(Taida Begic) Applicable Law in International Inve

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
Published, sold and distributed by Eleven International Publishing
P. O. Box 358
3500 AJ Utrecht, the Netherlands
Tel.: +31 30 231 0545
Fax: +31 30 225 8045
info@elevenpub.com
www.elevenpub.com
Printed on acid-free paper.
ISBN 90-77596-12-7
© 2005 Eleven International Publishing
This publication is protected by international copyright law.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system,
or transmitted in any form or by any means, electronic, mechanical, photocopying, recording
or otherwise, without the prior permission of the publisher.
Printed in The Netherlands

Table of Contents
ABBREVIATIONS xi
INTRODUCTORY NOTE xiii
ACKNOWLEDGEMENTS xv
CHAPTER I: INVESTOR/STATE ARBITRATION AND
THE APPLICABLE SUBSTANTIVE LAW 1
1 Generally 1
2 Applicable Substantive Law and the ICSID Convention 4
3 Applicable Substantive Law in Context of Other
Arbitration Systems 6
(a) Additional Facility arbitration rules 6
(b) UNCITRAL arbitration rules 7
(c) ICC arbitration rules 8
(d) Iran–United States Claims Tribunal 9
4 The Methodology Employed by the Arbitral Tribunal 11
CHAPTER II: AGREED CHOICE OF LAW 13
1 The Principle of Party Autonomy 13
2 Choice of Law Modalities 15
(a) Direct agreement between the host state and the investor 15
(i) Law of the host state as the law chosen by the parties 16
(ii) The host state’s law subject to a stabilization clause 16
(iii) Law of a third state as the law chosen by the parties 17
(iv) International law alone as the law chosen by
the parties 18
(v) The law of the contract as the law chosen by the parties 18
(vi) Compound choice of law clause in the
direct contract between the parties 19
v
vi TABLE OF CONTENTS
AGIP V. CONGO (APPLICATION OF THE HOST

STATE’S LAW TESTED AGAINST INTERNATIONAL LAW) 21
(vii) Concluding remarks 24
(b) Choice of law in treaties 25
(i) Choice of law clauses in multilateral treaties 26
(ii) Choice of law clauses in BITs 27
(iii) Arbitral practice 29
MAFFEZINI V. SPAIN (APPLICATION OF THE HOST
STATE’S LAW ONLY) 29
ANTOINE GOETZ V. BURUNDI (APPLICATION OF BOTH
THE HOST STATE’S LAW AND INTERNATIONAL LAW) 32
CME V. THE CZECH REPUBLIC (REFUSAL TO
APPLY THE HOST STATE’S LAW) 39
(iv) Concluding remarks 56
(c) Choice of law provisions in domestic legislation 56
3 Explicit or Implicit Choice of Law? 57
(a) Expression of implicit choice of law 57
(b) Arbitral practice 59
(i) SPP v. Egypt (reference in the parties’ agreement
to domestic law as implicit choice of law) 59
(ii) LETCO v. Liberia (reference in the parties’
agreement to domestic law as implicit
choice of law) 64
(iii) AAPL v. Sri Lanka (the parties’ conduct and
submissions as proof of an implicit choice of law) 66
(iv) Wena Hotels v. Egypt (the parties’ conduct
and submissions as proof of an implicit
choice of law) 74
(c) Concluding remarks 79
4 Subsequent Choice of Law 80
(a) Overview of the arbitral practice 80
(b) Concluding remarks 83
5 Stabilization Clauses 84
a) Meaning and types 84
b) Arbitral practice 85
(i) TOPCO v. Libya (stabilization clauses valid and
binding under international law) 85
(ii) AMINOIL v. Kuwait (breach of a stabilization
clause does not lead to unlawfulness
of nationalization as long as it is
not expressly prohibited) 86
TABLE OF CONTENTS vii
(iii) AGIP v. Congo (breach of a stabilization

clause leads to unlawfulness of
nationalization) 91
(iv) LETCO v. Liberia (in the presence of
a stabilization clause nationalization is
justified if it meets required criteria) 92
(v) Amoco v. Iran (breach of a stabilization clause
does not lead to unlawfulness of nationalization
as long as it is not expressly prohibited) 93
c) Concluding remarks 96
6 Limitations on the Parties’ Freedom to Choose
the Applicable Law 98
(a) Relevance of mandatory norms and public policy 98
CHAPTER III: ABSENCE OF AGREED CHOICE OF LAW 103
1 Methods for Determining the Absence of the Parties’
Agreement on Choice of Law 103
2 Application of the Residual Rule of Article 42(1)
of the ICSID Convention 106
(a) Arbitral practice 107
(i) Amco v. Indonesia (parallel application of the
host state’s law and international law) 107
(ii) SOABI v. Senegal (application of the host
state’s law only) 113
(iii) Tradex v. Albania (international law used
as guidance for the interpretation of the
host state’s law) 116
(iv) CDSE v. Costa Rica (in the event of concurrence
between the two legal systems international
law may be applied only) 119
(b) Concluding Remarks 122
3 Absence of the Parties’ Agreement on Choice of Law
in Other Arbitration Systems 123
(a) Arbitral practice 127
(i) Sapphire v. National Iranian Oil Company
(the parties’ intention excludes the application
of any national legal system) 127
(ii) Wintershall v. Qatar (application of the
closest connection test led to the applicability
of the host state’s law only) 133
(iii) The Rakoil Case (a-national law determined
as the applicable law) 139
viii TABLE OF CONTENTS
(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]) 142
(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) 149
(vi) Phelps Dodge Corp. and OPIC v. Iran
(international law and the Treaty of Amity
apply to the issue of expropriation) 151
(b) Concluding remarks 152
CHAPTER IV: THE ROLE OF INTERNATIONAL LAW
AND ITS RELATION TO DOMESTIC LAW 155
CHAPTER V: ISSUES OF ANNULMENT 165
1 Necessity of the Review Process 165
2 Annulment Under the ICSID Convention 166
(a) Generally 166
(b) Manifest excess of powers and the
Non-application of the proper law 168
(c) Arbitral Practice 169
(i) Klöckner v. Cameroon (failure to rely on specific
legal source led to annulment) 169
(ii) Amco v. Indonesia (failure to apply one important
provision led to annulment) 174
(iii) MINE v. Guinea (technical error does not
warrant annulment) 178
(iv) Wena Hotels v. Egypt (in case of collision between
the two legal systems international law prevails) 181
(d) Concluding remarks 185
3 Setting Aside of Arbitral Awards in Non-ICSID
Investment Arbitration 187
(a) Generally on review of non-ICSID arbitral awards 187
(b) Proper law and nullity 190
(c) Arbitral practice 192
(i) The Czech Republic v. CME (decision based on part
of applicable law only does not warrant annulment) 192
(ii) Mexico v. Metalclad (a mere reference to the wrong
provision of the applicable treaty led to annulment) 201
(iii) Mexico v. Feldman (no reference to the provision of
the applicable treaty does not warrant annulment) 207
(d) Concluding remarks 214
TABLE OF CONTENTS ix
CHAPTER VI: PROHIBITION OF A NON-LIQUET 217

CHAPTER VII: DECISION EX AEQUO ET BONO 219
1 Generally 219
2 Amiable Composition or ex aequo et bono 221
3 Express Agreement on a Decision ex aequo et bono 222
(a) Original agreement 222
(b) Subsequent agreement 223
(c) Possibility of dépeçage 223
4 No Authorization to decide ex aequo et bono 224
(a) Klöckner v. Cameroon 224
5 Application of Both Law and Equity 226
(a) Benvenuti & Bonfant v. Congo 226
6 Equity within the Law 228
7 Limits on Decision ex aequo et bono 229
8 Concluding Remarks 229
CHAPTER VIII: SUMMARY OF CONCLUSIONS 231
TABLE OF CASES 239
OFFICIAL DOCUMENTS 245
BIBLIOGRAPHY 247
Abbreviations
AAA American Arbitration Association

ADRLJ Arbitration and Dispute Resolution Law Journal
AJIL American Journal of International Law
Arb. Int. Arbitration International
Art(s). Article(s)
BIT(s) Bilateral Investment Treaty(ies)
BYIL British Year Book of International Law
Ch. Chapter
Co. Company
Colum. JIL Columbian Journal of International Law
CSD Claims Settlement Declaration
D.D.C. Federal District Court for the District of Columbia
Doc. Document
ECT Energy Charter Treaty
ed. edition
e.g. exempli gratia (for example)
F. Supp. Federal Supplement
FILJ Foreign Investment Law Journal
Harv. ILJ Harvard International Law Journal
History of the Analysis of Documents Concerning the Origin and
Convention, Vol. I the Formulation of the ICSID Convention (1970)
History of the Documents Concerning the Origin and the
Convention, Vol. II Formulation of the ICSID Convention (1968)
ICC International Chamber of Commerce
ICCA International Council for Commercial Arbitration
ICJ International Court of Justice
ICSID International Center for Settlement of Investment
Disputes
xi
xii ABBREVIATIONS
ILC International Law Commission

