Applicable law Professor Ole Spiermann University of Copenhagen Jonas Bruun Law Firm

Treaty and contract claims “Whether there has been a breach of the BIT and whether there has been a breach of contract are different questions. Each of these claims will be determined by reference to its own proper or applicable law – in the case of the BIT, by international law; in the case of the Concession Contract, by the proper law of the contract.” CAA and Vivendi v. Argentina, Annulment Decision, 3 July 2002, 6 ICSID Reports 340 at para. 96

Contract claims

Proper law of contract Elements of a choice-of-laws analysis: International arbitral tribunals have no lex fori Party autonomy Investment contracts often have their closest link to the national law of the host state Need for internationalisation?

Internationalisation in the PCIJ? “[A] sovereign state … cannot be presumed to have made the substance of its debt and the validity of the obligations accepted by it in respect thereof, subject to any law other than its own” Serbian Loans, PCIJ Series A No. 20 (1929) at 42 “[I]t cannot be admitted that when a Government places a foreign loan with a promise of payment having reference to a well-known standard of value, that reference is to be disregarded” Brazilian Loans, PCIJ Series A No. 21 (1929) at 116

Pacta sunt servanda Overarching standard against which all aspects of national law, procedural as well as substantive, are judged If contractual rights held by an investor are affected in a way not in conformity with the principle pacta sunt servanda, and national law does not provide adequate remedy, an arbitral tribunal is likely to resort to law other than national law (of the host state) Slogan for intricate legal analysis

Rationale (1): Choice of law Dépeçage (splitting the contract): To the extent that national law might impinge on the principle pacta sunt servanda, the contract is governed by some other law, such as general principles of law -Saudi Arabia v. Aramco, Award, 23 August 1958, 27 ILR 117 at Sapphire v. NIOC, Award, 15 March 1963, 35 ILR 136 at 171 -Lena Goldfields v. Soviet Union, Award, 1930, (1950) 36 Cornell Law Quarterly 42 at para. 22 “a gigantic first step for international commercial arbitration, almost equivalent to the caveman’s discovery of fire”, V.V. Veeder, (1998) 47 ICLQ 747 at 772

Rationale (1 bis): Choice of law Ordre public: Pacta sunt servanda constitutes part of mandatory rules to be applied by the arbitral tribunal -Société des Grands Travaux de Marseille v. East Pakistan Industrial Development Corporation, Award, 1972, 1 ICC Awards 40 at 44-5 and 47

Rationale (2): Transnational law The principle pacta sunt servanda as a substantive principle of law governing the contract vis-à-vis the proper law of contract? -Company Z and others v. State Organization ABC, Award, April 1982, (1983) 8 Yearbook of Commercial Arbitration 94 at 108-9

Rationale (3): Public international law The principle pacta sunt servanda forms the bedrock of key rules associated with the international law for the protection of aliens These rules are external to the contract and distinct from the proper law of the contract Possibly relevant to an arbitral tribunal situating itself outside the national legal system of the host state to the effect that the interplay between legal systems is contemplated from the point of view of public international law

Article 42(1) of the ICSID Convention “The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties.” “In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.”

Linked to pacta sunt servanda “the reference to international law..., in reality, comprised (apart from treaty law) only such principles as that of good faith and the principle that one ought to abide by agreements voluntarily made and ought to carry them out in good faith” History of the ICSID Convention (vol. 2, 1968), p. 985 (Aron Broches)

ICSID: National and international law National law of the host state may provide the better protection of investors International law = complementary and corrective -Klöckner v. Cameroon, Decision on Annulment, 3 May 1985, 2 ICSID Reports 95 at para 122 -Amco v. Indonesia, Annulment Decision, 16 May 1986, 1 ICSID Reports 509 at paras 20-2 May general international law be different from yet not in conflict with national law (because international law being permissive or optional)? Emmanuel Gaillard and Yas Banifatemi, (2003) 18 ICSID Rev.-FILJ 375 at 398

Internationalisation and party autonomy The principle pacta sunt servanda rank superior to party autonomy? -BP v. Libya, Award, 10 October 1973, 53 ILR 300 at 331 -Texaco v. Libya, Award, 19 January 1977, 53 ILR 420 at para. 49 -Company Z and others v. State Organization ABC, Award, April 1982, (1983) 8 YBCA 94 at 108 -Letco v. Liberia, Award, 31 March 1986, 2 ICSID Reports 346 at 358 -Amco v. Indonesia, Annulment Decision, 16 May 1986, 1 ICSID Reports 509 at para. 21 -SPP v. Egypt, Award, 20 May 1992, 3 ICSID Reports 189 at 207

Treaty Claims

ECT and NAFTA “A tribunal established under paragraph (4) shall decide the issues in dispute in accordance with this Treaty and applicable rules of international law” Article 26(6) of the Energy Charter Treaty “A tribunal established under this Section shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law” Article 1131(1) of NAFTA

Article 42 of the ICSID Convention “... the Tribunal shall apply the law of the Contracting State party to the dispute … and such rules of international law as may be applicable” International law implicitly chosen by the parties -AAP v. Sri Lanka, Award, 27 June 1990, 4 ICSID Reports 250 at paras 20 and 38 -Wena v. Egypt, Award, 8 December 2000, 6 ICSID Reports 89 at para. 78 -MTD and MTD v. Chile, Award, 25 May 2004 at para. 87

