International Commercial Arbitration Lecture 3: Applicable Law. Part Two 2 By Feruza Bobokulova

Conflict Rules and the Search for the Applicable Law If disputes arise, and no choice of law has been agreed, it is difficult to make a proper assessment of the rights and obligations of the parties because of the lack of legal framework If arbitration proceedings are commenced, one of the first tasks of the AT will be to do what the parties have failed to do, that is to establish what law is applicable to the contract This may be time consuming and expensive process

Conflict Rules and the Search for the Applicable Law In the absence of an express choice of law, the AT will usually look first for the law that the parties are presumed to have intended to choose. This is often referred to as a tacit choice of law, which may also be known as an implied, inferred or implicit choice In the absence of an express choice of law, the AT will generally decide that the contract is to be governed by the law of the country with which it is most closely connected

Conflict Rules and the Search for the Applicable Law It will be presumed that this is the country which is the place of business or residence of the party that is to effect the performance characteristic of the contract However, this presumption does not apply if the place of characteristic performance cannot be determined Indeed, it will be disregarded altogether if it appears that the contract is more closely connected with another country

Conflict Rules and the Search for the Applicable Law Choice of forum as choice of law The criterion for attributing a choice of law to the parties, in the absence of any express choice is that based on a choice of forum by the parties If the parties make no express choice of law, but agree that any disputes between them shall be litigated in a particular country, it is generally assumed that they intend the law of that country to apply to the substance of their disputes

Conflict Rules and the Search for the Applicable Law The assumption makes sense when the reference is to a court of law For example, if the parties fail to put a choice of law clause into their contract, but provide for the resolution of any disputes by the courts of New York, it would seem to be a reasonable assumption that they intended those courts to apply their own law – the law of New York

Conflict Rules and the Search for the Applicable Law In the absence of an express choice by the parties, an AT is faced with the problem of choosing a system of law or a set of legal rules to govern the contract It must first decide whether it has a free choice or whether it must follow the conflict of law rules of the seat of the arbitration – the conflict rules of the lex for Every developed national system of law contains its own rules for the conflict of laws. These conflict rules usually serve to indicate what law is to be chosen as the law applicable to a contract

Conflict Rules and the Search for the Applicable Law To carry out this role, the relevant conflict rules generally select particular criteria that serve to link or connect the contract in question with a given system of law These criteria are often referred to as ‘connecting factors’ Some of the rules that are applied to connect a particular contract with a particular national law or set of legal rules now look decidedly out of date

Conflict Rules and the Search for the Applicable Law Under the conflict rules of some states, for instance, the applicable law (in the absence of an express or tacit choice) is likely to be the law of the place where the contract was concluded (the lex locus contractus) However, with contracts being concluded nowadays by email or by fax or by meetings at an airport or some other location, the place in which the contract is finally concluded is often a matter of little or no significance

Conflict Rules and the Search for the Applicable Law Does an international arbitral tribunal have a lex fori? Conflict of law rules differ from one country to another A judge or AT in once country may select the applicable law by reference to the place where the contract was made, whereas in another country it may be selected by reference to the law with which the contract has the closest connection In the context of international commercial arbitration, this is plainly unsatisfactory

Conflict Rules and the Search for the Applicable Law Does an international arbitral tribunal have a lex fori? The seat of arbitration is invariably chosen for reasons that have nothing to do with the conflict rules of the law of the place of arbitration This has led to the formulation of a doctrine that has found support both in the rules of arbitral institutions and in the practice of international arbitration, namely that, unlike the judge of a national court, an international AT is not bound to follow the conflict of law rules of the country in which it has its seat

Law Governing the Agreement to AArbitrate A submission to arbitration, which is drawn up after the dispute between the parties has arisen should address all the principal aspects of the proposed arbitration, including choice of the AT and choice of the law, which that tribunal is to apply But what if there is a dispute about the submission agreement itself? If for instance, there is an issues as to whether or not a party was legally capable of entering into such an agreement, this would in principle fall to be determined under the law applicable to that party

Law Governing the Agreement to AArbitrate The applicable law clause set out above refers expressly to the ‘substantive issues in dispute’. It does not refer in terms to disputes that might arise in relation to the submission agreement itself; and it would be sensible, in drafting a submission agreement, to make clear what law is to apply to that agreement It would seem reasonable to assume that the law chosen by the parties to govern the contract will also govern the arbitration clause

Law Governing the Agreement to AArbitrate Professor Lew: “There is a very strong presumption in favour of the law governing the substantive agreement which contains the arbitration clause also governing the arbitration agreement. This principle has been followed in many cases. This could even be implied as an agreement of the parties as to the law applicable to the arbitration clause”

Law Governing the Agreement to AArbitrate The presumption that the arbitration clause is governed by the same law as the underlying contract was reaffirmed by the English court in Sonatrach Petroleum Corporation (BVI) v Ferrell International Ltd: “Where the substantive contract contains an express choice of law, but the agreement contains no separate choice of law, the latter agreement will normally be governed by the body expressly chosen to govern the substantive contract”

Law Governing the Agreement to AArbitrate An arbitration clause is taken to be autonomous and to be separable from other clause in the agreement. If necessary, it may stand alone It is this separability of an arbitration clause that opens the way to the possibility that it may be governed by different law from that which governs the main agreement

Law Governing the Agreement to AArbitrate If it becomes necessary to determine what law is to govern an agreement to arbitrate, whether contained in an arbitration clause or a submission agreement, what are the choices? The law of the place where the agreement was made would appear to have little or no relevance There are other possibilities, but the real choice – in the absence of any express or implied choice by the parties – appears to be between the law of the seat of the arbitration and the law which governs the contract as a whole

Law Governing the Agreement to AArbitrate There are a number of cases, in different jurisdictions, in which a court or AT has taken the law of the seat of the arbitration as the appropriate law to govern the parties’ arbitration agreement

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

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