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SUBMITTED TO Mr. Prasenjeet Kundu
SUBMITTED BY ANOOP KUMAR ROLL NO. 11
DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY
ACKNOWLEDGEMENT I would like to take this opportunity to express my sincere thanks to Mr. Prasenjeet Kundu, Faculty of Law, Dr. Ram Manohar Lohiya National Law University, and who gave me an opportunity to write on this topic and also gave his valuable suggestions to complete this project and without him this project would not have reached this shape. I would also like to thank my family, without their love and support this project would not have completed. Last but not the least; I would like to thank my friends who were very helpful throughout the completion of the project.
Date: 21st November, 2010
Anoop Kumar Roll no. 11
INTRODUCTION LEX ARBITRI. DETERMINATION OF LEX ARBITRI. DETERMINING THE PLACE OF ARBITRATION IN A MULTIPLE GEOGRAPHIC ARBITRATION. INFERRED CHOICE OF LAW APPLICABLE LAW IS THE COMMON LAW RULE. GENERAL PRINCIPLES OF CHOOSING THE SUBSTANTIVE LAW STANDARDIZING THE CHOICE OF LAW CONCLUSION. BIBLIOGRAPHY.
INTRODUCTION. In the matters of international commercial arbitration, there arises a question as to which law should be applicable on the dispute. As far as the law governing international arbitration is concerned, there are many different laws that come into picture, i.e., the proper law of the contract, lex arbitri, procedural law or the curial law.´1 As far as the issue of applicability of law is concerned, there are different aspects of applicability. The law applicable to the rights, duties and obligations of the parties are not necessarily same as the law governing the arbitration. There may be even more than four or five legal systems relevant for the international arbitration. The parties to the agreement may even agree not to arbitrate in the country of which they are resident for the fear of biasness. In such case, the law of that nation will govern the arbitration. However, if they have agreed upon the law of another nation, the arbitration proceeding will be governed by the law agreed by them, irrespective of the fact that seat of arbitration is different. Arbitration agreement is a separate contract within the contract. Therefore, it is not necessary that the applicable law will govern the arbitration agreement. Further, the lex arbitri plays a very significant role in arbitral process. It is the set of mandatory rules that are applicable to the arbitration.
Paul Smith Ltd v H & S Holding Inc  2 Lloyds's Rep 127 available at TRANS LEX.ORG, http://www.translex.org/output.php?docid=303000&markid=969000
LEX ARBITRI. The rights, duties and contractual obligations of the parties are to be determined by the law governing the arbitration. The law which governs the arbitration is called µlex arbitri¶. In the very fundamental case of Paul Smith Ltd v H & S Holding Inc2, STEYN J. observed following about lex arbitri:
a body of rules which sets a standard external to the arbitration agreement, and the wishes of the parties, for the conduct of the arbitration. The law governing the arbitration comprises the rules governing interim measures (e.g. Court orders for the preservation or storage of goods), the rules empowering the exercise by the Court of supportive measures to assist an arbitration which has run into difficulties (e.g. filling a vacancy in the composition of the arbitral tribunal if there is no other mechanism) and the rules providing for the exercise by the Court of its supervisory jurisdiction over arbitrations (e.g. removing an , arbitrator for misconduct).
Lex arbitri can be distinguished from the curial or procedural law as it is the set of rules of law applicable to the arbitration. On the other hand, the curial law is the law that governs the procedure of arbitration.
DETERMINATION OF LEX ARBITRI. There are three conceptual theories in arbitration that determine what lex arbitri is. 1. The Jurisdictional theory. This theory emphasizes upon state sovereignty above the consensual agreement of the parties. In other words it affirms affirming the lex loci arbitri as the law which governs the conduct of the arbitration and the status of arbitral awards. 2. Contractual theory. This theory suggests that the validity of an arbitral process is wholly dependent on the consensual agreement of the parties as to its conduct3. However, it is dependent on the assumption that an existing legal system confers such freedom to so agree on the parties. Hence, it is not as independent of the lex loci arbitri as it first appears to be.
 2 Lloyds's Rep 127, 130 SEEE v World Bank, Yugoslavia and France (1985) 82 ILR 59 at 69
3. Party Autonomy. The authority of arbitral tribunals comes solely from agreements between parties4. As arbitration only exists as a result of party consent, the parties¶ choice of arbitration rules cannot easily be replaced by the unilateral decision of the arbitral institution. Thus, great consideration must be made of party intentions and expectations as a tribunal only has authority to hear disputes if the parties intend that it do so. Furthermore, in addition to the general principle for respecting party autonomy, the New York Convention5 and UNCITRAL Model Law 6 also explicitly require respect for the parties¶ choice of procedural provisions.
