R R R R R ol o
ARTICLES
REALITY TEST: CURRENT STATE OF AFFAIRS IN THEORY AND PRACTICE RELATING TO “LEX ARBITRI”
Loukas Mistelis∗
I. INTRODUCTION
The law and rules governing international arbitration procedure (also referred to as “lex arbitri”) is the focus of this article. The references to realism are effectively references to Karl Popper and his work on verification or disproval of theories.1 The article examines in particular whether the existing dominant definition of “lex arbitri” in English law2 can be verified or disproved on the basis
∗ Clive M. Schmitthoff Professor of Transnational Commercial Law and Arbitration; Director, School of International Arbitration, Centre for Commercial Law Studies, Queen Mary University of London. I am grateful to Dr. Stefan Kröll and Professor Julian Lew QC who shared their comments and criticism on earlier drafts of this paper. Mr. Stavros Brekoulakis read critically at the final stage of the manuscript. Errors of fact, judgment, and taste are, of course, mine. A shorter version of this paper was submitted to the Festschrift Norbert Horn. 1 KARL POPPER, LOGIK DER FORSCHUNG (1994). See, in particular, pp. 199 and 223: Zwar geben wir zu: Wir wissen nicht, sondern wir raten. Und unser Raten ist geleitet von dem unwissenschaftlichen, metaphysischen (aber biologisch erklärbaren) Glauben, daß es Gesetzmäßigkeiten gibt, die wir entschleiern, entdecken können. (We have to admit: we know nothing, simply we guess. And our guess is guided by the unscientific, metaphysical (but biologically explainable) belief, that there is some regularity (norm) that we can decode and discover.) (Translation by author). 2 ALAN REDFERN & MARTIN HUNTER WITH NIGEL BLACKABY & CONSTANTINE PARTASIDES, LAW AND PRACTICE OF INTERNATIONAL COMMERCIAL ARBITRATION, para. th 2-08 (4 ed.) [hereinafter REDFERN & HUNTER]. The lex arbitri is: [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 The American Review of International Arbitration (ARIA), v17/no2, 155-181, copyright 2007 ©JurisNet LLC
156 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 17 of practice and the current law. In addition, the article examines whether this definition meets international standards. More generally, this article looks at the law governing arbitration procedure and the ways in which this law is determined. This article defines “lex arbitri,” establishes its independence from the law applicable to the merits of the dispute and delimits its scope (Section II). In addition, it distinguishes between two types of “lex arbitri”: the internal lex arbitri that regulates the arbitration procedure before the arbitral tribunal and the external lex arbitri that provides the regulatory framework for the relation of the arbitration proceedings with the courts and establishes which courts may perform a supervisory function. Next, the ways of determining the lex arbitri are looked at with particular emphasis on party autonomy and the importance of the seat of arbitration (Section III). Finally, the article draws some conclusions while looking at the impact of transnationalization on the debate on the “lex arbitri” (Section IV).
II. WHAT IS THE “LEX ARBITRI”?
The main task is to ascertain the meaning of “lex arbitri” and to understand how it features amongst the various rules and laws governing the arbitration. Such laws may govern procedural or substantive matters.
A. Applicable Law in International Commercial Arbitration
In general, a number of different legal systems or sets of rules of law become relevant during the course of an international arbitration. In the award in ICC case No. 5505 of 19873 a distinction was made between four choice-of-law issues: choice of substantive law, choice of procedural law, choice of a rule of conflict of laws, and choice of law to determine the validity and effect of the arbitration clause. A closer look at the arbitration process reveals a number of legal systems or sets of rules and standards that may be relevant:
• capacity of the parties (normally a different set of rules will be relevant for each party);
of its supervisory jurisdiction over arbitrations (e.g. removing an arbitrator for misconduct.) The definition was contained originally in the 2nd edition of the book in 1991 and was adopted by Steyn J. (as he then was) in Smith Ltd. v. H.& S. Int’l Holding, Inc., [1991] 2 Lloyd's Rep. 127, 130 (Com. Ct.). 3 Mozambique Buyer v. Netherlands Seller, 13 Y.B. COM. ARB. 110, para. 7 (1988).
2006] REALITY TEST: THEORY & PRACTICE RELATING TO LEX ARBITRI 157
• formal validity of the arbitration agreement; • substantive validity of the arbitration agreement; • substance (merits) of the dispute; • arbitration procedure; • conflict of laws rules to determine applicable law(s); • mandatory rules - of the law of the place of arbitration - of the law of the place most closely connected with the dispute and/or subject matter - of the law of the place of enforcement - international public policy; • recognition and enforcement of the award (again several laws may be relevant in this context).
While in proceedings with limited or no foreign elements all these legal systems may coincide in one single legal system, it is not unusual that a different set of rules or a different legal system covers each of the points mentioned above. For example, in a large scale arbitration involving several European telecommunication companies, the laws of Germany, France, Italy, Belgium, Switzerland and EC law as well as ICC Rules were found to be applicable.4 These conflict of laws issues are discussed elsewhere;5 the emphasis of this article is on applicable procedural law, the law(s) or rules of law that govern the arbitration procedure. Indeed, unlike litigation where the judge is comforted with the security of the lex fori, an arbitrator faces the salient question of which procedural law should govern the arbitration procedure. This question does not arise in judicial proceedings because of the universally accepted principle that all procedural issues are governed by the lex fori,6 the law of the forum, whereas substantive issues are governed by the lex causae, which may be the law of the forum or a
4 Michael Goldhaber, The Court that Came in From the Cold (2001), available at http://www.wilmerhale.com/files/News/9d98da62-518b-4f40-939b-3e40aa2c1fe9/ Presentation/NewsAttachment/7c2db51c-9517-4d18-a292-417dd0de8191/lawcom_ born.pdf. 5 See, e.g., JULIAN D. M. LEW, LOUKAS A. MISTELIS & STEFAN M. KRÖLL, COMPARATIVE INTERNATIONAL COMMERCIAL ARBITRATION, Chs. 4, 6, 7, 9, 17, 18, 19, 24, 26 (2003) [hereinafter LEW MISTELIS & KRÖLL]; FOUCHARD GAILLARD GOLDMAN ON INTERNATIONAL COMMERCIAL ARBITRATION, paras. 1171 et seq., 1420 et seq. and passim (Emmanuel Gaillard & John Savage eds., 1999) [hereinafter FOUCHARD GAILLARD GOLDMAN]. 6 Don v. Lippman, (1837) 5 Cl. & F. 1 (per Lord Brougham).
158 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 17 foreign law. While the line between substance and procedure7 is not always clear, the distinction between the two categories is innate to conflict of laws. Hence, there are often references to the “lex arbitri,”8 the “law governing the arbitration9 procedure,”10 to “curial law,”11 or to “procedural law” which is often contrasted to the “law governing the substance” or “the merits” of the dispute. It should always be remembered, and it is widely recognized by modern arbitration statutes and rules,12 that decisions about the arbitration and the applicable law are normally made as closely as possible to carry out the intentions of the parties. Accordingly, to decide the jurisdiction whose lex arbitri will apply, the tribunal shall look first at the arbitration agreement and secondly, at the institutional rules chosen by the parties. Only to the extent that there is no express or clear reference to the lex arbitri in the arbitration agreement or the contract of the parties, will the tribunal lastly attempt to find rules applicable to the arbitration. This discretion allowed for in the various arbitration laws is fairly broad. Sometimes, where the parties have failed to make any stipulations in the contract, the determination of the lex arbitri or the applicable substantive law may take the form of a procedural order, or, more often, of an interim award on that issue.
