Introduction
Implied or tacit choice
Choice of law based on choice of forum
Conflict of law rules

Arbitral tribunal and lex fori
Comment


Introduction

The parties to a contract can choose the law that governs their contractual relationship and, in case of a dispute, the dispute resolution procedure. However, due care and consideration should be employed when exercising this right, as it will prove to be valuable in case of a conflict.

If the parties fail to choose the law which they deem fit to apply to their contract, the applicable law must still be determined in order to assess their rights and obligations. In the absence of an express choice of law by the parties, the task trickles down to the arbitral tribunal. This will be one of the first tasks required of an arbitral tribunal, as adjudication of a dispute is not possible until the applicable law has been determined. Further, the application of an incorrect law is a ground for setting aside an arbitral award.

This article examines the role of an arbitral tribunal in determining the applicable law in arbitration proceedings.

Implied or tacit choice

When determining the applicable law, in the absence of an express choice by the parties, an arbitral tribunal will first look for the implied or presumed law that the parties may have intended to adopt. This is usually referred to as the 'tacit' choice of law. The task of ascertaining the implied choice of law is difficult and seldom successful as the parties themselves have given little or no thought to the question of applicable law.

In such an event, the arbitral tribunal would usually opine that the contractual relationship between the parties is to be determined by the law of the country with which the contract is most closely connected. In such situations, this is usually presumed or implied to be the country where the place of business or residence of the party that is to effect the characteristic performance of the contract is situated. However, such a presumption fails to apply in situations where it is impossible to determine the characteristic performance of the contract. Another concern attached to this theory is that it is unhelpful in cases where more than one country is closely connected to the contract.

Choice of law based on choice of forum

Another parameter for attributing the choice of law applicable to a contract is the choice-of-forum theory. Under this theory, an arbitral tribunal would resolve to apply the law of the country where the parties may have agreed to litigate disputes. It is generally assumed that the choice of forum (ie, country or place) where disputes between the parties are to be resolved signifies the parties' intention for the laws of that forum to apply to any disputes which arise. The maxim qui indicem forum elegit jus (ie, a choice of forum is a choice of law) expresses this assumption.

The application of the maxim and the resultant assumption is more compelling if the reference is to a country's courts rather than to the place where arbitration proceedings should be conducted within that country. This is because parties could choose the place of arbitration for numerous reasons (eg geographical convenience, neutrality of venue or reputation regarding arbitration) without intending for the law of such place to apply.

Notwithstanding the drawbacks, in the absence of an express choice of law, parties' choice of a place for adjudication of disputes arguably serves as an indication of their intention and, in the absence of other constraints, as an influencing factor for arriving at a decision on the applicable law.

Conflict of law rules

When faced with determining the applicable law, an arbitral tribunal must consider whether it must follow the conflict of law rules of the seat of arbitration or whether it has the liberty of free choice. The conflict of law rules serve as a means of determining the law applicable to a contract. Most developed nations have their own conflict of law rules.

Conflict of law rules provide certain criteria to help establish the link between a contract and the law applicable thereto (commonly known as 'connecting factors'). Since the conflict of law rules differ from country to country, an arbitral tribunal's determination of the applicable law will yield varied results depending on which rules are applied.

The conflict of law rules of some countries state that the lex contractus (ie, law of the place of the contract's conclusion) is the applicable law. This is the traditional approach, which advocates for the application of the law of the place where the contract was concluded since this would be the place of business or residence of one of the parties. However, this approach is now rather outdated given the advancement of technology and modern means of conducting business. As contracts can now be concluded via email or remotely from a neutral location (eg, airport), where a contract is concluded has little significance.

Conversely, the modern approach advocates that contracts should be governed by the law of the country with the closest connection thereto. However, this approach also has drawbacks – namely, multiple places may be closely connected to the contract, such as the location of the central administration or principal place of business or the place of performance of the party that is to effect characteristic performance of the contract.

Arbitral tribunal and lex fori

As discussed above, the applicable law will vary depending on which conflict of law rules an arbitral tribunal selects. Such an approach may yield unsatisfactory results for the arbitration community. As a result, a doctrine known as 'direct choice' was formulated based on rules of arbitral institutions and international arbitration practice. Under this doctrine, an international arbitral tribunal, unlike a national judge or court, is not bound to follow the conflict of law rules of the seat of arbitration or otherwise. This is based on the notion that an international arbitral tribunal has no lex fori (ie, the law of the country in which an action is brought). Thus, under the direct choice doctrine, an arbitral tribunal can choose the law that it deems most suitable given the facts of the case at hand.

Comment

In determining the applicable law, an arbitral tribunal must first determine the criteria or principle that it should apply to do so. Notably, there is no universally applicable rule or system for completing this task.

In reaching a decision, an arbitral tribunal may select any system or rule of law on which the parties would have agreed had such a choice been made. Alternatively, it can apply the 'most closely connected' theory instead of relying on the parties' implied intention. In adopting the process, an arbitral tribunal may apply the conflict of law rules of the seat or may simply adopt a procedure devoid of the influence of any national law system.

If an arbitral tribunal can be assigned the duty of adjudicating a dispute, it can arguably also be trusted to determine the applicable law. However, parties should be mindful of agreeing the applicable law when concluding a contract. If for some reason the parties' choice of law is not expressed in their contract, they may choose to do so by a later agreement when referring a dispute to arbitration.

Universal rules should be introduced for determining the applicable law, similar to the United Nations Commission on International Trade Law Model Law or the rules regarding the taking of evidence during arbitral proceedings or the independence and impartiality of arbitrators.

For further information on this topic please contact Ajay Bhargava, Aseem Chaturvedi or Shivank Diddi at Khaitan & Co by telephone (+91 11 4151 5454) or email ([email protected], [email protected] or [email protected]). The Khaitan & Co website can be accessed at www.khaitanco.com.