Published online by Cambridge University Press: 21 May 2009
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.’
2. Jaenicke, G., ‘Consequences of a Breach of an International Agreement Governed by International Law, by General Principles of Law, or by Domestic Law of the Host State’, in Dicke, D.C., ed., Foreign Investment in the Present and a New International Economic Order (1987).Google Scholar
3. In this article ‘conflict of laws'and ‘private international law’ have been used interchangeably, so have ‘conflict of laws’ and ‘conflicts of law’.
4. The terms ‘delocalization’ and ‘denationalization'used in this article are interchangeable.
5. As adopted by the UN Commission on International Trade Law on 21 June 1985.
6. Art. 28(2) of the Model Law on International Commercial Arbitration provides that: ‘Failing any designation (of law applicable to the substance of the dispute) by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable’. See 2 Arbitration Int. (1986) p. 11, at p. 18, also in Redfern, A. and Hunter, M., Law and Practice of International Commercial Arbitration, 2nd edn. (1991) App. 21, p. 798, at p. 806, pp. 508–527;Google Scholar see also Herrmann, G., ‘UNCITRAL Adopts Model Law on International Commercial Arbitration’, 2 Arbitration Int. (1986) p. 2;CrossRefGoogle ScholarHerrmann, G., ‘The UNCITRAL Model Law – Its Background, Salient Features and Purposes’, 1 Arbitration Int. (1985) p. 6.CrossRefGoogle Scholar
9. See generally, Lando, O., ‘The Conflict of Laws of Contracts: General Principles’, 189 Hague Recueil (1984–VI) pp. 225–448;Google ScholarWeintraub, R.J., ‘Fundamental Developments in Choice of Law for Contracts’, 187 Hague Receil (1984–IV) pp. 239–306;Google ScholarDavid, R., L'Arbitrage dans le Commerce International (1982);Google ScholarBatiffol, H., Les Controls en droit international Privé Comparé (1981);Google ScholarSmedresman, P.S., ’Conflict of Laws in International Commercial Arbitration: A Survey of Recent Developments’, 7 Calif. WILJ (1977) p. 263.Google Scholar
10. Rules for the International Chamber of Commerce Court of Arbitration, Art. 13.3 reprinted in 15 ILM (1976) p. 395; Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, March 18, 1965, Art. 42.1: 17 UST 1270; TIAS No. 6090, 576; UNTS 159 reprinted in 4 ILM (1965) p. 532; UN Conventions on International Trade Laws (UNCITRAL) Rules of Arbitration Art. 33(1) in II YB Com. Arb. (1977) p. 161; Model Law on International Commercial Arbitration (1985) Art. 28(2); European Convention on International Commercial Arbitration (1961), 484 UNTS 364, 16 May 1961, VII (I). See also B.P. v. Libya, 53 ILR (1979) p. 326.Google Scholar
See also Craig, W.L. et al. , International Chamber of Commerce Arbitration, 2nd edn. (1990) at pp. 283–292;Google ScholarDore, I.I., Arbitration and Conciliation under the UNCITRAL Rules: A Textual Analysis (1986).Google Scholar
11. See Goldman, B., ‘Les conflits de lois dans l'arbitrage international de droit privé’, 109 Hague Recueil (1963-II) pp. 347, 409.Google Scholar
12. See generally, Prebble, J., Choice of Law to Determine the Validity and Effects of Contract (thesis, Cornell University, 1972);Google ScholarPrebble, J., ‘Choice of Law to Determine the Validity and Effect of Contracts: A Comparison of English and American Approaches to Conflict of Laws’, 3 Cornell LR (1973) p. 433;Google ScholarJaffey, A.J.E., ‘Essential Validity of Contracts in the English Conflicts of Laws’, 23 ICLQ (1974) p. 1;CrossRefGoogle ScholarJaffey, A.J.E., ‘The English Proper Law Doctrine and the EEC Convention’, 33 ICLQ (1984) p. 531;CrossRefGoogle ScholarUche, U.U., ‘Conflict of Laws in a Multi-Ethnic Setting: Lessons from Anglophone Africa’, 228 Hague Recueil (1991-III) p. 273.Google Scholar
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17. See generally, Klein, F.-E., ‘The Law to be Applied by the Arbitrator to the Substance of the Dispute’, in Schultszand, J.C.van den Berg, A.J., eds., The Art of Arbitration (1982) p. 189.Google Scholar
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19. See S.P.P.(Middle East) Ltd. et al. v. Arab Republic of Egypt 22 ILM (1983) p. 752, at p. 769,Google Scholar para. 49, in favour ofthe lex loci solutionis; see also Petroleum Development Ltd. v. Sheikh of Abu Dhabi (1951) 18 ILR p. 144;Google Scholar ICC Arbitration No. 1472, Award 196S, in Revue de l‘arbitrage (1973) p. 141.
