International Commercial Contracts: Contract Terms, Applicable Law and Arbitration [2 ed.] 9781316514238, 9781009082822, 9781009077989

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INTERNATIONAL COMMERCIAL CONTRACTS

Any practising lawyer and student working with international commercial contracts faces standardised contracts and international arbitration as mechanisms for dispute settlement. Transnational rules may be applicable, but national law is still important. Based on extensive practical experience, this book analyses international contract practice and its interaction with the various applicable sources. It considers vital questions concerning the role played by contractual regulation, national law and transnational sources. What is the interaction between these factors, and how does it apply to contracts that refer disputes to international arbitration? This revised second edition has been fully updated to reflect developments in the field and includes useful tools like chapter introductions and conclusions, tables of cases and sources and a list of electronic resources and databases. giuditta cordero-moss is a professor at the Law Faculty of the University of Oslo where she teaches international commercial law, international commercial arbitration and private international law. She is also an international arbitrator and has in the past practised as an international commercial lawyer in Italy, Norway and Russia.

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INTERNATIONAL CO MM E R CIA L C ONTRAC TS CONTRACT TERMS, APPLICABLE LAW AND ARBITRATION

GIUDITTA CORDERO-MOSS University of Oslo

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Shaftesbury Road, Cambridge CB2 8EA, United Kingdom One Liberty Plaza, 20th Floor, New York, NY 10006, USA 477 Williamstown Road, Port Melbourne, VIC 3207, Australia 314–321, 3rd Floor, Plot 3, Splendor Forum, Jasola District Centre, New Delhi – 110025, India 103 Penang Road, #05–06/07, Visioncrest Commercial, Singapore 238467 Cambridge University Press is part of Cambridge University Press & Assessment, a department of the University of Cambridge. We share the University’s mission to contribute to society through the pursuit of education, learning and research at the highest international levels of excellence. www.cambridge.org Information on this title: www.cambridge.org/9781316514238 DOI: 10.1017/9781009082822 © Giuditta Cordero-Moss 2024 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press & Assessment. First published 2024 A catalogue record for this publication is available from the British Library A Cataloging-in-Publication data record for this book is available from the Library of Congress ISBN 978-1-316-51423-8 Hardback ISBN 978-1-009-07798-9 Paperback Cambridge University Press & Assessment has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

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Contents

Preface to the Second Edition page xv Preface to the First Edition xix Treaties and Conventions xxii EU Legislative Instruments xxiii EU Documents xxiv Domestic Legislation xxvi Court Decisions and Awards xxx Introduction I.1

1

1

Explanation of the Term ‘Commercial’

2

I.2

Explanation of the Term ‘International’

I.3

The Public International Law Dimension

3 5

International Contract Practice and Its Expectations in Terms of the Governing Law 8 1.1

Issues Arising Out of International Contract Practice

1.2

International Contracts

1.3

The Models for International Contract Drafting

1.4

The Dynamics of Contract Drafting

1.5

13

18

Examples of Self-Sufficient Contract Drafting 1.5.1 Boilerplate Clauses

(a) Entire Agreement Clause

23

25

(c) No Oral Amendments Clause 1.5.2 Subject to Contract Clause 1.5.3 Termination Clause

29

1.5.4 Arbitration Clauses

30

26

27

32

1.6

The Chimera of the Autonomous Contract

1.7

The Relational Contract

1.8

The Balance

34

38

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23

(b) No Waiver Clause

1.5.5 Other Clauses

8

11

32

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2

The Role of Transnational Law 2.1

Introduction

2.2

Sources of Transnational Law

39

39

2.2.1 Trade Usages

46

48

(a) Contract Practice

48

(i) Detached Contracts

49

(ii) Standard Contracts

50

(iii) ‘Good Commercial Practice’

51

(iv) A Uniform Contract Practice? 2.2.2 General Principles

52

54

(a) Battle of the Forms

55

2.2.3 General Principles of Commercial Law and of Public International Law 56 (a) An Example of Cross-Fertilisation: International Administrative Law 58 (b) An Example of Fragmentation: Unilateral State Declarations and Contract Law 64 2.2.4 The CISG

66

2.2.5 The Principles of International Commercial Contracts (UPICC) and the Principles of European Contract Law (PECL) 70 (a) The UPICC and the PECL (b) Uses of the Principles

70 73

(c) Use of the UPICC to Interpret the CISG?

74

(d) Use of the UPICC to Correct National Law in Investment Arbitration? 78 (e) Also Best Rules

82

(f) The Problematic Central Role of the Principle of Good Faith 83 (i) Entire Agreement (ii) No Waiver

87

90

(iii) Subject to Contract (iv) Termination

91

92

(g) An Autonomous Principle of Good Faith? 2.2.6 Soft Sources Harmonising Specific Sectors (a) INCOTERMS (b) UCP 600

92 96

97 99

(c) Model Contracts

100

(d) The UNCITRAL Model Law on International Commercial Arbitration 101 (e) IBA Guidelines on Conflict of Interests

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101

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contents (f) IBA Rules on Taking of Evidence and Prague Rules (g) Corporate Social Responsibility 2.2.7 Summing Up 2.3

102

103

106

No Replacement of the Governing Law

106

2.3.1 Can Transnational Law be Chosen as the Only Governing Law? 107 2.3.2 When the Transnational Law Conflicts with the Governing Law 110 (a) The UCP 600

111

(i) Case 1

111

(ii) Case 2

112

(iii) Case 3

113

(b) The UPICC: Irrevocable Offer and Consideration (c) ISDA Model Swap Agreement

114

115

(d) IBA Guidelines on Conflict of Interests

116

2.3.3 When the Transnational Law Competes with the Contract Terms 117 (a) Ancillary Obligations Not Regulated in the Contract (i) No Assignment

119

(b) Competing Contract Regulation (i) Notice of Defect (ii) Hardship

120

120

120

(iii) No Oral Amendments

121

(c) Discretionary Contract Rights (i) Subject to Contract (d) Conclusion

118

123

123

124

2.3.4 When the Transnational Law Has Gaps: Autonomous Interpretation 125 (a) The UPICC: Force Majeure and Choice Between Contracts 126 2.3.5 When the Transnational Law Needs Interpretation: Autonomous Interpretation 127 (a) The CISG: Force Majeure and the Requirement of Beyond the Control 129 2.4

3

Conclusion

133

The Impact of the Governing Law

135

3.1

English Law Privileges Predictability

3.2

Civil Law Systems Privilege Justice, but to Different Extents

3.3

Convergence between Civil Law and Common Law?

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136 145

142

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contents 3.4

The Effects of the Governing Law on the Interpretation and Construction of Contractual Terms 155 3.4.1 Boilerplate Clauses

155

(a) Entire Agreement Clause (b) No Waiver Clause

155

158

(c) No Oral Amendments Clause 3.4.2 Subject to Contract 3.4.3 Termination Clauses 3.5

159

160 162

Contractual Terms Contradicting, Supplementing or Being Supplemented by Non-mandatory Rules of the Governing Law 165 3.5.1 Representations and Warranties Clauses 3.5.2 Liquidated Damages 3.5.3 Force Majeure

166

168 171

(a) Supplier’s Failure

174

(b) Choice Between Contracts

176

3.5.4 Hardship Clause (Material Adverse Change) 3.6

3.6.1 Firm Offer and Consideration (a) Revocation

180

180

(b) Revocation and Reliance

181

3.6.2 Amendments to a Contract

183

(a) Unilateral Obligation (b) Factual Benefit 3.7

183 185

Does Arbitration Ensure a Uniform Approach to Contractual Terms? 186 3.7.1 Arbitration as a Unitary System? 3.7.2 Various Approaches

189

190

3.7.3 The Importance of the Selection of Arbitrators 3.7.4 Conclusion 3.8

4

177

Contractual Terms Contradicting Mandatory Rules of the Governing Law 179

194

197

The Drafting Style Does Not Achieve Self-Sufficiency, but Has a Certain Merit 198

Which State’s Law Governs an International Contract? 4.1

Introduction

4.2

Determination of the Forum as a Necessary First Step 4.2.1 Jurisdiction

200

200 204

204

(a) Choice of Forum

206

(b) Lacking Choice of Forum by the Parties

208

(c) Claims Against the Parent Company for Subsidiary’s Conduct Abroad 210

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contents 4.2.2 Enforceability of the Decision 4.3

213

The Most Important Conflict Rule for Contracts: Party Autonomy 4.3.1 Which Law to Choose

214

217

(a) Choice of One of the Parties’ Law

217

(b) Criteria for Choosing the Governing Law (i) Literal Interpretation: English Law

218 219

(ii) Purposive Interpretation: Germanic Law

220

(c) Accurate Application Assumes a Thorough Understanding of the Law 221 4.3.2 Tacit Choice of English Law for International Contracts? (a) The Use of Common Law Contract Models (b) The Governing Law

223

224

225

(c) Severability: Drafting Style as a Partial Choice of Law? (d) Drafting Style as a Tacit Choice of Law?

229

(e) Drafting Style as the Closest Connection? (f) Conclusion

232

233

4.3.3 Choosing Transnational Law? 4.4

234

What If the Parties Have Not Chosen the Governing Law? (a) The Rome Convention Provided for Presumptions

235 236

(b) Loose Interpretation: Article 4.2 as a Weak Presumption

237

(c) Strict Interpretation: Article 4.2 as a Strong Presumption

238

(d) Conclusion

238

(e) The Rome I Regulation 4.5

226

239

Are All Rules of Any Other Connected Laws Excluded Once the Governing Law Is Chosen? 241 4.5.1 The Scope of Party Autonomy: Incidental Questions, Classification and Exclusive Conflict Rules 242 4.5.2 The Scope of Party Autonomy in Arbitration

247

(a) Does Party Autonomy Exclude Any Other Conflict Rules? 248 (b) Classification of the Issues (c) Company Law

250

(d) Legal Capacity

253

248

(e) Winding Up and Insolvency (f) Property

255

257

(g) Assignment, Security Interests and Collateral 4.5.3 Overriding Mandatory Rules (a) Competition Law (b) Labour Law (c) Agency Contracts

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262

265 266 267

259

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268

(e) Good Faith and Fair Dealing

269

(f) Corporate Social Responsibility

270

4.5.4 Overriding Mandatory Rules of Third States

272

4.5.5 Impossibility of the Performance Due to a Foreign Law

273

4.5.6 Illegality of the Performance Under a Foreign Law 4.5.7 Violation of the Ordre Public of the Lex Fori 4.6

Private International Law and Arbitration

274 276

277

4.6.1 The Relevance of Private International Law in Arbitration 4.6.2 Which Private International Law Is Applicable?

5

Does Arbitration Ensure a Self-Sufficient Contract? 5.1

Briefly on Arbitration

279

281

285

287

5.1.1 Arbitration Is Still the Preferred Method for Dispute Resolution 288 5.1.2 Sources Applicable to Arbitration

291

5.1.3 Ad Hoc and Institutional Arbitration 5.2

293

The Relevance of National Law to International Arbitration

296

5.2.1 Is There a Difference between International Arbitration and Domestic Arbitration? 297 5.2.2 When Does State Law Become Relevant to International Arbitration? 298 (a) International Arbitration and the State Law of the Seat of Arbitration (Lex Arbitri) 300 (i) The Relevance of the Lex Arbitri to the Arbitral Procedure 301 (ii) The Relevance of the Lex Arbitri to the Challenge of an Arbitral Award 303 (iii) The Relevance of the Lex Arbitri to the Enforcement of an Arbitral Award 304 (b) International Arbitration and the State Law of the Place(s) of Enforcement 305 5.3

Specific Criteria for Invalidity or Unenforceability of Arbitral Awards: Is an International Award Really Detached from State Law? 305 5.3.1 Challenge to the Validity 5.3.2 Enforcement

306

307

5.3.3 Judicial Control Is Not an Appeal (a) Scope of Judicial Control (b) Intensity of Court Control (i) The Issue of Jurisdiction

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308 309 310 312

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contents (ii) The Issue of Public Policy: The Maximalist and the Minimalist Approach 314 (iii) The Balance

316

(iv) Preclusion?

319

(v) The Consequences of Court Control on Arbitrability 320 5.4

Grounds for Setting Aside an Award or for Refusing Its Enforcement 320 5.4.1 Lack of Jurisdiction and Incidental Questions: In Particular on Corruption 320 5.4.2 Invalidity of the Arbitration Agreement

324

(a) Choice of Law by the Parties: Separability

325

(b) Absent Choice by the Parties: Lex Arbitri

328

(c) Formal Validity

328

(i) For Formal Validity the Standard was Set in New York Convention, but There Has Been an Evolution 328 (ii) UNCITRAL Model Law on the Validity of Arbitration Agreements 330 (iii) Article II of the New York Convention on the Validity of Arbitration Agreements 332 (iv) Competition between State Law and Article II of the New York Convention 335 (v) May the More-Favourable-Law Provision of Article VII Assist? 337 (vi) Is the Procedural Requirement of Article IV an Obstacle? 338 (vii) Conclusion 5.4.3 Legal Capacity

340

341

5.4.4 Constitution of the Arbitral Tribunal

343

5.4.5 Excess of Power (Ultra Petita Partium and Infra Petita Partium) 344 5.4.6 Irregularity of Procedure 5.4.7 Right to be Heard

346

347

5.4.8 Conflict with the Arbitrability Rule

347

(a) Incidental Questions Do Not Affect Arbitrability of the Dispute 349 (b) The Scope of Arbitrability and Court Control (c) Threats to the Scope of Arbitrability

(d) Arbitrability of Intra-EU Investment Disputes (e) The Law Governing Arbitrability (i) In the Pre-award Phase

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351

354 355

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contents (ii) In the Phase of the Challenge to an Award

359

(iii) In the Phase of Enforcement of an Award

359

(iv) The Law Governing the Dispute is Irrelevant

360

(f) Arbitrability is Equal to the Ordre Public in International Disputes without a Connection to the Lex Fori 361 5.4.9 Breach of Ordre Public (Public Policy) (a) Autonomous Interpretation

362 363

(b) International Ordre Public as a Corrective to Positive Ordre Public 364 (c) Relative or Territorial Ordre Public as a Corrective to Positive Ordre Public 366 (d) Truly International Ordre Public as a Transnational Phenomenon 367 (e) Conflict with Principles, Not with Rules (f) Fundamental Principles

368

370

(g) Actual Violation and Incidental Questions (h) Procedural Public Policy

373

(i) Substantive Public Policy

374

(i) Company Law

371

375

(ii) Insolvency

377

(iii) Property and Encumbrances (iv) Competition Law (v) EU Law

379

380

382

(vi) Labour Law; Insurance

383

(vii) Good Faith and Fair Dealing (viii) Embargo and Sanctions (ix) Corruption

383 385

386

(x) Corporate Social Responsibility, Human Rights (j) Conclusion

387

5.4.10 Annulment at the Seat 5.5

388

The Power of the Arbitral Tribunal in Respect of the Parties’ Pleadings 5.5.1 The Procedural Rules 5.5.3 Arbitration Rules

398

(a) Party’s Default

398

(b) Adverse Inferences

398

(c) Additional Information (d) Burden of Proof

400

401 401

(f) The Right to be Heard

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394

5.5.2 Arbitration Agreements and the Scope of the Tribunal’s Powers

(e) Impartiality

387

402

394

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contents 5.5.4 Arbitration Law

402

5.5.5 The Ultimate Borders: Excess of Power, Right to be Heard, Procedural Irregularity 405 5.6

The Tribunal: An Umpire or an Inquisitor?

406

5.6.1 Excess of Power Regarding Questions of Law: May the Tribunal Disregard the Choice of Law Contained in the Contract? 409 (a) The Difficult Borderline between a Review of the Applicability of the Law and a Review of the Merits 410 (b) The Tribunal Disregards the Contract’s Choice and Applies Another National Law 411 (i) Disregard of the Contract’s Choice in Favour of the Otherwise Applicable Law 412 A. Violation of the Ordre Public of the Lex Arbitri?

413

B. Application of the Chosen Law Refers to the Excluded Law 414 C. Application of Private International Law D. Conclusion

415

415

(ii) Disregard of the Contract’s Choice in Favour of a Law That Is Not Otherwise Applicable 416 (c) Disregard of the Contract’s Choice of Law in Favour of Transnational Sources 417 (d) Conclusion

418

5.6.2 Excess of Power Regarding Questions of Law: May the Applicable Law be Disregarded if the Parties Do Not Sufficiently Prove It? 419 5.6.3 Excess of Power Regarding Questions of Law: May the Tribunal Develop Its Own Legal Arguments? 421 (a) New Qualifications under the Same Sources (b) Application of New Sources (c) New Remedies

421

422

424

5.6.4 Excess of Power Regarding Questions of Fact: Is the Tribunal Bound to Decide Only on Invoked Facts? 426 5.6.5 Right to Be Heard: Inviting the Parties to Comment

427

5.6.6 Distinction between Domestic and International Arbitration? 5.6.7 Procedural Irregularity: Application of ‘Law’ or of ‘Rules of Law’

430 432

(ii) The Application of Transnational Sources and Procedural Irregularity 435 (iii) Conclusion

436

5.6.8 Burden of Proof: May the Tribunal Request Additional Information to Undermine Uncontested Evidence? 436 5.7

Conclusion

439

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6

Conclusion

441

Appendices

444

Arbitration Rules and Model Clauses Soft Law

445

Digests, Databases

Bibliography Index 471

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446

448

444

Preface to the Second Edition

This second edition updates the first book published in 2014, to include the last decade’s most important developments in the field of international commercial law. It also benefits from the experience gained by having used the book throughout the last decade: extensive editorial changes have been made to enhance the book’s clarity and highlight the relationship between its different parts. I am very thankful to all the students, teachers and practitioners around the world who have adopted this book and given me feedback. When the first edition was published, it was meant to fill a gap in international commercial lawyers’ legal education. I am grateful that the main purpose of this book has been appreciated: it was written as the book I would have liked to have read before starting my career as an international commercial lawyer. At that time, several programmes for prospective international practitioners were already offered by various institutions. Still, I considered it might be useful to provide a comprehensive overview of how the different aspects of the law interact with each other in the context of international contracts: contract law, comparative contract law, transnational law, private international law and arbitration. Traditionally, each of these aspects was taught separately; this book attempted to bring them together and show the significance that these aspects have for each other and ultimately for the enforceability of the rights and obligations that are formalised in an international contract. In the past decade, there has been a proliferation of programmes for prospective international practitioners. Numerous courses have been created, particularly at postgraduate level, to convey the special knowledge required for international practice. However, the law education still reflects the classical division of disciplines: contract law, comparative contract law, transnational law, private international law and arbitration are still taught as separate disciplines. This separation does not necessarily correspond to the life cycle of an international commercial contract. When the explanation of an issue stops at the borders of one discipline, without considering assumptions or implications that belong to the other disciplines, it runs the risk of conveying an incomplete picture. While it is true that a complete picture can be built after having learnt all other disciplines and having put together all partial pictures formed in each of the disciplines, there is a risk that some gaps remain. To name some examples: comparative law xv

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explains that there is a convergence between the civil law and the common law – thus leaving the impression that the same contract clause has the same legal effects irrespective of the governing law; contract law explains how courts interpret contracts – thus leaving the impression that arbitration is freer from the governing law; private international law explains that the parties may instruct the arbitral tribunal to apply sources different from national laws – thus leaving the impression that the transnational law provides a uniform and comprehensive regulation of international contracts. These impressions are, to a certain extent, incorrect; but it does not belong to comparative law to analyse contract practice – this is a matter of contract law; it does not belong to contract law to analyse the restrictions on enforceability of arbitral awards – this is a matter of arbitration law; and it does not belong to private international law to analyse the harmonisation of soft law – this is a matter of transnational law. At the same time, these impressions are not necessarily corrected after having studied contract law, arbitration law or transnational law. The literature on contract law, arbitration law and transnational law does not necessarily deal directly with the issues that are implied by the other disciplines. The function of this book, therefore, is still relevant: to investigate the enforceability of contract terms following international contracts from the phase of negotiations to the phase of interpretation and performance of the contract, to the arising of disputes and finally the enforcement of decisions solving the disputes – irrespective of which academic discipline the issues may belong to. As a consequence of this original scope, the book does not give an exhaustive explanation of all the traditional content of each of the disciplines that are touched upon (contract law, comparative contract law, transnational law, international commercial law, private international law, arbitration law). Rather, it analyses which sources are applicable to the contract in the different phases, and how the will of the parties interacts with these sources. The intention is to give a legal map of the main issues to take into consideration when dealing with international contracts. The numerous references, particularly to internet resources, will permit readers to find specific details once they have identified the issues and the sources applicable to them. A feature of this book deserves mentioning: in addition to being based on relevant sources such as legislation, case law and literature, it is heavily inspired by my own practice – initially as a corporate lawyer, and later as an arbitrator. This is reflected in the examples that are given to illustrate different issues. As my practice included, from the last days of the Soviet Union and until recently, transactions and arbitration between Western and Russian parties, a lot of examples assume precisely this party composition. When the first edition was written, there was nothing remarkable in bringing as an example a contract between, say, a Norwegian, a Ukrainian and a Russian party. Today, the geopolitical situation has changed dramatically, and such a party composition is unthinkable. The examples could have been rewritten.

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However, I decided to leave them as they were: in part because they are fully justified from an historical point of view, and in part in the hope that they will soon again become realistic. As for the first edition, this edition has benefited greatly from the discussions held in the sessions of the UNCITRAL Working Group II, in which I still have the honour of participating as the Norwegian delegate. In addition, I would like to acknowledge the precious insight gained from my membership of the International Court of Arbitration of the International Chamber of Commerce (ICC), of which I have the honour of being a member since 2018; from my participation in the Norwegian delegation to the Hague Conference during the negotiations of the 2019 Hague Judgments Convention, as well as from the various academic fora in which I had and have the pleasure of participating – among which I wish particularly to mention the Hague Academy of International Law, the Center for Transnational Litigation, Arbitration, and Commercial Law of New York University, SciencesPo École de Droit (Paris), the Groupe européen de droit international privé (GEDIP) and the International Academy of Comparative Law. I would like to thank the Department of Private Law of the Law Faculty, University of Oslo for its continued support. Thanks also to my research assistant, Ellen Bennin Brataas, who compiled the bibliography and list of references. I would like to thank Cambridge University Press, particularly my editor Marianne Nield, for their very pleasant and professional cooperation in connection with the publication of this book. This second edition is updated as per September 2022.

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https://doi.org/10.1017/9781009082822.001 Published online by Cambridge University Press

Preface to the First Edition

This is the book that I would have liked to have read when I started my career as an inhouse lawyer in an Italian multinational company about thirty years ago. Working with international contracts, I soon started wondering about various aspects of contract drafting. Why are international contracts written in a style that is completely different from their domestic counterparts and why are they written in the same style irrespective of the law that governs them? Is there some sort of transnational law that allows for the governing law to be disregarded and requires that contracts be written in a certain way, independently of the jurisdiction in which they will be implemented? Is national law made redundant by the extremely detailed style of the contracts? Does the choice-of-law clause written in the contract mean that the parties may exclude the applicability of any other rules from any other laws? Does the arbitration clause written in the contract mean that the parties may rely fully on the terms of the contract and the choice of law made therein, and need not be concerned with any other sources? These questions continued presenting themselves after I went over to a Norwegian multinational company, and became even more pressing when I started following this company’s legal interests in what was soon to become the former Soviet Union. After numerous years as a corporate lawyer, in which a thorough analysis of these questions inevitably had to yield to new projects and more urgent matters, my generous employer gave me the opportunity to spend some time researching some of these issues. The result was a PhD thesis at the Institute of State and Law in the Russian Academy of Sciences, Moscow, under the knowledgeable supervision of Professor August A. Rubanov. This was the introduction to my academic career: the Russian PhD was followed by a PhD at the University of Oslo, under the invaluable supervision of Professors Sjur Brækhus and Helge J. Thue. Since then, about fifteen years have elapsed, during which I have devoted my research and teaching at the University of Oslo to the list of questions that I had compiled in my nearly fifteen years as a corporate lawyer, and to the additional questions that continue to arise in connection with arbitration proceedings that I am involved in or legal advice that I am requested to render. The results of these almost thirty years of dwelling on the practical and academic aspects of international contracts, their sources and their enforceability are reflected in this book. Academically, the questions arising from international contracts fall into xix

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separate disciplines: contract law, comparative contract law, private international law, civil procedure and international arbitration. Scholars may specialise in a couple of these disciplines, but rarely in all of them. Therefore, it is not very common for all of the implications of international contracts to be dealt with in one book. In practice, however, questions arise out of international contracts in their complexity, irrespective of the academic discipline within which they fall. This explains the opening sentence of this preface, stating that this is the book that I would have liked to have read when I started working with international contracts. In addition to the text being based on my own research and my practical experience, the material presented here takes advantage of the results of two research projects that I have organised at the University of Oslo. The first project, the so-called ‘Anglo project’, was financed by the Norwegian Research Council and it ran from 2004 to 2009. It started from the observation that international contracts are written on the basis of common law models, even when they are subject to a civil governing law, and a series of so-called boilerplate clauses were analysed to assess their function in the original common law models and to verify what legal effects these clauses could achieve under civil laws. The project produced three PhD theses and a series of master’s theses (a list may be found at www .jus.uio.no/ifp/english/research/projects/anglo/index.html) and resulted in a book: Giuditta Cordero-Moss (ed.), Boilerplate Clauses, International Commercial Contracts and the Applicable Law (2011). The second research project, the so-called ‘APA’ (Arbitration and Party Autonomy) project, is still running, and is financed by the University of Oslo and the Norwegian multinational companies Statoil ASA, Orkla ASA, Yara ASA, as well as the law firms Selmer and DLA Piper. This project verifies to what extent party autonomy meets restrictions when a contract contains an arbitration clause. The project has so far resulted in various international conferences and a series of masters theses (a list may be found at www.jus.uio.no/ifp/english/research/projects/choice-of-law/), as well as in a book: Giuditta Cordero-Moss (ed.), International Commercial Arbitration: Different Forms and their Features (2013). In addition, this book benefits from my lecturing activity, first of all at the University of Oslo, but also at the Centre for Energy, Petroleum and Mineral Law and Policy, Dundee, at the LLM in International Trade Law organised by the ILO, the University of Turin and the University Institute of European Studies, at The Hague Academy of International Law, as well as at the numerous universities and organisations where I have lectured as a guest. The questions and discussions following a lecture or the presentation of a paper are often useful to illustrate or clarify matters, and can give inspiration for new issues. Another important source that this book takes advantage of is my participation in the UNCITRAL Working Group on Arbitration, where I was the delegate for Norway during the revision of the UNCITRAL Arbitration Rules and the preparation of a standard of transparency for treaty-based arbitration. The discussions in the

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Working Group and the assistance given by the UNCITRAL Secretariat have provided an invaluable insight into the different approaches to various aspects of arbitration, as well as into the logic of international cooperation. I would like to thank the members of the Department of Private Law of the Law Faculty, University of Oslo, of which I am presently the Director, for their support and for having borne with me while I was finalising this book. Thanks also to research assistants Nanette Christine Flatby Arvesen and Oivind K. Foss, of the APA project, who have compiled the bibliography. I would like to thank Cambridge University Press, and particularly Senior Commissioning Editor Sinead Moloney, for their very pleasant and professional cooperation in connection with the publication of this book. Finally, I would like to express my sincere appreciation and gratitude to Finola O’Sullivan, Editorial Director of Law at Cambridge University Press, for her intelligent and continuing support.

