Choice of law stands as the second “pillar” of contract stabilization, together with stabilization clauses and international arbitration.  In fact, choice of law provisions sometimes consist of stabilization clauses in the form of “freezing” by incorporation and inopposability provisions. Brown emphasizes the importance of choice of law for contract stability:

[The anxieties of the foreign investor] are more likely to focus on the possibility that the contractual obligations of the government may be discharged or modified by an exercise of the legislative competence of the State. If such an event occurs the contract as originally agreed between the parties no longer exists, and remedies for breach of it may not be strictly in point.  It follows that in a situation in which the dominant concern of the foreign investor is with the legislative competence of the State, attention, in the first instance, at least, must focus on questions concerned with the proper law of the Contract.<fn>Roland Brown, Choice of Law Provisions in Concession and Related Contracts, 39 Modern L. Rev. 625, 632-33 (1976).</fn>

When negotiating choice of law with a host government, the investor normally wants to “internationalize” the applicable law, so that changes in the national law of the host country do not apply to the investment contract, while the host government, as Sovereign, naturally wants its law to apply.

Unless the host country agrees to application of the law of the investor’s home country or of a third country or of international law, without application of its own law – an unusual but not entirely unheard of occurrence<fn>See Kurdistan Regional Government of Iraq Model Production Sharing Contract art. 43.1 (2012).</fn> – the investor can proceed down two paths in negotiations with the host government over the applicable law. Those two paths, by the way, can intersect. The investor can seek to expand application of the host government’s laws to include extra-State laws and norms and/or the investor can seek to limit application to the contract of future changes to the host government’s laws. Governments agree to go down either or both of these paths for basically the same reason they agree to include stabilization and international arbitration provisions in their investment contracts – the desire to attract foreign investment.

No doubt exists that governments and investors can negotiate and enter into agreements that depart to greater or lesser extent from the law of the host countries. “[I]t is an accepted universal principle of both domestic and international laws that the parties to a mixed public and private contract are free to select in their contract the law to govern their contractual relationship.”<fn>LIAMCO v. Libya, Award (April 12, 1977), VI Year Book Com. Arb. 89, 92 (1981).</fn> If the parties fail to specify the applicable law in their investment contract, an arbitral tribunal asked to choose the applicable law may conclude that that failure indicates the parties prefer another set of laws to govern their relationship.<fn>Cf. Saudi Arabia v. Arabian American Oil Co., Award (August 23, 1958), in 27 Int’l Law Rep. 117, 156 (1963) (“The Arbitration Tribunal holds, therefore, that it has to ascertain the law to be applied to the merits according to the indications given by the Parties and, failing adequate indications of the Parties, to determine this law taking all the circumstances of the case into consideration.”).</fn> Possible sources of an expanded law include: (1) principles of law common to the home countries of the host government and the investors; (2) law of a third country; (3) and international law, including general principles of law.

A 1985 Syrian EDPP Contract offers a glaring example of what NOT to agree with respect to choice of law with multiple parties, each from a different country.

Taking into account their different nationalities, this Contract shall for the purpose of arbitration be given effect and be interpreted and applied in conformity with principles of law common to the SYRIAN ARAB REPUBLIC, the UNITED STATES OF AMERICA, THE NETHERLANDS and the UNITED KINGDOM, and the FEDERAL REPUBLIC OF GERMANY, and in the absence of such common principles, then in conformity with principle of law normally recognized by civilized nations in general, including those which have been applied by International Tribunals.”<fn>Syrian Arab Republic Contract for the Exploration, Development and Production of Petroleum (August 21, 1985), 26 I.L.M. 1186, 1213 (1987).</fn>

This approach promises months if not years of testimony and deliberations by the tribunal on the applicable law, with recourse eventually to international law.

While recourse to the law of a third country might be theoretically possible, the likelihood of a host government’s agreeing that its investment contract would be governed by the law of another country seems extremely unlikely. One notorious example of such an agreement can be found in the Karabakh PSC, where the applicable law clause provides in part: “This Agreement shall be governed and interpreted in accordance with principles of law common to the law of the Azerbaijan Republic and English law, and to the extent that no common principles exist in relation to any matter then in accordance with the principles of the common law of Alberta, Canada (except for laws regarding conflicts of laws).”<fn>Agreement on the Exploration, Development and Production Sharing for the Karabakh Prospective Struture and Area Adjacent in the Azerbaijan Sector of the Caspian Sea art. 22.1 (10^th Nov. 1995).</fn> The Kurdistan model contract governing law provision also chooses the law of a third country, calling for English law, “together with any relevant rules, customs and practices of international law, as well as by principles and practice generally accepted in petroleum producing countries and in the international petroleum industry.”<fn>See Kurdistan Regional Government of Iraq Model Production Sharing Contract art. 43.1 (2012).</fn>

