Applicable Law in International Arbitration – The Experience of ICSID and Iran-United States Claims Tribunal

by Niki Nozari (Author)
©2019 Thesis 290 Pages


This study aims to examine the substantive applicable law in different arbitral tribunals, especially the ICSID and the Iran-US Claims Tribunal. Additionally it examines the role of international law and whether it has supremacy over national laws. To that end, this publication is mainly based on case studies, the most cited ICSID and Iran-US Claims Tribunal cases. Furthermore, it addresses scientific works on this topic with regard to various arbitration rules and in particular to the applicable law.

Table Of Contents

  • Cover
  • Title Page
  • Copyright Page
  • About the author
  • About the book
  • Citability of the eBook
  • Contents
  • Series Page
  • Introduction
  • 1. Applicable substantive law and the ICSID Convention
  • I) Background
  • II) ICSID jurisdiction
  • III) Jurisdiction and applicable law
  • 1) Scope of jurisdiction
  • 2) Applicable law rules in treaties
  • 3) The correlation between the scope of jurisdiction and applicable law
  • IV) General rules of applicable law in ICSID Convention
  • V) The autonomy of the parties
  • 1) Background and definition
  • 2) Party autonomy and the first sentence of Article 42(1) of the ICSID Convention
  • VI) Limitations of party autonomy
  • 1) Public policy
  • 2) Mandatory provisions of the host state’s law
  • 3) Reasonable connection
  • VII) Choice of law varieties
  • 1) Direct agreement between the parties
  • a) The law of the host state
  • b) The law of the investor’s home country or of third state
  • c) Investment agreement as a self-contained legal system
  • d) International law
  • aa) International law alone as the law chosen by the parties
  • bb) Compound choice of law
  • cc) International minimum standards
  • e) Transnational law and Lex Mercatoria
  • f) General principles of law
  • 2) Applicable law chosen in treaty or legislation
  • a) Choice of law in domestic legislation
  • b) Choice of law in treaties
  • VIII) Implied choice of law
  • 1) Reference to international arbitration
  • 2) Choice of the place of arbitration
  • 3) Choice of law by reference to domestic legislation
  • 4) Parties’ submissions and the circumstances of the case
  • a) Choice of law derived from parties’ submissions
  • b) Parties’ submissions as confirmation of the chosen law
  • IX) Stabilization clauses
  • 1) Stabilization clause and the risk of subsequent changes in law
  • 2) Non-comprehensive stabilization clauses
  • 3) Absence of stabilization clauses
  • X) Absence of agreement on the applicable law
  • 1) Examining the absence of the agreed choice of law
  • 2) General view of the second sentence of Article 42(1) – The residual rule
  • 3) Application of the host state’s law
  • a) Limits on the application of the host state’s law
  • aa) Application of international law
  • bb) The state’s capacity to submit to arbitration
  • cc) The investor’s legal status
  • 4) Rules on the conflict of laws
  • 5) Application of international law
  • XI) Prohibition of a non liquet
  • XII) Decision ex aequo et bono
  • 1) Definition
  • 2) The distinction between equity within the law and ex aequo et bono
  • 3) Amiable composition and ex aequo et bono
  • 4) The agreement on a decision ex aequo et bono in ICSID arbitration
  • 5) Absence of an authorization to decide ex aequo et bono
  • 6) Limitations on decision ex aequo et bono
  • XIII) Annulment of ICSID awards
  • 1) Necessity of a review mechanism
  • 2) Annulment process by ICSID
  • 3) Manifest excess of powers
  • a) Non-application and misapplication of the applicable law
  • b) Partial non-application of the applicable law
  • c) Substantiation of sources
  • d) Non-application of international law
  • 2. Applicable law and the Iran-United States Claims Tribunal
  • I) Background
  • II) Structure of the Tribunal
  • III) Jurisdiction of the Tribunal
  • 1) The Ratione Personae jurisdiction of the Tribunal
  • a) Private persons before the Tribunal
  • b) States versus nationals
  • c) State versus state
  • d) Government-controlled entities
  • aa) The notion of “control”
  • bb) Date of control
  • cc) Other factors in relation to the notion of “control”
  • dd) No evidence of control
  • e) Dual nationals
  • aa) Doctrine of state non-responsibility
  • bb) Doctrine of dominant and effective nationality
  • cc) Tribunal’s approach on the standing of dual nationals
  • 2) The Ratione Materiae jurisdiction of the Tribunal
  • a) Article II of the Claims Settlement Declaration and the Undertakings
  • b) The Iranian-forum clause decision
  • aa) Binding contract
  • bb) Specifically providing
  • cc) Any disputes
  • dd) Sole jurisdiction
  • ee) The competent Iranian courts
  • IV) The substantive applicable law of the Tribunal
  • 1) The origin of Article V of the Claims Settlement Declaration
  • 2) The tribunal’s fundamental obligation
  • 3) Determination of the substantive applicable law
  • a) Contract
  • aa) Payment
  • bb) Performance
  • cc) Existence of contract
  • dd) Interpretation
  • ee) Termination
  • a) National law
  • b) General principles of law
  • aa) Unjust enrichment
  • bb) Force majeure
  • cc) Other principles
  • c) Public international law
  • d) Changed circumstances
  • Conclusion
  • Bibliography
  • Lebenslauf


