12 – CHOICE OF SUBSTANTIVE LAW IN INTERNATIONAL ARBITRATION

This chapter examines the choice of substantive law applied to the merits of the parties’ dispute in an international arbitration. The chapter first considers the choice of substantive law by international arbitrators in the absence of any agreement by the parties as to the law governing their dispute, including the examination of principal choice-of-law rules applied in international commercial and investment arbitration. Second, the chapter considers the choice of substantive law where parties have agreed to a choice-of-law clause selecting the applicable law, including the conflict of laws principles applicable to the validity and en-forceability of such agreements. Third, the chapter considers the interpretation of choice-of-law agreements.

Parties often choose international arbitration to resolve their disputes because they desire enhanced certainty and predictability about their legal rights. Among other things, private parties want a stable, predictable substantive legal regime and a single, neutral procedural framework.¹ These objectives are particularly important in international commercial matters, where the needs for predictability and stability are particularly acute.

International arbitration seeks to provide comparative predictability with respect to both substantive and procedural matters,² often by combining a choice-of-law clause with an arbitration agreement. As explained by the U.S. Supreme Court in Scherk v. Alberto-Culver Co.:

         uncertainty will almost inevitably exist with respect to any contract touching two or more countries, each with its own substantive laws and conflict-of-laws rules. A contractual provision specifying in advance the forum in which disputes shall be litigated and the law to be applied is, therefore, an almost indispensable precondition to achievement of the orderliness and predictability essential to any international business transaction.³

There is considerable force to this analysis. Nevertheless, while arbitrating international disputes offers advantages over litigation in national courts, it sometimes can also generate choice-of-law questions that are potentially as complex as those in litigation. The choice-of-law complexities that arise in international arbitration do not comport with the ideals of predictability and efficiency of the arbitral process. In the words of one commentator:

         The freedom [that arbitrators have in choosing the applicable law] has been useful in some cases. However, it has also led to some unpredictability. With the growing use of international arbitration this uncertainty has become a matter of concern to parties. They see no attraction in unpredictable conflict-of-laws rules. They need some degree of certainty as to the law applicable, when drafting their contracts … and when resorting to arbitration.⁴

As discussed above, it is necessary to distinguish between several different conflict of laws issues that arise in the international arbitral process.⁵ In international arbitration, questions can arise about any of the following applicable laws: (1) the substantive law applicable to the merits of the parties’ dispute, including the validity, enforceability and interpretation of the underlying contract and the law governing any non-contractual claims;

(2) the substantive law applicable to the parties’ arbitration agreement (as distinguished from the parties’ underlying contract), including its validity, enforceability and interpretation; (3) the law applicable to the arbitral proceeding, including its procedural conduct (i.e., the “procedural law” or “curial law”); and (4) the conflict of laws rules that are to be applied in selecting each of the foregoing laws.⁶

As also discussed above, it is possible for each of the foregoing laws to be that of a different state.⁷ The possibility of applying different national laws to different substantive and procedural issues raised in an arbitration can be seen as a peculiarly complex example of dépeçage.⁸ This chapter concerns only the substantive law applicable in international arbitration to the merits of the parties’ dispute (and not the substantive law applicable to the parties’ arbitration agreement or the procedural law applicable in the arbitration).

A. CHOICE OF LAW GOVERNING MERITS OF PARTIES’ DISPUTE IN ABSENCE OF AGREEMENT ON APPLICABLE LAW

In a substantial number of cases, the parties to an international dispute will not have agreed, either in their underlying contract or otherwise, upon the substantive law governing their relations. In these circumstances, an arbitral tribunal will be required to select the applicable substantive law, either applying some set of conflict of laws rules or “directly” applying a substantive law.⁹

International arbitration regimes take differing approaches to selection of the applicable substantive law. In principle, six basic choice-of-law approaches can be identified in contemporary arbitration regimes: (a) although long regarded as archaic, the law of the arbitral seat may mandatorily require arbitrators to apply either local conflict of laws rules (applicable in national courts) or (b) local substantive law;¹⁰ (c) some arbitration legislation imposes specialized choice-of-law rules on arbitral tribunals seated within national territory (albeit ordinarily via very general formulae that leave tribunals with broad freedom to select an applicable law);¹¹ (d) a number of contemporary statutes authorize arbitrators to apply the choice-of-law rules they consider “applicable” or “appropriate”;¹² (e) some legislation grants arbitrators the power “directly” to apply whatever substantive rules of law they consider appropriate, without applying conflict of laws principles;¹³ and (f) a nation’s law may dictate that particular claims or defenses must be heard by the arbitrator under mandatory national law.

Institutional rules also vary, but generally grant arbitrators broad flexibility in selecting an applicable substantive law (in the absence of agreement by the parties). Some rules provide for the arbitrators to apply the law selected by those conflict of laws rules that they consider “applicable.”¹⁴ Other rules permit the tribunal to apply directly the substantive law it considers “appropriate” or “applicable,” without reference to any conflict of laws rules.¹⁵

In some cases, national law and/or institutional rules provide relatively clear guidance or directions to the arbitral tribunal in selecting the applicable substantive law—as, for example, with an arbitration where the parties have agreed to institutional rules prescribing a choice-of-law rule¹⁶ or seated the arbitration in a jurisdiction that prescribes a specific, mandatory conflicts rule for international arbitrations.¹⁷ In most cases, however, arbitrators are either expressly or impliedly granted broad powers (absent a choice-of-law agreement) with regard to choosing the applicable substantive law—including the authority to apply the conflict of laws rules that they deem “applicable”¹⁸ or the substantive rules that they deem “appropriate.” ¹⁹ The resulting latitude has produced a considerable range of choice-of-law decisions by arbitral tribunals, outlined in the materials excerpted below.

JAPANESE ARBITRATION LAW

Article 36

36(1). The arbitral tribunal shall decide the dispute in accordance with such rules of law as are agreed by the parties as applicable to the substance of the dispute. In such case, any designation of the law or legal system of a given State shall be construed, unless otherwise expressed, as directly referring to the substantive law of that State and not to its conflict of laws rules.

36(2). Failing agreement as provided in the preceding paragraph, the arbitral tribunal shall apply the substantive law of the State with which the civil dispute subject to the arbitral proceedings is most closely connected.

36(3). Notwithstanding the provisions prescribed in the preceding two paragraphs, the arbitral tribunal shall decide ex aequo et bono only if the parties have expressly authorized it to do so.

36(4). Where there is a contract relating to the civil dispute subject to the arbitral proceedings, the arbitral tribunal shall decide in accordance with the terms of such contract and shall take into account the usages, if any, that may apply to the civil dispute.

2012 SWISS INTERNATIONAL ARBITRATION RULES

Article 33(1)

The arbitral tribunal shall decide the case in accordance with the rules of law agreed upon by the parties or, in the absence of a choice of law, by applying the rules of law with which the dispute has the closest connection.

FINAL AWARD IN ICC CASE NO. 5460

XIII Y.B. Comm. Arb. 104 (1988)

[The arbitration was between an Austrian equipment franchisor and a South African franchisee. The dispute arose out of a franchise agreement, which included a clause submitting the parties “to the jurisdiction of the [ICC], as the arbitration court,” but did not select an arbitral seat. The ICC Court of Arbitration selected London as the arbitral seat and appointed the arbitrator. Excerpts of his default award follow.]

The place of this arbitration is London, and on any question of choice of law I must therefore apply the relevant rules of the private international law of England. Under those rules, questions of performance or breach of a contract fall to be determined in accordance with what we call the “proper law” of the contract. Unlike the laws of some other countries, the principal consideration here is not the lex loci contractus, but rather the law of the place with which the contract has its closest connection—which, in practice, means the place in which the principal obligations under the contract are to be performed.

In the present case, virtually all the obligations of both parties fell to be performed in South Africa. It was there that the claimant’s drawings and other documents were to be delivered; it was there that the defendants had to obtain the appropriate exchange control consent before dispatching the royalties to claimant; above all, it was there that the equipment was to be made and sold. On any commercial view, the principal place of performance of this Contract, and the place with which it had its closest connection, was South Africa. Insofar as it may be necessary for the purposes of this award, I therefore hold that the proper law of the Contract was South African law.

Under the rules of English private international law, foreign law is a question of fact, to be established by expert evidence; failing evidence to the contrary, English private international law compels me to assume that any foreign law is the same as English domestic law. Neither party has furnished me with any evidence about the South African substantive law of contract. Accordingly, I am bound to assume that it does not differ from the law of England….

AWARD IN ICC CASE NO. 4237

X Y.B. Comm. Arb. 52 (1985)

[The claimant was a Syrian state entity; the respondent was a Ghanaian state entity. The claimant contracted to purchase various wood products from the respondent. The products were not shipped according to schedule, and the claimant sought damages, first in a Syrian court and then in an ICC arbitration. The parties signed Terms of Reference selecting Paris as the arbitral seat and “French International Arbitration Law” as the procedural law. They disagreed as to the applicable substantive law.]

The question of the law applicable to the substance of the dispute poses the preliminary question which conflict of laws rules are to be applied in order to determine this law. Claimants relied on Syrian conflict of laws rules … (i.e., application of Syrian law because contract was signed in Syria). However, Claimants overlook the fact that this arbitration is expressly subjected to French International Arbitration Law, which Law, as rightly pointed out by Defendants, contains conflict rules for determining the law applicable to the substance of the dispute. The Arbitrator notes that it is controverted in literature whether an international arbitrator should apply the conflict rules of the law applicable to the arbitration, but since the new French law itself contains conflicts rules the Arbitrator feels himself obliged to follow these rules. Article 1496 of the [French NCCP] provides: “The arbitrator shall decide the dispute according to the rules of law chosen by the parties; in the absence of such a choice, he shall decide according to such rules as he deems appropriate.”

As no documents submitted by the parties … point to “rules of law chosen by the parties,” the Arbitrator shall, in virtue of Article 1496, have to determine which are the appropriate rules governing the substance of the dispute. This poses the question which rules of law are appropriate. It is argued in literature that international arbitrators should, to the extent possible, apply the lex mercatoria. Leaving aside that its contents are not easy to determine, neither party has argued that a lex mercatoria should be applied. Rather, each party strenuously argued on the basis of a national law, i.e., Syrian and Ghanaian/English law respectively. Accordingly, the Arbitrator shall follow the implied desire of the parties to apply a national law.

Within the framework of the conflict rules contained in Article 1496 …, Article 13(3) of the ICC Rules constitutes a contractual elaboration of the conflicts rules contained in Article 1496…. In other words, Article 13(3) of the ICC Rules specifies how the Arbitrator has to determine the appropriate rules. Consequently, and admittedly this is rather complicated, the Arbitrator is, [by] virtue of Article 13(3) …, again obliged to determine conflict rules in order to arrive at the law governing the substance of the dispute. But this time the Arbitrator is not bound to follow conflict rules of a national system of law as Article 13(3) constitutes contractual conflict rules contained in international arbitration rules.

