the State was not responsible under its own law.116 Therefore, the Tribunal concluded: In other words, it falls to the Republic of Burundi, in order to establish the conformity with international law of the disputed decision to withdraw the certificate, to give an adequate and effective indemnity to the claimants as envisaged in Article 4 of the Belgium–Burundi Investment Treaty, unless it prefers to return the benefit of the free zone regime to them. The choice lies within the sovereign discretion of the Burundian government. If one of these two measures is not taken within a reasonable period, the Republic of Burundi will have committed an act contrary to international law the consequences of which it would be left to the Tribunal to ascertain.117 113

Para. 130. Para. 130. 115 Para. 131. 116 Para. 132. 117 Para. 133. 114

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The decision in Goetz v. Burundi provides very clear and detailed analysis of the applicable law. Such a preliminary discussion is more than desirable for the identification of rules of law that will govern the dispute. With respect to the legal sources listed in the relevant provision of the BIT the Tribunal had no doubt that it had to examine and apply all of them i.e. both domestic law and international law. In respect of the applicability of the host State’s law it appears that the Tribunal suggested a ranking of sources since the host State’s law was listed first in Art. 8(5) of the BIT. The Tribunal was entirely clear in saying that both legal systems must be examined and applied. The Tribunal’s analysis of the merits of the case demonstrates that it indeed followed its finding on applicable law, i.e. it analyzed in detail all relevant issues first in light of the host State’s law and then, in light of the BIT and international law in general. In relying on international law the Tribunal found that the Claimant must be compensated. It is possible therefore to conclude that the Tribunal acted in accordance with the parties’ agreement on applicable law. CME v. The Czech Republic (refusal to apply the host state’s law) In CME v. The Czech Republic, the case was brought before an ad hoc UNCITRAL Tribunal and the seat of arbitration was in Stockholm. Therefore, the arbitration was governed by the UNCITRAL Arbitration Rules. The Stockholm Arbitral Tribunal established its jurisdiction on the basis of the BIT of 1991 concluded between the Netherlands and the Czech and Slovak Federal Republic (now the Czech Republic). The BIT contains the following choice of law clause in its Art. 8: 6. The arbitral tribunal shall decide on the basis of the law, taking into account in particular though not exclusively: the law in force of the Contracting Party concerned; the provisions of this Agreement, and other relevant Agreements between the Contracting Parties; the provisions of special agreements relating to the investment; the general principles of international law.118

As already explained above, this clause on applicable became part of the parties’ arbitration agreement upon the investor’s acceptance of the offer to consent to arbitration. The UNCITRAL Arbitration Rules in its Art. 33(1) stipulates that: 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.119

118 119

Investment Treaties, looseleaf Collection (ICSID ed.), Oceana (1983 -). At http://www.uncitral.org/en-index.htm.

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Therefore, the UNCITRAL ad hoc Tribunal was bound to examine and apply the law as agreed by the parties. The law designated by the parties as applicable to the substance of the dispute in CME v. The Czech Republic was both Czech law and international law as provided by the choice of law clause in Art. 8(6) of the Netherlands/Czech BIT. The Tribunal first rendered a Partial Award on liability120 and only later Final Award on the quantum of damages.121 Both deserve analysis from the perspective of applicable substantive law. Before that some basic facts of the dispute must be illustrated. The dispute arose out of the Czech Republic’s treatment of CME’s investments in the first private nation-wide commercial television station in the Czech Republic. CME claimed that the Czech Republic breached its obligations under the BIT by actions and omissions of the Media Council, a State agency, which destroyed CME’s investment in that State.122 ˇ CME held 99% of the equity interests in CNTS, a Czech television servˇ ices company. These ownership interests in CNTS were acquired in steps.123 ˇ CEDC, CET 21 and the Czech Savings Bank were co-founders of CNTS which was established as a joint venture with the purpose to provide broadˇ casting services to CET 21. CME’s investments in CNTS were related to the broadcasting license granted to CET 21 by the Czech Media Council, a body empowered to issue such licenses under the Czech law.124 The partners to CET 21 (Czech nationals) agreed with CEDC and the Media Council in 1993 to ˇ establish a participation of CEDC in the form of joint venture i.e. CNTS. The ˇ license holder was CET 21 and CNTS was the operator of the broadcasting ˇ station. CET 21 contributed to the newly established CNTS the right to use the license on an exclusive basis and for that contribution in kind CET 21 ˇ obtained 12% of its ownership interest in CNTS. All these actions were governed by the 1993 Memorandum of Association and Investment Agreement ˇ (the “MOA”) and approved by the Media Council in the same year. CNTS and CET 21 started broadcasting through their newly created broadcasting station TV NOVA. Although initially the Media Council had approved the creation of ˇ CNTS it reversed its position afterwards (in 1996) and objected to the activiˇ ˇ ties of CNTS. It also instituted court proceedings against CNTS. CET 21 and ˇ ˇ CNTS concluded a Service Agreement in 1997 which provided CNTS with a position of an exclusive service provider for TV NOVA. This agreement was

120

CME Czech Republic B.V. (the Netherlands) v. The Czech Republic, Partial Award, 13 September 2001, at http://www.mfcr.cz/static/Arbitraz/en/PartialAward.pdf. 121 Final Award, 14 March 2003, at http://www.cetv-net.com/ne/articlefiles/439-Final_ Award_Quantum.pdf. 122 Partial Award, 13 September 2001, paras. 20-21. 123 Partial Award, 13 September 2001, paras. 5-7. 124 Partial Award, 13 September 2001, para. 8.

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terminated by CET 21 in 1999 due to a dispute between the contracting ˇ parties. CNTS instituted court proceedings against CET 21. All the above mentioned as well as CME’s and its predecessor’s investments in the joint venˇ ture (CNTS) were the object of the dispute between the parties. ˇ CME claimed that CNTS had been commercially destroyed by the actions and omissions of the Media Council, an organ of the Czech Republic.125 Because of that CME had suffered damage and the Czech Republic was in violation of the BIT. The Claimant invoked several provisions of the BIT.126 The Respondent disputed these contentions and argued that the loss of the investments resulted from a failure on the part of CME and its commercial misjudgments. Furthermore, it argued that CME’s claim was part of a ˇ commercial dispute between CNTS and Dr. Zelezny (director of CET 21 and ˇ CNTS) for which the BIT was not available.127 The question relevant for this analysis is whether the Tribunal’s decision followed the choice of law as agreed by parties i.e. both the host State’s law and international law. There is no preliminary discussion on the applicable law in the Partial Award. The Tribunal simply proceeded to deal with the “Merits of the Claimant’s Case under the Treaty”. Therefore, it is necessary to look into the Tribunal’s analysis of the merits in order to demonstrate on what legal basis the Tribunal based its findings and whether they are in compliance with the parties’ choice of law. For that purpose the next analysis refers to the Tribunal’s finding in the Partial Award that the Media Council in 1996 coerced CME to abandon the security for its investment in the Czech Republic. As mentioned above, the Claimant argued that the Czech Republic was responsible under the BIT for the acts of Media Council, based on the established principle that a State is responsible for wrongful acts of its agents or instrumentalities.128 It argued that the Media Council’s 1996 reversal of its own ˇ 1993 action approving the agreement between CNTS and CET 21 had violated the Czech Republic’s BIT obligations i.e. the obligation not to deprive Claimant of its investment, to provide fair and equitable treatment, not to take unreasonable and discriminatory actions, to provide full security and protection for Claimant’s investment, and to act in compliance with principles of international law.129 Furthermore, according to the Claimant, the Media Council in 1996 coerced the amendments to the 1993 MOA which in turn laid the ground for ˇ Dr. Zelezny’s termination of the arrangement betweenCNTS and CET 21. CME argued that the Media Council, therefore, had not fulfilled its obligations under ˇ both the BIT itself and Czech law to intervene to protect CNTS “by restoring

125

Partial Award, 13 September 2001, paras. 20-21. Partial Award, 13 September 2001, para. 26. 127 Partial Award, 13 September 2001, paras. 22, 29. 128 Partial Award, 13 September 2001, para. 52. 129 Partial Award, 13 September 2001, para. 166-169. 126

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ˇ CNTS to the exclusive position with respect to CET 21 that the Media Council had approved in 1993”.130 As a matter of fact, CME claimed that the Media Council’s subsequent reversal of its 1993 position was not valid under Czech law. But regardless of the validity or non-validity under Czech law, the Claimant claimed legally enforceable rights under the BIT and, therefore, the Respondent would be under an obligation under international law to remedy its violations of the BIT.131 According to Claimant, the above mentioned actions amounted to a deprivation of CME’s investments by the Czech Republic without satisfying the BIT’s requirements in accordance with Art. 5.132 The Respondent referred to the choice of law clause contained in Art. 8(6) of the BIT and argued that Czech law should be applied primarily in determining whether or not the Czech Republic had breached its obligation under the BIT.133 In the view of the Respondent the Media Council acted in accordance with Czech law: The Council’s actions have been the lawful exercise of the power of Government, carried out as part of the regulation of economic activity in the Czech Republic.134

Furthermore, the Respondent argued that the Media Council’s actions, described by the Claimant as coercion, did not fall within the definition of deprivation or expropriation of investment.135 It said: Although in some circumstances a coerced capitulation may constitute an expropriation, a review of the authorities indicates that there is no solid or wide consensus on coercion outside of the cases dealing with physical force.136

The Respondent took the view that the Media Council only tried to ensure that ˇ CNTS and CET 21 complied with Czech law, in particular the amended Media Law. It said: The Media law, in common with the laws and procedures of many other nations, licenses scarce broadcast spectrum on the basis of prudential and public interest considerations; and does not permit unlicensed broadcasting. Under no circumstances can it be held that the conduct of the Council gave rise to any breach by the Czech Republic of the Treaty.137

As can be seen, the arguments of both parties were based on the BIT itself, on international law in general as well as on the law of the Czech Republic. All these sources are, indeed, listed in the Art. 8(6) of the BIT. 130

Partial Award, 13 September 2001, para. 169. Partial Award, 13 September 2001, paras. 165, 171. 132 Partial Award, 13 September 2001, para. 170. 133 Partial Award, 13 September 2001, para. 287. 134 Partial Award, 13 September 2001, paras. 315, 326. 135 Partial Award, 13 September 2001, paras. 318-320 136 Partial Award, 13 September 2001, para. 331. 137 Partial Award, 13 September 2001, para. 367. 131

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The Tribunal started its analysis of the merits by saying that the amendments to the Media Law were a reason for the Media Council’s 1996 reversed position. The operators of broadcasting were asked for some changes in the license without which the Media Council’s control over the operator of the license under the split license holder-operator scheme would be weakened.138 For these reasons the Tribunal understood that the Council decided “to put pressure on the ˇ participants of the split scheme (i.e. CET 21 and CNTS) in order to change it”.139 Then the Tribunal proceeded to explain the way in which the Council actually did that. It referred to a legal opinion of Dr. Barta of the Czech Academy of Science who was requested by the Council to give his view regarding the split structure. His opinion suggested the application of the Czech Administrative Law in order to find a basis for the Council’s actions.140 In this context, the Tribunal explicitly said that it was “not to decide on the Czech Administrative Law aspects of this question” and that Dr. Barta’s legal opinion was not in conformity with the BIT requirements “which does not allow reversal and elimination of the legal basis of a foreign investor’s investment by just taking the view that an administrative body’s formal resolution, the corner-stone for the security of the investment, was simply wrong”.141 The Tribunal understood that Dr. Barta’s opinion had the purpose of covering up the changed legal position of the Council towards CET 21 and the investor. The Tribunal found support for that in the subsequent events such as forced changes to the MOA and replacement of the “use of License” in the MOA as a CET 21’s contribuˇ tion in CNTS by the “use of the know-how of the license”.142 With respect to these changes in the contractual relationship the Tribunal again openly said that it did not need to “decide whether the contribution of the “use of the License” in 1993 was legally valid under Czech law”.143 Therefore, although the legality of 1993 structure was doubtful, the Tribunal decided not to examine that issue from the perspective of Czech law. The Respondent took the position that the amended structure (use of knowhow of the License and conclusion of a Service Agreement) fully compensated the waiver of the 1993 “safety net” (use of the License) in the MOA.144 The Tribunal was of the opposite view. It took the view that the above mentioned changes to the contractual arrangement were obtained under coercion and that these changes “vitiated the Claimant’s protection”145as well as “undermine the

138

Partial Award, 13 September 2001, paras. 461-462. Partial Award, 13 September 2001, para. 463. 140 Partial Award, 13 September 2001, paras. 465-466. 141 Partial Award, 13 September 2001, para. 467. 142 Partial Award, 13 September 2001, para. 468. 143 Partial Award, 13 September 2001, para. 469. 144 Partial Award, 13 September 2001, paras. 470-473. 145 Partial Award, 13 September 2001, para. 469. 139

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legal protection of CME’s investment”.146According to the Tribunal, this was fully achieved by terminating the Service Agreement by CET 21 in 1999.147 ˇ Because of that CNTS brought a lawsuit against CET 21 before the Regional Commercial Court which decided that the termination was void. The Court of Appeal reversed that decision and the case was still pending before the Czech Supreme Court at the time of the closing of the hearing of the arbitration proceedings in CME v. The Czech Republic. The Tribunal treated the domestic proceedings as “unacceptable legal and commercial risk of prolonged legal battles”148 and that it was “speculation whether CME could have gained support through the Czech Republic’s administrative and/or civil courts”.149 According to the Tribunal the Court of Appeal had “inadequately dealt with the facts and circumstances” and “even if the Czech Supreme Court was to reverse the Appellate Court’s decision and re-instate the first instance court decision, this would not change the Tribunal’s assessment”.150 It said: It is not the Tribunal’s role to pass a decision upon the legal protection granted to the foreign investor for its investment under the Czech Civil Law and civil court system.151

Therefore the Tribunal again disregarded the applicable Czech law as well as the Czech courts’ decisions. It explained that its mandate was to assess “whether the amendment of the legal structure of the Claimant’s investments in 1996 prejudiced the protection of the Claimant’s investment in the Czech Republic and whether this was a breach of the Treaty”.152 But the Tribunal never examined the legal questions from the perspective of applicable Czech law. In order to find further support for its findings of alleged coercion the Tribunal referred to the administrative proceedings concerning the unauthoˇ rized broadcast initiated by the Media Council against CNTS. For the Tribunal that was again evidence of a “threat”153 against the investor with the purpose to force it to change the MOA. CME’s reaction to these alleged pressures was explained by the Tribunal in the following terms: The Claimant decided to give in, which is a normal commercial consequence in any situation of unlawful pressure, when the affected victim of such pressure has to make a careful assessment. Such a decision for compromise, however, does not make the Council’s unlawful acts legal and cannot be deemed as a waiver of CME’s rights under the Treaty. This is the considered conclusion of the Arbitral Tribunal.154 146

Partial Award, 13 September 2001, para. 480. Partial Award, 13 September 2001, para. 474. 148 Partial Award, 13 September 2001, para. 532. 149 Partial Award, 13 September 2001, para. 521. 150 Partial Award, 13 September 2001, paras. 475, 477. 151 Partial Award, 13 September 2001, para. 476. 152 Partial Award, 13 September 2001, para. 478. 153 Partial Award, 13 September 2001, para. 499. 154 Partial Award, 13 September 2001, paras. 515-516. 147

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Here the Tribunal referred to an article of Prof. Vagts in an evident effort to apply international law to the issue of coercion. According to Prof. Vagts: The threat of cancellation of the right to do business might well be considered coercion . . . Such coercion might be found, even where a “clean” waiver of rights is signed.155

Furthermore, the Tribunal cited the elements of a code of unfair bargaining practices during investor-government negotiations as suggested by Prof. Vagts in his article.156 On that basis the Tribunal found evidence for an act of coercion exercised by the Council. It said: This seems to be a reasonable threshold which is passed by the Council’s actions in this case.157

According to the Tribunal “the effect of the coercion was that CME lost its legal protection for the investment”.158 It also dealt with the Media Council’s letter of 15 March 1999 which was again classified as a proof of “the (unlawful) situation of coercion”.159 With respect to the Respondent’s contention that the 1996 arrangement had never been tested the Tribunal said: The Czech Republic and/or the Media Council are as a matter of principle not debarred from amending or altering the basis for CME’s investment, subject to acquired rights and treaty obligations. This is a question of the Czech Republic’s national sovereignty. However, any such action should have been done under due process of law, providing just compensation to the deprived investor (Art. 5 of the Treaty). The silent and coerced vitiation of CME’s basis of its investment does not fulfill such a requirement and is, therefore, under the standards of the Treaty, and the rules of international law, a breach of treaty obligations.160

Finally, the Tribunal (the majority) concluded that: The Media Council, acting on behalf of the Czech Republic, in 1996 breached the Treaty by coercing CME and CNTS into giving up legal security for CME’s investment in the Czech Republic.161

The Partial Award in CME appears highly questionable from the perspective of applicable law. This case was governed by the combined choice of law clause explicitly stipulated in the pertinent provision of the BIT. Therefore, the Tribunal was under the obligation to examine and apply both Czech law and international law to the relevant issues. Unfortunately, the Tribunal did not discuss the question of applicable law and consequently the decision lacks 155

Partial Award, 13 September 2001, para. 517; Vagts, D. F., Coercion and Foreign Investment Rearrangement, 72 AJIL 17 (1978). 156 Partial Award, 13 September 2001, para. 526. 157 Partial Award, 13 September 2001, para. 526. 158 Partial Award, 13 September 2001, para. 527. 159 Partial Award, 13 September 2001, para. 518. 160 Partial Award, 13 September 2001, para. 533. 161 Partial Award, 13 September 2001, para. 538.

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this preliminary determination of the applicable law. The analysis of the merits of the case openly ignores the law of the Czech Republic and constantly denies its applicability. The correct approach would have been to examine and apply first Czech law to the relevant legal questions. Only after analyzing the problem from the perspective of Czech law should the Tribunal have examined and applied international law, in particular BIT provisions. If the host State’s law violates international law the latter prevails. With such an approach the Tribunal would have acted in compliance with the parties’ agreement on applicable law. This approach would not have put the investor at a disadvantage. But the Tribunal acted in the opposite way. It explicitly said (which is more than surprising) that it was refusing to examine and apply the law of the host State. This approach is completely incorrect especially because of the fact that certain issues needed to be examined from the perspective of Czech law since they are regulated by that law (e.g. whether the acts of the Media Council were in compliance with Czech law). Furthermore, the Tribunal simply assumed the consequences of the legal changes in the parties’ contractual arrangement. In fact, on this point it completely ignored the Czech courts decisions for the purpose of its own assessment purporting to find a basis for that in the BIT itself. The decision is mainly based on the substantive provisions of the BIT. But even these provisions should be applied in light of the established rules of international law. The decision contains some references to the sources of international law.162 To what extent the Tribunal has to substantiate its findings by reference to international law or domestic law is one of the important questions that must be considered. It will be discussed in a separate section dealing with the issue of annulment. For the aforementioned reasons, it is possible to conclude that the majority of the Tribunal failed to apply the proper law i.e. Czech law. The Dissenting Opinion to the Award criticized the Tribunal’s analysis from the perspective of applicable law. It pointed out that the Tribunal was under the obligation to apply the law of Czech Republic, in particular because it was listed first in the Art. 8(6) of the BIT. It said: It is without any doubt that the sequence of the legal provisions has been fixed by both states – partners to the Treaty intentionally. Therefore primarily the Czech law should be applied. But it must be stated that two arbitrators do not take this fact into consideration and apply only the international law and only those parts that are convenient for the Claimant, absolutely non-respecting the Treaty and consequently the provisions of the Czech law.163

162

Partial Award, 13 September 2001, in para. 398 the Tribunal referred to the FEDAX Award on Jurisdiction of 11 June 1997; In paras. 517, 526 it referred to one scholarly writer (Prof. Vagts); and in paras. 580, 583-584 it referred to the ILC Articles and Commentary on State Responsibility; See also para. 581. 163 Partial Award, 13 September 2001, para. VIII.

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In the Final Award the issue of applicable law was again before the Tribunal.164 It entered into a discussion on this point since the Respondent argued that the Tribunal in its Partial Award had failed to apply the law chosen by the parties (i.e. Czech law). The Respondent’s position on the applicable law was summarized in the Tribunal’s analysis of that issue. The Tribunal first cited Art. 8(6) of the BIT and noted that it was bound by that provision on applicable law. It also cited Art. 3(5) of the BIT which provides for the application of the rules which are more favorable to the investor. Such a provision is seen as useful guidance for the issue of interrelation between the two legal systems when both are determined to be applicable. But the Tribunal did not touch this issue. It turned to the Respondent’s position on applicable law which relied on Art. 8(6) of the BIT and the Common Position of the Netherlands and the Czech Republic. The Common Position on the BIT was agreed by the delegates of the Netherlands and the Czech Republic. As a matter of fact, after the issuance of the Partial Award the Czech Republic called for “consultations” with the Netherlands, as provided by Art. 9 of the BIT, with an aim to resolve certain issues of the Partial Award that were, according to the Czech Republic, inconsistent with the BIT.165 One of the issues concerned the correct interpretation of Art. 8(6) of the BIT. The following is the common position as agreed by the two contracting parties: The arbitral tribunal shall decide on the basis of the law. When making its decision, the arbitral tribunal shall take into account, [in particular] though not exclusively, each of the four sources of law set out in Art. 8.6. The arbitral tribunal must therefore take into account as far as they are relevant to the dispute the law in force of the contracting party concerned and the other sources of law set out in Art. 8.6. To the extent that there is a conflict between national law and international law, the arbitral tribunal shall apply international law.166

Under the heading “The Effect of the Common Positions’ the Respondent noted that “the statement of common position on the applicable law echoes precisely the language of Art. 8.6. of the Treaty”.167 In the view of the Respondent in the Quantum phase: The Tribunal is obliged to make its decisions on the basis of the law, not ex aequo et bono. The Tribunal is obliged to take into account four specified sources of law, out of which only three are available: the law of the Czech Republic as host state of the investment, the Treaty and general principles of international law. No other source of law is available. Only to the extent that

164 Final Award, 14 March 2003, at http://www.cetv-net.com/ne/articlefiles/439-Final_Award_ Quantum.pdf. 165 Final Award, 14 March 2003, paras. 87-93. 166 Final Award, 14 March 2003, para. 91. 167 Final Award, 14 March 2003, para. 218.

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The Respondent’s position was that the Tribunal must reconsider the Partial Award since it “must first apply Czech law to analyze any legal acts that have taken place in the Czech Republic and, in particular, the Tribunal must apply any Czech laws of mandatory nature”169 while “international law only becomes applicable if there is a “genuine gap” in Czech Law and if the Czech law must be corrected as being inconsistent with international law”.170 The Respondent referred to a legal opinion of Prof. Christoph Schreuer. According to the Tribunal, Prof. Schreuer took the following approach: The last word on matters of Czech law is with the Czech Courts, notably the Supreme Court. Only after having examined the issues in the light of the final Court decisions is it, in the view of Prof. Schreuer, possible to check the result then reached for compliance with international law “not until the Czech Courts have decided the issue we will know whether the change in the contractual arrangements deprived CME of the protection of its investment”. Prof. Schreuer is of the view that this requirement differs from that of an exhaustion of local remedies. (His view is not shared by the Tribunal).171

After that, the Tribunal offered its own analysis on applicable law which was lacking in its Partial Award. It briefly commented upon Prof. Schreuer’s legal opinion. In the Tribunal’s view the four categories of sources listed in Art. 8(6) of the BIT have no ranking according to the wording of the BIT.172 It found confirmation for its position in the Common Position of the Netherlands and the Czech Republic. Then the Tribunal referred to the pleadings of the two parties stating that they exclusively based their arguments on the interpretation of the BIT from the perspective of the international law principles.173 According to the Tribunal, Prof. Lowe was the only expert on law who based his arguments on international law in the First Phase of the arbitration and Czech law was pleaded by the Respondent for the first time in the Second, the Quantum Phase. Here, the Tribunal decided to comment briefly on the Prof. Schreuer’s opinion which was submitted by the Respondent together with its contention that because of the Tribunal’s failure to apply the proper law the Partial Award must be annulled. The Tribunal took the position that it could not find any support for Prof. Schreuer’s view that the Tribunal had failed to apply the 168

Final Award, 14 March 2003, para. 219. Final Award, 14 March 2003, para. 398. 170 Final Award, 14 March 2003, para. 399. 171 Final Award, 14 March 2003, para. 398. This Legal Opinion of 22 May 2001 was prepared together with Prof. Reinisch, but the Tribunal referred only to Prof. Schreuer. Italics and emphasis original. 172 Final Award, 14 March 2003, para. 400. 173 Final Award, 14 March 2003, para. 400. 169

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proper law in its Partial Award. The Tribunal rejected precedents cited by Prof. Schreuer finding that these cases did not adequately support his conclusions.174 According to the Tribunal, Prof. Schreuer relied on cases in which the parties had not agreed on the applicable law. Also, the choice of law clauses contained in the BITs and applied by the tribunals were not similar to Art. 8(6) of the Netherlands/the Czech Republic BIT. With respect to that clause, the Tribunal’s analysis led to the conclusion that it “is broad and grants to the Tribunal discretion, without giving precedence to the systems of law” stipulated in the pertinent provision of the BIT.175 The Tribunal tried to support its view by distinguishing between the wording “to take into account, in particular though not exclusively” as used in the said BIT and the wording “to apply” as used in other BITs. On that basis, the Tribunal could not find any similarity of the treaty clauses cited by Prof. Schreuer with the one before it because of the fact that they, according to their language, do not offer such discretion to the tribunals.176 Furthermore, the Tribunal found that the wording “shall decide on the basis of law”, as used in Art. 8(6) of the BIT stipulates the Tribunal’s main obligation regarding the applicable law and as such “is a self-explanatory confirmation of the basic principle of law to be applied in international arbitration according to which the arbitral tribunal is not allowed to decide ex aequo et bono without authorization by the parties”.177 The Tribunal was of the view that Prof. Schreuer confused the application of the international law principles with ex aequo et bono decisions.178 It referred in particular to the Klöckner v. Cameroon Decision on Annulment finding that this and other precedents cited by Prof. Schreuer did not sustain his contentions. In the Tribunal’s view “his opinion gives the dubious impression that only the reference to specific national law rules would prevent a tribunal’s decision from being characterized as a decision ex aequo et bono” and “if intended by Prof. Schreuer, would contrast with the principles of international law as applied by numerous international arbitral tribunals for decades”.179 According to the Tribunal: An arbitral tribunal’s decision is rendered “on the basis of the law”, if the award is based on well-recognized international law precedents as developed, e.g., by the International Court of Justice, or ICC or UNCITRAL tribunals, as cited by this Tribunal in the Partial Award.180

Then the Tribunal proceeded to provide examples for issues addressed under Czech law in the Partial Award but which were, according to the Tribunal, 174

Final Award, 14 March 2003, para. 401. Final Award, 14 March 2003, para. 402. 176 Final Award, 14 March 2003, para. 402. 177 Final Award, 14 March 2003, para. 403. 178 Final Award, 14 March 2003, para. 404. 179 Final Award, 14 March 2003, para. 405. 180 Final Award, 14 March 2003, para. 406. 175

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irrelevant to its decisions. It referred to the legal opinion of Dr. Barta, to the opinion of Prof. Lowe as well as to the Czech Court decisions. According to the Tribunal’s analysis of Prof. Schreuer’s opinion, he accepted the view of ranking of sources. With respect to that, Prof. Schreuer referred to the holding of the ICJ in Elettronica Sicula (ELSI) Case which was recited by the Tribunal in its Final Award. The ICJ stated: Where the determination of a question of municipal law is essential to the Court’s decision in a case, the Court will have to weigh the jurisprudence of the municipal courts . . .181

The Tribunal questioned whether that principle established by the ICJ was applicable to the broad language of the choice of law clause contained in Art. 8(6) of the BIT. And even if the established principle was applicable: This does not mean that a tribunal is bound to research, find and apply national law which has not been argued or referred to by the parties and has not been identified by the parties or the Tribunal to be essential to the Tribunal’s decision.182

The Tribunal’s discussion of applicable law in the Final Award is an obvious search for justification for its position towards Czech law in the Partial Award. It mainly relied on the assertion that Czech law was not argued by the parties before the Tribunal in the First Phase of the Arbitration or was not identified by the Tribunal itself as essential to its decision. Prof. Schreuer’s position that the Tribunal was required to withhold the issuance of the Partial Award until the Czech courts had finally decided the ˇ dispute between CET 21 and CNTS was understood by the Tribunal as necessitating the exhaustion of local remedies in the Czech Republic.183 The Tribunal could not accept such a view and held that its implementation “would mean injection into a choice-of-law clause a further requirement: the exhaustion of local remedies” which was in conflict with the BIT.184 In the end, the Tribunal expressed serious concerns about the policy implications of Prof. Schreuer’s views since the arbitration under a BIT would then always be threatened by the possibility of annulment because local remedies had not been exhausted or domestic law had not been properly applied.185 As can be seen, the Tribunal in its Final Award discussed the issue of applicable law in order to justify the approach it took in the Partial Award. In the Final Award the Tribunal was obviously concerned with the issue of applicable law because of the fact that the Respondent argued that the Tribunal had failed to apply the proper law. In any case, this time it offered some explanations for its position on applicable law which deserve some comments. 181

Final Award, 14 March 2003, para. 410. Final Award, 14 March 2003, para. 411. 183 Final Award, 14 March 2003, para. 412. 184 Final Award, 14 March 2003, para. 412. 185 Final Award, 14 March 2003, para. 413. 182

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The main argument of the Tribunal was based on the language of the choice of law clause itself. It treated that provision as different (more broad and granting discretion to the Tribunal) from other clauses cited in Prof. Schreuer’s opinion. The provision on applicable law in Art. 8(6) is indeed broad in terms of the sources listed in it. It provides for the applicability of both domestic law and international law. But the listed legal sources do not offer complete discretion to the Tribunal in terms that it may apply whatever law it chooses. Such discretion would exist only in case of an absence of agreement on applicable law between the parties as provided by Art. 33(1) of the UNCITRAL Arbitration Rules. In the case before the Stockholm Tribunal the parties had reached such an agreement and the Tribunal was, therefore, bound by the provision of Art. 8(6) of the BIT. This was also the position of Prof. Schreuer. He noted that the cases reported in his Legal Opinion (Fedax, Mafezzini and Goetz) “demonstrate clearly that a Tribunal operating under a BIT which contains a provision on applicable law that includes the law of the host State may not restrict itself to looking at international law alone but must examine and apply both systems of law”.186 With regard to the wording of the choice of law clauses in these cases, Prof. Schreuer in his response on the Stockholm’s Award correctly noted that he was “unable to see any peculiarity of Art. 8(6) of the Czech/Netherlands BIT that would set it apart from the clauses that were applied in the other three cases”.187 The Tribunal’s analysis led to the conclusion that the sources listed in Art. 8(6) of the BIT have no ranking. The Tribunal aimed to find a confirmation for its position in the Common Position of the two Contracting Parties to the BIT emphasizing that international law governs in case of discrepancy among these sources. Some arbitral tribunals discussed the view of a ranking of the sources listed in the applicable choice of law clauses in BITs. In Antoine Goetz v. Burundi the dispute was also governed by both domestic law and international law. The Tribunal accepted the view of complementarity of the two legal systems but also said that it “must, however, apply Burundian Law since this law is referred to first in the relevant provision of the Belgium–Burundian bilateral investment treaty”.188 Whether or not the Tribunal in Goetz suggested a ranking of sources, it clearly held that it must apply the host State’s law not least because of the fact that it was listed first in the provision of the BIT. Again, the same position was expressed by Prof. Schreuer. Contrary to the Tribunal’s interpretation, Prof. Schreuer suggested 186

Legal opinion submitted to the Stockholm Tribunal in the Quantum Proceedings (prepared by Prof. Schreuer and Prof. Reinisch), para. 191, available at http://www.univie.ac.at/ intlaw/main03.html. 187 Schreuer, C., Comments relating to Applicable Law on the Stockholm Tribunal’s Final Award of 14 March 2003, at p. 8, available at http://www.univie.ac.at/intlaw/main03.html. 188 Antoine Goetz v. Burundi, Award, 10 February 1999, 15 ICSID Review – FILJ 457 (2000), para. 98.

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only that “the examination of the host State’s law should come first as a matter of temporal sequence”.189 The result reached by applying the host State’s law must be tested against international law. Additionally, in the present case the Common Position explicitly confirms that the host State’s law must be taken into account as far as it is relevant to the dispute. Various issues needed to be examined from the perspective of Czech law since they were indeed relevant to the dispute and regulated by the host State’s law. But the Tribunal treated the law of Czech Republic as irrelevant. For example, the Czech courts’ decisions were treated as irrelevant and no effort was made to analyze the relevant issues from the perspective of Czech Civil Law. On this point the Tribunal attributed to Prof. Schreuer the view of a need to exhaust local remedies which is erroneous. Prof. Schreuer’s opinion indicates that he by referring to the application of Czech law clearly required the Tribunal to take into account the decision of the Czech Courts since the last word on matters of Czech law is normally with the Czech Courts.190 Therefore, when applying the domestic law the Tribunal must take into account the decisions of the domestic courts. Indeed, Prof. Schreuer referred to the principle established by the ICJ that an international court (or the tribunal) must take into account the jurisprudence of domestic courts when applying the domestic law.191 This is what the Tribunal refused to do on the basis that it was not bound to check the host State’s law since that law was not referred to by the parties or was not essential for the Tribunal’s decision. According to Prof. Schreuer it was essential to know the domestic courts’ position with respect to the issue of whether the change in the contractual arrangements had indeed deprived the investor of the protection of its investment. And Prof. Schreuer also noted that the results obtained by applying Czech law, in light of the final Court decision, should then be checked for compliance with international law.192 One cannot see anything wrong with this position and the proposed method does not disadvantage the investor since international law would ensure the protection of his/her rights. Furthermore, Dr. Barta’s opinion was rejected although the Tribunal argued in the Final Award that it had actually addressed relevant issues under

189 Schreuer, C., Comments relating to Applicable Law on the Stockholm Tribunal’s Final Award of 14 March 2003, at p. 7, http://www.univie.ac.at/intlaw/main03.html; Legal opinion submitted to the Stockholm Tribunal in the Quantum Proceedings (prepared by Prof. Schreuer and Prof. Reinisch), paras. 186-191, 239-240. 190 Legal opinion submitted to the Stockholm Tribunal in the Quantum Proceedings (prepared by Prof. Schreuer and Prof. Reinisch), paras. 245-247; Schreuer, C., Comments relating to Applicable Law on the Stockholm Tribunal’s Final Award of 14 March 2003, at p. 7. 191 Legal opinion submitted to the Stockholm Tribunal in the Quantum Proceedings (prepared by Prof. Schreuer and Prof. Reinisch), para. 246. 192 Legal opinion submitted to the Stockholm Tribunal in the Quantum Proceedings (prepared by Prof. Schreuer and Prof. Reinisch), para. 245.

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Czech law in the context of this opinion. But the Partial Award indicates something different. Dr. Barta’s opinion had suggested the application of Czech Administrative Law in order to find a basis for the Media Council’s actions.193 In the Partial Award, the Tribunal explicitly said that it was “not to decide on the Czech Administrative Law aspects of this question” and that Dr. Barta’s legal opinion was not in conformity with the BIT requirements.194 Therefore, although requested to check the law of the Czech Republic the Tribunal refused to do so. Also, there is no basis for the argument that Czech law was not relevant to the circumstances of the case. The result reached by applying Czech law could have led to a result different from the one reached by applying international law. As the Common Position itself states, as well as the opinion of Prof. Schreuer, in case of discrepancy international law would prevail. The Tribunal also sought to justify its position by saying that Czech law was not pleaded by both parties in the First Phase of the arbitration in contrast to the international law arguments. Since the Claimant based its arguments on the BITs provisions, consequently the Respondent tried to defend itself in the light of BIT and international law as well. But if one looks into the sections dealing with the Respondent’s positions and its arguments the references to Czech law are more than evident.195 Finally, the analysis of the merits in the Final Award is in contrast to the Partial Award with respect to the applicable law. In the Final Award the Tribunal made an effort to examine Czech law as well as to refer to it constantly. The first part of the Tribunal’s analysis of the merits in the Final Award was related to its findings in the Partial Award because the Respondent asked the Tribunal to re-litigate the issue of liability and to reconsider its position in the Partial Award. The Tribunal defended its earlier findings mainly in light of Czech law. The Respondent on its side relied on both Czech law and international law in respect to the principles of causation, the principles of contributory fault, mitigation of losses and joint tortfeasors. ˇ With respect to CET 21’s contribution to CNTS in 1993 (the exclusive right to use the license) the Respondent referred to Czech law according to which the contribution was irrevocable and therefore no change to CET 21’s contribution took place in 1996 since the host State’s law would not permit that.196 It supported its position by a legal opinion of Prof. Dedic. The Respondent also referred to Czech law with respect to the alleged acts of coercion by the Media Council in 1996 finding that any coercion was a legal 193

See Partial Award, 13 September 2001, paras. 465-466. See Partial Award, 13 September 2001, para. 467. 195 Partial Award, 13 September 2001, see e.g. paras. 287, 312, 315, 326; See also Schreuer, C., Comments relating to Applicable Law on the Stockholm Tribunal’s Final Award of 14 March 2003, at pp. 5-6. 196 Final Award, 14 March 2003, para. 316. 194

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nullity unless confirmed by the coerced party.197 The Respondent further referred to the Media Council’s letter of March 15, 1999 arguing that the letter had no legal effect since, under Czech law, only formal administrative proceedings commenced by the Media Council would have legal effect.198 Therefore, to satisfy the condition of Art. 5 of the BIT the letter would have to be a “measure” in order to constitute a “taking” which was not the case and accordingly there was no BIT violation by the Media Council.199 The Tribunal rejected the above contentions. With respect to the issue of joint tortfeasors the Tribunal decided to comment on Prof. Schreuer’s opinion on that issue finding it unsustainable in fact and law. After concluding that Prof. Schreuer’s conclusions on Joint Tortfeasors did not correspond to the facts of the case, the Tribunal turned to his view on State responsibility in light of international law. The Tribunal held that his analysis was “inconsistent with the general principles of international law found by the Tribunal as well as the Czech Civil Code”.200 Prof. Schreuer’s opinion in relation to the issue of joint tortfeasors was expressed in the following terms: These very specific findings on liability are not substantiated by any reference to Czech civil law. They are based exclusively on an interpretation of the International Law Commission’s Draft Articles on State Responsibility of 2001. This interpretation, as developed by the Tribunal, does not reflect current international law [paras. 149-200 in the Opinion submitted to the Svea Court of Appeal]. It does not even purport to represent Czech civil law which contains a very specific provision on joint tortfeasors [reference to Section 438 of the Czech Civil Code]. Therefore, Czech law, which would have been applicable, is totally ignored also in this context.201

Therefore, in the view of Prof. Schreuer, the Tribunal’s findings on joint tortfeasors represent neither current international law nor Czech law. As matter of fact, no reference was made to Czech law on this point. Interestingly, what is evident in the Final Award is that the Tribunal this time indeed examined Art. 438 of the Czech Civil Code and held the following: The Tribunal held in the Partial Award that the Respondent (as consequence of the Media Council’s breaches of the Treaty by supporting Dr. Zelezny) is liable under the Treaty. The Tribunal’s position is consistent with Art. 438(1) Czech Civil Code, according to which tort-feasors are jointly and separately liable. Only for good reasons may a court decide that someone who caused the damage shall be liable only in respect to the damage caused by him personally 197

Final Award, 14 March 2003, para. 317. Final Award, 14 March 2003, para. 321. 199 Final Award, 14 March 2003, para. 322. 200 Final Award, 14 March 2003, para. 452. 201 Legal opinion submitted to the Svea Court of Appeal (prepared by Prof. Schreuer and Prof. Reinisch), para. 121; See Legal opinion submitted to the Stockholm Tribunal in the Quantum Proceedings (prepared by Prof. Schreuer and Prof. Reinisch), paras. 255-298. 198

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(Art. 438(2) Czech Civil Code) This does not apply here as the Media Council, according to the Tribunal’s findings, by its actions in 1996 and 1999 undermined CNTS’ exclusivity of the use of the broadcasting license, which exclusivity was the main protection for the Claimant’s investment in the Czech Republic.202

The Tribunal in the Final Award not only took into account Czech Law but also constantly referred to it. The following issues were also discussed by the Tribunal in light of Czech law: With respect to the Respondent’s new argument, expressed by Prof. Dedic in his opinion, that the 1996 MoA amendments were void, the Tribunal discussed and cited the Czech Civil Code and its position regarding the acts of coercion as well as the Czech Commercial Code.203 It found that the Civil Code’s plain language provides only for the voidability of a coerced act and not its invalidity. It also added that Art. 49 of the said code is legally inapplicable to the MoA since the Czech Commercial Code specifically excludes the possibility of claiming invalidity on grounds of coercion.204 After that, the Tribunal discussed Prof. Dedic’s opinion (who referred to Czech law), Prof. Lowe opinion (who referred to international law) and Dr. Barta’s opinion (who referred to Czech law) and found that they are contradictory.205 Dr. Barta had argued that the contribution of the use of the ˇ license by CET 21 to CNTS in 1993 was illegal and void while Prof. Lowe had argued that not the legal structure but the implementation of the broadˇ casting services by CNTS were in breach of the Media law. Prof. Dedic took the position that the 1996 MoA amendments were void since CET 21’s conˇ tribution to CNTS in 1993 were irrevocable under Czech law. Because of these contradictory arguments under Czech law the Tribunal said: This change of the legal position of the host State towards the foreign investor is in the eyes of this Tribunal unacceptable and cannot be given credence or effect. It cannot be easily reconciled with the principle that a party cannot be heard to deny that which it has previously affirmed and on which the other party had acted in reliance.206

After that, the Tribunal noted that the Quantum was unaffected by the Czech court proceedings since the Claimant had not yet gained any relief from these proceedings.207 Then the Tribunal proceeded to decide on the quantum of the Claimant’s claim. This part of the Award also constantly referred to Czech law, in particular the Czech Civil Code and Commercial Code as well as to the BIT itself and international law principles.208 202

Final Award, 14 March 2003, para. 452. Final Award, 14 March 2003, para. 486. 204 Final Award, 14 March 2003, para. 486. 205 Final Award, 14 March 2003, para. 488. 206 Final Award, 14 March 2003, para. 488. 207 Final Award, 14 March 2003, para. 489. 208 Final Award, 14 March 2003, paras. 492, 503-507, 627, 631-632, 637-642. 203

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The above extensive analysis of this important decision was necessary in order to demonstrate the clearly mistaken position of the Tribunal in the Partial Award from the perspective of applicable law. The correct approach is the one already proposed above: first to examine and apply the host State’s law and then, to check the result in the light of international law, in particular the BIT. In case of discrepancy between the two legal systems international law prevails. Non-application of the proper law constitutes an excess of powers and a ground for annulment. This will be demonstrated below. In response to the Tribunal’s concerns that arbitration under a BIT would be subject to nullity because domestic law had not been properly applied, Prof. Schreuer noted that A mere error in judicando in the application of the proper law is no ground for annulment. But the risk does exist if the domestic law has not been applied although it is part of the applicable law.209

This decision was indeed challenged on several grounds one of which included an excess of mandate for failure to apply the proper law. The decision of the Svea Court of Appeal will be analyzed in a chapter dealing with issues of annulment. (iv) Concluding remarks The above examination of arbitral practice shows that the tribunals’ approach towards combined choice of law clauses is not as consistent as would be desirable. These clauses combine both the host State’s law and international law as the applicable law and the tribunal is bound to apply both. The parties’ agreement on choice of law must be respected. When the tribunal operates under such a clause it must examine and apply the legal sources listed in the respective provision of the BIT. The sources listed do not offer discretion to the Tribunal in terms that it may apply whatever law it chooses. Once again, it would seem that the host State’s law must be first examined and applied and then, the result should be checked against international law, in particular in light of the BIT. If the host State’s law violates international law, the latter prevails.

(c) Choice of law provisions in domestic legislation The third way by which the agreement on applicable law in investor/State arbitration may be exercised is through domestic legislation. The host State legislation may include a reference to ICSID arbitration or some other means of dispute settlement between the investor and the host State.210 In cases 209

Schreuer, C., Comments relating to Applicable Law on the Stockholm Tribunal’s Final Award of 14 March 2003, at p. 9. 210 For example in SPP v. Egypt the ICSID’s jurisdiction was based on Art. 8 of Egypt’s Law No. 43 of 1974.

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where domestic legislation is the basis for the arbitral jurisdiction, its own clause on applicable law, if any, becomes a choice of law agreed by the parties. Therefore, as in the case of treaties, such a clause is transformed into an agreement on applicable law between the parties upon the investor’s acceptance of the jurisdiction which may be expressed simply by instituting arbitration proceedings. Explicit choice of law clauses contained in domestic legislation are rare. But if such clauses are contained in domestic legislation the parties may rely on them before the arbitral tribunal.

3 Explicit or Implicit Choice of Law? One of the questions that must be considered by the arbitral tribunal relates to an indirect or implicit choice of law made by parties. The most desirable option would be to have an explicit stipulation of choice of law in the agreement between the parties but arbitral practice shows that this is not always the case. In the absence of an explicit choice of law, the Tribunal may proceed in two ways: it may attempt to discern the true intentions of the parties in order to find the proper law to their dispute, or it may treat the situation as an absence of agreement on choice of law. The first question that may be raised is whether the parties’ agreement on applicable law must be explicit or it may also be implicit. The respective provisions of the authorizing instruments do not require that the parties’ agreement on choice of law must be expressly stated or even that it should be in writing.211 Therefore the assumption is that the parties’ agreement on choice of law may, indeed, be implied as will be demonstrated below.

(a) Expression of implicit choice of law In case of an implied agreement on choice of law, the question would be: what is the method for finding it?212 According to one view, the reference of the dispute by agreement to an international arbitration implies a choice of international law as the applicable substantive law. For the arbitrator in the TOPCO

211

See Art. 42(1) of the ICSID Convention; Art. 54(1) of the Additional Facility Arbitration Rules; Art. 33(1) of the UNCITRAL Arbitration Rules of 1976; Art. 17(1) of the ICC Arbitration Rule of 1998. 212 The PCIJ in the Serbian and Brazilian Loan Cases offered the following criteria for determination of applicable law: “The Court which has before it a dispute involving the question as to the law which governs the contractual obligations at issue, can determine what this law is only by reference to the actual nature of these obligations and to the circumstances attendant upon their creation, though it may also take into account the expressed or presumed intentions of the Parties.”, PCIJ, Ser. A, No. 21 (1929) at p. 41.

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case not only an explicit reference to international law in the parties’ agreement but also the nature of a dispute as well as the reference to international arbitration implied a choice of international law as the applicable law. Therefore, in his view, internationalization results from the reference in the contract to international law and general principles of law, the contractual clause referring to international arbitration as the method for resolving disputes, and from the nature of the agreement between a State and a private person.213 As already indicated above, the TOPCO case was governed by an explicit choice of law clause but the arbitrator’s position indicates that the choice of particular forum may imply a choice of applicable substantive law. The Iran–United States Claims Tribunal has frequently justified its position on applicable law by resorting to its own international character. An issue of expropriation was always examined in light of international law only, regardless of the law expressly chosen by the parties.214 That Tribunal justified its approach mainly by referring to the broad wording of Art. V of the CSD and by emphasizing its international character. The better view would be that although the reference to international arbitration may have an impact on the determination of applicable law it cannot be treated as an automatic choice of international law as the applicable substantive law.215 Another view is that the choice of the place of arbitration implies a choice not only of the procedural law but also of the substantive law to be applied by the tribunal. In ICSID arbitration such a principle is definitely not applicable. The place of arbitration has no impact on the applicable law, procedural or substantive. Nor has the locus of the arbitration an impact on the applicable substantive law in the context of other arbitration systems in investor/State disputes.216 Arbitral practice indicates that tribunals may try to discern an implicit agreement on the basis of the terms of the contract or the circumstances of the case (including the choice of a particular forum). 213

Texaco Overseas Petroleum Company/California Asiatic Oil Company v. Libya, Award, 19 January 1977, 17 ILM 1 (1978), at pp. 14-17. 214 Mobil Oil Iran, Inc. v. The Government of the Islamic Republic of Iran, Partial Award, 14 July 1987, 16 Iran–U.S. C.T.R. 3; Amoco International Finance Corporation v. Islamic Republic of Iran, Partial Award, 14 July 1987, 27 ILM 1314 (1988); See chapter on absence of agreed choice of law. 215 On this point see Delaume, R. G., Law and Practice of Transnational Contracts, Ch. I, Booklet 1, Release 88-1, Oceana (1988) at pp. 15-30. 216 But it has an impact on procedural law. In case of e.g. ICC, UNCITRAL or Additional Facility arbitration the domestic courts may interfere with the conduct of arbitration, mandatory provisions of the law of the country which is the seat of arbitration may also have an impact. Furthermore parties should take into account whether the country is a party to the New York Convention of 1958 (or Panama Convention of 1975) which makes enforcement of the final awards easier. In case of the request for annulment, the grounds for nullity will depend on the domestic law at the place of arbitration.

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For the aforementioned reasons, the best method for finding an implicit agreement on applicable law is the one proposed by the European Convention on the Law Applicable to Contractual Obligations. Its Art. 3(1) provides that the choice of law “must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case”.217 Therefore, the terms of the contract itself or the circumstances of the case should lead a tribunal when searching for any implicit agreement on applicable law, provided that such agreement can be demonstrated with reasonable certainty. The next section will analyze the arbitral practice that has considered implicit choice of law.

(b) Arbitral practice (i)

SPP v. Egypt (reference in the parties’ agreement to domestic law as implicit choice of law)

In SPP v. Egypt, the dispute arose out of Egypt’s termination of a tourism development project in which SPP, a Hong Kong company, was engaged. The reason for this termination was the project’s impact on a site regarded as part of the world cultural heritage. The dispute led to ICSID as well as ICC proceedings. In both proceedings the issue of applicable law was of major importance. The 1974 Agreement (named the “Heads of Agreement”) concluded between SPP and the Egyptian General Company for Tourism and Hotels (EGOTH) provided for the creation of a joint venture company for the development of tourist facilities at the Pyramids area near Cairo and on the Mediterranean Coast. In the Preamble to the “Heads of Agreement” it was stated that the Agreement was made in accordance with several Egyptian laws, in particular the Law No. 43 of 1974 Concerning the Investment of Arab and Foreign Funds and the Free Zones. Shortly thereafter, the parties concluded a further, more detailed agreement (named the “Agreement for the Development of Two International Tourist Projects in Egypt – the Pyramid and Ras-El-Hekma Area”). This Agreement contained identical references to the law of Egypt. In the ICC proceedings218 the Tribunal discussed the issue of applicable law under the heading “Governing law”. The Claimant argued that “no rules and/or 217

Article 3(1), 19 ILM 1492 (1980); 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. 190. 218 ICC Award (Case No. 3493), 11 March 1983 (date of certification of the award by the ICC), 22 ILM 752 (1983). The Agreement for the Development of Two International Tourist Projects in Egypt – the Pyramid and Ras-El-Hekma Area, dating from 12 December 1974, provided for the arbitral settlement of disputes under the Rules of the ICC. The Tribunal ruled in favor of SPP but the French courts annulled the award for lack of valid agreement to arbitrate on the part of Egypt., see Cour d’ appel, Paris, 12 July 1984, 23 ILM 1048 (1984); Cour de cassation, Paris, 6 January 1987, 26 ILM 1004 (1987).

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principles drawn from the body of domestic Egyptian law should be allowed to override the principles of international law applicable to international investment projects of this kind”.219 The Respondent argued that Egyptian law was the law applicable to the dispute and not international law.220 The Tribunal noted that the parties’ agreements did not provide specifically for the law applicable to the merits of the dispute but that: The parties have fully debated this issue coming to conclusions which only partially diverge. They both agree that in view of the circumstances of the case the relevant domestic law is that of Egypt.221

The Tribunal took the position that there was no doubt as to the applicability of the law of Egypt. Its finding was based primarily on the fact that the parties’ agreements were made in Egypt and that there were several references in these agreements to the law of Egypt.222 Moreover, the place of performance was almost entirely in Egypt. The ICC Tribunal also noted that “failing contractual designation of the governing law, the same result (i.e. reference to the law of the host country) would also normally be achieved by applying the ordinary principles of conflict of laws”.223 But the Tribunal did not stop here. According to the Tribunal the basic issue that should be resolved was “whether contracts between States and private Law persons can be removed at least to a certain extent from domestic law and made subject to International Rules”.224 The Respondent’s refusal to accept a “denationalization” theory prompted the Tribunal to enter into a discussion on this point. In this regard the Tribunal referred to different theories that have emerged on that subject and, in particular, it referred to Art. 42 (1) of the ICSID Convention. After reciting the said provision it noted that the provision is applicable only to investment agreements and investment disputes but it also agreed with the view of one of the Commentators saying that: “in the world today, there is no reason why this solution should be limited to a particular category of state contracts. In other words, the rule formulated in article 42 can be considered as illustrative of a principle of wider application.225

Therefore, the question remained whether the law of Egypt should be deemed to include the general principles of international law. The Claimant had argued that the principles of international law such as pacta sunt servanda and

219

ICC Award, 11 March 1983, 22 ILM 752 (1983) at p. 769, para. 49. At p. 769, para. 49. 221 At p. 768, para. 49. 222 At p. 770, para. 49. 223 At p. 769, para. 49. 224 At p. 769, para. 49. 225 At p. 769, para. 49 the Tribunal cited Delaume, G. R., State Contracts and International Arbitration, 75 AJIL 784 (1981) at p. 786. 220

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just compensation for expropriatory measures were not incompatible with the law of Egypt.226 The Claimant’s argument was supported by the opinions of Egyptian specialists who referred to the Constitution as well as to the Egyptian Civil Code, stating that “these principles are deeply rooted in the Egyptian legal tradition, characterized by the general rule of “siyadat et kanoun, i.e. supremacy of the law”.227 As further decisive element in support of these contentions was the impact of Law No. 43 of 1974 which referred to the ICSID Convention ratified by Egypt, and which according to the Tribunal, indicated the intent of Egypt to abide by these principles. The Tribunal stated: We have found that International Law Principles such as “Pacta Sunt Servanda” and “Just compensation for expropriatory measures” can be deemed as part of Egyptian Law. The adherence to the ICSID Convention should then be treated as conclusive evidence of Egypt’s declared intent to abide by these principles, which indeed represent the basic philosophy adopted by the Convention’s drafters.228

Being satisfied with the above, the Tribunal finally concluded that: . . . reference to Egyptian law must be construed so as to include such principles of international law as may be applicable and that the national laws of Egypt can be relied upon only in as much as they do not contravene said principles.229

Therefore, the Tribunal determined the law of Egypt as the applicable law and international law as part of that law. The Tribunal proceeded to examine the merits of the case on the basis of Egyptian law. In SPP there was no explicit choice of law in the parties’ agreement but the parties’ positions were identical with respect to the law of Egypt. That provided the basis for the Tribunal’s finding that there was an implicit agreement on applicable law supported by the facts and circumstances of the case. This decision therefore indicates that the parties’ agreement on applicable law may be implied but “must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case”.230 The Tribunal’s reference to the conflict of laws rules was obiter since it already accepted an implied agreement on applicable law. It probably wanted to demonstrate that in case it had not recognized the implicit agreement on applicable law, the conflict of laws rules would lead to an identical result i.e. to the law of Egypt as the governing law. The only problem appeared to be whether the principles of international law should be deemed as a part of Egyptian law. Since that was argued by the Claimant the Tribunal felt that it was under the obligation to discuss the

226

At p. 770, para. 49. At p. 770, para. 49. 228 Ibid. 229 At p. 771, para. 49. 230 Article 3(1) of the European Convention on the Law Applicable to Contractual Obligations, 19 ILM 1492 (1980). 227

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applicability of international law to the dispute before it. With respect to that the Tribunal referred to Art. 42 (1) of the ICSID Convention “as illustrative of a principle of wider application”. Article 42(1) of the ICSID Convention in the second sentence refers to both the host State’s law and international law as the applicable law in the absence of the parties’ agreement. This provision logically cannot be used in the ICC proceedings and the ICC Tribunal did not do so. Rather, it sought to find support for its “internationalization” theory. In Egypt’s adherence to the ICSID Convention the ICC Tribunal sought to find support for its view of Egypt’s declared intent to abide by the principles of international law. The better approach to this issue is the following: Egypt’s adherence to the ICSID Convention and other relevant treaties may indeed be evidence of its intent to abide by the principles of international law.231 But the investor should be cautious about relying on international law merely as part of the chosen domestic legal system. The status of international law under domestic constitutions may be changed in the passage of time. Obviously the Tribunal was reluctant to exclude the principles of international law on which the investor sought protection for its investment. In the ICSID proceedings, in SPP v. Egypt,232 there was disagreement between the parties as to whether there was an agreement on the applicable law. The Respondent argued that there was an implicit agreement between the parties, in accordance with the first sentence of Art. 42(1) of the ICSID Convention to apply the law of Egypt.233 In the view of the Respondent the parties’ agreement as to applicable law did not need to be express and the parties through their reference in the preamble of the Heads of Agreement to Egyptian laws expressed their choice of law as to Egyptian law. Therefore, in the Respondent’s view the second sentence of Art. 42(1) was not applicable since it is applicable only in the absence of an agreement. According to the Respondent international law was to be applied only indirectly through those rules and principles incorporated into Egyptian law (e.g. the 1972 UNESCO Convention for the Protection of the World Cultural and Natural Heritage).234 The Claimant rejected the Respondent’s position as to the implicit agreement on Egyptian law as the applicable law.235 It argued that the second sentence of Art. 42(1) of the ICSID Convention was applicable since there was no agreement on applicable law. Although their investment in Egypt was governed by Law No. 43 of 1974, that law did not cover every aspect of the dispute according to the Claimant.

