Worldwide: Choice Of Law: Problems In International Commercial Arbitration

Last Updated: 13 January 2017
Article by Amarendra Pratap Singh

Most Read Contributor in India, July 2017

INTRODUCTION

A. DETERMINATION OF THE APPLICABLE LAW BY THE PARTIES

When an arbitrator has to decide which law to apply for the solution of the dispute, he may find a contractual clause providing an express choice of law1: "The validity, construction and performance of this contract shall be governed by and in accordance with the law of..." or similar provisions. The parties may provide for the application of some national law or for some nonnational set of rules.

IF THE PARTIES CHOOSE A NATIONAL LAW

In such situation, the arbitrator has to decide: should he test the autonomy of the parties in choosing the applicable law under a conflict of laws system or should he recognize that freedom without relying on any conflict of laws rule? The party autonomy is widely recognized both in common law and civil law. However, not every country gives parties unlimited freedom to choose the applicable law. Since every right, power or duty of a person has its root in the law of the nation, even the party autonomy principle as well as arbitration as a whole, must rely on and derive its existence from a national law system. The arbitrator must analyze the party autonomy under the conflict of laws of the lex fori and he can also disregard the choice of the parties if they did not select the national law with which the contract has its closest connection. In so doing they can find an agreement that they probably could not have reached if they had applied the national law of either party. Those factors make the choice of the parties "appropriate" – meaning that for those reasons the contract has sufficient connections with that law such as to admit that choice.

(II) IF THE PARTIES CHOOSE A NON-NATIONAL SET OF RULES

Non-national standard has been defined in different ways: international law, international customs or usages2, transnational law. In spite of all these different labels probably the same phenomenon reoccurs: a set of rules developed to regulate international trade in the merchants' community. The question is whether an arbitrator should respect the choice of the parties. Furthermore, not being a highly developed system, lex mercatoria does not cover all the matters which might be the object of a dispute.

B. Determination of the Applicable Law by the Arbitrator When the Parties Do Not Make a Choice

It so happens that an agreement is sound but when parties reach the stage of selecting the applicable law they face a difficult situation. They come from different countries and therefore they are not acquainted with and do not confide in the respective national laws. Why is the determination of the applicable law by the arbitrator a problem in an international commercial arbitration?

(i) Application of the Conflict of Laws System of the Country Which Would Have Had Jurisdiction in the Absence of an Arbitration Clause The conflict of laws system controlling arbitration is that of the country which would have had jurisdiction to settle the dispute between the parties if they had not included the arbitration clause in the contract. That country has been in reality dispossessed of its jurisdictional authority by the arbitration clause and therefore it may reaffirm its control over arbitration in this way. The theory has been criticized mainly on two grounds. An arbitrator, under Anzilloti's theory, has the difficult burden to determine which national court would have had jurisdiction if parties had not submitted to arbitration. Second, this solution is not acceptable because it is circular. An arbitrator has to select a conflict of laws rule to know which country would have had jurisdiction; hence the issue of the applicable private international law system arises again.3

(ii) Application of the Conflict of Laws System Where the Arbitral Tribunal Has Its Seat Under this theory, the will of parties is respected: they can freely choose the seat of arbitration and therefore indirectly select the applicable conflict of laws rule. An arbitration clause, as any other contract between private parties, cannot be suspended in the air, but must draw its authority from a national law provision.

(iii) Application of the Conflict of Laws System:

Three Trends

It has often been suggested that the conflict of laws rules of the arbitrator should apply. The first question is: what test should be followed: the nationality, the domicile or the residence of the arbitrator? The argument in favor of this theory is that an arbitrator has the best knowledge of his personal law. It is very easy to object that in an ICA the two parties come from different countries and therefore an arbitrator choosing the law of either party leaves the other one unsatisfied. The third and last example is the attempt to apply the private international law system of the state where the arbitral award will be enforced.

(iv) Cumulative Application of the Conflict of Laws Systems Connected with the Dispute An arbitrator, instead of applying one of the conflict of laws systems mentioned in the previous sections, looks at all the systems that have any contact with the dispute.4 From this analysis, might ascertain that these systems lead to the same solution: they all select the same national law as applicable to the contract.

(v) Application of a Substantive National Law without Having Recourse to any Conflict of Laws System

The substantive conflicting laws may contain different provisions, hence leading to dissimilar solutions of the dispute: this is a so-called true conflict of laws situation. In this context a national court would usually apply its private international law rule. When the intention of the parties to a contract with regard to the law governing it is not expressed and cannot be inferred from the circumstances, the contract is governed by the system of law with which the transaction has its closest and most real connection.5

II. INTERNATIONAL CONVENTIONS' PROVISIONS AND ARBITRAL INSTITUTIONS' RULES ON THE APPLICABLE LAW

(i) New York Convention on Recognition and Enforcement of Foreign Arbitral Awards Its purpose is to render compulsory among contracting parties the enforcement of arbitral awards. Therefore the specific subject of the Convention does not interfere with the issue at hand: the applicable law in an international commercial arbitration. The provision is dealing exclusively with the arbitration agreement and not with the whole contract. It is undisputed today that the two issues, the validity of the arbitration agreement and the validity of the contract, are separate and therefore the law applicable to the former is not necessarily the same one applicable to the latter. Consequently a national court could refuse enforcement of the award if the arbitration clause was invalid under either law of article V (l) a, but it could not if any other substantive provision of the contract was invalid under that law.

(ii) European Convention on International Commercial Arbitration, April 21, 1961 In contrast with the New York Convention, article VII6 of the European Convention specifically deals with the issue of the applicable law in an international commercial arbitration.

(iii) Rules of Arbitral Institutions on the Applicable Law The International Chamber of Commerce, the UNCITRAL, the UNECAFE and the UNECE Arbitration Rules, contain specific provisions dealing with the law applicable in an international commercial arbitration. All three provisions follow the pattern of the 1961 European Convention: recognition of the principle of party autonomy, the rule of conflicts which the arbitrator deems applicable and the relevant trade usages.

III. CONCLUSION: THE RATIONALE UNDERGIRDING THE DEBATE OF CHOICE OF LAW

Some authors support lex mercatoria, "denationalization" of arbitration and the idea that arbitration should not be necessarily bound by any national conflict of laws rule. Another part of the doctrine, as authoritative as this, argues against lex mercatoria and any attempt to detach arbitration from any national law system. It is important to stress that international commerce needs a "denationalization" of arbitration and that international merchants look at an arbitration as disconnected from any national law system. One has to demonstrate how this new legal order, in which international arbitration plays such an important role, can subsist theoretically.

Footnotes

1 Article 28(1) of the UNCITRAL Model Law on International Commercial Arbitration.

2 Article 28(4) of the UNCITRAL Model Law on International Commercial Arbitration; Article VII, European Convention on International Commercial Arbitration.

3 Videocon Industries Pvt. Ltd. v. UOI (2011) 6 SCC 161. 4 C v. D, 2007 EWHC 1541 (Comm).

5 Article 187, Swiss P.I.L. Act.

6 Art. VII of the Convention reads: The parties shall be free to determine, by agreement, the law to be applied by the arbitrators to the substance of the dispute. Failing any indication by the parties as to the applicable law, the arbitrators shall apply the proper law under the rule of conflict that the arbitrators deem applicable. In both cases the arbitrators shall take account of the terms of the contract and trade wages.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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