Aspects of Applicable Laws in the International Commercial Arbitration

　　Introduction

　　International commercial arbitration (ICA ) is one way, chosen privately by the parties who have entered into an international commercial transaction in which the disputes have occurred or may occur, to resolve the disputes. Being a private option, the arbitration, compared with the litigation, looks like a more amiable, negotiable and flexible method. In the international commercial transactions, parties come from different territories with different traditions, cultures and legal or political backgrounds. They settle issues through negotiation and ultimately put the results into a contract. The contract is regarded as their own law created not only for setting down each party’s obligations but also for designing a means of dispute solution. From the party’s perspective, they prefer trusting their contract to trusting other laws. Is this meant the ICA should preclude any law? The answer is ‘no’. It is usually the case, one party’s behaviour was alleged breaking the contract, but this party said that he had to do so because he believed his opponent broke the contract first. Dispute occurred and the arbitrator(s) was invited. Then, who was a competent arbitrator? He should be a person authorised by a law. What the arbitrator(s) should do? He should follow a procedure permitted by a law. How could an arbitrator interpret the term of contract legitimately? He may invoke a law as standard. How may an award be valid and enforceable? The answer again should come from a law. Obviously, the ICA cannot be operated in a law vacuum. Conversely, its application of law is more complicated than litigation.

　　This essay attempts generally to introduce five different law systems involved in the whole process of ICA by means of dividing the arbitral process into five sections in order to according with the analysis of the five different laws. The following will give an overview of these five law systems, which can be regarded as the answer to the question: What law governs the parties’ capacity to enter into the arbitration agreement, the arbitration agreement and the performance of that agreement, the existence and proceedings of the arbitration tribunal, the substantive issues in dispute and the recognition and enforcement of the award? As a law student, it is impossible to outline so much different legal systems to give a full comparative analysis, so, if necessary, I will just invoke Chinese arbitration law to help the discussion, because it is familiar to me.

　　1.The law governing the capacity

　　The capacity means the ability of a person to effect a legal transaction . The person here can be a natural or juristic person. In the context of the ICA, the latter would usually be a corporation. The Model Law illustrates a list of ‘international commercial transactions’ , in which activities involved into IAC was introduced, even if they are not limited to the list. Many jurisdictions admit the term ‘commercial’ should be given an interpretation wider than the list of Model Law. Since the arbitration is a method used to resolve disputes that have arisen or may arise in a legal transaction and the ICA deals with the international commercial transactions, thus we can determine the parties’ arbitral capacity by means of determining whether a party has the ability to effect an international commercial transaction or whether a party has capacity to sign thus an agreement. Here, questions would like to be asked. Who are competent to enter into an international commercial agreement? The answer may be referred to the national contract law. This would cause complex problems because the contract laws are different from state to state. To determine the applicable law dealing with capacity could not reach a universal rule. It has to be taken account of the individual matter involved into individual contracts.

　　For example, while Contract Law of P. R China deals with the circumstances of void contract, it says that a contract shall be void if it is ‘violating the compulsory provisions of the laws and administrative regulations.’Some Chinese laws or administrative regulations prohibit Chinese nature persons to enter into international trade contracts or joint venture contracts, even if Chinese firms are prohibited from international trade without being authorised by the State administrator, but these prohibitions do not apply to the foreign parties.The rigorous international trade-restraints may sometimes bring confusions to the foreign parties. It is really a tough job to find out those provisions that could invalidate a contract without a Chinese lawyer’s help. However, this issue seems rarely to be happened in practice. A Chinese firm having no authorisation for international trade may often ask an authorised firm to be its agent to sign the contract. It is an interesting scene that, during the proceeding of arbitration in CIETAC,the foreign party could usually see his opponent was not the actual business partner who was used to contacting with.[page]

　　Concerning the circumstance in which an international arbitral award may refused, Article V.1. (a) of the NY Convention provides,

　　The parties to the agreement referred to in article II, were under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon under the law of country where the award was made.

