‘Contractual Obligation’ Vis a Vis ‘Sovereign Immunity’ Viewed

Under the International Commercial Arbitration: Third World

Perspective
Mohammad Mamunur Rashid1
Abstract: To draw the attention of the investors to deploy in the developing country is the
premier preference of Third World countries’ government. As a result, the interests of the
Third World countries are endangered from early negotiation level of contracts to
finalization. Investing corporations usually do not accept the municipal law of the contracting
states for safeguarding investor’s interest even though the contracting states have been losing
the ‘sovereign immunity’ in many cases. The interests of the investors are also protected, if
the settlement is accomplished under the auspices of ICSID. Investors intend to have
‘certainty’ or ‘stabilization clause’ incorporating the lex arbitri or lex contractus in the
contracts or ‘delocalizing’ or ‘internationalizing’ dispute settlement of the contract.
Surprisingly this trend is the antagonistic to age old traditional practice of the ‘lex loci’. This
situation demands development of the ‘lex mercatoria’ which is yet undecided. What would
be priority in this regard? Is it either ‘principles of international law’ or ‘common laws of the
civilized nations’? Whatever is it? The ‘international minimum standards’ for all, ‘Public
interest’ or ‘general good’ of developing countries are to be accounted for making the
arbitration friendly settlement measure. The objectives of this article are to explore the pulse
of international commercial arbitration towards Third World countries’ ‘development’,
‘contractual obligations’, ‘sovereign immunity’ and interest of the investors irrespective of
nationalities they belong in present in general, and in future in particular. In doing this, it
would analyze the ‘autonomy of the party’, different perspectives of the presence and absence
of the lex arbitri and lex contractus to see the prospects of the ‘depoliticized’ and
‘denationalized’ settlement forum’ and legal framework’.

Keywords: Party Autonomy, Delocalization, Internationalization, Sovereign Immunity,

Development and Interest of the Investors, lex arbitri, lex contractus, lex mercatoria.

1
Assistant Professor, Faculty of Law, Eastern University, Dhaka, Bangladesh, E-mail:
mrashid@easternuni.edu.bd, My warmest gratitude is to younger brother, Md. Al-Ifran Hossain Mollah for
assisting me, to collect few invaluable academic documents which are significant even to fix up my title of the
article.
1
Introduction:

“There is a new global deal on the table: When developing countries fight corruption, strengthen their
institutions, adopt market-oriented policies, respect human rights and the rule of law, and spend more
on the needs of the poor, rich countries can support them with trade, aid, investment and debt relief.” 2

During the last decades, international commercial arbitration has broadened its implications
in multiple countries though there is ‘conflict’ between the north and south regions of the
universe considering the difference of the specters of economy, development and changes of
the political dynamics. It has been blamed that developing countries, ‘Third World’ countries
are not honored from the ‘private investors’ in respect of contractual terms, immune
sovereignty and choice of law and place of arbitration. Nevertheless, underdeveloped
countries maintain the contract with the investors with a view to saving or feeding the poor,
impoverished and needy people of them. Most of the developing countries are not capable to
provide the employment opportunities and basic needs to their citizen without assurance of
Foreign Direct Investment. ‘Private investors’ take this phenomenon as the dent to trap the
Third World countries in the contract primarily, in the arbitration clause secondarily.
International commercial arbitration emerges to minimize the expectation and loses of both
parties from contract making to dispute settlement arising out of the contract. The objective
of this article are to explore the ways and paths forward so that none can apply in for sole
benefit of anyone in sense or term. In doing this it would test the objectivity of the dispute
resolution irrespective of the parties’ regional belonging, status of the ‘sovereign immunity’
in contract and arbitration, neutralization of the parties’ economic development management
and profit maximization of in arbitration, and finally rigorous scrutiny of the parties’
unimaginable preference of specific law and place for dispute settlement.

(1) Sovereign Immunity Tracing Back from Common Law to Civil Law: What Does
International Law Stand For?
Sovereign Immunity is a principle by which the State cannot commit a legal wrong and is immune from civil or
criminal prosecution. Erwin Cherinsky3 accused that it is a principle of ‘anchronistic relic originated from
English Common law which assumes that ‘the King can do no wrong’. 4Since the time of Edward the First, the
Crown of England has not been suable unless it has specifically consented to suit. 5 Though Erwin Cherinsky
emphasized the full articulation considering the national law especially American legal system where there is no
existence of sovereign immunity meaning ‘no one is above the law’ 6, we have to analyze the sovereign
immunity from the context of international law, investment and Third World economy.