Herausgeber: Bernd von Hoffmann (†), Erik Jayme, Heinz-Peter Mansel, Christine Budzikiewicz, Michael Stürner, Karsten Thorn und Marc-Philippe Weller

Band 199


Current trends in international dispute resolution are all rooted in the booming concept of globalization. When we think profoundly of every single desirable characteristic in any available means of international dispute settlement, we could easily acknowledge that the factors that create the attractiveness of these novel means reflect our today’s world. Time efficiency, for example, has gained great importance, which perfectly mirrors the present-day reality not only in the field of international law or business and legal matters in general but also in our real day-to-day life.

International arbitration as one of the most utilized means of dispute resolution would continue to evolve only when it can meet the demands of the contemporary world. With that being said, flexibility in this method would become a vital element for a variety of reasons.

Arbitration or any other method should be capable of satisfying the expectations of two parties. Expectations that as a matter of fact are not in line with one another.

Notwithstanding the method of dispute settlement, applicable substantive law as the basis of deciding disputes, and its determination as one of the preliminary steps of every legal procedure are of great importance. In this research, we are about to look at this issue throughout the experience of two arbitral institutions.

The two institutions that we are going to analyze are ICSID and Iran-United States Claims Tribunal. There are a variety of reasons behind choosing these two institutions. It should however be noted that the comparison may still be of great importance, even where it seems at the outset that the subjects of it, are not of identical goals and purposes, such as the case with the two institutions compared in this study. To that end, at the beginning we should take into account that these two tribunals have several discrepancies, to name a few, their origins, procedural rules and jurisdictional scopes. Even though their differences are distinct, they cover extensive common legal issues that are of the utmost importance particularly in connection with international investment arbitration.

This study comprises two main chapters. The first chapter is dedicated to ICSID tribunals, which begins with a brief background and purposes of ICSID’s establishment. The primary intentions of the drafters will be considered in order to perceive the elements that were vital at the time in order to meet the expectations of the fast-growing sphere of international investment.

←9 | 10→

Subsequently, we will review the jurisdictional scope of ICSID Convention. Although our main study focuses on applicable law issues, reviewing the key jurisdictional issues even briefly seems indispensable given the fact that the essence of a comparative study relies on the comprehension of the scope, under which two institutions are functioning. To that end, we also end the Jurisdiction section by analyzing the correlation between the scope of jurisdiction and applicable law.

The main part of our first chapter deals with various aspects of applicable substantive law in accordance with the ICSID Convention. Firstly, we will define the principle of party autonomy, which is considered as a cornerstone of determination of the applicable law, not only under the ICSID Convention but also in many other arbitration rules. The further step would be analyzing Article 42 of the Convention and its key features. To that end, we need to examine the situations that the Convention has stipulated as to whether the parties have selected the governing law and what would be the consequences of each situation. We continue the research by reviewing each matter in the light of Tribunal’s caseload.