In view of the international character of the present arbitration, the Arbitrator deems it appropriate to apply those conflict rules which are generally followed in international arbitrations of the kind under consideration. The decided international awards published so far show a preference for the conflict rule according to which the contract is governed by the law of the country with which it has the closest connection. The country with which it has the closest connection is the country where the party who has to carry out the most characteristic performance has its head office. In the case of a contract for the sale of goods on C & F conditions, the most characteristic performance has to be carried out by the seller. Accordingly, Ghanaian law would in principle be applicable. However, Defendants argued that English law should be applied. As Defendants’ arguments are convincing and English law is not different from Ghanaian law, especially since Ghana has enacted the English Sale of Goods Act, the Arbitrator accepts that the dispute is to be resolved on the basis of English law.…

AWARD IN ICC CASE NO. 2930

IX Y.B. Comm. Arb. 105 (1982)

[After citing Article 13(3) of the 1975 ICC Rules, for the proposition that it was free to select the appropriate conflicts rules, the tribunal reasoned as follows.] [T]he most authoritative present-day doctrine and international arbitration jurisprudence admit that in determining the substantive law, the arbitrator may leave aside the application of the conflict rules of the forum. The arbitral tribunal thus enjoys wide, and even discretionary, powers in the choice of the applicable law.… [I]t is authorized to refer to the different systems of conflict of laws at its disposal, it is by no means obliged to give preference to one of them above another. In the choice of the applicable law, the arbitral tribunal will also take into consideration the results of the work of the Commission on International Commercial Practice of the ICC which were presented at the Congress in Stockholm on October 9, 1981, in the form of draft rules on the law applicable to international contracts. The arbitral tribunal will also take into account the Convention on the Law Applicable to the International Sale of Goods, … and ratified … by France and Switzerland…. Article 3 of the Convention [provides] that the sale shall be governed by the domestic law of the country in which the seller has his habitual residence at the time when he receives the order, but, nevertheless, the sale shall be governed by the domestic law of the country in which the buyer has his habitual residence, if it is in that country that the order was received by the seller.

The private international law provisions of Switzerland, France, and Yugoslavia at the present time all refer to similar criteria in looking for the law applicable to contractual obligations. The first task should be the determination of the most characteristic performance of the contract(s) under examination. The second task is to determine with which territory is the performance most closely connected, or to use a very meaningful phrase of the Swiss Federal Tribunal, to locate the “centre of gravity” of the contract. This solution was also relied upon by the [Rome] Convention on the Law Applicable to Contractual Obligations.…

[T]he arbitral tribunal observes that the aggregate of contracts which it has to examine is indisputably closely connected, and even very closely connected, with Yugoslavia and as one single law should be applicable to the entirety of the contractual obligations of the parties, the connection with Yugoslav law prevails without any doubt. [In addition,] any contract concerning import into Yugoslavia or export from Yugoslavia is subject to the mandatory provisions of [Yugoslav Law of 1972 Controlling Imports and Exports.]…

AWARD IN ICC CASE NO. 4491

2(1) J. Int’l Arb. 75 (1985)

The Plaintiff submits that the Defendant cannot [raise statute of limitations defenses] because Finnish law is the relevant law, and … there is no Limitation Act under Finnish law…. However, the arbitration is taking place in London, and English law is the lex fori. In questions of limitation the provisions of the lex fori must be taken into account—see for example British Linen Co. v. Drummond, 10 B. & C. 903, 912 [(English K.B. 1830)]. The Limitation Act 1980 applies the Act and any other limitation enactment to English arbitrations. I must apply the Limitation Act 1980 even though Finnish law has no enactment—assuming for this purpose, that Finnish law is the proper law of the licensing agreement. The relevant period for a contractual claim or for an account is six years from the date on which the cause of action accrued: sections 5 and 23 of the Limitation Act 1980. The arbitration must therefore have been commenced within six years of the date when the cause of action accrued.

PRELIMINARYAWARD IN ICC CASE NO. 4132

X Y.B. Comm. Arb. 49 (1985)

[The dispute arose out of a Supply Agreement between the Claimant, an Italian supplier, and the Defendant, a South Korean buyer. The agreement provided for ICC arbitration and did not contain a governing law clause. The Claimant alleged various breaches of contract by the Defendant, who invoked statutory protections of Korean law, including Korean antitrust, unfair competition and price control statutes. The Defendant also relied on EU competition law.]

The Agreement has been executed and performed partly in Italy and partly in Korea. At the time the Agreement was made the parties did not express themselves as to the law that would govern their contractual relationship. Lacking such choice-of-law by the parties and all further direct points of contact which could be decisive for the determination of the governing law, the Centre of Gravity test, as proposed by the defendant, could indeed be relevant in order to decide this question.…

Claimant has granted to defendant the right to use their technical know-how relating to the manufacture of [the product], on an exclusive basis in the Republic of Korea. Defendant purchased from Claimant the raw materials required for the production of [the product] in Korea. Taking these special elements of the Agreement into account this Tribunal is satisfied that the Agreement is for a larger part to be performed in Korea and that for that reason Korean private law should prevail as the law governing the Agreement.…

[W]hatever national private law may govern the Agreement, the latter is likely to affect the domain of Korean (public) law, so that this Tribunal must determine whether Korean law as invoked by the Defendant is applicable to the Agreement, even if it does not govern it. However, the national public law as invoked by the Defendant in this case (antitrust law, price law, fair trade law) is by nature of public order. Usually, the very application of these public laws is based upon considerations of national public policy. It is for this reason that this Arbitral Tribunal is not free directly to apply the Korean public law as invoked by the Defendant when such considerations of public policy would be involved to an appreciable extent.

On the other hand, the tribunal is empowered to apply national public law insofar as the Tribunal is satisfied that in the circumstances of the case pursuant to published jurisprudence of the competent national courts and/or the published and stated policy of the competent national authorities the acts under consideration of the Arbitral Tribunal are deemed null and void and unenforceable as prohibited by any relevant national public law. As a consequence of this, the party which in arbitral proceedings appeals to any national public law must prove that this law, indeed, is applicable in the case, and to what extent.… Since the Defendant did not provide sufficient evidence as to the [elements of a Korean statutory claim,] the Tribunal is of the opinion that the Defendant did not sufficiently prove his case.…

[W]ith respect to national public laws also the rules on competition (Article 85 et seq.) of the Treaty [of Rome] are of public order and part of the public policy of the Community. As far as the possible application of those rules on competition of the Treaty in this arbitral case is concerned, the Tribunal refers, mutatis mutandis, to its considerations here above…. Pursuant to Article 85(2) of the Treaty … all agreements between undertakings, decisions by associations of undertakings, and concerted practices in violation of Article 85 … are prohibited and shall be automatically void. If this Tribunal will find that the Agreement in whole or in part contravenes Article 85 …, the consequence thereof is likely to be that the relevant clauses, if not the Agreement in toto, are deemed void, and unenforceable. With reference to its considerations hereabove, the Tribunal must, therefore, on its own initiative investigate whether the Agreement comes under the prohibition of Article 85(1).…

According to pertinent decisions of the [European Court of Justice] pertaining of Article 85 … the prohibition, as contained in the first paragraph of this Article, is applicable only in so far as the relevant agreements, decisions by associations of undertakings, and concerted practices have as their object or effect the prevention, restriction, or distortion of competition within the common market of the Community and may affect trade between Member States, to an appreciable extent. Since the Agreement is a contract between an Italian and a Korean undertaking and was for larger part performed in Korea, this Tribunal is not satisfied that the Agreement may affect trade between Member States and that the Agreement, particularly its clause 2, has as its object or effect a prevention, restriction or distortion of competition within the common market of the Community, to any appreciable extent. Therefore, the Tribunal … does not accept the applicability of Article 85 of the Treaty to the Agreement.…

NOTES

    1. Arbitrators’ selection of substantive law applicable to merits of parties’ dispute. All of the decisions excerpted above provide, absent agreement by the parties, for the arbitrators to select the substantive law applicable in an arbitration (subject to very limited judicial review in annulment or recognition proceedings). Consider also Article 28 of the UNCITRAL Model Law and Article 187 of the Swiss Law on Private International Law, as well as Article 35 of the UNCITRAL Rules and Article 21(1) of the ICC Rules, excerpted at pp. 92 & 159 and pp. 174 & 190 of the Documentary Supplement. What alternatives exist for this means of selecting the applicable law and how would they work? Are they desirable? Could national courts play a positive role in this process?

    2. Choice of substantive law in international arbitration under New York and European Conventions. What do the New York Convention and Inter-American Convention provide with regard to the choice of the substantive law governing the parties’ dispute? Recall that both Conventions address the law governing the arbitration agreement. See supra pp. 302, 308–14. Why is the law governing the substance of the parties’ dispute treated differently?

                Compare the European Convention, excerpted at pp. 29–36 of the Documentary Supplement. What is the point of Article VII(2)? What does it prevent? Would Article VII(2) permit a Contracting State to require arbitrators to apply local substantive law in any locally-seated arbitration? To apply local conflict of laws rules? Compare the approach of the ICSID Convention. Would it be desirable for the New York and Inter-American Conventions to have a choice-of-law provision like that in the ICSID Convention? What would it provide?

    3. Arbitrators’ choice of substantive law under UNCITRAL Model Law. What does Article 28(2) of the Model Law, excerpted at p. 92 of the Documentary Supplement, permit arbitrators to do? Does it permit arbitrators to “directly” apply a substantive law, without first considering choice-of-laws rules? See infra pp. 971–72, 977.

    4. Arbitrators’ choice of substantive law under SLPIL. Consider Article 187(1) of the SLPIL, excerpted at p. 159 of the Documentary Supplement. How does Article 187(1) differ from Article 28(2) of the Model Law? Do arbitrators in a Swiss-seated arbitration, where the parties have not chosen the applicable law, have freedom to apply the conflict of laws rules they consider appropriate? Or must they apply the conflicts rule contained in Article 187(1)?

                Other states have adopted statutory provisions comparable to Article 187(1), including Germany, Japan and Egypt. See German ZPO, §1051(2) (“Where the parties to the dispute failed to determine which statutory provisions are to be applied, the arbitral tribunal is to apply the laws of that state to which the subject matter of the proceedings has the closest ties”); Japanese Arbitration Law, Art. 36; Egyptian Arbitration Law, Art. 39(2). What are the benefits of the approach adopted by the SLPIL? What are the disadvantages?

    5. Arbitrators’ choice of substantive law under national arbitration legislation providing for “direct” choice of law. Some arbitration legislation grants arbitrators power “directly” to apply whatever substantive rules of law they consider appropriate, without applying conflict of laws principles. Consider Article 1511 of the French Code of Civil Procedure. Other legislation, in Europe and elsewhere, is similar. See Hungarian Arbitration Act, §49(2) (“the applicable law shall be determined by the arbitral tribunal”); Indian Arbitration and Conciliation Act, Art. 28(1)(b)(iii) (“apply the rules of law it considers to be appropriate given all the circumstances surrounding the dispute”); Netherlands Code of Civil Procedure, Art. 1054(2) (“in accordance with the rules of law it considers appropriate”).

