Internationa Arbitration CHOICE OF LAW IN INTERNATIONAL CONTRACTS~—SOME FUNDAMENTAL CONFLICT OF LAWS ISSUES BY A.F.M. MANIRUZZAMAN Vol. 16 No. 4 December 1999 ISSN 0255-8106Journal of International Arbitration 16(4): 141-172, 1998. © 1999 Kluwer Intemational, Printed in Great Brita, Choice of Law in International Contracts Some Fundamental Conflict of Laws Issues A.BM. Mantruzzaman* INTRODUCTION ‘There is no denying that choice of law is one of the central issues of conflict of Jaws or private international law. In this article certain fundamental and recurring choice of law issues in the context of intemational contracts, with special reference to international economic development agreements (EDAs), will be addressed and examined in the light of recent legal developments and international arbitral practice ‘The attempt in the pages that follow is mainly to fill in the void in conventional text books on conflict of laws with a commentary, not pretending to be comprehensive, on the doctrinal views and arbitral practice on those matters relating to international contracts or transnational transactions. I, Tas Doctrine OF THE PRopER LAW/APPLICABLE LAW OF THE CONTRACT A system of law or a body of rules or principles governs the various aspects of a contract. However, in different legal traditions different expressions are used for this purpose. The expression “the proper law of the contract” is peculiar to English common law and to the legal systems mainly based on English law. In other jurisdictions the terms “governing law” or “applicable law” of the contract are usually found to be popular. Recently, in various relevant international conventions the term “applicable law”! has been used either categorically? or indirectly.> In English jurisprudence the expression “the proper Jaw of the contract” is a formal one, rather technical, which has certain specific connotation.t Thus in the Amin Rasheed Corporation case,> Lord Wilberforce defined it as ® Visiting Scholar, St. John College, University of Oxford, Lecturer in Law, University of Kent t ‘Camerbuty, United Kingdom; Advocate, Supreme Court of Bangladesh and Associate of the Chartered Insitute of Arbitrators, London; International Legal Constitant, Member, International Committee on International Commercial Arbitration of the International Law Assocation, London, UK. "Unless otherwise mentioned or indicated, in this arcle “applicable law” is meant throughout te mean applegble sabtantie lw ot lw applicable te the subance of te dispute ?'The Roe Convention on the Law Applicable to Contractual Obligations (1980) uses the, term “Applicable Law" (Art 10) rather than the Fngish common law term “the Proper Lav of the Contract". The Inter-American Convention on the Law Applicable to International Contracts (1994) also uses the term “Applicable Law” (Chapters 2 and 4) in 33 LL.M. 732, 733-739 (1994), 2 See, for example, Convention on the Law Applicable to Agency, The Hague, 14 March 1978; Convention on the Law Applicable to Inteoatona Sale of Goous, The Hague (1985) snl (1986). 4 this article, however, the expressions “proper law of the contract” and’ “applicable Jaw” are used interchangeably. 5" Ainin Resheed Shipping Corporation » Kuwait Inuranee Co. [1984] AC. 50.142, JOURNAL OF INTERNATIONAL ARBITRATION “the law which governs the contract and the parties’ obligations under it; the law which determines normally its validity and legality, its construction and effect, and the conditions of its discharge”.* The English juristic view of the doctrine of “proper law” has also been traditionally forged by the English case law. One scholar has thus defined it as “the system. of law which governs the validity and interpretation of the contract, the rights and obligations of the parties, and the consequences of breaches of the contract. The proper law, therefore, covers most but not necessarily all the potential legal issues”.” What is cleat is that the notion of “proper law” denotes a system of law and nothing less, and that is the traditional English law position. Brown has succinctly summed up the position as: “A contract is the creature of its proper law, and it is a reference by the patties to a system of law which is to give life to the contract.”® We shall turn to this controversial positivistic notion shortly. There is, however, no denying that the scope of the proper law of the contract depends upon the intention of the parties. The Anglo-American common law and civil law systems as well as various international conventions allow patties to a contract to split the proper law, i.e. déperage, for the purpose of governing different aspects of the contiact by different laws rather than by a single law. Some international conventions such as the Rome Convention on the Law Applicable to Contractual Obligations (1980)? and the Mexico Convention on the Law Applicable to Intemational Contracts (1994)! have slightly deviated from the traditional notion and © Asnote 5, above, at 55, 7 DR, Thotnas, Arhittion Agrents asa Siupast ofthe Proper Lay [1984] LMCLQ p. 141 at p. V4; see also. Spina, “Re-cxaminaion ofthe Proper Law”, in Bisys in Honour of CM. Schmit (Frankfort, 2.M., 1973), pp. 341-357. '® R, Beown, Choice of La Provisions in Coucsions end Related Contras, 39 MLR, (1976), p. 625 at p. 638. See ako AA. Broches, Chola-Of-Law Provisions a Contacts With Goveraments, i International Contats: Choie of ‘Law! and Language (Chirseth Anniversary Symposium, Parker School Studies in Foreign and Comparative Law) (WLM, Reese, ed, 1962), p. 64, a p70, "[he choice-of-law clauses shoor the usual rich variety of terminology. ‘Thus, the contract, or the rights and obligations of the parties, are sai to be ‘abject to’, ‘governed by’, ‘construed acconling to and sibject co, ‘interpreted and have effect in accordance with’, and ‘deemed for all purposes to have been executed in and in all respects [to] be subject to and consteued in accordance with? the ws of the government”. 3° EC Convention on the Law Applicable to Contractual Obligations (Rome 1980), 1980 OJ. (L/266), 42 Inter-American Convention on the Law Applicable to International Conteacts (Done at Mexico City, 17 March 1994), 33 LLM, 732 (1994) et sea,CHOICE OF LAW IN INTERNATIONAL CONTRACTS 143, scope of the common law doctrine of the proper law of the contract.!! As mentioned carlier, neither convention uses the common law expression but the neutral one, ive. “applicable law”. This is pethaps to avoid the jargonistic illusion as the term “proper law” in English jurisprudence obviously denotes a legal system per se whereas “applicable law” seems to indicate something less than a legal system, ie. legal principles or rules other than a legal system will do, which increasingly appears to be the undercurrent in recent international codifications!