7 PETER NORTH & JAMES FAWCETT, CHESHIRE AND NORTH’S PRIVATE th INTERNATIONAL LAW, Ch. 6 (13 ed. 1999); DICEY & MORRIS ON THE CONFLICT OF LAWS th Ch. 7 (Lawrence Collins gen. ed., 13 ed. 2000); Edgar Ailes, Substance and Procedure in the Conflict of Laws, 39 MICHIGAN L. REV. 392-418 (1941); Walter Wheeler Cook, “Substance” and “Procedure” in the Conflict of Laws, 42 YALE L. J. 333-58 (1941/42); Albrecht Mendelssohn Bartholdy, Delimitation of Right and Remedy in the Cases of Conflict of Laws, 16 B.Y.B.I.L. 20-41 (1935); Erwin Spiro, Forum Regit Processum (Procedure is Governed by the Lex Fori), 16 INT’L & COMP. L.Q. 949-60 (1969); LOUKAS MISTELIS, CHARAKTERISIERUNGEN UND QUALIFIKATION IM INTERNATIONALEN PRIVATRECHT 15, 70-74, 135-6, 178, 221 (1999). 8 REDFERN & HUNTER, supra note 2, at para. 2-04. 9 W. MICHAEL REISMAN ET AL., INTERNATIONAL COMMERCIAL ARBITRATION, CASES, MATERIALS AND NOTES ON THE RESOLUTION OF INTERNATIONAL BUSINESS DISPUTES 691 (1997). 10 FOUCHARD GAILLARD GOLDMAN, supra note 5, at paras. 1171 et seq.; Lawrence Collins, The Law Governing the Agreement and Procedure in International Arbitration in England, in CONTEMPORARY PROBLEMS OF INTERNATIONAL ARBITRATION 126 (Julian D.M. Lew ed., 1986). 11 Rhidian Thomas, The Curial Law of Arbitration Proceedings, 1984 LLOYD’S MARITIME & COM. L.Q. 491-98. 12 See, e.g., INTERNATIONAL CHAMBER OF COMMERCE RULES OF ARBITRATION [hereinafter ICC RULES], Art. 15(1); LONDON COURT OF INTERNATIONAL ARBITRATION RULES [hereinafter LCIA RULES], Art. 14(1).
2006] REALITY TEST: THEORY & PRACTICE RELATING TO LEX ARBITRI 159
B. Distinction Between Substance and Procedure in International Arbitration
The distinction between substance and procedure has not always been recognized in the law of arbitration. It was long assumed in the history of arbitration that the law applicable to the merits of the dispute should also govern the proceedings. In the early 1970s13 it became apparent that one should distinguish between the law applicable to the merits of the dispute and the law governing the procedure or indeed the law of the seat of arbitration.14 Here are the three main reasons for this distinction:
• First, the arbitration agreement is autonomous (separable from the rest of the contract) and hence, the law governing the arbitration procedure, as an extension of that agreement, is independent from the law applicable to merits of the dispute.15 The problem with this argument is that it anticipates that the lex arbitri and the law governing the arbitration agreement will be the same.16 The law governing the arbitration agreement is to be determined using different connecting factors than the factors used for the determination of the lex arbitri. • Second, as it is not fully settled whether arbitration is of a contractual or jurisdictional or mixed nature, one should not unduly favor the contractual over the jurisdictional element.17
13 See, e.g., James Miller & Partners Ltd v. Whitworth Street Estates (Manchester) Ltd, [1970] AC 583, [1970] 1 All ER 796, [1970] 1 Lloyd's Rep. 269 (HL). The case is a landmark on the independence of the lex arbitri. The parties entered into an agreement whereby a Scottish construction company agreed to remodel an English company’s factory in Scotland. The Royal Institute of British Architects (RIBA) standard contract contained an arbitration clause but did not specify the applicable substantive law, place of arbitration, or procedural law. After disputes arose, the President of the RIBA named a Scottish architect, practicing in Scotland, as an arbitrator and the arbitration took place in Scotland based on Scottish procedure. The House of Lords found by a three to two majority that the law applicable to the substance of the dispute was that of England, but found unanimously that Scottish law governed the arbitration and hence the Arbitration Act 1950 was not applicable. 14 The law of the seat of arbitration is often mistakenly called the lex fori; the accurate term is lex loci arbitri; arbitration has no forum. 15 See General National Maritime Transport Co. (GMTC) Libya v. Société Götaverken Arendal AB, Cour d’Appel, Paris, Feb. 21, 1980, 107 J. DROIT INT’L (CLUNET) 660 (1980), and note by Fouchard in id. at 669, 671. English text in 6 Y. B. COM. ARB. 221 (1981). 16 Fouchard, id., at 671. 17 On the juridical nature of arbitration, see LEW MISTELIS & KRÖLL, supra note 5, Ch. 5.
160 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 17
• Third, the considerations likely to guide the parties or the arbitrators in choosing the applicable law are not necessarily the same in the case of the substance of the contract and the arbitration procedure.18 For example, often the parties and their counsel may want to adopt one procedural style (civil law) while they want another law (common law) to govern their contract.
The distinction between the lex arbitri and the law applicable to the merits of the dispute (lex causae) is even clearer in Compagnie Tunisienne de Navigation S.A. v. Compagnie d'Armement Maritime S.A..19 Lord Diplock's opinion was pertinently stated:
It is not now open to question that if parties to a commercial contract have agreed expressly upon the system of law of one country as the proper law of their contract and have selected a different curial law by providing expressly that disputes under the contract shall be submitted to arbitration in another country, the arbitrators must apply as the proper law of the contract that system of law on which the parties have expressly agreed.20
This and other decisions21 are authority for the dichotomy between the law governing the procedure and the law governing the substance of the dispute and also support the proposition that in the absence of an express choice, the law of the seat should be the law governing the arbitration proceedings. Four years after the James Miller case22 was decided, the Paris Court of Appeal considered and confirmed the dichotomy between the law governing the substance and the law governing the arbitration procedure. The issue arose in two combined cases, Société OCPC v. Wilhelm Diefenbacher KG and Société OCPC v. Wilhelm Godfried Diefenbacher in 1974.23 Under the terms of the contract which gave rise to these disputes, the respondents (a German company and Mr. Diefenbacher in his individual capacity) granted the claimant (a Belgian company) an exclusive license for the exploitation of the respondents’ patents. The contract contained an arbitration clause providing for arbitration under ICC Rules and a choice of Belgian substantive law to govern the merits of the dispute. The
18 See OCPC v. Wilhelm Diefenbacher KG and OCPC v. Diefenbacher, Cour d’Appel, Paris, June 18, 1974, 1975 REV. ARB. 179 and note by Robert at 189. 19 [1971] AC 572 (HL). 20 Id. at 604. This rule was reiterated and widened in Bank Mellat v. Helleniki Techniki SA, [1984] QB 291, 301 (CA) and in Sumitomo Heavy Industries Ltd v. Oil and Natural Gas Commission, [1994] 1 Lloyd's Rep. 45. 21 See Bank Mellat and Sumitomo, supra note 20. 22 Supra note 13. 23 Supra note 18.
