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Patrick C. Osode, State Contracts, State Interests and International Commercial
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 State contracts, state interests and
international commercial arbitration:
a Third World perspective*
Patrick C Osode**
Senior Lecturer,MercantileLaw
University ofFort Hare

INTRODUCTION
An unmistakable feature of international commerce during the last four
decades has been the active participation of developing countries, usually in
the form of contractual relationships with foreign private parties.' Develop-
ment economists believe that many developing countries do not have, nor
can they generate, enough savings to finance industrialisation. 2 The direct
result is their inability effectively to pursue their development aspirations
3
without foreign investment.
Knowing that doing business with a developing state is tantamount to
dealing with a partner whose legal rights, prerogatives and competence in
the domestic and international legal orders may be vastly superior to those
of the foreign investor, the latter has consistently demonstrated an 'almost

*This article is a slightly revised version of a paper delivered by the author at the
Seventh Biennial Conference of the International Academy of Commercial and
Consumer Law held at the Faculty of Law, Bar Ilan University, Tel Aviv, Israel on
18-21 August 1996.
LLM (Lagos) SJD (Toronto). The comments and suggestions of my senior
colleague and UNESCO/Oliver Tambo Chair of Human Rights, Prof. Nasila S.
Rembe and my friend and former colleague, Paul D. Ocheje, doctoral candidate,
Osgoode Hall Law School, Toronto, Canada, are gratefully acknowledged.
Responsibility for any errors remain exclusively mine.
I'he most common examples of contractual relationships constituted between
states and state entities and private persons of foreign origin, referred to
throughout this article as 'state contracts', are oil and mineral concessions, joint
ventures, production sharing contracts, technical assistance contracts, agriculture
and manufacturing concessions, turnkey contracts, transfer of technology and
licensing contracts, engineering, construction and building contracts, loan and
other financing agreements as well as contracts for the construction and
2
operation of public utilities.
E Snyder 'Protection of private foreign investment: examination and appraisal'
(1961) 10 ICLQ 469 at 470.
'Ibid.
 XXX CILSA 1997

omnivorous desire for protection of his investment'.4 Consequently, state

contracts with foreign private parties, the subject of this paper, consistently
contain, inter alia, provisions for the settlement of disputes by arbitration5
and for the regulation of the contracts by a body of law acceptable to the
investor.

State contracts necessarily give rise to significant tension between the

interests of the foreign investor as a private party interested in, and com-
mitted only to the goal of, profit maximisation and, on the other hand, those
of the host 'developing' contracting states who enter into the contractual
relationship in response to the urgency of development facing their
countries and for the purpose of resisting the entrenchment of poverty and
misery among their peoples. One definite result of this irreconcilable
divergence of interest is that while the state contractor frequently desires
'flexibility' in the performance of the obligations created, the foreign
investor is usually content with nothing short of 'stability' and 'certainty'.
Past experience has shown the readiness of state contractors to exercise
their competence, prerogatives or rights in ways fundamentally incompatible
with the contractual rights and expectations of foreign investors. Ihis is
especially common and likely where those contractors seek to escape from
contracts whose terms in the end prove too onerous or injurious to their
development aspirations.
This paper examines a number of contemporary developments and trends in
the law and legal framework relevant to international arbitration of 'state
contract' disputes by which the 'international community' has responded to
the tendency of developing state contractors to 'abuse' their position in the
domestic and international legal orders. The developments and trends in
question range from the radical movement away from the absolute version
of the doctrine of sovereign immunity; and the expressed belief among
certain arbitrators and eminent scholars that it is now possible for parties to
state contracts to 'internationalise' their agreements; to the establishment of
the International Centre for the Settlement of Investment Disputes (ICSID)
under the auspices of the World Bank.
The discussion proceeds on the premise that it is fundamentally inadequate

4
bid. The fact that some of the developing countries feature a climate of economic
nationalism in which multinational corporations are seen as 'enterprises
committed to the perpetuation of an inequitable international division of labour'
has certainly not helped the cause of persuading foreign investors that ample
legal protection of their investments is not absolutely necessary. See B11 Weston
'The charter of economic rights and duties of states and the deprivation of
foreign-owned wealth' (1985) 75 AJIL 437 at 461.
5
Arbitration, as a dispute resolution mechanism, is preferred because, inter alia, in
contrast with judicial settlement of disputes, it allows foreign investors to
overcome difficulties resulting from the differing juridical status of the parties,
one being a sovereign and the other a private individual or corporation. See I
Dore Arbitration and conciliation under the UNCITRAL Rules: a textual analysis
(1986) at 4; and H loren 'Commercial disputes and their settlement: a factor in
business planning' In InternationalArbitration: 60 years of ICC arbitration- a
look at the future (1984) at 35ff.
 Internationalcommercial arbitration

to explain away these developments and trends as being merely the results
of the evolutionary process which international economic law must go
through; nor is it sufficient to say that they result from a search, by all the
parties whose interests are involved in international commercial arbitrations,
for the most efficient body of rules and institutional frameworks consistent
with the objectives of promoting foreign investment in particular and
international commerce in general.
The theses of this article are as follows. Firstly, each one of the develop-
ments and trends examined reveals both a resounding victory for the foreign
investor in its search for stability and, rather sadly, an indication that with
respect to reforms in the international legal order, 'they that have the power
of the purse dictate the tune'.
Secondly, there is a definite sense in which the international legal and
institutional responses under review appear lopsided in that they focus
solely upon providing the quality of stability to the contractual relationship
between the parties to state contracts. In the absence of any parallel
responses aimed at providing flexibility to the relationship, the conclusion
that the former responses are patently partisan appears both compelling and
inescapable.
Thirdly, and perhaps more importantly, the developments and trends give
birth to a legal regime of foreign investment which, in resolving the unique
problems presented by state contracts, follows an approach that does not
permit arbitrators and the national courts of the major centres of
international commercial arbitration effectively to recognise and accommo-
date the national interests and the 'right to development' of state parties
wherever possible. In so doing, that regime significantly discounts those
national interests and fails woefully to recognise the 'right to development'
in the critical context of state contracting and investment dispute resolution.
The academic enterprise of demonstrating the theses of this article must, of
necessity, entail a confrontation with the twin questions as to the extent to
which party autonomy should be respected in the conduct of international
arbitrations of foreign investment disputes, and the extent to which the law
and practice of international commercial arbitration should accord
recognition and deference to the national interests and 'right to develop-
ment' of the countries of the Third World. In critically exploring the
developments and trends discussed in this article and which effectively
constitute the answers that have thus far been provided by the governments
of capital-exporting countries, international commercial arbitrators and the
World Bank, it is hoped that the closely related theses of this article will be
demonstrated.

