Applicable law
Professor Ole Spiermann
University of Copenhagen
Jonas Bruun Law Firm
Treaty and contract claims
“Whether there has been a breach of the BIT and
whether there has been a breach of contract are
different questions. Each of these claims will be
determined by reference to its own proper or
applicable law – in the case of the BIT, by international
law; in the case of the Concession Contract, by the
proper law of the contract.”
CAA and Vivendi v. Argentina, Annulment Decision, 3
July 2002, 6 ICSID Reports 340 at para. 96
Contract claims
Proper law of contract
Elements of a choice-of-laws analysis:
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International arbitral tribunals have no lex fori
Party autonomy
Investment contracts often have their closest link to
the national law of the host state
Need for internationalisation?
Internationalisation in the PCIJ?
“[A] sovereign state … cannot be presumed to have
made the substance of its debt and the validity of the
obligations accepted by it in respect thereof, subject to
any law other than its own”
Serbian Loans, PCIJ Series A No. 20 (1929) at 42
“[I]t cannot be admitted that when a Government
places a foreign loan with a promise of payment
having reference to a well-known standard of value,
that reference is to be disregarded”
Brazilian Loans, PCIJ Series A No. 21 (1929) at 116
Pacta sunt servanda
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Overarching standard against which all aspects of
national law, procedural as well as substantive, are
judged
If contractual rights held by an investor are affected in
a way not in conformity with the principle pacta sunt
servanda, and national law does not provide adequate
remedy, an arbitral tribunal is likely to resort to law
other than national law (of the host state)
Slogan for intricate legal analysis
Rationale (1): Choice of law
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Dépeçage (splitting the contract): To the extent that
national law might impinge on the principle pacta sunt
servanda, the contract is governed by some other law,
such as general principles of law
- Saudi Arabia v. Aramco, Award, 23 August 1958, 27
ILR 117 at 165-71
- Sapphire v. NIOC, Award, 15 March 1963, 35 ILR 136
at 171
- Lena Goldfields v. Soviet Union, Award, 1930, (1950)
36 Cornell Law Quarterly 42 at para. 22
“a gigantic first step for international commercial
arbitration, almost equivalent to the caveman’s
discovery of fire”,
V.V. Veeder, (1998) 47 ICLQ 747 at 772
Rationale (1 bis): Choice of law
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Ordre public: Pacta sunt servanda constitutes part of
mandatory rules to be applied by the arbitral tribunal
- Société des Grands Travaux de Marseille v. East
Pakistan Industrial Development Corporation, Award,
1972, 1 ICC Awards 40 at 44-5 and 47
Rationale (2): Transnational law
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The principle pacta sunt servanda as a substantive
principle of law governing the contract vis-à-vis the
proper law of contract?
- Company Z and others v. State Organization ABC,
Award, April 1982, (1983) 8 Yearbook of Commercial
Arbitration 94 at 108-9
Rationale (3): Public international law
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The principle pacta sunt servanda forms the bedrock
of key rules associated with the international law for
the protection of aliens
These rules are external to the contract and distinct
from the proper law of the contract
Possibly relevant to an arbitral tribunal situating itself
outside the national legal system of the host state to
the effect that the interplay between legal systems is
contemplated from the point of view of public
international law
Article 42(1) of the ICSID Convention
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“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.”
Linked to pacta sunt servanda
“the reference to international law ..., in reality,
comprised (apart from treaty law) only such principles
as that of good faith and the principle that one ought to
abide by agreements voluntarily made and ought to
carry them out in good faith”
History of the ICSID Convention (vol. 2, 1968), p. 985
(Aron Broches)
ICSID: National and international law
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National law of the host state may provide the better
protection of investors
 International law = complementary and corrective
- Klöckner v. Cameroon, Decision on Annulment, 3 May
1985, 2 ICSID Reports 95 at para 122
- Amco v. Indonesia, Annulment Decision, 16 May 1986,
1 ICSID Reports 509 at paras 20-2
 May general international law be different from yet not
in conflict with national law (because international law
being permissive or optional)?
Emmanuel Gaillard and Yas Banifatemi, (2003) 18
ICSID Rev.-FILJ 375 at 398
Internationalisation and party autonomy
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The principle pacta sunt servanda rank superior to
party autonomy?
BP v. Libya, Award, 10 October 1973, 53 ILR 300 at
331
Texaco v. Libya, Award, 19 January 1977, 53 ILR 420
at para. 49
Company Z and others v. State Organization ABC,
Award, April 1982, (1983) 8 YBCA 94 at 108
Letco v. Liberia, Award, 31 March 1986, 2 ICSID
Reports 346 at 358
Amco v. Indonesia, Annulment Decision, 16 May 1986,
1 ICSID Reports 509 at para. 21
SPP v. Egypt, Award, 20 May 1992, 3 ICSID Reports
189 at 207
Treaty Claims
ECT and NAFTA
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“A tribunal established under paragraph (4) shall
decide the issues in dispute in accordance with this
Treaty and applicable rules of international law”
Article 26(6) of the Energy Charter Treaty
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“A tribunal established under this Section shall decide
the issues in dispute in accordance with this
Agreement and applicable rules of international law”
Article 1131(1) of NAFTA
Article 42 of the ICSID Convention
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“... the Tribunal shall apply the law of the Contracting
State party to the dispute … and such rules of
international law as may be applicable”
International law implicitly chosen by the parties
- AAP v. Sri Lanka, Award, 27 June 1990, 4 ICSID
Reports 250 at paras 20 and 38
- Wena v. Egypt, Award, 8 December 2000, 6 ICSID
Reports 89 at para. 78
- MTD and MTD v. Chile, Award, 25 May 2004 at para.
