I. INTRODUCTION
First developed in 1994, the UNIDROIT Principles of International Commercial Contracts are ‘a restatement of international legal principles applicable to international commercial contracts made by a distinguished group of international experts coming from all prevailing legal systems of the world, without the intervention of states or governments'.Footnote 1 In a relatively short period of time, they have seen a degree of success in serving as a reference point for courts and arbitral tribunals resolving contractual disputes around the world. Reflecting their favourable reception, the Principles have twice been revised by a Working Group at UNIDROIT, in 2004 and 2010.
Despite this success in other fields of law, references to the UNIDROIT Principles in public international law are scant, with only isolated appearances in the decisions of international courts and tribunals.Footnote 2 In contrast to this general silence, though, the Principles have featured relatively frequently in one field of public international law: investment treaty arbitration. In 2002, former ICSID Deputy Secretary-General Antonio Parra observed that claimants had cited the UNIDROIT Principles in two ICSID arbitrations.Footnote 3 Subsequently, one prominent arbitrator observed in 2004 that ‘[d]isputes arising out of bilateral or multilateral investment treaties may … prove fertile ground for the application of the UNIDROIT Principles'.Footnote 4 This prediction has proved accurate, at least to some degree: references to the UNIDROIT Principles can be found on average in two investment treaty awards per year since 2003. While these figures only represent a small proportion of the now-extensive investment treaty case-law as a whole, and are similarly minor in comparison to use of the Principles by domestic courts and international commercial arbitral tribunals,Footnote 5 they nevertheless represent a body of references significant enough to warrant closer examination.
Relations between the UNIDROIT Principles and international investment law have already been the object of academic attention in various ways. Studies have considered UNIDROIT's efforts to codify contract law into a single instrument, and the lessons that might be drawn from this for proposals to reform investment law,Footnote 6 or to codify it into a ‘soft law’ instrument or a single, binding multilateral treaty.Footnote 7 Others have considered the use in international arbitration of soft law instruments similar to the UNIDROIT Principles, such as the IBA Guidelines on Taking Evidence in International Arbitration.Footnote 8
However, until recently, there had been no study of the direct use of the UNIDROIT Principles by investment treaty tribunals. One work on the sources of international investment law noted only that the Principles had been cited in four cases (as of mid-2011), without further discussion.Footnote 9 Although the Principles' appearance in a 2011 investment treaty award garnered some critical attention,Footnote 10 discussions of their role in investment treaty arbitration had typically been contained to sections or footnotes of works focussing on broader or different questions.Footnote 11 But the variety of references to the Principles over the last decade, combined with the fact that they continue to be cited in parties' filings in currently pending cases,Footnote 12 suggest that more detailed consideration is needed of this potentially additional source of rights and obligations in investment law.
In three recent publications, scholars have begun to provide this consideration. Two shorter articles, by Reinisch and Bernardini, provide an initial descriptive survey of references to the Principles in investment treaty case-law.Footnote 13 In a longer article, Cordero-Moss and Behn make a normative case for reference to the Principles on questions of both domestic and international law.Footnote 14 After reviewing arbitrators' legal authority to apply the UNIDROIT Principles, Cordero-Moss and Behn contend that investment arbitrators can validly refer to the Principles to confirm prior findings of domestic law, but should not do so to replace an examination of domestic law. With respect to questions of international law, the authors observe that the Principles have similarly been used to confirm tribunals' findings, and they discuss the potential for greater reference to the UNIDROIT Principles as a manifestation of the third source of international law, general principles of law.
Building on Cordero-Moss and Behn's analysis, this article presents a more sceptical normative view of use of the UNIDROIT Principles in investment treaty arbitration. In Section II, the article briefly agrees with these authors that reference to the Principles can confirm but should not override domestic law, while also suggesting that the Principles can be particularly helpful where the host State fails to appear (a circumstance not unknown in investment treaty arbitration). In Section III, however, although acknowledging that reference to the Principles may be justified on questions of international law by resort to general principles of law, the article contends that the Principles have only a limited role where the primary and secondary rules of investment protection are already found in treaties and custom. When the Principles can be relied on, tribunals must ensure that they are drawing appropriate comparisons, using the Principles' secondary rules only to interpret the secondary rules of international law, rather than differently-structured primary rules. In addition, while general principles have historically been drawn from domestic private law, there is increasing recognition that general principles of public law are more relevant to investment arbitration. Given this, Section III suggests that reference to the UNIDROIT Principles—a quintessentially private law instrument—will not necessarily be useful on questions of international law in this area.
II. USE OF THE PRINCIPLES ON QUESTIONS OF DOMESTIC LAW
It is now well recognized that, despite the international law context of investment treaty disputes, tribunals will often need to apply domestic law. This law will largely define issues including, for instance, the nationality of the investor and the existence and scope of the rights comprising the investment in the host State.Footnote 15 Indeed, the frequently unavoidable role of domestic law marks out investment treaty arbitration from other fields of public international law, and, at first glance, might provide an ideal setting for reference to the UNIDROIT Principles when tribunals are faced with issues of domestic contract law, in particular.
However, as this section contends, the appropriateness of reference to the UNIDROIT Principles will depend on whether the tribunal is simply adding weight to an interpretation of domestic law reached by other means, or whether the tribunal instead treats the Principles as an authority for the content of domestic law. While the former use is welcome in investment treaty arbitration, the latter use threatens both the arbitral framework and the legitimacy of tribunals.
