Choice of Substantive Law

8/11/2019 Choice of Substantive Law

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Party Autonomy and the Choice of

Substantive Law in International

Commercial Arbitration

Master Thesis

20 Credits

Sprin 200!

By; Helena Carlquist

Supervisor; Professor Svante O. Johansson

Department of LawSchool of Business !conomics an" Law

#$%!BO '()*!&S)%+


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Party Autonomy and the Choice of Substantive Law in International Commercial Arbitration

H. Carlquist

Summary

, ma-ority of international commercial contracts inclu"e an aritration clausewhich in the event of a contractual "ispute "irects the parties to apply aritral

procee"in/. One of the central motives for choosin/ aritration is the ri/ht tochoose which law or rules of law shall /overn the parties0 contractual relationship.%he ri/ht to choose sustantive law is often referre" to asparty autonomy.

1ost parties enterin/ into aritration a/reements elieve that once a choice of lawis ma"e that law e2clusively "etermines the le/al framewor3 etween the parties.However this overloo3s the fact that circumstances remain in which an aritrator

will e require" to apply rules arisin/ from a le/al re/ime other than the onechosen y the parties. %here e2ist in fact numerous of restrictions which in"ifferent ways limits the parties4 choice of law. %his thesis is an attempt to presenta useful an" efficient metho" when i"entifyin/ which restrictions the parties0choice of law mi/ht e su-ect to.

Part Ipoints out the asics of international commercial aritration an" presents anoverview of the principle of party autonomy in the conte2t of applicalesustantive law.Part IIshows that party autonomy is a conflict rule which in theevent of a conflict etween potential applicale laws "esi/nates the 5correct6applicale law. ,s party autonomy in itself is a conflict rule private international

law must e applie" to "etermine its scope. ,ccor"in/ly private international lawan" its conflict rules 7other than party autonomy8 mi/ht have to e applie" even ifthe parties have chosen an applicale law.Part III e2amines current aritrationlaws an" rules of law in respect to conflict rules. %he section shows that mo"ernle/islation often /rant the aritral triunal a far9reachin/ free"om y lettin/ thearitrators use the conflict rules it "eem appropriate 7or even y /ivin/ thearitrators the free"om not to use any conflict rules at all8.

Part IV "iscusses which system of private international law /overns partyautonomy an" "etermines its scope. )t e2amines the "ifferent approaches availalefor the aritral triunal an" shows that the most sufficient approach is an

application of the so9calle" closest connection test i.e. the scope of partyautonomy must e "etermine" y the system of private international law whichhas the closest connection to the su-ect matter of the "ispute.

Part V summari:es the conclusions "rawn in the fore/oin/ "iscussions an"reflects upon these. )t un"erlines the fact that private international law still is anational phenomenon 9consequently the scope of party autonomy may vary"epen"in/ on which system of private international law one applies.

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Abbreviations

,,, ,merican ,ritration ,ssociationD)S #erman )nstitute of ,ritration!' !uropean 'nion)CC )nternational Chamer of Commerce)CJ )nternational Court of Justice

(,) (etherlan"s ,ritration )nstituteLC), Lon"on Court on )nternational ,ritration'(C)%&,L 'nite" (ations Commission on )nternational %ra"e

an" Commerce

SCC Stoc3holm Chamer of Commerce*),C *ienna )nternational ,ritration )nstitute' 'nite" in/"om

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H. Carlquist

Table of Content

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G.< #!(!&,L...................................................................................................................... > %H! CL,SS)C,L %O %H! 1OD!&( ,PP&O,CH .............................................................. >>

).!.$ *he *erritorial Approach........................................................................................ !!

).!.! *he +uropean Convention of $,&$ ......................................................................... !").!." *he -ashinton Convention of $,&) ...................................................................... !"

).!./ *he 01CI*'AL Arbitration 'ules of $,#& ............................................................. !/

).!.) *he Claims Settlement 2eclaration of $,($ ........................................................... !/

).!.& *he 'ome Convention of $,(3 ................................................................................ !)

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G.? )(S%)%'%)O(,L ,&B)%&,%)O( &'L!S .......................................................................... >G).".$ ICC Arbitration 'ules of $,#) and $,,( ................................................................ !&

).".! LCIA 'ules of $,,(................................................................................................. !&)."." AAA International Arbitration 'ules of $,,( ......................................................... !#)."./ VIAC 'ules of !33$................................................................................................. !#

).".) 1AI 'ules of !33$ ................................................................................................... !().".& 2IS Arbitration 'ules of $,,( ................................................................................ !(

).".# SCC Arbitration 'ules of $,,, ............................................................................... !(G.E (,%)O(,L ,&B)%&,%)O(S L,S ................................................................................. >D

)./.$ *he 2utch Code of Civil Procedure........................................................................ !,)./.! *he Swiss Private International Law Act................................................................ !,

)./." *he %erman Code of Civil Procedure .................................................................... "3

)././ *he Italian Code of Civil Procedure....................................................................... "3

)./.) *he 04 Arbitration Act........................................................................................... "3

G.G '(C)%&,L 1OD!L L,............................................................................................ ?