® and also the tendency in many civil and even in some common law countries." It should be ‘noted that the Rome Convention upholds the positivistic notion of “the law” as it limits the parties’ choice to a national legal system, whereas the Mexico Convention has broken through that barrier. The latter in. Article 9Q), second sentence, authorises, in the view of some," the pasties to stipulate the general Both the Rome and Mexico Conventions have excluded “arbitration agreements” (Rome Convention, ‘Are, 1.2(q)) oF “the agreements of the parties concerning arbitration” (Mexico Convention, Art. 5(@) fiom the scape of the Conventions. This means that contracts will have to be spit up so that the questions concerning the existence and validity ofthe arbitration clause in a contract will have to be determined by rales other than that applicable under the Conventions, whereas the rest ofthe contract will be governed by the vules applicable under the Conventions. Thus, there may be the posibility of different lve governing the agreement on arbitestion and the rest of the contact. See PM. North and JJ. Faweett, Cheshire and Nor Priate utrnaionel Law (Eells Edition, 1992, Butterworths, London), at p. 472, Sec alo R. Thoms, Proper Law of Aritation Agreement (1984] 2EMCLQ 304, He holds the view that an “arbitration agreement may have is own proper law which may differ fiom the proper law of the contract within which itis contained” (emphasis added). Ck Compagnie d’Armenent Martine S.A. n. Compagnie Tinisiene de Navigation S.A, [1971] AC, at p. 872 (per Lord Wilberforee) at p. 596; B Nygh, Choice of Fomis and Law i International Comnral Arbitration (Foran Intexnationale, No. 24, june 1997), at p. 4: “Although arbitration agreements have been exelided fiona the scope of the Rome Convention on the Lay Applicable to Conteactual Obligations, the provisions of ehat Convention will, of course, be applicable to determine the lav governing the principal conteact.” Te is noteworthy that the Instixite of International Fav in its Resolution on Arbitration Between States, State Enterprises or State Entities, and Foreign Enterprises (1989) adopted at 5t: Santiago de Compostela Sesion provided some usefal guidance in Art, 4 which provides that “Where the validity of an agreement to arbitrate is challenged, the tvibunal shall resolve the issue by applying one or mote of the following: the law chosen by the parties, che law indicated by the system of private international la stipalated by the patties, general principles of public or privat international lay, general principles of international srbitation, or the lw that would be applied by the court of the tersitory in which the tribunal hs it seat In msking thei selection, the tibunal shall be guided in every case by the principle in favorom validittis.” Sce Ann{DI, Vol. 63(l) 324-331 (1990). Are. 4 “tests ... diectly on the practices and functional needs of international atbitation”, Sec A. von Mchen, Acitmtion Between States end Foreign Entrpries: The Significance of the Instzte of International Law's Santiago de Composice Resoliton, 8 ICSID Rev-Fil} (1990), pp. 54, 59. See ko ‘Art. 178, por. 2, of the Swiss Federal Act on Private International Law (1987) 1 Ror example, see Art. 14.2 of the London Court of Arbitration Rules 1998; Art, 28(1) (second sentence) of the American Arbitrstion Association’ International Arbivration Rules (1997): Art. 17(1) of the International Chamber of Commerce Rules of Arbitration 1998; and Art, 5(a) of the World Inellecuual Property Organisation WIPO) Arbitration Rules (1994) © For example, sce Art, 1496 ofthe French Code of Civil Procedure (French Decree of 12 May 1981): “The arbitrator shall decide the dispute in accordance with the nes of law the partis have chosen; in the absence ofsach a choice, in accordance with those which he considers appropriate. He shall, in all ees, take into account commercial customs” (emphasis added) (eansated). ‘Axe. 187(1) of the Swiss Private International Law (PILA) (Swiss Arbitration Act, i.e. Chapter 12 of PILA); Art. 1054@) of the Netherlands Arbitration Act 1986; s. 25()(D)@)ii) of the Arbitration and Conciliation Act 1996 of Indias Art, 46 of the Netherlands Arbitration Insitute Rules 1986; and Art. LM5@) of the Mexican Commercial Code. See ako for developments in different countries: Mate Blessing, Regulation in Avbitation Rules on Coie of Lay in Planning Efiens Arbitration Proceedings: The Law Applabe in Intentional Arbitration (Albert). van den Berg (ed) 1996) ICCA Congress Seies no. 7, pp. 391-416 ORK, Juengen, Te Iner-Anerios Conwention on the Lave Applicable t International Contmets: Sone Highlighis cand Comparisons, 2 A.C, (1994), p. 381, at p. 392144. JOURNAL OF INTERNATIONAL ARBITRATION, principles of international commercial law recognized by international organizations." ‘The Convention’s deviation fiom the positivist stance is further reinforced by Article 10 which provides that: “In addition to the provisions in the foregoing articles, the guidelines, customs, and principles of international commercial law as well as commercial usage and practices generally accepted shall apply in order to discharge the requirement of justice and equity in the particular case.” No doubt, ie thus follows that where the Mexico Convention, unlike the Rome Convention, applies, the UNIDROIT Principles of International Commercial Contracts! and the Principles of European Contract Law!” will have a great appeal. Both Article 10 of the Rome Convention and Article 14 of the Mexico Convention have seemingly reflected an international consensus on the scope of the applicable law of the contract, Both articles, in common, subject interpretation, performance, the various ways of performing obligations and prescription and limitation of actions, and the consequences of nullity of the contract'® to the applicable law of the contract. In addition, both Conventions have assigned the role of the applicable law to determine the existence and validity of a contract or of any of its terms or provisions including the existence and validity of the consent of the parties as to the choice of the applicable law.!? Both 1 ie (the Court) shall ako take into accoune the general p recognized by international organizations '® See UNIDROIT, Principles of hiternational Commercial Contracts Prnipes UNIDROIT relate conta dt commer international, Rome 19945 MJ. Bonnell, an Intemational Restatement of Contd Lair —The UNIDROFT Prineples of Intemational Commerial Cons (iansnational Juris Publicasons, Inc, Irvington, New York, 1994); M Bonnel, Unifation of Law by NoLayslaive Mears: ‘The UNIDROIT Draft Priniples fr Ineratonal Conmerial Contac, 40 A}. Comp Law (1982), p. 617; MJ. Bonnell, A ‘Restatement’ of Prnaples fr Intemational Carunerial Canta: An Acadonie Frere or & Praca! Neei?, Reve de Droit des Affaires Tnternaéonales (1988), p. 873; M. Fontaine, Ls prinpes pour les ontetscomnerdans inemationaus daborts par UNIDROIT, Revue de droit international e¢de droit compare (1991), p. 23; MJ. Bonnell, The UNIDROIT Priples of hernational Commerial Conti andthe Prinple of Eiropoas Conta Lav: Siilar Rs fo the Sane Puyoses2, Ik Uniform Law Review (1996), p. 229; Mi. Bonel, sn Intemational Restalonent of Contnet Law: The UNIDROIT Prixiples of liemationdl Commonial Contras (Transnational Juris Publications, Inc, Irvington, New York, 1994), at p. 137; Hans van Houtte, The UNIDROIT Prineigls of Inmational Carmmeréal Cons, 1 Arbivation International (No. 4, 1995), p. 373: “the Principles wil only be pact of the lex meratora if they ate recognized as such by the business community and its abitators” K.P Berger, Inemationa Arbtml Prac and dhe UNIDROIT Pringpls of International Conmeriel Couns, 46 ALLL. (1958), p. 129, esp. at pp. 143-145; TCC: Instute for International Business Taw and Practice (ed.), UNIDROIT Prineple for Intemational Cammenial Connects: A Now Lex Meretori? (1995); B. Kozolehye, The UNIDROIT Principles ‘a Model forthe Unification ofthe Best Conical Paes inthe Americas, 45 A} CL. (1988), p. 151; MJ. Bonnell, The UNIDROIT Prndpes of Intertional Commeriel Contmas andthe Prindpes of Eimopem Contra Law: Similar Rules fr the Same Papo? (1996) It Unioean ny Review 229, Mi. eel he URIDROM Pip Pace Esperione of the Bist “Tivo Year, (bup.//wwrwmnideoitorg/english/principles/pe-esperhun}, where the author Incas chon aga awa Som ecson appjng Ge UNUROEE np m wel contin hich these Principles ate chosen a the In govetning the contact, at pp 4-6, Holzmann and Neukaus, A Guide 10 the UNIDROIT Medel Lav of Intemational Consmerial Aibieaton: Legidatve History and Commentary (1989), p. 768. “Rakes of lw” is a more flexible term which would coves, Or ‘example, “the rules embodied in 2 convention or similar text elaborated on the international level, even if not yet in force”. J Hil, 46 ICLQ (1997) at p. 30. "A, Havdkamp, Bripls of Contact Law, in Tewards ¢ Euopron Civil Code (Hartkamp etal, eds, 1994), p37 4 Jealy and the United Kingdom have made reservation to this matter. 4 Rome Convention, Atts 8.1 and 3.4;’Meaico Convention, Art. 12, iples of international commercial law(CHOICE OF LAW IN INTERNATIONAL CONTRACTS 145 Conventions also exclude 1e1v0,® a conformation to the already existing consensus in the Jaw of contract. I, Neep For a SprctFic LEGAL SySTEM AS APPLICABLE LAW? In the context of the theoretical foundations of the law governing a EDA berween a State and a foreign private entity, the fundamental and elementary hypothesis from which one can start, as traditionally done, is that “(e)very contract is necessaily governed by a specific legal order”? The classic expression of this position may be found in Lord Diplock’s following statements: “[T}he purpose of entering into a contract being to create legal rights and obligations between the pasties to it, interpretation of the contract involves determining what are the legal rights and obligations to which the words used in it give vise. This is not possible except by reference t9 the system of law by which he legal consequences that follow from the se of thase word isto be ascertained” (Emphasis added.) “{CJontraets axe incapable of existing in a legal vacuum. ‘They are mere pieces of paper devoid of all legal effect unless they were made by reference to some system of private law which the obligations assumed by the patties to the contract by their use of particular forms of words and prescribes the remedies enforceable in a court of justice for failure to perform any of those obligations.” (Emphasis added.) Although the above position may be still true in the context of court litigation in many national jurisdictions, recently intemational arbitral practice tends to increasingly ® The Rome Convention (Art, 15): “The application of the aw of any country specified by this Convention. sans the aplication of theres of ain Force inthe coutry ter tha ls of peste international a” ‘The Mexico Convention (Art. 17): “For the purposes of this Convention, ‘kw? shall be understood to mean the lave cartent in a State, excinding rules conccening conflict of laws.” On the controversy about the doctrine of reinoi, sce J. Collier, Confit of Eaws (Second Edition, 1994), at pp. 24-28; McClean, Morris, The Confit of Laws (Fourth Edition, 1993) at pp. 478-480; R. Schuz, A Modern clpproach to the Inidntal Question (Kluwer Law International, 1997), at pp. 27-30. 20 See min Réshed Shipping Corp. Kinet Insurance Co. [1984] AC 50. But see Art. 42(1) of the Convention on the Setilement of Investment Disputes States and Nationals of Other States, 1965 (CSID Convention) which provides that “The Tiibunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties In the absence of auch agreement, the Tribunal shall apply the law of the Contacting Stae party to he disp (ineluding its rales ofthe cot of laws) and such res of international law as may be applicable.” (GEinphasis added.) (1 ICSID Reports (1993), p 3, 2¢ p. 14] Sce comments on this spect in Art, 42(1) of the ICSID Convention in G.R., Delaume, Convention ofthe Setlement of Iivestment Disputes Betuven Stats and Notinals of Other States (1966) + tnt Lawyer, p. 64 at p. 79. 2 FA. Mann, 11 RevBelude Dent’! (1975) p. 862; EA. Mann, Notes and Comments on Cases in Inferetional ay Comme Law and Aton Osfod, 199, tp. 31 ets; and EA. Man, Te Paper Law ty the Gon of Laws, 36 ICLQ (1987), p. 437, at pp. 447-448, See aio P, Weil, 128 Hague Recueil des Cours (1963), pp. 95, 181-2; W, Friedman, The Changing Siriture of Intesational Lew (1968) p. 175; and Seidl-Hohenveldern, 11 RevBel.de Detne'i (1978), p. $67, at p. 569. 3 [1983] 3 WER 24, 245. 2 As note 25, above, ap, 249 (reaffemed by the English House of Londs, 2 AMER 884 (1989), at p. 891).146 JOURNAL OF INTERNATIONAL ARBITRATION, deviate from this traditional position.