The primary application of national law is often a result of agreement between the disputing parties or other considerations relating to the sovereignty of the host state. The reason this happens is that the host state has the sovereign right to regulate activity on its territory. A less common reason for application of national or foreign law is the nature of the claim, such as a breach of contract. However, it is possible for a dispute to involve both of these factors.

The primary application of national law is determined by the courts of a particular state. The tribunals decide whether the rule is applicable or not, according to its terms. When they do not reach a decision, they can make use of other rules of law. If the parties agree to the interpretation of national law, it will apply. Otherwise, a party may seek international arbitration. The host state will try to avoid this, and will attempt to apply its domestic law where appropriate.

The secondary application of national law in investment treaty arbitration is based on the principle that a country’s domestic law should be overridden by international rules. As long as the governing bodies of both parties have agreed to this, the arbitral tribunal can override the prevailing national laws. In such cases, the arbitral tribunals can enact new rules that are not derived from national law. A judge may be able to rewrite a ruling based on international rules, and a party can challenge the validity of the result.