2.1 General principles in early arbitrations

General principles, or the technical term ‘general principles recognized by civilized nations’ with explicit reference to Article 38 of the PCIJ and later the International Court of Justice (ICJ), were invoked in a number of awards in the few early arbitrations between a company and a state.Footnote ²¹ A systematic analysis reveals that these invocations constituted an argumentative pattern that enabled the elevation of concession agreements to the international sphere.

As mentioned before, the majority of early arbitrations involved a British company as well as a number of British lawyers who worked together on both sides of the arbitrations. In the Sheikh of Abu Dhabi Arbitration of 1951 Walter Monckton, Hersch Lauterpacht, G. R. F. Morris, and R. Dunn appeared on behalf of the company, whereas the Ruler of Abu Dhabi was represented by N. R. Fox-Andrews, C. H. M. Waldock, Stephen Chapman, and J. F. E. Stephenson. Together with R. V. Idelson, Hartley Shawcross, Arnold McNair, and John Megaw, these lawyers worked on most of the cases involving British companies and some aspect of international law at the time. In addition to the Sheikh of Abu Dhabi Arbitration (1951), N. R. Fox and Walter Monckton served as counsel in the Ruler of Qatar Arbitration (1953).Footnote ²² In The Rose Mary case (1953), Idelson and Lauterpacht were part of the drafting team, and Hartley Shawcross and John Megaw appeared as counsel.Footnote ²³ McNair was the presiding judge in the Anglo-Iranian case (1952) at the ICJ in which Waldock was counsel for the British government and Laupterpacht and Idelson were part of the legal team.Footnote ²⁴ Indeed, the Sheikh of Abu Dhabi Arbitration took place after the nationalization of the Anglo-Iranian oil company in Iran in March 1951, but before the ICJ issued a judgment on 22 July 1952. The Rose Mary case evolved from the same facts as the Anglo-Iranian dispute and was decided in 1953,Footnote ²⁵ so that the legal work for the three cases must have been done at the same time. These lawyers worked together on many more occasions and were likely to know each other well and be familiar with the arguments and findings in the other cases.Footnote ²⁶

One commonality between them was that ‘general principles of law recognized by civilized nations’ were invoked. This was the case in the Lena Goldfields arbitration 1930, the Anglo-Iranian case 1953, the Sheikh of Abu Dhabi arbitration 1951 and the Ruler of Qatar arbitration 1953. In each of these instantiations their application was grounded in an article of the concession agreement. As we will see in more detail below, explicit stipulations in the concession agreements referencing ‘good faith’ and ‘reason’ were interpreted to demand the application of general principles, rather than domestic law. Remarkably, the relevant article in the concession agreements referencing ‘good faith’ and ‘reason’ read almost identical in all four cases and it can be almost stated with certainty, that the drafter of the concession agreements underlying these arbitrations was R.V. Idelson.Footnote ²⁷

The tight knit relationships between the practitioners invite a focus on legal practice, as invented and undertaken by the lawyers. By applying this lens, we can see how ‘legal knowledge comes into agentive being in the process of its being handed from one legal actor to another … What matters, rather, is the practice, the move, the replication’.Footnote ²⁸ Thus, a pattern of reasoning was established through the same argument and travelled from one award to the other through the people who were involved. This focus on practice demystifies the legal claim and its status. It turns it from an expression of ‘the law’ into an argument particular to the actors involved in these cases.

One might ask about the contestations against this line of reasoning and wonder how it was able to travel so smoothly? The response to this has to do with the definition of what counted as the legal sphere. In the eyes of Western lawyers and the Western media, contestations of socialist governments were not understood to take the form of legal arguments. They were located outside the legal field and construed as political manoeuvres. From the Soviet perspective, the withdrawal of its arbitrator from the Lena Goldfields arbitration in 1930 was a contestation of the legitimacy of the constitution of the arbitral tribunal.Footnote ²⁹ In scholarship and media in the West it was characterized as a rejection of the rule of law.Footnote ³⁰ In a similar vein, the insistence of the Mossadegh government on the payment of compensation according to domestic laws after the nationalization of the oil concession of British Petroleum finally ending with a coup d’état by the British and US governments, is a form of contestation illegible as lawful from a study of awards over concession agreements.Footnote ³¹