2
Kofi Annan, “Help by Rewarding Good Governance”, International Herald Tribune, Wednesday, 20 March
2002, p. 8.
3
Erwin Cherinsky, Against Sovereign Immunity, see https://scholarship.law.duke.edu/cgi/viewcontent.cgi?
article=1685&context=faculty_scholarship last visted on 26-12-2017.
4
See 5 Keneth Clup Davis, Administrative Law Treatise, 6-7 (2 nd Edition 1984) (quoting Blackstone), 2 Charles H.
Koch, JR., Administrative Law and Practice 210 (1985), actually, as Jon Orth pointed out to Erwin Cherinsky,
the phrase, ‘the King can do wrong’, has many possible meanings. It might simply mean that when a wrong
occurs, someone else must have done it, because the King can do no wrong. Alternatively, I might mean that a
remedy must exist, because the King cannot do wrong, as would occur if a harm went remedied.
5
United States Vs Lee, 106 U.S. 196, 205 (1882).
6

2
 (2) International Contracts and Development: How Would Interests of Third World
be Ridiculed or Safeguarded?

The concept ‘Third World’ or ‘Developing’ countries emerges due to the ‘sudden
independence’ or ‘re-birth’ or evolution of the multiple countries in the late three decades of
the last century in the wake of second world war or decolonization. Developing countries are
lagging behind in development, amalgamation of natural or manmade resources which
created a situation of dependency over the western especially developed and industrialized
countries.7 Inability of effective and fruitful management of the development goals of them
has widened the necessity of seeking, obtaining, and relying on the Foreign Direct
Investment.8 So tension between the interest of the foreign investors (private party) and the
host (developing) countries’ urgency of development has been extending. Poverty and misery
of the people are grave so the developing countries would not deny inviting private investors.
Conflicting interest of the contracting parties create different situations i.e. state parties
expect flexible terms and conditions in one hand, foreign investors hope to accommodate the
‘stabilization’9 and ‘certainty’10 clause in the contract on the other hand.

As the foreign investors’ prime objective is to generate profit, they tend to internationalize or
delocalize the contracts. Investors scare that ‘misery of people’ may be used as tool of
‘abuse’. ICSID has been established under the aegis of the World Bank to protect the interest
of the private investors. Domestic laws of the State contractors are considered disfavoring the
investors. ICSID has developed not to frustrate the objectives of the agreement, but to
facilitate the ‘win win’ position of the contractual parties in international forum. 11 How much
would the ICSID safeguard the contractual obligations of both parties prioritizing the
development target of the Third World Countries with utmost care of their ‘sovereign
immunity’ though this is considered as the institutional ‘internationalization’ or
‘decolonization’, ‘delocalization’ or ‘depolarization’ of the settlement of the investment
dispute?12

(3) Dominance in the Proceedings of Arbitration: Sovereign Immunity, Contractual

Obligation, or Development?

7
Osode, Patrick C., State Contracts, State Interests and International Commercial Arbitration: A Third World
Perspective, 9 Afr. J. Int’l and Comp. L. (1997), p. 107.
8
E. Snyder, Protection of Private Foreign Investment: Examination and Appraisal, (1961) 10 ICLQ 469 at 470.
9
See the section 4 of this paper.
10
See the section 4 of this paper.
11
G Bamodu, ‘Exploring the Interrelationships of Transnational Commercial Law, the New Lex Mercatoria and
International Commercial Arbitration’ (1998) 10 Afr J Int'l & Comp L 31, 31.
12
Osode, Patrick C., State Contracts, State Interests and International Commercial Arbitration: A Third World
Perspective, 9 Afr. J. Int’l and Comp. L. (1997), p. 107 and https://intllaw.net/wp-
content/uploads/2016/12/HAVING-A-GENERAL-GLANCE-TO-ARBITRATION.pdf last visited on
15.12.2017.
3
‘Arbitration clause’ of the ‘substantive contract’ provides the governing law of the arbitration
with the place of the arbitration. The contractor State would prefers the national laws and
municipal courts (lex fori). If the arbitration clause is absent, non-institutional arbitration
require to apply the municipal laws to conduct the arbitral procedures like securing interim or
provisional measures of protection, compelling witnesses and discovering documents etc.
There may a doubt arise how the ‘forum state’ would treat the ‘sovereign State’ in the
proceedings. Problem would not arise, if the parties are not ‘sovereign’ i.e. private parties.