> As noted earlier, in international arbitration it is not “the system of law” or “some system of private law” but “rules of law” that is being increasingly endorsed. Furthermore, an intemational contract may be subject to more than one system of law. The governing rules of a contract may be chosen from more than one system of law, and recently there appears to be a trend to choose complex amalgams of national and non-national systems of law. However, not each component of an amalgam choice should necessarily represent “a system of law” per se. This is clear from the jurisprudence of the Libyan nationalization arbitration. (ad hoe) cases, Some writers, relying heavily on the notion of the “autonomy of the will” of the parties, that is to say applying the notion autonomously in disregard of any link with any legal system, suggest that the contract itself is the law of the parties, i.e, the lex contractus, and there is no need to have recourse to any legal system.” Professor Verdross, the leading advocate of this theory, characterised EDAs as “quasi- international agreements” which are neither governed by the municipal law of a State nor by public international law, but by a new legal order, created by the concurring wills of the parties, ic. the agreed lex contractus.”® He wrote: “The contract, created by a quasi-international agreement, is an independent legal order, regulating the relation between the parties exclusively. Naturally, the lex contracts may refer, for its interpretation or the filling up of eventual gaps, to the legal order of the contracting ® But sce for the support of the taditional position in international al Co, (Anco), 27 TER AYT, 165 “eis obvious that no contract can exist fn mane ie, without being bated on legal system, The conclusion ofa contact snot eft othe wnfeered dicretion ofthe Pats ri ncesaly ited to Some psisve ew which gives legal effects to the reciprocal and concordant manifestations of intent made by the partis. The contact cannot even be conceived without a system of law under which itis erated. Human will can only create contractual zelationship if the applicable system of law has fist recognised is power to do 50°" % See B.P x Libyn, 53 ILR (1977), p. 297, at p. 329. The Concession Agreements between Libya and foreign companies contained the following clause: “The Concession shall be governed by and interpreted in accordance ‘with the principles ofl of Libya common to the principles of international hw and in the absence of such common principles then by and in accordance with the general principles of lay including such of those principles as may have been applied by international wibunals.” BP argued that “since the Parties have expressly excluded the direct and sole application of Libyan lw, but have made reference ta the general principles of law, and since "system most govern, ‘the only system that is left is public international aw”. ‘The tribal rejected this argument and pointed out that “the governing systern of zw is what that clause expressly provides «.. 2 A. Verdross, The Siauis of Foreign Private Interests Stemming from Eononie Development Agrecients with Arbitration Clases, in Seeded Regs on Protection by Lar of Private Forcgn Invests (1964) 117 ot (1958) ZaBV 635; Mi, Bourgin, dition and Erno Delon! genni Seed Rens 99 oF (1960) Bus. Lat, 860. The claimants in B.P v. Libya suggested che tribunal to follow the Fes contntus a8 one of the three possble alternative laws applicable to the concession concerned: "The Claimant wall make three submissions regaeding the law applicable to the conc: tation: Saudl Anabia American Oi1 iewill (A) ‘The law governing the Concession is public international lays (B) Aitematively, de concession itll constitutes the sole source of lw conten the relationship bewween the partes, (©) In the facther alternative, the legal position of the parties falls to be decided by reference to “general principles of law”, (Emphasis added.) See Memorial ofthe BP Explonstion Company (Libja) Limited in B.P.» Libya (Pavt ‘Two, Chapter Ul, at p. 16): the Pleadings are available at Lauterpacht Research Centee far International Lavy, University of Cambridge, UK. 2A. Verdeoss, note 27, above, at p. 121CHOICE OF LAW IN INTERNATIONAL CONTRACTS 147 State, or of the other Party, or to intemational nw. But these legal orders can only be applied in as much as they are delegated by the lex coniractus, because it is the mutual rights and duties of the patties.”* Verdross thus disputed the positivist contention of an external legal system and tried to establish the ld contractuslab autonomous. In this process he also later refined his thesis by attributing the binding force of the lex contracts to the principle pacta sunt servanda and all other general principles of law concerning the conclusion and the validity of contracts.2° However, as far as the question of interpretation is concerned the les contractus was probably intended tq remain autonomous. Although pacta sunt servanda requires the exclusive application of the lex contractus, any gap in the lex is said to be filled by resort to the related general principles of law.! However, as opposed to McNair,2? Lalive,*? and others, Verdross and his supporters,» although they subjected economic development agreements to the general principles of law, did not conceive of these agreements as being based on a pre-existing legal system. From this standpoint, as far as the positivist notion of a legal system is concerned, there remains little difference between the fex contractus and the approach that subjects a contract to the general principles of law or the lex mercatoria’® as both are considered contrat sans toi. It will suffice here to comment for the time being that the doctrine of the lex contracts is fraught with both theoretical and practical difficulties.°? As far as the theoretical aspect is concerned, a contract needs to draw its binding force from a ‘As note 27, above, a p. 125. 2A. Verdioss, Qnast-tntersational Agrenuents and Intemational Eeonowie Transactions, (1964) YBWA 230, 231. & See support fo this view in the Sapphire awaid 35 LL.R., 136, 175. judge Cavin found thatthe concession agreement between a Canadian corporation and the NIOC was not a “noumaP’ contract, that no particular legal system could apply and that any lacunae in the contract could be filled using “principles of lav generally recognited by acted nation ® Lord MeNait, The Gener Prindples of Laur Reegnized by Civilized Netons, BYBIL (1957), pp. 1 et eq, 3 Jo Lalive, Contracts Between a State ora Slate Agency ed « Foreign Company 13 ICLQ (1964), p. 987. 5! Hourquin, 15 Bus, Lawyer, pp. 860-872; Kipp, Verte zwischen stein tnd wichstaatichen Burinenn, in S Berichte der Deusschen Geselschat for Volkerrecht, pp. 139-193 (1964); and Ray, “Law Governing Contracts Beoween States and Foreign Nationals”, in Selected Readings on Protection of Private Foreign Tnvesimenis (1964) pp. 453-822. 3 Bur see Texawo w Libyw 53 LL-R. p. 389, a pp. 446-447, See also A.EM, Manituzzaman, The Lex Mevatoria sand International Contracts: A Challenge for Intemational Conmerial Abitation?, 4 American Univerisy International Law Review (No. 3, 1999) pp. 657-734. 