W7: Laws and Rules Applicable to the Merits

Question 1

Conflict Rules and the Search for the Applicable Law

[Choice of the Applicable Law by Arbitrators in Absence of Party Autonomy]

Answer 1

1. Contracting parties are entitled to choose law that is to govern their contractual relationship; to be exercised w/proper care and consideration
2. If dispute arises and no choice of law has been agreed = difficult to make a proper assessment of the rights and obligations of the parties - no know legal framework
3. If arb. proceedings commenced, one of the first tasks of the tribunal is to set. law applicable to contract (in absence of party autonomy)
4. ILA’s Committee for ICA recognised need for guidance and development of best practices for parties, counsel and arbitrators in ascertaining contents of applicable law to an ICA
   - ‘Ascertaining of the Content of the Applicable Law in ICA’ recommended to tribunals to facilitate UNIFORMITY and CONSISTENCY in identifying the potentially applicable laws/rules

Question 2

Absence of Party Autonomy: Implicit/Tacit Choice

Answer 2

1. In absence of express choice of law, tribunal will first look for the law the parties are presumed to have ‘intended’ to choose; i.e., TACIT choice of law, AKA implied, inferred, implicit
2. Certain artificiality involved in selecting substantive law for parties, attributing it to their tacit choice, where practically, it is apparent that parties have given little to no thought to the Q.
   - Rome I Regulation Art. 3(1): “expressed/demonstrated w reasonable certainty by terms of contract/circumstances of the case” - court not permitted to infer tacit choice where parties “had no clear intention of making a choice”
   - Report by Profs. Guiliano and Lagarde
3. Tribunal will generally decide contract to be governed by law of the country with which it is ‘most closely connected’ - presumed: place of business/residence of the party to effect the performance characteristic of the contract
   - Presumption does not apply if place cannot be determined - disregarded altogether if appears to be connected more closely w/another country

Question 3

Absence of Party Autonomy: Choice of Forum as Choice of Law

Answer 3

1. Choice of forum by parties - no express choice of substantive law, but agree that nay disputes be litigated in a particular country - generally assumed they intended that country’s law to apply to substance of their disputes
   - MAXIM: Qui Indicem Forum Elegit Jus: a Choice of Forum, is a Choice of Law
2. Makes sense when ref: a court of law
3. Less compelling when DR clause provides for arbitration in a particular country, rather than lit. in the courts
   - Seat may be chosen for many reasons unconnected w law of that place: geographical convince, suitable neutral venue, high reputation of arbitration services, etc.
4. Nevertheless, absent other indications, may have an influence on decision of substantive law should be

Question 4

Absence of Party Autonomy: Conflict Rules

Answer 4

1. Tribunal must first decide:
   i. if it has free choice; or
   ii. whether it must follow the conflict-of-law rules @ Seat; i.e., conflict rules of the Lex Fori
   - Every developed national system contains its own rules for the conflict of laws (Pvt. Int’l Law); which serve to indicate what law is to be chosen as substantive law
2. To do this, relevant conflict rules generally select particular criteria that connect/link contract w given system of law; AKA ‘connecting factors’.
   - Differ from country to country
   - ‘Lex Locus Contractus’: Place where contracted was concluded - irrelevant in modern times
3. Modern Set of Conflict Rules: Rome I Regulation Art 4(1)
   - In absence of express choice, contract be governed by law of country in which party is to effect the ‘performance characteristic of the contract’ has its central administration, principle place of business, or other place of business thru which performance is to be effected

Question 5

Does an Int’l Arbitral Tribunal Have a Lex Fori?

Answer 5

1. Choice of Law based on place of concluding contract or place with closest connection is not enough in ICA
2. Seat chosen for practical reasons which may have nothing to do w the law of the place
3. Led to the formulation of a Doctrine (supported by institutional arbitral rules and practice of int’l arb.; i.e, unlike judge of a national court, a tribunal is NOT bound to follow the conflict-of-law rules of the country of Seat
   * Sapphire arbitration
4. A tribunal must looks for the COMMON INTENTION of the parties, and use CONNECTING FACTORS (generally used in Doctrine and in case law), and must DISREGARD national peculiarities
5. Early enunciation of ‘Direct Choice’ (Voie Directe) method of choosing substantive law - irl, gives arbitrators freedom to choose as they please