‘Sovereign immunity’ is holy principle of international law. It allows the State to be exempt
from the jurisdiction of the foreign states. From origin and application of this doctrine, the
sovereign state could not be made party to proceedings before the municipal courts of another
state unless it had attorned to jurisdiction. So if the action is taken against the State
(bypassing national sovereignty) without consent, detriments to sovereign equality of nations
and offences to dignity of States would be assumed.13

After the Second World War, the judiciary became hostile to the ‘sovereign immunity’ as the
number of participating sovereign States has increased in commercial activities. It was
difficult to settle the dispute, if the ‘immune sovereignty’ in toto is applied in every case.
That is why judges began to apply this doctrine in restrictive manner. 14 Now it has been
practicing that the ‘sovereignty’ loses its ‘immunity’ from suit where the judicial or arbitral
proceedings arise out of the ‘commercial transaction’ to which the State or one of its agencies
is party.15 State contractors are simply precluded from asserting its immunity to prevent the
possibility of frustration of the purposes of the agreement 16 and spoil of the interests of the
capital exporting states as well their nationals.17

Another serious striking argument has been made that immune sovereignty would not be
protected in the settlement of the commercial disputes, as the State contractors are
maintaining the ‘private act’. So the rights and privileges enjoyed by the State in the activities
of ‘public character’ would be suspended. This argument would may pose the great threat for
the Third World for number of reasons:18 Firstly, developed countries do not need to think
about the living conditions of the citizen about whom the developing countries are struggling
since their emergence; secondly the developing countries created an underdeveloped

13
O. Chukwumerije, ICSID Arbitration and Sovereign Immunity (1990) 19 Anglo-American LR 166 at 169.
14
See the English Cases of Baccus S.R.L v Servicio del Trigo (1958)1 Q.B. 438, the Philippine Admiral Case
(1976) 2 W.L.R. 214.; and Trendtex Corporation Ltd. Vs The Central Bank of Nigeria (1977) Q.B. 529. As the
Abandonment of the absolute version of the sovereign imunity doctrine by the United States of America,
Canada and Italy, see O. Chukwumerije, ICSID Arbitration and Sovereign Immunity (1990) 19 Anglo-
American LR 166 at 171.
15
Osode, Patrick C., State Contracts, State Interests and International Commercial Arbitration: A Third World
Perspective, 9 Afr. J. Int’l and Comp. L. (1997), p. 110.
16
See Lybian Nationalization cases namely Texaco Overseas Ptroleum Co et al. Vs the Government of the
Lybian Republic (1978) 17 ILM 3: BP Exploration Co. (Lybia) Ltd. Vs The Government of the Libyan Arab
Republic (1979) Int’L Law Rep. 297; and Lybian American Oil Co. v the Government of the Libyan Arab
Republic (1981) 20 ILM 1.
17
Osode, Patrick C., State Contracts, State Interests and International Commercial Arbitration: A Third World
Perspective, 9 Afr. J. Int’l and Comp. L. (1997), p. 111.
18
Osode, Patrick C., State Contracts, State Interests and International Commercial Arbitration: A Third World
Perspective, 9 Afr. J. Int’l and Comp. L. (1997), p. 111.
4
entrepreneurial class due to their ‘poverty’ laden legacy. As a result, Developed Countries or
the investors from Developed Countries could not trust Third World even on the provisions
of goods, services as well as the exploitation of natural resources. They also provide no
chance of choice in the commercial contracts especially regarding them as ‘private acts’.
Thirdly the States would not involve in the commercial transaction differentiating between
‘private and public’ nature of the activities, if they assume that it would destroy the national
objectives and aspirations (‘sovereign immunity’). The Soviet legal theory opposes to
distinguish between ‘private’ and ‘public’ acts of the socialist State. 19 Fourthly would the
‘sovereign immunity’ anyway be so commonly shared? 20 Socialists countries are in clear
position that ‘sovereign immunity’ would never be ceased for any country only because of
the mere personal contract of anyone from non socialist legal systems. 21 There is also no
evidence that Third World countries have disagree with Soviet legal theory and Socialist
states’ position.22

(4) Governing Law of the Arbitration: Is It New Opening for the Municipal,
International Law or Investment policy?

It is commonly believed for the time immemorial that parties have the competence to
determine what laws should govern contractual relationship, arbitration for any conflict
arising therefrom. It is significant part of the parties ‘autonomy of the will’. Accordingly, the
parties may choose the national law of the State contracting party, the general principles of
law, the lex marcatoria, public international law or combination of those sources of law. 23
Experience shows that the State contracting party should avoid their application of the
municipal law or attmept to keep their law frozen for any particular contract as the foreign
investors distrust the contracting parties’ judicial proceedings and competence. Sometimes
the contracting party has to change their municipal law with no reference of foreign
investors.24 This section would attempt to explore the dimensions of the vociferous changes
in the platform of commercial practices and international commercial conventions, traditions
and usages in the 21st century.