5 Professor Nygh notes"... the French teem sans fol €oes not mean ‘lawless’ in the sense of being without binding tales, bue rather indicates the absence of, in AUstinian cerms, a rule or set of rales emanating from a sovereign authority and enforced by public authority”. Peter Nygh, Anfonomy in Intemational Contacts (Clarendon Press, Oxford, 1999), at p. 172 37 See generally SJ. Toope, Mixed Intemational Aritatin (Grotius, 1990), at pp. 59-61; and A.N_ Onejeme, ‘The Law of Nature Resources Development: Agreowents Betwcen Developing Counties and Forign Investors, 5 Syr]-int L.& Com, (Not, 1977), p. 1, at. 46.148 JOURNAL OF INTERNATIONAL ARBITRATION specific legal system extraneous to the contract itself.%® Pacta sunt servanda is not such a system per se and cannot be alone a sufficient basis for making a contract binding on the parties in the manner considered by Verdross. In the words of Sohn and Baxter: “Pacta surat servanda is undoubtedly the basic norm of any system of law dealing with agreements, but the principle speaks on such a high Jevel of abstraction that it affords little or no guidance in the resolution of concrete legal disputes relating to agreements, What is pactun and when and how and if it is to be servandum are questions which must be answered by a systern of law capable of reacting in a sophisticated manner to these problems.""? Another theoretical problem relates to the fact that EDAs are not contracts infer pares because of the unique position of the State a8 a sovercign as well as a contracting party at the same time. Such agreements must be regarded as “public contracts” which reserve certain regulatory powers to the State“? This phenomenon of such agreements appears to be contradictory to the doctrine of the lex comtractus which is supposedly based on the notion of equality of parties to the contract.!! As far as the practical aspect is concerned, it is understandable that no contract could possibly contain all the detailed and complex set of rules to deal with any kind of issuc that may arise between the patties. This fact, in practice, requires a contract to be written against che background of an established system of law which provides che necessary rules of construction and rules which may be used for filling eventual gaps in the agreement. It is the proper law or the applicable law of the contract which is meant to perform such a function, Thus this is the extraneous role of the applicable law in relation to the contract of which it forms a part that even prompted some scholars to attribute an independent status to the applicable law. Although in many recent investment agreements there seems to be a trend to spell out in great detail the various aspects of a contract and thereby to marginalise the role of the applicable law, its ® See Lord MeNoix, The General Prniples of Lav Recguized by Civilized Nations, BYBIL (1957), 1, ap. 7: “lf is often said tha che partes co a conuace make thle own Inv and i iy of course, tee hat sect te the rules of public policy and ore publi, the parties ate fice to agice upon sch terms % they ay choose. Nevertheless, agreements that ae intended ro have a legal operation Gs opposed to amnerey soci ‘peration) create legal righs and duties, and legal vights and duties cannot exist ina vacuum but mist have 4 place within a legal sytem which i available for dealing with such questions ss the validity, application and interpretacon of contmies and, genctally. for supplementing thei express provisions Ofen atch contacts (EDA) ay lve some indicalon of the legal system wathin which the, or some ptt of tht provisions, ae intended to operate =.” ® Sohn and Baster, Reponstliyof Sts for Injures te the Beonomie intr of Alen, 55 ANIL (1961) 545, 569. See also HLA. Grigera Nan, Chota Prblens in Intentional Commenial Aviation (1982), pp. 128-139, *® See generally, AFM. Manirarzaman, The Now Generation of Eneyy and Naval Resoine Develop, Asreenents: Some Refecons, 1t Journal of Energy and Natural Resouces Law (No. 4, 1993), pp. 207-247 and B Rernartini, “Development Agreements with Host Governments", in B. Pritchard (ed) Evonomie Develpinet, Fora Investment aed the Lae (199), 1H See A.A. Fatousos, The Administive Contract ix Tansatinal Transactions Jus Prowtun Gentawy: Peach Fir Max Rinse (1969), p, 259, 4 See E, Rabel, Prise Interttiondl Low (Second Réition, 1960), Vol. If at p. 369; and P. Nygh, Auonooty in Intemational Contracts (1999), p. 85: .. the choice of law chuse isto be regarded as independent of any contact of which it may form a part in the senge tha the choice made (provided its val ivel) willbe given efecto, even ‘here the existence and/or validity ofthe agreement of which i fori a par sin hse”. See ao, Nygh at ps 8,(CHOICE OF LAW IN INTERNATIONAL CONTRACTS 149 extraneous role for the contract is not disturbed.” It is true that Verdross suggested in his refined thesis that the lex contractis, for its interpretation, filling up of eventual gap, binding force and validity, may tum to the national law of either of the contracting parties, to international law or to the general principles of law. The issue still remains that if the les contractus is itself considered autonomous," it can override such recourse to various alternative sources, as suggested, if its result is not in the spisit of the lex contractus, Itis thus clear from Verdross’s own words when he sai “The contractual stipulations prove beyond doubt that it is not the municipal law of the contracting State but the lex contractual which is the supreme material law basis for the rights and obligations of the patties, since municipal law, as well as international law, is applicable only inasmuch as it is delegated by the lex contracts.” Tt would also mean that the parties to a contract are themselves sovereign with regard to their rights and obligations and the various aspects of the contract and are not subject to external restrictions in their own affairs. This would defy the authority of any territorial sovereign. Further, although Verdross and his supporters contended that any contract concluded by the patties contrary to elementary demands of national ordre public would be nullified by inviolable general principles of law,*® the tisk remains that the parties may try to avoid some important restraining public poliey of a country‘? which would be vital to observe, and which may not be covered by the kind of inviolable general principles of law as Verdross aspired to mean. Thus, on the whole, Mann*® has rightly criticised the doctrine of the lex contractus that such an idea is “doctrinally so unattractive, so impractical, so subversive of public international law, and it hardly requires emphasis that every legal relationship in general and every contract