Choice of Law by Arbitrators: The Applicable Conflict of Laws System

by D r BEDA WORTMANN *

I. INTRODUCTION PARTIES TO an international contract often choose arbitration because they want a measure of certainty and predictability as well as neutrality and effectiveness for the dispute resolution process. Besides, the parties aim at a stable substantive law under which their disputes should be resolved. This legal regime is the basis for the award. Since there are still differences among national laws, the parties have a great interest in the arbitrator's determination of the law applicable to the merits of their disputes.' Although this question is of crucial importance, a homogeneous answer has not yet been given. Nor do resulting arbitrations reveal any clear dominant attitude towards the application of conflict of laws rules by international arbitrator^.^ A reason for this might be that arbitration is secret and the awards do not have the authority of precedents, although there may be psychological elements of persuasive authority amounting to precedents: 'Faced with a problem one wants to know what others in similar situations have done, and one tends to copy them'.3 Will the arbitrators apply the conflict of laws rules pertaining to the seat of arbitration, or those of the country which has the 'closest connection' with the disputeT4 Or will they not apply conflict of laws rules at all? The problem can be divided into two logical steps: the first question is whether it is necessary to apply a conflict of laws system at all, and secondly, if the answer is positive, which system should be applied.

* Piinder, Volhard, Weber & Axster (Frankfurt am Main). ~ J . E . Jaffey, "bitration of International Commercial Contracts: Thc Law to be Applied by the

Arbitrators', in Current Issues in International Business Haw (ed. Perrott and Pogany) (Aldershot, Ashgate 1988) at p. 129. J. Lew, Applicable Law in International Commercial Arbitration: A Study in Commercial Arbitration Awards (New York, 1978) at p. 581. 0. Lando, 'The Law Applicable to the Merits of the Dispute', in Contemporary Problems in Inkmational Arbimtion (ed. J. Lew) (Dordrecht, Kluwer 1987) at p. 103. See ICC Award No. 4131/1982 cited by K.P. Berger, International Economic Arbihation @eventer/Boston, Kluwer I a w International 1993) at p. 522, n. 246. " See the conflict of laws rule contained in Art. 187(1) of the Swiss Private International Law Statute.

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11. IS THE APPLICATION OF A CONFLICT OF LAWS SYSTEM REALLY NECESSARY?

In order to determine the proper law of the contract, the arbitral tribunal might renounce the application of any principles of private international law, and might instead directly apply a certain substantive law.

(a) Choice of Law by the Parties

When the parties have agreed upon the substantive law applicable to the merits of their dispute, it seems as if the problem of which conflict of laws rules should be applied by the arbitrators will not arise because the arbitral tribunal can solve the disputes by directly applying the chosen substantive law. But does this mean that the arbitrator has to recognize the parties' autonomy without relying on any conflict of laws rule? The answer to this question would be aMirmative if all private international law systems accepted the freedom of the parties to choose the applicable law without any restrictions. Although the principle of party autonomy is basically recognized in both common law and civil law systems, the freedom which each country permits is limited. For instance, in the English system of private international law, a choice by parties must be 'bona fide and legal' and a merely 'eccentric or capricious' choice of law will have no effect.5 Is it possible to choose only some provisions of a legal system and to exclude the others? Can the parties agree that, for example, one part of a complex joint venture agreement is subject to the law of country A whereas another part is subject to the regulations of country B (dkpe~age)?~ Is a retroactive choice of law p~ss ib le?~ Must the choice of law comply with certain formal requirements? In order to answer these questions, the arbitrator must examine which conflict of laws rule affects the validity of the choice of law.

Moreover, in some cases a statutory provision, for example in English law, will apply to a contract despite the fact that the parties have chosen a foreign law governing the merits of their ont tract.^ Thus, under English private international law the parties cannot escape from the mandatory provisions of that legal system with which the contract has its most substantial connection and which, for this reason, the court would have applied if there had not been an expressed or implied choice of law.g In general, mandatory rules comprise rules of law which cannot be derogated from by contract, including rules regarded by a legal system as being of such importance that they must be applied irrespective of the

Vita Food Produch Inc. v. Unus Shipping Co. [I9391 AC 290. See Art. 3(1), third sentence of the European Convention on the Law Applicable to Contractual Obligations (hereinafter referred to as the Rome Convention). See e.g. Art. 3(2) of the Rome Convention and Art. 116 of the Swiss Private International Law Statute. The Hollandia 119831 1 AC 565. Dicey & Morris, The Conflict ofLaws (London, Sweet & Maxwell 1993, 12th ed.), rule 177, at p. 1239; see also Art. 3(3) of the Rome Convention; for the international situation see D. Hochstrasser, 'Mandatory Rules in International Arbitration' (1994) 11 J. Int% Arb. 57 at pp. 67-75 and the guidelines at pp. 85-86.

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applicable law. Since these regulations in the interest of the general public solely achieve their objective if they are applied notwithstanding the chosen law governing the merits of the dispute, it would violate the will of the respective legislatures to apply only the rules of the law chosen by the parties.1° Otherwise, the parties could circumvent those provisions which did not appeal to them. Since arbitrators ought to have an incentive to apply mandatory rules out of a sense of duty to the survival of international arbitration as an institution, they must not permit recourse to arbitration to become a means for escaping fundamental principles of public policy. By complying with compulsory provisions representing the public policy of a state, arbitration is more likely to be tolerated by states and their courts, and consequently to survive as a private dispute settlement system within those states." What would be the reaction of US courts if arbitrators did not apply the relevant American anti-trust legislation, although in the Mitsubishi case the matter was regarded as arbitrable? Once accepted that an arbitrator has to pay regard to mandatory rules, the logical question which follows is with which mandatory rules an arbitrator has to comply. Of course, he has to apply the obligatory provisions of the substantive law chosen, even if the parties excluded them. Beyond that, conflict of laws rules might help him to confine the scope of systems of law whose obligatory provisions should influence the parties' dispute.12 Consequently, even if the parties have chosen the applicable law it may be vital for arbitrators to determine the conflict of laws rules.13

(b) Direct Application o f Substantive Law Where the parties fail to agree upon the applicable law14 one might think that the arbitrators always have to select conflict of laws rules. If the parties are free to agree upon the governing law, why should the arbitral tribunal not be allowed to choose an applicable law for them without any recourse to rules of private

lo See e.g. Art. 34 of the Rome Convention and Art. VIII(Z)(b) of the International Monetary Fund (IMFI Bretton Woods Convention). In respect of the latter, see the Award of the Amsterdam Grain Trade Association cited by Berger, op. cit at p. 691, n. 267.