　　The above provision leaves a room to challenge an arbitral party’s capacity in the national courts, so the issue of applicable law relating to the capacity is not only a theoretical one but also important in practice. The law governing the capacity should be a starting point of an arbitration agreement. It seems to be impossible to the parties to choose their preferable law to avoid incapacity. Once a party is incapable under the applicable law, usually the law of a state where the party’s nationality belongs to or he resides in, or where a corporate is registered, that means this party is incompetent to effect the said contract or arbitration agreement. The law-choice clause is a part of contract or a part of an independent arbitration agreement. It is not justified for the parties to use an invalid agreement to validate a clause of that agreement. In other words, provided that a party was incompetent to effect an agreement, of course, he is incompetent to effect a law-choice clause. Thus, the principle of ‘party autonomy’ should not apply to avoid the matter of incapacity or should only apply to capable parties.

　　2.The law governing the agreement and performance of the agreement

　　An agreement to arbitrate is the fundamental document to give rise to arbitration. No valid arbitral process starts itself in the ICA without an arbitration agreement.The agreement could be a clause (or clauses) in the principal contract or a separate one. In practice, the later often arises to deal with an existing dispute, because parties would prefer to take more considerations to choose a suitable governing law for the matters having come into sight, therefore the governing law of agreement possibly tailored together with the law governing the substantive issues.

　　If the agreement is written into as a part of a main contract, one should be careful when determining the governing law of the agreement. It has been perceived that there are three approaches to determining the applicable law for the arbitral agreement. First, the agreement may be chosen a proper law by a sole clause to govern itself. Secondly, when the sole clause is absent, the decision may refer to the other provisions that include a choice of proper law to govern the main contract. It is assumed that the same law governs both arbitration agreement and the contract. In case of a choice of proper law to govern the entire contract, it is illogical to separate the proper law of agreement from those provisions of the main contract, because the arbitration clause, as a part of that contract, is theoretically subjected to the provisions of its principal contract. We can also find out evidence to support this assumption from Union of India v. McDonnell Douglas Corp . In this case, the judge stated: "An arbitration clause in a commercial contract like the present one is an agreement inside an agreement… The parties may make an express choice of law to govern their commercial bargain and that choice may also be made of the law to govern the agreement to arbitrate." Thirdly, when neither choice is made, the governing law of agreement should be, according with the seat theory,referred to the law of the seat of arbitration. The provisions of Swiss law contribute an apt suggestion similar to these three steps, by which three accesses can approach the law governing agreement. The law provides:

　　As regards its substance, an arbitration agreement shall be valid if it conforms either (i) to the law chosen by the parties or (ii) to the law governing the subject matter of the dispute, in particular the law governing the main contract or (iii) if it conforms to Swiss law.

　　The validity of arbitration agreements gives rise to problems in both the areas of essential validity such as capacity (discussed above) and the formal validity. In terms of the formality of an arbitration agreement, ‘in writing’, as a ritual incantation, has been set down in treaties as well as in national laws. Article II 2 of New York Convention defined this as: “the term ‘agreement in writing’ shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.” This definition proved old-fashioned because of the emergence of Internet and new communication technology. The Model Law set out a modern definition of ‘in writing’, and added new grounds in which an exchange of statement might form a valid agreement, even if the parties did not sign it.Some jurisdictions started to accept oral agreement, provided that there is reference to written form which itself contains an agreement to arbitration.Some jurisdictions may have not adopted the definition of Model Law, but they have realised the limitation of the New York Convention’s definition. Again the example of Chinese laws, the Law of Arbitration of P. R. China was enacted in 1995 but the provision relating to the form of arbitration agreement was quite simple. It provided that an arbitration agreement, including arbitration clauses written in a contract or other forms of agreement, should be, in writing, agreed before or after the emergence of disputes.Four years later, the new Chinese Contract Law sets out a clear definition of ‘written forms’ that include a written contractual agreement, letters, and data-telex (such as telegram, telex, fax, EDI and e-mails), but whether an oral agreement or implied agreement is acceptable still remains in debates.[page]