See also Foreign Trade Arbitration Commission, Moscow: Award 4 May 1957 Necton S.A. (Belgium) v. Prodintorg, Collected Arbitration cases FTAC No. 61, also in Journal du droit international (1960) p. 880;Google Scholar see also Collected Arbitration Cases FTAC (4 vols, covering 1934–1965) Nos. 18, 29, 34, 36, 40, 44–46, 50, 52–54, 56, 60, 62, 68, 75–78, 125, 131.
See the Interim Award in ICC Case No. 6560 of 1990, 17 YB Comm. Arb. (1992) pp. 226–229; see also the Final Award in ICC Case No. 6283 of 1990, 17 YB Comm. Arb. (1992) p. 178, at p. 179.
20. See the Interim Award in ICC Case No. 6560 of 1990, 17 YB Comm. Arb. (1992) pp. 226–229; see also the Final Award in ICC Case No. 6283 of 1990, 17 YB Comm. Arb. (1992) p. 178, at p. 179.
21. See the Final Award in ICC Case No. 5885 of 1989, 16 YB Comm. Arb. (1991) p. 92; see also the Hague Convention on the Law Applicable to International Sales (1955) Art. 3(1).
22. ICSID Convention of 1965 Art. 42(1).
23. Sapphire International Petroleum Ltd. v. National Iranian Oil Co. (1963), 35 ILR p. 171;Google ScholarSaudi Arabia v. Arabian American Oil Co. (1959), 27 ILR p. 165, at p. 166;Google ScholarRevere Copper and Brass Inc. v. Overseas Privatelnt. Corp. (1978), 56 ILR p. 294;Google Scholar for other possibilities see 18 Int. Lawyer, (1984) p. 245, at pp. 255–256; Ann. IDI (1979–11) p. 281Google Scholar, Arts. 1 and 2.
Reese, W.L.M., ’Dépaçage: A Common Phenomenon in Choice of Law’, 73 Columbia LR (1973) p. 58:CrossRefGoogle Scholar ‘Dépeçage can be defined broadly to cover all situations where the rules of different States are applied to govern different issues in the same case. It can be defined more narrowly to be present only when the rules of different States are applied to govern different substantive issues, and most restrictive definitions would confine the term to situations where by applying the rules of different States to different issues a result is reached which could not be obtained by exclusive application of the law of any one of the States concerned’.
24. See Dicey and Morris on the Conflict of Laws, 10th edn. (1980) vol. 2, at p. 1127;Google ScholarSassoon, D.M., ‘Choice of Tribunal and the Proper Law of the Contract’, J. Bus. L. (1964) p. 18;Google ScholarCollins, L., ‘Arbitration Clauses and Forum Selecting Clauses in the Conflict of Laws: Some Recent Developments in England’, 2 J. Mar. L. & Comm. (1971) p. 363.Google Scholar
25. 47(2) Ann. IDI (1957) p. 491, at p. 496.
