The Applicable Substantive Law in International Investment Arbitration: A Critical Analysis and a Proposal for a New Framework

Determining and applying the relevant substantive law in foreign investment disputes has been complicated by legal evolutions since the mid-twentieth century, the emergence of international investment law, and Article 42(1) of the ICSID Convention, as well as by the approach adopted by certain arbitral tribunals. The findings of this article support the insight that limitations on party autonomy are especially pronounced in international investment arbitration. None of the existing theories concerning the determination of the applicable law by the arbitral tribunal offers a suitable mechanism; therefore, a new approach in this area is necessary. In the interpretation and application of an international investment treaty, it is necessary to consider relevant rules from both domestic and international law to form the legal framework governing the treaty. When a clause provides for the application of international law, the scope of ‘international law’, in its specific conceptualization, encompasses only the general principles of law. The general principles of public international law, on the other hand, play a superior and normative function relative to contractual sources and the private agreements of parties in foreign investment. The article concludes with recommendations regarding the nature of foreign investment contracts and the applicable substantive law in international investment arbitration.