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Abstract
Arbitration International, 2023, 39, 1–17 https://doi.org/10.1093/arbint/aiad001 Advance access publication 4 February 2023 Article The international validity of domestic law in investment-treaty arbitration Martin Jarrett S PE C IF YIN G THE IS S UE OF IN TER N ATION A L L E G A L VA L IDIT Y OF D OM E S TIC L AW This article deals with the issue of the international validity of domestic law in investment-treaty arbitration. This somewhat opaque, but fascinating, legal issue arose in the high-profile case of Philip Morris v Australia. Australia’s challenge to the arbitral tribunal’s jurisdiction prevailed on account of an abuse-of-rights argument. It was not the only challenge that it submitted. It also argued that the investor failed to satisfy the legality requirement in the applicable investment treaty, which read as follows : “investment” means every kind of asset, owned or controlled by investors of one Contracting Party and admitted by the other Contracting Party subject to its law and investment policies applicable om fr time to time… The specific argument was that the investment was not admitted to Australia in accordance with Australian law or Australian investment policies. The relevant Australian law effectively stipulated that the investor had to register its acquisition of the investment in question with 6 7 Australian authorities. The investor complied with this stipulation. Australia alleged, however, that the investor’s registration application was misleading because it did not reveal all the rea- sons for its acquisition, particularly that, with this acquisition, it could bring a claim against Australia under the applicable investment treaty. That omission was allegedly in breach of the Martin Jarre, S tt enior Research Fellow, Max Planck Institute for Comparative Public Law and International Law. The author wishes to thank Stephan Schill for providing constructive feedback on an earlier draft of this article. Any errors are the author’s alone. In the Razian sense of ‘validity’, see Joseph Raz, The Authority of Law: Essays on Law and Morality (OUP 1979) 146 (‘A rule which is not legally valid is not a legal rule at all. A valid law is a law, an invalid law is not. Similarly a valid rule is a rule and an invalid rule is not a rule at all’). Philip Morris Asia Limited v The Commonwealth of Australia, PCA Case No. 2012-12 (‘Philip Morris v Australia’). Philip Morris v Australia, Award on Jurisdiction and Admissibility (17 December 2015) 585. 1993 Hong Kong-Australia BIT, Art 1(e) (emphasis added). Philip Morris v Australia (n 3) 244. Ibid 252. Ibid 157. Ibid 267, 271. © The Author(s) 2023. Published by Oxford University Press on behalf of the London Court of International Arbitration. This is an Open Access article distributed under the terms of the Creative Commons Attribution License ( https:// creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited. 2 • e i Th nternational validity of domestic law in investment-treaty arbitration applicable rules. But these ‘rules’ were not contained in any primary legislation or secondary legislation. They were rather found in a ‘How-to-Apply Guide’ and in a document entitled ‘Australia’s Foreign Investment Policy ’. Given the apparent non-legal nature of these documents, the arbitral tribunal had to answer the question: Should the statements in these documents on how to register investment-acquisitions be recognized as ‘rules’ for the purposes of the legality requirement in the applicable investment treaty? For the record, the arbitral tribunal decided that these statements were not ‘rules’, with the result that this challenge failed. It is important to recognize what the arbitral tribunal was asking itself here: should these domestic-level statements be recognized as legally valid ‘rules’ for the purposes of the arbitration? This is the issue of the ‘international validity of domestic law in investment-treaty arbitration’. When this issue arises, domestic law is being used to resolve a legal issue. This legal use of domestic law can be distinguished from situations where domestic law becomes relevant as a fact. In that situation, the usual question is whether the operation of the relevant domestic law is lawful with reference to some international rule (an investment-protection standard in invest- ment-treaty arbitrations), noting that the exact operation of the domestic law is a question of fact. The same issue might also arise in respect of nationality requirements. As per the well-estab - lished jurisprudence on nationality requirements, the basic question that an arbitral tribunal has to answer asks: under the law of the investor’s putative home state, is the investor a ‘citizen’ or a company ‘incorporated’ there? Accordingly, the application of a nationality requirement involves the application of domestic law. Arbitral tribunals usually apply that domestic law without questioning its legal validity. If, however, the investor’s putative home state enacted a law that retrospectively applied to deny the investor its citizenship status in an effort to please the host state, should an arbitral tribunal strike down this citizenship-denying ‘rule’ as inva- lid? The consideration of counterclaims is another occasion when the international validity of domestic law might arise. Few counterclaims have been filed in investment-treaty arbitration, but in the post-UNCITRAL reform process world, this situation might change. In this future world, there will presumably be counterclaims brought that essentially allege that an investor has breached domestic law in the host state. If, for example, the relevant domestic law was found in secondary legislation and this secondary legislation could only be accessed by specif- ically asking for a copy of it from the minister who created it, should this ‘law ’ be legally recog- nized as a validly existing law for the purposes of determining the counterclaim? Ibid 252, 254. Philip Morris v Australia (n 3) 517 (‘the Respondent has not demonstrated that these requirements were mandatory. Hence, the Tribunal cannot conclude that non-compliance with some aspects of the Guide or the Policy, which is neither contained nor referred to in the FATA, resulted in a misleading application which could invalidate the admission’.) For other scholarship on this issue, see Julio César Betancourt, ‘Understanding the “Authority” of International Tribunals: A Reply to Professor Jan Paulsson’ (2013) 4 JIDS 227; Pierre Mayer, ‘L’arbitre international et la hiérarchie des normes’ (2012) 2 Revue de l’arbitrage 361; and Jan Paulsson, ‘Unlawful Laws and the Authority of International Tribunals’ (2008) 23 ICSID Rev 215. 12 rd Ursula Kriebaum, Christoph Schreuer and Rudolf Dolzer, Principles of International Investment Law (3 edn OUP 2022) 59. An infamous example is the Nuremberg Laws; for a comprehensive overview, see Martin Dean, ‘The Development and Implementation of Nazi Denaturalization and Confiscation Policy up to the Eleventh Decree to the Reich Citizenship Law’ (2002) 16 Holocaust and Genocide Studies 217. For example, in Oppenheimer v Caer tt mole, it was held by the House of Lords that citizenship-denying laws passed in Nazi Germany were not valid ‘laws’, see Oppenheimer v Caer tt mole (HM Inspector of Taxes) [1976] AC 249. For a list, see Maxi Scherer, Stuart Bruce and Juliane Reschke, ‘Environmental Counterclaims in Investment Treaty Arbitration’ (2021) 36 ICSID Rev 414 fn 7. UNCITRAL Secretariat, ‘Multiple Proceedings and Counterclaims’, A/CN.9/WG.III/WP.193 (22 January 2020) 33. For an example of a counterclaim ultimately based on a breach of domestic law, see Hesham T. M. Al Warraq v Republic of Indonesia, ad hoc arbitration (UNCITRAL Rules), Final Award (15 December 2014) 655, 672. According to Fuller’s conception of the formal rule of law, laws that are not promulgated are usually invalid, see Lon Fuller, The Morality of Law (Yale UP 1964) 49, 51. e i Th nternational validity of domestic law in investment-treaty arbitration • 3 How should arbitral tribunals respond to arguments that a domestic law should not be rec- ognized as a valid ‘law ’ at the international level? That is the main question that this article seeks to illuminate. That illumination process comprises two core parts, the first of which examines whether an arbitral tribunal should decide this question or refer it to the competent court in the host state. This examination is completed in the Competence over the issue of international validity of domestic law section. Assuming arbitral tribunals should decide on challenges to the validity of domestic law, the second part of this article asks: what law should they apply to resolve it? Answering this question is the business of The applicable standards for deter - mining validity: domestic standards, international standards, or a combination? section. The Conclusion section