" P. Mayer, 'Mandatory Rules of Law in International Arbitration' (1986) 2 Arbitration International 3,274 at pp. 284-285; 0. Lando, 'Conflict-of-Law Rules for Arbitrators' in FestscJ~rift fiir Konrad Zweigert zum 70. Geburtstag (ed. H. Bernstein et al.) (Tiibingen, Mohr 1981) at pp. 172-173. However, it is far from clear how and to what extent an arbitrator must observe mandatory rules; see 0. Chukwumerije, Choice of Law in International Commercial Arbih-ation (Westport, Greenwood Publishing 1994), at pp. 185-191.

l3 If, in the case of an expressed choice of law by the parties, the arbitrators cannot leave open the question of which conflict of laws rules they apply, then this must a fortiori be valid when there is only an implicit choice of law.

14 This may not correspond with the usual practice in international trade. But nevertheless, it should not necessarily be ascribed to the carelessness of the parties, or to the failure of the lawyers, since sometimes the parties, after a long period of negotiation, cannot agree upon a choice of law clause. Instead of starting to negotiate again they prefer to leave the issue open, or to postpone the problem to the time that a dispute arises. rather than not to conclude the contract.

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international lawT15 In other words, they could directly apply a substantive law ('voie directe').16 A good example of such an approach can be found in section 1051 (2) of the German Code of Civil Procedure (Zivilprozefiordnung) which came into force on 1 January 1998." In this case, the problem of selecting a conflict of laws rule would apparently not arise. Two possibilities are open to the arbitrators when they apply a substantive law without any reference to conflict of laws rules: the national law of a certain country, or a non-national set of rules (lex mercatoria) .

(i) National law The arbitral tribunal may apply the national law of a certain country, such as the law of the country in which one party is located. Without reference to a stated set of conflict of laws rules it is not possible for the parties to foresee the law which the arbitrators deem applicable to the merits of the dispute. This may result not only in undesirable unpredictability of the outcome of the arbitration but also in the situation that the parties are not able to present their case, for they do not know on which legal grounds they should argue, suggest a solution to the dispute, or express factual arguments, until the arbitral tribunal has laid down the applicable law. Since various legal systems may provide divergent solutions for issues such as those relating to the transfer of title or risk, to the rate of legal interest, or to the time-limit imposed on the buyer to complain about the quality of the goods delivered, the success of a claim may be different, depending on the applicable law. Therefore, it is absolutely essential for the parties to know the potential applicable law in advance.

In addition to that, the same problems arise as if the parties made a choice

'" Seethe ICC Awards Nos. 1776/1966,3880/1982,4132/1983,4381/1986 cited by Berger, op. cit. a tp. 499, n. 128; Lew, op. cit. at p. 225; S. Toope, Mixed International Arbitration (Cambridge, CUP 1990) at p. 55.

l6 See e.g. Art. 29(1) of the International Arbitration Rules of the American Arbitration Association: 'The hibunal shall apply the substantive law or laws designated by the parties as applicable to the dispute. Failing such a designation by the parties, the tribunal shall apply such law or laws as it determines appropriate' (emphasis added). See also Art. 1486 of the French Code of Civil Procedure: 'The arbitrator shall decide the dispute according to the rules of law chosen by the parties; in absence of such a choice, he shall decide according to such rules as he deems appropriate'. See Art. 1054(2) of the Netherlands Arbitration Act.

l7 This new provision reads as follows:

Section 1051 - Rules applicable to substance of dispute . . . (2) Failing any designation by the parties, the arbitral tribunal shall apply the law of the State with which the subject-matter of the proceedings is most closely connected.

Section 1051 is part of the amended Tenth Book of the German Code of Civil Procedure which contains all German statutory provisions relating to aibitral issues. For a closer description and analysis of the new German Arbitration Act see (1998) 14 Arbitration International 1 at p. 11. Although the wording of the new section 1051(2) implies that arbitrators are entitled to apply substantive law directly to solve the dispute concerned, it is far from clear whether the arbitrators are indeed released from having recourse to a conflict of laws system, because the German legislature in its official reasoning proceeds on the assumption that arbitrators have to apply the principles of German private international law. For a more detailed analysis of the inconsistency of the wording of the new section with the legislature's intention, see D. Solomon, 'Das vom Schiedsgericht in der Sache anzuwendende Recht nach dem Entwurf eines Gesetzes zur Neuregelung des Schiedsverfahrensrechts' in (1997) RIW 981 et seq.

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of law, namely the question with which mandatory provisions the arbitrators have to comply. This difficulty can, as we have seen, only be solved by applying some conflict of laws rules selecting the compulsory provisions. Furthermore, if arbitrators apply the national law of a country without any recourse to conflict of laws rules, they are always influenced by certain con- siderations having led them to exactly this particular system of law. These considerations are nothing more than the application of conflict of Iaws rules because the arbitrators will almost always look at factors, such as the 'closest connection' of the contract, in order to determine the applicable law.'* Therefore, the arbitrators de facto use conflict of laws considerations, even if they are not aware of doing so. However, in this case it is better when they unveil their deliberations not only to enable the parties to foresee the applic- able law but also to make themselves realize that they are deciding a question of conflict of laws. Hence, even if arbitrators choose a substantive law without any reference to private international law, the selection of conflict of laws rules is nevertheless necessary.