A. Use to Confirm Interpretations of Domestic Law
Recent surveys of case law have described situations in which the UNIDROIT Principles have been used to confirm an interpretation of a relevant domestic law.Footnote 16 In AHC v Democratic Republic of the Congo, for instance, the tribunal drew on the UNIDROIT Principles to confirm that its view of Congolese law (on whether contracts were required to be in writing) was internationally acceptable.Footnote 17 Conversely, in Chevron v Ecuador, the tribunal cited the Principles to show that the State's proposed interpretation of its own domestic law was not in conformity with international standards and was therefore ‘unusual’, with the tribunal instead supporting the investor's proposed interpretation.Footnote 18
As commentators have suggested, this kind of supplemental or confirmatory use of the UNIDROIT Principles ‘may be particularly useful in assisting the tribunal in legitimizing their interpretation and conclusions about national law’.Footnote 19 Part of the standard justification given for the existence of investment treaties is that, in return for encouraging foreign investment and economic development, they provide an international constraint on sovereign State conduct, with a binding dispute resolution mechanism to enforce the constraint. In the absence of such treaties, the justification goes, foreign investors would be at the mercy of the host State's domestic law, which could potentially provide legal cover to interfere with them.Footnote 20 The problem, however, is that foreign investors cannot escape the application of domestic law entirely, as explained above. An opportunity therefore arguably exists for States to manipulate their domestic law on such issues to the detriment of foreign investors.
When investment tribunals come to apply domestic law in the course of an arbitration, then, they brush up against a sensitive point of interaction between two legal systems. Any tool that arbitrators can draw on to demonstrate that the domestic law which they are applying is not idiosyncratic, parochial or biased will therefore be welcome.Footnote 21 Observers of the use of the UNIDROIT Principles by domestic courts and in commercial arbitration have noted the ‘educational purpose’Footnote 22 for which the Principles are often cited, ‘underscor[ing] the compatibility of the applicable national law with international legal precepts’.Footnote 23 The UNIDROIT Principles can serve in a similar capacity in investment arbitration, and they appear to have done so already in several cases.
B. Use as Applicable Law on Questions Governed by Domestic Law
Arbitral tribunals convened to hear investment treaty disputes may also, on occasion, be asked to resolve parallel disputes under other instruments, often an investment contract.Footnote 24 When the parties have chosen (implicitly or explicitly) the UNIDROIT Principles as the applicable law governing this other instrument, it is uncontroversial that the tribunal should apply the Principles to resolve the dispute. This use of the Principles was shown in Lemire v Ukraine, where the investor alleged breaches of an earlier settlement agreement between himself and Ukraine, alongside breaches of the US–Ukraine bilateral investment treaty (BIT). In ruling on the breaches of the settlement agreement, the tribunal determined that the parties intended it to be governed by the UNIDROIT Principles, and it went on to apply the Principles and reject the investor's claims.Footnote 25
However, perhaps more often, host State law will be the governing law of the investment contract, settlement agreement, or other instrument relevant to the investment. Furthermore, as explained above, host State law also necessarily governs other aspects of the investment, for instance including the property rights comprising it. In this situation, while (as the previous section explained) a tribunal might validly draw on the Principles in a confirmatory role, it is contended that reference to the Principles that displaces reference to the governing host State law is unjustifiable.Footnote 26
An illustration of such unjustifiable reliance can be found in Eureko v Poland.Footnote 27 One issue arising in this case was whether the investor could raise certain claims concerning breach of a bilateral investment treaty (BIT) after having concluded a settlement agreement and waiver with Poland. Eureko argued that, because Poland had allegedly failed to perform an obligation in the settlement agreement, a general ‘exception of non-performance’ applied (exceptio non adimpleti contractus), and Eureko was therefore not bound by its own obligations, including the waiver.Footnote 28 Citing, ‘for example’, Article 7.1.3 of the UNIDROIT Principles, the tribunal held that the exception of non-performance only applied to ‘cases of simultaneous or conditional performance’.Footnote 29 It considered that Poland's obligation was conditional on Eureko's waiver, rather than the reverse, and so the exception could not apply.Footnote 30 This meant that the investor's waiver remained in place, and the tribunal had no jurisdiction over the waived claims concerning the breach of the BIT.Footnote 31
It is curious, however, that the tribunal did not examine the scope of the exception under the settlement agreement's governing law, this being Polish law.Footnote 32 If this law interpreted the exception differently, the tribunal's conclusion could well have been different, meaning that the investor would have been permitted to bring a larger range of claims and potentially obtain additional compensation. But the tribunal did not appear to consider that Polish law might apply to this point.Footnote 33 It noted that it would address the exception of non-performance ‘[w]ithout deciding whether [it] is a maxim of interpretation or a rule of international law’.Footnote 34
Even if Polish law interprets the exception of non-performance in the same way as formulated in the UNIDROIT Principles, it nevertheless remains important for tribunals to refer to the actual governing law, at least to the extent possible, to resolve a question of domestic law. For one thing, failure to apply the applicable law can lead to annulment of an arbitral award.Footnote 35 But alongside this, tribunals have strong reasons to take care when applying domestic law. One of the major criticisms currently plaguing investment tribunals stems from their perceived continual disregard for domestic policy concerns.Footnote 36 Many writers have questioned the standards of review and degree of deference that investment arbitrators have applied to host State preferences,Footnote 37 drawing on models of subsidiarityFootnote 38 and judicial review to urge a more sensitive approach. Arbitrators' engagement with questions of domestic law raises the same legitimacy questions. Domestic law is a natural expression of State sovereignty,Footnote 39 and the terms of this engagement will have significant ramifications for the reception of an award in the domestic polity.Footnote 40 Rather than displacing domestic law with an external, non-binding instrument such as the UNIDROIT Principles, tribunals must actively seek a solution in domestic law in the first instance, or risk further inflaming the present ‘backlash’ against the investment treaty regime.Footnote 41
The Eureko tribunal was assisted by numerous experts on Polish law,Footnote 42 and could surely have obtained further information on the exception of non-performance as implemented in Polish contract law. Reference to the UNIDROIT Principles could certainly have been made in a supplementary fashion, if the tribunal was concerned to demonstrate that it was not rejecting the investor's claims via an idiosyncratic Polish legal principle. But, as explained, this reference must remain subsidiary to an assessment under the relevant governing law.Footnote 43