The famous choice of law provision in the 1955 Libyan model Deed of Concession seems to present a shorter path than the one laid out in the Azerbaijan and Kurdistan contracts; it provides for application of the host country’s law plus international law. “This Concession shall be governed by, and interpreted in accordance with, the principles of law of Libya common to the principles of International Law and in the absence of such common principles then by and in accordance with the general principles of law, including such of those principles as may have been applied by International Tribunals.”<fn>Libya Model Deed of Concession cl. 28(7) (attached as Schedule 2 to Libya Petroleum Law No. 25 of 1955).</fn> The Turkmenistan 1997 Model Production Sharing Agreement seems to take choice of the host country’s law, plus international law, to the next level. It states: “This Agreement shall be governed by, interpreted and construed in accordance with the Law of Turkmenistan and as applicable, the principles of international law and the decisions of international tribunals and international treaties to which Turkmenistan is a party.”<fn>Model Production Sharing Agreement for Petroleum Exploration and Production in Turkmenistan (Part 1) art. 29.1 (March 20, 1997).</fn> The last phrase brings into the model contract Turkmenistan’s investment treaty obligations.

When an investor and host government agree on application of international law, what does that mean?  Article 38(1) of the Statute of the International Court of Justice defines International Law as:

• International conventions establishing rules expressly recognized by the contesting States
• International custom, as evidence of a general practice accepted as law
• The general principles of law recognized by civilized nations
• Judicial decisions and writings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.

While host government contracts have rarely expressly incorporated Article 38(1) by reference, at least one concession did so in 1933, requiring that the arbitral “award shall be based on juridical principles contained in Article 38 of the Statutes [sic] of the Permanent Court of International Justice. There shall be no appeal against the award.”<fn>Concession granted by Persian Government to Anglo-Persian Oil Company art. 22(F) (29 April 1933).  The AIPN Model Dispute Resolution Agreement ¶ 1(B), at 4 (2017), provides in part: “The substantive law of ____ [designate state/country], to the extent consistent with international law, as defined in Article 38 of the Statute of the International Court of Justice . . . , shall apply to the determination of [disputes, claims, or controversies of any nature arising out of or relating to this Agreement, including but not limited to its formation, existence, performance, interpretation, breach, validity, or termination] . . . between or among the Parties.”</fn>

Customary international law requires two key elements: (1) a relatively uniform and consistent state practice regarding a particular matter; and (2) a belief among states that such practice is legally compelled.<fn>See Sean D. Murphy, Principles of International Law 78 (2006).</fn> Under customary international law a State is responsible for economic injury to nationals of other States resulting from a taking by the State of the property of the national of another State that is not for a public purpose, or is discriminatory, or is not accompanied by provision for just compensation.<fn>See Restatement of the Law (Third) of the Foreign Relations Laws of the United States § 712 (1987).</fn> A State may also be responsible under customary international law for injury resulting from a repudiation or breach by the State of a contract with national of another State where the repudiation is discriminatory or motivated by non-commercial considerations, and compensatory damages are not paid, or for injury from other arbitrary or discriminatory acts or omissions by the State that impair property or other economic interests of a national of another State.<fn>See id.</fn>

General principles of law recognized by civilized nations constitute the third category of international law under Article 38(1) of the ICJ Statute. They include principles that exist in national laws of States worldwide, general principles of law derived from the specific nature of the international community, principles intrinsic to the idea of law, and general principles of law that appear to arise from notions of natural law or natural justice.<fn>See Sean D. Murphy, Principles of International Law 86-88 (2006).</fn> These principles include: duty of good faith; pacta sunt servanda (contract should be honored); doctrine of unjust enrichment; estoppel and acquiescence; respect for acquired rights; rights must not be abused; obligation to repair a wrong; principle of res judicata (a final judgment on merits is conclusive between parties); passage of time as a defense to a claim; no one may be judge in his own case; non-aggravation of dispute before tribunal. The AIPN 2017 Model Dispute Resolution Agreement states in part: “The substantive law of ____ [designate state/country], to the extent consistent with international law, as defined in Article 38 of the Statute of the International Court of Justice . . . shall apply to the determination of [disputes, claims, or controversies of any nature arising out of or relating to this Agreement . . . . To the extent the laws of ____ [designate state/country] are not consistent with international law, then general principles of international law shall prevail.”<fn>AIPN Model Dispute Resolution Agreement ¶ 1(B), at 4 (2017).</fn>