26. See 48(2) Ann. IDI (1959) at p. 264.
27. Mann, F.A., ‘The Theoretical Approach Towards the Law Governing Contracts between States and Private Foreign Persons’, 11 Revue Beige (1975) p. 562, at p. 565.Google Scholar See also Mann, , ‘Lex Facit Arbitrum’, in Sanders, P., ed., International Arbitration: Liber Amicorum for Martin Domke (1967) p. 157, at pp. 159–160.Google Scholar See the observations of Mann in 63(1) Ann IDI (1989) p. 173; Graveson, R.H., Conflict of Laws, 7th edn. (1974) p. 57.Google Scholar But see ‘The UNCITRAL Model Law – Lex Facit Arbitrum’ – The Notes Editors, 2 Arbitration Int. (1986) no. 3, pp. 241–261.
28. In many awards arbitrators relied on the rules of lex fori. See, for instance, the Sapphire award, 35 ILR at p. 171;Google ScholarAlsing Trading Co. Ltd. and Svenska Tandsticks Aktiebolaget v. Greece (Award of 22 December 1954), 23 ILR p. 633,Google Scholar at p. 637. Cf., BP. v. Libya, 53 ILR p. 309,Google Scholar at pp. 326–27; The Government of Kuwait v. Aminoil, 66 ILR at p. 560.Google Scholar
29. In the Economic Commission for Europe (ECE), the negotiatorsof the European Convention on International Commercial Arbitration 1961 rejected the Institut's position and adopted an alternative approach that has gained a wide following. According to the Convention, arbitrators have wide discretion as to the applicable conflict of laws to determine the proper law when such a provision to this effect is absent in the contract. See Art. VII(I) of the European Convention on International Commercial Arbitration 1961,484 UNTS 364, reprinted in Brower, C. and Marks, L., eds., International Commercial Arbitration (1983) p. 215.Google Scholar See also Art. 13(3) of the ICC Arbitration Rules, 28 ILM (1989) p. 231; Art. 33 of the UNCITRAL Arbitration Rules and Art. 28 of UNCITRAL's 1985 Model Law on International Commercial Arbitration, 15 ILM (1976) p. 701, and 24 ILM (1985) at p. 1302, respectively.
30. Batiffol has stressed the contrast between State judges, who are bound by the conflict rules of their State, and international arbitrators, who are not rendering justice in the name of any State. See Batiffol, H., ‘L'arbitrage et les conflits de lois’, Revue de l'arbitrage (1957) p. 111;Google Scholar ICC Award No. 1250 of May 1954, 5 YB Comm. Arb. (1980) p. 168; see also Holleaux, in Revue de l'arbitrage (1964) p. 134;Google ScholarCarlston, K.S., ‘PsychologicalandSociologicalAspectsoftheJudicialand Arbitration Processes’, in Sanders, , ed., op. cit. n. 27, p. 44;Google Scholar I.N.D. Wallace, Q.C., ‘Control by the Courts: A Plea for More, Not Less’, 6 Arbitration Int. (1990) no. 3, p. 253
31. See the Kuwait v. Aminoil arbitration case, Aminoil Counter-Memorial (5 January 1981), vol. I (Text), Pleadings, Book 4, pp. 103–111, para. 226 et seq. [The Pleadings are available at the Research Centre for International Law, University of Cambridge, UK].
32. See Böckstiegel, K.-H., The Legal Rules Applicable in International Commercial Arbitration Involving States or State-ControlledEnterprises (1982) p. 52;Google ScholarLew, J., Applicable Law in International Commercial Arbitration (1978) pp. 252–253;Google Scholar see also Nusaire, Y.A.M., International Arbitration: the Place and the Stages of Arbitration (thesis, C.P.M.L.S., University of Dundee, 1987).Google Scholar
34. S.P.P. (Middle East) Ltd. et al. v. Arab Republic of Egypt, 22 ILM (1983) p. 752, at p. 769,Google Scholar para. 49. Cf., ICC Arbitration award 16 June 1960, Arb. Rechtspraak, 1960, p. 281 (in English); Ad hoc Arbitration award 15 August 1957; Arb. Rechtspraak, 1959, p. 243 (in Dutch); Arbitration court of the Bulgarian chamber of commerce awards 21/56, 1/56,5/55,2/56, 16/56, 10/56,17/56, 9/56, 67/64 as reported by Kojouharoff, in Journal du droit international (1967) p. 171 et seq, and p. 175;Google Scholar Foreign Trade Arbitration Commission, Moscow: Award of 4 May 1957, NectionS.A. (Belgium))v. Prodintorg; see Collected Arbitration cases FTAC No. 61, also published in Journal du droit international (1960) p. 880;Google Scholar see Collected Arbitration cases FTAC (four vols. covering 1934–1965) Nos. 18, 29, 34, 36, 40, 44–46, 50, 52–54, 56, 60, 62, 68, 75–78, 125, 131; ICC Arb. No. 1472 Award 1968, see Revue de l'arbitrage (1973) p. 141;Google Scholar see also Hober, K., ‘Arbitration in Moscow’, 3 Arbitration Int. (1987) no. 2, pp. 119–163.CrossRefGoogle Scholar
36. This is also known as the ‘Centre of gravity’ or ‘most significant contacts’ theory of the contract conflict of laws.