in particular miust be governed by a system of law and is otherwise ‘unthinkable””.? IIL, BINDING FORCE OF CONTRACT AND OF THE Proper Law In the Texaco award, Sole Arbitrator Professor Dupuy stated: “... unless one were to concede that, in the initial stage where the parties are to choose the applicable law, the relevant contracttal stipulation may depend solely on their choice, it is © For recent contractual practice, see GR. Delaume, The Proper Law of State Contes Revisited, 12 1CSID Rev- BLL], (1997, No.1), py at pp. LAS. 1 Recently there seem to be a passion in certain quarters for some kind of autonomous contract doctrine. See generally, Ralph Amissah, The Autonomous Contact: Reflecting the Borderless Bletoni- Comex Environment in Contacting, in In the view of some jurists the internationalisation status of State contracts is so omnipresent that even the parties’ chosen national law is to be relegated to the status of renvoi.” As Professor Weil stated: ‘Municipal law does not therefore apply in itself but as a law of ranvoi. The presence in the contract of a provision referring to the municipal law of the host State does not therefore necessarily mean that internationalization must be ruled out: if such internationalization results from the other characteristics of the contract—and this is the case with most economic development agreements—the contract will nonetheless be internationalized, and stich national Jaw will therefore be applicable as a law of renvol on the basis of the choice of the parties as authorized by the international law applicable in the field of contracts ....””2 Such a position is attributed to the conviction that State contracts like EDAs are inherently rooted in the international law of contracts, that is to say, the Gnundlegung effect, However, the question of validity of the doctrine of the internationalisation of State contracts and the extent to which these alternative international legal orders or the international law of contracts can successfully bring about the result to which their proponents aspire have been subject to serious scholarly debate over the last few decades.” According to some jutists”” and judicial decisions,” a national legal order can be an alternative basic legal order for State contracts,” ‘Whatever the basic legal order is—international, transnational or national—its role of objective determination of the validity of a contract and of its proper law would frustrate the parties’ intention as to the choice of law. ‘Thus, the theory of the Grundleging is a stumbling block to the doctrine of party autonomy universally recognised, Such a theory is neither supported nor sustained by conflict of laws itself because it is the widely recognised starting point, that the validity of a contract and its binding force must be evaluated according to the “proper Jaw” of the contract as 7 Tris to be noted that fiom the Austinian positivist point of view there are sil ongoing controversies as 69 whether public inteenational law, the general principles of law or the lex meratoria are respectively a legal system or oder. 18 Texaco u Libya, 53 LLR., 389, at pp. 460-461, 75 BL Weil, Les Clauses de Stabilization ow dlntangibité Insrée dans les Accords de Développement Economique, in ‘Mélanges: Offerts & Charles Rousseau (1975), p. 301, at pp. 319-320 (as translated and quoted in Texeco » Libya, 53 1LR,, 389, at pp. 460-461). 8 See generally, M. Somnarijah, Tle Pursuit of Natinclized Property (Martinus Nijhoff, 1986), Chap. 2; see aso, ‘The Intemational Loto on Forign lnwestnest (CUR, 1994), Chap. 8; Stephen J. Toope, Mixed Intemational hiraion (Grosius, Cambridge, 1990), at pp. 56-97; Georges R. Delaume, The Peper Law of State Contracts and the Lee Meretora: A Reappraisal, 3 TCSID Rees. Fil} (1988), pp. 79 ct seq.; AEM. Manizuzzaman, The Lex Meratora and Intemational Contsts; A Challenge for International Commental Aritrtion?, 14 Am.U.daeT L.Bew. (No. 3, 1999) pp. 657-734, ® See, ex, P. Well, Droit buernational e¢ Contras d’Etat, in Mélanges Reuter 549-582, p. 560. 1 "Tie Serbian Loa Case [1929] PCL, Sex. A, No. 20, p. 40, tp. 41; The Permanent Court of International Justice observed that: “Any conteact which is not a contract between States in their capacity as subjects of international lw is based upon the municipal law of some countey” The Brazilian Loans Case (1929) PC.1], Ser A, No, 21, Cf. Mecsageriee Moritines (1951) D. Jur. 749 [1951] S. Jae. U1 (Cass, Civ. Ine). See generally, H, Batitfol and B Lagatde, Droit Intemational Privé Sixth Edition, 1976, Vel. 2), pp. 260 et eq. 7 See generally, Georges R. Delaume, The Proper Law of State Conducts Revisited, 12 1CSID Rey.-FIL) (1997), pp. 1-28; A.N. Onejeme, The Lav of Natura Resores Development: Agreements Betucen Developing Counties aud Fore(gn Investors, 5 Syrj.ine' L. & Com. (No. 1, 1977), p. 4 at pp. 49-51154 JOURNAL OF INTERNATIONAL ARBITRATION determined by the conflict of laws rules.*° This also gained support in the final resolution of the Institute of International Law in 1977 at its Oslo session after a failed attempt by some in the discussion meeting to endorse a distinction between the law that governs the contract and the legal order from which the contract derives its binding force.®! One might carefully notice that the Texaco award, which propounded the theory of internationalization of contract, relied implicitly on the conflict of laws principle of party autonomy by starting from the choice of law clause as contained in the agreement.% Thus, conflict of laws rules remaini perpetual as far as the question of the determination of the proper law of the contract is concerned. As Lord McNair puts it: “Jc [private international law or conflict of laws] is adjectival and its duty isto prescribe rules for the guidance of a tribunal in deciding which system of law it should apply for the solution of a question submitted to it that contains a foreign element and with respect to which it has jurisdiction." IV. Snot Law OR DEPEGAGE? ‘The parties to a contract can, by virtue of the autonomy of will, designate a single law to the whole contract or they can split the different issues to be governed by different laws, a method known as “dépesage” or “split proper law”! As Dicey and Morris noted, there is no authority to the effect “that there can be but one proper law in respect of any given contract ...”.* ‘Thus dépesage represents the frontier of party autonomy signifying the legal pluralism within che context of the same contract. Professor Nygh notes, “dépesage gives the parties a very wide range of choice and even opponents of the use of a-national law, have conceded that through dépesage parties can fice themselves fom national restrictions”.