(i) Immateriality of Lex arbitri in Arbitral Process

Protagonists (consisting of academics and practitioners) of the ‘delocalization’ theory of

arbitration observe that the law of the arbitration consisting of a set of procedural rules made
by the parties or by the arbitral tribunals for their maintenance. 25 So the arbitral awards may
be detached from the law of the country where the proceedings take place and yet remain
19
See A.O. Adede, Lon Agreement with Foreign Borrowers: Issues of Sovereign Immunity: Applicable Law
and Settlement Dispute, (1987) 3 Leosotho LJ 101 at 119.
20
Osode, Patrick C., State Contracts, State Interests and International Commercial Arbitration: A Third World
Perspective, 9 Afr. J. Int’l and Comp. L. (1997), p. 111.
21
See C. Osakwe, “A Soviet Perspective on Foreign Sovereign Immunity: Law and Practice”, (1983) 23 Va.JIL
13; and E. Morgan, Foreign State Debtors in Domestic Courts: A Theory of Sovereign Immunity, (1989) 3
BFLR 287.
22
See A.O. Adede, Lon Agreement with Foreign Borrowers: Issues of Sovereign Immunity: Applicable Law
and Settlement Dispute, (1987) 3 Leosotho LJ 101 at 108.
23
See AnnIDI, Vol 58, tome 2, at 195 (1979)
24
Osode, Patrick C., State Contracts, State Interests and International Commercial Arbitration: A Third World
Perspective, 9 Afr. J. Int’l and Comp. L. (1997), p. 111.
5
enforceable.26 This practice ensure the foreign investors that proceedings of the arbitration
and validity of the arbitrations to which they are party are not related to the law and public
policy sensitivities of the national legal systems of the State contracting parties.27

‘Lex loci arbitri’ (the law of the place of arbitration) is mainstream practice of the as the
‘mandatory provision’ of the arbitration. ‘Delocalization’ theory is not presenting the
traditional view.28 Irrespective of nations contracting with investors, arbitration respects the
‘mandatory norms of the seat of the arbitration’ which would not allow the norms to be
applied that would be inconsistent with ‘transnational minimum standards of justice’. Parties
are entitled to choose law to govern their contracts and some of the procedural rules applied
by arbitrators. They cannot choose the entire set of rules of governing the arbitration though
they could do it by choice of the situs.29

Generally Arbitration is unacceptable, if the arbitration involves to any sensitive public

interests of State contracting party.30 Public interest issue becomes so grave when the parties
of the contract are from different countries having different economic status or ideological
diversities? UNCITRAL Model Law has possibly been adopted to upgrade the municipal
laws of the state especially municipal laws of the major arbitration centers to facilitate the
national interests and aspirations of the State contractors. 31 Would the trends of commercial
aspirations of the ‘foreign investors’ be changed after the modifications of the municipal laws
of the contracting states or would they allow the contracting states to conduct the arbitration
honoring the ‘sovereign immunity’, ‘public policy’ and’ sensitive issues of the legal system
sacrificing their business gain?

(ii) Effect of UNCITRAL Model Law Over Existing International

Commercial Usage

UNCITRAL Model Law is significant progress in the total stature of the dispute settlement
mechanism of the international commercial dispute. It aimed to set a system of rules to settle
the decisions persuading the member states to upgrade their arbitration laws so that
uniformity might be maintained among the contracting parties. Clout (judicial decisions)
made on the basis of UNCITRAL Model Law is also important to develop the harmony.32

25
A. Redfern and M. Hunter, Law and Practce of International Commercial Arbitration (London: Sweet and
Maxwell, 1991) at. 82.
26
J. Paulsson, Delocalization of International Commercial Arbitration: When and Why it matters, (1983) 32
ICLQ 53 at 57.
27
Osode, Patrick C., State Contracts, State Interests and International Commercial Arbitration: A Third World
Perspective, 9 Afr. J. Int’l and Comp. L. (1997), p. 113.
28
Hirsh, the Place of Arbitration and Lex Arbitri, 1979 34 Arb.j. 43.
29
William W. Park, the Lex Loci Arbitri and International Commercial Arbitration, (1983) 32 ICLQ 21.
30
See T. Cabonneau, the Elaboration of a French Doctrine on Inernational Commercial Arbitration: A Study in
Liberal Civilian Creativity, (1980) 55 Tulane L.Rev. 1 at 29-30.
31
William W. Park, the Lex Loci Arbitri and International Commercial Arbitration, (1983) 32 ICLQ at 30.
32
LEGAL HARMONIZATION THROUGH MODEL LAWS : THE EXPERIENCE OF THE UNITED
NATIONS COMMISSION ON INTERNATIONAL TRADE LAW (UNCITRAL) by José Angelo Estrella
Faria, Legal Officer, United Nations Office of Legal Affairs Secretary of the UNCITRAL Working Group on
Electronic Commerce, see: http://www.justice.gov.za/alraesa/conferences/2005sa/papers/s5_faria2.pdf, last
visited on 12-12-2017.
6
UNGA has adopted Uncitral Model Law on Electronic Commerce (1996) with 1 additional
article 5 bis adopted in 1998 and guide to enactment to Model Law recommending the State
to give priority over the Model law when they revise their law with a view to bringing the
uniformity applicable to alternatives to paper based methods of communications and storage
of information.33

(iii) Internationalization as Occasional Best Choice

‘Delocalization’ threats the sovereign immunity. Nevertheless few countries freed the
arbitration from the jurisdiction of national courts. A good example of that trend is Belgium
which enacted law excluding international arbitrations from supervisory control of Belgian
courts.34 French expressed their support for the abolition of the national restrictions on the
international arbitration process.35 Finally creation of the International Center for the
Settlement of Investment Dispute (ICSID) is the best of example of the ‘delocalization’.