231

See the ad hoc Committee’s discussion on this point in Wena Hotels v. Egypt, Decision on Annulment, 8 January 2002, 41 ILM 933 (2002) at pp. 941-942. 232 SPP v. Egypt, Award, 20 May 1992, 3 ICSID Reports 189. 233 At p. 206, para. 75. 234 At p. 207, para. 76. 235 At p. 207, para. 77.

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After summarizing the parties’ positions on applicable law the Tribunal simply held: 78 . . . the Parties’ disagreement as to the manner in which Article 42 is to be applied has very little, if any, practical significance. Both Parties agree that Law No. 43 is applicable to their dispute. Nor is there any question that the UNESCO Convention is relevant . . .236

It offered an explanation for its approach in the following terms: 80. Finally, even accepting the Respondent’s view that the Parties have implicitly agreed to apply Egyptian law, such an agreement cannot entirely exclude the direct applicability of international law in certain situations. The law of the ARE, like all municipal legal systems, is not complete or exhaustive, and where a lacunae occurs it cannot be said that there is agreement as to the application of a rule which ex hypothesi, does not exist. In such case, it must be said that there is “absence of agreement” and, consequently, the second sentence of Article 42(1) would come into play.237

Therefore, the Tribunal’s position was that both Egyptian and international law were applicable under the first and second sentences of Art. 42(1) of the ICSID Convention.238 This decision stresses the importance of an explicit contractual stipulation of the applicable law. The Tribunal did not reject the possibility of an implicit choice of law made by the parties but simply considered it as immaterial. The question of whether there was an implicit agreement or not in favor of Egyptian law was left open in this case. For the Tribunal the manner in which Art. 42(1) of the ICSID Convention is to be applied had no importance. The Tribunal’s approach has been criticized.239 The method recommended by Delaume seems preferable i.e. the tribunal should, first, determine whether parties made an agreement on the choice of law, explicit or implicit, and then to proceed to apply either the first or second sentence of Art. 42(1) of the ICSID Convention.240 International law could certainly be applicable in both situations (under the first and second sentence of the said article) but it must be borne in mind that the second sentence of Art. 42(1) explicitly refers to international law as the applicable law. In case of the first sentence the situation is different since the Tribunal is bound by the parties’ agreement on applicable law which may not include international law. Even then the applicability of international law may be possible. This would require a discussion on whether the choice of domestic legal system excludes the applicability of international law. Therefore,

236

At p. 207. At p. 207. 238 At pp. 207-209, paras. 80-85. 239 See Delaume, G. R., The Pyramids Stand – The Pharaons Can Rest in Peace, 8 ICSID Review – FILJ 231 (1993). 240 Ibid., at pp. 241-242. 237

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the question would be whether international law would be applicable in the absence of its choice. This issue will be discussed in a separate section. For the aforementioned reasons, it would seem that not only the Tribunal’s refusal to determine whether the law of Egypt had been chosen by the parties or not but also its holding that the same sources of law would be applied under both first and second sentence must be criticized. With respect to the Respondent’s argument that the parties, by their reference in the preamble of the Heads of Agreement to Egyptian laws, expressed their choice of law as to Egyptian law, the better view would be that such a mere reference in the parties’ agreement is not a convincing argument in favor of an implied agreement on the host State’s law. Reliance on such arguments does not satisfy the proposed test for finding the implicit agreement, i.e. that any implied agreement must be demonstrated with reasonable certainty by the terms of the contract. (ii) LETCO v. Liberia (reference in the parties’ agreement to domestic law as implicit choice of law) In LETCO v. Liberia,241 the dispute arose out of the revocation of the Concession Agreement of 1970 by the Government of Liberia before the date fixed for its expiration. LETCO instituted ICSID arbitration proceedings seeking recovery of damages for breach of the Concession Agreement. This Agreement stated in its opening paragraph that it was made under the General Business Law, Title 15 of the Liberian Code of Laws of 1956. The parties disagreed as to whether there was an express agreement on applicable law. The Claimant, at one stage of the proceedings, stated that there had been no express choice of law and therefore international law should be applied as well in accordance with the second sentence of Art. 42(1) of the ICSID Convention. But later it said that Liberian law was “probably applicable”.242 After determining the applicable procedural law to the arbitration proceedings, the Tribunal proceeded to identify the applicable substantive law. It noted that the first sentence of Art. 42(1) of the ICSID Convention grants freedom of choice of law to the parties.243 Then it referred to the Concession Agreement of 1970 and its opening paragraph which stated that it was made under the General Business Law. For the Tribunal that appeared to indicate an express choice by the parties of the Law of Liberia as the law governing the Concession Agreement.244

241 Liberian Eastern Timber Corporation v. Republic of Liberia, Award, 31 March 1986 (rectified 10 June 1986) 2 ICSID Reports 346. 242 At p. 358. 243 Ibid. 244 Ibid.

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The Tribunal added the following: . . . there is no doubt as to the applicability of Liberian law. No other system or rules of law were chosen by the parties; and even if (leaving aside the opening words of the Concession Agreement itself) there was no express choice of Liberian law by the parties, it is plain that the Tribunal must apply Liberian law to the present dispute. The only question is whether Liberian law is applied on its own (as the law chosen by the parties) or in conjunction with applicable principles of public international law.245

Therefore, for the Tribunal the parties’ reference in their agreement to the host State’s legislation amounted to a choice of the host State’s law as the law governing their relationship. The only remaining question was whether the law of Liberia should be applied as the law chosen by the parties or together with international law, in accordance with the second sentence of Art. 42(1) of the ICSID Convention. After citing the said article of the ICSID Convention the Tribunal noted that: . . . The law of the Contracting State is recognized as paramount within its own territory, but is nevertheless subjected to control by international law . . .246

Finally it confirmed that the law of Liberia was in compliance with the generally accepted principles of international law: . . . the rules and principles of Liberian law which it has taken into account are in conformity with generally accepted principles of public international law governing the validity of contracts and the remedies for their breach.247

The Tribunal proceeded to examine the merits of the case in light of both Liberian law and international law. This decision indicates that a reference in the parties’ agreement to the host State’s legislation may be taken by a tribunal as an implicit choice of the host State’s law as the governing law. The Tribunal in the LETCO case determined that such a reference indicated an express choice of Liberian law. The better view would be that such a reference does not demonstrate with reasonable certainty an implied agreement on the host State’s law as the applicable law. This position is shared by some writers.248 For these reasons, it would seem that the residual rule of Art. 42(1) of the ICSID Convention should have been applied. In fact, after confirming that Liberian law was in compliance with international law the Tribunal indeed examined the merits of the case on the basis of both the host State’s law and international law.

245

Ibid. Ibid. 247 At p. 359. 248 Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at p. 576; See also Delaume, G. R., The Pyramids Stand – The Pharaons Can Rest in Peace, 8 ICSID Review – FILJ 231 (1993). 246

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(iii) AAPL v. Sri Lanka (the parties’ conduct and submissions as proof of an implicit choice of law) Whether an implied choice of law can be construed from the parties’ submissions during the arbitration proceedings was the subject of discussion in AAPL v. Sri Lanka.249 The dispute arose out of the destruction of the Serendib shrimp farm, a Sri Lankan company in which AAPL was a shareholder. The destruction was the result of a counter-insurgency operation undertaken by Sri Lankan Security Forces. The ICSID arbitration proceedings were initiated pursuant to the Sri Lanka/UK BIT of 1980. There was no provision on applicable law in the BIT. AAPL argued that the BIT should be considered tantamount to an agreed choice of law by the parties within the context of the first sentence of Art. 42 of the ICSID Convention.250 Moreover, it stated that the customary international law rules and Sri Lankan law should be regarded as supplementary sources of applicable law.251 On the other hand, the Respondent argued that the Sri Lankan law was the law applicable to their dispute and that the application of the BIT was only possible to the extent that it had been incorporated into Sri Lankan law.252 The Tribunal started its analysis on the applicable law by observing that this was the first case in which ICSID’s jurisdiction was established under a consent clause to arbitration in a BIT and that the parties consequently had not had an opportunity to choose the applicable law in advance. Therefore their agreement on applicable law was only possible after the emergence of the dispute in the course of the arbitration proceedings.253 The Tribunal said: 19. . . . the Parties in dispute have had no opportunity to exercise their right to choose in advance the applicable law determining the rules governing the various aspects of their eventual disputes. In more concrete terms, the prior choice-of-law referred to in the first part of Article 42 of the ICSID Convention could hardly be envisaged in the context of an arbitration case directly instituted in implementation of an international obligation undertaken between two States in favor of their respective nationals investing within the territory of other Contracting State. 20. Under these special circumstances, the choice-of-law process would normally materialize after the emergence of the dispute, by observing and construing the conduct of the Parties throughout the arbitration proceedings.254

249

AAPL v. Sri Lanka, Award, 27 June 1990, 4 ICSID Reports 246. At p. 253. 251 At p. 253. 252 At p. 257. 253 At p. 256. 254 Ibid. 250

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On the basis of the parties’ conduct in the arbitration proceedings the Tribunal found that: 20 . . . both Parties acted in a manner that demonstrates their mutual agreement to consider the provisions of the Sri Lanka/UK Bilateral Investment Treaty as being the primary source of the applicable legal rules.255

The Tribunal reached its finding on the basis of an analysis of the parties’ pleadings made in the proceedings. It noted that the Claimant had relied heavily on the BIT as the primary source of applicable legal rules and that the Respondent had accepted that and even based its main arguments on the BIT provisions. The Respondent also invoked Art. 157 of the Sri Lankan Constitution emphasizing that the BIT had become applicable as part of Sri Lankan law.256 After determining the BIT as the primary source of applicable law the Tribunal noted that it is not a self-contained closed legal system and that, therefore, recourse to other supplementary rules was necessary: 21. Furthermore, it should be noted that the Bilateral Investment Treaty is not a self-contained closed legal system limited to provide for substantive material rules of direct applicability, but it has to be envisaged within a wider juridical context in which rules from other sources are integrated through implied incorporation methods, or by direct reference to certain supplementary rules, whether of international law character or of domestic law nature.257

The parties’ submissions in the proceedings, according to the Tribunal, clearly demonstrated an agreement on the supplementary role of the recourse to general customary international law, other specific international rules being applicable in implementation of the most-favored-nation clause in the BIT and Sri Lankan law.258 The Tribunal, furthermore, noted that although the Claimant was initially reluctant to admit the applicability of general customary international law rules and Sri Lankan law, as required by the second sentence of Art. 42 of the ICSID Convention, it had arrived in the course of the proceedings at a position similar to that adopted by the Respondent.259 The Tribunal referred to submissions of the parties in the Award in sections 7(iii), 9 and 10. Section 7(iii) referred to the Claimant’s position regarding the supplementary source of law while in section 10 the Respondent referred to the BIT provisions with a purpose to respond to the Claimant’s interpretation of the relevant provisions of the BIT which was seen as incorrect by the Respondent. Finally, the Tribunal’s analysis of the parties’ submissions led to the conclusion that both parties agreed in the course of proceedings “during 255

Ibid. At p. 257. 257 Ibid. 258 Ibid. 259 Ibid. 256

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their respective pleading” to the UK/Sri Lankan BIT as the primary source of applicable law and international and domestic law as supplementary sources.260 After determining the applicable law, the Tribunal proceeded to analyze the merits of the case. It noted that although both parties invoked and agreed on the BIT as the primary source of applicable law, the relevant provisions of the BIT were interpreted differently by the parties and consequently led to different conclusions.261 In fact, the Claimant argued that the correct interpretation of the Sri Lanka/UK BIT led to the conclusion that the parties had replaced a traditional due diligence standard of customary international law as applied to State responsibility with a standard of strict liability based on the Art. 2(2) of the BIT which requires “full protection and security of the investment” and on the Most Favoured Nation (MFN) clause contained in Art. 3 of the BIT.262 On the basis of the MNF clause the Claimant relied on the Sri Lanka/ Switzerland BIT which does not provide for a “war clause” or “civil disturbance” exemption from the standard of protection and security and, therefore, was more favorable to the investor than the Sri Lanka/UK BIT. In the view of the Claimant this meant that “a standard of unmitigated strict liability has to be assured by Sri Lanka in favor of British Investments”.263 The second argument, and as alternative only, was based on a specific rule contained in Art. 4(2) of the Sri Lanka/UK BIT. Art. 4 of the Sri Lanka/UK BIT provides: Article 4 Compensation for losses (1) Nationals or companies of one Contracting Party whose investments in the territory of the other Contracting Party suffer losses owing to war or other armed conflict, revolution, a state of national emergency, revolt, insurrection or riot in the territory of the latter Contracting Party shall be accorded by the latter Contracting Party treatment, as regards restitution, indemnification, compensation or other settlement, no less favorable than that which the latter Contracting Party accords to its own nationals or companies or to nationals or companies of any third State. (2) Without prejudice to paragraph (1) of this Article, nationals and companies of one Contracting Party who in any of the situations referred to in that paragraph suffer losses in the territory of the other Contracting Party resulting from (a) requisitioning of their property by its forces or authorities, or (b) destruction of their property by its forces or authorities which was not caused in combat action or was not required by the necessity of the situation, shall be accorded restitution or adequate compensation. Resulting payments shall be freely transferable.264 260

At p. 257. At pp. 258-263. 262 At pp. 253, 258. 263 At p. 258. 264 Sri Lanka/United Kingdom BIT of 1980. 261

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According to the Claimant, Art. 4(2) of the BIT is an exception to the strict liability rule of Art. 2(2) of the Sri Lanka/UK BIT and provides for compensation in cases where the destruction of the investor’s property in situation of war or civil disturbance was not required by the necessity of the situation.265 Therefore, in order to avoid the applicability of the said article, Sri Lanka had to prove that the destruction of the investor’s property was caused “in combat action”, and was required by the “necessity of the situation”.266 The Respondent argued to the contrary that no standard of strict liability had been provided by the BIT but that it “incorporates, rather than overrides, the customary international legal standard of responsibility” and, therefore, there was no support for AAPL’s absolute liability theory.267 According to the Respondent “under Art. 4(2), the Government incurs liability if its actions are not reasonably necessary” and provides for compensation in case Sri Lanka acts in violation of its obligations under Art. 2(2) of the BIT.268 That would be the case if the Government could have prevented the destruction of the investor’s property through due diligence. Sri Lanka argued that the destruction was not attributable to the Governmental security forces but to rebels; that it was a combat action; that there was no proof that the destruction of the investor’s property was not required by the necessity of the situation and therefore Art. 4(1) must be applied.269 It also addressed the issue of a remedy for “any losses suffered owing to the war” from the perspective of the applicable rules and standards under Sri Lankan law.270 These different interpretations of the BIT’s provisions by the parties led the Tribunal to rule on the correct interpretation of the treaty in accordance with the universally accepted rules of treaty interpretation as codified in Art. 31 of the Vienna Convention on the Law of Treaties,271 as formulated by l’Institut de Droit International and as established in practice.272 The Tribunal said: 41. In the light of the above mentioned canons of interpretation, the relevant provisions of the Sri Lanka/UK Bilateral Investment Treaty have to be

265

At p. 258. At pp. 253, 258. 267 At pp. 261-262. 268 At p. 261. 269 At p. 262. 270 At pp. 262-263. 271 Article 31(1) reads: “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.”, VCLT, 115 UNTS 331 (1969); See also Art. 33. 272 AAPL v. Sri Lanka, Award, 27 June 1990, 4 ICSID Reports 263. 266

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Therefore, the Tribunal determined that the BIT provisions had to be examined and applied in light of international law in general. It examined all relevant provisions of the BIT and concluded that the Claimant’s interpretation of the words “full protection and security” in Art. 2(2) as an imposition of a standard of strict liability on the part of the host State cannot be justified under any of the canons of Treaty interpretation.274 According to the Tribunal, such an interpretation of Art. 2(2) would go beyond the minimum standard of customary international law which requires a standard of “due diligence” on the part of the host State. The Tribunal supported its conclusion by referring to both the oldest and the recently reported arbitral decisions and judicial rulings (e.g. the ELSI case).275 In the opinion of the Tribunal this conclusion “still reflects . . . the present state of International Law Investment Standards”.276 On this basis, the Tribunal also rejected the Claimant’s argument based on the MFN clause contained in Art. 3 of the Sri Lanka/UK BIT. It found that no strict liability standard had been adopted in the Sri Lanka/Switzerland BIT and that the Tribunal is convinced that, in the absence of a specific rule provided for in the Treaty itself as lex specialis, the general international law rules have to assume their role as lex generalis.277

The Tribunal proceeded to analyze the Claimant’s “alternative submissions” based on Art. 4 of the BIT which contains specific rules that govern losses suffered in civil disturbances.278 The Tribunal noted that Art. 4(1) was to be applied as lex generalis to all situations not covered by the Art. 4(2) as lex specialis.279 It noted that the burden of proof is upon the Claimant, that the Claimant must convince the Tribunal of the truth of evidence and prove the international responsibility of Sri Lanka. The Tribunal’s analysis led to the conclusion that all three conditions (that the governmental forces caused the destruction; that the losses were suffered in combat action; that there was no “necessity of the situation”) necessary for the applicability of Art. 4(2) of the Sri Lanka/UK BIT were

273

At p. 266. At p. 268. 275 At p. 269. 276 At p. 270. 277 At p. 272. 278 At p. 272. 279 At pp. 275-276. 274

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proven to be non-existent.280 Therefore, only Art. 4(1) of the BIT was available for the Claimant as a basis for its claims. The Tribunal determined that the only condition required for the applicability of Art. 4(1) was the existence of “losses suffered”. It said: 66 . . . Precisely, Article 4.(1) does not include any substantive rules establishing direct solutions; i.e. material rules providing remedies expressed in fixed and definitive terms. Like conflict-of-law rules, Article 4.(1) contains simply an indirect rule whose function is limited to effecting a reference (renvoi) towards other sources which indicate the solution to be followed. According to the undisputed plain language of Article 4.(1), the investor – already enjoying the “full security” under Article 2.(2) of the Sri Lanka/UK Treaty – has to be accorded treatment no less favorable than: (i) that which the host State accords to its own nationals and companies; or (ii) that accorded to nationals and companies of any Third State.281

Therefore, the Tribunal treated the MFN clause contained in the BIT as a renvoi to general international law. Such a construction of Art. 4(1) of the Sri Lanka/UK BIT led the Tribunal to apply principles of State responsibility under the general rules of international law. It stated: 78 . . . the arbitral Tribunal has to review the evidence submitted by both Parties in the present case in order to establish the proven facts, and to determine whether these facts sustain the Claimant’s allegation that the Respondent Government failed to comply with its obligation under the Sri Lanka/UK Bilateral Investment Treaty (particularly the standard provided for in Article 2.(2), as well as by virtue of the rules governing State responsibility under general international law (which becomes necessarily applicable by virtue of the renvoi contained in Article 4.(1) of the Treaty)).282

On that basis it concluded that Sri Lanka had violated its obligation of due diligence by failing to take all necessary measures to prevent the destructions of the property and killings of the staff and, therefore, compensation should be payable under Art. 4(1) of the BIT.283 The Dissenting Opinion to the Award284 criticized the analysis of the applicable law employed by the majority of the Tribunal. It recalled the Claimant’s position that the parties’ submission to the Sri Lanka/UK BIT should be considered tantamount to the agreement envisaged in Art. 42(1) of the ICSID Convention and found this argument unacceptable.285 The fact that jurisdiction

280

At pp. 274-275. At p. 276. 282 At p. 282. 283 At p. 287. 284 At p. 296. 285 At p. 299. 281

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was established through the operation of the BIT provision cannot be construed as a choice of law of the BIT itself: The parties to the case, through the operation of Article 8(1) of the Sri Lanka/ UK BIT, have submitted to the jurisdiction of this arbitration tribunal, but this, in itself, does not imply that the parties have agreed on the applicable law. As a matter of principle, jurisdictional questions are clearly distinguishable from issues concerning applicable law, and, in the absence of strong evidence that the parties wished to merge the two, there is no reason to presume that this has taken place.286

Furthermore, the Dissenting Opinion noted that in order to invoke the BIT provisions as the applicable law, the parties must demonstrate “either that the treaty itself authorized this course of action or that the parties to the dispute expressly agree to regard the provisions of the Treaty as the applicable law”.287 The Tribunal’s conclusion that the BIT itself was the primary source of applicable legal rules was found unconvincing by the Dissenting Opinion for the following reasons: In adversial proceedings such as those before this Tribunal, it is usually in the best interest of each party to respond to all the substantive legal points raised by the other. Thus, where points of substance based on the Treaty were advanced by the Claimant, it was to be expected that the Respondent would address those particular points and vice versa; for, the party which ignores this course of action may find ultimately that it has lost the opportunity to present its views on individual issues to the Tribunal. In other words, a response by one party to the interpretation of particular provisions of the Treaty suggested by the other does not necessarily imply that the parties agree that the Treaty constitutes the primary source of legal obligation; instead, it could possibly only demonstrate prudence and caution on both sides. In addition, it seems somewhat unrealistic to say that there was mutual agreement by subsequent conduct when, as a matter of record, both parties have adopted divergent positions on this point.288

Therefore, the Dissenting Opinion concluded that there was no real agreement between the parties on the applicable law and, accordingly, the second sentence of Art. 42(1) should have been applied. According to the Dissenting Opinion the BIT was also relevant but to the extent that it was incorporated by Art. 157 of the Sri Lankan Constitution into domestic law.289 Therefore, the Tribunal’s conclusion that the conduct of the parties demonstrated an agreement in favor of the application of the BIT and international law in general led to a result that was substantially different from the application of

286

At pp. 297-298. At p. 298. 288 At pp. 298-299. 289 At p. 299. 287

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the residual rule of Art. 42(1) of the ICSID Convention since the later places emphasis on the application of both the host State’s law and international law: The present approach differs from that adopted by the majority in one substantial respect: by placing primary emphasis on Sri Lankan law, it establishes that rules on the protection of property which are municipal in origin should receive as much attention as those incorporated into local law from treaties or custom.290

The Award in AAPL v. Sri Lanka indicates that the arbitral tribunal may infer an implied agreement on applicable law from the parties’ conduct and submissions during the arbitration proceedings. There is nothing incorrect in such an approach as long as it undoubtedly demonstrates an agreement on applicable law. But the question is whether the parties in AAPL indeed reached an implicit agreement on the BIT and international law in general as the applicable law. The arguments of the Dissenting Opinion appear convincing for the following reasons: the mere fact that jurisdiction was established by virtue of the BIT is not good evidence that the parties agreed implicitly on the BIT as the “primary source of law”. Furthermore, the parties’ conduct and pleadings do not convincingly support the Tribunal’s conclusion as to the applicable law. The fact that the Respondent responded to the Claimant’s interpretation of the BIT provisions is not a proof that it implicitly agreed on the BIT as the primary source of law. On the other hand, the argument of the Dissenting Opinion that the BIT was relevant only to the extent that it was incorporated into Sri Lankan law is not satisfactory. Under the second sentence of Art. 42(1) of the ICSID Convention, international law in general, and the BIT as a part of it, has an independent role. Therefore, under this sentence the application of the BIT is not dependent on its incorporation into Sri Lankan law. As already mentioned, the absence of an agreement by the parties on applicable law would lead to a different result. The BIT would be applicable in any case, as part of international law or by virtue of its incorporation into Sri Lankan law. But the recourse to the second sentence of Art. 42(1) of the ICSID Convention would have required the application of Sri Lankan law as well. On this point the result reached by the Tribunal substantially differs from the application of the second sentence of Art. 42(1). Although the Tribunal accepted Sri Lankan law as a supplementary source of rules to be applied the decision was mainly based on international law. Additionally, the Tribunal incorrectly interpreted the MFN clause as a renvoi to general international law. Renvoi is a process in which a law applicable to the relationship may contain conflict of laws rules which may refer to another legal system whereas a MFN clause incorporates certain rules within the same system of law. Finally, it is appropriate to note

290

At p. 299.

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that many commentators have criticized the Tribunal’s approach in a similar or rather identical manner.291 (iv) Wena Hotels v. Egypt (the parties’ conduct and submissions as proof of an implicit choice of law) In Wena Hotels v. Egypt, ICSID’s jurisdiction was established under the Egypt/UK BIT of 1975.292 A dispute arose out of long-term agreements concluded between Wena Hotels, the investor, and the Egyptian Hotels Company (EHC), an Egyptian public sector company, to lease and develop two hotels located in Egypt. EHC seized the two hotels and placed them under its own management. These actions were recognized as illegal by the relevant Egyptian authorities and the hotels were returned to Wena. After the return of the hotels, Wena initiated domestic arbitrations against EHC for breaching the lease of the two hotels. The result of these arbitrations was that damages were issued in favor of Wena but it lost control of the hotels. Wena claimed that Egypt violated the BIT, Egyptian law as well as international law by expropriating its investments without compensation.293 It also argued that Egypt had violated the BIT and other international norms by failing to protect and secure Wena’s investments.294 Egypt denied these allegations. The Tribunal discussed the issue of applicable law under the heading “Law Applicable to this Arbitration”. The Tribunal first noted that both parties agreed that the case concerned an alleged violation of the BIT by Egypt.295 On that basis and supported by the parties’ submissions and oral arguments the Tribunal concluded that it had to consider, just like the parties, the BIT [termed the IPPA by the Tribunal] as the primary source of applicable law.296 It continued its analysis in the following terms: 79. However, the IPPA is a fairly terse agreement of only seven pages containing thirteen articles. The parties in their arguments have not treated it as containing all the rules of applicable law to their dispute, and this is also the view of the Tribunal. In particular, Egypt has relied on Egyptian law, namely, the Egyptian Civil Code to raise its first defense – that Wena’s claims are time barred. In its response to that defense, Wena has taken the position that both Egyptian law and international law are applicable to the dispute.297 291 Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 579-581; Elombi, G., ICSID Awards and the Denial of Host State Law, 11 JIA 61 (1994) at pp. 65-66; See generally Asiedu-Akrofi, D., Asian Agricultural Products Limited (AAPL) v. Republic of Sri Lanka, 86 AJIL 371 (1992). 292 Wena Hotels Ltd. v. Arab Republic of Egypt, Decision on Jurisdiction, 25 May 1999, 41 ILM 881 (2002). 293 Wena Hotels Ltd. v. Arab Republic of Egypt, Award, 8 December 2000, 41 ILM 896 (2002) at p. 910. 294 At p. 910. 295 Ibid. 296 Ibid. 297 At pp. 910-911.

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It then referred to Art. 42(1) of the ICSID Convention and noted that it had not found any special agreement between the parties on applicable law but that the pleadings of both parties had indicated that in addition to the BIT’s provisions it had to apply “both Egyptian law (i.e., ‘the law of the Contracting State party to the dispute’) and “such rules of international law as may be applicable”.298 At the end of its analysis the Tribunal pointed out that the provisions of the BIT would in any event be the first rules of law to be applied by the Tribunal, “both on the basis of the agreement of the parties and as mandated by Egyptian law as well as international law”.299 After identifying the applicable rules of law, the Tribunal proceeded to examine the merits of the case. First it examined Wena’s complaint that Egypt had violated its obligation under Art. 2(2) of the BIT to provide “fair and equitable treatment” and “full protection and security” to Wena’s investments.300 The Respondent denied these allegations arguing that it “neither authorized nor participated in the repossession of the Luxor and Nile Hotels on April 1, 1991 or most of the subsequent events of which the Claimant complaints”.301 The Tribunal disagreed with the Respondent since the facts of the case indicated that there was sufficient evidence that Egypt was aware of EHC’s intentions to seize the hotels and took no actions to prevent those seizures.302 Furthermore, neither the police nor the Ministry of Tourism took any immediate action to restore the hotels to Wena after EHC had illegally seized the hotels. And, finally, Egypt did no impose any sanctions on EHC or its senior officials which implied that Egypt approved EHC’s actions.303 The Tribunal noted that another ICSID tribunal, in AMT v. Zaire, in interpreting a similar provision from another BIT, had held that that provision imposes on the host State an obligation of vigilance as a minimum standard of international law. On the other hand, it cannot be interpreted as an imposition of a standard of strict liability on the part of the host State, as noted by the tribunal in AAPL v. Sri Lanka. Finally, the Tribunal held that Egypt violated its obligation under Art. 2(2) of the BIT.304 After that, the Tribunal examined the Claimant’s second contention that Egypt’s actions constituted an expropriation without “prompt, adequate and effective” compensation and as such in violation of Art. 5 of the BIT.305 After quoting the said article, the Tribunal referred to international arbitral awards and authorative writings in order to demonstrate the fundamental

298

At p. 911. At p. 911. 300 At pp. 911-914. 301 At p. 911. 302 At pp. 911-913. 303 At p. 914. 304 At pp. 912, 914. 305 At pp. 914-915. 299

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principles of what constitutes an expropriation under international law. It noted that expropriation is not only limited to tangible property rights. Contract rights are also entitled to the protection under international law. In particular, by reference to the Tippets case in which the Iran–US Claims Tribunal held that “(a) deprivation or taking of property may occur under international law through interference by a state in the use of that property or with enjoyment of its benefits, even where legal title to the property is not affected”,306

the Tribunal in the Wena case found that the occurred actions constituted an expropriation. It said: 99. Here, the Tribunal has no difficulty finding that the actions previously described constitute such an expropriation. Whether or not in authorized or participated in the actual seizures of the hotels, Egypt deprived Wena of its “fundamental rights of ownership” by allowing EHC forcibly to seize the hotels, to possess them illegally for nearly a year, and to return the hotels stripped of much of their furniture and fixtures. Egypt has suggested that this deprivation was merely “ephemeral” and therefore did not constitute an expropriation. The Tribunal disagrees. Putting aside various other improper actions, allowing an entity (over which Egypt could exert effective control) to seize and illegally possess the hotels for nearly a year is more than an ephemeral interference “in the use of that property or with the enjoyment of its benefits”.307

The Tribunal also added that even after the hotels were returned to Wena, Egypt refused to offer compensation for the losses suffered, and therefore, did not satisfy its obligation under the BIT and international law in general.308 The above analysis led the Tribunal to conclude that Egypt had violated its obligation under Art. 5 of the BIT. After discussing the Claimant’s complaints, the Tribunal proceeded to discuss two claims raised by the Respondent. Egypt argued that Wena’s claims were time barred under Art. 172(i) of the Egyptian Civil Code (three-year statute of limitation).309 It also argued that in case Egyptian law was not applied, the Tribunal should take into account the principles of prescription common to both Contracting Parties to the BIT and noted that the statute of limitation under the English Limitation Act 1980, for breach of contract or tortious behavior is six years.310 In the Tribunal’s view there was “no legal or equitable reason to bar Wena’s claim”.311 It noted that neither party had been disadvantaged during the proceedings and since Wena had been rather aggressive in prosecuting its

306

Cited by the Wena Tribunal at p. 914. At p. 915. 308 Ibid. 309 Ibid. 310 Ibid. 311 Ibid. 307

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claims, Egypt had enough notice of that on-going dispute.312 Furthermore, the “municipal statutes of limitation do not necessarily bind a claim for a violation of an international treaty before an international tribunal”.313 The Tribunal referred to international precedents confirming that this general principle was recognized long ago, but it also added that on occasion international tribunals took into account equitable principles of prescription to reject untimely claims.314 However, the Tribunal refused to exercise such discretion for the above mentioned reasons. The Tribunal disagreed with the Respondent’s contention that the Tribunal was obliged to apply Art. 172(i)’s three-year statute under the second sentence of Art. 42(1) of the ICSID Convention. It noted that a strict application of that statute would be in collision with applicable international law rules: 107. Egypt contends that Article 42(1) of the ICSID Convention mandates that the Tribunal must apply Article 172(i)’s three-year statute of limitation. The Tribunal does not agree. Article 42(1) of the ICSID Convention provides that a Tribunal shall apply domestic law “and such rules of international law as may be applicable”. As Wena notes, the decision in Amco Asia case advised that one situation where a tribunal should apply rules of international law is “to ensure the precedence of international law norms where the rules of the applicable domestic law are in collision with such norms”. Here, strict application of Article 172(i)’s three-year limit, even if applicable, would collide with the general, well-established international principle recognized since before the Gentini case: that municipal statutes of limitation do not bind claims before an international tribunal (although tribunals are entitled to consider such statues as well as equitable principles of prescription when handling untimely claims).315

Furthermore, the Tribunal noted that its primary source of applicable substantive law was the BIT itself which in its Art. 8(1) “suggests a greater concern that the parties not rush into arbitration than that the parties will delay the initiation of proceedings”.316 For the above mentioned reasons, the Tribunal concluded that Wena’s claim was not time barred. After that the Tribunal proceeded to discuss the consultancy agreement concluded between Wena and Mr. Kandil (the Chairman of EHC). Egypt argued that “Claimant improperly sought to influence the Chairman of EHC [Mr. Kamal Kandil] with respect to the award of the leases that are the subject of this arbitration” and, therefore, as a result of this alleged corruption, “Claimant cannot now properly appear before an international tribunal, constituted in accordance with the IPPA, and claim compensation for the alleged loss of leasehold interests that were improperly obtained in the first place”.317 312

At p. 916. Ibid. 314 Ibid. 315 At p. 916. Italics and emphasis original. 316 At p. 916. 317 At p. 910. Emphasis original. 313

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The Tribunal agreed with the Respondent that this type of corruption had often been held by international tribunals as contrary to international bones mores, but it also added that it is not easy to determine it.318 The Tribunal, after reviewing presented evidence found that the Respondent failed to prove the allegations of corruption. It said: 116 . . . Nevertheless, given the fact that the Egyptian government was made aware of this agreement by Minister Sultan but decided (for whatever reason) not to prosecute Mr. Kandil, the Tribunal is reluctant to immunize Egypt from liability in this arbitration because it now alleges that the agreement with Mr. Kandil was illegal under Egyptian law.319

Finally, the Tribunal proceeded to determine the amount of damages to be awarded to the Claimant. It noted that Art. 5 of the BIT provides for prompt, adequate and effective compensation in case of an expropriation and that “such compensation shall amount to the market value of the investment immediately before the expropriation”.320 The Tribunal proceeded to apply that standard to the determination of damages. The parties disagreed in respect of the amount of damages to be paid. The Tribunal declined to accept a discounted cash flow projection and agreed with the Respondent that the Claimant’s claim for lost profits, lost opportunities and reinstatement costs were inappropriate.321 In this regard, it referred to the SPP and Metalclad decisions. In the view of the Tribunal (supported by the parties’ submissions) the proper calculation of the market value of the investments had to be based on the Claimant’s actual investments in the two hotels. After determining the amount of the Claimant’s proven investment the Tribunal proceeded to determine an amount of interest. It said: 128. To this should be added an appropriate sum for interest. Claimant has claimed interest but neither specified a rate nor whether interest should be compounded. Moreover, the IPPA, the lease agreements, and the ICSID Convention and Rules are all silent on the subject of interest. The Panel is of the view that in this case interest should be awarded and that it would be appropriate to adopt a rate of 9%, to be compounded quarterly.322

The Tribunal was of the view that “an award of compound (as opposed to simple) interest is generally appropriate in most modern, commercial arbitrations”.323 It referred to the Metalclad decision and two scholarly writings on this point.

318

At p. 917. At p. 917. 320 At p. 918. 321 At p. 918. 322 At p. 919. 323 At p. 919. 319

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In this case an implied agreement on the BIT as the primary source of applicable law was inferred from the parties’ submissions throughout the arbitration proceedings. In the view of the Tribunal, the parties’ pleadings also indicated that it had to apply the host State’s law and applicable international law rules, in addition to the BIT. Under the Tribunal’s reasoning it appears confusing whether, in the end, the choice of law had been made under the first or the second sentence of Art. 42(1) of the ICSID Convention. For the Tribunal it was probably not so important since both the parties’ submissions as well as the residual rule of Art. 42(1) referred to both legal systems. Furthermore, the Tribunal already upheld an implicit agreement on the BIT as the primary source of applicable law which application was also mandated by Egyptian law and international law. The ad hoc Committee, in its Decision on Annulment discussed below, clearly noted that there was no agreed choice of law in this case in accordance with the first sentence of Art. 42(1) of the ICSID Convention and, consequently, resort to the residual rule was necessary. This position is more satisfactory.

(c) Concluding remarks The above cases demonstrate that when there is no clear, explicit agreement on the applicable law the tribunal has to check thoroughly whether the parties have in fact made an implicit agreement on choice of law. In SPP v. Egypt the ICSID Tribunal concluded that it did not have to decide whether the parties had in fact made any choice of Egyptian law as applicable law and held that it was of “very little significance”. This conclusion was reached on the basis of the argument that there would always be some measure of absence of agreement between the parties on applicable law. As already explained above, such an approach is incorrect. It is possible that the parties agree on a law which is actually incomplete, but the incompleteness of such law must be determined by the tribunal and not simply assumed. In this particular case, the argument that every national system is incomplete and where lacuna occurs in the chosen domestic law it amounts to an absence of agreement is not convincing.324 In LETCO v. Liberia the Tribunal determined that the parties had agreed on a choice of law by their reference in the opening paragraph of the agreement to a piece of the domestic legislation. However, it is more convincing to say that this argument does not imply a choice of law with reasonable certainty. In AAPL v. Sri Lanka the Tribunal concluded that the implied agreement had been made on the basis of the parties’ conduct throughout the proceedings. In Wena Hotels v. Egypt the Tribunal concluded that the parties in their submissions implicitly agreed on 324

See also section dealing with methods for determining the absence of parties’ agreement on choice of law.

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the BIT as the primary source of applicable law. This argument, in principle, may be accepted but the implicit agreement must be clearly evidenced by parties’ conduct and submissions. It is in the interest of both parties to employ clear language when drafting a choice of law clause in their agreement. As long as their agreement on applicable law is clear and unequivocal the tribunal’s task is easy. In that way the parties would avoid any confusion and ambiguity in case of a dispute. Alternatively, their conduct throughout the proceedings should demonstrate with reasonable certainty their agreement on applicable law. As noted, in finding any implied agreement the tribunal should be led by the terms of the contract or the circumstances of the case which must evidence that an implicit choice of law is actually made.

4 Subsequent Choice of Law The best way to agree on a choice of law is to insert a clause on applicable law in the initial investment agreement between the parties. But sometimes the parties fail to do so. When jurisdiction is based on a treaty or on domestic legislation that contains no clause on applicable law the parties would not have an opportunity to agree on applicable law prior to the arbitration proceedings. The question is whether the parties should be allowed to reach their agreement on applicable law in the course of the arbitration proceedings. The next analysis of the case law will consider the question of subsequent choice of law.

(a) Overview of the arbitral practice In Benvenuti & Bonfant v. Congo,325 the dispute arose out of the seizure of the PLASCO company and all its activities by the Government of Congo. The parties in this case had agreed to set up a company (PLASCO) for the manufacture of plastic bottles and production of mineral water. Under the parties’ agreement of 1973, the Government agreed to guarantee financing that PLASCO would need. It also guaranteed taxes privileges, protection from foreign competition and business with certain state corporations such as SIACONGO. The Italian partner, on its side, agreed to support the marketing of PLASCO’s products. In 1975 the bottling plant was open and a large quantity of bottles was delivered to SIACONGO which failed to pay for this delivery. In addition to this, the Government failed to fulfill other undertakings provided by the agreement. In 1976, Mr. Bonfant received an Administration Memorandum which treated PLASCO as a State company. Soon thereafter, 325

Benvenuti & Bonfant v. Congo, Award, 15 August 1980, 1 ICSID Reports 330.

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the Italian staff of PLASCO was forced to leave the Congo since their personal safety was no longer guaranteed. The Congolese army occupied the head office. B&B submitted a request for ICSID arbitration. The parties’ agreement did not contain any provision on applicable law. In such a case the tribunal would normally apply the second sentence of Art. 42(1) of the ICSID Convention. Indeed, the Tribunal stated that it had to apply Congolese law as well as the applicable principles of international law.326 But in this case the parties agreed, in the course of the arbitration proceedings, to authorize the tribunal to decide ex aequo et bono. As a matter of fact, during the first meeting of the Tribunal on 14 and 15 June 1978 the Claimant proposed to the Government of Congo to authorize the Tribunal to decide ex aequo et bono in accordance with Art. 42(3) of the ICSID Convention.327 The Government did not attend that session and was informed by letter dated 20 June 1978 of the Claimant’s proposal. The Government gave a negative reply by its letter of 30 August 1978.328 Later on in the course of the hearings, the minutes of a meeting between the disputing parties dated 5 June 1979 were presented to the Tribunal. According to these the parties had agreed to end their dispute on the basis of an amicable settlement and if such settlement would not be possible by 30 August 1979, the parties requested the Tribunal to render its award on the basis of an ex aequo et bono decision.329 Since no amicable settlement was reached by the agreed date the Claimant requested the Tribunal to render its Award.330 The Tribunal when dealing with the issue of applicable law in its Award confirmed its power to decide on the basis of equity as authorized by the parties during the proceedings.331 Although the parties’ agreement made in the course of proceedings in this case did not refer to the rules of law in the sense of the first sentence of Art. 42(1) it is convincing to argue that such an agreement made during the proceedings would be acceptable as well. The same position is also indicated by some writers.332 Nothing should prevent the parties to reach an agreement on applicable law in the course of proceedings if they want to do so. The best way would be to express such an agreement explicitly at the very beginning of the arbitration proceedings and in a way that removes the possibility of interpreting it as an absence of agreement on choice of law.

326

At p. 349. At p. 338. 328 At p. 338. 329 At p. 342. 330 At p. 342. 331 At p. 349. 332 Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at p. 572. 327

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In AAPL v. Sri Lanka333 the Tribunal undoubtedly confirmed that the parties may agree on the applicable law in the course of proceedings. As already mentioned in the section discussing implicit agreements, in the AAPL case the arbitration proceedings was initiated pursuant to the Sri Lanka/UK BIT. There was no provision on applicable law in the BIT. Taking into account that jurisdiction was based on a BIT that contained no provision on the applicable law, the Tribunal noted that the parties did not have an opportunity to agree on applicable law prior the proceedings. It said: 19 . . . In more concrete terms, the prior choice-of-law referred to in the first part of Article 42 of the ICSID Convention could hardly be envisaged in the context of an arbitration case directly instituted in implementation of an international obligation undertaken between two States in favor of their respective nationals investing within the territory of the other Contracting State.334

It continued in the following terms: 20 . . . the choice-of-law process would normally materialize after the emergence of the dispute, by observing and construing the conduct of the Parties throughout the arbitration proceedings.335

Therefore, the Tribunal upheld the view that the parties can make an agreement on governing law in the course of the arbitration proceedings. On the basis of the parties’ pleadings during the proceedings, it concluded that the conduct of the parties demonstrated their agreement to choose the Sri Lanka/ UK BIT as the primary source of the applicable legal rules and the relevant rules of international law and Sri Lanka domestic law as a supplementary source.336 This decision confirms that, particularly in case where jurisdiction is based on a treaty or on domestic legislation that contain no choice of law clause, a subsequent choice of law is possible and, if made, it is accepted by the tribunal. In these situations, the parties would not have an opportunity to reach an agreement on applicable law before the institution of arbitration proceedings. In the TOPCO case the situation was different. The clause on applicable law in the parties’ agreement varied over time. In the Award it was held that the parties had the right, which they had exercised, to change during the course of their contractual relationship the law applicable to the contract. In this sense the sole arbitrator offered the following explanation: 39. Thus, the clause relating to the choice of law varied over time: it does not seem that the process itself can give rise to any objection because, to the extent that it is admitted that the contracting parties themselves are free to decide the 333

AAPL v. Sri Lanka, Award, 27 June 1990, 4 ICSID Reports 246. At p. 256. 335 At p. 256. 336 At p. 257. 334

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choice of the law or the system of law which is to govern their relations, one does not see why they could not, by mutual consent, agree to change this choice (this result, as the Tribunal has already noted in passing, is accepted by certain national jurisprudences). Here, this should be the case even more as these amendments were in accordance with the fundamental charter of the parties in the sense that they always gave rise to acceptance by the concession holders as provided for under Clause 16, and considering further that they had a very distinct contractual character: it is truly the whole balance of the contract that was at stake, in particular with respect to the last amendment. This did in fact tend to improve the legal situation of the concession holders while, for its part, the defendant Government obtained, as a counterpart, substantial economic advantages. . . . Therefore, not only is there no objection as a matter of principle to taking account of these amendments, but there is also the fact that failure to approve them would fundamentally change the contractual balance which was intended and achieved by the contracting parties.337

Taking into account all circumstances as well as the reasonable expectations of the parties, the sole arbitrator concluded that the choice of law clause in its latest formulation must be applied.338 To reject the changes to the choice of law clause would be contrary to the parties’ expectations since these changes were, indeed, agreed by mutual consent and improved the legal situation of the concession holders.

(b) Concluding remarks The above analysis of the case law leads to the conclusion that the parties may agree upon the applicable law not only at the time of conclusion of their contract but also subsequently. This may be as late as in the course of arbitration proceedings. The parties may also change or modify the law initially chosen. If any further support is needed for this conclusion it could be found in authoritative writings on this topic.339 Therefore, it is possible to conclude that the agreement on applicable law should not be limited in terms of time. The parties should be free to agree in the course of arbitration proceedings on the law (or rules of law) that will govern their dispute but their agreement on applicable law should be clear and reached as early as possible. Nothing should prevent them from making a post-contract or subsequent choice of law.

337

Texaco Overseas Petroleum Company/California Asiatic (Calasiatic) Oil Company v. Libya, Award, 19 January 1977, 17 ILM 1 (1978) at p. 15. 338 At p. 15. 339 Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 571-573; See generally Delaume, G. R., Law and Practice of Transnational Contracts, Ch. II, Booklet 1, Release 88-1, Oceana (1988) at pp. 41-42; Delaume, G. R., How to Draft an ICSID Arbitration Clause, 7 ICSID Review – FILJ 168 (1992) at p. 186; 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. 201.

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5 Stabilization Clauses (a) Meaning and types If the parties choose the law of the host State, a problem may arise if that State subsequently changes its law and that change affects the investment. Such change may have a serious impact on the investment relationship (e.g. the expropriation of the investor’s property). The investor may try to protect himself against this risk by inserting into the contract a stabilization clause. This clause serves to protect the contract from subsequent changes in the law of the host State. In other words, by including the stabilization clause in the investment agreement the State party to the contract “undertakes neither to annul the agreement nor to modify its terms, either by legislative or administrative measures”.340 In this way the parties may stabilize their relationship by incorporating the law as of a certain date.341 Stabilization clauses have been used frequently in investment agreements. The Deeds of Concession concluded between Texaco/Calasiatic and Libya contained a choice of law clause that referred to the applicability of principles of Libyan law that are common to the international law principles. In the absence of their compliance with international law principles the general principles of law were to be applied. Clause 16 was a stabilization clause which provided the following: The Government of Libya will take all steps necessary to ensure that the Company enjoys all the rights conferred by this Concession. The contractual rights expressly created by this concession shall not be altered except by mutual consent of the parties. This Concession shall throughout the period of its validity be construed in accordance with the Petroleum Law and the Regulations in force on the date of execution of the agreement of amendment by which this paragraph (2) was incorporated into this concession agreement. Any amendment to or repeal of such Regulations shall not affect the contractual rights of the Company without its consent.342

The first part of this clause clearly states that mutual consent of the parties is necessary in order to alter the contractual rights provided for by the concession. 340

Brownlie, I., Principles of Public International Law, 5th ed., Oxford Clarendon Press (1998) at p. 554; This type of clause is usually called an intangibility clause, see on this point Curtis, C. T., The Legal Security of Economic Development Agreements, 29 Harv. ILJ 317 (1988) at pp. 346-347. 341 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. 389. 342 Several agreements had been concluded between Texaco and Libya in the period 1963-1971. This is the final version of Clause 16 contained in the Agreement of 20 January 1966. Texaco Overseas Petroleum Company/California Asiatic (Calasiatic) Oil Company v. Libya, Award, 19 January 1977, 17 ILM 1 (1978) at p. 4.

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It also provides for the possibility of negotiation between the contracting parties and, correspondingly, the parties may create new contractual relations in order to adapt to new circumstances. The second part ensures that no subsequent changes of domestic legislation can affect the contractual rights of the company without its consent. Stabilization clauses may also be employed selectively. For example, the Agreement of March 10, 1967 between Revere, Ltd. and the Government of Jamaica contained “no further tax” clause. It read as follows: “12. No further taxes . . . burdens, levies . . . will be imposed on bauxite, bauxite reserves, or bauxite operations . . .” “13. For the purposes of taxation and royalties the provisions of this Agreement shall remain in force until the expiry of twenty five years . . .”343

This selective clause was directed at one particular area of the host State’s law – its taxation regime. By this clause the host State bound itself not to impose any further taxes or, in other words, not to apply any future changes, in respect of taxation, on bauxite and related operations. Furthermore, the contracting Government guaranteed a long-term (25 years) validity of the agreement for taxation purposes.

(b) Arbitral practice The validity of a stabilization clause and its relationship to the sovereign right of the host State to legislate is likely to give rise to debate after a dispute arises.344 The question is what is the legal foundation and significance of these clauses. Tribunals have respected such clauses, in principle. (i)

TOPCO v. Libya (stabilization clause valid and binding under international law)

The sole arbitrator in TOPCO v. Libya discussed the relationship of the stabilization clause contained in the parties’ agreement to the host State’ sovereign right to legislate. He was clear in saying that: 71. Such a provision, the effect of which is to stabilize the position of the contracting party, does not, in principle, impair the sovereignty of the Libyan State. Not only has the Libyan State freely undertaken commitments but also the fact that this clause stabilizes the petroleum legislation and regulations as of the date of execution of the agreement does not affect in principle the legislative and regulatory sovereignty of Libya. Libya reserves all its prerogatives 343

Revere Copper and Brass, Incorporated v. OPIC, Award, 24 August 1978, 17 ILM 1321 (1978) at pp. 1323, 1332. 344 Sornarajah, M., The International Law on Foreign Investment, Cambridge University Press (1994) at p. 330; See also Brownlie, I., Principles of Public International Law, 5th ed., Oxford Clarendon Press (1998) at p. 554.

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CHAPTER II to issue laws and regulations in the filed of petroleum activities in respect of national or foreign persons with which it has not undertaken such a commitment. Clause 16 [the stabilization clause] only makes such acts invalid as far as contracting parties are concerned – with respect to whom this commitment has been undertaken – during the period of applicability of the Deeds of Concession. Any changes which may result from the adoption of new laws and regulations must, to affect the contracting parties, be agreed to by them. This is not so because the sovereignty of Libya would be reduced, but simply by reason of the fact that Libya has, through an exercise of its sovereignty, undertaken commitments under an international agreement, which, for its duration, is the law common to the parties.345

Therefore, the arbitrator accepted the binding nature of a stabilization clause contained in an investment contract freely entered into between the host State and the investor. For the arbitrator it was unquestionable that the host State may adopt or change its laws. But these changes cannot affect the freely undertaken commitments under an international agreement. Therefore, the host State, by virtue of the stabilization clause, made a binding legal commitment not to exercise its sovereign power. If any changes were to occur that abrogate the parties’ agreement without their mutual consent, such an act is invalid under international law and the contracting State would be in a breach of the stabilization clause: 68 . . . The result is that a State cannot invoke its sovereignty to disregard commitments freely undertaken through the exercise of this same sovereignty and cannot, through measures belonging to its internal order, make null and void the rights of the contracting party which has performed its various obligations under the contract. ... 71 . . . Thus, the recognition by international law of the right to nationalize is not sufficient ground to empower a State to disregard its commitments, because the same law also recognizes the power of a State to commit itself internationally, especially by accepting the inclusion of stabilization clauses in a contract entered into with a foreign private party.346

Therefore, the TOPCO decision upheld the validity and binding nature of stabilization clauses under international law. (ii) AMINOIL v. Kuwait (breach of a stabilization clause does not lead to unlawfulness of nationalization as long as it is not expressly prohibited) The value of stabilization clause was also discussed extensively in AMINOIL v. Kuwait.347 AMINOIL, an American company, was granted a concession by the 345

Texaco Overseas Petroleum Company/California Asiatic (Calasiatic) Oil Company v. Libya, Award, 19 January 1977, 17 ILM 1 (1978) at p. 24. 346 At p. 24. 347 American Independent Oil Company v. Kuwait, Award, 24 March 1982, 21 ILM 976 (1982).