contains the conclusion. C OM PE TEN C E O VER THE IS S UE OF IN TER N ATION A L VA L IDIT Y OF D OM E S TIC L AW This section investigates whether an arbitral tribunal or a competent court in the host state should decide the international validity of domestic law in investment-treaty arbitration. Considering that specialized constitutional courts in domestic legal orders are created for the specific pur - pose of reviewing the validity of domestic law, and other domestic courts routinely conduct such review, there is something to be said for an arbitral tribunal referring the question over to them. But if an arbitral tribunal were inclined to hand over the issue to a domestic court, then it would have to be satisfied that it could legally make such a referral. Alternatively, if an arbitral tri - bunal determined that it should decide the mae tt r, it must be satisfied that it has the competence to do so. Thus, there are two lingering legal questions that need to be addressed before turning to the more normative question regarding which adjudicative body should decide the issue of international validity of domestic law. These are two legal questions are: - Do arbitral tribunals in investment-treaty arbitrations have the competence to decide issues of international validity of domestic law? - If an arbitral tribunal is inclined to refer the issue of international validity of domestic law to a domestic court, does it have the competence to make such a referral? Each of these two questions is addressed in the Competence of arbitral tribunals on the issue of international legal validity of domestic law and Arbitral tribunals referring the question of legality to domestic courts sections, respectively. Following that, in The normative factors sec - tion, the normative question will be addressed. Competence of arbitral tribunals on the issue of international legal validity of domestic law If the issue of the international validity of domestic law arises in the jurisdiction phase of an investment-treaty arbitration, arbitral tribunals can point to the competence–competence prin- ciple to justify their adjudication of it. To illustrate this point, consider a case where the state objects to jurisdiction on the ground that the investor has failed to satisfy the legality require- ment in the applicable investment treaty. The investor retaliates by contending that the domes - tic law that it has allegedly breached is internationally invalid. If, at this point, the state argues Alec Stone Sweet, ‘Constitutional Courts’ in Michel Rosenfeld and András Sajó (eds), The Oxford Handbook of Comparative Constitutional Law (OUP 2012) 823. This is the thesis of Betancourt’s scholarship on the international validity of domestic law; see Betancourt (n 11). As noted in the Specif ying the issue of international legal validity of domestic law section, this was one challenge to the arbi- tral tribunal’s jurisdiction in Philip Morris v Australia that Australia used. For an overview of legality requirements, see Katharina Diel-Gligor and Rudolf Hennecke, ‘Investment in Accordance with the Law ’, in Marc Bungenberg and others (eds), International Investment Law: A Handbook (Hart 2015) 566. 4 • e i Th nternational validity of domestic law in investment-treaty arbitration that the arbitral tribunal should not decide this issue because it is an issue that its constitu- tional court has exclusive competence over, then the arbitral tribunal can invoke the compe- tence–competence principle to effectively say: our jurisdictional competence is a mae tt r for us to decide. And they can do this because the competence–competence principle provides that arbitral tribunals have the competence to decide on their jurisdiction over a dispute, as opposed to courts having to decide the mae tt r for them. Although courts may subsequently review arbitral tribunals’ decisions, the point remains that the question of jurisdiction is one for arbi- tral tribunals to initially decide. This principle is found in the two most frequently applicable arbitral rules for investment-treaty arbitrations, namely the ICSID Convention (and ICSID Arbitration Rules) and the UNCITRAL Rules. If the issue of the international validity of domestic law arises in the merits phase, arbitral tribunals could argue that they can decide it via their general mandate to resolve the dispute between the investor and the host state. There is an additional basis upon which an arbitral tribunal could justify its adjudication of the issue. Specifically, when arbitration is initiated under an investment treaty, the arbitral tribunal is being tasked with interpreting this treaty. In carrying out that task, they have to give meaning to treaty text, with the result that wherever the words ‘law of the host state’ (or words to that effect) appear in the treaty, arbitral tribunals have to decide on their meaning. And that is ultimately what the adjudication of the issue of the international validity of domestic law involves—determining whether a particular domestic law falls within the scope of the words ‘law of the host state’. Accordingly, whether in the jurisdiction phase or merits phase, arbitral tribunals have the competence to adjudicate on the issue of the international validity of domestic law. But can that competence be taken away from them? Consider a situation where the state alleges that the investor has breached a legality requirement, the investor responds by challenging the interna- tional validity of the domestic law (that it has allegedly breached), and then the state quickly arranges for its constitutional court to hand down an opinion on its validity. That opinion finds that the domestic rule is a valid law in the state’s legal system. The arbitral tribunal insists that the question is one for it to decide—not the constitutional court. The constitutional court retaliates by issuing an interdiction order vis-à-vis the arbitral tribunal and its determination of the ques- tion. It reasons that as the constitution gives the constitutional court the final say on whether a rule (within its legal order) is valid or not, the arbitral tribunal must submit to its interdiction 26 27 order. Such constitutional provisions are common in Kelsen-inspired legal orders, such as the Austrian constitution : The Constitutional Court decides on the unconstitutionality of a Federal or Land Law… Could this tactic of interdicting the arbitral tribunal work? Probably not. W hile this order might be effective in the domestic legal system, arbitral tribunals in investment-treaty arbitrations are not part of that legal order. They are part of the international legal order. And, as the European Court of Justice has discovered, arbitral tribunals are not ready to bow to orders coming from 22 rd Gary Born, International Commercial Arbitration, vol. I (3 edn Kluwer 2021) 7.01. 23 th Nigel Blackaby and others, Redfern and Hunter on International Arbitration (6 edn OUP 2015) 5.112. Barton Legum, ‘An Overview of Procedure in an Investment Treaty Arbitration’ in Katia Yannaca-Small (ed), Arbitration nd Under International Investment Agreements: A Guide to the Key Issues (2 edn OUP 2018) 5.17. See Born (n 22) [13.04(A)(6)]. This possibility that only domestic courts legally have the power to decide on questions of validity is most powerfully taken up by Betancourt. He argues essentially that adjudicating on the validity of domestic law is a sovereign power exclusively belong- ing to domestic courts, see Betancourt (n 11) 237. Peter Bussjaeger and Mirella Johler, ‘Powers and Jurisdiction of Constitutional Courts/ Supreme Courts’, Max Planck Encyclopedia of Comparative Constitutional Law (December 2018) 35, 36. Bundesverfassung (‘Federal Constitutional Law ’ (Austria)), Art 140(1). e i Th nternational validity of domestic law in investment-treaty arbitration • 5 domestic courts, considering that only one arbitral tribunal, at the time of writing, has submit- ted to the de facto interdiction order that it issued in Slovakia v Achmea. Arbitral tribunals referring the question of legality to domestic courts Accordingly, not only do arbitral tribunals have the power to decide on questions of interna- tional validity of domestic rules, it is a power that domestic courts would have great difficulty taking away from them. But the fact that arbitral tribunals have this power does not mean that they have to use it. As detailed in The normative factors section, some arbitral tribunals might be persuaded to refer the issue to domestic courts. If they are so inclined, there is a preliminary question that they need to address: would such a referral be legal? The first step towards answering that question is considering whether there is any duty for the arbitral tribunal to decide for itself. Out of the catalogue of duties that arbitral tribunals are subject to, the most relevant is the duty to apply the law. Paulsson has also opined that defer- ring the