2006] REALITY TEST: THEORY & PRACTICE RELATING TO LEX ARBITRI 161 arbitrator, appointed by the ICC, sitting in Paris, found for the respondents. The Belgian claimant challenged the award before the Paris Court of Appeal. In its opinion the court noted that the parties submitted their disputes under the ICC Rules, an international institution based in France. The parties also agreed to the appointment of a French arbitrator and to his choice of Paris as the seat of the tribunal. Considering these facts, the Court of Appeal held that the parties impliedly had chosen French law to govern the arbitral proceedings. The choice of Belgian law to govern the merits of the dispute did not, in the court's opinion, mandate the conclusion that Belgium should also govern the procedure.24 These cases, which are not flawless, since, for example, the seat of the arbitration institution should not necessarily be of any significance, recognize that the parties can choose to submit their main contract and the arbitration procedure to different laws. Failing such a choice the arbitration tribunal can determine the applicable law without any reference to the parties’ choice of substantive law. In any event, the unequivocal dichotomy of the lex arbitri and the lex causae by the House of Lords in James Miller, and by the Paris Court of Appeal in Diefenbacher, was a significant development. It recognized that the choices of law governing the procedure and the merits of the dispute may be influenced by different considerations, and, in fact, emancipated the arbitration procedure from any choice of substantive law.25 Although the cases mentioned above recognized the distinction between lex arbitri and lex causae, neither case decided how the lex arbitri should be determined, nor what the ambit of the lex arbitri is. Since then, modern arbitration law and practice have accepted the prima facie test in favor of the seat as determinative of the lex arbitri albeit with occasional qualifications. This is justified, as in many cases the parties do not make an express choice of the seat of arbitration. In such instances either the tribunal itself or the arbitration institution
24 The decision was based on ICC Rules, Art. 16, which then read as follows: The rules by which the arbitration proceedings shall be governed shall be these [ICC] Rules and, in the event of no provision being made in these Rules, those of the law of procedure chosen by the parties or, failing such choice, those of the law of the country in which the arbitrator holds the proceedings. The reference to the law of the seat of arbitration which could be found in Rule 16 of the 1955/1964 ICC Rules was deleted in the 1975 amendment. 25 The emancipation of procedure law in civil litigation was a dogmatic development of the mid-19th century, while the emancipation of conflict of laws was a development of the 20th century.
162 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 17 will choose the seat.26 Moreover, parties may choose the seat for reasons of convenience rather that for its arbitration law.27 The distinction between substance and procedure has been discussed here only in terms of applicable law. There is insufficient data from judicial or arbitral case law in this respect. However, a useful attempt to classify matters as procedural or substantive is made in the English Arbitration Act 1996, where Section 34(2) makes such a classification.28
C. Definition of Lex Arbitri
What is the lex arbitri? The question was posed rhetorically by Steyn J. (as he then was) in Smith Ltd v. H. & S. International.29 In attempting an answer he made reference to the 1991 edition of the classic textbook of Redfern and Hunter. He states that the law governing the arbitration is
26 See United Nations Commission on International Trade Law [hereinafter UNCITRAL] ARBITRATION RULES, Art. 16(1); ICC RULES, Art. 14(1). 27 See, however, the discussion in Roy Goode, The Role of the Lex Loci Arbitri in International Commercial Arbitration, 17 ARB. INT’L 19, 32-33 (2001). 28 Section 34 provides: 34. Procedural and evidential matters (1) It shall be for the tribunal to decide all procedural and evidential matters, subject to the right of the parties to agree any matter. (2) Procedural and evidential matters include- a. when and where any part of the proceedings is to be held; b. the language or languages to be used in the proceedings and whether translations of any relevant documents are to be supplied; c. whether any and if so what form of written statements of claim and defence are to be used, when these should be supplied and the extent to which such statements can be later amended; d. whether any and if so which documents or classes of documents should be disclosed between and produced by the parties and at what stage; e. whether any and if so what questions should be put to and answered by the respective parties and when and in what form this should be done; f. whether to apply strict rules of evidence (or any other rules) as to the admissibility, relevance or weight of any material (oral, written or other) sought to be tendered on any matters of fact or opinion, and the time, manner and form in which such material should be exchanged and presented; g. whether and to what extent the tribunal should itself take the initiative in ascertaining the facts and the law; h. whether and to what extent there should be oral or written evidence or submissions. (3) … 29 [1991] 2 Lloyd’s Rep 127, 130.
2006] REALITY TEST: THEORY & PRACTICE RELATING TO LEX ARBITRI 163
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 …, the rules empowering the exercise by the Court of supportive measures to assist an arbitration which has run into difficulties … and the rules providing for the exercise by the Court of its supervisory jurisdiction over arbitrations ….
This definition focuses on the relation of the arbitration with the local courts and is not exhaustive. The judgment in Smith can be criticized on another point as it misconceives the origin of the lex arbitri; it does not accept party autonomy as a source of the law which governs the arbitration. Steyn J. stated:
The lex arbitri, the curial law or the law governing the arbitration … is not to be confused with (1) the proper law of the contract, (2) the proper law of the arbitration agreement, or (3) procedural rules which will apply to arbitration. These three regimes depend on choice, express of presumed, of the parties.30
It is noteworthy that the definition above does not include as part of the lex arbitri the “procedural rules which will apply to arbitration.” In any event, any definition of the lex arbitri may be of relative value. Indeed, the concept and ambit of lex arbitri varies from jurisdiction to jurisdiction and effectively reflects the limits that legal systems impose on parties’ freedom to choose the law governing the arbitration procedure. The definition of lex arbitri in the English courts and scholarly writing focuses exclusively on the relation of arbitration proceedings to the outside world in general and in particular to the courts that may be deemed to have jurisdiction over the proceedings. This relation is essential but disregards that the lex arbitri has two components: the internal lex arbitri regulates the arbitration procedure before and within the arbitral tribunal while the external lex arbitri provides the regulatory framework for arbitration proceedings in relation to courts which may perform a supervisory function or may have to assist the arbitral proceedings. Indeed, the determination of the law applicable to the arbitration proceedings has further implications than merely providing the parties and the arbitration tribunal with a set of rules which addresses all procedural issues relating to or emanating from the arbitration. Often the chosen procedural law will have an impact on the jurisdiction of courts which may be involved in the granting of interim measures or in assisting with the constitution of the tribunal, and even in dealing with challenges to the award.
30 Id. at 129-30. The decision was cited in obiter dicta in M. H. Alshaya Company W.L.L. v. Retek Information Systems Inc., 2000 WL 33116470 (Q.B.D.) per Garland J., at 7; and in Shell International Petroleum Co. Ltd. v. Coral Oil Co. Ltd., [1999] 1 Lloyd’s Rep. 72, 76 (Q.B.D.), per Moore-Bick J. In neither case was this reference decisive.
164 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 17
While there is no doubt that the lex arbitri is a predominately procedural law, the widely accepted terms lex arbitri and “law governing the arbitral procedure” merit an abstract and flexible description.
1. Internal Lex Arbitri The internal lex arbitri is the body of law and rules that governs and regulates the structure and procedure of the arbitration. It differs and is specific for each arbitration. It comprises:
• the specific agreement of the parties; • the arbitration rules expressly or impliedly incorporated by the parties; and • national and international procedural rules adopted by the parties and by the arbitrators to govern the arbitration.
While, with respect to the internal lex arbitri, parties may exercise maximum autonomy, their agreement is invariably subject to the mandatory law of the place of arbitration, the international standards of due process and the requirements of the New York Convention at the place of enforcement.
2. External Lex Arbitri The external lex arbitri is the body of law and rules that governs and regulates the relation of the arbitration proceedings to the courts which may have jurisdiction over the arbitration proceedings. It similarly comprises:
• the specific agreement of the parties; • the arbitration rules expressly or impliedly incorporated by the parties; and • national and international procedural rules adopted by the parties and by the arbitrators to govern the arbitration.
In the external lex arbitri the focus is on national and international procedural rules as party autonomy may never force a court to hear a case if the court itself does not want to assume jurisdiction over the arbitration proceedings and the legal application before it. Naturally, the external lex arbitri is usually the law of the seat of the arbitration (lex loci arbitri) and is, in any event, similar to the internal lex arbitri, an expression of the mandatory law of the place of arbitration, the international standards of due process and the requirements of the New York Convention at the place of enforcement.
