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Bluebook 21st ed.

Julian D. M. Lew, Determination of Applicable Substantive Law, 25 INT'l Bus. LAW. 157
(1997).

ALWD 6th ed.

Lew, J. D., Determination of applicable substantive law, 25(4) Int'l Bus. Law. 157
(1997).

APA 7th ed.

Lew, J. D. (1997). Determination of applicable substantive law. International
Business Lawyer, 25(4), 157-160.

Chicago 7th ed.

Julian D. M. Lew, "Determination of Applicable Substantive Law," International
Business Lawyer 25, no. 4 (April, 1997): 157-160

McGill Guide 9th ed.

Julian D M Lew, "Determination of Applicable Substantive Law" (1997) 25:4 Int'l Bus
Law 157.

AGLC 4th ed.

Julian DM Lew, 'Determination of Applicable Substantive Law' (1997) 25(4)
International Business Lawyer 157.

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Lew, Julian D. M. "Determination of Applicable Substantive Law." International
Business Lawyer, vol. 25, no. 4, April, 1997, p. 157-160. HeinOnline.

OSCOLA 4th ed.

Julian D M Lew, 'Determination of Applicable Substantive Law' (1997) 25 Int'l Bus Law
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 4~
Julian D M Lew discusses choice of
law a the use
ud of col ict of
rules.
In this article I shall briefly explore two questions in
relation to the determination of applicable
substantive law in international arbitration. First,
how should arbitrators choose the standard to apply
to the substantive issues in any particular case?
Should arbitrators have recourse to an established
body of conflict of law rules or should they simply
apply directly the law which they think or indeed
know is applicable?
Second, are there any limits to the options
available to either of the parties in choosing, or the
arbitrators in determining, an applicable law? This
question involves considering whether the range of
available applicable laws should be restricted to
recognised systems or whether it is possible to
choose more general or non-legal standards. There is
a difference in the answer to this question in both
legal theory and arbitral practice.
International arbitration is, by definition,
fundamentally different to national systems of
dispute resolution. Invariably it involves parties
based in different countries, arbitrators of different
nationalities and, in some cases, proceedings which
take place in different countries. Thus arbitration
has no fixed statutory or procedural rules, by
contrast with national courts and judges who of
International Business Lawyer April 1997
course have a detailed procedural code together
with statutory or other binding conflict of law rules.
In national courts, in most circumstances, it is the
conflict of law rules of the forum which apply.
Traditionally, this approach has also been adopted by
arbitral bodies2 so that arbitrators have applied the
conflict of law rules of the country in which their
arbitration is taking place. In parallel, however, with
the growth of the theory that international
arbitration has no forum and is in effect
'transnational', there has emerged a consensus that
it is inappropriate, or at least it is not obligatory, for
arbitrators to resort to the conflict of laws rules of
the seat of the arbitration.' This is recognised in
international arbitration practice.' In one award' the
tribunal held as follows: 'In accordance with the
classical doctrine on conflicts of law, this rule Lie the
appropriate rule of the conflict of laws] should be
determined by the law in force at the place of
arbitration (lerfori). However, this doctrine has
been widely criticised, mainly in consideration of
the fact that the arbitrator, differently from the
national judge, has no lexfori.' The tribunal in this
case went on to determine the applicable rule by
other criteria.
Generally, when seeking factors relevant to the
selection of the applicable law, the arbitrator is faced
with any number of variable factors, all of which
have different importance in each case. These
include the origin or nationality of the parties, the
origin or nationalities of the arbitrators themselves,
the place of arbitration, the institutional or ad hoc
rules applicable, the law governing the arbitration
(the lex arbitri)and the subject-matter of the
arbitration. Given that these variables are likely to
give rise to a multiplicity of often conflicting
national legal considerations, international
arbitration is emerging increasingly as a sui iuris
institution, with its own character and standing,
independent of a national legal system.
The courts in England have, historically, been
inimical to the idea of the parties agreeing to
resolution of their disputes otherwise than in
accordance with some settled system of domestic
law.6 The justification for this was a desire to reserve
to the court a supervisory jurisdiction: if the
arbitrator had misdirected himself with regard to
some objective and readily ascertainable set of rules,
then there was a yardstick against which his actions