CHANGES IN THE CONCEPTION AND APPLICATION OF THE

SOVEREIGN IMMUNITY DOCTRINE
Reference to municipal courl, is important in international commercial
arbitrations, especially those of a non-institutional character, with particular
regard to conduct of the arbitral process. This is essentially because judicial
 XXX CILSA 1997

assistance may be required for, inter alia, securing interim or provisional

measures of protection, compelling witnesses and discovering documents.
The manner in which the courts of the 'forum state' treat sovereign parties
is, therefore, frequently material during such proceedings. More importantly,
reference to municipal courts will remain unavoidable as long as arbitrators
lack 'sovereign' powers equivalent to those of states as well as in the powers
6
necessary to ensure the proper conduct of the arbitration proceedings.
Sovereign immunity is a hallowed principle of international law under which
a state is essentially exempted from the jurisdiction of the courts of foreign
states. As originally formulated and applied, the doctrine was tantamount to
a legal stipulation that a sovereign state could not be made a party to
proceedings before the municipal courts of another state unless it had
consented to jurisdiction. In the common law tradition, the doctrine had its
origins in the acknowledgment of the need for international comity and the
evolution of the concept of national sovereignty. In that respect, it was
thought that the 'assumption of jurisdiction over a sovereign state without
its consent constituted an erosion of the principle of sovereign equality of
nations and an affront to its dignity'. 7 The honour of being the first to apply
the sovereign immunity doctrine in its absolute formulation belongs to the
United States' which was later followed by the United Kingdom.9 As if to
give the doctrine of sovereign immunity a sense of logical completeness,
absolute immunity from execution was also accorded to states by the courts
of the United States and the United Kingdom."0
The sovereign immunity doctrine became the subject of judicial hostility in
the developed countries in the years immediately following the end of World
War II which saw the increased participation of states in commercial
activities. Increasingly, judges became favourably disposed to applying the
doctrine only in those cases that had nothing to do with commercial
activities resulting both in the demise of the doctrine in its absolute
formulation and in the birth of the 'restrictive doctrine' of sovereign
immunity." Essentially, the latter doctrine postulates that a state loses its
immunity from suit where the underlying judicial or arbitral proceedings
originate from a commercial transaction to which the state or one of its
agencies was a party.
With respect to the particular context of international commercial arbitra-

'A Redfern & M Hunter Law and practice of internationalcommercial arbitration

(1991) at 306-07.
70Chukwumerije 'ICSID arbitration and sovereign immunity' (1990) 19 Anglo-
American LR 166 at 169.
'See Schooner Exchange v Macadden 7 Cranch 116 (1812).
'See Tbe Parliament Beige (1880) 5 PD 197.
"See 0 Chukwumerije n 7 above at 170.
"See the English cases of Baccus SRL v Servicio del Trigo 1958 1 QB 438; The
Philippine Admiral Case 1976 2 WLR 214; and Trendtex Corporation Ltd v The
Central Bank of Nigeria 1977 QB 529. As to the abandonment of the absolute
version of the sovereign immunity doctrine by the United States of America,
Canada and the Italy, see Chukwumerije n 7 above at 171ff.
 Internationalcommercial arbitration

tions, there is now an overwhelming weight of authority for the view that a
state party to an arbitration agreement is precluded from asserting its
immunity in order to frustrate the purpose of the agreement. The relevant
authorities consist of decisions of arbitral tribunals, 2 provisions found in
the European Immunity Convention, the 1978 State Immunity Act of the
United Kingdom, the Federal State Immunity Act of the United States of
America, and the pronouncements of some English and American courts.
Indeed, the effect of the above statutory provisions is that once a sovereign
had agreed in writing to submit a dispute to arbitration, it was estopped
from asserting its immunity whenever some issue pertaining to such arbitra-
tion came before the municipal courts of either the United States or the
United Kingdom irrespective of where the seat of the arbitration was
located.13

These developments, which owe their authorship to the governments of the

major capital-exporting states, must be evaluated keeping in mind the
interests that they were intended to serve. Without doubt, they aimed at
strengthening the protection available to foreign investors by shielding the
arbitration agreement from unilateral state action aimed at frustrating it.
These developments seek to eliminate, from the context of international
commercial arbitrations, the principle of sovereign immunity from suit
which, in the absence of these developments, would have been protective of
state contracting parties seeking to escape front their prior commitments to
arbitrate.
However, a plausible argument can be made for exempting developing
countries from a general application of the restrictive doctrine of sovereign
immunity." It is widely acknowledged that the birth of the doctrine was
informed by the increase in state participation in transnational commerce
and the conviction of the lawmakers of the developed world that when a
state stepped into the commercial arena, it was to be seen as performing a
'private act' and, therefore, disentitled to the protection ordinarily available
to it when engaged in acts having a public character. While the

"See the now famous Libyan nationalisation cases namely: Texaco Overseas
Petroleum Co et al v The Government of the Libyan Arab Republic 1978 17 1LM 3;
BP Exploration Co (Libya) Ltd v The Government of the Libyan Arab Republic
1979 ILR 297; and Libyan American Oil Co v The Government of the Libyan Arab
Republic (1981) 20 ILM 1.
13See Verlinden BV v Central Bank of Nigeria 488 F Supp 1284 (SDNY 1980) atfd
647 F 2d 320 (2d Cir 1981); s 9(1) of the State Immunity Act (UK); and GR
Delaume 'State contracts and transnational arbitration' (1981) 75 AJIL 784 at
787-88.
4
Differential treatment of Third World countries in recognition of their right to
development is nothing novel. For over three decades now, they have been the
beneficiaries of the famous Generalized Preferences (GP) established within the
International trading system regulated by the General Agreement on Tariffs and
Trade. According to one commentator, the principle of differential treatment
Iconstitutes a statement of the right of underdeveloped states to improve their lot,
and, at the same time, Implies a duty for the Industrialized countries to contribute
to the realization of that right'. See AA Yusuf 'Differential treatment as a
dimension of the right to development' in RJ Dupuy (ed) The right to
development at the internationallevel (1980) at 234.
 XXX CILSA 1997

public/private act distinction is entirely appropriate for the developed

countries given the economic history and structure of their societies, the
application of a doctrine founded on that distinction to developing
countries is indefensible for a number of reasons.
Firstly, the developing countries have, since their emergence into the
international scene, struggled with economic and living conditions to which
the populations of the developed countries can barely relate. Secondly,
because of the involuntary contact with Europe dating back to the sixteenth
century and the colonial experience that followed, developing countries
feature an underdeveloped entrepreneurial class to which the provision of
goods and services as well as the exploitation of natural resources cannot be
trusted. Accordingly, engaging in acts of a commercial character,
traditionally regarded as 'private' in western society, is something with
respect to which third world governments have no choice. In other words,
state involvement in the economy not only as a regulator but also as a
'trader' is an absolute necessity in many developing countries. It is,
therefore, submitted that such governments cannot be fairly said to be
engaged in acts of a private nature when they enter into transactions having
an underlying commercial content in the pursuit of national objectives and
aspirations."
There is a further reason why a general application of the restrictive doc-
trine of sovereign immunity is questionable. While the reasoning that
informed the absolute doctrine of sovereign immunity can properly be said
to have been universal in terms of being common to all the state actors at
the time of its birth, that which informs the restrictive version of the doc-
trine cannot be said to be so commonly shared. The best illustration of this
lack of consensus is the position of the former and present socialist states to
the effect that a state does not cease to be sovereign merely because it
performed functions traditionally reserved for private persons in non-
socialist legal systems. 6 There is also no evidence indicating that the
countries of the Third World have accepted the restrictive doctrine as
representing contemporary international law. 17

ARBITRATION AGREEMENTS IN STATE CONTRACTS

The competence of contracting parties to determine what law or laws
should govern their relationship as well as the arbitration of any disputes
arising therefrom is one of significant antiquity. Such competence is an all-

15
See AO Adede 'Loan agreements with foreign sovereign borrowers: issues of
sovereign immunity, applicable law and settlement of disputes' (1987) 3 Lesotbo LJ
101 at 119.
6
hat position was best expressed in the spurning of the restrictive doctrine of
sovereign immunity by Soviet legal theory on the basis that a distinction cannot
be made between the acts of a socialist state which are of a public nature and
those which are of a private nature. See C Osakwe 'A Soviet perspective on
foreign sovereign immunity: law and practice' (1983) 23 Va J Int'l L 13; and E
Morgan 'Foreign state debtors in domestic courts: a theory of sovereign Immunity'
(1989) 3 BFLR 287.
17AO Adede n 15 above at 108ff.
 Internationalcommercial arbitration

important part of the parties' 'autonomy of will'. Accordingly, the parties

may choose the national law of the state contracting party, the general
principles of law, the 'lex mercatoria',public international law or a combi-
nation of those sources of law.18For the past three decades, however, the
trend in state contracts has been to make stipulations of governing law that
seek to avoid the application of the municipal law of the contracting state or
attempt to keep that law frozen for the duration of the particular contract.
This trend results from the foreign investors' mistrust of state contracting
parties and an acknowledgment of their competence, by virtue of the
sovereign status, to make changes in their municipal law without reference
to the foreign investor.
In this part of the article, an attempt is made to evaluate the efficacy and
appropriateness of the legal devices adopted by foreign investors to take
their disputes and the ensuing arbitral process beyond the reach of the
sovereign party's national law or beyond any unilateral changes therein.