question (on the validity of a domestic rule to a domestic court) would constitute a clear breach of this duty. This opinion should ordinarily be the end of the road for any arbitral tribunal contemplating a referral to a domestic court, remembering that an arbitral tribunal that does not comply with its duties risks having its arbitral award successfully challenged. Having said that, there is, to this author’s knowledge, no prior jurisprudence in support of Paulsson’s view. Considering this, an arbitral tribunal might convince itself that there is nothing to stop it from referring to a domestic court. In that case, it would then need to devise a plan to secure an opinion from the relevant domestic court. Formulating a legally sound plan will be difficult. First, various domestic courts with competence to decide on constitutional mae tt rs do not 33 34 35 36 37 issue advisory opinions, including Australia, India, Ireland, Singapore, and the USA. Second, in respect of those domestic courts which do issue advisory opinions, there will be questions whether an arbitral tribunal has the proper standing to apply for one. For example, various Kelsen-inspired constitutions provide for the option of a court to refer a question of validity to the constitutional court, but ‘court’ is ordinarily restricted to courts within the legal system that the constitutional court forms part of; in other words, the German constitutional court can only receive referrals from German courts. An arbitral tribunal might avoid this lack-of-standing problem by instructing one of the parties to seek an advisory opinion from a At the time of writing, only one arbitral tribunal had declined jurisdiction on basis of Slovakia v Achmea, specifically Green Power Partners K/S and SCE Solar Don Benito APS v Spain, SCC Arbitration V (2016/135). Additionally, in another case, Adamakopoulos and Others v Cyprus, a dissenting opinion was written in favour of following Slovakia v Achmea, see further Lisa Bohmer, ‘For the first time, an arbitrator declines jurisdiction under an intra-EU BIT – but majority disagrees’ (IAReporter , 14 February 2020) <https://www.iareporter.com/articles/analysis-intra-eu-nature-of-claims-should-have-led-tribunal-to-de- cline-jurisdiction-in-adamakopoulos-v-cyprus-according-to-dissenting-arbitrator-marcelo-kohen/> accessed 29 December For a detailed description of this duty, see Born (n 22) [13.04(A)(5)]. Paulsson (n 11) 226. See Blackaby (n 23) 5.72. Kristen Walker, ‘Advisory opinions’ in Michael Coper, Tony Blackshield and George Williams (eds), The Oxford Companion to the High Court of Australia (OUP 2001). Under the Indian Constitution, only the President can seek out an advisory opinion from the Supreme Court of India, see Raeesa Vakil, ‘Jurisdiction’ in Sujit Choudhry, Madhav Khosla and Pratap Bhanu Mehta (eds), The Oxford Handbook of the Indian Constitution (OUP 2016) 373, 374. Under the Irish Constitution, only the President can seek out an advisory opinion from the Supreme Court of Ireland, see Brice Dickson, The Irish Supreme Court: Historical and Comparative Perspectives (OUP 2019) 107. Kevin YL Tan, The Constitution of Singapore: A Contextual Analysis (Hart 2015) 167. Steven D Schwinn, ‘Limits on Access to Judicial Review ’ in Rainer Grote, Frauke Lachenmann and Rüdiger Wolfrum (eds), Max Planck Encyclopedia of Comparative Constitutional Law (last update: January 2017) 35. For a list, see Ibid 6, 7. 1949 Basic Law for the Federal Republic of Germany (Grundgesetz für die Bundesrepublik Deutschland) (FRG) Art 100(1). For commentary confirming that only courts, as opposed to arbitral tribunals, can refer questions, see Jan-R Sieckmann and Sibylle Kessal-Wulf, ‘GG Art 100’ in Hermann von Mangoldt, Friedrich Klein and Christian Starck (eds), Kommentar zum th Grundgesetz (7 edn Beck 2018) 15. 6 • e i Th nternational validity of domestic law in investment-treaty arbitration domestic court, but the legal basis for such an order is not immediately apparent. Under both 40 41 ICSID Rules and UNCITRAL Rules, arbitral tribunals have a general power to control the conduct of arbitrations, but it would be an unusual exercise of power if it were used to instruct one of the parties to approach a domestic court for a determination on an outstanding legal issue. The traditional roles of domestic courts are to supervise and support arbitral tribunals ; for example, by reviewing their decisions on their jurisdiction and enforcing their awards, respectively. Referring a legal issue to a domestic court is neither supervisory nor supporting in nature—it is a request for adjudication. Adjudicating the legal issues within a dispute is the core function of an arbitral tribunal. It is not a task that an arbitral tribunal can delegate. For this reason, the idea that the arbitral tribunal might instruct one of the parties to seek an advisory opinion from a domestic court on the validity of a domestic law, with the help with its general power to control the conduct of an arbitration, should be discounted. e n Th ormative factors In summary, not only may arbitral tribunals for investment-treaty arbitrations determine the issue of the international validity of domestic law, there is a good argument that they have to determine it. Further, even if an arbitral tribunal convinced itself that it could legally refer the question to a domestic court, it would face substantial difficulties in having its application admitted by such court. Legally speaking, the issue is one for arbitral tribunals, but is there a good normative case in support of this conclusion? e n Th ormative case for domestic courts to determine the international validity of domestic law As regards factors that weigh against arbitral tribunals deciding the issue, the most prominent one is that if arbitral tribunals adjudicate on the validity of a domestic law, then the integrity of the host state’s legal order (from which such rule originates) is arguably compromised. To illustrate this problem, consider a case where the state brings a counterclaim against the inves- tor. The counterclaim is based on the investor’s alleged breach of a domestic law on taxation, the obligation to comply with which is found in the applicable investment treaty : Investors and their investments shall comply with the provisions of law of the Parties concerning taxation, including timely payment of their tax liabilities. Considering its retrospective application, the investor argues that the tax law should not be recognized as a ‘law’ for the purposes of this clause. The investor succeeds. Essentially, this is judicial review of the tax law, but it is carried out by an international adjudicative body. Judges from the constitutional court of the host state protest against this practice. With reference to ICSID Arbitration Rules, rule 27(1). For commentary, see Matthew Weiniger, ‘Rule 19 – Procedural Orders’ in Julien Fouret, Rémy Gerbay and Gloria M. Alvarez (eds), The ICSID Convention, Regulations and Rules: A Practical Commentary (Edward Elgar 2019) 23.01, 23.02. UNCITRAL Rules, Art 17. For commentary, Peter Binder, Analytical Commentary to the UNCITRAL Arbitration Rules (Sweet & Maxwell 2013) 17-003. Blackaby and others (n 23) 7.01. Born (n 22) 13.04(A)(8). Another iteration of this idea featured prominently in Slovakia v Achmea. There, the European Court of Justice held that the fact that arbitral tribunals decide questions of Union law would compromise the legal order of the European Union, see Case C-284/16, Slovakia v Achmea BV, [2018], ECLI:EU:C:2018:158, 58. This example is inspired by the case Cairn Energ y PLC and Cairn UK Holdings Limited (CUHL) v Government of India, PCA Case No. 2016-7 (‘Cairn v India’). For a case summary, see Kshama A. Loya and Vyapak Desai, ‘The Cairn Energy v India Saga: A Case of Retrospective Tax and Sovereign Resistance against Investor State Awards’ (Kluwer Arbitration Blog, 2 July 2021) <http://arbitrationblog.kluwerarbitration.com/2021/07/02/the-cairn-energy-v-india-saga-a-case-of-retrospective-tax-and- sovereign-resistance-against-investor-state-awards/> accessed 29 December 2022. 