The applicable substantive law: an absent debate in the current international investment legal reform proposals

José Antonio Moreno Rodríguez
Senior Partner, Altra Legal, Asunción, Paraguay
jmoreno@altra.com.py

The^[1] international investment claims regime faces several reform proposals. Some corners of academia, governments and even the European Union direct their criticism towards the current arbitration practice. They argue that the appointment of permanent international tribunals staffed by state-appointed adjudicators (as is the case, for example, with the International Court of Justice) would represent a superior dispute resolution mechanism. Several critics of the international investment system envision these courts functioning as at least an appellate body, thereby ensuring – according to them – jurisprudential uniformity superior to the contradictory award precedents that currently co-exist in several substantive areas of foreign investment law.

Surprisingly, a core issue remains unaddressed in most of these discussions, namely: the nature of the substantive law applicable to foreign investments. An adjudicator, whoever and however appointed, is limited in their ability to produce reliable precedent in the absence of an appropriate substantive regulatory framework. Without taking a position on the question of the optimal attention resolution mechanism or the avenues of reform for international investment claims, the lines below will address the critical matter of the applicable substantive law.

Given that there is no realistic hope for the negotiation, much less the ratification, of a universal instrument to comprehensively deal with this matter, focus can and must shift to the current evolution in relevant areas of law related to foreign investments. Impressive developments in public and private international law and in international arbitration already exist today that, taken as a whole, are conducive to more appropriate handling of the substantive law applicable to foreign investments. However, better interdisciplinary dialogue is needed. Private and international private law provide adequate answers to many of the problems that have led to the contradiction in several foreign investment matters, and arbitration itself provides tools that favour an integrative dialogue in disputes resolved through the arbitral process.

In its birth, public international law borrowed legal concepts from ancient Roman private law thanks to the academic work of jurists such as Grotius, Vitoria, Gentile and Vattel, who in the 17th century devised justifications for protecting the economic interests of Western Europe, resulting from its investments in its fledgling colonies. Certain minimum standards of protection were eventually consolidated over time, thanks to their adoption in numerous treaties of ‘Friendship, Commerce and Navigation’, and through the creation of special international tribunals or ‘mixed claims commissions’ that resolved international investment disputes and gradually created a rudimentary case law as a result.

However, the treaties – and customary international law in general at that time – were sparing with respect to minimum standards of protection. To fill the gap, the public international law theorists and special tribunals of the time resorted to the law then common in Europe: the Roman private law that had taken root over the centuries and continued to nourish the various new branches emerging from it. The doctrine and jurisprudence at the time frequently used concepts entrenched in Roman law, such as good faith, estoppel, strict performance and unjust enrichment. The decisions that emerged therefrom became recognised as established rules within public international law. Thus, for centuries, private law has shaped public international law. What better than the ratio scripta – which is how Roman law was applied – to fill the gaps in an incipient discipline such as this? Its suitability was reinforced by Rome’s strong protection of the right to property, recognition of compensation for damages and defence of the sanctity of contracts. In other words, all the ingredients desired by those who advocated meaningful legal protection of European economic interests across the full breadth of their colonial empires.

This mechanism was called into question in the Americas towards the end of the nineteenth century as independence movements spread in the region: it was one thing for Europeans to impose their own law on their colonies, but it was quite another for independent countries to be forced to accept such an imposition. That new tension gave rise to the so-called ‘Calvo Doctrine’, which advocated applying the national rights of the countries receiving foreign investment and the judicial supremacy not of international tribunals but of national courts. Critics observed that this doctrine contravened safeguards needed for foreign investment to flourish, since host countries could alter protection standards – as they have in fact done repeatedly through changes in their regulations – and consequently leaves those ventures at the mercy of domestic political vicissitudes and judgments by local courts frequently shaped by the sensibility that ‘in my backyard, my rules prevail’.

As the colonialist yoke began to yield in other regions, the tensions of this debate transferred to the League of Nations and then to the United Nations, but neither in these nor in other institutions that tried to do so – for example, the Organization for Economic Cooperation and Development – was a consensus reached on what course should be pursued nor, even less, on a comprehensive substantive law corpus on the field of international investments. At most, the United Nations managed to approve ‘soft law’ instruments, such as a document on the responsibility of states for unlawful acts, with ‘secondary obligations’ for non-compliance (for example, reparation for damages and other penalties provided for under public international law).