The law governing the arbitral process (/ex arbitri)

The protagonists of the 'delocalisation' theory of arbitration, consisting of
both scholars and practitioners, see the law of an arbitration as consisting of
a set of procedural rules which, in the case of an international commercial
arbitration, is made by the parties or by the arbitral tribunal on their
behalf. 9 They suggest therefore that arbitral awards may be detached from
the law of the country where the proceedings t.ake place and yet remain
enforceable.?0 This recent and radical thinking would clearly support the
efforts of foreign investors to ensure that the conduct and validity of
arbitrations to which they are party is not dependent on the law and public
policy sensitivities of national legal systems, including those of state con-
tracting parties.
However, the 'delocalisation' theory is not representative of mainstream
thinking which remains inclined to the traditional view that the mandatory
provisions of the lex loci arbitri (the law of the place of arbitration) govern
the validity of an arbitration. 21 The fact, therefore, is that irrespective of the
contracting parties' stipulation to the contrary, the law of the arbitration
includes the mandatory norms of the seat of arbitration, subject to the
caveat that those mandatory norms must not be inconsistent with trans-

'8See AnnlDI vol 58 tome 2 at 195 (1979).

19
Rcdfem & Ilunter n 6 above at 82. See also Award of the Arbitration Tribunal in
the arbitration between Saudi Arabia and the Arabia American Oil Co (ARAMCO)
(1963) 27 ILR 117 at 155-56.
2See, for example, J Paulsson 'Delocalization of international commercial
arbitration: when and why it matters' (1983) 32 ICLQ 53 at 57.
21
FA Mann forcefully articulated the position thus: 'Every right or power a private
person enjoys is Inexorably conferred by or derived from a system of municipal
aw which may conveniently and in accordance with tradition be called lexfori,
though it would be more exact (but also less familiar) to speak of the lex arbitri'.
Mann Lex facit arbitrum' in P Sanders (ed) International arbitration: Liber
Arnicorlumfor Martin Domke at 157. See also Hirsh 'The place of arbitration and
the lex arbitri' (1979) 34 ArbJ 43.
 XXX CILSA 1997

national minimum standards of justice.22 Thus, while parties may choose

the law governing their contract and even choose some of the procedural
rules applied by arbitrators, they cannot effectively choose the entire body
of law governing the arbitration, except indirectly through choice of its
23
situs.

So long as foreign investors ensure that any arbitration with a state con-
tracting party does not take place within the territory of that party, the above
position does not, prima facie, neutralise the devices frequently employed
by the investors to shield their interests from the municipal law and public
policy of the sovereign contractor. However, it is worth noting that many
national legal systems prohibit arbitration of disputes involving sensitive
public interests such as contracts with state agencies.24 However, where
the arbitration is 'international', in which case the public interests involved
are not those of the 'forum state', the lex loci arbitri would show no
deference to the state contractor treating the parties to the arbitration as
2
two private parties who contracted at arm's length. 5
Accordingly, it must be conceded that the practice of taking arbitrations of
investment disputes outside the territories of the state parties is an effective
way of placing them beyond the reach of such parties' national law and
public policy thereby enhancing the prospect of 'equalising' the disputing
parties in proceedings before the arbitrator. It is, however, disturbing that
while the municipal laws of the developed countries 26 recognise the non-
arbitrability of commercial disputes implicating sensitive public interests of
the 'forum' state, those laws would be indifferent where the public interests
involved are those of developing countries who have contracted with
foreign investors. If there is indeed something in the nature of national
interests that makes them deserving of some differential treatment and if
indeed all states are equal in international law and relations, then the
principles and demands of international comity argue for a modification in
the municipal laws of the major arbitration centres to accommodate the
national interests and aspirations of state contractors.27

'See 0 Chukwumerje Cboice of law in international commercial arbitration

(1994) at 88ff; and J Paulsson 'Arbitration unbound: ,ward detached from the law
of its country of origin' (1981) 30 ICLQ 358 at 369ff.
3William W Park 'The lex loci arbitri and international commercial arbitration',
(1983) 32 JCLQ 21.
z'For the position in France, see T Carbonneau 'The elaboration of a French
doctrine on international commercial arbitration: a study in Liberal civilian
creativity' (1980) 55 Tulane L Rev 1 at 29-30.
2W Park n 23 above at 29-30.
2'1ihe most famous centres of international commercial arbitration are located in
these countries. See Redfcrn & Hunter n 6 above at xiii.
z7Professor William Park, after stating that the courts in a forum state should
exercise significantly greater control over those arbitrations in which national
policies are implicated, asserts that international commercial arbitration is less
likely than domestic arbitration to Implicate such policies. He further submits that
even If an international arbitration touches upon some national interest or policy,
'a national legal system still may accommodate the needs of international trade
and investment by refraining from exercising supervision over the legal merits of
 Internationalcommercial arbitration

Even more disturbing is the fact that some countries are now 'receptive to
the idea of freeing international arbitrations from control of national
arbitration laws of the place of arbitration'.2 A good example of that trend
is provided by Belgium where Article 1717 of the CodeJudtciareexcludes
some international arbitrations conducted in that country from the supervis-
ory control of Belgian courts by providing that:
The courts of Belgium may be seized of a request for annulment only if at
least one of the parties to the dispute decided by the arbitral award is either a
physical person having Belgian nationality or residence, or a legal entity
created in Belgium or having a branch or any other establishment In
Belgium.
The effect of this provision is that judicial review of an award resulting from
an international arbitration which took place in Belgium is not available in
that country. 29 Similarly, recent French judicial practice reveals support for
the eradication of national restrictions on the international arbitration
process." And of course there is no better illustration of the practice of
delocalisation than the conduct of arbitrations under the auspices of the
International Centre for the Settlement of Investment Disputes (ICSID).3 '

The law governing the contract (ekx contractus)

It should be pointed out from the outset that the governing law of the
contract which regulates the determination of the dispute on the merits is
distinct from, and independent of, the law which regulates the arbitral
32
process (lex arbitri). Mention has also been made of the fact that the
desire of foreign investors in this respect is to shield their contract from the
municipal law of the state party even if the net result is uncertainty. 33 On
the question of governing law, arbitration clauses are of different types and
thus present different scenarios.
Where there is no stipulationof governing law
The first scenario worthy of consideration is where the contracting parties
omit a definite statement as to what law should govern their contract in the
event of a dispute. A good example of this scenario is presented by a model
arbitration clause presently in use in the Nigerian oil industry. The particular
contract is the 55 percent participation agreement between the Nigeria
National Petroleum Corporation (NNPC), Texaco Overseas Petroleum Co

the arbitration'. Accordingly, he does not subscribe to the accommodation of

national interests by a municipal order in dealing with international commercial
arbitrations. W Park n 23 above at 30. If that emerges as the dominant view, the
implications for those states frequently involved in international commercial
arbitrations is obvious.
28O Chukwumerije n 22 above at 92.
91bId.
'See T Carbonneau 'Book review (1984) 24 VaJ Int't L 527 at 530.
31
See discussion of the origin and nature of ICSID arbitrations at 77-79.
32
See Award of the Tribunal in the ARAMCO Arbitration n 19 above.
3
1See discussion of the now famous internalisation theory' nn 40-48 below, and
accompanying text.
 XXX CILSA 1997

