Substantive Norms
NATIONAL LAW AND COMMERCIAL JUSTICE*
A. The Limits of Transnational Norms
Today one sometimes hears cheerful talk about “autonomous” arbitration and “delocalized” procedure, free from the procedural safeguards traditionally imposed by those national legal systems that support the arbitral process.1 The liberation of international arbitration from national legal systems implicates several themes. First, arbitrators often interject trade usage in deciding the merits of a dispute.2 Second, judges increasingly permit arbitration of sensitive public law claims, such as antitrust or securities regulation.3 Finally, arbitral procedure has been to some extent “delocalized,” in the sense of breaking free from procedural norms of the arbitral situs.4
Local procedural safeguards
Many European arbitral centers have attempted to increase their shares of the fees accruing to local lawyers and arbitrators by enacting reforms. These reforms free arbitrators from fear of judicial second-guessing through direct or indirect appeal of their legal conclusions.5 The rationale for these changes is that businessmen who opt for arbitration prefer speed and finality over the legal precision arguably obtained from appeal. Judicial review on the merits of awards may make arbitration merely a rehearsal for court litigation.6
Such delocalized arbitration would seem to promote the wishes of the parties without necessarily violating the vital interests of the arbitral seat. In a transnational dispute, the arbitration usually will have its economic or social impact outside the borders of the place of the proceedings. Only if local substantive law applies to the merits of the dispute will detachment from the law of the place of the arbitration affect the country of the proceedings, and then only tangentially by removing from judges some disputes that otherwise might have fertilized the local law’s evolution.
The trend toward delocalization, however, has gone beyond merely taking from judges the power to hear appeals on substantive legal issues. Belgium has abolished any right of annulment of awards in arbitration between foreigners—even, it would seem, for arbitrator corruption.7 Switzerland has given foreign parties the option to contract out of any judicial review.8
A transnational adjudicatory system, completely detached from national judicial control at the arbitral seat, arguably permits the arbitrator to pursue a more perfect justice by ignoring otherwise applicable rules of law that the arbitrator finds inconvenient in the case at hand. The winner is likely to approve of the speed, finality, and economy resulting from such arbitral justice.
But what of the loser? Will the pursuit of justice, in disregard of applicable law, deny the parties’ shared expectations? What of society? Will disregard of law affect the enforcement of statutes designed to protect public as well as private interests? What of the health of arbitration as an adjudicatory system, when dissatisfied contenders perceive the process as untrustworthy?
The dark side of delocalized arbitration is that arbitrators will find it easier to exceed their powers in jurisdictions that provide no control over the arbitration’s procedural fairness.
The loser in a defective arbitration (for example a corporation improperly joined to the arbitration merely because of its relationship to the defendant) will not be able to litigate the arbitrator’s excess of authority at the time the award is rendered. Instead, the loser will have to raise the matter in every country in which its assets are at risk in the execution of the award. When the victim of procedural irregularities is the losing claimant, the results of the arbitral autonomy are even more dramatically unfair. If denied the opportunity to have the award set aside where rendered, the unsuccessful claimant has no enforcement forum in which to contest the defective award, for the simple reason that there is nothing to enforce. Its only remedy will lie with litigation, which may be inconsistent with the agreement to arbitrate.
All arbitrators must fill gaps in the agreements they are asked to interpret. Arbitrators may be empowered to fill gaps either by the parties themselves, or by the properly applicable law.9 Trade usage inevitably plays a role in contract interpretation.10 But filling gaps by reference to a best guess about the parties’ intent is not the same as filling gaps according to the arbitrator’s private sense of the correct outcome. When properly applicable legal rules indicate the result of a dispute, justice apart from law denies the parties’ shared expectations and opens an avenue to discredit the arbitral process. Indeed, a case might be made for judicial review, to insure that the arbitrators have not rewritten the contract or ignored imperative norms of international public policy,11 even when the parties have authorized the arbitrator to dispense with the application of law and to act as amiable compositeur.12
The variety of choice of law clauses found in international contracts makes it difficult to generalize about the limits of arbitral autonomy. Sometimes parties provide for a specific national legal system to govern their obligations, which trade usage and mandatory norms of the place of performance may or may not supplement. Occasionally the contract provides nothing, leaving the arbitrators free to select a governing law according to their view of appropriate conflicts rules.13 Some arbitrators are explicitly given power to dispense with the law and to act as an amiables compositeurs, or to apply a non-national “law merchant,” or lex mercatoria.
