International Commercial Arbitration Lecture 2 Applicable Law Part

International Commercial Arbitration Lecture 2: Applicable Law. Part One. By Feruza Bobokulova

Applicable Law • At least five different systems of law may be relevant to ICA, which are: • The law governing the parties’ capacity to enter into an arbitration agreement; • The law governing the arbitration agreement and the performance of that agreement; • The law governing the existence and proceedings of the AT-the lex arbitri; • The law governing the substantive issues in dispute-generally described as the ‘applicable law’, ‘governing law’, ‘the proper law of the contract’ or ‘the substantive law’, and • The law governing the recognition and enforcement of the award

Applicable Law • An ICA usually takes place in a country that is neutral, in the sense that none of the parties to the arbitration has a place of business or residence there • This means that the law of the country in whose territory the arbitration takes place, the lex arbitri, will be different from the law that governs the substantive matters in dispute

Applicable Law • If the parties do not make an express choice of the place of arbitration, the choice will have to be made for them, either by the AT itself or by a designated arbitral institution • If the ICC is called upon to choose a place of arbitration under such a provision, it generally selects the country of the sole or presiding arbitrator because the arbitrator is usually of a different nationality from that of the parties

The Lex Arbitri • The lex arbitri is likely to extend to: • The definition and form of an agreement to arbitrate; • Whether a dispute is capable of being referred to arbitration; • The constitution of the AT and any grounds for challenge of that tribunal; • The entitlement of the AT to rule on its own jurisdiction; • Equal treatment of the parties; • Freedom to agree upon detailed rules or procedure; • Interim measures of protection; • Statement of claim and defence; • Hearings; • Default proceedings; • Court assistance if required, and others.

Procedural Rules and Lex Arbitri • There is a great difference between the general provisions of the law governing the arbitration (the lex arbitri) and the detailed procedural rules that will need to be adopted or adapted for the conduct of the proceedings • The rules of the arbitral institutions, such as the ICC and the LCIA, provide an overall framework within which to operate. Even these rules will need to be supplemented by more detailed provisions • It is sometimes suggested that parties to an arbitration are free to choose between the law governing the arbitration (the lex arbitri) and a set of procedural rules

The Seat Theory • The concept that an arbitration is governed by the law of the place in which it is held, which is the ‘seat’ (or forum or ‘locus arbitri’) of the arbitration, is well established in both theory and practice of international arbitration • The seat of arbitration is defined as ‘the juridical seat of the arbitration designated by the parties or by an arbitral institution or the arbitrators themselves, as the case may be. Unless the parties agree otherwise, the seat of the arbitration must be stated in the award of the arbitrators’.

Is the Lex Arbitri Procedural Law? • It is true that the lex arbitri may deal with procedural matters, but it is much more than a purely procedural law • It may stipulate that a given type of dispute is not capable of settlement by arbitration under the local law and this is not a matter of procedure • Or an award may be set aside on the basis that it is contrary to the public policy of the lex arbitri • Parties may well choose a particular place of arbitration precisely because its lex arbitri is one which they find attractive. Nevertheless, once a place of arbitration has been chosen, it brings with it its own law. If that law contains provisions that are mandatory so far as arbitrations are concerned, those provisions must be obeyed. It is not matter of choice.

Choice of Foreign Procedural Law • The concept of subjecting an arbitration in one state to the procedural law of another has been the subject of much discussion • It is not easy to understand why parties might wish to complicate the conduct of an arbitration in this way as it means that the parties and the AT would need to have regard to two procedural laws • If the procedural law of a particular country is so attractive or so familiar to the parties that they wish to adopt it, they would do better to locate their arbitration in that country

Where an Award is Made • It may become necessary to determine where an award is made because recognition and enforcement of an ward may be refused on the basis that the arbitration agreement was not valid ‘under the law of the country where the award was made’ • Some arbitration rules and some national laws deal expressly with the place at which an award is made. F. e. , the ICC Rules provide that an award is deemed to be made at the place (or seat) of the arbitration and on the date stated therein