(Nigeria) Ltd and Chevron Oil Co (Nigeria) Ltd.34 A perusal of the arbitra-
tion clause in the contract immediately reveals the glaring omission of a
stipulation of the governing law of the agreement. This is surprising con-
sidering that a common feature of contemporary economic development
agreements, especially those relating to the exploitation of natural
resources, is the stipulation of the municipal law of the contracting state as
the lex contractus. The question, then, is what law governs a state contract
that makes such an omission.
There is no apparent consensus as to what law is applicable by arbitrators
where there is no stipulation of the law applicable to the agreement. In the
fairly recent dispute between Revere Copper& Brass Inc v Overseas Private
Investment Corp (OPIC),3 5 the members of the arbitral tribunal were
divided on the point. While the majority decided that the principles of
public international law applied to the agreement in so far as the govern-
ment party was concerned, the minority took the view that the two parties to
the dispute being corporations incorporated in the state of Maryland, the
law applicable was the law of the United States of America. Closely analog-
ous to the position of the majority in the above case is that taken by Pro-
fessor Rene Dupuy, acting as sole arbitrator, in the first of the 'Libyan
trilogy', Texaco v Libya,3' which was to the effect that the mere submission
of contracting parties to arbitration is indicative of an intention to
'delocalize' or 'internationalise' their relationship in terms of having it
governed by international law rather than by municipal law.37 In reaching
this conclusion, Professor Rene Dupuy relied on part of the arbitration
agreement between the parties which provided for the appointment of a
sole arbitrator by the President of the International Court of Justice where
the parties failed to appoint two arbitrators, one each. He held further that

"'he contract is dated 6 January 1978. The arbitration clause reads: 'A.The NNPC
and the companies agree that if a difference or dispute arises between the NNPC
on the one hand and the companies or either of them on the other hand, or
between any of them and the operator, concerning the interpretation or perform-
ance of this agreement, and If the parties hereto fall to settle such difference or
dispute by amicable agreement, then either party may serve on the other a
demand for arbitration. Within 45 days of such demand being served, each party
shall appoint an arbitrator and the two arbitrators thus appointed shall within a
further ten days appoint a third arbitrator who shall be of a nationality different
from that of either of the parties or the arbitrators ... and If the arbitrators do not
agree on the appointment of such third arbitrator, or if either party falls to
appoint the arbitrator to be appointed by it, such arbitrator shall be appointed by
the President or Vice-President of the International Court of Justice on the
application of either party ... and when appointed, the third arbitrator shall
convene meetings and act as chairman thereat ... The arbitration rules and
procedures and the award of the arbitrators shall be determined by a majority of
the arbitrators, or in the absence of the agreement of any two arbitrators, by the
chairman alone. The arbitration award shall be binding upon the parties and the
expenses of the arbitration shall be borne by the parties in such proportion and
manner as may be provided in the award. B. Save as aforesaid, the Nigerian
Arbitration Act shall apply.'
"5(1978) ILM 1321.
'Note 12 above.
37
See paras 40-45.
 International commercial arbitration

'internalisation' would result in cases of absence of choice of 'substantive'

law if the contract in question is an economic development agrcement. 38 In
fact, this was the view followed in the Revere Copper Arbitration39 where
the majority found it plausible to hold that a state contract was 'inter-
nationalised', in the absence of either a reference to international law or to
general principles of law, merely because it involved the exploitation of
natural wealth and resources.4"
It has been observed that the classification of certain state contracts as
economic development agreements and the attribution of an international-
ising effect to them appears designed specifically for contracts to which
developing countries are party. 41 In a scathing critique of the 'interna-
tionalisation' theory, Chukwumerije has noted that:
It appears that only contracts involving developing countries would satisfy
the test for designating a contract as an economic development agreement.
More Instructive, the term is usually defined to exclude contracts involving
developed countries. This yields the absurd result whereby the legal impli-
cation of a contract would vary depending on whether the contract was
entered Into with a developed or developing 4 country. This discriminatory
effect of the theory renders it objectionable. f

To the advantage of foreign private contracting parties and the inevitable

detriment of developing countries, the 'internationalisation' theory
espoused by Professor Rene Dupuy 43 and the majority in the Revere Cop-
per Arbitration44 disregards the public international law presumption
against limiting the sovereign authority of states. While Fatouros has
criticised the theory on the basis, interalia, that it casually reverses what is
4
a fundamental and widely accepted presumption in international law, 5
Chukwumerije has suggested that
given the restriction that the international standards imported by interna-
tionalization would have on the sovereign powers of a State, the existence of
a clear and unequivocal evidence of an intention to Internationalize 46 is
necessary before international law could be applied to a State contract.
There is no gainsaying that such evidence was absent in those cases which

38bid.
"Note 35 above.
40It is pertinent to note here that Rene Dupuy's decision In Texaco v Libya
accepting the possibility of regulating state contract relations by a body of
international law, was entirely novel. Prior to that decision, the dominant view
was that 'the system of international law was purely an inter-state system in which
an individual or a company has no legal personality'. See E Paaslvirta,
'Internationalization and stabilization of contracts versus state sovereignty' (1989)
60 BYIL 315 at 321ff.
41
Chukwumerlje n 22 above at 157.
42
1bid.
4
Note 12 above.
'Note 33 above.
45
See A Fatouros 'International law and the internationalized contract' (1980) 74
AJIL 134 at 136.
"6Chukwumerile n 22 above at 157.
 XXX CILSA 1997

currently stand as authority for the internalisation theory. Yet almost all the
modem text writers continue to express the opinion that state contracts can
be internationalised in specified circumstances.4 7 Even Chukwumcrije in
his critique of Dupuy's award assumes the possibility of effectively inter-
nationalising such a contract. 48

Furthermore, the said theory also disregards a presumption of contemporary

international law in favour of the application of the domestic law of the
contracting state in the absence of an express stipulation to the contrary.
This argument is fortified by the United Nations resolutions on permanent
sovereignty over natural resources and the establishment of a New Interna-
tional Economic Order 9 and by the decision of the Permanent Court of
International Justice in the Serbian Loans case.50 This argument is not
adequately confronted by the submission of Delaume that 'the presumption
that in the absence of a choice of law, state contracts should be governed by
the law of the state involved produces a rigidity of results and does not
correspond to reality'." For this writer, it is sufficiently gratifying that
implicit in Delaume's submission is an admission of the fact that until
recently, a presumption did arise in favour of the application of the munici-
pal law of state contracting parties in the particular scenario under dis-
cussion.
Wbere internationallaw is the designatedgoverning law
There is now a consensus of academic opinion that the parties to state
contracts can properly and effectively provide that their contract be gov-
erned by international law.' 2 However, the debate rages on as to the
effectiveness of the various means by which proponents of the
'internationalisation' theory had thought that this result could be
achieved.53 In the light of this consensus, the material question is whether
international law has any body of rules designed for the regulation of
commercial relations between states and individuals or between individuals
of different nationalities. If the compelling answer to this question is in the
negative, then foreign investors inevitably obtain inadequate protection