　　The content of arbitration agreement may also influence the validity. A clause written in a contract providing as ‘any dispute is to be settled by arbitration in London’ may constitutes a valid arbitration agreement under English law, but a clause as ‘any dispute is to be settled by arbitration in Beijing’ cannot be treated as a valid agreement under Chinese law. Article 16 of Law of Arbitration of P. R. China states that a written arbitration agreement shall, inter alia, designate an arbitration commission. Without a certain designation, the courts would consider the agreement invalid. This is because that China has not accepted ad hoc arbitration and all arbitrations are taken place in different standing arbitration commissions. An arbitration tribunal should be composed of arbitrators or arbitrator who had been listed in a given commission. There might exist several arbitration commissions in Beijing, so an absence of designation would cause arguments between parties.

　　It was described that the New York Convention was ‘the single most important pillar on which the edifice of international arbitration rests’.Because of the limits of the definition in the Convention and the different interpretations existing in national laws, the requirements of a valid arbitration agreement are likely different from state to state. Some modern arbitration laws have improved the formative validity of arbitration agreements. The parties have more opportunities to choose the good law, as applicable law, which is suitable for their arbitration agreement.

　　3.The law governing the existence and proceeding of the arbitration tribunal

　　The law governing the existence and proceeding of the arbitration tribunal is deemed to procedure law in some countries. For instance, in the Chinese law system, the provisions to regulate arbitration were written into the Civil Procedure Law of the P. R. China 1991and the later statute, the Law of Arbitration of the P. R. China (1994), is cited in the procedure law category of the authoritative law collections.It has no doubt that the arbitration law bears many characteristics of procedure law because they deal with similar matters such as composition of tribunal, time-limits, conduct of procedure, interim measures of protection and so on. For this reason the arbitration law should be separate from the substantive law in an arbitration proceeding. In practice of the ICA, parties usually chose a neutral as the place of arbitration. It means this place has no connection with the place of each party’s business or residence as well as their substantive contractual disputes, so the arbitration law or lex arbitri should be also distinct from the proper law of the contract. This distinction offers the parties an opportunity to make a choice of law to govern the procedure of the arbitration. Although the parties have rights to agree that an arbitration shall be held in a country but subject to the procedure law of another country, this option would be less worthy to be recommended and would be unpractical because the parties would face the difficulty to acquire the assistance of a foreign court to exercise trans-national jurisdiction.

　　Some arguments called for ‘de-localisation’ that meant neither the lex arbitri nor should the national courts intervene the procedure of arbitration because the parties could devise the rules by themselves. These arguments favoured ‘party autonomy’ but caused danger to reach the fair awards, therefore the recognition and enforcement of those awards. During the proceedings of ICA, a party may request a summons of witness or a writ of property preservation from a national court. In this case, if the parties’ own rules conflicted with the arbitration law followed by that court, it would lead the court to being in a dilemma: where the parties’ own rules were followed and the award would not be considered as domestic award, this award might be challenged in the course of seeking enforcement in this country because of ‘contrary to the public policy of that country’ under Article V 2 (b) of New York Convention; where the existing arbitration law was followed, the award might be challenged because of that ‘the composition of the arbitral procedure was not in accordance with the agreement of the parties’ under Article V 1 (d) of the Convention. Then, if the Convention should be respected, it is safe to the parties to choose the existing arbitration law or lex arbitri as applicable law rather than devise their own rules.

　　In order to avoid any inconvenience or impracticality, a theory, so called “seat theory”,should be accepted in the ICA. It means that the law of the place in which it is held governs the arbitration and that place is the seat of arbitration. This theory has been well established both in international treaties and national laws. The Geneva Protocol 1923 states: “ 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.”The new Swedish Arbitration Act 1999 makes a clearer point of this theory by means of denying any other laws to govern the proceeding of arbitration held in Sweden. Section 46 of this Act states: ‘this Act shall apply to arbitration proceedings which take place in Sweden notwithstanding the fact that the dispute has an international connection.’The English law and the Swiss law provide the similar provisions to build links between the seat of arbitration and the lex arbitri . However, to fix a seat is the right of parties, only if the parties’ choice is absent, the arbitral institution or arbitrators may designate it.Many arbitration rules also emphasize a seat should be fixed, for instance, the ICC Rules says as “ The place of arbitration shall be fixed by the Court unless agreed upon the parties.”The similar provisions may be found out from the UNCITRAL Rules and the LCIA Rules.Now it is fairly to say that under the modern arbitration laws, to decide a seat is regarded as to decide the lex arbitri.[page]