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State of Kuwait for the exploration and exploitation of petroleum and natural gas in the Saudi Arabia–Kuwait Neutral Zone. The parties entered into a 1948 Concession Agreement. A Supplemental Agreement of 1961 modified the 1948 Agreement and, in 1973, the parties proposed amendments to the previous ones which were embodied in a Draft Agreement. In 1974, OPEC countries adopted the “Abu Dhabi formula”, which raised taxes on the oil produced by AMINOIL. AMINOIL objected to this change. Afterwards, in 1977 the Government of Kuwait issued Decree Law No. 124 terminating its concession to AMINOIL and nationalizing AMINOIL’s assets. AMINOIL instituted ad hoc arbitration and claimed that the Government by its actions violated the stabilization clause contained in the 1948 Concession Agreement. The stabilization clause read as follows: Article 17 “The Shaikh shall not by general or special legislation or by administrative measures or by any other act whatever annul this Agreement except as provided in article 11. No alteration shall be made in the terms of this Agreement by either the Shaikh or the Company except in the event of the Shaikh and the Company jointly agreeing that it is desirable in the interest of both parties to make certain alterations, deletions or additions to this Agreement”.348

The Tribunal determined that it was required to apply Kuwaiti law and international law (with its rules governing the legality of an expropriation) as a part of the law of Kuwait.349 Faced with the fact that the concession agreement contained a stabilization clause, the Tribunal decided to examine whether the nationalization was indeed lawful in light of this clause.350 In addition to the above cited clause, the Tribunal also referred to Art.1 of the 1948 Agreement and Art. 7(g) of the 1961 Supplemental Agreement. Article 1 of 1948 Concession Agreement provided that: The period of this Agreement shall be sixty (60) years from the date of signature.351

Article 7(g) of the 1961 Supplemental Agreement provided for the deletion of Art. 11 of the 1948 Agreement and, accordingly, for a new version of Art. 11. The new version in paragraph B stated: (B) Save as aforesaid this Agreement shall not be terminated before the expiration of the period specified in Article 1 thereof except by surrender as provided in Article 12 or if the Company shall be in default under the arbitration provisions of Article 18.352

348

At pp. 990-991. At p. 1000. 350 At p. 1020. 351 At pp. 990-991. 352 At p. 1020. 349

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After reciting the above provisions the Tribunal said: These clauses combined, but especially Article 17, constituted what are sometimes called the “stabilisation” clauses of the contract. A straightforward and direct reading of them can lead to the conclusion that they prohibit any nationalization. Such is the view maintained by the Company. The Government of Kuwait on the other hand, in a series of arguments the merits of which the Tribunal must now consider, maintained that, on the contrary, these clauses did not prevent a nationalisation.353

The Government argued that the “stabilization clauses – initially valid and effective – were annulled by the emergence of a subsequent factor in the shape either of the Kuwait Constitution of 1962, or of a public international law rule of jus cogens forming part of the law of Kuwait”.354 The Tribunal rejected these arguments holding that the provisions of the Constitution had not in any way prevented the State from granting stabilization guarantees by contract and furthermore, the State was under the obligation to notify its contractual partner of the putting into force of the constitutional changes to a current contract.355 In respect of the question of permanent sovereignty over natural sources and jus cogens rule the Tribunal said (2) Equally on the public international law plane it has been claimed that permanent sovereignty over natural resources has become an imperative rule of jus cogens prohibiting States from affording, by contract or by treaty, guarantees of any kind against the exercise of the public authority in regard to all matters relating to natural riches. This contention lacks all foundation. Even if Assembly Resolution 1803 (XVII) adopted in 1962, is to be regarded, by reason of the circumstance of its adoption, as reflecting the then state of international law, such is not the case with subsequent resolutions which have not had the same degree of authority. Even if some of their provisions can be regarded as codifying rules that reflect international practice, it would not be possible from this to deduce the existence of a rule of international law prohibiting a State from undertaking not to proceed to nationalization during a limited period of time. It may indeed well be eminently useful that “host” States should, if they so desire, be able to pledge themselves not to nationalize given foreign undertakings within a limited period; and no rule of public international law prevents them from doing so.356

Therefore, in the view of the Tribunal no rule of international law prevented States from undertaking not to proceed to nationalization during a limited period of time if they want to do so. The fundamental question was, however, whether the stabilization clauses can prohibit any nationalization. The Tribunal said: No doubt contractual limitations on the State’s right to nationalize are juridically possible, but what that would involve would be a particularly serious undertaking which would have to be expressly stipulated for, and be within the

353

At p. 1020. At p. 1021. 355 At p. 1021. 356 At pp. 1021-1022. 354

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regulations governing the conclusion of State contracts; and it is to be expected that it should cover only a relatively limited period.357

Therefore, on that basis the Tribunal found that the nationalization was not prohibited since “the case of nationalization is certainly not expressly provided against by the stabilization clauses of the Concession”. 358 It said: . . . if the Tribunal thus holds that it cannot interpret Articles 17 and 7(g) – revised 11 – as absolutely forbidding nationalization, it is nevertheless the fact that these provisions are far from having lost all their value and efficacy on that account since, by impliedly requiring that nationalization shall not have any confiscatory character, they re-inforce the necessity for a proper indemnification as a condition of it.359

The Tribunal also added that even if the stabilization clauses originally prohibited nationalization they had ceased to do so due to the fact that the character of the concession had changed to a great extent by 1977 and the stabilization clauses no longer possessed their former absolute character.360 Finally it concluded that “the take-over of AMINOIL’s enterprise was not, in 1977, inconsistent with the contract of concession, provided always that the nationalization did not posses any confiscatory character”.361 This decision is important on several points. The existence of a stabilization clause in the parties’ agreement obliged the Tribunal to discuss the right of the host State to nationalize in the face of such a clause. There is no doubt that the tribunal recognized the validity of the stabilization clause in principle. But it ignored the prohibition against changing the agreement in any way except in the event of mutual consent. The explanation for such a position was that the prohibition did not refer expressly to nationalization and that the stabilization clause could only operate for a limited period of time. Such an approach is open to criticism since the nationalization act was the act that terminated the Concession before its expiry and contrary to its provisions. To insist on an express reference to nationalization in the stabilization clause is not a persuasive argument. The Tribunal’s approach has been indeed criticized by commentators.362 In this context, it is appropriate to note the view of the arbitrator in the TOPCO case on this point: One cannot hold the view that any international contract is implicitly subject to a termination clause by way of nationalization, as this would deprive the stabilization clauses therein of any effectiveness.363 357

At p. 1023. Ibid. 359 Ibid. 360 At pp. 1023-1024. 361 At p. 1024. 362 See Seidl-Hohenveldern, I., International Economic Law (2nd revisited ed.), Martinus Nijhoff Publishers (1992) at p. 150. 363 Texaco Overseas Petroleum Company/California Asiatic (Calasiatic) Oil Company v. Libya, Award, 19 January 1977, 17 ILM (1978) at p. 25. 358

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The Separate Opinion of Sir Gerald Fitzmaurice in AMINOIL took a different approach. In Sir Gerald’s view the fundamental question was “the right to nationalize in the face of a contractual undertaking not to do so, if that exists; or more accurately, in terms of the present case, to nationalize where this involves terminating a concession before its time in spite of a provision to the contrary”.364 With respect to the Tribunal’s conclusion that nationalization was not inconsistent with the concession agreement because it was not confiscatory, Sir Gerald took the following position: There is absolutely nothing in the stabilization clauses to warrant the view that they were intended to be confined in the manner suggested – i.e. to the case of confiscatory measures only. These clauses are not really concerned with confiscation at all, in the direct sense. What they are concerned with is any measure terminating the Concession before its time. In that respect, it would be difficult to imagine language (or draft it) that would more effectively combine the notions of the comprehensive and the specific: “. . . shall not by general or special legislation or by administrative measures or by any other act whatever annul this Agreement . . .”365

Indeed, as already confirmed above, the nationalization act entitled Decree Law No. 124 Terminating the Agreement between the Kuwait Government and AMINOIL was the measure (either special legislation or administrative measure or any other act) that terminated the Concession before its time and, consequently, inconsistent with the stabilization clauses contained in parties’ agreement. Any interpretation contrary to this one is unpersuasive. The Separate Opinion continued by saying that “nationalizations may be lawful or unlawful, but the test can never be whether they are confiscatory or not; because by virtue of their inherent character, they always are”.366 And finally, in conclusion, it said: . . . that although the nationalization of AMINOIL’s undertaking may otherwise have been perfectly lawful, considered simply in its aspect of being an act of the State, it was nevertheless irreconcilable with the stabilization clauses of a Concession that was still in force at the moment of the take-over.367

Therefore, the incompatibility of the nationalization with the stabilization clauses of the Concession Agreement was sufficient to demonstrate the unlawful character of the nationalization. Contrary to the position of the majority of the Tribunal that only express reference to nationalization in the stabilization clause may lead to the unlawful character of nationalization in case of the violation of such a clause, the position taken by the Separate Opinion should be accepted. 364

American Independent Oil Company v. Kuwait, Award, 24 March 1982, 21 ILM 976 (1982) at p. 1051. 365 At p. 1051. Emphasis original. 366 At p. 1052. 367 At p. 1053

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The AMINOIL decision should be a cause of concern for the foreign investors. This view is shared by some commentators.368 For the aforementioned reasons, the suggestion is that the investor negotiating a stabilization clause must be perfectly clear in what it is meant to prohibit (e.g. that the State expressly waives its right to nationalize). Furthermore, since the award raised an issue of “change of circumstance” (the Tribunal’s view was that due to the subsequent changes in the concession the stabilization clause had lost its absolute character), a stabilization clause should provide that its terms are binding regardless of subsequent compromise, negotiation, or amendment of the agreement unless both parties provide expressly, in writing, to change the meaning or binding effect of the stabilization clause.369 The decisions of ICSID tribunals confirm a respect for stabilization clauses as well as a readiness to regard them as part of international law.370 (iii) AGIP v. Congo (breach of a stabilization clause leads to unlawfulness of nationalization) The case AGIP v. Congo has already been discussed in the chapter dealing with combined choice of law clauses in the parties’ direct agreements. In that case, the law chosen by the parties was Congolese law supplemented by international law. The choice of law clause was supplemented by the following stabilization clauses: Article 4 of the Parties’ Agreement of 1974 provided that the Government of Congo should not apply certain ordinances and decrees as well as “all other ordinances or subsequent decrees the object of which is to change the private joint-stock character of the Company”.371 Article 11 additionally declared that “in the event of modifications being made to the Company laws, appropriate provisions would be enacted to ensure that these modifications did not affect the structure and composition of the organs of the Company provided for in the Agreement and the Articles of Association of the latter, which provide a duration for the Company of 99 years”.372 The Tribunal discussed whether the act of nationalization was in breach of the stabilization clauses contained in the parties’ agreement. After examining the legality of the nationalization of the AGIP in light of Congolese law the Tribunal turned to examine the compatibility of nationalization with international law on the stabilization clauses. It said: 86. These stabilization clauses, which were freely entered into by the Government, do not affect the principle of its legislative and regulatory sovereignty since it 368

Comeaux, P. E./Kinsella, N. S., Protecting Foreign Investment Under International Law: Legal Aspects of Political Risk, Oceana (1997) at pp. 143-144. 369 Ibid, at p. 143. 370 Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 593-594. 371 AGIP v. Congo, Award, 30 November 1979, 1 ICSID Reports 321, para. 69. 372 At pp. 321-322, para. 70.

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CHAPTER II retains both with respect to those, whether nationals or foreigners, with whom the Government has not entered into such undertakings, and that, in the present case, they are limited to rendering the modifications to the legislative and regulatory provisions provided for in the Agreement, unopposable to the other contracting party. 87. In consequence, the application of international law in the present case does not require an examination of the other possible violations of its rules with which AGIP reproaches the Government, in particular those relating to the discriminatory nature ascribed to the disputed measures. It suffices to concentrate the examination of the compatibility of the nationalization with international law on the stabilization clauses. 88. It is indeed in connection with these clauses that the principles of international law are used to complete the rules of Congolese Law. The reference made to international law suffices to demonstrate the irregular nature, from the point of view of this law, of the acts of nationalization carried out in the present case . . .373

Therefore, it was not even necessary to examine whether or not the act of nationalization was in compliance with other rules of international law since it was clearly not in conformity with the position of international law on the stabilization clauses. The position taken by the Tribunal in this case is identical to the view of the Separate Opinion in the AMINOIL case. The incompatibility of the nationalization with the stabilization clauses of the Parties’ Agreement of 1974 was sufficient to demonstrate the unlawful character of the nationalization. The consequence was that Congo was under the obligation to compensate the investor for the damage suffered. This decision clearly indicates that the stabilization clauses were regarded as part of international law. (iv) LETCO v. Liberia (in the presence of a stabilization clause nationalization is justified if it meets required criteria) In LETCO v. Liberia, the Tribunal determined that the parties had, by their reference to the legislation of Liberia in their agreement, chosen Liberian law as the applicable law to their relationship.374 It also noted that Liberian law was in conformity with generally accepted principles of public international law. The Concession Agreement contained in Art. X, under the title “Warranty of Concessionaire’s Rights”, the following stabilization clause: Except as otherwise provided in this Agreement, no amendment or repeal of any law or regulation governing this Agreement or any part thereof shall affect the rights and duties of the CONCESSIONAIRE without its consent.375

In accordance with this clause, any later changes of the domestic law that are inconsistent with the parties’ agreement cannot apply to their agreement

373

At p. 324. LETCO v. Liberia, Award, 31 March 1986, 2 ICSID Reports 358. 375 At p. 368. 374

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except in case of mutual consent of the contracting parties. The Tribunal took the following position with respect to this clause: This clause, commonly referred as a “Stabilization Clause”, is commonly found in long-term development contracts and, as is the case with notification procedures of the Concession Agreement, is meant to avoid the arbitrary actions of the contracting government. This clause must be respected, especially in this type of agreement. Otherwise, the contracting State may easily avoid its contractual obligations by legislation.376

Although the Tribunal found no indication that the law of Liberia had been changed so as to affect the Concession Agreement, it still recognized the stabilization clause. But it also noted that the legislative action taken by the contracting State which was not in accordance with contractual obligations can only be justified by nationalization which meets the required criteria.377 This then means that termination of a contract containing a stabilization clause by an act of nationalization would not by itself lead to the unlawful character of a nationalization. As long as nationalization meets the required criteria it would not be considered inconsistent with the stabilization clause. It would than seem that this Tribunal intended to share the position of the one in AMINOIL. (v) Amoco v. Iran (breach of a stabilization clause does not lead to unlawfulness of nationalization as long as it is not expressly prohibited) The Amoco case, decided by the Iran–US Claims Tribunal, is important on several points. The Tribunal discussed the following questions: whether the clauses found in the parties’ agreement were indeed stabilization clauses; whether they were binding on the Government; whether they were valid and recognized under international law; whether they led to the unlawful character of the expropriation. In Amoco v. Iran378 the Claimant argued that in terminating the Khemco Agreement concluded between Amoco, the investor, and the National Petrochemical Company (the company controlled by the Government of Iran) Iran violated the stabilization clauses contained therein. The clauses were the following: Article 21 was headed “Guarantee of Performance and Continuity” and its paragraph 2 provided the following: Article 21 2. Measures of any nature to annul, amend or modify the provisions of this Agreement, shall only be made possible by the mutual consent of NPC and AMOCO.379 376

Ibid. Ibid. 378 Amoco International Finance Corporation v. Islamic Republic of Iran, Partial Award, 14 July 1987, 27 ILM 1314 (1988). 379 At p. 1355. 377

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Furthermore the Claimant also regarded Art. 30(2) as a stabilization clause. Article 30 was headed “Applicable Law” and its paragraph 2 read as follows: Article 30 2. The provisions of any current laws and regulations which may be wholly or partially inconsistent with the provisions of this Agreement shall, to the extent of any such inconsistency, be of no effect in respect of provisions of this Agreement.380

It was disputed whether these provisions were to be regarded as stabilization clauses and, if so, whether these clauses were binding on the Government or not. In respect of Art. 30(2) of the Agreement the Tribunal said: 166 . . . This cannot be considered as a stabilization clause in the usual meaning of the term, however, since that term normally refers to contract language which freezes the provisions of a national system of law chosen as the law of the contract as of the date of the contract, in order to prevent the application to the contract of any future alterations of this system. Article 30, paragraph 2 applied only to the provisions of any current laws and regulations, clearly referring solely to the laws and regulations existing at the time of execution of the Khemco Agreement. Therefore it provided no guarantee for the future and is not a stabilization clause.381

Indeed this provision should be read in conjunction with paragraph 1 of Art. 30 which provided a choice of law clause agreed by parties: 1. This Agreement shall be construed and interpreted in accordance with the plain meaning of its terms, but subject thereto, shall be governed and construed in accordance with the laws of Iran.382

The Tribunal in the section dealing with the “Applicable Law to the Contract” interpreted the above provisions in the following terms: the Khemco Agreement itself was first applicable and only if the problems can not be solved by applying the Agreement itself would the laws of Iran be applied. Therefore, in the view of Tribunal “the contractual regime established by the Khemco Agreement may constitute an exception to the legal regime otherwise existing in Iran”.383 The Tribunal, therefore, correctly interpreted Art. 30. Paragraph 2 of the said Article cannot be interpreted as a stabilization clause in its usual meaning. With respect to Art. 21(2) the Tribunal offered the following interpretation: 170. Paragraph 2 of Article 21 has a more precise meaning in so far as it prohibited changes in the provisions of the Khemco Agreement by unilateral measures. According to the Claimant the term “measures” in this context refers

380

At p. 1353. At p. 1355. 382 At p. 1353. 383 At p. 1353. 381

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to legislative or regulatory measures. Such an interpretation is not easily reconcilable with the terms of Article 21, however, which mentions “[m]easures of any nature” and distinctly states that such measures “shall only be made possible by mutual consent of NPC and Amoco,” neither of which has power to take legislative or regulatory measures.384

Therefore, in the Tribunal’s view the measures mentioned in Art. 21(2) were not necessarily legislative or regulatory measures, in particular because neither of the contracting parties had a power to take such measures. Such an interpretation is not persuasive. Although the language of the stabilization clauses could be more specific (e.g. by specific reference to general or special legislation or to administrative measures) the term “measures of any nature” includes indeed legislative and regulatory measures. As a matter of fact, the Concurring Opinion of Judge Brower adopted this interpretation.385 The Tribunal’s analysis of the two articles led to the conclusion that they were not stabilization clauses and that they were not binding on the Government because it was not a party to the Khemco Agreement: In conclusion, the Tribunal does not find that the Khemco Agreement contains any “stabilization” clauses binding on the Government. The clauses referred to by the Claimant bind only the parties to the Khemco Agreement, namely NPC and Amoco. According to its own terms, Article 30, paragraph 2 cannot be construed as a stabilization clause and Article 21, paragraph 2 only prohibits unilateral measures by NPC or Amoco to “annul, amend or modify” the provisions of the Khemco Agreement.386

On the basis of the above findings in the view of the Tribunal only NPC and Khemco could be responsible for breach of contract. But the facts of the case indicated that although NPC acted only for itself when it concluded the Khemco Agreement, it acted as an instrument of the Iranian Government when it took the measures, together with NIOC, characterized by the Claimant as breach and repudiation of the Agreement. Therefore, the Tribunal concluded that NPC cannot be held liable for breach of contract.387 Under the heading “Breach of Contract as a Cause of Unlawfulness of the Expropriation” the Tribunal again referred to the issue of stabilization clauses. It said: 179. In international practice, and notably in the cases submitted to international arbitration, the dispute has focused on the question of the so-called “stabilization clauses”. For the reasons set forth in the preceding paragraph, it is not seriously questioned that, in the absence of such a stabilization clause, a contract does not constitute a bar to nationalization. That is one aspect of the

384

At p. 1356. See generally the position of Judge Brower on stabilization clauses at pp. 1394-1398. 386 At p. 1355. 387 At p. 1357. 385

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CHAPTER II evolution of international law in this area and of the general recognition of the right of States to nationalize.388

Therefore in case of absence of stabilization clauses the answer is easy: nationalization is not prevented by the terms of a contract. The Tribunal concluded finally: To sum up, the Tribunal finds that the expropriation in this case cannot be characterized as unlawful as a breach of a contract, since Iran, the expropriating State, was not a party to the Khemco Agreement and, therefore, not bound by any stabilization clause allegedly contained herein. Moreover, even if Article 21, paragraph 2 could be considered as binding upon the Government, that clause does not expressly prohibit nationalization of the contract.389

In order to substantiate its opinion the Tribunal referred to the AMINOIL case already discussed above. It concluded that Amoco’s rights and interests under the Khemco Agreement were therefore lawfully expropriated by Iran.390 In the end, the Tribunal adopted the same position as the Tribunal in the AMINOIL case to which it had indeed referred. Therefore, even if Art. 21(2) could be considered as a stabilization clause binding upon the Government, in the Tribunal’s view, the nationalization was not prohibited because it was not expressly covered by the terms of the stabilization clause. This decision suggests that a binding legal commitment of the host State not to exercise its legislative power against the specific investment relationship sometimes cannot be established easily. Therefore, the investor must make sure that the State is indeed a party to the agreement and, accordingly, bound by the stabilization clause contained in it.391

(c) Concluding remarks Arbitral tribunals consistently recognize stabilization clauses and regard them as a part of international law. The majority of writers also confirm that these clauses are binding and valid under international law and that the tribunals must observe them.392 The incorporation of a stabilization clause into an 388

At p. 1358. At p. 1358. 390 At p. 1359; See also Concurring Opinion at p. 1397 “If, as I believe, the expropriation here was contrary to an undertaking by Iran to stabilize the Khemco Agreement, then it was for this reason as well unlawful act”. 391 On this point see Maniruzzaman, A., The Relevance of Public International Law in Arbitrations concerning International Economic Development Agreements, 6 The Journal of World Investment and Trade 263 (2005) at pp. 273-279. 392 Curtis, C. T., The Legal Security of Economic Development Agreements, 29 Harv. ILJ 317 (1988) at p. 346; Delaume, G. R., The Proper Law of State Contracts Revisited, 12 ICSID Review – FILJ 1 (1997) at p. 23; Sornarajah, M., The Pursuit of Nationalized Property, Martinus Nijhoff Publishers (1986) at p. 93; Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 591-592. 389

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investment agreement simply means that any later changes of the domestic law cannot apply to the parties’ agreement or, if applied, the investor must be compensated for any harmful consequences of such a change. The reason for this conclusion is that parties when exercising their freedom of choice of law decided to choose a law as it existed at the time of the conclusion of their agreement. This can be done by virtue of a stabilization clause. By incorporating such a clause into an investment agreement the host State binds itself not to annul its contractual obligations through a change of its legislation in a way that would seriously affect an investor. In case of any arbitrary changes by the contracting State, the stabilization clause will serve to reinforce the position of the foreign investor. In particular, this would be the case if the State’s action amounts to a nationalization or expropriation without compensation. The position of the arbitral tribunals, as demonstrated above, is clear: under international law the foreign investor must be compensated for the losses suffered by such actions. But the positions appear divergent as to whether the incompatibility of the nationalization with the stabilization clause will be sufficient reason to demonstrate the unlawful character of the nationalization. In TOPCO and AGIP, the tribunals were clear in holding that the nationalization as an act that terminated the parties’ agreement was in violation of a stabilization clause contained therein and this violation was sufficient to demonstrate the unlawful character of nationalization. In AMINOIL and Amoco, the tribunals refused to accept the position that the nationalization was unlawful in light of these clauses. In their opinion, only an express prohibition of nationalization provided by the contract may have the effect of making such an act inconsistent with the stabilization clauses and, consequently, unlawful under international law. Such a construction of the meaning of the stabilization clauses has already been criticized above. Regardless of which of these opinions prevails, it is advisable to further specify the parties’ agreement on applicable law by a stabilization clause. This means that the tribunal is obliged to apply the chosen law as it existed at the time of the conclusion of the agreement. The subsequent changes in the law of the host State are allowed, but they are inapplicable to the specific investment relationship. As already suggested, the stabilization clauses should be explicit and carefully drafted in order to avoid any misinterpretation by the arbitral tribunal. The problem is more complex in the absence of a stabilization clause. In this situation it is difficult to answer whether any subsequent legislation should be applied or not. For the Tribunal in the Amoco case, it was not “seriously questioned that, in the absence of such a stabilization clause, a contract does not constitute a bar to nationalization”.393 The assumption is that when

393

Amoco International Finance Corporation v. Islamic Republic of Iran, Partial Award, 14 July 1987, 27 ILM 1314 (1988) at p. 1358.

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parties decide to choose the host State’s law as the law governing their relationship without qualifying it with a stabilization clause they accept possible later changes of that law. Indeed, where there is an agreement on applicable law it is difficult to argue that the parties wanted to stabilize their relationship if that was not explicitly stipulated in their agreement. The view of writers is that the position of international law would depend on whether the contracting State has acted in good faith or not. Bona fide or normal changes of the domestic law would have to apply to existing investment arrangement.394 This means that changes should not gravely, arbitrary affect or discriminate against prior contractual arrangements. Therefore, subsequent changes of the domestic law of the host State that merely alter the contractual relationship should be distinguished from those that abrogate it, as in the case of nationalization. In the latter situation, the investor is protected under internationally recognized minimum standards. The mandatory international rules which provide minimum standards of protection for aliens must be respected and, therefore, they cannot be affected by subsequent changes of the host State’s law. The arbitral tribunals are obliged to apply them regardless of the chosen law.

6 Limitations on the Parties’ Freedom to Choose the Applicable Law (a) Relevance of mandatory norms and public policy An arbitral tribunal derives its authority from the parties’ agreement and, if their agreement contains a choice of law clause, it must be respected by the tribunal and applied as such. The carrying out of an investment activity in the host State would require application of different laws (monetary, customs, labor, environmental protection laws etc.) that are, or may be, regarded as mandatory provisions of the host State law. Therefore, the question arises what is the relevance of the mandatory norms of the most closely connected system of law which is, in most investment cases, the host State’s law. In case of an investment contract involving a State and a private party, a choice of law that seeks to avoid these mandatory norms is unlikely to arise due to the fact that the parties will not risk making such an agreement invalid.395 In the context of ICSID arbitration it is argued that the host State

394 Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 595-596. 395 See Collier, J./Lowe, V., The Settlement of Disputes in International Law: Institutions and Procedures, Oxford University Press (1999) at pp. 239-248.

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should have the power to choose a law other than the host State’s law in certain matters (e.g. monetary, labor, administrative legislation) but that would require proof of the parties’ unequivocal intent.396 The same view has been expressed with regards to other arbitration systems i.e., if the parties wanted to exclude some rules of the host State law, which are regarded as mandatory provisions of that law, they must clearly demonstrate that they intended to do so.397 It is necessary to note that some domestic laws may limit the power of the Government to choose the law other than its own. In such cases it is advisable to examine the effect of such limitations before entering into any contractual arrangement. The second issue that may be problematic is public policy. If the agreement offends for some reasons local public policy the domestic courts would refuse to enforce such an agreement.398 No national code or international agreement defines the notion of public policy. The question is therefore: what are the criteria for its establishment? It is clear that public policy is more narrowly construed and applied than mandatory norms. A mandatory norm may be in contravention of public policy which serves to protect the basic principles of domestic legal system (e.g. prohibition of discrimination). On the other hand, the concept of domestic public policy is more broadly construed than the concept of international public policy. If the host State relies on its own public policy in order to avoid the application of the law of a third State or the law of the investor’s home State, as agreed to with the investor, such a behavior should not be upheld by the arbitral tribunal. The more relevant question concerns the application of international public policy and international mandatory rules to investment contracts. As a matter of fact, by recourse to the “truly international public policy” the arbitral tribunals may refuse to give effect to the parties’ choice of law.399

396

Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at p. 567. 397 See generally on this point Derains, Y., Public Policy and the Law Applicable to the Dispute in International Arbitration (in Comparative Arbitration Practice and Public Policy in Arbitration), ICCA VIIIth International Arbitration Congress, Kluwer (1986) at p. 27; With respect to the mandatory rules of the place of arbitration, Art. 27 of the ICC Rules directs the ICC Court to pay an attention to that matter. Although international arbitration has no lex fori in a strict sense, a challenge of non-ICSID awards may happen due to a violation of a mandatory rule or public policy. Therefore, in order to make effective decisions, non-ICSID tribunals would take into consideration any possible obstacles to the enforcement of the award. 398 Delaume, R. G., Law and Practice of Transnational Contracts, Ch. IV, Booklet 1, Release 88-1, Oceana (1988) at p. 117; See Art. 16 of the European Convention on the Law Applicable to Contractual Obligations, 19 ILM 1492 (1980). 399 Derains, Y., Public Policy and the Law Applicable to the Dispute in International Arbitration (in Comparative Arbitration Practice and Public Policy in Arbitration), ICCA VIIIth International Arbitration Congress, Kluwer (1986) at pp. 251, 254.

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The peremptory rules of international law (e.g. prohibition of terrorism, torture and genocide, slavery, piracy, the protection of basic principles of human rights etc.) must be respected.400 Vienna Convention on the Law of Treaties in Art. 53 defines a jus cogens norms or peremptory rules of international law as: . . . a norm accepted and recognized by the international community of States as a whole as a norm from which no derogation is permitted and which can be modified only by a subsequent norm of general international law having the same character.401

The International Court of Justice in Barcelona Traction case stated that jus cogens norms include “principles and rules concerning the basic rights of human person” and are the concern of all states: “they are obligations erga omnes”.402 This means that these norms prevail over all other rules of international law. It follows that every contractual arrangement must respect jus cogens norms. In other words, if any of the substantive provisions of the investment contract provides for arrangement contrary to these norms, such agreement must fail. Therefore, any investment agreement that contracts out of the peremptory rules of international law or in any way violates these rules should not be upheld by the arbitral tribunal.403 Finally, as noted in the Resolution of the Institute of International Law: Article 2 In no case shall an arbitrator violate principles of international public policy as to which a broad consensus has emerged in the international community.404

A question of public policy may be relevant at the enforcement stage or even in setting aside proceedings. In the context of ICSID arbitration, no domestic legal system would provide the standards for public policy.405 Articles 53 and 54 of the ICSID Convention do not mention any ground for refusal to recognize and enforce awards, not even public policy. On the other hand, other arbitral institutions (e.g. ICC), an ad hoc arbitration under the UNCITRAL Arbitration Rules (or arbitration under the Additional Facility Rules) do not

400

See generally on jus cogens Brownlie, I., Principles of Public International Law, 5th ed., Oxford Clarendon Press (1998) at pp. 514-516, who, in addition to the above mandatory rules, adds other rules that have this special status and they include the principle of permanent sovereignty over natural resources and the principle for self-determination. 401 Article 53 of the Vienna Convention on the Law of Treaties, at http://www.publicinternational-law.net. 402 The Barcelona Traction, Light and Power Co. (Belgium v. Spain), ICJ Reports (1970) 3, 32. 403 Mayer, P., Mandatory Rules of Law in International Arbitration, 2 Arbitration International, No. 1 (1986), at p. 291. 404 5 ICSID Review – FILJ 139 (1990) at p. 140. 405 Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at p. 568.

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have their own enforcement mechanisms and in these cases Art. V of the New York Convention of 1958 becomes relevant. Art. V(2)(b) provides that: Article V 2. Recognition and Enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that: ... (b) The recognition and enforcement of the award would be contrary to the public policy of that country.406

The goal of the New York Convention is to facilitate the recognition and enforcement of both agreements to arbitrate and arbitral awards.407 Under Art. V(2)(b) of the New York Convention the enforcing country preserves a right to refuse to recognize and enforce an arbitral award that would be contrary to its public policy. However, practice shows that generally the domestic courts construe and apply the notion of public policy narrowly and, as a matter of fact, followed a strong preference in support of international arbitration and enforcement of arbitral awards. It seems that enforcement would be refused only if it violates the most basic notions of morality and justice of the forum.

406

United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958, at http://www.uncitral.org/en-index.htm. 407 See Arts. II and III of the New York Convention. Article I(3) provides for reservations in the following terms: “3. When signing, ratifying or acceding to the Convention, or notifying extension under art. X hereof, any State may on the basis of reciprocity declare that it will apply the Convention to the recognition and enforcement of awards made only in the territory of another contracting State. It may also declare that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration”.

CHAPTER III

Absence of Agreed Choice of Law

1 Methods for Determining the Absence of the Parties’ Agreement on Choice of Law In the absence of the parties’ agreement on the law applicable to the merits of their dispute, the residual rule of the authorizing instruments comes into effect. Before turning to the residual rule the tribunal must determine that there is no agreement on choice of law between the parties. Different methods can be used in order to determine the absence of such agreement. For instance, in Benvenuti & Bonfant v. Congo,1 the Tribunal examined the contract concluded between the parties and found that the two articles of the parties’ agreement, Arts. 12 and 25 of the Bylaws, did not contain an explicit choice of law. Therefore, there was no agreement on applicable law between the parties and the Tribunal had to apply Congolese law (based on French law) as well as international law. The Tribunal said: 4.2. These Articles do not contain any provision regarding the law applicable. In this case, according to Article 42 (1) of the Convention, the Tribunal applies the law of the contracting State which is a party to the dispute as well as the principles of international law in the matter. 4.3. Congolese law applies to civil and commercial matters French law as it existed at the time of the accession of the country to independence (1960). This body of rules, and in particular the French Civil Code, has the force of the law by virtue of Article 23 of the French decree of 28 September 1897. This legislation falls within the framework of the Constitution of the People’s Republic of the Congo of 24 June 1973 and the “Fundamental Act of the Military Committee of the Party” of 5 April 1977, which amended certain provisions of the Constitution.2

1 2

Benvenuti & Bonfant v. Congo, Award, 15 August 1980, 1 ICSID Reports 330. At p. 349.

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Furthermore, in the Benvenuti case the Tribunal was authorized to decide ex aequo et bono, in accordance with Art. 42(3) of the ICSID Convention.3 Such a power gives the Tribunal discretion to apply both the rules of law and equity. As a matter of fact, this is what the Tribunal did in that case. It applied Congolese law, international law and principles of equity. The Benvenuti decision will be analyzed further in the chapter dealing with a decision ex aequo et bono. The identical method for determining the absence of the parties’ agreement on choice of law was employed in Cable TV v. The Federation of St. Christopher (St. Kitts) and Nevis. An agreement concluded between the parties did not contain a clause on applicable law. After citing Art. 42(1) of the ICSID Convention, the Tribunal said: 6.02 The Agreement is silent on the matter of applicable law and, in the circumstances, in accordance with Article 42 (1) of the Convention the law of the Federation and applicable international law will apply.4

Therefore, only after determining that the parties’ agreement was silent on the choice of law, did the Tribunal turn to the residual rule of Art. 42(1) of the ICSID Convention which requires the applicability of both the host State’s law and international law. The ad hoc UNCITRAL Tribunal, in Wintershall v. Qatar, found that the parties’ agreement contained no choice of law provision.5 In the absence of an agreed choice of law the UNCITRAL Tribunal had to apply the law determined by the applicable conflict of laws rules. On the basis of the close links of the parties’ agreement to the law of Qatar the Tribunal found that the applicable substantive law was the law of Qatar.6 This case will be analyzed below. In addition, the arbitral tribunal must examine whether an implicit choice of law exists between the parties. This issue has already been discussed above. For the purpose of this analysis it is appropriate to note that in LETCO v. Liberia the Tribunal accepted the argument that a reference in the parties’ agreement to the host State’s legislation amounted to a choice of the host State’s law.7 On the other hand, in SPP v. Egypt an answer whether there was an implicit agreement on choice of law or not, in favor of Egyptian law, was left open. As a matter of fact, in the SPP case the ICSID Tribunal considered the manner in which the first and the second sentence of Art. 42(1) of the ICSID Convention is to be applied as

3

At pp. 338, 342, 349. Cable TV v. The Federation of St. Christopher (St. Kitts) and Nevis, Award, 13 January 1997, 13 ICSID Review – FILJ 328 (1998) at p. 371. 5 Wintershall A.G., et al. v. The Government of Qatar, Partial Award, 5 February 1988, 28 ILM 795 (1989) at p. 802. 6 At p. 802. 7 LETCO v. Liberia, Award, 31 March 1986, 2 ICSID Reports 358. 4

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immaterial.8 In the view of the Tribunal, in either way both the law of Egypt and international law would have to be applied.9 It based that finding on the argument that every national system is incomplete and where a lacuna occurs in the chosen domestic law it amounts to an absence of agreement and, consequently, resort to the residual rule of Art. 42(1) of the ICSID Convention is necessary.10 It is possible that the parties may agree on a law which is actually incomplete. For instance, if the parties choose the law of a contract as the law applicable to their relationship such a choice of law may lead to an incomplete agreement on applicable law since certain aspects of the parties’ relationship could not be resolved by applying the law of the contract only. In other words, if the contract does not provide an answer to the relevant questions, the arbitral tribunal may treat this as an absence of an agreement and, consequently, resort to the residual rule of an authorizing instrument. For instance, in such a case, an ICSID tribunal will apply the second sentence of Art. 42(1) of the ICSID Convention. But, in the SPP case, the argument of incompleteness of Egyptian law sounds unconvincing. Indeed, the Dissenting Opinion to the Award11 as well as some commentators12 correctly noted that Egyptian law, like other domestic systems, has its own devices to close any perceived gaps and in such a situation resort to the second sentence of Art. 42(1) of the ICSID Convention would probably be unnecessary. In any case, this decision indicates that an incomplete agreement on choice of law may lead the tribunal to treat it as an absence of an agreement. Finally, an implicit agreement on choice of law may be inferred from the parties’ conduct and submissions during the arbitration proceedings. The Tribunals in AAPL v. Sri Lanka and in Wena v. Egypt followed this method. That method is, in principle, acceptable as long as it undoubtedly demonstrates the parties’ agreement on choice of law. On the basis of the above, it is possible to conclude that whatever method is used, it has to demonstrate clearly that there is no agreement on applicable law. Only after being satisfied that there is no such agreement, the arbitral tribunal may resort to the residual rule of the authorizing instrument.13

8

SPP v. Egypt, Award, 20 May 1992, 3 ICSID Reports 207. At pp. 207-209. 10 At p. 207. 11 At pp. 249, 321. 12 Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 597-598; 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 pp. 195-196. 13 On this point see also Autopista Concesionada de Venezuela, C.A. v. Bolivarian Republic of Venezuela, Award, 3 September 2003, http://www.worldbank.org/icsid/cases/Award_Total.pdf, paras. 92-100. 9

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2 Application of the Residual Rule of Article 42(1) of the ICSID Convention The ICSID Convention in the second sentence of Art. 42(1) contains a compound choice of law clause. It reads as follows: Article 42 (1) . . . 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.14

Therefore, in the absence of the parties’ agreement on applicable law, an ICSID tribunal has to apply the law of the host State (including the host State’s conflict of laws rules) as well as the applicable rules of international law. This means that an ICSID tribunal is authorized and obliged to examine and apply both legal systems.15 The second sentence of Art. 42(1) explicitly mentions the host State’s rules on the conflict of laws. Private international law rules or conflict of laws rules designate the applicable law. Renvoi is a process in which a law applicable to the parties’ relationship may contain conflict of laws rules which may refer to another legal system. Accordingly, if the host State’s conflict of laws rules refer to the law of another country, because the particular investment relationship has a closer connection to that law, the ICSID tribunal will apply the law of that other country.16 Therefore, it appears that an ICSID tribunal is obliged first to check the conflict of laws rules of the host State, and only after determining that they do not refer the matter to another system of law, may it apply the substantive rules of the host State law. 14

575 UNTS 159, reprinted in ICSID Basic Documents, Doc. ICSID/15 (January 1985). For an analysis of the role of international law in the second sentence of Art. 42(1) see generally Gaillard, E./Banifatemi, Y., The Meaning of “and” in Article 42(1), Second Sentence, of the Washington Convention: The Role of International Law in ICSID Choice of Law Process, 18 ICSID Review – FILJ 375 (2003). In their contention “under Article 42(1), second sentence, an ICSID tribunal may also apply international law as a body of substantive rules in order to resolve the dispute or a particular issue. The fact that those rules would apply as opposed to the rules of the law of the host State does not mean that the latter, when they simply differ from the former, are set aside, but that the rules of international law constitute, in the arbitrators’ determination, the proper law for the issue under consideration”. Therefore, “depending on the circumstances of the case, each ICSID tribunal should have discretion to decide whether any rules of international law are directly applicable, without any requirement of initial scrutiny into the law of the host State”, at pp. 399, 409; See also Gaillard, E., The Extent of Review of the Applicable Law in Investment Treaty Arbitration (in Annulment of ICSID Awards, edited by Gaillard, E./Banifatemi, Y), 223 (2004) at pp. 228-236. 16 Since the governing law of a loan relationship is normally the law of the lender’s country it is expected that in such a situation the host State’s conflict rules will refer to the law of the lender’s country., See Delaume, G. R., Law and Practice of Transnational Contracts, Ch. IV, Booklet 1, Release 88-1, Oceana (1988) at p. 116. 15

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The analysis of arbitral practice in the next section will demonstrate the manner in which ICSID tribunals have applied the residual rule of Art. 42(1) of the ICSID Convention. The reference to both legal systems in the second sentence of Art. 42(1) has prompted ICSID tribunals to enter into a discussion on the interrelation between domestic law and international law in this context. This issue will be discussed later.

(a) Arbitral practice (i)

Amco v. Indonesia (parallel application of the host state’s law and international law)

In Amco v. Indonesia17 the dispute was related to the construction and management of a hotel in Djakarta. Under the parties’ agreements, Amco had to invest at least three million U.S. Dollars in equity capital in the project. The dispute arose in connection with Amco’s performance of the management part of the agreements. PT Wisma (an Indonesian organization closely connected with the Indonesian Army and Amco’s partner in the project) took over the management of the hotel with the help of army and police personnel. It also persuaded Indonesian Government to revoke the investment license. Amco instituted ICSID arbitration proceedings. Before examining the merits of the case, the ICSID Tribunal entered into a discussion on applicable law. First, it pointed out that the case had to be decided in accordance with the applicable rules of law since there was no agreement that empowered the Tribunal to decide ex aequo et bono in accordance with Art. 42(3) of the ICSID Convention.18 After that, the Tribunal cited Art. 42(1) of the ICSID Convention noting that there was no agreement on choice of law between the parties. Therefore, the residual rule of Art. 42(1) was applicable: 148. The parties having not expressed an agreement as to the rules of law according to which the disputes between them should be decided, the Tribunal has to apply Indonesian law, which is the law of the Contracting State Party to the dispute, and such rules of international law as the Tribunal deems to be applicable, considering the matters and issues in dispute.19

The Tribunal then referred to the renvoi provision of the second sentence of Art. 42(1) of the ICSID Convention. As already explained above, this provision requires the Tribunal to check first the conflict of laws rules of the host State. The Tribunal noted that there was no need to discuss the conflict of laws rules of the Indonesian law since both parties had referred to the substantive 17 18 19

Amco v. Indonesia, Award, 20 November 1984, 1 ICSID Reports 413. At p. 452. At p. 452.

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law of Indonesia and, moreover, the investment took place in Indonesia which raised no doubt as to the applicability of the substantive law of the host State: 148 . . . As to Indonesian law, there is no need to enter into a discussion of its conflicts of laws’ rules. Indeed, Claimants as well as Respondent were constantly referring, in their discussion on the merits to the substantive law of Indonesia. Moreover, the dispute before the Tribunal relating to an investment in Indonesia, there is no doubt that the substantive municipal rules of law to be applied by the Tribunal are to drawn from Indonesian law.20

In the same way the Tribunal confirmed the applicability of international law rules. Not only was the Tribunal directed to apply international law by virtue of the second sentence of Art. 42(1) but also “the parties not only did not deny their applicability, but constantly referred to them in their pleadings and in the final oral arguments.”21 After identifying the applicable substantive law, the Tribunal proceeded to examine the relevant legal questions in relation to both Indonesian law and international law. The Claimant argued that the seizure of the hotel amounted to an expropriation.22 It also argued that the Respondent violated Arts. 21 and 22 of the Foreign Investment Law No 1/1967 which expressly prohibits expropriation except under certain conditions which, according to the Claimant, were not fulfilled in this case.23 The Tribunal proceeded to analyze whether the taking of the hotel amounted to an expropriation which, in accordance with both legal systems i.e., Indonesian law and international law, can give rise to a claim for compensation.24 It referred to Arts. 21 and 22 of the Indonesian Law of Foreign Investment (ILFI) and to the generally accepted rules of international law regarding expropriations. According to the Tribunal, although there are many different opinions as to the definition of expropriation in international law “it emerges, however, as a conditio sine qua non that there shall exist a taking of private property and that such taking shall have been executed or instigated by a government, on behalf of a government or by an act which otherwise is attributable to a government”.25 The Tribunal raised the questions of whether the taking occurred on behalf of or on the instigation of the Government, or whether the taking occurred on behalf of or on the instigation of the army, Inkopad or PT Wisma and, if the answer is yes, whether such action could be attributed to the Government.26 In the view of the Tribunal, although a close relationship existed between PT 20 21 22 23 24 25 26

At p. 452. At p. 452. At p. 454. At p. 454. At pp. 454-460. At p. 455. At p. 456.

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Wisma and Inkopad, and between the latter and the army, that fact in itself did not attribute the acts of Wisma to the Government. The Tribunal held: . . . these acts of PT Wisma are not an expropriation or taking neither according to national (Indonesian) nor to international law. Nor are the acts of PT Wisma in any way attributable to the Government of Indonesia.27

Then, the Tribunal raised a question of whether the assistance rendered to Wisma by police and army forces can involve responsibility for the Government.28 The Tribunal noted that it did not know of any authority that can legitimize such an act unless the internal situation made this absolutely necessary.29 Although the Tribunal found that the acts of Wisma were not an expropriation under Indonesian law or international law, the Tribunal held that the internationally wrongful act was committed through the State’s failure to protect aliens and their investment against unlawful acts committed by stateorgans.30 Therefore, these actions were attributable to the Government which is, therefore, internationally responsible. In this regard, the Tribunal referred to one scholarly writing and cited Arts. 3, 5 and 10 of the Draft Articles on State Responsibility, formulated in 1979 by the ILC.31 After establishing that Indonesia was internationally responsible, the Tribunal proceeded to discuss the legal consequences of that international wrong. Before that, the Tribunal entered into an extensive analysis of the legal characterization of the relationship between the parties, established by the investment application and its approval.32 By reference to both legal systems the Tribunal held that the parties’ relationship should be characterized “as a sui generis legal relationship, comparable to a contract” and that there was no need to discuss the license’s revocation as a measure of nationalization.33 In the Tribunal’s view the issue of the lawfulness of the withdrawal of the investment application’s approval should have been examined. In respect of the procedure of the revocation, the Tribunal referred to the relevant Indonesian regulations and found that the Claimant was deprived of due process since there was an absence of any warnings which was required by the domestic regulations.34 The Tribunal said: 198 . . . Thus, the warning (or warnings) are an element of due process, rightly in the opinion of the Tribunal, established by Indonesian law to protect the investor, in particular where a sanction as heavy – and indeed, irremediable – as a revocation is envisaged against him. In the instant case, this protection was 27 28 29 30 31 32 33 34

At p. 457. At p. 457. At p. 458. At pp. 458-459. At pp. 458-459. At pp. 460-468. At pp. 460-468. At pp. 469-474.

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CHAPTER III not made available to the Claimants, who were thus deprived of due process, contrary to Indonesian law as well as contrary to general principles of law.35

The Tribunal held that the procedure of the revocation was unlawful under both Indonesian law and general principles of law. An examination of the reasons for the withdrawal of the investment’s application led the Tribunal to conclude that the revocation of Amco’s investment license was not justified in substance.36 The Tribunal had calculated that the total sum of Amco’s investment reached US $2,472,490 and that the shortfall of 1/6 of the required investment had been immaterial and, therefore, did not justify the revocation of Amco’s investment license.37 The Tribunal proceeded to examine extensively the liability of Indonesia for the withdrawal of the investment authorization from the perspective of both legal systems. First, it examined the issue under Indonesian law.38 It referred to the relevant Indonesian regulations noting that due process was not granted to the investor and that the revocation was not justified since there was no material failures on the side of investor. The Tribunal, therefore, held that: 246 . . . Accordingly, in both respects, the revocation amounted to a violation of a fundamental principle and of relevant particular provisions of Indonesian law; be it only for this reason, it committed the State’s liability, in the framework of its own legal system.39

It continued in the following terms: 247 . . . As a result, where the revocation is not justified by public interest – nor, as in the instant case, by the alleged failures of the investor on which the decision is based – it consists in a violation of obligations undertaken by the State, readily comparable to a violation of contractual obligations. Therefore, the fundamental principle of pacta sunt servanda, embodied in the Indonesian Civil Code by Article 1338 (contracts are the law of the parties), is to be applied; the consequence of said application is that the State’s liability is committed in this respect as well.40

Therefore, by applying the principle pacta sunt servanda as embodied in Indonesian law the Tribunal established that the Respondent was liable for the acts committed. Furthermore, by withdrawing the investor’s rights without due process and for no material reasons, the State had committed a wrong under Art. 1365 of the Indonesian Civil Code as well, which provides that “persons responsible for any act in violation of the law which results in a loss to another party are obliged to replace said loss”.41 Therefore, the State was liable and had to pay damages. 35 36 37 38 39 40 41

At pp. 471-472. At pp. 474-489. At p. 489. At pp. 490-491. At p. 490. At pp. 490-491. At p. 491.

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The examination of this issue under international law led to the identical result.42 The Tribunal started its analysis by saying that the principle pacta sunt servanda is a principle of international law, first, since it is a general principle of law in the meaning of Art. 38 of the Statute of the ICJ and, second, “since it is common to all legal systems in which the institution of contract is known”.43 The Tribunal noted that this principle is embodied in civil law systems, in common law as well as in Islamic law. The Award contains references to pertinent authorities. The Tribunal, in particular, found support for the application of the principle pacta sunt servanda in the international arbitral awards that had applied the said principle (e.g. the Aramco, TOPCO, Sapphire awards).44 Furthermore, the Tribunal relied on the principle of respect for acquired rights which were conferred upon the Claimant in conformity with the authorization to invest, as granted by the Respondent. The Tribunal found that the Respondent was also liable in this respect. It said: 248 . . . These acquired rights could not be withdrawn by the Republic, except by observing the legal requisites of procedural conditions established by law, and for reasons admitted by the latter. In fact, the Republic did withdraw such rights, not observing the legal requisites of procedure, and for reasons which, according to law, did no justify the said withdrawal. The principle of respect of acquired rights was thus infringed, and the Republic has committed its international liability also in this respect.45

Again, the Tribunal referred to international judicial and arbitral awards. Finally, the Tribunal noted that its position was in accordance with the purpose of the ICSID Convention: 249 . . . To deny the host State’ s liability where the same infringes the obligations undertaken towards the investor – as well as to refuse, in other instances, the investor’s liability where he infringes his own obligations – would move to empty the ICSID Convention of any meaning.46

Therefore, under both legal systems the Respondent’s liability towards the Claimant had been established and, consequently, the Respondent was liable to pay damages. The Tribunal proceeded to determine the amount of damages to be awarded to the Claimant. Again, with respect to the legal basis of calculation of damages, the Tribunal examined both Indonesian law and international law. It found that under both legal systems damages were to compensate the whole prejudice suffered by the Claimant.47 The Tribunal substantiated its finding by 42 43 44 45 46 47

At pp. 491-494. At p. 491. At pp. 492-493. At p. 493. At p. 493. At pp. 499-501.

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reference to the Indonesian Civil Code, the French Civil Code, the Uniform Commercial Code and, to a number of international judicial and arbitral awards.48 In order to grant the investor full and effective compensation, both Indonesian law and international law authorized the repatriation of the money in US $.49 With respect to the rate of interest the Tribunal applied Indonesian law, while the date for the commencement of interest was the date of the request for arbitration under both legal systems.50 In Amco v. Indonesia the Tribunal determined that, since there was no agreed choice of law in accordance with the first sentence of Art. 42(1) of the ICSID Convention, it had to apply the residual rule of Art. 42(1). The Tribunal took into account the renvoi rule, but pointed out that, in this particular case, it was not necessary to check the conflict of laws rules of the host State. The Tribunal found confirmation for its finding on the applicability of the substantive law of Indonesia in the parties’ submissions as well as in the fact that the dispute was related to an investment in Indonesia. In accordance with the residual rule of Art. 42(1) of the ICSID Convention, the Tribunal had to apply international law as well. Again, it found support for its finding on the applicability of international law in the parties’ submissions. Therefore, it may be concluded that the first Tribunal, in Amco v. Indonesia, identified the applicable law correctly, in accordance with the residual rule of Art. 42(1). The reference to the parties’ submissions should be understood as support for the Tribunal’s own finding on applicable law. This decision provides detailed examination of a number of legal questions from the perspective of both legal systems which led to identical results. The Tribunal operating under the combined choice of law clause is bound to proceed in such a way. The reading of the Award gives the impression that the Tribunal not only purported to apply but also that it had indeed applied both Indonesian law and international law. But, as will be seen later in the section dealing with the issues of annulment, this Award was annulled for a failure of the Tribunal to apply the proper law, which constitutes a manifest excess of powers and, therefore, a ground for annulment under Art. 52(1)(b) of the ICSID Convention. The ad hoc Committee, in its Decision on Annulment, examined whether the Tribunal had, in fact, applied the law it was bound to apply to the dispute.51 In the ad hoc Committee’s view, the Tribunal had failed to apply an important provision of Indonesian law and, consequently, manifestly exceeded its powers. This issue will be discussed below.

48 49 50 51

At. pp. 499-501. At p. 504. At p. 506. Amco v. Indonesia, Decision on Annulment, 16 May 1986, 1 ICSID Reports 509.

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(ii) SOABI v. Senegal (application of the host state’s law only) In SOABI v. Senegal52 the dispute arose out of the Government’s unilateral termination of a contract concluded with the investor. SOABI submitted a request for ICSID arbitration and claimed a breach of contract. Before entering into the merits of the case, the Tribunal pointed out that it must first decide on what rules governed the parties’ relationship.53After citing Art. 42 (1) of the ICSID Convention, the Tribunal said: 5.02 . . . In the Tribunal’s view, in the absence of agreement between the parties, the national law applicable to the relations of two Senegalese parties in respect of a project that was to take place in Senegal, can only be Senegalese law. The Tribunal is of the opinion that the agreements in question must be characterized as “government contracts”, the effect and execution of which are governed primarily by the Code of Governmental Obligations (C.G.O.). It appears from the position of the Government stated in its Counter-memorial . . . and that of SOABI contained in its Reply . . . that both parties agree that the applicable law is Senegalese administrative law.54

Therefore, the Tribunal determined that since there was no agreement on applicable law between the parties it had to apply Senegalese law, in particular Senegalese administrative law. After that, the Tribunal commented on Senegalese administrative law and reviewed the fundamental provisions of the Code of Governmental Obligations (C.G.O.) to which the parties had referred extensively. The provisions of the C.G.O. evidenced that Senegalese administrative law was largely influenced by French law.55 The Award contains numerous references to the C.G.O. (e.g. in relation to sanctions for non-fulfillment of contractual obligations; in relation to contractual liability, indemnification etc.)56 Accordingly, the Tribunal proceeded to decide the merits on the basis of Senegalese law, in particular the C.G.O. It said: 5.21 . . . It is in light of these C.G.O. provisions and of the above-mentioned principles of Senegalese administrative law that the Tribunal proposes to determine the issues raised by the parties concerning liability for “the termination (by the State of Senegal) of the contract for the construction of 15,000 units of low-income housing” . . . 57

The Claimant’s claim for compensation for losses as a result of the Government’s termination of the contract was rejected by the Respondent on the basis that “such termination was in fact a termination in response to 52 53 54 55 56 57

SOABI v. Senegal, Award, 25 February 1988, 2 ICSID Reports 190. At p. 221. At p. 221. At pp. 222-226. Ibid. At p. 226.

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SOABI’s own breaches”.58 According to the Respondent, the Claimant failed to observe: the contract price of units and to secure adequate financing for the project and, consequently, the Government’s termination was justified in accordance with Art. 136 of the C.G.O. (Government Termination by Reason of Breach).59 In its response, the Claimant relied on Art. 81 of the C.G.O which requires a formal demand to be made to a co-contracting party in order to comply with its contractual obligations, before the Government may impose any sanctions on the co-contracting party.60 Therefore, in the view of Claimant: 5.30 . . . if the Government wanted to terminate the agreement, it had two courses of action open to it: termination for breach (Article 136 of the C.G.O.) or discretionary termination (Article 137 of the C.G.O.). Had the Government chosen the former, it had to proceed its actions with a demand that SOABI comply with its contractual obligations. As the Government did not do so, it had no authority to terminate the agreement, as against SOABI, for breach. The only alternative would therefore be Article 137, which gives the Government a discretionary power to terminate the agreement on condition that it indemnify its co-contractor. Thus, SOABI implicitly based its claim on the faulty exercise by the Government of its powers under Article 136, or in alternative, on the Government’s refusal to fulfill its obligation to compensate pursuant to Article 138.61

In respect to the above argument, the Respondent argued that even if it failed to make a formal demand, that did not mean that it failed to give notice to the Claimant. The Respondent referred to the concept of demand, as developed in the jurisprudence of France and Senegal, according to which there is no requirement of a registered letter, but a demand may even be made orally.62 The Tribunal rejected the Respondent’s argument noting that a demand “must at least clearly inform the defaulting party that it is in default, make a request that it fulfill its obligations, and be accompanied by a warning of the sanctions that may be pursued failing compliance”.63 Finally, the Tribunal also refused to accept the Respondent’s argument that “a contracting party may only claim compensation, even in the case of unilateral termination, if it itself has not breached any of the contractual terms”.64 The Tribunal again referred to the C.G.O. and offered the following analysis: 5.36 . . . The C.G.O., which draws a very clear distinction between termination upon breach and termination absent breach, a distinction that authors have stressed, provides a Government who wishes to terminate a contract with an option. If it considers that the co-contracting party has failed in its contractual 58 59 60 61 62 63 64

At p. 228. At pp. 225, 228. At pp. 225, 228. At p. 228. At p. 229. At p. 229. At p. 229.

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obligations, it must make a demand and, if the situation is not rectified, may terminate the contract for breach. In such a case, the Tribunal is of the view that the Government is free to seek damages, or it may content itself with the dissolution of the contract. The Government, which maintains that it could terminate for cause based on SOABI’s breaches, cannot rely on those alleged breaches as a defense against Article 138 compensation, having unilaterally terminated the SOABI project without making a demand or even mentioning in its letter of termination that it considered SOABI to have failed in its contractual obligations.65

On this basis, the Tribunal concluded that the request for compensation under Art. 138 of the C.G.O. is admissible in principle, but it also decided to examine whether the breaches argued by the Respondent had indeed been committed by the Claimant.66 It proceeded to examine the alleged breaches as relevant to the question of damages and found that these allegations were unjustified.67 Finally, the Tribunal proceeded to discuss the damages to be awarded to the Claimant. This part of the Award also contains extensive references to the law of Senegal (in particular, to the C.G.O. and the Code of Civil and Commercial Obligations) and to scholarly writings on this point.68 This decision demonstrates a finding on the applicable law that is quite confusing. The Tribunal’s analysis lacks a clear statement as to whether the finding on applicable law was reached by applying the first or the second sentence of Art. 42(1) of the ICSID Convention. The Tribunal, after noting the absence of the parties’ agreement on choice of law, found that the relevant national law must be the law of Senegal. This finding appears to be based on the second sentence of Art. 42(1) of the ICSID Convention which mandates the application of the host State’s law (except if the host State’s conflict of laws rules refer to another national law). The Tribunal sought support for its finding in the fact that relevant connecting factors pointed to the law of Senegal as the applicable law (project location was in Senegal and it involved two Senegalese parties). But, after that, the Tribunal said that both parties were agreed on Senegalese administrative law as the law applicable to their dispute. As a matter of fact, this part of the Tribunal’s analysis is the one that is confusing, since the Tribunal now refers to the parties’ agreement on the applicable law. But, it appears plausible to argue that the Tribunal merely sought support for its finding on the applicable law in the parties’ submissions since it previously found the absence of such agreement. Furthermore, the Tribunal’s finding on the applicable law lacks a reference to international law. The residual rule of Art. 42(1) of the ICSID Convention explicitly includes reference to both the host State’s law and international law

65 66 67 68

At pp. 229-230. At p. 230. At pp. 230-245. At pp. 245-254.