A more appropriate approach to this issue is demonstrated by the case of PSEG v Turkey. There, the State had contended that the main investment contract did not qualify as an investment but was merely an agreement to negotiate further, since it omitted some essential commercial terms.Footnote 44 In response, the claimants cited the UNIDROIT Principles, arguing that a full agreement was not necessary, as long as the parties had the intention of forming a contract and had committed themselves to negotiate the remaining terms.Footnote 45 However, the tribunal ignored this appeal to the UNIDROIT Principles, and instead rightly applied Turkish law to resolve the question of the existence and validity of the contractFootnote 46—which was, after all, governed by Turkish law.Footnote 47 The claimants' reference to the UNIDROIT Principles may well have supported its case, but when a question of domestic law can be answered by reference to the domestic law itself, a tribunal must do so, rather than relying on the Principles.Footnote 48
Commentators have, nevertheless, recognized a legitimate role for the UNIDROIT Principles in arbitration generally where the substantive content of the applicable law is ‘impossible or excessively burdensome’ to ascertain.Footnote 49 In these situations, tribunals may well be justified in turning to the readily-available UNIDROIT Principles to substitute for domestic contract law. Such situations may not be likely to arise frequently today, given the global spread of technology and the online publication of laws and commentaries. But investment treaty arbitration may again provide a particularly apposite context for this use of the UNIDROIT Principles. This stems from the acknowledgement that a reasonable proportion of investment treaty cases are brought against lower income countries.Footnote 50 These countries may not have the same financial capacity or political commitment to pursue publication and transparency as richer and more developed States, increasing the likelihood that ascertaining the contents of their domestic law will be ‘impossible or excessively burdensome’. On top of this, based on existing investor–State case-law, lower income countries appear to be more likely to fail to appear in their own defence, creating additional difficulties for the tribunal in locating primary and secondary texts on the host State law.Footnote 51 Such a situation arose in Goetz v Burundi,Footnote 52 pushing the tribunal to apply French and Belgian law in the absence of any information on Burundian law.Footnote 53 Other lower-income States, including MoldovaFootnote 54 and Tajikistan,Footnote 55 have similarly failed to appear in investment treaty proceedings. These problems of limited capacity and non-appearance compound each other, with the result that investment treaty arbitration could represent a particularly relevant context for tribunals' reliance on the UNIDROIT Principles in these specific circumstances.
III. USE OF THE PRINCIPLES ON QUESTIONS OF INTERNATIONAL LAW
Section II considered the use of the UNIDROIT Principles on questions governed by domestic host State law, suggesting that such use was permissible, and perhaps even encouraged, when undertaken in order to confirm an interpretation of domestic law, but is usually impermissible when done to displace analysis under the governing host State law. This section, by contrast, examines the potential role of the Principles in investment treaty arbitration on questions of international law.
The issues here can be framed by considering a case-law example. In PSEG v Turkey, also discussed above, the State relied on the UNIDROIT Principles in the course of interpreting the obligation of fair and equitable treatment (FET) in a BIT. Citing the Principles, Turkey contended that there was no general obligation on negotiating parties to reach any binding agreement, and therefore that its failure to reach agreement with the investor—despite long negotiations—did not constitute any FET breach.Footnote 56 However, the tribunal ignored this reference to the Principles, instead interpreting the FET standard largely by reference to previous BIT jurisprudence,Footnote 57 and finding a breach for other reasons.Footnote 58 Was this a mistake by the PSEG tribunal? Could the arbitrators usefully and legitimately have drawn on the UNIDROIT Principles to give content to the FET standard?
A. The UNIDROIT Principles as ‘General Principles of Law’
Arbitrators in investment treaty disputes cannot, of course, apply any instrument that they feel is relevant to resolve a question of international law before them. They are constrained in various ways, most notably by the obligation to apply only the accepted sources of international law set out in Article 38(1) of the ICJ Statute. The UNIDROIT Principles are clearly not a treaty, since they are a privately-drafted statement of rules that is not binding on any State.Footnote 59 Moreover, an argument that the Principles represent customary international law would be unlikely to succeed. Setting aside the ‘subsidiary means’ of reference to judicial decisions and academic writings,Footnote 60 this leaves general principles of law under Article 38(1)(c). If the UNIDROIT Principles can be cast as a collection of general principles of law, this would provide an investment treaty tribunal with the authority that it needs to apply the Principles on questions of international law.
The predominant view, amongst the various tribunals and commentators that have considered the issue, appears to be that the Principles do reflect general principles of law.Footnote 61 However, Cordero-Moss and Behn make the important observation that the Principles are not merely a ‘lowest common denominator’ collection of only those rules that are uniformly applied throughout domestic legal systems, but also offer compromise solutions in areas of disagreement between States. The authors suggest that ‘some (but not all) of the [UNIDROIT Principles] would qualify as general principles of law’,Footnote 62 and that tribunals must verify whether the specific rule in question is recognized widely enough, via a ‘careful comparative analysis of national legal systems’,Footnote 63 before applying it. Nevertheless, while the presence of a particular rule in the UNIDROIT Principles should not automatically mean that the rule is a general principle of law, it provides a strong starting point for a tribunal to assist its search for general principles.
B. General Principles and Primary and Secondary Rules in Investment Treaty Arbitration
Even if the Principles do constitute general principles of law, it still does not necessarily follow that they can be used as authority on all questions of international law in an investment arbitration. This will depend, it is suggested, on whether the tribunal is confronted with interpreting and applying a primary rule or a secondary rule of international law.Footnote 64 Although there is no express hierarchy amongst the three major sources of international law in Article 38(1),Footnote 65 it is commonly acknowledged that resort to general principles is intended only in a subsidiary sense, either as background to treaty interpretation under VCLT Article 31(3)(c),Footnote 66 or when rules of treaty or custom are insufficient and leave a gap or lacuna to be filled.Footnote 67 In a typical investment treaty dispute, the primary rules setting out the substance of the State's obligations to the investor will be found in the relevant investment treaty. Customary international law may also set out pertinent primary rules, for instance via an implicit or explicit connection between the treaty's FET standard and the customary international law minimum standard of treatment.Footnote 68 Applying the regular tools of treaty interpretation, and the regular rules governing the identification of customary international law, it might be thought that no such gap or uncertainty exists in the primary rules of investment protection. This would leave little need for reference to general principles in relation to primary rules.