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Treaties, Laws, Decisions Treaties and Conventions

1924 International Convention for the Unification of Certain Rules of Law relating to Bills of Lading, and Protocol of Signature (Hague Rules). 1945 Statute of the International Court of Justice, 59 Stat 1031; TS 993; 39 AJIL Supp 215 (1945). 1948 Universal Declaration of Human Rights (adopted by the UN General Assembly Resolution 217 A(III) of 10 December 1948), 217 A (III). 1950 Convention for the Protection of Human Rights and Fundamental Freedoms (adopted 4 November 1950, entered into force 3 September 1953), UNTS 213 (ECHR). 1955 Hague Convention on the Law Applicable to International Sales of Goods. 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958. 1964 UNIDROIT Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF). 1964 UNIDROIT Uniform Law on the International Sale of Goods (ULIS). 1965 Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID). 1968 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (Consolidated version CF 498Y0126(01)). 1968 Protocol to Amend the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading (Hague–Visby Rules). 1969 Vienna Convention on the Law of Treaties, UNTS 1155. 1974 New York Convention on the Limitation Period in the International Sale of Goods, UNTS 1511 No 26119. 1978 United Nations International Convention on the Carriage of Goods by Sea (Hamburg Rules). 1980 United Nations Vienna Convention on Contracts for the International Sale of Goods, 1489 UNTS 3 (CISG). 1988 UNIDROIT Convention on International Factoring. 1994 Energy Charter Treaty. xxii

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1997 OECD (Organisation for Economic Co-operation and Development), Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. 2003 United Nations Convention Against Corruption, A/58/422. 2004 United Nations Convention on Jurisdictional Immunities of States and Their Property, A/RES/59/38. 2005 HCCH Hague Convention on Choice of Court Agreements. 2010 Organization for the Harmonization of Business Law in Africa (OHADA) Uniform Act Relating to General Commercial Law. 2019 HCCH Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters. EU Legislative Instruments Conventions 1958 Treaty on the Functioning of the European Union, Consolidated version OJ C326/39 2012. Convention on the Law Applicable to Contractual Obligations 80/934/ECC (1980) OJ (L 266/1) 1 (Rome Convention). Convention on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, 30/10/2007 (Lugano Convention). Convention on Contracts for the International Sale of Goods approved by the United Nations Commission on International Trade Law together with a commentary prepared by the Secretariat (A/CONF./97/5) (draft). Directives Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents. Second Council Directive 88/357/EEC of 22 June 1988 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and laying down provisions to facilitate the effective exercise of freedom to provide services and amending Directive 73/239/EEC. Council Directive 90/619/EEC of 8 November 1990 on the coordination of laws, regulations and administrative provisions relating to direct life assurance, laying down provisions to facilitate the effective exercise of freedom to provide services and amending Directive 79/267/EEC.

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treaties, laws, decisions

Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, OJ L 95, 21 April 1993. Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC. Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements. Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC. Directive (EU) 2019/771 of the European Parliament and of the Council of 20 May 2019 on certain aspects concerning contracts for the sale of goods, amending Regulation (EU) 2017/2394 and Directive 2009/22/EC, and repealing Directive 1999/44/EC. Regulations Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II). Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations. (Rome I). Regulation (EC) No 4/2009 of 18 December 2008 on jurisdiction, applicable law, recognition and enforcement of decisions and cooperation in matters relating to maintenance obligations. Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (Brussels I). Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast). Regulation (EU) 2017/2394 and Directive 2009/22/EC, and repealing Directive 1999/44/EC. EU Documents Commission European Commission, Commission Notice – Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements (Text with EEA relevance). 6 January 2001, OJ C 003, pp. 2–30. European Commission, Communication from the Commission to the Council and the European Parliament on European Contract Law, COM (2001) 398 final.

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European Commission, Green paper on the conversion of the Rome Convention of 1980 on the law applicable to contractual obligations into a Community instrument and its modernisation, COM (2002) 654 final. European Commission, Communication from the Commission to the European Parliament and the Council – A more coherent European contract law – An action plan, COM (2003) 68 final. European Commission, Communication from the Commission to the European Parliament and the Council – European Contract Law and the revision of the acquis: the way forward, COM (2004) 651 final. European Commission, Communication from the Commission – Notice – Guidelines on the application of Article 81(3) of the Treaty (Text with EEA relevance). 27 April 2004, OJ C 101, pp. 97–118. European Commission, First Annual Progress Report on European Contract Law and the Acquis Review, COM(2005) 456 final. European Commission, Proposal for a regulation of the European parliament and the council on the law applicable to contractual obligations (Rome I), COM(2005) 650 final. European Commission, Evaluation Report on the Financial Collateral Arrangements Directive (2002/47/EC) COM(2006) 833. European Commission, Proposal for a regulation of the European parliament and of the council on a Common European Sales Law, COM(2011) 635 final (CESL). European Commission, Commission Staff Working Document Guidance on restrictions of competition ‘by object’ for the purpose of defining which agreements may benefit from the De Minimis Notice, SWD(2014) 198 final. European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on the applicable law to the proprietary effects of transactions in securities (COM(2018) 89 final). European Commission, Proposal for a regulation of the European parliament and of the council on the law applicable to the third-party effects of assignments of claims, COM (2018) 96 final (2018/0044) (COD). European Commission, Decision C(2018) final of the European Commission of 24 May 2018, Case AT.39816. European Commission, Commission decision of 29.6.2018 on outside activities and assignments and on occupational activities after leaving the Service Brussels, C(2018) 4048 final. European Commission. Directorate-General for Justice and Consumers. Study on due diligence requirements through the supply chain: final report (Publications Office, 2020). European Commission, Proposal for a Directive on Corporate Sustainability Due Diligence, COM(2022) 71 final.

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treaties, laws, decisions

Council Council of the European Union, Discussion on the topic of the Common Frame of Reference (CFR) in the Council of the European Union, initiated by the Presidency on 28 July 2008, 8286/08JUSTCIV 68 CONSOM 39. Court of Justice Court of Justice of the European Union, Opinion 1/17, 30 April 2019. Parliament European Parliament, Resolution of the European Parliament on the Annual Legislative Programme of March 16, 2000, 29/12/2000, OJ C 377. European Parliament. ‘Annual report from the Council to the European Parliament on the main aspects and basic choices of the Common Foreign and Security Policy (CFSP), 2009 European Parliament resolution of 11 May 2011 on the annual report from the Council to the European Parliament on the main aspects and basic choices of the Common Foreign and Security Policy (CFSP), presented to the European Parliament in application of Part II, Section G, paragraph 43 of the Interinstitutional Agreement of 17 May 2006 (2010/2124(INI))’. Official Journal of the European Union, 2012/ C 377E/06. European Parliament, DRAFT REPORT with recommendations to the Commission on corporate due diligence and corporate accountability (2020/ 2129(INL)), 11 September 2020. European Parliament, Proposal for a directive of the European parliament and of the council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, COM (2022) 71 final. Domestic Legislation Argentina Código Civil y Comercial de la República Argentina (aprobado por la Ley N° 26.994 de 1 de octubre de 2014, y modificado por el Decreto N° 62/2019 de 21 de enero de 2019) (Civil and Commercial Code). Austria Gesetz über das internationale Privatrecht – IPR-Gesetz of 15 June 1978, BGBl. No 304/1978 (Private International Law Act).

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Belgium Code Judiciaire of 10 October 1967 (Code of Civil Procedure). Brazil Federal Law No 9,307/1996, amended by Federal Law No 13,129/2015 (Arbitration Act). Law No 13.655, Introductory Act to the Norms of Brazilian Law (IANBL). France Code Civil. Code de procédure civile (Code of Civil Procedure). Germany Bürgerliches Gesetzbuch (BGB) (Civil Code). Einführungsgesetz zum bürgerlichen Gesetzbuche (EGBGB) (Introductory Act to the Civil Code). Deutsches Richtergesetz (DriG) (Judiciary Act). Handelsgesetzbuch (Commercial Code). Zivilprozessordnung (ZPO) (Code of Civil Procedure). Italy Codice Civile (Civil Code). Private International Law Act No 218 of 1995. Japan Act No 78 of 2006 on General Rules for Application of Laws. Private International Law Act. Lebanon Code of Civil Procedure Legislative Decree No 90/83. Netherlands Code of Civil Procedure Book 4 (Arbitration Act).

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treaties, laws, decisions

Norway Maritime Code of 27 May 1932 No 3. Ministry of Justice’s Report on the Sales of Goods Act and on ratification of the CISG, Ot.prp. nr. 80 (1986–87). Sale of Goods Act of 13 May 1988 No 27. Ministry of Justice’s Report on the Act on choice of law for insurance contracts, Ot.prp.nr. 72 (1991–92). Agency Act of 19 June 1992 No 96. Act on the Law Applicable to Insurance Agreements 27 November 1992 No 111. Company Act of 13 June 1997 No 44. Law Commission Report on the Arbitration Act, NOU 2001:33. Arbitration Act of 14 May 2004 No 25. Criminal Act of 20 May 2005 No 28. Disputes Act of 17 June 2005 No 90. Protection of Employees and Working Environment Act 2005. Parliament’s Report on ratification of the Convention on Immunities, St.prp.nr. 33 (2005–2006). Customs Act of 21 December 2007 No 119. Contracts Act of 31 May 2018 No 4. Act relating to enterprises’ transparency and work on fundamental human rights and decent working conditions of 18 June 2021 No 99. Paraguay Law 1879/02 for arbitration and mediation (Arbitration Act). Law 5393 of 2015 on the law applicable to international contracts. Peru Legislative Decree 1071 (Arbitration Act). Portugal Law 63/2011 (Arbitration Act). Russia Law on International Commercial Arbitration 1993.

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Sweden Law Commission Report on the Arbitration Act, SOU 1994:81. Governmental Report on the Arbitration Act, prop 1998/99:35. Act 1999:116 (Arbitration Act). Switzerland Code of Obligations, SR/RS 22. Private International Law Act (PILA). Turkey Act No 5718/2007 on Private International and Procedural Law. United Kingdom Law Reform (Frustrated Contracts) Act 1943. Misrepresentation Act 1967. Unfair Contract Terms Act (UCTA) 1977. Sale of Goods Act 1979. Arbitration Act 1996. Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/834). Law Commission Consultation Paper 257, Review of the Arbitration Act 1996: A Consultation Paper (2022). United States Federal Arbitration Act 1925. American Law Institute, Restatement (First) of Conflict of Laws (1934). Alien Torts Act 1948. Uniform Commercial Code of the United States. American Law Institute, Restatement (Second) of Conflict of Laws (1971). American Law Institute, United States Restatement (Second) of Contracts (1981). Uniform Foreign-Country Money Judgments Recognition Act (2005). American Law Institute, Restatement of the U.S. Law of International Commercial and Investor-State Arbitration (Final draft approved in 2019).

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treaties, laws, decisions

Court Decisions and Awards Court of Justice of the European Union (CJEU) Judgment of the Court of 4 February 1988, Horst Ludwig Martin Hoffmann v. Adelheid Krieg, C-145/86, ECLI:EU:C:1988:61 (Hoffmann). Judgment of the Court of 27 September 1988, The Queen v. HM Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust plc, C-81/87, ECLI:EU:C:1988:456. Judgment of the Court of 17 June 1992, Jakob Handte & Co GmbH v. Traitements Mécano-chimiques des Surfaces SA, C-26/91, ECLI:EU: C:1992:268. (Handte). Judgment of the Court (Sixth Chamber) of 2 June 1994, Solo Kleinmotoren GmbH v. Emilio Boch, C-414/92, ECLI:EU:C:1994:221 (Solo Kleinmotoren). Judgment of the Court of 9 March 1999, Centros Ltd v. Erhvervs- og Selskabsstyrelsen, C-212/97, ECLI:EU:C:1999:126 (Centros). Judgment of the Court of 1 June 1999, Eco Swiss China Time Ltd v. Benetton International NV, C-126/97, ECR I 3079, ECLI:EU:C:1999:269 (Eco Swiss). Judgment of the Court of 28 March 2000, Dieter Krombach v. André Bamberski, C-7/98, ECLI:EU:C:2000:164 (Krombach). Judgment of the Court (Fifth Chamber) of 11 May 2000, Régie nationale des usines Renault SA v. Maxicar SpA and Orazio Formento, C-38/98, ECLI: EU:C:2000:225 (Renault). Judgment of the Court (Sixth Chamber) of 13 July 2000, Group Josi Reinsurance Company SA v. Universal General Insurance Company (UGIC), C-412/98, ECLI:EU:C:2000:399 (Group Josi). Judgment of the Court (Fifth Chamber) of 9 November 2000, Ingmar GB Ltd v. Eaton Leonard Technologies Inc, C-381/98, ECR I-09305, ECLI:EU: C:2000:605 (Ingmar). Judgment of the Court of 5 November 2002, Überseering BV v. Nordic Construction Company Baumanagement GmbH (NCC), C-208/00, ECLI: EU:C:2002:632 (Überseering). Judgment of the Court of 30 September 2003, Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire Art Ltd, C-167/01, ECLI:EU: C:2003:512 (Inspire Art). Judgment of the Court (Grand Chamber) of 1 March 2005, Andrew Owusu v. N. B. Jackson, C-281/02, ECLI:EU:C:2005:120 (Owusu). Judgment of the Court (First Chamber) of 26 October 2006, Elisa María Mostaza Claro v. Centro Móvil Milenium SL, C-168/05, ECLI:EU: C:2006:675 (Claro).

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Judgment of the Court (Grand Chamber) of 16 December 2008, CARTESIO Oktató és Szolgáltató bt, C-210/06, ECLI:EU:C:2008:723 (Cartesio). Judgment of the Court (First Chamber) of 2 April 2009, Marco Gambazzi v. Daimler Chrysler Canada Inc. and CIBC Mellon Trust Company, C-394/07, ECLI:EU:C:2009:219 (Gambazzi). Judgment of the Court (Grand Chamber) of 28 April 2009, Meletis Apostolides v. David Charles Orams and Linda Elizabeth Orams, C-420/ 07, ECLI:EU:C:2009:271 (Apostolides). Judgment of the Court (Third Chamber) of 4 June 2009, T-Mobile Netherlands BV, KPN Mobile NV, Orange Nederland NV and Vodafone, C-8/08, T-Mobile et al. v. Raad van bestuur van de Nederlandse Mededingingsautoriteit 2009 ECR I-04529 ¶ 29, ECLI:EU:C:2009:343 (T-Mobile). Judgment of the Court (First Chamber) of 6 October 2009, Asturcom Telecomunicaciones SL v. Cristina Rodríguez Nogueira, C-40/08, ECLI: EU:C:2009:615. Judgment of the Court (Grand Chamber) of 6 October 2009, Intercontainer Interfrigo SC (ICF) v. Balkenende Oosthuizeb BV and MIC Operations BV, C-133/08, ECLI:EU:C:2009:617. Judgment of the Court (Grand Chamber) of 29 November 2011, National Grid Indus BV v. Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam, C-371/10, ECLI:EU:C:2011:785 (National Grid). Judgment of the Court (Third Chamber), 12 July 2012, VALE Építési kft, C-378/10, ECLI:EU:C:2012:440 (Vale). Judgment of the Court (First Chamber) of 6 September 2012, Trade Agency Ltd v. Seramico Investments Ltd, C-619/10, ECLI:EU:C:2012:531 (Trade Agency). Judgment of the Court (Third Chamber) of 11 September 2014, Groupement des cartes bancaires (CB) v. European Commission, C-67/13P, ECLI:EU: C:2014:2204 (Cartes Bancaires). Judgment of the Court (First Chamber) of 16 July 2015, Diageo Brands BV v. Simiramida-04 EOOD, C-681/13, ECLI:EU:C:2015:471 (Diageo). Judgment of the Court (Sixth Chamber) of 17 March 2016, Taser International Inc. v. SC Gate 4 Business SRL and Cristian Mircea Anastasiu, C-175/15, ECLI:EU:C:2016:176 (Taser). Judgment of the Court (First Chamber) of 7 July 2016, Genentech Inc. v. Hoechst GmbH and Sanofi-Aventis Deutschland GmbH, C-567/14, ECLI:EU:C:2016:526; Opinion of Advocate General Wathelet, 17 March 2016, ECLI:EU:C:2016:177. Judgment of the Court (Grand Chamber) of 25 October 2017, Proceedings brought by Polbud – Wykonawstwo sp. z o.o., C-106/16, ECLI:EU: C:2017:804 (Polbud).

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Judgment of the Court (Grand Chamber) of 6 March 2018, Slovak Republic v. Achmea BV, C-284/16, ECLI:EU:C:2018:158 (Achmea). Judgment of the General Court (Second Chamber, Extended Composition) of 18 June 2019, European Food SA and Others v. European Commission, T 624/15, T-694/15 and T 704/15, ECLI:EU:T:2019:423. Judgment of the Court (Grand Chamber) of 2 September 2021, République de Moldavie v. Komstroy LLC, C-741/19, ECLI:EU:C:2021:655 (Komstroy). Judgment of the Court (Grand Chamber) of 26 October 2021, Republiken Polen v. PL Holdings Sàrl, C-109/20, ECLI:EU:C:2021:875 (PL Holding). Judgment of the Court (Grand Chamber) of 25 January 2022, Case C-638/19 P, European Commission v. European Food SA and Others. Judgment of the General Court (Eighth Chamber, Extended Composition) of 2 February 2022, Polskie Górnictwo Naftowe i Gazownictwo S.A. v. European Commission, T-616/18, ECLI:EU:T:2022:4. European Court of Human Rights (ECtHR) Osmo Suovaniemi v. Finland, Decision of 23 February 1999, Application No 31737. Tabbane v. Switzerland, Decision of 1 March 2016, Application No 41069/12. Mutu and Pechstein v. Switzerland, Decision of 2 October 2018, Application No 40575/10 and No 67474/10. International Administrative Tribunals ADBAT 24. Asian Development Bank Administrative Tribunal. Decision No 24 (6 January 1997). EBRDAT. European Bank for Reconstruction and Development Administrative Tribunal 2018/AT/02 (14 September 2018). EBRDAT. European Bank for Reconstruction and Development Administrative Tribunal 2019/AT/06 (4 October 2019). ILOAT. International Labour Organization Administrative Tribunal 67 (26 October 1962). ILOAT. International Labour Organization Administrative Tribunal 122 (15 October 1968). ILOAT. International Labour Organization Administrative Tribunal 701 (14 November 1985). ILOAT. International Labour Organization Administrative Tribunal 3459 (12 February 2015). ILOAT. International Labour Organization Administrative Tribunal 3551 (30 June 2015).

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ILOAT. International Labour Organization Administrative Tribunal 4045 (20 June 2018). IMFAT. International Monetary Fund Administrative Tribunal 1999–1 (12 August 1999). UNAT. United Nations Administrative Tribunal 233 (6 May 2014). WBAT. World Bank Administrative Tribunal 215 (22 October 1973). International Court of Justice (ICJ) Nuclear Tests (Australia v. France) [1974], Judgment, ICJ Reports, p. 253 et seq Arbitral Decisions Ad Hoc Arbitration Raiffeisen Bank International AG (Austria) and Raiffeisen Bank Austria d.d. (Croatia) v. The Republic of Croatia, PCA Case No 2020–15. Swembalt AB v. Republic of Latvia, Arbitral Decision rendered in Copenhagen on 23 October 2000 under the ‘Agreement between the Government of the Kingdom of Sweden and the Government of the Republic of Latvia concerning the Promotion and Mutual Protection of Investments dated 10 March 1992, SÖ 1992-93’. The Arbitration Institute of the Stockholm Chamber of Commerce (SCC) Iurii Bogdanov, Agurdino-Invest Ltd and Agurdino-Chimia JSC v. Republic of Moldova, SCC Award, 22 September 2005. Renta 4 S.V.S.A, Ahorro Corporación Emergentes F.I., Ahorro Corporación Eurofondo F.I., Rovime Inversiones SICAV S.A., Quasar de Valors SICAV S.A., Orgor de Valores SICAV S.A., GBI 9000 SICAV S.A. v. The Russian Federation, SCC No 24/2007. Cairo Regional Centre of International Commercial Arbitration (CRCICA) CRCICA Award No 154/2000. In Mohie EldinI. Alam Eldin, Arbitral Awards of the Cairo Regional Centre of International Commercial Arbitration II (1997–2000), The Hague 2003, 25.

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International Centre for Settlement of Investment Disputes (ICSID) Amco Asia Corporation and others v. Republic of Indonesia, ICSID Case No ARB/81/1, 20 November 1984. Anderson et al. v. Republic of Costa Rica, ICSID Case No ARB(AF)/07/3, 19 May 2010 (on an issue of illegality). EDF (Services) Limited v. Romania, ICSID Case No ARB/05/13, 8 October 2009. El Paso Energy v. Argentina, ICSID Case No ARB/03/15, Award, 31 October 2011. Fraport AG Frankfurt Airport Services Worldwide v. Philippines, ICSID Case No ARB/01/01, 31 March 2014. Gustav F.W. Hamester GmbH & Co KG v. Republic of Ghana, ICSID Case No ARB/07/24, 18 June 2010. Inceysa Vallisoletana, SL v. Republic of El Salvador, ICSID Case No ARB/03/ 26, 2 August 2006. Industria Nacional de Alimentos SA & Indalsa Perú SA (formerly Empresas Lucchetti SA & Lucchetti Perú SA) v. Peru, ICSID Case No ARB/03/4, Decision on Annulment, 5 September 2007. Joseph Charles Lemire v. Ukraine, ICSID Case No ARB/06/18, 14 January 2010. Klöckner Industrie-Anlagen GmbH and others v. United Republic of Cameroon and Société Camerounaise des Engrais, ICSID Case No ARB/ 81/2, 21 October 1983 (Klöckner). Maritime International Nominees Establishment v. Guinea, ICSID Case No ARB/84/4, Decision on Annulment, 22 December 1989. Plama v. Bulgaria; Phoenix Action Ltd v. The Czech Republic, ICSID Case No ARB/06/5, 15 April 2009. Repsol v. Petroecuador, ICSID Case No ARB/01/10, Decision on Annulment, 8 January 2007. Salini et al. v. Morocco, ICSID Case No ARB/00/4, 23 July 2001. Tidewater v. Venezuela, ICSID Case No ARB/10/5, Decision of 23 December 2010. Tokios Tokeles v. Ukraine, ICSID Case No ARB/02/18, 29 April 2004. Universal Compression v. Venezuela, ICSID Case No ARB/10/9, Decision of 20 May 2011. Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No ARB/07/26. Wena Hotels v. Egypt, ICSID Case No ARB/98/4, Decision on Annulment, 5 February 2002. World Duty Free Company v. Republic of Kenya, ICSID Case No ARB/00/7.

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International Chamber of Commerce (ICC) ICC Award No 1110 of 1963 by Gunnar Lagergren, YCA 1996, at 47 et seq. ICC Award No 5832, Clunet 1988, at 1198 et seq. ICC Award No 5713, 1989. ICC Award No 6149 of 1990, YAC 1995, at 20 et seq. 41. ICC Award No 6673, Clunet 1992, at 996 et seq. ICC Award No 5622, YCA 1994, at 105 et seq. (also published in: Rev. d. Arb. 1992, at 773 et seq.). ICC Award No 8908, ICC Bull. 10/No 2 (1999), at 83 et seq. ICC Award No 9593, ICC Bull. 10/No 2 (1999), at 107 et seq. ICC Award No 9839, YCA 2004, 66 et seq. ICC Award No 18272, TBK [2011]. Peter De Sutter, Kristof De Sutter, DS 2 S.A. and Polo Garments Majunga S.A.R.L. v. Republic of Madagascar, Award dated 29 August 2014. Milano Chamber of Arbitration Camera Arbitrale Nazionale e Internazionale di Milano of 28 November 2002. Domestic Cases Austria Oberster Gerichtshof of 28 June 1983, 3 Ob 30/83. Oberster Gerichtshof of 26 January 2005, 3 Ob 221/04b. Oberster Gerichtshof of 23 February 2016, 18 OCg 3/15p. Oberster Gerichtshof of 1 March 2017, 5 Ob 72/16y (Ecolex 520). Belgium Cour de Cassation of 16 November 2006, PAS. 2006, I, No 11. Cour de Cassation of 19 June 2009, PAS. 2009, No 7 (Scafom International v. Lorraine Tubes S.A.S.). Cour de Cassation of 14 January 2010, PAS. 2010, I, No 12. Cour de Cassation of 3 November 2011, PAS. 2011, I, No 1. Cour de Cassation of 7 April 2023, C.21.0325.N. Canada Judgment of the Prince Edward Island Supreme Court, Grow Biz International Inc. v. D.L.T. Holdings Inc., 2001, PESCTD 27.

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Ontario Court, General Division, Robert E. Schreter v. Gasmac Inc., 13 February 1992, OJ No 257. Ontario Court, Superior Court of Justice, Consolidated Contractors Group SAL v. Abatovy Minerals SA, 2016 ONSC 7171. Supreme Court of Canada, Chevron Corp v. Yaiguaje, 2015 SCC 42 No 35682. Supreme Court of Canada, Nevsun Resources Ltd v. Araya, 2020 SCC 5, 28 February 2020. The Courts of British Columbia, Quintette Coal Ltd v. Nippon Steel Corp (1990), 47 BCLR (2d), aff’d 51 BCLR (2d) 105 (BCCA). Denmark UfR 1996, 937. Estonia Supreme Court, 12 December 2018, 2–18–4731. France Cour de Cassation Civ. 1ère of 8 March 1988, n° 86–12.015 (Société Thinet v. Labrely ès-qualites). Cour de Cassation Civ. 1ère of 5 February 1991, n° 89–14.382 (Almira Films v. Pierrel). Cour de Cassation Civ. 1ère of 22 October 1991, n° 89–21.528 (Valenciana). Cour de Cassation Civ. 1ère of 4 January 1992, n° 90–12.569 (Société Saret v. SBBM). Cour de cassation of 20 December 1993, n° 91–16.828 (Dalico). Cour de Cassation of 23 March 1994, n° 92–15.137 (Hilmarton v. Omnium de Traitement et de Valorisation (OTV)). Cour de Cassation of 10 June 1997, n° 95–18.402 and 95–18.403 (Hilmarton v. Omnium de Traitement et de Valorisation (OTV)). Cour de Cassation Civ. 1ère of 29 June 2007, n° 05–18.053 (Putrabali Adyamula v. Rena Holding). Cour de cassation of 4 June 2008, n° 06–15.320 (SNF v. Cytec Industries BV). Cour de cassation of 6 May 2009, n° 08–10.281 (Jean Lion et Cie S.A. v. International Company for Commercial Exchanges). Cour de cassation of 17 February 2015, n° 12–29.550. Cour de cassation of 17 February 2015, n° 13–18.956. Cour de cassation of 17 February 2015, n° 13–20.230.