 could be measured, and the possibility of the court
I
intervening and reviewing his decision was retained;
~.0
if the arbitrator was empowered to decide according
to rather more subjective views of fairness and
justice, the scope for the court intervening was
correspondingly reduced. Recent years, however,
have seen a realisation on the part of the courts (and
now, on the part of the legislature) that it is only by
according proper respect to the principle of party
autonomy - including in relation to their choice as
to the rules applicable to the determination of their
dispute - that the integrity of the arbitration
process can be preserved.
In Deutsche Schachtbau v Shell Petroleum Co Ltd,'
an award creditor sought to enforce in England an
award obtained in default in arbitration proceedings
in Switzerland. The contract contained no express
choice of law provision. The procedural law of the
arbitration was Swiss, but the arbitrators applied as
the substantive law 'internationally accepted
principles of law governing contractual relations'.
The award debtor asserted that enforcement of the
award in England would be contrary to public policy
because no clearly defined national law was applied.
The Court of Appeal rejected this argument, and
held that the award could be enforced: giving effect
to the award was not contrary to public policy, since
the parties had intended to create legally enforceable
rights and liabilities. Notably, this case was a foreign
arbitration and only enforcement was sought under
the New York Convention. Further, it did not
involve any express choice of law by the parties.
Nonetheless, Sir John Donaldson MR suggested that
a choice by the parties of some system of law which
was not that of England or any other State might be
recognised, if the parties intended to create legally
enforceable rights and obligations, and if the
resulting agreement were sufficiently certain to
constitute a legally enforceable contract.
English law has now been revolutionised by the
Arbitration Act 1996 and now reflects what is the
norm, increasingly, in practice. Section 46(1)
provides as follows:
'The arbitral tribunal shall decide the dispute:
(a) in accordance with the law chosen by the parties
as applicable to the substance of the dispute; or
(b) if the parties so agree, in accordance with such
other considerations as are agreed by them or
determined by the tribunal.'
The commentary on these provisions in the Report
by the Departmental Advisory Committee states as
follows: 'Subsection I(b) recognises that the parties
may agree that their dispute is not to be decided in
accordance with a recognised system of law but
under what in this country are often called "equity
clauses", or arbitration "ex aequo et bono ", or
"amiable composition", ie, general considerations of
justice and fairness etc. . . However, it is to be noted
that in agreeing that the dispute shall be resolved in
this way, the parties are in effect excluding any
rights to appeal to the Court (there being no
"question of law" to appeal)'.?
This approach mirrors a general trend both in
decided case law and in the new Arbitration Act
of greatly reducing the role of the courts in
arbitration. It recognises that if parties wish to
agree to resolve their disputes without any reference
to the Courts then they should be free to do so.
This is simply an extension of the doctrine of
party autonomy.
The almost universal starting point for an
arbitration tribunal in selecting a system of law to
govern the substantive issues to be decided is that
the parties themselves should be free to choose. This
principle of party autonomy now appears in almost
all arbitration systems, both national and
international. The UNCITRAL Model Law
expresses this principle as follows: 'The arbitral
tribunal shall decide the dispute in accordance with
such rules of law as are chosen by the parties as
applicable to the substance of dispute'.' The rules of
arbitration of the International Chamber of
Commerce give similar prominence to the notion
that the overriding principle in determining
applicable law is that 'the parties shall be free to
determine the law to be applied by the arbitrator to
the merits of the dispute'."
Published awards show that arbitrators are very
slow to derogate from the principle of party
autonomy. In one reported arbitration" between
Belgian and Italian parties, the tribunal upheld a
choice of Italian law in the contract in dispute. This
was despite submissions by the Belgian party that it
was forced to accept the choice of law provisions in
the contract because of the stronger bargaining
position of the Italians.
The doctrine of party autonomy suggests that
parties should be free to chose whatever law strikes
them as appropriate. Does this mean that parties can
opt for any system of law or standard at all, no
matter how vague or ridiculous, or should there be
some restriction to this choice?
International Business Lawyer April 1997
 Whilst impossible to generalise, a non-exhaustive