                How does Article 1511 differ from the UNCITRAL Model Law and the SLPIL? How is it similar to each instrument? What are the benefits of Article 1511’s “direct” application approach? What are the drawbacks?

    6. Arbitrators’ choice of substantive law under institutional arbitration rules. Institutional rules are as diverse, in their treatment of the choice of the applicable substantive law, as national arbitration statutes. Consider Article 35 of the UNCITRAL Rules, excerpted at p. 174 of the Documentary Supplement. How does it compare with the UNCITRAL Model Law’s approach? Compare Article 21 of the ICC Rules, excerpted at p. 190 of the Documentary Supplement. How does it differ from the UNCITRAL Rules?

                Compare Article 33(1) of the Swiss Rules. See also DIS Rules, §23(2) (“the law of the State with which the subject-matter of the proceedings is most closely connected”). How does Article 33(1) of the Swiss Rules limit the arbitrators’ freedom to choose the applicable substantive law? Also compare Article 33(1) of the Swiss Rules with Article 187 of the SLPIL. Does Article 187 require a rule such as Article 33(1)?

    7. Interaction between arbitral seat’s conflict of laws rules and institutional rules granting arbitrators authority to select conflicts rules. As noted above, many institutional rules (including the UNCITRAL, ICC, AAA and LCIA Rules) grant arbitrators authority to select the applicable law that they deem appropriate, either “directly” or through the application of the choice-of-laws rules that the arbitrators consider appropriate. See supra pp. 962–64. What effect do these institutional rules have where the arbitration legislation of the arbitral seat prescribes a particular choice-of-law rule (e.g., Switzerland)?

                As discussed below, most legal systems permit parties to agree on the substantive law governing their dispute. See infra pp. 988–90. Does this recognition of party autonomy to select the applicable substantive law apply to the selection of choice-of-law rules, rather than of the substantive law itself? For example, can an ICC arbitrator in an arbitration in Switzerland (without an express choice-of-law clause) apply a conflict of laws rule other than the “closest connection” formula in Article 187(1) of the SLPIL? What does the arbitrator in ICC Case No. 4237 conclude about Article 13(3) of the 1975 ICC Rules? See also D. Caron & L. Caplan, The UNCITRAL Arbitration Rules: A Commentary 118-19 (2d ed. 2012); Karrer, in S. Berti et al. (eds.), International Arbitration in Switzerland Art. 187, ¶¶118, 144 (2000) (agreement to ICC Rules supersedes Article 187’s “closest connection” formula).

    8. Mandatory application of conflict of laws rules of arbitral seat. The historic view in many states was that international arbitral tribunals were mandatorily required to apply the arbitral seat’s choice-of-law rules. This conclusion was reached even in the absence of arbitration legislation, like that in Switzerland or Germany, expressly requiring the arbitrators to apply a specified conflicts rule; rather, these authorities concluded that the arbitrators were bound to apply the generally-applicable conflicts rules applicable in the courts of the arbitral seat. (A variation of this rule (discussed below) was that the arbitral seat’s substantive laws were mandatorily applicable to the merits of the parties’ dispute.) See G. Born, International Commercial Arbitration 2629-31, 2637 (2d ed. 2014).

                For an example of a broader rule that the arbitral seat’s conflicts rules must always be applied, consider the 1957 Resolution of the Institute of International Law: “The rules of choice of law in the state of the seat of the arbitral tribunal must be followed to settle the law applicable to the substance of the dispute.” Institute of International Law, Resolution on Arbitration in Private International Law 1957 (Amsterdam), Tableau des Résolutions Adoptees (1957-1991) 237, at Art. 11(1) (1992).

                Consider ICC Case No. 5460. What did it conclude regarding the obligation of an arbitral tribunal seated in England to apply English private international law rules to select the substantive law? What is the legal basis for this conclusion? Compare the conclusion in ICC Case No. 2930. How does the arbitral tribunal deal with the suggestion that they are bound to apply the conflicts rules of the arbitral seat? Compare also ICC Case No. 4491.

    9. Rationale for arbitrator’s application of seat’s conflict of laws rules. What was the rationale for the historic rule requiring arbitrators to apply the conflicts rules of the arbitral seat? Was this a requirement imposed by some international standard? Was it a requirement imposed by the law of the arbitral seat? Was it required by the parties’ agreement to arbitrate?

                Some traditional authorities reasoned that the conflicts rules of the arbitral seat were binding because they provided the procedural law (or “lex fori”) for the arbitral proceedings. This was the theory of the 1957 Resolution of the Institute of International Law, quoted above. Consider:

         “In the legal sense, no international commercial arbitration exists. Just as, notwithstanding its notoriously misleading name, every system of private international law is a system of national law, every arbitration is a national arbitration, that is to say, subject to a specific system of national law…. No one has ever or anywhere been able to point to any provision or legal principle which would permit individuals to act outside the confines of a system of municipal law…. [E]very arbitration is necessarily subject to the law of a given state…. The law of the arbitration tribunal’s seat initially governs the whole of the tribunal’s life and work. In particular, it governs the validity of the submission, the creation and composition of the tribunal, the rules of the conflict of laws to be followed by it, its procedure, the making and publication of its award.” Mann, Lex Facit Arbitrum, reprinted in 2 Arb. Int’l 241, 244-45, 248 (1986) (emphasis added).

                Is this persuasive? What is the source of the requirement that arbitrators must apply the conflicts rules of the seat? Does not Professor Mann assume that it is the law of the arbitral seat that imposes this requirement (that arbitrators apply the conflicts rules of the arbitral seat)? Is this in fact what contemporary arbitration legislation provides?

                Recall that many contemporary arbitration statutes do not require arbitrators in arbitrations seated locally to apply local conflict of laws rules; on the contrary, as discussed above, these statutes grant arbitrators broad authority to select the conflicts rules that they consider appropriate. See supra pp. 962–64, 970–71. Consider in this regard Article 28(2) of the UNCITRAL Model Law. Consider also arbitration legislation, like the French Code of Civil Procedure, permitting arbitrators to “directly” apply the substantive law that they consider appropriate, without any choice-of-law analysis.

                Consider again Article VII(1) of the European Convention. Does it require that arbitrators apply the conflicts rules of the arbitral seat? Does Article VII(1) permit a Contracting State to require international arbitral tribunals, seated locally, to apply the conflicts rules of the seat?

  10. Erosion of support for requirement that arbitrators apply conflict of laws rules of arbitral seat. The historic rule that arbitrators were required to apply the conflicts rules of the arbitral seat was eroded during the second half of the 20th century. As ICC Case No. 2930 and (arguably) ICC Case No. 4237 illustrate, arbitrators frequently concluded that they were not bound by the conflicts rules of the seat. Similarly, many commentators concluded that the arbitral tribunal is not equivalent to a national court and is not bound by the “lex fori.” In the words of one award, “the arbitration tribunal does not have a lex fori.” Saudi Arabia v. Arabian Am. Oil Co., Ad Hoc Award of 23 August 1958. Or, as another award reasoned:

         “it is highly debatable whether a preferred choice of the situs of the arbitration is sufficient to indicate a choice of governing law. There has for several years been a distinct tendency in international arbitration to disregard this element, chiefly on the ground that the choice of the place of arbitration may be influenced by a number of practical considerations that have no bearing on the issue of applicable law.” Award in SCC Case No. 117/1999 of 2001, 2002:1 Stockholm Arb. Rep. 59, 64.

Consider:

         “The arbitrator exercises a private mission, conferred contractually, and it is only by a rather artificial interpretation that one can say that his powers arise from—and even then very indirectly—a tolerance of the State of the place of arbitration, or rather of the various States involved (States of the parties, of the siège, of the probable places of execution of the award), which accept the institution of arbitration, or of the community of nations, notably those which have ratified international treaties in the matter. Would it not be to force the international arbitrator into a kind of Procrustean bed if he were assimilated to a State judge, who is imperatively bound to the system of private international law of the country where he sits and from which he derives his power of decision?” Lalive, Les régles de conflits de lois appliquées au fond du litige par l’arbitre international siégant en Suisse, 1976 Rev. arb. 155.

                Is this persuasive? If the arbitral seat’s conflicts rules do not apply, what rules do? Are there no legal standards that guide the arbitrators’ choice of law? As a matter of policy, should the conflict of laws rules of the arbitral seat be mandatorily applicable by the arbitrators? Is that likely to be what the parties intended?

                Consider the discussion below concerning the parties’ implied choice of the arbitral seat’s substantive law. See infra pp. 973–74. Is there any reason to think that the parties might have intended the conflicts rules of the arbitral seat to apply to their dispute? What conflict of laws rules other than those of the arbitral seat might the parties think applicable?

  11. Enduring significance of arbitral seat’s conflict of laws rules. While there has been an erosion of the traditional “arbitral seat” rule, the announcements that the rule has been wholly abandoned are wrong. Arbitrators continue in many cases to apply the choice-of-law rules of the arbitral seat, based either on local legislation prescribing this method or on theories of implied choice. See, e.g., Final Award in ICC Case No. 9771, XXIX Y.B. Comm. Arb. 46, ¶ 18 (2004) (“The indication of Stockholm as the place of arbitration could be interpreted as an indication of the will of the parties to let the law of the place of arbitration govern their contract. In this case nothing seems to warrant such a conclusion. It does, however, support the conclusion that Swedish conflict of law rules should apply to determine the applicable law.”); Award in ICC Case No. 8619, in Grigera Naón, Choice-of-Law Problems in International Commercial Arbitration, 289 Recueil des Cours 9, 230 n.230 (2001) (“It can be reasonably argued that the parties who fail to explicitly agree on an applicable substantive law, but agree on arbitration at a specified place pursuant to specified arbitration rules and procedures … impliedly also agree—or at least impliedly accept a determination to that effect—on the conflict of laws rules of the law of the jurisdiction in which the place of arbitration is located”); Award in ICC Case No. 1598, in S. Jarvin & Y. Derains (eds.), Collection of ICC Arbitral Awards 1974-1985 19 (1990) (tribunal sitting in Switzerland applies Swiss law (Article 178(2)) to uphold Swiss choice-of-law clause).

                Is the continuing reliance on the conflicts rules of the arbitral seat, by some national arbitration legislation and arbitral awards, appropriate? What alternatives are there to applying the conflicts rules of the arbitral seat?

  12. Application of substantive laws of arbitral seat. Historically, a number of authorities concluded that arbitrators were required to apply the substantive law of the arbitral seat. In the words of a mid-20th century U.S. commentator, “[i]t is widely held that the parties who have chosen a place of arbitration have thus impliedly agreed on the applicability of both the procedural and substantive law of that place.” A. Ehrenzweig, Conflict of Laws 540 (1962) (emphasis added). Likewise, English courts historically held that designation of England as arbitral seat constituted agreement on English substantive law. Tzortzis & Sykias v. Monark Line A/B [1968] 1 Lloyd’s Rep. 337, 413 (English Ct. App.) (selection of England as arbitral seat “raises an irresistible inference which overrides all other factors”); Norske Atlas Ins. Co. v. London Gen. Ins. Co. [1927] 2 Lloyd’s Rep. 104 (English Ct. App.). Is ICC Case No. 4491 an example of a tribunal’s application of the substantive law of the arbitral seat?

