Often parties seek to avoid the law of the host-
Below, a short approach is introduced on how the parties, investor and state, seek to avoid the laws of the host state, the reason behind which they choose any body of laws or legal principles, how international law principles are applied to such contracts and possible solutions and how China is dealing with this matter.
The question dealing with the controversy as to whether the contracts signed by an investor and a host state should be governed by the domestic law of the host state or public international law, i.e.
- The domestic law as a traditional approach
In particular, the domestic law of the host state was not guaranteeing a stable legal environment or the procedure in the national courts was quite slow and unpredictable. For example, it
- The “internationalization process”
This problematic situation made foreign investors to search for new ways of protection in order to secure their investment capitals and be reassured that the system of the country which hosts their investment would remain stable, at least with respect to their investment.
Around the 1950s, a tendency emerged for these contracts to be seen as “internationalized”, mainly for reasons associated with the aforementioned protection of the investors. It seems that the internationalization process promotes better the investors’ interests because international law provides higher standards in comparison with the unstable procedure provided by domestic law (e.g. non- discrimination, national treatment, just compensation in case of expropriation). This is mainly the reason why, up to nowadays, the parties, in investor – state contracts define international law as the applicable law in their relations. Of course, no interpretative issue arises in case the parties have already
From my point of view, this change came naturally. The domestic law does not always guarantee a stable platform, whereas the international law does as it is explained. In the unfortunate case that the parties have not determined the applicable law, it is submitted, in light of the above, that international law should govern their relations. International investment law is a distinct body of law that has been formatted particularly for the objective of these contracts
This opinion has been confirmed time and again by international tribunals. For instance, the Tribunal in Texaco v. Libya
- The bilateral and Multilateral investment treaties give the solution
The applicable law problem was solved mainly in two ways: By the bilateral or multilateral investment treaties (BITs/MITs) that the countries sign among them or by introducing stabilization clauses into the contract between the investor and the state.
It is also significant that major developing states delay concluding BITs. China, for example, concluded its first BIT in 1982. However, China
BITs are international treaties concerning how the countries deal with investment transactions. They are essentially a set of rules with the intention of both parties of a project to be regulated by this. The parties usually put also an umbrella clause in their contracts so as to ensure that any claim arising out of their agreement will be elevated to
It is common place
It is not uncommon that an investor from a developed country might take advantage of a developing country doing its business against the host country rights, as in the Kiobel 
In accordance with the Article 38 of
- International conventions, whether general or particular, establishing rules expressly recognized by the contesting states,
- International custom, as evidence of a general practice accepted as a law,
- The general principles of law recognized by civilized nations,
- Subject to the provision of art. 59 judicial decisions and the teaching of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.
- The interpretation of the international law
The cases of Libya are interpreted differently using a different source of the international law. To be specific, as in the BP
Another effort made by the industrialized countries to restate the principles governing the protection of foreign investments was the United Nations General Assembly resolution 1803 (UNGA). However, the investment arbitration clause is based on a contract. So, under the Article 8 UNGA, it is stated that:
Foreign investment agreements freely entered into by or between sovereign states hall be observed in good faith, states and international organizations shall strictly and conscientiously respect the sovereignty of peoples and nationals over their natural wealth and resources in accordance with the charter and the principles set forth in the present resolution.
This means that the main idea is both parties must abide by the terms of their contract.
- How the stabilization clause works
Another method to ensure the stability of an agreement between the investor and the state is the stabilization clause, which should be respected by both parties. Hence, by including a stabilization clause in the Concession-Contract, the Concession would be governed by the already existing regulations of the Host State, regardless of any future changes. Thus, if a country decides in the future to change the current legal framework, it does not have any impact on the contract between them.
The majority of these contracts related to
Therefore, the contractual rights which are given by concession to the parties are not going to change unless the parties decide to.
However, no investor wishes to lose investment capitals by expropriation, which is the most severe form of a state to
An example of a stabilization clause involved in the concession agreement in the case Texaco v. Libya arbitration reads as follows:
The Government of Libya will take all
stepnecessary to ensure the company enjoys all the rights conferred by the concession. The contractual rights expressly created by this concession shall not be altered except by the mutual consent of the parties.
The above is a form of
indirect stabilization clausewhich implies that the future legislative changes would not be applied to their agreement. The foreign invest must give his consent in order these changes made impact on their agreement.
However, even if the country has a stability in governance, it is sometimes impossible to foresee the dynamic factors in the market. This is the reason the fiscal policies keep changing significantly from time to time and it seems impossible for the countries to respect their commitments.
Of course, the principle of the state territorial sovereignty is important. However, there is a limit on its rights by the time it voluntarily signs a concession contract with another party. In other words, the expropriation could take place if some requirements are fulfilled, namely the expropriation must serve the public purpose and an adequate compensation must be given. At this point it is important to mention that when an investment dispute arises, the host states’ courts have the jurisdiction to settle it. On the one hand, conflict of law rules may be taken into consideration in the host state court proceeding, on the other hand dragging the country outside of the host state would be a barrier because of the state immunity.
- The new age of settling the disputes
So, in order the foreign investment disputes be solved efficiently, a new system of dispute settlement was developed during the second half of the 20th century. It allowed foreign investors and host States to settle the disputes that arose between them directly, without having to anticipate the exercise of diplomatic protection that relied upon the discretion of the investor’s state of nationality.
In this regard, in order for the weaker party, (i.e.
This was the International Centre for Settlement of Investment Disputes (ICSID), the institution based on a Convention which provides support to deal with these issues by choosing arbitration and setting up an arbitration system which promotes the justice between the parties.
- How China deals with the matter of choice of
When a party is characterized as dealing with foreign-related transaction, then it can freely make the choice of law. However, a wholly foreign owned enterprise (WFOE) and Sino-foreign joint venture
Article 128 of
In December 2017, the China International Economic and Trade Arbitration Commission (CIETAC)
In January, the Shenzhen Court of International Arbitration (SCIA) came into force. It has since entered into cooperation arrangements with the ICC and ICSID, agreeing to share facilities and knowledge in administering international commercial disputes.
China has updated its arbitration system and is promoting its arbitration centres. However, although China has invented arbitration centres for Chinese and foreign-related transactions, foreign investors seek to solve the dispute with
Last but not least, we may mention that as
To conclude, international investment law and international dispute settlement (e.g.
China seeks to protect its investment by establishing a strong arbitration system. Its effort to establish arbitration centres is a signal of China’s determination to internationalize the country’s dispute resolution platform.
*Special thanks to Ms.
 Definition of investment and foreign investor at the Article 25 International Centre for Settlement of Investment Disputes (ICSID) states: (1) The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally. (b)
 Texaco Overseas Petroleum Co.
 China-Sweden (1982).
 Newcombe A, Paradell L, Law and Practice of Investment Treaties, Kluwer Law International (2008).
 BP Exploration company (Libya) Limited v. Government of the Libyan Arab Republic, 53 I.L.R. 297.
 Libyan American Oil Company (LIAMCO) V.