INTRODUCTION

Purpose

The Convention does not provide substantive rules for the relationship between host States and foreign investors. It is merely designed to establish a procedural framework for the settlement of investment disputes. Suggestions, made in the course of the Convention's drafting, to offer some substantive guidance to tribunals (History, Vol. II, pp. 418 et seq.) were not pursued (at pp. 465, 472, 570). Doing so would have led to insurmountable difficulties in trying to reconcile sharply conflicting positions and would have endangered the entire project. At the same time, it was considered necessary to offer some legal security and predictability concerning the outcome of arbitration proceedings.

Art. 42 provides a mechanism whereby the tribunal is to select the appropriate rules of law for the particular dispute. It is designed to combine flexibility with certainty. Flexibility by granting maximum autonomy to the parties in choosing rules, certainty by ensuring that the tribunal will find appropriate rules even in the absence of such a choice. The aim of flexibility is served by the first sentence of para. (1), on agreement by the parties, and by para. (3), extending party autonomy to equitable principles.