2006] REALITY TEST: THEORY & PRACTICE RELATING TO LEX ARBITRI 165
D. Ambit of the Lex Arbitri
There is no generally accepted catalog of the issues governed by the lex arbitri. Is it everything to do with the arbitration except for the substantive rights and obligation of the parties? The question of the ambit of the lex arbitri has been predominately addressed by scholars.31 It has been suggested that the issues covered by the lex arbitri include the conflict rules which determine the applicable substantive law, the need for a reasoned award, the need to base the award upon substantive rules of law, and judicial review of the arbitrator’s decision.32 In addition, it has been suggested that the lex arbitri governs the conflict rules that determine the law applicable to the arbitration agreement.33 Later scholars included the ability to arbitrate a given issue; the court’s power to stay judicial proceedings and order arbitration; the methods by which arbitrators are appointed and the opportunities for challenging their mandate; the possibility of resorting to a court during the arbitration; and, finally, whether, and to what extent, the parties may determine the procedural rules to be applied by the arbitrator.34 This was effectively a full-fledged external lex arbitri. By determining the scope separately for the external and internal lex arbitri it is possible to approach the topic more effectively.
1. Internal Lex Arbitri The internal lex arbitri governs the following issues: constitution of the arbitration tribunal, including appointment and challenges to the tribunal as well as standards of independence and impartiality; the conduct of the arbitration proceedings; the allocation of roles between parties and arbitrators as well as their respective procedural rights, powers and obligations; formalities, timing and method of presentation of the case, including place of hearings, service of process, rebuttal rights of each party, the close of hearings; admission and probative value of evidence; and the form the final award must take. It also governs the power of the arbitration tribunal to grant any interim measures, the method to apply in determining the law applicable to the merits of the case and whether the arbitrators are expected or allowed to decide ex aequo et bono or as amiables
31 See Vitek Danilowicz, The Choice of Applicable Law in International Arbitration, 9 HASTINGS INT'L & COMP L. REV. 235 (1986), with further references at 238- 39. 32 Gabriel Wilner, Determining the Law Governing Performance in International Commercial Arbitration: A Comparative Study, 19 RUTGERS L. REV. 646, 648 (1965). 33 Ernst Metzger, The Arbitrator and Private International Law, in INTERNATIONAL TRADE ARBITRATION 233 (Martin Domke ed., 1958). 34 Alain Hirsch, The Place of Arbitration and the Lex Arbitri, 34 ARB. J. 43, 44-45 (1979).
166 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 17 compositeurs, and if not, whether the parties can give them this power or impose on them this duty.
2. External Lex Arbitri The external lex arbitri governs the extent of judicial assistance, supervision or control over the arbitration proceedings. It also governs which court may be seized in support of the arbitration proceedings and the relevance of local or international mandatory rules and public policy. The external lex arbitri determines, inter alia, the arbitrability of the dispute; whether an arbitrator may be appointed by a court or whether a court may otherwise assist in the constitution of the arbitration tribunal; whether the court should stay or dismiss judicial proceedings pursuant to an arbitration agreement; and whether and which court may grant an interim injunction in support of the arbitration proceedings, including granting security for costs. It also determines what remedies are available to a party that wishes to challenge the award when it has been rendered, and the circumstances in which remedies may be excluded. The areas identified above define best the scope of (external or internal) lex arbitri irrespective of any reference to a specific legal system. It is also essential to point out that all of the above mentioned scholarly definitions35 were formulated without reference to any particular legal system. It is, however, axiomatic that each legal system decides for itself which issues are procedural. Certainly, if the parties are free to choose the lex arbitri, its scope may be discussed without regard to national law. If, however, national law determines the choice of the lex arbitri, national law also fixes its scope. The classification of a given issue as substantive or procedural is, therefore, of particular importance in those legal systems that limit party autonomy with regard to choice of the lex arbitri.36 It also has an impact on the applicability of a chosen lex arbitri as well as on the extent of intervention or assistance by local courts.
III. DETERMINATION OF THE LEX ARBITRI
Party autonomy plays a significant role in determining the lex arbitri. Parties may choose arbitration rules (e.g. the ICC or LCIA Rules), a set of procedural rules without reference to a national legal system (e.g. the IBA Rules of Evidence or the UNCITRAL Notes for Organizing Arbitral Proceedings) or may choose a national law (e.g. the Swiss Private International Law Act or the English Arbitration Act).37 However, occasionally parties do not include certain issues in
35 See also Collins, supra note 10, at 133-34. 36 Danilowicz, supra note 31, at 239. 37 William W. Park, The Procedural Soft Law of International Arbitration: Non- Governmental Instruments, in PERVASIVE PROBLEMS IN INTERNATIONAL ARBITRATION
2006] REALITY TEST: THEORY & PRACTICE RELATING TO LEX ARBITRI 167 their agreement. In such cases arbitrators, as a matter of practice, adopt pragmatic and flexible solutions in relation to the internal lex arbitri by not resorting to a specific national law but by looking at the choice of the parties and the law of the seat of arbitration. That said, when the assistance of courts is required, the applicable external lex arbitri must be determined as the jurisdiction of national courts over the arbitration proceedings needs to be established. There is no room for much flexibility in that regard. The various connecting factors for the determination of the lex arbitri are examined below with particular focus on party autonomy and the role of the law of the seat.
A. Party Autonomy and Other Connecting Factors
1. Party Autonomy and its Limitations If the parties to the arbitration choose the law or rules governing the procedure, in the arbitration clause or later, the arbitration tribunal should abide by this decision. In most instances this is not a matter the parties actually consider; the parties either neglect to choose the internal or external lex arbitri or are unable to agree on the applicable law. In these cases, the law and/or rules governing the arbitration procedure must be determined by the arbitrator(s). One may question the necessity of determining the procedural law in advance. It may be argued that the parties best know the law that should govern their proceedings, once the dispute has arisen and it has been established what the evidentiary and procedural complications are. Practically, however, at this time the parties’ interests will invariably differ and the procedural law will be selected for restrictive reasons rather than for its pragmatism and flexibility. On the other hand, an early determination of the lex arbitri guarantees a higher degree of certainty and predictability. De Ly summarizes38 the four different theories of connecting factors for the determination of the lex arbitri:
• The lex arbitri should be connected with the place of arbitration; • Party autonomy, i.e. choice of arbitral procedural law (with the relevant mandatory laws limitations); • Delocalized arbitration (without reference to any national legal system);
141 (Loukas Mistelis & Julian D.M. Lew eds., 2006); and Wang Shengchang & Cao Lijun, The Role of National Courts and Lex Fori in International Commercial Arbitration, in id., at 155. 38 Filip De Ly, The Place of Arbitration in the Conflict of Laws of International Commercial Arbitration: An Exercise in Arbitration Planning, in THE PLACE OF ARBITRATION 1, 22-23 (Marcel Stone & Filip De Ly eds., 1992), article also available in 12 NW. J. INT'L L. & BUS. 48-85 (1991).
168 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 17
• Unilateral conflicts (effectively substantive rules)39 which provide for arbitral proceedings deregulated from the procedural law of the seat of arbitration.
Most modern arbitration systems give parties the freedom to choose the law governing the procedure. They often provide, irrespective of the applicable law, for procedural rules applicable to international arbitration proceedings taking place under these systems. The freedom of parties is limited by the mandatory rules of the place of arbitration, should such jurisdiction be interested in the arbitration or should it be necessary to seek the assistance of local courts. This approach found legislative approval in the systems influenced by the UNCITRAL Model Law. Article 19 reads:
Subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings. Failing such agreement, the arbitral tribunal may, subject to the provisions of this Law, conduct the arbitration in such manner as it considers appropriate. The power conferred upon the arbitral tribunal includes the power to determine the admissibility, relevance, materiality and weight of any evidence.