2015 Indian Model Bilateral Investment Treaty, Art 11(iii). e i Th nternational validity of domestic law in investment-treaty arbitration • 7 a constitutional provision to support their position, they declare that they have a monopoly on the task of judicial review of domestic law. And that monopoly exists for a good reason: it avoids the problem of parallel legal regimes for different investors depending on their nation- ality. This problem arises because as the investor has convinced an arbitral tribunal that the tax law is not a ‘law’ at the international level, the host state decides that it should not enforce the payment of this tax against other foreign investors (with investor status under the host state’s investment treaties). The reasoning is that if the host state does so enforce, these foreign inves - tors will probably have a strong chance of claiming that such action breaches the standard on fair and equitable treatment. But because this tax has been ruled to be legally valid by the con- stitutional court, the host state continues to enforce it against local investors. In effect, while local investors are subject to one tax regime, investors with the same nationality as the investor are subject to another tax regime. The point is that if arbitral tribunals take on the task of determining the international validity of domestic law, then there is the potential for parallel legal regimes to develop. Is there a way to extinguish this potential? In a word, ‘yes’, if arbitral tribunals apply domestic standards to determine the international validity of domestic law, and strictly follow the rulings of domestic courts, then the risk of parallel legal regimes dissipates. But, as noted in The applicable stand - ards for determining validity: domestic standards, international standards, or a combination? section, there are circumstances when international standards have to be applied to the issue, meaning that the development of parallel legal regimes is a risk. Aside from this risk of creating parallel legal regimes, domestic courts can also argue that as they have the greatest expertise on the question of the validity of domestic rules, then the decision rightfully lies with them. The truth of this contention is undeniable. But the gap in knowledge could be substantially made up. Arbitral tribunals routinely rely on expert evidence to bridge their knowledge gap in respect of domestic-law jurisprudence. And while producing, consuming, and using this expert evidence does take time, the alternative of referring the issue of international validity to a domestic court will also be time-consuming and costly. One remaining justification to refer the issue of international validity of domestic law to domestic courts is the principle of deference. It has been defined as follows : e co Th ncept of deference under international law can be defined to describe a response by one actor to the recognition of another actor’s decision-making authority. This principle has manifested itself in international law through various more specific rules. A rule that might be added to that collection is a rule to the effect that arbitral tribunals must refer the issue of international validity to domestic courts. Some reasons standing behind this rule have already been discussed, specifically the risk of creating parallel legal regimes and the greater expertise of domestic courts. A third reason might be that in light of the backlash against See, for example, n 29 above. Indeed, in Cairn v India, the investor convinced the arbitral tribunal that a retrospective tax law breached the fair-and-eq- uitable-treatment standard in the applicable investment treaty; see Cairn v India (n 45), Final Award (21 December 2020) 1801, In Cairn v India, the constitutionality of the tax measures in question had not been decided upon, see Ibid 1680. Particularly when ‘formal validity’ and ‘substantive validity’ is being tested, see the Formal validity and Substantive validity sections. See Esmé Shirlow, Judging at the Interface: Deference to State Decision-Making Authority in International Adjudication (Cambridge University Press 2021) 20, 25. Frédéric Gilles Sourgens, Kabir Duggal and Ian A. Laird, Evidence in International Investment Arbitration (OUP 2018) 7.40. Esmé Shirlow, ‘The Rule of Law, Standards of Review, and the Separation of Powers’ in Stephan Schill and August Reinisch (eds), Investment Protection Standards and the Rule of Law (OUP 2022) (forthcoming). Esmé Shirlow, ‘Deference’ in Hélène Ruiz Fabri (ed), Max Planck Encyclopedia of International Procedural Law ( January 2021) 2. 8 • e i Th nternational validity of domestic law in investment-treaty arbitration investor-state dispute settlement, an arbitral tribunal might conclude that deciding the issue of international validity itself would give rise to much controversy considering that domestic courts traditionally conduct judicial review of domestic law. This is a policy of appeasement. As detailed in The normative case for arbitral tribunals to determine the international validity of domestic law section, it is considered that there is a stronger case for arbitral tribunals themselves to adjudicate on the issue of the international validity of domestic law, so this policy of appeasement should not be pursued. But this is not the end of the road for the principle of deference. This is because the principle of deference does not have to be translated into a hard rule to the effect that arbitral tribunals must refer the issue of international validity to domestic courts, but it can rather express itself in a soft obligation to ‘give respectful consideration’ to domestic judicial decisions. This soft obligation has a role to play when arbitral tribunals go about the task of applying the applicable law to determine the issue of international validity of domestic law. As explained in The applicable standards for determining validity: domestic standards, international standards, or a combination? section, arbitral tribunal sometimes has a choice between domestic and international standards to settle the issue. As an expression of deference to domestic courts, arbitral tribunals should ordinarily give priority to the domestic standards that they have developed. e n Th ormative case for arbitral tribunals to determine the international validity of domestic law The main factor favouring resolution of this issue by arbitral tribunals is the nemo judex in sua causa principle. This is a core principle of adjudication, thereby explaining its considerable argumentative force. Its content specifies that no one can be the judge of his or her own case. A strong argument can be made that if a domestic court had the opportunity to determine the international validity of a domestic law for the purposes of an investment-treaty arbitration, then this principle would be breached. The reasoning behind this conclusion is straightforward: investment-treaty arbitration involves suits against states, international law recognizes that the judicial arm forms part of the state for the purposes of international responsibility, thereby entailing that any referral would make the state the judge of an aspect of its own case. This rea - soning might be criticized for being grounded more in legal fiction than in legal reality. Most particularly, the fact that a domestic court is independent undermines the notion that it legally forms part of the state. But this counterpunch is very weak. A well-settled principle of the law of international responsibility holds that the fact that a domestic court is independent is no excep- tion to the rule that it forms part of the state. How, in practice, could a domestic court have the opportunity to influence the outcome of an investment-treaty arbitration? Consider a case where the state challenges the arbitral tribunal’s jurisdiction on the ground that the investor has failed to comply with a legality requirement in the applicable investment treaty. The investor contends that the domestic law that it has alleg - edly breached is invalid. The arbitral tribunal refers this challenge to the host state’s constitu- tional court. It confirms the validity of the domestic law under the constitution. Because the independence of this constitutional court is beyond question, the arbitral tribunal accepts this decision. The state’s challenge to jurisdiction succeeds. This decision is a mortal blow to the This is a form of deference that Shirlow describes as submitting to the recognized leader; see Shirlow (n 51) 26. Shirlow (n 54) 16. For further reading on the psychology underlying this kind of thinking, see generally Alison R Fragale and others, ‘Appeasing Equals: Lateral Deference in Organizational Communication’ (2012) 57 Admin Sci Q 373. For a more detailed account of the degrees of deference, see Alison Young, ‘In Defence of Due Deference’ (2009) 79 Mod L R 554, 559, 563. D.E.C. Yale, ‘Iudex in Propria Causa: an Historical Excursus’ (1974) 33 Cam L J 80. Adrian Vermeule, ‘Contra Nemo Iudex in Sua Causa: The Limits of Impartiality’ (2012) 122 Yale L J 384. International Law Commission, Responsibility of States for Internationally Wrong ful Acts (2001), Art 4. James Crawford, State Responsibility: The General Part (CUP 2013) 121. e i Th nternational validity of domestic law in investment-treaty arbitration • 9 investor’s (otherwise meritorious) claim, with the result that it loses out on claiming compensa- tion for the state’s mistreatment of its investment. Another factor weighing in favour of adjudication by arbitral tribunals is the additional time that would be needed if the domestic courts were used to decide the issue. This additional time might be measured in years in many cases. Given the time needed to