Delocalization Theory • Delocalization theory stipulates that ICA is to be detached from control by the law of the place in which it is held • The idea being that instead of dual system of control, first by the lext arbitri and then by the courts of the place of enforcement of the award, there should be only one point of control-that of the place of enforcement • The delocalization theory took as its starting point the autonomy of the parties • The reality is that the delocalization of arbitrations (other than ICSID) is only possible if the local law permits it

The Law Applicable to Substance • When questions of procedure have been settled, the principal task of the AT is to establish the material facts of the dispute. It does this by examining the agreement between the parties, by considering other relevant documents • An agreement intended to create legal relations is supported by a system of law, which is generally known as ‘the substantive law’, ‘the applicable law’, or ‘the governing law’ of the contract • Changes in the law applicable to the contract may bring about changes in the contract itself. For instance, a country may enact currency regulations. These regulations will then apply to contracts that are governed by the law of that country

The Autonomy of the Parties • It is generally recognized that parties to an international commercial agreement are free to choose for themselves the law applicable to that agreement • The Washington Convention: “The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. ” • The UNCITRAL Rules: “The AT shall apply the law designated by the parties as applicable to the substance of the dispute. ”

Restrictions on Party Autonomy • There may be limited restrictions on the rule, designed to ensure that the choice of law is bona fide and is not contrary to public policy • Thus, the Rome Convention, f. e. , does not allow the choice of a foreign law to override the mandatory rules of law of a country to which all the factual elements of the contract point so that, f. e. , the choice of a foreign law for the purpose of tax evasion would not be permissible • In Soleimony v Soleimony, the English Court of Appeal refused to enforce an award where the transaction was not illegal under the applicable law, but was illegal under English law

Time of Choice • At its origin, the rule of party autonomy related to the freedom of the parties to choose the applicable law at the time of making their contract • It now extends (under the international conventions and rules cited) to the right of the parties to choose the law as it is to be applied at the time of the dispute

The Choices • The choices that may be available to the parties include: • National law • Public international law (including general principles of law) • Concurrent laws (and combined laws – the tronc commun doctrine) • Transnational law (including international development law, the lex mercatoria, codified terms and practice, and trade usages) • Equity and good conscience

National Law • In most international commercial contracts, including those where a state or a state entity is one of the parties, it is usual for a given system of law to be chosen as the law applicable to the contract itself • In an ideal world, almost any national system of law should be suitable so long as that law had been drawn up in a manner which suits the requirements of modern commerce • In the real world, some national systems of law will be found to contain outdated laws and regulations, which make htem unsuitable for use in international contracts

National Law- Precluding Unfair Treatment • Various devices such as revision clauses, hardshlp clauses, and force majeure clauses have been borrowed from private law contracts with the aim of helping to maintain the balance of the contractual relationship • In some long-term economic development agreements, tha national law has been frozen by the parties agreeing that the law of the state party will be applied as it was on a given date • The state party may still introduce a law avoiding such clauses in its own territory

National Law- Stabilization Clauses • Another method that has been tried, particularly in oil concession agreements, is the inclusion of stabilization clauses • These are undertakings on the part of the contracting state that it will not change the terms of the contract by legislative action, without the consent of the other party to the contract • In one of the arbitrations, which arose out of the Libyan oil nationalizations, the arbitrator held that the Libyan government’s act of nationalization was in breach of certain stabilization clauses and accordingly an illegal act under international law, entitling the companies to restitution of their concessions

National Law- Stabilization Clauses • In another Libyan oil nationalization arbitration, where the facts were almost identical, the sole arbitrator did not regard the stabilization clauses as preventing the government’s act of nationalization • He held that this nationalization was a legitimate exercise of sovereign power as long as it was accompanied by equitable compensation • Stabilization clauses like provisions that seek to freeze the law, attempt to maintain a particular legal regime in existence, often for a considerable period of time, irrespective of any changes, which may occur in the political, social, and economic environment of the country concerned

Public International Law and General Principles of Law • International law may be specified as the substantive law of a contract • There are many sources of international law, including international conventions and international custom, but probably the most relevant, so far as non-state parties are concerned, are the general principles of law recognized by civilized nations • The problems of adopting international law or the general principles of law, as the system of law which is to govern a commercial relationship is not a problem of principle but of practice • International law being concerned primarily with the relationship between states, is not particularly well equipped to deal with detailed contractual issues. The same criticism may be made towards general principles of law • Therefore, they should not solely be used in a contract, but should be used as a concurrent law