  13. Rationale for application of arbitral seat’s substantive law. Consider the following quotation from the Restatement (Second) Conflict of Laws §218 comment b (1971), explaining application of the arbitral seat’s substantive laws:

         “Provision by the parties in a contract that arbitration shall take place in a certain state may provide some evidence of an intention on their part that the local law of this state should govern the contract as a whole. This is true not only because the provision shows that the parties had this particular state in mind; it is also true because the parties must presumably have recognized that arbitrators sitting in that state would have a natural tendency to apply its local law.”

                In some European jurisdictions, these results were explained on the grounds of qui elegit arbitrum elegit ius—as in the United States, the parties were presumed to have intended application of the seat’s conflicts or substantive rules. G. Born, International Commercial Arbitration 2637-39 (2d ed. 2014).

                Is the foregoing rationale persuasive? Perhaps it was (and still is) where the parties to a straightforward, two-party contract agree to arbitrate in one party’s home state. As described above, however, in contemporary international arbitration it is common for arbitrations to be conducted in a neutral state and for the law of a different state from either the arbitral seat or the parties’ domiciles to provide the substantive law. A nation is usually selected as the arbitral seat because of its arbitration law, its convenience, and its neutrality—and not its substantive law. See supra pp. 620, 622–24, 652–55.

                Do these considerations significantly undermine explanations of the traditional seat rule based on the parties’ implied choice? If the parties selected a “neutral” state as their arbitral seat, and have not selected the applicable law, is it reasonable to conclude that they also expected the “neutral” substantive law of the arbitral seat to apply? Wouldn’t this conclusion make particular sense in light of the complexities and uncertainties of contemporary conflict of laws analysis and the desire of most businesses for an efficient, predictable and neutral resolution of their international disputes? How would this analysis apply where the parties have agreed to arbitrate in one party’s domicile, without selecting an applicable substantive law?

  14. Erosion of support for automatic application of seat’s substantive law. Just as the rule requiring application of the arbitral seat’s conflicts rules eroded, so did the rule requiring automatic application of the arbitral seat’s substantive law. As one decision said: “It is appropriate to eliminate forthwith the law of the forum, whose connection with the case is purely fortuitous.” Award in ICC Case No. 1422, 101 J.D.I. (Clunet) 884 (1974). See also supra pp. 786, 972.

                Note that in ICC Case No. 5460, the ICC International Court of Arbitration—not the parties—selected the arbitral seat. What force does the theory of an implied choice of law have in such cases? Particularly where the arbitral seat is selected by the arbitral institution, the parties may have had no conceivable reason to contemplate the application of its substantive (or choice-of-law) rules. This can produce anomalous results. An example involves a German and an English company arbitrating in Switzerland, in a dispute where both German and English conflicts rules would have selected English law, but Swiss conflicts rules selected German law. Cohn, The Rules of Arbitration of the International Chamber of Commerce, 14 Int’l & Comp. L.Q. 132, 162 (1965).

  15. Other conflict of laws rules applied by contemporary arbitral tribunals. Against this historical background, choice-of-law rules other than those of the arbitral seat are frequently applied in contemporary awards selecting the applicable substantive law. Unfortunately, while several alternatives to the traditional “arbitral seat” rule can be identified, there is not yet a consensus regarding any of these alternatives (or even a clear trend towards any solution). As a result, substantial uncertainty often surrounds the selection of the applicable substantive law by international arbitral tribunals.

        (a)   “International” conflict of laws rules. The arbitrators in ICC Case No. 2930 applied what they characterized as “international” conflict of laws rules. Other authorities have also adopted this approach. See G. Born, International Commercial Arbitration 2651 (2d ed. 2014). What is likely contemplated by the parties to an international contract who select international arbitration as a means of resolving their disputes (principally for reasons of neutrality, efficiency, and effective international enforcement)? Is it likely that they bargained for the conflict of laws rules of the arbitral seat or that they intended to engage in lengthy future debate about the intricacies of conflicts rules in different jurisdictions? Do “international” conflicts rules provide a uniform, neutral formula that satisfies the parties’ expectations?

                        What content does an “international” conflict of laws rule have? What sources should one consult in answering this question? Do developed nations share certain basic principles relating to choice of law? How does the tribunal in ICC Case No. 2930 suggest that such principles are to be ascertained? Are the difficulties in ascertaining the content of “international” conflicts principles any greater than those of ascertaining the content of domestic conflicts principles?

                        In practice, arbitrators have looked to international conventions on choice-of-law issues even when those conventions are not, by their terms, directly applicable. In particular, tribunals have relied on the International Sale of Goods Convention (cited in ICC Case No. 2930) and the Rome Convention on the Law Applicable to Contractual Obligations (cited in ICC Case No. 6379, infra pp. 993–94). Compare the development of so-called lex mercatoria and “general principles of law,” infra pp. 977–78, 1019–20.

        (b)   Cumulative application of national conflict of laws rules. As ICC Case No. 2930 suggests, arbitrators sometimes purport to apply the conflicts rules of each of the states with a connection to the dispute. G. Born, International Commercial Arbitration 2649-50 (2d ed. 2014). As a practical matter, this “cumulative” approach often concludes that all the relevant conflicts rules select the same national law. When this occurs, it demonstrates a particular type of “false conflict.” Grigera Naón, Choice-of-Law Problems in International Commercial Arbitration, 289 Recueil des Cours 9, 191 (2001) (“Tribunals normally make special efforts to show that the substantive solution found for the dispute is either one pointed out by the private international law systems of the national jurisdictions reasonably connected with the dispute (false ‘conflit de systèmes’) or by a generally accepted conflict-of-laws rule”).

                        It is also said that, on a practical level, the cumulative approach provides some insulation against a challenge to the award for failure to apply the proper conflict of laws rules. Compare W. Craig, W. Park & J. Paulsson, International Chamber of Commerce Arbitration 326-27 (3d ed. 2000) (“The cumulative method is particularly apt for use in the arbitral process.… [T]he arbitrators are able to infuse an international element into the proceedings and assure both parties that the issue has not been determined by the narrow application of the system of a single state, whose relationship to the dispute is not necessarily predominant.”).

                        If all potentially-applicable conflicts rules point towards application of the same substantive law, then the choice-of-law issue is easy; indeed, in these circumstances, there is no need for the “cumulative” method, since any choice-of-law rule produces the same result. Suppose, however, that the potentially-relevant conflict of laws rules point towards two or more different national laws. In that case, does the “cumulative” method provide any basis for choosing between the competing alternatives? If not, then how is the appropriate conflict of laws rule to be selected?

        (c)   Application of conflicts rule that arbitrators consider “appropriate.” Contemporary arbitral tribunals frequently apply the conflict of laws rule that the tribunal considers “appropriate.” See, e.g., Award in ICC Case No. 8385, in J.-J. Arnaldez, Y. Derains & D. Hascher (eds.), Collection of ICC Arbitral Awards 1996-2000 474, 478 (2003) (tribunal “should apply the law, and if necessary the private international law, that is most appropriate in the circumstances”); BP Co. Ltd v. Libyan Arab Repub., Award on Merits in Ad Hoc Case of 10 October 1973, V Y.B. Comm. Arb. 143, 148 (1980) (tribunal “is at liberty to choose the conflicts of laws rules that it deems applicable, having regard to all the circumstances of the case”). Recall that this is the standard prescribed by Article 28(2) of the Model Law and by a number of institutional rules. See supra pp. 962–64, 970.

                        What does it mean to apply the “appropriate” conflicts rule? Is that a legal standard? How does one go about determining whether a particular conflicts rule is “appropriate” or not? Does one look at connecting factors with specific jurisdictions? At the content of the substantive laws chosen? At international principles? What is there, if anything, that ensures consistency and predictability in choice-of-law decisions under this standard?

        (d)   Application of conflicts rules of state with closest connection to dispute. Another approach to the choice of the substantive law by arbitral tribunals involves selecting the conflict of laws system of the state that is most closely connected to the merits of the parties’ dispute. See, e.g., Final Award in ICC Case No. 5885, 1(2)

ICC ICArb. Bull. 23 (1990); Interim Award in ICC Case No. 6149, XX Y.B.

Comm. Arb. 41 (1995). Note that a leading choice-of-law standard is the “closest connection” test, which provides for application of the substantive law of the state with the closest connection to the dispute. Does it make sense to apply the conflicts rules—as distinct from the substantive laws—of the state with the closest connection to a dispute? Does this introduce unnecessary and confusing complexity?

        (e)   Application of substantive law of state with closest connection to dispute. As discussed above, some arbitration legislation prescribes a “closest connection” standard for arbitrators seated on national territory (e.g., Germany, Switzerland, Japan, Egypt). See supra p. 969. Even where no such statutory rule applies, some awards have applied a “closest connection” choice-of-law rule. See Award in ICC Case No. 4237, X Y.B. Comm. Arb. 52 (1985) (“awards published so far show a preference for the conflict rule according to which the contract is governed by the law of the country with which it has the closest connection”). This approach draws support, as to the choice-of-law analysis applicable to contracts, from the related approaches of the Rome Convention and Rome I Regulation (most “closely connected”) and Restatement (Second) Conflict of Laws (“most significant relationship”). See G. Born, International Commercial Arbitration 2653-54 (2d ed. 2014).

        (f)   “Direct” application of substantive law. As already discussed, some arbitration legislation (Article 1511 of the French Code of Civil Procedure) and institutional rules (Article 21(1) of the 2012 ICC Rules) permit “direct” application by the arbitrators of the substantive law that they determine to be “appropriate.” See supra pp. 962–64, 969–70. A number of awards have adopted this approach. See G. Born, International Commercial Arbitration 2646-47 (2d ed. 2014). How is a tribunal to determine what substantive rules are “appropriate”? Can a tribunal do so without applying conflict of laws rules? If so, what defines what law is “appropriate”? Does Article 21(1) contribute to the predictable, efficient resolution of international business disputes?

  16. Uncertainty about choice of applicable substantive law. As the foregoing materials suggest, the choice of applicable substantive law in international arbitration is often surrounded by uncertainty. That is not consistent with the ideal of predictability, particularly as concerns applicable law, that international arbitration promises. Scherk v. Alberto-Culver Co., 417 U.S. 506, 516-17 (1974); supra pp. 961–62. Consider the comment at supra pp. 961–62 regarding the unpredictability of some contemporary conflicts analyses. What alternatives are available?

  17. What conflict of laws rules should international arbitrators apply? In light of the possibilities, outlined above, what conflict of laws rules should be applied by international arbitrators? In some cases, as described above, the arbitration legislation of the arbitral seat will impose a conflicts rule (e.g., Switzerland, Germany). In those instances, and assuming that the parties have not agreed to institutional rules specifying a different standard, the arbitral tribunal has no choice but to apply the statutory standard. Right?