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as the applicable law. No explanation was offered for such an approach. The Tribunal’s analysis of the merits followed its finding on applicable law i.e., the Tribunal examined and applied solely Senegalese law to the relevant questions. Therefore, it follows that the Tribunal, operating under the second sentence of Art. 42(1) of the ICSID Convention, thought that it may base its decision on the law of the host State only. In this particular case, the host State’s law, influenced by French law, provided clear rules in favor of the investor. The question is whether the Tribunal was obliged to find support for its findings under international law as well. The role of international law is not limited to filling the gaps in the applicable domestic law but, it also has a corrective function as will be discussed below. Therefore, the result reached by applying the host State’s law should be tested against international law. Whether the Tribunal did this is an open question. The Award itself is silent on this point. It is convincing to argue that the Tribunal applying the combined choice of law clause, provided by the second sentence of Art. 42(1) of the ICSID Convention, is obliged, at least, to note such concurrence. The earlier versions of the ICSID Convention provided for the applicability of such rules of national or (and) international law as the Tribunal determines to be applicable in the absence of the parties’ agreement on choice of law.69 Although it is impossible to conclude that the Tribunal followed this formula, its determination of applicable law was closer to this, rejected version, than to the one finally adopted which contains an explicit reference to both the law of the Contracting State party to the dispute and to international law. (iii) Tradex v. Albania (international law used as guidance for the interpretation of the host state’s law) In Tradex v. Albania, the dispute concerned an alleged expropriation of an agricultural joint venture in Albania. The case was brought by Tradex, the investor, on the basis of consent to arbitration under the ICSID Convention contained in the 1993 Foreign Investment Law (the 1993 Law) in Albania.70 The Tribunal held that it had jurisdiction on the basis of that Law, but the issue as to whether or not an expropriation had been shown as required by the 1993 Law, was joined to the merits of the case.71 The 1993 Law limits the consent to ICSID arbitration by providing that only disputes related to expropriation may be submitted before an ICSID tribunal. Since the Tribunal joined to the merits of the case the jurisdictional 69

History of the ICSID Convention, Vol. I, at pp. 190, 192. Tradex had also relied on the Albania/Greece BIT of 1991 as a basis for the Tribunal’s jurisdiction, but the Tribunal was not able to establish its jurisdiction on the basis of this treaty because it entered into force after the alleged expropriation and the request for arbitration. 71 Tradex v. Albania, Decision on Jurisdiction, 24 December 1996, 14 ICSID Review – FILJ 161 (1999). 70

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question of whether an expropriation had been shown, it correctly found that the relevant provisions of the 1993 Law should be primarily examined as to whether Tradex’ claim was justified on the merits. The Tribunal said: 69. Therefore, in its consideration of the merits, the Tribunal is prevented from examining the claim on any other possible legal basis such as any other of the various investment laws issued in Albania, the Bilateral Investment Treaty between Albania and Greece, as well as other sources of international law. Although court and arbitral decisions and legal writings dealing with such other sources may be of relevance in interpreting the 1993 Law, it is this 1993 Law which the Tribunal will examine as to whether Tradex’ claim is justified on the merits. This is in conformity with Art. 42 (1) of the ICSID Convention according to which “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”. Accordingly, the Tribunal will make use of sources of international law insofar as that seems appropriate for the interpretation of terms used in the 1993 Law, such as “expropriation” . . . 72

Therefore, the Tribunal noted that its reliance on the 1993 Law, as the legal basis for the Tradex’s claim, was in compliance with the residual rule of Art. 42(1) of the ICSID Convention. It also added that the sources of international law would be used for the interpretation of the 1993 Law. After that, the Tribunal noted that a further limitation came from the 1993 Law itself which in Art. 8(2) provides for the submission to ICSID arbitration only if the dispute relates to an expropriation, compensation for expropriation, discrimination or to the transfers in accordance with Art. 7 of the same law.73 Since no claim had been raised in relation to discrimination or transfer in accordance with Art. 7 of the 1993 Law, the Tribunal decided to examine only the provisions of the 1993 Law related to expropriation and compensation for it, as a possible source of the claim. With respect to the issue of expropriation, the Tribunal referred to Art. 4 of the 1993 Law which provides that foreign investments shall not be expropriated directly, indirectly or by any measure of tantamount effect.74 Since the parties disagreed as to the actual facts, the Tribunal examined every incident alleged by the Claimant as having the effect of a taking. In addition to Art. 4 of the 1993 Law, the Tribunal also used the sources of international law as guidance for its interpretation of Art. 4 of the 1993 Law. It referred to the decisions of the Iran–US Claims Tribunal stating that a similarly broad interpretation of “expropriation” as in Art. 4 of the 1993 Law was given in international law as well.75 The Tribunal noted that although a broad range of takings may be considered in this regard, the attributability to the State is the 72

Tradex v. Albania, Award, 29 April 1999, 14 ICSID Review – FILJ 197 (1999) at pp. 216-217. Emphasis original. 73 At p. 217, para. 70. 74 At p. 232, para. 133. 75 At p. 232, para. 135.

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important condition for such a taking to qualify as an expropriation.76 It confirmed that this is well established in international law and referred to two international decisions. The parties agreed that the attributability to the State is a condition of expropriation, but disagreed as to whether certain interferences were to be attributed to Albania. Therefore, in the view of the Tribunal it was necessary to examine whether there was a taking of rights acquired by the Claimant as a part of its investment and, if so, whether that taking was attributable to Albania.77 The Tribunal’s analysis of the Governmental decisions and events led to the conclusion that none of these constituted an expropriation and, in the end of the relevant period, there was no sufficient evidence that the Claimant had less land available than in August 1992.78 Although the Claimant had some difficulties and had not agriculturally used all of the land, the Tribunal noted that the relevant fact was only whether expropriation measures were the cause of these difficulties. In this regard, the Tribunal referred to the international judicial and arbitral decisions in the following terms: 200 . . . As the International Court of Justice pointed out in the Elsi Case, it must be proved “that the ultimate result was the consequence of the acts or omissions” of the state authorities . . . Or, as the Iran–US Claims Tribunal found in the Otis Case, “a multiplicity of factors affected Claimant’s enjoyment of its property rights . . . However, the Tribunal is not convinced that the Claimant has established that the infringement of these rights was caused by conduct attributable to the Government of Iran. The acts of interference determined by the Tribunal as being attributable to Iran are not sufficient in the circumstances of this Case, either individually or collectively, to warrant a finding that a deprivation or taking of the Claimant’s participation in Iran Elevator had occurred.” . . . Taking these standards into account, the Tribunal in this Case finds that Tradex has not proved that the failure of the Joint Venture was due to expropriation measures by the State of Albania.79

Therefore, the above analysis led the Tribunal to conclude that the Claimant had not been able to prove that an act of expropriation had occurred in relation to its investment in the joint venture.80 Since no expropriation had occurred there was no jurisdiction according to Art. 8 of the 1993 Law and no need to discuss the quantum of compensation.81 In this case, ICSID Tribunal upheld its jurisdiction on the basis of the consent clause to ICSID arbitration contained in the domestic legislation. But that consent was limited, in effect, to measures of expropriation. The Tribunal joined to the merits of the case the jurisdictional question of whether an expropriation had been shown. Since the 1993 Law was determinative for the 76 77 78 79 80 81

At p. 233, para. 136. At pp. 233-248, paras. 137-203. At pp. 244-248, paras. 191-203. At p. 247. Emphasis original. At p. 248, paras. 203-204. At p. 248, para. 205.

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consideration of the merits, the Tribunal correctly found that it had to base its decision primarily on the relevant provisions of that law. The Tribunal noted that this approach was in compliance with the residual rule of Art. 42(1) of the ICSID Convention. Although the Tribunal first stated that all other sources, including international law, must be excluded in interpreting the 1993 Law, afterwards, it added that it is necessary to consider the rules of international law for the interpretation of the term “expropriation”, as required by the second sentence of Art. 42(1) of the ICSID Convention. The Tribunal indeed used the sources of international law as guidance for its interpretation of the 1993 Law. (iv) CDSE v. Costa Rica (in the event of concurrence between the two legal systems international law may be applied only) In CDSE v. Costa Rica,82 the dispute arose out of an expropriation by Costa Rica of a property owned by CDSE. CDSE was formed primarily for the purpose of purchasing the property known as “Santa Elena” with the intention of developing it as a tourist resort and residential community. In 1978, Costa Rica expropriated the property of Santa Elena and proposed to pay CDSE compensation for the expropriation of its property. But CDSE contested the price fixed by Costa Rica and that resulted in 20 years of intensive legal proceedings between these two parties before the courts of Costa Rica. Finally, the case was brought to ICSID arbitration with the aim to resolve the amount of compensation to be paid by Costa Rica. The parties disagreed as to the applicable law. The Claimant argued that it had never agreed on that and, therefore, the second sentence of Art. 42(1) of the ICSID Convention should have been applicable. It said that: 61 . . . i) the Tribunal must apply the law of Costa Rica to the issues in dispute; ii) rules of international law are to be applied only in the event of a lacuna in Costa Rican law or if such law is inconsistent with the international law principles of good faith and pacta sunt servanda; iii) In the present case, there is no such inconsistency, with the result that the Tribunal should apply Costa Rican law, though “ . . . the result would be the same if principles of international law were applied”83

The Respondent argued that they had agreed on international law as the law solely applicable to the merits of the dispute. In order to support its contentions, the Respondent said that their agreement, although not in writing or even expressly stated, had its basis in Costa Rica’s consent to ICSID jurisdiction and CDSE’s request for arbitration.84 82

CDSE v. Costa Rica, Award, 17 February 2000, 13 World Trade and Arbitration Materials 83 (2001). 83 At pp. 104-105. 84 At p. 105.

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The Tribunal’s analysis of the issue of applicable law started with a reference to Art. 42(1) of the ICSID Convention. After citing the said article, the Tribunal noted that the parties disagreed as to the applicable law. With respect to the Respondent’s contentions, the Tribunal decided to examine whether the parties had indeed reached an agreement on applicable law. It said: 63. Article 42(1) of the ICSID Convention does not require that the parties’ agreement as to the applicable law be in writing or even that it be stated expressly. However, for the Tribunal to find that such an agreement was implied it must first find that the substance of the agreement, irrespective of its form, is clear. Having reviewed and considered Respondent’s oral and written argument on this question and analyzed the documents to which we have been referred, including, in particular, the Helms Amendment and related documents, the Tribunal is unable to conclude that the parties ever reached a clear and unequivocal agreement that their dispute would be decided by the Tribunal solely in accordance with international law.85

Since the Tribunal found that the parties had not reached a clear and unequivocal agreement on the applicability of international law only, it resorted to the residual rule of Art. 42(1) of the ICSID Convention: 64. This leaves the Tribunal in a position in which it must rest on the second sentence of Article 42(1) (“In the absence of such agreement . . . ”) and thus apply the law of Costa Rica and such rules of international law as may be applicable. No difficulty arises in this connection. The Tribunal is satisfied that the rules and principles of Costa Rican law which it must take into account, relating to the appraisal and valuation of expropriated property, are generally consistent with the accepted principles of public international law on the same subject. To the extent that there may be any inconsistency between the two bodies of law, the rules of public international law must prevail.86

Therefore, the Tribunal noted that the relevant rules of the host State’s law were in compliance with applicable international law rules. But, it also pointed out that in case of conflict of these two legal systems, international law would prevail. The above analysis led the Tribunal to conclude that international law was controlling and that under the residual rule of Art. 42(1) of the ICSID Convention the arbitration was governed by international law.87 The Tribunal reinforced its conclusion by referring to the history of the dispute and the circumstances under which the case was submitted to ICSID arbitration.88 The Tribunal proceeded to apply the rules of customary international law to the question of compensation. In this sense there was no need to discuss the standard of compensation since both parties agreed on the applicability of the 85 86 87 88

At p. 105. At p. 106. At p. 106. At p. 106.

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principle of full compensation for the fair market value of the property.89 However, the parties disagreed with respect to the date on which the property was expropriated and with respect to the value of the property on that date.90 Therefore, the issue of valuation was of major importance and the Tribunal discussed it extensively. In respect of the date at which the property must be valued the Tribunal relied on the international law authorities and noted that: 78 . . . international law does not lay down any precise or automatic criterion, such as the date of the transfer of ownership or the date on which the expropriation has been “consummated” by agreed or judicial determination of the amount of compensation or by payment of compensation. The expropriated property is to be evaluated as of the date on which the governmental “interference” has deprived the owner of his rights or has made those rights practically useless. This is a matter of fact for the Tribunal to assess in the light of the circumstances of the case.91

An examination of the facts led the Tribunal to the conclusion that the taking of the property occurred on 5 May 1978 and, therefore, the value of the property must be valued as of that date.92 The Tribunal then proceeded to determine the fair market value of the property as of 5 May 1978 by making an approximation of that value on the basis of the parties’ appraisals of 1978.93 In this context, the Tribunal referred to a number of decisions of the Iran–US Claims Tribunal which proceeded in the same manner.94 On that basis the Tribunal determined that the sum of U.S. $4,150,000 constituted a reasonable and fair approximation of the value of the property at the date of its taking.95 Finally, by reference to international law authorities the Tribunal justified its finding that compound interest rather than simple interest had to be awarded in this particular case.96 It said: 103. In other words, while simple interest tends to be awarded more frequently than compound, compound interest certainly is not unknown or excluded in international law. No uniform rule of law has emerged from the practice in international arbitration as regards the determination of whether compound or simple interest is appropriate in any given case. Rather, the determination of interest is a product of the exercise of judgment, taking into account all of the circumstances of the case at hand and especially considerations of fairness which must form part of the law to be applied by this Tribunal.97

89 90 91 92 93 94 95 96 97

At pp. 107-108. At p. 108. At p. 110. At pp. 110-111. At p. 113. At pp. 113-114. At pp. 114-115. At pp. 115-117. At p. 117.

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In CDSE v. Costa Rica the Tribunal correctly found that the parties had not reached a clear agreement on international law as the law solely applicable to their dispute. The analysis of the parties’ positions on the applicable law supported this conclusion. Therefore, resort to the residual rule of Art. 42(1) of the ICSID Convention was necessary. The Tribunal’s analysis led to the conclusion that under the residual rule of Art. 42(1) of the ICSID Convention the arbitration was governed by international law. Obviously the Tribunal had in mind a corrective function of international law i.e., in case of conflict international law prevails. The issue of interrelation between domestic law and international law will be discussed below. The Tribunal’s position on applicable law may be explained in the following way: since the Tribunal found no agreement on choice of law in accordance with the first sentence of Art. 42(1) of the ICSID Convention, it turned to the second sentence of Art. 42(1) which contains a reference to both the host State’s law and international law. An examination of the rules of Costa Rican law relating to the appraisal and valuation of expropriated property, led to the conclusion that the host State’s law was generally in conformity with the principles and rules of international law. Furthermore, in case of inconsistency between the two legal systems international law prevails. The Tribunal found support for its finding in the parties’ positions on applicable law which, in the end, led to identical result i.e., international law alone would have to be applied. Once the Tribunal had determined that the host State’s law rules were consistent with the applicable international law rules, it decided to apply international law only. Therefore, it can not be argued that the Tribunal, in applying the second sentence of Art. 42(1) of the ICSID Convention, disregarded the host State’s law. Only after establishing such concurrence between the two legal systems did the Tribunal decide to apply the standard of compensation in light of international law and based its decision on that law only.

(b) Concluding remarks The analysis of the above cases demonstrates that ICSID tribunals, in applying the second sentence of Art. 42(1) of the ICSID Convention made an effort to act in a manner required by the residual rule of Art. 42(1) of the ICSID Convention. In Amco the applicable substantive law was properly determined and the Award contains a detailed examination and application of both legal systems. In CDSE the Tribunal only after noting the compliance of the host State’s law with applicable international law rules, turned to apply international law alone. In Tradex the Tribunal first found that the 1993 Law must be examined and applied only but, after that, it added that international law rules should provide guidance for the interpretation of the term “expropriation”. Therefore, after determining the absence of the parties’ agreement on applicable law these tribunals identified the applicable law correctly and proceeded

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to check both the host State’s law and international law. Where a detailed examination and application of both legal systems is lacking in the award, the tribunals made an effort to explain its approach (e.g. in CDSE the Tribunal made clear that the host State’s law was in conformity with international law and, therefore, resort to international law only was permissible). In contrast to these awards, the SOABI Award contains a confusing finding on applicable law. The explicit reference to both legal systems in the second sentence of Art. 42(1) of the ICSID Convention instructs the tribunal to apply both the host State’s law and international law. The absence of a reference to international law as well as clear explanation for such approach makes the Tribunal’s selection of the applicable law unsatisfactory. The Tribunal based its decision on Senegalese law only. The circumstances of a case may justify the application of the host State’s law alone since, for instance, particular questions may be regulated only by that law and not by international law. Since the Tribunal in the SOABI case found in favor of the investor on the basis of the host State’s law, it probably considered it unnecessary to employ international law in its corrective function.98 At any rate, the better view would be that the compliance with international law should be made evident in the award.

3 Absence of the Parties’ Agreement on Choice of Law in Other Arbitration Systems ICC tribunals, ad hoc UNCITRAL tribunals, Additional Facility tribunals and the Iran–US Claims Tribunal have a great discretion in choosing the applicable law. In the absence of the parties’ agreement on choice of law, an ad hoc UNCITRAL tribunal will apply the law determined by the conflict of laws rules which it considers applicable.99 An ICC tribunal is directed simply to apply the rules of law it considers appropriate.100 Therefore, the UNCITRAL 98

This prevailing view of a dual supplemental and corrective function of international law in relation to domestic law has recently come under criticism. In this context see Gaillard, E./ Banifatemi, Y., The Meaning of “and” in Article 42(1), Second Sentence, of the Washington Convention: The Role of International Law in ICSID Choice of Law Process, 18 ICSID Review – FILJ 375 (2003) at pp. 381-399. 99 Article 33(1) of the UNCITRAL Arbitration Rules of 1976; See also Art. 33(1) of the PCA Optional Rules for Arbitrating Disputes between Two Parties of Which Only One Is a State; 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. 191. 100 Article 17(1) of the 1998 ICC Arbitration Rules states: “In the absence of such agreement, the Arbitral Tribunal shall apply the rules of law which it determined to be appropriate”.

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Arbitration Rules dictates the tribunal to apply the system of conflict of laws rules by which the applicable substantive law will be determined, while the ICC tribunal is authorized to determine the applicable rules of law directly without considering conflict of laws rules. In other words, the UNCITRAL Arbitration Rules provide a method for dealing with a question of applicable substantive law while the ICC Rules allow the tribunal to apply the voie directe i.e., the tribunal may determine the applicable rules of law directly without having an obligation to explain the basis for their determination.101 Some national arbitration acts provide identically.102 With respect to the authority of an ICC tribunal to choose rules of law directly without reference to any system of conflict of laws, or some particular conflict of law rule, the commentators note that although such authority is, indeed, granted to an ICC tribunal, it will probably seek to justify its choice of law by reference to some choice of law criteria.103 The commentators also correctly note that Art. 17(1) of the ICC rules is reinforced by Art. 25(2) which requires the ICC tribunal to state reasons for its award and which, therefore, prompts the tribunal to state why it found the rules of law it choose to be appropriate.104 The tribunals operating under the ICSID Additional Facility Arbitration Rules will apply the law determined by applicable conflict of laws rules as well as international law rules as it considers applicable. Therefore, although these rules follow the traditional formula for designating the applicable substantive law, they also contain an explicit reference to applicable international law rules. The relevant question is: which conflict of laws methods will be used by an UNCITRAL arbitral tribunal, an Additional Facility tribunal or, in case of an ICC tribunal, how it will determine the appropriate rules of law. Since conflict of laws rules are expressed in terms of connecting factors, the problem is how these factors will be determined.105 In this context, the question has been 101

See very instructively on Art. 17(1) of the ICC Rules, Craig, W. L./Park, W. W./ Paulsson, J., International Chamber of Commerce Arbitration, 3rd ed., Oceana (2000) at pp. 319, 320, 323, 329. These commentators noted that “the freedom of the arbitral tribunal, like that of the parties, to apply rules of law other than those of a single state provides a flexibility to meet the intentions of the parties and to respond to all the circumstances of a case”, at p. 320; But see also a commentary on Art. 28(1) of the UNCITRAL Model Law which provides identical provision as the UNCITRAL Arbitration Rules, in Holtzmann M. H./Neuhaus E. J., A Guide To The UNCITRAL Model Law On International Commercial Arbitration, Kluwer (1989) at pp. 769-770. 102 See e.g. Article 1496 of the 1981 French Code of Civil Procedure; Article 1054 of the 1986 Netherlands Arbitration Act. 103 Craig, W. L./Park, W. W./ Paulsson, J., International Chamber of Commerce Arbitration, 3rd ed., Oceana. (2000) at p. 329; See also Blessing, M., Regulations in Arbitration Rules on Choice of Law (in The Law Applicable in International Arbitration), VII ICCA Congress Series, KLI 391 (1996) at p. 413. 104 Ibid. 105 Dicey & Morrris, The Conflict of Laws, 13 ed., Vol. 1, Sweet & Maxwell (2000) at pp. 29-30.

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raised whether a tribunal must take into account the conflicts rules of the seat of the arbitration or can proceed independently.106 The modern concept of international arbitration is that the arbitral tribunal is bound neither by the conflict of laws rules at the place of arbitration nor by any other national conflict of laws rules.107 Rather, in order to determine the applicable substantive law, the tribunals frequently referred to generally accepted principles of the conflict of laws.108 In case of investment disputes, the application of the closest connection test would lead to the law of the host State as the applicable law since, in most cases, it is the law to which the investment relationship has the closest connection.109 The modern approach towards determining the applicable law in the absence of an agreement by the parties indicates that the tribunal may select the rules of law, as provided by the ICC Rules, rather than have to select a particular national legal system.110 Reference to the rules of law is seen as the detachment from systems of national law as the proper law. As a matter of fact, on occasions, arbitral tribunals determined that a so-called lex mercatoria governed the dispute exclusively.111 A decision in which the lex mercatoria is determined as the applicable law will be illustrated below. Both the UNCITRAL and the ICC rules provide that the tribunal has to take into account the terms of a contract and the relevant trade usages. The 106

Delaume, G. R., Law and Practice of Transnational Contracts, Ch. IV, Booklet 1, Release 88-1, Oceana (1988) at pp. 319- 321. 107 Delaume, G. R., Law and Practice of Transnational Contracts, Ch. IV, Booklet 1, Release 88-1, Oceana (1988) at p. 321; On the background of choice of law process in ICC arbitration see Craig, W. L./Park, W. W./ Paulsson, J., International Chamber of Commerce Arbitration, 3rd ed., Oceana (2000) at pp. 320-323; Rubino-Sammartano, M., International Arbitration: Law and Practice, KLI (2001) at pp. 426-438. 108 See Blessing, M., Regulations in Arbitration Rules on Choice of Law (in The Law Applicable in International Arbitration), ICCA VII Congress Series, KLI 391 (1996) at p. 412; Craig, W. L., International Ambition and National Restraints in ICC Arbitration, 1 Arbitration International 49 (1985) at p. 65; See also Craig, W. L./Park, W. W./ Paulsson, J., International Chamber of Commerce Arbitration, 3rd ed., Oceana (2000) at pp. 323-329, who discussed the choice of law criteria used in the ICC arbitral practice. According to them, these included: choice of law system in force at the seat of arbitration, cumulative application of different choice of law systems, generally recognized principles of conflict of laws, conflict of laws rules chosen directly by the tribunal without reference to any national system or systems of law and free choice by the tribunal without reference to any system of conflict of laws). 109 With an exception of loan contracts and licensing arrangements. The closest connection test is found in some national legislation as a generally accepted criterion for determining the applicable substantive law (e.g. in Germany); See Blessing, M., Regulations in Arbitration Rules on Choice of Law (in The Law Applicable in International Arbitration), ICCA VII Congress Series, KLI 391 (1996) at p. 431. 110 Maniruzzaman, A., Choice of Law in International Contracts: Some Fundamental Conflict of Laws Issues, 16(4) JIA 141 (1999); See also the arbitration rules of the LCIA. 111 Craig, W. L., International Ambition and National Restraints in ICC Arbitration, 1 Arbitration International 49 (1985) at p. 67.

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question is: what is the effect of this requirement. According to the commentators, the tribunals should and generally do give a primacy to the contractual provisions and both contract and applicable trade usages “may be seen either as a complement to the provision of a national substantive law determined to be applicable to the contract, or as a substitute for application of a national substantive law”.112 By contrast to the above, Art. V of the Claims Settlement Declaration contains a somewhat untypical provision on the applicable law. Under this provision 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.113

Article V of the CSD does not require the Iran–US Claims Tribunal to apply any specific system of conflict of laws rules, but refers to the application of choice of law rules and principles of commercial and international law found to be applicable by the Tribunal.114 Furthermore, relevant trade usages, contract provisions and changed circumstances may be taken into account when deciding a particular case. The following observation offered by the Tribunal in the Anaconda case is of help in interpreting Art. V of the CSD. The Tribunal said: This article has a vast scope of application. The Algiers Accords apply to a great number of claims arising out of contracts which may contain very different provisions regarding applicable law. More importantly, Article V creates a novel system of determining applicable law. Contrary to NICIC’s [the Respondent] contentions, the Tribunal finds that according to this system the Tribunal is not required to apply any particular national or international legal system. On the contrary, the Tribunal is vested with extensive freedom in determining the applicable law in each case. This freedom is not a discretionary freedom, however, as the Tribunal is given a rather precise indication as to the factors which should guide its decision. 112

See Craig, W. L./Park, W. W./ Paulsson, J., International Chamber of Commerce Arbitration, 3rd ed., Oceana (2000) at p. 331; Craig, W. L., International Ambition and National Restraints in ICC Arbitration, 1 Arbitration International 49 (1985) at pp. 67-68; Aksen, G., The Law Applicable in International Arbitration – Relevance of Reference to Trade Usages (in The Law Applicable in International Arbitration), ICCA VII Congress Series, KLI 391 (1996) at p. 476; In respect of the same provision provided by the UNCITRAL Model Law, the commentary noted that “the provision was said to ensure that the parties’ expectations were fulfilled, on the ground that parties choose arbitration in part because they expect that arbitrators will above all base their decisions on the wording and history of the contract and the usages of trade” in Holtzmann M. H./Neuhaus E. J., A Guide To The UNCITRAL Model Law On International Commercial Arbitration, Kluwer (1989) at p. 772. 113 20 ILM 230 (1981). 114 See Brower, C. N./Brueschke, J. D., The Iran–United States Claims Tribunal, The Hague: Martinus Nijhoff (1998) at p. 632.

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131. Contract provisions constitute one of these factors, but it is noteworthy that they are not listed first, nor foremost, among the factors enumerated. 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. 132. In the present Case, the TAA [Technical Assistance Agreement] does not contain any choice of law rules. For the reasons developed above, the Tribunal cannot on that ground conclude, as does the Claimant, that the TAA is self-sufficient under all circumstances and that no law shall govern the TAA. No more can the Tribunal conclude, as does the Respondent, that Iranian law is applicable because the place of conclusion and execution of the TAA was Iran. In most contract cases before the Tribunal the contracts actually were concluded and executed in Iran. If the States Parties to the Algiers Accords had intended that Iranian law would apply to all such cases which do not contain a contractual clause to the contrary, the Algiers Accords undoubtedly would have contained specific provisions to that effect. As we have seen, however, Article V created quite a different system.115

Therefore, the Tribunal refused to apply the law of the contract alone or Iranian law, as being applicable on the basis of the objective connecting factors. Rather, the above analysis led the Tribunal to conclude that “in the present Case, and by virtue of Art. V of the CSD, the Tribunal is required to take into consideration relevant usages of trade as well as relevant principles of commercial and international law”.116 It follows that Art. V of the CSD provides to the Tribunal a far reaching freedom to select the law. Most commentators agree and arbitral practice confirms that the Tribunal indeed used that freedom.117 The following case law illustrates the manner by which the non-ICSID tribunals approached the issue of applicable substantive law in the absence of the parties’ agreement.

(a) Arbitral practice (i)

Sapphire v. National Iranian Oil Company (the parties’ intention excludes the application of any national legal system)

The Sapphire case does not fall into one of the categories discussed above. It was decided on an ad hoc basis. But a discussion of this case seems relevant in the sense that it is one of those cases that introduced the modern approach towards the determination of the applicable substantive law in investor/State

115

Anaconda–Iran, Inc. v. Iran, Interlocutory Award, 10 December 1986, 13 Iran–U.S. C.T.R. 199, at pp. 231-233. 116 At p. 233. 117 Aldrich H. G., The Jurisprudence of the Iran–United States Claims Tribunal, Clarendon Press Oxford (1996) at p. 156.

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arbitration. This approach tends to internationalize the governing law. It is interesting to see how in this particular case the arbitrator selected the applicable law. In Sapphire v. NIOL, the dispute concerned the interpretation and performance of the concession agreement concluded between Sapphire, the investor, and the National Iranian Oil Company (NIOC), the State corporation.118 NIOC wanted to expand the production and exportation of Iranian oil while Sapphire had necessary technical competence and the financial resources needed for the operations agreed to in the contract. In order to carry out the operations provided by the agreement, the parties agreed to set up a joint stock company named the Iranian Canada Oil Company. This company was to act as agent of both parties, or, where the agreement so provided, as agent of Sapphire alone. The agreement set out in detail the obligations of both parties. Sapphire proceeded with the preliminary prospecting work for which NIOC refused to pay its share of the cost. NIOC had deliberately failed to carry out some other obligations under the agreement. Sapphire instituted arbitration proceedings claiming a breach of contract by NIOC. In this case there was no agreement between the parties on either the applicable procedural law or the applicable substantive law. On the basis of the seat of arbitration (Lausanne), a sole arbitrator determined that the applicable procedural law had to be the law of Vaud. After that, he proceeded to discuss on applicable substantive law. The arbitrator noted that he was not bound to apply the conflict of laws rules of the seat of arbitration. The arbitrator based his reasoning on the view that the common intention of the parties as well as the relevant connecting factors should be considered for determining the applicable substantive law. He said: I. Since the arbitration has its seat in Switzerland, Swiss Private International Law might be applicable, as the lex fori, for determining the substantive law applicable to the interpretation and performance of the agreement. However, in the view of some eminent specialists in Private International Law, since the arbitrator has been invested with his powers as a result of the common intention of the parties he is not bound by the rules of conflict in force at the forum of the arbitration. Contrary to a State judge, who is bound to conform to the conflict law rules of the State in whose name he metes out justice, the arbitrator is not bound by such rules. He must look for the common intention of the parties, and use the connecting factors generally used in doctrine and in case law and must disregard national peculiarities . . . This consideration carries particular weight in the present case, since, in view of the fact that they have not directly agreed upon the seat of the arbitration and instead have only determined which authority should appoint the umpire or the sole arbitrator, the parties cannot be

118

Sapphire International Petroleums Ltd. v. National Iranian Oil Company, Award, 15 March 1963, 35 ILR 136 (1967).

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presumed to have agreed upon the choice of a conflict rule by their common choice of the form of the arbitration.119

The arbitrator added that the same result would be achieved by applying the law of the forum and “it is only when there is no such manifestation of intention that the judge determines the law applicable according to the objective tests laid down by case law”.120 Since there was no agreement on choice of law between the parties, the arbitrator proceeded to determine the substantive law on the basis of the parties’ intentions and, in particular, on the basis of the contract. He found that the contract was both concluded and was due to be performed in Iran and, therefore, both the lex loci contractus and the lex loci executionis pointed to Iranian law as the substantive law.121 But the arbitrator noted that although these connecting factors were important, they are not necessarily decisive. He proceeded to provide a justification for the refusal to apply Iranian law exclusively. First, he noted that the specific character of the concession, partly public and partly private, evidenced a need to exclude the application of Iranian law. If Iranian law would apply, the investor would not be protected against legislative changes that may alter the character of the contract.122 In order to find a justification for his position, the arbitrator referred to certain connecting factors contained in the contract which indicated a negative intention of the parties to reject exclusive application of Iranian law. In regard to the arbitral clause as a connecting factor, the arbitrator said: It is not feasible in the present case to imply an intention by the parties to submit to the substantive law of the forum of the arbitration, a forum which they did not know of at the time they concluded the agreement. However, if no positive implication can be made from the arbitral clause, it is possible to find there a negative intention, namely to reject the exclusive application of Iranian law.123

The intention to reject an exclusive application of Iranian law was, in the view of the arbitrator, reinforced by Art. 38(1) of the agreement according to which the parties undertake to carry out the provisions of the contract in accordance with the principles of good faith and good will and to respect the spirit as well as the letter of the agreement.124 The arbitrator referred to several arbitral awards on the basis of which it held that such a clause indicates more often the need for application of the general principles of law based upon the

119 120 121 122 123 124

At p. 170. At p. 171. At p. 171. At p. 171. At p. 172. At pp. 140, 172.

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practice common to civilized countries, rather than, strict application of the rules of the particular legal system. The arbitrator offered the following reasoning for his finding: In fact, in ordinary law, the judge who decides a dispute concerning the interpretation or performance of a contract normally refers to the complementary rules contained in the positive law applicable to the contract. On the other hand, a reference to rules of good faith, together with the absence of any reference to a national system of law, leads the judge to determine, according to the spirit of the agreement, what meaning he can reasonably give to a provision of the agreement which is in dispute. It is therefore perfectly legitimate to find in such a clause evidence of the intention of the parties not to apply the strict rules of a particular system but, rather, to rely upon the rules of law, based upon reason, which are common to civilized nations. These rules are enshrined in Article 38 of the Statute of the International Court of Justice as a source of law, and numerous decisions of international tribunals have made use of them and clarified them. Their application is particularly justified in the present contract, which was concluded between a State organ and a foreign company, and depends upon public law in certain of its aspects.125

The arbitrator found further support for his conclusion in Art. 37 of the agreement which provided for the case of force majeure, and paragraph 2 of this article provided that the term force majeure should be defined in accordance with the principles of international law.126 He interpreted this provision as further evidence that the parties intended to refer the interpretation of the agreement and its performance to the general principles of law. In this regard the arbitrator said: It is characteristic that, in the only clause of their agreement which defines a contractual notion by a reference to a particular judicial system, the parties should have referred not to Iranian law-which, however, recognizes this notion (Article 229 of the Civil Code, according to Aghababian, Legislation iranienne actuelle, Paris, 1952)-nor to the law of any other nation, but that they appeal to the general principles of international law, which they expressly state to be applicable. If this provision is read with Article 38, which it immediately precedes, it can reasonably be regarded as having a wider application than simply referring to force majeure. It is possible to find in it further evidence of the intention of the parties to submit the interpretation and performance of their agreement to the general principles of law.127

Finally, the arbitrator noted that the agreement concluded between Sapphire and NIOC was the last of several agreements made by NIOC with other foreign investors. These agreements also contained a provision identical to Art. 38 of the Sapphire/NIOC agreement. The difference was that these other

125 126 127

At p. 173. At pp. 140, 173. At pp. 173-174.

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agreements contained express provision on the applicable substantive law, in the following terms: In view of the diverse nationalities of the parties to this Agreement, it shall be governed by and interpreted and applied in accordance with the principles of law common to Iran and the several nations in which the other parties to this Agreement are incorporated, and in the absence of such common principles then by and in accordance with principles of law recognized by civilized nations in general, including such of those principles as may have been applied by international tribunals.128

In the view of the arbitrator, this choice of law clause provided guarantees to the foreign investors against any unilateral decision of Iran that may gravely affect the contractual arrangement. If Iranian law had been declared applicable no such guarantees would have existed. Therefore, the arbitrator took the view that, regardless of the absence of an express choice of law clause, the agreement between Sapphire and NIOC should not be interpreted as a refusal of such guarantees given to the foreign investor in the previous agreements.129 By reference to the principles of good faith and good will, the arbitrator found that the same solution should be adopted in Sapphire as well i.e., that the parties by reference to the principles of good faith and good will intended to “internationalize” their relationship. The arbitrator said: By virtue of the principle of good faith, NIOC cannot claim that the absence of an express provision regarding the law applicable should be interpreted as a denial of a principle contained in previous agreements which had the same object. The requirements of a guarantee by the foreign company are the same; therefore, according to reason and good faith, the same solution should be adopted as NIOC formally agreed to with more powerful partners. If then, in the present contract, NIOC had intended to cast aside a principle which is recognized in the previous agreements and to refuse Sapphire a guarantee which they had previously conceded as legitimate, it must be presumed that the draughtsman of the contract would have expressly shown this intention.130

On the basis of the above, the arbitrator concluded that the parties intended to exclude the application of Iranian law and that the relevant connecting factors pointed to the fact that their intention was to rely upon the principles of law generally recognized by civilized nations: The arbitrator will therefore apply these principles, by following, when necessary, the decisions taken by international tribunals. He points out that, this being so, he has no intention of deciding the case according to “equity”, like an “amiable compositeur”. On the contrary, he will try to disentangle the rules of positive law, common to civilized nations, such as are formulated in their statutes or are generally recognized in practice.131 128 129 130 131

At p. 174. At p. 175. At p. 175. At p. 175. Italics and emphasis original.

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In the end, the arbitrator added that the application of general principles of law to the investor/State dispute is in the interest of both parties: It is in the interest of both parties to such agreements that any disputes between them should be settled according to the general principles universally recognized and should not be subject to the particular rules of national laws, which are very often unsuitable for solving problems concerning the rights of the State where the contract is being carried out, and which are always subject to changes by this State and are often unknown or not fully known to one of the contracting parties.132

In Sapphire, the parties agreed neither on the applicable procedural law nor on the substantive law. The sole arbitrator had the duty to determine both. The governing procedural law was determined to be that of the canton Vaud, since the seat of arbitration was in Lausanne. In such a situation it would be expected from the arbitrator to look into the conflict of laws rules of the forum. But the arbitrator rejected this traditional view and noted that he was not bound to apply the conflict of laws rules of the seat of arbitration. What mattered in identifying the applicable substantive law and provided guidance to the arbitrator was a common intention of the parties and relevant connecting factors. Although the connecting factors pointed to Iranian law as the applicable law, the arbitrator found an intention to reject the exclusive application of Iranian law in the parties’ reference in the contract to the principles of good faith and good will. By virtue of that clause, the arbitrator found evidence of the parties’ intention to exclude the application of any national legal system and to rely upon the general principles universally recognized. In the arbitrator’s view, this finding was reinforced by the fact that the force majeure clause provided that this term should be defined in accordance with the principles of international law. Therefore, by including these two provisions in the contract the parties demonstrated their intention to denationalize the applicable substantive law. The character of the concession justified such an approach. If Iranian law were to apply, the investor would not be protected against legislative changes that may change the character of concession. And finally, the arbitrator construed the Sapphire/NIOC agreement in light of provisions of agreements concluded between NIOC and some other foreign investors. As noted, this old decision illustrates a modern approach in international investment arbitration. This means that the tribunal may proceed independently to identify the applicable substantive law without being bound by the choice of law rules of the forum. The Sapphire decision also indicates that the tribunal may refuse to determine the applicable law on some objective connecting factors (e.g. lex loci contractus and lex loci executionis) since it may not evidence the parties’ intentions. This approach gives great discretion to, 132

At pp. 175-176.

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but also imposes a great burden on the tribunal due to the fact that, sometimes, the parties’ intentions may be interpreted incorrectly. In Sapphire, the arbitrator’s determination of the applicable law through the parties’ intention is not satisfactory. Reference to the principles of good faith and good will can not be interpreted as evidence of the parties’ intention to refer to general principles of law as the applicable law. This view is shared by some commentators.133 The effect of that provision is that the parties simply undertake to perform their contractual obligations in good faith. The arbitrator’s determination of the applicable law by reference to other NIOC agreements appears also unsatisfactory. Absence of an explicit choice of law clause in the Sapphire/NIOC agreement rather evidences that the parties were unable to reach an agreement on the applicable law. At any rate, the Sapphire case demonstrates that the tribunal, led by the fact that the parties did not want to refer their dispute to any national law, may seek to denationalize or internationalize the applicable substantive law. (ii) Wintershall v. Qatar (application of the closest connection test led to the applicability of the host state’s law only) In Wintershall v. Qatar, the dispute concerned an alleged breach of an Exploration and Production Sharing Agreement (EPSA) concluded between Wintershall (and four other companies) and the Government of Qatar.134 In 1976 Wintershall entered into the Exploration and Production Sharing Agreement (EPSA) with the Government of Qatar as a substitution for the Concession Agreement of 1973. Under the EPSA, Wintershall had an exclusive right to explore, drill and produce petroleum in a defined area of Qatar (i.e. Contract Area) for 30 years. After five years Wintershall was required to relinquish 50 per cent of the Contract Area, and after eight years another 20 per cent of that area. The Government had a right to terminate the EPSA in case crude oil in commercial quantities or economically utilizable was not found or in case the non-associated gas was not found in a period of eight years. In case non-associated gas was discovered, Wintershall had a right to produce it by virtue of a further contractual arrangement for the utilization of non-associated gas to be agreed upon with the Government, or by virtue of the “go it alone” clause provided by the EPSA. Since Wintershall did not discover crude oil in commercial quantities, the Government refused to accept the proposal for further joint development. Furthermore, Wintershall was prevented to drill in the Structure A area, which was considered as the area most likely to contain crude oil, due to a boundary dispute with Bahrain. In 1980 133 Delaume, G. R., Law and Practice of Transnational Contracts, Ch. I, Booklet 1, Release 88-1, Oceana (1988) at pp. 16-18. 134 Wintershall A.G., et al. v. The Government of Qatar, Partial Award, 5 February 1988, 28 ILM 795 (1989); Final Award, 31 May 1988, 28 ILM 833 (1989). Emphasis original.

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Wintershall discovered non-associated gas in the Contract Area, which was thought to be economical, and informed the Government of its discovery. No agreement was reached with respect to the projects for the utilization of nonassociated natural gas neither in these areas nor in the areas close to the Contract Area. The arbitration was governed by the UNCITRAL Arbitration Rules of 1976 which in Art. 33(1) provides: 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.135

The Claimant argued not only the breach of the EPSA, but also that the Respondent had expropriated the investor’s rights, in violation of both Qatari and international law. The Respondent rejected these contentions. The Tribunal discussed the issue of applicable substantive law under the heading “Substantive Governing Law”. It offered the following analysis: . . . “In the absence of a controlling choice of substantive governing law clause and in consideration of the close links of . . . the EPSA . . . to Qatar, the governing substantive law shall be the law of Qatar and, in case the Tribunal should determine that it is relevant to an issue, public international law”. The Tribunal, after reviewing the disputed authorities on public international law, has determined that public international law is not independently relevant to the issues before the Tribunal in this Partial Award on Liability, and that the governing substantive law on those issues is the law of Qatar.136

Therefore, the Tribunal noted the absence of the agreement on choice of law between the parties. But it only affirmed that considering the close links of the EPSA to Qatar, the law of Qatar had to be applied, without identifying the applicable conflict of laws rules. The Tribunal also considered the possibility of the applicability of international law but found that it was not independently relevant to the dispute and, therefore, only the substantive law of Qatar was found to be applicable. The Tribunal, in its discussion on the merits of the case, referred to the provisions of the EPSA and to the applicable Qatari law. The Claimant position was that the Respondent breached the EPSA and expropriated its contractual rights by denying the Claimant permission to explore for petroleum in Structure A (area on the border with Bahrain) and by failing to agree with Claimant on further contractual arrangements for the utilization of nonassociated natural gas discovered by the Claimant in 1980. The Respondent rejected these contentions.

135 136

http://www.uncitral.org/en-index.htm. Partial Award, 5 February 1988, 28 ILM 795 (1989) at p. 802.

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The Tribunal proceeded to examine the relevant provisions of the EPSA and found that the Respondent did not agree that the utilization of nonassociated natural gas was economical, as required by the EPSA, and accordingly it had no further duties to the Claimant under the agreement.137 The Claimant’s argument was that the Government had a duty to negotiate in good faith. With respect to that the Tribunal held that the Respondent’s refusal to accept the Claimant’s proposals was not contrary to the law of Qatar i.e., it was made in good faith and justified under normal commercial practice. The Tribunal said: The Tribunal, moreover, is of the view, after a thorough examination of all the evidence, particularly the very detailed examination of Claimants’ principal witness, . . . by the Respondent’s counsel . . . , that there was not a violation by the Respondent of any duty to negotiate in good faith regarding this matter. Even accepting the view of the expert legal witness for the Claimants . . . , that there was such a duty to negotiate in good faith, it is clear that such a duty does not include an obligation on the part of the Respondent to reach agreement with respect to the proposals made by the Claimants. To the extent that there was a duty to negotiate under Qatari law on this matter, the Tribunal finds that the refusal by the Respondent to accept proposals by the Claimants was made in good faith and was justified under normal commercial practice.138

The examination of the EPSA provisions led the Tribunal to conclude that the Claimant had no right to develop areas beyond the area for exploration and production of petroleum defined as such in the contract i.e. beyond the Contract Area. Accordingly, the Respondent was not obliged to accept the proposals made by the Claimant in connection to joint development of areas beyond the Contract Area. Therefore, there was no breach of the EPSA on the part of the Respondent from the perspective of the applicable Qatari law: On the basis of the documentary and testimony evidence submitted to the Tribunal, including the technical and economic background evidence, the Tribunal’s construction of the relevant provisions of the EPSA and giving effect to the applicable Qatari law, the Tribunal has concluded that there was no breach of the EPSA.139

After that, the Tribunal examined whether the Respondent expropriated the Claimant’s rights and economic interests. The Tribunal noted that it had already found that the Claimant’s contractual rights were honored and added that the Claimant’s economic interests under the EPSA were related only to the exploration and production of petroleum within the Contract Area.140 Therefore, the Claimant did not have legal rights under the EPSA to jointly

137 138 139 140

At pp. 813-815. At pp. 814-815. At p. 813. At p. 815.

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develop outside of the Contract Area, and the Respondent’s refusal to accept such a proposal did not amount to an expropriation of the Claimant’s contractual rights since it had no legal duty to accept these proposals.141 Furthermore, the Claimant argued that it had a right to use the Structure A area under the EPSA and that the Respondent expropriated that right as well. The Tribunal found that the Respondent’s refusal of permission to explore in that area was not a violation of the Claimant’s contractual rights under the EPSA.142 It reached its conclusion on the basis of the EPSA provisions and surrounding circumstances. The Tribunal found that the EPSA explicitly authorized the Respondent to limit the Claimant’s operations and, in doing so, the Respondent was only exercising its contractual rights under the EPSA.143 But, it also found that the Respondent failed to advise the Claimant of its dispute with the neighboring state, Bahrain, in connection with this particular area before signing the EPSA. The documentary and testimony evidence indicated that the parties agreed that the application of relinquishment provisions of the EPSA with respect to the Structure A area would not be implemented between them.144 Therefore, the Tribunal concluded that there was no breach of EPSA provisions relating to Structure A area and no expropriation of these rights, but “in order for the Claimants to exercise their rights under the EPSA in respect of this area, the relinquishment provisions under Article XI apply to such Structure A only from the date that Claimants are permitted to exploit this area under the EPSA provisions”.145 Since the Claimant, alternatively, based its claim on the theory of unjust enrichment the Tribunal discussed that claim as well. The Claimant argued that “the Government has enriched itself not only by depriving Claimants of their economic interest in the gas but also by appropriating for itself the well test and other information about the North Field that Claimants provided pursuant to the EPSA”.146 The Tribunal noted that the Claimant had the exclusive right to explore for, drill for and produce petroleum within the Contract Area, but the right in the gas in the ground had been exclusively with the Government: This claim obviously lacks a basis under Article II of the EPSA, the contractual rights of the Claimants being solely those of the exclusive right within the Contract Area to explore for, drill for and produce petroleum, as well as the right to store, transfer and sell. If the Claimants did not utilize these rights, particularly the right to produce gas, there is no basis for the Claimants’ right in

141 142 143 144 145 146

At p. 816. At p. 816. At p. 816. At pp. 816-818. At p. 818. At p. 820.

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the gas in the ground, the title to which, under Qatari law, has always remained with the Government.147

In respect of the appropriation of oil test, the Tribunal was unable to find any basis for that claim in the provisions of the EPSA. The Tribunal noted that the only provision of Qatari law cited by the Claimant, in order to support its claim on unjust enrichment, was Art. 81 of the Qatari Code. That article refers to enrichment “without lawful cause at the expense of another person”.148 The Tribunal could not find any lack of lawful cause in the parties’ exchanges of information since it was an implied duty of Wintershall under the EPSA to report. The Tribunal said: If the alleged enrichment was lawful under the EPSA, there cannot be any independent basis of liability outside the EPSA provisions. Insofar as the dealings between the Parties did not fall within the provisions of the EPSA, any passing of information was a part of the process of informal collaboration and negotiation, which process is evident from the documents. It would be very difficult to see a lack of “lawful cause” in exchanges of information which may have taken place on this basis”.149

The Tribunal also referred to Art. 86 of the Qatari Code which provides for the enrichment in good faith on the side of the Respondent, since the Respondent had deprived the Claimant of its right to exercise the “go it alone” option of the EPSA or its rights in Structure A. But the Tribunal added that this was already remedied by the extension of the performance periods as well as by the Respondent’s obligation under the EPSA to cooperate with the Claimant in the exercise of the Claimant’s rights.150 The Tribunal based its finding on the extension of time for relinquishment under the EPSA on Art. 49 of the Qatari Code which requires the performance of the contract in good faith as well as the contract’s performance in compliance with the law, usage and equity.151 Therefore, the proper and equitable interpretation of the Government’s obligations under the EPSA led the Tribunal to conclude that it was necessary to extend the term for exercising the “go it alone” option. The interpretation of the relinquishment provisions of the EPSA under Qatari law led the Tribunal to the following conclusion: Accordingly, in determining what this EPSA provision means, the Tribunal has determined that to give effect to the intention of the Parties that the Claimants would be entitled to a realistic opportunity to exercise their option to “go it alone”, there must be a term in which these rights may be exercised. We have concluded that the selection of an eight-year term is a reasonable application of

147 148 149 150 151

At p. 820. At p. 821. At p. 821. At pp. 821, 823. At p. 823.

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It followed that there was no unjust enrichment on the side of the Respondent, but since the Respondent had deprived the Claimant of its right to exercise the “go it alone” clause of the EPSA, the Tribunal decided to extend the period for exercising that right. Therefore, the EPSA continued to be in force, and there was neither a breach nor an expropriation of the investor’s rights as well as no unjust enrichment by the Respondent. In this case the Tribunal explicitly noted the absence of the agreement on choice of law between the parties. In determining the applicable substantive law, the Tribunal simply affirmed that it would apply the law of Qatar considering the close links of the parties’ agreement to that law. No conflict of laws analysis as required by Art. 33(1) of the UNCITRAL Arbitration Rules was employed by the Tribunal. It is possible to argue that the Tribunal used the closest connection test which represents a generally accepted method for determining the applicable law, but felt unnecessary to say so. At least, the wording “in consideration of the close links of EPSA to Qatar” appears to justify the above assumption. At any rate, the better approach would be to demonstrate that the applicable substantive law was selected on the basis of the applicable conflict of laws rules, identified as such by the Tribunal. The Tribunal also considered the possibility of the applicability of international law. This indicates a modern arbitral approach in the sense that the tribunal may seek to apply rules of law rather than particular national legal system. But in this particular case, the Tribunal decided not to depart from national law. Interestingly, or rather strangely, it did not find that international law is independently relevant to the case and, correspondingly proceeded to apply the law of Qatar only. Two possible explanations may be offered: either the Tribunal was not ready to deal with, as it said “the disputed authorities on public international law” or it found that the EPSA provisions and applicable Qatari law offered clear rules for resolving the dispute. The Tribunal obviously had not in mind the corrective function of international law. Therefore, by contrast to the Sapphire case, in Wintershall the Tribunal was reluctant to depart from national law. Article 33(3) of the UNCIRAL Arbitration Rules mandates the tribunal to decide in all cases in accordance with the terms of the contract. In Wintershall the contract provisions constituted an important legal source in deciding the case. These provisions were examined and applied in light of the applicable Qatari law. The same paragraph of the UNCITRAL rules authorizes the tribunal to take into account the trade usages where appropriate. In relation to

152

At p. 824.

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the duty to negotiate in good faith the Tribunal indeed took into account the relevant trade usages. It held that the refusal by the Respondent to accept the Claimant’s proposals was made in good faith and justified under normal commercial practice. (iii) The Rakoil case (a-national law determined as the applicable law) The Rakoil case153 concerned a dispute over the 1973 Concession Agreement and two, subsequent, oil exploration agreements concluded between the parties. This case is decided under the older ICC Arbitration Rules. The ICC Tribunal noted the absence of the parties’ agreement on choice of law. Neither did the 1976 Operating Agreement, which was the direct basis of the Claimant’s claim, nor the Assignment or the Concession Agreement contained a provision on applicable law.154 After that the Tribunal cited the provision on applicable law of the previous ICC Rules of Conciliation and Arbitration155 which provided the following: Article 13(3) 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.156

Therefore, in the absence of the parties’ agreement on choice of law, the previous ICC rules dictated the tribunal to apply appropriate conflict of laws rules by which the applicable substantive law was to be determined. The Tribunal pointed out that the parties’ agreements were contracts concluded between several companies, organized under various laws, and a State agency. In the view of the Tribunal, it was inappropriate to apply the law of the State of nationality of any one of the companies or the law of the State on whose territory one or several of these contracts were entered into.157 Rather, the Tribunal referred to the common practice in international arbitration and said: (18) The Arbitration Tribunal will refer to what has become common practice in international arbitrations particularly in the field of oil drilling concessions and especially to arbitrations located in Switzerland. Indeed, this practice, which must have been known to the parties, should be regarded as representing

153

Deutsche Schachtbau-und Tiefbohrgesselschaft mbH (DST) (FR Germ.) et al. v. The Government of the State of Ras Al Khaimah (UAE) and The Ras Al Khaimah Oil Company (Rakoil) (UAE), Final Award in ICC Case No. 3572 of 1982, XIV Y.B.Com. Arb. 111 (1989). 154 At p. 117. 155 The present Arbitration Rules of the ICC came into effect on 1 January 1998. 156 Final Award in ICC Case No. 3572 of 1982, XIV Y.B.Com. Arb. 111 (1989), at p. 117. 157 At p. 117.

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CHAPTER III their implicit will. Reference is made in particular to the leading cases Sapphire International Petroleums Ltd. v. National Iranian Oil Company . . . , Texaco Overseas Petroleum Company v. The Government of Libyan Arab Republic . . . (19) The Arbitration Tribunal therefore holds internationally accepted principles of law governing contractual relations to be the proper law applicable to the merits of this case.158

Therefore, by reference to the common practice in the field of oil drilling concessions, as expressed in the pertinent arbitral awards, the Tribunal found that internationally accepted principles of law governing contractual relations should have been regarded as the proper law applicable to the merits. After reviewing the facts of the case the Tribunal found that neither the Assignment Agreement nor the 1976 Operating Agreement contained a representation by the Consortium that commercial quantities of oil had effectively been discovered. Therefore, the Respondent’s allegations that these agreements were void due to the misrepresentations were rejected.159 Furthermore, there was no evidence that these agreements were invalid on the grounds of mistake on the part of the Respondent or for any other reason.160 Because of that the Tribunal noted that (22) “For these reasons, the choice of the law to be applied to the agreements is of little significance, if any, under the prevailing circumstances”.161

The only reference to the applicable law in the Award was made in regard to the payment of interest. The Tribunal referred to the 1976 Operating Agreement and noted that the absence of the word “simple” in that agreement did not imply that the parties intended to compound interest. Therefore, it awarded simple interest up to the date of the Award.162 With respect to the interest after the date of the Award the Tribunal held: (38) . . . a majority of the Tribunal holds that the right to interest according to the contract does not lapse by virtue of the arbitration dispute or the Award sought by the Claimants. “Thus, a majority holds that the Claimants are entitled to simple interest on the US$ 4,635,664.- or the unpaid portions thereof until fully paid, at the rate per annum of 3% above the prime rate of Commerzbank. (39) “Since this interest rate in all probability might fluctuate, the Claimants at the hearing altered their claim in regard to interest after the date of the Award to 11%
3% = 14% per annum. However, since the contractual stipulated interest may fall below this figure, our award is made for interest after the date of the award at an annual rate according to the contract, however limited to 14% per annum. This interests is to be payable on the total sum of the award, or the unpaid portions thereof, until the debt discharged. 158 159 160 161 162

At p. 117. Footnote omitted. At pp. 113-115, 118. At p. 118. At p. 118. At pp. 120-121.