(5) The Law Governing the Contract (Lex Contractus): Is It for State Contractors or
Foreign Investors’ interest?

Surely governing law of the contract that fixes the disputes on merits is separate from the law
regulating the arbitral process. Investors intend to shield to their contractual terms or lex
contractus from the municipal law of the State party even if the net result is uncertainty. 36
This section would attempt to bring the issue into light what the fluctuating trends of
investors prevail over the different circumstances.

(a) Absence of Governing Law of the Arbitration: What would be the guideline?

There is no apparent consensus as to what is applicable law of arbitration when the agreement
does not stipulate the applicable law to the agreement. For example, in Revere Copper and
Brass Inc. V Overseas Private Investment Corp (OPIC), 37 arbitral members were divided on
the point of governing law. Majority adjudicators were in favor of the application of
international law and minority judges were in favor of the application of domestic law
showing that both the parties are corporations.

Professor Rene Dupuy concluded in Texaco Vs. Libya38 that ‘mere submission of the dispute
by the contracting parties to arbitration is apparently inactive of the intention to ‘decolalize’
‘internationalize’ their relationship in s sense that arbitration would be conducted under the
international law rather than municipal law. Besides Dupuy pointed out that
‘internationalization’ of the arbitration may be assumed where the decision has to be made by
the sole arbitrator (failure of the two parties to appoint their arbitrators, one for each); 39
absence of the ‘substantive’ law of the contract to regulate the arbitration,
33
http://www.jus.uio.no/lm/un.electronic.commerce.model.law.1996/portrait.pdf last visited on 12-12-2017.
34
Article 1717, du Code Judiciare.
35
T. Carbonneau, Book Review (1984) 24 VaJIL 527 at 530.
36
Famous discussion on ‘Internationalization Theory’.
37
(1978) ILM 1321.
38
Texaco Overseas Ptroleum Co et al. v The Government of the Libyan Arab Republic, (1978) 17 ILM 3
39
Texaco Overseas Ptroleum Co et al. v The Government of the Libyan Arab Republic, (1978) 17 ILM 3, paras
40-50.
7
‘internationalization’ could be assumed if the contract is related to the ‘economic
development management’,40 and ‘exploitation of natural wealth and resources’.41

(b) Contracts of Economic Development Management: Is It Subversive to the

Developing Countries?

Opposing Dupuy, O. Chukumerijie stated that ‘economic development management’

agreement is only applicable where the parties are developing countries. 42 More specifically
this term is confined to exclude contracts involving the developed countries. As a result, legal
implication of a contract would vary depending on whether the contract was made with
Developed or Developing countries. It is discriminatory and that is why it is objectionable. 43
So ‘internationalization’ theory espoused by the Professor Rene Dupuy may bring the
advantage for the foreign private investors though it is undoubtedly detrimental for the
developing countries. A.A. Fatourouros has criticized that theory reversed the wide accepted
‘common norms of the presumption of international law’, O. Chukumerijie suggested that
‘internationalization’ would apply over the sovereign powers of State, where there is a clear
and unequivocal evidence of an intention of the parties to internationalize.44

(c) Presumption of Internationalization: How Would the Natural Resources and

Wealth be Protected?

