The applicability of international law as governing law of state contracts.

• Author: Dang, Hop

ABSTRACT

Whether international law is applicable to govern state contracts has long been discussed from different perspectives. This article revisits this issue from the perspective of powers of courts and arbitral tribunals in applying international law. To this end, the article examines the choice of laws rules applicable in a number of courts and arbitral tribunals to determine whether they have the power to apply international law to state contracts in three situations: where the parties have chosen international law; where the parties have chosen only a national law; and where the parties have not chosen a law to govern the contract. The article concludes that a national court has no power to apply international law while arbitral tribunals are obliged to apply international law where it has been chosen by the parties. Most arbitral tribunals may also apply international law where the parties have not made a choice of law. However, where the parties have chosen only a national law to govern the contract, most courts and tribunals have no power to apply international law to it, except for special cases where the rules governing the court or the arbitral tribunal allow otherwise. While this article focuses on the applicability of international law, most of the discussions in it will equally apply to other forms of non-national law, in particular the choice of lex mercatoria, which is also found in a number of state contracts.

Introduction

This article revisits the issue of whether international law may serve as the governing law of state contracts. In other words, it examines whether courts or tribunals hearing a state contract dispute may apply international law to determine issues arising from it. With its own methodology of assessment, this article will demonstrate that there arc circumstances in which tribunals are authorised and even required to apply international law to state contracts and other circumstances in which courts or tribunals may not apply international law to state contracts. It is important that this threshold question be correctly understood and resolved so that international law will only be applied to state contracts in appropriate situations.

1. Methodology

   The applicability of international law to state contracts has been extensively discussed. Opposite views have been expressed and will continue to co-exist. Many authors including Bowett, (1) Greenwood, (2) Higgins, (3) Jennings, (4) Lauterpacht, (5) Mann, (6) Schwebel, (7) and Weil (8) are of the view that international law is applicable to state contracts. On the other hand, another group of authors such as Amerasinghe, (9) Brownlie, (10) Delaume, (11) Grigera-Naon, (12) Sornorajah, (13) Suratgar, (14) and Toope (15) argue that international law is not applicable to state contracts. These commentators have examined the issue and reached their conclusions from different angles. For example, Weil and Dupuy have advocated the application of international law based on the nature of state contracts as long-term contracts involving a sovereign state as a contracting party. On the other hand, authors such as Grigera-Naon and Sornorajah have argued against the applicability of international law on the basis of the lack of rules in international law on contractual issues. Other authors, such as Toope, (16) have rejected the applicability of international law to state contracts on the traditional ground that private investors could never be subjects of international law and contracts with them cannot be assimilated to treaties. On the contrary, Higgins (17) and Schwebel (18) have argued for the application of international law to state contracts based on their perception of a developing trend of international law to extend beyond its traditional subjects of only states and international organisations.

   Amongst these different approaches, the most appropriate methodology, it is submitted, is the one adopted by Mann since the early days of this debate. Mann held the view that whether international law may apply to a state contract is a question for the rules of private international law applicable in the particular case. This point was first made by him in 1944 (19) and subsequently re-stated in 1959 as follows:

   The question whether and under what circumstances it is open to an international person and a private person to submit their contract to public international law relates to the doctrine of the proper law in private international law rather than to public international law. (20) This is the legally correct approach because it forces one to ask whether, under the rules of private international law applicable in the circumstances, the contracting parties may-choose international law to govern their contract and, more importantly, whether the court or tribunal hearing the dispute may apply international law to the contract. This, it is submitted, is the fundamental question. Courts and arbitral tribunals in each jurisdiction no doubt must comply with the choice of law rules that bind them. A failure to do so may expose the judgment or award to being set aside or not enforced. (21) If under such rules, the court or tribunal does not have the power to apply international law to the contract, then regardless of the nature of the contract, the merits of international law or any other factors favouring the application of international law, international law is simply inapplicable. Conversely, if under the relevant choice of law rules, the court or tribunal must give effect to a choice of international law by the parties or is otherwise required to apply international law, then regardless of how unattractive international law may be in the circumstances, international law is applicable to the contract.

   Having posed the right question, Mann, however, only made some general observations without examining this issue in detail. For example, he simply stated that most systems would respect a choice of international law by the parties. (22) However, as conflict rules for each forum may vary, such a generalisation is unconvincing, particularly when unsupported by a close examination of the specific rules in each forum. This article will provide this missing link by examining the conflict rules in some specific fora to ascertain whether they allow the application of international law to state contracts. Because this article can only cover a limited number of fora, it is proposed that the position of arbitral tribunals and, as a contrast, national courts in five jurisdictions being England, France, Germany, Switzerland and the United States be examined. Hence, the terms 'courts' and 'tribunals' as used in this article shall refer to those in these five jurisdictions. In addition, tribunals at the International Centre for Settlement of Investment Disputes ('ICS1D') and the Iran United States Claims Tribunal (IUSCT') will also be discussed as they often deal with state contracts in the relationship with international law. While it is difficult to generalise, the position in these established common law and civil law fora should be indicative.

   It should be emphasised at the outset that this article does not address the substantive issue of whether international law should apply as the governing law of state contracts. It merely discusses whether international law may apply as the governing law of state contracts, which is a more procedural question. It will now proceed to do so by examining various circumstances in which international law may potentially apply.

2. Choice of International Law

   The first scenario to consider is where the parties choose international law, either alone or with a national law, to govern their contract. This choice is relatively common in state contracts. (23) However, such a choice of international law by the parties by itself is not conclusive that international law will apply to the contract. It is necessary that the court or tribunal, hearing the dispute, has the power to give effect to a choice of international law. If it does not have such power, it will disregard the choice of international law by the parties and determine the applicable law as if the parties had not made a choice in the contract. (24) The position of national courts and arbitral tribunals will now be considered in turn.

   1. National Courts

      In practice, it has been rare for a national court to have to consider a contract containing a choice of international law. Disputes over such contracts, being international in nature and involving states, are often submitted to international arbitration, rather than domestic courts. However, it is useful to consider the position of national courts because, as will be shown below, it provides a contrast to the position of arbitral tribunals. In addition, the possibility of a contract governed by international law being adjudicated in a domestic court, however slight that may be, cannot be entirely excluded.

      A national court in the jurisdictions considered in this article so far does not have the power to give effect to a choice of international law in a contract due to the restrictions in choice of law rules binding on them. For example, in determining the law applicable to contracts, English courts used to have to follow the Convention on the Law Applicable to Contractual Obligations 1980 ('the Rome Convention'), (25) which, under Article 1(1), regulates only choices between 'laws of different countries'. (26) The unanimous academic and judicial view is that this limits the scope of the Rome Convention to only national legal systems, excluding international law. (27) Consequently, it is also accepted that the permissible choices of law for contracts in jurisdictions governed by the Rome Convention are limited to national legal systems, not international law. (28) This has been confirmed by the English Court of Appeal in Shamil Bank v Beximco as follows:

      The wording of article 1(1) of the Rome...