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Cour de cassation of 1 June 2017, n° 16–18029 (de Sutter, DS2 (Luxembourg) and Majunga SARL v. Madagascar). Cour de cassation of 2 December 2020, n° 19–15.396 (Schooner). Cour de cassation of 29 September 2021, n° 558 F-D. Cour de cassation of 23 March 2022, n° 17–17.981 (Belokon v. Kyrgyzstan). Cour de cassation of 7 September 2022, n° 20–22.118 (Sorelec v. Libya). Cour de cassation of 28 September 2022, n° 20–20.260 (Kabab-Ji). Cour d’appel de Paris, 1e ch., of 18 November 2004, Rev arb. 2005 751 (Thalès Air Defence v. Euromissile). Cour d’appel de Paris of 27 May 2010, n° 09/08191 (M. Cohen v. Société Total Outre Mer SA). Cour d’appel de Paris of 17 February 2011, n° 09–28533. Cour d’appel de Paris, 7 April 2011 (Fitzpatrick). Cour d’appel de Paris of 4 November 2014, n° 13/10256. Cour d’appel de Paris of 25 November 2014, n° 13/1333. Cour d’appel de Paris of 20 January 2015, n° 13/20318. Cour d’appel de Paris of 24 February 2015, n° 13/23404. Cour d’appel de Paris of 7 April 2015, n° 14/00480. Cour d’appel de Paris of 14 April 2015, n° 14/07043. Cour d’appel de Paris of 8 November 2016, n° 13/12002. Cour d’appel de Paris of 17 February 2017, n° 14/21103 (République Bolivarienne du Venezuela c/ Société Gold Reserve INC). Cour d’appel de Paris of 21 February 2017, n° 15/01650. Cour d’appel de Paris of 16 January 2018, n° 15/21703. Cour d’appel de Paris of 28 May 2019, n° 16/11182 (Alstom). Cour d’appel de Paris of 28 May 2019, n° 17/03659. Court d’appel de Paris of 25 February 2020, n° 17/18001. Cour d’appel de Paris of 3 June 2020, n° 19/07261. Cour d’appel de Paris of 15 September 2020, n° 19/09058. Cour d’appel de Paris of 27 October 2020, n° 19/04177. Cour d’appel de Paris of 17 November 2020, n° 18/02568. Cour d’appel de Paris of 25 May 2021, n° 18/27648 (Cengiz v. Libya). Cour d’appel de Paris of 25 May 2021, n° 19/16601. Cour d’appel de Paris of 28 September 2021, n° 19/19834 (Nurol v. Libya). Cour d’appel de Paris of 5 October 2021, n° 18/18708. Cour d’appel de Paris of 12 October 2021, n° 19/21625 (Abouk Halil v. Senegal). Cour d’appel de Paris of 11 January 2022, n° 20/1793 (Republic of Benin v. SGS Company). Cour d’appel de Paris of 5 April 2022, n° 20/03242.

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Cour d’appel de Paris of 19 April 2022, n° 48/2022 (Republic of Poland v. Strabag SE, Raiffeisen Centrobank AG, Syrena Immobilien Holding AG). Cour d’appel de Paris of 19 April 2022, n° 49/2022 (Republic of Poland v. CEC Praha and Slot Group AS). Germany Bundesgerichtshof 178 BGHZ 192. Bundesgerichtshof of 15 June 1987, Case II ZR 124/86. Bundesgerichtshof of 26 February 1991, Case XI ZR 349/89. Bundesgerichtshof of 29 March 1996, Case II ZR 124/95. Bundesgerichtshof of 8 December 1998, Case XI ZR 302/97 (IPRax, 2000). Bundesgerichtshof [2005] ZIP 805. Bundesgerichtshof of 27 October 2008, Case ZR 192/20. Bundesgerichtshof of 30 October 2008, Case III ZB 17/08. Bundesgerichtshof of 6 April 2009, Case II ZR 255/08. Bundesgerichtshof of 5 September 2012, Case VII ZR 25/12 (Neue juristische Wochenschrift). Bundesgerichtshof request for preliminary ruling, decision of 3 March 2016, Case I ZB 2/15 (Slovak Republic v. Achmea). Bundesgerichtshof of 23 August 2016, Case I ZR 23/16. Bundesgerichtshof of 31 October 2018, Case I ZB 2/15 (Slovak Republic v. Achmea). Bundesgerichtshof of 26 November 2020, Case I ZR 245/19. Bundesgerichtshof of 17 November 2021, Case I ZB 16/21. Bundesgerichtshof of 27 September 2022, Case KZB 75/21. Bayerisches Oberstes Landesgericht of 15 December 1999, No 4 Z Sch 23/99. Bayerisches Oberstes Landesgericht of 20 November 2003, No 4 Z Sch 17/03. Bayerisches Oberstes Landesgericht of 18 January 2022, No 101 Sch 60/21. Frankfurt am Main Oberlandesgericht of 10 July 2003, No 26 Sch 01/03. Frankfurt am Main Oberlandesgericht of 27 August 2009, No 26 Sch 03/09. Frankfurt am Main Oberlandesgericht of 16 January 2020, No 26 Sch 14/18. Frankfurt am Main Oberlandesgericht of 25 March 2021, No 26 Sch 18/20. Hamburg Oberlandesgericht of 12 March 1998, IPRspr 1999 No 178. Karlsruhe Oberlandesgericht (OLG) of 4 January 2012, No 9 Sch 02/09. München Oberlandesgericht of 5 October 2009, No 34 Sch 12/09. Hamburg Landesgericht of 18 September 1997, No 305 O 453/96. München Landesgericht of 5 May 2021, No 21 O 8717/20.

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Hong Kong Brunswick Bowling & Billiards Corporation v. Shanghai Zhonglu Industrial Co Ltd [2009] HKCFI 94. Ireland Yukos Capital S.A.R.L. v. OAO Tomskneft, VNK [2014] IEHC. Italy C. 86/6404. C. 91/12346. Cassazione Civile of 20 January 1995 No 637. Cassazione Civile of 12 March 2020, No 8770/2020 (Cattolica). Cassazione Civile of 29 July 2021, No 21830. Lithuania Lithuanian Supreme Court, 18 January 2022, Civil Case No e3K-3-121-916/ 2022, Republic of Lithuania v. ICOR, Vilniaus Energija, Litesko, Veolia Energie International SA. Moldova Buletinul Curtii Supreme de Justitie a Republicii, 16 February 2006, Decision No 2re-46.2006, No 3. Netherlands Hoge Raad of 25 September 1992, IPRax 1994, 243 (Société Nouvelle des Papeteries de L’Aa Sa v. BV Machinefabriek BOA). Hoge Raad of 21 March 1997 (Eco Swiss China Time Ltd v. Benetton International NV). Hoge Raad of 16 May 1997, No 16470. Hoge Raad of 10 December 2004, NJF 2005/239. Hoge Raad of 17 April 2015, No 14/02966 (NRSL v. Kompas). Hoge Raad of 1 May 2015, No 14/04336 (Sonera v. Çukurova). Hoge Raad of 24 November 2017, No 491569/KG RK 11-1722 and 200.100.508/ 01 (Maximov v. OJCS Novolipetsky Metallurgichesky Kombinat). Hoge Raad, 23 November 2018, No 17/03478 (Tiffany v. Swatch). Hoge Raad of 4 December 2020, No 0/01892.

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Gerechtshof Amsterdam of 28 April 2009, No 200.005.269/01 (Yukos Capital S.A.R.L. v. OAO Rosneft). Gerechtshof Amsterdam of 25 April 2017, No 200.170.351/01 (Tiffany v. Swatch). Gerechtshof Haag of 28 April 1998, No 24. Gerechtshof Haag of 18 October 2004, HA/RK 2004, 667. (Telkom Malaysia v. Ghana). Gerechtshof Haag of 24 March 2005, NJF 2005/239. Gerechtshof Haag of 24 March 2005, TvA 2006/24 (Marketing Displays International Inc. v. VR Van Raalte Reclame B.V). Gerechtshof Haag of 18 February 2020, Case No 200.197.079/01. Gerechtshof Haag of 26 May 2021, C/09/571932/HA ZA 19–379 (Milieudefensie et al. v. Royal Dutch Shell PLC). Rechtbank Amsterdam of 4 March 2015, No C/13/567933 / HA ZA 14-653 (Tiffany v. Swatch). Norway Rt. 1970 s. 1059. Rt. 1977 s. 577. Rt. 1979 s. 1117. Rt. 1991 s. 220 (Sollia Borettslag). Rt. 1992 s. 796 (Pepsico). Rt. 1994 s. 581. Rt. 1997 s. 1637. Rt. 2004 s. 675. Rt. 2005 s. 1590. Rt. 2005 s. 268. Rt. 2009 s. 1537. Rt. 2010 s. 306 (Hempel). Rt. 2011 s. 531. Rt. 2012 s. 1779 (Victocor). HR-2016–1251-A. HR-2016–1447-A (Norsk Gjenvinning). HR-2017–1297-A (Bergen Bunkers). HR-2022–1148-A. HR-2022–192-A. LF-2018–123987, 18 October 2019 (Fevamotinico S.à.r.l v. Boa Imr AS). Russia Supreme Court, 28 April 2017, Decision No A40-147645/2015.

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The Arbitrazh Court of St Petersburg and Leningrad Region Ruling No A5625416/2021 of 21 October 2021. Singapore AKN and another v. ALC and others and other appeals (2015) SGCA 18. BLB and another v. BLC and others [2013] SGHC 196. CAJ v. CAI [2021] SGCA 102. CRW Joint Operation v. PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33, ICC Case No 18272/CYK. Denka Advantech Pte Ltd v. Seraya Energy Pte Ltd [2020] SGCA 119. Lim Teng Siam v. Hong Chhon Hau [2021] SGCA 43. PT Prima International Development v. Kempinski Hotels SA [2021] SGCA 35. Sweden Supreme Court, 2 June 2008, Case No T 339–08. Supreme Court, 20 March 2019, Case No T 5437–17 (Joint Stock Company Belgorkhimprom v. Koca Insaat Sanayi Ihracat Anonim Sirketi). Svea Court of Appeal, 2000, Decision 8090–99. Svea Court of Appeal, 15 May 2003, Case No T 8735-01 (CME v. Czech Republic). Svea Court of Appeal, 17 December 2007, Case No T 3108–06 (State of Ukraine v. Norsk Hydro ASA). Svea Court of Appeal, 28 November 2008, Case No T 745–06. Svea Court of Appeal, 5 September 2013, Case No T 10060–10. Svea Court of Appeal, 4 December 2014, Case No T 2610–13. Svea Court of Appeal, 20 March 2015, Case No T 8043–13. Svea Court of Appeal, 18 January 2016, Case No T 9128–14 (Renta4 v. Russian Federation). Stockholm District Court, 9 November 2011, Case No T 24891–07. Switzerland 4A_254/2010. 4A_294/2019. 4A_300/2021. 4A_301/2018. 4A_400/2008. 4A_406/2021. 4A_428/2008.

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4A_453/2021. 4A_461/2019. 4A_486/2019. 4A_492/2021. 4A_50/2012. 4A_532/2014. 4A_534/2014. 4A_538/2012. 4A_564/2020. 4A_618/2020. 4A_62/2020. 4A_65/2018. 4A_678/2015. 4A_74/2019. 4A_84/2015. 4P_100/2003. 4P_115/1994. 4P_14/2004. 4P_278/2005. Société de Banque Suisse v. Société Generale Alsacienne de Banque [1989] BGE 105 II 67. X S.p.A. v. Y S.r.l., Tribunal Fédéral, 8 March 2006, Arrêts du Tribunal Fédéral (2006) 132 III 389. Ukraine Supreme Court, 9 January 2020, Case No 761/46285/16-C. Supreme Court, 13 February 2020, Case No 824/100/19. United Kingdom The Supreme Court of the United Kingdom (UKSC)/House of Lords

Arnold v. Britton [2015] UKSC 36. Bank of Scotland v. Dunedin Property Investments Co Ltd [1998] UKSC 657. Braganza v. BP Shipping Ltd [2015] UKSC 17. Cavendish Square Holding BV v. El Makdessi and Parking Eye Ltd v. Beavis [2015] UKSC 67. Chartbrook Ltd v. Persimmon Homes Ltd [2009] UKHL 38. Dallah Real Estate & Tourism Holding Co v. Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46.

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Dunlop Pneumatic Tyre Company Ltd v. New Garage and Motor Company Ltd [1915] AC 79, UKHL. Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38. Fiona Trust & Holding Corporation and others v. Privalov and others [2008] 1 Lloyd’s L Rep 254. Interfoto Picture Library Ltd v. Stiletto Visual Programmes Ltd [1988] 2 WLR 615. Investors Compensation Scheme Ltd v. West Bromwich BS [1998] All ER 98; 1 WLR 898 (HL). J. Lauritzen AS v. Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep. 1. Kabab-Ji SAL (Lebanon) v. Kout Food Group (Kuwait) [2020] 1 Lloyd’s Rep 269; [2021] UKSC 48. Lesotho Highlands Development Authority v. Impregilo SpA [2005] UKHL 43. Marks & Spencer Plc v. BNP Paribas Securities Services Trust Co [2015] UKSC 72. Okpabi and others v. Royal Dutch Shell Plc and another [2021] UKSC 3. Photo Production Ltd v. Securicor Transport Ltd [1980] UKHL 2. Rainy Sky SA et al. v. Kookmin Bank [2011] UKSC 50. Rock Advertising Ltd v. MWB Business Exchange Centres Ltd [2018] UKSC 24. Taurus Petroleum Limited v. State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64. Triple Point Technology Inc v. PTT Public Company Ltd [2021] UKSC 29. Vedanta Resources PLC & Anor v. Lungowe & Ors [2019] UKSC 20. Walford v. Miles [1992] 2 AC 128; 1 All ER 453 UKHL. Wells v. Devani [2019] UKSC 1106. Wood v. Capital Insurance Services Limited [2017] UKSC 24. His Majesty’s Court of Appeal in England and Wales (EWCA)

Amey Birmingham v. Birmingham City Council [2018] EWCA Civ 264. Arcos Ltd v. Ronaasen [1933] AC 470. Astor Management AG v. Atalaya Mining Plc [2018] EWCA Civ 2407. Bank of New York Mellon (International) Limited v. Cine-UK Limited and London Trocadero (2015) LLP v. Picturehouse Cinemas Limited & Others [2022] EWCA Civ 1021. BDV Trading Ltd (t/a Barratt North London) v. JM Rowe (Investments) Ltd [2011] EWCA Civ 548. Candey Limited v. Bosheh & Anor [2022] EWCA Civ 1103. Charter Reinsurance Co Ltd v. Fagan [1997] AC 313.

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Compound Photonics Group Ltd v. Vollin Holdings Ltd [2022] EWCA Civ 1371. Davies Contractors Ltd v. Fareham Urban District Council [1956] AC 696. Dexia Crediop Spa v. Comune di Prato [2017] EWCA Civ 428. Deutsche Schachtbau- und Tiefbohrgesellschaft mbH v. Ras Al Khaimah National Oil Co [1987] 2 Lloyd’s Law Rep 246 (CA). DHL Project & Chartering Ltd v. Gemini Ocean Shipping Co Ltd [2022] EWCA Civ 1555. Dodika Ltd v. United Luck Group Holdings Ltd [2021] EWCA Civ 638. First Tower Trustees Ltd v. CDS (Superstores International) Ltd [2018] EWCA Civ 1396. Globe Motors v. TRW Lucas Varity Electric Steering [2016] EWCA Civ 396. Haugesund Kommune v. DEPFA ACS Bank [2010] EWCA Civ 33. Interbulk Limited v. Aiden Shipping Co Ltd [1984] 2 Lloyd’s Rep 66 (CA). Joanne Properties Limited v. Moneything Capital Limited [2020] EWCA Civ 1541. JP Morgan Chase v. Springwell [2010] EWCA Civ 1221. Kason Kek-Gardner Ltd v. PCL [2017] EWCA Civ 2132. Lomas v. JFB Firth Rixson Inc [2012] EWCA Civ 419. Lombard North Central plc v. Butterworth [1987] 1 All ER 267 (CA). Merthyr (South Wales) Ltd v. Tydfil County Borough Council [2019] EWCA Civ 526. Mid Essex Hospital Services NHS Trust v. Compass Group UK and Ireland Trading Ltd [2013] EWCA Civ 200. MonSolar IQ v. Woden Park Ltd [2021] EWCA Civ 961. Municipio de Mariana and others v. BHP Group (UK) Ltd (formerly BHP Group PLC) and BHP Group Ltd [2022] EWCA Civ 951. MUR Shipping BV v. RTI Ltd [2022] EWCA Civ 1406. National Carriers Ltd v. Panalpina (Northern) Ltd [1981] AC 675. Peekway v. Australia & New Zealand Banking Group [2006] EWCA 386. Proforce Recruit Limited v. The Rugby Group Ltd [2006] EWCA Civ 69. Raiffeisen Zentralbank Oesterreich AG v. Five Star General Trading LLC and others [2001] EWCA Civ 68 (2001) QB 825. Robert Bou-Simon v. BGB Brokers LP [2018] EWCA Civ 1525. Schofield & Anor v. Smith & Anor [2022] EWCA Civ 824. Syska v. Vivendi Universal SA [2009] EWCA Civ 677. Teoco UK Ltd v. Aircom Jersey 4 Ltd [2018] CA Civ 23. Virgin Atlantic Airways v. Zodiac Seats UK Ltd [2013] UKSC 46 [2014] AC 160. Vita Food Products Inc v. Unus Shipping Co [1939] AC 277 PC. Watson v. Haggitt [1928] AC 127.

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Westacre Investments Inc. v. Jugoimport-SDPR Holdings Co Ltd and others [1999] 3 All ER 864, 885. White & Carter (Councils Ltd) v. McGregor [1963] AC 413. Yukos Capital SARL v. OJSC Rosneft Oil Company [2012] EWCA Civ 855. His Majesty’s High Court of England and Wales (EWHC)

Accentuate Ltd v. Asigra Inc [2009] EWHC 2655 (QB), [2009] 2 Lloyd’s Rep 599. Al Nehayan v. Kent [2018] EWHC 333 (Comm). Alan Bates v. Post Office Limited [2019] EWHC 606 (QB). Alexander Brothers Ltd (Hong Kong SAR) v. Alstom Transport SA and Another [2020] EWHC 1584 (Comm). Astor Management AG & Another v. Atalaya Mining Plc & Others [2017] EWHC 425 (Comm). Banca Intesa Sanpaolo Spa and another v. Comune di Venezia (2022) EWHC 2586 (Comm). Banco Santander Totta SA v. Companhia de Carris de Ferro de Lisboa SA [2016] EWHC 465 (Comm). Barclays Bank plc v. Svizera Holdings BV & anr [2014] EWHC 1020 (Comm). Black Sea Commodities Ltd v. Lemarc Agromond Pte Ltd [2021] EWHC 287 (Comm). British Petroleum (Libya) Ltd v. The Government of the Libyan Arab Republic [1979] 53 ILR 297. Brockton Capital LLP v. Atlantic-Pacific Capital Inc [2014] EWHC 1459 (Comm). Canary Wharf (BP4) T1 Ltd v. European Medicines Agency [2019] EWHC 335 (Ch). Cathay Pacific Airways Ltd v. Lufthansa Technik AG [2020] EWHC 1789 (Ch). Chandler v. Crane, Christmas & Co [1951] 2 KB 164. Credit Agricole Indosuez v. Unicof Ltd [2003] EWHC 2676 (Comm). Crossley & Ors v. Volkswagen AG & Ors [2021] EWHC 3444 (QB). D & C Builders Ltd v. Rees [1966] 2 QB 617. Dassault Aviation SA v. Mitsui Sumitomo Insurance Co Ltd [2022] EWHC 3287 (Comm). De Boinville v. IG Index Ltd [2021] EWHC 3326 (Comm). Decura IM Investments LLP v. UBS AG [2015] EWHC 171 (Comm). Deutsche Bank v. Busto [2021] EWHC 2706. Dexia Crediop SpA v. Provincia di Pesaro [2022] EWHC 2410 (Comm). Ducat Maritime Ltd v. Lavender Shipmanagement Inc [2022] EWHC 766 (Comm).

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Essex County Council v. UBB Waste (Essex) Ltd [2020] EWHC 1581. European Professional Club Rugby v. RDA Television LLP [2022] EWHC 50 (Comm). Fern Computer Consultancy Ltd v. Intergraph Cadworx & Analysis Solutions Inc [2014] EWHC 2908 (Ch). Fleetwood Wanderers Limited v. AFC Fylde Limited [2018] EWHC 3318 (Comm). Gold Group Ltd v. BDW Trading Ltd [2010] EWHC 163. Hulley Enterprises Ltd & Others v. The Russian Federation [2022] EWHC 2690 (Comm). Idemitsu Kosan v. Sumitomo [2016] EWHC 1909 (Comm). India v. Reliance Industries Limited and another (2022) EWHC 1407. Leeds City Council v. Barclays Bank Plc [2021] EWHC 363. Libyan American Oil Company v. The Government of the Libyan Arab Republic [1982] 62 ILR 140. Libyan Arab Foreign Bank v. Bankers Trust Co [1989] QB 728. Malicorp Ltd v. Government of the Arab Republic of Egypt [2015] EWHC 361 (Comm). Marme Inversiones 2007 v. Natwest Markets Plc [2019] EWHC 366 (Comm). Maximov v. OJSC Novolipetsky Metallurgichesky Kombinat [2017] EWHC 1911 (Comm). Monde Petroleum SA v. Westernzagros Limited [2016] EWHC 1472 (Comm). Moore & Co Ltd v. Landauer Co [1921] 2 KB 519. Mott MacDonald Ltd v. Trant Engineering Ltd [2021] EWHC 754 (TCC). MSC Mediterranean Shipping Company S.A. v. Cottonex Anstalt [2015] EWHC 283 (Comm); [2016] EWCA Civ 789. MUR Shipping BV v. RTI Ltd [2022] EWHC 467 (Comm). Myers v. Kestrel Acquisitions Ltd [2015] EWHC 916. National Iranian Oil Company v. Crescent Petroleum Company International Limited & Crescent Gas Corporation Limited [2022] EWHC 1645 (Comm). Optimares S.p.A. v. Qatar Airways Group Q.C.S.C [2022] EWHC 2461 (Comm). PBO v. DONPRO [2021] EWHC 1951 (Comm). Phoenix Interior Design Ltd v. Henley Homes Plc [2021] EWHC 1573 (QB). Riverrock Securities Limited v. International Bank of St Petersburg [2020] EWHC 2483 (Comm). Russel v. Cartwight & Ors [2020] EWHC 41 (Ch). Seadrill Ghana Operations Limited v. Tullow Ghana Limited [2018] EWHC 1640.

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SK Shipping Europe Plc v. (3) Capital VLCC 3 Corp (5) Capital Maritime Trading Corp [2020] EWHC 3448 (Comm). Taqa Bratani Ltd v. Rockrose UKC88 LLC [2020] EWHC 58. The Football Association Premier League Ltd v. PPLive Sports International Ltd [2022] EWHC 38 (Comm). Travellers Casualty and Surety Company of Canada (UK) Limited [2002] EWHC 1704 (Comm). Trustee v. Duchess & Others [2019] EWHC 778 (Ch). TRW Ltd v. Panasonic Industry Europe GmbH [2021] EWHC 19 (TCC). TSG Building Services Plc v. South Anglia Housing [2013] EWHC 1151. UK Acorn Finance Ltd v. Markel (UK) Ltd [2020] EWHC 922 (Comm). Union of India v. McDonnell Douglas Corp [1993] 2 Lloyd’s Rep 48. Union of India v. Reliance Industries Limited and another [2022] EWHC 1407 (Comm). UTB LLC v. Sheffield United Ltd [2019] EWHC 2322. W Limited v. M SDN BHD (2016) EWHC 422 (Comm). Wales v. CBRE Managed Services Ltd [2020] EWHC 16 (Comm). Williams v. Roffey Bros. & Nicholls (Contractors) Ltd [1991] 1 QB 11. Wilson v. Maynard Shipbuilding Consultants AG Ltd [1978] QB 665. Yam Seng Pte Limited v. International Trade Corporation Limited [2013] EWHC 111 (QB). Zayo Group International Ltd v. Michael Aigner et al. [2017] EWHC 2542 (Comm). Other

Adams v. British Airways plc [1995] IRLR 577. Altimo Holdings v. Kyrgyz Mobil Tel [2011] UKPC 7. AXA Sun Life Services Plc v. Campbell Martin Ltd [2012] Bus LR 203. Betamax Ltd v. State Trading Corporation (Mauritius) [2021] UKPC 14 (United Kingdom). Credit Lyonnais v. New Hampshire Insurance Company [1997] 2 CMLR 610 CA. Ferguson Shipbuilders Ltd v. Voith Hydro GmbH & Co KG [2000] SLT 229. Hare v. Horton [1883] 5 B & Ad 715. McGrath v. Shaw [1987] 57 P & CR 452. Offord v. Davies (1862) 142 ER 1336; 12 CBNS 748. Overseas Union Insurance Ltd v. AA Mutual International Insurance Co Ltd [1988] 2 Lloyd’s Rep 63. Scotia Homes (South) Ltd v. Mr James Maurice McLean and Mrs Linda Isabella McLean [2012] A216/10. Stilk Myrick [1809] 2 Camp 317. Stuart v. Wilkins [1778] I Dougl. 18, 99 Eng Rep 15.

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Texaco Overseas Petroleum Company, California Asiatic Oil Company v. The Government of the Libyan Arab Republic, award of 9 January 1977 [1978] 17 ILM 3. Union Eagle [1997] 2 All ER 215. United States American Central Eastern Texas Gas Co v. Union Pacific Resources Group, 2004 US App Lexis 1216 (5th Cir 2004). Ameropa A.G. v. Havi Ocean Co LLC, District Court, Southern District of New York, 16 February 2011, 2011 WL 570130. Avalon Hotel Partners, LLC, 302 BR 377, 381, United States Bankruptcy Court, District of Oregon (October 30, 2003). Baker Marine (Nig) Ltd v. Chevron (Nig) Ltd, 191 F 3d 194 (2d Cir 1999). Baxter Int’l v. Abbott Laboratories, 315 F 3rd 829 (7th Cir 2003). Belship Navigation Inc v. Sealift Inc (The ‘Huntsville’), US District Court (SDNY) (Robert P Patterson Jr DJ) 27 July 1995. BG Group, PLC v. Republic of Argentina, 572 US 25, 34 (2014). Browning-Ferris Industries of California, Inc., d/b/a BFI Newby Island Recyclery and FPR-II, LLC, d/b/a Leadpoint Business Services and Sanitary Truck Drivers and Helpers Local 350, International Brotherhood of Teamsters, 362 NLRB 1599 (2015). Chromalloy Gas Turbine Corp v. Egypt, 939 F Supp 907 (DDC 1996). Corporation Mexicana de Mantenimiento Integral v. Pemex Exploration y Production, 962 F Supp 2d 642 (SDNY 2013). Dewan v. Walia, 544 F App’x 240 (4th Cir 2013). Dynamics Corp of America v. Citizens and Southern National Bank [1973] 356 F Supp 991. Esso v. Nigerian National Petroleum Corporation, 4 September 2019, US District Court (SDNY). Fertilizer Company of India, Southern District of Ohio, 517 F Supp 948 (1981). First Options of Chicago, Inc. v. Kaplan, 514 US 938 (1995). Freedom Foods Pty Ltd v. Blue Diamond Growers [2021] FCAFC 86. Hall Street Associates LLC v. Mattel Inc, 522 US 576 (2008). Interest to the Ministry of War of the Government of Iran v. Cubic Defense Systems, Inc, Court of Appeals, Ninth Circuit, 15 December 2011, 665 F3d 1091 Intervention Energy Holdings LLC, Case No 16–11247 (District of Delaware June 3, 2016). J. Zeevi & Sons v. Grindlay’s Bank (Uganda), 37 NY2d 220, 333 NE2d 168, 371 NYS2d 892.

