Applicable Law in Investment Agreements

Abstract

The law applicable to investment disputes is of paramount importance because it can be a determinant of the outcome of the dispute. Disputing parties can choose the law applicable to their dispute. This derives from the principle of party autonomy in international arbitration. The parties’ choice of the applicable law often takes place in tandem with or as part of their consent to arbitration. Treaty partners can insert a clause on applicable law in the investment treaty or indirectly incorporate the provisions on applicable law of various arbitration rules, such as when offering arbitration according to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) or the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL). When an investor accepts the host state’s offer to arbitrate, it also accepts its choice of applicable law as expressed in the treaty and/or in the arbitration rules under which the investor selects to bring the dispute. There are also other ways in which disputing parties can choose the applicable law. For instance, their choice of applicable law can be crystallized in a compromis drafted once a dispute has arisen. In the absence of an express choice of applicable law, the latter is determined on the basis of the default rules found in the arbitration rules which govern the dispute. As an illustration, Article 42(1) of the ICSID Convention provides that, if the parties do not agree on the applicable law, the tribunal shall apply the law of the host state, including its conflict of law rules, “and such rules of international law as may be applicable.” Debates about the identification of the applicable law have often revolved around the relative weight to be accorded to the municipal law of the host state and to international law. Sometimes the tribunal’s failure to apply primarily the investment treaty has been at the heart of debate. Failure to apply the proper law constitutes a ground for annulment under the ICSID Convention (as manifest excess of powers). In non-ICSID Convention arbitration, awards can also be set aside for failure to apply the applicable law (e.g., when the tribunal is perceived to overstep its mandate). However, such annulment or set-aside concerns the effect of failure to apply the applicable law. This is a separate issue and as such it is not covered in the present article.