Governing Law and Dispute Resolution Design in International Investment Agreements

Governing Law and Dispute Resolution Design in International Investment Agreements

International investment agreements span a wide range of structures: concession and implementation contracts with public authorities, energy and infrastructure projects, mining and licensing arrangements, joint ventures, and long-term supply or operations agreements. In practice, two issues determine the “outcome” of the relationship long before any dispute is filed: the choice of governing law and a well-built dispute resolution design. Because investments are inherently long-term, they face shifting regulations, currency risk, permitting delays, and potential public-interest interventions. In this environment, uncertainty becomes the most expensive cost.

1) Governing law is not a single sentence—it is an architecture

A clause saying “This agreement shall be governed by the law of X” is necessary, but rarely sufficient. In cross-border investments, governing law should be analyzed in three layers:

1. Contractual governing law: The law chosen by the parties typically governs formation, interpretation, performance, default, remedies, damages, and liability allocation.
2. Mandatory rules of the host state: Licensing, environmental compliance, tax, competition, public procurement, sanctions, and regulatory supervision often operate as mandatory regimes. Even with a foreign governing law clause, these rules can shape performance and risk allocation in real life. The investor should map potential friction points between the chosen law and the host-state’s mandatory regulations.
3. International law overlay: Where the project interacts heavily with state power, treaty-based protections under investment treaties (BITs and similar instruments) can create an additional, non-contractual protection layer—covering standards such as fair and equitable treatment, protection against unlawful expropriation, non-discrimination, and free transfer of funds.

The key point is this: the choice of governing law should not be driven by familiarity alone. It must produce predictability against the project’s true risk profile—permit cancellation, tariff changes, sanctions exposure, transfer restrictions, and unilateral governmental measures.

2) Stabilization, adaptation, and renegotiation mechanisms

One of the most litigated areas in long-term investment contracts is change in law. For that reason, parties often use:

• Stabilization clauses (limiting the investor’s exposure to legal/regulatory changes),
• Adaptation and rebalancing tools (hardship, economic equilibrium, tariff adjustment),
• Renegotiation triggers (license-condition changes, significant tax burden increases, currency/transfer restrictions).

These tools are where governing-law analysis meets commercial reality. Poorly drafted clauses create disputes; well-drafted clauses prevent them—or at least narrow the battlefield.

3) Dispute resolution design: “where, how, and when?”

Dispute resolution design is not just choosing “court or arbitration.” It is process engineering. A robust design clarifies at least the following:

• Forum selection: In state-linked projects, arbitration is commonly preferred; in purely private deals, hybrids (courts + arbitration) may be used.
• Rules and institution: Institutional arbitration (e.g., an ICC-style framework) versus ad hoc arbitration (UNCITRAL-style). Institutions can improve discipline on timelines, appointments, costs, and procedural organization.
• Seat of arbitration: The seat determines the annulment regime and the scope of court support. A “neutral seat” is a classic risk-management choice.
• Language, confidentiality, document production: Will the process allow broad document production (closer to common-law practice), or a more limited civil-law approach? This choice directly impacts cost and duration.
• Multi-tier clauses: Negotiation–senior management escalation–mediation–arbitration structures can be helpful, but if drafted vaguely they can turn into gateway fights over whether arbitration is premature. Define time limits, participants, and clear failure criteria.
• Interim relief: Emergency arbitrator, interim injunctions, security, and evidence preservation should be addressed with clarity—especially where assets, permits, or sensitive data are involved.
• Parallel proceedings risk: Contract arbitration and investment arbitration can overlap. Drafting may consider tools such as fork-in-the-road concepts, waivers, consolidation/joinder mechanisms, and coordination language to reduce inconsistent outcomes.

4) Practical takeaway: good design prevents disputes—or at least makes them cheaper

A coherent governing law strategy combined with careful dispute resolution design increases predictability, reduces early procedural fights (jurisdiction and governing law battles), and helps the parties focus on merits if a dispute arises. In international investment agreements, the goal is not only “to win” but to reduce uncertainty and protect the investment’s long-term sustainability.