By contrast, investment treaties typically do not specify secondary rules, such as the rules that govern the consequences of a breach of the treaty and the compensation to be paid. Tribunals have acknowledged that the content of these secondary rules must come from one of the other sources of international law—customary international law or general principles of law.Footnote 69 If the UNIDROIT Principles encapsulate general principles of law, then, tribunals could validly refer to them to fill the treaty or customary gap in specification of secondary rules.
C. Use of the UNIDROIT Principles in relation to Secondary Rules
Indeed, several cases have used the UNIDROIT Principles for precisely this purpose—to clarify and provide content to a secondary rule, particularly rules of damages.Footnote 70 These cases can be separated into two categories. The first category covers cases that employed a reference to general principles of law, in the form of the UNIDROIT Principles, to confirm a prior finding made by reference to customary international law. The second category, meanwhile, covers cases where the reference to the UNIDROIT Principles, as general principles of law, was the sole source of authority for the secondary rule at issue. As will be seen, while the first category's confirmatory use is acceptable to lend further authority to the tribunal's view (similar to the use on domestic law questions, described in Section II above), the second category's direct use of the Principles as authority often sits uneasily with the subsidiary role of general principles in international law.
1. Use to confirm finding of customary international law
Several authors have observed the confirmatory use of the UNIDROIT Principles on a question of damages in Talsud v Mexico.Footnote 71 In that case, after finding that customary international law recognized the possibility of damages awards for lost profits and loss of opportunity, the Talsud tribunal further supported its position with a reference to the Principles.Footnote 72 Just as on questions of domestic law, discussed in Section II, such confirmatory use of the Principles with regard to the secondary rules of international law can be commended as enhancing the tribunal's reasoning.Footnote 73
2. Use as sole authority
However, in other cases the UNIDROIT Principles have been relied on, as general principles of law, much more clearly as the main authority for a secondary rule. These have included rules on damages (including interest calculations), estoppel, the existence of a dispute, and treaty interpretation.Footnote 74 These uses must be treated with some caution. General principles are, of course, general in nature,Footnote 75 and any particular general principle may need to be balanced against others before a solution can be reached. In addition, since reference to general principles is intended to fill gaps in treaty or custom (either by providing a rule or providing background to interpret an unclear treaty rule), reliance on the UNIDROIT Principles as authority is particularly misplaced when no gaps or uncertainties exist.
As seen from the cases analysed below, arbitrators have sometimes gone wrong in citing the Principles as authority for secondary rules. In particular, while the use on damages might represent permissible efforts to fill gaps in treaty or customary rules, reference to the Principles on estoppel, on the existence of a dispute and on treaty interpretation is questionable when clearer international law sources are available.
a) Damages and interest
Given the notorious uncertainty of customary international law rules on damages,Footnote 76 and the lack of specification in investment treaties, resort to general principles (including the UNIDROIT Principles) might seem particularly useful on questions of damages. Indeed, the cases of Petrobart v Kyrgyzstan and AIG v Kazakhstan demonstrate well the potential in this area.
In the 2005 case of Petrobart, the tribunal found several violations of the Energy Charter Treaty by Kyrgyzstan, stemming originally from the breach of a contract by a Kyrgyz State entity, and the investor was awarded compensation. Petrobart requested interest on this amount, calculated in accordance with the UNIDROIT Principles, which contains a detailed rule on interest in Article 7.4.9. The State, meanwhile, argued that interest—if payable at all— should be determined according to the default judgment rate in Kyrgyz law.Footnote 77 However, the tribunal agreed with Petrobart. It noted that the investor's claim was ‘based on the [Energy Charter] Treaty and is therefore a claim under international law’.Footnote 78 Because of this, the tribunal said, the applicable interest rate should be ‘based on international rather than national rules’, and the investor's suggested reference to the UNIDROIT Principles was deemed appropriate.Footnote 79
The tribunal's indication that it relied on the UNIDROIT Principles because they represented international rules does not fully explain the reference. It is doubtful that the very specific rule on interest contained in Article 7.4.9 of the Principles is a general principle of law.Footnote 80 According to one analysis, the Petrobart tribunal applied the UNIDROIT Principles because ‘the case arose from a breach of the commercial contract between the parties but the Contract did not state the level of interest payable in case of a dispute’.Footnote 81 While the dispute's origins clearly lay in a breach of contract, however, the tribunal ultimately found a breach of a treaty. Given that the applicable law on questions of damages was international law, the tribunal could well have ignored any interest rate specified in the contract anyway. Alternatively, one of the key architects of the UNIDROIT Principles has cited Petrobart as an instance where the Principles were drawn on to interpret and supplement an unsophisticated domestic law (thus placing the case more as an example for Section II(A) above).Footnote 82 However, there was no suggestion in the award itself that Kyrgyz law was not developed enough to contain principles on interest rates.
The answer probably lies instead in the general principle of law (or even customary rule) that tribunals enjoy a large degree of discretion in determining damages generally, and—in particular—whether to award interest and what rate to use.Footnote 83 The Petrobart tribunal's reference to the UNIDROIT Principles may be best explained simply as an exercise of this discretion, drawing on whatever ‘international’ rule on interest was readily available to it.Footnote 84
A second instance of reliance on the UNIDROIT Principles on a question of damages is found in the October 2003 award of the tribunal in AIG v Kazakhstan. While reviewing the existence of a duty to mitigate losses in a range of legal systems, the tribunal noted that it was also present in international instruments, ‘for instance … the UNIDROIT Principles’,Footnote 85 seemingly accepting mitigation as a general principle of law. However, the tribunal ultimately concluded that the rule should not apply in investment treaty arbitration. It reasoned that, once an expropriation had been found, it would be inappropriate to require the injured investor to mitigate its losses: this would ‘only encourage Governments to breach with impunity solemn provisions of an international treaty and weaken the protection of foreign investors’.Footnote 86 Whether or not the tribunal's conclusion was correct,Footnote 87 the UNIDROIT reference served as authority for a general principle of law on a question that finds little clear support in treaty or custom.Footnote 88
b) Estoppel
In other areas, though, resort to general principles of law appears less well-founded. The use of the UNIDROIT Principles in relation to estoppel in Lemire v Ukraine provides one example of this. The case included a dissenting opinion from arbitrator Jürgen Voss, who referred to the UNIDROIT Principles to support several of his findings relating to the concept of estoppel, framed in Article 1.8 of the Principles as a prohibition on ‘inconsistent behaviour’. According to the dissenter, the claimant had acted inconsistently in various respects, for instance by complaining about a particular practice of the State which benefited his competitors while he had also benefited from the practice.Footnote 89 For arbitrator Voss, this conduct prevented the investor's BIT claim from succeeding.