“Subject to the provisions of this law” is both a statutory limitation on party autonomy as well as a clear statement of the role of mandatory rules which impede the choice of law by the parties.40 In light of this provision, a 1998 Australian decision held that an agreement between the parties cannot displace compulsory application of local arbitration law and that in any event an agreement in favor of the UNCITRAL Arbitration Rules is not an exclusion agreement.41
2. Applicable Law Absent a Choice of Law by the Parties In the absence of an express choice of law by the parties, the law governing the proceedings will be determined by the arbitration tribunal. In determining the internal or external lex arbitri, as throughout the entire proceedings, an
39 See, e.g., French NEW CODE OF CIVIL PROCEDURE [hereinafter NCCP], Arts. 1493, 1494; Swiss Private International Law Act [hereinafter PIL], Art. 182. 40 See Hong-Lin Yu & Peter Molife, The Impact of National Law Elements on International Commercial Arbitration, 4(1) INT’L A.L.R. 17, 19 (2001). See further Pierre Mayer, Mandatory Rules of Law in International Arbitration, 2 ARB. INT’L 274 (1986); Nathalie Voser, Mandatory Rules of Law as a Limitation on the Law Applicable in International Commercial Arbitration, 7 AM. REV. INT'L ARB. 319 (1996). 41 Supreme Court, New South Wales, Commercial Division, Mar. 26, 1998, American Diagnostica Inc. v. Gradipore Ltd., 44 NSWLR 312 (1998); 24(a) Y.B. COM. ARB. 574 (1999).
2006] REALITY TEST: THEORY & PRACTICE RELATING TO LEX ARBITRI 169 international arbitration tribunal must be guided by the objective of producing an enforceable award.42 Hence, the lex arbitri must be chosen with this goal in mind. This consideration, for example, led the arbitrator in the BP v. Libyan Arab Republic43 arbitration to adopt Danish law to govern the proceedings. The most likely reason that arbitrators choose the lex loci arbitri more often than another law would seem to be that the place of arbitration is the most likely forum for court proceedings in support of the arbitration. In other words, the lex loci arbitri is usually also the external lex arbitri. In James Miller, a majority of four Lords held that when the parties fail to choose the lex arbitri, the proceedings should be governed by the lex loci arbitri because that law usually is most closely connected to the proceedings.44 The arguments were presented in Union of India v. McDonell Douglas and were discussed by Saville J. (as he then was) in the court’s judgment:
In the present case, Mr. Veeder Q.C. for the defendants places great stress on the fact that the parties have expressly selected London as the “seat” and not just the place of the arbitration. The word “seat,” he suggests, is a legal term of art, meaning the legal place of the arbitration proceedings. By choosing the legal place of the arbitration proceedings the parties ipso facto choose the laws of that place to govern their arbitration proceedings. Indeed, although the choice of a “seat” also indicates the geographical place for the arbitration, this does not mean that the parties have limited themselves to that place. As is pointed out by Redfern and Hunter…in a passage approved by the Court of Appeal in Naviera Amazonica Peruana v. Cie. Internacional de Seguros del Peru, [1988] 1 Lloyd's Rep. 116 at 121, it may often be convenient to hold meetings or even hearings in other countries. This does not mean that the “seat” of the arbitration changes with each change of country. The legal place of the arbitration remains the same even if the physical place changes from time to time, unless of course the parties agree to change it. In short, Mr. Veeder suggested that the word “seat” carried with it much more clearly the meaning conveyed by the French word “siege” than the English word “place” though his submission was that this word too in an
42 ICC RULES, Art. 35; LCIA RULES, Art. 32.2. See also Jan Paulsson, Arbitration Unbound, 30 INT’L & COMP. L.Q. 358, 376 (1981). 43 Award in ad hoc arbitration, sole arbitrator: Mr. Justice Gunnar Lagergren (Sweden), B.P. Exploration Co. (Libya) Ltd. v. The Government of the Libyan Arab Republic, award of Oct. 10, 1973, 53 ILR 297 (1979), 5 Y.B. COM. ARB. 157 (1980). See also award / re-opening of Aug. 1, 1974, B.P. Exploration Co. (Libya) Ltd. v. The Government of the Libyan Arab Republic, 5 Y.B. COM. ARB. 158 (1980). 44 Lords Hudson, Guest, Wilbeforce and Viscount Dilhorne, James Miller, supra note 13, [1970] AC at 612, 616, 687, 689.
170 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 17
arbitration agreement would be primarily concerned with the legal rather that the physical place of the arbitration.45
The Commercial Court held that it was clear from the authorities that English law did allow at least in principle that the parties were free to choose to hold their arbitration in one country but subject it to the procedural laws of another; however, the jurisdiction of the English court under the Arbitration Act over an arbitration in England could not be excluded by an agreement between the parties to apply the laws of another country.46 The court further clarified that the choice of a procedural law different from the law of the place of arbitration would, at least where the place was England, necessarily mean that the parties had actually chosen to have their arbitral proceedings at least potentially governed both by their express choice and by the laws of England.47 The second limb reinstates the importance of the lex loci arbitri as a fallback choice of procedural law and as the preferred external lex arbitri. Where the arbitration has no substantial contacts with the seat, however, local courts might decline to assert jurisdiction. Therefore, adopting the lex loci arbitri to govern the arbitration proceedings would serve no purpose. In Dubai Islamic Bank v. Paymentech Merchant Services,48 Paymentech, a Texas company and respondent to a dispute with Dubai Islamic Bank, a merchant bank, which had resulted in an arbitration award in Paymentech’s favor, applied to set aside an order granting Dubai Islamic Bank permission to serve it with an arbitration claim form out of the jurisdiction. The documents-only arbitration scheme under which the award had been made, was based in California, and in view of English law, permission could be granted only where the award had been made in the United Kingdom. The Commercial Court held that it had no power to make that order. It appears that the application of the lex loci arbitri is justified when the seat of arbitration has significant connections to the dispute. An important issue is which contacts between the seat and the arbitration justify the choice of the lex loci arbitri as the applicable procedural law. If the choice of a given place to serve as the seat of a tribunal is solely made for reasons of convenience and neutrality, such choice does not assume any interest on the part of the courts at the seat in regulating the arbitral proceedings.49 If, on the other hand, the seat of the tribunal is chosen specifically because of its
45 [1993] 2 Lloyd’s Rep. 48, 50. This was also recently reiterated in light of the Arbitration Act 1996 in Dubai Islamic Bank PJSC v. Paymentech Merchant Services Inc., [2001] 1 Lloyd’s Rep. 65 (Q.B.D. per Aikens J.). 46 See Dubai Islamic Bank, supra note 45. 47 Union of India v. McDonnell Douglas, [1993] 2 Lloyd’s Rep. at 50. 48 Supra note 45. 49 See General National Maritime Transport Co., supra note 15.