ILM International Legal Materials
ILR International Law Reports
Ibid. Ibidem (the same)
i. e. id est (that is to say)
Iran-U.S. C.T.R. Iran-United States Claims Tribunal Reports
JIA Journal of International Arbitration
KLI Kluwer Law International
LCIA London Court of International Arbitration
Ltd. Limited
MERCOSUR Mercado Comun del Sur
NAFTA North American Free Trade Agreement
No. Number
OPIC Overseas Private Investment Corporation
p(p). Page(s)
para(s). Paragraph(s)
PCA Permanent Court of Arbitration
PCIJ Permanent Court of International Justice
Prof. Professor
Rep. Reports
Rev. Review
Sec. Section
Ser. Series
T.I.A.S. Treaties and other International Acts Series
UK United Kingdom
UN United Nations
UNCITRAL United Nations Commission on International
Trade Law
UNCTAD United Nations Conference on Trade and
Development
UNIDROIT International Institute for the Unification
of Private Law
UNTS United Nations Treaty Series
US United States
U.S.T. United States Treaties
v. versus (against)
VCLT Vienna Convention on the Law of Treaties
Vol(s). Volume(s)
Y. B. Com. Arb. Yearbook of Commercial Arbitration
YBILC 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 appli-
cable substantive law in investor/State arbitration. Interpretation of the rele-
vant 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 illus-
trated. 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.
xiii
xiv 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 arbi-
tration. 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 annul-
ment 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.
xv
CHAPTER I
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, arbitra-
tion (ad hoc or institutional ) and even diplomatic protection. The most charac-
teristic 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 arbitra-
tion. 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
1
2 CHAPTER I
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 refer-
ences to more than one dispute settlement mechanism.6 Some BITs refer to arbi-
tration under the Arbitration Rules of the United Nations Commission on
International Trade Law (UNCITRAL)7 either alone or together with the refer-
ences 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 dis-
putes 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 amend-
ments 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 arbitra-
tion 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.
INVESTOR/STATE ARBITRATION AND THE APPLICABLE SUBSTANTIVE LAW 3
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 agree-
ment between the disputing parties. The parties may stipulate a dispute settle-
ment provision in a direct contract between them. Alternatively, investor/State
arbitration can find its basis in a BIT or multilateral treaty or through the oper-
ation 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 agree-
ment with the host State. This offer of consent contained in the treaty or domes-
tic 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.
14
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 interpre-
tation 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.
4 CHAPTER I
specific features. Therefore the ways of dealing with this issue are somewhat dif-
ferent 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 fre-
quently 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 pri-
vate 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
American Case Book Series, West Publishing Co. (1993) at p. 740.
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 deter-
mining the applicable law to the particular dispute the tribunal has to exam-
ine 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 apply-
ing 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 substan-
tive 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
6 CHAPTER I
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 appli-
cable 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’ agree-
ment 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 tribu-
nal 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 appli-
cable 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.
(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 par-
ties. 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 applica-
ble 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 par-
ties 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 appli-
cable 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
23
E.g. the first award in SPP v. Egypt was rendered by an ICC tribunal.
24
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).
8 CHAPTER I
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 proce-
dural 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 agree-
ment, 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), avail-
able 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.
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 fol-
lows that the ICC tribunal is authorized to determine the applicable substan-
tive 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 con-
tract 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 par-
ties’ 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 var-
ious 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
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,
10 CHAPTER I
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 prin-
ciples 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 negotia-
tors 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 follow-
ing: “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.
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 deter-
mine 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 dis-
cussed 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 tri-
bunal 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 prac-
tical 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 instru-
ments acknowledge this freedom of choice of law. For example, the first sen-
tence of Art. 42(1) of the ICSID Convention grants such a freedom to the par-
ties. 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 arbi-
tral 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 author-
ize 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
14 CHAPTER II
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 dif-
ferent 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
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 con-
sent 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 invest-
ment 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
9
LCIA Recommended Clauses for Contracts, available at http://www.lcia-arbitration.com/
arb/uk.htm.
16 CHAPTER II
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 sta-
bilization 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 invest-
ment 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
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.
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.
15
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.
18 CHAPTER II
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 circum-
stances 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 employ-
ment 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 (with-
out 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
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 inter-
national law”. Furthermore, “internationalization clauses may refer to such norms as those pro-
vided 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
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.
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.
20 CHAPTER II
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 stipu-
lated 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 inter-
national 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 interna-
tional 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
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.
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 com-
pany, 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 accord-
ing 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 com-
pany’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 applica-
ble law which provided as follows:
Article 15(2)
The law of the Congo, supplemented if need be by any principles of interna-
tional law, will be applicable.29
Before examining the merits of the case, the Tribunal entered into a discus-
sion 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 determin-
ing 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 independ-
ence (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
AGIP v. Congo, Award, 30 November 1979, 1 ICSID Reports 306.
29
At p. 313.
30
At p. 318, para. 43.
31
At p. 318, para. 44.
32
At p. 318.
22 CHAPTER II
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 modifica-
tions 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 nation-
alization 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 prop-
erty 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 sov-
ereign State to nationalize, since the same Article provides equally that “limi-
tations on private ownership may, when the general interest requires, be deter-
mined 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
At p. 318, para. 47.
34
At p. 321, para. 68.
35
At p. 321, para. 69.
36
At pp. 321-322, para. 70.
37
At p. 322, para. 71.
38
At p. 322, para. 72.
39
At p. 322. Emphasis original.
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 meas-
ures 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 obliga-
tion 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
At p. 322, para. 73.
41
At p. 322, para. 74.
42
At p. 322, para. 75.
43
At pp. 322-323, para. 76.
44
At p. 323, para. 77.
45
At p. 323, para. 78.
46
At p. 323.
24 CHAPTER II
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 interna-
tional 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 interna-
tional law.
As illustrated above, the Tribunal decided to discuss the issue of applica-
ble law before examining the merits of the case. This is the appropriate and
logical course of proceeding. As will be seen later, some decisions unfortu-
nately lack this preliminary discussion of the applicable law. In AGIP the
Tribunal’s analysis of the law applicable to the dispute before it was com-
pletely 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 accor-
dance 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 rela-
tion 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 lan-
guage 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
At pp. 323-324, paras. 83-84.
48
At p. 324.
parties are often divergent. It is suggested that the parties should avail them-
selves of the possibility to choose the law or rules of law that will govern their
relationship by express, precisely worded contractual stipulation of the appli-
cable 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 desir-
able” 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 dis-
putes (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 multi-
lateral 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 con-
tained 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 juris-
diction 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
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
26 CHAPTER II
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 inter-
national 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 inter-
national 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.
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 prin-
ciples 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 agree-
ments 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.
57
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.
28 CHAPTER II
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 agree-
ment, 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 con-
cluded 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 prin-
ciples 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 refer-
ence 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.
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 invest-
ments 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 identi-
cal. 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 provi-
sions 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).
30 CHAPTER II
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 implica-
tions 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 environ-
ment.71 It also mentioned specific legislation enacted to fulfill these require-
ments 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.
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 appli-
cable 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 gen-
eral 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 compli-
ance with the parties’ agreement on the applicable law. The application of
75
Para. 71.
76
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.
32 CHAPTER II
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 regard-
ing 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.
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 interna-
tional 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 interna-
tional law obligations which it freely assumed under the Treaty for the protec-
tion 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, meas-
ures depriving of or restricting property rights or similar measures as regards
investments situated on its territory. To that is added the fact that the interna-
tional obligations assumed by Burundi under the investment treaty refer in sev-
eral 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
Para. 95.
83
Para. 98.
84
Para. 98.
34 CHAPTER II
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 sys-
tems 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 viola-
tion 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 abro-
gation 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
Para. 99.
86
Para. 99.
87
Para. 101.
88
Para. 101.
89
Para. 102.
90
Para. 103.
91
Para. 104.
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 modi-
fied 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 min-
erals to the FTZ regime, and the Order of 29 May 1995, which modified the for-
mer, 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 com-
pany 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 paral-
lel 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 eligi-
ble 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 rev-
ocation 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
Para. 105.
93
Para. 106.
94
Paras. 106-107.
95
Para. 108.
96
Para. 110.
97
Para. 110.
98
Para. 111.
99
Paras. 111-112.
36 CHAPTER II
The Claimant argued that beside the decision itself, the Burundian admin-
istration 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 can-
not 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 jurispru-
dence 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 liabil-
ity 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.
101
Paras. 114-116.
102
Para. 117.
103
Para. 118.
104
Para. 118.
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 legit-
imacy 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 interna-
tional 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 invest-
ments” 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 depriv-
ing 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 revoca-
tion 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 law-
ful expropriation. According to the BIT the first condition relates to public
utility, national security or national interest. The Tribunal noted that this con-
dition 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.
106
Para. 120.
107
Para. 123.
108
Para. 124.
109
Para. 124.
110
Para. 126.
111
Para. 127.
112
Para. 128.
38 CHAPTER II
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 inter-
national 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 effec-
tive 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 inter-
national 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 responsibil-
ity 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 con-
formity with international law of the disputed decision to withdraw the certifi-
cate, 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 meas-
ures 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.
114
Para. 130.
115
Para. 131.
116
Para. 132.
117
Para. 133.
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 find-
ing 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 par-
ties’ arbitration agreement upon the investor’s acceptance of the offer to con-
sent 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 arbi-
tral tribunal shall apply the law determined by the conflict of laws rules which
it considers applicable.119
118
Investment Treaties, looseleaf Collection (ICSID ed.), Oceana (1983 -).
119
At http://www.uncitral.org/en-index.htm.
40 CHAPTER II
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 applica-
ble 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 invest-
ments in the first private nation-wide commercial television station in the
Czech Republic. CME claimed that the Czech Republic breached its obliga-
tions under the BIT by actions and omissions of the Media Council, a State
agency, which destroyed CME’s investment in that State.122
CME held 99% of the equity interests in ČNTS, a Czech television serv-
ices company. These ownership interests in ČNTS were acquired in steps.123
CEDC, CET 21 and the Czech Savings Bank were co-founders of ČNTS
which was established as a joint venture with the purpose to provide broad-
casting services to CET 21. CME’s investments in ČNTS 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
establish a participation of CEDC in the form of joint venture i.e. ČNTS. The
license holder was CET 21 and ČNTS was the operator of the broadcasting
station. CET 21 contributed to the newly established ČNTS the right to use
the license on an exclusive basis and for that contribution in kind CET 21
obtained 12% of its ownership interest in ČNTS. All these actions were gov-
erned by the 1993 Memorandum of Association and Investment Agreement
(the “MOA”) and approved by the Media Council in the same year. ČNTS and
CET 21 started broadcasting through their newly created broadcasting station
TV NOVA. Although initially the Media Council had approved the creation of
ČNTS it reversed its position afterwards (in 1996) and objected to the activi-
ties of ČNTS. It also instituted court proceedings against ČNTS. CET 21 and
ČNTS concluded a Service Agreement in 1997 which provided ČNTS 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
124
Partial Award, 13 September 2001, para. 8.
terminated by CET 21 in 1999 due to a dispute between the contracting