The dissenter did not explain the legal basis for relying on the UNIDROIT Principles. The Lemire tribunal had already jointly determined (albeit in a different context) in an earlier decision that the Principles constituted ‘rules of international law’,Footnote 90 meaning that the dissenter may have felt comfortable resorting to the Principles as authority for applying the general principle of estoppel. However, this is not an ideal choice, given that the basic applicability of estoppel in international law is well confirmed by other more traditional sources.Footnote 91
c) Existence of dispute
Similarly, one case has involved questionable use of the Principles in determining the existence of a ‘dispute’ under the USA–Democratic Republic of Congo BIT. In the ICSID case AHC v Democratic Republic of the Congo, the tribunal's jurisdiction depended on whether the dispute between the parties had arisen during the 1990s, when the State had originally failed to pay the claimant for certain construction work, or only in 2004–05, when the State first officially declared that it would not pay the contractual debts at all.Footnote 92
The parties cited a range of materials on the question of a dispute, including ICSID and PCIJ case law.Footnote 93 However, to resolve the question, the tribunal ultimately turned solely to the UNIDROIT Principles. It observed that the dispute essentially concerned the non-payment of a contractual debt. It then cited the situation of non-performance in Article 7.1.1 of the Principles, which, the tribunal noted, included late performance. This meant that the dispute arose at the time of the non-payment—during the 1990s—and, as a result, the tribunal declined jurisdiction.Footnote 94
In a dissenting opinion, one arbitrator placed much more reliance on prior ICSID case law in interpreting the BIT. Notably, though, the dissenter did not question the majority's use of the UNIDROIT Principles. Indeed, he cited other provisions of the Principles, relating to the right to cure non-performance and the possibility of allowing additional time, which suggested to him that mere non-performance did not yet amount to a ‘dispute’.Footnote 95
Both the majority and the dissenter in AHC v DRC, then drew on the UNIDROIT Principles to resolve a substantive question of international law—namely, whether the tribunal had jurisdiction ratione temporis over the claimant's BIT claim at ICSID. As others have observed, however,Footnote 96 neither the majority nor the dissent gave much explanation of their reliance on the UNIDROIT Principles. Even if the Principles fall within the applicable law, they should not be the analytical starting point, in light of the gap-filling role of general principles, when more traditional sources are relevant and available, such as the VCLT's rules of treaty interpretation assisted by ICSID and PCIJ case law. Furthermore, the provisions of the Principles cited by the tribunal actually say nothing about when a dispute arises, instead focusing on whether breach (‘non-performance’) has occurred, and the resulting consequences. As a background tool of treaty interpretation, the Principles were of limited benefit regarding the particular question facing the AHC tribunal.
AHC v DRC also demonstrates that reference to the Principles is not a panacea. While the majority arbitrators and the dissenter both relied on the Principles, they came to opposite conclusions, suggesting that the Principles do not always offer an obvious solution to a problem. Again, this may simply reflect the general nature of general principles—if there is already a more specific rule in treaty or custom, reference to a general principle is unlikely to provide any direct resolution of the problem at hand.
d) Rules of treaty interpretation
The dissenting opinion in the Lemire case, already mentioned, included a further reference to the UNIDROIT Principles—but, oddly, on a point of treaty interpretation.Footnote 97 In particular, the dissenter drew on subsequent practice of the United States in interpreting the FET standard in the 1996 US–Ukraine BIT.Footnote 98 Of course, VCLT Article 31(3)(b) permits reference to subsequent practice when interpreting a treaty. But arbitrator Voss did not frame his argument on subsequent practice in the VCLT's terms. Instead, he relied on Article 4.1(2) of the UNIDROIT Principles, which provides that a contract shall be interpreted according to the meaning that reasonable persons would give to it where the common intention of the parties cannot be established. In addition, the dissenter cited Article 4.3(c), which directs a contractual interpreter to consider subsequent conduct of the parties.Footnote 99
Although the Lemire dissenter labelled this argument only a ‘subsidiary’ one,Footnote 100 the use of the UNIDROIT Principles on this issue is clearly indefensible. If the general principles of law are designed to fill lacunae in treaty or customary rules, there is no justification for reference to general principles on the rules of treaty interpretation. These are clearly well-established both in custom and in the Vienna Convention, leaving no reason to draw from the UNIDROIT Principles as general principles of law.
3. Conclusions
In several other cases the parties' efforts to rely on the UNIDROIT Principles in their damages submissions have been passed over by the tribunal, even while the tribunal agreed with the point made. One explanation for this is that the tribunal simply saw no lacuna or uncertainty in secondary rules that needed filling by reference to general principles. In SGS v Paraguay, for instance, the claimant argued that interest should begin to accrue from the time that certain payments, not paid by the State, were originally due to the claimant. To support this contention, the claimant cited both the ILC Articles and the UNIDROIT Principles.Footnote 101 The tribunal agreed with the contention,Footnote 102 citing the ILC Articles—but not the UNIDROIT Principles.Footnote 103 The tribunal may have viewed a UNIDROIT reference as unnecessary given that the more traditional source of the ILC Articles (reflecting custom) already confirmed the point. Similar arguably deliberate failures to engage with claimants' secondary rule submissions drawing on the UNIDROIT Principles can be found in Robert Azinian v Mexico,Footnote 104LLC AMTO v Ukraine,Footnote 105Azurix v Argentina,Footnote 106Mobil v Canada Footnote 107 and Guaracachi v Bolivia.Footnote 108
Nevertheless, this section demonstrates that there may be a limited role for reference to the UNIDROIT Principles as authority for secondary rules of international law where other sources are inconclusive, as for instance on questions of damages.