2006] REALITY TEST: THEORY & PRACTICE RELATING TO LEX ARBITRI 171 local law and related infrastructure, and this law is also designated as the applicable law, the result might be different. Thus, in the BP arbitration, the arbitrator chose Copenhagen as the seat of the tribunal because of the “wide scope of freedom and independence enjoyed by arbitral tribunals under Danish law.”50 When sitting in a place unrelated to the proceedings, the arbitration tribunal may wish to adopt as the internal lex arbitri the law of one of the jurisdictions having a significant relationship with the arbitration, e.g., the arbitration law of the place of performance of the contract. In some circumstances, the choice of a neutral internal lex arbitri unrelated to the dispute may be justified. For example, if a legal system is exceptionally well-developed or particularly suited to the arbitration proceedings for some other reason such a choice may be warranted. Some jurisdictions permit an arbitrator to adopt a foreign lex arbitri;51 others do not.52 A choice of internal lex arbitri in favor of a law other than that of the seat is in most instances allowed as a matter of practice. As a result, an arbitrator who defies local law and applies foreign procedural law faces the risk that the proceedings will be found invalid under the lex loci arbitri (external lex arbitri) and that the award will be unenforceable not only in the seat of arbitration but possibly also in other jurisdictions. This may happen because the attitude of local law and local courts towards arbitrators’ autonomy in respect of choice of law and rules governing the arbitration is not set in stone and may change from time to time. However, it would be difficult to think of cases where arbitrators’ autonomy will overstep the boundaries of the permissive under lex loci arbitri, save for cases with excessively restrictive local law; an example would be admissibility of evidence on the basis of gender of the witness or association of a witness with one of the parties. The limits in the arbitrators’ authority in choosing a lex arbitri unrelated to the seat are given in the New York Convention, which in Article V(1)(d) deems an award unenforceable if it is proven that the arbitration procedure was not in accordance with the agreement of the parties or, failing such agreement, not in accordance with the law of the country where the arbitration took place. Further,
50 53 ILR at 309. 51 See, e.g., UNCITRAL Model Law, Art. 19(1); French NCCP, Arts. 1493, 1494; Swiss PIL, Art. 182; Union of India v. McDonnell Douglas Corporation, [1993] 2 Lloyd's Rep. 48; ICC case No. 5029, French Contractor v. Egyptian Employer, 3 INT’L CONSTRUCTION L. REV. 473 (1986) (choice of Egyptian procedural law in arbitration proceedings in the Hague), 12 Y.B. COM. ARB. 113 (1987); Volt Information Sciences v. Board of Trustees, 489 U.S. 468 (1989). 52 See, e.g., Guatemalan Code of Civil and Commercial Procedure, Art. 187; Chilean Organic Law of the Judiciary, Art. 223; American Diagnostica Inc. v. Gradipore Ltd., supra note 41.
172 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 17
Article V(1)(e) ultimately subjects an award to the challenge procedures of the place where the award was made.53 Similarly, all major conventions recognize the importance of party autonomy; the European Convention on International Commercial Arbitration 1961,54 and the ICSID Convention55 have minimized the importance of the seat, while the law of the seat is the default rule under the New York Convention.
B. Relevance and Importance of the Seat of Arbitration
1. Importance of the Seat of Arbitration: Origins and Theoretical Basis The importance of the seat of arbitration stems from the theory of the jurisdictional nature of arbitration, according to which arbitration operates within the framework of a national legal order and never in a vacuum. It can also be seen as an expression of territorial approaches in arbitration, which inevitably conflict with theories that favor full party autonomy. Such theories suggest that party autonomy exists because it is allowed by the local arbitration statute; sadly these approaches overlook the fact that historically party autonomy in arbitration predates national codification, and national codification has been introduced in order to facilitate arbitration and endorse party autonomy.56
53 See the discussion in Goode, supra note 27, at 22-28. 54 484 U.N.T.S. 364, Article IV(1): 1. The parties to an arbitration agreement shall be free to submit their disputes: to a permanent arbitral institution; in this case, the arbitration proceedings shall Formatted: Bullets and Numbering be held in conformity with the rules of the said institution; to an ad hoc arbitral procedure; in this case, they shall be free inter alia to appoint arbitrators or to establish means for their appointment in the event of an actual dispute; to determine the place of arbitration; and to lay down the procedure to be followed by the arbitrators. 55 Convention on the Settlement of Investment Disputes Between States and Nationals of other States. See, e.g., Art. 44: Any arbitration proceeding shall be conducted in accordance with the provisions of this Section and, except as the parties otherwise agree, in accordance with the Arbitration Rules in effect on the date on which the parties consented to arbitration. If any question of procedure arises which is not covered by this Section or the Arbitration Rules or any rules agreed by the parties, the Tribunal shall decide the question. (emphasis added) 56 For a comprehensive discussion of the various models representing the territoriality versus autonomy debate see Goode, supra note 27, at 24-29. See also the recent debate: Tetsuya Nakamura, The Place of Arbitration - Its Fictitious Nature and Lex Arbitri, 15(10) INT’L ARB. REP. 23-29 (2000); Noah Rubins, The Arbitral Seat is No Fiction: A Brief Reply to Tatsuya Nakamura's Commentary, “The Place of Arbitration - Its Fictitious Nature and Lex Arbitri”, 16(1) INT’L ARB. REP. 23-28 (2001); Philippe
2006] REALITY TEST: THEORY & PRACTICE RELATING TO LEX ARBITRI 173
Supporters of the territorial approach argue that the law of the seat of arbitration (lex loci arbitri) has an automatic right to govern the proceedings or that alternatively, failing an agreement by the parties, it will govern the arbitration by default.57 Recently, the Supreme Court of Pakistan in the case of Hitachi Ltd v. Rupali Polyester58 ruled that the lex loci arbitri or lex fori, as it was wrongly referred to, is deemed to be the procedural law/curial law,59 thus treating lex arbitri as synonymous with external lex arbitri and the lex loci arbitri. The theory developed as a result of the 1923 Geneva Protocol, Article 2, which provided:
The arbitral procedure, including the constitution of the arbitral tribunal, shall be governed by the will of the parties and by the law of the country in whose territory the arbitration takes place.[60] [emphasis added]
The Contracting States agree to facilitate all steps in the procedure which require to be taken in their own territories, in accordance with the provisions of their law governing arbitral procedure applicable to existing differences.
This principle was adopted with modifications in the New York Convention (“law of the country where the arbitration took place”61 and “law of the country where the award was made”62). While the New York Convention favors party autonomy, its exact limits may be determined by national laws. The critics of the jurisdictional (territorial) approach argue it is incompatible with the modern needs of the international business community or the reality of international arbitration practice. As pointed out by Sanders,
Pinsolle, Parties to An International Arbitration With the Seat in France are at Full Liberty to Organise the Procedure as They See Fit: A Reply to the Article by Noah Rubins, 16(3) INT’L ARB. REP. 30 (2001); Tetsuya Nakamura, The Fictitious Nature of the Place of Arbitration May not Be Denied, 16(5) INT’L ARB. REP. (2001). 57 William W. Park, The Lex Loci Arbitri and International Commercial Arbitration, 32 INT’L & COMP. L.Q. 21 (1983); F.A. Mann, England Rejects Delocalised Contracts and Arbitration, 33 INT’L & COMP. L.Q. 193 (1984). 58 1998 S.C.M.R. 1618, June 10, 1998. See 10 WORLD ARB. & MEDIATION REP. 155 (June 1999). 59 10 WORLD ARB. & MEDIATION REP. at 157. 60 Case law interpreted “and” as a default rule in favor of the law of the seat. See, e.g., Italian Corte di Cassazioni, Mar. 27, 1954, REV. CRIT. DROIT INT’L PRIVÉ 611 (1956); Swiss Federal Court, Sep. 24, 1952, Telefunken v. Philips, 78 I ATF 352, 359. See also JEAN ROBERT, L'ARBITRAGE – DROIT INTERNE, DROIT INTERNATIONAL PRIVE, para. 294 (6th ed. 1993). 61 Art. V1(d). 62 Art. V1(a) and (e).
