Chapter 14: Methodological Variations in Determining Applicable Laws in International Commercial Arbitration

International commercial arbitration does not exist in a legal vacuum but functions in a different legal environment from national courts. Unlike national courts, arbitral tribunals are not automatically subject (at least not entirely) to the laws of the jurisdiction where the arbitration is seated, including conflict of laws provisions. In my previous work, I focused on the issue of limited court review, a cornerstone of arbitration that has undergone certain adjustments in the past few decades. 1 These adjustments have consisted of widening the scope of public policy grounds during the annulment/enforcement stage and interventionist attitudes of national courts in cases when the parties claim to be “taken by surprise” by arbitrators’ choice or application of the law. 2 This chapter builds on that work by discussing the primary question of the methodology applied by arbitral tribunals when determining the applicable law in arbitration.

The central thesis of this chapter is that there is a need to preserve a proper understanding of the methodological differences between national courts and arbitral tribunals in their determination of the applicable law in arbitration to achieve procedural efficiency and retain the legitimacy of arbitration as a dispute resolution method. To support this argument, the methodology for choosing the following applicable laws will be analysed:

• the law, or the relevant legal rules, governing merits, i.e. the substantive issues in dispute;

• the law governing the arbitration agreement;

• the law governing the effects of bankruptcy of one of the parties to an ongoing arbitration;

• the law governing the allocation of costs in arbitration.

The transnational approach is the starting point for modern arbitration when determining applicable laws. The transnational and international theories of international arbitration contributed to the more widespread use of arbitration, especially in the second half of the 20th century after adopting the Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1958 (New York Convention). These theories also served as a baseline for a more liberal approach to determining the applicable laws, as this chapter will show.

Due to this starting point, as a general rule, arbitrators have fewer mandatory conflict of laws rules to follow than national courts and more discretion in determining and applying the applicable substantive laws. 3 However, this chapter argues that, with time, the harmonisation of approaches in determining applicable law throughout different jurisdictions led to perceptible localisation (i.e. territorialisation) of international arbitration. This claim cannot be made for all applicable laws in arbitration. Still, it is submitted that it is borne out as regards the law applicable to merits in arbitration and that applicable to an arbitration agreement (Section II). In this regard, the chapter argues that the methodology for determining applicable law in international arbitration scholarship developed through and together with the progressive development of arbitral practice, which in some cases even led to codification. This chapter also argues that further arbitral practice and jurisprudence may lead to similar results for some other applicable laws in arbitration.

However, the significance of methodological differences between arbitral tribunals and national courts as to how they determine and apply applicable laws is preserved precisely because the legal framework of arbitration allows a more liberal approach to determining applicable laws. For example, such harmonisation and localisation of methodology for determining the applicable law are not yet present when it comes to the law governing the effects of bankruptcy of one of the parties to a pending arbitration (Section III) and the law governing the allocation of costs (Section IV). The former still reflects a fragmented, localised, and non-uniform approach to determining applicable laws. In contrast, the methodology for determining the law applicable to allocating costs transcends national laws and presents a proper transnational legal solution. This chapter contends that practitioners and academics should acknowledge the differences in approach to foster an appropriate understanding of methodology, which is crucial for preventing a loss of predictability in the future but also for preserving the flexibility inherent in international arbitration: one of its most important advantages.

The methodology for determination of the law applicable to an arbitration agreement and that applicable to the merits developed to the point of providing a solid framework for arbitrators and courts. Due to its harmonisation and localisation tendencies, this developed framework challenges the starting point of arbitral tribunals not belonging to a particular legal system of conflict of laws rules. It is argued in this section that, despite the welcome predictability and harmonisation that characterises the determination of such applicable laws, the methodology for such determination departs from that of national courts. The distinction is crucial and stems from theoretical and legislative frameworks of international arbitration. It serves the essential purpose of allowing for more flexibility in arbitration, and a proper understanding of it preserves procedural efficiency.

As mentioned earlier, the methodology for determining these two applicable laws was designed following the transnational (delocalised) theories of arbitration, according to which the legitimacy of arbitration is rooted in a transnational legal order and not in a national legal system. 4 In this context, it means that arbitrators are, to some extent, sometimes even completely, detached from the conflict of laws rules of the seat and rely heavily on procedural regulations chosen by the parties and/or on their discretion in determining the law. 5

Despite these transnational roots of methodologies for determining applicable law to merits and an arbitration agreement, the arbitral practice and doctrine eventually led to a more territorial and systemised approach. This will now be addressed in greater detail.