parties. ČNTS instituted court proceedings against CET 21. All the above
mentioned as well as CME’s and its predecessor’s investments in the joint ven-
ture (ČNTS) were the object of the dispute between the parties.
CME claimed that ČNTS 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
commercial dispute between ČNTS and Dr. Zelezny (director of CET 21 and
ČNTS) 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 estab-
lished 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
1993 action approving the agreement between ČNTS 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 unreason-
able 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
Dr. Zelezny’s termination of the arrangement betweenČNTS and CET 21. CME
argued that the Media Council, therefore, had not fulfilled its obligations under
both the BIT itself and Czech law to intervene to protect ČNTS “by restoring
125
126
127
Partial Award, 13 September 2001, paras. 22, 29.
128
129
Partial Award, 13 September 2001, para. 166-169.
42 CHAPTER II
ČNTS 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 deter-
mining 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 accor-
dance 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
ČNTS 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 inter-
est considerations; and does not permit unlicensed broadcasting. Under no cir-
cumstances 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
131
132
133
134
135
Partial Award, 13 September 2001, paras. 318-320
136
137
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
participants of the split scheme (i.e. CET 21 and ČNTS) 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 regard-
ing 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 rever-
sal 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 under-
stood 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 contribu-
tion in ČNTS 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 know-
how 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
139
140
141
142
143
144
145
44 CHAPTER II
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
Because of that ČNTS 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 sup-
port 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 unautho-
rized broadcast initiated by the Media Council against ČNTS. 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
147
148
149
150
151
152
153
154
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 (unlaw-
ful) 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
157
158
159
160
161
46 CHAPTER II
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 find-
ings 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 major-
ity 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.
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 appli-
cable 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, incon-
sistent 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 deci-
sion, 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 tri-
bunal 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
48 CHAPTER II
there is a conflict between Czech law and the Treaty or general principles of
international law, the Tribunal shall apply international law.168
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
169
170
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
173
proper law in its Partial Award. The Tribunal rejected precedents cited by
Prof. Schreuer finding that these cases did not adequately support his conclu-
sions.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 sup-
port 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 dubi-
ous 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 princi-
ples 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
175
176
177
178
179
180
50 CHAPTER II
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 hold-
ing 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 appli-
cable 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 iden-
tified 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
dispute between CET 21 and ČNTS was understood by the Tribunal as neces-
sitating 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 impli-
cations 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 appli-
cable 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 explana-
tions for its position on applicable law which deserve some comments.
181
182
183
184
185
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 applica-
bility 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 inter-
national 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 confirma-
tion 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.
52 CHAPTER II
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 irrele-
vant. 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 invest-
ment. 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
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
by Prof. Schreuer and Prof. Reinisch), para. 246.
192
by Prof. Schreuer and Prof. Reinisch), para. 245.
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 con-
stantly. 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 interna-
tional law in respect to the principles of causation, the principles of contribu-
tory fault, mitigation of losses and joint tortfeasors.
With respect to CET 21’s contribution to ČNTS 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.
194
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
54 CHAPTER II
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 “inconsis-
tent 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 inter-
national 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 tort-
feasors 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
198
199
200
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.
(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 under-
mined CNTS’ exclusivity of the use of the broadcasting license, which exclu-
sivity 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 argu-
ment, expressed by Prof. Dedic in his opinion, that the 1996 MoA amend-
ments 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
license by CET 21 to ČNTS in 1993 was illegal and void while Prof. Lowe
had argued that not the legal structure but the implementation of the broad-
casting services by ČNTS were in breach of the Media law. Prof. Dedic took
the position that the 1996 MoA amendments were void since CET 21’s con-
tribution to ČNTS 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
203
204
205
206
207
208
Final Award, 14 March 2003, paras. 492, 503-507, 627, 631-632, 637-642.
56 CHAPTER II
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 pre-
vails. 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 deci-
sion 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 desir-
able. 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’ agree-
ment 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 pro-
vision 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.
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 agree-
ment 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 pro-
visions of the authorizing instruments do not require that the parties’ agree-
ment 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 inter-
national 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 deter-
mination 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.
58 CHAPTER II
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 arbitra-
tion implied a choice of international law as the applicable law. Therefore, in his
view, internationalization results from the reference in the contract to interna-
tional 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 posi-
tion 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 justi-
fied 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 arbi-
tration may have an impact on the determination of applicable law it cannot
be treated as an automatic choice of international law as the applicable sub-
stantive 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 circum-
stances of the case (including the choice of a particular forum).
213
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, manda-
tory 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.
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 cer-
tainty 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 applica-
ble 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 devel-
opment 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 devel-
opment 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).
60 CHAPTER II
principles drawn from the body of domestic Egyptian law should be allowed to
override the principles of international law applicable to international invest-
ment 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 specifi-
cally for the law applicable to the merits of the dispute but that:
The parties have fully debated this issue coming to conclusions which only par-
tially 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 perform-
ance 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 domes-
tic 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 invest-
ment 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.
220
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.
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 appli-
cable 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 agree-
ment 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.
227
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).
62 CHAPTER II
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 consti-
tutions 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 par-
ties 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 agree-
ment 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.
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 implic-
itly 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.
237
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.
64 CHAPTER II
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 par-
ties’ 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 pro-
posed 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 appli-
cable 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 pro-
ceedings, 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 (recti-
fied 10 June 1986) 2 ICSID Reports 346.
242
At p. 358.
243
Ibid.
244
Ibid.
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 gov-
erning 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 deter-
mined 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 appli-
cable 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.
246
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).
66 CHAPTER II
(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’ submis-
sions 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 appli-
cable 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 interna-
tional 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 appli-
cation 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 vari-
ous 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 nor-
mally materialize after the emergence of the dispute, by observing and con-
struing the conduct of the Parties throughout the arbitration proceedings.254
249
AAPL v. Sri Lanka, Award, 27 June 1990, 4 ICSID Reports 246.
250
At p. 253.
251
At p. 253.
252
At p. 257.
253
At p. 256.
254
Ibid.
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 heav-
ily 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 incor-
poration 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 gen-
eral 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 custom-
ary 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.
256
At p. 257.
257
Ibid.
258
Ibid.
259
Ibid.
68 CHAPTER II
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 differ-
ent 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 distur-
bance” 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 argu-
ment, 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.
261
At pp. 258-263.
262
At pp. 253, 258.
263
At p. 258.
264
Sri Lanka/United Kingdom BIT of 1980.
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 over-
rides, 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.
266
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 ordi-
nary 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
70 CHAPTER II
identified, each provision construed separately, examined within the global

context of the Treaty, in order to determine the proper interpretation of each
text, as well as its scope of application in relation to the other treaty provisions
and with regard to the various general rules and principles of international law
not specifically referred to in the Treaty itself.273
Therefore, the Tribunal determined that the BIT provisions had to be exam-
ined and applied in light of international law in general. It examined all rele-
vant 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 bur-
den 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 condi-
tions (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.
274
At p. 268.
275
At p. 269.
276
At p. 270.
277
At p. 272.
278
At p. 272.
279
At pp. 275-276.
proven to be non-existent.280 Therefore, only Art. 4(1) of the BIT was avail-
able 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 establish-
ing 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 ren-
voi 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 appli-
cable 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 con-
sidered 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.
281
At p. 276.
282
At p. 282.
283
At p. 287.
284
At p. 296.
285
At p. 299.
72 CHAPTER II
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 appli-
cable 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 demon-
strate prudence and caution on both sides. In addition, it seems somewhat unre-
alistic 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 sen-
tence 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.
287
At p. 298.
288
At pp. 298-299.
289
At p. 299.
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 substan-
tial 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 sub-
missions during the arbitration proceedings. There is nothing incorrect in such
an approach as long as it undoubtedly demonstrates an agreement on applica-
ble 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 appli-
cable 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 interna-
tional 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.
74 CHAPTER II
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 con-
cluded 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 interna-
tional 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 contain-
ing 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
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.
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 pro-
visions 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 man-
dated 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 equi-
table 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 imme-
diate 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 inter-
preting 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 imposi-
tion 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.
299
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.
76 CHAPTER II
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 expro-
priation. 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 inter-
ference “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 obli-
gation 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.
307
At p. 915.
308
Ibid.
309
Ibid.
310
Ibid.
311
Ibid.
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 viola-
tion of an international treaty before an international tribunal”.313 The
Tribunal referred to international precedents confirming that this general prin-
ciple 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 interna-
tional 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 gen-
eral, 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 substan-
tive 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 con-
cluded 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 arbi-
tration” 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 inter-
ests that were improperly obtained in the first place”.317
312
At p. 916.
313
Ibid.
314
Ibid.
315
At p. 916. Italics and emphasis original.
316
At p. 916.
317
78 CHAPTER II
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 deter-
mine 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 com-
pounded. 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 writ-
ings on this point.
318
At p. 917.
319
At p. 917.
320
At p. 918.
321
At p. 918.
322
At p. 919.
323
At p. 919.
In this case an implied agreement on the BIT as the primary source of

applicable law was inferred from the parties’ submissions throughout the arbi-
tration 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’ submis-
sions 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 neces-
sary. 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 conclu-
sion 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 incomplete-
ness 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 deter-
mined 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.
80 CHAPTER II
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 appli-
cable 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 find-
ing any implied agreement the tribunal should be led by the terms of the con-
tract 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 domes-
tic 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 manu-
facture 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 quan-
tity of bottles was delivered to SIACONGO which failed to pay for this deliv-
ery. 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.
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 par-
ties 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.
327
At p. 338.
328
At p. 338.
329
At p. 342.
330
At p. 342.
331
At p. 349.
332
at p. 572.
82 CHAPTER II
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 appli-
cable 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 inter-
national 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 emer-
gence 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 agree-
ment 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
334
At p. 256.
335
At p. 256.
336
At p. 257.
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 princi-
ple to taking account of these amendments, but there is also the fact that fail-
ure 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 con-
sent 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 con-
tract 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
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.
84 CHAPTER II
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 adminis-
trative 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
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.
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, baux-
ite 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.
86 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 con-
tracting 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 commit-
ment 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 obliga-
tions 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
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).
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 inter-
national 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 expira-
tion 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 provi-
sions of Article 18.352
348
At pp. 990-991.
349
At p. 1000.
350
At p. 1020.
351
At pp. 990-991.
352
At p. 1020.
88 CHAPTER II
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 read-
ing 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 cir-
cumstance 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 juridi-
cally 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.
354
At p. 1021.
355
At p. 1021.
356
At pp. 1021-1022.
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 pro-
vided 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 indemnifica-
tion 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 prohi-
bition 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 crit-
icism 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 stabi-
lization clauses therein of any effectiveness.363
357
At p. 1023.
358
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
Award, 19 January 1977, 17 ILM (1978) at p. 25.
90 CHAPTER II
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 con-
fiscation at all, in the direct sense. What they are concerned with is any meas-
ure terminating the Concession before its time. In that respect, it would be dif-
ficult to imagine language (or draft it) that would more effectively combine the
notions of the comprehensive and the specific: “. . . shall not by general or spe-
cial 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 unlaw-
ful 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
366
At p. 1052.
367
At p. 1053
The AMINOIL decision should be a cause of concern for the foreign