/ &I&LI)8#AP0$ %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% ,+

A.< L!#)SL,%)O(................................................................................................................ E?(.$.$ Institutional Arbitration 'ules ................................................................................ /"(.$.! 1ational Arbitration Laws ...................................................................................... /"

(.$." International Conventions....................................................................................... //

(.$./ 7ther Leal 2ocuments .......................................................................................... //A.> BOOS.......................................................................................................................... EE

A.? ,&%)CL!S ..................................................................................................................... EG

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1 Introduction

1.1 General

%ra"e an" commerce have always een international relate" phenomenon. %hepresent era of /loali:ation has seen an increase" numer of commerciala/reements etween two or more parties from "ifferent countries an" le/alsystems. 1ost of these contracts now inclu"e an aritration clause which in theevent of a contractual "ispute "irects the parties to apply aritral procee"in/. %heavoi"ance of courtroom procee"in/s is one of the primary reasons for parties toenter into an aritration a/reement. ,nother central motive for choosin/

aritration is the ri/ht to choose which law or rules of law shall /overn the parties0contractual relationship. %his ri/ht is calle"party autonomy.FFE8 pa/e >@


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tra"e. %he ri/ht of parties to appoint their own aritrators is a/ain an importanta"vanta/e as parties can appoint aritrators who are specially qualifie" for the

"ispute in question. =,nother element which attracts many parties is that thearitral triunal0s "ecision is in"in/ an" final 7within certain limits8 an" cannot

e challen/e" on the merits.@

,ll the aove mentione" factors a"" up to the most si/nificant enefit ofaritration I the aritral procee"in/ is fle2ile an" it is therefore possile to tailor

the procee"in/ to the parties wishes an" the specific "ispute at han".A

2.3 The Arbitral Proceedin!s "eal #rame$or%

%o un"erstan" the very core of international commercial aritration one must 3eepin min" that the parties create the framewor3 for the aritration. %hey are the onesthat set the stan"ar"s of the procee"in/ since the aritration as such is ase" on an

a/reement etween them.

&e/ar"less of whether the aritral procee"in/ is ad hoc or institutional thefoun"ation of aritration remains the same; aritration is foun"e" on the will ofthe parties. %he aritral triunal is chosen y the parties to resolve a specific"ispute an" is /iven "irections on how to procee". )t "erives its authority from the

parties an" the scope of this authority is "etermine" y the a/reement etween the

parties..E.8

)n a ma-ority of aritral procee"in/s the aritrators "o not have to loo3 eyon"the a/reement to "eci"e the outcome the "ispute. %he contract itself re/ulates theoli/ations an" responsiilities an" which party must e hel" liale if any failureto perform arises. However it is essential to rememer that the relationship that aninternational commercial contract creates e2ists within a le/al framewor37e2istin/ of one or many systems of law8. %his le/al framewor3 /overns an"re/ulates the le/ality an" interpretation of the contract the parties0 "uties an"ri/hts the mo"e of performance an" the consequences of any reach of thecontract.FFE8 pa/e


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within this le/al framewor3 is far9reachin/ it is not unlimite".


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from le9 fori an" foun"e" on 5free enterprise6. )n contrast the -uris"ictionaltheory emphasi:es on national soverei/nty. %he theory ar/ues that all elements of

an aritral procee"in/ are su-ect to an" re/ulate" y a "omestic law inclu"in/ itsconflict of laws rules. F#enerally however international commercial aritration must e consi"ere" as a

phenomenon ase" on the will of the parties an" not su-ect to nationalle/islation. One must nevertheless reco/ni:e that party autonomy is a conflict oflaws rule Kconflict rule0 an" -ust li3e other conflict rules private internationallaw must e applie" to "etermine its scope an" to i"entify the formal con"itions

attache" to it.>> %he /eneral

principle is that the parties have the free"om to choose which law shall /overn the

sustance of their contract.>?

%he choice of law is an essential "ecision as it "etermines the ris3s arisin/ from

the contract. !ven if the avoi"ance of courtroom procee"in/s is the mostsi/nificant reason for parties to enter into an aritration a/reement is it ovious

FFG8 pa/e >> Hunter an" &e"fern 7? Bo/"an 7>FFE8 pa/e >@@>; see also Hunter an" &e"fern 7


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that many actors in the fiel" of international commercial transactions choose

aritration ecause they wish to have the free"om to select applicale law.