The focus will be further drawn to the role of international law along with national laws and whether one has primacy over the other and what are the consequences. General principles of law recognized by civilized nations as a source of international law will be taken into account, given its vital role in meeting the expectations of the players of today’s globalized investment transactions.

Another approach of ICSID Convention on applicable law in case of an existing agreement of parties is whether the choice is explicit. The ICSID tribunals diligently examine the requirements for an implicit choice to be considered as eligible.

Our study would not be complete without taking other alternative methods into consideration. Ex aequo et bono is a method consistent with today’s necessities. We all share the opinion that arbitration is aiming to facilitate the settlement of disputes by bringing them out of the national legal systems in order to provide the parties with an unbiased settlement procedures, while all these advantages and what makes them attractive is the distrust that parties share of each other’s national courts system along with national laws. Therefore, setting the case free of the legal boundaries might practically advance the arbitration procedures; however, there are some inconsistencies regarding this theory.

We will sum up the first chapter by reviewing the annulment proceedings by ICSID ad hoc committees to reflect how the controversial issues with respect to applicable law have been dealt with at these committees. We try to demonstrate the possible arguments, under which the parties have brought up their ←10 | 11→challenges in connection with applicable law before the committees, since the grounds provided by Article 52 of the Convention, based on which the parties may request annulment of the award are limited, observing the cases on this matter would be of essence.

The objective of the second chapter of this research is reviewing the rules concerning substantive applicable law and the relevant experience of the Iran-United States Claims tribunal.

The Iran-US Tribunal is a unique institution mainly given to its background, history and the political setting, in which the tribunal was established. The Tribunal is rooted in a historical event early after the Islamic Revolution in Iran. The upheaval caused by Iranian students capturing the United States’ Embassy in Tehran and taking its personnel as hostage, demanding the United States to return the Shah to Iran. The political repercussions of this event have led to a very complicated circumstance between Iran and the United States, which ultimately resulted in two declarations known as Algiers Accords issued by the Government of Algeria as the official intermediary. Alongside with the General declaration, the “Declaration of the Government of Democratic and Popular Republic of Algeria concerning the Settlement of Claims by the Government of the United States of America and the Government of the Islamic Republic of Iran” was the agreement to establish the Iran-United States Claims Tribunal. The General Declaration ensured the release of American nationals detained in the U.S. Embassy in Tehran and the return of Iranian assets. In addition, following the termination of the pending cases against Iran in United States courts, the General Declaration provided for the establishment of a security account to secure and pay the claims against Iran, which were to be submitted to the newly born Tribunal.

Given the challenges that the Tribunal had to face, it issued a remarkable amount of awards and decisions. As many commentators agree, the Tribunal’s awards have been acknowledged as one of the most influential and important bodies of international arbitration jurisprudence. The Tribunal’s workload does not only cover an extensive variety of legal issues, but also they stand out given their persuasive power, which is an essential character for an award to be considered as precedent. It is noteworthy that ICSID has the most references to Iran-United States Claims Tribunal’s awards and decisions among other arbitral institutions.

After explaining the Tribunal’s history, which in order to conceive its jurisprudence seems inevitable, we lay the groundwork by describing the Tribunal’s structure and scope of jurisdiction. Reviewing the provisions of the Claims Settlement Declaration concerning the jurisdiction of the Tribunal is necessary ←11 | 12→given the discrepancies between them and the ICSID rules on jurisdictional matters. Under this section, we also analyze legal issues such as identifying government-controlled entities and dealing with dual nationals in depth as they are an area of significant activity for the Tribunal.

The Tribunal’s jurisdiction over claims based on contracts containing choice of forum clauses has been also a controversial issue. Choice of forum clauses were common in Iran’s prerevolutionary contracts, and we will discuss the existing arguments whether such clauses in certain contracts were enforceable.

The substantive applicable law under the Claims Settlement Declaration is set out by Article V, which gives the decision makers a great freedom in determination of the applicable law. Due to this Article, which is not similar to the applicable law provisions that we typically see, the arbitrators have a great discretion in determining the governing law, which leads to divergent arguments. Similar to what we examine under ICSID, here again we try to find out the relation between national and international law, the tendency of the Tribunal toward each choice, whether the Tribunal gives priority to one source over another and the role of general principles of international law.

