International commercial arbitration: the conflict of laws issues in determining applicable substantive law in the context of investment agreements

The parties to an investment agreement, i.e. a State or its controlled enterprise and a foreign private entity, often fail to reach an agreement as to the substantive law applicable to any dispute that may arise during the course of their contractual relationship. Sometimes, such disagreement occurs owing to the conflicting interests of the parties. As a distinguished jurist has aptly put it: 'While the host State is primarily interested in subjecting foreign investments to its national legal system because it wishes to retain the fullest legislative freedom in pursuance of its national economic policies, the foreign investor is primarily interested in excluding the application of the law of the host State because he fears that the host State may use its sovereign legislative power to change the legal environment to the detriment of his investment. ' Thus, in the face of the opposing views of the parties when agreement with regard to the selection of applicable law turns out to be impossible, the parties prefer to leave the issue open so that it should be determined by the prospective arbitrator or arbitrators in case any dispute arises in the future.