                If the arbitration is seated in a jurisdiction that does not impose a conflict of laws rule on the tribunal, then what conflicts rule should the arbitrators apply? What rule is likely to provide the greatest degree of predictability, neutrality and efficiency?

                Are national conflict of laws rules appropriate for application in international arbitrations? Are they instead designed for, and properly limited to, litigation in national courts? Consider:

         “the choice of law process constitutes an attempt to localize a legal issue, i.e., to link a contractual arrangement with a national legal system to govern the legal relationship between the parties. Consequently, the traditional conflict of laws rules in general provide for the application of a certain national law. By contrast, modern conflict of laws rules for international arbitration recognize that it is often inappropriate to localize legal issues arising out of an international contract…. It has also been suggested that law is merely a non-mandatory model for the arbitrator and that there may be no obligation for an arbitrator to apply it.” M. Blessing, Introduction to Arbitration: Swiss and International Perspectives ¶630 (1999).

                Is this correct? Do parties who agree to international arbitration generally regard law as a “non-mandatory model”? If parties intend national substantive laws to apply in arbitral proceedings, why wouldn’t they intend national choice-of-law rules to do so? Which national choice-of-law rule is best-suited for application in international arbitration?

  18. Application of non-national systems of law. Application of either a choice-of-law system or “direct” application of a substantive law results in the application of some set of legal rules; in most cases, this will be the national law of a particular state. Nonetheless, a few arbitral tribunals have applied so-called non-national legal systems or rules of law—including lex mercatoria, general principles of law, the UNIDROIT Principles of International Commercial Contracts, or the Principles of European Contract Law (“PECL”). See, e.g., Award in ICC Case No. 3131, in S. Jarvin & Y. Derains (eds.), Collection of ICC Arbitral Awards 1974-1985 122 (1990) (“Faced with the difficulty of choosing a national law the application of which is sufficiently compelling, the Tribunal considered it was appropriate, given the international nature of the agreement to leave aside any compelling nature to a specific legislation, be it Turkish or French, and apply the lex mercatoria”); Award in SCC in Case No. 117/1999 of 2001, 2002:1 Stockholm Arb. Rep. 59 (tribunal held that the “parties in this case deliberately refrained from agreeing on the applicable law” governing their contract and found that the dispute at hand should be decided on the basis of “such rules of law that have found their way into international codifications….”); Final Award in ICC Case No. 10422, 130 J.D.I. (Clunet) 1142 (2003) (“The arbitral tribunal, in view of the fact that the parties apparently wanted a neutral solution, decided to apply ‘general principles and rules of international contracts, i.e., the so-called lex mercatoria’”).

                Do the arbitration statutes excerpted above permit application of a non-national system of law (absent the parties’ agreement thereto)? Consider the UNCITRAL Model Law. Note that Article 28(2) provides for the arbitrators to apply the “law” chosen by the conflicts rules they consider appropriate. Compare Article 28(1), which provides for the arbitrators to apply the “rules of law” selected by the parties’ agreement. See infra p. 1018. The reference to “rules of law,” rather than merely “law,” has been interpreted as permitting parties to select non-national legal systems (such as lex mercatoria or the UNIDROIT Principles) in their choice-of-law agreements. Report of the Secretary-General on the Analytical Commentary on Draft Text of A Model Law on International Commercial Arbitration, U.N. Doc. A/CN.9/264, XVI Y.B. UNCITRAL 104, 132-33 (1985).

                In contrast, Article 28(2) of the Model Law provides for the arbitrators to apply the “law” determined by applicable conflicts rules. That difference in the text of Articles 28(1) and 28(2) suggests, and has been interpreted as requiring, that arbitrators may not—in the absence of a choice-of-law agreement selecting such a legal system—apply non-national rules of law. H. Holtzmann & J. Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration 764-807 (1989); P. Sanders, The Work of UNCITRAL on Arbitration and Conciliation 117 (2d ed. 2004). Compare Derains, The Application of Transnational Rules in ICC Arbitral Awards, 5 World Arb. & Med. Rev. 173, 174-75 (2011) (“For many years, international arbitrators, in particular those acting under the auspices of the [ICC] have been applying transnational rules in their awards in order to resolve disputes submitted to them.… It is no longer disputed that, in most countries, international arbitrators may apply transnational rules to the merits of a dispute without putting the validity of their award in danger, even in the absence of a choice-of-law agreement expressly selecting such norms.”).

                Just considering the language of Articles 28(1) and 28(2), is there a real difference between “law” and “rules of law”? Does it make sense to permit the parties to agree upon a non-national system of law, but not to permit arbitrators to apply such a system, absent the parties’ agreement? Compare the treatment of ex aequo et bono decisions.

See infra pp. 1020–21.

                In a few jurisdictions, including Switzerland, India, Algeria, Ontario and Lebanon, legislation has been adopted that modifies Article 28(2) of the Model Law to refer to “rules of law.” SLPIL, Art. 187(1); Indian Arbitration and Conciliation Act, Art. 28(1)(b)(iii); Lebanese New Code of Civil Procedure, Art. 813; Ontario Arbitration Act, §32(1). This change has generally been intended to authorize arbitrators to select a non-national legal system or set of non-national rules to govern a dispute, even in the absence of an agreement to this effect. Is this a wise legislative choice?

  19. Application of mandatory law and public policy in arbitration. Consider the analysis in ICC Case No. 4132. How does the choice-of-law issue considered by the tribunal differ from that in the other awards excerpted above? What law governed the parties’ agreement? What laws did the tribunal nonetheless consider potentially applicable to the parties’ dispute? Would it have been possible for both Korean and EU competition laws to apply? Why didn’t the tribunal actually apply EU public law? Would the tribunal have done so if the jurisdictional requirements of EU competition law were satisfied?

                What would have authorized the arbitrators to apply Korean or EU public laws? EU law was not the law applicable to the parties’ contract (which was governed by Korean law). What would have empowered the tribunal to nonetheless apply EU law? Note that the arbitral seat was in the EU. Does that affect the applicability of EU competition law? Suppose the issue was whether U.S. antitrust law was applicable. What was the choice-of-law analysis by which the tribunal considered whether EU competition law was applicable? Did the tribunal consider Korean conflicts rules? Other national conflicts rules? Or did the tribunal simply consider the applicability, under EU law, of EU competition legislation? How would this differ from other types of choice-of-law analysis in international arbitration?

  20. Arbitrators’ authority to apply public policy. May an arbitrator resolve a claim or defense based on a “mandatory” public policy or statutory duty imposed by a legal system other than that selected by the parties?

        (a)   Traditional view that arbitrators could not consider claims or defenses based on public policy or statutory protections. As discussed below, see infra pp. 979–80, during the early part of the 20th century, many national courts held that arbitrators were forbidden from considering non-contractual claims based on public policy. The following passage from a U.S. decision is illustrative:

         “As the proctor of the bargain, the arbitrator’s task is to effectuate the intent of the parties…. The arbitrator … has no general authority to invoke public laws that conflict with the bargain between the parties:

         ’An arbitrator is confined to interpretation and application of the … agreement; he does not sit to dispense his own brand of … justice. He may of course look for guidance from many sources, yet his award is legitimate only so long as it draws its essence from the … agreement. When the arbitrator’s words manifest an infidelity to this obligation, courts have no choice but to refuse enforcement of the award.’ United Steelworkers of Am. v. Enter. Wheel & Car Corp., 363 U.S. 593, 597 (1960).

         If an arbitral decision is based ‘solely upon the arbitrator’s view of the requirements of enacted legislation,’ rather than on an interpretation of the collective-bargaining agreement, the arbitrator has ‘exceeded the scope of the submission,’ and the award will not be enforced. Thus, the arbitrator has authority to resolve only questions of contractual rights, and this authority remains regardless of whether certain contractual rights are similar to, or duplicative of, the substantive rights secured by [a federal statute].” Alexander v. Gardner-Denver Co., 415 U.S. 36, 56-57 (1974).

                At the same time, as discussed above, national courts also held that many claims (and defenses) based on mandatory public laws were nonarbitrable, instead being reserved to national court litigation. See supra pp. 475–83. Is this traditional approach to mandatory law claims (and defenses) persuasive? Why should an arbitration agreement be interpreted as encompassing only the parties’ contractual rights, and not their other legal rights (including their statutory rights)?

        (b)   Contemporary view that arbitrators can consider claims and defenses based on public policy or statutory protections. As also discussed above, during the last three decades, courts in most developed jurisdictions have abandoned traditional restrictions on the power of arbitrators to consider public policy and statutory claims and related concepts of nonarbitrability. See supra pp. 483–510. As ICC Case No. 6379 illustrates, arbitrators now routinely consider claims (and defenses) based on mandatory public laws and policies. See also Trade & Transp., Inc. v. Valero Refining Co., Final Award in SMA Case No. 2699 of 23 August 1990, XVIII Y.B. Comm. Arb. 124 (1993) (arbitral award in excess of $500,000 for violations of RICO).

                        Why should these conclusions be accepted? Why should “private” arbitrators be empowered to decide important issues of public policy? In confidential proceedings and awards? Without normal judicial review?

  21. Rationales for arbitrators’ consideration of public policy and mandatory law claims. What is the basis for the trend in most jurisdictions towards permitting consideration of mandatory law and public policy claims by arbitrators? What is the source of an arbitral tribunal’s authority to consider and decide such claims? (a) Parties’ arbitration agreement as source of authority to consider public policy and mandatory law claims. An arbitration agreement typically grants arbitrators power to resolve “all disputes” relating to the parties’ contract; as a matter of interpretation, that formulation usually encompasses disputes based on statutory and other non-contractual claims, provided they have a sufficient factual nexus to the parties’ contract. See supra pp. 529–32, for authorities holding that such non-contractual claims fall within the scope of an arbitration clause. Only if one implies an exclu-sion—“all disputes except disputes based on tort or non-contractual claims”—would most arbitration agreements fail as a matter of interpretation to grant the arbitrators the power to resolve such claims.

                        Many authorities have concluded that, if the parties’ arbitration agreement encompasses public law claims, that agreement will ordinarily be a sufficient justification for the arbitrators’ power to resolve such claims. Under this view, the parties will have granted the arbitrator the authority to resolve all disputes, including public law disputes, and, unless some legislative instrument forbids that grant, it should be enforced. As the U.S. Supreme Court reasoned in Mitsubishi Motors, excerpted above at pp. 486–92:

                       “[T]he international arbitral tribunal owes no prior allegiance to the legal norms of particular states [and] has no direct obligation to vindicate their statutory dictates. The tribunal, however, is bound to effectuate the intentions of the parties. Where the parties have agreed that the arbitral body is to decide a defined set of claims which includes, as in these cases, those arising from the application of American antitrust law, the tribunal therefore should be bound to decide that dispute in accord with the national law giving rise to the claim.” 473 U.S. at 636-37.