(ii) Lex mercatoria Instead of selecting a national set of rules, the arbitrators may think of a non- national standard.lg Although different labels such as transnational law, international customs, lex mercatoria, and the like, have been used, they all refer to the same phenomenon: a set of rules developed to regulate international trade in the business community.20 These substantive rules are derived not only from international commercial dealings, standard clauses, international conven- tions and arbitral awards but also from various sets of legal rules issued by the International Chamber of Commerce (ICC) or other international organi~ations.~'

l8 See ICC Award No. 423711984 in Jarvin and Derains, Collection of ICC Arbitral Awards 1974-1985 (Deventer, Kluwer Law International 1990) at pp. 170-171; ICC Award No. 6719/1991 in Arnaldez, Derains and Hascher, Collection of ICCArbitral Awards 1991-1995 (Deventer, Kluwer Law International, 1997) at p. 577. Berger, op. cit. at p. 502: '. . . in international arbitral practice, the reasons which lead arbitrators to select the appropriate applicable law are similar to the connecting factors used in conflict-of- laws rules'. Indeed, it seems as if the direct application of substantive law were akin to the English proper law doctrine.

19 This choice may be excluded from the outset if the parties argue on the ground of national law, since this may be construed as an exclusion of the application of non-national law. See Lando, 'Conflict-of-Law Rules' op. cit. at p. 168.

20 B. Goldmann, 'The Applicable Law: General Principles of Law - The Lex Mercatoria' in Contemporary Problems in International Arbitration (ed. J. Lew) (Dordrecht, Kluwer 1987) at pp. 113-116; C. Croff, 'The Applicable Law in an International Commercial Arbitration: Is It Still a Conflict of Laws Problem?' (1982) Intern. Lawyer 613 at p. 623; M. Somarajah, International Commercial Arbitration: The Problem of State Contracts (Singapore, 1990), pp. 116-117. The concept of lex mercatoria can in particular be found in contracts between states or state entities and foreign companies because this supranational system cannot be changed by the legislation of the state party. Hereinafter, the expression 'lex mercatoria' is used synonymously for all labels.

21 See e.g. the ICC International Rules for the Interpretation of Trade Terms (INCOTERMS) and the UNIDROIT Principles of International Commercial Conbacts; G.B. Born, International Commercial Arbitration in the United States (Deventer/Boston, Kluwer Law International 1994) at p. 134.; H. van

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Although the arbitrators refer to a non-national system of rules, the lex mercatoria is not an autonomous and self-supporting legal system. On the contrary, these principles depend on their recognition by national or public international law. The concept can only exist insofar as a national state recognizes the use of the lex mercatoria. All contracts between private parties cannot exist in a vacuum, but must draw their authority from a national law provision,22 or in the words of the A r a r n c ~ ~ ~ arbitral tribunal:

It is obvious that no contract can exist in vacuo, i.e., without being based on legal system. The conclusion of a contract is not left to the unfettered discretion of the parties. It is necessarily related to some positive law which gives legal effects to the reciprocal and concordant manifestations of intent made by the parties.

Since only a state has the authority to enjoin a duty on a person, the commitments resulting from a private contract are only derived from a state's authority. The question of which country offers the framework for the principles of the lex mercatoria must be decided on the basis of conflict of laws rules.

Another argument which has to be mentioned in this context is that an arbitrator applying the lex mercatoria might find it impossible to decide every aspect of the case by non-national standards because certain practices and contractual clauses only apply in a specific industrial sector, or the principles are frequently phrased in general terms, i.e. they are too elementary and plati- tudinous to permit detached evaluation of conflicting interest.24 Although there exist some common general principles, such as pacta sunt servanda, rebus sic stantibus, the doctrine of the so-called 'effet utile9, etc., in practice it is difficult to determine the 1ex mercatoria because its contents are vague and often c~ntradictory.~~ When can pacta sunt servanda be set aside by rebus sic stantibus? Some of the principles speak on such a high level of abstraction that they afford little or no guidance in the resolution of concrete legal disputes. With regard to international commercial contracts this existing vagueness might,

con t. Houtte, 7he Law of International Trade (London, Sweet & Maxwell 1995) at para. 1.33; 'The UNIDROIT Principles of International Commercial Contracts' (1995) 11 Arbiiration International 4 at 373; Berger, op. cit. at pp. 526 et seq.; Michael J. Bonell, 'The UNIDROIT Principles of International Commercial Contracts' in Process and Substance - Lectures on Comparative Law (ed. Roger Cotterrell) (London, 1995) at pp. 45 et seq.

22 See Amin Rasheed Shipping Corp. v. Kuwait Insurance Co. [I9841 AC 50 at pp. 60 and 65, per Lord Diplock; Redfern and Hunter, Law and Practice of International Commercial Arbitration (London, Sweet & Maxwell 1991, 2nd ed.) at p. 71.

23 Saudi Arabia v. Aramco, decision of 23 August 1958, reprinted in (1963) 27 ILR 117 at p. 165. 24 see e.g. the standard conditions of the London Corn Trade Association, of the Grain and Feed Trade

Association (GAFTA), of the International Air Transport Association (IATA); van Houtte, op. cit. n. 2 at para. 1.33; Redfern and Hunter, op. cit. at pp. 119-120. However, it must be admitted that gaps also appear in national legal systems. '" See ICC Award No. 423711984 in Jarvin and Derains, op. cit. at p. 170 rejecting the possibility of applying the Iex mercatoria; Sornarajah, op. cit at p. 116 et seq.; van Houtte, op. cit. at paras. 1.33- 1.34 and 11.26; Berger, op. cit. at pp. 544-553. See also the remark by Redfern and Hunter, op. cit. at p. 120: 'To this list the cynical reader may feel like adding other well-known maxims of the "a stitch in time saves nine" variety!'