Article 42 … Changed interpretation of Article 42(1): “a more pragmatic and less doctrinaire approach” -Wena v. Egypt, Annulment Decision, 5 February 2002, 6 ICSID Reports 129 at paras CMS v. Argentina, Award, 12 May 2005 at para Azurix v. Argentina, Award, 14 July 2006 at para. 66 -Cf. Autopista Concesionada de Venezuela v. Venezuela, Award, 23 September 2003, at para. 102: “[T]here is no reason in this case, considering especially that it is a contract and not a treaty arbitration, to go beyond the corrective and supplemental functions of international law”

Article 42 … But does a provision designed for contract claims really apply to treaty claims? ICSID’s jurisdiction depends on consent and Article 25 of the ICSID Convention, as opposed to Article 42(1) -CMS v. Argentina, Decision on Jurisdiction, 17 July 2003, 7 ICSID Reports 494 at para. 88 -Azurix v. Argentina, Decision on Jurisdiction, 8 December 2003, at paras Camuzzi v. Argentina, Decision on Jurisdiction, 11 May 2005, at para. 17

National law is not a defence “A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty” Article 27 of the Vienna Convention on the Law of Treaties “The characterization of an act of a State as internationally wrongful is governed by international law. Such characterization is not affected by the characterization of the same act as lawful by internal law” Article 3 of the Articles on Responsibility of States for Internationally Wrongful Acts

Treaty interpretation Text and context, including connected agreements and instruments Object and purpose (balanced) Subsequent agreement between the parties Any relevant rules of international law applicable in the relations between the parties Also in British Columbia? Cf. Mexico v. Metalclad, Supreme Court of British Columbia, Judgment, 2 May 2001, 5 ICSID Reports 238 at paras 68-76

Position of the investor Investors are holders of rights under investment treaties ”From a legal point of view the most striking feature of the [ICSID] Convention is that it firmly establishes the capacity of a private individual or a corporation to proceed directly against a State in an international forum, thus contributing to the growing recognition of the individual as a subject of international law.” Aron Broches, (1972) 136 Recueil des Cours 331 at 349

National law as facts Certain incidental and preliminary questions fall to be decided by national law in establishing the “facts”, e.g.: -MTD v. Chile, Award, 25 May 2004, para Waste Management v. Mexico (No. 2), Award, 30 April 2005 at para. 73 Has a contract been concluded? -Maffezini v. Spain, Award, 13 November 2000, 5 ICSID Reports 419 at paras Was the representative empowered to act on behalf of the state? -Olguin v. Paraguay, Award, 26 July 2001, 6 ICSID Reports 164 at para. 65

National law … Has the contract been terminated? -Wena v. Egypt, Annulment Decision, 5 February 2002, 6 ICSID Reports 129 at para 33 -Azurix v. Argentina, Award, 14 July 2006 at para. 258 Which currency to be used in calculating tariffs and what conditions for adjusting tariffs? -CMS v. Argentina, Award, 12 May 2005, at paras Taxation -Occidental Exploration and Production Company v. Ecuador, Award, 1 July 2004, at para. 93

Internationalisation (again) However, national law is disregarded to the extent contrary to international law, the principle pacta sunt servanda included, e.g.: “the Treaty... does not allow reversal and elimination of the legal basis of a foreign investor’s investment by just taking the view that an administrative body’s formal resolution, the corner-stone for the security of the investment, was simply wrong” -CME v. Czech Republic, Preliminary Award, 13 September 2001, at para. 467

Internationalisation … Statutory limitation does not apply -Maffezini v. Spain, Award, 13 November 2000, 5 ICSID Reports 419 (2000) at para. 93 -Wena v. Egypt, Award, 8 December 2000, 6 ICSID Reports 89 at para. 107 Interest cannot be reduced on the basis of national law -Middle East Cement v. Egypt, Award, 12 April 2002, 7 ICSID Reports 178 at para Wena v. Egypt, Annulment Decision, 5 February 2002, 6 ICSID Reports 129 at para. 53 -Cf. SwemBalt AB v. Latvia, Award, 23 October 2000, at paras 45-6

Interest and calculation of damages National legislation does not trump the calculation of damages under the well-known formula of prompt, adequate and effective compensation -Santa Elena v. Costa Rica, Award, 17 Feburary 2000, 5 ICSID Reports 157 at para Metalclad v. Mexico, Award, 30 August 2000, 5 ICSID Reports 212 at para Wena v. Egypt, Annulment Decision, 5 February 2002, 6 ICSID Reports 129 at paras 52-3

Decisions of national courts An arbitral tribunal will not be bound by decisions of national courts -ICC Award No. 3327, 1981, 1 ICC Awards 433 at Amco v. Indonesia, Award, 20 November 1984, 1 ICSID Reports 413 at paras 150, 177 and 262 -Azinian v. Mexico, Award, 1 November 1998, 5 ICSID Reports 272 at para. 86 -CSOB v. Slovakia, Decision, 1 December 2000, 5 ICSID Reports 358 at para. 35

Conclusions: contract claims Starting point = national law, or as commercial arbitration in general Internationalisation in order to secure equality of parties Choice-of-law approach = distinct spheres, i.e., some aspects governed by national law while other aspects are internationalised International-law approach = two-step model: all aspects governed by national law since international law is complementary and corrective Party autonomy yields to internationalisation?

Conclusions: treaty claims Starting point = international law, as international law dispute settlement in general Certain ”facts” governed by proper law of contract (national law), but only to the extent not in conflict with international law Individual may waive protection under international law (international legal personality; party autonomy)?