In addition to the non-recognition of contestations in legal terms, the ease of building a pattern of reference stems from the fact that the same British lawyers sometimes appeared as counsel on both sides of the dispute.Footnote ³² The claim to a higher legal order through general principles was normalized, it became the common ground for argumentation. The focus on repetition and the engagement of the same lawyers on both sides of the arbitration indicates the early formation of a professional field with shared commitments and assumptions as has become common place today in both commercial as well as investment arbitration. The developments described here should be understood to have emerged prior to and in conjunction with the field of arbitration more broadly as traced in sociological terms by Dezalay and Garth.Footnote ³³ In the following I will develop the deployment of a claim for a higher legal order in the Sheikh of Abu Dhabi arbitration to substantiate my argument. Yet, a similar substantiation could be made by example of any of the other above-mentioned arbitrations.

2.2 The Sheikh of Abu Dhabi arbitration

The dominant view in the first half of the twentieth century was that contracts were subject to the national laws of the country in which the contract was performed.Footnote ³⁴ In the Sheikh of Abu Dhabi arbitration, the arbitrator, Lord Asquith, took this understanding as a starting point, but ended with the application of ‘a sort of “modern law of nature”’,Footnote ³⁵ which was in effect a representation of English law. His reasoning was based on the text of Article 17 of the concession agreement. This Article read as follows: ‘The Ruler and the Company both declare that they intend to execute this Agreement in a spirit of good intentions and integrity, and to interpret it in a reasonable manner.’Footnote ³⁶ From this clause Lord Asquith deduced that the parties ‘repel[ed] the notion that municipal law of any country could be appropriate’, and that instead the ‘terms of the clause prescribe[d] a sort of modern law of nature’.Footnote ³⁷ Let us follow Lord Asquith’s argument to unravel some of the foundational ideas. In a search for the appropriate legal regime to govern the concession agreement, Lord Asquith argued the following:

The argument rested on two different ideas. One was the intention of the parties as critical for the interpretation of the contract and the other was a resort to a natural law-grounded order of legal principles. The first strand was expressed when the Arbitrator tried to establish that the application of municipal law could not have been intended, because the particular municipal law in question could not ‘reasonably be said to exist’ in the administration of ‘a purely discretionary justice with the assistance of the Koran’. In particular, the Arbitrator doubted the existence of ‘principles applicable to the construction of modern commercial instruments’.Footnote ³⁹ In the absence of applicable domestic law, so the argument went, the parties could not have intended its application. But because the Arbitrator had tied his reasoning to the inapplicability of any domestic law, he needed to establish a different legal order to adjudicate the dispute. By invoking general principles as an expression of principles grounded in natural law, the Arbitrator distinguished between such domestic laws that had the quality to represent the modern law of nature and those that did not. On this basis he presented English municipal law as the representation of ‘the modern law of nature’. Its application was therefore not warranted ‘as such’ but because ‘its rules [were] so firmly grounded in reason, as to form part of this broad body of jurisprudence’.Footnote ⁴⁰ This line of reasoning was based on a phrase in the concession agreement recording the parties’ commitment to ‘good intentions and integrity’ and interpretation in a ‘reasonable manner’. From these cues, Lord Asquith developed a universal legal order superseding domestic laws and concluded that the parties intended this legal order to be applied to their contract. Islamic law was not an expression of this order, but English law was. In his argument, Islamic law was merely domestic law, while English law was bestowed with a double quality. It was domestic law, but it was also representative of a higher universal legal order. This aspect of Lord Asquith’s reasoning is an iteration of what Pahuja calls the ‘operationalisation of the universal’,Footnote ⁴¹ a constitutive technique for international law. When Lord Asquith said, ‘modern law of nature’, British law moved from the ‘particular’ to the ‘universal’ thereby authorizing the dismissal of Islamic law.Footnote ⁴²