　　Once having chosen a seat of arbitration, it should be noted that the neutral lex arbitri might differ from the legal system, which was most familiar to respective parties. For example, many common law systems regard time-limits as the matter of procedure law but many civil law systems regards it as the matter of substantive law. If the lex arbitri is not as the same system as the law governing the substantive matters, the conflict may arise. Some states such as China seem not to recognise the contractual time-limits because this matter has been imposed by contract law and it subject to the law governing the substantive issues rather than the lex arbitri. If contractual time-limits are longer than that the law imposed, breach of the law is amount to breach of the public policy. If it is shorter, the respondent cannot challenge the claimant’s delay unless that delay has exceeded the law-imposed time-limits. Then, the ‘party autonomy’ has to subject to some restrictions in certain jurisdictions.

　　4. The law governing the substantive issues in dispute

　　The terms of “governing law”, “proper law of the contract”, “applicable law” and “the substantive law”，except being specialized, are usually equal in reference to the law governing the substance when depicted in context of ICA. As an important principle, the autonomy of parties is widely respected by the arbitration tribunal and the choice of governing law is preferably used by parties on purpose of use a “neutral” law system (sometimes rules or principles of law) to resolve the disputes. Thus the complexity and flexibility is left to the tribunal and the participants of the ICA as well to discern what law is applicable. According to the autonomy of parties, choices of governing law are different from time to time to be suitable for the different circumstances. Some authors listed at least several laws (including rules of law) or principles of law are adopted as applicable law in the international commercial practice.They are as following:

　　.

　　 National law: is most commonly used in practice for applicable law and is often “neutral” .

　　 Public international law: Where the parties of commercial contract are states or state entities, e.g. Channel Tunnel project , the legal framework was an international treaty.

　　 Concurrent laws: That where one party of the contract is a state or state entity, the state’s law is recognized and the principles of international law is introduced at the same time is adopted by the Washington Convention.

　　 Combined laws: That is to choose the common parts of both parties’ national laws, perfectly practiced in Channel Tunnel project.

　　 The Shari’ah: Where the parties are all Muslim, the Shari’ah law will be automatically the governing law.

　　 Trans-national law: It includes the general principle of law, international development law, the lex mercatoria, codified terms and practices and trade usages.

　　 Equity and good conscience: It is effective when parties agree and the applicable law permits.

　　Although the parties have the right to choose the applicable law, ignoring the choice of law occasionally exists in the contractual activities. If the parties have not expressed that choice, the arbitration tribunal may then have a task to establish the applicable law by means of inferring such a tacit choice that is “demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case”.If neither express nor tacit choice exists, the traditional approach is that the arbitrators should determine the applicable conflict rules first and then follow the rules to reach the proper law. This approach was established in some early international conventions.It was realised that the traditional way might cause the proper law unforeseeable because the conflict rules in one state might refer the proper law to another state and the choice of law might be time consuming. The new trend has moved to conferring the arbitrators the right to determine the proper law directly rather than follow conflict rules. Many west European states have accepted the new approach.

　　There also exist compulsory restrictions to ‘party autonomy’ in relation to the choice of proper law. It is probably these restrictions are closest to the national public policy, for instance, Article 126 of Chinese Contract Law provides: ‘the contracts for Chinese-foreign equity joint ventures, for Chinese-foreign contractual joint ventures and for Chinese-foreign cooperative exploration and development of natural resources to be performed within the territory of the P. R. China shall apply the laws of the P. R. China.’ However, the first sentence of this Article respects the party autonomy as ‘the parties to a contract involving foreign interests may choose the law applicable to the settlement of their contract disputes.’[page]