conclude investment-treaty arbitrations is a perennial complaint of states, this need for additional time is concerning. Moreover, the delay is an unnecessary one, noting that arbitral tribunals are instructed to avoid unnecessary delays under both 63 64 the ICSID Rules and UNCITRAL Rules. As noted above, if arbitral tribunals have the assistance of expert evidence, they can adjudicate on the international validity of domestic law themselves. Combining this factor with the factor that referrals to domestic courts would breach the nemo judex in sua causa principle, the conclusion is that arbitral tribunals should themselves adjudicate on the issue of the international validity of domestic law. But how should they undertake that task? More specifically, what is the applicable law that they should use when so adjudicating? THE A PPL IC A B L E S TA ND A R DS F OR DE TER M ININ G VA L IDIT Y: D OM E S TIC S TA ND A R DS , IN TER N ATION A L S TA ND A R DS , OR A C OM B IN ATION ? Legal considerations on applicable standards for determining validity This is a choice-of-law question. To answer it, the first step is to determine which choice-of-law rules arbitral tribunals must use. For investment-treaty arbitration conducted under the ICSID Convention, the relevant rule is found in Article 42 : e T Th ribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable. This rule incorporates a popular two-step process that is found in many arbitral rules: apply the law selected by the parties or, if no selection is made, apply the most appropriate law, which, under the ICSID Convention, is limited to international law or the domestic law of the host state. For non-ICSID arbitrations, the same rule applies, as formulated in the UNCITRAL Rules : e a Th rbitral tribunal shall apply the rules of law designated by the parties as applicable to the sub - stance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law which it determines to be appropriate. If the parties fail to make an election, this rule formally gives arbitral tribunals much discretion as regards the applicable law, but no body of law other than international law or the domestic law of the host state could be considered ‘appropriate’ for determining the issue of international UNCITRAL Working Group III (Investor-State Dispute Settlement Reform), Working Paper 142 (A/CN.9/WG.III/ WP.142, 18 September 2017) 20. Although this duty is not explicitly laid down in the ICSID Rules, the commentary on Art 44 of the ICSID Convention holds that arbitral tribunals for ICSID arbitrations have a duty to proceed efficiently; see Christopher Harris and Cameron Miles, ‘Article 44’ in Julien Fouret and others (eds), The ICSID Convention, Regulations and Rules: A Practical Commentary (Elgar 2019) 4.366. UNCITRAL Rules, Art 17 (‘The arbitral tribunal, in exercising its discretion, shall conduct the proceedings so as to avoid unnecessary delay’). ICSID Convention, Art 42(1). UNCITRAL Rules, Art 35(1). 10 • e i Th nternational validity of domestic law in investment-treaty arbitration validity of a particular domestic law of the host state. W hat this means, whether in ICSID arbi- tration or non-ICSID arbitration, is that when the parties fail to make a selection of the applica- ble law, the arbitral tribunal will have a choice to apply either international law or the domestic law of the host state. How they should use this choice is covered in the Towards a nuanced approach of determining validity section. But what is the situation when the parties do make a selection? Technically, a selection may be made in any way, but, most commonly, it will be made via a governing-law clause in the applicable investment treaty and, by starting arbitration under this treaty, the investor implicitly agrees to the terms of such clause. Governing-law clauses in investment treaties generally take one of two forms. In the first form, the arbitral tribunal has to apply the provisions of the investment treaty, principles of international law, and the domestic law of the host state, as demonstrated in the Ivory Coast- Turkey BIT : e a Th rbitral tribunal shall take its decisions in accordance with the provisions of this Agreement, the laws and regulations of the Contracting Party involved in the dispute on which territory the invest- ment is made (including its rules on the conflict of laws) and the relevant principles of international law as accepted by both Contracting Parties. The second form of governing-law clause omits to mention the domestic law of the host state. A prominent example of this type of governing-law provision can be found in the Energy Charter Treaty : A tribunal…shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law. This is the kind of governing-law clause that can cause headaches for present purposes. On a strict formal interpretation of this provision, the domestic law of the host state may not be used to resolve the ‘issues in dispute’, including the issue of the international validity of domestic law. This is problematic because, in certain situations, there is no alternative other than to use domestic law. The paradigm example of such a situation arises when the international validity of a domestic law is challenged on the basis that its enactment was beyond the competence of the legislative body that made it. For example, under the American constitution, the federal government only has competence to make laws that relate to the enumerated powers listed in Article I, Section 8. When it enacts a law that does not have this relation, it is legally invalid. To answer the question whether a particular legislative body has the constitutional competence to make the domestic law in question, only domestic law could be used to answer it, thereby explaining the headache that governing-law clauses like the one in the Energy Charter Treaty cause when determining the international validity of domestic law. What is the fix for this headache? It starts with going back to the choice-of-law rules in the ICSID Convention and the UNCITRAL Rules. As noted, the primary rule of both is that the parties can select the applicable law. The question is, when they do make a selection, does that mean that the secondary rule, specifically that arbitral tribunals can make the choice, cannot Hege Elisabeth Kjos, Applicable Law in Investor-State Arbitration: The Interplay Between National and International Law (OUP 2013) 72. Yas Banifatemi, ‘The Law Applicable in Investment Treaty Arbitration’ in Yannaca-Small (ed) (n 24) 19.10. 2016 Agreement between the Government of the Republic of Turkey and the Government of the Republic of Côte d’Ivoire Concerning the Reciprocal Promotion and Protection of Investments, Art 10(6). 1994 Energy Charter Treaty, Art 26(6). See the Competence validity and Procedural validity sections. As famously decided in Marbury v Madison 5 U.S. 137. e i Th nternational validity of domestic law in investment-treaty arbitration • 11 be activated? This is important because, under the secondary rule, arbitral tribunals have the discretion to apply the domestic law of the host state. The question ultimately asks for an inter - pretation of the primary rule. What is needed is an interpretation of the primary rule to the effect that the parties’ selected applicable law only applies to the legal issues that it is capable of resolving. If this interpretation is accepted, then the corollary is that any residual legal issues are subject to the secondary rule, thereby practically meaning that the arbitral tribunal would select the applicable law for determining them. As previously noted, this applicable law could only be the domestic law of the host state or international law. To put this interpretation on a solid doctrinal footing, the first step is to emphasize that unless this interpretation is adopted, it leads to a manifestly absurd result. This is not difficult. A chal - lenge to the international validity of a domestic law on the foundation that, for example, its enactment was beyond the competence of the law-making body that made it could not be adju- dicated with international law—international law contains no rules on which topics different levels of government within a state have jurisdiction over. That the application of international law to this kind of challenge would lead to a manifestly absurd result brings Article 32 of the Vienna Convention on the Law of Treaties into the frame. It permits the use of supplemen- tary means of interpretation to determine the meaning of treaty text if the ordinary meaning would lead to a manifestly absurd result. ‘Supplementary means of interpretation’ includes 75 76 well-known maxims of interpretation, such as the absurdity doctrine. It provides that minor adjustments to the ordinary meaning of legal text can be made to correct absurdities. And this is what the proposed interpretation of the primary rule achieves: rather than having the parties’ selection of international law apply to all legal issues in a dispute, it simply limits this selection to the issues that international law is capable of resolving. A final note is that, technically speaking, this VCLT-based argument is only applicable to the ICSID Convention, and not the UNCITRAL Rules. The reason is that the VCLT rules on inter - pretation are only applicable to treaty text, which the provisions of the UNCITRAL Rules are not. The UNCITRAL Rules, particularly its choice-of-law rules, should rather be interpreted with reference to the law on arbitration in the arbitral seat. It will be assumed that, under any such law, it would be possible to interpret the primary choice-of-law rule in the UNCITRAL Rules in the manner proposed above. Towards a nuanced approach of determining validity In summary, in all cases, arbitral tribunals will have discretion on whether to apply the domestic law of the host state or international law to determine the international validity of domestic law. Because of that discretion, the question is not so much ‘which body of law must the arbi- tral tribunal apply’, but more ‘which body of law should it apply?’ This question should not be interpreted as a binary choice between domestic law and international law. Rather, a bespoke approach is needed where the applicable standards are determined with reference to which aspect of legality is under consideration. There are four aspects of legality: competence validity, formal validity, procedural validity, and substantive validity. Each is examined in the sections below with a view to deciding whether domestic standards or international standards should be applied to determine the specific question of legality that they raise. Hereinae ft r ‘VCLT’. VCLT, Art 32(b). 75 nd Richard Gardiner, Treaty Interpretation (2 edn OUP 2015) 358. For an overview of their use in investment-treaty arbitra- tion, see Romesh Weeramantry, Treaty Interpretation in Investment Arbitration (OUP 2012) 5.86, 5.97. Antonin Scalia and Bryan A Garner, Reading Law: The Interpretation of Legal Texts (Thomson West 2012) 234. VCLT, Art 31(1). Kjos (n 67) 63, 64. See further Paulsson (n 11) 229, 230 (indicating that arbitral tribunals should only apply domestic standards, although Paulsson was not specifically examining investment-treaty arbitrations). 12 • e i Th nternational validity of domestic law in investment-treaty arbitration Competence validity Competence validity concerns the issue whether the relevant legislature has the constitutional competence to enact the domestic law in question. In federations, legislatures have limits on their legislative competence. One common limitation is territorial in nature. Typically, consti- tutions for federated states give legislative power to regional governments in respect of certain geographical regions. The other major limitation concerns the topics over which legislatures have competence. Each level of government enjoys legislative power in respect of particular topics. The rules that divvy up the topics between the governments are different from juris - diction to jurisdiction, thereby meaning that the rules on competence validity are jurisdiction specific. Accordingly, only domestic standards can be applied to determine whether a domestic law is invalid on account of lack of competence. The only point that potentially undermines this conclusion is Article 4 of the ILC Articles on State Responsibility, which reads as follows : e co Th nduct of any State organ shall be considered an act of that State under international law… whatever its character as an organ of the central government or of a territorial unit of the State. Using Article 4, it could be argued that whether a legislature acts beyond its competence is not a concern for arbitral tribunals for investment-treaty arbitrations, meaning that the question of competence validity should not arise at all. This is not a strong argument. Article 4 applies to deem the conduct of lawmaking as an ‘act’ for the purposes of international law, regardless whether such lawmaking was beyond the competence of legislature in question. For exam- ple, if a regional government enacts a law beyond its competence that gives rise to a legitimate expectation for the investor, then the state (represented by the federal government) cannot argue that this act of regional lawmaking should be discounted because it exceeds the compe- tence of the regional legislature. When the investor alleges competence invalidity, it does not make that argument. It instead alleges that the domestic law in question should not be recog- nized as a valid law, as opposed to an act, in international law. For that reason, Article 4 does nothing to undermine the conclusion that competence validity could become a live issue in an investment-treaty arbitration. Formal validity The second aspect of legality is formal validity. Although the name ‘formal validity’ suggests that this aspect looks at the form of a rule, this is only half true. The full truth is that formal validity fundamentally asks: is this rule reasonably capable of being obeyed? To illustrate, con- sider the application of one element of formal validity, ‘publicity’. This is the requirement for Daniel Halberstam, ‘Federalism: Theory, Policy, Law ’ in Michel Rosenfeld and András Sajó (eds), The Oxford Handbook of Comparative Constitutional Law (OUP 2012) 580, 581. See generally Peter Bussjaeger and Mirella Johler, ‘Distribution of Powers in Federal Systems’ in Rainer Grote, Frauke Lachenmann and Rüdiger Wolfrum (eds), Max Planck Encyclopedia of Comparative Constitutional Law (last update: August 2018). Note that even though Art 7 contains the rule on attribution of conduct of an ‘organ of a State…empowered to exercise ele- ments of the governmental authority, it is well recognized that such organs are not regional governments, while ‘territorial units’, in Art 4, are; see Djamchid Momtaz, ‘Attribution of Conduct to the State: State Organs and Entities Empowered to Exercise Elements of Governmental Authority’ in James Crawford and others (eds), The Law of International Responsibility (OUP 2010) 241, 242. Paulsson (n 11) 229 (although Paulsson was writing more generally about the obligation of an arbitral tribunal not to sim- ply accept what the state tells it what is or is not a law as that would amount to a ‘dereliction of duty’) James Crawford, State Responsibility: The General Part (CUP 2013) 123. See James Crawford and Simon Olleson, ‘The Application of Rules on State Responsibility’ in Bungenberg and others (n 21) 427. Jeremy Waldron, ‘The Rule of Law and the Importance of Procedure’ in James E Fleming (ed), Getting to the Rule of Law (NYU Press 2011) 4. e i Th nternational validity of domestic law in investment-treaty arbitration • 13 public promulgation of a rule in order for its subjects to know their legal obligations —without knowledge of their legal obligations, it is impossible to ask subjects (of such legal obligations) to comply with them. The other requirements of formal validity are ‘consistency ’, ‘intelligibility ’, ‘practicability’, ‘prospectivity’, and ‘stability’. Because the question of formal validity does not depend on local factors in the legal system of the host state, such as its status as a federation, arbitral tribunals could apply domestic stand- ards or international standards or both to determine it. It is considered that both should be applicable. Reference should primarily be made to domestic standards on formal validity, while international standards would play a secondary role. W hat is the reasoning behind this formula? On account of the principle of deference, domestic laws should be judged against the domes- tic standards from the legal system to which they belong. International standards should only play a role when the domestic standards fall short; for example, when domestic standards on the promulgation of domestic legislation do not require that such legislation needs to be made public before taking effect. W hat should these international standards on formal validity be? There are two options. First, there is the jurisprudence developed in respect of the fair-and-equitable-treatment standard, which has been described as an investment-protection standard that is essentially concerned with ensuring that investments are treated in accordance with the rule of law. This essential concern of the fair-and-equitable-treatment standard was on display in Cairn v India, where it was held that retrospective taxes were incompatible with this standard. Accordingly, jurispru- dence from the fair-and-equitable-treatment standard could inform the international standards. A second option for filling in the content of the international standards would be the scholar - ship that has been produced on the formal rule of law. A difficulty with this second option, however, is establishing that the legal status of this scholarship is ‘law’ for the purposes