In all these variants of the choice of law process, the arbitral situs traditionally has provided some measure of control over the basic procedural integrity of the process.14 Respect for the parties’ chosen law is protected by giving the loser the right to challenge the award for arbitrator excess of authority, a concept present in most legal systems under different names.15
The desirable extent of control has been the subject of spirited interchanges. The great intellectual protagonists have included Professor Berthold Goldman, who argues that all investigation of the nature of international arbitration “leads to the ineluctable necessity of a system that is autonomous, not national.”16 In the opposite corner of the ring, Dr Francis Mann has maintained that “it is in the highest interest of the State … to maintain the principle of judicial review of arbitration not only to develop the law, but also to ensure the administration of justice and thus to avoid the risk of arbitrariness.”17 Seeming to moderate the debate, Professor Arthur von Mehren has suggested that arbitrations are subject to national law only to the extent that public authorities intervene in connection with the conduct of the arbitration or the enforcement of the award.18
National intervention often occurs when courts are asked to enforce an award, or when the loser attacks the validity of an award at the place of the proceedings.19 At issue are not just the grounds for challenging awards, but also the timing and the geography of judicial review—the when and the where of court intervention.
Few disagree that review should be available in the jurisdiction in which the award is enforced. There is less consensus, however, on whether review should also be available at the place of arbitration when the award is rendered.
In most arbitral centers, national law provides for challenge to awards rendered locally even if no local citizens or residents are involved. Modern arbitration statutes exclude, or permit exclusion of, review of the merits of a dispute, while granting a right of review to insure procedural fairness. This required review extends to matters such as the proper constitution of the arbitral tribunal, the arbitrator’s respect for the terms of his mission, and the absence of corruption.20
Some grounds for review are fairly subjective and have engendered considerable controversy. In the United States, dicta in one Supreme Court case suggest that federal courts can vacate awards for a type of excess of authority labeled “manifest disregard of law.”21 In England, an award may be set aside for arbitrator “misconduct.”22 French judges can annul awards that violate international public policy (ordre public international).23 In Switzerland, under cantonal procedure, an award can be annulled for a “clear violation of law or equity.”24 After the new Swiss federal law goes into effect, awards may be annulled for violation of public policy (ordre public) unless both parties are non-Swiss and have expressly waived any right to judicial challenge.25
National support for the arbitral process
In arbitration, contracts invest decision-making authority in non-governmental tribunals.26 Transnational commercial arbitration in most cases justifies itself principally as a means to achieve a non-national neutral forum.27
National law, however, contributes to arbitration’s legally binding character. Courts become actors in arbitration when business managers ask that arbitration agreements and awards be enforced against recalcitrant parties, that assets be attached,28 that the scope of the arbitration clause be determined,29 or that poorly drafted (sometimes pathological) arbitration clauses be made workable.30 The authority of an arbitrator, therefore, derives not only from the consent of the parties, but also from the several legal systems that support the arbitral process: the law that enforces the agreement to arbitrate, the forum called on to recognize and enforce the award, and the law of the place of the proceedings. The practical importance of this last legal system, often referred to as the law of the arbitral seat, derives from the scheme of the New York Arbitration Convention.31 Under that scheme, the arbitral seat gives the award an international currency merely by letting the award be rendered within its territory.32 The place of the proceedings provides support to the arbitral process by allowing an award to take on a presumptive validity under the New York Convention. That validity facilitates enforcement against assets found in jurisdictions that adhere to the Convention.33
The arbitral situs may also provide active support to arbitration conducted within its frontiers. Assistance may take the form of enforcing the agreement to arbitrate, compelling production of documents, or granting attachment of assets ultimately used to secure payment of the award.