174 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 17
the wishes of the international business communities undoubtedly go towards denationalisation … The parties … want their dispute, as far as possible, to be dealt with regardless of any specific national law.63
Moreover, the forum of the seat of arbitration may not be interested in the proceedings which take place in its jurisdiction.64
2. Current Law and Practice The detachment of international arbitration from national legal systems had been accepted in France by the Cour de Cassation with respect to procedure65 even before the reform of the Code of Civil Procedure. This liberal approach is now endorsed and codified in the new French Code of Civil Procedure, Article 1494:
An arbitration agreement may, directly or by reference to arbitration rules, deter- mine the arbitral procedure or subject [it] to any procedural law. If the arbitration agreement is silent the arbitrator shall determine the procedure inasmuch as necessary, either directly or by reference to a law or to arbitration rules.
Party autonomy is encouraged and national laws only apply where the parties or, subsidiarily, the arbitrators, choose to apply them.66 Switzerland has also become more liberal in this respect. Article 182 of the Swiss Private International Law provides:
The parties may, directly or by reference to arbitration rules, determine the arbitral procedure; they may also submit it to a procedural law of their choice.
Where the parties have not determined the procedure, the arbitral tribunal shall determine it to the extent necessary, either directly or by reference to a law or to arbitration rules.
63 Pieter Sanders, Trends in the Field of International Commercial Arbitration, 145(2) RECUEIL DES COURS 205, 262 (1975). 64 General National Maritime Transport Co., supra note 15. For an analysis of this case and an English translation of the operative part of the judgment, see Jan Paulsson, Arbitration Unbound, 30 INT’L & COM. L. Q. 358, 385-87 (1981). 65 See, e.g., Cour de Cassation, 1e Civ, June 16, 1976, Krebs v. Milton Stern, 104 J. DROIT INT’L (CLUNET) 671 (1977), 1977 REV. ARB. 269; Cour de Cassation, 1e Civ, June 30, 1976, Bruynzel Deurenfabrik NV v. Ministre d'Etat aux Affaires Etrangères de la Républic Malgache, 104 J. DROIT INT’L (CLUNET) 111 (1977), 1977 REV. ARB. 137. 66 FOUCHARD GAILLARD GOLDMAN, supra note 5, at para. 141. Note that cases like Götaverken were decided on the basis of the old French CCP.
2006] REALITY TEST: THEORY & PRACTICE RELATING TO LEX ARBITRI 175
In addition case law also reflects this increasing emancipation from the law of the place of arbitration. One example of this trend is the LIAMCO arbitration.67 In England, the rule that arbitration taking place there must be governed by English procedural law is well-established and is founded on English conflict of laws.68 Union of India v. McDonnell Douglas69 reiterated the importance of the seat. The contract in question contained an arbitration clause:
In the event of a dispute…the arbitration shall be conducted in accordance with the procedure provided in the Indian Arbitration Act of 1940 or any… modification thereof. The arbitration shall be conducted in the English language. …The seat of the arbitration proceedings shall be London, United Kingdom…70
A dispute arose which the parties referred to arbitration on January 11, 1993. They referred to the court for a determination of which law would govern the arbitration proceedings. The parties were in agreement that the court could decide this question, and could do so “on the basis that there is no difference on this issue between English and Indian Law.” For the reasons set out below, the court, per Saville, J., determined that by their agreement the parties chose English law as the law to govern their arbitration proceedings. The relevant part of the judgment stated:
67 Libyan American Oil Co. (LIAMCO) v. Government of the Libyan Arab Republic, Award of April 12, 1977, 10 I.L.M. 1 (1981); extensive extracts in 6 Y. B. COM. ARB. 89-118 (1981); also 1980 REV. ARB. 132-191 (French translation of the award, original in English). See also Socialist Libyan Arab Popular Jamahiriya v. Libyan American Oil Co (LIAMCO), BGE I, June 19, 1980, 6 Y. B. COM. ARB. 151-154 (1981). The LIAMCO arbitration involved a dispute between a U.S. oil company and the Libyan government. The arbitrator awarded the U.S. claimant a substantial amount in damages. To secure execution of the award, the company attached Libyan property in Switzerland. The attachment was challenged by Libya in a Swiss court. Although it found the award enforceable in Switzerland, the court dissolved the attachment because the Swiss forum was not sufficiently connected to the dispute; the arbitration involved two non-Swiss parties and property located outside Switzerland, the seat of arbitration was Switzerland’s only contact with the dispute. The Federal Court found that this contact did not justify the attachment. The Swiss court emphasized that the decision regarding the seat of the arbitral tribunal was made by the arbitrator and not by the parties. In other words, Switzerland was a disinterested forum and Swiss law was not the external lex arbitri in relation to the issue at stake. 68 James Miller & Partners v. Whitworth Street Estates (Manchester), [1970] AC 583, 616 (HL). 69 Supra note 47. 70 Id.
176 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 17
If the parties do not make an express choice of procedural law to govern their arbitration, then the Court will consider whether they have made an implicit choice. In this circumstance the fact that the parties have agreed to a place for the arbitration is a very strong pointer that implicitly they must have chosen the laws of that place to govern the procedures of the arbitration. The reason for this is essentially one of common sense. By choosing a country in which to arbitrate the parties have, ex hypothesi, created a close connection between the arbitration and that country and it is reasonable to assume from their choice that they attached some importance to the relevant laws of that country, i.e., those laws which would be relevant to an arbitration conducted in that country . . . Indeed, English law at least has turned its face against the notion that it is possible to have arbitral procedures that are wholly unconnected with any national system of law at all. . . .
The question posed . . . is whether upon the proper construction of [the arbitration agreement] the pending arbitration between the parties and any award made by the arbitral tribunal is subject to the supervisory jurisdiction of the Indian Courts or the English Courts. For the reasons given my answer to this question is that it is the latter.71
These final sentences highlight the importance of the seat with regard to the supervisory jurisdiction of local courts rather than with regard to the law applicable to the proceedings. Hence the seat becomes particularly relevant for the external, not the internal, lex arbitri. In light of this judgment one should read the English Arbitration Act 1996 which in its Section 4 endorses and emphasizes the freedom of the parties to choose the law applicable to the procedure. However, Section 3, entitled “the seat of the arbitration” provides:
In this Part “the seat of the arbitration” means the juridical seat of the arbitration designated- (a) by the parties to the arbitration agreement, or (b) by any arbitral or other institution or person vested by the parties with powers in that regard, or (c) by the arbitral tribunal if so authorised by the parties, or determined, in the absence of any such designation, having regard to the parties’ agreement and all the relevant circumstances.
It is the juridical seat of arbitration proceedings which links an arbitration with the local courts upon which jurisdiction is conferred for matters in support of the arbitration. In Dubai Islamic Bank PJSC v. Paymentech Merchant Services Inc.72 the court held that
71 Id. at 50. 72 Supra note 45.
2006] REALITY TEST: THEORY & PRACTICE RELATING TO LEX ARBITRI 177
it was clear from s. 2(1) of the [English Arbitration] Act that the concept of the “seat” was used in order to define which arbitrations would be subject to the statutory regime in Part One of the 1996 Act; only those arbitrations that had their “seat” in England and Wales would be subject to the exercise of the Court’s powers in Part One of the Act;73
. . . Section 3 states that the seat of the arbitration means the juridical seat of the arbitration . . . It was clear that “seat” was intended to refer to some state or territory; the location contemplated was a particular state or territory which was associated with a recognizable and distinct system of law; and the juridical seat of the arbitration meant the state or territory where for legal reasons the arbitration was to be regarded as situated.74
The decision in Dubai Islamic Bank further states that under English law an arbitration must have a seat and that it is contrary to the whole idea of a juridical seat if its seat should somehow be peripatetic; and that the procedural law regime of an arbitration could not change capriciously from one point in the arbitration process to the next. Once a seat had been identified it could not move.75 The judgment also addresses the circumstances which should be considered in determining the juridical seat. Factors to be considered include:
(i) the parties (ii) the dispute which would be the subject of the arbitration (iii) the proposed procedures in the arbitration including the place of interlocutory and final hearing and (iv) the issue of award or awards.76
This is a useful test which will undoubtedly be used in the future. The U.S. Supreme Court analyzed the nature and needs of international arbitration in the case of Scherk v. Alberto Culver Co.77 With regard to the choice of the lex arbitri, the Court said that “an agreement to arbitrate before a specified tribunal is, in effect, a specialized kind of forum-selection clause that posits not only the situs of the suit but also the procedure to be used in resolving the dispute.”78 This language seems to suggest that the Court would allow the parties to choose the applicable procedural law.