® In international commercial arbitration when the parties to a dispute leave the arbitrators to exercise their freedom on the matter, the latter tend to be attracted by the possibility of dépecage. Especially in the context of State contracts when there is no choice of law in the contract concerned or % See, eg., Batiffol and Lagarde, Droit International Privé (Seventh Réition) No. 596 (1983); Dicey and Mortis, The Conflict of Laws, Vol. 2 Tenth Edition) p, 789 (1980). ‘57/1 AnniDI, p. 207 No. 22 (1972), pp. 192-203, 246-254. © 53 LR. pp. 152 ct seq. foo Eat Mea Te Genel Pos of Law Regd by Ched Neos, BYDIL 195), ps ap (oormores omit See generaly, Bernard Hanotian, Dépeyage in. Choice of Law: An Analysis, in Le Contmat Beononigue Interatonel Stabilité et Evolution (1973), 1-8-3; WLM, Reese, Dépegage: A Consmon Phenomenon in Choice of Las, 73 Colambia L, Rev. (1973), p. 58; and K. Lipstein, The Gonerl Principles of Prvwe Intemational Lay, 138 Recueil dle Cours (1972-1) at p. 214, : © Dicey and Morris, The Cowl of Laws (Tenth Edition, 1980), at p. 749; see also Kahler x Midland Banke 1950] AC 24, 42; Re United Retlways of Havana, ee, Warehouses Ld, [1960] Ch 52, 92. Phe Aranio awaed note! ‘Sometimes the contract is split into different parts by legal practice and doctrines: capacity is governed by the l vce othe es dom of the patie, he form ofthe contact by the ln ofthe place where made ‘essential validity by the fex lod contacts and its effects by the lex: lc sotnis, Elsewhere this division of the contrac is rejected and the whole contract is governed by a single law.” Saudi Arabia x Aram 27 LLR., p. 117, atp. 166. See FA. Mann, Fugland Rejects "Deleclved” Contacts and Arbitution, 33 1CLQ (1984), p. 193, a¢p. 197, “... every contract must be subject to a defined system of aw and cannot be subject to no such sytem (Ley the lex mercotori) or more thas one” (emphasis added). 8D Nygh, Atenoniy in Sntenational Contr (1999), at p. 176.(CHOICE OF LAW IN INTERNATIONAL CONTRACTS 155 in the arbitration agreement to apply the merits of the dispute, there proves to be a trend amongst arbitrators to apply different laws to different issues in order to reflect, the implied intention of the parties for the purpose of the protection of foreign investment.” In the words of Cheshire: “i is essential to appreciate at the outset that not all the matters afleeting a contract are necessarily governed by one law. The correct inguiry is not—what lw governs a contract? It is—what governs the particular question raised in the instant proceedings? Different questions may well be determinable by different laws. The questions, for instance, whether agreement has been reached, whether the parties possess capacity, whether contract is formally valid or what interpretation is to be put upon a particular’ clause in the contract do not necessarily fall to be governed by the same law,”** In contractual practice, parties may designate a combination of sources of Jaw in the choice of law provision which are meant to be applied to different issues. In international Joan agreements the doctrine of dépesage characteristically plays an important role.% In such an agreement various issues related to the bond transactions may be subject to the relevant local Jaws while the main loan agreement is to be governed by international law, which is usually the case, at least in the loan agreements of the World Bank! The notion of dépegage or split proper law has also been endorsed in different international instruments by different international bodies. ‘As the Institute of International Law declared in a resolution adopted in 1979 in its Athens session’? “Article 2: The parties may in particular choose as the proper law of the contract either one or several domestic Jegal systems or the principles common to such systems or the general principles of law or the principles applied in international economic relations, or international Jaw, or a combination of these sources of hn.’ ‘The same Institute also declared in another resolution adopted in 1989 in its Santiago de Compostela session: “Auticle 6: The parties have full autonomy to determine the procedural and substantive nules and principles that are to apply in the arbitration. In particular (1) a different source may be ‘See generally, A.FM. Maniruzvaian, State Conn and Avital Choke Lav Process and Teknigus: A Cita Appr! (1998), 15 jn Arb, 3, pp. 65-92. Cheshire, rw Iniernatfonl Law (Eleventh Edition, 1987) p. 448 (footnotes omitted). See ako C. MeLachlan, Splitng the Proper Law x Private Intemational La 61 BYBIL (1990), p. 311, See K, Met, Govming-Law Clans of Leas Agrees ix Iuerntonal Projed Finaning, 20 Toernational Lawyer (1986), p 219, at pp. 225-228: "Despite he espa spulaton ofthe governing law. dhe cathe relaonship between the pats not always governed by that law only. The seope ofthe governing lw (the fe cia) can be lined because diferent laws ate applied to diferent issues in the agreement under a doctrine Requentiy referred to 25 ‘atpaige, or because the ability of the parties wo stipulate the governing lw i limited” (tp. 225), % See A.O, Adede, Legal Tends in Intemational Lexdng and hwestnent isthe Developing Counties, 180 Hague Rec, des Cours (1983-19, p. 9 a p. 71. St Sce P, Wood, air ae Prete of intemadoual Fane (1980), at pp. 19-22. ® Resolution on “The Proper Law of the Contract in Agreements beticen a State and a Foreign Private Perton” in AnaIDI, Vol. 58 (1D, p. 193, at p. 195. * See 5 ICSID Rev-Hit} (1990), pp. 139-41, 2t p. 140. (Resolution on Arbitration Between Stites, State Enterprises, and Foreign Enterprises, September, 1989),156 JOURNAL OF INTERNATIONAL ARBITRATION chosen Yor 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.””* More specifically, the Institute provided in Article 7 of its 1992 Basel resolution entitled “The Autonomy of the Parties in International Contracts between Private Persons or Entities” that: “The parties may choose the law to be applied to the whole or to one or more parts of the contract.” ‘The Rome Convention on the Law Applicable to Contractual Obligations, 1980% has also endorsed the techtiique of déperage or split proper law. Article 3, entitled “Freedom of Choice”, provides inter alia that: “By their choice the parties can select the law applicable to the whole or part only of the contract.” Article 4, which prescribes the applicable law in the absence of choice, allows that “... a severable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country.” ‘This is more of an objective approach endorsed by the Rome Convention. Article 7.1 of the Mexico Convention also provides for déperage.