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Kiobel v. Royal Dutch Petroleum Co., 569 US 108 (2013). Micula v. Government of Romania, 404 F Supp 3d 265 (DDC 11 September 2019). Mitsubishi Motors Corp v. Soler Chrysler-Plymouth, Inc., 473 US 614, 628 (1985). National Oil Corporation (Libya) v. Libyan Sun Oil Company [1990] 733 F Supp 800. Nestlé USA, Inc v. Doe et al., 141 S Ct 1931 (2021). Parsons & Whittemore Overseas v. Société Générale de L’Industrie du Papier (RAKTA), Court of Appeals, Second Circuit, 508 F2d 969 (1974). Re Lehman Brothers Holdings, Inc., US Bankruptcy Court Case No 08– 13555 et seq. (JMP). Salen Dry Cargo AB v. Victrix Steamship Co, F 2d 709 (2nd Cir 1987). Scherk v. Alberto-Culver [1974] 417 US 506. State Property Fund of Ukraine v. TMR Energy Limited, Court of Appeals, District of Columbia Circuit, 17 June 2005, 2005 US App Lexis 11540. Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., 559 US 662 (2010). United States Court of Appeals, Seventh Circuit, 16 January 2003, 315 Federal Reporter, Third Series (7th Cir 2003). United States Court of Appeals for the District of Colombia, No 19-7127, 2020 US App LEXIS 16008 (DC Cir 19 May 2020). United States District Court, Northern District of Illinois, Eastern Division, 29 September 2004, 2004 US Dist Lexis 19728. United States District Court, Southern District of California, 7 December 1998, Civ No 98–1165-B, 29 Federal Supplement, Second Series (SD Cal 1998) pp. 1168–74.

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u Introduction

That a commercial contract is international may seem intuitive to some observers, yet it is difficult to find an accepted definition for the term. What is even more difficult is identifying the legal rules to which international commercial contracts are subject. Are international contracts subject to some sort of international law? What are the sources of this law and what is its scope of application? To the extent that international contracts are subject to national rules, which law’s rules are applicable? These questions become even more pressing when the practice of international contracting is taken into consideration: contracts are often written as if their terms were the only source with which to regulate the parties’ relationship and as if any sources of law were irrelevant. This self-sufficiency is attempted through drafting the contract in great detail, by writing clauses that attempt to exclude any interference from external sources and by stipulating that disputes between the parties shall be solved out of court via arbitration. Contracts tend to be drafted in the same way, irrespective of the legal system in which they will be implemented. Ambitions regarding self-sufficiency, standardisation and arbitration clauses make one wonder about the relationship between the contract and the governing law. This book will analyse the interaction between international commercial contracts and the sources that govern them. In Chapter 1 I will present the practice of international contract drafting and will highlight how its peculiarities may fit with the applicable sources of law when a contract has to be interpreted and enforced. In Chapter 2 I will go through the most important sources of non-national law and will analyse to what extent they may contribute to the harmonised interpretation and regulation of international contracts. In Chapter 3 I will examine how international contracts may be influenced by the national governing law. In Chapter 4 I will discuss how the governing law is chosen and what role the will of the parties has in this process. In Chapter 5 I will analyse the extent to which the role of the parties’ will is enhanced when the contract stipulates that any disputes arising between the parties out of the contract shall be solved by arbitration. 1

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Before starting the analysis of the role played by the parties’ will and by the applicable sources of law in the interpretation and enforcement of international contracts, however, it is necessary to define the starting point of the analysis; namely, international commercial contracts. Two elements require explanation: the term ‘commercial’ and the term ‘international’. I.1 Explanation of the Term ‘Commercial’ To explain the term ‘commercial’ it will be sufficient here to specify that it refers to transactions entered into between parties in the course of their business activities. This leaves consumer contracts outside of the scope of the subject, as well as other aspects of private law, such as family or inheritance law. It is not the intention here to contribute to the old and extensive debate, which seems particularly to characterise some civil law legal traditions, concerning the difference between private law and commercial law; the difficulty in defining precisely the term ‘commercial’ appears clearly in the explanation of the term provided by the Model Law on International Commercial Arbitration made by the United Nations Commission on International Trade Law (UNCITRAL), which, in footnote 2 relating to Article 1, uses a tautology; that is, it explains the term ‘commercial’ by referring to the same concept, without imparting any additional explanation other than a long, non-exclusive list of transactions that are deemed to be of a commercial nature: The term ‘commercial’ should be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature, whether contractual or not. Relationships of a commercial nature include, but are not limited to, the following transactions: any trade transaction for the supply or exchange of goods or services; distribution agreement; commercial representation or agency; factoring; leasing; construction of works; consulting; engineering licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture and other forms of industrial or business co-operation; carriage of goods or passengers by air, sea, rail or road.1

As unsatisfactory as it may be to operate with a non-exhaustive list rather than with a clear definition of the scope of the content, we will follow the guidelines laid down by UNCITRAL, and will consider the kinds of transactions listed as the object for this book. This seems to cover only private law matters and leaves out questions of public law. However, this distinction is not clear cut. Leaving aside that the private–public law divide is not necessarily recognised in all legal systems (notably, not in the common 1

United Nations Commission on International Trade Law, Model Law on International Commercial Arbitration 1985, as amended in 2006, https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/ 19-09955_e_ebook.pdf.

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explanation of the term ‘international’

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law tradition), there are aspects of public international law that may well be relevant to commercial activity, as mentioned in Section I.3 of this Introduction. In particular, this book will, when relevant, consider investment arbitration. I.2 Explanation of the Term ‘International’ As far as the term ‘international’ in the name ‘international commercial law’ is concerned, there are two possible interpretations: (i) the law is international because it stems from international sources; or (ii) it is not the law that is international, but the object that the law regulates. Although the former is not completely irrelevant, as mentioned in Section I.3 of this Introduction, it is the latter construction that correctly describes the subject of this book. We will focus on the law that governs international commercial relationships; however, the definition of ‘international’ varies according to the criteria used by the interpreter. Different state laws and different international conventions have different definitions of what international is. For example, the Vienna Convention on Contracts for the International Sale of Goods of 1980 (also known as the CISG) specifies, in Article 1.1, that a sale falls within the scope of the Convention (and therefore is to be deemed as international) if the parties have their place of business in different states: This Convention applies to contracts of sale of goods between parties whose places of business are in different States.

Therefore, under the CISG, a contract between, for example, a French seller and a Norwegian buyer, is considered an international contract. A contract between two companies based in France, however, would not be considered international under the CISG, even if the contract requires one party to import certain goods from a foreign state to sell them to the other party. The Hague Convention on the Law Applicable to International Sales of Goods of 19552 does not define the term international, and simply states in Article 1 that the mere determination by the parties is not sufficient to give a sale international character (indirectly accepting that a sale may be international if there are some foreign elements to the transaction, but that this is not necessarily the place of business of the parties): The mere declaration of the parties, relative to the application of a law or the competence of a judge or arbitrator, shall not be sufficient to confer upon a sale the international character provided for in the first paragraph of this Article.

2

This Convention has been ratified by eleven European states, and is largely absorbed, as between EU member states, by the EU Rome I Regulation on the Law Applicable to Contractual Obligations (Regulation EC 593/2008 of 17 June 2008). The Convention is applicable when one of the parties belongs to a signatory state, which is not an EU member state, notably, Norway. The Hague Conference in 1986 drafted a more modern convention on the same subject; this convention, however, never entered into force.

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Therefore, a contract between two Italian parties for the sale of a product manufactured in Italy according to which both delivery and payment will be made in Italy, will not qualify as international under the Hague Convention, even if the contract has a clause choosing German law as the law governing the transaction. However, the abovementioned contract between two French companies for the import and successive domestic sale of certain goods might be considered as international for the purpose of the Hague Convention because there is a foreign element involved in the import of the goods. The EU Rome I Regulation on the Law Applicable to Contractual Obligations (Regulation EC 593/2008 of 17 June 2008), which is the European Union’s (EU’s) instrument regulating the choice of law for contracts, speaks in Article 1.1 of any situation involving a conflict between the laws of different states; thus, indirectly, it opens the door even for the eventuality that the only foreign element to a transaction is the choice made by the parties of a foreign law – although, in such situations, the applicability of party autonomy, which is the most important conflict rule contained in the Regulation, is limited by Article 3.3 thereof: 3.3. Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement. Therefore, the abovementioned import and subsequent domestic sale between two companies based in France would fall within the scope of Article 1.1 of the Rome I Regulation and allow for a wide choice of law, as regulated for in Article 3.1, because the import of the goods is an element that connects the situation with more than one state. The domestic contract between the two Italian companies mentioned, however, even though it falls within the scope of Article 1.1, would be subject to Article 3.3 of the Rome I Regulation, and would allow a more restricted party autonomy (see, however, Section 1.2, for a restrictive interpretation of this provision). The UNCITRAL Model Law on International Commercial Arbitration defines an arbitration as international if one or more conditions are met, including the mere determination by the parties that the subject matter of the dispute relates to more than one state, see Article 1.3: An arbitration is international if: (a) the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different states; or (b) one of the following places is situated outside the state in which the parties have their places of business: (i) the place of arbitration if determined in, or pursuant to, the arbitration agreement;

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(ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject matter of the dispute is most closely connected; or (c) the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one state. Therefore, a dispute arising out of the abovementioned domestic agreement between two Italian companies would qualify as international for the purpose of the UNCITRAL Model Law if the parties have chosen a foreign governing law or a foreign state as a venue for the arbitration. Bearing in mind these discrepancies, and that it is therefore necessary to verify in each specific case (on the basis of the applicable law) whether the transaction is international or not, it will suffice for the purpose of this book to define a transaction as international whenever there is a foreign element to it that connects it with at least two different states. The most evident example would be a contract entered into by two parties that are resident in different states: for example, an Italian clothes producer entering into an agency contract with a Norwegian agent for the promotion and sale of products in the Norwegian territory, or a Russian aluminium producer entering into a contract for the export of its products to Norway. There might be, however, less evident cases, where an inquiry is necessary before the transaction may be defined as either international or domestic. Where a contract is entered into between a company located in a certain state and the local, wholly owned subsidiary of a foreign company, for example, some state laws will permit disputes connected therewith to be defined as international,3 whereas others focus on the formal aspect of the common nationality of the parties and consider the disputes to be domestic.4 I.3 The Public International Law Dimension Public international law is the branch of the law that regulates the relationship between states. States are sovereign and are therefore free to regulate their internal affairs through legislation, administrative regulation and the exercise of the judicial function; their sovereignty, however, does not extend beyond their respective territory. In terms of their relationship with other states, when states act as sovereign states and need to determine their respective positions towards each other, they are subject to the principles and rules of public international law.

3

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For example, the Russian Law on International Commercial Arbitration provides in Article 1.2 of its 1993 version that disputes arising out of contracts between two Russian companies may be submitted to international arbitration if one of the Russian companies was (wholly or even partially) owned by a foreign entity. For example, the Swiss Private International Law Act, Article 176(1).

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A state does not act as a sovereign when it engages in commercial activity, and public international law, therefore, is not relevant. Commercial transactions will be subject to commercial and private law, even when one of the parties involved is a state. Generally, there is no overlap between these branches of the law. In some situations, however, there is interference. This happens mainly when an investor engages in a business activity in a foreign country. The investor will enter into a series of contracts of a commercial nature with other private parties, or even with the host state, and these contracts will be subject to private or commercial law in accordance with the rules of private international law. The investor’s activity will, in addition, have a series of implications in terms of administrative or public law, and these will be regulated by the law of the host country – for example, the enterprise will generate income that is subject to the local tax law; it will perhaps involve production activities, with implications for the local environmental law; it will have employees who are subject to the local labour law; it will have access to natural resources or infrastructure subject to administrative concessions; it will have export activity subject to licensing and so on. All these regulations to which the investor is subject are part of the legal system of the host country, and the host country, in its sovereignty, legislates and administrates within these fields as it deems fit and in accordance with its evaluation of what is in the public interest. This regulatory activity is within the sovereignty of the state, and, as a general rule, it is not subject to any constraints other than the rule of law and the constitutional principles of the state itself. Should the host country regulate these matters in a way that violates fundamental principles, for example, because it engages in discriminatory behaviour or because it confiscates property without paying compensation, it may encounter limitations being placed on it through public international law. Public international law, particularly through treaties entered into on a bilateral or multilateral basis for the protection of investments made by nationals of one state in the territory of the other state, contains some principles that may be invoked by the foreign investor who is affected by the state’s conduct. Traditionally, individuals were not considered to be subjects of public international law and had to present their claims against the host country via their respective country of origin, mainly through diplomatic protection. This gave the process a political, rather than a legal dimension, and was not necessarily favourable to the investor. Therefore, the Washington Convention of 1965 on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) established a legal proceeding in which foreign investors could pursue their claims directly against the host country in a special arbitration proceeding – the so-called investment arbitration. This arbitration largely resembles the procedure for commercial disputes but permits the investor to raise claims based on alleged violations by the host country of its public international law obligations regarding the treatment of foreign investors, mainly based on treaties on investment protection. In the past decades, bilateral investment treaties (BITs) have proliferated, as well as some multinational treaties, giving investors the possibility of being able to directly bring an action against the host country

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in an arbitration form known as investment arbitration. Many of these treaties allow for the possibility of being able to choose not only a dedicated ICSID arbitration, but also forms of arbitration that are designed for commercial disputes, such as arbitration under the UNCITRAL Arbitration Rules or under the rules of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC). In the past few decades, investment arbitration has been frequently used by investors and it has become a significant instrument in foreign business activity. Investment protection does not fall within the scope of this book, but investment arbitration will be mentioned occasionally when it is relevant. The great number of international treaties on investment protection has led in the past decade or two to a boom in so-called investment disputes, in which foreign investors initiate an arbitration procedure against the host country by claiming that the public international law rules protecting foreign investment have been violated. For the sake of completeness, it must be pointed out that, in recent years, the boom in investment disputes has created a considerable reaction: states have withdrawn from multilateral treaties such as the 1994 Energy Charter Treaty, bilateral treaties between EU member states have been discontinued and the mechanism of investment arbitration is under scrutiny. This public international law protection may be wrongly interpreted as encouraging international transactions in general (also those for which investment protection is not relevant) to be considered as detached from national law and subject to international law instead.5 In reality, investment protection is not relevant to mere commercial relationships, and, furthermore, it does not replace national law, not even when it is applicable. Investment protection adds a corrective dimension to national law, without, however, excluding its applicability. If a certain activity qualifies as a foreign investment and enjoys the relevant protection, it will still be subject to the applicable state law, with corrections available through the fundamental principles of public international law such as nondiscrimination, compensation upon expropriation, fair and equitable treatment, full protection and security. Any rules and regulations of national law that do not violate these fundamental principles will still be applicable to the investment. However, the borderline between public international law and international commercial law is somewhat blurred, particularly in the context of transnational sources. This book will, therefore, discuss the public international law dimension when examining transnational sources that may be applicable to international contracts. Questions related specifically to investment arbitration will be touched upon only marginally, mainly in respect of investment proceedings that are carried out under commercial arbitration rules. 5

See Giuditta Cordero-Moss, ‘Commercial Arbitration and Investment Arbitration: Fertile Soil for False Friends?’ In Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds.), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (Oxford University Press, 2009), pp. 782–97, Section 2.

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1 International Contract Practice and Its Expectations in Terms of the Governing Law

1.1 Issues Arising Out of International Contract Practice International contracts are often written on the basis of rather standardised models that are mainly drafted in English. Not only are they written in the English language, but they also employ a drafting style that is typical for English contracts. This does not mean, however, that the parties intend the contract to be subject to English law. Often, contracts are governed by a law that does not belong to the common law family – which is the name of the legal tradition (so-called legal family) to which English law belongs.1 A contract between a Norwegian and an Italian party, for example, may contain a clause choosing Swiss law as the governing law. This contract will have no connection whatsoever with the common law, Norway, Italy and Switzerland being countries belonging to the so-called civil law legal family.2 Yet the contract will most probably be written in English and according to the English contract style, or some hybrid development thereof. This may create tensions between the contractual provisions and the governing law. Furthermore, and as a consequence of being inspired by the common law, international contracts are drafted in a style that aims to create an exhaustive, and as precise as possible, regulation of the underlying contractual relationship, thus attempting to render redundant any interference from external elements such as the interpreter’s discretion or the rules and principles of the governing law. To a large extent, this degree of detail may achieve the goal of rendering the contract a self-sufficient system, thus enhancing the impression that, if only they are sufficiently detailed and clear, contracts will be interpreted on the basis of their own terms and without being influenced by any governing law. This impression, however, has been proven to be illusionary, and not only because governing laws may contain mandatory rules that may not be derogated from by the contract. As a matter of fact, not many mandatory rules affect international 1

2

Broadly, among the countries belonging to the common law legal family are England, India, many Asian countries, some African countries, Oceania, most of the United States and most of Canada. Among the countries belonging to the civil law legal family are continental Europe, Turkey, Russia, Japan, some Asian countries, some African countries and the Latin American countries.

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commercial contracts, although there are important mandatory rules, for example, in the field of the limitation of liability, that are also relevant in the commercial context.3 Perhaps more importantly, the governing law, which may vary from contract to contract, will affect, consciously or not, the way in which the contract is interpreted, construed and applied. In the legal discourse, particularly in US legal theory, an important distinction is being made between interpretation and construction.4 While interpretation is the process of clarifying the linguistic meaning of a text, construction is the process of inferring legal effects from that text. Often, it is expected that interpretation assumes an unclear text;5 construction, to the contrary, does not require lack of clarity. Even if the contract language is clear, the legal effects will not flow solely from the words of the contract. The words will produce the legal effects that the law attaches to them, and they will therefore be understood in the light of the applicable law. As an example of how the process of construction can influence the legal effects of contract wording, see the Force majeure clause, discussed in Section 3.5.3. The wording is clear: the seller is exempted from liability if delivery is prevented by an event which is, inter alia, beyond the seller’s control. What is to be deemed to be beyond the seller’s control, however, depends on the applicable law. Notwithstanding any efforts by the parties to include as many details as possible in the contract in order to minimise the need for interpretation, the governing law will necessarily project its own principles regarding the function of a contract, the advisability of ensuring a fair balance between the parties’ interests, the role of the interpreter in respect of obligations that are not explicitly regulated in the contract, the existence of a duty of the parties to act loyally towards each other and the existence and extent of a general principle of good faith – in short, the balance between certainty and justice, see Sections 3.1 and 3.3. That the same contract wording may be interpreted differently depending on the legal tradition of the interpreter (see Section 3.4), largely deprives of its meaning the self-sufficiency goal, since it entails that the legal effects of the contract do not flow solely from the contract, but from the interaction of the contract with the governing law. It could be tempting to rely on an emerging opinion that legal systems (particularly the common law and the civil law) converge on an abstract level and that, consequently, very similar results may be achieved in the various systems, albeit by applying different legal techniques. This observation, however, does not afford much help to the parties to a specific contract. Firstly, convergence can rarely be said to be complete, as Section 3.3 will show. Even within one single legal family there are significant differences – for example, 3

4

5

Some examples are discussed in Section 3.6. To what extent mandatory rules of the governing law have an impact in the context of international commercial arbitration will be analysed in Section 5.2. Lawrence B. Solum, ‘The Interpretation-Construction Distinction’. Constitutional Commentary 27 (2010), p. 676. In linguistics, however, interpretation does not necessarily imply the clarification of an equivocal text: the process of understanding the meaning of any word is an interpretation.

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between the US and English law regarding exculpatory clauses. Even within the same system, there may be divergences, as the same clause may have different legal effects in the different states within the United States.6 Secondly, there is little use in observing that legal systems converge at a high level of abstraction, and that differences are mainly found only at the level of technical implementation. Reducing the divergence to a mere question of technicalities misses the point: it is precisely the different legal techniques that matter when a specific contract wording has to be applied. It would not be of much comfort for a party to know that it could have achieved the desired result if only the contract had had the correct wording as required by the relevant legal technique. The party is interested in the legal effects of the particular clause that was written in the contract, not in the abstract possibility of obtaining the same result from a different clause. It could be tempting to overcome the inconsistent legal effect of contract terms by invoking transnational sources. Transnational law is believed to provide a uniform system that is independent of the peculiarities of national laws. As Chapter 2 will show, however, there do not seem to be any generally acknowledged transnational principles that are sufficiently comprehensive and specific to give exhaustive and uniform guidance on the interpretation and construction of contracts. The question of contract interpretation and construction, thus, has to be addressed under the governing law. As will be seen in Chapter 3, the main difference in interpreting contracts under the common law or the civil law tradition consists in the importance attached to the terms of the contract. The common law tradition privileges a literal interpretation of the contract language and enforces contracts according to their terms if these are sufficiently clear, without being concerned with the results of their performance – in particular, it is irrelevant whether the performance of the contract terms leads to a balanced result. The civil law tradition starts too from the wording of the contract, but then construes it according to its legal system: it supplements the contract terms with ancillary obligations, restricts them with implied assumptions and integrates them with considerations of fairness, good faith and the need to achieve a balance between the parties’ interests. Furthermore, the contract regulates only the issues which fall within the scope of the freedom of contract. However, there are many aspects of a legal relationship that do not fall within this scope, and that consequently are regulated by the applicable law, see Section 4.5. Even a simple contract of sale presents issues that cannot be regulated by the parties – for example, whether the title passed from the seller to the buyer (this is a matter of property law and is outside the sphere of freedom of contract); whether the signature on the contract is binding (this is a question of 6

Edward T. Canuel, ‘Comparing Exculpatory Clauses under Anglo-American Law: Testing Total Legal Convergence’. In Giuditta Cordero-Moss (ed.), Boilerplate Clauses, International Commercial Contracts and the Applicable Law (Cambridge University Press, 2011), pp. 80–103, Section 2.

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legal capacity and is outside the sphere of freedom of contract); whether the agent could bind the seller (this is a question of agency law and is outside the sphere of freedom of contract). More complex legal relationships will present even more issues that fall outside the scope of contract freedom: in a contract creating a security interest, the existence and effects of the security are regulated by property law; in a contract relying on a board resolution, its existence and validity is subject to the applicable company law and so on. To avoid external interferences, contracts often contain a series of clauses in which the parties try to take into their own hands those aspects where the balance between certainty and justice may be challenged – the so-called boilerplate clauses. These clauses relate to the interpretation and general operation of contracts and are to be found in most contracts irrespective of the subject matter of the contract. They are relatively standardised and their wording is seldom given attention during the negotiations. Some examples of these clauses will be presented in Section 1.5.7 Their interpretation under transnational sources will be discussed in Section 2.2.5(f) and their interpretation under various governing laws will be presented in Section 3.4.1. Furthermore, to avoid external interferences, often contracts contain an Arbitration clause. In this way, the parties agree that disputes between them shall not be solved by courts, but in arbitration – a private disputes settlement mechanism. As arbitration enjoys a significant autonomy from courts and national laws, the influence of national law is reduced, see Section 5.1, although not completely avoided, see Section 5.2. To what extent this autonomy also ensures a uniform interpretation of the contract, will be discussed in Section 3.7. 1.2 International Contracts The foregoing presented international contract practice as if it was a well-recognised category. However, notwithstanding the mentioned ambitions of uniformity that characterise international contract practice, there does not seem to be a uniform definition of when a contract is considered international (see the Introduction, Section I.2). In most situations, there are no doubts about the internationality of the legal relationship: for example, a Canadian producer enters into a commercial agency agreement with a Belgian agent for the promotion of its products in the territory of the EU. This is evidently an international contract. But would the international qualification be as obvious if the Canadian producer established a subsidiary in Belgium, and this Belgian company entered into sales contracts with Belgian buyers? According to one of the most important international 7

For a more extensive list of boilerplate clauses and an analysis of their legal effects under a variety of legal systems, see Cordero-Moss (2011a).

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conventions in the field of international commerce, the 1980 United Nations Vienna Convention on Contracts for the International Sale of Goods, known as CISG (see Section 2.2.4), a contract is international if the parties have their place of business in different states. Even though the seller is a subsidiary of the Canadian producer, therefore, the fact that it is established in the same country as the buyer’s prevents consideration of the sales contracts as international. A dispute arising out of these contracts could nevertheless be deemed to be international under the UNCITRAL Model Law on International Commercial Arbitration (see Section I.2 of the Introduction, Section 2.2.6(d) and Chapter 5), which considers as international also disputes in which a substantial part of the obligations of the commercial relationship is to be performed in a state different from the parties’ state. The widest definition of internationality is apparently to be found in the EU Regulation on the Law Applicable to Contractual Obligations (see Section I.2 of the Introduction and Section 4.3). As was mentioned in the Introduction, the Rome I Regulation permits the parties to any contract to choose the governing law, irrespective of whether there is an international element. However, Article 3(3) restricts this very wide understanding: if, apart from the choice of a foreign law, all other elements are located in the same state, the chosen law will not have the effect of governing the contract, but will only be incorporated into the contract as if it was a term of the contract. The contract, together with the incorporated chosen law, will still be subject to the local governing law – in particular, to its mandatory rules. Therefore, the simple choice of a foreign law is not sufficient to render the contract international. It is interesting to point out that this provision has been applied in a rather restrictive way in England. Some decisions were rendered before Britain’s exit from the European Union (‘Brexit’), some after. Following Brexit, Britain is no longer an EU member and therefore Rome I Regulation no longer applies; however, England has enacted a statute on choice of law that reproduces the Rome I Regulation.8 After Brexit, English courts are no longer bound to follow the case law by the Court of Justice of the European Union (CJEU), and their application of the provision corresponding to Article 3(3) does not necessarily have significance for the application of Rome Regulation I in the EU. However, considering that many international contracts, particularly in the field of financing, insurance and transportation, choose English courts to solve disputes, the definition of international applied by English courts is of great interest, even though it does not necessarily coincide with the definition applied in the European Union. In a series of cases, English courts had to determine whether the choice of English law was valid for financial contracts entered into between two Italian parties, and that 8

The Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/834).