investors. This view is shared by some commentators.368 For the aforemen-
tioned 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 inter-
national law. The choice of law clause was supplemented by the following sta-
bilization 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 addi-
tionally 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 interna-
tional 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
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.
92 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 dis-
criminatory 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 interna-
tional 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 identi-
cal to the view of the Separate Opinion in the AMINOIL case. The incompat-
ibility 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 indi-
cates 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.
374
LETCO v. Liberia, Award, 31 March 1986, 2 ICSID Reports 358.
375
At p. 368.
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 proce-
dures 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 sta-
bilization clause. But it also noted that the legislative action taken by the con-
tracting 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 sev-
eral 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.
377
Ibid.
378
Amoco International Finance Corporation v. Islamic Republic of Iran, Partial Award, 14
July 1987, 27 ILM 1314 (1988).
379
At p. 1355.
94 CHAPTER II
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.
381
At p. 1355.
382
At p. 1353.
383
At p. 1353.
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 nei-
ther of the contracting parties had a power to take such measures.
Such an interpretation is not persuasive. Although the language of the sta-
bilization 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 con-
strued as a stabilization clause and Article 21, paragraph 2 only prohibits uni-
lateral 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 interna-
tional 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.
385
See generally the position of Judge Brower on stabilization clauses at pp. 1394-1398.
386
At p. 1355.
387
At p. 1357.
96 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 char-
acterized 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 relation-
ship 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.
389
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.
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 incorpo-
rating 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 compen-
sation. 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 nation-
alization. In TOPCO and AGIP, the tribunals were clear in holding that the
nationalization as an act that terminated the parties’ agreement was in viola-
tion of a stabilization clause contained therein and this violation was suffi-
cient to demonstrate the unlawful character of nationalization. In AMINOIL
and Amoco, the tribunals refused to accept the position that the nationaliza-
tion 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, conse-
quently, 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 invest-
ment 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 “seri-
ously 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.
98 CHAPTER II
parties decide to choose the host State’s law as the law governing their
relationship without qualifying it with a stabilization clause they accept pos-
sible later changes of that law. Indeed, where there is an agreement on appli-
cable law it is difficult to argue that the parties wanted to stabilize their rela-
tionship 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 invest-
ment arrangement.394 This means that changes should not gravely, arbitrary
affect or discriminate against prior contractual arrangements. Therefore, sub-
sequent 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 interna-
tional 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
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.
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 agree-
ment 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 nar-
rowly construed and applied than mandatory norms. A mandatory norm may
be in contravention of public policy which serves to protect the basic princi-
ples 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
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 manda-
tory 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.
100 CHAPTER II
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 inter-
national 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 recog-
nize and enforce awards, not even public policy. On the other hand, other arbi-
tral 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 sov-
ereignty over natural resources and the principle for self-determination.
401
Article 53 of the Vienna Convention on the Law of Treaties, at http://www.public-
international-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
at p. 568.
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 enforce-
ment 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 meth-
ods 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 pro-
visions of the Constitution.2
1
2
At p. 349.
103
104 CHAPTER III
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 deci-
sion 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’ agree-
ment 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 cir-
cumstances, 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 deter-
mined 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 appli-
cable 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 refer-
ence 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.
4
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.
ABSENCE OF AGREED CHOICE OF LAW 105
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 incom-
plete. For instance, if the parties choose the law of a contract as the law appli-
cable 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, conse-
quently, 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 incomplete-
ness 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 demon-
strates 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
9
At pp. 207-209.
10
At p. 207.
11
At pp. 249, 321.
12
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.
106 CHAPTER III
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 rela-
tionship 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).
15
For an analysis of the role of international law in the second sentence of Art. 42(1) see gen-
erally 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’ deter-
mination, the proper law for the issue under consideration”. Therefore, “depending on the cir-
cumstances 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.
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 man-
agement 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 accor-
dance 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 provi-
sion 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
Amco v. Indonesia, Award, 20 November 1984, 1 ICSID Reports 413.
18
At p. 452.
19
At p. 452.
108 CHAPTER III
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 con-
stantly 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 com-
pensation.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
At p. 452.
21
At p. 452.
22
At p. 454.
23
At p. 454.
24
At pp. 454-460.
25
At p. 455.
26
At p. 456.
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 state-
organs.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 invest-
ment 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
At p. 457.
28
At p. 457.
29
At p. 458.
30
At pp. 458-459.
31
At pp. 458-459.
32
At pp. 460-468.
33
At pp. 460-468.
34
At pp. 469-474.
110 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 invest-
ment 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 short-
fall 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 mate-
rial 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
At pp. 471-472.
36
At pp. 474-489.
37
At p. 489.
38
At pp. 490-491.
39
At p. 490.
40
At pp. 490-491.
41
At p. 491.
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 con-
tains references to pertinent authorities. The Tribunal, in particular, found
support for the application of the principle pacta sunt servanda in the inter-
national arbitral awards that had applied the said principle (e.g. the Aramco,
TOPCO, Sapphire awards).44 Furthermore, the Tribunal relied on the princi-
ple 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 interna-
tional 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 obliga-
tions 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
At pp. 491-494.
43
At p. 491.
44
At pp. 492-493.
45
At p. 493.
46
At p. 493.
47
At pp. 499-501.
112 CHAPTER III
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 par-
ticular 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 applica-
bility 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 par-
ties’ 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’ submis-
sions should be understood as support for the Tribunal’s own finding on
applicable law.
This decision provides detailed examination of a number of legal ques-
tions 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 impres-
sion 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 dis-
cussed below.
48
At. pp. 499-501.
49
At p. 504.
50
At p. 506.
51
Amco v. Indonesia, Decision on Annulment, 16 May 1986, 1 ICSID Reports 509.
(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 cit-
ing 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 pri-
marily 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 particu-
lar 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 provi-
sions 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 obliga-
tions; 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 termina-
tion (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
SOABI v. Senegal, Award, 25 February 1988, 2 ICSID Reports 190.
53
At p. 221.
54
At p. 221.
55
At pp. 222-226.
56
Ibid.
57
At p. 226.
114 CHAPTER III
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 discre-
tionary 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
At p. 228.
59
At pp. 225, 228.
60
At pp. 225, 228.
61
At p. 228.
62
At p. 229.
63
At p. 229.
64
At p. 229.
obligations, it must make a demand and, if the situation is not rectified, may ter-
minate 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 dis-
solution of the contract. The Government, which maintains that it could termi-
nate for cause based on SOABI’s breaches, cannot rely on those alleged
breaches as a defense against Article 138 compensation, having unilaterally ter-
minated 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 sen-
tence 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
At pp. 229-230.
66
At p. 230.
67
At pp. 230-245.
68
At pp. 245-254.
116 CHAPTER III
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 ques-
tions. 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 cor-
rective 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 appli-
cable 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 determi-
nation 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 tri-
bunal. Since the Tribunal joined to the merits of the case the jurisdictional
69
History of the ICSID Convention, Vol. I, at pp. 190, 192.
70
Tradex had also relied on the Albania/Greece BIT of 1991 as a basis for the Tribunal’s juris-
diction, 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).
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 accord-
ing 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 inter-
national law as may be applicable”. Accordingly, the Tribunal will make use of
sources of international law insofar as that seems appropriate for the interpre-
tation 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 expro-
priated 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.
118 CHAPTER III
important condition for such a taking to qualify as an expropriation.76 It con-

firmed 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 interfer-
ences 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 deci-
sions and events led to the conclusion that none of these constituted an expro-
priation 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 meas-
ures 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 estab-
lished 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 tak-
ing 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 rela-
tion 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 con-
sent 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
At p. 233, para. 136.
77
At pp. 233-248, paras. 137-203.
78
At pp. 244-248, paras. 191-203.
79
80
At p. 248, paras. 203-204.
81
At p. 248, para. 205.
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 sen-
tence 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 pro-
ceedings 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 con-
tentions, the Respondent said that their agreement, although not in writing or
even expressly stated, had its basis in Costa Rica’s consent to ICSID jurisdic-
tion 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.
120 CHAPTER III
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 argu-
ment on this question and analyzed the documents to which we have been
referred, including, in particular, the Helms Amendment and related docu-
ments, 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 unequi-
vocal 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 inter-
national 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
At p. 105.
86
At p. 106.
87
At p. 106.
88
At p. 106.
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 expropri-
ation 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 “interfer-
ence” 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 cir-
cumstances 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 pro-
perty must be valued as of that date.92 The Tribunal then proceeded to deter-
mine 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 fre-
quently 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 consider-
ations of fairness which must form part of the law to be applied by this
Tribunal.97
89
At pp. 107-108.
90
At p. 108.
91
At p. 110.
92
At pp. 110-111.
93
At p. 113.
94
At pp. 113-114.
95
At pp. 114-115.
96
At pp. 115-117.
97
At p. 117.
122 CHAPTER III
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 inter-
national 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 follow-
ing way: since the Tribunal found no agreement on choice of law in accor-
dance 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 incon-
sistency 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.
The analysis of the above cases demonstrates that ICSID tribunals, in apply-
ing 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 interna-
tional 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 appli-
cable law these tribunals identified the applicable law correctly and proceeded
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 applica-
ble 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
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 deter-
mined to be appropriate”.
124 CHAPTER III
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 interna-
tional 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 con-
flict 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 com-
mentary 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.
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 con-
flict 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 clos-
est 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 par-
ticular 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
88-1, Oceana (1988) at pp. 319- 321.
107
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 sys-
tem 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 tri-
bunal 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 appli-
cable 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.
126 CHAPTER III
question is: what is the effect of this requirement. According to the commen-
tators, 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 con-
tains a somewhat untypical provision on the applicable law. Under this provi-
sion 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, con-
tract 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, how-
ever, 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.
131. Contract provisions constitute one of these factors, but it is notewor-

thy 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 contrac-
tual clause to the contrary, the Algiers Accords undoubtedly would have con-
tained 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 fac-
tors. Rather, the above analysis led the Tribunal to conclude that “in the pres-
ent 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 con-
firms that the Tribunal indeed used that freedom.117
The following case law illustrates the manner by which the non-ICSID tri-
bunals 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.
128 CHAPTER III
arbitration. This approach tends to internationalize the governing law. It is

interesting to see how in this particular case the arbitrator selected the appli-
cable law.
In Sapphire v. NIOL, the dispute concerned the interpretation and perform-
ance 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 pro-
vided 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 pro-
ceeded 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 obli-
gations 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 appli-
cable procedural law or the applicable substantive law. On the basis of the seat
of arbitration (Lausanne), a sole arbitrator determined that the applicable pro-
cedural 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 con-
flict 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).
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 inten-
tion 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 con-
cession, 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 indi-
cated 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 arbi-
tral 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
At p. 170.
120
At p. 171.
121
At p. 171.
122
At p. 171.
123
At p. 172.
124
At pp. 140, 172.
130 CHAPTER III
practice common to civilized countries, rather than, strict application of the