There are also commonly agreed principles that presumption could not be made to apply the
contemporary international law than the domestic law should be applied in the absence of
contrary. It has been strengthened by the United Nations resolutions on the permanent
sovereignty over natural resources,45 the establishment of the ‘new international economic
order’46 and the decision of the Permanent Court of International Court of Justice in the
40
Texaco Overseas Ptroleum Co et al. v The Government of the Libyan Arab Republic, (1978) 17 ILM 3, paras
40-50.
41
(1978) ILM 1321
42
O. Chukwumerije, Choice of Law in International Commercial Arbitration, (Westport, Connecticut: Quorum
Books, 1994) at 88.
43
O. Chukwumerije, Choice of Law in International Commercial Arbitration, (Westport, Connecticut: Quorum
Books, 1994) at 88.
44
See A. Fatouros, International Law and the Internationalized Contracts, (1980) 74 AJIL 134 at 136.
45
http://www.ohchr.org/Documents/ProfessionalInterest/resources.pdf last visited 12-12-2017 which declares
that ‘ the right of peoples and nations to permanent sovereignty overtheir natural wealth and resources must be
exercised in the interest of their national development and of the well-being of the people of the State
concerned.
46
Resolution adopted by the General Assembly, 3201 (S-VI). Declaration on the Establishment of a New
International Economic Order, see http://www.un-documents.net/s6r3201.htm, last visited on 12-12-2017.
The New International Economic Order (NIEO) was a set of proposals put forward during the 1970s by some
developing countries through the United Nations Conference on Trade and Development to promote their
interests by improving their terms of trade, increasing development assistance, developed-country tariff
8
Serbian Loans case47. George R. Delaume submitted that the presumption that in the absence
of a choice of law, state contracts should be governed by the law of the State involved is not
practical.48 He also acknowledged that a presumption did arise in favor of the application of
the municipal law or the State parties under certain circumstances. It is of course gratifying
for the Developing countries when there is situation of the protection of the ‘natural
resources’.

Some authors again reitereste on the assumption of the governing law from the governing law
of the substantive contracts. These might be considering the following issues:

a. What law has been governing the substantive contract?

b. What law has been governing the arbitration procedure or legal seat?
c. What law has been governing the arbitration agreement?
d. What are the laws of the state(s) where the award will be enforced?
If you do not what applicable law you provide as applicable law or what you wrote in the
contract you cannot recall, the intention expressed in the contract works actually you thought.
It is easier for you to save money, inter alia, drafting process.49

(ii) International Law as Governing Law of Arbitration: Law of Internal

Contract as a mystery or Dream to be Reality

Parties may agree that State contracts would be governed by international law.50 Now
question arises whether international law has any set of rules to regulate the commercial
relations between States and individuals or individuals of different nationalities? If there is no
‘set of rules’ in this regard, the foreign investors or Developing countries certainly fall into
the dent of inadequate protection under the auspices of international law. Professor Rene
Dupuy optimistically answered that, in the domain of international law, there are ‘a good
number of substantives rules’ in which the State contracts may confide for their dispute
disposal. He opined that international law does not only deal with the treaties, it also deals
with contracts between States and private persons, under certain terms and conditions falling
within the contour of specific and innovative area of international law namely ‘the
international law of contract’51 despite there is scarcity of specific principles other than
singular theory pacta sunt servanda. Should we stop here? This principle could not avail

reductions, and other means. It was meant to be a revision of the international economic system in favour
of Third World countries, replacing the Bretton Woods system which had benefited the leading states that had
created it especially the United States. This order was demanded by the Non-Aligned Movement (NAM).
47
PCIJ series A, Nos. 20/1, Judgment No. 14, July 12, 1929. In that case, the court tool the position that a State
could have intended to make the vailidty of its obligations subject to any law other its own.
48
G. R. Delaume, State Contracts and Transnational Arbitration, (198) 75 AJIL 784 at 798.
49
http://www.morrisjames.com/newsroom-articles-66.html last visited on 04-09-2017.
50
O. Chukwumerije, Choice of Law in International Commercial Arbitration, (Westport, Connecticut: Quorum
Books, 1994) at 155.
51
Texaco Overseas Ptroleum Co et al. v The Government of the Libyan Arab Republic, (1978) 17 ILM 3, para
32.
9
proper adjudication as it did not distinguish between private and public (State) contracts. 52 Ian
Brownlie ruled out the existence of the body of law as ‘international law of contracts’. 53
There is, of course, consensus of necessity for developing’ international law of contracts’ or a
lex mercatoria which is the ultimate vision of the future.

What does the ‘international law of contracts’ or lex mercatoria’ means is a totally mystery?
F.A. Mann propounds that it might comprise codified law enshrined in or originated from
‘international convention’, ‘trade usages’, ‘custom’ and ‘ideas of business fairness’, ‘efficacy
or reasonableness’. The premier aim of those rules is to diffuse the ‘conflict of laws’ which
may pose insoluble ramifications and result man made and impractical consequences. It is
hardly believed that no such ‘group of laws exists.54

There is confusion; there exist ‘law of the international contracts. How the dispute would be
resolved, if the parties refer the application of the international law to govern their contract?
Should the contract be nullified or resolved according to contemporary principles of
international law? A. Redfern and M. Hunter think that dispute of such contracts should be
resolved according to the principles of ‘contemporary international law’.55

(a) Misconception of Private International Law and Lex Mercatoria

What is the relation between the private international law and Lex Marcatoria. There is
misconception of applying any national law for resolving the dispute would mitigate the
requirement of private international law and lex marcatoria. Redfern and Hunter submitted
that ‘proper law (applicable law for the international contract) is out of touch with the
realities of modern international trade; and that what is needed is not a particular national
system of law, bu a modern law merchant’ which differently explained as ‘international law
of contracts’, ‘international lex mercatroia’, and ‘international trade law’.56

