Applicable Laws in ICSID Arbitration: Direct application of international law and its implications

The purpose of this paper is to demonstrate, through the analysis of arbitration awards, that in investor-state arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States ("ICSID Convention"), it has been permissible for claims to be directly based on international law even if it is not specifically designated as the applicable law, and to identify the problems and limits of this jurisprudence.

First, it is not only what substantive protection is warranted for investors but also what international law is enforced on host countries through judicial mechanisms initiated by a private party, or conversely whether their actions taken to perform their obligations under international law can be immune, and whether and how international law should be treated as applicable law in investor-state arbitration. Chapter 2 argues that both of these issues need to be considered.

Chapter 3(1) makes the point that with regard to applicable law for investor-state arbitration, in order to address the issue that actions of the governments of host countries are easily legitimatized under their own national laws, legal stratagems have been employed in investment agreements hitherto, and nevertheless, even with the interpretation of Article 42 of the ICSID Convention specifying both domestic law and international law as the applicable law, it is considered that domestic law should be primarily applied, and only if there are lacunae in that law or there is conflict with international law should international law be applied complimentarily. Chapter 3(2), however, points out that in arbitration based on the relevant provisions of international investment agreements, with regard to claims based on the provisions of such international investment agreements, a number of arbitral awards have been rendered as established precedents to the effect that the international investment agreements themselves are directly applicable on the grounds that the national law of the host country recognizes the applicability of international law within its national law order.

Chapter 3(3) explains the grounds and limitations of that, based on the premise that the direct applicability of international law has been established. First, although arbitration awards state that the national laws of host countries recognize the applicability of international law within its national legal order, it critically examines whether, as a formalistic legal interpretation, that would negate the meaning of the first paragraph of Article 42 of the ICSID Convention, and also whether an international investment agreement is directly applicable may essentially depend upon the will of the host country. This further argues that it should be determined whether the international law is a treaty that presupposes the enforcement by private parties by means of a judicial mechanism.

Chapter 4 further discusses whether any international treaty other than international investment agreements can be indeed directly applicable, even given the general direct applicability of international law. First, paragraph 1 argues that with regard to permitting direct application as the basis for claims, what implementation is supposed varies from one treaty to another, and thus, that it is necessary to examine whether the treaty is supposed to be implemented through the judicial remedial process. Second, paragraph 2 examines, even if direct application is denied as being the base of claims, whether it is necessary to permit a defense to be based upon obligations borne under other treaties. It points out the need for accepting such a defense anyway, in light of the special characteristics of investor-state arbitration that involves relationships with investors who are highly unlikely to have any particular concern over compliance with other treaties.

Chapter 5 indicates that as stated above, requests for remedies have become permissible through arbitration directly based upon substantive obligations laid down in international investment agreements, and thus conventional international investment agreements, whose main aim is to make arbitration available as a relief procedure alternative to court proceedings in host countries, have become functionally closer to modern international investment agreements that expressly recognize claims based on the international investment agreements themselves. This also applies to conventional international investment agreements that Japan has concluded.