Author

Mr Alessandro Rollo

Associate - Omnia Strategy LLP

Editors
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Applicable Law to the Merits

I. Introduction

1.

The merits stage of investment disputes is normally characterised by the interplay of rules from multiple legal systems, including public international law and the domestic law of the contracting parties.

II. Applicable law to the merits under the ICSID convention

2.

Article 42(1) of the ICSID Convention states: “The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.”

3.

Numerous tribunals have held that this provision addresses exclusively the law applicable to the merits and not jurisdiction or procedure.1 However, Article 42(1) of the ICSID Convention has been occasionally relied on in respect of jurisdiction.2

4.

Article 42(1) prioritises the parties’ agreed choice of applicable law.3 The tribunal in Santa Elena v. Costa Rica held that the parties’ agreement on applicable law must be “clear”.4 

5.

The parties to an investment dispute may choose the applicable law by means of an express agreement. When jurisdiction is based on a contract, the applicable law choice may be made in that contract.5 When jurisdiction is based on a treaty or domestic legislation, these instruments may contain a clause setting out the applicable law,6 which the parties are deemed to accept by virtue of their consent to arbitration.7 In Benvenuti & Bonfant v. Congo, the parties reached an agreement on applicable law during the proceedings.8 

6.

In the absence of the parties’ agreement on applicable law in the relevant treaty, legislation or elsewhere, numerous ICSID tribunals have held that the applicable law was “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” in accordance with Article 42(1)’s second sentence.9 The annulment committee in Wena Hotels v. Egypt endorsed this approach.10 However, considering cases under investment treaties that lack an applicable law clause, other ICSID tribunals have inferred an implicit agreement that international law is the applicable law.11 

7.

Tribunals have interpreted the reference to “such rules of international law as may be applicable” in Article 42(1)’s second sentence as encompassing various sources of international law among those set out in Article 38(1) of the Statute of the International Court of Justice,12 including treaties,13 customary international law,14 general principles of law,15 jurisprudence16 and scholarly writings.17

8.

Various tribunals have held that the host State’s domestic law was part of the applicable law in accordance with Article 42(1)’s second sentence.18 

III. Applicable law to the merits under other arbitration rules

IV. The relationship between international and domestic law

10.

Tribunals have expressed various views on the roles of international and domestic law and their interaction in the merits of investment disputes. Certain tribunals have held that international law prevails over domestic law.20 This interpretation has been challenged with regard to Article 42(1)’s second sentence of the ICSID Convention.21 Other tribunals have held that international law has a complementary or corrective function.22 Other tribunals have held that both international and domestic law can be applied if appropriate.23

11.

Tribunals have adopted different approaches towards domestic law. Christoph Schreuer noted that “[e]ven in cases where jurisdiction is limited to claims alleging the violation of a treaty's substantive standards an incidental application of domestic law is often called for.”24 Certain tribunals, established under bilateral investment treaties or the Energy Charter Treaty, treated domestic laws as “facts”, refraining from making findings on them as a matter of law.25 This is also the approach of the Comprehensive Economic and Trade Agreement between Canada and the European Union, which provides that “in determining the consistency of a measure with this Agreement, the Tribunal may consider, as appropriate, the domestic law of a Party as a matter of fact.”26 This approach has been criticised.27 The tribunal in Invesmart v. Czech Republic considered that the difference between applying domestic law “as factum or as a governing law is immaterial”.28

V. Relationship between applicable law and jurisdictional scope

12.

International tribunals have recognised the “distinction between the scope of the rights and obligations which an international tribunal has jurisdiction to enforce and the law which it will have to apply in doing so”.29 According to this view, under international law, in the presence of a jurisdictional clause defining a tribunal’s jurisdictional scope, applicable law clauses do not serve the function of establishing or affecting the scope of that tribunal’s jurisdiction.30 In other words, if a tribunal’s jurisdiction is limited to adjudicating breaches under a particular treaty, that tribunal cannot entertain claims and make final findings of breaches of other rules of international or domestic law on the sole basis that they are included in the relevant applicable law clause.

Bibliography

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