DETERMINING THE PLACE OF ARBITRATION IN A MULTIPLE GEOGRAPHIC ARBITRATION. The traditional µSeat theory¶ follows that: µthe law of the arbitration is the law of the place of the arbitral proceedings; the lex arbitri is the lex loci arbitri. Thus an arbitrator must bow to mandatory norms of the country in which he sits¶. Several institutional rules and various legal systems underscore this link between the place of arbitration and the law governing that arbitration7. The geographical place of arbitration is thus the factual connection between the arbitral proceeding and the lex arbitri. A major problem arises when the parties fail to select an applicable law by agreement. Under such circumstances, the Model law provides, ³Failing any designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of law rules which it considers applicable´. But, this provision and the policy embodied in it have been disputed. The application of rules of lex fori is conventional in litigation, but international commercial arbitration is confronted with the question whether the tribunal has a lex fori and if so where it is located? Presuming, the legal system of the place where the arbitration is held to be the lox fori, there is still a strong body of opinion that an arbitration tribunal is not bound to apply, the conflict rules of the seat of arbitration. The next question that arises in this context is how the arbitral tribunal should select the rules of law.
Gary B. Born , INTER NATION AL COMM ERCIAL ARBITRATION : COMMENTARY AND MATERIALS 560 (2d ed. 2001). 5 New York Convention, art. V(1)(d). 6 UNCITRAL Model Law, at art. 19(1). 7 Article VII(2) NYC, Article 1(2) UNCITRAL Model Law
It was stated in the Saphire Arbitration8 that a tribunal ³must look for common Intention of the parties and use the connecting factors generally used in doctrine and in case law and must disregard national peculiarities´. Thus, in rare situations where the parties have not provided for an agreed choice of applicable law, it would be seen that an arbitrator may have substantial freedom in the choice of rules of law. One would assume that in these situations a system familiar to the arbitral tribunal will be used. If the parties made a choice of the law of a country which included an international business law approach, the tribunal would give effect to that choice, and would apply the rules of the sub area. If the parties do not agree, it would still be opened to an arbitration tribunal to apply the law of a country which includes an international business law approach.
Determination of Proper Law. The proper law of contract may be determined in three ways: (1) by express selection by the parties (2) by inferred selection from the circumstances (3) or by judicial determination of the system of law with which the transaction has the closest and most real connection. Where express selection and closest connection are to a certain extent, free from confusion, the inferred selection is a usual problem posed before arbitrators / judges.
INFERRED CHOICE OF LAW The complexity in an arbitration agreement arises when there is no express choice of the proper law. Then the court will consider whether it can ascertain that there was an implied or inferred choice of law by the parties. If the parties agree that the arbitration shall take place in a particular country, an English court will usually, conclude that the parties have by implication chosen the law of the country of arbitration as the proper law. Similarly, if the parties agree that the courts of a particular country shall have jurisdiction over the contract, there is a strong inference that the law of that country is to be the proper law. Other factors from which the courts have preferred to infer the intention of the parties as to the proper law are the legal terminology in which the contract is drafted, the form of documents involved in the transaction, the currency in which the payment (if any) is to be made,
Saphire International Petroleum Ltd. v. The International Iranian Oil Company, 13 I.C.L.Q. 1011 (1964).
the use of a particular language, a connection with a preceding transaction, the nature and location of the subject matter of the contract, the residence of the parties or the fact that one of the parties is a government. Thus when express provision is missing, the arbitrator can go through all these factors to find the intention of the parties.
APPLICABLE LAW IS THE COMMON LAW RULE. Two issues arise whenever a contract has an international element; which country¶s law shall be the contract¶s applicable law and if there is an arbitration clause, in which country, should the arbitration be held. An international element could exist because parties are domiciled or companies incorporated in different countries; or because the subject matter of the contract is located in a country which is different from that of any of the parties. The common law rule is that, in an action for damages for breach of contract, the applicable law determines questions of remoteness of damage, whereas the quantification of damages which according to the applicable law is not too remote is governed by the law of the country in which the proceedings are brought. The general rule is that legislation only discharges or modifies obligation under a contract if passed under the contract applicable law. And the common law is that parties are free to select the applicable law, provided that their choice is bonafide and legal and there is no reason for setting aside the choice on the ground of public policy. The view strengthens when they say that the parties¶ choice will be conclusive. However, it has been doubted whether at common law parties have absolute freedom of choice. In particular, there has not been any clear authority that a choice of English Law would be valid where a contract has no connection whatsoever with England, although the assumption underlying a wide range of commercial and financial agreements have been that such a choice would be upheld.
