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M. Alessandro Rollo

Associate - Omnia Strategy LLP

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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. For a general introduction to the concept, see Applicable law and Choice of law.

II. Determination of the applicable law to the merits under the ICSID Convention

A. The rule

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

B. In presence of the parties' agreement

4.

The parties to an investment dispute may choose the applicable law by means of an express agreement.3 Article 42(1) provides that the tribunal shall decide a dispute in accordance with the parties’ agreed applicable law, if the parties have reached such an agreement.4 

5.

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.

The tribunal in Santa Elena v. Costa Rica held that the parties’ agreement on applicable law must be “clear.”9

7.

Where the parties agree, Article 42(3) of the ICSID Convention provides that the tribunal has the power to decide a dispute ex aequo et bono.10

8.

A tribunal’s failure to apply the law chosen by the parties may lead to the annulment of the award for excess of powers.11 See further Excess of powers, Section III.B.

C. In the absence of the parties’ agreement

9.

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.12 The annulment committee in Wena Hotels v. Egypt endorsed this approach.13

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.14

11.

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,15 including treaties,16 customary international law,17 general principles of law,18 jurisprudence19 and scholarly writings.20

12.

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.21

III. Determination of the applicable law to the merits under the ICSID Additional Facility Rules

13.

Article 54(1) of the ICSID Arbitration Additional Facility Rules mandates that the tribunal apply “the rules of law designated by the parties as applicable to the substance of the dispute”.22 In the absence of such a choice, the tribunal shall apply “the law determined by the conflict of laws rules” and “rules of international law” that it considers applicable.23

14.

Like Article 42(3) of the ICSID Convention, Article 54(2) of the ICSID Arbitration Additional Facility Rules provides that the tribunal may decide ex aequo bono in the presence of the parties’ agreement and if the applicable law allows for it.24

IV. Determination of the applicable law to the merits under other arbitration rules

15.

The ICC Arbitration Rules,25 LCIA Arbitration Rules,26 SCC Rules27 and UNCITRAL Arbitration Rules28 mandate that tribunals apply the law chosen by the parties, failing such choice, the tribunals shall apply the law that they deem appropriate. The ICC Arbitration Rules also require the tribunal to “take account of the provisions of the contract, if any, between the parties and of any relevant trade usages.”29 All of these arbitration Rules specify that the tribunal may not decide the dispute ex aequo et bono without the parties’ agreement.30

V. Interpretation of applicable law clauses in selected investment agreements

A. Energy Charter Treaty

16.

Article 26(6) of the Energy Charter Treaty provides that the applicable law to the dispute is the Treaty and the “applicable rules and principles of international law.”31 Tribunals have held that this provision only applies to the merits of the dispute, excluding jurisdictional issues.32 In the context of intra-EU disputes, certain ECT tribunals have held that EU law could be considered as “international law.”33 Certain tribunals established under other investment agreements have also agreed with this approach.34 Other tribunals established under the ECT have concluded that EU law is not included in the “rules and principles of international law” under Article 26(6) of the ECT35 or held that even if EU law was applicable, it would not prevail over the provisions of the ECT.36 See Intra-EU claims as an objection to jurisdiction for discussion on EU Law and jurisdiction of arbitral tribunals.

B. NAFTA

17.

The NAFTA also contains a specific provision on applicable law. Article 1131(1) provides that a tribunal established under the NAFTA shall decide the isssues in dispute in accordance with the NAFTA and “applicable rules of international law.” NAFTA tribunals have interpreted the “applicable rules of international law” to cover customary international law,37 including the Vienna Convention on the Law of Treaties,38 and due process requirements.39

VI. Relationship between international and domestic law

18.

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, in case of conflict, international law prevails over domestic law.40 This interpretation has been challenged with regard to Article 42(1)’s second sentence of the ICSID Convention.41 

19.

Furthermore, certain tribunals have held that international law has a complementary or corrective function42 while tribunals have held that both international and domestic law can be applied if appropriate.43

20.

Different approaches have emerged regarding the role of 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."44 Certain tribunals, established under a bilateral investment treaty or the Energy Charter Treaty, treated domestic laws as “facts”, refraining from making findings on them as a matter of law.45 There is arbitral jurisprudence supporting the same conclusion in respect of EU law.46 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."47 This approach has been criticised.48 The tribunal in Invesmart v. Czech Republic considered that the difference between applying domestic law “as factum or as a governing law is immaterial”.49

VII. Relationship between applicable law and jurisdictional scope

21.

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”.50 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.51 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.

VIII. Applicable law and most-favoured nation clauses

22.

An applicable law clause cannot act as a most favoured nation clause to enable investors to “import the standards of protection of a different treaty […] by simply referring to that treaty as the law applicable to the merits under another treaty.”52

IX. Applicable law and the iura novit curia principle

23.

When addressing applicable law, a number of tribunals held that by virtue of the iura novit curia principle, they were not bound by the arguments advanced by the parties and could form their own opinion on the meaning of the law they had to apply.53 

Bibliography

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