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A direct result of globalization
A direct result of globalization was coming into existence of multi national companies and various international institutions. As a result of greater interaction among these global entities, and the rapid rise in trade that resulted thereof, there came into existence private international law. Due to this increase in trade, a natural fallout was the arising of trade disputes. One of the challenges that came up as a result of all this was that most national laws were not sufficient to deal with issues that arose when any sort of foreign or outside element was involved in any business relationship or business dispute in question. This meant that whenever any law except the national law was part of any business dispute, then a problem situation could arise. It is for this reason that international arbitration is the most established method of resolving commercial disputes world over and this reality is reflected in the laws of most countries. International arbitration may be between legal individuals, between states and individuals as well as between states.
Even though there is no commonly or uniformly accepted definition of arbitration the world over, yet it is governed by some core principles that are universally accepted in most jurisdictions. These include:
The existence of an arbitration agreement.
The existence of a dispute.
The referral of this dispute to a third party.
An award by the third party.
One more mandatory requirement is that the process of arbitration that is followed should be judicial in nature and the award adjudicatory in nature. As far as the law that is to be followed is concerned, there is no conflict in the case of domestic arbitrations, as the domestic law is directly applied. The problem that comes up is in the case of international commercial arbitration where various legal systems interact.
There exist five systems of law that have a bearing on an international commercial arbitration:
The law governing the parties' capacity to enter into an arbitration agreement,
The law governing the arbitration agreement and the performance of that agreement,
The law governing the existence and proceedings of the arbitral tribunal - the lex arbitri,
The law governing the substantive issues in question - this is variously described as the ‘applicable law' or ‘governing law' or ‘substantive law',
The law governing the recognition and enforcement of the award.
This project shall deal with the arbitration tribunal's determination of the ‘applicable law' or ‘governing law' or ‘substantive law'. This is thus the law under which the dispute will be resolved. There is no disputing the fact that the parties enjoy full autonomy to choose the system of substantive law. This in fact is known as the Doctrine of Party Autonomy. The parties are free to choose national law, public international law, concurrent law, transnational law or even equity and good conscience as the substantive law.
However the scope of this project will only be limited to focusing on the determination of substantive law governing the contract by the arbitrator where the parties do not make a specific and express choice.
Choice Of Substantive Law: A Look At The International Arena
There are three main ways by which arbitral tribunals determine the applicable law in international commercial arbitrations where the parties have not made an express choice.
The implied approach
In this method, when there has been no express choice of applicable law, the arbitrator tries to figure out whether there in fact is any implied or tacit choice of law. this method is often criticized as being highly presumptuous in nature as the arbitrator relies to use the law that he feels the party have in fact presumed to have chosen, when in fact it may actually be quite clear that the parties never applied their mind as to which law should in fact be applied.
However, Redfern and Hunter warned against this duplicity whereby a tacit choice was being attributed to a party when it was obvious that they had not really thought about the choice of law to be applied to the arbitration. The Rome Convention in fact recognizes this duplicity and seeks to guard against this. It provides in Art. 3(1) that a choice of law must be ‘expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case.' A Report published along with this Convention provides that where the parties had no clear intention of making a choice, the Court is not permitted to infer a choice of law.
Conflict Of Laws Approach
Another approach to determine the applicable law is the conflict of laws approach. This is the traditional approach and it finds resonance in a number of international conventions. The European Convention of 1961 gives the arbitrators the freedom to apply the rules of conflict of laws that they deem applicable. The UNCITRAL Rules states that when the parties fail to designate the law which is to be applicable to the dispute, the arbitral tribunal shall apply the law to be determined by the conflict of law rules that it considers applicable.