>E

ithout a full un"erstan"in/ of the principle of party autonomy in respect of theri/ht to choose applicale law it is impossile to e2amine how to "etermine itsscope. %hus it is essential that the asics of the principle are reco/ni:e" an"comprehen"e". %he followin/ section therefore "iscusses an" analyses the

principle.

Party autonomy has /aine" acceptance in international law an" has receive"

reco/nition in almost all national -uris"ictions. >G%he principle provi"es a ri/htfor the parties of an international commercial a/reement to choose applicale

sustantive law. hen the parties have ma"e a choice of sustantive law thischoice /enerally refers to the law /overnin/ the parties0 contractual relationship.'nless otherwise provi"e" for such choice "oes not refer to the conflict rules

arisin/ un"er private international law.>=

%he mo"ern view is that the parties have the free"om to choose any sustantivelaws or rules of law even if these "o not have any connection to the parties or the

specific "ispute. >@%he parties are not only free to choose a system of nationallaw ut may also choose to rely on tra"e usa/e a9national rules of lawtransnational law le9 mercatoria /eneral principles of law or /eneral principles of

international law.>A

3.2 The )odi(ication o( Party Autonomy

Party autonomy is reco/ni:e" oth in national le/al systems an" internationalconventions. > ,rticle @ of the !uropean Convention on )nternationalCommercial ,ritration of


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1ost aritral institutions also reco/ni:e the principle or party autonomy fore2ample "o the )nternational Chamer of Commerce0s ,ritration &ules of E7


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3.3 The Primary Ad*antaes o( Party Autonomy

%he primary a"vanta/e of party autonomy is that the parties can choose a law thatthey are familiar with an" whose provisions are suitale for the a/reement inquestion. %he parties can further avoi" the application of a law with a closeconnection to the transaction an" which therefore woul" apply y choosin/another applicale law. By ma3in/ a clear choice of law the parties will 3nowwhat they can e2pect from each other an" the aritral triunal. Party autonomy is

therefore often ar/ue" to provi"e for certainty an" pre"ictaility. ?However aswill e "iscusse" later the scope of party autonomy is limite" an" su-ect torestrictions. )n fact a choice of law may not set the le/al stan"ar"s the partiesthou/ht it woul".

3.& The )hoice o( "a$

Parties to an international commercial contract will in most cases ma3e a choice

of law y inclu"in/ a choice of law clause in their contract.EF

!ven if the parties not have ma"e an e2plicit choice of law the aritrators mayconclu"e that the parties have ma"e a so9 calle" implie" or tacit choice of law.%his is "one y inferrin/ a choice of law from the contract or the surroun"in/circumstances. E

Hence an implie" choice of law canonly e i"entifie" where it is reasonaly clear that it is an authentic choice ma"ey the parties.E?orth mentionin/ in this conte2t is that the ma2im qui indicemforum eleit ius 7a choice of forum is a choice of law08 is re-ecte" y mostscholars an" is almost totally aan"on in aritral practice. %he choice of a

particular forum is at present /enerally only consi"ere" to e oneof many factorswhich may e relevant when tryin/ to i"entify an implie" choice of law.EE

)n the asence of an e2plicit or implie" choice of law one approach is to applymore than one law. ,ccor"in/ to this so9calle" tronc commun "octrine thearitrators must avoi" applyin/ the national law of one of the parties an" instea"apply the common parts of oth parties0 national laws I this ein/ closer to the

intentions of the parties.EG

? Chuc3wumeri-e 7


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3.+ The Absence o( a )hoice o( "a$

,s mentione" earlier the parties in a ma-ority of commercial a/reements use theirri/ht to choose a sustantive law. )n the few situations where the parties have notma"e a choice of law there are "ifferent options open to the aritrators whentryin/ to "etermine which sustantive law or rules of law to apply. %he aritratorscan either focus on the silence of the parties an" try to interpret the asence of achoice of law 7the so9calle" su-ective approach8 or they can apply conflict rulesof private international law an" consi"er relevant connectin/ factors 7the so9calle"

o-ective approach8.E=

%he su-ective approach has clearly lost /roun" even if occasionally applie" yaritral triunals. %he o-ective approach is more commonly use". )t offers a

5ma/ic tool6 for the aritrators to use when "eci"in/ which sustantive law toapply.E@

!ven where the o-ective approach referrin/ to conflict rules is use" the questionwhich conflict rules shoul" e applie" remains. %his topic has een wi"ely"iscusse" an" e2amine" y le/al scholars. )t is also the main "iscussion point ofthis stu"yN namely which system of private international law should overn partyautonomy and be applied to determine its scope

Choice of Substantive Law

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