(b) Law of International Contract: Protection of Immune Sovereignty

Development of the law of international contract is sine qua non for proper realization of the
interests of the merchants especially interests of the state contractors. As it is submitted that
‘modern law merchant’ is very much capable of favoring the national interests, right to
development of developing countries, so the development of international lex mercatori is
aspiration in ahead. That surely would be founded on the principal legal systems of the
modern world effectively to recognize a State party’s wide, sovereign or prerogative powers
to determine the contractual obligation differently considering the public interests. That is
why Patrick S. Osode expects that international lex mercatora requires to be founded from

52
D. W. Bowett, State Contracts with Aliens: Contemporary Development on Compensation for termination or
Breach, (1988) 59 BYIL 49 at 55.
53
See Ian Brownlie, Principles of Public International Law (Oxford: Clarendon Press, 1990) at 548-49.
54
F.A. Mann, Private Arbitration and Public Policy, (1985) 4 Civil Justice Quaterly 257 at 264.
55
A. Redfern and M. Hunter, Law and Practice of International Commercial Arbitration (London: Sweet and
Maxwell, 1991) at 306-07.
56
A. Redfern and M. Hunter, Law and Practice of International Commercial Arbitration (London: Sweet and
Maxwell, 1991) at 306-07.
10
the principles of law common to civilized nations rooming the State interests within such
body of rules which is yet to be implemented.57

(ii) Application of Municipal Law as the Governing Law of the Arbitration

To exploit the natural resources and other economic development, contemporary practice
allows the State party’s municipal law as the lex contractus considering the territorial
sovereign is competent to legislate for the ‘general good’.58 Similarly the lex contractus is
the applicable law of the arbitration. Foreign investors would always choose to take their
contracts beyond the reach of the State contracting parties. Would the foreign investors
permit the State contracting party’s law as applicable law of the arbitration as they think it
would be discomfort for securing their interest? In this regard the investors enunciate few
clauses to change applicable law of the State party though it is prima facie may be
disfavouable to the investors. .

(a) Stabilization Clause:

According to the stabilization clause, contracting parties should not change the term with no
mutual consent. It compels the State party not to do anything which anyway hampers the
interest of the investors. As a result, the State would be losing ‘legislative sovereignty, public
interest of State party and the long term viability of the contractual relationship’. 59 It is also
inconsistent with ‘contemporary principles of permanent sovereignty over natural resources’.
‘Stabilization clause’ is also indefensible on the fundamental principles of fairness, good
sense, and justice. Since the State party’s treaties and contracts with the private investors
honoring the obligations under international law and they have similar objectives, private
party has singled objective to maximize profit and interest so they should take burden.60

(b) Certainty:

Agreement to arbitrate should be sustained by the universally accepted principles of pacta

sunt servanda, estoppel and good faith. Pacta Sunt Survanda can be applied subject to
‘universal experience of mankind’ and ‘requirement of good sense and justice’. Certainly
rules requires that if any party incorporates the ‘stabilization clause’ in the arbitration
agreement, in effect, immune from interference by the competent legislator. 61

57
Osode, Patrick C., State Contracts, State Interests and International Commercial Arbitration: A Third World
Perspective, 9 Afr. J. Int’l and Comp. L. (1997), p. 120.
58
Osode, Patrick C., State Contracts, State Interests and International Commercial Arbitration: A Third World
Perspective, 9 Afr. J. Int’l and Comp. L. (1997), p. 120.
59
See Ian Brownlie, Principles of Public International Law (Oxford: Clarendon Press, 1990) at 551.
60
O. Chukwumerije, Choice of Law in International Commercial Arbitration, (Westport, Connecticut: Quorum
Books, 1994) at 145.146.
61
E. Passivirta, Internaionalisation and Stabisation of Contracts Versus State Sovereingty, (1989) 60 BYIL 315
at 329.
11
 (6) How the Sovereign Immunity and Contractual Obligation Scrutinized Under
ICSID?

To oversee the contractual relationship between the states and nationals of other State
International Center for the Settlement of Investment Disputes has been established under the
supervision of World Bank with a view a view to settling the dispute in a mutually acceptable
forum and depoliticizing the investment disputes. Thus it facilitates the capital flows across
national boundaries to the ultimate benefits of the capital importing States of the Third World
but few provisions of the ICSID require specific and intensive scrutiny.

In pursuance article 25(1), parties may submit the issue for the settlement before the ICSID
through mutual consent. Consent should be written. Such consent may be in the arbitration
clause or the written agreement to submit the dispute to the ICSID. Once consent is given, no
one can withdraw the consent unilaterally. State party cannot frustrate the purposes of the
contract or change the stipulation of the contract by changing the municipal laws with its own
wish. Hence what investors could not do effectively through the ‘stabilization clause’, they
could easily do it through the submission of the investment dispute to ICSID.