Conflict of laws are rules of law which determine if the courts of a particular country have jurisdiction over the subject matter of the case. These rules are part of the system of laws of the place where the case is instituted (the lex fori). Transposition of this principle to international commercial arbitration would imply that the arbitral panel would have to apply the conflict rules prevailing at the place of arbitration (lex arbitri). Traditionally, this position has been defended but criticism has been expressed because in some cases it may be hard to determine the place of arbitration and, more importantly, because the place of arbitration does not always have many links with the issues which have to be decided by the arbitrators. Indeed, a more fundamental question can be asked: Do international arbitral tribunals have a lex fori. In this regard, authors have proposed not to rely on conflict rules stemming from domestic legal systems, but rather to work with other techniques. These techniques are (1) autonomous conflict rules; (2) general principles of conflict of laws; (3) cumulative application of conflict rules.
Under the first technique, arbitrators would not be bound by domestic conflict rules but they might apply the conflict rule which they consider most appropriate. The second perspective allows arbitrators to apply a common denominator of conflict rules which functions as a principle of conflict of laws generally accepted in various jurisdictions. The third method looks at the conflict rules applicable in the jurisdictions which are connected to the dispute. To the largest extent possible, this method applies these conflict rules cumulatively. In cases of false conflicts where the conflict rules in the relevant jurisdictions do not differ, one might easily apply the cumulative method. However, when one is faced with true conflicts, the cumulative method does not solve the question as to the applicable conflict rule.
The third major method to determine the law applicable in an arbitration is the direct choice method or the voie directe. Here the arbitral tribunal can directly choose any law without reference to the conflict of laws system of any country. The 1998 ICC Rules of Arbitration allow for such a choice. Also the American Arbitration Association's International Rules allow for direct selection of applicable arbitration law. The London Court of International Arbitration Rules, 1998 too allow such a choice. The French, Dutch and the Swiss legal regimes too follow such an approach.
The decision to allow arbitral tribunals the right to decide the applicable law or to choose the applicable law flows logically from the decision to allow them the authority to decide the dispute. If they are thought competent enough to adjudicate on the dispute then they ought to be thought competent enough to choose the applicable law. The national and international jurisdictions mentioned above allow the tribunals the freedom to choose their own tools. However concerns have been raised regarding the uncertainty surrounding the choice of law this method would give rise to.
An example of a tribunal ignoring the conflict of laws would be Saudi Arabia v. Arabian American Oil. In this case the tribunal determined that while Saudi law would be applicable to some of the issues in dispute, they had to determine the law applicable to the rest of the disputes. They decided to apply the law which corresponded best to the nature of the legal relationship between the parties. This was, according to the tribunal, the law of the country with which the contract had the closest connection and also the law of the place where the contract was to be carried out. An arbitration where an extreme stand was taken by the tribunal making the award was Sapphire International Petroleum v. NIOC. Here the tribunal ruled that it was not bound by the conflict of laws of the seat of arbitration. Here the tribunal ruled on the basis of general principles of international law stating that national laws were not best suited to resolve such disputes.
How Is The Choice Of Method To Be Made
An obvious question arises here. How do the arbitrators choose which of the methods to apply: whether to go for the conflict of laws approach or to opt for the direct choice method? This is a determination made under municipal law as it is the local municipal law which declares how the tribunal is to make its choice Again, another logical question arises. Which municipal law is to be applied? Tweeddale and Tweeddale suggest that the following be taken into consideration while determining the approach:
The law of the place which would have had jurisdiction but for the arbitration clause,
The law of the seat of arbitration,
The laws of all the countries which have a connection with the dispute,
The application of no law,
Laws derived from international treaties.
Choice Of Substantive Law: The Indian Scenario
Which of the three methods mentioned in the previous chapter does India follow? Section 28 (1) (b) of the Arbitration and Conciliation Act of India, 1996 states that where the place of arbitration is situated in India, in international commercial arbitrations, failing any designation of the applicable law by the parties, the arbitral tribunal shall apply the rules of law it considers to be appropriate given all the circumstances surrounding the dispute.