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however, change, since the UNIDROIT Principles of International Commercial Contracts, pursuant to Comment 4(b) in the Preamble, aim to avoid, or at least considerably reduce, the uncertainty accompanying the use of the lex mercatoria. According to paragraph 3 of the Preamble, '[the Principles] may be applied when the parties have agreed that their contract shall be governed by "general principles of law", the lex rnercatoria or the like'. But only if the business community and its arbitrators recognize the Principles, will they be part of the lex mercatoria. Since the UNIDROIT Principles were launched only a few years ago, it still remains to be seen to what extent, in practice, parties to international commercial contracts will agree upon the application of the UNIDROIT Principles, and, above all, to what extent arbitrators will use them for identifying the contents of the Jex mercatoria. Although a systematic and well-defined set of rules such as the UNIDROIT Principles is a step towards minimizing the problem of vagueness implied in the lex mercatoria, there may nevertheless occur legal gaps2'j which could be filled by provisions of a national legal system which must again be determined by conflict of laws rules. In addition to that, some questions are by nature ordinarily governed by national law, such as capacity to contract, corporate powers, prescription, statutory interest, and the like.27 The question of which law applies to these points is again a problem to be resolved by conflict of laws rules. Hence, the arbitral tribunal is not released from deciding which conflict of laws rules have to be applied.

Besides, the application of the lex mercatoria is subject to the same restrictions as if a national system of law were chosen, so that the arbitrators also have to comply with mandatory provision~,~8 for 'in absence of any jus cogens international trade would be ruled by jungle law'.2g Failure by the arbitrators to have regard to relevant mandatory rules may result in the award either being set aside by the court with the supervisory jurisdiction over the arbitration or being unenforceable in other countries on the ground of public policy.30 The relevant norms of each country are in turn a question of conflict of laws rules. Had it been suggested that, as a general rule, an arbitrator 'must consider any strong principle of public policy of a country closely connected with the contract'31 then this is nothing else but a conflict of laws rule determining the applicable mandatory rule. Even the application of a well-defined set of rules such as the UNIDROIT Principles of International Commercial Contracts does not release the arbi- trators from ascertaining the applicable conflict of laws rules, since Article 1.4

26 The UNPDROIT Principles do not, for example, cover the transfer of property by sales and they exclude issues of capacity and form; see van Houtte, (1995) 11 Arbitration International 4 373, at pp. 374 and 381.

27 Craig, Park and Paulsson, International Chamber of Commerce Arbitration (New York, London, Rome, 1990) at p. 295.

28 Berger, op. cit at p. 536; J. Hill, The Law Relating to In~ernational Commercial Disputes (London, Uoyds of London Press 1994) at p. 491; 0. Lando, 'The Lex Mercatoria in International Commercial Arbitration' (1985) ICLQ 747 at pp. 764-768.

29 Tallon, quoted by J. Kropholler, Internationales Privatrecht (Tiibingen, Mohr 1990) at p. 396. 30 Mayer, op. cjt at pp. 284-296. 31 Lando, 'The Lex Mercatoria', op. cit. at p. 766; see also Bonell, op. cit at p. 71.

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provides: 'Nothing in these Principles shall restrict the application of mandatory rules, whether of national, international or supranational origin, which are applicable in accordance with the relevant rules of private international law.'

If arbitrators are allowed to act as amiables compositeurs or ex aequo et bon0,3~ they have to decide according to equity, seemingly without any recourse to private international law. Nevertheless, the arbitral tribunal's powers to find a fair and equitable solution to the dispute are limited by relevant mandatory procedural and substantive rules and the ordre public of the applicable law,33 which must again be determined by some sort of conflict of laws rules. In summary, whatever may be the arguments for or against the application of the lex mercatoria or the principle of amiables compositeurs, and without taking sides in a complex academic debate, at least one point is clear: arbitrators cannot escape questions of private international law.

(c) Summary From the above it follows that an arbitrator always has to apply a conflict of laws system. It does not matter at all whether the parties have explicitly or implicitly chosen the applicable law, or whether the arbitrator directly applies a substantive law without any recourse to private international law. Consequently, the next logical step is to ask which conflict of laws system amongst those connected with the dispute should arbitrators apply?34

111. APPLICATION OF CONFLICT OF LAWS SYSTEMS Almost all leading conventions on arbitration or institutional arbitration rules contain a provision allowing the arbitrators to apply the rules of conflict of laws which they deem appropriate or appl i~able .~~ This is supported by the view of arbitrators. For example, in the BP arbitration Judge Lagergren held that the arbitral tribunal 'is at liberty to choose the conflict of laws rules that it deems

32 The terms are used interchangeably. See e.g. Art. 13(4) of the ICC Arbitration Rules; Art. 28(3) of the UNCITRAL Model Law; Art. 1054(3) of the Netherlands Arbitration Act; Art. 187(2) of the Swiss Private International Law Statute; 5 21.3 of the Arbitration Rules of the German Institute for Arbitration.

33 Berger, op. cit at p. 574; Hill, op. cit at p. 487; Craig, Park and Paulsson, op. cit. at pp. 313-314. 34 his problem will not occur if the parties agree upon the applicable private international law; see e.g. ICC

Award No. 211411972 in Jarvin and Derains, op. cit at p. 52. 35 Art. 13(3) of the ICC Arbitration Rules which was influenced by Art. VII(1) of the European Convention

on International Commercial Arbitration; Art. 33(1) of the UNCITRAL Arbitration Rules; Art. 33(1) of the Inter-American Commercial Arbitration Association; Art. 46 of the Netherlands Arbitration Institute Arbitration Rules; 5 21.2 of the Arbitration Rules of the German Institute for Arbitration; see 0. Sandrock, Welches Kollisionsrecht hat ein Internationales Schiedsgericht anzuwenden?' (1992) RIW 785 at pp. 790- 791 with many further examples. See on the other hand, Art 42(1) of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which provides that the tribunal must apply the conflict rules of the contracting state which is a party to the dispute.

