This chapter covers the first of two preliminary issues that arise for consideration in investment arbitration. It should be read in conjunction with Chapter 7, which addresses the other preliminary issue – the treatment of evidence. The resolution of preliminary issues should precede any attempt by an arbitral tribunal to fully evaluate the strength of each disputing party's submissions on the merits. However, excepting applicable laws governing the dispute, guiding principles on the assessment of evidence are discussed by some arbitral tribunals, but not others. This chapter focuses on the sources and interplay of laws applicable to the substance and procedure of a claim. Section 1 deals with the lex causae, the law applicable to the substance of the dispute. Section 2 deals with the lex arbitri, the law governing the arbitral process. Section 3 deals with the lex loci arbitri, the law of the seat of arbitration.
Before an arbitral tribunal embarks on a thorough evaluation of the strength of a claim that culminates in a final award, it must ensure that this evaluation is conducted in accordance with the laws and principles that govern the dispute. These laws supply the juridical basis for a party's liability (lex causae), shape arbitral proceedings (lex arbitri) or belong to the seat of the arbitration (lex loci arbitri). Given the potential variety of laws to which a claim is subject, determining what the applicable laws are and how they interact is not always straightforward. However, the proper identification of the applicable laws by an arbitral tribunal is crucial to the finality of the ensuing award. An award premised on the erroneous identification of the applicable laws is susceptible to challenge, and may not be enforceable. Determining the applicable laws is therefore one of the most vital tasks that an arbitral tribunal undertakes.
Applicable laws can be substantive, procedural or both. The laws governing the merits of the dispute, namely, the lex causae, are substantive laws. The laws governing the arbitral process, namely, the lex arbitri, are procedural laws. The laws of the seat of the arbitration or the lex loci arbitri, particularly the mandatory rules of the forum from which parties cannot derogate or contract out of, can regulate both substantive and procedural matters.