®® It is noteworthy that the doyen of conflicts lawyers, Professor Lipstein observed: “[nlo specific principles, rules or criteria for selecting the laws to form this combination (ie. the combination of legal systems to determine the substance of a dispute) have been established, however; instcad the will of the parties as expressed in their agreement has furnished the ultimate justification”. However, in the absence of choice of law, ICSID practice has developed an operational relationship between °" Ant 6 also provides that “[Jo the extent that the parties have left such issues open, the eibunal shall supply the necessary rules and principles drawing on the sotwees indicated in Article. Article 4 provides th "Where the validity of the agzeement to arbitrate is challenged, the tibunal shall resolve the ise by appl fone or more of the following: the law chosen by the partis, the law indicated by the system of private intecnational law stipulated by che parties, general principles of public or private inteenational Iw, general principles of international arbitration, or the law that would be applied by he courts of the territory in which the tibanal has its seat. In making his selection, the bun sal be ged in every cave by the principle in favoeys waits.” 3 Annuaire de Ulnsttut de droit international, Sesions de Bile (1992), Vol. 64-1, p. 364, at p. 387. % (BO/D34/EEC), Offa journal ofthe Exropean Communities, (JC) 1980, L266, See ako R. Plender, The European Contrets Convention: The Rome Convention on the Choice of Law of Commas (1991), pp. 199-237. "The Convention entcied into force on 1 April 1991 in France, Waly, Denmark, Luxembourg, Greece, Germany, Belgium and the UK, OJBC (1991), C. 52/1 See also the Hague Convention on the Law Applicable to Contracts for the International Sale of Goods, 1985; Art. 7, that deals with choice of law by the parties, and which allows that “auch a choice misy be limited to 4 part ofthe contract”, See Hague Conierence on Private International Law, Reciil des conventions (1988), p. 326, ‘Actes ef doarments (1985). % See algo Art. 7.1 of the Hague Convention on the Law Applicable to Conttacts for the International Sale 0 Goods (1985). XK. Lipstcin, “International Arbitration Between Individeals and Governments and the Conllct of Laws", in B, Cheng and B. Brown (eds) Contemporry Probes of Iierntfonal Laur: Esq in Honour of George Scharzenberger on his Fighteth Binhday (1988), p. 177, a8 p. 179.CHOICE OF LAW IN INTERNATIONAL CONTRACTS 157 “the applicable Contracting State’s law and such rules of international law as may be applicable” as provided in Article 42(1) of the ICSID Convention, 1965.! Despite the fact that there is support for the approach of split proper law or dépesage in the literature! and case law, and that it is increasingly endorsed in various international conventions and international professional bodies’ recommendations, there are some sceptics and critics of it." The latter’s concen is manifold. As Vischer observed, “Dépesage increases the danger of contradictory solutions resulting from references of different aspects of the question to different laws.”' Some French jurists took the same lines arguing that dépesage runs counter to the fundamental purpose of choice of law in a contract, to unite the various provisions of the contract under a single system." Despite such pessimism of some jurists,"% the theory of dépecage is gaining ground in legislative, arbitral and judicial practices in many States.!% In practice, no doubt, there might arise problems. Thus, two distinguished jurists have suggested that: “.., when the contract is severable the choice must be logically consistent, i.e. it must late to elements in the contract which can be governed by different laws without giving rise to contradictions.” Although the technique of dépesage is welcomed by jurists and tribunals alike, its application requires necessary caution. !°* In practice, in the case of a complex choice of © See A. Broches, The Convention ou de Seulement of fnvestment Disputes Between States ond Nationals of Other utes, 136 Hague Recueil des Cours (1972-1, p. 331, at p. 392; sce also AFM. Manicazaamin, Intenatfoel Conmercil cbtetin: The Confit of Lavs Bsues ix Detemminiag dhe Applitle Subsantve Lar inthe Context of Tnvesinent lgremant, Nethertands Interoational Law Review (Vol. XL, No.2, 1993), p. 201, a pp. 238-235, io Seq, expe Reese, Dipopiges A Connon Pheronenon ia Chole of Lay 73 Columbia L. Rew. (1973), p- 58; [ArT von Miley, Lat fa the Uned Stats: Gener ed Comparative View (1988), pp. 64-67; K, Met, Goveming: Law Clases of Loan Agreements in International Pojed Fawn, 20 ‘The International Lawyer (1986), p. 219, at 5p. 225-228. 18 See, eg, Vischer, Dafing Nuanal Legislation and Confer of Laws: the Suis Experience, 4 Lave and Contemporary Problems (1977), p. 131, at p. 138, Losssouara and Bourel, Droit international peivé (Third Ealtion, 1980}, p. 258; Batol and Lagande, Dwit inemnaional privé (Seventh Edition, 1983), Vol. 2, p. 274; O. Lando, Contras tn Inerttional Eneycloptia of Comparative Law (1976), Vol 3, Chap, 24, pp. $13, at p13; Kahn~ Freund, Goren! Prinipler of Piet Intemational Law (1976), at p. 256; Cz MeLachian, Spliting the Proper La in Prine uuenationel Law, 61 BYBIL (1990), p. 311 1H Vischer, nove 102, above, at p. 138. See, eg. Loussovarn and Bourel, note 102, above, at p. 258; Batifol and Lagarde, note 102, above, at p24. 'US See also A.B, Anton, Private Intertationel Law Second Edition, 1990), at p. 274: "The doctrine of the proper law is adopted today, rather than che lex loci contmetus or the lex lo solutions to give legal expression to the underlying economic unity of the contract. This unity snight be disturbed by the application of elierent parts of the contrac of «plurality of legal systems with diferent approaches tothe balance of rights and duties, Teis, nevertheless, posible to provide expressly that different aspects of a contract shall be refered to diferent tens of Iv but the intention to do so wil ot cay be Implied” empha acded). 1% See generally, ©, Lando, note 102, above; B. Rabel, The Conflict of Laws: A Comparative Study (1960), Vol. 2, pp, 469-72; and AT. won Meheen, op cit pp. 687, ior iano-Lagatde Report on the Convention on the Law Applicable to Contracraal Obligations jon), in R. Plender, The Eurapeant Contacts Convention: The Rome Cenvention on the Choice of Law for Contacts (1991), p. 243, at p. 260, ‘8 See GR, Delaunte, Tanstional Contacts: Applicable Law and Settlment of Disputes (Vol. 1, Booklet 1, Release 88-1, Fesued, Janusary 1988), at p. 10, “las in the case of any other stipulations of applicable lay, those regarding, dipsyage require precise drating, lest they give rise to unexpected issues of interpretation”.