38. The Resolution ‘The Proper Law of the Contract in Agreements between a State and a Foreign Private Person’ of the Institut de Droit International (adopted by the Institut at its Athens Session, September 4–13, 1979), 58 Ann. IDI (1979) pp. 193, 195 (Arts. 1 and 5).Google Scholar
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41. In re United Railways of Havana & Reg la Warehouses Ltd.  AC p. 1007, at p. 1068.
43. Mann, F.A., ‘The Proper Law of the Conflicts of Law’, 36 ICLQ (1987) p. 437, at pp. 437–438:CrossRefGoogle Scholar ‘The expression “the proper law” is peculiarto the law of England and the Commonwealth. It does not seem to be usual in the United States and it means little, if anything to a Continental lawyer, for it makes sense only in an uncodified system of law. Taken literally, the term simply denotes the appropriate legal system. It says nothing about the all-important question how you find that system, how you identify it. There is, however, room for the impression that if you ask an English lawyer for a definition he will go a little further and mention the legal system with which the matter in issue is closely or, perhaps, most closely connected. John Morris certainly used the phrase in this sense’.
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49. See the Final Award in ICC Case No. 6363 of 1991, 17 YB Comm. Arb. (1992) p. 186, at pp. 190–191.
50. Award 1961 No. Vb 1024, cited by Mora in Questions of International Law (1964) p. 141.Google Scholar See also ICC Award, No. 805, Doc. No. 410/81, 24 October 1951; ICC Award No. 1001, Doc. No. 410/777, 12 October 1960; ICC Award No. 1005, Doc. No. 410/592, 10 April 1958; ICC Award No. 1846, Doc. No. 410/1953, 24 February 1971; ICC Award No. 1177, Doc. No. 410/1614,13 March 1968; ICC Award No. 1445, Doc. No. 410/1492,18 January 1967; ICC Award No. 1009, Doc. No. 410/514, 13 November 1957; ICC Award No. 1442, Doc. No. 410/1665, 25 September 1968; ICC Award No. 1082, Doc. No. 410/744, 15 June 1960; ICC Award No. 1687, Doc. No. 410 /1855,10 June 1970; ICC Award No. 1529, Doc. No. 410/1658, 10 July 1968; ICC Award No. 1717 (1972).
51. See the Interim Award in ICC Case No. 6560 of 1990, 17 YB Comm. Arb. (1992) p. 226.
54. Soviet Union: Civil Code (1964) Art. 566; Statute of Japan (Private International Law) Art. 7(2); Sawada, T., ‘Practice of Arbitration Institutions in Japan’, 4 Arbitration Int. (1988) No.2, p. 120;CrossRefGoogle Scholar Thailand: Private International Law Art. 13; Czechoslovakia: Private International Law and International Civil Procedural Law Art. 10(3); Bustamante Code Art. 186; Poland: Code on Private International Law Art. 29.
56. The former German Democratic Republic: The Act Concerning the Law Applicable to International Private, Family and Labour Law Relationships as well as to International Commercial Contracts Art. 12(2).
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76. ICC Arbitration No. 1776, Award 1970.