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were to be performed in Italy. The criteria for considering the contracts to be fully domestic were met, but the courts nevertheless considered them international. The contracts regulated financial derivative relationships, so-called Swap agreements. The agreements were entered into on the basis of a standard form known as the ISDA (International Swaps and Derivatives Association) Master Agreement, see Section 2.2.6(c), which is utilised all over the world. The ISDA Master Agreement contains a choice of law clause subjecting the relationship to English law. In evaluating whether this contract between two Italian parties that was to be performed solely in Italy was domestic or international, the English Court of Appeal conceded that all elements of the relationship between the parties were connected only with Italy. However, the court considered that the contract was based on a standard which is used internationally. This was sufficient to render the contract international. Hence, the Court considered the choice of English law to be full and not restricted by Article 3(3) of the Rome I Regulation.9 1.3 The Models for International Contract Drafting English is undeniably the common language for international business transactions. Communication between the business parties is mainly carried out in English and contracts that formalise the deals are written in English. When searching for models for specific contract terms or for entire contracts in the English language, the most common approach is to find contracts originally written in English and these are usually English contracts written by English lawyers and subject to English law. This has bigger consequences than the mere linguistic aspect: contracts that are drafted by lawyers educated in the common law tradition and that are subject to the common law are developed to meet the requirements of the common law and to satisfy the common law criteria for contracts. Historically, most of the internationally distributed publications offering model contract collections reproduced common law-style contracts. As a result, law firms and corporate lawyers in a variety of jurisdictions (not only in common law jurisdictions) learnt to draft international contracts on the basis of these models. This has grown into a style of drafting contracts. International financial institutions impose the use of US or English-style contracts for the transactions that they are financing, irrespective of whether the financed entities or the investors involved come from common law states or not, or whether or not most of the related contracts are governed by English law, or another system of common law. As a result, operators in civil law states become accustomed to drafting in the common law style to meet the expectations of financial institutions. 9

Dexia Crediop Spa v. Comune di Prato [2017] EWCA Civ 428. See also Dexia Crediop SpA v. Provincia di Pesaro [2022] EWHC 2410 (Comm). The High Court reached the same result in a dispute on a Swap agreement between two Portuguese parties, Banco Santander Totta SA v. Companhia de Carris de Ferro de Lisboa SA [2016] EWHC 465 (Comm).

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During the former Soviet Union’s and the East European countries’ transition to market-driven economies in the 1990s, for example, the European Bank for Reconstruction and Development, an international organisation devoted to financing East European and former Soviet Union projects, almost exclusively adopted common law contract models for projects that were to be carried out in those civil law countries, even when all of the parties involved belonged solely to the civil law tradition. Contract types developed through practice, such as, for example, Swap contracts and other contracts for the trade of financial derivatives, are standardised by branch associations following the common law contract style. As a result, new types of transactions are regulated exclusively by common law-style contracts, and these contracts are used to regulate not only international transactions, but even domestic transactions within civil law systems. Contracts for the hedging of financial risk, for example, might be written in English and inspired by English law, even if they are entered into by a Norwegian company and a Norwegian bank and are governed by Norwegian law. This applies not only to the abovementioned Swap contracts but to any types of financial contracts, even where there is no world-wide accepted model such as the ISDA. The above-described widespread use of common law models is such that it is increasingly affecting even traditional contract types and domestic legal relationships, such as the rental of real estate or sale agreements within the borders of the same country. Even contract models applied by the Norwegian public sector for public procurement, to name one example, are increasingly drafted on the basis of these models, which are generally considered to represent state-of-the-art contracting among the law firms that might be hired by the relevant state body to draft the tender documentation. The Anglo-Americanisation of contract models, therefore, influences not only firms and companies that engage in international commerce, but also individuals, companies and even public bodies with purely domestic interests. These contract models do not reflect the tradition of civil law. As will be seen in Chapter 3, a civilian court reads the contract in the light of the numerous default rules provided in the governing law for that type of contract. Extensive provisions are not required in the contract if the contract is subject to a law that regulates most of the legal relationship, see Chapter 3. The common law drafting tradition, in turn, requires extensive contracts that spell out all of the obligations between the parties and leave little to the court’s discretion or interpretation – because common law courts see it as their function to enforce the bargain agreed upon between the parties, rather than to replace it with a bargain which the interpreter deems to be more reasonable or commercially sensible.10 Thus, English courts will be reluctant to read into the contract obligations that were not expressly agreed on by the parties. Since English courts often affirm that a sufficiently 10

Charter Reinsurance Co Ltd v. Fagan [1997] AC 313.

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clear contract wording will be enforced, parties are encouraged to increase the level of detail, and to write around mechanisms that have proven to be problematic (regulation applicable by operation of law and not aligned with the parties’ interests) by formulating clauses that will place the issue outside the scope of the regulation (see, for example, the Liquidated damages clauses described further on in this section). This drafting style follows the same approach that inspired the original common law models: caveat emptor.11 A commercial contract between professionals, often written by expert lawyers, is expected to reflect careful evaluations made by each of the parties of its respective interests. The parties are assumed to be able to assess the relevant risks and to make provision for them. The negotiations are expected to be carried out in a way that adequately takes care of each of the parties’ positions, and the final text of the contract is deemed to reflect this. The contract is deemed to have been written accurately, so that each party may use the contractual terms to objectively quantify its risk and, for example, insure against it. Another reason for privileging an accurate application of the contract’s wording is that contracts may be assigned to third parties – for example, as collateral for other obligations, or in the context of other transactions. Furthermore, contracts may be relied on in financing arrangements: the parties can agree that a loan will be repaid by the cash flow generated by the performance of a contract that the borrower has with a customer. Furthermore, contracts may be insured: in order to be able to calculate the risk and the consequent premium to be paid, the insurance company will need to carefully assess the rights and obligations arising out of the contract. Commercial practice is, therefore, based on the possibility that third parties, such as an assignee, a bank or an insurance company may rely on the contract. In order to rely on the contract, to ascertain its value or to assess the risk, these third parties must be put in a position to carefully evaluate the contract’s content, predict its performance and ascertain the precise scope of the rights and obligations flowing from it. Contracts should therefore contain all elements according to which they will be interpreted, and interpretation must be made objectively and on the basis of the contract’s wording. Third parties who come into contact with the contract have no possibility of being able to assess the subjective position of each of the parties, their respective assumptions, their non-expressed intentions and the content of their communications during the negotiations or even after the conclusion of the contract. Under these circumstances, a literal and thus predictable application of the contract is perceived as the only fair application of contracts. It might be unfair to draw on external elements in addition to the wording of the contract, such as, for example, the conduct or silence of one of the parties that may have created expectations in the other party at some stage during the negotiations or even after the contract was 11

This formula was pronounced by Lord Mansfield in Stuart v. Wilkins [1778] I Dougl. 18, 99 Eng. Rep. 15 and has since been used to characterise the approach of English contract law, whereby each party has to take care of its own interests.

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signed. How can a contract circulate and be used as a basis for calculating an insurance premium, granting financing or be assigned to a third party if its implementation depends on elements that are not visible in the contract itself? This heightens the impression that a well thought through formulation in the contract may solve all of the problems that may arise out of the contract and thus avoid the necessity of applying the governing law. When adopting the common law style, drafters may apparently be tempted to overdo things, and to write provisions that seek to elevate the contract to the level of law.12 This indulgence in self-referencing (also known as ‘boot-strapping’) makes one think of the tales featuring Baron Munchausen, namely that where the Baron attempts to lift himself (and his horse) up from a swamp by pulling his own hair. The eagerness in drafting may reach excesses that have been defined as ‘nonsensical’ by a prominent English expert.13 For example, the ubiquitous Representations and Warranties clause (see Section 3.5.1) may list, among the matters that the parties represent to each other, that their respective obligations under the contract are valid, binding and enforceable.14 This Representation is itself an obligation under the contract and subject to any ground for invalidity or unenforceability that might affect the contract, so what value does it add? A contract clause affirming that the contract is valid has a classical precedent in the known paradox of Epimenides of Crete, which states that all Cretans are liars. It is particularly interesting that this Representation is criticised by an English lawyer, because it shows that the attempt to detach the contract from the governing law may go too far, even for English law, and this notwithstanding that the drafting style adopted for international contracts is no doubt based on the English and US drafting traditions – which in turn encourages a seemingly self-sufficient style. The Representation on the validity and enforceability of the contract is not the only attempt to detach the contract from the governing law: as will be seen, other clauses, which often recur in contracts, regulate the interpretation or construction of the contract and the application of remedies independently from the governing law. Chapter 3 will show that some of these clauses will not achieve the desired results if the contract is subject to civil law. This is due to the overarching principle of good 12

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A similar attempt to elevate the contract to the level of law may be found in the assumption that the contract’s choice of law clause has the ability to move the whole legal relationship out of the scope of the application of any law, but the law chosen by the parties. The choice of law made by the parties, however, has effect mainly within the sphere of contract law. For areas that are relevant to the contractual relationship, but are outside the scope of contract law, the parties’ choice does not have any effect. Areas such as the parties’ own legal capacity, the company law implications of the contract or the contract’s effects on third parties within property law are governed by the law applicable to those areas according to the respective conflict rule, and the parties’ choice is not relevant. See Chapters 4 and 5. Edwin Peel, ‘The Common Law Tradition: Application of Boilerplate Clauses under English Law’. In Cordero-Moss (2011a), pp. 129–78, footnote 160. A representation clause on the validity and enforceability of the contract is a typical part of boilerplate clauses. See, for example, the contract database Law Insider, www.lawinsider.com/clause/representationsand-warranties-of-both-parties.

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faith that, in different ways, prevents a literal interpretation and application of the contract leading to unfair results. Interestingly, some of these clauses do not seem to achieve the desired results, even under English law. As noted by Peel,15 observers may tend to overestimate how literally English courts may interpret contracts. Be that as it may, contract practice shows that it is based on the illusion that it is possible, by writing sufficiently clear and precise wording, to draft around problems and circumvent any criteria of fairness that may inspire the court in the interpretation of the contract. Peel actually confirms that this is supported indirectly by English courts themselves, who often found their decisions on the interpretation of the wording rather than on substantial considerations such as the balance between the parties’ interests. In respect of some contract clauses, which interestingly attempt to regulate the interpretation of the contract precisely, it seems that the drafting efforts are not likely to achieve results that might be considered unfair by the court, no matter how clearly and precisely the wording was drafted, and in spite of the English courts’ insistence on making this a question of interpretation. For these clauses, therefore, English courts will not decide in the over-formalistic way that is often assumed to be typical of English courts, see Section 3.4. In respect of other clauses, however, the criteria of certainty and consistency seem to be given primacy by the English courts. This ensures a literal application of the contract notwithstanding the result, as long as the clause is written in a sufficiently clear and precise manner. The clause on Liquidated damages, for example, is designed to escape the common law prohibition of penalty clauses. The clause is meant to determine, in advance, the amount of damages that may arise if one party fails to perform the contract. By predetermining the damages, the parties avoid the uncertainty connected with having to prove that there has been a loss, that the loss was due to the other party’s default and the amount of the loss. A fixed sum to be paid in case of default is efficient, and in addition it has a function as an incentive to properly perform the contract. It can be compared to a fine that the defaulting party has to pay in case of default. Under some civilian laws, it is very common to agree on contractual fines which come under the name of penalty. Under the common law, however, a fine is deemed to be a penal feature that cannot be agreed in a contract. For this reason, contract practice developed the Liquidated damages clause. The clause has the same function as a penalty but is structured as a clause regulating reimbursement of damages. This reformulation is sufficient to render the arrangement admissible under common law. This clause provides a significant example of how drafting may be used to achieve a result that otherwise would not be enforceable: this is defined as the possibility of the parties being able to manipulate the interpretation to avoid the intervention of the courts,16 as will be seen in more detail in Section 3.5.2. 15

Peel (2011), Section 3.

16

Peel (2011), Section 2.7.

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Since international contracts are based on common law models, the common law terminology is adopted in international contracts that are governed by civil laws – even though the applicable law permits contractual penalties, and where it would not be necessary to structure the penalty as a pre-estimation of damages. This creates problems of coordination with the civil governing law, as will be seen in Section 3.5.2. The Liquidated damages clause is one example of the different approaches taken to drafting and interpretation in the common law and in the civil traditions. Whereas the former permits circumventing the law’s rules by appropriate drafting, the latter integrates the language of the contract with the law’s rules and principles. The possibility of writing around problems is thus quite rooted in the common law tradition; international contracts adopt models developed under the common law, and they are often written as if they were assuming that any issues might be solved by properly drafted clauses, quite irrespective of the governing law. 1.4 The Dynamics of Contract Drafting As seen in the previous section, the drafting style of commercial contracts usually attempts to create a self-sufficient system. The assumption that is not necessarily always consciously relied on, and derives from the common law style, is that, if the parties had wanted to restrict or qualify the application of the contract provisions, then they would have written the restrictions or the qualifications into the contract. Imposing the application of the governing law’s construction based on principle of good faith and ancillary obligations would interfere with the contract and create uncertainty. As Chapter 3 will show, however, this goal for self-sufficiency may not be fulfilled when the contract is subject precisely to a governing law that bases its construction on the principle of good faith and ancillary obligations. We will explain the reasons for this gap between the ambitions of self-sufficiency of the contract style and the actual legal effects of the contract under the governing law. Often, contracts are written by lawyers who are not experts in the applicable law. They are written even before it is clear which law will govern the contract. In a negotiation between a Norwegian and a Brazilian party, for example, the discussions will initially be carried out between the relevant technical or commercial officers of each of the parties. At a certain point, each of the parties will involve its lawyer. The lawyers will be asked to start putting the agreed technical and commercial terms into a contractual form. This draft will be negotiated and modified until it reflects the commercial understanding of the parties. At this stage, the contract will be fully drafted. It is usually only at this point that the parties insert or discuss the clause choosing the law that will govern the contract. In our example, the parties may choose a third, neutral law – for example, English law. In this case, the Liquidated damages

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clause in the model can be retained without creating any inconsistencies with the governing law. If the parties choose, for example, Norwegian law, it would be better to change the Liquidated damages clause into a Penalty clause. However, at this stage, it is too late to adjust the contract terms to the governing law. The parties have already negotiated and agreed on the commercial, technical and financial substance of their relationship, including the specifications, the pricing, the level of payments to be made in case of default and so on. They rely on the substance of their agreement, and do not worry about the gap between the contract terms and the governing law. As Chapter 3 will show, however, the contract has different legal effects under each of these laws. This approach does not necessarily derive from the parties’ ignorance of the legal framework surrounding the contract. More precisely, the parties may often be aware of the fact that they are unaware of the legal framework for the contract. They are aware that the interpretation and construction of the contract under the governing law may result in an outcome which is different from what would follow a literal application of the contract wording. They nevertheless write those clauses in the contract and accept, as a calculated risk, the possible discrepancy between the wording and the result. Furthermore, some of the clauses in a contract are often inserted without the parties having given any particular consideration to their content. This applies particularly to the already mentioned boilerplate clauses, which are inserted more out of habit than out of a specific need or intention to regulate those matters in that particular way. Considering the importance that the governing law has for the application and even the effectiveness of contract terms (see Chapter 3), it may seem surprising that the parties negotiate details of their deal and draft the corresponding provisions before even considering the question of which law will govern the contract, and that they insert contract language without having it carefully considered. However, this practice is not necessarily always unreasonable. From a merely legal point of view, it may make little sense; from the overall commercial perspective, however, it is more understandable. A contract is the result of a process in which both parties participate from opposite starting points. This means that the final result is, necessarily, a compromise. In addition, time and resources are often limited during negotiations. This means that the process of negotiating a contract does not necessarily meet all of the requirements that would ideally characterise an optimal process under favourable conditions. What could be considered an indispensable minimum in the abstract description of how a legal document should be drafted does not necessarily match with the commercial understanding of the resources that should be spent on such a process. This may lead to contracts being signed without the parties having negotiated all of the clauses, or without the parties having complete information regarding each clause’s legal effects

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under the governing law. What may appear, from a purely legal point of view, to be unreasonable conduct, is actually often a deliberate assumption of contractual risk.17 Considerations regarding the internal organisation of the parties are also a part of the assessment of risk. In large multinational companies, risk management may require a certain standardisation, which in turn prevents a high degree of flexibility in drafting individual contracts. In balancing the conflicting interests of ensuring internal standardisation and permitting local adjustment, large organisations may prefer to enhance the former.18 It is, in other words, not necessarily the result of thoughtlessness if a contract is drafted without having regard for the governing law. Neither is it a symptom of a refusal of the applicability of national laws. It is the result of a cost–benefit evaluation, leading to the acceptance of a calculated legal risk. Thus, it is true that boilerplate clauses, originally meant to create certainty about the interpretation and operation of the contract, may create uncertainty upon interaction with the governing law.19 The uncertainty about how exactly a clause will be interpreted by a court is deleterious from a merely legal point of view. However, this uncertainty may turn out to be less harmful from a commercial perspective: faced with the prospects of employing time and resources to pursue a result that is unforeseeable from a legal point of view, the parties may be encouraged to find a commercial solution. Rather than maximising the legal conflict, they may be forced to find a mutually agreeable solution. This may turn out to be a better use of resources once the conflict has arisen. In addition, this kind of legal uncertainty is evaluated as a risk, just like other risks that relate to the transaction. Commercial parties know that not all risks will materialise, and this will also apply to the legal risk: not all clauses with uncertain legal effects will actually have to be invoked or enforced. In the majority of contracts, the parties comply with their respective obligations and there is no need to invoke the application of specific clauses. In the situations where a contract clause actually has to be invoked, the simple fact that the clause is invoked may induce the other party to comply with it, irrespective of the actual enforceability of the clause. An invoked clause is not necessarily always contested. There will be, thus, only a small percentage of clauses that will actually be the basis of a conflict between the parties. Of these conflicts, we have seen that some may be solved amicably, exactly because the uncertainty of the clause’s legal effects acts as a deterrent against litigation and as 17

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See more extensively, David Echenberg, ‘Negotiating International Contracts: Does the Process Invite a Review of Standard Contracts from the Point of View of National Legal Requirements’. In Cordero-Moss (2011a), pp. 11–19. See also the debate in the APA seminar mentioned in Section 3.7.2. See more extensively, Maria C. Vettese, ‘Multinational Companies and National Contracts’. In CorderoMoss (2011a), pp. 20–32. This observation is made by Viggo Hagstrøm in ‘The Nordic Tradition: Application of Boilerplate Clauses under Norwegian Law’. In Cordero-Moss (2011a), pp. 265–75, Section 2.

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an incentive to find a commercial solution rather than pursuing legal avenues. This leaves quite a small percentage of clauses upon which the parties may eventually litigate. Some of these litigations will be won; some will be lost. The commercial thinking requires a party to assess the value of this risk of losing a lawsuit on enforceability of a clause (also by considering the likelihood that it will materialise) and compare this value with the costs of the alternative conduct. The alternative conduct would be to assess every single clause of each contract that is entered into, verify its compatibility with the law that will govern each of these contracts and propose adjustments to each of these clauses to the various other contracting parties. This, in turn, requires the employment of internal resources to revise standard documentation, and external resources to adjust clauses to the applicable law, and possibly to engage in negotiations to convince the other contracting parties to change a model of the contract with which they are well acquainted. In many situations, the costs of adjusting each contract to its applicable law will exceed the value of the risk that is run by entering into a contract with uncertain legal effects. Often, to mitigate the risk of writing a contract that is unenforceable under the applicable law, the final draft of the contract is submitted to a local law firm with the request for verification that it is in compliance with the applicable law. This review, however, is normally limited to verifying that no mandatory rules are being violated. It does not extend to the compatibility of the drafting style with the applicable legal tradition, nor does it explain how the contract is interpreted or supplemented by the governing law. The sophisticated party, aware of the implications of adopting contract models that are not adjusted to the governing law and consciously assessing the connected risk, will identify the clauses that matter the most, and concentrate its negotiations on those, leaving the other clauses untouched and accepting the corresponding risk. A further element that may be relevant is the specialisation of lawyers. Often, lawyers who draft contracts are specialised in negotiating and drafting contracts, but not in litigation. When a contract that they have drafted is signed, they will turn to the negotiation of the next contract. If a dispute arises out of one of the contracts that they have drafted, it will not be the drafting lawyers who will be involved, but litigation lawyers. Therefore, the drafting lawyers will not have the opportunity of verifying how the clauses work in practice. The success of a clause will not be measured against the way in which the clause is interpreted or in terms of its effectiveness in avoiding disputes because the drafting lawyer is not involved in this phase. The success of a clause will be measured against the frequency with which the clause is accepted by the other party during the negotiations. That the drafting lawyer rarely sees how the clauses work in practice may contribute to enhancing the gap between the drafting style and the legal effects of international contracts.

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Litigation lawyers have a quite different approach to contract terms. A litigation lawyer works on a specific dispute and has the goal of solving that dispute on the basis of the applicable sources. To permit an assessment of whether the dispute shall be litigated or whether a commercial settlement is to be preferred, the contract’s legal effects and enforceability are central in the evaluation of the litigation lawyer. The contract will, therefore, be read in light of the governing law, and all applicable sources will be assessed. The foregoing shows that no hasty conclusions should be drawn from the practice of drafting contracts without considering the applicable law. This practice does not justify the disregard of national laws in the field of international contracts or arbitration. 1.5 Examples of Self-Sufficient Contract Drafting In this section are examples of some contract clauses that often recur in international commercial contracts. With these clauses, the parties try to take into their own hands those aspects that are usually decided by the governing law, such as interpretation and construction of the contract. The aim is to create the contract’s own general contract law, thus rendering the applicable law redundant. In the matters regulated by these clauses, however, the balance between certainty and justice may be challenged. For example, a clause may specify that the contract is the only source of obligations between the parties and that no other sources are allowed. Nevertheless, under some circumstances, excluding side agreements on which one of the parties has relied may seem unfair. Certain governing laws, therefore, may permit considering such side agreements, and the contract clause prohibiting their consideration will not be applied literally. As another example, a clause may specify that a party does not lose its contractual right to terminate even though it does not exercise it within a reasonable time. Nevertheless, under some circumstances, it may seem unfair to permit exercising a remedy that is not a proportionate reaction to an old event of termination but is only meant to take advantage of a market change. Certain governing laws, therefore, may prevent exercise of a contractual remedy, and the contract clause permitting it will not be applied literally. These and other scenarios are examined in Section 3.4.1. Each applicable law may have its own balance between certainty and justice, and this may affect the interpretation and construction of the very same contract clause that aims at regulating interpretation and construction of the contract. Chapter 2 will show that the interpretation of these clauses is not uniform under transnational sources, and Chapter 3 will show that the wording of the clauses may have differing legal effects depending on the governing law.

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1.5.1 Boilerplate Clauses Some clauses are frequently part of international commercial contracts, irrespective of the type of contract. Not only are they generally expected as an integral part of contract drafting, they are also immediately recognised and thus very seldom discussed during the negotiations. The drafting of these clauses is often considered to be a mere ‘copy and paste’ exercise. They are often referred to as having ‘boilerplate’, standard language with a general applicability that follows automatically and does not require any particular attention. Through these clauses, the parties attempt to regulate the contract’s interpretation, its construction, the exercise of remedies for breach of contract and the legal effects of future conduct. At the same time, these clauses attempt to exclude any rules that the applicable law may have on these aspects. Generally, the result that the clauses seek to achieve is to give effect to the wording of the contract, insulating it from the assumptions, ancillary obligations and so on, that may follow from the governing law. The following are examples of some of the most typical boilerplate clauses. (a) Entire Agreement Clause The purpose of the Entire agreement clause (also known as the Merger clause or Integration clause) is to attempt to isolate the contract from any source or element that may be external to the document. This is also often emphasised by referring to ‘the four corners of the document’ as the borderline for the interpretation or construction of the contract. The parties’ aim is thus to exclude terms or obligations that do not appear in the document. A typical Entire agreement clause might read as follows: This Agreement constitutes the entire agreement between the Parties and supersedes any prior understanding or representation of any kind preceding the date of this Agreement.

As Chapter 2 will show, there does not seem to be a uniform transnational standard for interpreting this clause. As Chapter 3 will show, the ability of this clause to obtain the desired result varies considerably depending on the governing law. To understand the origin of the Entire agreement clause, it is necessary to keep in mind that many international contracts are based on English models. English contracts are written to meet the requirements and to take advantage of the possibilities contained in the English law of contracts. Traditionally, an interpreter of English law contracts is bound by the language of the contract. As a general rule, the interpreter would not be allowed to take into consideration external circumstances when interpreting and construing the contract, such as the parties’ conduct during negotiations or after the signature of the contract.20 This is traditionally known as the parol evidence rule, which 20

Wilson v. Maynard Shipbuilding Consultants AG Ltd [1978] QB 665. More extensively, see Sections 3.1 and 3.2.

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prevents the parties from producing any evidence to add to, vary or contradict the wording of a contract when its terms are being construed, and imposes that the contract be read exclusively on the basis of the provisions that are written therein.21 The purpose of this rule is to enhance predictability in the course of commerce; in balancing the contrasting interests of, on one hand, establishing the real intention of the parties and, on the other hand, preserving predictability within commercial transactions, the parol evidence rule favours the latter. In the interests of certainty, therefore, a written contract is to be interpreted objectively and independently from extrinsic circumstances that are characteristic of the factual transaction. Gradually, however, a series of exceptions to the parol evidence rule has been created by court practice, mainly to ensure that the interpreter is aware of what the factual background of the parties was when they entered into the contract. Thus, it is permitted that evidence is produced of the factual background existing at or before the date of the contract (but not after that date, as is the case in the civil law systems), at least in respect of facts that were known to both parties.22 The Entire agreement clause is, in part, a countermove to this exception to the parol evidence rule. The parties may seek to prevent the admission of evidence of the factual background by inserting an Entire agreement clause in their contract, stating that the document contains the entire contract.23 This explains the origin of the Entire agreement clause in English contract practice: it is mainly meant to avoid the exceptions to the parol evidence rule that have evolved in court practice, and to reinstate the original regime of strict adherence to the text of the contract. When it is used in contracts subject to a civil law, however, the clause may be applied differently. To illustrate how the use of an Entire agreement clause may clash with the good faith principle, imagine a situation whereby one party regularly purchases raw materials for its production from a supplier. After some years of cooperation, the producer informs the supplier that it intends to upgrade its production, and that therefore the material to be supplied will have to be made according to a different alloy. The supplier is reluctant to accept the change because it would require significant investments. After negotiations and considering the importance of the volume that would be sold to the producer, the supplier accepts changing the alloy for the material that it is going to supply to the producer for the next five years. This is formalised in a side letter. Meanwhile, the frame supply agreement under which the parties had been operating is about to expire, and the producer sends the supplier a draft renewed frame agreement. The draft does not reflect the changed alloy that the parties had just negotiated and does not mention the side letter. The supplier is relieved that the producer evidently after all has been convinced by the supplier’s argument against the change and continues producing the material according to the 21 22

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Adams v. British Airways plc [1995] IRLR 577. Investors Compensation Scheme Ltd v. West Bromwich BS [1998] All ER 98 and Bank of Scotland v. Dunedin Property Investments Co Ltd [1998] SC 657. McGrath v. Shaw [1987] 57 P & CR 452.