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applicable, having regard to the circumstances of the case'.36 Offering a wide discretion, the principle is objectionable on the grounds that it leads to uncertainty, since the parties cannot predict which law governs their c~ntract.~' Even if the arbitrators are free to choose the appropriate conflict of laws rule they have to decide which rule among several is appropriate. There will always be a sort of underlying conflict of laws rule leading to the appropriate rule. This is a prior step to the actual application of a conflict of laws system which then determines the substantive law. Therefore, even under institutional rules of arbitration, there is a need for a procedure in order to determine exactly the appropriate private international law system. Furthermore, if the arbitrators follow a certain 'guideline' the problems of unpredictability are less crucial.

(a) Law o f the Country which would have had Jurisdiction in the Absence of a n Arbitration Clause

One of the first scholars who dealt with the problem was Dionisio An~i lo t t i .~~ He held the opinion that arbitration should be governed by the conflict of laws system of the country which would have had jurisdiction to settle the dispute between the parties, had they not included the arbitration clause in their contract, for the arbitration agreement has dispossessed the jurisdictional authority of that country and as a consequence it may reaffirm its control over arbitration in this way.3g

This theory can be criticized on several grounds. First of all, there arises the problem of which country would have had jurisdiction over the dispute. In practice, this question is not as easy to answer as it might appear reading Anzilotti's statement, for in international trade more than one country might have jurisdiction over the dispute. Thus, it would be up the arbitrator to decide which country is the relevant one in the argument. One major advantage of arbitration - the avoidance of uncertainty and inconvenience relating to international conflicts of jurisdiction - would be totally f r~s t r a t ed .~~ Therefore, the unpredictability of the dispute's result would increase. Finally, this solution is not acceptable because it is circular. In order to ascertain the country which, in the absence of the arbitration agreement, would have had jurisdiction, the arbitrator also has to select a kind of conflict of laws rule. For this reason, the same problem would arise for which the theory strives to provide a solution.

36 British Petroleum v. Libya (Merits), decisions of 10 October 1973 and 1 August 1974, reprinted in (1979) 53 ILR 297, at p. 326.

37 Jaffey, op, cit. at p. 132; Lando, 'Conflict-of-Law Rules', op. cit. at p. 159. 38 (1906) Rivista di Diritto Internazionale 467. 39 See also in a different context the formulation by Hill, op. cit. at p. 492: '. . . in international situations the

arbitrator takes the place of all the courts which might have had jurisdiction to determine the dispute in the absence of the arbitration agreement.' " Oroff, op. cit. at p. 624.

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Consequently, this position has never formed the basis of any known arbitral awardm4'

(b) Seat o f Arbitration The traditional point of view is that the conflict of laws rules should be applied which pertain to the country in which the arbitral tribunal is located." The basis for this opinion is the assumption that a national court and an arbitrator play the same role in a legal system, i.e. the arbitrator replaces the judge of a national court. Accordingly, it is a small step to conclude that if the judge has to apply the private international law of the forum, the same must mutatis mutandis be right for the arbitrator. Therefore, he has to make use of the private international law of his 'natural forum', the lex arbitri." Another argument in favour of this approach is the correspondence of the procedural law of arbitration (the lex arbitr~) with the applicable conflict rule.

This point of view does not only entail advantages but can also be challenged upon both practical and theoretical grounds. First of all, it must be mentioned that this solution furthers one of the major advantages of arbitration because a strict application of this 'seat theory' entails the predictability and uniformity of disputes' results. Furthermore, the will of the parties is respected: by choosing the seat of arbitration, they can indirectly select the applicable conflict of laws rules. The last point, however, also implies disadvantages, because if the parties have failed to agree upon the seat of arbitration it is up to either the arbitrator44 or an arbitral institution such as the ICC" to choose it instead. In this case, the argument of respecting the parties' wishes does not carry weight. Moreover, the conflict of laws rules of the tribunal's seat will normally have no connection at all with the dispute in question. Worse, applying the conflict of laws rules of the seat might result in the application of a law unintended by either party. This can be demonstrated by an example." An arbitral tribunal domiciled in Germany has to decide upon a dispute between a company from Syria and a company from the USA. On the failure of the parties to choose the applicable substantive law, the applicable law is determined under the Syrian conflict rules" by the lex loci contractus. Under the conflict of laws rules in the USA, the place of

4' ibid. ICC Award No. 546011987 in Jarvin, Derains and Arnaldez, Collection of ICC Arbitral Awards 1986-1990 (Deventer, Kluwer Law International 1994) at p. 138.

43 The leading exponent of this traditional view was F.A. Mann, 'Lex Facit Arbitrum' in International Arbitration: Liber Amicorum for Martin Dornke (ed. P. Sanders) (The Hague, Kluwer 1967) at p. 167; for ICC cases applying the 'seat theory' see Lew, op. cit at pp. 201-202, 239-240 and 255-272. See also Czar~kowv. Roth, Schmidt & Co. 119221 2 KB 478 at p. 488, per Scrutton LJ.

44 See e.g. Art. 20(1) of the UNCITRAL Model Law on International Commercial Arbitration. 45 Art. 12 of the ICC Arbitration Rules; see also Art. 7.1 of the Rules of the London Court of International

Arbitration (LCIA). See Sandrock, op. cit at p. 788; see also the example by EJ. Cohn, 'The Rules of Arbitration of the International Chamber of Commerce' (1965) ICLQ 132 at p. 162. '' Art. 20(1) of the Syrian Civil Code 1949.

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contracting also gains some importance to identify the applicable law." Perhaps the parties signed the contract in either Damascus or Detroit, being conscious of the significance of the place of contracting for the determination of the applicable law. In contrast to this, the German conflict o l laws rulea as the applicable provision in accordance with the 'seat theory' does not emphasize the place of signature in order to find the substantive law of the ~ontract.~" Consequently, applying German conflict of laws rules would result in completely opposing the parties' intentions.