D. El Paso v Argentina: The UNIDROIT Principles and Confusion of Primary and Secondary Rules
The discussion so far has suggested that tribunals may justifiably rely on general principles of law to interpret or ground a secondary rule in some circumstances. This assumes, however, that the rule in question is indeed a secondary rule, and not a primary rule. In El Paso v Argentina, the tribunal appeared to confuse the two kinds of rule, leading to a questionable reliance on the UNIDROIT Principles. Indeed, while other scholars have treated the case as an instance of their use to confirm a finding of customary international law (like the Talsud case discussed in Section III(C)(1) above),Footnote 109 the tribunal's misunderstanding of primary and secondary rules undermines this analysis.
El Paso v Argentina represents another case in the long series of investment treaty claims against Argentina arising out of its financial crisis in the early 2000s. As is well known, most of these cases have involved controversy over the application of the defence of necessity, said by Argentina to justify the emergency measures taken by the State that were central to most of the foreign investors' claims.
Some of the controversy over the defence of necessity in the Argentina cases has arisen because of the presence of two seemingly similar rules, one found in Article XI of the US–Argentina bilateral investment treaty,Footnote 110 and one found in customary international law (usuallyFootnote 111 taken to be codified in Article 25 of the ILC Draft Articles on State Responsibility).Footnote 112 The two rules have an important difference. Article XI sets out a primary rule, defining the conditions under which a State will be responsible for breach of the treaty. Article 25, meanwhile, is a secondary rule, defining the consequences of a breach of the treaty. This should mean that the customary defence only becomes relevant once the treaty rule has been found not satisfied.Footnote 113 Several of the tribunals ruling on investor claims against Argentina have been criticized—and, in some cases, have seen their awards annulled by ad hoc annulment committees at ICSID—for failing to appreciate this difference between the two rules.Footnote 114
The major issue in relation to the defence of necessity in El Paso, a case brought under the US–Argentina BIT, was whether Argentina could invoke the defence despite having (arguably) contributed to creating the crisis through its deliberate choice of economic policies. ILC Article 25 resolves this issue, by providing that ‘necessity may not be invoked … if … the State has contributed to the situation of necessity’.Footnote 115 However, Article XI is silent on the matter. At the outset, the scope of the two rules on the question of contribution should not necessarily be expected to be the same. Treaty parties might well provide for a primary rule on necessity in a specific area that is more flexible, or more easily satisfied by States, than the general secondary rule on necessity found in custom.Footnote 116
Unlike many of the earlier tribunals, the El Paso tribunal did acknowledge that Article XI was a lex specialis, and that it should be analysed first before turning, if relevant, to the customary defence.Footnote 117 The tribunal also effectively acknowledged that Article XI set out a primary rule while the customary defence constituted a secondary rule.Footnote 118 Quoting the CMS annulment decision, the tribunal held that ‘if [Article XI] applies, the substantive obligations under the Treaty do not apply. By contrast, Article 25 is an excuse which is only relevant once it has been decided that there has otherwise been a breach of those substantive obligations'.Footnote 119 Despite this, the remainder of the tribunal's analysis seemed to ignore this distinction. The tribunal reasoned that, even if Article XI was a stand-alone treaty rule, concepts from customary international law could be used to interpret the treaty text. The tribunal then observed that ILC Article 25 expressly provided for the ‘no-contribution’ rule, and it concluded that the treaty rule should be interpreted in the same way.Footnote 120 It added that other parts of the ILC Draft Articles, on force majeure (Article 23) and distress (Article 24), also applied a ‘no-contribution’ rule.Footnote 121
As with the earlier Argentina cases, this analysis overlooks that Article XI is not a secondary rule of the same kind as the customary defence. Since the ILC Draft Articles relate solely to secondary rules,Footnote 122 references to Article 25 (or, indeed, Articles 23 or 24) do not necessarily avail in interpreting a primary rule found in a treaty,Footnote 123 particularly where the treaty text is silent on the matter.Footnote 124 Indeed, although the tribunal cited Continental Casualty v Argentina in support of the ‘no-contribution’ interpretation of Article XI,Footnote 125 that case explicitly noted that the customary law position on this issue could not control the treaty clause's interpretation.Footnote 126
Notably, this same confusion of primary and secondary rules appeared to infect the El Paso tribunal's use of the UNIDROIT Principles as well. After finding that the customary defence contained the ‘no-contribution’ rule, and (erroneously) using this to interpret the treaty provision, the tribunal then considered whether the ‘no-contribution’ rule constituted a general principle of law which could also be used to interpret the treaty.Footnote 127 To answer this, the tribunal consulted the UNIDROIT Principles' provisions on force majeure, exclusion clauses and hardship.Footnote 128
The first two of these rules are contained in Chapter 7 of the Principles, entitled ‘Non-Performance’.Footnote 129 They regulate the parties' obligations once a contractual breach has been found—by excusing the breach (in the case of force majeure), or by excluding the wrongdoer's liability for the breach (in the case of exclusion clauses).Footnote 130 In this sense, these are secondary rules,Footnote 131 ones that do not necessarily assist in interpreting a primary rule on non-precluded measures. These rules could, perhaps, be used to confirm the existence of a general principle of law holding that a situation of necessity can preclude wrongfulness as long as the wrongdoer has not contributed to the situation. But to use the UNIDROIT secondary rules to interpret a differently-worded primary rule—one not about preclusion of wrongfulness but about the existence of wrongfulness—is to fall once again into the trap of primary/secondary rule confusion for which the Argentina tribunals have been so extensively criticized.