rules of the particular legal system. The arbitrator offered the following rea-
soning for his finding:
In fact, in ordinary law, the judge who decides a dispute concerning the inter-
pretation 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 clar-
ified 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 agree-
ment 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 fur-
ther evidence that the parties intended to refer the interpretation of the agree-
ment 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
At p. 173.
126
At pp. 140, 173.
127
At pp. 173-174.
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 inter-
national 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 applica-
ble 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 par-
ties 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 rec-
ognized 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 neces-
sary, 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
At p. 174.
129
At p. 175.
130
At p. 175.
131
132 CHAPTER III
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 recog-
nized 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 contract-
ing 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 connect-
ing 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 arbitra-
tor’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 sub-
stantive law. The character of the concession justified such an approach. If
Iranian law were to apply, the investor would not be protected against legisla-
tive 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 independ-
ently 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 con-
necting 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.
but also imposes a great burden on the tribunal due to the fact that, some-
times, 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 exclu-
sive 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 pre-
vented 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.
134 CHAPTER III
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 non-
associated 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 arbi-
tral 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 govern-
ing 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 deter-
mined 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 independ-
ently 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 posi-
tion was that the Respondent breached the EPSA and expropriated its
contractual rights by denying the Claimant permission to explore for petro-
leum in Structure A (area on the border with Bahrain) and by failing to agree
with Claimant on further contractual arrangements for the utilization of non-
associated natural gas discovered by the Claimant in 1980. The Respondent
rejected these contentions.
135
http://www.uncitral.org/en-index.htm.
136
Partial Award, 5 February 1988, 28 ILM 795 (1989) at p. 802.
The Tribunal proceeded to examine the relevant provisions of the EPSA

and found that the Respondent did not agree that the utilization of non-
associated natural gas was economical, as required by the EPSA, and accord-
ingly 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
At pp. 813-815.
138
At pp. 814-815.
139
At p. 813.
140
At p. 815.
136 CHAPTER III
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 contrac-
tual 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 dis-
pute with the neighboring state, Bahrain, in connection with this particular
area before signing the EPSA. The documentary and testimony evidence indi-
cated 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 pro-
visions 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 pur-
suant 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, par-
ticularly the right to produce gas, there is no basis for the Claimants’ right in
141
At p. 816.
142
At p. 816.
143
At p. 816.
144
At pp. 816-818.
145
At p. 818.
146
At p. 820.
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 inde-
pendent 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 negotia-
tion, 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
At p. 820.
148
At p. 821.
149
At p. 821.
150
At pp. 821, 823.
151
At p. 823.
138 CHAPTER III
the Tribunal’s duty under Qatari law to construe the meaning of the contract in
good faith . . . 152
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 enrich-
ment 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 consid-
ering 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 jus-
tify 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 inter-
national 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 obvi-
ously 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 tri-
bunal to take into account the trade usages where appropriate. In relation to
152
At p. 824.
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 com-
mercial 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 par-
ties. 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 con-
tained a provision on applicable law.154 After that the Tribunal cited the provi-
sion 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 con-
cluded 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.
140 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 princi-
ples 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 con-
cessions, 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 rep-
resentation by the Consortium that commercial quantities of oil had effec-
tively 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
At p. 117. Footnote omitted.
159
At pp. 113-115, 118.
160
At p. 118.
161
At p. 118.
162
At pp. 120-121.
(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 applica-
ble 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 mer-
chant.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 appropri-
ate 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.
164
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:
“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 mer-
catoria 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).
142 CHAPTER III
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 interna-
tional law as well as different rules of law for different parts of their contrac-
tual 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 chemi-
cals. 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 interna-
tional law.171 The Respondent argued that the expropriation was made in com-
pliance 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
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.
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 con-
tract 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 agree-
ment. 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 con-
tract,” 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 expropria-
tion, 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 nation-
als 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
At p. 1338, para. 87.
173
At p. 1353.
174
At pp. 1338-1345.
175
At p. 1341, para. 97.
176
At pp. 1338-1341, paras. 88-100.
177
At pp. 1341-1342, para. 101.
144 CHAPTER III
Article IV(2) of the Treaty states:

Property of nationals and companies of either High Contracting Party, includ-
ing 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 com-
pensation. 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 tangi-
ble assets. No convincing explanation has been adduced to justify such a nar-
row 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 eco-
nomic value, their nullification by the Single Article Act could have been con-
sidered 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
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.
is expressly authorized by Article V of the CSD to apply the rules and princi-
ples 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 enact-
ment 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 estab-
lished 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 gen-
erally, 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 inter-
national law rules on expropriation. It referred to the PCIJ decision in the
Case Concerning Certain German Interest in Polish Upper Silesia as the lead-
ing expression of the rules of customary international law and noted later, pro-
gressive 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 neg-
ative 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
At p. 1342.
184
At p. 1342, para. 102.
185
At p. 1343, para. 111.
186
At p. 1343.
187
At p. 1344, paras. 113-114.
146 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 obli-
gation accepted as a general rule of customary international law.189 It con-
firmed 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 cus-
tomary 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 pay-
ment, 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 interna-
tional 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 condi-
tion. 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
At p. 1344, para. 116.
190
At p. 1344, para. 117.
191
At p. 1345, para. 117.
192
At p. 1345.
193
At pp. 1345-1348, paras. 121-132.
194
At p. 1348, para. 132.
With respect to the Claimant’s second contention that there was no pay-
ment 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 imple-
mentation 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 com-
pensation 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 pro-
vision 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 pro-
cedure 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 inter-
national 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 inter-
national 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 dis-
crimination.199 The Claimant argued that the expropriation of Amoco’s inter-
ests 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
At p. 1349, para. 136.
196
At p. 1349, para. 136.
197
At p. 1349.
198
At p. 1350, para. 138.
199
At p. 1350, para. 140.
200
At p. 1350, para. 139.
148 CHAPTER III
different treatment of other companies was justified by the specific circum-