In other arbitrations, the rhetoric was less dismissive and condescending, but the mode of reasoning stayed the same: the displacement of a domestic legal order by reference to a higher legal order. This higher legal order was determined by turning a particular domestic law into a universally applicable norm, claiming its status as ‘general principle of law recognized by civilized nations’. In each arbitration the reference to general principles served as a basis of an argument for the application of a higher legal order that could supersede domestic law. Thus, on a practical level, it is the work of a small number of British international lawyers that enabled general principles to become the vehicle for the internationalization of contracts. To show how the above-described practice was embedded in a larger view of the world prevalent in particular parts of the international legal academy, the next section develops the role of general principles in the scholarship of Lauterpacht, McNair, and Verdross.

3.1 General principles as rules of private law

General principles occupy a particularly important place in international legal theory.Footnote ⁴³ In the discussion of the sources of the binding force of international law, the battle line in the interwar period ran between positivists and natural lawyers.Footnote ⁴⁴ Lauterpacht located his own view of international law between the ‘believer in the law of nature and the principles of natural justice forming part of international law’ and the ‘rigid positivist’.Footnote ⁴⁵ He saw himself as someone occupying:

Indeed, for Lauterpacht, general principles had delivered un coup mortel to positivist theory.Footnote ⁴⁷ They provided a solution to the problem of a court ruling of non liquet due to gaps,Footnote ⁴⁸ or lacunae, in international law, arising from a strictly positivist view. General principles were the logically necessary expression of the completeness of the law, since ‘law, like physics, does not tolerate a vacuum’.Footnote ⁴⁹

Lauterpacht saw Article 38(3) as an acknowledgment of the already established and long-standing arbitral practice refuting the positivist problem of gaps in international law.Footnote ⁵⁰ In his second doctoral thesis ‘Private Law Sources and Analogies of International Law’ at the LSE under the supervision of McNair in 1927, he wrote ‘there exists a customary rule of international law to the effect that “general principles of law,” “justice,” and “equity” should, in addition to and apart from custom and treaties, be treated as binding upon international tribunals’.Footnote ⁵¹ Lauterpacht’s argument was that the reference to Article 38(3) was a recognition of the already established customary rule that general principles formed part of the body of international law.Footnote ⁵² His thesis then set out to document and systematize the practice of international courts and tribunals to better grasp the content and character of such principles. Indeed, McNair characterized Lauterpacht’s LSE thesis as ‘in effect, a commentary upon Article 38(1)(c) of the Statute of the Court’.Footnote ⁵³

The connection between a broader theory of international law and the place of general principles becomes crucial when we pay attention to the sources Lauterpacht offered for these general principles. As indicated in the title of his thesis, he looked at analogies to private law sources.Footnote ⁵⁴ This was not simply to fill the gaps of the international legal system, but was based on an understanding that ‘regards the relation of the State to its territory as identical with or as analogous to the private law right of property’.Footnote ⁵⁵ The most obvious place to trace this conception is the debate over acquired rights in cases of state succession.Footnote ⁵⁶ When we pay attention to the terminology, we see that the notion of succession already implied a certain continuity. In Lauterpacht’s vision, international law served as a ‘legal bridge’ for the continuity of international obligations.Footnote ⁵⁷ Here, too, Lauterpacht argued in favour of a strict analogy to private law principles since the problems were ‘identical’.Footnote ⁵⁸ In the case of state succession, as in the case of death of any legal subject, ‘the purpose of the law should be, and in fact is, to preserve acquired rights and maintain the continuity of law’.Footnote ⁵⁹

He asked, ‘is he [the new sovereign] bound by the obligation of the former sovereign, because he finds it convenient to be so, or because international law imposes upon him that duty’?Footnote ⁶⁰ For Lauterpacht, international law, rather than the will of the state, was the source of rights that made the coming into being of ‘new’ states possible.Footnote ⁶¹ Recognition became the topic of Lauterpacht’s first book after the war.Footnote ⁶² As Koskenniemi put it, recognition was the ‘master technique establishing the connection between the abstract rule and its concrete manifestation’.Footnote ⁶³ Recognition provided the technique to make international law the source of new sovereignty. Combining these two strands of thought, international law as the source for the right for the constitution of a new state and international law as concerned with a continuation of obligations, we can see how acquired rights become the focal point of the international legal regime. Lauterpacht regarded the protection of acquired rights as the basic function of law, which had to be regulated ‘by a rule of law independent of the will of the actual successor’.Footnote ⁶⁴