In addition, if the arbitrator does not expressly lay down the seat of arbitration, its identification may be impossible. For practical reasons the arbitrator might have fixed the hearings in two or even more different countries because the evidence pertaining to each country is more accessible that way. It is not a convincing solution to this problem to say that the law of the country where the first meeting was held shall prevail, since this is merely a static and arbitrary selection. If the arbitration is solely conducted by an exchange of letters between the arbitrator and the parties, the problem becomes even more difficult. Where does the arbitration take place in this case? At the domicile or the residence of the arbitrator, or of one of the parties? Neither selection would be satisfactory. Indeed, if there are sundry possibilities open for the seat of arbitration the solution of this theory is also circular because in order to select the appropriate seat of the arbitral tribunal a kind of conflict of laws rule is again necessary. Then, the theory would fail in exactly that case for which it strives to give an answer.

If an institution determines the place of arbitration the former problems are less likely to occur because it will clearly state the seat of arbitration. Then, it does not matter when the hearings are held at different places. However, in this case, the advantages of certainty inherent in the 'seat theory' are less obvious, since, until the institution has laid down the arbitral tribunal's seat, the parties will not know the place, and thereby they cannot foresee the substantive law applicable to the merits of their dispute. This period of time is therefore wasted for them in order to prepare the case.51 Hence, the main advantage of this position, i.e. the predictability of the applicable substantive law and by that the potential result of the dispute, only prevails as long as the parties themselves have chosen the seat of arbitration.

Another aspect of this theory causing criticism is based on practical grounds. The reasons why the parties or the arbitrator choose a certain country as the seat of arbitration usually have nothing in common with the conflict of laws pro- visions of that country. Therefore, the rule qui eligit arbitrum eligit ius basically

" Restatement of the Law 2d, Conflict of Laws, Vol. 1 , by the American Law Institute, s. 188(2)(a) and (3). 4g Art. 28 of the In&oductory Law of the Civil Code is the same as Art. 4 of the Rome Convention. 50 Art. 4(2) of the Rome Convention. 51 See K.H. BGckstiegel, Arbitration and State Enterprises (Deventer, Kluwer Law International 1984) at

p. 27; Craig, Park and Paulsson, op. cit at p. 136.

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does not apply to international arbitration, and a fortiori does not apply to the determination of the appropriate conflict of laws rule, although the choice of the seat of the arbitral tribunal may be one factor among others taken into account when looking for an implicit choice of law.52 The parties might even not be aware that a selection of the place of arbitration can become so important for the solution of their possible future disputes. On the contrary, the seat of arbitration might be chosen because its location is for all parties most con-venient. It is, for example, for all participants of the arbitration the closest place; it provides the necessary infrastructure, such as conference rooms, interpreters, etc.; or it is a neutral place, i.e. neither party has any connection with that place or could take advantage of 'playing at home'.53

Last but not least, there is a more theoretical reason demonstrating a weakness of the 'seat theory'. When it is maintained that arbitral tribunals are comparable to national courts then the argument that arbitration replaces litigation is over- emphasized, since both derive their powers from different sources: the private tribunal derives its power from the arbitration agreement, whereas a national court derives its power from the state and thereby from the public. In contrast to this, arbitrators do not exercise public or institutional powers in the name of a state. As a consequence, the basis of the 'seat theory', namely the comparison with national judges, neglects the private character of arbitration. Summing up, it has to be said that the advantages of the seat approach, namely the implied predictability of disputes' results, only carry weight as long as the parties have agreed upon the seat of arbitration. Otherwise, it appears that the disadvantages of the theory prevail.

(c) Further Approaches which Favour a Single Conflict o f Laws System Besides the seat of arbitration position, there have been further theories which refer to a single aspect in order to select the relevant private international l a ~ . 5 ~ First of all, one might argue that the arbitrator should apply his own law, because he has the best knowledge of this.55 This is not convincing, since the question occurs of which test should be followed: the nationality, the domicile, or the residence of the arbitrator? This would again be circular because in order to select the governing test, a lund of conflict of laws rule would be necessary. The

Cmpagnie D'Armement Maritime S.A. v. Compagnie Tunisienne de Navigation S.A. [I9711 AC 572 at p. 588, per Lord Morris and at p. 597, per Lord Wiberforce. Dicey & Morris, op. cit. at p. 761; U.S. Supreme Court, Scherk v. Alberto Culver, 417 US 506 at 519 n. 13 (1974). In contrast to this, see the German Federal Supreme Court (Bundesgerichtshofl (1967) AWD/RIW 108 at p. 109: 'In agreeing on an arbitral institution, the parties also agree on the application of the substantive law in force at its seat' (original in German). But looking at the decision as a whole, it becomes obvious that in fact the court only used the seat of arbibation as one indication of the parties' will; see Berger, op. cit. at p. 496 n. 108.

53 See Lando, 'The Law Applicable to the Merits of the Dispute', op. cit. at p. 102; van Houtte, op. cit at para 11.22, 'equality of arms', and at para. 11.23 for legal considerations concerning a suitable law of arbitration.

54 see Craig, Park and Paulsson, op. cit. at p. 288, n. 14. 55 See Croff, op. cit. at p. 628.

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proposed rule would be unsuccessful in just that case for which it attempts to find a resolution. These problems would increase if an arbitrator is replaced by another of different nationality, or if the tribunal consists of three arbitrators. Should, then, the nationality of the majority of arbitrators be decisive, or that of the chairman? Moreover, one would not do justice to international arbitrators if their capacity to understand and correctly apply foreign private international law were underestimated. Conversely, arbitrators in international commercial arbi- tration are almost always appointed because of their experiences with different legal systems.56

Similarly, another approach has to be rejected: the arbitrator cannot simply apply the private international law of one of the parties because, regularly coming from different countries, at least one party is left unsatisfied. A further attempt to use the conflict of laws system of the country where the award will be enforced is also not convincing. Though the arbitrator shall make every effort under Article 26 of the ICC Arbitration Rules to sender an enforceable award, which he is more likely to achieve if he applies the private international law of the country of enforcement, he will hardly foresee the forum of enforcement because the losing party may have assets in different countries. Since the theories which favour a single conflict of laws system are not entirely convincing, one has to turn to approaches concentrating on a broader basis.