of an investment-treaty arbitration. As previously noted, ‘principles of international law ’ are ordinarily one source of applicable law in investment-treaty arbitrations. Arbitral tribunals have interpreted this source of law to refer to various sources of international law laid down in Article 38 of the Statute of the International Court of Justice. One of those sources is ‘general principles of law’. It might be argued that the various aspects of the formal rule of law are such general principles, and that the scholarship serves as good evi- dence of them, noting that Article 38(1)(d) provides that scholarship should serve this function in international adjudication. This is a feasible argument, but it will encounter the problem that what constitutes a ‘general principle of law ’ is always up for debate. In order to stand on firmer doctrinal ground, option one (using the jurisprudence on the fair-and-equitable-treatment standard) might be preferred, although, again, it is not a bul- let-proof solution. W hen jurisprudence on the fair-and-equitable-treatment standard is used to Fuller (n 18) 49. Waldron (n 86) 4. Out of Fuller’s eight principles, the two missing here are ‘generality’ and ‘congruity’. They are not included because, with respect to ‘generality ’, Fuller described this as a requirement that there must be some law and, with respect to ‘congruence’, it is more procedural in nature because it looks at whether there is congruence between law and official action. See The normative case for arbitral tribunals to determine international validity of domestic law section. Nicolas Angelet, ‘Fair and Equitable Treatment’ in Anne Peters (ed), Max Planck Encyclopedia of Public International Law (last update: March 2011) 5. Cairn v India (n 45), Final Award (21 December 2020) 1801, 1802. For a list of the most prominent scholarship, see Jeremy Waldron, ‘The Rule of Law ’ (Stanford Encyclopedia of Philosophy, 22 June 2016) 5.1 <https://plato.stanford.edu/entries/rule-of-law/> accessed 29 December 2022. 93 nd Borzu Sabahi, Noah Rubins and Don Wallace, Jr., Investor-State Arbitration (2 edn OUP 2019) 8.13. ICJ Statute, Art 38(1)(c). 95 nd Hugh Thirlway, The Sources of International Law (2 edn OUP 2019) 12. See Alain Pellet and Daniel Müller, ‘Competence of the Court, Article 38’ in Andreas Zimmermann and others (eds), The rd Statute of the International Court of Justice: A Commentary (3 edn OUP 2019) 256, 267. 14 • e i Th nternational validity of domestic law in investment-treaty arbitration determine the international validity of domestic law, the underlying theory is that investment treaties have to be interpreted in a consistent manner ; for example, if a domestic law is effec - tively invalid under the fair-and-equitable-treatment standard, then the same law should not be recognized as a ‘law ’ for the purposes of an in-accordance-with-host-state-law clause in the same treaty. But what happens when there is no such jurisprudence on the fair-and-equitable-treat- ment standard as it is found in the applicable investment treaty? In that circumstance, which should arise frequently because there are thousands of investment treaties, another step will be needed, specifically clarifying the meaning of ‘fair and equitable treatment’ through jurispru- dence developed in respect of other investment treaties. This is standard practice in interna - tional investment law, but it should not be an automatic process: investment treaties should be interpreted according to their own terms. In some cases, that principle might mean that jurisprudence developed in respect of one investment treaty should not be used to interpret another investment treaty. In summary, to determine the formal validity of a domestic law in investment-treaty arbitra- tion, a two-step process should be completed. The first step asks: is the domestic law valid under the applicable domestic standards from the host state? If ‘yes’, then the second question is: is the same law valid under international standards? If ‘yes’, then the domestic law is internation- ally valid. These international standards might be drawn from one of two sources, specifically the jurisprudence on the fair-and-equitable-treatment standard or scholarship on the formal aspects of the rule of law. Procedural validity Procedural validity is the third aspect of validity. W hen assessing procedural validity, the task is to ask: has the correct procedure been followed in bringing the domestic law in question into legal effect? For example, if the domestic law is a piece of primary legislation that has been passed by a parliament, then assessing the procedural validity of such a law might involve check- ing whether there was a quorum in place when the vote to adopt it took place. It should be expected that there will be few investment-treaty arbitrations where the pro- cedural validity of domestic law will be called into question. The issue could have, however, been argued in Philip Morris v Australia. This case was previously encountered in the Specif ying the issue of international legal validity of domestic law section. As mentioned there, Australia argued that the investor’s investment had not been admitted in accordance with Australian law because the investor’s application to gain lawful admittance was misleading. What made the investor’s application misleading was that it allegedly failed to mention all of the reasons for acquiring the investment. Australia contended that there were legally binding rules that stip- ulated that applicants had to disclose all of their reasons. The investor successfully argued that these ‘rules’ had ‘no legal effect and [were] not binding under Australian law’. Exactly why they lacked legal effect is not disclosed, but one argument could have been that the documents Gardiner (n 75) 165. Stephan W. Schill, The Multilateralization of International Investment Law (CUP 2009) 326, 328. 99 nd McLachlan, Shore and Weiniger, International Investment Arbitration: Substantive Principles (2 edn OUP 2017) 3.158. A similar test is constructed in respect of substantive validity; see Substantive validity section. For another case involving procedural validity, see von Pezold v Zimbabwe. There, Zimbabwe argued that the investor failed to satisfy the legality requirement on account of its breach of certain rules issued by the Zimbabwe Stock Exchange. The arbitral tribunal dismissed this argument. It reasoned that: ‘The Tribunal does not consider the [Zimbabwe Stock Exchange] Rules to have formed part of the laws of Zimbabwe at the relevant time, and therefore any breach thereof would not be a sufficient basis on which to deny treaty protection’; see Bernhard von Pezold and Others v Republic of Zimbabwe, ICSID Case No. ARB/10/15, Award (28 July 2015) 419. It is apparent that these rules were not part of Zimbabwean law because they had not been enacted in a way to give them the status of secondary legislation. Philip Morris v Australia (n 3) 263. e i Th nternational validity of domestic law in investment-treaty arbitration • 15 in which they were contained were not pieces of secondary legislation. For although these doc- uments were issued by an Australian government ministry, these documents were not registered as ‘legislative instruments’ under the Legislative Instruments Act 2003, noting that such registra- tion is required to give government-issued documents the status of secondary legislation under Australian law. With such an argument, the investor would have essentially argued that the ‘rules’ were procedurally invalid because the process of giving them legal effect had not been followed. What this example illustrates is that the issue of procedural validity is specific to the type of rule under consideration. Because of this specificity, only specifically designed domestic rules from the host state’s legal order should be applied to determine it. Again, this is another situa- tion where international standards are inapplicable and only domestic standards can perform the task. Substantive validity The fourth aspect of legality, substantive validity, is the sexiest. The issue of substantive validity evaluates the content of a rule. Because formal validity also looks at a rule’s content, there is the potential for some confusion between it and substantive validity. But they are distinguishable. A rule is formally invalid if it is practically impossible to obey, for example : A person must not cough or sneeze in the presence of the king. Although such a rule might be motivated by good reasons, particularly stopping the spread of viruses, these actions (coughing and sneezing) are involuntary actions over which humans have little to no control. By contrast, a substantively invalid rule is practically possible to obey, but it should not be obeyed because of its incompatibility with some recognized fundamental right which is based on some moral value, meaning that the question