3.2 Acquired rights and unjust enrichment

McNair’s body of work was also informed by an interest in treaty law and contract, and he shared Lauterpacht’s orientation towards analogies from private law sources.Footnote ⁶⁵ McNair based his conceptualization of international law and property on the distinction of imperium and dominium, understood as ‘the imperium or sovereignty which belongs to the State, and the dominium or property which belongs to the individual’.Footnote ⁶⁶ The distinction between imperium and dominium lies at the heart of the notion of acquired rights, which are considered to be part of the sphere of dominium and thereby unaffected by changes in imperium. The analytic terms of imperium and dominium are the basis for an imagined distinction between the political and the economic sphere. The Austrian international lawyer, Alfred Verdroß, had written extensively on general principles and acquired rights in international law, and was cited by both Lauterpacht and McNair. Verdroß’ arguments and ideas show the connection between the economists and the international lawyers of the interwar period. In his Hague lecture on Règles internationales concernant le traitement des étrangers of 1931, Verdroß explicitly distinguished between the rules for the treatment of foreigners in general and the rules pertaining especially to the economic sphere.Footnote ⁶⁷ Verdroß argued on the basis of a distinction between imperium and dominium that the latter should be ‘autonomous’.Footnote ⁶⁸ He referred to the World Economic Conference in Geneva in 1927, co-organized by the International Chamber of Commerce and the League of Nations, which was the place for advancing liberal politics for thinkers such as Röpke, Hayek, and Haberler.Footnote ⁶⁹ In line with these thinkers, in Verdroß’ argument, the necessity of a distinction between the political and the economic sphere arose out of the assumption that a functioning economic system depended on private property and free trade.Footnote ⁷⁰

One of the most difficult questions was the relationship between sovereignty and acquired rights. Most authors were of the opinion that a change in the sovereign did not affect private rights per se.Footnote ⁷¹ However, this position did not provide an answer to the question whether the ‘new’ state had to respect those rights after succession. In 1941 McNair wrote that ‘once the cession has taken place the dominium is at the mercy of the new sovereign’.Footnote ⁷² A similar argument was made by Kaeckenbeeck, the president of the Arbitral Tribunal of Upper Silesia, in 1937 when reflecting on the status of acquired rights:Footnote ⁷³

These positions built on the distinction between imperium and dominium, but did not limit sovereignty in and of itself. Rather they appeared to insist on the primacy of imperium over dominium. This primacy, however, came with a catch: that of compensation.

The state’s prerogative over legality and illegality of the act of confiscation required an international minimum standard of compensation. Indeed, Kaeckenbeeck’s article on acquired rights ends with a section on compensation calling for the establishment of a flexible international standard. He argued that the question of the legality of ‘the suppression’ of a vested right is solely for the national jurisdiction to decide. The question of compensation for the imposition of ‘the economic sacrifice demanded on behalf of the community’ is, to some extent, one that could be bound to an ‘international minimum standard for equitable compensation’.Footnote ⁷⁵ The debate over the appropriate standard of compensation took on particular prominence in the form of the two conceptions of the Hull Formula and the Calvo Doctrine and continues until today.Footnote ⁷⁶ The Hull Formula goes back to a 1938 letter by US Secretary of State Cordell Hull after the nationalization of US interests in Mexico and prescribed ‘prompt, adequate and effective compensation’.Footnote ⁷⁷ The Calvo Doctrine was developed by the Argentine jurist Carlos Calvo in the nineteenth century and prescribed the primacy of domestic law over an international standard of compensation.Footnote ⁷⁸ What is often overlooked in the literature is the related but slightly different concept of unjust enrichment.Footnote ⁷⁹ The principle is at the heart of the connection of acquired rights and compensation as described by O’Connell: ‘The juridical justification for the obligation to pay compensation is to be found in the concept of unjustified enrichment, which lies at the basis of the doctrine of acquired rights.’Footnote ⁸⁰ It has been relied on to argue for the application of the Hull Formula, rather than the Calvo Doctrine, and thus in favour of an international minimum standard rather than domestic discretion.Footnote ⁸¹ It is considered to provide a remedy precisely when there is no clear breach of law, but ‘in cases when justice in a very fundamental sense requires it’.Footnote ⁸² Thus, at least the common law conception of the notion is rooted in an idea of natural law.Footnote ⁸³