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(40) “The Arbitration Tribunal is unanimous in holding that the Claimants are entitled to such interest rate as may be due on the award according to applicable law”.163

This decision has attracted considerable attention because of the fact that it was based on what, is sometimes called, lex mercatoria i.e. the law of merchant.164 The term itself is quite ambiguous and has different expressions, but mainly refers to the general principles and usages of international commerce.165 The Rakoil case was decided under the previous ICC Rules which required a conflict of laws analysis in order to determine the applicable substantive law. Accordingly, the determination of the applicable law in this case is clearly contrary to Art. 13(3) of the previous ICC Rules. Under that provision the Tribunal had to identify the conflict of laws rules which it deemed appropriate and by which the proper law had to be determined. This decision seems to indicate that the ICC Tribunal was primarily led by the fact that the parties’ intention was to detach their agreement from any national legal system and to refer it to the principles of lex mercatoria or, some similar formulation. These formulas are seen as internationalization of the applicable substantive law. In the view of some commentators, in this case the relevant provision was actually Art. 13(5) of the previous ICC Rules (which granted the freedom to the ICC tribunal to apply in all cases the terms of contract and trade usages)166 which granted the freedom to the ICC tribunal to base its decision

163

At pp. 121-122. Note that the English Court of Appeals held that this ICC award rendered in Switzerland and based on lex mercatoria may be enforced. The Court said:

164

“By choosing to arbitrate under the Rules of the ICC and, in particular, Art. 13(3), the parties have left proper law to be decided by the arbitrators and have not in terms confined the choice to national systems of law”. Deutsche Schachtbau-und Tiefbohrgesselschaft mbH (DST) (FR Germ.) et al. v. The Ras Al Khaimah Oil Company (Rakoil) (UAE) and Shell International Petroleum Co. Ltd., Court of Appeal, 24 March 1987, XIII Y. B. Com. Arb. 522 (1988) at p. 535, para. 27. 165

See very instructively on three concepts of lex mercatoria: Craig, W. L./Park, W. W./ Paulsson, J., International Chamber of Commerce Arbitration, 3rd ed., Oceana (2000), at pp. 623-639; Some writers note that lex mercatoria is rarely invoked by name, but rather through its elements such as: general principles of international law, principles of good faith, or usages of trade, principles of municipal systems common to each other and common to international law, Rivkin, W. D., Enforceability of Arbitral Awards Based on Lex Mercatoria, 9 Arbitration International 67 (1993) at p. 68-72; Wilkinson, V. L. D., The New Lex Mercatoria, Reality or Academic Fantasy?, 12 JIA 2 (1995) at p. 105 also speaks about different elements of lex mercatoria such as: uniform laws of international trade, general principles of law, customs and usages and arbitral awards; See also Rubino-Sammartano, M., International Arbitration: Law and Practice, 2nd ed., KLI (2001) at pp. 421-422, 438-446; See criticism of Delaume, G. R., The Proper Law of State Contracts and the Lex Mercatoria: A Reappraisal, 3 ICSID Review – FILJ 79 (1988) at p. 79. 166 As noted above, the current ICC Rules provide identically in Art. 17(2).

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on a-national law, a freedom which they occasionally exercised.167 According to them, the Rakoil case is an illustrative example. But the Award evidences that the Tribunal made no reference to Art. 13(5) of the previous Rules. Rather it quoted Art. 13(3) and, regardless of the guidance provided by that article, the Tribunal merely identified internationally accepted principles of law governing contractual relations as the proper law without reference to any national legal system. Principles and usages of commerce are not the “law” and, consequently, the Tribunal’s designation of these principles as “the proper law” is not satisfactory. The better view would be that “most often these principles are used in their supplementary function i.e., to reinforce the principles found in national law either chosen by the parties or identified as the proper law by the tribunal”.168 As noted above, the new ICC Rules explicitly empower the tribunal to select the rules of law it deems appropriate. The reference to the “rules of law” indicates that either domestic or international law, both domestic and international law as well as different rules of law for different parts of their contractual relationship may be identified as the governing law. (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]) In Amoco v. Iran,169 the two parties established a joint venture company, Khemco, with the purpose to extract and process associated gas and chemicals. Both parties agreed that Amoco’s interests in Khemco were expropriated, but disagreed as to its lawfulness which was, in the view of the Tribunal, the central issue to be analyzed. The Claimant argued that the expropriation was unlawful because it was contrary to the Treaty of Amity concluded between Iran and United States170 which incorporates the rules of customary international law.171 The Respondent argued that the expropriation was made in compliance with international law since it was a legitimate exercise of Iran’s right

167

Craig, W. L., International Ambition and National Restraints in ICC Arbitration, 1 Arbitration International 49 (1985) at pp. 67-68. 168 Ibid: See also Highet, K., in Lex Mercatoria and Arbitration (edited by Carbonneau, T.), Revised edition, Kluwer Law International (1998) who noted that “The concept of principia mercatoria more correctly reflects the nature, application, and content of the law merchant than any suggestion that it amounts to an inchoate or undiscovered legal system that exists outside national jurisdictions”, at p. 134. 169 Amoco International Finance Corporation v. Islamic Republic of Iran, Partial Award, 14 July 1987, 27 ILM 1314 (1988). 170 Treaty of Amity, Economic Relations and Consular Rights, between Iran and the United States, 15 August 1955, 8 U.S.T. 899, T.I.A.S. No. 3853. 171 Partial Award, 14 July 1987, 27 ILM 1314 (1988), at p. 1338, para. 87.

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to nationalize. It also argued that the Treaty of Amity was neither operative nor applicable to their dispute.172 The Iran–US Tribunal distinguished between the law applicable to the contract and the law applicable to the issue of expropriation. In the Tribunal’s view, the validity, interpretation and implementation of the Khemco Agreement was governed by the choice of law clause stipulated in the agreement. It said: 154. In the present context the issue of the applicable law is quite different from the question of the law applicable to expropriation. It relates to the problem known in conflict of laws, or private international law, as “the law of the contract,” namely the law governing the validity, interpretation and implementation of the Khemco Agreement . . . 173

But, in respect of the question of lawfulness or unlawfulness of the expropriation, the Tribunal pointed out that it had to be decided under international law only. The latter position was supported by reference to the parties’ contentions which confirmed that the lawfulness of the expropriation had to be decided by applying international law only. No further explanation had been offered by the Tribunal on this point. It seems that it was logical for this Tribunal to examine the legality of Iranian’s actions in light of international law only having in mind its international character. For the Tribunal, the important question was only the nature of the rules of international law to be applied in this case and, under the heading “The Applicable Law”,174 the Tribunal proceeded to discuss that. The Tribunal entered into a lengthy discussion of the applicability of the Treaty of Amity. It noted that there was no notice of intention, on the side of both parties, to terminate the Treaty of Amity.175 In that respect, the Tribunal relied on its previous awards as well as on the ICJ decision in the Case Concerning United States Diplomatic Consular Staff in Tehran and concluded that the Treaty was applicable to the relations between the two nations at the time the relevant claim arose.176 As a second contention, the Respondent argued that even if the Treaty was in force it was not applicable to the expropriation of Amoco’s interests since: (1) Amoco’s interest in Khemco is not “property” in the meaning of Article IV, paragraph 2 of the Treaty; (2) the Treaty clearly recognizes Iran’s right to nationalize; (3) the Treaty creates rights and duties only between Iran and the United States, not for private entities; and (4) the United States and its nationals cannot take advantage of the Treaty’s special standard of compensation, since the Treaty originated from the unlawful conduct of the United States.177 172 173 174 175 176 177

At p. 1338, para. 87. At p. 1353. At pp. 1338-1345. At p. 1341, para. 97. At pp. 1338-1341, paras. 88-100. At pp. 1341-1342, para. 101.

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Article IV(2) of the Treaty states: Property of nationals and companies of either High Contracting Party, including interests in property, shall receive the most constant protection and security within the territories of the other High Contracting Party, in no case less than that required by international law. Such property shall not be taken except for a public purpose, nor shall it be taken without the prompt payment of just compensation. Such compensation shall be in an effectively realizable form and shall represent the full equivalent of the property taken; and adequate provision shall have been made at or prior to the time of taking for the determination and payment thereof.178

The Tribunal analyzed the above arguments in the following manner: In respect of the first contention, the Tribunal pointed out that not only property, but also interests in property may be expropriated: 107 . . . nothing in Article IV, paragraph 2 suggests that the word “property,” as used in that paragraph, should be construed as applying only to rights in tangible assets. No convincing explanation has been adduced to justify such a narrow interpretation, which is not in line with the common usage of the word, nor with the express terms of the Treaty protecting not only “property” but also “interests in property”.179

Therefore, since Amoco’s interests under the Khemco Agreement had an economic value, their nullification by the Single Article Act could have been considered as a nationalization.180 With respect to the second contention the Tribunal noted that the Treaty of Amity indeed recognized the right of each party to nationalize, under stated conditions.181 It also added that “this recognition does not mean that any nationalization automatically is lawful, since this will be the case only if the conditions listed in Article IV are actually met”.182 With respect to the third argument the Tribunal offered the following reasoning: 103. The question raised by the third objection, whether the Treaty did or did not create rights or duties for private persons, cannot be answered in the abstract, but can be decided only by reference to the terms of the Treaty and the procedures available for its implementation. It is indisputable, however, that certain provisions of the Treaty, including Article IV, set standards of treatment that each party must accord to the nationals and companies of the other party. The nationals and companies concerned, therefore, are entitled to receive such treatment. In an adjudication before an international tribunal such as this, which 178 Treaty of Amity, Economic Relations and Consular Rights, between Iran and the United States, 15 August 1955, 8 U.S.T. 899, T.I.A.S. No. 3853. 179 Amoco International Finance Corporation v. Islamic Republic of Iran, Partial Award, 14 July 1987, 27 ILM 1314 (1988) at p. 1342. 180 At pp. 1342-1343, para. 108. 181 At p. 1342, para. 104. 182 At p. 1342, para. 104.

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is expressly authorized by Article V of the CSD to apply the rules and principles of international law, it is immaterial whether or not the enforcement of such treaty rights and law by domestic courts would be dependent on the enactment of legislation introducing the provisions of the treaty into the law of the State.183

Therefore, there was no doubt that the Treaty of Amity creates rights and duties not only between Iran and the United States, but also for private entities. And, finally, in respect of the fourth contention the Tribunal reiterated its position that “since the Treaty was in force, the rights and obligations it established were valid and enforceable according to its terms”.184 Therefore, the analysis of the Respondent’s contentions led the Tribunal to conclude that the rights invoked by the Claimant fall within Art. IV(2) of the Treaty, which was therefore applicable.185 After determining that the Treaty of Amity was applicable to the parties’ relations, the Tribunal discussed the applicability of customary international law. Its analysis was as follows: 112. As a lex specialis in the relations between the two countries, the Treaty supersedes the lex generalis, namely customary international law. This does not mean, however, that the latter is irrelevant in the instant Case. On the contrary, the rules of customary law may be useful in order to fill in possible lacunae of the Treaty, to ascertain the meaning of undefined terms in its text or, more generally, to aid interpretation and implementation of its provisions.186

Therefore, the Treaty of Amity was first to be applied to the case while the rules of customary international law were applicable to help in ascertaining the meaning of the terms left undefined by the Treaty i.e. nationalization and lawful expropriation, or to help interpretation of its provisions. The Tribunal proceeded to compare Art. IV(2) with the customary international law rules on expropriation. It referred to the PCIJ decision in the Case Concerning Certain German Interest in Polish Upper Silesia as the leading expression of the rules of customary international law and noted later, progressive recognition of the right of states to nationalize.187 The Tribunal said: 115. The provisions of Article IV, paragraph 2 of the Treaty must be read against this background, since the negotiation of the Treaty must be presumed to have taken place in this legal context. Although the provisions are phrased in a negative form and emphasize the principle of the respect due to foreign property, they nevertheless amount to a clear recognition of the right to nationalize. In stating that “[s]uch a property shall not be taken except for a public purpose,”

183 184 185 186 187

At p. 1342. At p. 1342, para. 102. At p. 1343, para. 111. At p. 1343. At p. 1344, paras. 113-114.

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CHAPTER III the Treaty implies that an expropriation which is justified by a public purpose may be lawful, which is precisely the rule of customary international law.188

Then, the Tribunal referred to other condition for a lawful expropriation i.e. “the prompt payment of just compensation” and noted that it is also an obligation accepted as a general rule of customary international law.189 It confirmed the existence of this rule by referring to G.A. Resolution 1803 (XVII) as well as by noting that a number of international awards and conventions recognized the same rule. However, the Tribunal noted that “the rules of customary international law relating to the determination of the nature and amount of the compensation to be paid, as well as of the conditions of its payment, are less well settled”.190 But, it added, that the parties by choosing the term “just compensation” in the Treaty solved this problem.191 On the other hand, neither the Treaty nor customary international law solved the question of how to determine the value of the expropriated property. The Tribunal proceeded to examine the merits of the case in accordance with its finding on applicable law. Under the heading “The Application of the Law to the Facts of the Instant Case”, the Tribunal proceeded to examine five arguments raised by the Claimant as a proof of the unlawfulness of the expropriation under international law. In respect of the Claimant’s argument that an expropriation was not authorized under Iranian law and that it violated existing law, the Tribunal said: 120. Conformity with domestic law is not usually cited as a condition for an internationally lawful nationalization, and the Treaty specifies no such condition. It is therefore doubtful whether it is one of the requisites of international law. The case law on this point is not very helpful. Violation of domestic law, when invoked, is most often analyzed as evidence of the lack of fulfillment of one of the conditions imposed by international law, such as the existence of a public purpose, as in the Amco Asia case referred to by the Claimant, . . . , or of the payment of compensation.192

Anyhow, in order to determine whether the expropriation was in compliance with Iranian law or not, it was necessary to examine the relevant facts since these were in disagreement between the parties.193 In the view of the Tribunal, the facts evidenced that the expropriation was in accordance with a legislative act, the Single Article Act.194 188 189 190 191 192 193 194

At p. 1344. Emphasis original. At p. 1344, para. 116. At p. 1344, para. 117. At p. 1345, para. 117. At p. 1345. At pp. 1345-1348, paras. 121-132. At p. 1348, para. 132.

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With respect to the Claimant’s second contention that there was no payment of compensation and that no offer of compensation was made prior to the taking, the Tribunal referred to Art. IV(2) of the Treaty of Amity noting that there was no requirement that the amount of compensation should have been determined at or prior to the time of the taking, but only that adequate provision should have been made.195 It also added that although the implementation of this provision raised some problems due to the fact that an expropriation was realized through a process which lasted more than twenty months, the transfer of property formally took place upon the decision of the Special Committee on 24 December 1980. Therefore, the provisions of compensation were included in the Single Article Act and were made at or prior to the time of the taking.196 The Tribunal also discussed as to whether this provision was also “adequate”. The following reasoning was offered by the Tribunal: 137 . . . In so far as it does not apply to the compensation itself, but to the procedure for determining such compensation, this term is not very often used in practice and does not have a specific legal connotation. Taking into account the ordinary meaning of the term, the Tribunal considers that, to be “adequate,” the provisions for the determination and payment of compensation must provide the owner of the expropriated assets sufficient guarantee that the compensation will be actually determined and paid in conformity with the requisites of international law, that is, in the present Case, that “just compensation” will be promptly paid. This does not necessarily imply that a judicial procedure should be set up to this effect . . . 197

Therefore the term “adequate” refers to the procedure for determining the compensation which must be determined and paid in compliance with international law rules. The Single Article Act did not fix any standard for the compensation to be paid and only empowered the Special Commission to determine the compensation which, on its side, aimed to arrive at settlement agreements.198 In regards to the argument that the expropriation was discriminatory, the Tribunal referred to both the Treaty of Amity and to customary international law and confirmed a wide recognition of the principle of prohibition of discrimination.199 The Claimant argued that the expropriation of Amoco’s interests in Khemco was based on discrimination against American interests, and, correspondingly, was unlawful. It relied on the fact that another joint venture with a Japanese partner was not expropriated.200 In the view of the Tribunal, 195 196 197 198 199 200

At p. 1349, para. 136. At p. 1349, para. 136. At p. 1349. At p. 1350, para. 138. At p. 1350, para. 140. At p. 1350, para. 139.

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different treatment of other companies was justified by the specific circumstances in each case.201 Furthermore, the Claimant argued that the condition of public purpose was lacking and that the real motivation of Iran was to avoid contractual obligations. In the view of the Tribunal: 145. A precise definition of the “public purpose” for which an expropriation may be lawfully decided has neither been agreed upon in international law nor even suggested. It is clear, that, as a result of the modern acceptance of the right to nationalize, this term is broadly interpreted, and that States, in practice, are granted extensive discretion. An expropriation, the only purpose of which would have been to avoid contractual obligations of the State or of an entity controlled by it, could not, nevertheless, be considered as lawful under international law . . . Such an expropriation, indeed, would be contrary to the principle of good faith and to accept it as lawful would run counter to the well-settled rule that a State has the right to commit itself by contract to foreign corporations . . . 202

Therefore, in the view of the Tribunal, the SAA was adopted for a clear public purpose and the subsequent Special Committee’s decision was taken in compliance with this act. The Tribunal also added that financial considerations, if considered, were not sufficient to prove that the expropriation was not taken for a public purpose.203 Finally, the Tribunal proceeded to discuss whether the Respondent had breached the Khemco Agreement, including the stabilization clauses, which could lead to the unlawfulness of the expropriation as argued by the Claimant. This issue has been discussed in section dealing with stabilization clauses and, therefore, only brief reference to this question is provided here. As noted above, in the view of the Tribunal, the law applicable to the interpretation of the contract was different from the law applicable to the issue of expropriation. The choice of law clause provided that the Khemco Agreement itself was first applicable and only if the problems can not be solved by applying the Agreement itself would the laws of Iran be applied.204 Since the Government was not a party to the Khemco Agreement and since the law of contract applies only to the interpretation and implementation of that agreement as between the parties (i.e. NPC and Amoco), the Tribunal concluded that the Government was not liable for breach of contract.205 The Tribunal also examined the alleged stabilization clause and concluded that even if the Khemco Agreement contained such a clause it was not binding on the Government since the Government was not a party to that agreement.206 201 202 203 204 205 206

At pp. 1350-1351, para. 142. At p. 1351. At pp. 1351-1352, para. 146. At p. 1353, para. 155. See section on stabilization clauses. At pp. 1354-1355. At pp. 1355-1357, paras. 165-173.

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It followed that the expropriation “cannot be characterized as unlawful as a breach of a contract, since Iran, the expropriating State, was not a party to the Khemco Agreement and, therefore, not bound by any stabilization clause allegedly contained herein”.207 For the aforementioned reasons, the Tribunal concluded that the Claimant’s arguments did not sustain the contention that the expropriation of Khemco was unlawful. Therefore, it followed that Amoco’s rights and interest were lawfully expropriated and the Tribunal proceeded to determine the compensation to be paid in such circumstances.208 In relation to the question of the compensation, the Tribunal applied customary international law.209 (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) The Iran–US Claims Tribunal in the Mobil Oil case followed the identical approach. However, in this case the Tribunal offered much more thorough explanation for its position on the applicable law. This case concerned a breach of contract and expropriation of the investor’s rights under the Sale and Purchase Agreement (SPA) by the National Iranian Oil Company and Iran. The choice of law clause was contained in Art. 29 of the SPA and provided as follows: This Agreement shall be interpreted in accordance with the laws of Iran. The rights and obligations of the Parties shall be governed by and according to the provisions of this Agreement. The termination before expiry date or any alteration of this Agreement shall be subject to the mutual agreement of the Parties.210

The Tribunal had no doubt that the issue of expropriation must be governed by reference to international law only. The validity under international law of a legislative act (the Single Article Act) and its application to the parties’ agreement was not dependent upon the law agreed to by the parties. The Tribunal said: 73 . . . the Tribunal concludes, and the Parties agree, that the lawfulness of an expropriation must be judged by reference to international law. This holds true even when the expropriation is of contractual rights. A concession, for instance, may be the object of nationalization regardless of the law the parties chose as the law of the contract. In the instant Cases, the validity under international law of the Single Article Act and of its application to the SPA or any other

207

At p. 1358, para. 180. At p. 1359, para. 182. 209 At pp. 1359-1364, paras. 183-209. 210 Mobil Oil Iran, Inc. v. The Government of the Islamic Republic of Iran, Partial Award, 14 July 1987, 16 Iran–U.S. C.T.R., at p. 20. 208

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By contrast, the issue of breach of contract had to be governed by the law agreed to by the parties. The Tribunal offered the following reasoning: 75. The claim for alleged breach and repudiation of the Agreement, however, raises quite different issues. At the outset, the Tribunal notes that, when determining the alleged liability of Iran or the United States, the Tribunal must act pursuant to the principles and rules of international law, as it is empowered to do by Article V of the CSD. However, when a claim is based on an alleged breach of contract, the Tribunal first must determine whether the alleged breach actually took place. Obviously, such a determination is made by reference to the terms of the relevant contract, but it also may depend upon legal issues to which the provisions of the contract do not provide a solution. Whether certain conduct of a party constitutes a repudiation of the contract or whether certain dealings of the parties constitute an agreement altering the initial contract are examples of such issues. In questions of this kind, it becomes necessary to rely upon the law applicable to the contract. This is also the case when the Tribunal must decide upon the alleged liability of an entity other than Iran or the United States, when the entity is not a subject of international law.212

But the Tribunal described the choice of law clause contained in Art. 29 of the SPA, as only secondarily concerned with a choice of law. In the view of the Tribunal, this clause was of limited effect i.e. it applied only to the issue of interpretation and, consequently, the Tribunal had to determine the law applicable to all other issues. The Tribunal said: 80. In sum, Article 29 is only partially and secondarily concerned with a choice of law. The fact that this choice only applied to the issue of interpretation, in contrast with the usual practice, does not justify an extension of this choice to other issues. Expressio unius exclusio alterius est. The only possible interpretation is that the parties were unable to arrive at an agreement beyond the question of interpretation and that no choice of law was made in the Agreement in relation to the law applicable to any other issue. 81. In the absence of contract provisions, the Tribunal must decide what choice of law is applicable by taking into consideration all circumstances that it deems relevant. In view of the international character of the SPA, concluded between a State, a State agency and a number of major foreign companies, of the magnitude of the interests involved, of the complex set of rights and obligations which it established, and of the link created between this Agreement and the sharing of oil industry benefits throughout the Persian Gulf Countries, the Tribunal does not consider it appropriate that such an Agreement be governed by the law of any Party. This conclusion is in accord with the spirit of Article 29 and with the usages of trade, as expressed in agreements between States and foreign companies, notably in the oil industry, and confirmed in several recent arbitral awards . . . 213 211 212 213

At p. 25. At p. 26. At pp. 27-28.

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Therefore, in order to determine the law applicable to all other issues, the Tribunal had considered all relevant circumstances of the case, in particular international character of the parties’ contract and common practice in the oil industry. On that basis the Tribunal concluded that 81 . . . the law applicable to the Agreement is Iranian law for interpretative issues, and the general principles of commercial and international law for all other issues. For reasons previously set forth, the law applicable to the liability of Iran, as well as of NIOC, which acted as an instrumentality of the Iranian Government in these Cases, is international law.214

The Tribunal proceeded to examine the question of expropriation under international law, and the question of interpretation of the parties’ agreement under Iranian law. Amoco and Mobil Oil are illustrative examples of the Iran–US Claims Tribunal’s approach towards the applicable law when a claim concerned alleged expropriation and breach of contract. The legality of an expropriation was always determined by applying international law rules, either on the basis of the Treaty of Amity of 1955 (when determined to be applicable) or on the basis of customary international law, or both of them. When a contract between the parties contained a choice of law clause such a chosen law was determined to be applicable only for the interpretation or/and implementation of the agreement. Article V of the CSD grants such discretion to the Tribunal. But the Tribunal also justified its approach by reference to its own international character and to the character of the parties and their agreements. Many other cases decided by this Tribunal which involved claims of expropriation followed the same approach. The common feature in these cases is the fact that they contain a preliminary discussion on the applicable law. However, some awards contain no discussion on the applicable law and the Tribunal simply proceeded to apply the rules of international law to the issue of expropriation or nationalization. The next case is an example of such an approach. (vi) Phelps Dodge Corp. and OPIC v. Iran (international law and the Treaty of Amity apply to the issue of expropriation) In the Phelps Dodge case215 the Tribunal did not discuss the applicable law but simply reviewed the relevant facts and found that on 15 November 1980 the Respondent took control over the SICAB factory (the Iranian company in which the Claimant was one of the founders) and deprived Phelps Dodge of

214

At p. 28. Phelps Dodge Corp. and Overseas Private Investment Corp. v. The Islamic Republic of Iran, 19 March 1986, 25 ILM 619 (1986).

215

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all the value of its property rights in SICAB.216 The Tribunal referred to its previous awards (Tippets and Starret decisions) in which it held that: A deprivation or taking of property may occur under international law through interference by a state in the use of that property or with the enjoyment of its benefits, even where legal title to the property is not affected. While assumption of control over property by a government does not automatically and immediately justify a conclusion that the property has been taken by the government, thus requiring compensation under international law, such a conclusion is warranted whenever events demonstrate that the owner was deprived of fundamental rights of ownership and it appears that this deprivation is not merely ephemeral. The intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact.217

Therefore by applying international law the Tribunal concluded that the Respondent had effectively taken Phelps’s Dodge property and, therefore, must pay compensation.218 The parties disagreed with respect to the appropriate standard of compensation i.e., as to whether the Treaty of Amity was applicable or, in case it was inapplicable, what are the rules of customary international law on compensation.219 The Tribunal, by referring to the position taken by the ICJ in the Case Concerning United States Diplomatic and Consular Staff in Tehran, concluded that the Treaty was applicable at the time the claim arose and reviewed the standard of compensation under the Treaty i.e. Art. IV(2) of the Treaty of Amity requires the payment of just compensation which must represent the full equivalent of the property taken. It noted that it was the same standard it had applied in previous awards.220 The Tribunal proceeded in such a manner. Therefore, in respect of the primary claim, the Tribunal applied international law in general and since it held that the Treaty of Amity was applicable, it relied on its provisions for determining the standard of compensation for expropriated property.

(b) Concluding remarks In contrast to the ICSID Convention which contains explicit reference to the host State’ law, as the applicable national law in case of investment disputes, 216

At pp. 624-625. Tippets, Abbott, McCarthy, Stratton and TAMS–Affa Consulting Engineers of Iran et al., Award No. 141-7-2, pp. 10-11 (29 June 1984); Starrett Housing Corp. and Government of Islamic Republic of Iran et al., Award No. ITL 32-24-1, pp. 51-54 (19 December 1983) as quoted in the Phelps Dodge Case at p. 626. 218 Phelps Dodge Corp. and Overseas Private Investment Corp. v. The Islamic Republic of Iran, 19 March 1986, 25 ILM 619 (1986) at p. 626. 219 At p. 626. 220 At p. 627. 217

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and to applicable international law rules, other arbitration rules contain more open-ended formulae for determining the applicable law in the absence of the parties’ choice. The above case law indicates that there is no uniform practice in relation to the determination of the applicable law by the nonICSID tribunals. These tribunals, when selecting the proper law, came to widely divergent conclusions. They employed, what is sometimes called, both a subjective and an objective approach i.e., they give way to the parties’ intentions as well as to the relevant connecting factors. Some commentators note that a combination of these two approaches promises more predictability and certainty.221 It is true that these tribunals enjoy discretion when charged with the duty to select the applicable law, but such discretion is limited by the pertinent provision of the authorizing instrument. In other words, the residual rule of the UNCITRAL Rules clearly provide that the proper law has to be determined by the conflict of laws rules found to be applicable by the tribunal (the same provided the previous ICC Rules) or the tribunal may simply apply the rules of law it considers appropriate under the new ICC Rules. In Wintershall, the Tribunal does not seem to identify the conflict of laws rules it deems applicable. That approach is not satisfactory. In Rakoil, the Tribunal did not employ the conflict of laws analysis and identified internationally accepted principles of law governing contractual relations as the proper law without reference to any national legal system. In light of the pertinent provision applicable in the absence of the parties’ agreement on choice of law, the conclusion reached in Rakoil is entirely unsatisfactory. At any rate, the above cases indicate that the tribunals, in investment disputes, would attempt to examine all relevant circumstances of the case in order to identify the proper law that would satisfy the parties’ expectations. In particular, the character of the parties in investor/State arbitration and their investment contract may lead the tribunal to denationalize the choice of law. But, as illustrated in the Wintershall case, the tribunal may also be reluctant to depart from national law. The above cases also demonstrate that the contract provisions as well as relevant trade usages constitute important legal source when deciding the case. As a matter of fact, in Rakoil, the principles and usages of commerce were identified as the applicable substantive law. This decision has been already criticized above. It follows that such contradictory conclusions make the tribunal’s selection of the law applicable to the merits more unpredictable. The approach of the Iran-US Claims Tribunal is somewhat different. Expropriations claims were always examined under international law only, even in case of a contractual choice of domestic law. Such a chosen law was

221

Blessing, M., Regulations in Arbitration Rules on Choice of Law (in The Law Applicable in International Arbitration), ICCA VII Congress Series, KLI 391 (1996) at p. 416.

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applied only for the contract interpretation. As already noted above, Art. V of the CSD indeed offers such a broad discretion to the Tribunal. Its broad wording obviously intended to avoid application of both Iranian and American law. Taking into account the special features of this Tribunal, its approach towards the issue of applicable law, although different from other arbitration mechanisms, is justified.

CHAPTER IV

The Role of International Law and its Relation to Domestic Law

When a case is governed by a combined choice of law clause, either on the basis of the parties’ direct agreement or by virtue of choice a provision in the relevant treaty or domestic legislation, the issue of the interrelation between these two legal systems arises. When dealing with combined choice of law clauses, the tribunals were faced with a necessity to clarify and define the interrelation between the two legal systems. In particular, the requirement of the applicability of both domestic law and international law under the second sentence of Art. 42(1) of the ICSID Convention, prompted ICSID tribunals to enter into a discussion of the interrelation between these two legal systems. During the drafting of the ICSID Convention, the negotiators discussed this issue within the meaning of the second sentence of Art. 42(1).1 The questions concerned – what is the role of international law in the context of this sentence and, what is the hierarchical order of the two legal systems i.e., which law will be applied in case of discrepancy between the two. The drafters of the ICSID Convention accepted the doctrine of a supplemental and corrective function of international law in relation to the host State’s law.2 This means that international law may be used to close any gaps in the host State’s law and, furthermore, in case of conflict between the two legal systems, international law would prevail. This view is generally shared by commentators.3 1

History of the Convention, Vol. II. pp. 570-571, 800, 804, 985-986. Ibid; For an extensive analysis on this point see Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 622-631 (2001). 3 Broches, A., The Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 136 Recueil des Cours (1972-II) at pp. 331, 392; Feuerle, P., International Arbitration and Choice of Law under Art. 42 of the Convention on the Settlement of Investment Disputes, 4 Yale Studies in World Public Order 89 (1977) at pp. 118-119; Kahn, P., The Law Applicable to Foreign Investments: The Contribution of the World Bank Convention 2

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A sole arbitrator in TOPCO v. Libya touched this issue. As a matter of fact, the choice of law clause agreed to by the parties defined itself the interrelation between the two legal systems. It referred to the Libyan principles of law that are common to the international law principles and, in the absence of such concurrence, the Tribunal had to apply the general principles of law: (7) 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.4

In discussing this combined choice of law clause, the arbitrator pointed out that international law must be the standard for the application of Libyan law: 41 . . . these principles of international law must, in the present case, be the standard for the application of Libyan law since it is only if Libyan law is in conformity with international law that it should be applied.5

In the view of the arbitrator, general principles of law may be used to fill gaps in the less-developed national law and serve to protect the investor from unilateral and arbitrary changes of the host State’s law: 42 . . . It should be noted that the invocation of the general principles of law does not occur only when the municipal law of the contracting State is not on the Settlement of Investment Disputes, 44 Indiana Law Journal 1 (1968) at pp. 27-29; RubinoSammartano, M., International Arbitration Law, Kluwer (1990) at p. 55; Chukwumerije, O., International Law and Municipal Law in ICSID Arbitration, 1 Canadian Journal of International Business Law and Policy 62 (1996) at p. 82; Elombi, G., ICSID Awards and the Denial of Host State Law, 11 Journal of International Arbitration 61 (1994) at p. 66; Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 622-631; Shihata, F.I./Parra, A. R., Applicable Substantive Law in Disputes Between States and Private Foreign Parties: The Case of Arbitration under the ICSID Convention, 9 ICSID Review – FILJ 183 (1994) at p. 192; See also Weil, P., The State, the Foreign Investor, and International Law: The No Longer Stormy Relationship of a Ménage À Trois, 15 ICSID Review – FILJ 401 (2000) who stated that “the fact that the second sentence of Art. 42 refers not to international law alone, but to both domestic law and international law, prompted some ICSID tribunals and writers to seek a solution whereby the two sources could be combined – in other words, to prevent international law from serving as the sole governing law . . . However complex and multifaceted, these attempts are actually futile, for no matter how domestic law and international law are combined, under the second sentence of Art. 42(1), international law always gains the upper hand and ultimately prevails”, at pp. 408-409; For a position which emphasizes the importance of the law of the host State, see Reisman, W. M., The Regime for Lacunae in the ICSID Choice of Law Provision and the Question of its Threshold, 15 ICSID Review – FILJ 362 (2000); But see also recent criticism of the doctrine of a supplemental and corrective function of international law in relation to the host State’s law, Gaillard, E./Banifatemi, Y., The Meaning of “and” in Art. 42(1), Second Sentence, of the Washington Convention: The Role of International Law in ICSID Choice of Law Process, 18 ICSID Review – FILJ 375 (2003). 4 Texaco Overseas Petroleum Company/California Asiatic Oil Company v. Libya, Award, 19 January 1977, 17 ILM 1 (1978) at p. 11. 5 At p. 15.

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suited to petroleum problems. Thus, for example, the Iranian law is without doubt particularly well suited for oil concessions but this does not prevent the contracts executed by Iran from referring very often to these general principles. The recourse to general principles is to be explained not only by the lack of adequate legislation in the State considered (which might have been the case, at one time, in certain oil Emirates). It is also justified by the need for the private contracting party to be protected against unilateral and abrupt modifications of the legislation in the contracting State: it plays, therefore, an important role in the contractual equilibrium intended by the parties.6

Finally, the arbitrator explicitly said that the result reached by applying the host State’s law must be tested against international law: 49 . . . The application of the principles of Libyan law does not have the effect of ruling out the application of the principles of international law, but quite the contrary: it simply requires us to combine the two in verifying the conformity of the first with the second.7

ICSID tribunals did not always discuss the issue of interrelation between the two legal systems in their decisions. The two decisions discussed in this study are illustrative examples. For instance, in Amco v. Indonesia, the first Tribunal did not touch this issue.8 It identified the applicable law correctly and examined and applied separately both the host State’s law and international law. The Tribunal reached identical conclusions under both legal systems. There was no discussion on the interrelation between the two legal systems in the Award, but the consistency between the two systems was found to exist. In another case, SOABI v. Senegal, the Tribunal had to apply the residual rule of Art. 42(1) of the ICSID Convention, since there was no agreement on choice of law between the parties. The Tribunal found that it had to apply Senegalese law only and proceeded to examine and apply that law.9 Therefore, in contrast to Amco where both legal systems were applied, in the SOABI Award there was no reference to international law either in the Tribunal’s statement on applicable law nor in its discussion on the merits of the case. The Tribunal probably felt it was not obliged to enter into a discussion on international law since it found a clear rule in favor of the investor on the basis of the host State’s law. No answer on the interrelation between the two legal systems may be found in this decision. Rather, it indicates that the decision may be based on the host State’s law only without reference to international law. 6

At p. 16. At p. 18. 8 Amco v. Indonesia, Award, 20 November 1984, 1 ICSID Reports 413; See prior discussion of this case in section dealing with application of the residual rule of Art. 42(1) of the ICSID Convention. 9 SOABI v. Senegal, Award, 25 February 1988, 2 ICSID Reports 221; See prior discussion of this case in section dealing with application of the residual rule of Art. 42(1) of the ICSID Convention. 7

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In many other cases, ICSID tribunals and ad hoc Committees offered a useful discussion on the interrelation between the two legal systems. As a matter of fact, probably the most useful discussion is provided by the ad hoc Committees when charged with the complaint that the tribunals exceeded their powers for failure to apply the proper law. In order to decide whether there was an excess of powers on the side of the tribunal, it was necessary first to define the interrelation between the two legal systems, determined to be applicable. These annulment decisions will be analyzed in a separate section and, for the purpose of the present analysis, a brief statement concerning the role of international law and its relation to domestic law will suffice. The view of the supplemental and corrective function of international law in relation to the host State’s law was introduced by the ad hoc Committee in Klöckner v. Cameroon. The Committee described the role of the principles of international law that had to be applied together with the host State’s law in the following manner: This gives these principles (perhaps omitting cases in which it should be ascertained whether the domestic law conforms to international law) a dual role, that is, complementary (in the case of “lacuna” in the law of the State), or corrective, should the State’s law not conform on all points to the principles of international law. In both cases, the arbitrators may have recourse to the “principles of international law” only after having inquired into and established the content of the law of the State party to the dispute (which cannot be reduced to one principle, even a basic one) and after having applied the relevant rules of the State’s law. Article 42(1) therefore clearly does not allow the arbitrator to base its decision solely on the “rules” or “principles” of international law.10

Therefore, the principles of international law have a dual role i.e., to close any lacuna in the host State’s law and, in the event of inconsistency between the two legal systems, international law would prevail. This position not only confirms the supplemental and corrective functions of international law but also points out that only after examining and applying the host State’s law may the tribunal have recourse to international law. The identical view was shared by the ad hoc Committee in Amco v. Indonesia. It said: 20. It seems to the ad hoc Committee worth noting that Article 42(1) of the Convention authorizes an ICSID tribunal to apply rules of international law only to fill up lacunae in the applicable domestic law and to ensure precedence to international law norms where the rules of the applicable domestic law are in collision with such norms. 21. The above view of the role or relationship of international law norms vis-àvis the law of the host State, in the context of Article 42(1) of the Convention,

10

Klöckner v. Cameroon, Decision on Annulment, 3 May 1985, 1 ICSID Review – FILJ 89 (1986) at p. 112. Italics and emphasis original.

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is suggested by an overall evaluation of the system established by the Convention. The law of the host State is, in principle, the law to be applied in resolving the dispute. At the same time, applicable norms of international law must be complied with since every ICSID award has to be recognized and pecuniary obligations imposed by such award enforced, by every Contracting State of the Convention (Article 54(1), Convention). Moreover, the national State of the investor is precluded from exercising its normal right of diplomatic protection during the pendency of the ICSID proceedings and even after such proceedings, in respect of a Contracting State which complies with the ICSID award (Article 27, Convention). The thrust of Article 54(1) and of Article 27 of the Convention makes sense only under the supposition that the award involved is not violative of applicable principles and rules of international law.11

This ad hoc Committee too confirmed the supplemental and corrective functions of international law. Its reasoning indicates that after examining and applying the law of the host State, the result must be checked against international law. Otherwise, the purpose and the system established by the ICSID Convention would be frustrated. In the Resubmitted Case of Amco v. Indonesia, the second Tribunal pointed out: 40. This Tribunal notes that Article 42(1) refers to the application of host-state law and international law. If there are no relevant host-state laws on a particular matter, a search must be made for the relevant international laws. And, where there are applicable host-state laws, they must be checked against international laws, which will prevail in case of conflict. Thus international law is fully applicable and to classify its role as “only” “supplemental and corrective” seems a distinction without a difference. In any event, the Tribunal believes that its task is to test every claim of law in this case first against Indonesian law, and then against international law.12

Therefore, international law would be applied in case of lacuna in the host State’s law and where the host State’s law is applied, it must be tested against international law. In case of a conflict between the two legal systems, international law would prevail. Therefore, there is no doubt that international law is fully applicable in the cases governed by the combined choice of law clause. In SPP v. Egypt, the Tribunal determined that both Egyptian and international law had to be applied. In the view of the Tribunal, when national law contained a lacuna or international law was violated by the exclusive application of national law, the Tribunal was bound to apply international law directly. It said: 84. When municipal law contains a lacuna, or international law is violated by the exclusive application of municipal law, the Tribunal is bound in accordance with Article 42 of the Washington Convention to apply directly the relevant principles and rules of international law.13 11 12 13

Amco v. Indonesia, Decision on Annulment, 16 May 1986, 1 ICSID Reports 515. Amco v. Indonesia, Resubmitted Case: Award, 5 June 1990, 1 ICSID Reports 580. SPP v. Egypt, Award, 20 May 1992, 3 ICSID Reports 208.

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In CDSE v. Costa Rica, the Tribunal resorted to the second sentence of Art. 42(1) of the ICSID Convention after having determined that the parties had not reached a clear agreement that their dispute should be decided on the basis of international law only. The Tribunal, after determining the conformity of the host State’s law rules with international law rules, explicitly said that in case of inconsistency between the two legal systems international law would prevail.14 It also added that this position was in accordance with the purpose of the ICSID Convention: Where this not so in relation to takings of property, the protection of international law would be denied to the foreign investor and the purpose of the ICSID Convention would, in this respect, be frustrated.15

In Tradex v. Albania, the Tribunal found that it had jurisdiction on the basis of the Albanian Law on Foreign Investment of 1993 and that the 1993 Law must be examined as to whether Tradex’ claim was justified on the merits. The Tribunal held that it was prevented from examining the claim on any other possible legal sources including international law.16 But the Tribunal also stated that in applying the second sentence of Art. 42(1) of the ICSID Convention it “will make use of sources of international law insofar as that seems appropriate for the interpretation of terms used in the 1993 Law”.17 In Wena Hotels v. Egypt, the ad hoc Committee under the heading “The Role of International Law” entered into an extensive theoretical discussion on the interrelation between domestic law and international law in context of the residual rule of Art. 42(1) of the ICSID Convention. It noted that various views were expressed as to this question but that “there seems not to be a single answer as to which of these approaches is the correct one”.18 In the ad hoc Committee’s view the word “may” in the second sentence of Art. 42(1) of the ICSID Convention gives a degree of discretion to the tribunal in interpreting the meaning of this sentence. The ad hoc Committee said: 39 . . . the use of the word “may” in the second sentence of this provision indicates that the Convention does not draw a sharp line for the distinction of the respective scope of international law and of domestic law and, correspondingly, that this has the effect to confer on the Tribunal a certain margin and power for interpretation. 40. What is clear is that the sense and meaning of the negotiations leading to the second sentence of Article 42(1) allowed for both legal orders to have a role. The law of the host State can indeed be applied in conjunction with international law if this is justified. So too international law can be applied by itself if the appropriate rule is found in this other ambit.19

14 15 16 17 18 19

CDSE v. Costa Rica, Award, 17 February 2000, 15 ICSID Review – FILJ 169 (2000) at p. 191. At p. 191. Tradex v. Albania, Award, 29 April 1999, 14 ICSID Review – FILJ 197 (1999) at p. 216, para. 69. At p. 217, para. 69. Wena Hotels v. Egypt, Decision on Annulment, 28 January 2002, 41 ILM 933 (2002) at p. 941. At p. 941.

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This ad hoc Committee was obviously not ready to give any general conclusion on this point. It appears from the above reasoning that the circumstances of each case may justify one or another solution.20 It is interesting that this Committee spoke about the necessity of justification for the application of both legal systems in the context of the residual rule of Art. 42(1) of the ICSID Convention. One cannot see why any such justification would be needed in the face of such explicit reference to both legal systems. Rather, in case the tribunal applies only part of the applicable law, justification for such approach would be needed. The ad hoc Committee noted that the host State’s treaties which are part of the domestic law prevail over domestic rules that might be incompatible with them. The ad hoc Committee said: 41. In particular, the rules of international law that directly or indirectly relate to the State’s consent prevail over domestic rules that might be incompatible with them. In this context it cannot be concluded that the resort to the rules of international law under the Convention, or under particular treaties related to its operation, is antagonistic to that State’s national interest. 42. Particular emphasis is put on this view when the rules in question have been expressly accepted by the host State. Indeed, under the Egyptian Constitution treaties that have been ratified and published “have the force of law”. Most commentators interpret this provision as equating treaties with domestic legislation. On occasions the courts have decided that treaty rules prevail not only over prior legislation but also over subsequent legislation. It has also been held that lex specialis such as treaty law prevails over lex generalis embodied in domestic law. A number of important domestic laws, including the Civil Code and Code of Civil Procedure of Egypt, provide in certain matters for a “without prejudice clause” in favor of the relevant treaty provisions. This amounts to a kind of renvoi to international law by the very law of the host State.21

Therefore, it follows that international law in relation to the host State’s law is hierarchically superior.22 20

On the approach taken by the ad hoc Committee in Wena Hotels v. Egypt, see Gaillard, E./ Banifatemi, Y., The Meaning of “and” in Art. 42(1), Second Sentence, of the Washington Convention: The Role of International Law in ICSID Choice of Law Process, 18 ICSID Review – FILJ 375 (2003) at pp. 404-411. According to them “the rationale underlying the Wena holding is that, on a given issue, the rules of international law can be applied as the proper law in the same way as the law of the host State. The tribunal may find two equally applicable rules in each legal system and decide that, under the circumstances of the case, it will apply the rule of international law, without any need to identify either a lacuna or an inadequacy of the law of the host State”, at p. 407; See also Schreuer, C., The Relevance of Public International Law in International Commercial Arbitration: Investment Disputes, unpublished paper available at http://www.univie.ac.at/intlaw/schreu.htm, at pp. 12-22. 21 At pp. 941-942. Italics and emphasis original. 22 See also Autopista Concesionada de Venezuela, C.A. v. Bolivarian Republic of Venezuela, Award, 23 September 2003, at http://www.worldbank.org/icsid/cases/Award_Total.pdf, in which the Tribunal noted: The role of international law in ICSID practice is not entirely clear. It is certainly well settled that international law may fill lacunae when national law lacks rules on certain issues (so called complementary function). It is also established that it may correct the result of the application of

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Furthermore when a case is based on the BIT and governed by a combined choice of law clause, a useful guidance for the issue of interrelation between the two legal systems may be provided by the BIT itself. A provision which provides for the application of the rules which are more favorable to the investor offers such guidance. An example for such a provision is contained in the Greece/Egypt BIT of 1993. It reads as follows: Article 11 If the provisions of law of either Contracting Party or obligations under international law existing at present or established hereafter between the Contracting Parties in addition to the present Agreement contain a regulation, whether general or specific, entitling investment by investors of the other Contracting Party to a treatment more favorable than it is provided for by the present Agreement, such regulation shall to the extent that it is more favorable, prevail over the present Agreement.23

In Antoine Goetz v. Burundi, the Tribunal took into account such a provision. It first noted that different views had been expressed in regard to the issue of the relationship between domestic law and international law. The Tribunal said: In the previous case-law the problem of the links between the various applicable sources of international law is posed in the context of the second sentence of Article 42, first paragraph, of the ICSID Convention, and it has received divergent responses, abundantly commented on in academic writings: hierarchal relationships according to some, domestic law applying first of all but being overborne where it contradicts international law; according to others, relationships based on subsidiarity, with international law being called upon only to fill lacunae or to settle uncertainties in national law; according to others again, complementary relationships, with domestic law and international law each having its own sphere of application.24

In the view of the Tribunal, in this particular case “a complementary relationship must be allowed to prevail”.25 But it also added that the host State’s law

national law when the latter violates international law (corrective function) . . . Does the role of international law extend beyond these functions? The recent decision of the ICSID Ad hoc Committee in Wena Hotels Ltd. v. Arab Republic of Egypt accepts the possibility of a broad approach to the role of international law, and that the arbitral tribunal has “a certain margin and power of interpretation” . . . Whatever the extent of the role that international law plays under Art. 42(1) (second sentence), this Tribunal believes that there is no reason in this case, considering especially that it is a contract and not a treaty arbitration, to go beyond the corrective and supplemental functions of international law . . . it holds that international law prevails over conflicting national rules., paras. 101-105. Italics and emphasis original. 23

See also e.g. Egypt/Kazakhstan BIT of 1993; Albania/Croatia BIT of 1993; Albania/Egypt BIT of 1993, Netherlands/the Czech Republic BIT of 1991. 24 Antoine Goetz v. Burundi, Award, 10 February 1999, 15 ICSID Review – FILJ 457 (2000), para. 97. 25 Para. 98.

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must be applied in any case since that law was listed first in the choice of law provision contained in the BIT.26 After noting that the validity of the State’s acts did not necessarily lead to identical result under the host State’s law and international law, including the BIT, the Tribunal referred to the BIT provision providing for the application of the rules which are more favorable to the investor. The Tribunal said: . . . Far from establishing a priori a hierarchy between the two systems of law which govern the relationship between Burundi and Belgian investors and must serve as a base for the Tribunal’s settlement of the dispute, the Belgium-Burundi Investment Treaty obliges the Tribunal to examine the legal situation created in the wake of the measure of 29 May 1995 in the context of both: each must reign in its own sphere of application, and in case of conflict between the two it is, by common accord of the parties, the provisions which are more favorable to the investors which must be applied.27

Therefore, the Tribunal found that each of these two legal systems had to prevail in its own sphere of application and, in case of conflict between the two, the investors may rely on those which are more favorable to them. The Tribunal indeed proceeded to examine the merits of the case in this manner. Arbitral practice, therefore, demonstrates that the supplemental and corrective function of international law in relation to the host State’s law is widely accepted. At the same time, it seems that in terms of chronological order it is essential to check and apply the host State’s law first. From the practical point of view this course of action is even logical. Only after establishing the content of the host State’s law can the tribunal find if anything has to be supplemented or corrected by reference to international law. That approach tends to satisfy the expectations of both parties and the award is likely not to be attacked for failure to apply the proper law. Unfortunately, this approach is not always followed. In particular when a claim is based on a BIT containing a combined choice of law clause, the tribunals may tend to rely primarily on international law, in particular BIT provisions, even to the exclusion of the applicable host State law.28 Normally BIT provisions and international law in general must be applied to the relevant questions, but the rules of the host State’s law should receive as much attention as needed and possible. And this is what the award should evidence. Application of the host State’s law to the identified, relevant questions must be then checked against the BIT itself and international law in general. In case of any conflict, the foreign investor will be protected under international law. At the same time, the host State’s law will on its part receive the necessary

26

Para. 98. Para. 99. 28 See e.g. CME Czech Republic B.V. (the Netherlands) v. The Czech Republic, Partial Award, 13 September 2001, at http://www.mfcr.cz/static/Arbitraz/en/PartialAward.pdf. 27

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attention. Finally, the tribunal will act in accordance with the parties’ agreement to arbitrate. To act in compliance with the clause on applicable law ensures that the outcome of the case will be reached in a satisfactory manner from the perspective of the applicable law. The combined choice of law clause balances the interests of the parties to investment disputes and there is no reason why the tribunal should act contrary to the parties’ expectations. With respect to the issue of the role of international law and its relation to domestic law, the decisions of the Iran–United States Claims Tribunals undoubtedly confirm the primacy of international law.29 But these decisions do not adequately fit into the picture illustrated above. This chapter concerned the issue of the relationship of the two legal systems when both are determined to be applicable either on the basis of the parties’ agreement or by virtue of residual rule of Art. 42(1) of the ICSID Convention. The decisions of the Iran–US Claims Tribunal are somewhat different. They acknowledge the primacy of international law in the sense that regardless of the parties’ agreement on choice of law the Tribunal will resort to international law. The parties’ agreements on choice of law mostly referred to domestic law as the only applicable law. But the Tribunal declined to apply domestic law (at least) in relation to the nationalization or expropriation claims. According to the Tribunal, the validity of these acts is always governed by international law only (including the Treaty of Amity when determined to be applicable) and that law prevails over any contradictory domestic law.30

29

See generally Westberg, J. A., Applicable Law, Expropriatory Takings and Compensation in Cases of Expropriation; ICSID–Iran–United States Claims Tribunal Case Law Compared, 8 ICSID Review – FILJ 1 (1993); See also Brower, C. N./Brueschke, J. D., The Iran–United States Claims Tribunal, The Hague: Martinus Nijhoff (1998). 30 See e.g. American Bell International, Inc. v. The Government of the Islamic Republic of Iran, Interlocutory Award, 11 June 1984, 6 Iran–U.S. C.T.R. at pp. 74, 94, 97-100.

CHAPTER V

Issues of Annulment

1 Necessity of the Review Process In order to ensure that the arbitration process is in accordance with fundamental requirements of fair procedure and within a tribunal’s terms of reference some review process of arbitral awards is necessary. By submitting their investment dispute to the international arbitration, the parties expect that it will be resolved in a fair and speedy manner free, as much as possible, from court control. But, at the same time, they want to preserve some kind of control over the arbitration and, in case of serious deficiencies, to have a right of recourse against an award. Therefore, certain post-award remedies must be available. In this context the question of annulment as a review mechanism for the arbitral awards arises.1 In addition to annulment, under the national legislation parties may also opt for an appeal if they want to do so.2 However, the two remedies differ greatly. The difference lies in two elements i.e., one is related with the result of the process and, the other one, with the aspects of the decision under review.3 In the annulment proceedings the annulment body may only declare that arbitral award is void (in whole or in part) and can not amend or vary it, while an appellate body may vary the original award. Furthermore, in the annulment proceedings there will be no review on the merits, in contrast to appeal.4 1

Note that name of this remedy varies from country to country (e.g., annulment, vacation or setting aside). 2 See section dealing with the review process of non-ICSID arbitral awards. 3 See generally on this point Caron, D. D., Reputation and Reality in the ICSID Annulment Process: Understanding the Distinction Between Annulment and Appeal, 7 ICSID Review – FILJ 21 (1992) at p. 23. 4 See Paullson, J., ICSID’s Achievements and Prospects, 6 ICSID Review – FILJ 380 (1991) at p. 392; Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at p. 892.

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It follows that while both remedies constitute an exception to the principle of finality of the arbitral awards, annulment, in contrast to appeal, is the more limited remedy. It is based on specific, narrowly construed standards.5 In this context, the question arises as to who decides about nullity. ICSID arbitration has its own, special, unique procedure for annulment while in case of non-ICSID arbitration systems resort to domestic courts is a possibility. The new national arbitration acts generally contain provisions on annulment of the arbitral award. As already noted above, some of them still contain provisions on appeal against the award. However, the general tendency is that the recourse against the award is made in the application for annulment and not appeal.6 The next section deals first with annulment under the ICSID Convention and, thereafter, with the annulment under national legislation.

2 Annulment Under the ICSID Convention (a) Generally The ICSID Convention in Art. 52(1) offers the possibility to either party to request annulment of the award on the basis of one or several grounds listed there.7 An application for annulment is dealt with by an ad hoc Committee 5

Caron, D. D., Reputation and Reality in the ICSID Annulment Process: Understanding the Distinction Between Annulment and Appeal, 7 ICSID Review – FILJ 21 (1992) at p. 49; Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 892, 894. 6 Craig, W. L., Uses and Abuses of Appeal from Awards, 4 Arbitration International 174 (1988) at p. 179; Delaume G. R., The Finality of Arbitration Involving States: Recent Developments, 5 Arbitration International 21 (1989) at p. 28; Redfern, A./Hunter, M., Law and Practice of International Commercial Arbitration, 2nd ed., Sweet & Maxwell (1991) at p. 429. 7 Article 52(1) of the ICSID Convention provides: (1) Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds: (a) (b) (c) (d) (e)

that the Tribunal was not properly constituted; that the Tribunal has manifestly exceeded its powers; that there was corruption on the part of a member of the Tribunal; that there has been a serious departure from a fundamental rule of procedure, or that the award has failed to state reasons on which it is based;

On the issue of annulment under the ICSID Convention see C. Schreuer, The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 881-1075; See also http://www.unctad.org/en/docs/edmmisc232add7_en.pdf; Applications for annulment before ICSID tribunals were based on multiple grounds and these included: manifest excess of powers, serious departure from a fundamental rule of procedure and/or failure to state reasons on which the award is based., see generally on the grounds for annulment used in ICSID arbitration Broches, A., Observations on the Finality of ICSID Awards, 6 ICSID Review – FILJ 321 (1991) at pp. 327-332.

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appointed from the panel of ICSID arbitrators.8 Under the ICSID Convention domestic courts can not interfere with the review process over ICSID awards. Article 53(1) requires an absolute exclusion of appeal and any other remedy except those provided for in the Convention itself. As noted by the ad hoc Committee in MINE v. Guinea: 4.02 . . . The post-award procedures (remedies) provided for in the Convention, namely, addition to, and correction of, the award (Art. 49), and interpretation (Art. 50), revision (Art. 51) and annulment (Art. 52) of the award are to be exercised within the framework of the Convention and in accordance with its provisions. It appears from these provisions that the Convention excludes any attack on the award in national courts. The award is final in that sense. It is also final in the sense that even within the framework of the Convention it is not subject to review on the merits. It is not final, on the other hand, in the sense that it is open to being completed or corrected, interpreted, “revised” or annulled . . . ... 4.04. Article 52(1) makes it clear that annulment is a limited remedy. This is further confirmed by the exclusion of review of the merits of awards by Article 53. Annulment is not a remedy against an incorrect decision. Accordingly, an ad hoc Committee may not in fact reverse an award on the merits under the guise of applying Article 52.9

The annulled award may be resubmitted to a new tribunal. Only annulled parts of the award will be relitigated.10 Ad hoc Committees offered different interpretation of Art. 52(1) i.e., they interpreted it either narrowly or broadly. The view that should be accepted lies somewhere in the middle of these two theories and was offered by the ad hoc Committee in MINE v. Guinea. In its view, Art. 52(1) of the ICSID Convention should be interpreted in accordance with its object and purpose excluding a review of the award on the merits, but giving full effect to the limited areas for which it was made: 4.05. The fact that annulment is a limited, and in that sense extraordinary, remedy might suggest either that the terms of Article 52(1), i.e., the grounds for

8

Article 52(3) of the ICSID Convention provides: (3) On receipt of the request the Chairman shall forthwith appoint from the Panel of Arbitrators an ad hoc Committee of three persons. None of the members of the Committee shall been a member of the Tribunal which rendered the award, shall be of the same nationality as any such member, shall be a national of the State party to the dispute or of the State whose national is a party to the dispute, shall have been designated to the Panel of Arbitrators by either of those States, or shall have acted as a conciliator in the same dispute. The Committee shall have the authority to annul the award or any part thereof on any grounds set forth in para. 1. 9 Maritime International Nominees Establishment (MINE) v. Guinea, Decision on Annulment, 22 December 1989, 5 ICSID Review – FILJ 95 (1990) at pp. 101-102. 10 Amco v. Indonesia, Resubmitted Case: Decision on Jurisdiction, 10 May 1988, 1 ICSID Reports 546-547, 553-558.