　　According to party autonomy, in context of international transactions, choice of national law might cause some disadvantages such as restriction of public interests, unfair treatment, and changing of the law. It could be imagined that an identical dispute might get different results attributing different choices of law. Can these disadvantages be avoided? The answer should be ‘yes’ because the parties have opportunities to choose trans-national laws, or even they have opportunities to refuse choosing any law at all. These opportunities are either available or practicable. First, there exist some developed uniform commercial custom or codified terms and practices in particular area of international trade, e.g. Uniform Custom and Practice for Documentary Credits. These customs were made by the international trade community and tailored for the certain activities, so they are welcomed throughout the worldwide traders. Why not use them to resolve disputes? Secondly, the Model Law, the Conventions, the national laws and even the arbitral rules have accepted the ‘rules of law’ as applicable law in case of the parties agreed. Thirdly, the national courts are reluctant to use the public interests to refuse the recognition of ‘rules of law’ unless the compulsory applicable law involved. All these reasons have left rooms to the choice of trans-national laws. It seems to that the rare choice of trans-national law is due to the limitation of those laws themselves. It was suggest that the trans-national laws are fragments of particular rules rather than a uniform legal system. It may be competent to deal with particular activities but less competent to deal with the whole matters consisting in the course of international trade. Anyway, provided the parties could make a perfect contract, which covered most predictable issues, the choice of trans-national law in conjunction with the contract as reference to the arbitral tribunal should be more practicable. The modern national arbitration laws should set down provisions to leave a room open for accepting the trans-national laws. Providing the contract was good rule per se and the parties appointed trade experts or technical experts as arbitrators, the parties appeared to trust their own rules and the expertise more than trust any other laws or rules. In this event, the parties would prefer reference of ‘equity and conscience’ to law or rules of law, so the national laws should by no means erect any barriers to reject such a choice.

　　5.The law governing the recognition and enforcement of the award

　　It is understandable that the ultimate aim of the parties to arbitrate is, bringing an award to a national court (or courts), to seek the enforcement of the award made by a legitimate arbitration, in case of absence of voluntary carrying out. Parties may take account of the issues of recognition and enforcement before they conclude the arbitration agreement. Both the potential claimants may think of these questions: If I win, where are the opposing party’s assets located? Will the award of arbitration be enforced in that place?

　　If the intended recognition and enforcement is sought in the country in which the arbitration award was made, the process of recognition and enforcement will be easier to approach because this award is not foreign or international and the court will regard it as a domestic arbitration award. As mentioned above, the awards of international commercial arbitration are frequently made in a neutral place and the losing party’s assets may be located in more than one country, accordingly the awards when submitted in the national courts are often regarded as foreign awards, as a result, seeking the recognition and enforcement should be considered into a worldwide dimension. From the Geneva Protocol of 1923 to the Geneva Convention of 1927 then culminating in the New York Convention, which had largely superseded the formers, treaties have been acting an importance role to call for the recognition and enforcement of foreign or international arbitral awards. By the end of 1998, more than 115 countries had adhered to the New York Convention 1958. After 1958, even less impact than New York Convention, there were several international and regional conventions made for the particular circumstances.In other words, the ICA awards have approaches to be recognized and enforced by the national courts in most important trading countries of the world and once a country has signed on a treaty, e.g. New York Convention, it means that country has adopted the provisions of New York Convention, and the only thing should be done by its domestic courts is to examine whether the award meets the requirements of the provisions for recognition and enforcement. One point should be clear that the parties may choose their preferable lex arbitri, appoint arbitrators whoever they like, decide the proper law referred to arbitral tribunal and select the appropriate place for enforcement of the award, but they have nothing to do with the risk of refusal of recognition and enforcement, which is resulting from the recognition and enforcement against the public interest of that country. They cannot choice other laws to avoid that country’s public interest. Since the public policies are very complex and different from country to country, no one can offer a universal standard. In my opinion, this issue should be left to conventions, bilateral treaties or multi-treaties by way of national treatment or reciprocity principles.[page]

　　Some problems may arise from certain circumstance. After Hong Kong came back to China in 1997, the recognition and enforcement of awards made in the other legal territory had to be pending in both the courts of Hong Kong and the courts of Mainland China. This is because: the P. R. China has recognized the existing legal system in Hong Kong; the P. R. China and Hong Kong are independent parties to New York Convention; both arbitration laws treat foreign awards as Convention awards; there is no legal framework to consider those awards not domestic awards. Fortunately, it was recognised that there is no reason to build any barriers between two legal territories for enforcement of arbitral awards. Until June 1999, two highest judiciary institutions signed an arrangement for recognition and enforcement the awards each other.Those awards were no longer pending.