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old specifications. When the producer invokes breach of contract because the side letter with the new alloy was not complied with, the supplier invokes the Entire agreement clause. According to the clause’s wording, the supplier is not bound by the side letter. However, in some legal systems, particularly those belonging to the family of civil law, as well as in soft sources such as the UNIDROIT Principles of International Commercial Contracts (UPICC) (see Section 2.2.5), the parties’ attempt to exclude the relevance of facts or of the parties’ conduct whenever these are not expressly reflected in the wording of the contract, may contradict a duty of good faith that the parties may have towards each other. This may in turn lead to a restrictive interpretation of the clause. Whether this clause actually manages to achieve uniform results will be discussed in Sections 2.2.5(f)(i) and 3.4.1(a). (b) No Waiver Clause The purpose of a No waiver clause is to ensure that the remedies described in the contract may be exercised in accordance with their wording at any time and irrespective of the parties’ conduct. This clause is originally meant to exclude the effects of the rule on acquiescence under English law. The rule on acquiescence would lead to a result that is similar to the requirement of exercising rights and remedies in good faith, present in many civil law regimes and in the transnational sources analysed in Chapter 2: if the innocent party behaves in such a clear and unequivocal way that the defaulting party may understand it as the expression of an intention by the former to waive its remedy, then the innocent party loses the possibility of exercising its remedy. Inserting a No waiver clause in the contract is meant to prevent any passive behaviour of the innocent party being interpreted as a clear and unequivocal representation, and therefore prevents the effects of the rule on acquiescence.24 The parties try, with this clause, to create a contractual regime for the exercise of remedies without regard to any rules that the applicable law may have on the time frame within which remedies may be exercised and the conditions for such exercise. The No waiver clause is inserted to avoid these ‘invisible’ restrictions on the possibility of exercising contractual remedies. A typical No waiver clause reads as follows: The failure of any party at any time to require performance of any provision or to resort to any remedy provided under this Agreement shall in no way affect the right of that party to require performance or to resort to a remedy at any time thereafter, nor shall the waiver by any party of a breach be deemed to be a waiver of any subsequent breach.

To illustrate how the use of a No waiver clause may clash against the good faith principle, imagine a situation whereby a company borrows a considerable sum from 24

For an analysis of this clause and its implications, with further references, see Peel (2011), Section 2.2.

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a bank to expand its production facilities. The loan agreement contains the usual covenants imposing on the borrower to carry out its activity, throughout the duration of the loan, in a way that does not prejudice its ability to repay its debt. The loan agreement gives the bank the power to terminate the loan with immediate effect if the borrower breaches these obligations. Imagine that the loan was at a fixed interest rate, which turns out to be too low as interest rates unexpectedly increase due to pandemic, wars and related inflation. The loan agreement is binding for several years, and the bank looks for a way to terminate it as a new loan agreement would incur a higher interest rate than the old one. The bank recalls that the borrower had, some years earlier, breached one of its obligations. At that time, interest rates were low, and the bank was not interested in terminating the loan. Now, however, the situation has changed, and the bank invokes the old breach of contract to terminate the agreement. The borrower argues that the old breach had no consequences and that the loan has been properly performed ever since, and that therefore there is no basis on which to terminate. The bank invokes the No waiver clause and argues that it has the power to terminate on the basis of the old breach. According to the clause’s wording, the bank is entitled to terminate. However, many legal systems have principles that protect the defaulting party’s expectations and restrict the innocent party’s formal rights so that the exercise of these rights does not result in an abuse. These rules may affect the exercise of remedies in a way that is not visible in the language of the contract. As Section 2.2.5(f)(ii) will show, there does not seem to be a uniform transnational standard for interpreting this clause. As Section 3.4.1(b) will show, the ability of this clause to obtain the desired result varies considerably depending on the governing law. (c) No Oral Amendments Clause The purpose of this clause is to ensure that the contract is implemented at any time according to its wording and irrespective of what the parties may later have agreed, unless recorded in writing. This clause is useful when the contract is going to be exposed to third parties in connection with the raising of finance or insurance. Third parties who assess the value of the contract must be assured that they can rely on the contract’s wording. If oral amendments were possible, an accurate assessment of the contract’s value could not be made simply on the basis of the document. The clause is also useful when performance of the contract requires the involvement of numerous officers of the parties, who are not necessarily all authorised to represent the respective party. The parties must feel sure that the contract may not be changed by an agreement given by some representatives who are not duly authorised to do so. In a large organisation, it is essential that the ability to make certain decisions is reserved for the bodies or people with the relevant formal competence.

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A typical No oral amendments clause reads as follows: No amendment or variation to this Agreement shall take effect unless it is in writing, signed by authorised representatives of each of the Parties.

As Section 2.2.5(f)(iii) will show, there does not seem to be a uniform transnational standard for interpreting this clause. As Section 3.4.1(c) will show, the ability of this clause to obtain the desired result varies considerably depending on the governing law. 1.5.2 Subject to Contract Clause In connection with larger commercial contracts with long-lasting and complicated negotiations, a widespread practice is to sign various documents in the course of the negotiations, usually named ‘Letter of Intent’, ‘Heads of Agreement’ or ‘Memorandum of Understanding’. In the traditional picture of contract formation, a letter of intent is hard to categorise: it is not an offer, it is not an acceptance, and it is not the final contract text. It is a pre-contractual document with an unclear function.25 The legal effects of a letter of intent cannot be assessed once and for all, mainly because the content and function of letters of intent vary considerably from case to case. What is common to all of these forms is that they have a clause, usually the last one, stating something along the following lines: This document is a letter of intent and is not binding on the parties. Failure to reach an agreement shall not expose any party to liability towards the other party.

Letters of intent may be quite detailed, so much so that they sometimes could be mistaken to be the final contract – if it were not for the Subject to contract clause. One reason for entering into such a detailed a letter of intent in advance of the final contract is that the parties may not yet have negotiated all of the specific aspects of their cooperation and may therefore not be in a position to be able to write the contract with the degree of detail with which they would feel comfortable. As the details may have a significant impact on the evaluation of the transaction, it is understandable that the parties do not want to be bound until all technical, financial, commercial and other elements have finally been agreed upon. If the parties do not, and with good reason, want to be bound until they have agreed on all the aspects of their cooperation, why do they describe their cooperation in such a precise way in the letter of intent? What is this document meant to achieve? The document is said to not be binding, not only in respect of the freedom not to finalise 25

More extensively, see Giuditta Cordero-Moss, ‘The Function of Letters of Intent and Their Recognition in Modern Legal Systems’. In Reiner Schulze (ed.), New Features in Contract Law (Sellier European Law Publishers, 2007b), pp. 139–59.

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the cooperation, but also in respect of the content of the cooperation: should one party, during the negotiations, depart from some of the parameters that were set forth in the letter of intent, it would not be in breach of contract because the document is not a binding contract. During the detailed negotiations, numerous issues may arise that have an impact on the parties’ respective evaluation of their own and the other party’s contribution to the cooperation, and this may have consequences relating to the split of the profit and liabilities between themselves. It is, therefore, understandable that the parties do not want to be bound to some items of the deal as long as the others are unclear. While it may from a legal point of view be possible to argue that a certain parameter was not binding, its disregard may create practical difficulties during the negotiations, and a sudden change of position in such an important respect might undermine the mutual trust that is necessary for successful cooperation. Therefore, the letter of intent may be seen as an attempt to convey a certain moral pressure against unjustified modifications to the terms contained therein. Sometimes, the moral pressure is expressed in the same clause determining the non-binding character of the document, which continues with a provision according to which ‘the parties shall continue negotiations in good faith’, or ‘the parties shall use their best efforts to reach an agreement’. Often these clauses are not considered to be particularly binding: they are defined as being ‘only’ best effort obligations and, therefore, they are deemed to be without any binding content. The legal effects of these obligations will be touched upon in Section 3.4.2. If the parties want to maintain full liberty in respect of the negotiations, why do they execute a document describing in relative detail the result that the negotiations are supposed to achieve? Sometimes the explanation may be found in a malicious use of the ambiguity of this document. It is not unusual for one party to emphasise the last article of the letter of intent regarding the parties not being bound. In these cases, a party may deem that the most important function of a letter of intent consists in establishing that the parties are not bound. A party may, for example, wish to keep all possibilities open to start similar cooperation with a third party, or to enter that specific market on its own. A letter of intent specifically stating that the parties are not bound may create the illusion that any break-off of the negotiations is acceptable. The non-binding character will be invoked if one party wishes to break off the negotiations or to modify the terms set forth in the letter of intent, whereas the moral commitment will be invoked if it wishes to prevent the other party from doing so. Some legal systems, particularly those belonging to the family of civil law, as well as soft sources such as the UPICC, contain an overarching duty of good faith that may restrict the liberty to break off negotiations if a party did not act in good faith. Also in this case, as we saw for the previous clauses, Sections 2.2.5(f)(iii) and 3.4.2 will show that there is no uniform standard according to which the clause can be interpreted.

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1.5.3 Termination Clause Termination clauses stipulate that the contract may be terminated prior to its planned expiry if certain events occur; for example, one party may be given the power to terminate the contract early upon breach by the other party of certain obligations. Often, Termination clauses distinguish between termination as a consequence of an ‘Event of default’, and termination as a consequence of an ‘Event of termination’. The former entails that one party failed to perform its obligations under the contract. The latter entails that one party, though not in default, is affected by circumstances that render the contract less interesting for the other party. For example, if the affected party’s economic situation deteriorates, the innocent party may find it too risky to be bound by the contract. In a sort of anticipation of a future default, the innocent party may be given the possibility to terminate the contract. Usually, the contract regulates different consequences for termination following an Event of default or an Event of termination. The Termination clause is meant to be operative irrespective of the consequences of the breach (that is, there is no need to ascertain whether the breach was so fundamental that termination is justified) or of the early termination (that is, there is no need to verify whether termination of the contract is a proportionate remedy under the given circumstances). By this clause, the parties attempt to avoid the uncertainty connected with the evaluation of how serious the breach is and what impact it has on the contract. This evaluation is due to the requirement, to be found in most applicable laws, that a breach be fundamental if the innocent party shall be entitled to terminate the contract. By defining certain terms as essential in the contract, or by spelling out that certain breaches give the innocent party the power to terminate the contract, the parties attempt to specify effects that arise automatically, instead of allowing for an evaluation that takes all of the circumstances into consideration. To illustrate how the use of a Termination clause may clash against the good faith principle, imagine the situation that was described in Section 1.5.1(b), whereby a company borrows a considerable sum from a bank to expand its production facilities. Among the obligations of the borrower, there is one providing that the borrower shall send its audited financial statements to the bank within a certain date from their approval. The borrower breaches this obligation and sends the financial statements one day too late. The financial statements show that the borrower’s financial position is strong, and there is no ground to worry about the borrower’s ability to repay its debt. However, the bank exercises its contractual right to terminate the loan upon a breach by the borrower of one of its obligations. The borrower argues that the breach does not have any consequences on the performance of the main obligation, and that the termination is motivated by the bank’s desire to take advantage of the change in the interest rates, not by the consequences of the breach. Moreover, a termination would have disastrous effects for the borrower, since the

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borrower would need to immediately repay the whole outstanding amount that should have been repaid over several years. The bank points out that the termination clause is clear and gives it the absolute right to terminate upon a breach. The clause’s terms permit the bank to terminate; however, many legal systems, particularly those belonging to the family of civil law, as well as soft sources such as the UPICC, may restrict the applicability of clauses that do not reflect a reasonable balance between the parties’ interests. As Section 2.2.5(f)(iv) will show, transnational sources do not seem to provide a sufficiently detailed standard of interpretation that could ensure a uniform application of a Termination clause. As Section 2.2.5(f)(iv) will show, the effects of a Termination clause may vary depending on the governing law. 1.5.4 Arbitration Clauses The wording of Arbitration clauses is another good example of the importance of English law requirements to the drafting of international contracts. It is also an example of international contract drafting’s resistance to change: as will be seen, international Arbitration clauses gradually assumed a wording that was originally meant to respond to some needs for clarity under English law. English law does not have this need for clarity anymore, but Arbitration clauses continue to use the same wording. Arbitration clauses are very detailed in the definition of their scope. This seems to have been a reaction particularly to some English court decisions that placed considerable emphasis on the language of the Arbitration clause and drew (out of words that actually were not intended to restrict the scope of the Arbitration agreement) unexpected conclusions as to which disputes could be deemed to fall within the scope of the Arbitration clause. To name one example, a court interpreted a clause that referred to arbitration any disputes ‘arising under’ a certain contract. The court found that the clause covered only those disputes which may arise regarding the rights and obligations created by the contract itself. In contrast, a clause referring to arbitration disputes ‘in relation to’ the contract or ‘connected with’ the contract, was held to have a wider scope.26 This led to more and more detailed formulations aimed at clarifying that the Arbitration agreement covers all possible disputes between the parties. These fine verbal distinctions have now been abandoned by English courts: in the words of the House of Lords, these distinctions reflect no credit upon English commercial law. It may be a great disappointment to the judges who explained so carefully the effects of the various linguistic nuances if they could learn that the draftsman . . . obviously regarded the expressions ‘arising under this charter’ . . . and ‘arisen out of this charter’ . . . 26

Overseas Union Insurance Ltd v. AA Mutual International Insurance Co Ltd [1988] 2 Lloyd’s Rep 63.

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as mutually interchangeable. . . . [T]he time has come to draw a line under the authorities to date and make a fresh start.27

The House of Lords affirmed that the parties are unlikely to trouble themselves too much about [the clause’s] precise language or to wish to explore the way it has been interpreted in the numerous authorities, not all of which speak with one voice . . .. [I]f the parties wish to have issues as to the validity of their contract decided by one tribunal and issues as to its meaning or performance decided by another, they must say so expressly.28

Notwithstanding the clarification given by the House of Lords, the London Court of International Arbitration (LCIA) still determines the scope of its Model Arbitration clause by reference to ‘any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination’.29 This detailed formulation has even spread beyond the area of English law: the Model Arbitration clause recommended by the Arbitration Institute of the Stockholm Chamber of Commerce refers to ‘any dispute, controversy or claim arising out of or in connection with this contract, or the breach, termination or invalidity thereof’.30 Similarly, the Model clause of the Swiss rules refers to ‘Any dispute, controversy or claim arising out of, or in relation to, this contract, including the validity, invalidity, breach or termination thereof ’,31 and the Model clause of the UNCITRAL Arbitration Rules to ‘Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof’.32 Along the same lines, although somewhat more succinctly, the Model clause of the International Chamber of Commerce (ICC) refers to ‘All disputes arising out of or in connection with the present contract’. A detailed Arbitration clause is meant to counteract restrictive interpretations that may be imposed by the applicable arbitration law. A simple clause may probably have the same effect in many jurisdictions, including those already considered. The detailed wording of many Model clauses is, therefore, redundant. What a detailed Arbitration clause may not achieve, however, no matter how clear and precise it is, is to extend the scope of what the applicable arbitration law considers to be arbitrable. The matter of arbitrability will be analysed in Section 5.4.8. 27 28 29 30 31 32

Fiona Trust & Holding Corporation and others v. Privalov and others [2008] 1 Lloyd’s L Rep 254 at 257. Fiona Trust & Holding Corporation and others v. Privalov and others [2008] 1 Lloyd’s L Rep 254 at 259. www.lcia.org/Dispute_Resolution_Services/LCIA_Recommended_Clauses.aspx. https://sccarbitrationinstitute.se/en/model-clauses/model-clause-english. www.lcia.org/Dispute_Resolution_Services/LCIA_Recommended_Clauses.aspx. https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/21-07996_expedited-arbitra tion-e-ebook.pdf.

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1.5.5 Other Clauses Numerous other clauses could be mentioned to illustrate the self-sufficient drafting style of international contracts. In this book, we will mention clauses on Liquidated damages, Force majeure, Hardship, Irrevocability of the offer, Amendments to contracts and Representations and Warranties. These clauses will show that the same wording, in combination with different governing laws, may lead to dramatically different results. Elsewhere, I have published the results of research analysing a large number of boilerplate clauses and their effects under a variety of legal systems.33 1.6 The Chimera of the Autonomous Contract As previously seen, the text of the final contract is a mixture of legal analysis, the exercise of bargaining power, deference to widespread contract practice, reliance on one’s own drafting experience, the need for standardisation, the need for efficiency and the assumption of risk. The proportion of the various components may vary, and in some situations, the assumed risk is well considered whereas, in other situations, it may remind one more of recklessness than of the assumption of calculated risk. Whether calculated or not, a risk is often taken, and is taken as a consequence of the dynamics of contract negotiations, as described in Section 1.3. A court or an arbitrator who assumes that all contracts are always written following the optimal drafting process (i.e., by carefully considering every single clause and its compliance with the governing law) will assume a coherent and conscious will by the parties to comply with the applicable law. If the contract terms are not well coordinated with the applicable law, which is likely to happen considering the dynamics of contract drafting previously explained, the court or arbitrator who assumes a consistently careful drafting may react by proposing ingenious interpretations in an attempt to reconcile the two aspects. The parties, however, may have taken it as a calculated risk that there was no conformity between the contract terms and the applicable law. The ingenious reconciliation made by an interpreter who assumes that the drafters had a high degree of awareness of the applicable law, may come as a larger surprise to the parties than finding out that some of the contract terms are not compatible with the applicable law. Additionally, observers may induce, from the practice of drafting contracts without considering the applicable law, that international contract practice refuses to acknowledge national laws. On this assumption, observers may propose that contracts should be governed by transnational rules instead of national laws. However, that the parties may have disregarded the applicable law as a result of a cost–benefit evaluation does not necessarily mean that they want to opt out of the applicable law. 33

Cordero-Moss (2011a).

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When interpreting international contracts, it is important to acknowledge that contract drafting’s disregard for the governing law is a consequence of calculated risk, and not a symptom that implies that the drafters refuse to be subject to the governing law. The parties are still interested in enforcing their rights, and enforceability is ensured only by the judicial system of the applicable law. An important shift in attitude occurs between the contract drafting phase and the contract operation or litigation phase. The phase of negotiations and drafting may be characterised by the above-described commercially inspired cost–benefit evaluations, which induce the parties to minimise the resources employed in tailoring the contract to the governing law, and to rely on a detailed and as exhaustive as possible description of the deal instead. Once a contract is signed, however, a new phase starts. The drafting lawyers (often termed ‘transaction lawyers’) are not involved with that contract anymore, and contract implementation is usually taken over by engineers or commercial people. Once a contract is signed, its performance will be administered by an organisational part of the company that did not necessarily participate in the negotiations. In well-organised companies, there will be a contract manager office, or corresponding function, that will carefully read the contract (including its boilerplate clauses) and on that basis prepare guidelines for the rest of the organisation on how to perform the contract – for example: in case of default, what kind of notices should be sent by which office of the company to which body of the other party, and within what time limits; what procedure to follow for amending the agreement or for making a variation order and so on. At this stage, all the terms of the contract are taken seriously by the parties and are used as a measure for what conduct is permitted or required under the contract. Furthermore, once a dispute arises, yet another part of the company or an external lawyer will be involved. In order to assess the company’s legal position and suggest a strategy for solving the dispute, they will carefully consider all the terms of the contract. Should, for example, a party have duly followed the procedure for notice of defect contained in the contract, the strategy will be developed on the basis of the assumption that that party’s rights are intact (unless mandatory rules of the governing law have been violated). The company may, therefore, be more inclined to assert its rights strongly and if necessary, bring action in court. If that party has not followed the contractual procedures, it may assume that its rights are not intact and may take a more cautious approach to avoid the dispute ending up in court. When a dispute arises between the parties, or a difference in the interpretation becomes apparent, other lawyers are involved, who usually deal with dispute resolution (often termed ‘litigation lawyers’). As seen in Section 1.4, these litigation lawyers have a different approach from their negotiating counterparts: they often do not even talk to the drafting lawyers, so that transaction lawyers are seldom informed about the problems arising out of their contracts, and litigation lawyers seldom get insight into the reasoning behind specific wording. Litigation lawyers

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carefully analyse the specific contract and its effects under the governing law and try to assess as precisely as possible the chances of winning a case in court or securing a favourable arbitration result on the basis of the contract wording, the applicable law and the degree of factual background that the governing law allows. On the basis of this assessment, they will develop a strategy that may range from seeking to reach a commercial solution if the probability of winning in court is not high, to insisting on the party’s own position in cases where the prospects of a successful legal suit are high. In this phase, therefore, predictability of the legal framework and of the criteria applied for a decision are of the utmost importance. It can be useful here to quote an observation made by F.A. Mann, one of the most important jurists in the field of, among others, financial law and arbitration. In the occasion of a meeting of the Institute of International Law some decades ago, F.A. Mann strongly criticised the emerging delocalised approach – that is, the theory according to which international contracts and international arbitration are not subject to national laws, but to a transnational regime, see Chapter 2. He affirmed: I confess that I simply do not know what this means. Arbitrations take place on earth, in territories, in localities. They do not take place in a vacuum. . . . I fear that, when you speak of ‘delocalization’ you mean something like ‘delegalization’, the rejection of the control of law. If, as I fear, this is a correct interpretation, the disagreement is fundamental and almost of a philosophical character. . . . More than 50 years of very intensive and extensive practical experience have taught me that, when parties embark upon arbitration proceedings . . . they want to win and want to be told with what degree of likelihood they will win. In other words, they want to know the law. They are not in the least bit interested in what you seem to understand by ‘delocalization’. Nor are they interested in compromise solutions. On the contrary, they regard any tendency on the part of the arbitrators to adopt such solutions as a sign of weakness. In other words, they expect a judicial decision arrived at after a judicial process.34

In the context of such a picture, it is doubtful that the effects of the governing law on the contract should be disregarded in order to permit the drafter’s ambitions of selfsufficiency to be realised. 1.7 The Relational Contract We have seen the contours of an international commercial practice modelled on the common law tradition, aimed at ensuring an accurate application of the contract language and at insulating itself from any external influence, be it the governing law or the interpreter’s discretion. 34

Deliberations of the XVIII Commission of the Institute of International Law, Yearbook – Institute of International Law I (1989), p. 173.

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However, this is not the only approach to international contracts. The diametrically opposite approach can be seen, too, when considering the theory of the so-called relational contract. It is sometimes assumed that long-term contracts require a higher degree of flexibility in their regulation than discrete contracts that are performed simultaneously by the parties. This assumption was at the basis of the work that led to the 4th edition of the UPICC in 2016.35 In this context, the theory of relational contracts was mentioned.36 This leads to a dynamic and creative relationship between the contract terms and the UPICC, according to which the UPICC may forge contract terms independently from the wording of the agreed terms, if the circumstances so require. There is a clear tension between this approach and the expectations of predictability of commercial parties. The notion of relational contracts as long-term relationships which require mutual trust between the parties, has found its way even in English law, see Section 3.3. Some High Court decisions found that a general principle of good faith is to be implied in relational contracts,37 and this triggered a considerable interest in the notion of relational contract. However, the Court of Appeal seems to be quite reluctant to recognise the category of relational contracts and to imply good faith obligations.38 Furthermore, as explained in Section 3.3, the principle of good faith that may be implied under English law is a much more modest requirement than the dynamic and creative relationship envisaged by the UPICC. The theory of relational contracts dates to the 1960s and 1970s, when Ian Roderick Macneil and Stewart Macaulay wrote their seminal works on this subject.39 In short, the relational contract theory promotes an understanding of contract as relation, rather than as a rigid set of legal obligations which with each party is bound to comply accurately. In relational theory, a contract is an ongoing relation based on mutual trust and on the parties’ common desire to serve their interests – interests that 35

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See, for example, the document that was used as a basis of the Working Group’s first session: ‘The UNIDROIT Principles of International Commercial Contracts and Long-Term Contracts’. Position paper prepared by Professor Michael Joachim Bonell, October 2014, UNIDROIT 2014 Study L – Doc. 126. ‘The UNIDROIT Principles of International Commercial Contracts and Long-Term Contracts’, paras 6, 9, 41 and 49, as well as Annex I, comments by professor Neil B. Cohen, p. ii and by Justice Paul Finn, ‘The UNIDROIT Principles of International Commercial Contracts and Long-Term Contracts’, p. v f., and Annex II, containing the document that was used as a basis to present a proposal, similar to the proposal described in Section 3 of this chapter, for the 2010 edition of the UPICC – that proposal was rejected by the Governing Council in 2010: Position Paper with Draft Provisions on Termination of Long-Term Contracts for Just Cause by Professor Francois Dessemontet, UNIDROIT 2009 – Study L – Doc.109 (Excerpts), p. xi. Al Nehayan v. Kent [2018] EWHC 333 (Comm); Alan Bates v. Post Office Limited [2019] EWHC 606 (QB). Candey Limited v. Bosheh & Anor [2022] EWCA Civ 1103. Ian R. Macneil, ‘Whither Contracts?’ Journal of Legal Education 21 (1969), p. 403; ‘The Many Futures of Contracts’. Southern California Law Review 47.3 (1974a), pp. 691–816; ‘Restatement (Second) of Contracts and Presentation’. Virginia Law Review 60 (1974b), p. 589; and ‘Contracts: Adjustment of Long-Term Economic Relations under Classical, Neoclassical, and Relational Contract Law’. Northwestern University Law Review 72 (1977), p. 854; Stewart Macaulay, ‘Non-Contractual Relations in Business: A Preliminary Study’. American Sociology Review 28.1 (1963), pp. 55–67.

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are assumed to be aligned. The basis for this relationship is given not by legal obligations set forth in contract terms, but by social norms. The contract terms are a flexible framework that adapts to changing circumstances because it contains implied obligations based on a shared understanding of the social and economic context. The contractual relationship is, thus, collaborative, rather than being antagonistic. There is no need to specify in the contract detailed mechanisms to cater for any possible development, because contracts do not need to be complete: they will be formed throughout the life of the relation, on the basis of social norms and mutual trust. More recently, the notion of relational contract has been at the centre of research carried out by the International Association for Contract and Commercial Management (IACCM) of the University of Tennessee. Together with the Swedish law firm, Lindahl, they have published a White Paper called ‘Unpacking Relational Contracts’.40 The main underlying idea is that the contract does not need to be complete (in fact, it is impossible to write a contract that regulates each and every situation that may arise throughout the life of the contract). Also, the parties do not need to comply with the contract in case circumstances develop. The relation of mutual trust that binds the parties, as well as the parties’ common interest in implementing the business arrangement they envisage, will be sufficient basis to complete or adapt the contract whenever a development in circumstances requires it. This flexible, dynamic conception of contracts is in contrast with commercial practice, at least for some types of contract. Not all commercial or long-term contracts are designed to be adapted on the basis of discretionary evaluations made in the course of the contract’s life. Such a flexible contract requires that all parties have a common interest in jointly pursuing the adjustment of the contract terms. However, in many contracts the parties have opposed interests, and it is completely unrealistic to expect them to jointly pursue a common interest. These contracts are designed to contain mechanisms to cater for possible developments. These mechanisms contain clear criteria that the parties carefully negotiated at the moment of entering into the contract. When negotiating these contracts, the parties evaluate the various risks that may arise, and make provision for those risks in the contract. They allocate the consequences between each other or provide for specific adjustment mechanisms. Furthermore, as previously explained, many commercial contracts rely on an accurate application of the terms as agreed in the contract. The predictability that derives from applying the contract according to its wording is essential in multinational companies to properly exercise contract management and risk control; it is essential for commercial parties to obtain financing or to insure their activity, because financial institutions and insurance companies need to carefully assess the creditworthiness of the borrower and the size of the risk – and this can be done only 40

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on the basis of an accurate evaluation of the terms of the contract; it is essential for the lawyers to develop a strategy in case of disputes. For these reasons, parties usually spend considerable resources in negotiating detailed contracts and forming their contracts as exhaustively as possible. Parties even include provisions on the interpretation and general operation of the contract (so-called boilerplate clauses), that are intended to provide a form of ‘private’ general contract law for the contract – thus isolating it from any possible external interference, including from the governing law. Admittedly, the ambition of a fully self-sufficient contract reveals itself often as an illusion, as the present chapter and Chapter 3 explain. This ambition relies on the expectation, first, that the negotiating parties are capable of foreseeing and regulating the effects of each and every possible development that may occur during the life of the contract. Experience and analytical skills may contribute to foreseeing a large part of these developments, but it certainly cannot be excluded that unforeseen situations will arise. To this extent, the considerations made by theorists of the relational contract deserve support.41 However, the flexible frame posited by the relational theory assumes that the parties’ respective interests are always aligned. This gives the parties an incentive to find a reasonable solution to any difference that may arise – because an antagonistic conduct would prevent the parties from achieving their common goal. Alignment of the parties’ interests, however, is not always to be found. Imagine a contract for the exploration, development and production of mineral resources, entered into between the host country and a foreign company. Contracts of this kind have a duration of decades and a quite uneven distribution of the parties’ rights and obligations. In the initial phase of contract performance, the company carries the burden of huge investments: in the phase of exploration and development, the company carries out extensive activity on its own costs without any compensation but the prospect of participating in the profit once the company has developed the field, built the infrastructure and so on. In this phase, both parties’ interests are aligned: they are all interested in creating a profitable production of mineral resources. After many years of investment and activity, when production starts, the company may at last start covering its costs and eventually making a profit. At this point in time, however, the parties’ interests are no longer aligned. The company has contributed its know-how and resources and is interested in benefitting from the proceeds of the sales of the mineral resources. The state has obtained the development of its field and no longer needs the company to run the production. To optimise its profit, the state may be tempted to consider the company as an unnecessary cost now that it has made its contribution. Without binding and precise rules on profit sharing, the company runs the risk of being squeezed out.