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CHAPTER V annulment, should be strictly construed or, on the contrary, that they should be given a liberal interpretation since they represent the only remedy against unjust awards. The Committee has no difficulty in rejecting either suggestion. In its view, Article 52(1) should be interpreted in accordance with its object and purpose, which excludes on the one hand, as already stated, extending its application to the review of an award on the merits and, on the other, an unwarranted refusal to give full effect to it within the limited but important area for which it was intended.11

(b) Manifest excess of powers and the non-application of the proper law A “manifest excess of powers” (Art. 52(1)(b) of the ICSID Convention) as a ground for annulment arises in the event the tribunal deviates from the parties’ agreement to arbitrate. Part of this agreement may be a clause on applicable law. Article 42 of the ICSID Convention provides guidance to the tribunal when dealing with the issue of applicable substantive law. Paragraph 1 refers to both agreed and non-agreed choice of law. A failure to apply the law agreed by the parties may constitute an excess of powers. In the absence of the parties’ agreement on choice of law, an ICSID tribunal has to apply both the host State’s law and applicable international law rules. This combined choice of law clause would represent part of the tribunal’s terms of reference. Nonrespect for the combined choice of law clause contained in the said article may equally constitute an excess of powers which can result in nullity.12 ICSID arbitral practice discussed below confirms this finding. It follows that under the ICSID Convention a party seeking to annul the award for failure of the tribunal to apply the proper law has to rely on a “manifest excess of powers”.13 The Preliminary Draft to the ICSID Convention included excess of powers as a ground for annulment.14 The First Draft added the wording “manifest excess of powers” and in that way restricted this 11

MINE v. Republic of Guinea, Decision on Annulment, 22 December 1989, 5 ICSID Review – FILJ 95 (1990) at p. 102. 12 On failure to apply the proper law under the ICSID Convention, see generally Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 943-966. 13 There is no definition of the term “excess of powers” in Art. 52(1)(b) but it is known that it is based on the 1958 Model Rules on Arbitral Procedure prepared by the ILC, YBILC 84 (1958-II); See Feldman M., The Annulment Proceeding and the Finality of ICSID Awards, 2 ICSID Review – FILJ 85 (1987) at pp. 99-105; Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 932-936. 14 It also included corruption and departure from a fundamental rule of procedure including failure to state the reasons for the award, History of the ICSID Convention, Vol. I, at p. 230. For the Convention’s travaux préparatoires on an excess of powers as a ground for annulment see Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 931-933.

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ground to cases of only “manifest” excess of powers.15 The term “manifest” has been discussed by some commentators and, according to them, it relates to an excess of powers which may be understood and recognized easily and without deeper analysis.16 Although Art. 52(1) of the ICSID Convention does not state specifically that a failure to apply the proper law is one of the grounds for annulment, the parties in their requests for annulment have argued that it constituted a manifest excess of powers since the tribunal’s award was rendered in violation of Art. 42(1) of the ICSID Convention and, therefore, against the terms of the parties’ agreement to arbitrate.17 The drafting history of the ICSID Convention also confirms this principle.18 The preparatory works on the ICSID Convention and many commentators accepted a distinction between the non-application of the proper law and an erroneous application of the proper law.19 Only the first situation may result in nullity while the other situation can not be a valid ground for annulment even if an error in the application of the properly selected law is manifest. The following cases decided by ad hoc Committees have involved requests for annulment of awards for failure to apply the proper law. The ad hoc Committees have employed widely different standards of review.

(c) Arbitral practice (i)

Klöckner v. Cameroon (failure to rely on specific legal source led to annulment)

Klöckner’s application for annulment under Art. 52 of the ICSID Convention was the first such application in ICSID’s history. The dispute arose out of the construction and operation of fertilizer factory in Cameroon. 15

History of the ICSID Convention, Vol. II, at p. 232. Caron D. D., Reputation and Reality in the ICSID Annulment Process: Understanding the Distinction Between Annulment and Appeal, 7 ICSID Review – FILJ 21 (1992) at p. 38; Feldman M., The Annulment Proceeding and the Finality of ICSID Awards, 2 ICSID Review – FILJ 85 (1987) at pp. 100-101; Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 932-933. 17 A failure to state reasons has been also used as a ground under which violation of Art. 42(1) could occur, see Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at p. 924. 18 History of the Convention, Vol. II, pp. 518, 851; See particularly on this point Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 943-944. 19 History of the Convention, Vol. II at pp. 851, 853, 854; See also Broches, A., Observations on the Finality of ICSID Awards, 6 ICSID Review – FILJ 321 (1991); Gaillard, E., The Extent of Review of the Applicable Law in Investment Treaty Arbitration (in Annulment of ICSID Awards, edited by Gaillard, E./Banifatemi, Y ), 223 (2004) at pp. 236-237; Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 555-558, 943-966. 16

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There was no agreement on applicable between the parties and, therefore, the Tribunal resorted to the residual rule of Art. 42(1) of the ICSID Convention i.e., the Tribunal determined that it had to apply the civil and commercial law applicable in Cameroon, which in its relevant parts is based on French law.20 In the annulment proceedings, Klöckner invoked a manifest excess of powers because of a violation of Art. 42(1) of the Convention.21 It argued that according to this Art. the Tribunal should have rendered “its award by applying Cameroonian law, based on French law, since this, as the Tribunal itself had held, is the law applicable to the present dispute”.22 According to Klöckner the Tribunal had ignored this principle and, consequently, exceeded its powers. In order to determine whether the Application for Annulment was admissible within the framework of Art. 52(1)(b) of the ICSID Convention, the ad hoc Committee proceeded to discuss the following two questions: the interpretation of Art. 42(1) of the ICSID Convention and the consequences of a possible failure to observe it.23 In respect of Art. 42(1) the ad hoc Committee noted that the drafters of the ICSID Convention considered the sanction for non-compliance with the said article by virtue of Art. 52(1): 58 . . . In the opinion of the ad hoc Committee, the provisions of Article 42 could not be interpreted as stating simple advice or recommendations to the arbitrators or an obligation without sanction. Obviously, and in accordance with principles of interpretation that are recognized generally – for example, by Article 31 of the Vienna Convention on the Law of Treaties-Article 52 on the annulment of awards must be interpreted in the context of the Convention and in particular of Articles 42 and 48, and vice versa. It is furthermore impossible to imagine that when they drafted Article 52, the Convention’s authors would have forgotten the existence of Articles 42 or 48(3), just as it is impossible to assume that the authors of provisions like Articles 42(1) or 48(3) would have neglected to consider the sanction for non-compliance.24

The ad hoc Committee confirmed the view that the non-application of the rules of law agreed by the parties as well as the application of other rules may amount to excess of powers and, consequently, constitutes a ground for annulment.25 It continued by noting that the complaint based on failure to observe Art. 42(1) 20

Klöckner v. Cameroon, Award, 21 October 1983, 2 ICSID Reports 9. Klöckner v. Cameroon, Decision on Annulment, 3 May 1985, 1 ICSID Review – FILJ 89 (1986), at p. 109, para. 57. Other grounds invoked in the Application for Annulment were: manifest excess of powers due to the Arbitral Tribunal’s lack of jurisdiction; serious departure from a fundamental rule of procedure and failure to state reasons. 22 At p. 109, para. 57. 23 At p. 109, para. 58. 24 At p. 109. 25 At p. 110, para. 59. 21

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was, in principle, admissible but that in this context it had to distinguish between the non-application of the applicable law, which may lead to nullity, and the erroneous application of such law, which is not a ground for annulment. It said: 61. It is clear that an “error in judicando” could not in itself be accepted as a ground for annulment without indirectly reintroducing an appeal against the arbitral award, and the ad hoc Committee under Article 52 of the Convention does not, any more than the Permanent Court of Arbitration in the Orinoco case, have the “duty . . . to say if the case has been well or ill judged, but whether the award must be annulled.” . . . From the few known precedents . . . it is at least possible to conclude that an error in law, even an essential one, does not generally constitute an excess of powers, at least if it is not “manifest.”26

On that basis the ad hoc Committee concluded that the complaint was admissible and proceeded to examine whether it was also well founded. The ad hoc Committee noted that the Tribunal’s conclusion with respect to Klöckner’s violation of a duty of full disclosure to a partner in a contract was presented in the Tribunal’s Award as decided by applying the applicable law in accordance with Art. 42(1) of the ICSID Convention.27 Klöckner, in the annulment proceedings, argued that the Tribunal’s Award was not based “on a principle of French law, but on a sort of declaration, as general as it is imprecise, of principles which are allegedly universally recognized”.28 The ad hoc Committee proceeded to examine the text of the Tribunal’s Award in these terms. With respect to “the duty of full disclosure to a partner” the Tribunal in its Award had held that Klöckner had not dealt in a frank and loyal manner with the Government and that by violating these universal requirements, Klöckner had breached its contractual obligations.29 In the Tribunal’s view, “the duty of full disclosure to a partner” was a basic principle of French civil law. In this regard it said: We take it for granted that the principle according to which a person who engages in close contractual relations, based on confidence, must deal with its partner in a frank, loyal and candid manner is a basic principle of French civil law, as is indeed the case under the other national codes which we know of. This is the criterion that applies to relations between partners in simple forms of association anywhere. The rule is particularly appropriate in more complex international ventures, such as the present one.30

The Tribunal had not cited any specific legal authority in relation to this finding but rather referred to “universal requirements of frankness and loyalty”.31 26 27 28 29 30 31

At p. 110. Italics and emphasis original. At p. 111, para. 65. At p. 111, paras. 65, 66. Award, 21 October 1983, 2 ICSID Reports at pp. 59-61. At p. 59. At p. 60.

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The Tribunal’s reasoning was understood by the ad hoc Committee as a reference to the general principles of law.32 As to the recourse to the general principles of law, the ad hoc Committee proceeded to discuss, generally, the role of international law in the context of the second sentence of Art. 42(1) of the ICSID Convention. It introduced a doctrine of complementary and corrective role of international law and emphasized that only after examining the content of the host State’s law and after applying that law, may the tribunal resort to international law. Therefore, under the second sentence of Art. 42(1), the award cannot be based solely on international law rules or principles.33 Led by the above reasoning, the ad hoc Committee understood that the Tribunal’s Award “did not mean to refer to these principles of international law” and that it could not find any basis for such reference.34 It said: 71. Does the “basic principle” referred to by the Award . . . as one of “French civil law” come from positive law, i.e., from the law’s body of rules? It is impossible to answer this question by reading the Award, which contains no reference whatsoever to legislative texts, to judgments, or to scholarly opinions.35

It compared the Tribunal’s finding on the exceptio non adimpleti contractus with the one on the “duty of full disclosure” and noted that the first one contained a number of references to both doctrine and jurisprudence and that, therefore, it could be validly assumed that with respect to the second one “the arbitrators either began a similar search for authorities but found it unproductive or, more likely, thought that a search for positive law was unnecessary”.36 The above analysis led the ad hoc Committee to conclude that the Tribunal in its Award postulated, rather than demonstrated the existence of such domestic legal principle. It refused to determine instead of the Tribunal what rules of French civil law might be applicable: 73. It is not the responsibility of the ad hoc Committee under Article 52 to determine instead of the Tribunal what rules of French Civil Law might be applicable, to insert them in some a posteriori way into the Award, either in place of the reasoning found there and cited above, or in place of non-existent reasoning. The Committee can only take the Award as it is, interpreting it according to the customary principles of interpretation, and find that it indeed refers to general principles or “universal requirements,” postulated rather than demonstrated, and which are affirmed as being “particularly appropriate” or “particularly important” in cases such as the present one.37

32 33 34 35 36 37

Decision on Annulment, 3 May 1985, 1 ICSID Review – FILJ 89 (1986) at p. 112, para. 69. At p. 112, para. 69. At p. 112, para. 70. At p. 113. At p. 113, para. 71. At p. 113. Italics and emphasis original.

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In the view of the ad hoc Committee the Award’s reasoning seemed very much like a simple reference to equity, to “universal” principles of justice and loyalty, such as amiable compositeurs might invoke.38

Since there was no authorization by the parties to decide on the basis of equity, the Tribunal had exceeded its powers. The ad hoc Committee said: 79 . . . it must be acknowledged that in its reasoning, limited to postulating and not demonstrating the existence of a principle or exploring the rules by which it can only take concrete form, the Tribunal has not applied “the law of the Contracting State.” Strictly speaking, it could not be said that it made this decision without providing reasons, within the meaning of Articles 48(3) and 52(1)(e). It did, however, act outside the framework provided by Article 42(1), applying concepts or principles it probably considered equitable (acting as an amiable compositeur, which should not be confused with applying “equitable considerations” as the International Court of Justice did in the Continental Shelf case). However justified its award may be (a question on which the Committee has no opinion), the Tribunal thus “manifestly exceeded its powers” within the meaning of Article 52(1)(b) of the Washington Convention.39

Accordingly, the Award was annulled in its entirety. In this decision the ad hoc Committee concluded that the Tribunal had selected the applicable law correctly but failed to apply it and, therefore, exceeded its powers. This decision raises one important question: to what extent must a tribunal substantiate its findings by reference to the applicable law? In other words, whether the tribunal has to preface each finding with a reference to specific legal authority and whether the non-existence of reference to specific legal sources is indicative of a non-application of the proper law. In the ad hoc Committee’s view, the absence of any specific reference to legal authorities for the existence of the concrete domestic rule amounted to a non-application of the proper law. Although the absence of a reference to legal authority may indicate that the tribunal failed to apply the applicable law and resorted to equity, in this particular case, the better view would be that the lack of such a reference does not indicate that the Tribunal acted outside the applicable law. This view is shared by commentators.40

38

At p. 114, para. 77. At pp. 114-115. Italics and emphasis original. 40 Broches, A., Observations on the Finality of ICSID Awards, 6 ICSID Review – FILJ 321 (1991) at p. 360; Feldman, M. B., The Annulment Proceedings and the Finality of ICSID Arbitral Awards, 2 ICSID Review – FILJ 85 (1987) at pp. 92, 101; Paulsson, J., ICSID’s Achievements and Prospects, 6 ICSID Review – FILJ 380 (1991) at p. 389; Redfern, D. A., ICSID – Losing its Appeal?, 3 Arbitration International 98 (1987) at p. 106; Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 950-954; Schreuer, C., Decisions Ex Aequo et Bono Under the ICSID Convention, 11 ICSID Review – FILJ 37 (1996) at pp. 57, 59. 39

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(ii) Amco v. Indonesia (failure to apply one important provision led to annulment) In Amco v. Indonesia, the parties had not agreed on the applicable law and, therefore, the Tribunal had to apply the law of Indonesia and such rules of international law as may be applicable, in accordance with the second sentence of Art. 42(1) of the ICSID Convention.41 The Tribunal examined different legal questions on the basis of both Indonesian law and international law and found that both systems reached the same results.42 In the annulment proceedings,43 Indonesia challenged the Tribunal’s Award on several grounds. One of these included a manifest excess of powers in connection with the following findings: that the Claimant’s investment shortfall was not material and did not justify the revocation of PT Amco’s license, and that the amount of foreign equity capital invested by Claimants was approximately US $2,5 million; that Indonesia violated due process in revoking the investment license and, therefore, must pay compensation.44 The ad hoc Committee noted that the Tribunal’s finding on the applicable law was in accordance with the residual rule of Art. 42 (1) of the ICSID Convention.45 It proceeded to analyze the relationship of these two legal systems and concluded that “the law of the host State is, in principle, the law to be applied in resolving the dispute” and, in case of conflict between the two legal systems, international law prevails.46 The ad hoc Committee also confirmed the principle that a failure to apply the proper law constitutes a manifest excess of powers while the erroneous application of the proper law is not a valid ground for annulment. It said: 23. The law applied by the Tribunal will be examined by the ad hoc Committee, not for the purpose of scrutinizing whether the Tribunal committed errors in the interpretation of the requirements of applicable law or in the ascertainment or evaluation of the relevant facts to which such law has been applied. Such scrutiny is properly the task of a court of appeals, which the ad hoc Committee is not. The ad hoc Committee will limit itself to determining whether the Tribunal did in fact apply the law it was bound to apply to the dispute. Failure to apply such law, as distinguished from mere misconstruction of that law, would constitute a manifest excess of powers on the part of the Tribunal and a

41

Amco v. Indonesia, Award, 20 November 1984, 1 ICSID Reports 452. Award, 20 November 1984, 1 ICSID Reports at pp. 466-467, 473, 490-494, 498-501, 504, 506; See prior discussion of this case in section dealing with application of the residual rule of Art. 42(1) of the ICSID Convention. 43 Amco v. Indonesia, Decision on Annulment, 16 May 1986, 1 ICSID Reports 509. 44 At p. 512. 45 At pp. 514-515. 46 At p. 515. 42

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ground for nullity under Article 51(1)(b) of the Convention. The ad hoc Committee has approached this task with caution, distinguishing failure to apply the applicable law as a ground for annulment and misinterpretation of the applicable law as a ground for appeal.47

Furthermore, it pointed out that the parties had not authorized the Tribunal to decide ex aequo et bono.48 The Respondent argued that this explicit recognition by the Tribunal created a presumption that it had indeed refrained from deciding ex aequo et bono.49 The ad hoc Committee refused to accept such a general presumption and said: 24 . . . Accordingly, the ad hoc Committee has had to examine closely both what the Tribunal said it was doing and what it was in fact doing, in resolving particular questions. 25. At the same time, the ad hoc Committee does not believe that the Tribunal had necessarily to preface each finding or conclusion with a specification of the Indonesian or international law rule on which such finding or conclusion rests. The Tribunal’s conclusions or findings must of course be read in their context.50

The ad hoc Committee also noted that any mention of equitable considerations in the award did not necessarily lead to a decision ex aequo et bono.51 It would lead to nullity only where the Tribunal decided an issue or case ex aequo et bono without being authorized to do so.52 After considering these preliminary questions, the ad hoc Committee proceeded to deal with the substance of the annulment claims. Before analyzing the claims that led to annulment, it is interesting to illustrate those where the ad hoc Committee found that the Tribunal did not commit an excess of powers by failing to apply the proper law. Indonesia claimed that the Tribunal had manifestly exceeded its powers and had failed to state reasons in holding Indonesia responsible for the acts of army and police personnel in the Plaza Hotel on March 31- April 1, 1980.53 In the view of Indonesia, the Tribunal’s finding that those acts violated a special duty imposed by international law on states to protect foreign investors and their property must be challenged since the Tribunal was obliged to apply Indonesian law first before resorting to international law. In the ad hoc Committee’s view that part of the Award should be read “to mean that the Tribunal found the acts of PT Wisma, and therefore also the acts 47 48 49 50 51 52 53

At pp. 515-516. At p. 516. At p. 516. At p. 516. At p. 516. At p. 517. At p. 524.

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of the army and police personnel involved, to be illegal under Indonesian law”.54 The ad hoc Committee continued: 58 . . . It is true that the Tribunal did not refer to any specific Indonesian statutory or regulatory provision nor to any Indonesian case-law, but this omission is no more decisive of non-application of Indonesian law than it is indicative of an intent on the part of the Tribunal, at that point in the Award, to apply international law.55

The ad hoc Committee noted that Indonesia argued that the army and police personnel had a duty to assist PT Wisma as the lawful possessor of the hotel under Indonesian law which, therefore, should have been taken as a confirmation that the same army and police personnel had a duty under Indonesian law to protect Amco from the acts of PT Wisma on March 31-April 1, 1980.56 On the basis of the above reasoning, the ad hoc Committee did not sustain the Applicant’s contention that the Tribunal failed to apply Indonesian law in regard to the issue of legality of the acts of army and police personnel.57 In the same manner the ad hoc Committee proceeded to analyze other claims of nullity invoked by the Applicant. The decisive one related to the shortfall in the investment required from PT Amco. In its Award, the Tribunal had calculated that the total sum of Amco’s investment reached US $ 2,472,490 and that the shortfall of 1/6 of the required investment was not material and, therefore, did not justify the revocation of Amco’s investment license.58 Indonesia argued that the Tribunal, in its finding that the revocation order was illegal on substantive grounds, had manifestly exceeded its powers since it had failed to apply the proper law.59 With respect to the shortfall in the investment required from Amco, Indonesia argued that: 92 . . . important amounts included in the aggregate sum of US $2,472,490 found by the Tribunal to have been invested by PT Amco should have been excluded from the calculation of such investment, if the Tribunal had indeed applied Indonesian law.60

The ad hoc Committee examined the requirements of the Foreign Investment Law on the basis of which it found that in determining the investment made by Amco, the Tribunal had indeed failed to apply the relevant provision of Foreign Investment Law which states that only investments recognized and

54

At p. 524. At p. 524. 56 At pp. 524-525. 57 At p. 525. 58 Amco v. Indonesia, Award, 20 November 1984, 1 ICSID Reports 489. 59 At p. 531. Two other grounds for annulment were also invoked: serious departure from a fundamental rule of procedure and failure to state reasons. 60 At p. 533. 55

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definitely registered as such by the competent Indonesian authority (Bank Indonesia) were to be regarded as investments.61 With respect to the registration requirements, Amco argued that it had tried to do so but that the Bank Indonesia had been unwilling to register the investment actually made by Amco.62 Indonesia disagreed with that argument and referred to Art. 1365 of the Indonesian Civil Code providing a remedy for any arbitrary refusal of Bank Indonesia to register such investment which through the years had not been invoked by Amco.63 Accordingly, the evidence showed that the Tribunal in determining that Amco’s investment had reached the sum of US $2,472,490 while only US $983,992 had been registered under the Foreign Investment Law, had failed to apply the relevant provision of the law of Indonesia.64 Therefore, the ad hoc Committee held that the Tribunal had manifestly exceeded its powers and, consequently, this finding had to be annulled.65 In the end, the ad hoc Committee offered some explanation for the Tribunal’s failure to observe that fundamental provision of the Foreign Investment Law which, indeed, had been presented in the briefs and hearings before the Tribunal.66 The Tribunal had become so preoccupied with lengthy arguments and counterarguments on accounting principles that it had lost sight of that basic rule. As a consequence, the ad hoc Committee held that the Tribunal’s ruling on the non-materiality of a shortfall of 1/6 of the required level of investment as well as on damages had to be annulled as well.67 These conclusions did not affect the Tribunal’s finding relating to the illegality of the action by army and police personnel. This case demonstrates that a failure to observe one relevant provision of the applicable law may constitute a manifest excess of powers and, consequently, lead to nullity. In this case the applicable law was properly selected by the Tribunal, in accordance with the second sentence of Art. 42(1) of the ICSID Convention. But the ad hoc Committee found that the Tribunal had failed to apply an essential rule of the law of Indonesia and that led to annulment. Therefore, although the ad hoc Committee recognized a distinction between non-application of the proper law and erroneous application of that law, it based its conclusion on the view that a mistake in applying the properly selected applicable law, amounted to the non-application of that law. Or, in other words, such a mistake, in the view of the ad hoc Committee, warranted 61 62 63 64 65 66 67

Amco v. Indonesia, Decision on Annulment, 16 May 1986, 1 ICSID Reports 534-535. At p. 534. At p. 534. At pp. 534-535. At pp. 535-536. At p. 535. At pp. 537-539.

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the annulment. In this context, the Amco decision stands contrary to the view that an erroneous application of the proper law, even if it is manifestly unwarranted, provides no ground for annulment. This annulment decision has been rightly criticized for its extensive review of the correctness of the Tribunal’s interpretation of the law of Indonesia.68 Such review as to the merits of the case is not a task of an annulment body. On the other hand, the ad hoc Committee’s position relating to the illegality of the action by the army and police personnel illustrates that this Committee refused to accept that the Tribunal’s omission to cite specific legal source in relation to its finding led to a failure to apply the proper law. Rather it indicated an intent on the part of the Tribunal to apply international law, as part of the applicable law, to that part of the Award. The ad hoc Committee demonstrated that the rule applied was in fact in compliance with Indonesian law as well. (iii) MINE v. Guinea (technical error does not warrant annulment) In the annulment proceedings in MINE v. Guinea,69 Guinea had requested the partial annulment of the award that had been rendered on January 6, 1988 in this case.70 A dispute arose out of Guinea’s alleged breach of the contracts for the creation of facilities to ship bauxite. The parties in this case had agreed on the law of Guinea as the applicable law, subject to a stabilization clause.71 The Tribunal decided that Guinea had been in breach of the contract upon which Guinea requested the annulment of the award. One of the three grounds on which Guinea had based its request for annulment under the ICSID Convention was that the Tribunal had manifestly exceeded its powers for failure to apply the proper law.72 Before the Tribunal, MINE had based its case on Art. 1134 of the Union Civil Code, applicable in Guinea, which contains the principles pacta sunt servanda and good faith, while the Tribunal had cited Art. 1134 of the French Civil Code.73 The Applicant had argued that the part of the Tribunal’s Award relating to the breach of contract must be annulled because the Tribunal had failed “to apply any law whatsoever, much less the correct law–Guinean law, based on French law”, in regards to both the liability and the determination of damages.74 68

See Broches, A., Observations on the Finality of ICSID Awards, 6 ICSID Review – FILJ 321 (1991) at pp. 361-363. 69 MINE v. Guinea, Decision on Annulment, 22 December 1989, 5 ICSID Review – FILJ 95 (1990). 70 MINE v. Guinea, Award, 6 January 1988, 4 ICSID Reports 61. 71 MINE v. Guinea, Decision on Annulment, 22 December 1989, 5 ICSID Review – FILJ 95 (1990) at p. 97, para. 1.03. 72 At p. 99, para. 2.02. 73 Award, 6 January 1988, 4 ICSID Reports 73. 74 Decision on Annulment, 22 December 1989, 5 ICSID Review – FILJ 95 (1990) at pp. 99, 111, paras. 2.05, 6.30.

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Therefore, in the view of the Applicant, the Tribunal had manifestly exceeded its powers by violating its obligation under the first sentence of Art. 42(1) of the ICSID Convention. The ad hoc Committee first gave some general comments on the grounds for annulment invoked by the Applicant. With respect to an excess of powers, the ad hoc Committee noted that Art. 52(1)(b) requires that “the excess be manifest which necessarily limits an ad hoc Committee’s freedom of appreciation as to whether the tribunal has exceeded its powers”.75 After quoting the first sentence of Art. 42(1), the ad hoc Committee discussed its significance in the following terms: The Committee is of the view that the provision is significant in two ways. It grants the parties to the dispute unlimited freedom to agree on the rules of law applicable to the substance of their dispute and requires the tribunal to respect the parties’ autonomy and to apply those rules. From another perspective, the parties’ agreement on applicable law forms part of their arbitration agreement. Thus, a tribunal’s disregard of the agreed rules of law would constitute a derogation from the terms of reference within which the tribunal has been authorized to function. Examples of such a derogation include the application of rules of law other than the ones agreed by the parties, or a decision not based on any law unless the parties had agreed on a decision ex aequo et bono. If the derogation is manifest, it entails a manifest excess of power.76

Therefore, the ad hoc Committee confirmed that disregard of the applicable rules of law agreed by parties would constitute a derogation from the tribunal’s terms of reference and if such derogation is manifest it amounts to manifest excess of powers. Furthermore, the ad hoc Committee distinguished non-application of the proper law from erroneous application of that law which, “even if manifestly unwarranted, furnishes no ground for annulment”.77 After providing some general information on the background of the parties’ dispute and the Tribunal’s decision, the ad hoc Committee proceeded to examine the Applicant’s claim that the portion of the Award in connection to the breach of contract had to be annulled for failure to apply the proper law. The ad hoc Committee noted that the parties’ agreement contained a choice of law clause which stipulated Guinean law as the applicable law subject to a stabilization clause.78 It noted that both parties were agreed that the applicable Guinean law was private law i.e., the relevant law was the law of contract contained in Book III, Title III of the Code Civil de l’Union Française, referred to by MINE as the Union Civil Code.79 75 76 77 78 79

At p. 102, para. 4.06. At p. 104, para. 5.03. At p. 104, para. 5.04. At p. 111, paras. 6.31, 6.32, 6.33. At p. 112, para. 6.37.

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In order to determine whether there was a manifest excess of powers on the side of Tribunal, the ad hoc Committee referred to the Applicant’s position that there was almost no reference to legal authorities in the Tribunal’s finding. Guinea said that: Most notable is the almost total lack of citation to legal authorities. The single legal reference is contained in one footnote, citing an article of the French Civil Code as it appears in Louisiana law.80

The ad hoc Committee referred to the Tribunal’s finding in the following terms: . . . MINE based its case specifically on Article 1134 of the “Union Civil Code”. There was no disagreement between the parties as to the binding nature of agreements lawfully entered into and the requirement of good faith in the carrying out of their contractual obligations. The disagreement between the parties concerned the application of the Agreement, which pursuant to its Article XIII was binding on them. Each party argued its view of the facts and their effect under the Agreement and the Tribunal concluded, rightly or wrongly, that MINE had not failed to perform its obligations under the Agreement, so as to be in breach thereof; that Guinea was not entitled under the Agreement to dispose of its cargo-carrying rights which it had agreed to contribute to SOTRAMAR; and that by transferring these rights to a joint-venture between it and an international shipping group Guinea had violated its obligation of good faith imposed by Article 1134 of the “French Civil Code”.81

Therefore, the ad hoc Committee found that MINE had based its case on Art. 1134 of the Union Civil Code, which contains the principles pacta sunt servanda and good faith, while the Tribunal had cited Art. 1134 of the French Civil Code.82 In the ad hoc Committee’s view that mistake did not warrant annulment: There is thus no basis for saying that the Tribunal failed to apply any law. Admittedly, the Tribunal erred in citing Article 1134 of the French Civil Code. The Committee notes, however, that the relevant provision of the applicable Guinean law is contained in the “Code Civil de l’Union Française” with the same number and the same contents as Article 1134 of the French Civil Code. For this reason, the Committee does not consider that this error warrants annulment.83

For the aforementioned reasons the ad hoc Committee concluded that the Tribunal had not failed to apply the proper law and, therefore, had not manifestly exceeded its powers.84 80

At p. 112, para. 6.38. At the same page, in the footnote, the ad hoc Committee noted that the second sentence of the above Guinea’s statement was incorrect since the Tribunal, in its Award, stated that Guinea had violated the principle of good faith under the French Civil Code, quoting Art. 1134 in full in French. 81 At pp. 112-113, para. 6.39. 82 At p. 113, para. 6.40. 83 At p. 113, para. 6.40. 84 At p. 113, para. 6.43.

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The principle that a failure to apply the proper law constitutes an excess of powers which leads to the nullity of the award is confirmed by MINE decision as well. The ad hoc Committee correctly found that the technical error on the part of the Tribunal did not justify annulment. The two articles had the same number and the same contents and it would be entirely incorrect to accept Guinea’s argument. (iv) Wena Hotels v. Egypt (in case of collision between the two legal systems international law prevails) In Wena Hotels v. Egypt, ICSID’s jurisdiction was established on the basis of the BIT between Egypt and the United Kingdom. The Tribunal found that both parties agreed that the case concerned the alleged violation of the BIT and that, therefore, the BIT was the primary source of applicable law. Since there was no special agreement between the parties on applicable law the Tribunal held that it had to apply “both the Egyptian law (i.e., “the law of the Contracting State party to the dispute”) and “such rules of international law as may be applicable”.85 At the end of its analysis on applicable law the Tribunal pointed out that the provisions of the BIT would in any event be the first rules of law to be applied by the Tribunal, “both on the basis of the agreement of the parties and as mandated by Egyptian law as well as international law”.86 The Tribunal proceeded to apply the BIT on the basis of which it concluded that Egypt had violated its obligations under the BIT i.e., to provide “fair and equitable treatment”, “full protection and security” and had failed to provide Wena with “prompt, adequate and effective compensation” following the expropriation of the investment.87 It awarded damages including compound interest.88 One of the grounds on which Egypt based its request for annulment was a “manifest excess of powers” for failure to apply the proper law. Egypt argued that the Tribunal had failed to apply Egyptian law in contravention of Art. 42(1) of the ICSID Convention.89 In its Decision on Annulment, the ad hoc Committee pointed out that the remedy of Art. 52(1) of the ICSID Convention is in no sense an appeal and that the grounds of annulment listed in this article are to be interpreted neither narrowly nor extensively.90 85

Wena Hotels Ltd. v. Arab Republic of Egypt, Award, 8 December 2000, 41 ILM 896 (2002) at p. 911; See prior discussion of this case in section dealing with the expression of implicit choice of law. 86 At p. 911. 87 At pp. 911-915. 88 At pp. 918-920. 89 At p. 939. 90 Wena Hotels Ltd. v. Arab Republic of Egypt, Decision on Annulment, 28 January 2002, 41 ILM 933 (2002) at p. 938.

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The ad hoc Committee confirmed the view that the failure to apply the proper law may constitute a manifest excess of powers and, accordingly, a ground for annulment.91 It also approved the distinction between failure to apply the proper law and erroneous application of that law. Therefore, in the ad hoc Committee’s view the question was whether the Tribunal, although it had referred to Egyptian law, had in fact failed to apply it because of the fact that it had turned to the application of the IPPA as the primary source of law. 92 It noted the Applicant’s position that the host State’s law was intended to be the primary source and not international law. In the Applicant’s view the application of the law of Egypt was based on the “legitimate principle that a country that attracts foreign investment is entitled to insist that investors comply with the laws of that country”.93 The ad hoc Committee agreed with that but noted that the issue was whether the Tribunal’s resort to international law in any way contradicted that principle.94 The ad hoc Committee continued by discussing the term manifest excess of power which, in its view, must be self-evident: . . . the classic example of manifest excess of power under international law is that of a tribunal having been asked to adjudicate on one of two possible boundary lines submitted by the parties chooses a third line. The excess of powers must be self-evident rather than the product of elaborate interpretations one way or the other. When the latter happens, the excess of power is no longer manifest. This is, among other things, the reason why earlier decisions reached by ad hoc committees have been so extensively debated.95

After determining that the parties had not agreed on the applicable rules of law and that it, therefore, must apply the second sentence of Art. 42(1) of the ICSID Convention,96 the ad hoc Committee discussed the relationship between domestic law and international law in the context of that sentence. In the view of the ad hoc Committee, that discussion was necessary in order to determine whether there was an excess of power on the side of Tribunal in its reliance on the BIT as the primary source of law. The ad hoc Committee held that the host State’s treaties prevail over domestic rules in case of conflict, and accordingly, “it cannot be concluded that the resort to the rules of international law under the Convention, or under particular treaties related to its operation, is antagonistic to that State’s national interest”.97 Furthermore, it 91 92 93 94 95 96 97

At p. 939. At p. 939. At p. 939. At p. 939. At p. 939. At p. 941. At p. 941.

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added that it is particularly true with respect to the treaty law embodied in investment treaties to which Egypt is a party: 44. This treaty law and practice evidence that when a tribunal applies the law embodied in a treaty to which Egypt is a party it is not applying rules alien to the domestic legal system of this country. This might also be true of other sources of international law, such as those listed in Article 38(1) of the Statute of the International Court of Justice mentioned above. 45. Therefore the reliance of the Tribunal on the IPPA as the primary source of law is not in derogation or contradiction to the Egyptian law and policy in this matter. In fact, Egyptian law and investment policies are fully supportive of the rights of investors in that country. The ICSID Convention and the related bilateral investment treaties are specifically mentioned in Egypt’s foreign investment policy statements.98

Therefore, since the Tribunal’s reliance on the BIT as the primary source of law did not contradict the law of Egypt there was no excess of powers on the part of the Tribunal. The ad hoc Committee proceeded to discuss briefly the complaints in which, according to the Applicant, the Tribunal failed to apply Egyptian law and, consequently, exceeded its powers. The first one was related to the alleged corruption since Wena “improperly sought to influence the Chairman of EHC (Mr. Kandil who also consulted Wena) with respect to the award of the leases”.99 The ad hoc Committee found that this issue was a matter of evidence and not of the applicable law and, therefore, no excess of powers occurred on the part of the Tribunal: While such improper influence can invalidate the lease agreements under Egyptian law, or for the matter of corruption also under international law, such unlawful act has to be proved. The Tribunal did not consider that there was sufficient evidence to prove such a claim. It is therefore not a question of the applicable law but of evidence, the evaluation of which relates to the merits of the case and is not a matter for the ground for annulment related to a purported excess of power by the Tribunal.100

The second complaint concerned the investor’s rights under leases. The ad hoc Committee confirmed that a dispute between Wena and EHC in relation to the obligations under the leases was governed by Egyptian law and brought to a different arbitration under the lease agreements but, it also noted, that it was not a dispute brought to arbitration under the ICSID Convention and the BIT.101 Although the two disputes were separate, the final purpose of the relief sought by Wena was to be compensated for the losses suffered. Therefore, the ad hoc Committee noted that the Tribunal in awarding damages under the BIT 98

At p. 942. At p. 942. 100 At p. 942. 101 At pp. 939-940, 942. 99

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took into account the possibility of partial indemnification obtained in the domestic arbitration.102 Finally, the third complaint concerned the determination of interest. Since the BIT does not contain provisions on the determination of interest, the ad hoc Committee asked itself whether the Tribunal should have applied Egyptian law (i.e. Egyptian Civil Code), or its resort to international law and related ICSID practice was justified. It referred to Art. 5 of the BIT which provides for two criteria in respect of compensation i.e., it must be “prompt, adequate and effective” and “it shall amount to the market value of the investment expropriated immediately before the expropriation itself ”.103 In the ad hoc Committee’s view, the option the Tribunal took was in compliance with these criteria and within the Tribunal’s power. It offered the following explanation: 52 . . . Although not referring to interest, the provision must be read as including a determination of interest that is compatible with those two principles. In particular, the compensation must not be eroded by the passage of time or by the diminution in the market value. The award of interest that reflects such international business practice meets these two objectives. 53. The option the Tribunal took was in the view of this Committee within the Tribunal’s power. International law and ICSID practice, unlike the Egyptian Civil Code, offer a variety of alternatives that are compatible with those objectives. These alternatives include the compounding of interest in some cases.104 Whether among the many alternatives available under such practice the Tribunal chose the most appropriate in the circumstances of the case is not for this Committee to say as such matter belongs to the merits of the decision. Moreover, this is a discretionary decision of the Tribunal. Even if it were established that the Tribunal did not rely on the appropriate criteria this in itself would not amount to a manifest excess of power leading to annulment.105

Therefore, there was no excess of powers on the part of the Tribunal in respect of the determination of interest since international law provides a variety of alternatives, in contrast to the Egyptian Civil Code. These various alternatives are compatible with the compensation criteria established by the BIT.106 Accordingly, the ad hoc Committee dismissed Egypt’s request for annulment concluding that there was no excess of powers on the ground that the Tribunal failed to apply the proper law. 102

At p. 942. Ibid. 104 Atlantic Triton v. Guinea, Award of 21 April 1986, 3 ICSID Reports 17, at 33, 43; Compania del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica, Award of 17 February 2000, 15 ICSID Review – Foreign Investment Law Journal 169, at 200-202 (2000) (paras. 96-107); Emilio Augustin Maffezini v. The Kingdom of Spain, Award, 13 November 2000, 16 ICSID Review – Foreign Investment Law Journal 248, at 277 (2001) (para. 96). [footnote original]. 105 At p. 942. 106 At p. 943. 103

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In the Wena decision, the ad hoc Committee based its reasoning on the fact that the host State’s treaties, in case of conflict, prevail over domestic rules which in Egypt’s case are fully supportive of the investor’s rights. Under such circumstances resort to the BIT itself and international law in general was permissible and did not constitute a manifest excess of powers. Therefore, since international law in case of conflict prevails over domestic law, the Tribunal’s reliance on the BIT was, in this particular case, justified. Prevalence of international law is widely recognized and in no sense disputed. The ad hoc Committee made an effort to demonstrate such a conflicting result (unlike the Tribunal) with respect to the determination of interest. It also clearly refused to act as appellate body and review whether the Tribunal among various alternatives offered by international law chose the appropriate one. In this particular case, the ad hoc Committee’s reasoning is convincing and acceptable. But it should not mean that the tribunals may base its decision on international law only since that law, in any case, prevails over conflicting domestic law. Where some question requires an examination from the perspective of both legal systems, even though the result in the end would be in favor of international law, the tribunal’s award should demonstrate that.107 It is also appropriate to note that, in respect of the term excess of powers, the ad hoc Committee correctly noted that it must be self-evident in order to qualify for a manifest excess of powers which is a ground for annulment. The interpretation of this term by this ad hoc Committee shares the view of many commentators.108

(d) Concluding remarks The ad hoc Committes in the above decisions have applied greatly different standards of review. They have repeatedly pointed out that non-application of 107

On a criticism of the methodology offered by the doctrine of supplemental and corrective function of international law, see Gaillard, E., The Extent of Review of the Applicable Law in Investment Treaty Arbitration (in Annulment of ICSID Awards, edited by Gaillard, E./Banifatemi, Y ), 223 (2004) who argues that “under the Wena doctrine, however, the tribunal can freely access the rules of international law without any requirement of prior scrutiny into the law of the host State given that the two bodies of law equally constitute the proper law that may be applied by a tribunal under the second sentence of Art. 42(1). As a result, the review of a tribunal’s manifest excess of powers will not be concerned with the more or less broad recourse to the rules of international law. Depending on the circumstances of each case, the arbitral tribunal has a margin and power of interpretation with respect to the applicability of each of the rules of domestic law and of the rules of international law”, at p. 238. 108 Caron, D. D., Reputation and Reality in the ICSID Annulment Process: Understanding the Distinction Between Annulment and Appeal, 7 ICSID Review – FILJ 21 (1992) at p. 38; Feldman M., The Annulment Proceeding and the Finality of ICSID Awards, 2 ICSID Review – FILJ 85 (1987) at p. 101; Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 932-933.

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the proper law constitutes an excess of powers and, consequently, lead to annulment under Art. 52(1)(b) of the ICSID Convention. The ad hoc Committee also made a distinction between non-application of the proper law, which is a ground for annulment, and erroneous application of that law, which does not lead to nullity. These positions are undoubtedly correct but, unfortunately, not always followed by the same ad hoc Committees. In Klöckner and Amco annulment decisions, the reasoning of the two ad hoc Committees made unclear the advocated distinction between the failure to apply the proper law and erroneous application of properly identified law. As a matter of fact this distinction becomes trivial. In particular, the Amco Award evidences that the Tribunal indeed checked Indonesian law and purported to apply it but, in the end, it failed to take into account the relevant domestic provision. Although the drafters of the ICSID Convention by adding the word “manifest” to an excess of powers meant to clarify and restrict this ground further,109 the Amco and Klöckner annulment decisions indicate that this ground for annulment can be still subject of different interpretation. The view suggested by some commentators, that the term “manifest” becomes then indistinguishable from an error, no matter how egregious, carries a weight.110 Poor style of the tribunal’s reasoning or minor mistakes in the substantiation of the tribunal’s findings are not reasons that would justify annulment. Such a strict standard of review, as applied in Klöckner, is unacceptable. The Klöckner annulment decision indicates that the lack of reference to some legal authority for the tribunal’s finding may be decisive of non-application of the proper law. The Amco annulment decision indicates that non-observance of single provision of the applicable law may also amount to non-application of the proper law. These two decisions have been correctly criticized because of the fact that the ad hoc Committees exceeded their authority and extensively reviewed awards on the merits and, therefore, acted as appellate bodies.111 Indeed unjustified, extensive review of the merits is evident in both decisions. A manifest excess of powers because of failure to apply the proper law became a cause of concern after these two awards. The danger was that basically every award may be annulled because of mere error in the application of the proper law or due to the poor reasoning underlying the particular tribunal’s finding. The ad hoc Committees in MINE and Wena decisions took an effort 109

See History of the Convention, Vol. II, at pp. 423, 853-854. See Curtis, C. T., Amco v. Indonesia, 83 AJIL 106 (1989) at p. 110; Feldman, M., The Annulment Proceedings and the Finality of ICSID Arbitral Awards, 2 ICSID Review – FILJ 85 (1987) at p. 102. 111 Broches, A., Observations on the Finality of ICSID Awards, 6 ICSID Review – FILJ 321 (1991) at p. 358; Feldman, M., The Annulment Proceedings and the Finality of ICSID Arbitral Awards, 2 ICSID Review – FILJ 85 (1987) at pp. 97-99; Paulsson, J., ICSID’s Achievements and Prospects, 6 ICSID Review – FILJ 380 (1991) at p. 388. 110

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to remedy the situation. The standard of review applied by these Committees differs to a great extent from the above mentioned. In MINE v. Guinea, the ad hoc Committee correctly found that there was no failure to apply the proper law since the Tribunal’s reference to Art. 1134 of the French Civil Code instead of Art. 1134 of the Code Civil de l’Union Française was only of technical nature and, therefore, that shortcoming did not justify annulment. In the Wena decision, the ad hoc Committee had duty to determine whether there was a manifest excess of powers on the side of Tribunal in its reliance on the BIT as the primary source of law. The ad hoc Committee correctly held that since international law prevails over domestic law in case of conflict, the Tribunal’s resort to international law and, primarily to the BIT itself, did not contradict to Egyptian law and its investment policy and, correspondingly under the circumstances of the case, did not constitute a manifest excess of powers. Therefore, it relied on the fact that in case of inconsistency between these two legal systems international law would prevail. The ad hoc Committee found such inconsistency in respect of the question of interest.

3 Setting Aside of Arbitral Awards in Non-ICSID Investment Arbitration (a) Generally on review of non-ICSID arbitral awards While ICSID arbitration has its own internal mechanism for the challenging of its awards, other arbitral institutions do not. The awards of these arbitral tribunals may be challenged before national courts i.e., in a court of a state in which an award was rendered (or, in case of enforcement of the award, in the court of the state where enforcement is sought). Therefore, in the setting aside proceedings the UNCITRAL, the ICC awards as well as the Additional Facility awards are subject to review by national courts where the arbitration took place. Under the new national legislation recourse to the national court against an arbitral award is concentrated on the setting aside of the award and not in the action of an appeal.112

112

See generally National Reports in the ICCA International Handbook on Commercial Arbitration, Vols. I, II and III, KLI (2003); See also Craig, W. L., Uses and Abuses of Appeal from Awards, 4 Arbitration International 174 (1988) at pp. 174, 179; Delaume, G. R., The Finality of Arbitration Involving States: Recent Developments, 5 Arbitration International 21 (1989) at p. 28; Sanders, P., Quo Vadis Arbitration, Sixty Years of Arbitration Practice, Kluwer (1999).

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In the majority of countries, the new arbitration acts do not provide for appeal, except if the parties have so agreed.113 For instance, Art. 1050 of the Netherlands Arbitration Act of 1986 provides as follows: Article 1050 1. An appeal from the arbitral award to a second arbitral tribunal is possible only if the parties have agreed thereto.114

Therefore, under this Act, an appeal to a second arbitral instance may be made, but only with an express parties’ agreement. An appeal to a second arbitral tribunal should be distinguished from an appeal to a court. Under Section 69 of the English Arbitration Act of 1996, an appeal to the court is possible but it is limited to a question of English law, subject to the parties’ agreement.115 However, in practice parties rarely, if ever, agree to the appeal either to the second arbitral tribunal or to the court. As noted above, newly adopted national arbitration acts restrict the post-award remedies and, today, they are focused primarily on the action for setting aside of the award. Under Art. 34 of the 1985 UNCITRAL Model Law on International Commercial Arbitration, an application for setting aside is the exclusive recourse against arbitral award.116 This approach increases the finality of arbitral awards and, at the same time, ensures the integrity of the arbitration process. By introducing these changes in national legislation, states increase their chances of being selected as the seat of arbitration. The New York Convention of 1958 governs only recognition and enforcement of an arbitral award and not the setting aside of the award. In Art. V the 1958 New York Convention lists the narrow grounds for refusing recognition and enforcement of the arbitral award.117 The grounds for setting aside of the arbitral award rendered by the ICC, the UNCITRAL or the Additional Facility tribunal depend on the domestic law where this challenge is brought. There is 113

Note that some countries, such as France, distinguish domestic from international arbitration. In case of international arbitration, no appeal against an arbitral award is possible in France, but only the setting aside of the award, see Art. 1507 of the 1981 French Code of Civil Procedure, available at http://www.jus.uio.no/lm/france.arbitration.code.of.civil.procedure.1981/index.html. 114 ICCA International Handbook on Commercial Arbitration, Vol. III, KLI (2003). 115 See commentary on English Arbitration Act of 1996 in the ICCA International Handbook on Commercial Arbitration, Vol. II, KLI (2003); See also Sanders, P, Quo Vadis Arbitration: Sixty Years of Arbitration Practice, Kluwer (1999) at pp. 31-33. 116 See Holtzmann M. H./Neuhaus E. J., A Guide To The UNCITRAL Model Law on International Commercial Arbitration: Legislative History And Commentary, Kluwer, (1989) at pp. 910-1003. 117 330 UNTS 38 (1959). See Freyer, D. H./Gharavi, H. G., Finality and Enforceability of Foreign Arbitral Awards: From “Double Exequatur” to the Enforcement of Annulled Awards: A Suggested Path to Uniformity Amidst Diversity, 13 ICSID Review – FILJ 101 (1998); See also van den Berg, A. J., Recent Enforcement Problems Under the New York and ICSID Conventions, 5 Arbitration International 2 (1989).

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a tendency in recent domestic legislation to restrict the grounds for setting aside of the arbitral awards. This tendency is expressed by the Svea Court of Appeal, in CME v. The Czech Republic: In line with what might be deemed to be an expression of the legal situation in many other countries, by virtue of the Arbitration Act the Swedish legislature has adopted a restrictive approach towards to the possibilities to successfully have an arbitration award declared invalid or set aside based on a challenge . . . The same approach characterizes the rules in the aforementioned Recognition and Enforcement of Foreign Arbitration Awards Act and the underlying reasons given therefor. This has also been expressed in decisions of the Supreme Court when applying corresponding older provisions . . . On the international plane, this restrictive approach has been expressed in the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and in UNCITRAL’s Model Law. In this context, it may be noted that, in a judgment cited in this case, the European Court of Justice stated that “ . . . it is in the interest of efficient arbitration proceedings that review of arbitration awards should be limited in scope and that annulment of or refusal to recognize an award should be possible only in exceptional circumstances”.118

For the arbitral awards rendered by the Iran–United States Tribunal there are basically no effective post-award remedies. Article IV(1) of the CSD provides that all awards and decisions rendered by this Tribunal shall be final and binding.119 But the CSD contains no provision on post-award remedies. Some commentators found the explanation for this shortcoming in the extraordinary circumstances and the short-period of time in which it was drafted.120 The Tribunal adopted its own rules based on the UNCITRAL Arbitration Rules. But these Rules also do not regulate the issue of postaward remedies. As already explained, the awards rendered under the UNCITRAL Rules may be challenged before national courts and, accordingly, it was meant that the awards rendered by the Iran–United States Claims Tribunal may be equally challenged there. Iran indeed challenged the awards of this Tribunal before the courts of the Netherlands, but shortly thereafter it decided to withdraw it. A consequence was that no other avenue for challenging appeared available. Additionally, due to a Security Account which ensures payment of arbitral awards in favor of US claimants only, the right to challenge the awards of the Iran–US Claims Tribunal becomes practically meaningless. 118

The Czech Republic v. CME Czech Republic B.V., Svea Court of Appeal, 15 May 2003, 42 ILM 919 (2003) at pp. 960-961. Emphasis original. 119 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 http://www.iusct.org/claims-settlement.pdf. 120 On post-award remedies for the awards rendered by the Iran–US Claims Tribunal, see generally Seifi, J., Procedural Remedies Against Awards of Iran–United States Claims Tribunal, 8 Arbitration International 41 (1992).

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(b) Proper law and nullity The principle that the non-application of the proper law can constitute an excess of powers and, as a consequence, may led to nullity would also apply in the context of non-ICSID arbitration. The non-ICSID awards may be annulled for failure by a tribunal to apply the proper law if the domestic law provides such a basis for setting aside of an award. In the setting aside proceedings the merits of the case will not be subject of review. The following survey of the national arbitration laws demonstrates that they include an excess of powers by the arbitral tribunal as a ground for setting aside of the arbitral award. For instance, the Netherlands Arbitration Act of 1986 provides in Art. 1065 that: 1. Setting aside of the award can take place only on one or more of the following grounds: ... (c) the arbitral tribunal has not complied with its mandate.121

The Swedish Arbitration Act of 1999 in Section 33122 sets out three grounds for invalidity of an award, while Section 34 provides for the setting aside of the award. Its paragraph 2 states the following: An award which may not be challenged in accordance with section 36 shall, following an application, be wholly or partially set aside upon motion of a party: ... 2. if the arbitrators have made the award after the expiration of the period decided on by the parties, or where the arbitrators have otherwise exceeded their mandate.123

121

See ICCA International Handbook on Commercial Arbitration, Vol. III, KLI (2003). The 1986 Arbitration Act is also available at http://www.internationaladr.com/. Furthermore, it is appropriate to note that Art. 1065(4) provides that “The ground mentioned in para. (1)(c) above shall not constitute a ground for setting aside if the party who invokes this ground has participated in the arbitral proceedings without invoking such ground, although it was known to him that the arbitral tribunal did not comply with its mandate”. This provision most likely would not apply in the context of the applicable substantive law since in most cases it is unknown, before an issuance of the award, whether the tribunal complied with its mandate or not. 122 Section 33 “An award is invalid: 1. if it includes determination of an issue which, in accordance with Swedish law, may not be decided by arbitrators; 2. if the award, or the manner in which the award arose, is clearly incompatible with the basic principles of the Swedish legal system; or 3. if the award does not fulfill the requirements with regard to the written form and signature in accordance with section 31, first para. The invalidity may apply to a certain part of the award”. 123

ICCA International Handbook on Commercial Arbitration, Vol. III, KLI (2003).

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Under Art. 1504 of the French Code of Civil Procedure of 1981 “the action for setting aside is available against arbitral awards rendered in France in international arbitration, on the grounds of Art. 1502”.124 Under Art. 1502(3) annulment of the award is possible “if the arbitrator has not rendered his decision in accordance with the mission conferred upon him”.125 Article 829 of the Italian Code of Civil Procedure states: Notwithstanding any waiver, a recourse for nullity may be filed in the following cases: ... 4) if the award exceeds the limits of the submission to arbitration or fails to decide one or more items in the submission to arbitration or contains contradictory provisions, subject to the provisions of Article 817.126

Finally, the UNCITRAL Model Law on International Commercial Law in Art. 34(2) provides as follows: ... 2. An arbitral award may be set aside by the court specified in article 6 only if: ... (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provides that, if the decisions on matters submitted to arbitration can be separated from those not submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside.127

The above provisions do not state specifically that failure to apply the proper law is one of the grounds for annulment. But, as in case of ICSID arbitration, a party may in its requests for setting aside of an award, argue that because of non-application of the proper law the tribunal has not complied with its mandate (or, it has not rendered its decision in accordance with the mission conferred upon it, etc.) and, therefore, rendered the award against the tribunal’s terms of reference.128 The following cases decided by domestic courts are an illustrative example. 124

ICCA International Handbook on Commercial Arbitration, Vol. II, KLI (2003), available also at http://www.jus.uio.no/lm/france.arbitration.code.of.civil.procedure.1981/doc.html. 125 Ibid. 126 ICCA International Handbook on Commercial Arbitration, Vol. II, KLI (2003), available also at http://www.jus.uio.no/lm/italy.arbitration/829.html. 127 http://www.uncitral.org/en-index.htm. 128 In discussing the ground for setting aside of the 1986 Netherlands Arbitration Act, that the “arbitral tribunal has not complied with its mandate” it is said that “incorrect application of the rules as to substance does not constitute a failure to comply with the mandate. Only a failure to base the decision on the applicable rules, such as would occur if the arbitrators decided as amiable composituer without being authorized to do so qualifies for this ground”, see ICCA International Handbook on Commercial Arbitration, Vol. III, KLI (2003) at p. 30; The same

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(c) Arbitral practice (i)

The Czech Republic v. CME (decision based on part of applicable law only does not warrant annulment)

In CME v. the Czech Republic an arbitral tribunal sitting in Stockholm had jurisdiction on the basis of the BIT between the Netherlands and the Czech Republic (formerly the Czech and Slovak Federal Republic). The arbitration was governed by the UNCITRAL Rules. The Tribunal first rendered a Partial Award on liability,129 and in a second phase, rendered the Final Award on the quantum of damages.130 Article 8(6) of the BIT provided for the application of both the host State’s law and international law.131 The Tribunal (the majority), in its Partial Award on liability concluded that the Czech Republic had violated several provisions of the BIT. These included: the obligation not to deprive the investor of its investment, the obligation to provide fair and equitable treatment, the obligation not to take unreasonable and discriminatory actions in relation to investment, the

view was expressed in regard to Art. 1502(3) of the French Civil Code of Procedure of 1981. Commentators noted that the respect for a parties’ choice of law is also considered part of the mission of the arbitrators as mandated by Art. 1496 of the said Code. Article 1496 provides a guidance for a choice of law in case of international arbitration as follows: “The arbitrator shall decide the dispute in accordance with the rules of the law chosen by the parties or, in the absence of such choice, in accordance with the rules of the law he considers appropriate. In all cases he shall take the usages of the trade into consideration”.