For my purposes, the most important category of acquired rights are concession agreements, which Lauterpacht characterized as a ‘rather frail and undefined category of rights’ in 1927.Footnote ⁸⁴ Verdroß also only mentioned concession agreements as one iteration of an acquired right in 1931.Footnote ⁸⁵ There was, indeed, little to be said about concession agreements as a matter of public international law in the interwar period. Some peace treaties stipulated specific rules for the treatment of concessions, like the Treaty of Sèvres that was applied in the Palestine Railway arbitration, but there were only a few cases involving such contracts. Lauterpacht only reluctantly included a note on the Lena Goldfields arbitration in the Annual Digest of 1930.Footnote ⁸⁶ By the time McNair wrote his article ‘The General Principles of Law Recognized by Civilized Nations’ in 1957, the situation had changed, and the fate of concession agreements had become a major concern.Footnote ⁸⁷ The oil arbitrations, as a practical concern, put concession agreements and arbitrations between states and companies at the centre of attention.Footnote ⁸⁸

In his article, McNair did not offer a conclusive list of general principles in existence, but he gave two examples of ‘likely candidates[s], among many, for recognition’.Footnote ⁸⁹ It comes as no surprise that the two doctrines he proposed were ‘acquired rights’ and ‘unjust enrichment’.Footnote ⁹⁰ Perrone has traced the role of these two notions into contemporary investment law in the form of direct and indirect expropriation.Footnote ⁹¹ As discussed above, these two doctrines rested on ideas of equity and justice. Even though McNair did not rely on a notion of natural law, as Lord Asquith did, but emphasized the implied or explicit consent of the parties to the contract,Footnote ⁹² traces of natural law resembling Lord Asquith’s argument can still be found in McNair’s as well as in Lauterpacht’s writings. The resort to ‘equity’ and ‘justice’, or one could argue to ‘good faith’ and ‘reason’, as guiding lights was deployed in explicit opposition to the positivist tradition.Footnote ⁹³ Lauterpacht used the language of ethics when discussing state succession. In citing Charles Cheney Hyde, he affirmed the argument that:

Lauterpacht cannot be said to have been ‘simply a naturalist critic of nationalism and sovereignty’,Footnote ⁹⁵ but passages like the one cited above are important for showing the proximity between Lord Asquith’s ‘modern law of nature’, McNair’s ‘new legal system’, and Lauterpacht’s vision of general principles for a seamless international law. It is precisely in this leap, in the short distance between the positivist stance and Lauterpacht’s suggestion, that we find the door for the imposition of international legal rules against attempts by newly independent states to reorganize their economic systems. It is only through anchoring the international legal order in an element of natural law that its imposition over domestic law could be made plausible. Moving the jurisdiction over concession agreements from the domestic to the international sphere was enable by a hierarchization of legal orders where those legal orders that best protected Western foreign property were turned into expressions of universal rules based on justice and equity. As the next section discusses the notion of ‘civilization’ played a crucial role in establishing this hierarchy.