1.Applicable substantive law and the ICSID Convention


After more than ten years debate in various organs of the United Nations over the relationship between developing countries and multinational corporations, the General Assembly of the United Nations passed a resolution concerning the matter of permanent sovereignty over natural resources. This resolution was the first step toward the establishment of ICSID.1

This was the time of decolonization when a large number of previously colonized nations became sovereign countries. In their desire to develop, many of these newly independent countries were wished to attract foreign investment but unfortunately there were various factors that made the investors reluctant.

On the one hand the developing countries needed fund, technical assistance and know-how from the multinational corporations. On the other hand, the investors did not have enough protection.

From the point of view of foreign investors, factors that provide a favorable climate for investment include economic stability, a well-developed legal and regulatory framework, including favorable tax and labor codes, investment laws, property laws, the protection of intellectual property rights, a sufficient infrastructure and overall political stability.2 Most of these countries were lacking in many of these areas.

At the root of the major problem concerning the paucity of foreign investment was the lack of appropriate international mechanisms to stimulate the international investment. In the absence of international mechanisms, dispute settlement between a State and foreign investor has to take place in the host state’s court, which would not be desirable for the investors. The reasons are clear. The domestic courts of the host state usually do not have the specialized knowledge, which is necessary to settle the international investment disputes in a proper way. Moreover, they are bound to apply domestic law even when it fails to protect ←13 | 14→the investor’s rights. Above all was the investor’s suspicion about the lack of partiality of these courts.

The only method available to the foreign investors prior to the creation of ICSID was to pursue their claims through diplomatic protection by the investor’s country of nationality against the host state. However, this method proved to be inadequate and was riffed with difficulties. Firstly, before pursuing diplomatic protection may be given, the investor was obliged to exhaust all local remedies in the host state. Secondly, there was no certainty that diplomatic protection would be granted. Besides, in this method the investor does not have a direct control over its claim. Lastly, pursuing the diplomatic protection route could lead to political tensions between the states. Therefore, overall this method was not an attractive choice.

Therefore, the problem to find an appropriate system to promote the private international investment is still persisted.

Finally, after the drafting phase of the Convention on the Settlement of Investment Disputes between States and Nationals of other States between 1961 and 1965 through the framework of the International Bank for Reconstruction and Development (IBRD), the text of the convention was adopted by IBRD’s directors and entered into force on 14 October 1966.

The ICSID Convention is universally considered to be the “major arbitration treaty with worldwide effects.”3 The founders of ICSID believed that the “creation of an institution designed to facilitate the settlement of disputes between states and foreign investors can be a major step toward promoting an atmosphere of mutual confidence and thus stimulate a larger flow of private international capital into those countries which wish to attract it.”4

In order to “depoliticize” the settlement of investment disputes, Article 275 of the ICSID Convention suspends the right of Contracting States to exercise ←14 | 15→diplomatic protection of nationals, who have consented to ICSID arbitration.6 At the present time, ICSID is the most important institution to settle the international investment disputes and has registered nearly 400 cases.

Millions of arbitration cases until now have proved that this method is one of the most effective means of dispute settlement in the field of international investment arbitration.7 There are numerous reasons why parties choose arbitration as their preferred means. Beside the confidentiality, fast proceeding, flexibility and adaptability, parties’ ability to designate both the forum and the arbitrators and many others, one could not deny the amount of party autonomy this method provides.8


ISBN (Hardcover)
Publication date
2019 (February)
Substantive Law ICSID Convention Party Autonomy Law Varieties Stabilization Clauses
Berlin, Bern, Bruxelles, New York, Oxford, Warszawa, Wien. 2019. 290 p.

Biographical notes

Niki Nozari (Author)

Niki Nozari was born in Tehran. She passed her First Iranian State Examination in Law after studying at the University of Shahid Beheshti, Tehran, where she also received her Master of Laws. She completed her legal internship in Tehran until graduating with the Second State Examination in Law.


Title: Applicable Law in International Arbitration – The Experience of ICSID and Iran-United States Claims Tribunal