Commentators added that “both in domestic and in international arbitration an arbitrator fails to respect his mission if he decides as amiable compositeur without having the power to do so. However, if an arbitrator must take his decision in accordance with the rules of law, he has greater latitude in international than in domestic arbitration, as he is not limited to national laws. He may base his entire award on trade usage or on the lex mercatoria without failing to respect his mission”, see ICCA International Handbook on Commercial Arbitration, Vol. III, KLI (2003) at p. 59. 129 CME v. The Czech Republic, Partial Award, 13 September 2001, at http://www.mfcr.cz/ static/Arbitraz/en/PartialAward.doc; See earlier discussion of this decision in section dealing with choice of law clauses in BITs. 130 CME v. The Czech Republic, Final Award, 14 March 2003, at http://www.cetv-net.com/ ne/articlefiles/439-Final_Award_Quantum.pdf; See earlier discussion of this decision in section dealing with choice of law clauses in BITs. 131 Article 8(6) states: The arbitral tribunal shall decide on the basis of the law, taking into account in particular though not exclusively: the law in force of the Contracting Party concerned; the provisions of this Agreement, and other relevant Agreements between the Contracting Parties; the provisions of special agreements relating to the investment; the general principles of international law.

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obligation to provide full security and protection and the obligation to act in conformity with the principles of international law.132 The Tribunal based its conclusions on international law in general but primarily on the provisions of the BIT. In accordance with Sections 33 and 34 of the Swedish Arbitration Act of 1999, the Czech Republic sought the invalidation or setting aside of the Partial Award.133 It claimed, among other grounds, that the Tribunal had failed to take into consideration the applicable law and therefore, had exceeded its mandate.134 The following was the Republic’s position before the Svea Court of Appeal. According to the Republic a number of issues were to be determined by applying Czech law in accordance with Art. 8(6) of the BIT such as: the protection afforded to the original investor pursuant to the 1993 MOA, the commencement of the administration proceedings in 1996, and the alleged coercion in connection therewith, the relationship between the 1996 MOA and the 1993 MOA etc. In this regard the Republic said: . . . These issue could only be resolved by the application of Czech law. The Stockholm Tribunal had an obligation to comply with the choice of law clause and, in accordance with the same, an obligation to apply Czech law. The Stockholm Tribunal did not apply Czech law with respect to the aforementioned issues and went so far as to openly disregard Czech law. When the Stockholm Tribunal did not apply Czech law, it could not determine issues raised in the Stockholm proceedings in a correct manner. Nor did the Stockholm Tribunal apply international law or any other legal system with respect to the aforementioned issues, and did not reached its decision on the basis of law. The outcome of the case would have been different had the Stockholm Tribunal applied Czech law.135

Therefore, the Republic argued that the Stockholm Tribunal neither applied Czech law nor international law and, finally, did not reach its decision on the basis of law at all. The Republic noted that the Tribunal was composed of persons with expertise in international law, in Czech law, in commercial law and international arbitration and, therefore, it was expected that “the Stockholm Tribunal would make use of this collective expertise when it decided the case and believed that Czech law would be investigated, inter alia, in light of the fact that there was a Czech jurist on the Stockholm Tribunal”.136 But the Tribunal excluded the Czech arbitrator from its deliberations who was necessary for the investigation of the content of Czech law. 132

See CME v. The Czech Republic, Partial Award, 13 September 2001, paras. 586-614. The Czech Republic v. CME Czech Republic B.V., Svea Court of Appeal, 15 May 2003, 42 ILM 919 (2003), also available at: http://www.mfcr.cz/static/Arbitraz/en/Judgment_English.doc. 134 At p. 923. 135 At p. 931. 136 At p. 931. 133

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The Republic, furthermore, noted that it had relied on Czech law in its submissions before the Tribunal.137 For instance, it submitted translations of the Media Law, the Administrative Proceedings Act, and the Act governing the Media Council. In the view of the Republic, the failure to apply Czech law could not be discovered before the issuance of the Stockholm Award since the Tribunal indeed posed questions concerning both Czech law and international law during the final hearing.138 The Republic referred to specific issues in which the Stockholm Tribunal, in its Partial Award on liability, had disregarded Czech law. For instance, there was no legal analysis in respect of the Tribunal’s finding that the 1993 MOA and the split structure were a carefully designed scheme; that it was in conformity with Czech law as well as the basis for CEDC’s investment; that there was no legal analysis in respect of the Tribunal’s finding that “The use of “know-how” of a broadcasting Licence is meaningless and worthless” and that the 1996 contribution to the MOA of “the use of the know-how of the Licence” was quite a worthless and meaningless right.139 The Tribunal disregarded Czech law in connection with the question of the protection afforded to the investor according to the 1993 MOA compared with the 1996 MOA. In this regard, the Tribunal rather “looked to the actual chain of events in order to find support for its reasoning that the protection had deteriorated”.140 The Tribunal’s position was that the protection offered to the investor in Czech courts and according to Czech civil law was not relevant for the Tribunal’s conclusion. With respect to the alleged coercion the Republic argued: The Stockholm Tribunal assessed whether the Media Council’s acts in 1996 could constitute coercion or whether the amendments to the MOA were voluntary. The Tribunal, in this context, questioned whether the “opinion” rendered by Dr. Barta in which he concluded that “the split structure” was not compatible with law and that measures should be taken and concluded that it involved coercion. The Tribunal stated that it was not necessary to examine the Czech administrative law aspect of the issue and how the Media Council’s actions were to be adjudged according to Czech law, and whether the structure was legal according to Czech law. Instead, the Tribunal went directly to the Treaty and made an assessment based thereon.141

Furthermore, the Tribunal stated that the Media Council’s acts and omissions were the cause of collapse of CME’s investment without determining whether the Council’s actions were in accordance with Czech administrative law. Rather, the Tribunal thought that the BIT could be consulted directly in order 137 138 139 140 141

At p. 931. At p. 931. At pp. 931-932. At p. 932. At p. 932.

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to determine whether these actions amounted to a violation of the BIT. But the BIT did not answer these questions.142 The Republic also argued that the majority of the Tribunal not only did not apply Czech law but also did not consider that it was relevant to the decision. In this regard the Republic said: It is also apparent from the arbitrators’ correspondence and statements that the majority did not apply, nor considered that it was necessary to apply, Czech law. Czech law was raised in the list of questions prepared by Kühn. Kühn posed questions regarding Czech law and the question whether Czech law was to apply was raised. The reasoning, however, was never followed through. Schwebel stated in his response to the list of questions that he interpreted Article 8.6 of the Treaty to “take into account” entails a freer formulation than “apply”. Of the arbitrators, Schwebel was of the opinion that Czech law need not be applied. Rather, the Treaty could be directly consulted in order to determine whether CME had incurred an injury. Characteristic of Schwebel’s position was that he devoted himself to opining in lieu of investigating Czech law and the provisions thereof.143

Therefore, the position of the Republic was that the majority of the Tribunal had not even taken into account Czech law but, rather, they engaged in speculation. The Republic continued to provide examples of the issues where the Tribunal did not apply Czech law, and where appropriate, international law. In the view of the Republic, the application of Czech law would lead to different result in relation to the following issues: In respect of the legal basis of the investment, the Republic argued that the ˇ Tribunal did not analyze of what CET 21’s contribution to CNTS consisted and which rights CEDC acquired through its investments in the Czech Republic. The Republic noted that it had referred to Czech law and had stated objections on the basis of that law in relation to this issue. By applying Czech law, the Tribunal would have determined that CEDC through its investment acquired only contractual rights in relation to CET 21 and only CET 21 obtained the broadcasting license pursuant to Czech law.144 According to the Republic, in respect of the changes in 1996 and 1997 in ˇ the contractual relationship between CNTS and CET 21, it was necessary to examine Czech Law: The content and effect of 1993 MOA and the 1996 MOA and the service agreement should have been adjudged according to Czech law. Without analyzing the content and effect pursuant to Czech law of the contractual relationships ˇ between CET 21 and CNTS in 1993 compared with 1996 and 1997, and the content of the revocation of the terms and conditions of the license, it was not ˇ possible for the Stockholm Tribunal to determine whether CME/ CNTS had lost

142 143 144

At p. 932. At p. 932. At p. 933.

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CHAPTER V its legal safety net. Had the Stockholm Tribunal applied Czech law, it would have concluded that CET 21 would have been able to broadcast TV Nova irreˇ spective of the provisions of the 1993 MOA and found that CME/ CNTS had not lost any legal protection by virtue of the 1996 events.145

In respect of the Tribunal’s conclusion that the commencement of the administrative proceedings in 1996 had the purpose of coercing the investor, the Republic argued that the Tribunal did apply neither Czech law nor international law. It said: The award refers, inter alia, in paragraph 515 to “unlawful pressure” and in paragraph 516 to “unlawful acts”, but it does not refer to any legal system upon which such are based. Within international law, there is nothing other than physical coercion. Professor Vagts’ article, to which the Tribunal referred in paragraph 517 of the award, does not constitute international law, and Professor Vagts himself emphasized that the statements in the article did not constitute international law. The reference to Professor Vagts’ article is not tantamount to the application by the Tribunal of international law since reference to the article falls outside the scope of the application of international law. The Tribunal did not apply any legal system at all. According to Czech law, certain conditions must be satisfied in order for coercion to be deemed to exist. The act which constitutes coercion must, inter alia, be unlawful. In addition, according to Czech law, acts which are coerced are void. Where, following the cessation of coercion, a party who is subject to such coercion invokes a legal act which came about under such coercion, the legal act is no longer regarded according to Czech law as having come about under coercion.146

Furthermore, the Media Council had an obligation to commence administrative proceeding under the Media Law in case there was a suspicion of violation of that law. Therefore, it did not act unlawfully and there was no coercion under Czech law on the side of the Media Council. In this regard, the Republic referred to the London proceeding where the London Tribunal analyzed these issues in light of Czech law finding that it was a normal procedure for the Media Council.147 On the contrary, the Stockholm Tribunal openly ignored Czech law and stated that it had to examine only whether the Media Council’s action were in compliance with the BIT.148 In respect of the transfer agreement between CME Media and CME, the Republic argued that the application of Czech law, in order to determine the significance of the content of that transfer agreement, would have led the Tribunal to conclude that CME was unable to claim the alleged coercion in 1996.149 145 146 147 148 149

At p. 933. At pp. 933-934. At p. 934. At p. 934. At p. 934.

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With respect to the Media Council’s letter of March 15, 1999, the Republic argued that the Stockholm Tribunal had failed to apply both Czech law and international law, including the BIT.150 Again, the Republic referred to the position of the London Tribunal which found that the letter had no legal significance since it was only an expression of the supervisory authority’s general understanding of the correct interpretation of the Media Act. Therefore, the application of Czech law by the Stockholm Tribunal would have led it to conclude that the 1999 letter did not have the legal effect the Tribunal ascribed to it. Finally, “neither Czech law, international law, nor the Treaty provided any support for the conclusion that the mere issuance of a letter by a state supervisory authority could eliminate an exclusivity clause in an agreement between two private parties”.151 Furthermore, the Republic argued that the Stockholm Tribunal failed to apply Czech law or international law as to whether the Media Council could or should have revoked the letter of March 15, 1999.152 It noted that the application of Czech law would have led the Tribunal to conclude that the Media Council acted in accordance with Czech law and that there was no possibility for the Media Council to intervene in a private dispute between CET 21 and ˇ CNTS. With respect to the termination of the service agreement, the Republic argued that the Stockholm Tribunal again failed to apply international law and Czech law: In order for the Stockholm Tribunal to have been able to state that there was a violation of international law, the Tribunal must have found that the Czech judgment itself, or the Czech legal system, entailed a violation of the Treaty, e.g. in that CME was denied justice or due to the fact that the judgment or the legal system are incompatible with some rule according to international law.153

With respect to the issue of joint tortfeasors, again, neither international law nor Czech law was applied: The Stockholm Tribunal applied neither international law nor Czech law when it introduced the legal concept of “joint tortfeasors” in the Stockholm award. The conclusion regarding joint tortfeasors was determinative to the outcome of the Stockholm proceedings since the Republic could not have been held liable for Zelezny’s actions without such a determination. In support of its assertion regarding joint tortfeasors, the award contained a short citation from an ILC commentary which referred to Dr. Weir’s chapter in “The International Encyclopedia of Comparative Law”. The ILC commentary does not constitute applicable international law. Dr Weir’s work was neither a work about Czech law nor international law but, rather, concerned comparative national law.

150 151 152 153

At p. 935. At p. 935. At p. 935. At p. 936.

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CHAPTER V The term, joint tortfeasors, postulated by the Tribunal exists neither in international law nor in Czech law. A natural or legal person cannot be jointly liable for damages together with a state according to international law. A state may be liable according to international law, and a natural or a legal person may only be liable according to national law. Accordingly, a state and a natural or a legal person cannot be jointly and severally liable for damages for a “tort” according to international law. The Stockholm Tribunal has postulated a term without support in any applicable legal system. This is not a question of the erroneous application of international law but, rather, the non-application of international law to a determinative issue.154

Finally, in the view of the Republic the Tribunal’s conclusion that Dr Zelezny ˇ had breached his obligations as a senior executive of CNTS was reached neither on the basis of Czech law nor international law.155 CME denied these allegations and argued that the fundamental question before the Stockholm Tribunal was whether the Media Council’s action or omissions were in violation of the BIT. Therefore, the Tribunal acted in accordance with the applicable law and did not act as amiable compositeur but resolved the dispute on the basis of relevant sources of law.156 In the view of CME the Tribunal was not obliged to refer to Czech law to the extent claimed by the Republic since the Tribunal was of the opinion that many issues should have been determined on the basis of the BIT primarily.157 Furthermore, it added that even if Czech law would have been applied to the issues claimed by the Republic the outcome of the case would not have been different.158 It argued that the Stockholm Tribunal interpreted the choice of law clause in the BIT correctly and, even if that was not the case, a mistaken interpretation of such a clause can not lead to nullity: The interpretation of the choice of law provision in Article 8.6 of the Treaty fell within the purview of the Stockholm Tribunal’s mandate and, in the event the Stockholm Tribunal committed an error in the interpretation of the Treaty, such constitutes only a substantive error and does not form a basis of challenge. In any case, the Stockholm Tribunal interpreted the choice of law provision correctly and applied the Treaty and international law, and took into consideration Czech law when the Tribunal examined the issue of whether the Republic had violated the Treaty. Furthermore, the Republic’s assertions regarding Czech law are incorrect, and the outcome of the Stockholm proceedings would not have been different had additional Czech legal rules been applied or considered.159

After noting that in accordance with the Swedish Arbitration Act, the Swedish legislature has adopted a restrictive approach towards the possibilities of 154 155 156 157 158 159

At p. 936. At p. 936. At pp. 924, 946. At pp. 946-949. At pp. 949-953. At p. 924.

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challenging the arbitral awards,160 the Svea Court of Appeal proceeded to deal with the Republic’s allegations. It noted that the Swedish Arbitration Act does not contain “any rules as to the legal premises on which arbitrators should determine a dispute”, but the legislative history to the Arbitration Act indicates that “in Sweden, there is probably a unanimous view that arbitrators should base their awards primarily on governing law, unless the parties may be deemed to have decided differently”.161 The Court confirmed that the application of a law other than that agreed by the parties may lead to the setting aside of an award on the ground that the tribunal exceeded its mandate, while mistaken application of the chosen law would not be a valid ground for the setting aside of the award.162 The Court also added that even a mistaken interpretation of the parties’ agreement on choice of law would not lead to the setting aside of the award: Where it is evident that the arbitrators have applied the law of a different country in violation of such an agreement, upon application to the Court, the award may be set aside on the ground that the arbitrators have exceeded their mandate. On the other hand, in conjunction with a challenge, the Court should not, of course, determine whether the arbitrators erroneously applied the law agreed upon by the parties. Such a fact can still not lead to the arbitration award being set aside . . . A general conclusion which may be drawn from that which is stated in the legislative history is that the legislature has sought to reduce the possibilities to challenge an arbitration award on the ground that the arbitrators have applied the wrong law. The arbitrators may be deemed to have exceeded their mandate only where they have applied the law of a different country in violation of an express provision that the law of a particular country shall govern the dispute; in the opinion of the Court of Appeal, an almost deliberate disregard of the designated law must be involved. There is no excess of mandate where the arbitrators have applied the designated law incorrectly. Nor can there hardly be any question of excess of mandate where the arbitrators have been required to interpret the parties’ designation of applicable law and, in so doing, have interpreted the designation incorrectly.163

On the basis of the above, the Court proceeded to interpret the choice of law clause contained in Art. 8(6) of the BIT. It noted that Arts. 33(1) and 33(2) of the UNCITRAL Arbitration Rules provide that the tribunal shall apply the law as agreed by the parties and that the tribunal shall decide ex aequo et bono only if the parties have expressly authorized the tribunal to do so.164 In the view of the Court, the Tribunal’s interpretation of the clause on applicable law would have 160 161 162 163 164

At pp. 960-961. At p. 963. At p. 963-964. At pp. 963-964. At p. 964.

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constituted an excess of mandate only if it amounted to completely ignoring that provision: The first part of the provision whereby the arbitrators “shall decide on the basis of the law” is clear, while the following parts leave room for interpretation, as shown by the arbitrators’ differing opinions regarding the correct legal purport of the provision. The arbitrators have been obliged to comply with the choice of law provision and, accordingly, their mandate has also included interpretation of the provision insofar as it is not clear or not unambiguous. In the opinion of the Court of Appeals, an excess of mandate may be involved only where the arbitrators’ interpretation of the choice of law clause proves to be baseless such that their assessment may be equated with the arbitrators almost having ignored a provision regarding applicable law.165

The Court interpreted the choice of law provision as giving discretion to the tribunal to select the applicable rules among the sources listed in Art. 8(6) of the BIT.166 The four sources should not be interpreted in a manner that the law of the host State should be applied first and international law thereafter. In the view of the Court, since the list of sources is not numbered, that indicates that the contracting states gave discretion to the Tribunal to determine which of these sources should be applied, on a case by case basis. In the event of the violation of the BIT, the tribunal would, therefore, deem relevant to apply in the first instance international law in light of the BIT’s provisions.167 The Court found confirmation for its position in the Agreed Minutes according to which the Court understood that the choice of law clause “leaves to the arbitral tribunal to take into account Czech law and other sources of law insofar as such are relevant in the dispute”.168 The Court noted that in order to determine whether the Stockholm Tribunal had exceeded its mandate, it was sufficient to clarify whether the Tribunal based its decision on any of the sources listed in Art. 8(6) of the BIT, or in other words, whether it had based its decision on any law at all.169 The above reasoning led the Court to conclude that the Tribunal had acted in accordance with the choice of law clause. In other words, the Tribunal had applied primarily international law as the source of law relevant to the dispute and, therefore, had not decided ex aequo et bono. In the opinion of the Court, “the fact that each legal statement in the award is not directly derived citing a rule of law cannot be deemed to mean that the tribunal conducted a general assessment of reasonableness”.170 Therefore, it followed that the Stockholm Tribunal had not exceeded its mandate for failure to apply the applicable law and, correspondingly, the Republic’s claim was denied. 165 166 167 168 169 170

At p. 964. At p. 965. At p. 965. At p. 965. At p. 965. At p. 965.

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It has to be noted that the Stockholm Tribunal rendered its Final Award on Quantum before the Svea Court reached the above decisions.171 The way in which the Tribunal addressed the issue of applicable law in its Final Award is in complete contrast to the Partial Award. The Tribunal aimed to justify the approach it took in the Partial Award.172 In the CME case, the Tribunal operated under a combined choice of law clause contained in the BIT. The Court’s interpretation of that provision led to a position identical to the one adopted by the Stockholm Tribunal i.e., the Tribunal had discretion to chose among the listed sources insofar as such are relevant for a dispute. The argument that under the choice of law clause contained in Art. 8(6) of the Netherlands/the Czech Republic BIT, the Tribunal may apply whatever law it chooses is in the CME case particularly mistaken. It is unjustified due to the fact that the host State’s law was relevant for the dispute since various issues called for the application of Czech law. Unfortunately, the Court refused to examine whether there was such a need. It took the position that the Tribunal’s reliance on the BIT and international law in general was justified since the case arose out of the BIT’s violation. Under this reasoning it appears that every case that arises out of a BIT’s violation may be decided by applying international law only, notwithstanding the clear provision combining both domestic law and international law and notwithstanding a necessity of applying domestic law to some relevant issues. For the Court, only complete disregard of the applicable law, as provided by the pertinent provision, would constitute a deliberate excess of mandate on the part of the Tribunal. Furthermore, in the view of the Court, although some of the Tribunal’s findings were not accompanied with a reference to specific legal authority, that did not lead to a decision ex aequo et bono.

(ii) Mexico v. Metalclad (a mere reference to the wrong provision of the applicable treaty led to annulment) In Metalclad173 the investor was authorized by the Mexican federal government to operate a hazardous waste landfill, but local municipal authorities denied it a construction permit due to the adverse environmental effects of the hazardous waste landfill. In that way they prevented the investor from conducting any operations. The landfill site was declared part of a special ecological area for the protection of rare cactus. 171

Final Award, 14 March 2003, at http://www.cetv-net.com/ne/articlefiles/439-Final_Award_ Quantum.pdf. 172 Paras. 396-413; See prior discussion of CME v. The Czech Republic in section dealing with choice of law clauses in BITs. 173 Metalclad Corporation v. United Mexican States, Award, 30 August 2000, at http://www. naftalaw.org.

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Metalclad brought a claim under the NAFTA Chapter 11 investment provisions. It argued that the actions of the municipal authorities amounted to expropriation without compensation in violation of Art. 1110 of the NAFTA.174 Metalclad also argued that Mexico had violated Art. 1105 of the NAFTA which requires fair and equitable treatment in accordance with international law.175 A NAFTA Tribunal operated under the ICSID’s Additional Facility Arbitration Rules. Under Art. 1131(1) of the NAFTA, a tribunal established under Chapter 11 has to decide the issues in dispute in accordance with the NAFTA and applicable rules of international law.176 The Tribunal referred to Art. 1131(1) and Art. 102 of the NAFTA177 which sets out the treaty objectives. The universally accepted rules of treaty interpretation are codified in Art. 31 of the Vienna Convention on the Law of the Treaties, to which the Tribunal referred in its Award. It said: A Tribunal established pursuant to NAFTA Chapter Eleven, Section B must decide the issues in dispute in accordance with NAFTA and applicable rules of international law. (NAFTA Article 1131(1)). In addition, NAFTA Article 102(2)

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Paras. 1, 72; Art. 1110(1) of the NAFTA states: No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (‘expropriation’), except: (a) for a public purpose; (b) on a non-discriminatory basis; (c) in accordance with due process of law and Art. 1105(1); and (d) on payment of compensation in accordance with paras. 2 through 6, 32 ILM 641(1993).

175

Paras. 1, 72; Art. 1105(1) of the NAFTA states: Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security, 32 ILM 639 (1993). 176 32 ILM 645 (1993). 177 Article 102: Objectives 1. The objectives of this Agreement, as elaborated more specifically through its principles and rules, including national treatment, most-favored-nation treatment and transparency, are to: (a) eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between the territories of the Parties; (b) promote conditions of fair competition in the free trade area; (c) increase substantially investment opportunities in the territories of the Parties; (d) provide adequate and effective protection and enforcement of intellectual property rights in each Party’s territory; (e) create effective procedures for the implementation and application of this Agreement, and for its joint administration and for the resolution of disputes; and (f) establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this Agreement. 2. The Parties shall interpret and apply the provisions of this Agreement in the light of its objectives set out in para. 1 and in accordance with applicable rules of international law, 32 ILM 297 (1993).

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provides that the Agreement must be interpreted and applied in the light of its stated objectives and in accordance with applicable rules of international law. These objectives specifically include transparency and the substantial increase in investment opportunities in the territories of the Parties. (NAFTA Article 102(1)(c)). The Vienna Convention on the Law of Treaties, Art. 31(1) provides that a treaty is to be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of the treaty’s object and purpose. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes, any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty. (Id., Article 31(2)(a)). There shall also be taken into account, together with the context, any relevant rules of international law applicable in the relations between the parties. (Id., Article 31(3)). Every treaty in force is binding upon the parties to it and must be performed by them in good faith. (Id., Article 26). A State party to a treaty may not invoke the provisions of its internal law as justification for its failure to perform the treaty. (Id., Article 27).178

Therefore, by applying the standard rules of treaty interpretation the Tribunal found that it had to interpret the relevant treaty provisions within the wider context of the NAFTA, in light of the NAFTA objectives as set out in Art. 102(1), such as substantially increasing investment opportunities in the territories of the NAFTA and, in particular, the principle of transparency. At the end of its discussion on the applicable law, the Tribunal also referred to one of the objectives contained in the Preamble of the NAFTA i.e. that the NAFTA Parties agreed to “ENSURE a predictable commercial framework for business planning and investment”.179 It also quoted Art. 1802(1) contained in the NAFTA Chapter 18 dealing with “Publication, Notification and Administration of Laws”.180 The Tribunal proceeded to examine the Claimant’s contentions. It repeated that it had to interpret the NAFTA provisions in light of the NAFTA objectives, in particular transparency obligations. The Tribunal said: Prominent in the statement of principles and rules that introduces the Agreement is the reference to “transparency” (NAFTA Article 102(1)). The Tribunal understands this to include the idea that all relevant legal requirements for the purpose of initiating, completing and successfully operating investments made, or intended to be made, under the Agreement should be capable of being readily known to all affected investors of another Party. There should be no room for doubt or uncertainty on such matters. Once the authorities of the

178

Para. 70. Para. 71. 180 Article 1802(1) provides: Each Party shall ensure that its laws, regulations, procedures and administrative rulings of general application respecting any matter covered by this Agreement are promptly published or otherwise made available in such a manner as to enable interested persons and Parties to become acquainted with them, 32 ILM 681 (1993). 179

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The relevant facts evidenced, in the view of the Tribunal, that Mexico had violated the NAFTA’s provision on minimum standard of treatment (Art. 1105). In reaching this conclusion, the Tribunal relied on the NAFTA’s transparency obligations: . . . The absence of a clear rule as to the requirement or not of a municipal construction permit, as well as the absence of any established practice or procedure as to the manner of handling applications for a municipal construction permit, amounts to a failure on the part of Mexico to ensure the transparency required by NAFTA.182 ... Mexico failed to ensure a transparent and predictable framework for Metalclad’s business planning and investment. The totality of these circumstances demonstrates a lack of orderly process and timely disposition in relation to an investor of a Party acting in the expectation that it would be treated fairly and justly in accordance with the NAFTA.183

The same conclusion was reached in relation to Art. 1110 of the NAFTA. The Tribunal held that the actions of the municipal authorities amounted to an indirect expropriation. It said: These measures, taken together with the representations of the Mexican federal government, on which Metalclad relied, and the absence of a timely, orderly or substantive basis for the denial by the Municipality of the local construction permit, amount to an indirect expropriation.184

Mexico challenged this Award before the Supreme Court of British Columbia on several grounds one of which included that the Tribunal made decisions beyond the scope of the submission to arbitration.185 As noted above, Additional Facility awards are subject to review by national courts where the arbitration took place. In this case Vancouver was chosen as the place of arbitration and, therefore, the setting aside proceedings took place there. The review of the award was governed by the British Columbia International Commercial Arbitration Act. Under section 34(2)(a) of that Act, an arbitral award may be set aside by the Supreme Court only if 181

Metalclad Corporation v. United Mexican States, Award, 30 August 2000, para. 76. Para. 88. 183 Para. 99. 184 Para. 107. 185 United Mexican States v. Metalclad Corporation, Judicial Review, Supreme Court of British Columbia, 2 May 2001, at http://www.naftalaw.org. 182

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... (iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration . . .186

With respect to Art. 1105 of the NAFTA, Mexico argued that the Tribunal had used the transparency provisions of the NAFTA as a basis for finding a breach of that provision and in that way it went beyond the NAFTA’s transparency provisions and created new transparency obligations.187 According to the Claimant, the Tribunal did not go beyond the NAFTA’s transparency provisions, but simply interpreted Art. 1105 to include the minimum standard of transparency.188 Before examining Art. 1105 of the NAFTA, the Court discussed Chapter 11 of the NAFTA and its separate arbitration procedure in the following terms: Section B of Chapter 11 established a separate arbitration procedure. It allows investors of a NAFTA Party (who are not themselves a party to the NAFTA) to make claims against other NAFTA Parties by way of arbitration. However, the right to submit a claim to arbitration is limited to alleged breached of an obligation under Section A of Chapter 11 and two Articles contained in Chapter 15. It does not enable investors to arbitrate claims in respect of alleged breaches of other provisions of the NAFTA.189

Therefore, the Court had the task to examine whether the Tribunal made decisions on matters beyond the scope of Chapter 11. The Court turned to Art. 1105 of the NAFTA and discussed the Tribunal’s interpretation and application of that provision. In the view of the Court, the Tribunal had not simply interpreted that provision to include minimum standard of transparency, but misstated the applicable law to include transparency obligations. Since transparency obligations are contained in Chapter 18 and not Chapter 11, the Tribunal made a decision beyond the scope of the submission to arbitration. The Court’s conclusion was based on the following reasoning: On my reading of the Award, the Tribunal did not simply interpret Article 1105 to include a minimum standard of transparency. No authority was cited or evidence introduced to establish that transparency has become part of customary international law. In the Myers award [S.D. Myers v. Canada], one of the arbitrators wrote a separate opinion and surmised an argument that the principle of transparency and regulatory fairness was intended to have been incorporated into Article 1105 . . . In my view, such an argument should fail because there is no proper basis to give the term “international law” in Article 1105 a meaning other than its usual ordinary meaning. 186 187 188 189

Para. 50. Para. 66. Para. 66. Para. 58.

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CHAPTER V Although I do not agree with the argument posed by the arbitrator in the Myers award, it may be argued that the court would have no ability to set the award aside under the International CAA if the arbitrator had based the award on that argument. While the interpretation of Article 1105 would have been flawed, it may be that the arbitrator would not have decided a matter outside the scope of the submission to arbitration. In the present case, however, the Tribunal did not simply interpret the wording of Article 1105. Rather, it misstated the applicable law to include transparency obligations and it then made its decision on the basis of the concept of transparency. In addition to specifically quoting from Article 1802 in the section of the Award outlining the applicable law, the Tribunal incorrectly stated that transparency was one of the objectives of the NAFTA . . . Transparency is mentioned in Article 102(1) but it is listed as one of the principles and rules contained in the NAFTA through which the objectives are elaborated . . . The principles of transparency is implemented through the provisions of Chapter 18, not Chapter 11. Article 102(2) provides that the NAFTA is to be interpreted and applied in light of the objectives set out in Article 102(1), but it does not require that all the of the provisions of the NAFTA are to be interpreted in light of the principles and rules mentioned in Article 102(1).190

Therefore, in the view of the Court it followed that . . . the Tribunal made its decision on basis of transparency. This was a matter beyond the scope of the submission to arbitration because there are no transparency obligations contained in Chapter 11.191

In relation to the Tribunal’s finding that the actions of Mexico prior to the issuance of the Ecological Decree amounted to indirect expropriation, the Court found that this conclusion was influenced by the Tribunal’s analysis of Art. 1105 based on the concept of transparency. It followed that the Tribunal on this point also decided a matter beyond the scope of the submission to arbitration because it based its conclusion on a lack of transparency. The Court said: The Tribunal based its conclusion that there had been a measure tantamount to expropriation/indirect expropriation, at least in part, on the concept of transparency. In finding a breach of Article 1105 on the basis of a lack of transparency, the Tribunal decided a matter beyond the scope of the submission to arbitration. In relying on the concept of transparency, at least in part, to conclude that there had been an expropriation within the meaning of Article 1110, the Tribunal also decided a matter beyond the scope of the submission to arbitration.192

Accordingly, the award was set aside in relation to these two findings. In this case, the Tribunal’s interpretation and application of Arts. 1105 and 1110 of the NAFTA was subject of the review of the Supreme Court of British Columbia. The Court refused to accept that the Tribunal merely interpreted the wording of the pertinent provisions to include the minimum standard of 190 191 192

Paras. 68-71. Para. 72. Para. 79.

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transparency. It found that a lack of transparency was primarily relevant for the Tribunal’s findings of the breach of Art. 1105 and, consequently, of Art. 1110. Since the principle of transparency is, in the view of the Court, only implemented through Chapter 18 (for which arbitration was not available) and not Chapter 11, it found that the Tribunal misstated the applicable law. The Court’s standard of review must be criticized.193 The Award evidences that the Tribunal had identified the applicable law properly i.e. that the Tribunal had to decide in accordance with the NAFTA and applicable rules of international law. The analysis of the Award confirms that the Tribunal interpreted the relevant NAFTA provisions in light of the objectives set out in Art. 102(1) of the NAFTA. Article 102(2) of the NAFTA provides that the provisions of the NAFTA are to be interpreted in light of the NAFTA objectives and applicable rules of international law. Article 31(1) of the Vienna Convention on the Law of Treaties provides a rule for the treaty interpretation to which the Tribunal referred. In accordance with this provision “a treaty is to be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of the treaty’s object and purpose”.194 This is exactly what the Tribunal did. In particular, it relied on transparency obligations and, as a matter of fact, considered transparency as relevant for interpretation of fair and equitable treatment standard as contained in Art. 1105 of the NAFTA. Whether or not the Tribunal properly applied the relevant provisions is another matter, but it clearly had not misstated the applicable law. What obviously confused the Court was the Tribunal’s quotation of Art. 1802(1) which mandates certain transparency obligations. This led the Court to conclude that the Tribunal based its decision on the wrong chapter of the NAFTA. But the Tribunal did not rely on Chapter 18. A mere reference, in a section outlining the applicable law, to the wrong provision of the applicable treaty is not evidence that the Tribunal misstated the applicable law. The analysis of the Award confirms that the Tribunal relied on the Preamble of the NAFTA and Art. 102(1) simply for the interpretative analysis of the relevant provisions of the Chapter 11. For the aforementioned reasons, the Court’s standard of review is entirely unsatisfactory. (iii) Mexico v. Feldman (no reference to the provision of the applicable treaty does not warrant annulment) In Feldman v. Mexico195 the dispute arose out of the application of the Mexican tax rebate regime to the export of tobacco products by the investor. 193

See generally Weiler, T., Metalclad v. Mexico: A Play in Three Parts, 2 Journal World Investment 685 (2001); See also Schreuer, C., Failure to Apply the Governing Law in International Investment Arbitration, 7 Austrian Review of International and European Law 147 (2002). 194 VCLT, 115 UNTS 331(1969). 195 Marvin Feldman v. United Mexican States, Award, 16 December 2002, available at http://www.naftalaw.org.

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While the investor had been denied rebates for taxes on exported cigarettes over a period of time, such rebates had been allowed to some Mexican exporters of cigarettes regardless of the inability of the latter to conform to certain requirements imposed by domestic law (more precisely, to produce invoices stating the tax amounts separately). The Claimant brought a claim under the NAFTA Chapter 11 investment provisions. It argued that Mexico’s refusal to rebate excise taxes applied to cigarettes exported by the investor and Mexico’s constant refusal to recognize such a right of the investor constituted a breach of Mexico’ obligations under the NAFTA Chapter 11, Section A, more specifically violation of Arts. 1102 (National Treatment), 1105 (Minimum Standard of Treatment) and 1110 (Expropriation and Compensation) of the NAFTA.196 The Respondent denied these allegations.197 A NAFTA Tribunal operated under the ICSID’s Additional Facility Rules. The Tribunal first discussed the issue of an expropriation. Under the heading “Applicable Law: NAFTA Art. 1110 and International Law”, the Tribunal quoted Art. 1110 and noted that the said art. governs expropriation under Chapter 11 of the NAFTA.198 In accordance with that provision, the key issue was whether the actions of Mexican authorities constituted an expropriation or valid governmental activity. In understanding the customary international law in this area, the Tribunal relied on the Restatement of the Law of Foreign Relations of the United States and its comments. In the view of the Tribunal, the Restatement confirmed the view that “the conditions (other than the requirement for compensation) are not of major importance in determining expropriation”.199 With respect to the tax measures and their characterization of being an expropriation the Tribunal offered the following observation: By their very nature, tax measures, even if they are designed to and have the effect of an expropriation, will be indirect, with an effect that may be tantamount to expropriation. If the measures are implemented over a period of time, they could also be characterized as “creeping,” which the Tribunal also believes is not distinct in nature form, and is subsumed by, the terms “indirect” expropriation or “tantamount to expropriation” in Article 1110(1). The Claimant has alleged “creeping expropriation.” The Respondent has objected that the Claimant has in effect added a new element to the case which, among other things, should have been submitted to the Competent Authorities under Article 2103(6) for a determination as to whether it should be excluded from consideration as an expropriation . . .200

196

Paras. 1, 24, 89-91. Paras. 92-95. 198 Para. 97. 199 Para. 99. 200 Para. 101; See also para. 109 where the Tribunal explained that under Art. 2103(6) the State Parties to the NAFTA “expressly confirm that tax regulatory activity may be expropriatory under Art. 1110, albeit with significant limitations”. More precisely, the Tribunal explained in footnote 9 that “NAFTA Art. 2103 generally excludes tax measures from coverage under 197

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The Tribunal relied on the Restatement and its comments in order to distinguish between an indirect expropriation and valid government regulation.201 It noted that Drawing the line between expropriation and regulation has proved difficult both in the pre-NAFTA context and for the handful of NAFTA Chapter 11 tribunals that have considered the issue. Here again, despite the less specific language and the lack of references to “tantamount to expropriation”, the Restatement is somewhat helpful, particularly comments, in understanding customary international law in this area. ... the Restatement comment specifically includes “taxation” as a possibly expropriatory action and establishes state responsibility, inter alia, for unreasonable interference with an alien’s property. At the same time, nondiscriminatory, bona fide general taxation does not establish liability.202

In addition to the Restatement, the Tribunal sought guidance from the decisions of other NAFTA Chapter 11 tribunals that have interpreted Art. 1110.203 The Tribunal introduced its finding on expropriation in the following terms: The Tribunal has struggled at considerable length, in light of the facts and legal arguments presented, the language of Article 1110 and other relevant NAFTA provisions, principles of customary international law and prior NAFTA tribunal decisions, to determine whether the actions of the Respondent relating to the Claimant constituted indirect or “creeping” expropriation, or actions tantamount to expropriation. (There is in this case no allegation of a direct expropriation or taking under Article 1110.).204

The Tribunal proceeded to analyze the facts in light of the NAFTA provisions, customary international law rules and prior NAFTA Chapter 11 tribunal decisions. It concluded that the actions of Mexico with regard to the investor did not constitute an expropriation under Art. 1110 of the NAFTA.205 It also found that the public purpose, non-discrimination and due process criteria in Art. 1110(1) of the NAFTA did not contradict the negative finding of expropriation.206 The Tribunal proceeded to deal with national treatment standard under Art. 1102 of the NAFTA. According to the Claimant, it had been treated NAFTA . . . However, this exclusion is not absolute. Article. 2103(4)(b) makes Art. 1102 applicable to tax measures, and Art. 2103(6) makes Art. 1110 applicable under certain conditions. Article 1105 is not mentioned among the exceptions to the exclusion; therefore, it does not apply to tax measures, other than in a situation in which an expropriation under Art. 1110 has been found, and there is an analysis as to whether the expropriatory action met the requirements of due process and Art. 1105 as provided in Article 1110(1)(c)”. 201 Paras. 104-107. 202 Paras. 104, 106. 203 Paras. 143-152. 204 Para. 108. 205 Para. 153. 206 Paras. 135-141.

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differently from one Mexican exporter of cigarettes and, consequently, this action of Mexico violated the NAFTA under the ordinary meaning of Art. 1102.207 In the investor’s view, the relevant Mexican tax law was not discriminatory in face, but that law had been applied in a discriminatory manner.208 The Respondent rejected these contentions noting that “it would be highly inappropriate for the Tribunal to find a violation of national treatment based on the failure of SHCP [Mexican Ministry of Finance and Public Credit] to provide a benefit which they had no authority under Mexican law to provide”.209 The Tribunal noted that the national treatment/non-discrimination provision is a fundamental obligation of the NAFTA Chapter 11 and that the same language has been used in some other trade agreements concluded between the parties.210 For the Tribunal Despite its deceptively simple language, the interpretative hurdles for Article 1102 are several. They include (a) which domestic investors, if any, are in “like circumstances” with the foreign investor; (b) whether there has been discrimination against foreign investors, either de jure or de facto; (c) the extent to which differential treatment must be demonstrated to be a result of the foreign investor’s nationality; and (d) whether a foreign investor must receive the most favourable treatment given to any domestic investor or to just some of them.211

Therefore, it was necessary to examine the above issues in order to determine whether there was a breach of Art. 1102 of the NAFTA. The Tribunal noted that it was complicated to analyze these issues since limited factual information had been presented to the Tribunal, in particular in relation to other domestic resellers/exporters from Mexico and their treatment by Mexican authorities.212 The Tribunal noted that the parties disagreed as to how these domestic exporters are treated in comparison to the Claimant and that SHCP had declined to provide any detailed information in this regard.213 The key question was whether rebates had in fact been permitted to the domestic cigarette exporters while denied to the foreign exporters. This is what the Tribunal examined on the basis of the limited facts presented to it. It found that the investor had been treated in a less favorable manner than the domestic exporter of cigarettes and, therefore, a de facto discrimination occurred which was in breach of Art. 1102 of the NAFTA.214 The (majority) of the 207 208 209 210 211 212 213 214

Para. 156. Para. 157. Para. 160. Para. 165. Para. 166. Para. 167. Para. 168. Paras. 173-187.

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Tribunal recalled that the evidence on discrimination, found to be present in the Feldman case, was limited: The extent of the evidence of discrimination on the record is admittedly limited . . . One member of this Tribunal believes that this evidence on the record is insufficient to prove discrimination . . . The majority’s view is based first on the conclusion that the burden of proof was shifted from the Claimant to the Respondent, with the Respondent then failing to meet its new burden, and on an assessment of the record as a whole . . . Here, the Claimant in our view has established a presumption and a prima facie case that the Claimant has been treated in a different and less favorable manner than several Mexican owned cigarette resellers, and the Respondent has failed to introduce any credible evidence into the record to rebut that presumption . . . In weighing the evidence, including the record of the five day hearing, the majority is also affected by the Respondent’s approach to the issue of discrimination. If the Respondent had had available to it evidence showing that the Poblano Group companies [Mexican exporter of cigarettes] had not been treated in a more favourable fashion than CEMSA [the investor’s company] with regard to receiving IEPS [the Special Tax on Production and Services] rebates, it has never been explained why it was not introduced . . . Thus, it is entirely reasonable for the majority of this Tribunal to make an inference based on the Respondent’s failure to present evidence on the discrimination issue.215

Mexico challenged this Award before the Ontario Superior Court of Justice. Ottawa was designated as the place of arbitration and, therefore, the setting aside proceedings took place there. Among other grounds for setting aside, Mexico alleged that the arbitral procedure adopted by the Tribunal was not conducted in accordance with the parties’ agreement since it conflicted with a mandatory rule applicable to investor/State arbitration under the NAFTA contained in Art. 2105 of the NAFTA.216 Article 2105 is part of Chapter 21 of the NAFTA dealing with exceptions. It provides as follows: Article 2105: Disclosure of Information Nothing in this Agreement shall be construed to require a Party to furnish or allow access to information the disclosure of which would impede law enforcement or would be contrary to the Party’s law protecting personal privacy or the financial affairs and accounts of individual customers of financial institutions.217

215

Paras. 176-178; The conclusions of the Award concerning national treatment and discrimination were reached by the majority Tribunal; See Dissenting Opinion, 16 December 2002, at http://www.naftalaw.org. 216 United Mexican States v. Marvin Feldman, Judicial Review, Ontario Superior Court of Justice, 3 December 2003, at http://www.naftalaw.org, paras. 3, 14-20. 217 32 ILM 701 (1993).

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Canada, the intervener in this dispute, took a position in relation to Art. 2105 of the NAFTA. The Court stated the position of Canada under the heading “Intervener”. The Court noted that The Intervener argues that the Tribunal failed to respect the governing law and therefore exceeded its jurisdiction in two ways. First, it failed to take Article 2105 into account as part of the agreement to arbitrate, and secondly it failed to take account of Article 2105 as part of the applicable rules of international law.218

In the view of the Intervener, the consequence of the Tribunal’s failure to consider the effect of Art. 2105 of the NAFTA was that the Tribunal improperly supported its findings of discrimination and breach of Art. 1102 of the NAFTA by “drawing a negative inference from Mexico’s alleged refusal or failure to produce information about taxpayers without their consent.”219 The Intervener noted that Mexico was protected under its domestic law concerning taxpayer confidentiality and, consequently, in accordance with Art. 2105 of the NAFTA, could not be forced to disclose information about the tax treatment of other cigarette exporters. For the aforementioned reasons: . . . the Intervener argues that the approach adopted by the majority was inconsistent with the agreement of the parties and the rules governing arbitration as it forces a party to disclose information notwithstanding Article 2105 or risk losing the arbitration. And further, by drawing an adverse inference from Mexico’s refusal to produce the taxpayer’s documents at issue, the Tribunal failed to take into account Article 2105 and thereby exceeded the scope of the submission to arbitration in breach of Article 34(2)(a)(iii).220

The Court found that the Tribunal did not exceed the scope of the submission to arbitration for the following reasons: since neither Mexico nor the Tribunal addressed the Art. 2105 argument and its relation to Mexican domestic law, the Court found it improper to consider that Article on its review.221 The Court said: No requests were made by the Tribunal for confidential information under Section 69 of the FCC [Federation Fiscal Code]. No requests or submissions were made in respect of the application of Article 2105 of the NAFTA during the hearing and neither the majority award nor the dissent mention Article 2105. What was sought before the Tribunal was an accommodation to provide information as to whom rebates were given and who was undergoing an audit.222

In the view of the Court, Mexico could have provided the basic information about tax payments to other cigarette exporters without breaching the duty of 218

United Mexican States v. Marvin Feldman, Judicial Review, Ontario Superior Court of Justice, 3 December 2003, para. 32. 219 Paras. 27-28, 33. 220 Paras. 37-38. 221 Paras. 42-43. 222 Para. 44.

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confidentiality protected under Mexican law.223 The fact that the investor was denied certain rebates while other domestic cigarette exporters in like circumstances were permitted, primarily led the majority of the Tribunal to find a breach of Art. 1102 of the NAFTA.224 The Court agreed with the conclusion of the Tribunal: The majority of the Tribunal found that the Respondent had established a presumption and a prima facie case that CEMSA [the investor’s company] had been treated in a different and less favourable manner than several Mexican owned cigarette resellers, and Mexico had failed to introduce any credible evidence into the record to rebut that presumption.225

The Court found no basis to set aside the Award. In this case, the Ontario Superior Court of Justice found that since no requests were made in respect of the application of Art. 2105 during the arbitration proceedings, it was improper for the Court to consider Art. 2105 argument on its review. The decision of the Court is convincing for the following reasons:226 The Tribunal, in its Award, considered the relevant NAFTA provisions within the wider context of that treaty. In other words, since the Feldman case concerned taxation measures, limitation comes from Art. 2103 of the NAFTA set out in Chapter 21 dealing with exceptions. As a matter of fact, this is exactly what the Tribunal noted. It said that “NAFTA Art. 2103 generally excludes tax measures from coverage under NAFTA . . . However, this exclusion is not absolute. Art. 2103(4)(b) makes Art. 1102 applicable to tax measures, and Art. 2103(6) makes Article 1110 applicable under certain conditions. Article 1105 is not mentioned among the exceptions to the exclusion; therefore, it does not apply to tax measures, other than in a situation in which an expropriation under Art. 1110 has been found, and there is an analysis as to whether the expropriatory action met the requirements of due process and Art. 1105 as provided in Art. 1110(1)(c)”.227 Therefore, the Award evidences that the Tribunal had selected the applicable law correctly i.e. that the Tribunal had to decide in accordance with the relevant provisions of the applicable treaty together with applicable rules of international law. In setting aside proceedings, the relevant question concerned the effect of Art. 2105 of the NAFTA dealing with disclosure of information. As noted above, that article is also part of the exceptions contained in NAFTA Chapter 21. It provides that nothing in NAFTA “shall be construed to require a Party to furnish or allow access to information the disclosure of which would impede law enforcement or would be contrary to the Party’s law protecting personal 223

Paras. 45, 68-69. Para. 46. 225 Para. 67. 226 See comments of Weiler, T., (12 July 2003), available at http://www.naftaclaims.com/News/. 227 Marvin Feldman v. United Mexican States, Award, 16 December 2002, http://www. naftalaw. org, para. 109 (footnote 9). 224

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privacy”.228 The analysis of the Award indicates that the Tribunal had not imposed any such obligation on the part of Mexico.229 The Award also confirms that the Tribunal evaluated the limited evidence in light of relevant NAFTA provisions and applicable rules of international law and based its findings on that. For the aforementioned reasons, the Court in its judicial review took a correct approach.

(d) Concluding remarks For arbitral awards rendered in an ICC, UNCITRAL or Additional Facility arbitration, in contrast to ICSID arbitration, the place of arbitration becomes relevant in the setting aside proceedings. The drafters of the arbitration clause should, therefore, think in advance about the legal consequences of the choice of an arbitral forum since the possibility of recourse against these awards is governed by the national arbitration laws.230 This is particularly important since the setting aside of an award at the place of arbitration is a ground for refusal of recognition and enforcement of an award under the New York Convention.231 Generally, the national arbitration laws of all major arbitral forums provide for the setting aside of the award on the ground that the tribunal exceeded its mandate (or some other wording may be employed). The Svea Court of Appeal Judgment confirms that the failure to apply the proper law may constitute an excess of mandate. Therefore, the non-observance of the parties’ agreement on the applicable law may, as consequence, lead to nullity. However, the Svea Court refused to set aside the award on this ground. Its main argument was that the Tribunal decided the case within the framework of the applicable law and, therefore, it stayed within its terms of reference. The Judgment of the Svea Court illustrates a general reluctance of the domestic courts to set aside awards for failure to apply the proper law. In the view of the Svea Court, there is no excess of mandate as long as the Tribunal decides on the basis of some legal sources listed in the choice of law clause 228

32 ILM 701 (1993). In its Correction and Interpretation of the Award (13 June 2003), the Tribunal recalled that “it never at any time imposed any obligation on the Respondent to release information covered by NAFTA Art. 2105”, para. 11, at http://www.naftalaw.org. 230 Craig, W. L./Park, W. W./ Paulsson, J., International Chamber of Commerce Arbitration, 3rd ed., Oceana (2000) at p. 496. 231 See Art. V(1)(e). It has to be noted that under the 1958 New York Convention the domestic courts still may enforce an annulled award by relying on its own law. In this context see Chromalloy Aeroservices v. Arab Republic of Egypt, 939 F.Supp. 907 (D.D.C. 1996); See also Brower, N. C., A Crisis of Legitimacy, the National Law Journal, October 2002, available at http://www.whitecase.com/article_international_adr_10_7_2002.pdf; Craig, W. L./Park, W. W./ Paulsson, J., International Chamber of Commerce Arbitration, 3rd ed., Oceana (2000) at p. 504. 229

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contained in the BIT, whatever it chooses. It would then seem that the tribunal only fails to respect its mandate if it decides ex aequo et bono without having the power to do so. To annul the award on this ground is surely warranted. But, it is then possible to conclude that hardly any arbitral award may be set aside for failure to apply the proper because every tribunal will refer to at least some part of the designated law. It is hardly thinkable that in the face of several legal sources listed in the respective provision the tribunal decides on the basis of equity without authority to do so. And even in respect of the argument that the Award was based on equity rather than on law, the Svea Court declared that lack of specific references to some legal sources is not a proof that the Tribunal decided indeed ex aequo et bono. It follows that under this reasoning hardly any situation may be foreseen that would lead to nullity for failure to apply the proper law. Although such a limited standard of review preserves the finality of the awards it is unacceptable. By contrast to the Svea Court in the CME case, the Court in the Metalclad case annulled the part of the Award for failure to apply the proper law on the part of the Tribunal. In the view of the Court the applicable law was misstated in the sense that the Tribunal’s findings were based on the wrong chapter of the NAFTA. The Court’s standard of review is unacceptable. The Tribunal had identified the applicable law properly and, in order to interpret the provisions of the NAFTA Chapter 11 Section A, the Tribunal had simply considered other parts of the treaty, in particular the NAFTA’s Preamble and Objectives. That interpretative approach is in accordance with the standard rules of treaty interpretation as codified in the Vienna Convention on the Law of Treaties. By contrast to the above, the decision of the Ontario Superior Court of Justice in the Feldman case is satisfactory. The Tribunal had identified the applicable law properly i.e. it had to apply the NAFTA and the applicable international law rules. It proceeded to act within the framework of the applicable law. No reference had been made to the provision dealing with disclosure of information since the Tribunal had not imposed any such obligation on the part of Mexico. The Tribunal merely stayed within the limited evidence and based its conclusions on that. It follows that, under such circumstances, the Tribunal had not failed to respect the applicable law.

CHAPTER VI

Prohibition of a Non Liquet

Article 42(2) of the ICSID Convention expressly provides that “the Tribunal may not bring in a finding of non liquet on the ground of silence or obscurity of law”.1 The UNCITRAL and ICC arbitration rules do not contain such a provision, but international adjudication widely accepts the prohibition on a finding of non liquet.2 The prohibition of a non liquet reflects the view that the tribunal must provide an answer to every question and can not refuse to decide a case at all or certain questions only.3 This applies irrespective of what may be the proper law.4 In other words, in case of the parties’ agreement on choice of law under the first sentence of Art. 42(1) of the ICSID Convention the tribunal must, first, exhaust all possible methods for closing any gaps, provided by the chosen law. If no answer can be found in the rules of the chosen law (e.g. the

1

At http://www.worldbank.org/icsid/basicdoc/22.htm. “The prohibition of non liquet constitutes one of the most undisputably established rules of positive international law as evidenced by an uninterrupted continuity of international arbitral and judicial practice”, in Lauterpacht, H., Some Observations on the Prohibition of Non Liquet and the Completeness of the Legal Order, in Symbolae Verzije (1958) (as quoted in Stone, J., Non-liquet and the Function of Law in the International Community, 35 BYIL 124 (1959) at p. 124); Art. 11 of the Model Rules on Arbitral Procedure adopted by the International Law Commission states:

2

“The tribunal may not bring a finding of non liquet on the ground of silence or obscurity of international law or the compromis”, YBILC 84 (1958-II). 3

Article 42(2) of the ICSID Convention is reinforced by Art. 48(3) which provides that the award shall deal with every question submitted to the Tribunal; See Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at p. 632. 4 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. 196.

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host State’s law) the tribunal will resort to the second sentence of Art. 42(1) and apply both the host State’s law and international law.5 International law in its relation to domestic law has both corrective and supplemental function i.e., international law will be applied in case of lacuna in the chosen domestic law. In practice, general principles of law are usually used to close gaps left by treaties or customary international law. The tribunal may employ some other gap-filling techniques in order to avoid non liquet.6 For instance, the ICC and UNCITRAL arbitration rules explicitly provide that in all cases the tribunal must take into account contractual provisions and relevant trade usages. Therefore, these legal sources may be used as means to filling gaps in the applicable substantive law. In any case, whatever method is used, the applicable rules of law must be established and clearly demonstrated. Otherwise, the award may carry a risk of annulment on the ground that the tribunal exceeded its powers (or has not complied with its mandate) for failure to apply positive law. This applies to both ICSID and non-ICSID awards. Ex aequo et bono decisions can only be made with the express consent of the parties.

5 See generally on this point Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 632-633; See SPP v. Egypt, Award, 20 May 1992, 3 ICSID Reports 207-209, 249, 321. 6 See http://www.unctad.org/en/docs/edmmisc232add5_en.pdf.