stances 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 obliga-
tions. 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 pub-
lic purpose and the subsequent Special Committee’s decision was taken in
compliance with this act. The Tribunal also added that financial considera-
tions, 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 inter-
pretation 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 apply-
ing 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 agree-
ment 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
At pp. 1350-1351, para. 142.
202
At p. 1351.
203
At pp. 1351-1352, para. 146.
204
At p. 1353, para. 155. See section on stabilization clauses.
205
At pp. 1354-1355.
206
At pp. 1355-1357, paras. 165-173.
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 com-
pensation 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 con-
tained 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 alter-
ation 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.
208
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.
150 CHAPTER III
agreements is not dependent upon the law which the Parties chose to govern the
Agreement.211
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 deter-
mining 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 con-
duct 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 appli-
cable 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 interpreta-
tion is that the parties were unable to arrive at an agreement beyond the ques-
tion 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 mag-
nitude 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
At p. 25.
212
At p. 26.
213
At pp. 27-28.
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 inter-
national 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 implementa-
tion 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 agree-
ments. 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.
215
Phelps Dodge Corp. and Overseas Private Investment Corp. v. The Islamic Republic of Iran,
19 March 1986, 25 ILM 619 (1986).
152 CHAPTER III
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 auto-
matically 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 compen-
sation 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 compensa-
tion.219 The Tribunal, by referring to the position taken by the ICJ in the Case
Concerning United States Diplomatic and Consular Staff in Tehran, con-
cluded 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 interna-
tional 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.
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.
217
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
19 March 1986, 25 ILM 619 (1986) at p. 626.
219
At p. 626.
220
At p. 627.
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 non-
ICSID 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 predictabil-
ity 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 lim-
ited 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 interna-
tionally accepted principles of law governing contractual relations as the
proper law without reference to any national legal system. In light of the per-
tinent 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 dis-
putes, 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 con-
tract 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 contra-
dictory 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.
154 CHAPTER III
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 word-
ing 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 mecha-
nisms, 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 sen-
tence 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, interna-
tional 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.
2
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
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
155
156 CHAPTER IV
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 interrela-
tion 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 stan-
dard for the application of Libyan law since it is only if Libyan law is in con-
formity 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 uni-
lateral 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; Rubino-
Sammartano, 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 ulti-
mately 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
January 1977, 17 ILM 1 (1978) at p. 11.
5
At p. 15.
THE ROLE OF INTERNATIONAL LAW AND ITS RELATION TO DOMESTIC LAW 157
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 princi-
ples. 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 mod-
ifications 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 discus-
sion 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 interna-
tional 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.
7
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.
158 CHAPTER IV
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 ascer-
tained 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 correc-
tive, should the State’s law not conform on all points to the principles of inter-
national 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 deci-
sion 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 con-
firms 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-à-
vis 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.
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 pecu-
niary 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 func-
tions of international law. Its reasoning indicates that after examining and
applying the law of the host State, the result must be checked against interna-
tional 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 particu-
lar matter, a search must be made for the relevant international laws. And,
where there are applicable host-state laws, they must be checked against inter-
national 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, inter-
national 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 interna-
tional law had to be applied. In the view of the Tribunal, when national law con-
tained 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
Amco v. Indonesia, Resubmitted Case: Award, 5 June 1990, 1 ICSID Reports 580.
13
160 CHAPTER IV
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 conform-
ity 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 interna-
tional 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 sin-
gle 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 indi-
cates 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 interna-
tional 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
CDSE v. Costa Rica, Award, 17 February 2000, 15 ICSID Review – FILJ 169 (2000) at p. 191.
15
At p. 191.
16
Tradex v. Albania, Award, 29 April 1999, 14 ICSID Review – FILJ 197 (1999) at p. 216, para. 69.
17
At p. 217, para. 69.
18
Wena Hotels v. Egypt, Decision on Annulment, 28 January 2002, 41 ILM 933 (2002) at p. 941.
19
At p. 941.
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 sys-
tems 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 com-
mentators 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 interna-
tional 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 inter-
national 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
162 CHAPTER IV
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 inter-
national law existing at present or established hereafter between the Contracting
Parties in addition to the present Agreement contain a regulation, whether gen-
eral 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 pres-
ent 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 applica-
ble 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: hierar-
chal 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 relation-
ship 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 supple-
mental 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.
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 pre-
vail 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 cor-
rective 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 rele-
vant 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.
27
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.
164 CHAPTER IV
attention. Finally, the tribunal will act in accordance with the parties’ agree-
ment 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 per-
spective 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 deter-
mined 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 fundamen-
tal requirements of fair procedure and within a tribunal’s terms of reference
some review process of arbitral awards is necessary. By submitting their invest-
ment 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 con-
trol. 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 annul-
ment 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.
165
166 CHAPTER V
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 lim-
ited 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;
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) that the Tribunal was not properly constituted;
(b) that the Tribunal has manifestly exceeded its powers;
(c) that there was corruption on the part of a member of the Tribunal;
(d) that there has been a serious departure from a fundamental rule of procedure, or
(e) 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 pow-
ers, 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 arbitra-
tion Broches, A., Observations on the Finality of ICSID Awards, 6 ICSID Review – FILJ 321
(1991) at pp. 327-332.
ISSUES OF ANNULMENT 167
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.
168 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 appli-
cation 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 par-
ties’ agreement to arbitrate. Part of this agreement may be a clause on appli-
cable 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. Non-
respect 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 “man-
ifest 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,
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
pp. 931-933.
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 mani-
fest 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.
16
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,
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.
170 CHAPTER V
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 apply-
ing 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 admis-
sible 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.
21
(1986), at p. 109, para. 57. Other grounds invoked in the Application for Annulment were: man-
ifest 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.
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 erro-
neous 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 admis-
sible 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 vio-
lation 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 find-
ing but rather referred to “universal requirements of frankness and loyalty”.31
26
27
At p. 111, para. 65.
28
At p. 111, paras. 65, 66.
29
Award, 21 October 1983, 2 ICSID Reports at pp. 59-61.
30
At p. 59.
31
At p. 60.
172 CHAPTER V
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 cor-
rective 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 con-
tained 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 domes-
tic 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
Decision on Annulment, 3 May 1985, 1 ICSID Review – FILJ 89 (1986) at p. 112, para. 69.
33
At p. 112, para. 69.
34
At p. 112, para. 70.
35
At p. 113.
36
At p. 113, para. 71.
37
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 “mani-
festly 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 refer-
ence 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.
39
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.
174 CHAPTER V
(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 sen-
tence of Art. 42(1) of the ICSID Convention.41 The Tribunal examined differ-
ent 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 sys-
tems 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 erro-
neous 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
42
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
44
At p. 512.
45
At pp. 514-515.
46
At p. 515.
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 recogni-
tion 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 par-
ticular 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 considera-
tions 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 pro-
ceeded 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 pow-
ers 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
At pp. 515-516.
48
At p. 516.
49
At p. 516.
50
At p. 516.
51
At p. 516.
52
At p. 517.
53
At p. 524.
176 CHAPTER V
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 statu-
tory 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 per-
sonnel 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 con-
tention 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 revo-
cation 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.
55
At p. 524.
56
At pp. 524-525.
57
At p. 525.
58
59
At p. 531. Two other grounds for annulment were also invoked: serious departure from a fun-
damental rule of procedure and failure to state reasons.
60
At p. 533.
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 invest-
ment 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, conse-
quently, 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 annul-
ment. 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
Amco v. Indonesia, Decision on Annulment, 16 May 1986, 1 ICSID Reports 534-535.
62
At p. 534.
63
At p. 534.
64
At pp. 534-535.
65
At pp. 535-536.
66
At p. 535.
67
At pp. 537-539.
178 CHAPTER V
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 unwar-
ranted, 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 annul-
ment 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.
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 appreci-
ation 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 dero-
gation from the terms of reference within which the tribunal has been author-
ized 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 dero-
gation 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 tri-
bunal’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 pro-
ceeded 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
At p. 102, para. 4.06.
76
At p. 104, para. 5.03.
77
At p. 104, para. 5.04.
78
At p. 111, paras. 6.31, 6.32, 6.33.
79
At p. 112, para. 6.37.
180 CHAPTER V
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 posi-
tion 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 car-
rying 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 inter-
national 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 ser-
vanda 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 mani-
festly 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, quot-
ing 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.
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 par-
ties 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 con-
cluded 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 com-
pound 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 nei-
ther 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.
182 CHAPTER V
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 bound-
ary 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 interna-
tional law under the Convention, or under particular treaties related to its
operation, is antagonistic to that State’s national interest”.97 Furthermore, it
91
At p. 939.
92
At p. 939.
93
At p. 939.
94
At p. 939.
95
At p. 939.
96
At p. 941.
97
At p. 941.
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 suf-
ficient evidence to prove such a claim. It is therefore not a question of the appli-
cable 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.
99
At p. 942.
100
At p. 942.
101
At pp. 939-940, 942.
184 CHAPTER V
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 includ-
ing 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 objec-
tives. 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 estab-
lished 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 annul-
ment concluding that there was no excess of powers on the ground that the
Tribunal failed to apply the proper law.
102
At p. 942.
103
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.
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 per-
missible 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 inter-
national 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 alter-
natives 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 per-
spective 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.
186 CHAPTER V
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, unfortu-
nately, 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 fail-
ure 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 pur-
ported 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 “man-
ifest” to an excess of powers meant to clarify and restrict this ground fur-
ther,109 the Amco and Klöckner annulment decisions indicate that this ground
for annulment can be still subject of different interpretation. The view sug-
gested by some commentators, that the term “manifest” becomes then indis-
tinguishable 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 sin-
gle 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 basi-
cally 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.
110
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.
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 cor-
rectly 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 pre-
vail. The ad hoc Committee found such inconsistency in respect of the ques-
tion 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 tri-
bunals 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).
188 CHAPTER V
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 final-
ity of arbitral awards and, at the same time, ensures the integrity of the arbi-
tration 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 enforce-
ment 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 arbitra-
tion. 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.proce-
dure.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).
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 inter-
est 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 pro-
vides 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 post-
award remedies. As already explained, the awards rendered under the
UNCITRAL Rules may be challenged before national courts and, accord-
ingly, 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 chal-
lenging 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
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).
190 CHAPTER V
(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 pro-
ceedings 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 set-
ting 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, fol-
lowing 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 partici-
pated 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 prin-
ciples 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).
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 deci-
sion 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 follow-
ing 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 contra-
dictory 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 mat-
ters beyond the scope of the submission to arbitration, provides that, if the deci-
sions on matters submitted to arbitration can be separated from those not sub-
mitted, only that part of the award which contains decisions on matters not sub-
mitted 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 man-
date (or, it has not rendered its decision in accordance with the mission con-
ferred 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
192 CHAPTER V
(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 par-
ties or, in the absence of such choice, in accordance with the rules of the law he considers appro-
priate.
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.
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 pro-
tection afforded to the original investor pursuant to the 1993 MOA, the com-
mencement of the administration proceedings in 1996, and the alleged coer-
cion 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 aforemen-
tioned 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 interna-
tional 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.
133
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.
194 CHAPTER V
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 disre-
garded 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 deterio-
rated”.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 volun-
tary. The Tribunal, in this context, questioned whether the “opinion” rendered
by Dr. Barta in which he concluded that “the split structure” was not compati-
ble 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
At p. 931.
138
At p. 931.
139
At pp. 931-932.
140
At p. 932.
141
At p. 932.
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 deter-
mine whether CME had incurred an injury. Characteristic of Schwebel’s posi-
tion 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
Tribunal did not analyze of what CET 21’s contribution to ČNTS 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
the contractual relationship between ČNTS and CET 21, it was necessary to
examine Czech Law:
The content and effect of 1993 MOA and the 1996 MOA and the service agree-
ment should have been adjudged according to Czech law. Without analyzing the
content and effect pursuant to Czech law of the contractual relationships
between CET 21 and ČNTS in 1993 compared with 1996 and 1997, and the
content of the revocation of the terms and conditions of the license, it was not
possible for the Stockholm Tribunal to determine whether CME/ ČNTS had lost
142
At p. 932.
143
At p. 932.
144
At p. 933.
196 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 irre-
spective of the provisions of the 1993 MOA and found that CME/ ČNTS 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 admin-
istrative proceedings in 1996 had the purpose of coercing the investor, the
Republic argued that the Tribunal did apply neither Czech law nor interna-
tional 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 interna-
tional 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 administra-
tive proceeding under the Media Law in case there was a suspicion of viola-
tion 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
At p. 933.
146
At pp. 933-934.
147
At p. 934.
148
At p. 934.
149
At p. 934.
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 sig-
nificance since it was only an expression of the supervisory authority’s gen-
eral 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 appli-
cation 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
ČNTS.
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
At p. 935.
151
At p. 935.
152
At p. 935.
153
At p. 936.
198 CHAPTER V
The term, joint tortfeasors, postulated by the Tribunal exists neither in interna-
tional 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 sup-
port 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
had breached his obligations as a senior executive of ČNTS was reached nei-
ther 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 accor-
dance 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 cor-
rectly 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
At p. 936.
155
At p. 936.
156
At pp. 924, 946.
157
At pp. 946-949.
158
At pp. 949-953.
159
At p. 924.
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 indi-
cates 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 cho-
sen 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 coun-
try 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 des-
ignated law must be involved. There is no excess of mandate where the arbitra-
tors have applied the designated law incorrectly. Nor can there hardly be any
question of excess of mandate where the arbitrators have been required to inter-
pret 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
At pp. 960-961.
161
At p. 963.
162
At p. 963-964.
163
At pp. 963-964.
164
At p. 964.
200 CHAPTER V
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 tri-
bunal 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
At p. 964.
166
At p. 965.
167
At p. 965.
168
At p. 965.
169
At p. 965.
170
At p. 965.
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 con-
tained 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 vio-
lation 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 govern-
ment 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 con-
ducting any operations. The landfill site was declared part of a special eco-
logical 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.
202 CHAPTER V
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 inter-
national 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 objec-
tives. 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)
174
Paras. 1, 72; Art. 1110(1) of the NAFTA states: No Party may directly or indirectly nation-
alize or expropriate an investment of an investor of another Party in its territory or take a meas-
ure 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 serv-
ices 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 objec-
tives set out in para. 1 and in accordance with applicable rules of international law, 32 ILM 297
(1993).
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 interpre-
tation 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 par-
ties. (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 objec-
tives, 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.
179
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).
204 CHAPTER V
central government of any Party (whose international responsibility in such

