Continuing our series of articles on the practical aspects of international arbitration we consider the question of applicable law. Much focus and emphasis is given to the procedural aspects of international arbitration. What is often overlooked is the complex interplay between the myriad of potential applicable laws.

A number of systems of law may simultaneously apply to an international arbitration and which can be different from one another. They are as follows:

  • The law relevant to a party's capacity to arbitrate: This is normally the law of the place of creation of the entity in question.
  • The law applicable to the arbitration agreement: This is usually the same as that specified in the principal agreement, though it does not have to be so, given that it is widely accepted that the arbitration clause is a separate agreement and that it does not automatically terminate when the contract is which it is embedded comes to an end. This is the so-called concept of the "autonomy", "separability" or "severability" of the arbitration clause. Care must be taken as some legal systems place restrictions on the type of dispute that may be arbitrated.
  • The law of the arbitration proceedings themselves (the lex arbitri or lex fori): This will be the law of the juridical seat of the arbitration. It is usually the place or venue where the arbitration physically takes place, although it is open to the parties to nominate a different legal seat from the place where the arbitration hearing is conducted. Some continental European countries, such as Switzerland, have adopted the concept of "delocalised" arbitrations, whereby arbitrations are conducted with minimal interference from the local law. This theory does not have general acceptance, however, particularly in countries with legal systems based on the common law. The more widely accepted view is that arbitrations cannot take place in a legal vacuum. They must be conducted in accordance with the mandatory laws of the seat of the arbitration, which will also determine the right of appeal and of setting aside the award. In the absence of any provision in the arbitration agreement, and in the absence of any relevant institutional rules, it is to this law that one would look, for example, to establish whether there is any provision relevant to the appointment of arbitrators if the parties to the arbitration cannot agree on his identity.
  • The law applicable to the substantive issues between the parties (the lex causae): This can generally be chosen by the parties. Where nothing has been agreed between the parties as to the law applicable to the dispute, or as to how it is to be determined, care has to be exercised. Some countries, such as France, the Netherlands and Switzerland, have in their laws applicable to international commercial arbitrations a provision that the arbitrator is able to decide for himself what rules he considers are appropriate to settle the dispute. In many other countries, however, do not have such a liberal arbitration regime and require the arbitrator to apply the conflict of laws rules of the seat/place of the arbitration. Although it is vital to specify the applicable substantive law, it is common and in fact preferable to have a "governing law clause" separate from the arbitration clause in a contract to avoid confusion. However, it is perfectly acceptable to specify the applicable substantive law as part of the arbitration clause, so long as it is clear that the provision is independent from the other elements of the arbitration clause and relates to the contract as a whole. No discussion of the law applicable to the dispute would be complete without a brief mention of the power of "amiable composition" or the power of an arbitrator to decide "ex aequo et bono". As with much of the practice relating to international commercial arbitration, there is no precise and generally accepted definition of what these are. A useful approximation is that they permit an arbitrator, in the course of making an enforceable award, to arrive at a decision that he thinks is fair, even if it is not strictly in accordance with the applicable law. An arbitrator can only make use of these powers if the parties have agreed that he or she can do so. If such powers are to be conferred on an arbitrator it may be best to choose a arbitrator more for his/her knowledge of the subject matter of the dispute between the parties than for his/her knowledge of the applicable law. They may also be conferred on an arbitrator when the parties have entered into a long-term agreement and are anxious that disputes arising during the currency of the agreement should be resolved without harming the continuing relationship between them. In reality, however, it is only if a reasoned opinion is required, as in ICC practice and as may be stipulated under the AAA Rules, that the question of whether an arbitrator is law-bound or functions as amiable compositeur becomes significant.
  • The law of the place of enforcement of any award: This is particularly relevant in the context of Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the “New York Convention”) in that it will establish:
  1. Whether or not an award is enforceable under that convention; and,
  2. The defences which may be available in any enforcement proceedings.

Having a thorough understanding of ach of the above potential applicable laws and how they interact with each other is vital to ensuring a smooth running arbitration and an enforceable award.