47
The only exception seems to be Professor Ian Brownlle. See I Brownlle Principles
of public internationallaw (1990) at 550-51.
4
Chukwumerije n 22 above at 155ff
49
Sce General Assembly Resolutions 523 (VI) of January 1952; 626 (VII) of
December 1952; 1314 (XIII) of December 1958; 1803 (XV) of 1960; 2158 (XXI) of
1966; 2386 (XXIII) of 1968; 2692 (XXV) of 1970; 3016 (XXVII) of 1972; 3171
(XXVIII) of 1973; 3201 (S-VI) of 1974; 3281 (XXIX) of 1974; and 3362 of 1974.
51PCIJ Series A Nos 20/1, Judgment 14 July 12 1929. In that case, the court took
the position that a state could not have intended to make the validity of its
obligations subject to any law other than its own.
51Delaume n 13 above at 798.
52See, for example, Chukwumerije n 22 above at 154; Redfern & Hunter n 6 above
at 106; C Greenwood 'State contracts in international law - The Libyan Oil
arbitration' (1982) 53 BYIL 27 at 48-53; L Sohn & R Baxter 'Responsibility of states
for injuries to economic interests of aliens' (1961) 55 AJIL 545; R Jennings 'State
contracts in international law' (1961) 37 BYIL 156 at 181.
"1Se Chukwumerije n 22 above at 155ff.
 Internationalcommercial arbitration

under the aegis of international law. In his unusually zealous articulation of

the 'internationalisation' theory, Dupuy clearly saw in the corpus of
international law a collection of substantive rules to which parties to state
contracts could submit their disputes. According to him:
Treaties are not the only type of agreements governed by international law...
Contracts between States and private persons, under certain conditions,
come within the ambit of a particular
5 4 and new branch of international law:
the International law of contracts.
Unfortunately, the only substantive rule that the award seemed to have
deduced was the principle of pacta sunt servanda (sanctity of contracts).
According to Fatouros, this singular deduction (of little assistance for any
law of contracts, whether national or international) is bound to start from
this principle but it cannot legitimately stop there." To the extent that the
learned sole arbitrator did stop there, his award cannot be accepted as a
correct elaboration of the legal position with respect to the choice of law
question where parties to sate contracts resort to international law.' 6 More
pertinent to the present inquiry is the observation by Brownlie that there is
no 'international law of contracts'.' 7 Furthermore, while the need for an
international law of contracts or a lex mercatoria is now almost generally
accepted, it is similarly admitted that the idea of such a law is very clearly
only a vision of the future. As Mann put it:
What this so called law is or should be is a complete mystery. It is usually said
that it comprises uniform law embodied in or derived from international
conventions, trade usages, custom and ideas of business fairness, efficacy or
reasonableness. The object frequently is to dispense with the conflict of laws
which is said to create insoluble problems and to lead to artificial and
unrealistic58results. It is hardly necessary to emphasize that no such body of
law exists.
It is arguable, therefore, that where parties to a state contract specify
international law as the governing law of their contract, that provision
should, in the event of an arbitration arising from that contract, be treated as
a nullity given its reference to a non-existent body of rules. The contract
thus yields itself to treatment in the same way as an agreement that omits to
state the lex contractus.It follows that the municipal law of the contracting
state should be applied by the arbitrators in accordance with the earlier

'Texaco v Libya Arbitration note 12 above at par 32.

5
"Fatouros n 45 above at 135.
"Professor DW Bowett has also observed that the recurrent recourse to the maxim
pacta sunt servanda is scarcely adequate. In his view, the maxim is at such a level
of generality as to be misleading (since all legal systems recognise exceptions to
the rule when termination is justified) and even erroneous In that, so expressed,
the maxim fails to take account of the fundamental distinction between private
and public (or state) contracts. Bowett 'State contracts with aliens: contemporary
developments on compensation for termination or breach' (1988) 59 BYIL 49 at
55.
7
5Brownlie n 47 above at 548-9.
"FA Mann 'Private arbitration and public policy' (1985) 4 Civil Justice Quarterly
257 at 264. See also, M Bartels Contractualadaptation and conflict resoiution
(1985) at 110.
 XXX CILSA 1997

9
mentioned principle of contemporary international law.
There is no gainsaying that the attempts to appeal to an international body
of rules in the settlement of foreign investment disputes is a response to the
orthodox mode of determining the lex contractus which essentially con-
sisted of selecting a national system of law by applying the conflict rules of
private international law.'" That orthodox mode has been the subject of
scathing criticism which Redfem and Hunter have summed up as suggesting
that the
search for the proper law is out of touch with the realities of modern
international trade; and that what is needed is not a particular national
system of law, but a modern law merchant' which has been variously
described as 'international law
61 of contracts', 'International lex mercatoria',
and International trade law.
In seeking the recognition and accommodation of the peculiar position and
interests of state contracting parties, I am not averse to the idea of develop-
ing an international lex mercaloria.62 This is because of the fact, ignored
by many, that a modem law merchant, as contemplated, is quite capable of
favourably accommodating the national interests and right to development
of developing countries, the case this article seeks to advance. This view is
firmly and plausibly founded on the truism that the principal legal systems of
the modern world effectively recognise a state party's wide, sovereign or
prerogative powers to vary or terminate its contractual obligations in the
public interest.6 3 Accordingly, if, as is expected, the emergent international
lex mercatoria is to be built up from the 'principles of law common to
civilized nations', then the optimism that state interests can be properly and
effectively accommodated within such a body of rules is far from being
misplaced.

See n 50 above and accompanying text. A limitation in the reasoning of both

Dupuy and Fatouros should be pointed out here. As earlier Indicated In this
paper, Dupuy failed to elaborate what norms constitute the 'international law of
contracts' which he held applicable to 'internationalised' state contracts. In the
same vein, Fatouros In his critique of the 'internatlonalisation' theory, as
espoused by Dupuy, did not mention, let alone discuss, what substantive rules
applied to state contracts not specifically governed by the state party's municipal
law but rather by some type of 'international law'. The desperate need for a clear
elaboration of the substantive rules applicable to what we may refer to as
'dclocalised agreements' must, therefore, be acknowledged.
6
Redfern & Hunter n 6 above at 117ff
611bid.
'2This Is notwithstanding that the employment of the l/ mercatoria, in the
arbitration of state contract disputes, must be treated with caution given that, in
its present state, it offers few predictable rules and confers wide discretion on
arbitrators. See Bowctt n 56 above at 52.
61The Internationalencyclopedia of comparative law, based on a review of the
legal systems of the United Kingdom, United States of America, France, West
Germany and Italy, puts the matter thus: 'The most radical of special prerogatives
enjoyed by the administration is the right to terminate the contract unilaterally,
when the public interest so requires. This drastic power is a widespread feature of
national systems of procurement, and is evidently considered necessary in order
to maintain the freedom of action of public authorities.' See International
encyclopedia et al, vol 2 at 40.
 Internationalcommercial arbitration

Wbere the stateparty's municipal law is the specified governinglaw

With regard to agreements for the exploitation of natural resources and
other economic development agreements, the contemporary practice is for
the agreements to expressly specify the state party's municipal law as the lex
contractus. This practice, however, brings to the fore the important ques-
tion of the legal effect of changes in the applicable law subsequent to the
parties' execution of their contract. This question is important in the context
of foreign investment dispute resolution because an indisputable attribute of
the territorial sovereign is the competence to legislate for the 'general good'.

