Forbidding depecage: law governing investment treaty arbitration.

• Author: Heiskanen, Veijo

1. INTRODUCTION

   The law governing international arbitration has been a field of considerable conceptual controversy. The debate goes back to the 1960's and 1970's, when distinguished scholars such as F.A. Mann, Berthold Goldman, Philippe Fouchard and others argued whether international arbitration should be considered an autonomous system of law, a new lex mercatoria, or whether it ultimately remained subject to the applicable local legal system. (1) As is well known, the former view was shared by many French arbitration scholars, whereas the latter, more "conservative" view tended to dominate in the United Kingdom and other common law jurisdictions.

   While no consensus was reached in this debate, it did not remain inconsequential in that it clarified a number of the conceptual issues at stake, including those relating to the various meanings of the term "governing law." Indeed, it turned out that at least some of the conceptual confusion was explained by the fact that the various parties to the debate were in part addressing different issues. While F.A. Mann and others who sided with him were more concerned with the lex arbitri, or the "curial" law governing the arbitral tribunal rather than other aspects of the concept of governing law, the proponents of lex mercatoria were more interested in the substantive law of international arbitration. Consequently, as a result of the debate, a distinction came to be made, perhaps more consistently than before, between the law governing the arbitral tribunal (lex arbitri) and the law applicable to the merits (lex mercatoria). (2)

   While the lex arbitri v. lex mercatoria debate was conducted largely against the background and in the context of the quickly developing practice of international commercial arbitration, a parallel debate emerged around a related but separate issue--the law applicable to state contracts. Unlike the lex mercatoria debate, which was dominated by private international law scholars and international commercial arbitration practitioners, the debate about state contracts also attracted the attention of leading public international law scholars such as Robert Jennings and Prosper Weil, as well as, of course, the omnipresent F.A. Mann. The focus of this parallel debate was on the various issues raised by the participation of the state in international contracts and in international arbitration, including issues such as whether the state's agreement to arbitrate constituted a waiver of immunity, the existence of a public international law of contracts, the law governing the arbitration, and the limitations on the applicability of the host state's law on the contract. (3)

   The two grand debates of the 1960's and 1970's reflected an emerging distinction between international commercial arbitration and international investment arbitration--a distinction that is now taken virtually for granted, but was nothing but obvious at the time. This should not be considered surprising since at the time foreign investment usually took the form of direct contractual arrangements between the state and the foreign investor. As a result, both commercial arbitral tribunals and investment arbitration tribunals drew their jurisdiction from contractual arbitration clauses, negotiated at arm's length between the contracting parties. This contractual thinking was incorporated into, and is still reflected in the ICSID Convention, the great intellectual product of the era of state contracts. (4) The ICSID Convention more or less implicitly assumes that foreign investment will typically take the form of an investment contract entered into between a foreign investor and the host state, or an entity controlled by the state. (5)

   However, while the debates of the 1960's and 1970's reflected a growing interest in international arbitration as a process of resolving cross-border commercial disputes, and the parallel interest in developing alternative methods for the resolution of investment disputes (and the corresponding displacement of diplomatic protection as a method of dealing with these disputes), it remained, in the end, less than clear which theory or position in fact "prevailed" in these debates. By the 1980's, most international arbitration lawyers, or at least international arbitration practitioners, tended to take the view that the debates about lex mercatoria and state contracts in particular were mainly of academic or historical interest and, as such, of limited practical relevance.

   Indeed, by the 1980's, a new but analogous debate had emerged in the field of international arbitration--this time between prominent arbitration practitioners rather than academics. Now the controversy was about "a-national arbitration"--about whether parties to arbitration agreements would or should be able to "delocalize" the arbitration and have the arbitration conducted without regard to the mandatory rules of law of the seat or, in any event, have the arbitral award recognized and enforced even if it had been aside by the court of the seat of arbitration. (6) Unlike the debates in the 1960's and 1970's, the discussion about a-national or delocalized arbitration focused mainly on international commercial arbitration rather than investment arbitration. This reflected the remarkable development in the field of international commercial arbitration that took place during the 1970's and 1980's. In particular, private rules of international arbitration developed such as the rules of the International Court of Arbitration of the International Chamber of Commerce (ICC), the London Court of Arbitration (LCIA) and the American Arbitration Association (AAA), as well as quasi-private rules such as those developed by the United Nations Commission on International Trade Law (UNCITRAL). (7) As a result of these developments, parties less frequently designated the procedural law of a particular country as the law governing the arbitration proceedings because of increased use of privatized international arbitration rules. (8)

   But the focus on the legal framework of international commercial arbitration also belied another, parallel "development": The relative stagnation of international investment arbitration, as reflected in the statistics of ICSID. By the late 1980's, it had become increasingly clear that despite the impressive number of states parties to the ICSID Convention, state contracts would not be capable serving as the engine of foreign investment nor, it seemed, capable of generating a sufficient number of disputes to justify the continuing existence of an arbitration service provider dedicated exclusively to investment arbitration. (9)

   However, beginning in the early 1990's, there were new developments that swung the pendulum of intellectual interest back to international investment arbitration. This time the debate was not about state contracts. It was, as aptly and famously captured by Jan Paulsson, about "arbitration without privity," that is, arbitration of investment disputes under investment treaties without a direct contractual relationship between the state and the foreign investor. (10) These developments reflected the fundamental changes in the political-economic environment of international investment arbitration that had taken place in the late 1980's and early 1990's, in particular the end of the Cold War and the resulting quasi-global adoption of neoliberal economic policies. As part of these developments, which gathered momentum in the course of the 1990's, states increasingly withdrew from their role as market participants and owners or managers of business enterprises, and adopted the role of regulator--which made them indirect rather than direct market participants. (11) As a result of these developments, state contracts lost their function as the main vehicle of foreign investment and source of disputes and were replaced, to a rapidly increasing degree, by investment treaties, in particular bilateral investment treaties, (12) and to a lesser degree, foreign investment laws. (13)

   Investment treaties substantially modified the legal framework within which foreign investment was undertaken. Unlike in the case of a state contract, there is no direct contractual relationship--or "privity" of contract--between the state and the foreign investor under an investment treaty. The state's consent to arbitrate is given in a treaty, to which the foreign investor is not a party, and on an anonymous basis to a class of foreign investors as a whole rather than to any particular individual investor. (14) In other words, the state is in a sense acting in its regulatory (or statutory) capacity rather than as privy to a contract. Moreover, since the state's consent is expressed in a treaty, and a treaty is a source of public international law, when expressing its consent to arbitrate in the form of such an undertaking, the state is in fact acting in the sphere of public international law--on the "international plane"--and, accordingly, in its capacity as a sovereign. As an anonymous addressee of the state's consent to arbitrate, the foreign investor expresses its acceptance of the state's offer only after the fact, i.e., after the dispute has already arisen, in the request for arbitration.

   In such a legal construction, the agreement to arbitrate is not part and parcel of an arm's length transaction. It is expressed in two independent consents--or an "offer" and an "acceptance"--that remain separated by the invisible sovereign veil of the state, which is never pierced by the handshake of the parties. But this strange transnational transaction is not only separated in terms of jurisdictional space. It is also separated in terms of time, since at the time when the foreign investor accepts the state's offer to arbitrate, the dispute between the parties has already arisen. In other words, unlike in the case of an arbitration clause embedded in a contract, in the case of investment treaty...