(d) Denationalized and Flexible Approaches A step closer to a process of 'denationalizing' arbitration is the approach which looks at all conflict of laws systems having any contact with the di~pute."~ If all the legal systems connected with the dispute lead to the same solution, i.e. the same substantive law, the arbitrator can apply these laws and base his decision on this cumulative choice.58 This procedure is well known in national courts, when they have to deal with private international law matters. Instead of deciding which substantive law applies they leave this question open if all laws offer the same solution. This situation is usually labelled a 'false conflict9.

The theory contains both advantages and disadvantages. First of all, there is one major advantage in applying the connected conflict of laws systems cum- ulatively. Both parties will be satisfied if their own law is taken into account, and the enforceability of the award is more likely, since the arbitrator has based his

5"ee Redfern and Hunter, op. cit. at pp. 216-218. 57 See Art. 2(2) of the Draft Recommendations on the Law Applicable to International Contracts by the

Working Group of the Commission on Law and Commercial Practice of the ICC, published in Lando, 'Conflict-of-Law Rules' op. cit. at p. 17% Lew, op. cit. at pp. 335-341; Craig, Park and Paulsson, op. cit. at pp. 290-291; Cohn, op. cit at pp. 162-163; Sandrock, op. cit. at pp. 794-795. ICC Award No. 95311956: '. . . the principles of international private law developed in Germany, as well as in Greek law and in Swiss law, led to the same result . . .', and ICC Award No. 1512/1971 in Jarvin and Derains, op. cit at pp. 18 and 4; ICC Awards No. 510311988 and No. 628111989 in Jarvin, Derains and Arnaldez, op. cit. at pp. 250-251; ICC Award No. 614911990 in Arnaldez, Derains and Hascher, op. cit. at p. 327.

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decision on all conflict of laws systems related to the dispute. But it cannot be denied that the application of the theory is confined to situations of 'false conflict'. Therefore, this position does not provide a solution when the private international laws of the countries connected with the dispute lead to different substantive laws. Furthermore, an arbitrator will have discretion in order to establish which conflict of laws systems he has to take into account. Thus, for example, a person who stresses the contractual nature of arbitration might neglect the conflict of laws rules of the lex a r b i t ~ i . ~ ~ In addition to that, the likely long-lasting review of these legal orders will regularly delay the process of arbitra- tion and make it more complicated, which contrasts sharply with one of the parties' motives in choosing a rb i t r a t i~n .~~

A similar approach is the application of an international conflict of laws system allowing the arbitrator personally to create a conflict of laws rule with an international ~haracter.~' A significant example is the ICC Award No. 46501 1985:62 'The arbitral tribunal does not deem it necessary in this case to decide on a specific rule of conflict to designate the proper law of the contract in view of the fact that most major rules in some form or another point to the place of the characteristic or dominant work . . .'. The tribunals then apply those conflict of laws rules which are common to all or at least the leading legal systems and to international convention^.^^ Both this theory and the approach which applies conflict of laws systems cumulatively are based on a comparative analysis of several bodies of private international law and thereby simultaneously on the conflict of laws rules of the countries connected with the dispute. The difference is that the arbitrator applying a cumulative approach can leave the answer open as to which systems he finally applies, whereas the arbitrator applying an inter- national system must find a compromise among different laws. Since in the latter case the arbitrator has to decide which general principle of international private law prevails, the latter position also applies if there is no 'false conflict'.

A further approach encouraging 'denationalized' conflict of laws rules is that arbitrators should apply conflict of laws rules which are supposedly contained in public international law, in order to determine the applicable law.64 This viewpoint can be challenged on practical grounds because attempts to discover conflict of laws rules laid down by public international law have not been

59 See ICC Cases Nos. 1759 and 1990 of 1972 cited by Craig, Park and Paulsson, op. cit at p. 291, n. 24. Born, op. cit. at p. 115; Berger, op. cit at p. 505. ICC Cases Nos. 209611972 and 2585/1977 cited by Craig, Park and Paulsson, op. cit. at p. 291, nn. 26 and 27. See Jaffey, op. cit at p. 145; Lew, op. cit. at pp. 327-335. In Jarvin, Derains and Arnaldez, op. cit. at p. 68.

63 See the ICC Awards in Jarvin and Derains, op. cit., No. 171711972, p. 191; No. 268011977, p. 30% and No. 331611979, p. 88; see also the ICC Awards in Jarvin, Derains and Arnaldez, op. cit. No. 571311989, p. 223; and No. 628111989, p. 249; Lew, op. cit. at p. 584.

64 See e.g. Professor Dupuy's statement in Texaco Overseas Petroleum Co. v. Libya (Merits), decision of 19 January 1977, reprinted in (1979) 52 ILR 422 at p. 445; Libyan American Oil Co. v. The Government of the Libyan Arab Republic (Merits), decision of 12 April 1977, reprinted in (1981) 20 ILM 42, although there it was not deemed necessary to apply such rules.