Question 6

Absence of Party Autonomy: Int’l Conventions, Rules of Arb., and National Laws
[Choice of Law Rules Applicable in ICA]

Answer 6

1. ICSID Art. 4(1): “in absence of any choice of applicable/governing law of the contract by parties, the tribunal must apply law of the contracting state party to the dispute, together w such rules of int’l law as may be applicable
   - Accordingly, traditional practice of giving considerable weight to law of the STATE PARTY, in absence of choice
2. European Convention 1961 Art. VII: “failing any indication by the parties as to the applicable law, arbitrators shall apply the proper law u/rules of conflict that arbitrators deem applicable”
   - Rules of Conflict: NOT necessarily rules of conflict of the country of Seat; au contraire, ref: conflict rules that arbitrators deem applicable
3. Model Law: similar approach
   - Arbitrators proceed objectively. In practice, a tribunal will seek to apply the law (if permitted, rules of law) that it considers to be apt; whether reached thru conflict rules or more directly - may NOT matter
4. FRENCH LAW: omits any ref: conflict rules - logical and sensible
   - “The tribunal shall decide the dispute in acc. w rules of law it considers apt.”
   - 2 Propositions:
   i. an int’l tribunal NOT obliged to proceed to its choice of law by the adoption of any national conflict of laws rules
   ii. NOT obliged to choose a ‘system’ of law as the substantive law, but may instead choose such riles of law as it considers apt for resolution of dispute
   - Trail blazed by French Law been followed by other countries incl. Canada, India, Kenya, and the Netherlands

Question 7

Equity and Good Conscience [Opting out of the Application of the Law: Ex Aequo Et Bono/Amiable Compositeur]

Answer 7

1. Arbitrators may, from time to time, be required to settle a dispute by determining it on the basis of what is ‘fair and reasonable’, rather than on basis of law
2. Such power conferred by so-called equity clauses
   - E.g., ‘arbitrators shall decide according to an equitable rather than a strictly legal interpretation’; ‘shall decide as amiable compositeurs
3. Power to decide ‘in equity’ is pen to several interpretations. It may mean that the tribunals:
   i. should apply relevant rules of law to the dispute, but may ignore any rules that are purely formalistic (e.g., particular form of contract)
   ii. should apply relevant rules of law to the dispute, but may ignore any rules that appear to operate harshly/unfairly in the particular case
   iii. should decide acc. to general principles of law
   iv. may ignore completely any rules of law and decide case on its merits, as these strike the tribunal
   - #4 generally rejected: even a tribunal deciding ‘in equity’ must act in accordance w some generally accepted legal principles
   - Often, this means that the tribunal will decide large on consideration of facts and provisions of the contract, whilst trying to ensure that these provisions don’t operate unfairly to the detriments of one/other of the parties
4. FRENCH LAW: allows arbitrators to act as amiable compositeurs but requires satisfaction of certain standards
   - Paris Cour d’Appel: HELD - ‘arbitrators acting as amiable compsiteurs are obligated to ensure that their decision is EQUITABLE or else would betray their duty and give rise to a cause for annulment’
5. EFFECTIVE ‘EQUITY CLAUSE’ REQUIREMENTS:
   i. parties have EXPRESSLY agreed to it
   ii. permitted by the applicable law
   - UNCITRAL Rules Art 35(2)

Question 8

Party Autonomy

Answer 8

1. Doctrine of Party Autonomy - result of separate, contemporaneous, and pragmatic evolutions w/in the various national systems of conflicts of laws (common law, civil law, and socialist countries)
   - Expressed in Rome I Regulation
2. If national courts are prepared to recognise the Doctrine of Party Autonomy, then arb. tribunals should also be prepared to do so - as it owes its existence to the agreement, and in applying parties’ chosen law, is simply carrying out their agreement

Question 9

Party Autonomy: Recognition by Int’l Conventions

Answer 9

1. ICSID, Art. 42
2. UNCITRAL Rules, Art. 35(1)
3. ICC Rules, Art. 21(1)

Question 10

Party Autonomy: Time of Choice

Answer 10

1. At time of making contract (sensible)
2. At time when dispute arises (illogical)
   - In practice, parties do so, even if their choice of law differs from their previous choice
   - Parties are generally free to vary terms of their contract by agreement; similarly, they should be free to vary by agreement, the law applicable to a contractual dispute