The UNIDROIT Principles' rule on hardship, also cited by the El Paso tribunal, has a different structure. Unlike force majeure or an exclusion clause, it does not assume prior non-performance or breach of an obligation.Footnote 132 Under the Principles, when one party experiences hardship,Footnote 133 that party is not entitled to withhold performance.Footnote 134 However, it may request renegotiation of the contract,Footnote 135 and the other party must constructively engage in the renegotiations.Footnote 136 In this sense, the hardship rule is a primary rule, effectively placing an obligation on the wronged party in certain circumstances. But Article XI of the US–Argentina BIT, by contrast, does not impose any obligations on the (allegedly) wronged investor. Instead, it confirms that conduct of the State, when taken in certain circumstances, does not amount to a breach of the BIT. From this point of view, the Principles' hardship rule seems like a strange candidate for building a general principle that would be relevant to the interpretation of Article XI.
El Paso v Argentina, then, represents a misuse of the UNIDROIT Principles as background to treaty interpretation, stemming from confusion over primary and secondary rules.
E. Use of the UNIDROIT Principles in relation to Primary Rules
The role of the UNIDROIT Principles in serving as authority for secondary rules of international law was discussed above in Section III(C). Setting aside cases such as El Paso in which a primary rule was treated as a secondary rule, what scope might there be for the UNIDROIT Principles to serve as authority for primary rules of international law in investment treaty arbitration?
1. Suez v Argentina: A false start
The case that comes closest to demonstrating conscious use of the UNIDROIT Principles to interpret a primary rule of international law—namely, the FET obligation in the France–Argentina BIT—is Suez v Argentina. The tribunal majority in this case had concluded that Argentine provincial authorities violated FET when (amongst other conduct) they coerced the renegotiation of a long-term concession contract during the country's financial crisis.Footnote 137 In a separate opinion, arbitrator Pedro Nikken took issue with this finding. As part of a larger analysis, Nikken observed that the UNIDROIT Principles, ‘the international standard for such contracts’, imposed an obligation to renegotiate in times of hardship or changed circumstances.Footnote 138 This suggested for arbitrator Nikken that the renegotiation was not coerced and did not breach the FET standard.Footnote 139
While Judge Nikken's reference to the Principles in Suez was not a decisive element of his reasoning, it shows up a larger difference between his opinion and the majority on this point. The majority construed Argentina's conduct as regulatory or governmental conduct, done outside the normal contracting frame. The majority cited numerous decrees and resolutions taken under governmental authority,Footnote 140 and held that the State's actions ‘differ[ed] significantly from the various revisions or renegotiation processes provided by the Concession's legal framework’, and from previous renegotiations that had been undertaken within contractual limits.Footnote 141 Judge Nikken, meanwhile, appeared to construe Argentina's conduct in purely commercial terms, examining the parties' obligations under the contract. But BITs and the FET standard do not, without more, control ordinary commercial or contractual decisions of States, instead applying only to governmental or regulatory conduct.Footnote 142 In this sense, Nikken's reference to the UNIDROIT Principles was self-defeating: the reference demonstrated that he treated Argentina's conduct as merely contractual rather than governmental, but as soon as this conclusion had been reached, there was no conduct to which the BIT could apply, and the claim inevitably failed. Therefore, it appears that the UNIDROIT reference in Nikken's separate opinion was ultimately made not in order to interpret the FET primary rule, or even to confirm a previously-reached interpretation of it, but in order to conclude that the rule did not even apply.
2. The private law origins of general principles
In the absence of any actual examples of use of the UNIDROIT Principles to interpret primary rules, what hypothetical role might the Principles play in this respect? The answer to this depends firstly on consideration of the connection between the general principles of law and primary rules of international law. It was suggested in Section III(B) that the general principles of law are not likely to play a significant role in interpreting or providing content for primary rules in investment treaty disputes, because these rules are already sufficiently defined in treaty or custom, leaving no gap or uncertainty to be remedied. One 2008 survey provides support for this, identifying use of general principles by investment tribunals only in relation to secondary rules.Footnote 143 This minimal role in fact reflects the use of general principles in wider public international law, where they are invoked by international courts and tribunals mostly within the domain of secondary rules, including rules of evidence, procedure and jurisdiction.Footnote 144
Certainly, many have argued that the primary rules of investment treaties are actually highly open-textured, with much uncertainty remaining over their meaning even after a faithful application of the rules of treaty interpretation.Footnote 145 In this context, general principles could provide a much-needed background against which these treaties can be interpreted. However, there is a second feature of the general principles that goes some way to explaining their insignificance to date in investment law. Historically, general principles have been understood most often as principles of private law applied in domestic legal systems, where those principles can be adapted to relations between States.Footnote 146 Coming from private law, the principles thus assume a relation of equality between the two parties, whether two individuals or two States. It is now well recognized, though, that investment law does not display this equal relation.Footnote 147 The primary rules of investment treaties establish the obligations of States towards private parties. Investment treaty disputes are more akin to systems of human rights law or administrative law, where claimants are always private entities and States are always respondents, than to the classic private law areas of tort or contract.Footnote 148 For this reason, it might not be expected that general principles will be useful to the essentially public law context of an investment treaty's primary rules.
3. Public law principles in investment law
But, despite their historical focus, general principles of law need not necessarily be restricted to principles of private law.Footnote 149 In recent years, tribunals and scholars alike have acknowledged the potential for general principles of public law to play a greater role in the primary rules of investment treaty arbitration. One proponent of this view, Stephan Schill, has contended that investment treaty standards should be interpreted by reference to public law principles taken from comparative studies of domestic (and other international) legal regimes.Footnote 150
Indeed, it is telling that, where tribunals and authors have drawn from general principles of law to interpret the primary rules of investment protection, the principles referred to have had a distinct public law focus. In Total v Argentina, for instance, the tribunal engaged in a comparative domestic administrative law exercise in the course of establishing a general principle to interpret the FET guarantee in the France–Argentina BIT.Footnote 151 One leading textbook makes reference to human rights law and the newly-emerging concept of global administrative law in defining the general principles of law that are said to give content to the FET standard.Footnote 152 Other authors flag the role of general principles in defining FET, and then proceed to cite principles that characteristically apply only to the State in a public law setting, such as non-discrimination, due process, legal stability, and freedom from regulatory harassment.Footnote 153