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This is what the White Paper on relational contracts defines as the ‘contract paradox’, www.vestedway.com /wp-content/uploads/2016/10/Unpacking-Relational-Contracting_v19.pdf.

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A flexible, relational contract counting on the parties’ common interests would not be very useful. Considerations such as these were discussed in the Working Group that prepared the 4th edition of the UPICC, on which I had the honour of participating. The logic of the relational contract suggested that the UPICC should provide for the possibility of terminating a long-term contract for convenience. This, however, would have allowed for possible abuses, as in the example just given. Eventually, the provision on termination for convenience was not included in the final text.42 1.8 The Balance The approach to international contract practice is, as previously seen, not uniform. On the one hand, there are ambitions of autonomy and of delocalisation of contracts: the contract is seen as self-sufficient and based on a uniform regime detached from national law, where the language of the contract is sovereign and the only basis on which arbitral tribunals base their decisions. On the other hand, there are ideals, grounded in national law and in transnational sources, aimed at ensuring that the parties act loyally, for which contract terms are a flexible tool that can be bent to achieve the common goal of the parties. Can these different approaches be reconciled? Neither of these theories seems to fully reflect the effects of international contracts. Considering that the main interest of the parties is to be able to assert their rights in a predictable and enforceable manner, it is necessary to be aware of the scope and effects of transnational sources (Chapter 2), of the effects that the applicable law may have on the terms of the contract (Chapter 3) and on how it is determined which law is applicable (Chapter 4). It is also necessary to be aware of the limits of arbitration and thus avoid surprises when the assumption that party autonomy is completely unfettered in arbitration reveals itself not to be true (Chapter 5). 42

See Giuditta Cordero-Moss, ‘The Unidroit Principles: Long-Term Contracts’. In Pietro Galizzi, Giacomo Rojas Elgueta and Anna Veneziano (eds.), The Multiple Uses of the UNIDROIT Principles of International Commercial Contracts: Theory and Practice (Giuffrè Francis Lefebvre, 2020d), pp. 75–96.

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2 The Role of Transnational Law

2.1 Introduction Domestic contracts regulate domestic legal relationships; international contracts regulate international legal relationships. Domestic contracts are subject to domestic law (national law); for the sake of symmetry, international contracts should be subject to international law. However, with some important exceptions such as the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), in contract law there are no international sources (in the sense of treaties or conventions). Hence, according to the traditional approach, international contracts are subject to national law: a branch of each national law, known as private international law or conflict of laws, provides mechanisms that permit a choice of applicable law from the various national laws that have a connection with an international commercial relationship and may thus potentially be applicable. That many rules of private international law have been harmonised or even unified at a supranational level does not change the result of their application: international contracts will be subject to national law. Those who find this asymmetry to be unsatisfactory criticise it for creating an overcomplicated system that is not suitable for international commercial contracts. The mechanism of choice of law is perceived as confusing and unpredictable, and it is moreover criticised for resulting in the application of a national law – which per definition is meant to regulate domestic, and not international, contracts. Hence, a third system is advocated for, detached from national law and yet not international law – that is, not formally based on treaties or conventions. The third, detached system is often referred to as the lex mercatoria, transnational law or delocalisation.

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The delocalisation theory was launched by renowned scholars such as Goldman1 and Schmitthoff,2 and has received considerable support.3 Among other things, the various aspects of this delocalised, transnational approach have repeatedly been the object of courses at the Hague Academy of International Law. These range from the affirmation of an autonomous system for arbitration4 and the consideration of a uniform law for arbitration,5 to a more cautious approach analysing the relationship between arbitration and private international law,6 between arbitration and national law7 and between arbitration and national courts.8 Furthermore, courses have been offered on soft law sources for commercial contracts, such as the UNIDROIT

1

2

3

4

5

6

7

8

Berthold Goldman, ‘Frontières du droit et lex mercatoria’. Archives de philosophie du droit 9 (1964), p. 177; ‘La lex mercatoria dans les contrats et l’arbitrage internationaux: réalité et perspectives’. Travaux du Comité français de droit international privé 2.1977 (1980), pp. 221–70; ‘Lex Mercatoria’. Forum Internationale 3 (1983), p. 3; ‘The Applicable Law: General Principles of Law: The Lex Mercatoria’. In Contemporary Problems in International Arbitration (Springer, 1987), pp. 113–25; and ‘Nouvelles réflexions sur la lex mercatoria’. In Christian Dominicé, Robert Patry and Claude Reymond (eds.), Etudes de droit international en l’honneur de Pierre Lalive (Helbing & Lichtenhahn, 1993), p. 241. Clive M. Schmitthoff, ‘The Unification of the Law of International Trade’. Journal of Business Law, Annual Issue (1968), p. 105. Literature on the subject matter is vast. Among the most frequently referred to are Filip De Ly, International Business Law and Lex Mercatoria (Elsevier Science Ltd, 1992); Klaus Peter Berger, The Creeping Codification of the New Lex Mercatoria (Kluwer Law International, 2010); and Ole Lando ‘The Lex Mercatoria in International Commercial Arbitration’. International & Comparative Law Quarterly 34.4 (1985), pp. 747–68. Courses are collected in the Academy’s series Recueil des cours (Académie de Droit International de la Haye). See the courses by Berthold Goldman, ‘Les conflits de lois dans l’arbitrage international de droit privé’. Volume 109 (1963); Pierre Lalive, ‘Problèmes relatifs a l’arbitrage international commercial’. Volume 120 (1967); Dominique Hascher, ‘Principes et pratique de procédure dans l’arbitrage commercial international’. Volume 279 (1999); Emmanuel Gaillard, ‘Aspects philosophiques du droit de l’arbitrage international’. Volume 329 (2007); Luca Radicati di Brozolo, ‘Arbitrage commercial international et lois de police. Considérations sur les conflits de juridictions dans le commerce international’. Volume 315 (2015). Katharina Boele-Woelki, ‘Party Autonomy in Litigation and Arbitration in View of the Hague Principles on Choice of Law in International Commercial Contracts’. Volume 379 (2016). Pieter Sanders, ‘Trends in the Field of International Commercial Arbitration’. Volume 145 (1975); Horacio Grigera Naón, ‘Choice-of-Law Problems in International Commercial Arbitration’. Volume 289 (2001); Ted M. de Boer, ‘Choice of Law in Arbitration Proceedings’. Volume 375 (2015); George Bermann, ‘International Arbitration and Private International Law’. General Course on Private International Law, Volume 381 (2016); Jean-Michel Jacquet, ‘Droit international privé et arbitrage commercial international’. Volume 396 (2019). Riccardo Luzzato, ‘International Commercial Arbitration and the Municipal Law of States’. Volume 157 (1977); Richard Kreindler, ‘Competence–Competence in the Face of Illegality in Contracts and Arbitration Agreements’. Volume 361 (2013); Giuditta Cordero-Moss, ‘Limitations on Party Autonomy in International Commercial Arbitration’. Volume 372 (2015); Felix Dasser, ‘Soft Law in International Commercial Arbitration’. Volume 402 (2019). Antonio Remiro Brotóns, ‘La reconnaissance et l’exécution des sentences arbitrales étrangères’. Volume 184 (1984); Pierre Mayer, ‘L’autonomie de l’arbitre international dans l’appréciation de sa propre competence’. Volume 217 (1989); José Carlos Fernández Rozas, ‘Le rôle des juridictions étatiques devant l’arbitrage commercial international’. Volume 290 (2001); Alan Scott Rau, ‘The Allocation of Power between Arbitral Tribunals and State Courts’. Volume 390 (2018); Lotfi Chedly, ‘L’efficacité de l’arbitrage commercial international’. Volume 400 (2019).

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Principles,9 as well as soft law sources regulating party autonomy,10 private international law11 or economic law in general.12 An important purpose of the delocalisation theory is to provide a uniform, transnational regulation for international contracts, which can be applied equally all over the world and irrespective of the national legal systems with which the dispute is connected. This regulation would stem from a body of rules spontaneously emerging from the international business community, and its most prominent principle would be the primacy of the parties’ will. This delocalised, transnational system is based on a variety of sources, such as generally accepted principles, trade usages, contract practice, arbitration practice or publications by trade or branch associations such as the International Chamber of Commerce (ICC) or the International Bar Association (IBA). This results in a fragmentary system, the content of which is not easily accessible. It is legitimate to wonder whether the cure is perhaps worse than the disease. If the alternative to an allegedly confusing mechanism for selecting the applicable law is less than a uniformly applied and exhaustive law, the result is a mixture of national laws and partly harmonised rules – some of which are not necessarily applicable, and others which may be subject to a variety of interpretations (as this chapter will show). The advantages of embracing such a fragmented system are not evident. Another alleged reason for suggesting that a delocalised, transnational commercial law is desirable, is international contract practice. As seen in Chapter 1, contracts are written adopting the common law style, irrespective of whether there is a connection with English law or another law belonging to the same family. This style is based on the primacy of the parties’ will and assumes that all rights and obligations be spelled out in the contract, rather than being implied by the adjudicator or read into the contract by operation of the applicable law. This leads to extensive and detailed contracts which are meant to be self-sufficient, and which do not require integration by default rules of the applicable law. Furthermore, contracts are often standardised and contain therefore the same wording irrespective of which law governs them. Model contracts are being published as soft law and offered for use throughout the world. An exhaustive and standardised contract does not invite consideration of the applicable law. Contract practice may therefore give the impression that contracts are intended to be subject only to the will of the parties and spontaneous, transnational sources of soft law. In my opinion, however, this conclusion is not justified, see Section 1.4.

9

10 11

12

Michael Joachim Bonell, ‘The Law Governing International Commercial Contracts: Hard Law Versus Soft Law’. Volume 388 (2018); Lauro da Gama, ‘Les principes d’UNIDROIT et la loi régissant les contrats de commerce’. Volume 406 (2020). Boele-Woelki (2016). Diego Fernández Arroyo, ‘Compétence exclusive et compétence exorbitante dans les relations privées internationals’. Volume 323 (2006). Ignaz Seidl-Hohenveledern, ‘International Economic “Soft Law”’. Volume 163 (1979).

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Often, the supporters of a delocalised, transnational law link their preference for a delocalised system to the circumstance that disputes connected with international contracts are usually subject to arbitration and not to national courts of law. The assumption is that international arbitration is detached from any national law and that consequently arbitrators must follow the will of the parties, rather than a national law. Transnational law is deemed to be an emanation of usages, practices and generally recognised principles, and thus to be better suited to application in arbitration than national law. In my opinion, this conclusion is not justified either, see Sections 2.3 and 3.7. The literature supporting a delocalised, transnational system presents various arguments aimed at showing that national laws are not adequate sources for governing international contracts. Arguments range from the rather pragmatic (and irrefutable) observation that it is costly and time-consuming to analyse, for every contract, all potentially applicable laws, to the not necessarily always appropriate statement that conflict rules are a confusing and complicated mechanism and thus should be avoided, or to the usually unsubstantiated statement that national laws’ content is adequate to regulate domestic, but not international contracts. This latter argument seems to be less frequently invoked following the publication of principles and rules made specifically for international contracts (such as the UNIDROIT Principles of International Commercial Contracts (UPICC) or the Principles of European Contract Law (PECL) described in Section 2.2.5). As these rules and principles – tailored to international contracts – show no structural differences from those of national laws, it is difficult to affirm that national laws are not adequate for governing international contracts. Certainly, the variety of national laws to which an international contract may be subject requires awareness of the different systems, and contract practice must be adapted to the law that is applicable under any given circumstances. This is costly and time-consuming. As Chapter 1 showed, many drafters accept the risk flowing from not considering the applicable law and draft contracts that are not adjusted to the applicable law – assuming this as a calculated legal risk. The alternative envisaged by the proponents of a delocalised, transnational law, is a uniform law applied in the same way all over the world. This would obviously be much more efficient.13 When seeking 13

That such efficiency would be desirable is not evident: just as the diversity in languages makes communication less efficient but enriches the cultural picture, so should the various legal traditions be seen as a strength rather than a weakness. There does not seem to be an evident or unified need for harmonisation, and voices are raised to underline that it might be ‘better to celebrate our diversity rather than continue the quest for (a dull) uniformity’ (Ewan McKendrick, ‘Harmonisation of European Contract Law: The State We Are In’. In Stefan Vogenauer and Stephen Weatherill (eds.), The Harmonisation of European Contract Law (Hart Publishing, 2006), pp. 5–29, 28). Voices are also raised to warn against being led ‘into accepting the view that all non-state norms are a panacea for all ills, or that State laws or borders are the enemy’ (Symeon C. Symeonides, ‘Party Autonomy and Private-Law Making in Private International Law: The Lex Mercatoria That Isn’t’. In Festschrift für Konstantinos D. Kerameus (Ant. N. Sakkoulas & Bruylant Publishers, 2006), pp. 1397–423). That harmonisation of substantive law is not necessarily the only way to go was, at a certain point, recognised by the European Commission: in February 2009, the work on a European contract law and, in particular, the Common Frame of Reference (CFR) project was transferred

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solutions that adequately cater to the peculiarities of international contract drafting, however, it is necessary to consider how feasible and effective those solutions are. Are harmonised and comprehensive sources available on a transnational level that are capable of fully regulating the interpretation, construction and application of contracts, thus making national contract laws redundant? Do the drafting style and practice constitute a sufficiently clear basis for selecting the applicable sources, thus making redundant any rules meant to select the applicable law? Do contract practice and arbitration ensure that the transnational law is applied as a uniform regime? As this chapter will show, there are currently no full alternatives to a state governing law when it comes to principles of general contract law upon which the interpretation and application of the agreed wording is based. Admittedly, in the past decades, sources of soft law have been produced and have gained considerable recognition. Soft law is based on non-binding rules and principles. As opposed to hard law, it does not stem from authoritative sources, but derives from business practice and is generally laid down in instruments issued by commercial organisations or international bodies. Sources of soft law may be used as a model for legislation or for drafting contracts, they may take the form of rules governing certain relationships, they may contain guidelines for certain conducts and so on. Their application depends on the voluntary adoption by the involved parties. Soft law can be found in disparate fields: from the respect of human rights (see Section 2.2.6(g)), to procedural issues (see Sections 2.2.6(d), (e) and (f)), to contractual matters. Within the field of contractual matters there are, broadly speaking, two types of soft law sources: those that have a specific scope of application and thus assume that other sources will regulate all issues that do not fall within that scope (see Sections 2.2.6(a), (b) and (c)), and those that have a general scope of application and aspire to be the only applicable source (see Section 2.2.5). These latter are meant to render the transnational law more systematic and more easily accessible. The most notable source of soft general contract law is the UPICC, see Section 2.2.5. This restatement is systematic and has a high level of quality. In my opinion, however, the development of systematic sources of soft law does not achieve the replacement of the applicable law, see Section 2.3. As a matter of from the Commission’s Consumer Affairs Directorate to its Justice, Freedom and Security Director, of which Jonathan Faull was Director General. Mr Faull stated, in the evidence he gave to the House of Lords’ inquiry on European contract law, that ‘the thrust is very much one of mutual recognition rather than harmonization’, see the UK House of Lords European Union Committee, Social Policy and Consumer Affairs (Sub-Committee G), 12th Report of Session 200809, European Contract Law: The Draft Common Frame of Reference, Report with Evidence (10 June 2009), https://publications.parliament.uk/pa/ld200809/ ldselect/ldeucom/95/95.pdf, question 143. See also Sections 53 and 93 of the Report. Also, a law and economics-inspired view has received attention in Europe, according to which legal systems compete to offer the most attractive regulation. For an overview and a criticism of this view in the context of contract law, see Stefan Vogenauer, ‘Regulatory Competition Through Choice of Contract Law and Choice of Forum in Europe: Theory and Evidence’. European Review of Private Law 21.1 (2013), pp. 13–78.

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fact, a full replacement of the governing law is not even the goal of the UPICC, see Section 2.2.5(b). Restatements of soft law, compilations of trade usages, digests of transnational principles and other international instruments may be invaluable for specific contract regulations, such as the INCOTERMS used for the definition of the place of delivery in international sales (see Section 2.2.6(a)).14 However, these sources do not, for the moment, provide a sufficiently precise basis for addressing questions such as the function of a contract, the advisability of ensuring a fair balance between the parties’ interests, the role of the interpreter in respect of obligations that are not explicitly regulated in the contract, the existence of a duty of the parties to act loyally towards each other, or the existence and extent of a general principle of good faith. Some of the mentioned transnational sources – in particular, the UPICC and the PECL, as well as the various products of extensive work on a European contract law that started at the beginning of the millennium, such as the Draft Common Frame of Reference (DCFR) and the proposal for a regulation on a common European sales law (CESL), both based on the PECL – solve these questions by making extensive reference to the principle of good faith; however, good faith is a legal standard that requires specification, and there does not seem to be any generally acknowledged legal standard of good faith that is sufficiently precise to be applied uniformly and irrespective of the governing law, as Sections 2.2.5(f) and 2.3.3 will show. An instrument with the task of harmonising different legal traditions must be precise and leave little to the court’s discretion; otherwise, the harmonised rules are applied differently by the different countries’ courts.15 Moreover, these instruments grant the interpreter much room for interference regarding the wording of the contract based on the central role given to the principle of good faith. This seems to contradict the very intention of the parties as it is embodied in contract practice: as seen in Chapter 1, contract practice has ambitions of being exhaustive and self-sufficient. Any correction by principles such as good faith would run counter to the expectations of the parties. In turn, this makes it difficult to see these transnational sources as an emanation of the parties’ will and practice. There are undoubtedly difficulties in determining the exact content of such a harmonised non-national law. As will be seen in the following sections, the principles that can be determined as being part of a transnational law are mainly quite vague and therefore cannot be used to decide on specific disputes of a legal–technical character. 14

15

The INCOTERMS, however, do not cover all legal effects relating to the delivery: for example, they do not determine the moment when the title passes from the buyer to the seller, as pointed out by Maria C. Vettese, ‘Multinational Companies and National Contracts’. In Cordero-Moss (2011), pp. 20–32, Section 2. Horst G. M. Eidenmuller, Florian Faust, Hans Christoph Grigoleit, Nils Jansen, Gerhard Wagner and Reinhard Zimmermann, ‘The Common Frame of Reference for European Private Law: Policy Choices and Codification Problems’. Oxford Journal of Legal Studies 28.4 (2008), pp. 659–708.

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Furthermore, this delocalised law is quite fragmentary, leaving many areas of a dispute uncovered. It has been argued that the open and incomplete character of the transnational law is not a disadvantage, but a positive characteristic: by not containing specific solutions or clear criteria, the transnational law would permit an arbitral tribunal to develop solutions in a creative way, acting as a ‘social engineer’.16 The parties would delegate to the arbitral tribunal the task of developing the criteria according to which the decision will be taken. This approach exhibits a deep trust in the capability of the arbitral tribunal as a lawmaker, but it seems to disregard the criterion of predictability. As this chapter will show, transnational law lacks a framework within which arbitrators would develop their solutions – this would make the arbitrators’ creative work even less predictable. Fascinating as the idea of arbitrators as social engineers may be, the prospect of having to plead in front of a tribunal that develops its own criteria for decision-making alarmingly reminds one of the position of Josef K. in Franz Kafka’s dystopian novel Der Prozess. To the extent that the difficulty in identifying transnational rules and their fragmentation are seen as a negative aspect of the transnational law (which, in my opinion, they should be), a remedy may be found in the abovementioned soft law sources that restate, systematise and standardise rules and principles – such as the UPICC or the PECL (which, together with the 1980 Vienna CISG, are sometimes referred to as the ‘Troika’; a body of transnational law that is particularly apt for governing commercial contracts).17 Indeed the important production of systematic soft law significantly simplifies access to principles and rules that otherwise would be difficult to assess – assuming, of course, that the sources of soft law are representative of generally acknowledged principles or usages. Subjecting a contract to regulation by commercial practices or generally acknowledged principles or restatements thereof, however, would leave too much room for discretion, as will be seen, thus representing an uncertain ground for the solution of potential disputes. The theory of a delocalised, transnational law seems to be based on the misconception that commercial parties desire a flexible system that the interpreter (judge or arbitrator) can adapt to their needs. Practitioners, however, emphasise that they desire a predictable legal system that can be objectively applied by the interpreter.18 The task of adapting the contract to the specific needs of the case is a task for the 16

17

18

Lando (1985), p. 752 and ‘The Law Applicable to the Merits of the Dispute’. Arbitration International 2.2 (1986), p. 112. See, for example, Ole Lando, ‘CISG and Its Followers: A Proposal to Adopt Some International Principles of Contract Law’. The American Journal of Comparative Law 53 (2005), p. 379. This position was exemplarily explained by F.A. Mann. For references, see Giuditta Cordero-Moss, ‘Delocalisation and Re-Localisation in Commercial Law and the Law of Arbitration: The Continued Relevance of F.A. Mann’s Thought’. In Gerhard Danneman and Jason Allen (eds.), Legal Aspects: The Life and Legacy of F.A. Mann (Oxford University Press, forthcoming), Section 4.

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contract drafters, not for the interpreter.19 We have seen in Chapter 1 the different approaches taken by transaction lawyers who draft the contracts, and by litigation lawyers who deal with the disputes arising out of the contracts. One of the aspects that interests litigation lawyers is the enforceability of rights (whether these are based on a contract or on an arbitral award). Also, it is extremely important that the parameters for enforceability be predictable:20 if the criteria upon which the dispute will be decided are uncertain, it will be impossible to assess the risk connected with the dispute. How can a party embark on a costly proceeding that might last for years, without having been able to assess the risks connected with it? 2.2 Sources of Transnational Law There is no standard definition of a delocalised, transnational law. It can be referred to as a non-national set of rules and principles that is held to apply to international contracts. The sources that are often mentioned in the international literature as a basis for such a transnational law have different places in the system: (i) Usages of the trade or customs (see Section 2.2.1) are, under the traditional view, the proper content of what goes under the name of lex mercatoria.21 They are a source of law to all effects and, once proven, they are binding. Statutory confirmation of the quality of customs as sources of law can be found in various national laws. Contract practice and arbitration practice – if sufficiently proven and generalised – may be seen as part of trade usages or customs. (ii) General principles of law (see Section 2.2.2) are part of the law and, once established, they are applied and given effect to. There does not seem to be a consensus on the definition of these principles.22 Generally recognised principles are usually identified by assessing a convergence among various legal 19

20

21

22

For an interesting analysis of this aspect, see Willem Grosheide, ‘The Duty to Deal Fairly in Commercial Contracts’. In Stefan Grundmann and Denis Mazeaud (eds.), General Clauses and Standards in European Contract Law. Comparative Law, EC Law and Contract Law Codification (2006), p. 201. The practitioners’ reluctance to agree on the assumption that international contracts are drafted and should be interpreted outside of a domestic system of law was confirmed in Marcel Fontaine and Filip De Ly, Drafting International Contracts (Brill, 2006), pp. 629ff. The book is an analysis of contract terms based on the reports prepared by the Working Group on International Contracts, a group that has existed since 1975 and consists of practising lawyers who specialise in drafting, interpreting or litigating international contracts, as well as of academics. Criticising the possibility of a contract that is independent from any governing law, see also Symeonides (2006), pp. 6ff. School of International Arbitration of Queen Mary University of London, 2010 International Arbitration Survey: Choices in International Arbitration (2010). See also the study made by Gilles Cuniberti, ‘Three Theories of Lex Mercatoria’. Columbia Journal of Transnational Law 52 (2013); Ralf Michaels, ‘Non-State Law in the Hague Principles on Choice of Law in International Commercial Contracts’. In Kai Purnhagen and Peter Rott (eds.), Varieties of European Economic Law and Regulation: Liber Amicorum for Hans Micklitz (Springer Verlag, 2014). Substantiating this position, see Roy Goode, Herbert Kronke and Ewan McKendrick, Transnational Commercial Law: Texts, Cases and Materials, 2nd ed. (Oxford University Press, 2015), paras 1.63 ff. For an overview of the various theories, see De Ly (1992), pp. 193ff.

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systems, case law and scholarly works. Sometimes, general principles of public international law, often as determined in state–investor arbitration, are deemed to be a source of transnational commercial law.23 This is quite a paradox, as principles of public international law are generally derived from a comparison of, among other things, national authoritative sources. Giving these principles the quality of sources of commercial law, gives a somewhat circular reasoning that does not always lead to reasonable results, see Section 2.2.3. (iii) Sometimes a broader definition is used that covers, in addition to spontaneous sources, authoritative national and international sources (such as treaties and conventions) as long as they regulate international business activity.24 An example is the CISG, see Section 2.2.4. (iv) Soft law refers to sources that do not have binding force, but that are taken into consideration as long as the parties voluntarily apply them, see Sections 2.2.5 and 2.2.6. A notable source of soft law concerns the restatements of general principles of contract law (such as the UPICC or the PECL). To the extent that these restatements of principles can be deemed to reflect generally recognised principles, they will be relevant in determining the content of the general principles of law; otherwise, they will be considered for their persuasive authority. According to some, even standard contracts may be considered a source of soft law. Some of the soft law instruments listed are extremely widely acknowledged, and after years or even decades of general use in practice, are, in some cases, deemed to have become an international trade practice, and are therefore applied even if the parties have not made reference to them (if the applicable law directs or permits the judge to apply trade usages). Others are in the process of obtaining a generalised acknowledgement and cannot be considered as customary law yet; therefore, they are applicable only to the extent that the parties have made reference to them in their agreement. Irrespective of the degree of acknowledgement of all the abovementioned sources of transnational law, their application faces the question of the relationship with the state law that governs the transaction: is transnational law a replacement of state law, or does it integrate it – and to what extent can the state law be replaced or integrated? These questions will be dealt with in the following sections by analysing some examples. The examples will show that transnational law is an extremely useful tool with which to integrate the law applicable to an international transaction, but it is not capable of replacing it completely, and it cannot prevail in the case of a conflict with the mandatory rules of applicable national or international rules.