Thus, to this day, there is no corpus of norms dealing with the substantive law applicable to foreign investments. The international customary law developed through the centuries in doctrine and by international tribunals, therefore, remains in force even today, despite the Calvo Doctrine's efforts to dethrone it. Public international law gradually became imbued with private law and its principles, which were recognised and accepted over time by international tribunals and doctrinal works. There have indeed been treaties throughout the centuries, such as those of ‘Friendship, Commerce and Navigation’, which included minimum standards formulas for protecting foreign investment. However, due to the abstract nature of some of those formulas and gaps in several others, international tribunals and doctrine needed to supplement them with ingredients found primarily on private law and its principles.

The signing of bilateral and multilateral investment treaties helped formalise several of these broad standards of protection developed by customary international law and even went further in some cases, for example, by arguably incorporating the principle of fair and equitable treatment into the minimum standard of protection. However, there is still a gap concerning the corpus regulating or ‘establishing’ how those broad standards are applied, which largely explains the controversies they have given rise to and even the contradictory pronouncements by arbitration tribunals.

These treaties, as well as investment laws and contracts of recent decades, have increasingly favoured arbitration, and the broad powers granted to arbitrators in determining the applicable substantive law continue to contribute to developing the content of those broad standards. Especially towards the middle of the 20th century, the contribution of arbitration tribunals was particularly fruitful for consolidating principles, such as those recognised in well-known Middle East oil cases.

In recent times, private international law has benefitted from countless global, regional and national efforts to improve it. These efforts are generating numerous hard law texts (such as treaties and statutes) and soft law texts (such as guides, model laws and restatements or ‘principles’ – as they call themselves), which tend to break with the ‘localising’ orthodoxy in international cases. They have tapped a series of resources, such as those that enable judges to be flexible when the localising mechanism leads to unfair or inequitable results, thereby making it possible to develop uniform law texts, for example, the CISG. In this latter sense, the UNIDROIT Principles have become a powerful tool with potentially beneficial consequences not only in international commerce but also in the field of foreign investments, by providing formulas such as those relating to force majeure and unforeseeable circumstances that may arise in such contexts.

Likewise, other ‘conflict of law’ developments in current private international law, when properly understood, provide formidable tools for dealing with recurrent foreign investment-related problems, an option that is insufficiently exploited due to the lack of a fruitful interdisciplinary dialogue that would make it possible to take advantage of the many potential benefits. Foreign investment claims may involve conflict of laws discussions relating, for example, to capacity, non-contractual liability, property law and even complex issues relating to financial instruments and guarantees. Recent developments in private international law on these issues may have a marked impact on the fate of many of these disputes, so it is critical that they be handled appropriately.

Worth stressing, too, is the fact that the public-private distinction so vaunted by academia has been notoriously thinned, impacting foreign investment arbitrations in which private law issues are frequently addressed. This situation typically occurs in cases related to contractual breaches, but also happens in many others in which public law is unable to provide satisfactory answers.

In addition to the above developments in public and private international law, arbitration also experienced an impressive progress in the second half of the 20th century, with milestones such as the so-called New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards, the 1974 UNCITRAL Arbitration Rules (amended in 2010), the UNCITRAL Model Law of 1985 (amended in 2004) and the legislative modernisation initiatives derived from those instruments worldwide: the New York Convention has been ratified by more than 160 countries, and a significant number of countries on five continents have amended their laws to bring them into line with the UNCITRAL model. The same is true of the rules of procedure of arbitration institutions, the content of which is strongly impacted by the UNCITRAL model, as is the case, for example, with the rules of the Permanent Court of Arbitration (PCA) based in The Hague, which has been registering an increasing number of investment arbitration cases as a result of treaties or international contracts that are now concluded subject to them.

The growth mentioned above must be added to the ‘revolution’ brought about by the International Centre for Settlement of Investment Disputes (ICSID) since its establishment in 1965. Its peculiar self-sufficient system is not subject to national courts’ scrutiny, which also impacts arbitral discretion in applying the substantive law – again, interdisciplinary tools provide or may do so invaluable assistance for this task. ICSID became the leading mechanism recurred to by investors, which in turn generated an impressive number of precedents in the recent decades.

Both the ICSID rules and those of other arbitration mechanisms contain sparse but significant provisions on the law applicable to the merits of disputes submitted in accordance to them, including rules related to their choice or lack of selection, as well as criteria governing their flexible application, if pertinent, and to public policy. These rules also allow the possibility of opting for an equity or ex aequo et bono arbitration mechanism.

Despite their brevity, these provisions potentially entail weighing multiple issues of public international law, private international law, uniform law and private law in general. The absence of a corpus or body of comprehensive substantive norms in foreign investment matters makes it imperative to resort, depending on the context, to answers provided by the disciplines mentioned above, which reaffirms the compelling need for a fruitful interdisciplinary dialogue to cast their diverse lights on this field.