A division bench of the Supreme Court of India deliberated on the ‘proper law of contract' in National Thermal Power Corporation v. Singur Company. Although this case is a pre 1996 Act case, yet the principles enunciated in this case still remains relevant. Thommen, J. quoted with approval the definition of ‘proper law of contract' by Dicey and Morris: “The term 'proper law of a contract' means the system of law by which the parties intended the contract to be governed, or, where their intention is neither expressed nor to be inferred from the circumstances, the system of law with which the transaction has its closest and most real connection.” Thus, by this definition, it is clear that the courts were talking about the substantive law or the applicable law here.
With regard to determining the substantive law applicable, the court declared that the expressed intention of the parties was generally decisive in determining the proper law of the contract. The only limitation on this rule was that the intention of the parties had to be expressed bona fide and it ought not to be opposed to public policy. However where the parties had not made an express declaration of their intention, that intention had to be determined by applying "sound ideas of business, convenience and sense to the language of the contract itself".
In such situations, where parties had failed to make an express selection of the substantive law to govern the contract, selection of courts of a particular country as having jurisdiction in matters arising under the contract was usually, but not invariably, an indication of the intention of the parties that the system of law followed by those courts was the proper law by which they intended their contract to be governed. However, the mere selection of a particular place for submission to the jurisdiction of the courts or for the conduct of arbitration would not, in the absence of any other relevant connecting factor with that place, be sufficient to draw an inference as to the intention of the parties to be governed by the system of law prevalent in that place.
This was especially true for arbitration cases for the selection of the place of arbitration might have little significance. This was particularly true when the place of arbitration was not chosen by the parties themselves, but by the arbitrators or by an outside body, and that too for reasons unconnected with the contract. The Court thus declared that choice of place for submission to jurisdiction of courts or for arbitration may prove to have little relevance for drawing an inference as to the governing law of the contract, unless the choice was supported in that respect by the rest of the contract and the surrounding circumstances.
Where there was no determination of the express or implied intention of the parties the court would then impute an intention to the parties. The Judge had to determine the intention of the parties by asking himself "how a just and reasonable person would have regarded the problem." He had to take into account the place where the contract was made, the form and object of the contract, the place of performance, the place of residence or business of the parties, reference to the courts having jurisdiction and such other links are examined by the courts to determine the system of law with which the transaction has its closest and most real connection.
To summarize, the court declared that where there had not been an express choice of substantive law by the parties, the courts had to look for the implied intention by asking with which system of law the transaction had its closest and most real connection. The place where the arbitration was being held had little relevance in determining the choice of substantive law, unless the choice was supported by the rest of the contract and the surrounding circumstances.
In another pre 1996 Act case, the Delhi High Court in Gas Authority of India Ltd. v. SPIE CAPAG, SA declared that the Court must have regard to the connecting ties which point to the country in which the centre of gravity of the contract lies.
Post the 1996 Act, the only case in which the Supreme Court has dealt with the issue of substantive law of contract is Shreejee Traco (I) Pvt. Ltd. v. Paperline International Ltd. Here the petitioner, a company incorporated in India, held the respondent, a company incorporated in New York, guilty of breach of contract and claimed damages and compensation. It appointed an arbitrator and requested the respondent to appoint an arbitrator so that the nominated arbitrators could appoint the presiding arbitrator. The respondent neither appointed an arbitrator nor responded to the petitioner's notice. Hence the petitioner filed a Petition under Section 11(4) of the Arbitration and Conciliation Act, 1996, seeking appointment of an arbitrator on behalf of the respondent.
The Supreme Court dismissing the Petition inter-alia held that the law governing arbitration proceedings is the law chosen by the parties, or, in the absence of agreement, the law of the country in which the arbitration is held. In the absence of express choice of the law governing the contract as a whole or the arbitration agreement as such having been exercised by the parties, a presumption may arise that the law of the country where the arbitration is agreed to be held is the proper law of the arbitration agreement. The presumption is rebuttable. The parties have the freedom to choose the law governing an international commercial arbitration agreement. There is nothing in the contract or correspondence between the parties to rebut the ordinary presumption and spell out an intention of the parties that they intended proper law of India to govern arbitration in spite of the place of arbitration having been agreed to be at New York.