The general rule applicable to state contract arbitration is that the lex
contractus is the specified law as it stands at the time of the arbitration, not
merely as it was at the time the contract was made. The attempts continually
made by foreign investors to take their contracts beyond the reach of the
national law of state contracting parties can actually be construed as a
recognition, by those investors and their legal advisers, of both the legislat-
ive competence of the state party and the said general rule.
In those cases where the foreign investors have been unsuccessful in
securing the incorporation into their contracts of a choice of law provision
that could have the effect of 'intemationalising' the contract, they have
resorted to certain specially drafted clauses intended to insulate the con-
tracts from changes in the law of the state party that may be, at leastprima
facie, unfavourable to the investors' interests. 64 Those clauses, now popu-
larly referred to as 'stabilisation clauses', are the focus of the discussion
below.
6
Stabilisationclauses
A good example of these clauses, which are most commonly found in
'economic development agreements', can be seen in the contract between
the government of Libya, on the one hand, and Texaco Overseas Petroleum
and California Oil Company on the other. Clause 16 of that contract pro-
vided that 'the contractual rights shall not be altered except by mutual
consent of the parties'. The final part of the same clause then stipulated that:
This concession shall throughout the period of its validity be construed in
accordance with the Petroleum Law and the Regulations in force on the date
of execution of the agreement or amendment .... Any amendment to or
repeal of such Regulations shall not affect the contractual rights of the
company without its consent.
It thus appears that within the context of state contracts which specifically

64According to Chukwumerije n 22 above at 144 'stabilization clauses ... are

designed to freeze the essential provisions of state contracts by prohibiting any
legislative or administrative act that derogates from, or Is otherwise inconsistent
6
with, the provisions of the contract or the legal environment of the transaction'.
Dr SKB Asante has pointed out that stabilisation clauses are aimed at, inter alia,
(1) expropriation, nationalisation and any other form of state intervention in the
enterprise; and (2) the imposition of any fiscal changes in the general industrial
or commercial sectors in excess of the fiscal charges provided in the contract.
Asante 'Stability of contractual relations in the transnational investment process'
(1979) 28 ICLQ 401 at 409.
 XXX CILSA 1997

provide for the application of the state party's municipal law while also
incorporating a stabilisation clause, the classical question is whether the
state party would be within its rights if it changed the content of its law as it
affects a foreign investor without the latter's consent.
In confronting that question, Brownlie took what may be said to be the
middle ground when he said:
The legal significance of such clauses [stabilization clauses] Is inevitably
controversial, since the clause Involves a tension between the legislative
sovereignty and public interest of the State party and the long term viability
of the contractual relationship."
That position, devoid of certainty or definitiveness, does no more than beg
the question, probably in its attempt to avoid either one of two seemingly
extreme but more definite alternatives. The first of those alternatives is the
position taken by the proponents of foreign investment protection who
contend that the state contract, including the agreement to arbitrate, must of
necessity be sustained by the universally accepted principles ofpacta sunt
servanda, estoppel and good faith. 67 The logical conclusion which the
proponents' arguments yield is that a state contract which incorporates both
an arbitration agreement and a stabilisation clause is, in effect, immune from
interference by a competent legislator."
At the other extreme is the position with which the capital-importing states
naturally identify. In simple terms, it consists of the claim that stabilisation
clauses are invalid as being repugnant to, or inconsistent with, either the 69
contemporary principle of permanent sovereignty over natural resources,
or the obvious fact that beyond considering the immediate pecuniary
benefits of an agreement as a foreign investor would, a state contracting
party must consistently appraise the
70
repercussions of the agreement on the
general well-being of the people.
But what is the proper legal position that an international commercial

"Brownlie n 47 above at 551.

'See eg, Martin Domke 'Foreign nationalizations' (1961) 55 AJIL 585. P Well
articulated the position even more bluntly when he stated that: 'In subscribing to
a protection clause, the host government has thus created to the benefit of the
other contracting party a legitimate expectation, which the government may not
subsequently frustrate without infringing the principle of good faith.' P Well
quoted in W Peter Arbitration and renegotiation of internationalinvestment
agoeements (1986) at 144. See further, Hans Wehberg 'pacta sunt servanda'
(1959) 53 AJIL 775 at 786; F Sheikh The legal regime offoreign investment in the
Sudan and Saudi Arabia: a case study of developing countries (1986) at 257; Z
Kronfol Protection of foreign investment (1972) at 85.
'See Paasivirta n 40 above at 329.
'See n 49 above.
'See E Arechaga, 'Application of the rules of state responsibility to the
nationalization of foreign-owned property' in K Ilossain (ed) Legal aspects of the
new international economic order (1980) 220 at 230; S Asante, 'Stability of
contractual relations in the transnational investment process' (1979) 28 ICLQ 401
at 403; M Sornarajah The pursuit of nationalizedproperty (1986) at 94; and R
Geiger 'The unilateral change of economic development agreements' (1974) 23
ICLQ 73 at 77.
 Internationalcommercial arbitration

arbitrator should take when confronted with a stabilisation clause? A

definite answer to this question is compelling for a middle ground such as
that taken by Brownlie does not assist an arbitrator in any meaningful way. It
is submitted that the critical issue here is whether the principle of pacta
sunt servanda can be properly held applicable to state contracts. The
relatively inflexible application of the principle in the public international
law of treaties and in the private law of contracts (involving private citizens)
is defensible on the bases of fundamental fairness, good sense and justice.
This is largely because while the state parties to treaties have the same
obligations under international law and usually have similar objectives,
private parties to contracts also contract for the singular purpose of profit
maximisation, represent similar interests, and bear similar burdens in
municipal legal orders.7
However, the same affinity of purpose, interests and legal burdens is absent
in the realm of state contracting.72 At a minimum, this argues for the view
that with respect to state contracts, the principle of pacta sunt servanda
can only be properly applied subject to far-reaching qualifications. Sup-
porting this view, Mann has pointed out that the arguments seeking to
subject state contracts to the principle 'are opposed to the daily and
universal experience of mankind and to the requirement of good sense and
73
justice'.
In this regard, it is noteworthy that it is settled law in the United States, the
United Kingdom and other developed countries that stabilisation clauses
are, at a minimum, unenforceable. 74 The American position is best exemp-
lified by the position taken by the US Supreme Court in the case of Georgia
v City of Chattanooga7 where it bluntly stated that:
The taking of private property for public use upon just compensation Is so
often necessary for the proper performance of governmental functions that
the power is deemed essential to the life of the State. It cannot be surren-
76
dered, and, if attempted to be contracted away, it may be resumed at will.