Under the ICSID law, there is no opportunity of assertion of the ‘sovereign immunity’ from
the suit. Article 26 precludes the municipal courts to assume jurisdiction subject to an ICSID
clause, unless the contracting parties agree otherwise. Municipal courts are only empowered
to the recognition, enforcement and execution of ICSID arbitral awards.

Article 42 (1) approves the application of host State laws, if there is no specific law of the
arbitration. but law of the State should be in conformity with the international law. According
to Redfern and Hunter, public international law is thus made ‘a regulator or the national law’.
It also ensures that ‘national law would not fall below a minimum standard in its treatment of
foreign investors and others’. 62

(7) Independence and Impartiality of the Arbitrator: Is North-South Ideological

Debate Lopsiding the Domain of ICA?

As the arbitrators are appointed by the parties, there are ample opportunities of predisposition
of them with the parties. Maintenance of independence and impartiality is of great
importance. There are few matter like communication of the matters of the proceedings with
the party, working in the same chamber and staying in the same hotel are considered to be
ground to put suspicion about the partiality of the arbitrator.

There is serious dispute when the arbitration conducted in international level and dispute
arises out of the contract made between the ‘State contractor’ and ‘private party’. Investors
do not agree to accept the jurisdiction of the municipal law of the host State having distrust
over the judiciary of them. Host State contractors brings doubt over the arbitrators due to
differences in ideology, non-acquaintance of the arbitrator with the culture and traditions of
A. Redfern and M. Hunter, Law and Practice of International Commercial Arbitration (London: Sweet and
62

Maxwell, 1991) at 306-07

12
the contracting state, scarcity of the legal experts of the State contractors, expenses of the
travel of arbitrators, counsels and witnesses. Third World countries are to maintain the
contract to save the development.

Once upon a time it was argued that there did not have enough expert on arbitrations. Now
the scenario has been changed. The arbitrator is required to be appointed from the Third
world countries. Similarly Third World country has plethora of arbitral institutions or centers.
The place of arbitration might also be from the Third World country. 63 At least it should be
in the regional centers so that the travelling costs do not remain enormous for the parties.
After the adoption of the UNCITRAL Model Law, the national laws of the Third World
countries had also become appropriate claimant of ‘having the place of arbitration’ and lex
loci arbitri’.

…[M]ore or less open rivalry between various highly developed countries to provide
desirable market place for [arbitration] is bound to undergo a degree of dilution, since the
commerce of these countries is so largely involved with developing nations who are naturally
themselves aspiring to provide venues for the resolution in which they are involved. 64

Conclusion:

It is an endevour explore the evaluation of the ‘sovereign immunity’ in the frame of

contractual obligation through the practice of the international commercial arbitration. After
clarifying relevant issues it is expected that the legal framework of international commercial
arbitration should be developed honoring the ‘sovereign immunity’ of the contracting States,
principles of international law, expertise opinion and upgrading situations of the Third World
countries in the 21st century context.

Third World countries are dependent on the private investment of the national of the
developed countries. This dependency should not be matter of abuse or trap. Arbitrators from
Developing countries should be appointed so that the developing countries do not feel
deprived. Arbitrators should consider the inequality of the bargaining power between the
foreign investors and Third World countries, mandatory provisions of arbitration and
protection of natural resources of developing countries. .

Arbitration is the neutral mechanism. The place of the arbitration should be determined on
the basis of the ‘closeness’ of the parties to save them from expenses, strangeness of the alw
and legal practice of the lex loci arbitri, or contracting parties’. It is visible that that
developing countries expensed enormous amount of money for travelling of the witnesses,
counsels, and overall arbitration costs.

Arbitration should not be made inapplicable appointing arbitrator who does not know the
what the preferable necessity of the parties is, what the municipal legal practices of those

63
Jan Paulsson, Third World Participation ICSID Review, Foreign Investment Law Journal, in International
Investment Arbitration
64
Kerr, Arbitration and the Courts: The UNCITRAL Model Law, 50 Arbitration (Journal of Chartered Institute of
Arbitrations) 3, 8 (1984).
13
parties are, and what the cultural phenomenon of them are. These are to be considered when
any of the parties at least a sovereign country especially from the Third World.

‘Sovereign immunity’ of the state could not be limited only because of the profit
maximization of the private investors. If it is done, it would be considered as the violation the
norms of international law.

International commercial arbitration started its journey to be ‘depoliticized’, ‘denationalized’

or ‘delocalized’. This unique ‘forum’ of adjudication should not be misled only because of
the wrong selection of the adjudicator, law and place of arbitration.

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