                        Is this analysis persuasive? See also De Ly, Friedman & Radicati di Brozolo, International Law Association International Commercial Arbitration Committee Report and Recommendations on Ascertaining the Contents of the Applicable Law in International Arbitration, 26 Arb. Int’l 193, 216 (2010) (“public policy constrains contractual and arbitral freedom, and may impose limitations or restrictions that the parties cannot agree to disregard”); Rivkin, The U.S. Situation, in ICC, Competition and Arbitration Law 140 (1993) (“The tribunal must consider all issues falling within the scope of the arbitration clause in the agreement including an antitrust counterclaim if it falls within the scope of the arbitration clause.”).

                        Conversely, if the parties’ arbitration clause does not encompass particular statutory or public policy claims, then the arbitrators cannot consider these claims. International commercial arbitration is consensual: the parties can only be required to arbitrate that which they have agreed to arbitrate. See supra pp. 177, 517, 526.

        (b)   Arbitrators’ obligation to render enforceable award. Consider the argument referred to in ICC Award No. 4132, that an arbitrator’s overriding duty is to render an enforceable award, and impliedly that this requires consideration of public policy defenses and claims. For a similar formulation:

                       “Although arbitrators are neither guardians of the public order nor invested by the State with the mission of applying its mandatory rules, they ought nevertheless have an incentive to do so out of a sense of duty to the survival of international arbitration as an institution…. [A]rbitrators should pay heed to the future of their award. They should consider that if they do not apply a mandatory rule of law, the award will in all likelihood be refused enforcement in the country which promulgated that rule. It often turns out that that country is the one, or at least one of several, exercising a de facto control over the situation; it is not reasonable to disregard its attitude.” Mayer, Mandatory Rules of Law in International Arbitration, 2 Arb. Int’l 274, 284-86 (1986).

                        Is this persuasive? First, should the parties’ rights turn on an arbitrator’s “sense of duty to the survival of international arbitration as an institution”? Second, how persuasive is the argument that public policies and mandatory laws must be considered in order to ensure an enforceable award? Article 41 of the 2012 ICC Rules requires the arbitrator to “make every effort” to render an enforceable award. If the parties have not agreed to institutional rules containing such a provision, is there nonetheless an implied expectation or duty to do so? Should this general duty override a specific choice-of-law clause? Should the arbitrator’s primary duty be to render an award in accordance with the parties’ arbitration agreement, even if it proves unenforceable in some places, rather than a universally enforceable award that disregards the parties’ agreement?

  22. Distinction between matters of “substance” and “procedure.” What issues are subject to (a) the “substantive” law selected by the arbitrators’ choice-of-law analysis, and (b) the “procedural” law governing the arbitral proceedings? For example, what law applies to issues such as burden of proof, admissibility and weight of evidence, conduct of hearings, evidentiary privileges, availability and amount of interest, and limitations periods? Are these matters of “substance” or “procedure”? See infra pp. 982, 1013–14.

                Why does the distinction between “substance” and “procedure” matter? Recall the discussion above regarding the law applicable to the arbitral proceedings (the “procedural law of the arbitration” or “lex arbitri”). See supra pp. 625–40.

                Consider the award in ICC Case No. 4491. How is the statute of limitations issue categorized? What law would have applied to the issue if it were “substantive”?

                The distinction between substantive and procedural issues is elusive even within national legal systems. In the international context, where multiple characterizations exist, the distinction is even more complex. Suppose, in ICC Case No. 4491, that Finnish law characterized the statute of limitations issue as substantive. Suppose the parties’ underlying contract in ICC Case No. 4491 contained a choice-of-law clause selecting Finnish law. Would that clause have covered the statute of limitations issue? What law would apply to answering this question?

  23. National court decisions refusing to review arbitrators’ choice-of-law decisions. Neither the New York Convention nor most arbitration statutes expressly permit non-recognition of an award because the arbitrators erred in their choice-of-law analysis. Rather, in the absence of a choice-of-law agreement, the arbitrators’ choice-of-law decisions are subsumed within their rulings on the merits of the parties’ dispute, and thus subject to the general presumption in favor of recognition under the Convention and most developed arbitration legislation. See infra pp. 1113–25, 1164–66, 1189–99.

                The same deference to arbitrators’ choice-of-law decisions also applies under most national arbitration regimes in annulment actions. Thus, except where statutory protections or public policy issues are involved, judicial review of arbitrators’ choice-of-law decisions concerning the substantive law applicable to the merits of the parties’ dispute is usually minimal. See, e.g., ATSA of Cal., Inc. v. Cont’l Ins. Co., 754 F.2d 1394, 1396 (9th Cir. 1985) (reversing trial court’s holding that Egyptian law should apply, on grounds that arbitrator had authority to determine applicable law); B v. A [2010] EWHC 1626, ¶25 (Comm) (English High Ct.) (rejecting challenge to award on basis that arbitrators applied wrong substantive law); Judgment of 22 October 1991, Compania Valenciana de Cementos Portland v. Primary Coal Inc., 1992 Rev. arb. 457 (French Cour de cassation), Note, Lagarde (“The Court of Appeal was not required … to examine how the arbitrator determined and implemented the rule of law that was applied.”); Judgment of 18 September 1997, XXV Y.B. Comm. Arb. 641 (2000) (Landesgericht Hamburg) (defense to recognition based on excess of authority, based on application of wrong substantive law, rejected: “dealing with an objection relating to an [alleged] excess of authority would lead, in the present case, to reviewing the interpretation of the choice of law clause and indirectly to reviewing the correctness of the arbitral award as to the merits”). Recall the Karaha Bodas decision and the U.S. court’s deference to the arbitrators’ determination of the applicable procedural law, supra p. 610.

                Is this appropriate? Is there any argument that choice-of-law decisions should be subject to more intensive judicial review in annulment (or recognition) actions than other decisions?

  24. Choice of substantive law in investment arbitration. Consider Article 42 of the ICSID Convention, excerpted at p. 22 of the Documentary Supplement. Compare the ICSID Convention’s approach, of including a choice-of-law rule, to that under the New York Convention. What explains the different approaches? Which is preferable?

                What does Article 42 provide with regard to the law applicable in investment arbitrations under the ICSID Convention? What is meant by Article 42(1)’s statement that “the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable”? Note the reference to the law of the Contracting State, including its conflict of laws rules. Compare this to the anti-renvoi approach to choice-of-law agreements in the commercial context. See infra p. 1014. What is meant by the reference to “such rules of international law as may be applicable”? 25. Choice of substantive law in inter-state arbitration. Inter-state arbitrations, between states and/or state-like entities, raise special choice-of-law considerations, because of the (arguable) existence of a single, specialized body of law applicable to disputes between such parties (being public international law). Nonetheless, note the choice-of-law provisions in the Treaty of Washington (in Article VI) and in the Abyei Arbitration Agreement (in Article 3). Consider each of these choice-of-law provisions. Why did the parties agree to them? Can you identify other inter-state circumstances in which similar choice-of-law agreements might be constructive? What law would apply in the absence of such provisions?

B. CHOICE OF LAW GOVERNING MERITS OF PARTIES’ DISPUTE PURSUANT TO CHOICE–OF-LAW AGREEMENT

International arbitration agreements often include, or accompany, an express choice-of-law provision addressing the substantive law applicable to the parties’ contract and relationship.²⁰ Prior agreement on the governing substantive law increases the predictability of the parties’ relationship and, in some cases, selection of a particular nation’s law may provide important advantages to one or the other party. Where a choice-of-law clause exists, three significant issues arise: (a) is the choice-of-law agreement enforceable; (b) if so, subject to what exceptions; and (c) how is the choice-of-law clause to be interpreted? The materials excerpted below explore each of these issues.

1. Presumptive Validity of Parties’ Choice of Law in International Arbitration

The basic principle, recognized in most national and international instruments, is that choice-of-law agreements are presumptively valid and enforceable. ²¹ This principle is reflected in a wide variety of legislative and other sources, excerpted below, and is generally subject only to limited exceptions.

REGULATION ON THE LAW APPLICABLE TO CONTRACTUAL OBLIGATIONS (“ROME I REGULATION”)

Articles 3, 9 (2008)

3(1). A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract.

3(2). The parties may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice made under this Article or of other provisions of this Regulation. Any change in the law to be applied that is made after the conclusion of the contract shall not prejudice its formal validity under Article 11 or adversely affect the rights of third parties.

3(3). Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement.

3(4). Where all other elements relevant to the situation at the time of the choice are located in one or more Member States, the parties’ choice of applicable law other than that of a Member State shall not prejudice the application of provisions of Community law, where appropriate as implemented in the Member State of the forum, which cannot be derogated from by agreement.

3(5). The existence and validity of the consent of the parties as to the choice of the applicable law shall be determined in accordance with the provisions of Articles 10, 11 and 13.

9(1). Overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation.

9(2). Nothing in this Regulation shall restrict the application of the overriding mandatory provisions of the law of the forum.

9(3). Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application.

RESTATEMENT (SECOND) CONFLICT OF LAWS §187 (1971) SECOND INTERIM AWARD IN ICC CASE NO. 4145

XII Y.B. Comm. Arb. 97 (1987)

[The claimant was a Middle Eastern public entity. The respondent was a South Asian construction company. The respondent contracted to construct buildings for the claimant. The parties’ agreement contained an ICC arbitration clause and a choice-of-law clause: “The validity and construction of this Agreement shall be governed by the laws of the Canton of Geneva or country X, or both.” In arbitral proceedings, the claimant contended that Swiss law governed the parties’ dispute, while the respondent argued for the law of country X.]

The principle of autonomy—widely recognized—allows the parties to choose any law to rule their contract, even if not obviously related with [it]. This is what the parties have done in mentioning Swiss law, although at first sight less related with the Agreement than the law of country X. Such mention of Swiss law in the first place (before the law of country X) is in this respect an important indication. Moreover, Swiss law constitutes a highly sophisticated system of law, which answers all the questions that may arise from the interpretation or fulfillment of an agreement of the kind of the one entered into. On the other hand, the law of country X, might partially or totally affect the validity of the Agreement. It is then reasonable to assume that from two possible laws, the parties would choose the law which would uphold the validity of the Agreement. It is also a general and widely recognized principle that from two legal solutions, the judge will choose the one which favors the validity of an agreement (favor negotii).

In these circumstances, the arbitrators definitely decided to choose Swiss law as the applicable law, assuming that this choice corresponds to what the parties had in mind by inserting the above mentioned provision in Article 11 of the Agreement. (There is no reason to envisage the cumulative application of both Swiss law and the law of country X to the Agreement, such solution being rejected by most of the authors)….