Under the English common law, the 'absolute' power of the state unilaterally
to interfere in contracts with private individuals is enshrined in the twin
concepts ofpower of eminent domain andpolice powers. On their part, the
English courts have been consistent in upholding that power without any

71
See 0 Chukwumerje n 22 above at 145-146; and C NJenga 'Legal regime of
concession agreements' (1967) East Afr LJ 100.
72Sce Dickinson 'Analogy between natural persons and international persons in the
law of nations' (1916) 26 Yale LJ 572 at 588.
73
Mann 'State contracts and state responsibility' (1960) 54 Afll. 572 at 588.
74
DW Bowett n 56 above at 57. Writing along the same lines, Esa Paasivirta has
recently noted that 'it will have become clear to oil companies that the UK and
Norwegian Governments are no more willing than their OPEC counterparts to
stick rigidly to contracts that they deem unreasonably disadvantageous and that
there Is no absolute constitutional protection In either country for the principle
of pacta sunt servanda'. See Paasivirta n 40 above at 329-30.
75464 US 472.
76
1bid at 480.
 XXX CILSA 1997

significant qualifications. For example, in the case of Czarnikow v

Rolimpex,7 the Court of Appeal remarked that
... a government cannot fetter its duty to act for the public good. It
cannot bind itself 78 - by an implication in the contract - not to perform
its public duties.
It is particularly striking that in spite of the above, no commentator has
suggested that the legal systems of the developed countries are unsuitable
for the needs of local and international commerce or hostile to foreign
investments.
The compelling conclusion, therefore, is that stabilisation clauses in state
contracts are invalid as a matter of private and public international law to
the extent that they seek to restrict significantly the competence of a
territorial sovereign to either legislate or otherwise act for the 'public good'.
Inherent in that conclusion is a tacit recognition and acceptance of the fact
that 'the State has always to take the public welfare into consideration for it
only contracts as the guardian of the nation's welfare'. 9 Furthermore,
given that 'foreign investors in their home countries contract with their
home governments on a relatively insecure basis',' the position articulated
here on the legal status of stabilisation clauses is not, and ought not to be
perceived as, inconsistent with the objective of promoting foreign
investments in particular and transnational commerce in general.
Sadly, international arbitral jurisprudence does not show a willingness on
the part of international arbitrators to construe stabilisation clauses as being
invalid for the purposes of accomplishing the objectives intended by those
foreign investors successful in procuring the incorporation of those clauses
into state contracts. That unwillingness is best illustrated by Dupuy's
interpretation of the relevant 'choice of law' provisions in the famous
Texaco Arbitration."'In determining the rights and obligations flowing out
of Libya's nationalisation of Texaco's assets, Dupuy concluded that the
nationalisation was an illegal act under international law, whether or not it
was accompanied by appropriate compensation, solely because it was
directly inconsistent with the stabilisation clause. That conclusion paved the
way for his order of restitutio in integrum. Although there is an emerging
academic consensus that Dupuy's conclusion and the accompanying order
were wrong in that they went too far,82 there is some recent indication that
international arbitrators think otherwise. For example, recently, the Iran-US
Claims Tribunal, like Dupuy, took the view that stabilisation clauses
'preclude a sovereign during the stated period from exercising the rights it
otherwise possesses under international law to take an alien's property for a

7(1977) 3 WLR 686.

78
1bid.
79
DW Bowett n 56 above at 59.
83
ibid.
"Note 13 above.
'See Chukwumerije n 22 above at 147; and Redfern & Hunter n 6 above at 105.
 Internationalcommercial arbitration

3
public purpose, and without discrimination and for a just compensation'.,

One is left to wonder why international commercial arbitrators would seem

to favour a legal position on the effect of stabilisation clauses that is incon-
sistent with good sense, with the trite interpretation of contemporary public
international law, and even with the law relating to public contracts in the
developed countries. What is more disturbing is the fact that this position
fails to acknowledge the predicament of many developing countries facing a
continuing crisis of poverty and underdevelopment.8 4

ARBITRATION UNDER THE AUSPICES OF THE ICSID

This article would be incomplete without a critical review of the Convention
on the Settlement of Investment Disputes between States and Nationals of
other States. 3 The convention resulted from the efforts of the Interna-
tional Bank for Reconstruction and Development (otherwise known as the
World Bank) and it is the only convention which deals exclusively with
issues relating to state contract arbitrations. The convention establishes an
International Centre for the Settlement of Investment Disputes (ICSID). It
appears that the centre was 'created to fill a gap in the mechanism for
settling international disputes - a gap that made it difficult for a government
and a foreign investor to find a mutually acceptable forum to settle disputes
that might arise between them'." Undoubtedly however, it was intended to
'depoliticize investment disputes' and thereby facilitate capital flows across
national boundaries to the ultimate benefit of the capital-importing states of
the Third World.8 7 The centre provides arbitration and conciliation
facilities to qualifying contracting parties.
A few of the provisions of the Convention are worthy of specific examination
to demonstrate the theme of this article. By virtue of article 25(1), the
centre's jurisdiction derives solely from the consent of contracting parties.
That consent, which must be in writing, may itself derive from an arbitration
clause or from a written agreement between parties to submit an existing
dispute to the centre. More importantly, the same article stipulates that once
consent to ICSID arbitration has been given, none of the parties can
unilaterally withdraw its consent. The logical result is that a state contracting
party cannot frustrate arbitration as agreed by the parties by effecting

8(1987) Iran-USCTR3 at 65.

'One plausible explanation may be found in a statement recently made by Dr
Ibrahim Shihata of the World Bank by which he conceded that international
commercial arbitration 'is still largely dominated by Individuals whose cultural
backgrounds and values may bring them closer to foreign enterprises [from
developed countries] than to host governments in developing countries'. I
Shihata, 'The Institute of International Law's Resolution on Arbitration between
States and Foreign Enterprises - a comment' (1990) 5 ICSID Review 60 at 68.
nSee (1966) 575 UN7S at 160 No 8359.
96GR Delaume Transnattonalcontracts:applicable law and settlement of disputes.
Law andpracticeBooklet I, at 133.
7v
1 Shihata 'Towards a greater depoliticization of investment disputes: the role of
ICSID and MIGA' (1986) I ICSID Review 1; and Chukwumerije n 7 above at 167.
 XXX CILSA 1997

changes in its municipal law. A contractual stipulation designating that body

of law as the lex contractus makes no difference in this regard. In effect,
what foreign investors could not effectively do through the device of
stabilisation clauses can now, at least to some extent, be accomplished by
the submission of investment disputes to ICSID arbitration.
Furthermore, within the context of arbitration under the auspices' of the
ICSID, there is no place for assertions of sovereign immunity from suit. This
is because notwithstanding the consensus of academic and judicial opinion
that the effectiveness of the arbitral process is facilitated by municipal
courts' assistance," article 26 of the convention 'precludes municipal
courts in ratifying states from assuming jurisdiction over a dispute subject to
an ICSID clause', unless the contracting parties provide otherwise.8 9 The
only jurisdiction or role left to municipal courts by the framers of the
convention is that pertaining to the recognition, enforcement and execution
of ICSID arbitral awards." Even at this latter stage of the arbitral process, a
state party cannot plead jurisdictional immunity since 'every State party to
an ICSID arbitration must contemplate the involvement of fellow contracting
states in enforcing any attendant award'.9"
Without a doubt, therefore, ICSID arbitration provides the finest example of
'delocalised arbitration' to the extent that it effectively shuts out the courts
of the arbitralsitus as well as those of the contracting states from participa-
tion in the most critical phases of the arbitral process.9" For the purposes
of this paper's theme, the critical question is what 'delocalisation' does for
the parties to state contracts. The main postulation of the delocalisation
theory of arbitration is that an arbitration proceeding was not rendered
invalid by virtue of the fact that it was conducted independently of both the
laws and the courts of the place of arbitration provided transnational
minimum standards were observed by the arbitrators. 93 More specifically, a
delocalised arbitration is not subject to mandatory rules unique to the
arbitral situs. 94
It is notorious that the arbitral laws and practice of most countries are laden
with provisions which give some form of deferential treatment to state
parties. Similarly, some of their courts have been loathe to equate the
interests of private investors with those of sovereign entities. Herein lies the