This power to enhance the effectiveness of arbitration within national borders imposes a responsibility of judicial control over the integrity of the arbitral process that receives national support. An arbitrator’s binding decision has worldwide legal consequences for all the parties to the dispute. It would seem anomalous that the country in which this decision is made should exempt it from any judicial review, even for gross procedural defects such as arbitrator fraud or lack of a valid arbitration agreement. Without some judicial recourse, the loser in such a clearly defective arbitration must defend against enforcement of the award everywhere in the world in which the loser has assets, perhaps having to prove several times over that it never signed the arbitration clause or that the arbitrator took a bribe. If the loser in a defective arbitration is the claimant, the arbitral process may offer no recourse at all.34
On the other hand, an award annulled under the law of the country in which it was rendered will usually be refused recognition and enforcement abroad.35 Enforcement of an annulled award is rare in practice36 and is mandated by treaty only if the parties are covered by the 1961 European Convention.37 In the United States, conflicts of law principles might even compel res judicata effect for the issues decided by a foreign judgment annulling an award.38
The winner’s interest in speed, finality, privacy, and economy must at some point yield to the loser’s concern for a fair proceeding. The viability of transnational arbitration requires that the national legal systems that make arbitration binding also insure its integrity. Otherwise the trend toward transnational norms and “justice without law”39 may injure the parties as well as the legitimate public interest that law is designed to protect.40 The business community’s resulting loss of confidence in the arbitration process would not be surprising.
The counterpoise of rules and fairness41
Business decision-makers contemplating a proposed cross-border sale, loan, or acquisition will want to know how potential disputes will be adjudicated. Seeking a neutral forum, they may agree that future controversies will be settled by arbitration. These managers may also seek greater certainty by inserting into the contract a choice of law clause, providing for resolution of disputes according to the laws of a particular jurisdiction known for its developed legal system. For example, English law frequently is chosen to govern international insurance and maritime agreements.42
Admittedly, too much fuss can sometimes be made about the role of legal certainty in business choices. In the real world, business managers and their lawyers often compromise on a governing law without a great deal of research on how the chosen legal system will affect the outcome in the spectrum of possible controversies. Discussion of future disputes when signing the contract often seems a bit like planning for divorce at a wedding feast.
Yet lack of reasonable certainty regarding the applicable norms will not usually enhance cross-border commerce, finance, or investment. While some deals may be consummated without regard to applicable law, others will not. In many contexts, multinational business enterprises will insist on calculating and balancing legal risks in making choices about their alternative commercial opportunities.
A banker may extend credit on the basis of his borrower’s reputation and balance sheet. The lender will nevertheless want to know that the loan agreement, as well as any security agreement or third party guarantee, will be enforced under the applicable law.
Neither the banker nor the customer is likely to authorize that disputes be resolved under a shade tree, according to an adjudicator’s intuitive sense of fairness or momentary impulse, but will likely prefer the stability offered by a choice of national legal rules to govern the merits of any dispute.43
By opting for binding arbitration, international business managers are indicating that they desire procedures simpler than those of a national court. But unless arbitrators are authorized to act as amiables compositeurs, these businessmen are not opting for abandonment of legal rules. On occasion the chosen law itself may incorporate nebulous terms such as “fair play” or “good faith.”44 But this is a different matter from an arbitrator excusing performance of contractual obligations, or awarding an indemnity, merely because the performance appears onerous or the indemnity appropriate notwithstanding the applicable law.45
The essence of binding arbitration is that by contract parties to a dispute select their own private judges and procedures. Implicit in this agreement to avoid national courts is the assumption that arbitrators will follow the minimum requirements of a fair hearing, including respect for the party-chosen law.