73 Id. at 71 at para. 31. 74 Id. at 72 at para. 32. 75 Id. at 73, 74 at para. 49. 76 Id. at 74 at para. 50. 77 417 U.S. 506 (1974). 78 Id. at 519.
178 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 17
The cases discussed above suggest that, at least in situations where the territorial place of arbitration has no significant contacts with the dispute, the courts are willing to allow parties and arbitrators to choose a lex arbitri (in its entirety, i.e. both external and internal) other than the law of the seat. Cases in which a dispute has some significant connection with a seat pose a more difficult problem because the local jurisdiction has a genuine interest in regulating the proceedings. There is an international trend which indicates that, at least in the most developed (in arbitration terms) countries, the state’s interest in promoting commerce prevails over its interest in subjecting arbitration proceedings to national law. As a result, parties and arbitrators are given more freedom to choose the internal or external lex arbitri.79 This is particularly true where there is no conflict with mandatory rules of law of the seat of arbitration. Nevertheless, some authors argue that the state where the arbitration proceedings take place should be able to control these proceedings to ensure respect for international standards of fairness, as well as the “limits of the arbitral mission” and the rights of third parties.80 Other modern legislative texts have adopted the same principles.81 The UNCITRAL Model Law in Article 19 also reduced the role of the seat in accordance with international standards. The fact that modern laws often take a territorial approach in respect to their scope of application, does not automatically limit party autonomy. As expressed above, maximum party autonomy remains intact in relation to internal lex arbitri. External lex arbitri is normally subjected to the law of the seat but the parties may agree otherwise; their agreement is enforceable to the extent that it does not clash with mandatory rules of the law of the seat.
IV. CONCLUSION: VERIFICATION OF THE LEX ARBITRI
It seems that the common denominator as to the determination of the lex arbitri is the following escalating scheme which also reflects the conflict of interests in this process:
79 See, e.g., UNCITRAL Model Law, Art. 19(1); France NCCP, Arts. 1493, 1494; Swiss PIL, Art. 182; English Arbitration Act 1996, Sec. 4; Union of India v. McDonnell Douglas Corporation, supra note 47; Volt Information Sciences v. Board of Trustees, supra note 51. 80 Park, supra note 57, at 51; Goode, supra note 27, at 39. 81 See, e.g., Netherlands CCP (1986), Art. 1036; Portugal Law No. 31 of 1986, Art. 15; Algeria Law No. 93-09 of 1993, Art. 458 bis 6; Egypt Law No. 27 of 1994, Art. 25; Italy CCP (1994), Art. 816.
2006] REALITY TEST: THEORY & PRACTICE RELATING TO LEX ARBITRI 179
Parties Arbitration Tribunal State Courts
Arbitration agreement Render an enforceable award Mandatory provisions Choice of Rules Filling of gaps in choice of seat or
Choice of lex arbitri Determine lex arbitri of place of Enforcement
Parties wish to maintain control of the determination while state courts have to ensure compliance with the mandatory provisions of the seat of arbitration and/or the place of enforcement. The arbitration tribunal attempts to strike a balance by filling gaps (determine the lex arbitri) while always aware of its duty to render an enforceable award.
Further we have regulations of the procedure in two concentric circles:
• The inner circle and hard core contains the arbitration agreement with or without a choice of rules; it will normally also contain the arbitration rules chosen by the parties or the arbitrators and any gap-filling by application of a legal system (arbitration laws or general principles of law); • The outer circle (with which arbitration encounters the outer world) consists of and is controlled by all mandatory rules of the law of the seat and/or the place of enforcement.
180 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 17
Gap-filling by application of national law
Arbitration agreement and choice of rules
and general principles of law
Within the inner circle we normally find the internal lex arbitri. The outer circle indicates the impact of the external lex arbitri. Most modern arbitration rules and laws accept the patterns above. The increasing emancipation of arbitration82 from the physical (territorial) seat of arbitration as well as the relaxation of judicial control has boosted a movement by scholars83 who wish to promote the idea of “anational,” “stateless,” “delocalized,” “detached” or “transnational” arbitration. All of these effectively synonymous terms denote that international commercial arbitration can be autonomous and unconnected to any legal system. Lew Mistelis and Kröll84 point out in this regard that
[i]n fact, delocalized arbitration is not an extra-legal arbitration; it is a self- regulatory arbitration. Delocalization relates usually to the arbitration process or to the award. While the emancipation from the procedural law of the place of arbitration is now accepted, the enforcement of delocalized awards appears to be
82 The emancipation is a direct result of the increased internationalization and harmonization of international commercial arbitration achieved by the New York Convention and the UNCITRAL Model Law and the related autonomy of international arbitration. See more recently, Julian D. M. Lew, Achieving the Dream: Autonomous Arbitration, 22 ARB. INT’L 179 (2006). 83 It appears that the idea was first suggested by a Greek scholar, Charalambos Fragistas. Supporters of the idea include Rene David, Berthold Goldman, Philippe Fouchard, Julian Lew, Jan Paulsson, Pierre Lalive, and Arthur von Mehren. See F. A. Mann, Lex Facit Arbitrum, in INTERNATIONAL ARBITRATION LIBER AMICORUM FOR MARTIN DOMKE 157 (Pieter Sanders ed., 1967); Goode, supra note 27, at 21. 84 LEW MISTELIS KRÖLL, supra note 5, at para. 4-55.
2006] REALITY TEST: THEORY & PRACTICE RELATING TO LEX ARBITRI 181
problematic; ultimately, the enforcement is controlled by national courts. However, at least French and U.S. courts have enforced delocalized awards. Belgium and Switzerland have given foreign parties the option to contract out of any judicial review in limited circumstances. [citations omitted] A number of arbitration proceedings are governed by a lex arbitri other than the lex loci arbitri. In arbitration proceedings where both parties are co-operative, there is no need to connect the proceedings with a national legal system. Denationalized arbitration has been successful for two reasons. First, the majority of arbitration awards are implemented voluntarily so their validity and enforceability is never litigated. Second, a good number of states would enforce an award irrespective of whether the rules governing its procedure were in accordance with those at the seat of arbitration. In other words, the existing English definition of lex arbitri is disproved on the basis of the evidence above. By corollary, the distinction between internal and external lex arbitri is verified as it takes account of the fact that, failing any specific agreement of the parties to the contrary, arbitrators are masters of the proceedings. Their authority is restricted when there is necessary or unnecessary interaction with the outside world, in particular, with state courts. In other words, and to follow Popper’s likely argument that would make reference to natural sciences: the arbitration process is like a closed thermodynamic system which operates perfectly when it is closed; it would naturally explode when oxygen (outside the system) is injected.