list of choices of 'law', other than national law,
which have been upheld or determined to be
applicable by arbitral tribunals include the lex
mercatoria,general principles of international law
and the common principles of law, and non-legal
equity and fairness standards, otherwise known as ex
aequo et bono or amiable composition. A cautious
approach needs to be adopted to all such non-
national systems. This is because, even within
apparently developed systems such as the lex
mercatoria,there is no substantial body of authority
which clearly defines the principles involved. Thus
it is impossible in many cases to advise, in advance
of the resolution of a dispute in accordance with
non-national principles, what the outcome of that
process is likely to be.
As with every rule, there must be exceptions.
Where parties have made an express selection of
law, in what circumstances will an arbitral tribunal
override that choice? Prior to the coming into effect
of the 1980 Rome Convention, the leading authority
in English law was Vita FoodProducts Inc v Unus
2 shall apply the law determined by the conflict of
Shipping Limited,' which imposed as a condition of
choice of law by the parties that 'the intention
expressed is bona fide and legal, and provided there
is no reason for avoiding the choice on the ground of
public policy'.
The Rome Convention"i and the US Restatement
2nd on Conflicts'" contain provisions which are
broadly similar. These provisions all seek to preclude
a fraudulent choice, intended to avoid the
application of (for example) consumer protection or
employment protection legislation. In principle
however, in international commerce, there is
nothing inherently objectionable where the parties
have chosen the law of a country which has no
particular connection with the contract and which is
settled on precisely5 because it has no connection
with the contract.
Party autonomy will be affected by the
mandatory laws and public policy of the likely
places of enforcement of the arbitral award. The
Rules of Arbitration of the International Chamber
of Commerce'6 express what should perhaps be a
general rule in international arbitration that the
arbitrators have a duty to ensure that their award is
enforceable. Given that a national court is likely to
refuse enforcement of an award if it conflicts with
the public policy and/or the mandatory laws of that
forum, it is incumbent upon the arbitral tribunal to
have regard to such considerations in formulating
their award. 7
International Business Lawyer April 1997
The temptation, in all cases where there is no
express choice of law, to imply choice should be
resisted. The need for caution is emphasised by
Article 3(1) of the Rome Convention which states:
"... the choice must be expressed or demonstrated
with reasonablecertaintyby the terms of the
contract or circumstances of the case' (emphasis
added). Where an arbitration clause gives no
indication of the intended place of arbitration,
clearly no choice can be inferred. On the other hand,
where the clause nominates arbitration in a
particular country, perhaps with arbitrators carrying
on business in that country (for example, LMAA
arbitration in England, with English arbitrators,
appointed under LMAA Rules) the argument for
inferring a choice is much stronger.
In the absence of an express or implied choice by
the parties, national and international codes provide
little practical guidance. For example, Article 28(2)
of the UNCITRAL Model Law states that: 'Failing
any designation by the parties, the arbitral tribunal
laws rules which it considers applicable'.
8
This wording is echoed in international rules
and also in the new English Arbitration Act,' which
provides that where there is no choice, 'the tribunal
shall apply the law determined by the conflict of
laws rules which it considers appropriate. In its
commentary on this section the DAC declined to lay
down principles in this highly complex area.
The question then is how an arbitral tribunal
should decide which conflict of laws rules are
applicable. A number of doctrines have emerged
over the years on this subject. One system which has
found favour over the years is the cumulative
approach. This calls for the arbitrator to determine
the applicable law by applying all relevant conflict
of laws rules and adopting the law which emerges
°
most frequently as the applicable law?
The more contemporary approach is reflected in
the Swiss Private International Law Act dealing
with international arbitration. Article 187 provides:
'The arbitral tribunal shall decide the case according
to the rules of law chosen by the parties oi; in the
absence of such a choice, according to the rules of
law with which the case has the closest connection'.
This rule is similar to the Rome Convention."
Increasingly, this approach is followed by arbitrators
2
in international arbitrations.
In practice, the choice of an applicable law is in
the absence of choice often more instinctive than
i ~ s.~#