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81. ‘The arbitrator exercised his discretionary authority by selecting the law of the seat of arbitration (in that case Denmark) as the law applicable to the arbitral procedure. He apparently considered that an advantage of localizing the law in this way was that enforcement would be facilitated since the award made under the law of a contracting State would fall within the terms of the Convention on Enforcement of Foreign Arbitral Awards of 1958 (the so-called New York Convention). Attaching the award to the law of a particular State also provided the arbitrator with a developed procedural law for supplementary reference’. This point is brought out by Wetter, J.G. (who was Secretary of the tribunal) in The International Arbitral Process: Public and Private, vol. 2 (1979) pp. 409–410Google Scholar; see also the ICC Arbitration rules (reproduced in 13 YB Comm. Arb. (1988) p. 185) which stress in Art. 26 that the arbitrator ‘shall make every effort to make sure that the award is enforceable at law’.
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123. Under Art. V of the Claims Settlement Declaration, the Iran-US Claims Tribunal has great flexibility in its choice of law. Accordingly, the Tribunal has sometimes rejected the application of municipal law and has applied general principles of law. It has also adopted its own procedural law and choice-of-law principles. With regard to the Iran-US Claims Tribunal, Stein pointed out that the Tribunal has generally declined the invitation of the Claims Settlement Declaration to enter into subtle and academically satisfying discussions of conflict of laws principles, see the remarks made by Stein, T.L. in ASIL: Proceedings of the 78th Annual Meeting (1984) pp. 229–233.Google Scholar
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140. See Kuwait v. Aminoil, The Government's Memorial, Pleadings Bk. 3, para. 3.34, at p. 59; see also The Government's Reply (April 1981), Pleadings Bk. 9, paras. 2·36–2·54, at pp. 20–27. See generally, Robert, J. and Carbonneau, T.E., The French Law of Arbitration (1983).Google Scholar
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149. See generally, Hanotau, M.B., ‘Dépecage in Choice of Law: An Analysis’, in Le Contrat économique international stabilité et evolution (1973) l–A–3;Google ScholarReese, , loc. cit. n. 23, p. 58.Google Scholar But see McLachlan, C., ‘Splitting the Proper Law in Private International Law’, 61 BYIL (1990) p. 311;Google Scholar M. Ekelmans, ‘Le dépecage du contrat dans la Convention de Rome du 19 juin 1980 sur la loi applicable aux obligation contractuelles’, in Mélanges offerts à Raymond von Elst (1986) p. 243.
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153. See the Lena Goldfields case, 36 Cornell LQ (1951) p. 31 (Art. 89 of the agreement concerned between the parties); see also Kuwait v. Aminoil, The Aminoil Memorial (2 June 1980), Pleadings, vol. I (Text), Bk. 1, paras. 114–117, at pp. 40–41. But see The Government's CounterMemorial (December 1980), Pleadings Bk. 5, para. 3.35; Delaume, op. cit. n. 64.
155. See vol. I (2 June 1980) (Text), Pleadings Bk. 1, p. 39.
156. Ibid., para 113, at pp. 39–40; see also the Aminoil Reply (27 April 1981), Pleadings Bk. 7, paras. 50–76, at pp. 20–30. Aminoil suggested that, in view of Art. 111(2) of the Arbitration Agreement (that’ … the specific terms of Article 111(2) taken in the context of the Arbitration as a whole and of the contractual relations between the parties’), the applicable law should be the general principles of law. Ibid., Aminoil Memorial, vol. I (2 June 1980) (Text), Pleadings Bk. 1, p. 39, para. 113. Art. 111(2) of the Arbitration Agreement between Kuwait and Aminoil provides that: ‘The law governing the substantive issues between the parties shall be determined by the Tribunal, having regard to the quality of the parties, the transnational character of their relations and die principles of law and practice prevailing in the modern world’.
