The Legal Basis for the Application of Domestic Law in Investment Arbitration
29:4 American Review of International Arbitration, Forthcoming
Posted: 18 Nov 2018
Date Written: September 2018
Investment tribunals have regularly interpreted domestic law in disputes between foreign investors and host states in the past three decades. However, in most of these cases, they have offered little explanations as to why they were authorized to do so. The legal basis for the application of domestic law has been similarly undertheorised in the investment law scholarship. To begin filling this gap, this paper puts forward a conceptual framework to determine when and how domestic law is relevant in investment disputes. This framework stems from the effective interpretation of the legal documents granting jurisdiction to the tribunal and offering protections to foreign investors, and particularly from two international law concepts. First, this legal document may establish both primary norms (i.e. causes of action that form the basis of liability) and incidental norms (i.e. matters that must be decided in order to determine the state’s responsibility). Second, jurisdiction clauses take precedence over applicable law clauses because of the lex specialis principle in international law.
From this framework derives two discernable situations where a tribunal has the authority to apply domestic law. The first is when domestic law is applied as a primary norm. In this case, the relevant jurisdiction clause does not limit the application of international law to the merits of the dispute. To take straightforward example, certain domestic investment laws refer directly (and sometimes exclusively) to the host state’s laws. A more controversial example is when domestic law is neither specifically permitted nor precluded. For instance, international investment agreements (IIAs) commonly permit ‘all’ or ‘any’ disputes relating to investments to be decided by a tribunal, which has been interpreted at times as covering claims founded upon substantive protections other than those offered by the IIA, including some found in domestic law. This result is correct but only so long as the applicable law clause does not circumscribe the causes of action the investors are entitled to bring forward.
The second situation occurs when domestic law is applied as an incidental norm. When the IIA or state contract limits the basis of liability in its jurisdiction and applicable law clauses to international law, this instruction obviously constraints the tribunal’s powers. Nevertheless, the tribunal still has an incidental jurisdiction to apply domestic law when it is ‘essential’ to perform its mandate; that is, to exercise its jurisdiction and apply one or many primary norms. For instance, a tribunal may apply domestic law to decide specific issues — such as the definition of a state organ, the notion of investment, the nationality of an investor, shareholders’ rights, the concepts of property and contract, etc. — as part of the determination of liability in international law. A renvoi incidentally to a source of law potentially not contemplated by the jurisdiction and applicable law clauses is then permitted. This conceptual framework, in the end, should guide tribunals in determining the law applicable to each issue as well as the functional hierarchy between the various applicable laws in investment disputes.
Keywords: applicable law in international adjudication; domestic/national/municipal law in investment arbitration; jurisdiction and applicable law; lex specialis
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