analytical. This is the approach adopted by many 4 See Lew, Applicable Lae) in InternationalCommercial
continental jurisdictions." Many awards bear Arbitration, 1978, Oceana, Dobbs Ferry, New York; Grigera-
Na6n, Choice-of-law Problems in InternationalConmercial
witness to this fact. In the Aminoil arbitration,24
Arbitration, 1992, JCB Mohr (Paul Siebeck) Tilbingen.
despite voluminous submissions by both parties on 5 ICC Case No 6527 of 1991 (Yearbook of Commercial
the subject of the applicable law, the tribunal Arbitration XVIII (1993) at p 45).
effectively determined the issue in two sentences as 6 See, eg, Orion v Belfort [1962] 2 Lloyd's Rep 257 at p 264.
follows: 'With respect to the law applicable to the 7 [1990] I AC 295 (CA).
8 DAC Report p 49.
substantive issues in the dispute, which is what is
9 UNCITRAL Model Law Art 28(1).
really at stake between the parties regarding the 10 ICC Rules Article 13(3).
applicable law, the question is equally simple in the 11 Case No 6379 of 1990 (Yearbook of Commercial Arbitration
present case. It can hardly be contested but that the XVII (1992) 212 at p 215).
law of Kuwait applies to many matters over which it 12 [1939] AC277.
13 Articles 3(3) and 16.
is the law most directly involved'."
14 Section 187.
The tribunal never really effectively explained 15 It is this factor which results in so many international
why it had made this choice. Perhaps the arbitrators contracts being subjected to English, New York and Swiss
reeognised that to give reasons for their choice law.
would be to recognise that the choice of law process 16 Article 26.
17 See, for example, ICC Case No 4132 of 1983.
is an imprecise science. 6
18 Eg, ICC Rules Article 13(3), UNCITRAL Arbitration Rules,
Article 55.
19 Section 46(3).
Notes 20 For example, see ICC Case No 6149 of 1990 (Yearbook of
I Dr Julian D M Lew is a Partner at the City of London law Commercial Arbitration XX (1995) at,p 41).
firm, Herbert Smith. lie is also the Head of the School of 21 Article 4.
International Arbitration, Centre for Commercial Law 22 See ICC Case No 6560 of 1990 (Yearbook of Commercial
7
Studies, Queen Mary and Westfield College, University of Arbitration XVII (1992) 226 at p 22 );ICC Case No 6527 of
London. 1991 (Yearbook of Commercial Arbitration XVIII (1993) 4
2 Eg, Article 11 of IDI Resolution 1957, Ann IDI Volume 47 p at p 45).
491; ICC Case No 6527 of 1991 (Yearbook of Commercial 25 See, for example, Article 1496 of the French Code of Civil
Arbitration XVIII (1993) at p 45). Procedure and Article 1054 of the Netherlands Arbitration
3 See, for example, Goldman, Les Cor/iitsde Lois dans Act 1986.
L'ArbitrageInternationalde DroitPriv (1963), Recueil de 24 [1982 21 ILM 976.
Cours II p 347. 25 At p 99.

the Court would have to decide, when scrutinising
the award, whether the issue decided by the
arbitrator was a matter of substance, in which case
the Court may only draw the attention of the
arbitrator to possible problems, or whether it
concerned a question of form, in which case the
Court could refuse to approve the award. One could,
for instance, take the position that an ICC arbitrator
cannot issue an award which would violate the ICC
Rules and therefore already from a formal
viewpoint such an award cannot be approved, if it
were held that the Rules deal with this matter in a
final way.
But many of the above questions can arise not
only in the context of an 1CC arbitration but also in
other institutionalised arbitration systems or even in
purely ad hoc arbitrations.
I hope this example has given you some insight
into the kind of problems with which an arbitral
institution is or could be confronted. Obviously the
question of non-payment by the defendant arises
not infrequently but apparently no court, arbitral
institution or arbitrator has actually taken a decision
condemning the defendant, during the course of an
arbitration, to pay or deliver a guarantee to the
claimant to cover its share of the arbitration costs. 1
Note
1 This article was originally delivered as a lunchtime talk at
the IBA 25th Biennial Conference in Berlin, October 1996.

International Business Lawyer April 1997