Thus, we see shift in the approach of the Supreme Court. Whereas in the NTPC case it had stated that the place of arbitration has little relevance in determining the substantive law. In the latter case, the Court declared that there would be a presumption that the law of the country where the arbitration is agreed to be held is the proper law of the arbitration agreement.
National laws and international conventions have more binding value than the rules of international arbitration institutions. The latter only bind when the parties to an arbitration agreement accept the jurisdiction of these institutions. Where issues related to arbitration proceedings are brought before a court of law, the court will look at the relevant municipal law before looking at an international convention. As such, municipal arbitration laws are of prime importance. Manu jurisdictions like France, Netherlands and even India have positive laws in place choosing the directing approach. However, as of now, there is no universal rule with the conflict of laws method having its share of supporters. These supporters argue that a direct choice method gives too much discretion to the arbitrator which may lead to arbitrariness. They argue that an arbitral award may be more susceptible to challenge on the grounds of wrong choice of law if it is made by direct choice. By this they reckon that the choice of law would be unpredictable at best, at worst it might be arbitrary.
The Author would like to argue the opposite. The reason that arbitrations are favored as a method of dispute settlement is because the unique nature of the commercial transaction and hence, the unique nature of the dispute can be appreciated in an arbitration. This is contrary to the way courts work applying the general law of the land to a problem that might have special features. An arbitrator who is given the right to resolve a dispute ought to be given the proper tools to do his job. If the parties to an arbitration trust him enough to give him the authority to judge the dispute, they ought to trust his judgment regarding his choice of the law to be applied. He would choose that system of law which, in his opinion, was the most developed and progressive on the subject. The Indian Supreme Court has made a regressive judgment in Shreejee Traco by stating that there is a strong presumption for the application of the law of the place where the arbitration is being held. The place of arbitration might have been chosen for practical expediency rather than for reasons related to the contract. However, the best option in front of the parties is to expressly state the choice of law in the arbitration contract itself.
EEC, Convention On The Law Applicable To Contractual Obligations, 19th June, 1980, 80/934/EEC, http://www.rome-convention.org/instruments/i_conv_orig_en.htm [Last visited on 28th Dec. 2008].
ICC, Rules of Arbitration, 1998, available at http://www.jus.uio.no/lm/icc.arbitration.rules.1998/ [Last visited on 4th Jan., 2009].
See EEC, European Convention on International Commercial Arbitration, 21 April, 1961, available at http://www.unb.br/fd/gt/conteudo/Europ_Conv_1961.doc [Last visited on 28th December, 2008].
UNCITRAL, Model Law on International Commercial Arbitration, 21 June, 1985 (As Amended in 7 July, 2006), U.N. Doc.s A/40/17, annex I and A/61/17, annex I, available at http://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/07-86998_Ebook.pdf [Last visited on 28th December, 2008].
Alan Redfern et al., Law and Practice of International Commercial Arbitration 1 (Sweet & Maxwell 4th ed. 2006 South Asian edition)
Andrew Tweeddale & Keren Tweeddale, Arbitration of Commercial Disputes 40-42 (Oxford University Press 2005).
Debanshu Mukherjee, Proper Law in International Arbitratoins Involving Contractual Claims: When Parties Fail to Choose, 20(1) N.L.S.I.Rev. 62, 64 (2008).
Dicey and Morris, I The Conflict of Laws 1 (Lawrence Collins et al. ed.s, Sweet and Maxwell 13th ed. 2002 Second Impression).
Filip De Ly, The Place Of Arbitration In The Conflict Of Laws Of International Commercial Arbitration: An Exercise In Arbitration Planning, 12 Nw. J. Int'l L. & Bus. 48, available at www.westlaw.com
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