While the host country’s law may already recognize most or all of the legal principles mentioned above, expanding the applicable law to encompass both the host country’s law and international law, or general principles of international law, provides protection for investments based on application of international principles and doctrines (such as good faith, unjust enrichment, estoppel, and respect for acquired rights) as interpreted and applied by international tribunals. International law becomes especially useful in circumstances in which it may be deemed to prevail over contrary national laws promulgated by the host government after the parties entered into their contract.

In addition to or in the alternative to expanding the host country’s law to include principles of international law, the investor can negotiate to limit or reduce application of that law by insisting on inclusion of one or more stabilization devices when confronted by the host government’s demand that its law govern their contractual relationship. In this way, the investor can accede to the government’s demand for application of its law, but on the basis of provisions in the contract that: (1) “freeze” the law by incorporation of a specific set of law<fn>Incorporation of a set of laws by reference should be distinguished from a choice of law provision, which implicitly recognizes the possibility of changes to the substantive law during the parties’ contractual relationship.  As explained by a knowledgeable commentator, “Under the circumstances it is not truly the law of the state that is the lex contractus but a set of rules coinciding with the law of the state at a given point in time and incorporated into the contract.” Charles Leben, The Advancement of International Law 10 (2010).</fn>; (2) require the host government’s law to be consistent with the terms of the investment contract<fn>See, e.g., NIOC-ERAP Agreement, art. 44, reprinted in OPEC, Selected Documents of the International Petroleum Industry 1966 (1970)(“The provisions of the Mining Act of 1957 shall not be applicable to this Agreement, and any other laws and regulations which may be wholly or partly inconsistent with the provisions of this Agreement shall to the extent of any such inconsistency be of no effect in respect of the provisions of this Agreement.”).</fn>; (3) require mutual written agreement to amend the contract (aka “intangibility” provisions)<fn>See, e.g., Exploration and Production Sharing Contract between Republic of Gabon and Vaalco Gabon (ETAME), Inc., art. 43.4 (July 7, 1995), available at https://www.resourcecontracts.org/countries/ga, last visited Jan. 1, 2018 (“The terms and conditions of the Contract shall be modified only in written form and through mutual agreement.”).</fn>; (4) “contractualize” key provisions of the law<fn>See Bertrand Montembault, The Stabilization of State Contracts Using the Example of Oil Contracts, R.D.A.I./I.B.L.K. 593, 600 (2003).</fn>; (5) allocate risk as the government or national oil company’s area of responsibility constituting a lex specialis<fn>See Karl-Heinz Bockstiegel, The Legal Rules Applicable in International Commercial Arbitration Involving States or State-controlled Enterprises, in 60 Years of ICC Arbitration: A Look at the Future 117, 133 (1984).</fn>; (6) limit the effect of changes in the law by requiring renegotiation to restore the original value of the contractual relationship<fn>See, e.g., Production Sharing Contract between Nigerian National Petroleum Corporation and Esso Exploration and Production Nigeria Ltd. cl. 19.2 (21^st May 1993)(“In the event that any enactment of or change in the laws or regulations of Nigeria or any rules, procedures, guidelines, instructions, directives or policies, pertaining to the Contract introduced by any Government department or Governments parastatals or agencies occurs subsequent to the Effective Date of this Contract which materially and adversely affects the rights and obligations or the economic benefits of the CONTRACTOR, the Parties shall use their best efforts to agree to such modifications to this Contract as will compensate for the effect of such changes. . . .”).</fn>; or (7) require enactment of the contract into law.<fn>See, e.g., Model Concession Agreement for Petroleum Exploration and Exploitation between Egypt, EGPC, and Contractor art. XXIX (200_)(“APPROVAL OF THE GOVERNMENT: This Agreement shall not be binding upon any of the parties hereto unless and until a law is issued by the competent authorities of the A.R.E. authorizing the Minister of Petroleum to sign this Agreement and giving this Agreement full force and effect of law notwithstanding any countervailing Government enactment, and the Agreement is signed by the GOVERNMENT, EGPC, and CONTRACTOR.”).</fn>

© John Bowman 2017. This article first appeared in the King & Spalding Energy Newsletter.