4. Primary rules of private law in a public law setting?
This all suggests that the UNIDROIT Principles are precisely the wrong sort of instrument from which to draw ‘primary rule’ general principles of law for application in an investment treaty dispute. The UNIDROIT Principles are a set of principles of contract law, optimized for commercial arrangements between private parties. While they do envisage the possibility of application to investor–State contracts,Footnote 154 this means application only in respect of ordinary contract disputes between the investor and the State.Footnote 155 The Principles are not designed to regulate disputes about the exercise of sovereign powers, or disputes where the parties sit in an unequal ‘private vs public’ relationship, as in the typical investment treaty dispute.Footnote 156 The primary rules that they contain, such as the hardship rule drawn on by the El Paso tribunal, assume two freely-bargaining, self-interested parties, lacking the multitude of background stakeholders and interests that must be balanced by a State in its governmental decision-making. The El Paso tribunal itself recognized that the general principles are those domestic law principles which ‘after adaptation … are suitable for application on the level of public international law’.Footnote 157 But it did not appear to undertake any such ‘adaptation’ to take account of the dispute's public law context.
F. Private Law Analogies, Secondary Rules and the UNIDROIT Principles
This ‘private law’ feature of the UNIDROIT Principles may have further consequences. Despite what was suggested earlier, reliance on the UNIDROIT Principles might not be appropriate even for secondary rules, including the rule on preclusion of wrongfulness at issue in El Paso v Argentina. The situations in which private parties may be excused from performing their obligations are not necessarily the same as those for sovereigns. Instead of drawing on the UNIDROIT Principles' view of exceptional release from obligations, a more relevant comparison might be any discernible general principles of public law derived perhaps from domestic constitutional law on emergency powers of States,Footnote 158 or from domestic administrative law relating to the (non-)protection of legitimate expectations when national security is at stake.Footnote 159
This could apply to other secondary rules as well, such as damages rules. For instance, other factors apart from the claimant's actual loss might be relevant to the determination of compensation ordered against a State. Both domestic and international public law systems of liability often contemplate much more limited damages awards for injury caused by regulatory conduct than for injury caused by a private entity.Footnote 160 Some have recently argued that investment tribunals can, and should, take account of overriding host State interests such as human rights obligations when assessing damages.Footnote 161 Similarly, the financial effect of an award on a respondent State's budget has been identified as a relevant factor in considerations of damages in international law.Footnote 162 These views stand in some tension with the bold assertion of the UNIDROIT Principles that an ‘aggrieved party is entitled to full compensation for harm sustained’.Footnote 163
Therefore, the situations in which tribunals can appropriately consult the UNIDROIT Principles even in relation to a secondary rule may be quite limited.Footnote 164 What results from the analysis of Sections III(B) and (C) is that resort to the UNIDROIT Principles (as general principles of law), firstly, can only be appropriate when there is a lacuna of clear principles in the relevant treaty or in custom. Secondly, given the ‘private law’ nature of the Principles, references to them can only be justifiable in relation to the most general of the general principles (such as good faith, or the principle that breach of obligations entails reparations), to avoid being caught by structurally inappropriate comparisons. However, these principles are stated at such a high level of abstraction that they will rarely assist to resolve a dispute, meaning that a reference to the UNIDROIT Principles to support them adds little beyond brief confirmation.
IV. CONCLUSION
The hybrid nature of investment treaty arbitration carries many intriguing consequences, one of which is that tribunals are called upon to apply both private (domestic) law and public (international) law. The classic disputes of public international law, meanwhile, are not likely to involve contract law, and may not even relate to issues of commerce. Because of this, it is perhaps both appropriate and unsurprising that investment tribunals stand almost alone amongst international adjudicators in their reference to the UNIDROIT Principles, a collection of private law rules of contract designed for commercial disputes.Footnote 165 But, as this article has contended, even within investment law the Principles must be kept in their proper domain. They will find most relevance as a confirmatory tool on questions of domestic law, in situations where domestic law is unavailable, and on certain secondary rules of international law. Beyond this, even where their status as general principles of law has been demonstrated, reference to the UNIDROIT Principles is unlikely to be justifiable.
In light of this, what might be driving the growing number of references made to date in investment treaty case-law? While awards are often published, parties' pleadings are rarely made available. It is therefore usually difficult to know whether arbitrators' references to the Principles followed prompts by the parties in pleadings, or were done sua sponte. But the background of the arbitrators themselves may be a relevant factor. In Section II(B) above, the tribunal majority's use of the UNIDROIT Principles in Eureko v Poland was criticized on the grounds that it ignored Polish law. A strong dissent was issued in that case by Poland's nominated arbitrator. The dissenter, Polish academic Professor Jerzy Rajski, did not appear to disagree with the majority's jurisdictional finding (in favour of Poland) that relied on the UNIDROIT Principles, as discussed above. This is somewhat surprising, since one of the dissenter's major criticisms of the majority's view of the merits was that it had ignored the specificities of Polish law.Footnote 166
However, the tribunal's apparently unanimous references to the Principles may well be explained by the fact that Professor Rajski was an original member of the Working Group established to draft the first version of the UNIDROIT Principles. Although necessarily difficult to determine without further evidence (perhaps from the parties' pleadings or the transcripts of the hearings), there is some support for this ‘personal’ explanation for the dissemination of the Principles throughout the rulings of international tribunals. In particular, two other cases discussed in this article, AIG v Kazakhstan and El Paso v Argentina, included Piero Bernardini on the tribunal, who also participated in drafting the 1994 Principles.Footnote 167 Others have observed the role of personal connections in encouraging the global spread of legal concepts and norms,Footnote 168 and the appearance of the UNIDROIT Principles in investment treaty awards may, at least to some degree, be another example of this.
As noted in the Introduction, though, claimants themselves continue to cite the Principles in their submissions to investment treaty tribunals, and the references now preserved in the case law may well beget others in future.Footnote 169 There is undoubtedly scope to promote the use of the Principles in investment law, as this article has contended, but this must be done without ignoring distinctions between primary and secondary rules and the place of general principles in international law.