87
Article 42 …
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Changed interpretation of Article 42(1): “a more
pragmatic and less doctrinaire approach”
Wena v. Egypt, Annulment Decision, 5 February 2002,
6 ICSID Reports 129 at paras 39-41
CMS v. Argentina, Award, 12 May 2005 at para. 116
Azurix v. Argentina, Award, 14 July 2006 at para. 66
Cf. Autopista Concesionada de Venezuela v.
Venezuela, Award, 23 September 2003, at para. 102:
“[T]here 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”
Article 42 …
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But does a provision designed for contract claims
really apply to treaty claims?
 ICSID’s jurisdiction depends on consent and Article 25
of the ICSID Convention, as opposed to Article 42(1)
- CMS v. Argentina, Decision on Jurisdiction, 17 July
2003, 7 ICSID Reports 494 at para. 88
- Azurix v. Argentina, Decision on Jurisdiction, 8
December 2003, at paras 48-50
- Camuzzi v. Argentina, Decision on Jurisdiction, 11 May
2005, at para. 17
National law is not a defence
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“A party may not invoke the provisions of its internal
law as justification for its failure to perform a treaty”
Article 27 of the Vienna Convention on the Law of
Treaties
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“The characterization of an act of a State as
internationally wrongful is governed by international
law. Such characterization is not affected by the
characterization of the same act as lawful by internal
law”
Article 3 of the Articles on Responsibility of States for
Internationally Wrongful Acts
Treaty interpretation
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Text and context, including connected agreements and
instruments
Object and purpose (balanced)
Subsequent agreement between the parties
Any relevant rules of international law applicable in the
relations between the parties
Also in British Columbia?
Cf. Mexico v. Metalclad, Supreme Court of British
Columbia, Judgment, 2 May 2001, 5 ICSID Reports
238 at paras 68-76
Position of the investor
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Investors are holders of rights under investment
treaties
”From a legal point of view the most striking feature of
the [ICSID] Convention is that it firmly establishes the
capacity of a private individual or a corporation to
proceed directly against a State in an international
forum, thus contributing to the growing recognition of
the individual as a subject of international law.”
Aron Broches, (1972) 136 Recueil des Cours 331 at
349
National law as facts
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Certain incidental and preliminary questions fall to be
decided by national law in establishing the “facts”, e.g.:
MTD v. Chile, Award, 25 May 2004, para 204.
Waste Management v. Mexico (No. 2), Award, 30 April
2005 at para. 73
Has a contract been concluded?
Maffezini v. Spain, Award, 13 November 2000, 5 ICSID
Reports 419 at paras 89-90
Was the representative empowered to act on behalf of
the state?
Olguin v. Paraguay, Award, 26 July 2001, 6 ICSID
Reports 164 at para. 65
National law …
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Has the contract been terminated?
Wena v. Egypt, Annulment Decision, 5 February 2002,
6 ICSID Reports 129 at para 33
Azurix v. Argentina, Award, 14 July 2006 at para. 258
Which currency to be used in calculating tariffs and
what conditions for adjusting tariffs?
CMS v. Argentina, Award, 12 May 2005, at paras 12744
Taxation
Occidental Exploration and Production Company v.
Ecuador, Award, 1 July 2004, at para. 93
Internationalisation (again)
However, national law is disregarded to the extent
contrary to international law, the principle pacta sunt
servanda included, e.g.:
 “the Treaty ... 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”
- CME v. Czech Republic, Preliminary Award, 13
September 2001, at para. 467
Internationalisation …
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Statutory limitation does not apply
Maffezini v. Spain, Award, 13 November 2000, 5 ICSID
Reports 419 (2000) at para. 93
Wena v. Egypt, Award, 8 December 2000, 6 ICSID
Reports 89 at para. 107
Interest cannot be reduced on the basis of national law
Middle East Cement v. Egypt, Award, 12 April 2002, 7
ICSID Reports 178 at para. 174
Wena v. Egypt, Annulment Decision, 5 February 2002,
6 ICSID Reports 129 at para. 53
Cf. SwemBalt AB v. Latvia, Award, 23 October 2000, at
paras 45-6
Interest and calculation of damages
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National legislation does not trump the calculation of
damages under the well-known formula of prompt,
adequate and effective compensation
- Santa Elena v. Costa Rica, Award, 17 Feburary 2000,
5 ICSID Reports 157 at para. 104
- Metalclad v. Mexico, Award, 30 August 2000, 5 ICSID
Reports 212 at para. 128
- Wena v. Egypt, Annulment Decision, 5 February 2002,
6 ICSID Reports 129 at paras 52-3
Decisions of national courts
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An arbitral tribunal will not be bound by decisions of
national courts
ICC Award No. 3327, 1981, 1 ICC Awards 433 at 4334
Amco v. Indonesia, Award, 20 November 1984, 1
ICSID Reports 413 at paras 150, 177 and 262
Azinian v. Mexico, Award, 1 November 1998, 5 ICSID
Reports 272 at para. 86
CSOB v. Slovakia, Decision, 1 December 2000, 5
ICSID Reports 358 at para. 35
Conclusions: contract claims
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Starting point = national law, or as commercial
arbitration in general
Internationalisation in order to secure equality of
parties
Choice-of-law approach = distinct spheres, i.e., some
aspects governed by national law while other aspects
are internationalised
International-law approach = two-step model: all
aspects governed by national law since international
law is complementary and corrective
Party autonomy yields to internationalisation?
Conclusions: treaty claims
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Starting point = international law, as international law
dispute settlement in general
Certain ”facts” governed by proper law of contract
(national law), but only to the extent not in conflict with
international law
Individual may waive protection under international law
(international legal personality; party autonomy)?