3.3 From ‘civilization’ to development

McNair’s 1957 article located the necessity of a new international legal order in the context of a conflict between the countries of the global North, on the one hand, and Socialist countries and countries of the global South on the other. The internationalization of concession agreements, and thus the protection of contract and property, prevented ‘new’ states from changing ownership and distributional structures. Proponents of this imposition justified it through the racialized qualifier ‘civilized’ that morphed into the concept of development. The wording in McNair’s article is indicative of this transformation. Concession agreements were now called ‘economic development agreements’Footnote ⁹⁶ and McNair explicitly connected general principles, concession agreements and development. In the introduction to his article, McNair contended that general principles are:

In this linkage, McNair showed the continuity between the civilizing mission of the nineteenth century and the development discourse of the 1950s.Footnote ⁹⁸

He was careful to stress the economic perspective of his argument, speaking of material ‘civilization’ by which he did not want to ‘suggest any moral superiority’.Footnote ⁹⁹ McNair distanced himself from superiority established on moral grounds, but he did not distance himself from superiority as such. In a move traced by many postcolonial writers, the difference was now located in technical superiority.Footnote ¹⁰⁰ McNair relied on difference in the degree of legal sophistication to justify the imposition: ‘It is believed that the provisions, for instance, of the Islamic law respecting economic development agreements are very inadequate, if indeed there are any at all.’Footnote ¹⁰¹ He argued that the application of general principles was necessary ‘to a contract in which the legal systems of the two countries involved present a strongly marked contrast, both in content and in stage of development’.Footnote ¹⁰² Based on this distinction, McNair promoted a double standard for the application of general principles to contracts between states and companies. In the relationship between a Western state and a company, the sovereign kept the prerogative of defining the legal environment for the operations of a company. In the relationship between a ‘new’ state and a company, the sovereign state and the company were equalled on two grounds. On the one hand, the company achieved quasi-sovereignty by elevating contracts to the status of treaties and thus making it much harder to unilaterally change their terms.Footnote ¹⁰³ On the other hand, ‘new’ states were treated as private actors and considered to have renounced the sovereign prerogative to act in the public interest within that relationship.Footnote ¹⁰⁴ The term ‘civilized’ thus enabled McNair to conceptualize contractual relations between a state and a company in the West differently than in the rest of the world.

If we now also consider Verdroß’ terminology, we can see the relationship between ‘civilization’, development and liberalism. Verdroß ascribed the failure of the League of Nations’ Codification Conference of 1930, aiming at codifying multilaterally the responsibility of states for damage done in their territory to the person or property of foreigners, to a difference in the readiness to liberalize. ‘Les Etats moins avancés’ were proposing ‘leurs idées peu libérales’ which hindered the ‘Etats avancés’ from codifying their progressive and modern ideas.Footnote ¹⁰⁵ In explicit terms, Verdroß proposed that ‘les Etats avancés’ should establish this convention on their own and it would, hopefully by virtue of de facto application, become ‘des vraies normes universelles’.Footnote ¹⁰⁶ Thus, the actual relevance of the autonomy of the economic sphere was in regard to control over property in ‘new’ states, which appeared to not be liberal enough.

Self-determination and nationalization as modes of resistance against colonial rule were difficult to square with the imposition of a transnational legal system on domestic matters. In his capacity as UN Special Rapporteur on Succession of States in Respect of Matters other than Treaties, Mohammed Bedjaoui argued in 1968 that concessionary rights could neither be regarded as acquired rights nor could there be talk of compensation that would not consider the profits made through the concessionary enterprise.Footnote ¹⁰⁷ It was precisely the battle over the economic sphere of the ‘newly’ independent states that provided the background for the disputes over concession agreements. The resort to economic development superficially dispersed this tension and enabled the maintenance of Western control without claiming cultural inferiority.Footnote ¹⁰⁸ As Pahuja argues ‘the separation of an economic sphere allows backwardness to be situated away from culture, preserving the dignity obtained by self-determination by attributing that backwardness to economic exploitation by the colonizer’.Footnote ¹⁰⁹ This exploitation could now be remedied with the help of Western nations. Tzouvala draws our attention to the closely knit relationship between the ‘standard of civilisation’ and capitalism as constitutive for contemporary international law.Footnote ¹¹⁰ The legal framework that enables capitalist expansion is part and parcel of the development project. As invoked by President Truman in his inaugural address, what is needed is ‘capital investment in areas needing development’.Footnote ¹¹¹ He defined the horizon as development through economic growth for overcoming material underdevelopment. But in order to secure the necessary foreign ‘help’, as Truman would have it, the ‘new’ sovereign states had to accept McNair’s new legal system.