Internationally accepted Principles of Law Governing Contractual Relations . The decision of the court of Appeal in Deutsche Schachtbau - Und Tiefbohrgesellschaftu v. R AlKhaimah National Oil Co 9 ., indicates that, where parties do not permit their contract to be governed by the law of any particular country, a provision that the contract shall be governed by - ³Internationally accepted principles of law governing Contractual relations´ - will not be rejected by the English Court on the common law ground of uncertainty or public policy. An oil
1 AC 295 (1990).
exploration agreement contained an international chamber of commerce arbitration clause. The ICC arbitration rules provided that the parties were free to determine the governing law and that in the absence of any indication by the parties, the arbitrator shall apply the law designated as proper law by the rule of conflict which he deemed appropriate. In pursuance of that clause, the arbitrators determined that the proper law was internationally accepted principles of law governing contractual relation. It was held that the arbitration clause was governed by Swiss Law and uncontradicted expert evidence was that the arbitration clause was valid under Swiss Laws. The arbitration was held in Geneva, and the arbitral tribunal held that the defendant should pay 4.6 million dollars to the plaintiff. The letter applied to the English Courts for leave to enforce the award as a Judgment. The court of Appeal rejected the defendant's submission that it would be contrary to English public policy to enforce an arbitration award which held that the rights and obligation of the parties were to be determined, not on the basis of any particular national law but upon some unspecified, and possibly ill defined, internationally accepted principles of law. Sir John Donaldson described the internationally accepted principles of law governing contractual relation which the arbitrator applied as a common denominator of principles underlying the laws of the various nations governing contractual relation. The position was reiterated in DST v. Raknoc10. The same position was confirmed by the late Professor Clive Schmitthoff who noted that the Supreme Courts of France and Italy had ruled to the same effect. But these decisions have to be treated with caution as there is no specific law prescribed. If a court were to decide that a clause providing for a contract to be governed by internationally accepted principles of law governing contractual relation is not a valid choice of proper law, the common law position is that it would apply as the proper law the system of law with which it determines that the transaction has its closest and most real connection.
GENERAL PRINCIPLES OF CHOOSING THE SUBSTANTIVE LAW When the parties agree upon a substantive law of a particular jurisdiction, there is no scope for the application of general principles of law. This is determined by the choice of Law clause. This does not however confirm that national law is the best choice of substantive law available, for
1 AC 315 (1990).
national law too may have its own shortcomings. Hence parties may allow arbitral tribunals to apply a substantial law not tied to any particular jurisdiction. Still in some cases, reference to a non-national standard is fertile because of the political realities. The fact that Calvo Doctrine traditionally argued for equal treatment only to foreigners, could not be made applicable because International Arbitration often gives foreigners, but not citizens a right to arbitrate disputes. Thus Calvo Doctrine opposes arbitration on the ground that it gives preferential treatment to foreign investors.
STANDARDIZING THE CHOICE OF LAW Virtually all legal systems and arbitration rules permit the parties to choose the law governing their contractual relationship. It is important that the parties do so in the arbitration agreement or in a separate contractual provision for a number of reasons. First, the parties get a clear picture as to the governing law from the moment the contract is concluded and this clarifies the whole position. Thus, the loophole in contracts can be effectively plugged. Interpretation becomes easy when the law is clear: Secondly, where the parties do not designate the governing law, its determination can be difficult or uncertain11. Clarity narrows an arbitrator¶s choices of choosing either one side or the other. It never permits a compromise position. If one side embraces an unreasonable position, that side stands the risk that its offer will be discredited and the other side¶s proposal favoured. Thus theoretically, it causes disputing parties¶ offers to converge and thereby enhance the prospects of settlements. To uncover the truth, an illuminating process is needed, one that would evoke elucidating responses from the disputants. Present day arbitration needs a resolution which should come in the shape of a precise law, because then only neutrality could be preserved.
CONCLUSION. The nature of the debate about the possibility of delocalizing arbitration procedure and awards often conceals the real concerns that underlie the debate. The cardinal issue is not whether or not arbitrations are jurisdictional or contractual in nature, but to what extent and according to what standards international arbitrations should be regulated and administered. Most legal systems accord parties considerable freedom in determining arbitral procedure, while reserving the right to ensure the fairness and integrity of the process.
BIBLIOGRAPHY. Books. Born, Gary B., International Commercial Arbitration, Vol.1, 3rd ed, 2009, Wolters Kluwer, Demetriades Christina, Dillon Michelle, Johnstone Chris, Moore Charlotte Russell on Arbitration, 23rd Edition, Sweet & Maxwell.
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