PRELIMINARY AWARD IN ICC CASE NO. 5505

XIII Y.B. Comm. Arb. 110 (1988)

[excerpted above at pp. 629–32]

RULER OF QATAR v. INTERNATIONAL MARINE OIL CO. LTD

Award of June 1953, 20 I.L.R. 534 (1953)

SIR ALFRED BUCKNILL, Referee. On the 5 August 1949, an Agreement in writing hereafter called the Principal Agreement was made between His Excellency the Shaikh of Qatar of the first part, hereafter called the Ruler, and Sir Hugh Weightman on behalf of the Central Mining and Investment Corporation, a company registered in accordance with English law, and Robert Morton Allan Jr. on behalf of the Superior Oil Company, a California corporation, parties of the second part. They were acting as agents for a company to be formed, namely, the International Marine Oil Company, to whom in October, 1950, the parties of the second part assigned all their rights and obligations under the Principal Agreement. This Company is the Respondent to this Arbitration. Meanwhile the Ruler had assigned all his rights and obligations under the Principal Agreement to his son, His Excellency Shaikh Ali Bin Abdulla Al-Thani, who then succeeded as Ruler of Qatar, and is the Claimant in this Arbitration.

By the terms of the Principal Agreement any doubt or dispute arising between the parties concerning the interpretation of the Agreement or concerning the rights or liabilities of either party under it, were to be referred to two arbitrators, and to a Referee chosen by them. In 1952 disputes and doubts arose; the parties nominated their arbitrators, and they then nominated me, the Right Honourable Sir Alfred Bucknill, a member of Her Majesty’s Privy Council, to be the Referee.

Article 2 of the Agreement refers to the Proclamation issued by the Ruler of Qatar on [June 8, 1949], claiming jurisdiction and control over an area of the sea-bed and subsoil lying beneath the high seas of the Persian Gulf contiguous to the territorial waters of Qatar, states that he is satisfied that in respect of such area no prior obligation exists towards an individual or Company, and grants to the Company in conformity with this Agreement for a period of sixty five years from the date of signature hereof, the sole and exclusive right to explore for, drill for, develop, produce, transport and dispose of oil and/or gas or other kindred substances within the area described in Article 3. The Article ends by saying: “It is understood and agreed that this Agreement is subject to any rights which may be established under an existing concession in accordance with the machinery provided for in said concession.”…

Article 4 states: “On the date of signature of this Agreement, the Company shall pay to the Ruler the sum of Rupees 500,000. No part of this amount shall be returnable under any circumstances whatever.” Article 5 states:

         “The Company shall pay to the Ruler annually the sum of Rupees 1,000,000, the first payment to be made one year after the date of signature of this Agreement. Upon discovery of oil in commercial quantities this annual rental shall cease, but the amount payable thereafter to the Ruler as royalty under the terms of Article 8 hereof shall in no circumstances be less than the sum of Rupees 1,000,000 annually. For this purpose calculations shall be made on the expiry of each period of twelve months from the date of signature of this agreement. When oil is discovered in commercial quantities in the concession area the Company shall, if the Ruler so desires, make a loan to him of Rupees 1,000,000. The Company shall have the right to recover such loan by deduction from up to one half of the royalties accruing thereafter to the Ruler, provided that the amount paid to the Ruler in any one year shall not in consequence be reduced below the sum of Rupees 1,000,000 as provided above.”

The Principal Agreement defined “discovery of oil in commercial quantities” as “the time when a well or wells are drilled, tested and found capable of producing no less than 15,000 barrels of oil of satisfactory quality per day, for thirty consecutive days, according to good oil field practice.” The Principal Agreement was drawn up in Arabic and in English. Article 30 stated that: “This Agreement has been written in the Arabic and English languages, each of which has equal validity, but is understood that the Ruler will refer to the Arabic text.…”

The crucial issue on this Arbitration was whether the parties intended that the first payment of Rupees 1,000,000 to be made one year after 5th August, 1949, was to be a payment in respect of the year 5th August, 1949, to 5th August, 1950, or a payment in respect of the year 5th August, 1950, to 5th August, 1951. The Claimant argued that this sum of rupees 1,000,000 which was payable on each 5th August was in the nature of rent for the past twelve months, whereas the Respondent Company argued that the sum was a payment for the future twelve months…. At the conclusion of the arguments, the Arbitrators submitted to me certain questions on which they asked for my decision. I need not set out the exact words of the questions, but merely give the gist of them.

The first question was whether the proper law to be applied in the construction of the Principal Agreement is Islamic law or the principles of natural justice and equity. On this point the remarks of Mr. Justice Hardy, a Member of the Supreme Court of Oklahoma, in the case of Bearman v. Dux Oil Co., decided in 1917, and quoted to me, are apt. The case concerned an oil concession, and Mr. Justice Hardy … said:

         “On the construction of contracts, it is the duty of the Court to place itself as far as possible in the situation of the parties at the time their minds met upon the terms of the agreement, and from a consideration of the writing itself ascertain their intention, and if this cannot be done by the instrument itself, the circumstances under which it was made and the subject matter to which it relates may be considered, and with these aids, it is the duty of the Court so to interpret the contract as to give effect to the mental intention of the parties as it existed at the time of contracting, so far as that intention is ascertainable and lawful.”

There is nothing in the Principal or Supplemental Agreements which throws a clear light upon the intention of the parties on this point. If one considers the subject matter of the contract, it is oil to be taken out of ground within the jurisdiction of the Ruler. That fact, together with the fact that the Ruler is a party to the contract and had, in effect, the right to nominate Qatar as the place where any arbitration arising out of the contract should sit, and the fact that the agreement was written in Arabic as well as English, points to Islamic law, that being the law administered at Qatar, as the appropriate law.

On the other hand, there are at least two weighty considerations against that view. One is that in my opinion, after hearing the evidence of the two experts in Islamic law, Mr. Anderson and Professor Milliot, “there is no settled body of legal principles in Qatar applicable to the construction of modern commercial instruments” to quote and adapt the words of Lord Asquith of Bishopstone, in his award as Referee in an Arbitration in 1951 in which the Shaikh of Abu Dhabi, a territory immediately adjacent to Qatar and in fact much larger than Qatar, was a party, and the Arbitration concerned the interpretation of words in an oil concession contract. [See I.L.R., 1951, Case No. 37.] I need not set out the evidence before me about the origin, history and development of Islamic law as applied in Qatar or as to the legal procedure in that country. I have no reason to suppose that Islamic law is not administered there strictly, but I am satisfied that the law does not contain any principles which would be sufficient to interpret this particular contract.

Arising out of that reason is the second reason, which is that both experts agreed that certain parts of the contract, if Islamic law was applicable, would be open to the grave criticism of being invalid. According to Professor Milliot, the Principal Agreement was full of irregularities from end to end according to Islamic law, as applied in Qatar. This is a cogent reason for saying that such law does not contain a body of legal principles applicable to a modern commercial contract of this kind. I cannot think that the Ruler intended Islamic law to apply to a contract upon which he intended to enter, under which he was to receive considerable sums of money, although Islamic law would declare that the transaction was wholly or partially void. Still less would the Ruler so intend, and at the same time stipulate that these sums when paid were not to be repaid under any circumstances whatever. I am sure that Sir Hugh Weightman and Mr. Allan did not intend Islamic law to apply. In my opinion neither party intended Islamic law to apply, and intended that the agreement was to be governed by “the principles of justice, equity and good conscience” as indeed each party pleads in Claim and Answer, alternatively to Islamic law, in the case of the Claimant.

[The Referee then held that “Islamic law does not govern the Principal Agreement” and that the Agreement was valid.]

NOTES

    1. Need to select and apply conflict of laws rules even where choice-of-law provision exists. Like other contractual terms, choice-of-law provisions must be interpreted and enforced. Determining what law to apply to interpret and give effect to a choice-of-law clause requires resort to some set of rules of construction and validity, just as with other types of agreement. In turn, that requires application of some set of conflict of laws rules, to select the applicable rules of construction and validity. What conflict of laws rules are applied to the choice-of-law clauses in the above awards? Is the method of selecting conflict of laws rules any different where a choice-of-law clause exists than where it does not?

    2. Applicability of conflicts rules of arbitral seat to validity and interpretation of choice-of-law agreement. Consider the various arbitration statutes excerpted above. Under these statutes, what law applies to the validity of a choice-of-law clause? Is there any reason to doubt the appropriateness of this choice? If the parties’ underlying contract provides that it is governed by State X’s law, with the arbitration seated in State Y, can it be argued that State X’s law should also supply the conflicts rules to determine the validity and meaning of the choice-of-law clause? What if State Y’s law will not give effect to the choice-of-law clause, but State X’s law will?

    3. Presumptive validity of choice-of-law agreement selecting substantive law. To what extent is the parties’ autonomy to select the substantive law governing their relations recognized in international commercial arbitration?

        (a)   Presumptive validity of choice-of-law agreement selecting substantive law under New York and European Conventions. Does the New York Convention address the validity of choice-of-law agreements selecting the substantive law governing the merits of the parties’ dispute? What about Article V(1)(a), discussed above at pp. 302, 308–14? Does it not recognize the parties’ autonomy to choose the law governing their agreement? What agreement?

                        Consider Article VII(1) of the European Convention, excerpted at pp. 32 of the Documentary Supplement. How does Article VII(1) differ from Article V(1)(a) of the New York Convention? See also ICSID Convention, Art. 42 (“The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties.”). See also Tjong Very Sumito v. Antig Invs. Pte Ltd, [2009] SGCA 41, ¶28 (Singapore Ct. App.) (“the need to respect party autonomy … in deciding … the substantive law to govern the contract, has been accepted as the cornerstone underlying judicial non-intervention in arbitration.”); Bhatia Int’l v. Bulk Trading SA, [2002] 4 SCC 105, ¶25 (Indian S.Ct.) (“in international commercial arbitrations parties are at liberty to choose, expressly or by necessary implication, the law and the procedure to be made applicable.”).

        (b)   Presumptive validity of choice-of-law agreement selecting substantive law under national arbitration legislation. National arbitration legislation also generally recognizes the presumptive validity of agreements selecting the law governing the substance of the parties’ dispute. Consider Article 28(1) of the Model Law, Article 1511 of the French Code of Civil Procedure, Article 187(1) of the SLPIL, excerpted at pp. 92, 153 & 159 of the Documentary Supplement, and Article 36 of the Japanese Arbitration Law. Do these provisions limit the parties’ autonomy to select the substantive law governing their dispute? Consider the scope of the parties’ autonomy under these provisions—is it limited to choice of the law governing the parties’ contract?

                        Legislation in some states does not (expressly) provide a conflicts rule regarding choice-of-law agreements in international arbitrations, but courts in these states have found no difficulty applying the same rules that govern choice-of-law agreements. In the United States, the FAA is silent with regard to the validity of choice-of-law agreements, but under the laws of most U.S. states, and under federal common law rules applicable in matters subject to the New York Convention, such agreements are presumptively valid. See G. Born, International Commercial Arbitration 2678-80 (2d ed. 2014).

        (c)   Presumptive validity of choice-of-law agreement selecting substantive law under institutional rules. Recognition of party autonomy in the choice of substantive law is also the approach of leading institutional rules. Consider Article 35(1) of the UNCITRAL Rules and Article 21(1) of the ICC Rules, excerpted at pp. 174 & 190 of the Documentary Supplement. See also 2014 ICDR Rules, Art. 31(1); 2014 LCIA Rules, Art. 22(3); 2012 Swiss Rules, Art. 33(1). What is the effect of these rules? Do they enhance the presumptive validity or enforceability of particular choice-of-law agreements? How would that be?