CHAPTER VII

Decision ex aequo et bono

1 Generally Ex aequo et bono decision means a decision on the basis of equity i.e., in deciding a case “the arbitral tribunal would seek a fair and equitable solution”.1 It extends beyond the law and requires an express authorization from the parties. Ex aequo et bono decision represents an extension of the widely recognized principle of party autonomy. Therefore, not only may the parties agree on applicable rules of law to their relationship, but also they may authorize the tribunal to decide on the basis of equity i.e. beyond the law. Formerly, ex aequo et bono decision was connected to the nature of the dispute meaning that it was only appropriate for non-legal disputes or, was regarded as a way to fill gaps in international law.2 But, as stated in a recent study: Settlement of a dispute ex aequo et bono, rather than on the basis of law, results neither from the nature of the dispute, nor from lacunae in international law, but solely from the decision of the parties to obtain such a solution.3

Rules governing international arbitration commonly provide for decision ex aequo et bono.4 The power to decide ex aequo et bono, with the agreement of the 1 Hermann, G., The UNCITRAL Model Law, Its Background, Salient Features and Purposes, 1 JIA 6, at p. 23 (as quoted in Rubino-Sammartano, M., International Arbitration: Law and Practice, 2nd ed., KLI (2001) at p. 460). 2 Schreuer, C., Decisions Ex Aequo et Bono Under the ICSID Convention, 11 ICSID Review – FILJ 37 (1996) at p. 38. 3 Degan, L’ équité en droit international (1970) (as quoted in 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. 394). 4 ILC Model Rules on Arbitration Procedure of 1958, Art. 10(2), YBILC 84 (1958-II); UNCITRAL Arbitration Rules of 1976, Art. 33(2), UN Doc. A/3/17 (1976); PCA Rules, Art. 33,

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parties, is found in the Statutes of both, PCIJ and ICJ. For example, Art. 38(2) of the International Court of Justice provides: This provision shall not prejudice the powers of the Court to decide a case ex aequo et bono, if the parties agree thereto.5

Similar provision is found in the ICSID Convention. Article 42(3) provides: 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.6

Therefore, specific consent by the parties is required for a decision on the basis of equity. Furthermore, Art. 42(3) clearly states that the power of the tribunal to decide ex aequo et bono is not prejudiced by the determination of applicable law. By contrast to the ICSID Convention, Art. 54(2) of the Additional Facility Arbitration Rules provides: 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.7

Under the Additional Facility rules, the parties’ express authorization is required for ex aequo et bono decision and the applicable procedural law must allow such decision. The same provides the UNCITRAL Arbitration Rules in Art. 33(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.8

Therefore, two requirements must be fulfilled in order to empower the UNCITRAL tribunal to decide equitably. The first requirement relates to the necessity of an express authorization by the parties. The second one refers to the domestic law of the country where the arbitral proceedings are conducted. If that law does not permit arbitration ex aequo et bono, the tribunal is not allowed to decide on the basis of equity, but must render its award on the basis of law.9 Therefore, a problem may arise if the applicable procedural law does PCA Basic Documents: Conventions, Rules, Model Clauses and Guidelines, The Hague (1998); 1998 ICC Arbitration Rules, Art. 17(3), 36 ILM 1604 (1997); ICSID Convention, Art. 42(3), 575 UNTS 159, reprinted in ICSID Basic Documents, Doc. ICSID/15 (Jan. 1985); Art. 33(2) of the Iran–US Claims Tribunal Rules provide: “The arbitral tribunal shall decide ex aequo et bono only if the arbitrating parties have expressly and in writing authorized it to do so”, Final Tribunals Rules of Procedure (3 May 1983), reprinted in VIII Y.B.Com. Arb. 234 (1983). 5 At http://www.icj-cij.org. 6 At http://www.worldbank.org/icsid/basicdoc/partA.htm. 7 At http://www.worldbank.org/icsid/facility/partD.htm. 8 At http://www.uncitral.org/en-index.htm. 9 See analysis of ex aequo et bono decision and the modern legal systems in RubinoSammartano, M., International Arbitration: Law and Practice, 2nd ed., KLI (2001) at pp. 463-466; It has to be noted that the UNCITRAL Model Law does not stipulate this requirement due to the

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not allow a decision ex aequo et bono. In this context, it is necessary to note that provision for ex aequo et bono decision is found in a great majority of newly adopted national arbitration acts and, thus, the effect of this requirement is reduced to a great extent.10 Under Art. 17(3) of the ICC Rules the power to decide on the basis of equity is dependant only on the requirement of the parties’ authorization. It provides as follows: 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.11

2 Amiable composition or ex aequo et bono As can be seen from the above examples, some arbitration rules refer to both terms: amiable composition and ex aequo et bono. In this context, it is interesting to note that these two notions are not identically understood in different legal systems. According to some writers they are synonymous, while other writers advocate their distinction.12 According to Rubino-Sammartano, the distinction between these two notions has developed in the Italian legal system which distinguishes between settlement (amiable composition) and decision (ex aequo et bono).13 Under this view, reference to amiable composition grants a tribunal the power to settle the case, while the tribunal deciding ex aequo

“general policy of reducing the importance of the place of arbitration in international commercial arbitration, insofar as it recognized practices unknown in domestic arbitration at that place” in Holtzmann M. H./Neuhaus E. J., A Guide To The UNCITRAL Model Law on International Commercial Arbitration, Kluwer (1989) at p. 770. 10 See e.g. Art. 1054(3) of the 1986 Netherlands Arbitration Act; Section 1051(3) of the 1988 German Arbitration Act; See also Section 46(1)(b) of the 1996 English Arbitration Act which provides as follows: 46.(1) The Arbitral tribunal shall decide the dispute ... (b) if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the tribunal.

The commentaries of the above provision note that “such other considerations” refers to the decision ex aequo et bono and, therefore, corresponds to Art. 28(3) of the UNCITRAL Model Law., in International Handbook on Commercial Arbitration, Vol. II, KLI ( 2003). 11 1998 ICC Arbitration Rules, 36 ILM 1604 (1997) at p. 1612. 12 See generally Rubino-Sammartano, M., Intentional Arbitration: Law and Practice, 2nd ed., KLI (2001) at pp. 471-474. 13 Ibid., He noted that “Under Italian law, a distinction is made between procedural arbitration (in which the arbitrators reach a decision similar to a judge’s decision) and contractual arbitration (or joint mandate to settle) in which the parties grant to the arbitrators a mandate to settle in their place, a mandate which has contractual instead of procedural contents.”, at p. 471.

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et bono does hot have such an authority. In his view, these two notions are not synonymous and use of “or” instead of “and” in the wording of the UNCITRAL Model law confirms that.14 A commentary to the UNCITRAL Model Law notes that both terms are included not only because some legal systems use one or the other but also that some systems may distinguish between them.15 Anyhow, in practice this distinction of terms (if any) appears irrelevant.16 In both situations the tribunal is empowered to disregard the strict application of legal rules and to refer to equity. For this reason, this study uses the term ex aequo et bono as a synonym to amiable composition. Therefore, reference to amiable composition is understood as giving the power to the tribunal to decide on the basis of equity.

3 Express Agreement on a Decision ex aequo et bono (a) Original agreement As in case of an agreed choice of law, the normal way to agree on a decision ex aequo et bono is to include this provision in the initial arbitration agreement between the parties. Such provision would expressly authorize the tribunal to decide ex aequo et bono or, in other words, the parties’ express authorization is a prerequisite for a decision on the basis of equity. An illustrative example of such a provision is found in the Agreement of 12 August 1981 between Atlantic Triton and Guinea which in Art. 15 contained the following arbitration clause: Article 15 – Arbitration Any dispute arising from the interpretation, application and execution of this Agreement shall be amicably settled. In case of disagreement the parties accept to refer to the arbitration of the “International Center for Settlement of Investment Disputes Between States and Nationals of Other States” and the Disagreement shall be settled ex aequo et bono in accordance with the provisions of Article 42(3) of the said Convention . . .17

The ICSID Model Clauses of 1993 offers the following sample for such a clause: Clause 11 Any Arbitral Tribunal constituted pursuant to this agreement shall have the power to decide a dispute ex aequo et bono.18 14

Ibid, at p. 474. Holtzmann M. H./Neuhaus E. J., A Guide To The UNCITRAL Model Law on International Commercial Arbitration, Kluwer (1989) at p. 770. 16 See Craig, W. L./Park, W. W./ Paulsson, J., International Chamber of Commerce Arbitration, 3rd ed., Oceana (2000) at pp. 112-113. 17 Atlantic Triton v. Guinea, Award, 21 April 1986, 3 ICSID Reports 17. 18 4 ICSID Reports 364. 15

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(b) Subsequent agreement It is also recognized in practice that the parties may authorize a tribunal to decide ex aequo et bono in the course of the proceedings. In situations when a BIT or domestic legislation is a basis for arbitral jurisdiction, the parties would logically have no possibility to reach such an agreement prior the proceedings. In such circumstances they may decide to give the authorization to the tribunal at the beginning of the proceedings or at some later stage. This happened in Benvenuti & Bonfant v. Congo.19 There was no parties’ agreement on applicable law and, therefore, the Tribunal had to apply the residual rule of Art. 42(1) of the ICSID Convention. But the parties authorized the Tribunal, at a later stage of proceedings, to decide the dispute ex aequo et bono.20 The Tribunal when dealing with the issue of applicable law in its Award confirmed its power to decide on the basis of equity as being authorized by the parties during the proceedings.21 Therefore, only an explicit agreement of the parties may empower the tribunal to decide ex aequo et bono. In cases where the specific consent of both parties was lacking, the tribunal correctly found that it was bound to decide a dispute in accordance with the applicable rules of law only. For instance, in AGIP v. Congo the Tribunal, after noting that the parties had agreed on the applicable law, refused to decide on the basis of equity since one of the parties refused to grant it such a power: 44. In its Counter-Memorial the Government in effect proposed that the Tribunal should adopt the role of friendly arbitrator. Since AGIP has not agreed to this proposal, the Tribunal must make its decision in accordance with the provisions of the applicable law provided for in paragraph 2 of Article 15 of the Agreement. The said Article binds the parties and has force of law for the Tribunal by virtue of the above-cited Article of the Convention.22

(c) Possibility of dépeçage Furthermore, the parties may agree that only certain issues of their relationship may be decided on the basis of equity, whereas other must be decided in accordance with applicable rules of law.23 This method of dépeçage has been described in the context of the application of rules of law and, here, is equally acceptable.24 19

See discussion of this case in the chapter on subsequent choice of law. Benvenuti & Bonfant v. Congo, Award, 15 August 1980, 1 ICSID Reports 338, 342, 349. 21 At p. 349. 22 AGIP v. Congo, Award, 30 November 1979, 1 ICSID Reports 318. 23 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. 395. 24 See sections on the principle of party autonomy and on choice of law modalities. 20

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4 No Authorization to Decide ex aequo et bono If a tribunal decides a case ex aequo et bono without the parties’ authorization, such an award under both ICSID and non-ICSID arbitration system carries a risk of annulment. When the tribunal decides on the basis of equity without being authorized to do so by the parties, its award may be annulled on the ground that it exceeded its powers.25 Arbitral practice confirms this finding. The ruling of the ad hoc Committee in the Klöckner case is an illustrative example.

(a) Klöckner v. Cameroon In this case, Klöckner, a German company, together with its subsidiaries instituted ICSID arbitration against Cameroon in April 1981. The Award26 was rendered in favor of Cameroon whereupon Klöckner applied for the annulment of the Award under Art. 52 of the ICSID Convention.27 In its application, Klöckner requested annulment of the award on the ground of manifest excess of powers because of a violation of Art. 42(1) of the ICSID Convention. There was no agreement by the parties on a decision ex aequo et bono. The Claimant argued that the Tribunal was obliged to render its award by applying Cameroonian law based on French law, since this was the law applicable to the dispute.28 But in the Claimant’s view, the Tribunal had ignored this principle and, consequently, exceeded its powers.29 With respect to the excess of powers as a ground for annulment under the ICSID Convention, the ad hoc Committee noted that it may consist both in a failure to apply the proper law as well as in its resort to equity in lieu of applying the applicable rules of law: 59 . . . Excess of powers may consist of the non-application by the arbitrator of the rules contained in the arbitration agreement (compromis) or in the application of other rules. Such may be the case if the arbitrator . . . applies rules of local law while the arbitration agreement prescribes that he decide “on the basis of absolute equity, without regard . . . to the provisions of local law,” or if, conversely, he reaches a solution in equity while he is required to decide in law . . .30

In regard to the Tribunal’s finding that the duty of full disclosure to a partner was a basic principle of French law, the ad hoc Committee found that the 25

See Feldman, M., The Annulment Proceedings and the Finality of ICSID Arbitral Awards, 2 ICSID Review – FILJ 85 (1987) at p. 104; Schreuer, C., Decisions Ex Aequo et Bono Under the ICSID Convention, 11 ICSID Review – FILJ 37 (1996) at pp. 53, 61. 26 Klöckner v. Cameroon, Award, 21 October 1983, 2 ICSID Reports 9. 27 Klöckner v. Cameroon, Decision on Annulment, 3 May 1985, 1 ICSID Review – FILJ 89 (1986). See also analysis of this case in the chapter on annulment. 28 At p. 109. 29 At p. 109. 30 At p. 110.

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Tribunal had postulated rather, than demonstrated the existence of such a basic and general principle: 75. In any event, in the absence of any information, evidence or citation in the Award, it would seem difficult to accept, and impossible to presume, that there is a general duty, under French civil law, or for that matter other systems of civil law, for a contracting party to make a “full disclosure” to its partner. If we were to “presume” anything, it would instead be that such a duty (the basic idea of which may, of course, be accepted as it follows from the principle of good faith; cf. Article 1134, para. 3 of the French Civil Code) must, to be given effect in positive law, have conditions for its application and limits!31

Therefore, since there was no reference to any specific legal authority in the Award the Tribunal’s reasoning seemed to the ad hoc Committee 77 . . . very much like a simple reference to equity, to “universal” principles of justice and loyalty, such as amiable compositeurs might invoke.32

It followed that the Tribunal acted “outside the framework provided by Art. 42(1), applying concepts and principles it probably considered equitable”33 and that constituted a manifest excess of powers on the side of the Tribunal and, therefore, the Award had to be annulled. The Klöckner Award, therefore, confirms that a decision based on equity, without the parties’ authorization, amounts to an excess of powers and leads to nullity. In that case, the Tribunal had not substantiated its finding by clear reference to some legal authority, but invoked wording that led the ad hoc Committee to conclude that it resorted to equity. When terms such as “equitable”, “justice” or “fairness” are used by a tribunal it is necessary to examine in a general context whether the tribunal invoked some equitable considerations as part of the applicable rules of law, or resorted to equity. It appears that the invocation of these terms carries a risk of being interpreted as a reference to equity instead of law. For this reason, clear reference to some legal authority as a basis for the tribunal’s finding is desirable.34 The correct position on this point has been expressed by the ad hoc Committee in Amco v. Indonesia. In its opinion, not every reference to equitable considerations would amount to a decision ex aequo et bono: Invocation of equitable considerations is not properly regarded as automatically equivalent to a decision ex aequo et bono which, in view of the

31

At p. 114. Italics original. At p. 114. 33 At p. 115, para. 79. 34 But see, for instance, the position of the Svea Court of Appeal in The Czech Republic v. CME which held: “the fact that each legal statement in the award is not directly derived citing a rule of law cannot be deemed to mean that the tribunal conducted a general assessment of reasonableness”, Svea Court of Appeal, 15 May 2003, 42 ILM 919 (2003) at p. 965. 32

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CHAPTER VII determination of the law applicable to the present case, would constitute a decision annullable for manifest excess of powers. Nullity would be a proper result only where the Tribunal decided an issue ex aequo et bono in lieu of applying the applicable law.35

5 Application of Both Law and Equity The power to decide ex aequo et bono does not preclude the application of law or, in other words, application of both equity and law is possible.36 This means that the tribunals have great discretion when a power to decide ex aequo et bono is granted to them. Benvenuti and Bonfant v. Congo is an illustrative example of such an approach.

(a) Benvenuti & Bonfant v. Congo Since there was no agreement by the parties on choice of law, the Tribunal in this case, resorted to the second sentence of Art. 42(1) of the ICSID Convention.37 Furthermore, in the course of the proceedings the parties granted the Tribunal the power to decide ex aequo et bono.38 After identifying the applicable rules of law the Tribunal noted that it also had the power to decide on the basis of equity: 4.4. In the present case, the Tribunal also has the power to rule “ex aequo et bono” in accordance with the Agreement of the parties as authorized by Article 42(3) of the Convention. This agreement was signified to the Tribunal at the hearing of 6 June 1979 in Geneva. The Tribunal took cognizance of it in its procedural order of 7 June 1979.39

Such power gives the Tribunal discretion to apply both the rules of law and equity. As a matter of fact, this is what the Tribunal did in this case. It applied Indonesian law, international law and principles of equity. With respect to the obligation of compensation for the company’s expropriation, the Tribunal referred to both law and equity in the following terms: 4.64. This principle of compensation in case of nationalization is in accordance with the Congolese Constitution and one of the generally recognized principles of international law as well as of equity.

35

Amco v. Indonesia, Decision on Annulment, 16 May 1986, 1 ICSID Reports 516-517. Craig, W. L./Park, W. W./ Paulsson, J., International Chamber of Commerce Arbitration, 3rd ed., Oceana (2000) at p. 352; Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press (2001) at pp. 638-640; Schreuer, C., Decisions Ex Aequo et Bono Under the ICSID Convention, 11 ICSID Review – FILJ 37 (1996) at p. 44. 37 Benvenuti & Bonfant v. Congo, Award, 15 August 1980, 1 ICSID Reports 349. 38 At pp. 338, 342, 349. 39 At p. 349. 36

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4.65. By reason of the above, the Government must therefore be ordered to pay B&B damages, the quantum of which will be determined ex aequo et bono . . .40

Therefore, on the basis of both applicable systems of law (i.e. the host State’s law and international law) and principles of equity the Tribunal supported its finding on the obligation of the compensation in case of nationalization. It proceeded to determine the amount of damages ex aequo et bono. This part of the Award contains many references to equity. For instance, on the Claimant’s request for payment for intangible loss in the amount of CFA 250, 000, 000 the Tribunal decided equitably. It offered the following reasoning: 4.96. The Tribunal does not have any evidence capable of establishing the truth of B&B’s claims under this head. Indeed B&B limits itself to simple statements, unsupported by concrete evidence. Equally, it has not been established whether, even after receiving the compensation owed to it, with interest, it would have the possibility to work or to invest or to resume its activities in Italy or elsewhere. The Tribunal has reason to doubt B&B’s simple statement that it lost its credit with its suppliers or bankers or that it could not obtain the necessary personnel. Taking into account, however, the measures of which B&B was the object and the proceedings resulting therefrom, which have certainly disturbed B&B’s activities, the Tribunal considers it equitable to award it the sum of CFA 5, 000, 000 as damages for intangible loss.41

Resort to both equity and law is evident also in the Tribunal’s finding on interest. The Claimant sought interest at the rate of 15% a year on all sums awarded to it. The Tribunal returned to Congolese law saying that that law provides a legal rate of interest lower than the one claimed. The Respondent proposed another rate of interest on its counterclaim. The Tribunal reached an ex aequo et bono decision also in relation to this question. It said: 4.97 . . . B&B claimed interest at the rate of 15% a year on all sums awarded to it. 4.98. The Tribunal does not consider it possible to uphold this claim seeing as the law applicable; Congolese Law lays down a significantly lower rate of interest. The Tribunal observes, however, that the Government, in its Memorial in Defence, suggested a rate of interest of 10% in connection with its counterclaim. By virtue of its power to rule ex aequo et bono, the Tribunal considers it equitable to adopt this rate in relation to the compensation awarded to B&B.42

Since the Claimant requested interest on the various sums to run from certain dates the Tribunal again referred to equity: 4.100. The Tribunal considers these claims to be reasonable and equitable and therefore orders the Government to pay the above items of interest, to run from the stated dates.43 40 41 42 43

At p. 357. At p. 361. At p. 361. At p. 362.

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Finally, with respect to the costs of arbitration proceedings, the Tribunal accepted the Claimant’s request to take into account that the Government initially responded with delay to the proceedings and, consequently, incurred additional costs for the Claimant. Although there was a provision in the parties’ agreement on equal sharing of costs, the Government did not formally object to this request and the Tribunal decided to refer to equity on this point as well. The Tribunal said: 4.129. The Tribunal therefore considers it equitable that this request be accepted and decides accordingly that the Government must pay B&B in addition to the sums already awarded, the sum of US $ 15, 000 with interest at the rate of 6% per annum from the date of the award until payment.44

This decision therefore demonstrates that although the tribunal was authorized to decide ex aequo et bono, this authorization did not preclude it to check and apply the rules of law as well. As a matter of fact, the Tribunal resorted to equity mainly in respect to the determination of the amount of damages as well as of interest.45 In its award of procedural costs the Tribunal disregarded the strict application of rules of law and decided equitably.

6 Equity Within the Law Decision ex aequo et bono must be distinguished from equity within the law. Although such distinction is generally accepted and recognized, a clear line between the two concepts is not easily identified in practice.46 The reason is that sometimes an applicable rule of law calls for the application of equitable principles and, consequently, it appears difficult to distinguish equity within the law from a decision on the basis of equity. In this context, as some commentators note, ICSID tribunals have tried to give some directions but still no strict differentiation was achieved.47 For instance, in Amco v. Indonesia, the ad hoc Committee clearly distinguished a decision ex aequo et bono from equity within the law. It said: 26. Neither does the ad hoc Committee consider that any mention of “equitable consideration” in the Award necessarily amounts to a decision ex aequo et bono 44

At p. 365. Usually arbitral tribunals use normal equitable considerations for the calculation of damages (e.g. the method for valuation used in Iran–US Claims Tribunal in most cases was based on the Tribunal’s own view as to what was fair and reasonable). See generally Westberg, J. A., Applicable Law, Expropriatory Takings and Compensation in Cases of Expropriation; ICSID – Iran–United States Claims Tribunal Case Law Compared, 8 ICSID Review – FILJ 1 (1993). 46 Schreuer, C., Decisions Ex Aequo et Bono Under the ICSID Convention, 11 ICSID Review – FILJ 37 (1996) at p. 39. 47 Schreuer, C., Decisions Ex Aequo et Bono Under the ICSID Convention, 11 ICSID Review – FILJ 37 (1996) at p. 62. 45

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and a manifest excess of power on the part of the Tribunal. Equitable considerations may indeed form part of the law to be applied by the Tribunal, whether that be the law of Indonesia or international law.48

It also correctly added “that invocation of equitable considerations is not properly regarded as automatically equivalent to a decision ex aequo et bono”.49

7 Limits on Decision ex aequo et bono As already noted above, the UNCITRAL Arbitration Rules (like the ICSID Additional Facility Arbitration Rules) provide in Art. 33(2) that the tribunal may decide ex aequo et bono only if the parties have expressly authorized the tribunal to do so and if the law applicable to the arbitral procedure permits such arbitration.50

The reason for this stipulation lies in the fact that in accordance with the domestic law of certain states arbitration ex aequo et bono is not permitted. In this situation, the tribunal must check whether there is an express authorization by the parties to decide ex aequo et bono as well as whether the law applicable to the arbitral procedure permits such arbitration. In contrast to ICSID awards, Additional Facility awards and UNCITRAL awards (as well as ICC awards) are not insulated from domestic law. Their recognition and enforcement is governed by the law of the state in which recognition or enforcement is sought. Furthermore, these awards are subject to domestic rules in the setting aside proceedings A further limitation relates to the extent of the tribunal’s discretion to decide on the basis of equity. Mandatory rules of international law may not be violated and the arbitral tribunal may not act arbitrary.51 Furthermore, the tribunal is obliged, although not so rigorously, to state the reasons for its decision.52

8 Concluding Remarks Practice indicates that courts and tribunals have rarely decided cases ex aequo et bono. For instance, in case of ICSID arbitration, only two cases were decided 48

Amco v. Indonesia, Decision on Annulment, 16 May 1986, 1 ICSID Reports 516. At p. 517. 50 At http://www.uncitral.org/en-index.htm. 51 See Sohn, Arbitration of International Disputes Ex Aequo et Bono, in International Arbitration: Liber Amicorum for Martin Domke, as quoted in Schreuer, C., Decisions Ex Aequo et Bono Under the ICSID Convention at p. 51; Craig, W. L./Park, W. W./ Paulsson, J., International Chamber of Commerce Arbitration, 3rd ed., Oceana (2000) at pp. 110, 352. 52 Article 48(3) of the ICSID Convention; Art. 52(1)(i) of the Additional Facility Arbitration Rules; Art. 32(3) of the UNCITRAL Arbitration Rules; Art. 25(2) of the ICC Arbitration Rules. 49

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ex aequo et bono, with the parties’ authorization: Benvenuti & Bonfant v. Congo and Atlantic Triton v. Guinea.53 As illustrated above, although the Tribunal was authorized to decide ex aequo et bono in the Benvenuti case, it was reluctant to depart from the positive law and to decide the issues solely by reference to equity. On the other hand, the Klöckner Award indicates that invocation of some equitable considerations may carry a risk of being interpreted as a reference to equity instead of law and, consequently, may amount to an excess of powers and leads to nullity. Despite the limited case law on decisions ex aequo et bono, it is possible to argue that in investment disputes these authorizations can be particularly appropriate. But this assumption seems convincing only if the parties feel confidence in respect of this procedure in the sense that it works in favor of their mutual interests.54

53

See Atlantic Triton v. Guinea, Award, 21 April 1986, 3 ICSID Reports 17. See Schreuer, C., Decisions Ex Aequo et Bono Under the ICSID Convention, 11 ICSID Review – FILJ 37 (1996) at pp. 62-63. 54

CHAPTER VIII

Summary of Conclusions

This study aimed to analyze all relevant aspects of the issue of applicable substantive law in the context of investor/State arbitration. A comparative survey of both ICSID and non-ICSID arbitral practice provided a quite diverse picture on this point. The summary of the conclusions relating to various aspects of the applicable law is the following: The applicable substantive law determines the rules of law applicable to the merits of the dispute. Therefore, to discuss this issue before examining the merits of the case is the expected and logical course of the arbitration process. This study demonstrated, on the one hand, the need for such preliminary discussion on the applicable law and, on the other hand, the non-existence of such discussion in some arbitral awards. In determining the applicable law, the arbitral tribunals are governed by the provisions on applicable law contained in their authorizing instruments. These provisions provide guidance to the tribunals in selecting the proper law for the particular dispute. The mechanisms for selecting the applicable law provided by these provisions, differ. All major international instruments recognize the freedom of the parties to choose the law applicable to the merits of their dispute. The principle of party autonomy represents the basic principle governing the law to be applied by arbitral tribunals. This freedom of choice of law by the parties may be exercised in a number of ways. This study analyzed first the choice of law stipulated in direct agreements between the parties. The analysis of these choice of law clauses demonstrated widely different solutions and drafting techniques. A combination of both domestic law and international law would seem the most adequate solution in most investment disputes. Combined choice of law clauses balance the interests of both parties and prove to be practical. The study concentrated especially on these clauses and their treatment by the arbitral tribunals. The inclusion of such a clause into the parties’ agreement calls for the application of both legal

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systems. Arbitral practice confirms that the tribunal must examine and apply both systems of law. The parties’ choice of law may be also based on a clause on applicable law contained in a treaty. The survey of choice of law clauses found in multilateral and bilateral investment treaties indicates that they are not uniform. But, most of them refer to both domestic law and international law as the applicable law. Three cases governed by combined choice of law clauses made through BITs were analyzed. This analysis demonstrated a quite diverse approach towards these clauses. On the one hand, a clear and detailed application of both legal systems was evident in one case (in Goetz). On the other hand, a complete denial of the applicability of part of the applicable law, Czech law, was present (in CME). When the tribunal operates under a choice of law clause contained in a BIT it is bound to examine and apply all legal sources listed in the respective provision to the relevant questions. These sources do not offer discretion to the tribunal in the sense that it may apply whatever law it chooses. While in Mafezzini and, in particular, in Goetz the tribunals acted in accordance with the parties’ agreement on choice of law, the position of the Tribunal in the Partial Award in CME is disappointing. Non-application of part of the applicable law and its consistent rejection led the losing party to attack this award before the domestic courts for failure to apply the proper law. Finally, the parties to investment arbitration may agree on the applicable law by relying on a choice of law clause contained in domestic legislation. Such explicit clauses on applicable law stipulated in domestic legislation are quite rare. Unfortunately, the parties’ agreement on choice of law is not always clear and explicit. Arbitral practice confirms that the tribunals may attempt to discern the parties true intentions in order to find the proper law that governs their dispute. Arbitration tribunals may, in principle, recognize an implied choice of law provided that the parties’ intention to exercise such a choice is clear and unequivocal. A reference to international arbitration cannot be treated as an automatic choice of international law as the applicable substantive law. The place of arbitration has no impact on the applicable substantive law in investor/State arbitration. The argument that the parties by reference in their agreement to domestic legislation implicitly agreed on a choice of law cannon be accepted without further evidence. Implicit agreement on choice of law may be inferred on the basis of the parties’ conduct and submissions in the course of arbitration proceedings but their conduct must clearly evidence such agreement. In any event, in finding an implicit choice of law, the tribunal should be led by the terms of the contract or the circumstances of the case which must demonstrate with reasonable certainty that such agreement is actually made. Taking into account the potential complexities that may arise in order to solve the choice of law problem, it is advisable to clearly specify the applicable law in advance.

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Arbitral practice confirms that the parties in investor/State arbitration may agree on the applicable law (or rules of law) in the course of proceedings. They may also change or modify the law initially chosen. Although a subsequent choice of law is possible, it should be clear and reached as early as possible. Arbitral practice, in principle, recognizes stabilization clauses and regards them as a part of international law. But the views with regard to the consequences of their violation appear divergent. An expropriation or nationalization by the contracting state in the face of a stabilization clause would be regarded as inconsistent with international law. But whether the incompatibility of the nationalization with the stabilization clause will be a sufficient reason to demonstrate the unlawful character of the nationalization is not clearly settled. Regardless of some opposite views (e.g. in AMINOIL and in Amoco), it would seem that even if the existence of a stabilization clause will not prevent expropriation or nationalization, such a clause may be an important element in establishing the unlawful character of the state’s acts under international law. In any case, to include a stabilization clause in the parties’ contract appears useful and the investor should insist on that. In the absence of a stabilization clause the position of the investor is weaker. But even then a distinction should be made between the subsequent changes of the domestic law of the host State that merely alter the contractual relationship from those that abrogate it, as in the case of a nationalization. In the latter situation, the investor is protected under internationally recognized minimum standards. The parties sometimes fail to agree on the applicable law to their relationship and, consequently, the residual rule applicable in the absence of an agreement by the parties, becomes effective. Before resorting to the residual rule the arbitral tribunal must be assured that there is neither an explicit nor an implicit agreement on choice of law between the parties. Only after determining the absence of such agreement the tribunal may apply the residual rule which will guide the tribunal in selecting the proper law in particular case. The mechanisms provided by the residual rules of authorizing instruments are quite different. The compound choice of law rule of Art. 42(1) of the ICSID Convention providing explicitly for the application of both the host State’s law (including its conflict of laws rules) and international law offers some certainty and predictability to the parties in investment arbitration. Other arbitral tribunals, ICC tribunals, ad hoc UNCITRAL tribunal, Additional Facility tribunals and the Iran-United States Tribunal enjoy a great discretion when charged with the duty to determine the applicable substantive law. Arbitral practice evidences a variety of methods used by these tribunals for selecting the proper law. The survey of decisions decided under the residual rule of Art. 42(1) of the ICSID Convention indicates that these tribunals made an effort to examine and apply both legal systems. In Amco, CDSE and Tradex, ICSID tribunals, in applying the residual rule of Art. 42(1), have emphasized that they were

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bound to apply both the law of the host State and international law. By contrast, the SOABI Award contains reference to the applicability of the host State’s law only. Although it is evidence that the decision can be based on the host State’s law only, the better view would be that in any case compliance with international law should be evident in the award. An ICSID tribunal governed by the combined choice of law clause contained in the second sentence of Art. 42(1) of the ICSID Convention must follow the instructions of that article and clearly state that it is applying both legal systems. Therefore, in the first instance the tribunal has to identify the applicable law correctly. The second step concerns an examination and application of both legal systems. After determining the absence of the parties’ agreement on applicable law and after identifying the applicable law correctly the tribunal has to proceed to check both the host State’s law and international law. This should not mean that every legal question has to be examined from the perspective of both legal systems. Certain questions, for instance, may call for the application of the host State’s law only since there is no applicable international law rule. And even the whole award may be based on the host State’s law as long as it does not violate any mandatory international rule. But what should be evident in the award is that the tribunal has engaged in the examination of the different substantive issues in order to determine which law should be applied to them and, then, to examine and apply that law. Sometimes the application of only part of the applicable law may be justified because the tribunal, for instance, demonstrated conformity between the two legal systems (e.g. in CDSE). In any case, the tribunal must be aware that by failing to apply the proper law it may exceed its powers and, as a consequence, its award may be annulled. The ICC, the UNCITRAL and the Additional Facility Arbitration Rules follow the traditional open-ended formula for designating the applicable law. While the UNCITRAL Rules refer to the applicable conflict of laws rules as a method for finding the proper law, the ICC Rules authorize the arbitral tribunal to apply the rules of law it determines to be appropriate for a particular case. In the absence of the parties’ agreement on applicable law, the Additional Facility Arbitration Rules refer to applicable conflict of laws rules and, in addition, to international law rules as the tribunal considers applicable. Arbitral practice indicates that different approaches may be used when selecting the applicable law. However, these different approaches lead to quite contradictory results and, as a consequence, makes the tribunal’s selection of the applicable law more unpredictable. At any rate, the tribunal is not bound to apply any national system or systems of conflict of laws and frequently refers to the generally accepted principles of conflict of laws. In an investment arbitration their application would in most cases lead to the host State’s law as the applicable national law. The practice also indicates that these tribunals tend to denationalize the choice of law. This is, a more or less, common feature of investor/State arbitration. In light of the modern arbitral practice,

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reference to “rules of law” rather than “law” in the authorizing instruments appears more suitable. In both ICC and UNCITRAL arbitration, contract provisions and relevant trade usages constitute important source in deciding the particular case. The position of the Iran-United States Tribunal towards the applicable substantive law is somewhat different and it must be understood in the light of its specific character. The provision on applicable law established by the CSD is untypical. Since different claims both inter/State and investor/State needed to be decided, the broad discretion granted to this Tribunal is understandable. Since many investment contracts provided for the application of one or another national legal system, the Tribunal interpreted Art. V of the CSD as giving it discretion to avoid the application of any national legal systems when this seemed undesirable. But the Tribunal did not state that explicitly. Rather it justified its position on applicable law by reference to its international character, or to the nature of the investment contract. Most of the cases involved expropriation or nationalization claims. In these cases the Tribunal determined that a contractual choice of law applied only to the interpretation of the contract. Issues of nationalization or expropriation were always decided by applying either customary international law or the Treaty of Amity, when applicable, or both of them. When a case is governed by a combined choice of law clause the interrelation of the domestic law and international law becomes an important question. Arbitral practice confirms that international law has a supplemental and corrective function in relation to domestic law. Therefore, international law may be used to close the gaps in the domestic law. Furthermore, in the event of a conflict between the two systems of law, international law would prevail. Arbitral practice also suggests that, in terms of a chronological order, the host State’s law should be examined and applied first. After that, the result should be checked against international law and, in particular, in the light of BIT. This approach is logical since only after determining the content of the law of the host State is it possible to use international law in its supplemental and corrective function. The parties’ agreement on applicable law is a part of the tribunal’s terms of reference. By acting in accordance with its terms of reference it minimizes the risk of a possible subsequent attack on the arbitral award in national courts on the ground that the tribunal exceeded its powers since it failed to apply the proper law. Since some awards have been annulled for failure to apply the proper law, the practical significance of this ground of nullity has attracted much attention. The case law discussed in this study confirms the principle that the non-application of the proper law by the tribunal may lead to nullity on the ground that the arbitral tribunal exceeded its powers (authority, mandate etc). The ICSID Convention in Art. 52(2)(b) provides for such a ground for annulment. The survey of national arbitration acts of major arbitral forums

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indicates that they provide for the same ground, with some variations in language (e.g. excess of mandate, etc). Parties in their complaints before the reviewing bodies have argued that because of the non-application of the applicable law the tribunal exceeded its powers (or mandate) since it acted against the parties’ agreement to arbitrate. Therefore, both ICSID and non-ICSID awards were (and may be) challenged on this ground. However, the reviewing organs differ. While ICSID arbitration has its own, self-contained system for challenging its award, other, non-ICSID awards may be challenged before domestic courts. Seven annulment decisions were analyzed in this study and the results reached by the reviewing bodies in the annulment decisions differ to a great extent. Five cases were governed by a typical combined choice of law clause either on the basis of the parties’ direct agreement (MINE) or through the BIT choice of law clauses (CME) or by virtue of residual rule of Art. 42 of the ICSID Convention (Klöckner, Amco, Wena). The Metalclad and Feldman cases were governed by the choice of law clause provided by the NAFTA which refers only to the respective treaty and to the rules of international law. The reviewing bodies have repeatedly pointed out that non-application of the proper law may constitute an excess of powers and, consequently, lead to annulment. But, in which particular situation it had constituted an excess of powers and consequently justified annulment differed. In Klöckner, the ad hoc Committee was of the view that the lack of clear reference to some legal authority for the Tribunal’s finding amounted to the non-application of the properly identified law. The consequence was annulment of the award in its entirety. The Amco annulment decision shows that the award may be annulled for omission to apply a single provision of the properly identified law. In MINE, the ad hoc Committee correctly found that there was no excess of powers because of a failure of the Tribunal to apply the properly identified law since the Tribunal’s mistake was only of a technical nature. In the Wena decision, the ad hoc Committee found no excess of powers in the Tribunal’s reliance on international law and, particularly, in the BIT. In the Committee’s view the Tribunal’s approach did not warrant annulment since in case of conflicting results reached by applying both domestic law and international law, the latter would prevail. In CME, the Svea Court concluded that there was no excess of mandate as long as the Tribunal decides on the basis of some of the legal sources listed in the choice of law clause, whatever it chooses. In Metalclad, the Court found that the applicable law was misstated since the Tribunal based its conclusions on the wrong chapter of the NAFTA. In Feldman, the Court correctly found that the Tribunal made no decision beyond the scope of the submission to arbitration since its findings were reached within the framework of the applicable law and on the basis of relevant facts.

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In all these cases, except the CME case, the applicable law was properly identified. In CME the Tribunal interpreted the choice of law clause contained in the BIT mistakenly, but even that was upheld by the Court. In the view of the Svea Court even a mistaken interpretation of the choice of law provision would not warrant annulment. In Metalclad, the Tribunal had identified the applicable law properly but, in order to interpret the substantive provisions of the NAFTA Chapter 11 Section A, it had simply considered other parts of that treaty. The Tribunal’s mere reference, in section outlining the applicable law, to the wrong provision of the applicable treaty provided a ground to the Court to justify annulment. Therefore, the reasons for which some awards are annulled, and others are upheld, differ widely. In Klöckner, Amco and Metalclad the tribunals were found to have committed an excess of powers for failure to apply (part of) the applicable law. In CME the Court refused to do so despite a clear non-application of part of the applicable law. Some reasonings appears convincing (the MINE, Wena and Feldman decisions) while others attract criticism. The reasoning of the ad hoc Committees in Klöckner and Amco deprived the distinction between the non-application of the proper law and a mistaken application of the properly identified law of any meaning. It appears that, under the reasonings of these two Committees, both situations may, in fact, lead to nullity. Such a strict and extensive standard of review is unacceptable and carries serious policy implications. It seems that under such a standard, every award may be annulled for the reason that the applicable law has not been properly applied. As long as the award evidences that the tribunal identified the applicable law properly and proceeded to examine and apply it to the relevant questions, there is no good reason to annul it. A mere mistake in applying the applicable law is not a ground for annulment. The same applies to a failure by the tribunal to rely on legal authority in relation to some of its finding based on the properly identified applicable law. Otherwise the tribunal will be under too heavy a burden. Similarly, the strict standard of review in Metalclad attracts criticism. Consideration of the preamble and of the objectives of the applicable treaty for the interpretative analysis of the relevant provisions of that treaty is in accord with the standard rules of treaty interpretation. On the other hand, the decision of the Svea Court indicates quite the opposite approach. Under the reasoning of the Court, hardly any situation may be foreseen which would lead to nullity for failure to apply the proper law under a combined choice of law clause. It appears that under the Svea Court’s reasoning only a tribunal acting as amiable compositeur, without being authorized to do so, would exceed its mandate. To say that the tribunal’s disregard of the host State’s law as part of the applicable law, was justified under the circumstances of the case would be entirely incorrect. The question arises what is the effect of the explicit combined choice of law clause when the tribunal has discretion to disregard part of the applicable law, under the

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condition that it decides on the basis of any law. In contrast to the strict review adopted in the Amco and Klöckner decisions under which even a mere error in the application of the proper law may result in nullity, the limited review undertaken by the Svea Court deprives this ground for annulment of any practical significance. Under such a review standard even a manifest disregard of part of the applicable law does not carry a risk of annulment. Such a standard of review deprives the parties of their basic rights i.e., that their choice of law would be respected. In particular, the host State party to the investment dispute may be sensitive to that since it will expect that its own law is respected in the sense that it will be applied by the arbitral tribunal to the relevant questions. Therefore, even if the result reached by applying the two legal systems would, in the end, led to the prevalence of international law in case of its violation by domestic law, the tribunal must make the effort to demonstrate that. To refuse to give effect to the host State’s law simply because the case arises under the BIT is equally wrong. Normally obligations imposed by the BIT will be examined in the light of the provisions of the BIT but certain questions would call for application of the domestic law. In view of the above practice, it is necessary to note that the parties should not fail to refer to both domestic law and international law in their pleadings before the tribunal. This may “force” the tribunal to examine the relevant questions by relying on both legal systems and, therefore, the award more likely is to be based on both domestic law and international law. International adjudication generally accepts that a finding of non liquet by the tribunal is prohibited. The tribunal may not refuse to decide the case at all or to avoid to decide some particular question on the ground of silence or obscurity of the law. The power of the tribunal to decide ex aequo et bono requires an explicit agreement by the parties (under the Additional Facility Rules and UNCITRAL Rules, the second condition is that the arbitral procedural law must permit such arbitration). The parties may authorize the tribunal to decide ex aequo et bono in the course of the proceedings. The power to decide ex aequo et bono does not preclude the application of law. If the tribunal decides ex aequo et bono without being authorized to do so by the parties such award would be annulled for excess of powers.

Table of Cases

Cases of the Permanent Court of International Justice Serbian and Brazilian Loan Cases, p. 57

Cases of the International Court of Justice Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain), p. 100

Ad hoc Arbitral Awards AMINOIL v. Kuwait, p. 7, 86-91, 97 American Independent Oil Company v. The Government of the State of Kuwait, 24 March 1982, 21 ILM 976 (1982) B.P. v. Libya, p. 20 British Petroleum Exploration Company Ltd. v. The Government of the Libyan Arab Republic, 10 October 1973, 53 ILR 297 (1979) LIAMCO v. Libya, p. 7, 20 Libyan American Oil Company v. The Government of the Libyan Arab Republic, 12 April 1977, 20 ILM 1 (1981) Sapphire v. NIOC, p. 127-133 Sapphire International Petroleums Ltd. v. National Iranian Oil Company, Award, 15 March 1963, 35 ILR 136 (1967) TOPCO v. Libya, p. 7, 14, 16, 20, 58, 82-83, 84-85, 85-86, 89, 97 156-157 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)

UNCITRAL Cases CME v. The Czech Republic CME Czech Republic B.V. (the Netherlands) v. The Czech Republic, Partial Award, 13 September 2001, http://www.mfcr.cz/static/Arbitraz/en/PartialAward.pdf, p. 39-46, 56, 163, 192-193

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CME Czech Republic B.V. (the Netherlands) v. The Czech Republic, Final Award, 14 March 2003, http://www.cetv-net.com/ne/articlefiles/439-Final_Award_Quantum.pdf, p. 40, 47-56, 192, 201 Wintershall v. Qatar, p. 104, 133-139, 153 Wintershall A.G., et al. v. The Government of Qatar, Partial Award; 5 February 1988, 28 ILM 795 (1989); Final Award, 31 May 1988, 28 ILM 833 (1989)

ICSID Cases AGIP v. Congo, p. 14, 16, 21-24, 91-92, 97, 223 AGIP S. p. A. v. Government of the People’s Republic of the Congo (Case No. ARB/77/1), Award, 30 November 1979, 1 ICSID Reports 306 Amco v. Indonesia Amco Asia Corporation, Pan American Development Limited and PT Amco Indonesia v. Republic of Indonesia (Case No. ARB/81/1), Award, 20 November 1984, 1 ICSID Reports 413, p. 107112, 122, 157, 174, 176 Amco Asia Corporation, Pan American Development Limited and PT Amco Indonesia v. Republic of Indonesia, Decision on Annulment, 16 May 1986, 1 ICSID Reports 509, p. 112, 159, 174-178, 186, 226, 228 Amco Asia Corporation, Pan American Development Limited and PT Amco Indonesia v. Republic of Indonesia, Resubmitted Case: Decision on Jurisdiction, 10 May 1988, 1 ICSID Reports 543; Award, 5 June 1990, rectified 17 October 1990, 1 ICSID Reports 569, p. 167, 159 Antoine Goetz v. Burundi, p. 32-39, 162-163 Antoine Goetz and others v. Republic of Burundi (Case No. ARB/95/3), Award, 10 February 1999, 15 ICSID Review – Foreign Investment Law Journal 457 (2000) Atlantic Triton v. Guinea, p. 17, 222, 230 Atlantic Triton Company Limited v. People’s Revolutionary Republic of Guinea (Case No. ARB/84/1), Award, 21 April 1986, 3 ICSID Reports 17 AAPL v. Sri Lanka, p. 25, 66-74, 79, 82, 105 Asian Agricultural Products Limited v. Democratic Socialist Republic of Sri Lanka (Case No. ARB/87/3), Award, 27 June 1990, 4 ICSID Reports 246 Aucoven v. Venezuela, p. 105, 161-162 Autopista Concesionada de Venezuela, C.A. v. Bolivarian Republic of Venezuela (Case No. ARB/00/5), Award, 3 September 2003, http://www.worldbank.org/icsid/cases/Award_Total.pdf Benvenuti & Bonfant v. Congo, p. 80-81, 103-104, 223, 226-228, 230 S.A.R.L. Benvenuti & Bonfant v. Government of the People’s Republic of the Congo (Case No. ARB/77/2), Award, 15 August 1980, 1 ICSID Reports 330 Cable TV v. St. Kitts and Navis, p. 104 Cable Television of Navis, Ltd. and Cable Television of Navis Holdings, Ltd. v. The Federation of St. Christopher (St. Kitts) and Nevis (Case No. ARB/95/2), Award, 13 January 1997, 13 ICSID Review – Foreign Investment Law Journal 328 (1998)

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CDSE v. Costa Rica, p. 119-122, 123, 160 Compañia del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica (Case No. ARB/96/1), Award, 17 February 2000, 13 World Trade and Arbitration Materials 83 (2001) Colt Industries v. Korea, p. 17 Colt Industries Operating Corporation, Firearms Division v. Republic of Korea (Case No. ARB/84/2), Settlement, 3 August 1990, Unreported Fedax v. Venezuela, p. 25 Fedax N. V. v. Republic of Venezuela (Case No. ARB/96/3), Decision on Jurisdiction, 11 June 1997, 37 ILM 1378 (1998) Kaiser Bauxite v. Jamaica, p. 20 Kaiser Bauxite Company v. Government of Jamaica (Case No. ARB/73/3), Decision on Jurisdiction, 6 July 1975, 1 ICSID Reports 296 Klöckner v. Cameroon Klöckner Industrie-Anlagen GmbH, Klöckner Belge SA and Klöckner Handelmaatschappij B.V. v. United Republic of Cameroon and Société Camerounaise des Engrais (Case No. ARB/81/2), Award, 21 October 1983, 2 ICSID Reports 9, p. 169-170, 171, 224 Klöckner Industrie-Anlagen GmbH, Klöckner Belge SA and Klöckner Handelmaatschappij B.V. v. United Republic of Cameroon and Société Camerounaise des Engrais, Decision on Annulment, 3 May 1985, 1 ICSID Review – Foreign Investment Law Journal 89 (1986), p. 158, 169-173, 186, 224-225, 230 LETCO v. Liberia, p. 64-65, 79, 92-93 Liberian Eastern Timber Corporation v. Government of the Republic of Liberia (Case No. ARB/83/2), Award, 31 March 1986, rectified 10 June 1986, 2 ICSID Reports 346 Maffezini v. Spain Emilio Agustin Maffezini v. The Kingdom of Spain (Case No. ARB/97/7), Decision on Jurisdiction, 25 January 2000, 16 ICSID Review – Foreign Investment Law Journal 212 (2001), p. 29 Emilio Agustin Maffezini v. The Kingdom of Spain, Award, 13 November 2000, 16 ICSID Review – Foreign Investment Law Journal 248 (2001), http://www.worldbank.org/icsid/ cases/emilio_AwardoftheTribunal.pdf, p. 30-31 MINE v. Guinea Maritime International Nominees Establishment v. Republic of Guinea (Case No. ARB/84/4), Award, 6 January 1988, 4 ICSID Reports 61, p. 178 Maritime International Nominees Establishment v. Republic of Guinea, Decision on Annulment, 22 December 1989, 5 ICSID Review – Foreign Investment Law Journal 95 (1990), p. 167-168, 178-181, 186-187 SOABI v. Senegal, p. 113-116, 123, 157 Société Ouest Africaine des Bétons Industriels v. State of Senegal (Case No. ARB/82/1), Award, 25 February 1988, 2 ICSID Reports 190

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SPP v. Egypt Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt (Case No. ARB/84/3), Decision on Jurisdiction I, 27 November 1985, 3 ICSID Reports 112, p. 56, 59 Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt, Award, 20 May 1992, 3 ICSID Reports 189, p. 62-64, 79, 104-105, 159, 218 Tradex v. Albaina Tradex Hellas S. A. v. Republic of Albania (Case No. ARB/94/2), Decision on Jurisdiction, 24 December 1996, 14 ICSID Review – Foreign Investment Law Journal 161 (1999), p. 116 Tradex Hellas S. A. v. Republic of Albania, Award, 29 April 1999, 14 ICSID Review – Foreign Investment Law Journal 197 (1999), p. 116-119, 122, 160-161 Wena Hotels v. Egypt Wena Hotels Limited v. Arab Republic of Egypt (Case No. ARB/98/4), Decision on Jurisdiction, 25 May 1999, 41 ILM 881 (2002), p. 74 Wena Hotels Ltd. v. Arab Republic of Egypt, Award, 8 December 2000, 41 ILM 896 (2002), p. 74-80, 105, 181 Wena Hotels Ltd. v. Arab Republic of Egypt, Decision on Annulment, 28 January 2002, 41 ILM 933 (2002), p. 62, 160-161, 181-185, 186-187

Additional Facility Cases Feldman v. Mexico, p. 207-211, 213-214 Marvin Roy Feldman Karpa v. United Mexican States (Case No. ARB(AF)/99/1), Award, 16 December 2002, http://www.naftalaw.org Metalclad v. Mexico, p. 201-204 Metalclad Corporation v. United Mexican States (Case No. ARB(AF)/97/1), Award, 30 August 2000, 5 ICSID Reports 212, also http://www.naftalaw.org

ICC Cases The Rakoil Case, p. 139-142, 153 Deutsche Schachtbau-und Tiefbohrgesselschaft mbH (DST) (FR Germ.) et al. v. The Government of the State of R’as Al Khaimah (UAE) and The R’as Al Khaimah Oil Company (Rakoil) (UAE), Final Award in ICC Case No. 3572 of 1982, XIV Y.B.Com. Arb. 111 (1989) SPP v. Egypt, p. 7, 59-62 SPP (Middle East) Ltd. v. Arab Republic of Egypt, ICC Award (Case No. 3493), 11 March 1983 (date of certification of the award by the ICC), 22 ILM 752 (1983)

Cases of the Iran–United States Claims Tribunal American Bell v. Iran, p. 10, 164 American Bell International, Inc. v. The Government of the Islamic Republic of Iran, Interlocutory Award, 11 June 1984, 6 Iran–U.S. C.T.R. 74

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243

Amoco v. Iran, p. 11, 19, 93-96, 97, 142-149, 151 Amoco International Finance Corporation v. Islamic Republic of Iran, Partial Award, 14 July 1987, 27 ILM 1314 (1988) Anaconda v. Iran, p. 10, 127 Anaconda-Iran, Inc. v. The Government of the Islamic Republic of Iran, Interlocutory Award, 10 December 1986, 13 Iran–U.S. C.T.R. 199 CMI v. Iran, p. 9-10 CMI International, Inc. v. Ministry of Roads and Transportation and the Islamic Republic of Iran, Award, 27 December 1983, 4 Iran U.S. CT.R. 263 Mobil Oil v. Iran, p. 58, 149-151 Mobil Oil Iran, Inc. v. The Government of the Islamic Republic of Iran, Partial Award, 14 July 1987, 16 Iran–U.S. C.T.R. 3 Phelps Dodge v. Iran, p. 151-152 Phelps Dodge Corp. and Overseas Private Investment Corp. v. The Islamic Republic of Iran, 19 March 1986, 25 ILM 619 (1986)

AAA Cases Revere Copper and Brass, Incorporated v. Overseas Private Investment Corporation (OPIC), Award, 24 August 1978, 17 ILM 1321 (1978), p. 85

National Cases Canada Mexico v. Metalclad, p. 204-207, 215 United Mexican States v. Metalclad Corporation, Judicial Review, Supreme Court of British Columbia, 2 May 2001, http://www.naftalaw.org Mexico v. Feldman, p. 211-214, 215 United Mexican States v. Marvin Feldman, Judicial Review, Ontario Superior Court of Justice, 3 December 2003, http://www.naftalaw.org France Arab Republic of Egypt v. Southern Pacific Properties Ltd. and Southern Pacific Properties (Middle East) Ltd., Cour d’ appel, Paris, 12 July, 1984, 23 ILM 1048 (1984), p. 59 Arab Republic of Egypt v. Southern Pacific Properties Ltd. and Southern Pacific Properties (Middle East) Ltd., Cour de cassation, Paris, 6 January, 1987, 26 ILM 1004 (1987), p. 59 New Zealand Attorney-General of New Zealand v. Mobil Oil New Zealand Ltd., Decision of the High Court of New Zealand, 1 July 1987, 4 ICSID Reports 117, p. 16

244

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Sweeden The Czech Republic v. CME, p. 189, 192-201, 214-215, 225 The Czech Republic v. CME Czech Republic B.V., Svea Court of Appeal, 15 May 2003, 42 ILM 919 (2003) UK Deutsche Schachtbau-und Tiefbohrgesselschaft mbH (DST) (FR Germ.) et al. v. The Ras Al Khaimah Oil Company (Rakoil) (UAE) and Shell International Petroleum Co. Ltd., Court of Appeal, 24 March 1987, XIII Y. B. Com. Arb. 522 (1988), p. 141 USA Chromalloy Aeroservices v. Arab Republic of Egypt, 939 F. Supp. 907 (D. D. C. 1996), p. 214

Official Documents

Treaties, Conventions, Protocols and Other Legal Instruments Treaty of Amity, Economic Relations and Consular Rights, between Iran and the United States, 15 August 1955, 8 U.S.T. 899, T.I.A.S. No. 3853 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention, 10 June 1958), 330 UNTS 38 (1959), http://www.uncitral.org/enindex.htm European Convention on International Commercial Arbitration, 484 UNTS 364 (1961) Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention), 575 UNTS 159 (1966), reprinted in ICSID Basic Documents, Doc. ICSID/15 (Jan. 1985) Vienna Convention on the Law of Treaties, 115 UNTS 331 (1969) European Convention on the Law Applicable to Contractual Obligations, 19 ILM 1492 (1980) 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 (Claims Settlement Declaration), 19 January 1981, 20 ILM 230 (1981), http://www.iusct.org/claims-settlement.pdf UNCITRAL Model Law on International Commercial Arbitration (1985), http://www. uncitral.org/en-index.htm Resolution on Arbitration between States, State Enterprises or State Entities, and Foreign Enterprises (Institute of International Law, 12 September 1989), 5 ICSID Review – Foreign Investment Law Journal 139 (1990) The Espoo Convention of 1991, http://www.unece.org/env/eia/eia.htm Agreement between the Government of the Argentine Republic and the Government of the Republic of France for Reciprocal Protection and Promotion of Investments of 3 July 1991, entered into force 3 March 1993, UNTS, Vol. 1728 North American Free Trade Agreement, 32 ILM 605 (1993) 1994 Colonia and Buenos Aires Investment Protocols of the Common Market of the Southern Cone (MERCOSUR), http://www.sice.oas.org/cp_bits/english99/main.asp UNIDROIT Principles of International Commercial Contracts (1994), http://www.unidroit.org/ english/principles/contents.htm Energy Charter Treaty, 34 ILM 360 (1995) Investment Treaties, Looseleaf Collection (ICSID ed.) Oceana (1983 -) National Reports and Legal Texts (ICCA International Handbook on Commercial Arbitration) Vols. I-III, Kluwer Law International (2003)

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OFFICIAL DOCUMENTS

Arbitration Rules ILC Model Rules on Arbitral Procedure, YBILC 84 (1958-II) UNCITRAL Arbitration 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) Iran–United States Claims Tribunal, Final Tribunals Rules of Procedure (3 May 1983), reprinted in VIII Y. B. Com. Arb. 234 (1983) 1998 ICC Arbitration Rules, 36 ILM 1604 (1997) PCA Optional Rules for Arbitrating Disputes between Two Parties of Which Only One Is a State, PCA Basic Documents: Conventions, Rules, Model Clauses and Guidelines, The Hague (1998) ICSID Additional Facility Arbitration Rules (adopted in 1978; amended in 2003), ICSID/11/Rev. 1 January 2003

Model Clauses 1993 ICSID Model Clauses, 4 ICSID Reports 364 (Applicable Law) LCIA Recommended Clauses for Contracts, http://www.lcia-arbitration.com/arb/uk.htm

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