matters has been identified in the preceding section) become aware of any
scope for misunderstanding or confusion in this connection, it is their duty to
ensure that the correct position is promptly determined and clearly stated so
that investors can proceed with all appropriate expedition in the confident
belief that they are acting in accordance with all relevant laws.181
The relevant facts evidenced, in the view of the Tribunal, that Mexico had vio-
lated 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 con-
struction 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 circum-
stances demonstrates a lack of orderly process and timely disposition in rela-
tion 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.
182
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.
...
(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 provi-
sions, 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 obli-
gation 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 deci-
sions 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 trans-
parency 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 evi-
dence introduced to establish that transparency has become part of customary
international law. In the Myers award [S.D. Myers v. Canada], one of the arbi-
trators 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
Para. 50.
187
Para. 66.
188
Para. 66.
189
Para. 58.
206 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 word-
ing of Article 1105. Rather, it misstated the applicable law to include trans-
parency 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 trans-
parency 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 trans-
parency 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 trans-
parency. 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
Paras. 68-71.
191
Para. 72.
192
Para. 79.
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 interna-
tional 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 obliga-
tions and, as a matter of fact, considered transparency as relevant for interpreta-
tion 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 obvi-
ously 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.
208 CHAPTER V
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 head-
ing “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 “tanta-
mount 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.
197
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
The Tribunal relied on the Restatement and its comments in order to distin-
guish 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 interna-
tional 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, non-
discriminatory, bona fide general taxation does not establish liability.202
In addition to the Restatement, the Tribunal sought guidance from the deci-
sions 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 tanta-
mount to expropriation. (There is in this case no allegation of a direct expro-
priation 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 deci-
sions. 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 appli-
cable 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.
210 CHAPTER V
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 dis-
criminatory in face, but that law had been applied in a discriminatory man-
ner.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 provi-
sion 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 informa-
tion 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 domes-
tic 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
Para. 156.
208
Para. 157.
209
Para. 160.
210
Para. 165.
211
Para. 166.
212
Para. 167.
213
Para. 168.
214
Paras. 173-187.
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 lim-
ited . . . 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 favor-
able 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 com-
pany] 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 dis-
crimination 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 enforce-
ment 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 discrimi-
nation 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).
212 CHAPTER V
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 improp-
erly 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 concern-
ing taxpayer confidentiality and, consequently, in accordance with Art. 2105
of the NAFTA, could not be forced to disclose information about the tax treat-
ment of other cigarette exporters. For the aforementioned reasons:
. . . the Intervener argues that the approach adopted by the majority was incon-
sistent 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 pro-
duce 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 submis-
sions 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.
confidentiality protected under Mexican law.223 The fact that the investor was
denied certain rebates while other domestic cigarette exporters in like cir-
cumstances 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 arbi-
tration proceedings, it was improper for the Court to consider Art. 2105 argu-
ment on its review. The decision of the Court is convincing for the following
reasons:226 The Tribunal, in its Award, considered the relevant NAFTA pro-
visions 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 exclu-
sion; 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 fur-
nish 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.
224
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).
214 CHAPTER V
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 con-
firms 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 par-
ties’ 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).
229
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.
contained in the BIT, whatever it chooses. It would then seem that the tribu-
nal only fails to respect its mandate if it decides ex aequo et bono without hav-
ing 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 sev-
eral 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 appli-
cable law. No reference had been made to the provision dealing with disclo-
sure 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.
2
“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:
“The tribunal may not bring a finding of non liquet on the ground of silence or obscurity of inter-
national 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
183 (1994) at p. 196.
217
218 CHAPTER VI
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 applica-
ble 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 solu-
tion”.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
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,
219
220 CHAPTER VII
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 author-
ized 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
9
See analysis of ex aequo et bono decision and the modern legal systems in Rubino-
Sammartano, 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
DECISION EX AEQUO ET BONO 221
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 require-
ment 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 interest-
ing 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 dis-
tinction 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
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.
222 CHAPTER VII
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 agree-
ment 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 illus-
trative 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 fol-
lowing 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.
15
Holtzmann M. H./Neuhaus E. J., A Guide To The UNCITRAL Model Law on International
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
(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’ agree-
ment 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 author-
ized by the parties during the proceedings.21
Therefore, only an explicit agreement of the parties may empower the tri-
bunal 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 par-
ties 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 relation-
ship 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.
20
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
24
See sections on the principle of party autonomy and on choice of law modalities.
224 CHAPTER VII
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 insti-
tuted ICSID arbitration against Cameroon in April 1981. The Award26 was
rendered in favor of Cameroon whereupon Klöckner applied for the annul-
ment 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 apply-
ing 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 applica-
tion 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, con-
versely, 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
(1986). See also analysis of this case in the chapter on annulment.
28
At p. 109.
29
At p. 109.
30
At p. 110.
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 equi-
table”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 ref-
erence to some legal authority, but invoked wording that led the ad hoc
Committee to conclude that it resorted to equity. When terms such as “equi-
table”, “justice” or “fairness” are used by a tribunal it is necessary to examine
in a general context whether the tribunal invoked some equitable considera-
tions 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 author-
ity 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 auto-
matically equivalent to a decision ex aequo et bono which, in view of the
31
At p. 114. Italics original.
32
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 reason-
ableness”, Svea Court of Appeal, 15 May 2003, 42 ILM 919 (2003) at p. 965.
226 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 expro-
priation, 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.
36
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
38
At pp. 338, 342, 349.
39
At p. 349.
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 else-
where. 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 per-
sonnel. 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 inter-
est. 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 inter-
est. The Tribunal observes, however, that the Government, in its Memorial in
Defence, suggested a rate of interest of 10% in connection with its counter-
claim. 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
At p. 357.
41
At p. 361.
42
At p. 361.
43
At p. 362.
228 CHAPTER VII
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 author-
ized 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 com-
mentators 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 distin-
guished 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.
45
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
FILJ 37 (1996) at p. 39.
47
FILJ 37 (1996) at p. 62.
and a manifest excess of power on the part of the Tribunal. Equitable consider-
ations 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 prop-
erly 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 authoriza-
tion by the parties to decide ex aequo et bono as well as whether the law appli-
cable 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 enforce-
ment 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 set-
ting 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
49
At p. 517.
50
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.
230 CHAPTER VII
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 par-
ticularly 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.
54
See Schreuer, C., Decisions Ex Aequo et Bono Under the ICSID Convention, 11 ICSID
Review – FILJ 37 (1996) at pp. 62-63.
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 sur-
vey 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 exer-
cised 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 inter-
ests 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
231
232 CHAPTER VIII
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 respec-
tive 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 substan-
tive 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 tribu-
nal 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.
SUMMARY OF CONCLUSIONS 233
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 conse-
quences of their violation appear divergent. An expropriation or nationaliza-
tion by the contracting state in the face of a stabilization clause would be
regarded as inconsistent with international law. But whether the incompatibil-
ity of the nationalization with the stabilization clause will be a sufficient rea-
son 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 inter-
national law. In any case, to include a stabilization clause in the parties’ con-
tract 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 relation-
ship and, consequently, the residual rule applicable in the absence of an agree-
ment 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 deter-
mining 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 cer-
tainty 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
234 CHAPTER VIII
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 con-
tained 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 appli-
cation 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 tri-
bunal 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 select-
ing 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,
reference to “rules of law” rather than “law” in the authorizing instruments

appears more suitable. In both ICC and UNCITRAL arbitration, contract pro-
visions and relevant trade usages constitute important source in deciding the
particular case.
The position of the Iran-United States Tribunal towards the applicable sub-
stantive 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 char-
acter, or to the nature of the investment contract. Most of the cases involved
expropriation or nationalization claims. In these cases the Tribunal deter-
mined 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 interre-
lation of the domestic law and international law becomes an important ques-
tion. 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 cor-
rective 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
236 CHAPTER VIII
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 appli-
cable 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 annul-
ment 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 inter-
national 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 rele-
vant facts.
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 appli-
cable 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 deci-
sions) 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 exam-
ine 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 rela-
tion 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 pream-
ble 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 oppo-
site 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 rea-
soning only a tribunal acting as amiable compositeur, without being author-
ized 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
238 CHAPTER VIII
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 dis-
regard 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 UNCI-
TRAL 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
239
240 TABLE OF CASES
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. 107-
112, 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)
TABLE OF CASES 241
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
242 TABLE OF CASES
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
TABLE OF CASES 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

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 TABLE OF CASES
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/en-
index.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)
245
246 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
Bibliography
Books and Articles