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successful. Since public international law cannot provide real guidance, pur- porting to choose the conflict of laws rules of international law is, in reality, nothing more than a veiled attempt to allow arbitrators to apply any substantive law they wish." Therefore, arbitrators nevertheless have to choose certain conflict of laws rules, at least to determine the mandatory rules which are decisive for the dispute in question, because in this case the same principle is relevant as if the arbitrators had applied the substantive law without any recourse to private international laweG6

IV. CONCLUSION Several conclusions can be drawn from the above. First, an arbitrator cannot ignore the question of private international law in order to determine the substantive law applicable to the merits of the dispute. In other words, he cannot simply rely on the choice of law by the parties, or apply a national or non- national system of law which he regards as appropriate for the solution of the dispute. Even then, the question which conflict of laws rules apply has to be answered. Secondly, under the auspices of almost all leading institutional arbitration rules the arbitrator can apply the rule which he deems appropriate. The (far too) wide discretion offered by these rules may lead to the application of an unforeseeable set of conflict of laws rules. In order to preserve the predict- ability of an arbitral decision one must therefore look for an additional stage in the hierarchy, i.e. a kind of ultimate conflict of laws rule, leading to the appro- priate one, which then determines the substantive law applicable to the merits of the dispute.

From this, one can finally gather that no theory alone provides a satisfactory solution for this problem. All attempts comprise both advantages and dis- advantages, even though the latter prevail in some theories, such as the approach by Anzilotti, or those which regard the law of the arbitrator or the law of the place of enforcement as decisive. As we have seen, the advantages of both the 'seat theory' and the cumulative approach can only be acknowledged to a certain extent. Therefore it may be maintained that the best approach is to combine these different views because it may result in avoiding or compen- sating the disadvantages involved in each theory alone. Then the disadvantages of these views either can be ignored because they are of minor importance, or are balanced out because of the combined application of the theories. The cumulative approach entails the problem that it only applies if there is a real 'false conflict' among the conflict of laws rules connected with the dispute. In contrast to that, the disadvantage that arbitrators might not select the private international laws in a uniform way can be discounted because the scope of

" Toope, op. cit at p. 51. '"ee under 'National law', supra, section II(b)(i).

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relevant conflict of laws rules can be reduced to a minimum if one concentrates only on legal systems being most essential and worth taking into account: the lex loci arbitri; the laws of the countries of the parties; and the law of the country where the award will probably be enforced. On the other hand, the cumulative approach contains the advantage that each party will be satisfied because its own law plays a role in the solution of the dispute; an acceptance of the decision might be more likely. Moreover, looking not only at one single national law but at several systems of law is appropriate to the international character of the dispute. This frees international commercial arbitration from one concept of law without giving up all national legal systems, as by applying the lex mercatoria.

However, the theory plainly fails if the conflict of laws rules do not lead to the same substantive law applicable to the merits of the dispute. In this case, it makes sense to have recourse to the conflict of laws rules of the country in which the arbitration takes place. First of all, it does justice to the parties9 intentions if they have chosen the seat of arbitration. By this, they have at least shown that this country is of some importance to them, although the reasons why they agreed upon the seat might, admittedly, widely differ from those in choosing the conflict of laws rules. Nevertheless, it may be maintained that this latter argument against the "eat theory' is of minor importance with regard to the advantages of predictability and uniformity embraced in the seat approach. These disadvan- tages of the theory are of no consequence, since it makes a difference whether the substantive law of the country of the seat of arbitration is directly applied, or whether its rules of conflict lead to the applicable law. Only in the former case may the argument that the country of the seat has no connection with the dispute be relevant. However, this is also not a strong counter-argument, because even the parties sometimes choose the substantive law of a neutral country having no connection with the dispute whatsoever. On the other hand, the private international law only leads to the applicable law which itself may in turn have a close connection to the dispute. Besides, it should only be a question of common sense and time, until the parties also take into account questions of private international law when choosing the seat of arbitration if they know that it might influence the choice of the applicable substantive law. Furthermore, the question is whether it really matters which conflict of laws rule leads to the applicable law as long as the seat of arbitration is in a location having a developed system of private international law, such as England, France, Switzerland or New York, where most of the ICC and other arbitrations take place. Then the parties can at least be sure that the process of determining the substantive law is based on elaborated legal grounds.

On the other hand, if the parties have not agreed upon the seat of arbitration the argument of predictability cannot prevail. In this case, the cumulative approach should be used, with the difference that the arbitrator now has to find a compromise among the differing conflict of laws systems since no 'false conflict9 exists. Different possibilities should be open in order to find the prevailing rule among the private international law systems connected with the dispute. First of

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dl, the arbitrator may simply count the laws leading to the same substantive law and then apply the principles of this majority. Secondly, one can imagine applying the rules of that country having the closest connection with the dispute. Finally, it is imaginable that a certain convention will be applied, such as the Rome Convention. Ultimately, this is a step towards an internalional conflict of laws system. However, by applying only the rule of a national legal system or of a convention, the arbitrator will not operate in a legal vacuum. This last stage of an ultimate conflict of laws rule leading to the appropriate rule is thus not a 'new sort of lex mercatoria' for private international law independent from all legal systems. The measure of unpredictability possibly entailing this solution may be ignored in order to find a suitable system of conflict of laws rules. Besides, the number of cases in which the last stage of this combined approach has to be taken may be of less importance because a solution will almost always be found within the first two steps.

In summing up, it may be said that the best solution to determine the sub- stantive law applicable to the merits of the dispute is to combine three of the approaches offered in order to eliminate their disadvantages and to further their advantages. This solution itself might provide flexibility while at the same time ensuring that the arbitrators are not left without guiding principles. Hence, it may also lead to a compromise between two conflicting positions: on the one hand, the wish to achieve a perfect and stringent system of rules, i.e. a maximum of certainty and predictability; on the other, the quest for sufficient creativeness and inventiveness, leaving enough room for the arbitrators to take the facts, cir- cumstances and interests involved in each individual case into consideration. This combination is an ultimate conflict of laws rule, leading to the appropriate rules which determine the law applicable to the merits of the dispute. The result is a three-stage procedure:

(1) application of the cumulative approach if all rules of conflict of laws connected with the dispute lead to the same substantive law; if not

(2) application of the rules of conflict of laws being in effect at the seat of arbitration if the parties have chosen it; if not

(3) application of the general principles of private international law which can be found by a comparative review of the conflict of laws rules connected with the dispute.