Question 11

Party Autonomy: Restrictions

Answer 11

1. Designed to ensure choice of law is bona fide and not contrary t public policy
   - E.g., Rome I Regulation does not allow choice of foreign law to override mandatory rules of a country towards which all the factual elements of the contract point (choice of foreign law for purposes of tax evasion/avoiding competition regulation would NOT be permissible)
   * Soleimany v Soleimany: English Court of Appeal - refused to enforce an award where the transaction was not illegal u/applicable law, but was u/English Law

Question 12

Soleimany v Soleimany

Answer 12

1. Case concerned contract b/w father and son
2. Involved smuggling carpets out of Iran in breach of Iranian revenue laws and export controls
3. Agreement to submit dispute to arb. @ Beth Din (Court of Chief Rabbi in London)
4. Applied Jewish Law
   - Illegal purpose of contract had no effect on rights of the parties - proceeded to make award enforcing the contract
5. English Court of Appeal declined to enforce:
   “Court is concerned to preserve the integrity of its process, and see that it’s not abused. Parties canNOT override that concern by pvt. agreement. CanNOT by procuring an arbitration, conceal that they, or one of them, is seeking to enforce an ILLEGAL contract. Public Policy will NOT allow it.”

Question 13

Party Autonomy: Choices

Answer 13

1. Sub: only qualifications of good faith, legality, and no public policy objection, the conventions and rules on arb. Doctrine of Party Autonomy is applicable
2. Choice of law clause may be drawn in simple terms
3. Choices available to parties include:
   i. National Law
   ii. Public Int’l Law (incl. General Principles of Law)
   iii. Concurrent Laws (and Combined Laws - the Tranc Commun Doctrine)
   iv. Transnational Law (incl. int’l development law, the lex mercatoria, codified terms and practices, and trade usages)
   v. Equity and good conscience

Question 14

National Law

Answer 14

1. Parties who choose a law to govern their contract, or any subsequent dispute b/w them will generally choose an autonomous system of law - not merely a set of general principles/isolated legal rules
2. Interconnecting, interdependent collection of laws, regulations and ordinances, enacted by/on behalf of the State; interpreted and applied by the courts
3. Complete legal system, designed to provide an answer to any legal Q that may be posed
4. National system of laws will be a known and existing system, capable of reasonably accurate interpretation by experienced practitioners
5. National system of law provides a known (or determinable) legal standard against which the rights and responsibilities of the parties can be measured.

Question 15

National Law: Choice of System

Answer 15

1. Standard Arb. Clauses recommended by arbitral institutions (e.g. ICC) are usually followed by a note: ‘in addition to incorporating the arb. clause, parties should also add a ‘choice of law’ clause.
2. National Law is chosen because of its connection w contracting parties or simply b/c parties regard it as a system of law well suited to governing their commercial relations
   - Commodity, Shipping an Freight, Insurance Contracts: English Law
   - Reinsurance Contract: New York State Law
3. National/State laws have limitations wrt their social, political and economic environment - to be borne in mind.
   - Where one contracting party is a State: State (as legislator) may change the law, thus changing contract terms lawfully, but w/out agreement of the other contracting party
   - Unless contract drafted w such contingencies in mind - it is usually pvt. party who suffers from change in equilibrium of contract
   * Sapphire arbitration

Question 16

National Law: Precluding Unfair Treatment

Answer 16

1. Various devices borrowed from pvt. law contracts in an attempt to maintain balance of the contract; incl.:
   i. revision clauses
   ii. hardship clauses
   iii. force majeure clauses
2. In some long-term economic development agreements, national law is FROZEN by agreements that law of the State party shall be applied as it stood on a given date
   - State law then not operating as applicable law, but as an IMMUTABLE CODE of law incorporated into the contract (not change no matter what amendments are made to the state law itself)
3. Problem: (apart from lack of flexibility) Parties may still introduce a law avoiding such clauses in its own territory

Question 17

National Law: Stabilisation Clauses

Answer 17

1. Undertakings on the part of contracting state that it will not annul/change the terms of the contract by legislative/admin. action w/out consent of the other contracting party