See also CMI InternationalInc. v. Ministryoj'Roads andTransportationetal., 4 Iran-USCTR (1983) p. 263, at p. 268; Bermann, G.A., ‘Contracts between States and Foreign Nationals: A Reassessment’.in Smit, H. et al. ., eds., International Contracts (1981) Ch. 7, pp. 183–212Google Scholar; W.L.M. Reese, “The Law Governing International Contracts’, ibid., Ch. 1, pp. 3–50. See also ICCA Report (Series No. 2) p. 190: “The concern to apply the law best corresponding to the expectations of the parties therefore seems to be the. central element in the determination of the legal norms which die international arbitrator must apply in solving a dispute. When the parties have expressly chosen die applicable law, die object of this expectation is a priori known and, uierefore, becomes useless. Failing such a choice, the arbitrator tends to show what this expectation could legitimately be, either in concreto, or in consideration of a certain international consensus’.
157. See also ICSID Model Clauses, Doc. ICSID/S/Rev. 1., 7 July 1981.
158. Serbian & Brazilian Loans cases, Judgments 14 and 15 (1929) PCIJ, ser. A. No. 20, at p. 42, No. 21, at p. 121.
161. Broches, A., “The Convention on the Settlement of Investment Disputes between States and Nationals of Other States’, 136 Hague Recueil (1972–11) p. 331, at p. 392.Google Scholar
162. ICSID Documents Concerning the Origin and the Formulation of the Convention, vol. 2, part 2, p. 270 et seq.
163. See, e.g., Benvenuti & Bonfant, 21 ILM (1982) at p. 752Google Scholar; AGIP Co. v. Peoples' Republic of Indonesia, 24 ILM (1985) p. 1023Google Scholar; AMCO Asia Corp et al. v. The Republic of Indonesia, 24 ILM (1985) p. 1023;Google Scholar AMCO Asia Corp. etal. v. The RepublicofIndonesia (FinalAward of 5 June 1990 and Decision on Supplemental Decision and Rectification of 17 October 1990), 17 YB Comm. Arb. (1992) p. 73,Google Scholar at pp. 75—76; Liberian Eastern Timber Co. (Letco) v. Liberia, ICSID Award of 31 March 1986,Google Scholar 26 ILM (1987) pp. 661–662;Google ScholarKlöckner v. Cameroon, 1 ICSID Rev. (1986) p. 89CrossRefGoogle Scholar. See also Asian Agricultural Products Ltd. (AAPL) v. Republic of Sri Lanka, 30 ILM (1991) p. 580Google Scholar, also in 17 YB Comm. Arb. (1992) p. 106,Google Scholar see also comments on the case in Vasciannie, S.C., ‘Bilateral Investment Treaties and Civil Strife: The AAPL/Sri Lanka Arbitration’, 39 NILR (1992) p. 332, especially at pp. 335–339CrossRefGoogle Scholar. See also Burzynski, A., ‘Paving the Road for Settlement of Investment Issues: Polish ExperienceSo Far’, 18 Polish YIL (1989–1990)p. 135, at pp. 140–141Google Scholar; E.P.J. Myjer, ‘ICSID and the Settlement of Investment Disputes in Poland’, ibid., p. 143.
168. See, e.g., the ICC Award in S.P.P. (Middle East) Ltd. and S.P.P. Ltd. v. Egypt and Egoth, 22 ILM (1983) p. 752,Google Scholar at pp. 768–770; an the Ad hoc Tribunal Award in Kuwait v. Aminoil, 66 ILR p. 518.Google Scholar In recent contract practice, the ICSID formula is sometimes found to be explicitly incorporatedinconcessioncontracts.Thus, a 1987 Ghanaian agreement provides that: ‘This Agreement shall be governed by and construed in accordance with the laws of Ghana and such principles of international law as may be applicable’.
169. Redfern, and Hunter, , op. cit. n. 6, at p. 12Google Scholar: ‘… an agreement to arbitrate represented a compromise on the part of the parties; and this is reflected in the language of the civil law which refers to a submission agreement as a compromis and to an arbitration clause as a clause compromissoire’. See also fn. 44: ‘The secondary meaning of compromis is given as ‘an agreement under which the parties make mutual concessions’. Robert's Dictionnaire de la languefrançaise.
170. See ICCA Report (Series No. 2) p. 189.