Concurrent Laws, Combined Laws, and the Tronc Commun Doctrine • One established safeguard against unfair or arbitrary action by the state party to the contract is to stipulate the state’s own law will apply only insofar as it accords with either public international law, the general principles of law or some other system with accepted minimum standards • The Washington Convention makes use of this system of concurrent laws and it provides for the resolution of disputes between a state and a private party • The Convention stipulates that if a dispute arises and there has been no express choice of law by the parties, the AT will apply the law of the contracting state and such rules of international law as may be applicable

Concurrent Laws, Combined Laws, and the Tronc Commun Doctrine • Choosing the national laws of both parties and so obtaining the best or the worst of both world is stipulated under the tronc commun doctrine • The doctrine is based on the proposition that if free to do so, each party to international commercial transaction would choose its own national law to govern that transaction • If this proves to be unacceptable, common parts of the two different systems of law should be identified and applied to the matters in dispute

Concurrent Laws, Combined Laws, and the Tronc Commun Doctrine • In the Channel Tunnel project, Eurotunnel, entered into a construction contract with a group of Anglo-French companies • Surprisingly, this agreement between two private entities referred not to the national law of either party; not indeed to any national system of law, but instead to the common principles of both systems of law • When the dispute arose, the search for common principles of English and French law meant that teams of French and English lawyers on each side had to determine what the answer was likely to be under the applicable principles of their own law and then work out to what extent, if at all, these principles were common to both systems of law

Transnational Law The Lex Mercatoria • Probably the most important development in the field of transnational law is that of the lex mercatoria • This new law draws on the sources of public international law and the general principles of law • It also draws on the UNIDROIT Principles of international Commercial Law and the 1998 Principles of European Contract Law

Transnational Law: The Shari’ah • In a case, which came before the English court, a financial transaction had been structured in a manner, which ensured that the transaction confirmed with orthodox Islamic banking practice • There was provision for any disputes to be settled by arbitration in London under the ICC Rules of Arbitration and there was a choice of law clauses, which provided for any dispute to be ‘governed by the Law of England except to the extent it may conflict with Islamic Shari’ah, which shall prevail’

Transnational Law: The Shari’ah • The dispute arose and the sole arbitrator, Mr. Samir Saleh was appointed • The arbitrator’s award was challenged by the losing party, but the challenge was rejected by the English court, which held that the award was a clear and full evaluation of the issues and had all the appearances of being right

Transnational Law: Trade Usages • The relevant trade usages will have to be established by evidence in any given case unless the arbitrators are familiar with them and make this clear to the parties • The ICC has been prominent in attempting to establish a commonly understood meaning for expressions that are in frequent use in international trade contracts • Terms such as ‘ex works’, “CIF”, “FOB” are expressions which are in common use and which are intended to set out the rights and obligations of the parties

Equity and Good Conscience • Arbitrators may from time to time be required to settle a dispute by determining it on the basis of what is ‘fair and reasonable’, rather than on the basis of law • Such power is conferred upon them by so-called equity clauses • For the clauses to be effective, first, the parties must expressly agree to them, and secondly, they should be permitted by the applicable law

Equity and Good Conscience • Decided in equity gives different interpretations of equity: • The AT should apply relevant rules of law to the dispute, but may ignore any rules which are purely formalistic, or • The AT should apply relevant rules of law to the dispute, but may ignore any rules which appear to operate harshly or unfairly in the particular case before it; or • The AT should decide according to the general principles of law; or • The AT may ignore completely any rules of law and decide the case on its merits

Reading Materials • Redfern, A. , Hunter, M. , Blackaby, N. , and Partasides, C. , 2004. Law and Practice of International Commercial Arbitration, 4 th edn. London: Sweet and Maxwell. • Tweeddale, A. and Tweeddale, K. , 2005. Arbitration of Commercial Disptues: International English Law and Practice. Oxford: Oxford University Press.

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