• Libyan Oil Nationalisation cases
• # 1 Breach of Stabilisation clauses = illegal act u/int’l law = parties entitled to restitution of concessions
• # 2 Nationalisation was a legitimate exercise of sovereign power, as long as it was accompanied by ‘equitable compensation’

*Aminoil arb.: did not prevent Kuwaiti govt.’s act of nationalisation

2. Stabilisation clauses attempt to maintain a particular legal regime in existence for a considerable period of time, irrespective of changes that may occur in the social, political, and economic environments of the concerned country
   - Lenders view them as essential components of investment projects, esp. in developing states (with high political risk)
   - States keen to attract foreign investment seem them as valuable way of reassuring investors that the state can offer a STABLE INVESTMENT ENVIRONMENT
3. CRITIQUE:
   Pvt. investors should not be in a position to limit a host state’s sovereignty (ability to modernise its laws) - responsible for “regulatory chill”
4. TYPES:
   i. Traditional Stabilisation Clauses - “freezing clauses”: may face enforceability issues on public policy grounds
   ii. Economic Equilibrium Clauses - “renegotiation clauses”: compensation for cost of complying w new laws/renegotiate in good faith to restore original economic equilibrium of contract

Question 18

Mandatory Law

Answer 18

1. Limitations for Doctrine of Party Autonomy
2. Mandatory Rules have been defined as those that ‘cannot be derogated from by way of Contract’, may feature in the determination of a contractual dispute + governing law selected by parties
3. Most frequently encountered instance of application of mandatory law: competition/antitrust law
   * Mitsubishi Motor Corp. v Soler Chrysler-Plymouth: confirmed arbitrability of competition law issues

Question 19

Public Int’l Law and General Principles of Law

Answer 19

1. There are many sources of public int’l law, incl. int’l conventions and customs - but most relevant (for non-state parties) are ‘general principles of law recognised by civilised nations’; defined as ‘general principles of municipal jurisprudence in particular, or pvt. law, wrt applicability to relations of States’
2. Public In’tl Law: No problem in principle, but practically - not well equipped to deal w detailed contractual issues (mistake, misrepresentation, time of performance, effect of bankruptcy/liquidation, force majeure, measure of damages, etc.)
3. General Principles of Law: Problem is they deal w topics like Principle of Good Faith in treaty relations, Abuse of Rights, Concept of State and Individual Responsibility - excellent generalisations, but may lack sufficient detail for contractual relations (recommended to be used as concurrent law, rather than on their own)

Question 20

Concurrent Laws, Combined Laws, and the Tranc Commun Doctrine

Answer 20

1. ICSID: ‘if a dispute arises and there’s been no express choice of law by parties, the tribunal will apply law of contracting state party and such rules of int’l aw as may be applicable
2. Int’l law brought into play to set a min. standard, which tribunal would be empowered to uphold in its award

Question 21

Libyan Oil Nationalisation Arbitrations

Answer 21

Concurrent Law Interpretations:

1. Texaco: sole arbitrator HELD clause was primarily a choice of public int’l law
2. BP: sole arbitrator appears to have regarded it as a choice of general principles of law
3. Liamco: sole arbitrator HELD the governing law of contract was Law of Libya, but that the clause excluded any part of that law that was in conflict w principles of int’l law
4. Aminoil (Kuwait): similar to Liamco case

TRANC COMMUN DOCTRINE:

i. to choose national laws of both parties, so obtaining the best and worst of both worlds: common core of the 2 diff. systems
* Sapphire arb.
* Channel Tunnel Group arb.

Question 22

Transnational Law: Lex Mercatoria, UNIDROIT Principles, Trade Usages, and Shari’ah Law

Answer 22

1. LEX MERCATORIA:
   Modern version of ‘law merchant’ taken to consist of rules and practices evolved w/in the int’l business communities
   i. List Method: lacks flexibility
   ii. Functional Approach
2. UNIDROIT PRINCIPLES:
   Restatement of the general principles of contract law
   - est. neutral set of rules that may be used worldwide w/out any particular bias to one system of law over another
3. TRADE USAGES:
   Estd. by evidence in a given case
4. SHAR’IAH LAW:
   Embodies not only the Qur’an but also other sources of Islamic Law

• Authority to apply non-national law depends on:
  i. agreement of the parties
  ii. provisions of the applicable law