        (d)   Presumptive validity of choice-of-law agreement selecting substantive law. Consider ICC Case No. 4145 and ICC Case No. 5505. The awards are consistent with a considerable body of authority, reaching similar conclusions about the parties’ autonomy to select the substantive law governing their relations.

        (e)   Rationale for parties’ autonomy to select substantive law. Is it appropriate for private parties to be afforded substantial autonomy to specify the substantive law applicable to their relations? Are there societal interests implicated, beyond those of the autonomous “parties”? What about the employees, shareholders, lenders, suppliers, taxing authorities, and communities surrounding the “party”? Are not the interests of such entities directly affected by purported choices of law made by corporate managers? Does the lack of any meaningful judicial (or other) review of arbitral awards heighten these concerns about party autonomy?

                        Is it in fact correct that contracting parties obtain vital certainty from a choice-of-law clause? Consider how poorly-drafted the choice-of-law clauses in some of the foregoing awards are. Is it likely that the parties had any idea what the scope of these clauses was, whether the clauses were enforceable, or what the content of the law they might have thought they picked was? If in fact choice-of-law agreements do not provide much certainty, why enforce them?

        (f)   Exceptions to presumptive validity of parties’ choice-of-law agreement selecting substantive law. Consider the following: “[p]arty autonomy in arbitration is quite unlimited. Whatever restrictions different legal systems may place on the right of the parties to choose the law to govern their relations, those limitations can only bind the courts of that legal system.” J. Lew, Applicable Law in International Commercial Arbitration 126 (1978). Is it correct that limitations on the parties’ autonomy (discussed below) are irrelevant in international arbitration, and instead are applicable only in national courts? Is it likely that national legislatures, in enacting mandatory laws or legislation giving effect to public policies, intend that arbitrators are not bound by these rules?

    4. National laws invalidating or disfavoring choice-of-law agreements. Despite wide-spread recognition of party autonomy, there have been dissenting currents. The Calvo and Drago doctrines provided that states could not compromise their sovereignty by either submitting to “foreign” dispute resolution mechanisms or laws. Hershey, The Calvo and Drago Doctrines, 1 Am. J. Int’l L. 26 (1907). In most parts of the world, these ideas lost currency by at least the 1980s; nonetheless, political climates are cyclical, and there have been efforts in recent years in some states to invalidate or withdraw from agreements providing for either international arbitration or application of a foreign law. Cremades, Resurgence of the Calvo Doctrine in Latin America, 7 Bus. L. Int’l 53 (2006); Grigera Naón, Arbitration and Latin America: Progress and Setbacks, 21 Arb. Int’l 127 (2005). Why might a state refuse to give effect to choice-of-law clauses? Compare the reasons a state might refuse to give effect to international arbitration agreements. See supra pp. 335–474.

                Suppose an arbitration is seated in a state whose law does not give effect to choice-of-law agreements. Must the arbitral tribunal give effect to the local law invalidating choice-of-law clauses? On what basis could it decline? Does the New York Convention obligate the tribunal to give effect to the choice-of-law agreement? What provision?

                Suppose an arbitration is seated in a state that gives effect to choice-of-law clauses, but the parties’ transaction occurred principally in a state that does not permit such agreements. Would this restriction apply to the validity of the choice-of-law clause in the arbitration?

    5. Validation principle. The tribunals in ICC Case No. 4145 and Ruler of Qatar refer to the validation principle, which selects the law of the state that will enforce the parties’ agreement. Similar approaches exist under many developed national legal systems. See G. Born, International Commercial Arbitration 2687-89 (2d ed. 2014). Recall the discussion above, concerning application of the validation principle to international arbitration agreements. See supra pp. 306–07. Is the validation principle appropriate in either context? Why?

    6. “Reasonable relation” requirements in international arbitration. Historically, a few jurisdictions have conditioned the validity of choice-of-law agreements on the existence of a “reasonable relationship” between the parties’ transaction and their chosen law. See G. Born, International Commercial Arbitration 2724-29 (2d ed. 2014).

        (a)   The “reasonable relationship” requirement. Consider §187 of the Restatement (Second) Conflict of Laws: it provides that the parties’ chosen law must be applied unless, among other things, “the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice.” Comment f provides that §187’s requirement for a “reasonable basis” can be satisfied by the choice of a neutral, developed law: “The parties to a multistate contract may have a reasonable basis for choosing a state with which the contract has no substantial relationship. For example, when contracting in countries whose legal systems are strange to them as well as relatively immature, the parties should be able to choose a law on the ground that they know it well and that it is sufficiently developed.” Does §187 impose a reasonableness requirement on the parties’ choice of substantive law? What is meant by a “substantial relationship” to the parties or transaction or some other “reasonable basis” for the parties’ chosen law?

                        Section 1-105(1) of the U.S. Uniform Commercial Code (“U.C.C.”) historically imposed a similar “reasonable relation” test. The original U.C.C. required a “reasonable relationship” between a contract and the state whose law was selected by a choice-of-law clause. See U.S. U.C.C. §1-105(1). This requirement was significantly restricted in the revised version of the Code, adopted in 2001. The revised version of the U.C.C. contains a “reasonable relationship” requirement, but only with respect to “consumer” transactions (where many jurisdictions refuse to enforce choice-of-law clauses); it also requires that a choice-of-law clause not deprive consumers of the protection of any mandatory rule of law designed to safeguard their interests. Finally, with respect to wholly “domestic transactions” between businesses, the revised U.C.C. does not permit foreign law to be the chosen law. U.C.C. §§1-301 (c), (e), (f).

                        Even as revised, does the U.C.C. impose a sensible limitation on choice-of-law agreements? If two businesses wish to select a foreign law to govern their transaction, even if it is purely domestic, why should that not be permitted? What if the two parties do business in a market where a foreign legal system is highly-developed and provides predictable rules?

        (b)   Arbitrators generally do not apply reasonable relation requirements. As ICC Case No. 5505 illustrates, it is sometimes argued that the parties’ choice-of-law agreement should not be enforced because the chosen law is not “related” to the parties’ dispute. Such arguments almost inevitably meet the fate of that in ICC Case No. 5505.

        (c)   Reasonable relationship requirement of arbitral seat. Suppose an ICC arbitration is seated in a U.S. jurisdiction, where the original U.C.C. is in force; if the parties’ choice-of-law clause provides for application of English or Swiss law, should that clause be given effect by the arbitral tribunal? If so, what grounds can be advanced for that conclusion? What conflicts rules must the tribunal apply? Should the tribunal apply?

        (d)   Reasonable relationship requirement of state whose conflict of laws rules apply. If an arbitrator decides to apply the conflict of laws rules of some state that requires a reasonable relationship, can he or she ignore that requirement? Is there any basis for an arbitrator to apply national conflicts rules differently from a national court? Recall the basic aims of arbitration—neutrality, efficiency, and international en-forceability, detached as much as possible from the parochial features of any particular legal system. Are they relevant to the foregoing question?

    7. Requirements that choice-of-law clause be express or conspicuous. As ICC Case No. 5505 suggests, parties sometimes contest the validity of choice-of-law agreements in arbitration on the grounds that they fail to comply with local law requirements that such agreements be express, specific, or conspicuous. In ICC Case No. 5505, the tribunal concluded that Swiss law did not contain a requirement that choice-of-law clauses be explicit. Suppose that Swiss conflicts law did contain such a requirement for choice-of-law agreements. Would arbitrators in a Swiss arbitration have been obliged to apply it? What does Article 187(1) of the SLPIL provide? Article 28(1) of the Model Law?

    8. Internally-inconsistent or contradictory choice-of-law clauses. Suppose the parties’ choice-of-law agreement is internally inconsistent, providing, for example, “this contract shall be governed by the law of the parties’ principal place of business,” in a case where the parties have two or more principal places of business in different states. Or suppose the choice-of-law clause provides: “the contract shall be governed by the law referred to in Annex A,” and Annex A lists three different states. In these instances, is there any choice-of-law agreement? If not, does this have any consequences for the parties’ arbitration agreement? The underlying contract? See Compagnie d’Armement Maritime SA v. Compagnie Tunisienne de Navigation SA [1971] AC 572 (choice of law of vessel’s flag, where vessels had multiple flags) (House of Lords); Morgan Home Fashions, Inc. v. UTI, U.S., Inc., 2004 WL 1950370, at *3 (D.N.J.) (choice of law “of the State shown on the reverse side thereof” read against drafter when two states were referred to).

    9. Choice-of-law agreements selecting law of an “incomplete” legal system. Parties occasionally argue that a choice-of-law clause cannot be given effect because it selects a law that is “incomplete” or “ill-developed.” Although little commentary adopts this position, a few arbitral awards arguably do so. Consider Ruler of Qatar. The award is similar to that in another proceeding, cited in Ruler of Qatar, where the tribunal rejected a choice-of-law agreement selecting the (then uncodified) law of Abu Dhabi in favor of “English municipal law,” because the latter is “so firmly grounded in reason as to form part of this broad body of jurisprudence—this modern law of nature.” Petroleum Dev. Ltd v. Sheikh of Abu Dhabi, Ad Hoc Award of August 1951, 1 Int’l & Comp. L.Q. 247, 251 (1952).

                Is the “incomplete” character of a legal system a legitimate basis for denying effect to a choice-of-law clause? By what standard does one conclude that a law is “incomplete”? Does the concept invite parochial favoritism of local law (and local parties)? Note that parties are free to agree to arbitration ex aequo et bono, where no legal rules are applied. See infra pp. 1020–21. If parties can agree to no legal rules, can’t they agree to an incomplete set of legal rules?

  10. Choice-of-law agreement selecting law that would result in annulment of award. Suppose one party argues that the parties’ contractually-agreed law would, if applied, result in annulment of the award. Is this grounds for refusing to apply the parties’ agreed law? Consider how the tribunal in ICC Case No. 5505 refers to this possibility. Suppose a Swiss company enters into a contract, governed by Swiss law, with a Venezuelan state entity, with disputes to be resolved by ICC arbitration in Venezuela. Does the possibility that Venezuelan courts would refuse to honor the parties’ choice-of-law clause mean the arbitrators should refuse to do so? Why or why not?

2. Public Policy Limitations on Parties’ Choice of Law in International Arbitration

Issues of “public policy” or “mandatory law” play significant roles in international commercial arbitration. As discussed elsewhere, the New York Convention and other international arbitration instruments permit non-recognition of awards that conflict with the “public policy” of the enforcing state.²² In addition, however, “public policy” is not infrequently invoked in arbitral proceedings themselves, in support of arguments either that a choice-of-law clause should not be given effect or that a particular mandatory national (or other) law should be applied. The materials excerpted below examine this latter application of principles of public policy.

FINAL AWARD IN ICC CASE NO. 6379