While arbitration is the consensus means for resolving international contractual disputes, arbitration provisions can range from a terse sentence to lengthy tailor-made protocols. Regardless of length, it is always a good idea for parties to specify governing law, and a number of considerations and criteria, discussed below, should inform that specification.
Among other advantages, resolving transnational disputes by arbitration offers a high degree of flexibility and autonomy to parties. Not only are parties not required to go to court in a foreign land, but the principle of “party autonomy” leaves them free to negotiate the salient features and conditions under which their dispute is to be determined. And, party autonomy includes the freedom to choose the law or rules of law, which will govern their dispute.
Different Law May Apply to Different Matters
In a domestic transaction, choice of law is simple. In international arbitration, however, different legal regimes come into play. After all, if a dispute is “international,” it implicates at least two—and often several—sovereign jurisdictions. Different law can apply, at least theoretically, to at least:
1. The underlying contract or transaction. This law is the “substantive law” pertaining to the validity and performance of the commercial contract.
2. The arbitration clause or agreement. This law is usually, but not necessarily, the same as the substantive law controlling the commercial contract.
3. The arbitral tribunal and the manner in which it proceeds. This is the so-called lex arbitri.
4. Challenges to and enforcement of an arbitration award. The law of the enforcement jurisdiction should not create an impediment to realizing the benefits of an award.
Discussion of the optimal choice of law begins with a review of the principal pillar of the international arbitral regime, the 1958 New York Convention. Altogether, 157 countries have ratified the convention, including all of the world’s principal economies. Broadly speaking, courts in signatory countries have two basic obligations under the convention:
• First, they must enforce a written agreement to arbitrate an international dispute so long as it is signed or there is other evidence of party assent.
• Second, they must enforce awards made under such agreements.
Constraints on Party Autonomy
These obligations are subject to very few reservations and exceptions. Basically there are four:
1. By reservation, many countries, including the United States, do not apply the convention to commercial matters.
2. The convention does not require enforcement of agreements or awards pertaining to matters “not capable of settlement under the law of [the enforcing] country.”
3. Courts need not enforce an award in violation of the enforcing country’s public policy.
4. Courts are not required to enforce a choice of law provision, which purports to exempt a party from mandatory legal requirements.
With this background, parties should consider the following in choosing applicable law in an international arbitration agreement:
• Where might an award likely be enforced? An award must be enforceable notwithstanding any treaty reservation, and it must avoid any of the constraints noted above.
• Where will the arbitration be seated? An arbitral “seat” is its “juridical home.” While the parties can contract for another lex arbitri, the seat typically supplies it (i.e., the law governing the selection and removal of arbitratrors), whether and when court assistance can be obtained, the form of the award, etc. The seat will also be the location of any annulment, (sometimes referred to as “set aside” or “vacatur”) proceedings.
• Where will the arbitration agreement be enforced? Under a doctrine called “separability,” the law regards arbitration agreements as separate from the underlying or encompassing commercial agreement with which they are associated. Avoid any questions regarding the validity of the provision under the law selected.
• Finally, what substantive law will best serve the client’s interests? In this regard, the parties can pick a single body of substantive law (e.g., the law of Georgia or France. This approach can bring to bear a body of substantive law that is relatively well-developed and predictable. Alternatively, the parties can pick only certain rules of law from a given jurisdiction, for example the UCC, or from a separate compilation, for example the UNIDROIT Principles on International Contracts. A hybrid selection is also possible, e.g. the law of New York and Ontario, insofar as they agree. The parties can also opt for general mercantile law (i.e., the so-called lex mercatoria). Finally, of course, the parties can simply leave to the arbitrators the selection of the law.
How to Choose
It is best to exercise the right to choose law. Doing so will better allow parties to predict the outcome of a dispute, and perhaps avoid legal proceedings of any kind.
In doing so, parties, of course, keep in the foregoing points in mind, but endeavor to keep things simple. A few rules for doing so:
1. Select the seat first and opt for the lex arbitri of the seat. In selecting the seat look for, among other matters, drawn from the Chartered Institute of Arbitrators’ “London Principles”:
• A well-developed and supportive arbitral law
• A sophisticated and honest judiciary
• An open regime allowing lawyers from outside the jurisdiction a right of audience in arbitrations and ancillary proceedings
• Convenience and accessibility to the parties and witnesses
2. If possible, use the law of the seat not only as the lex arbitri but also as the substantive law.
3. Select a seat and with arbitral and substantive law supportive of arbitration.
4. Take advantage of established “soft-law” codes developed for international dispute resolution (e.g., the IBA Rules on the Taking of Evidence in International Arbitration, the UNIDROIT Principles).
5. Otherwise, avoid hybrid approaches. They lead to disputes and hence to expense.
6. Avoid trying to game the choice of law provision. It is difficult, if not impossible, to foresee the precise contours of a dispute before the dispute arises.
7. Trust the process. Efforts to constrain the discretion of arbitrators (e.g., requiring or prohibiting document production or requiring rulings on a certain schedule) often undermine the efficiency of an arbitration, which, after all, thrives on flexibility.