　　6. Conclusion

　　Since there exist different legal systems in this world, even in one country, there may be co-existed different law systems. Unlike litigation, which is based on single national law system, and even if the foreign law involved, the court would follow the choice or follow the national conflict rules to determine applicable law, the ICA raises more complex legal issues beyond any given national law. Many jurisdictions provide the arbitral tribunals more freedom to determine the applicable law than the national courts when parties give up their choice of law.

　　Concerning the parties of ICA, once they have decided to submit their disputes to arbitration, one thing should be borne in mind that they have the freedom to choose different laws to govern the arbitral agreement, the arbitral procedure, or the subject matters of disputes, and they also have the freedom to choose any suitable place for arbitration. But they could not abuse their rights because not every choice is acceptable or practicable in all legal systems involved. ICA is sometimes expensive and the choice of law is time consuming. No party likes wasting money, and no winner likes an award being refused in the course of enforcement. Simultaneously, to decide an arbitration to be held in state A, choose arbitration law of state B, use state C’s national law to govern arbitration agreement, and invoke state D’s law to govern the substantive matters, this is just a theoretical possibility. This might only occur in the time that the parties have to do so. While there is no a universal rule for precise choice, parties should make a scrutiny to the applicable laws before they make their choices.

　　Concerning the arbitration tribunals, the seat theory has resolved the question what procedure should be followed but when the parties gave up the choice of proper law expressly, another question, how to determine the proper law, remained unsolved. Some systems may still insist that the arbitration tribunal should follow the conflict rules of the seat of arbitration. Some system may have abandoned these two-steps approach and confer the arbitration tribunal to determine the proper law.

　　Concerning the national laws and the trans-national laws, it is difficult to say which law is good law. The problems fall into the hand of parties. They are in the best situation to make their own choice. I would say that the applicable law should be certain, competent to resolve dispute, accessible, and practicable. The choice should not establish any barriers to the recognition and enforcement of arbitral award. Any uncertain rules of law seem like causing risk of refusal of enforcement of awards.

　　【参考文献】

　　Bibliography: Books: Collins, Dictionary of Law, the second edition. (2001) Fraser P Davidson, Arbitration, (2000) Jilin Press: Collection of Laws of the People's Republic of China (2001) Alan Redfern & Martin Hunter, Law and Practice of International Commercial Arbitration, 3rd edition, (London: Sweet & Maxwell, 1999) Legislatures: - Age of Legal Capacity (Scotland) Act 1991 - Amman Convention 1978 - Arrangement for recognition and enforcement of awards made in Hong Kong or Mainland China, 21 June 1999 - Arbitration Law of the People's Republic of China - Civil Procedure Law of the People's Republic of China - Contract Law of the People’s Republic of China (adopted at the Second Session of the Ninth National People’s Congress on March 15, 1999) - English Arbitration Act 1996 - European Convention 1961 - Geneva Protocol 1923 - Geneva Convention 1927 - Law of the PRC on Chinese-Foreign Equity Joint Ventures 2000 - Moscow Convention 1972 - Swedish Arbitration Act of 1999 (SFS 1999: 116), enter into force on 1 April 1999 - Swiss PIL Act 1987 - Rome Convention - UNCITRAL Model Law On International Commercial Arbitration 1985 - Washington Convention 1965 Arbitral Rules: ICC Arbitration Rules UNCITRAL Arbitration Rules Articles: - Berger, ‘The New Law Merchant’ (2000) 4 International Arbitration Review 91 - Fortier, ‘The New, New Lex Mercatoria’ (2001) 17 Arbitration International 121 - Reymond,[page]