It is always open to the contract parties to agree to settle their controversy according to other models, such as non-binding mediation (which often precedes rather than replaces litigation) or a “split-the-difference” compromise imposed by an authorized third party.46 On occasion, even arbitrators not acting as mediators or empowered to decide as amiables compositeurs may be tempted to abandon the rules of law in favor of the more fluid principles of fairness.47 The arbitrators’ motivation seems to be that ad hoc justice, according to their sense of fairness rather than according to legal rules, permits finer distinctions to suit the peculiarities of a specific case.48
Wide variations exist in concepts of fairness. Like the notion of justice, fairness is usually encrusted with emotional and philosophic overtones. The authoritative adjudicatory process that comprises what we call law includes enforceable rules of conduct that the community recognizes as binding. These rules convey information to decision-makers about community goals, norms, and values.
Legal rules are not necessarily unfair or inequitable, but they sometimes lead to a result other than what the observer feels to be appropriate to a particular case. When juxtaposed to legal rules, fairness approaches that which in continental legal systems would be called équité. Fairness reaches toward general notions of “right” that may be in tension with the dictates of the state, and appeals to commands of morality or ethics beyond those expressed in court decisions and statutes.
To the extent that commercial law lags behind standards shared by the business community, arbitration according to fairness rather than legal rules may occasionally promote the parties’ expectations. However, these cases will be at the margins, rather than the normal experience, unless there is some reason to assume that law-makers are not doing their job well, or at least as well as arbitrators.
Moreover, law is part of a larger community process that may seek to limit business notions of acceptable behavior, for example, with respect to treatment of employees or tenants.
No one opts for an unfair result applied to himself. However, it is rarely possible to predict in advance of the dispute who will get the rough side of the law, since the contours of the controversy do not exist. For this reason, parties to commercial transactions agree to “play by the rules,” aware that application of the rules will not always produce agreeable results. It is not irrational to assume that businessmen desire the application of rules of law as an accepted calculus of justice, even though those rules lead to consequences that could be described as unfair.
The slim objective content of fairness makes the concept inherently chameleon-like. In contrast to the Chancellor’s equitable remedies in fourteenth-century England, transnational commercial fairness cannot be given coherent substance before any central adjudicatory authority. Businessmen who see fairness the same way in the abstract may diverge in its concrete application to commercial controversies, illustrating Emerson’s observation that “One man’s justice is another’s injustice.”49
Decisions that ignore legal rules are unlikely to provide the predictability that business managers seek in planning strategy, evaluating risks, and making commercial choices. Nor is dispute resolution according to non-legal criteria likely to be any more successful than legal rules in bringing community standards to bear on the allocation of values and resources that affect third parties.50
Any retreat from decision-making constrained by rules will call to mind the German National Socialist legislation that punished violations of the “sound popular instinct” (das gesunde Volksempfinden) that was thought to reflect the Führer’s will.51 This empty expression permitted de facto evasion of the principle “no punishment without law” (nulla poena sine lege), setting an extreme example of adjudication without rules. In short, whatever its benefits to a particular case, in meeting the needs of cross-border business and protecting public interest, ad hoc justice is unlikely in the long run to be any more satisfying than decisions according to legal rules.
The nationality of awards
During the quarter century since talk of “anational” arbitration has made its way from Professor Goldman’s Hague lectures to the more common conversation of international lawyers, the “nationality of awards” has been the subject of unnecessary mystification. Much of the confusion in characterizing awards and arbitrations has come from a tendency to apply labels without regard to their context.
The New York Arbitration Convention covers awards characterized as either “foreign” or “non-domestic.” Foreign awards are those rendered outside the enforcement forum. Non-domestic awards may be rendered locally, but are nevertheless covered by the Convention because they involve transactions and/or parties that are almost or entirely foreign.52
Foreign arbitration overlaps international arbitration.53 The latter deals with disputes having an international element, and may be delocalized procedurally within the limits of national arbitration law. In countries such as Belgium, England, France, and Switzerland, statutes either limit or permit the parties to restrict judicial review of awards that implicate international commerce.54