Aksen, G., The Law Applicable in International Arbitration – Relevance of Reference to Trade
Usages (in The Law Applicable in International Arbitration), VII ICCA Congress Series,
Kluwer Law International 471 (1996)
Aldrich, H. G., The Jurisprudence of the Iran–United States Claims Tribunal, Clarendon Press
Oxford (1996)
Asiedu-Akrofi, D., Asian Agricultural Products Limited (AAPL) v. Republic of Sri Lanka,
86 American Journal of International Law 371 (1992)
Blessing, M., Regulations in Arbitration Rules on Choice of Law, (in The Law Applicable in
International Arbitration), VII ICCA Congress Series, Kluwer Law International 391 (1996)
Bond, S., How to Draft an ICC Arbitration Clause (Revisited), 7 ICSID Review – Foreign
Böckstiegel, K. H., States in the International Arbitral Process, 2 Arbitration International, No.
1 (1986)
Bowett, D. W., State Contracts with Aliens: Contemporary Developments on Compensation for
Termination or Breach, 59 British Year Book of International Law 49 (1988)
Nationals of Other States, 136 Recueil des Cours 331 (1972-II)
Broches, A., Observations on the Finality of ICSID Awards, 6 ICSID Review – Foreign
Brower, N. C., A Crisis of Legitimacy, National Law Journal, October 2002, http://www.white-
case.com/article_international_adr_10_7_2002.pdf
Brower, C. N./Brueschke, J. D., The Iran–United States Claims Tribunal, The Hague: Martinus
Nijhoff (1998)
Brownlie, I., Principles of Public International Law, 5th ed., Oxford Clarendon Press (1998)
Caron, D. D., Reputation and Reality in the ICSID Annulment Process: Understanding the
Distinction Between Annulment and Appeal, 7 ICSID Review – Foreign Investment Law
Journal 21 (1992)
Chukwumerije, O., International Law and Municipal Law in ICSID Arbitration, 1 Canadian
Journal of International Business Law and Policy 62 (1996)
Collier, J./Lowe, V., The Settlement of Disputes in International Law: Institutions and
Procedures, Oxford University Press (1999)
247
248 BIBLIOGRAPHY
Comeaux, P. E./Kinsella, N. S., Protecting Foreign Investment Under International Law: Legal
Aspects of Political Risk, Oceana (1997)
Comeaux, P. E./Kinsella, N. S., in Transnational Contracts (edited by Stewart, C. E.), Commentary
I.1., Oceana (1997)
Craig, W. L., International Ambition and National Restraints in ICC Arbitration, 1 Arbitration
International 49 (1985)
Craig, W. L., Uses and Abuses of Appeal from Awards, 4 Arbitration International 174 (1988)
Craig, W. L./Park, W. W./ Paulsson, J., International Chamber of Commerce Arbitration, 3rd ed.,
Oceana (2000)
Curtis, C. T., The Legal Security of Economic Development Agreements, 29 Harvard International
Law Journal 317 (1988)
Curtis, C. T., Amco v. Indonesia, 83 American Journal of International Law 106 (1989)
Delaume, G. R., State Contracts and Transnational Arbitration, 75 American Journal of
International Law 784 (1981)
Delaume, G. R., ICSID and the Transnational Financial Community, 1 ICSID Review – Foreign
Delaume, G. R., The Proper Law of State Contracts and the Lex Mercatoria: A Reappraisal,
3 ICSID Review – Foreign Investment Law Journal 79 (1988)
Delaume, G. R., Law and Practice of Transnational Contracts, Booklet 1, Release 88-1, Oceana
(1988)
Delaume, G. R., The Finality of Arbitration Involving States: Recent Developments, 5 Arbitration
Delaume, G. R., How to Draft an ICSID Arbitration Clause, 7 ICSID Review – Foreign Investment
Delaume, G. R., The Pyramids Stand – The Pharaons Can Rest in Peace, 8 ICSID Review –
Foreign Investment Law Journal 231 (1993)
Delaume, G. R., The Proper Law of State Contracts Revisited, 12 ICSID Review – Foreign
Dicey & Morrris, The Conflict of Laws, 13 ed., Vol. 1, Sweet & Maxvell (2000)
Dolzer, R./Stevens, M., Bilateral Investment Treaties, Martinus Nijhoff Publishers (1995)
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)
Elombi, G., ICSID Awards and the Denial of Host State Law, 11 JIA 61 (1994)
Feldman, M., The Annulment Proceeding and the Finality of ICSID Awards, 2 ICSID Review –
Feuerle, P., International Arbitration and Choice of Law under Article 42 of the Convention on
the Settlement of Investment Disputes, 4 Yale Studies in World Public Order 89 (1977)
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 – Foreign Investment Law Journal 101
(1998)
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 – Foreign Investment Law Journal 375 (2003)
BIBLIOGRAPHY 249
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 ), International Arbitration
Institute Series on International Arbitration, Juris Publishing, Inc. 223 (2004)
Greenblatt, J./Griffin, P., Towards the Harmonization of International Arbitration Rules:
Comparative Analysis of the Rules of the ICC, AAA, LCIA and CIETAC, 17 Arbitration
Hanessian, G., General Principles of Law in the Iran–United States Claims Tribunal, 27
Columbian Journal of International Law (1989)
American Case Book Series, West Publishing Co.(1993)
Highet, K., in Lex Mercatoria and Arbitration (edited by Carbonneau, T.) Revised edition,
Kluwer Law International (1998)
Holtzmann, M. H./Neuhaus, E. J., A Guide To The UNCITRAL Model Law On International
Commercial Arbitration, Kluwer (1989)
Kahn, P., The Law Applicable to Foreign Investments: The Contribution of the World Bank
Convention on the Settlement of Investment Disputes, 44 Indiana Law Journal 1 (1968)
Maniruzzaman, A., Choice of Law in International Contracts: Some Fundamental Conflict of
Laws Issues, 16(4) Journal of International Arbitration 141 (1999)
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)
Mayer, P., Mandatory Rules of Law in International Arbitration, 2 Arbitration International,
No. 1 (1986)
Mohebi, M., The International Character of the Iran–United States Claims Tribunal, Kluwer
Law International (1999)
Obadia, E., ICSID, Investment Treaties and Arbitration: Current and Emerging Issues, News
from ICSID, Vol. 18, No. 20 (2001)
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 –
Parra, A. R., ICSID and Bilateral Investment Treaties, 17 ICSID Review – Foreign Investment
Parra, A. R., Applicable Substantive Law in ICSID Arbitration Initiated Under Investment
Treaties, 16 ICSID Review – Foreign Investment Law Journal 20 (2001)
Paulsson, J., Vicarious Hypochondria and Institutional Arbitration, 6 Arbitration International
226 (1990)
Paullson, J., ICSID’s Achievements and Prospects, 6 ICSID Review – Foreign Investment Law
Journal 380 (1991)
Redfern, D. A., ICSID – Losing its Appeal?, 3 Arbitration International 98 (1987)
Redfern, A./Hunter, M., Law and Practice of International Commercial Arbitration, 2nd ed.,
Sweet & Maxwell (1991)
Reisman, W.M., The Regime for Lacunae in the ICSID Choice of Law Provision and the
Question of Its Threshold, 15 ICSID Review – Foreign Investment Law Journal 362 (2000)
Rivkin, W. D., Enforceability of Arbitral Awards Based on Lex Mercatoria, 9 Arbitration
Rubino-Sammartano, M., International Arbitration Law, Kluwer (1990)
250 BIBLIOGRAPHY
Rubino-Sammartano, M., International Arbitration: Law and Practice, 2nd ed., Kluwer Law
International (2001)
Sanders, P., Quo Vadis Arbitration, Sixty Years of Arbitration Practice, Kluwer (1999)
Schreuer, C., The ICSID Convention: A Commentary (A Commentary on the Convention on
the Settlement of Investment Disputes between States and Nationals of Other States)
Cambridge University Press (2001)
Schreuer, C., Failure to Apply the Governing Law in International Investment Arbitration, 7
Austrian Review of International and European Law 147 (2002)
Seidl-Hohenveldern, I., International Economic Law (2nd revisited ed.), Martinus Nijhoff
Publishers (1992)
Seifi, J., Procedural Remedies Against Awards of Iran–United States Claims Tribunal, 8 Arbitration
Shihata, I. F. I., Towards a Greater Depolitization of Investment Disputes: The Roles of ICSID
and MIGA, 1 ICSID Review – Foreign Investment Law Journal 1 (1986)
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 – Foreign
Smith, R. H., An Inside View of the ICC Court, 10 Arbitration International 53 (1994)
Sornarajah, M., The Pursuit of Nationalized Property, Martinus Nijhoff Publishers (1986)
Sornarajah, M., The International Law on Foreign Investment, Cambridge University Press
(1994)
Stone, J., Non-liquet and the Function of Law in the International Community, 35 British Year
Book of International Law 124 (1959)
van den Berg, A. J., Recent Enforcement Problems Under the New York and ICSID Conventions,
5 Arbitration International 2 (1989)
von Schlabrendorff, F., Choice of Substantive Law in International Long-term Infrastructure
Contracts, 9 Arbitration and Dispute Resolution Law Journal 3 (2000)
Weil, P., The State, the Foreign Investor, and International Law: The No Longer Stormy Relationship
of a Ménage À Trois, 15 ICSID Review – Foreign Investment Law Journal 401 (2000)
Weiler, T., Metalclad v. Mexico: A Play in Three Parts, 2 Journal World Investment 685 (2001)
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 – Foreign Investment Law Journal 1 (1993)
Wilkinson, V. L. D., The New Lex Mercatoria, Reality or Academic Fantasy?, 12 Journal of
International Arbitration 2 (1995)
Ziadé, N. G., Some Recent Decisions in ICSID Cases, 6 ICSID Review – Foreign Investment
Unpublished Legal Opinions

Legal opinion submitted to the Stockholm Tribunal in the Quantum Proceedings (prepared by
Prof. Schreuer and Prof. Reinisch), http://www.univie.ac.at/intlaw/main03.html
Schreuer, C., Comments relating to Applicable Law on the Stockholm Tribunal’s Final Award
of 14 March 2003, http://www.univie.ac.at/intlaw/main03.html
BIBLIOGRAPHY 251
Other
Schreuer, C., The Relevance of Public International Law in International Commercial
Arbitration: Investment Disputes, http://www.univie.ac.at/intlaw/schreu.htm
UNCTAD Document (Course on Dispute Settlement: Applicable Law), http://www.unctad.org/
en/docs/edmmisc232add5_en.pdf
Weiler, T., (NAFTA news of 12 July 2003), http://www.naftaclaims.com/News/
Web Sites Consulted

ICSID
http://www.worldbank.org/icsid/
ICC International Court of Arbitration
http://www.iccwbo.org/court/english/arbitration/rules.asp
Iran–United States Claims Tribunal
http://www.iusct.org/index-english.html
UNCITRAL
http://www.uncitral.org
UNCTAD
http://www.unctad.org
International Alternative Dispute Resolution
http://www.internationaladr.com
Vienna Convention on the Law of Treaties
http://www.public-international-law.net
NAFTA cases
http://www.naftalaw.org

(Taida Begic) Applicable Law in International Inve

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

(Taida Begic) Applicable Law in International Inve

Uploaded by

Copyright:

Available Formats

APPLICABLE LAW IN INTERNATIONAL INVESTMENT DISPUTES

APPLICABLE LAW IN INTERNATIONAL

Printed on acid-free paper.

© 2005 Eleven International Publishing

This publication is protected by international copyright law.

Printed in The Netherlands

AGIP V. CONGO (APPLICATION OF THE HOST

(iii) AGIP v. Congo (breach of a stabilization

(iv) Amoco v. Iran (even in case of a contractual

CHAPTER VI: PROHIBITION OF A NON-LIQUET 217

AAA American Arbitration Association

ILC International Law Commission

Investor/State Arbitration and

arbitration.4 Arbitration under the ICSID Additional Facility Arbitration Rules

Colonia and Buenos Aires Investment Protocols of the Common Market of

2 Applicable Substantive Law and the ICSID Convention

3. Applicable Substantive Law in Context

By contrast to the ICSID Convention, the ICSID Additional Facility Arbitration

(b) UNCITRAL Arbitration Rules

Parties to investment disputes have frequently submitted to international

This provision follows the traditional, open-ended formula for designating

by international arbitral conventions as well as by the decisions of the arbitral

(c) ICC Arbitration Rules

(d) Iran–United States Claims Tribunal

In accordance with Art. V of the Claims Settlement Declaration (CSD),31 the

4 The Methodology Employed by the Arbitral Tribunal

Agreed Choice of Law

1 The Principle of Party Autonomy

international law or a combination of both.2 Combined clauses on applicable

2 Choice of Law Modalities

(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

(vi) Compound choice of law clause in the direct contract

AGIP v. Congo (application of the host state’s law tested against

The Tribunal referred to the Constitution of Congo of 1973 and the

additions to it”.47 The Tribunal proceeded to examine the compatibility of the

(vii) Concluding remarks

(b) Choice of law in treaties

(i) Choice of law clauses in multilateral treaties

Article 26(6) of the ECT provides:

The ICSID Convention also contains a combined choice of law clause in

a clause on applicable law stipulated in the France/Argentina BIT of 1991,

(iii) Arbitral practice

action is fully consistent with Article 2(1) of the Argentine–Spain Bilateral

Therefore, international law was applicable first because of its incorporation

problem in light of these two situations. According to the Claimant the

terminated by CET 21 in 1999 due to a dispute between the contracting

legal protection of CME’s investment”.146According to the Tribunal, this was

Here the Tribunal referred to an article of Prof. Vagts in an evident effort to

this preliminary determination of the applicable law. The analysis of the

nullity unless confirmed by the coerced party.197 The Respondent further

The above extensive analysis of this important decision was necessary in

(iv) Concluding remarks

(c) Choice of law provisions in domestic legislation

The third way by which the agreement on applicable law in investor/State

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

After summarizing the parties’ positions on applicable law the Tribunal

the question would be whether international law would be applicable in the

(ii) LETCO v. Liberia (reference in the parties’ agreement to