whether a rule is substantively valid depends on its compatibility with applicable fundamental rights. When arbitral tribu- nals in investment-treaty arbitrations test the substantive validity of a domestic law, what might these applicable fundamental rights be? In the constitutions of most states, there are fundamental rights that might be used for this purpose. They should be used in priority to any international standards that might be applicable. Two reasons inform this conclusion. First, there is the principle of deference—arbitral tribunals should recognize that when testing the validity of a domestic law from a particular legal system, then the specific standards from that legal system should be given precedence. A second rea- son is that when an investor invests into a particular host state, it has to accept the legal order in place there. This principle might be extended to the adjudication of the international validity of a domestic law; in other words, investors have to accept that validity will be tested primarily with reference to domestic standards. But there is a complication here: what happens if domestic standards render valid a domestic law that any fair-minded observer would view as invalid? An example might be a domestic law that imposed a special tax on business enterprises that applied according to the racial identities 103 th Roger Douglas and Michael Head, Douglas and Jones’s Administrative Law (7 edn Fed Press 2014) 311. This is also the case in respect of competence validity; see Competence validity section. Martin Krygier, ‘Rule of Law’ in Michel Rosenfeld and András Sajó (eds), The Oxford Handbook of Comparative Constitutional Law (OUP 2012) 237. For the inspiration behind this example, see Fuller (n 18) 36. 107 rd HLA Hart, The Concept of Law (3 edn OUP 2012) 204. Waldron (n 86) 5. See The normative case for arbitral tribunals to determine international validity of domestic law section. 16 • e i Th nternational validity of domestic law in investment-treaty arbitration of their employees; specifically, if a business enterprise employed any person of a particular race, it would be subject to a higher tax rate. This problem was previously encountered in respect of formal validity. The solution was the adoption of a two-step process for testing validity: first, test the domestic law in question against domestic standards and, second, test the same law against international standards. The same solution can be adopted here, but what standards ought to serve as the applicable international standards? There is a genuine choice on this mae tt r. There is a smorgasbord of fundamental rights that are recognized in international law, particularly in human rights–focussed treaties. Arbitral tri- bunals have shown a willingness to consider international human rights law in investment-treaty arbitrations. Most prominently, in Urbaser v Argentina, the arbitral tribunal recognized that an investor’s conduct could breach a population’s right to clean drinking waters, although the counterclaim that Argentina launched against the investor on this basis was unsuccessful. Notwithstanding this reception of international human rights law into international investment law, it would be a mistake to determine the substantive validity of a domestic law with reference to standards from international human rights law. Two reasons inform this conclusion. The chief among them is what might be called the prob - lem of indeterminacy. Concisely put, there is a multitude of human rights–focussed treaties from which standards could be drawn, with the result that it is unclear exactly what standards from these treaties should be applicable. Another problem is that if standards from a particular human rights–focussed treaty are used, and the host state has not signed up to that particular treaty, then the state effectively becomes subject to such standards without having expressed its consent thereto. As an example, consider the ILO Convention on Occupational Safety and 113 114 Health. This is one of the ILO’s ‘fundamental conventions’. As such, it might be viewed as a document from which standards could be drawn to test the validity of a domestic law. Chances are, however, that the host state will not have ratified it—only 74 states have done so. For the many states which have chosen not to ratify this treaty, or a similar treaty, they should not be subject to its application via the adjudication of the issue of the international validity of domes- tic law. The other source of international standards for testing the substantive validity of domestic law is the applicable investment treaty. An example of such a standard is the arbitrary-and-dis- criminatory-measures standard. When an arbitral tribunals rules that a state has breached this standard by the enactment of some law, it is effectively ruling that that law is invalid because of its arbitrary or discriminatory content. The applicability of international standards, which are drawn from the applicable investment treaty in an arbitration, cannot be in question. Indeed, if they are not applied, there is the risk of inconsistency in the treatment of the same law: in the context of assessing an investor’s claim, it might be assessed as invalid, while in the context of assessing a state’s counterclaim, it might be assessed as valid. For example, because Danubia is at war with Decadencia, it imposes a special tax on Decadencian investors to help fund its war efforts. This tax is held to be in breach of the arbitrary-and-discriminatory-measures standard. Now imagine another investment-treaty See Formal validity section. Urbaser S. A . and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v The Argentine Republic, ICSID Case No. ARB/07/26, Award (8 December 2016) 1199. Ibid 1221. 1981 Occupational Safety and Health Convention. ‘Conventions and Recommendations’ (International Labour Organization) <https://www.ilo.org/global/standards/intro - duction-to-international-labour-standards/conventions-and-recommendations/lang--en/index.htm> accessed 29 December ‘R atifications of C155—Occupational Safety and Health Convention, 1981 (No. 155)’ (International Labour Organization ) <https://www.ilo.org/dyn/normlex/en/f ?p=1000:11300:0::NO:11300:P11300_INSTRUMENT_ID:312300> accessed 29 December 2022. e i Th nternational validity of domestic law in investment-treaty arbitration • 17 arbitration between a Decadencian investor and Danubia, although, in this case, the investor complains about other conduct. Danubia launches a counterclaim: because of the investor’s non-payment of the special tax, it is argued that it has breached a clause in the Danubia– Decadencia BIT to the effect that investors must promptly pay their taxes. Under the ‘defence clause’ of the Danubian Constitution, the special tax is valid. But with reference to the arbi- trary-and-discriminatory-measures standard, the presiding arbitral tribunal should invalidate it—a domestic law cannot be held to be effectively invalid in one context in an investment-treaty arbitration, yet valid in another. As when testing the formal validity of a domestic law, a two-part test should be applied when testing the substantive validity of a domestic law. The first part applies domestic standards from the host state, while the second part applies international standards drawn from the applicable investment treaty. C ON C L U S ION In the 2009 Lalive Lecture, Jan Paulsson gave a speech on the topic of this article. He admits that his ideas on it were not fully developed and concluded with an invitation for further explora- tion. This article has accepted this invitation. It divided the issue into two main questions, the first of which asked: which adjudicative body should decide the issue of international validity of domestic rules in investment-treaty arbitration, arbitral tribunals, or domestic courts of the host state? The answer came down in favour of arbitral tribunals. The next question concerned the applicable standards that arbitral tribunals should use when determining the international validity of domestic law. In most cases, arbitral tribunals will be able to choose whether they use domestic standards or international standards. Which standards should be used depends on the nature of the challenge to the validity of the domestic law in question. It was posited that there are four potential grounds of challenge: (i) competence invalidity; (ii) formal invalidity; (iii) procedural invalidity; or (iv) substantive invalidity. In respect of all four of these grounds of challenge, it was determined that domestic standards were the default standards, but, par- ticularly in respect of formal invalidity and substantive invalidity, domestic standards had to be supplemented by international standards. Paulsson (n 11) 231. Ibid 230.
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Arbitration International – Oxford University Press
Published: Feb 4, 2023