See Redfern & Hunter n 6 above at 306; and Chukwumerije n 22 above at 91.
1O Chukwumerlje n 7 above at 174.
9
"Ibid.
9t
Chukwumerije n 7 above at 176-77.
'Chukwumerije n 22 above at 93. See also, P Szasz 'Using the new International
Centre for Settlement of Investment Disputes' (1971) 7 East Afr LJ 128 at 140-41.
93
Chukwumerije n 22 above at 88 f;,J Paulsson, 'Delocalization of international
commercial arbitration: when and why it matters' (1983) 32 1CLQ 53; and J
Paulsson, 'The extent of independence of international arbitration from the law
of the situs' in J Lew (ed) Contemporary problems in international arbitration
(1986) at 140.
9'Chukwumerije note 22 above at 89.
 Internationalcommercial arbitration

special benefit of the 'delocalised' ICSID arbitration machinery to the

foreign private contracting parties. There is no gainsaying that in providing
that additional protection to the private contracting parties, ICSID arbitra-
tion, like the other developments and trends examined in this article,
responds solely to the parties' pursuit of stability in the contractual relations
with capital-importing states.
Regarding the law applicable to the merits of a dispute, the convention
adopts what has been referred to as the 'concurrent law' approach9 by
virtue of article 42(1) which directs an ICSID tribunal, in the absence of an
express choice of governing law by the parties, to apply the law of the host
state (including its conflict rules) and such rules of international law as may
be applicable. The effect of this is to allow the application of the law of the
host state, but only to the extent that it is consistent with international law.
According to Redfern and Hunter, public international law is thereby made
'a regulator of the national law, ensuring that it does not fall below a
96
minimum standard in its treatment of foreign investors and others'.
Article 42(1) of the convention, neutral as it may appear, stands to operate
against the interest of state contracting parties to the extent that such a party
cannot rely on those parts of its municipal law that are susceptible to being
perceived and interpreted as falling below 'international minimum
standards'. In effect, the power of such parties to legislate and, thereby,
affect state contracts is effectively and significantly restricted. Worse still, the
provision tacitly recognises the existence of a body of international rules
capable of regulating international commercial intercourse and against
which the validity or effectiveness of relevant municipal law rules can be
judged. One wonders whether this is a balanced, non-partisan position for
such an important convention to take in the light of the notorious
uncertainties now surrounding the existence of such a body of international
97
rules.

95Redfern & Hunter n 6 above at 114ff.

'Jbid.See also, A Broches 'Settlement of disputes arising out of investment in
developing countries' (1983) 11 InternationalBusiness Lawyer 206.
TSee discussion of the 'internalisation theory' nn 40-48 above and accompanying
text. It should also be noted here that just as there is uncertainty as to the
existence of an 'international law of contract', it is very doubtful whether there is
any such thing as an 'International minimum standard' to which one could look
in determining the legality or propriety of a developing country legislation
affecting the interest of foreign investors. Louis Henkin, Emeritus Professor of
International Law at the Columbia University School of Law observed that 'in
order to determine whether an alien was mistreated, there had to be some
standard of treatment, and traditional international law, at least as seen in the
West, developed the idea of an international standard of justice. The learned
professor then bluntly confesses: 'I know of no philosophical foundation for this
international standard and no agreed legal definition of its contents, nor are
there enough cases from which one might derive a clear sense of what it imports'.
See L Henkin, RC Pugh, 0 Schachter, & H Smit International law: cases and
materials (1993) at 596.
 XXX CILSA 1997

CONCLUSION
This article has attempted to examine most of the knotty issues or problems
that attend the arbitration of investment disputes from a Third World
perspective. As with the general area of international trade, the interests at
play in the context of the legal regulation of foreign investment are not only
conflicting but also pitch nations and indeed trading blocs against each
other. The reality of this fact is revealed in the continual sharpening of the
legal framework for international commercial arbitration to strengthen the
protection available to foreign investors - a sharpening effected by the
investors themselves through the employment of various legal devices, by
international arbitrators through unbalanced rulings and decisions, by the
home governments of the foreign investors through the making of relevant
changes in their municipal legal orders, and by international institutions
such as the World Bank. What appears from the efforts of all of these
agencies is an unwillingness to allow state contractors any privileges not
bargained for.
There is little doubt that the legal regime of foreign investments impacts
significantly on the development effort of Third World countries. To the
extent that in resolving the unique problems presented by state contracts
this regime follows an approach that does not permit arbitrators and the
national courts of the major international commercial arbitration centres
effectively to recognise and promote the national interests of state parties
wherever possible, it aggravates development problems in at least two ways.
In the first place, the regime cloaks and formalises the unfairness that flows
from the basic inequality of bargaining power between the foreign investors
and Third World nations."
In the second place, one must place foreign investment as part of economic
strategy in the Third World in its proper perspective. Foreign investment in
classical economic thinking is meant to fill the gap in domestic saving and
investment, so that the benefits of the resulting accelerated economic
growth would 'trickle down' to the population. If there has been any
improvement in the conditions of the masses of the Third World after
decades of experimentation with the classic economic development strategy,
it is not at all obvious. What is clear, however, is the increasing en-
trenchment of poverty and misery in these countries. A legal regime of
foreign investment that consistently vindicates the interests and objectives of
the private foreign contracting parties while effectively disregarding the
national interests and right to development of state contractors must, at
least, take some of the blame for the dismal failure of the economic strategy.
One may understandably be loathe to give a negative or pejorative charac-
terisation to the foreign investors' response to the problems which fre-
quently plague the arbitration of investment disputes essentially because
they exist solely to maximise profits for their shareholders. However, the

"See SKB Asante, 'Traditional concepts versus developmental Imperatives in

transnatlonal investment law' in Dupuy n 65 above at 368.
 Internationalcommercialarbitration

same cannot be said of the government and institutional responses dis-

cussed in this article. It is unfair for international commercial arbitrators,
and for the said governments and institutions continually to discount the
right to development, the importance of national interests, and the urgency
of development specially characteristic of the domestic conditions of the
developing countries. This is particularly so since it is demonstrable that in
the period when the currently developed nations laboured under the same
urgency, any attempt to 'tie the hands' of the state in regulating for the
public welfare or othervise curtail its regulatory powers and prerogatives
was not countenanced.
The critical reader may suggest that the discussion undertaken in this article
necessarily culminates in the submission that effective recognition of the
'right to development' and the development needs of Third World countries
argues for the reinvention of the legal rules, practices, and institutions of
international commercial arbitration with particular reference to the
treatment of state contract disputes. However, such a drastic solution is not
absolutely necessary. This is because, with the exception of the Inter-
national Convention for the Settlement of Investment Disputes which may
require an elaborate and radical review, the imbalance presented by the
legislative, interpretive and institutional responses examined can be
answered by less drastic solutions." One example of such a solution
would consist of a change towards excluding the application of the restrict-
ive doctrine of sovereign immunity where the state contracting party
involved is a Third World country. Another example is a solution repre-
sented by a change of attitude on the part of international arbitrators making
them loathe to conjure up legal reasoning and solutions designed solely to
vindicate the interests and expectations of foreign investors."00 What is
certain is that without a new approach to solving, or applying the solutions
invented to address, the problems unique to the settlement of state contract
disputes, the institution of international commercial arbitration may, from
the point of view of Third World countries and their academic sympathisers,
lose its legitimacy.

"An elaborate investigation of the possible and plausible responses to the

essentially pro-investor bias of the examined legislative, interpretive and
institutional'responses was not intended to be within the scope of this one
article.
100ln this respect, International arbitrators, in addition to recognising the
fundamental conflict between the customary values and concepts of international
economic law and the development needs of Third World countries, will need to
reallse that no body of rules can 'pretend to be an international system If It
merely represents the traditional preoccupation with the protection of foreign
private property'. See Asante n 65 above at 370.