23

24

For example, the Trans-Lex Transnational Law Digest and Bibliography (www.trans-lex.org/) uses investment awards to substantiate numerous principles listed therein as part of the ‘new lex mercatoria’. Lando (1985), pp. 748f.

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Moreover, we will see that transnational sources are not so detailed as to provide a uniform basis for understanding principles such as that of good faith – and this in spite of the circumstance that many transnational sources attach great significance precisely to the principle of good faith: in the interpretation of contracts, in respect of contract performance as well as concerning the exercise of remedies for nonperformance. There is, therefore, no harmonised standard for contract interpretation and construction in the transnational law, nor harmonised guidelines for contract performance and for the exercise of remedies. 2.2.1 Trade Usages Trade usages are often referred to as an important source of transnational commercial law.25 Among the most important sources of trade usages are contract practice and arbitration practice. Assessing a trade usage might be quite demanding. In respect of the principle of good faith, which Section 3.4 will show is so important in the interpretation and performance of a contract, there does not seem to be evidence of a uniform usage that might be valid for all types of contracts on an international level or for one single type of contract. (a) Contract Practice As seen in Chapter 1, international contracts are often drafted without the parties bearing in mind which law will govern the contract. The clause choosing the governing law is often negotiated after the parties have agreed on all the commercial aspects of the transaction, and after the regulation of such commercial content has been drafted. Sometimes, the parties do not reach an agreement on which governing law to choose, and therefore they do not write a Choice-of-law clause in their contract. At times, the parties do not attach significant importance to the choice of the governing law and agree on the proposal of one of the parties without paying attention to the implications of that choice. At other times, the parties do not even think of the question of the governing law. In all these situations, the result is that a contract is drafted without awareness of which legal system the contract was subject to. In other words, the parties assumed that the contract represented a sufficient regulation of their relationship, that it would be enforceable without any problems in all relevant jurisdictions and that it would not be affected by rules or principles external to the contract, other than those to which the parties may have made reference (or they deliberately took the risk that the assumption was fallacious). This may lead one to assume that international commercial contracts are autonomous and not subject to any national law. The autonomous contract would, 25

Goode et al. (2015), para 1.64 ff., convincingly argue that trade usages are not self-validating and require external validation, usually in the form of a reference contained in the governing law.

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according to this theory, be detached from domestic law and would have to be interpreted and applied autonomously in the light of its own language, non-state principles and rules of international trade. In turn, this may be perceived as a basis for a uniform contract practice, which in turn would be deemed to be a trade usage. Two objections may be made which will be analysed in more depth in Chapters 3 and 4: first, the detachment is not full. And second, even if the detachment were full, this would not ensure that contracts are interpreted uniformly. (i) Detached Contracts The theory of the autonomous or detached contract may, to a certain extent, be connected with the doctrine of the internationalisation of contracts entered into between foreign investors and states. These contracts prompt the necessity of restricting the state’s role as a sovereign that may introduce new legislation, and thus unilaterally and unduly modify the conditions of the investment, see Section 3 of the Introduction. To avoid such abuses, the 1965 Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) establishing the ICSID arbitration, provides, in Article 42, that the tribunal is to apply (in the absence of a choice of law made by the parties) ‘the law of the host countries . . . and such rules of international law as may be applicable’. This formulation is usually interpreted to mean that the national law of the host country is to be applied inasmuch as it does not violate international law.26 Investment agreements formalising oil investments in Libya contained governing law clauses according to this principle; following nationalisation of the investments, three arbitral proceedings were initiated and led to three different results: in the Liamco case, the tribunal applied Libyan law, amended with a general principle regarding the necessity of providing compensation if assets are nationalised;27 in the BP case, the tribunal found that there were no principles common to both Libyan and international law, and proceeded to apply general principles of law;28 and in the Texaco case, the tribunal assumed that the parties had wished to submit the agreement to public international law.29 This may inspire the parties also to detach from national law in commercial contracts. As will be seen in Section 2.2.3(b), however, principles and doctrines developed in the sphere of investment protection are not necessarily automatically transferrable to the sphere of commercial contracts. In the Libyan cases, the arbitrators could easily apply the well-established public international law principle about compensation on expropriation; in a commercial dispute, in contrast, the arbitrators may need to find sources on quite technical questions, such as the conditions for 26

27 28 29

See Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary, 2nd ed. (Cambridge University Press, 2010), Article 42, para 153 ff. Libyan American Oil Company v. The Government of the Libyan Arab Republic [1982] 62 ILR 140. British Petroleum (Libya) Ltd v. The Government of the Libyan Arab Republic [1979] 53 ILR 297. Texaco Overseas Petroleum Company, California Asiatic Oil Company v. The Government of the Libyan Arab Republic, award of 9 January 1977 [1978] 17 ILM 3.

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excluding liability, or the relevance of the negotiations and the subsequent conduct of the parties in the interpretation of the contract. Section 2.2.5 will show that transnational principles are not sufficiently specific and systematic to harmonise the various laws and create a set of general principles that may govern all aspects of general contract law; Section 2.3 will show that transnational sources do not have the ability to fully replace a governing law. Hence, and as will be illustrated, commercial contracts may not be subject to ‘internationalisation’ and thus be able to escape from the scope of the governing law to the same extent as investment contracts may with states. (ii) Standard Contracts The European Commission seemed to encourage, albeit for a short period,30 standard contracts as a tool towards harmonisation of the various state contract laws.31 It was soon realised, however, that contracts, even if they are standardised, are subject to a governing law and cannot derogate from this law’s mandatory rules. Therefore, a standard contract, to be effective across the entire territory of the EU, would necessarily have to comply with the strictest of the criteria set by the various member states. This, in turn, would have prevented the standard contracts from adopting any more flexible criteria offered in other member states, hence preventing progress in contract practice. This would not have led to a seemingly desirable harmonisation. That a contract, even a standard contract, is subject to a governing law and that the governing law’s impact reaches even beyond that law’s mandatory rules, is shown in Section 3.4. As will be shown in Chapter 3, national laws differ from one another in respect of how contracts are to be interpreted, and this may lead to standard contracts being interpreted differently and having different legal effects depending on the governing law (in particular, regarding the ISDA Agreement, see Section 3.4.3). As shown in this chapter, furthermore, transnational sources do not have the ability to harmonise the general contract law and thus cannot ensure a uniform interpretation of standard contracts. Standard contracts, therefore, do not seem to be the appropriate tool with which to harmonise commercial contract laws. Moreover, there is an abundance of standard terms issued by a large number of organisations such as the ICC; branch associations such as the ISDA, the International Federation of Consulting Engineers (FIDIC) or Orgalime; or even by commercial companies. Standard contracts prepared by FIDIC and Orgalime compete to regulate similar contractual relationships within the same branch of construction; the very fact of this competition speaks against their ability to reflect a harmonised transnational law. 30 31

First Annual Progress Report on European Contract Law and the Acquis Review, COM(2005) 456 final. See Communication from the Commission to the European Parliament and the Council – A more coherent European contract law – An action plan, COM (2003) 68 final and Communication from the Commission to the European Parliament and the Council – European Contract Law and the revision of the acquis: the way forward, COM (2004) 651 final.

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The wealth of documents issued by a disparity of sources creates an additional uncertainty, since it creates the risk of attaching normative value to terms written by organisations or institutions that do not act impartially.32 As a tool for harmonising international contract law (in the particular proposal commented upon here, EU law), it has been proposed33 that standard contracts should be negotiated by organisations representing the involved parties. The democratic selection of the drafting parties would ensure legitimacy, and the collective character of the negotiations would ensure a balanced result that takes into account all of the involved interests.34 In the proposal, EU enactments should give these documents the force to derogate from mandatory rules of the applicable law, thus avoiding the abovementioned prospect of having to comply with the strictest of the potentially applicable laws. This regime would indeed solve the problems of legitimacy and of compliance with the law. However, these contracts would not be immune from another major problem affecting transnational sources: the lack of a uniform standard for interpretation, as will be seen in this chapter.35 (iii) ‘Good Commercial Practice’ In the course of the EU work towards a European contract law (see Section 2.2.1(iv)), some instruments were developed: the Academic DCFR, the Acquis Principles and the CESL (see Section 2.2.5). These instruments seem to indirectly endorse the idea of an autonomous contract. They have a double approach to commercial contracts: they extend rules of consumer protection to commercial contracts (including an extensive and mandatory principle of good faith) and then moderate the effect of this extension by making a reservation for contrary good commercial practice. As will be seen in Section 2.2.5(f), the principle of good faith is given a central role in these collections of principles, but has a content that is difficult to specify in a uniform way. Reference to good commercial practice as the only concretisation of the principle of good faith assumes that the interpreter is in a position to define good commercial practice and to assess its content. For want of better guidelines, it may be 32

33

34

35

See Goode et al. (2015), paras 1.53 ff.; Symeonides (2006), p. 6, who wishes a ‘check to the unbounded euphoria that seems to permeate much of the literature on the subject’ of non-state norms as a source of the new lex mercatoria. See also Federico Cafaggi, ‘Self-Regulation in European Contract Law’. In Hugh Collins (ed.), Standard Contract Terms in Europe: A Basis for and a Challenge to European Contract Law (Kluwer Law International, 2008), pp. 93–139, 137ff. For a suggestion to promote autonomous agreements that are not affected by the differences among the various contract laws, see Hugh Collins, ‘The Freedom to Circulate Documents: Regulating Contracts in Europe’. European Law Journal 10.6 (2004), pp. 787–803. For an incisive analysis of how standard contract terms would not be capable of being autonomous because they are subject to, among other things, the governing law’s influence in respect of the normative context and the interpretation, see Whittaker (2006). In a certain sector of Norwegian business, this practice is widespread and successful, and results in standard contracts that are known under the name of ‘agreed documents’. These standard contracts have a high degree of persuasive authority, and courts tend to accept the solutions contained therein, even though they would not be acceptable in a contract negotiated between private parties: see Rt. 1994 p. 626. A similar criticism is made by Whittaker (2006), 54ff.

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assumed that the sources of good commercial practice do not differ significantly from the sources of the transnational commercial law that are analysed here: trade usages, general principles and soft law. As will be seen in Section 2.3, these sources are not capable of giving a clear and harmonised picture of the transnational law of commercial contracts; hence, they do not give a clear picture of what good commercial practice is. In addition, scholarly works on the convergence of legal systems may be considered as relevant. As Section 3.3 will show, little guidance seems to be found there either. In addition to those sources, contract practice may be given particular attention. As seen in Chapter 1, contract practice generally adopts contract models prepared on the basis of English law or at least of common law systems, which, according to the traditional conception discussed in Chapter 3, do not contemplate good faith and fair dealing as a general standard. Contract practice is, therefore, quite distant from the principles underlying the DCFR and the CESL. Even if, as will be seen in Section 3.4, the system of English law might not always allow for the effects of all contract clauses, common law contract models are clearly drafted on the assumption that the contracts shall be interpreted literally and without influence from principles such as good faith. As a consequence of the broad adoption of this contractual practice, the regulations between the parties move further and further away from the assumption of a standard of good faith and fair dealing, even in countries with legal systems that do recognise the important role of good faith. This renders it even more difficult to specify the content of the general clause of good faith by reference to the general standard of good commercial practice. (iv) A Uniform Contract Practice? Even evidence that certain conduct is common in a certain branch of the trade does not necessarily mean that there is a binding usage to that effect.36 As seen in Chapter 1, commercial contracts often contain clauses that recur in all types of transactions and present relatively constant language, the so-called boilerplate clauses such as: Entire agreement, No waiver, No oral amendments, No reliance, Liquidated damages, Sole remedy, Assignment, Representations and Warranties and several others. Their main aim is to create a self-sufficient system for the contract. The contract is meant to be interpreted solely on the basis of its terms and without reference to external elements. The purpose of these clauses is, in other words, to avoid interference by principles such as good faith and fair dealing. While each of these clauses is quite common in commercial contracts, there is no evidence that any of these clauses has specific legal effects that may be considered generally recognised on an international level. These terms are typically adopted from common law 36

Goode et al. (2015), paras 1.64 ff., referring to Libyan Arab Foreign Bank v. Bankers Trust Co [1989] QB 728. On the establishment of uncodified usage and the lex mercatoria, see Roy Goode, ‘Usage and Its Reception in Transnational Commercial Law’. International & Comparative Law Quarterly 46.1 (1997), pp. 1–36.

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contract models, and, as will be seen in Chapter 3, can be incompatible with the civil law model based on good faith and fair dealing. Even within English law, and even more so within the common law legal family in general, there is not necessarily one single generally acknowledged interpretation of the scope of each of these clauses.37 There seems to be no basis, therefore, to assume the existence of a uniform interpretation of these contract terms that could elevate them to the status of trade usages.38 Not only are the legal effects of these clauses not uniformly recognised, it also seems that the parties do not always consciously insert those clauses into the contract with the clear intention of obtaining certain effects. As shown by the description of the dynamics of contract drafting made in Chapter 1, parties may not even have been aware of the detailed content of the boilerplate clauses, or they may have willingly taken the risk that they would not have had the intended effects under the applicable law. This does not seem to comply with the criteria that need to be met in order to qualify a certain practice as a trade usage; namely, the requirement that the parties are convinced that that conduct is a legal obligation (opinio juris ac necessitatis). Some of the strongest supporters of a spontaneous transnational law seem, over time, to have turned their back on their own earlier position and started to prefer more structured, semi-legislative instruments. This became apparent in the longlasting process of developing a European contract law, which has so far created the publications of the DCFR. The process was launched by a Communication from the Commission of the European Communities.39 The Communication asked stakeholders to comment on possible ways to harmonise European contract law. Among the alternatives that were presented were a spontaneous development left to market forces and the introduction of an optional instrument: a systematic regulation of contract law that the parties could decide to opt into. In their joint response to the Communication, the academic group defining itself as the Commission on European Contract Law (the author of the PECL, chaired by the Danish Professor Ole Lando) and its successor, the Study Group on a European Civil Code (the co-author of the DCFR), bluntly dismissed the primary source of transnational law – the spontaneous development by market forces of appropriate regulations and models – as not sufficient to bring about a uniform regulation of private law.40 Earlier, these very parties had praised this source as the most adequate source 37 38

39

40

See Peel (2011), pp. 136ff. One clause that seems to have reached a uniform interpretation, at least in the field of maritime law, is the clause ‘time is of the essence’, which thus transplants into civilian systems the English law formalistic power to repudiate a contract for a breach that might be immaterial: see § 348 and 375 of the 1932 Norwegian Maritime Code. Communication from the Commission to the Council and the European Parliament on European Contract Law, COM (2001) 398 final. Response to the Commission Communication by the Commission on a European Contract Law, Study Group on a European Contract Law, Response to the Commission Communication by the Commission on

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of regulation for international commerce.41 The PECL that represent (together with the UPICC) one of the best and most comprehensive codifications of transnational law are also dismissed with the observation that, for the moment, such a restatement cannot be reckoned to replace state law: what it lacks – in addition to a more comprehensive and detailed scope – is the legal basis for being considered as binding even when it does not comply with the mandatory rules of state laws. Hence, the joint response proposes that restatements of principles be enacted with binding force,42 and it proposes extending the conflict rules of European private international law so as to permit choosing restatements of principles as a governing law.43 The same doubts as to the effectiveness of a free development by market forces as well as to the usefulness of a restatement are expressed by the ICC in its response to the Communication – the ICC was, for numerous decades, one of the most convinced supporters of the transnational law as an efficient alternative to state laws. The ICC’s Department of Policy and Business Practices expresses ‘concerns as to whether nonbinding principles are sufficient’,44 though emphasising the importance of the Principles as a first step towards harmonisation. 2.2.2 General Principles General principles are traditionally listed in scholarly writings as one of the important sources of transnational law that may contribute to the harmonisation of different legal traditions.45 There does not seem to be a consensus on the definition of these principles;46 the most recognised criteria for identifying which principles are generally recognised seem to be the reliance on a convergence among various legal systems, case law and scholarly works. A widely appreciated paper by Lord Mustill identified, four decades ago, twentyfive principles that, in arbitration practice and the literature, were considered as being generally recognised.47

41

42 43 44

45 46

47

European Contract Law and the Study Group on a European Civil Code, ec.europa.eu/consumers/cons_int/ safe_shop/fair_bus_pract/ cont_law/comments/5.23.pdf, p. 44, 26. See, for example, Lando (1985); ‘Lex mercatoria 1985–1996’. In Åke Frändberg and Ulf Göranson (eds.), Festskrift til Stig Strömholm (Iustus Forlag, 1997), pp. 567ff. Response to the Commission Communication, p. 35. Response to the Commission Communication, p. 37. International Chamber of Commerce (ICC), Department of Policy and Business Practices Document 15 October 2001, Response to the Commission Communication by the Commission on European Contract Law and the Study Group on a European Civil Code, AH/dhh Doc. 373/416, p. 3. De Ly (1992), pp. 193ff. For an overview of the various theories see De Ly (1992), pp. 193ff. Goode et al. (2015), paras 170, 3.22, convincingly argue that their meaning and content is so uncertain that they are rarely invoked in practice. Michael Mustill, ‘The New Lex Mercatoria: The First Twenty-five Years’. Arbitration International 4 (1988), p. 86. 4° Mustill (1988), p. 92.

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A criticism moved by Lord Mustill against the principles generally included in the lex mercatoria, is that several of these principles cannot be deemed to be generally recognised because they are not known in the common law system; for example, the principle prohibiting the abuse of a right and the principle requesting good faith in the pre-contractual phase.48 Both principles will be touched upon in Section 2.2.5(f) because they are part of the UPICC, the PECL, the DCFR and the CESL. As will be seen in Chapter 3, there are few principles in respect of good faith and fair dealing that may be considered common to the civil law and common law systems; even among civil law systems, there are considerable differences.49 Furthermore, according to Lord Mustill’s evaluation, the principles included in the lex mercatoria are ‘so general that they are useless’.50 It is tempting to agree with this evaluation: principles such as pacta sunt servanda or rebus sic stantibus can hardly be of guidance when solving a dispute with specific questions of a technical–legal character. The former states the sanctity of an agreement, and the latter states that an agreement is not binding when the conditions under which it was entered into change substantially. Both principles are important fundaments of most laws, and there is no reason to criticise them. However, these principles have such a high degree of abstraction that it may be very difficult to solve a dispute simply on their basis. The sanctity of a contract, for example, assumes that a contract has been entered into; however, the principle does not contain any specific guidelines as to when and how a contract is considered as being entered into. (a) Battle of the Forms An example of the insufficiency of abstract principles to solve specific disputes is the so-called ‘battle of the forms’. A company that produces and sells certain products may have developed a set of general conditions of sale, and endeavours to apply these conditions for each sale contract that it enters into. If the buyer of these products has developed its own general conditions of purchase, each of the parties’ desire to apply its own general conditions may lead to a battle of the forms. The legal question that arises in connection with battles of forms is to be solved on the basis of the rules on the formation of contracts under the applicable law. Broadly speaking, there are various approaches: traditionally, an acceptance has to conform to the offer; otherwise, it would be considered as a rejection of the offer and thus a counter-offer. According to this so-called mirror-image rule, therefore, in the 48 49

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Mustill (1988), p. 111, respectively, footnotes 85 and 87. Even Zimmermann and Whittaker, despite the observation that the principle of good faith is relevant to all or most of the doctrines of modern laws of contract, conclude that each system draws a different line between certainty and justice, Reinhard Zimmermann and Simon Whittaker (eds.), Good Faith in European Contract Law (Cambridge University Press, 2000), p. 678. Mustill (1988), p. 92.

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eventuality that one party’s offer makes reference to that party’s general conditions, and the other party’s acceptance makes reference to that other party’s general conditions, there is no conformity between the offer and acceptance, and the response to the offer is to be considered a counter-offer. If the first party, not paying attention to the exchange of conflicting general conditions, starts performing the contract, this will be considered a tacit acceptance of the other party’s counter-offer. This is the so-called ‘last-shot theory’, according to which the battle of the forms is won by the party who sent its conditions in last.51 Some legal systems contain a rule according to which, in the case of a conflicting offer and acceptance, a contract may be deemed concluded to the extent that the acceptance was in conformity with the offer, while the general conditions knock each other out to the extent that they are not in conformity with each other, so that none of them will be applicable (the so-called ‘knock-out theory’).52 The principle of pacta sunt servanda does not give a basis for choosing between the two approaches. It may be interesting to point out that the battle of the forms is one example of regulation contained in the UPICC which does not represent generally recognised principles, but rules deemed to be most appropriate by the drafters (best rules, see Section 2.2.5(e)). Precisely because a comparative study shows that there are different approaches, the UPICC could not rely on a generally acknowledged principle and formulated instead what the drafters of the UPICC deemed to be the best rule: the knock-out rule, see Article 2(1)(22). 2.2.3 General Principles of Commercial Law and of Public International Law Generally recognised principles are referred to as sources in a variety of contexts: public international law disputes between states, investment protection disputes between states and foreign investors, commercial disputes between private parties. Sometimes, legal literature and arbitral awards refer to ‘principles rooted in the good sense and common practice of the generality of the civilised nations’ as one of the applicable sources in commercial arbitration. This wording is taken from Article 38 of the International Court of Justice (ICJ) statutes regarding sources of public international law to be applied in disputes between states. The generally acknowledged principles that apply to commercial disputes, however, are not necessarily the same general principles that apply to disputes between states or between foreign investors and the host country. It is necessary to distinguish

51

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TRW Ltd v. Panasonic Industry Europe GmbH [2021] EWHC 19 (TCC). In this case, however, the parties had at the outset signed a customer file specifying that the seller’s terms and conditions would apply unless the seller approved any contrary terms in writing. This wording was sufficient to displace the last-shot doctrine. See the Bürgerliches Gesetzbuch (German Civil Code) (BGB), § 154(1).

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between international disputes involving public international law and those involving commercial law. Disputes between states, and also between states and foreign investors are often, if not necessarily always, based on rules or general principles of public international law. Disputes between a foreign investor and the host state are mainly based on an alleged breach by the state of a rule of international law, be it a treaty-based standard of treatment or a customary principle. The point with these allegations is that the host state has used its sovereign powers in a manner that violates rules and principles that are binding on states. This is the only, or the most effective, defence available to a foreign investor against the host country: in the absence of rules and principles of public international law, the state would be free from any restrictions on the use of its public powers because it could pass legislation that renders legal within its territory any abusive or discriminatory act . Public international law is the dimension above national sovereignty that sets fundamental and generally recognised (or agreed to) criteria limiting the national states’ otherwise unrestricted use of their respective sovereign powers. Rules and principles of public international law are not necessarily equivalent to the rules and principles of commercial law, whether international or not. Commercial disputes mainly involve obligations of private law between private parties (or, at least, parties acting as private parties). They do not involve any use of public or sovereign powers and therefore do not require any dimension superior to the sovereign state to restrict the latter’s otherwise unlimited powers. They mainly concern contractual conduct that is restricted by the contract and by the governing law. To illustrate the difference on a quite elementary level, while investment awards need to resort to public international law in order to find criteria against which it is possible to evaluate whether the state’s introduction of a new law or use of administrative powers is legal, it suffices for commercial awards to look at the governing law in order to find criteria for the lawfulness of the buyer’s refusal to pay the price in full or the seller’s invocation of a circumstance limiting liability. For those who believe strongly in the necessity of avoiding national laws and advocate that transnational law is better for international contracts, this will be a transnational, but still commercial, law. This latter law is not national and can therefore improperly be defined as international; however, it is not the same as the international law in the proper sense. Transnational commercial law creates private law obligations and remedies between private parties: the buyer’s refusal to pay the full price, the seller’s invocation of the limitation of liability. It has nothing to do with the set of rules that bind the states and limit the exercise of their sovereign powers. The most evident problems in applying public international law to commercial disputes might arise in the legal systems that adhere to the dualistic theory, according to which the rules of public international law bind the state towards other states but do not represent binding sources within that state until they are ratified or otherwise incorporated into the legal system. However, as will be seen, applying rules that are

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meant to regulate the relationship among states as sources for commercial relationships may create problems quite irrespective of the traditional divide between the dualistic and the monistic theory, the latter of which considers public international law as a part of the domestic legal system without the necessity of specific legislation. For this reason, it may be difficult to apply principles of public international law to commercial contracts, see Section 2.2.3(b), and vice versa: it may be difficult to apply principles of state law in the context of public international law, see Section 2.2.5(d). However, such cross-fertilisation is not excluded, see Section 2.2.3(a). The uncertain definition of the term ‘international’ in respect of international commercial law leads sometimes to a cross-fertilisation with institutions of public international law. In turn, public international law is subject to considerable fragmentation. Fragmentation is a term used to describe a situation in which different branches of public international law exist as if they were self-contained regimes – they develop on the basis of their own assumptions, without necessarily reflecting the fact that they are a part of the larger system of public international law.53 As a consequence of fragmentation, public international law, which was originally and at least in principle a unitary system of law, may consist of separate regimes. This raises the question of whether it would be possible or advisable to cross-fertilise among these self-contained regimes, or even between regimes outside of the public international law. Could principles, values and mechanisms that have been developed under one regime be useful to another regime? And could they travel across the divide between commercial and public international law? In the following sections, I will discuss two branches of the law to illustrate the advisability of cross-fertilisation in the first case study, and its inadvisability in the second. This shows that there is no single correct answer to this debate. Firstly, I will examine international administrative law. Subsequently, I will discuss international commercial law, to demonstrate the pitfalls that exist in considering international commercial law as part of the public international law system, as it sometimes is. (a) An Example of Cross-Fertilisation: International Administrative Law Not only are there different regimes within public international law, there are also different courts, which enhances the impression that the various regimes are indeed separate and self-contained. 53

The literature on fragmentation is wide. See, for example, the Report of the Study Group of the International Law Commission, Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law (2006a), https://legal.un.org/ilc/documentation/eng lish/a_cn4_l702.pdf, as well as Conclusions of the work of the Study Group on the Fragmentation of International Law: Difficulties arising from the Diversification and Expansion of International Law (2006b), https://legal.un.org/ilc/texts/instruments/english/draft_articles/1_9_2006.pdf.

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Until 2020, for some years I was a judge at, and served as the President of, the Administrative Tribunal of the European Bank for Reconstruction and Development (EBRD). I will draw upon that experience to show how cross-fertilisation can sometimes be useful. By way of introduction, the EBRD was founded at the beginning of the 1990s pursuant to the changes that occurred in the aftermath of the collapse of the Soviet Union. Following this historically important event, an international bank was established, similar to the World Bank, but with the purpose of aiding the reconstruction and development of the former Soviet Union. International organisations have many different kinds of immunity. The Headquarters Agreement of the EBRD, which is one of the documents that established the EBRD, is an agreement between the EBRD and the United Kingdom, where the seat of the EBRD is located. Article 4 of this agreement lays down that the EBRD, as an international organisation, has immunity from judicial proceedings within the scope of its official activities. There are some exceptions, but they are not relevant to the topic at hand. The Bank may need immunity to enhance its functioning as an international organisation, which is desirable. However, there is a flip side. Among other things, immunity means that the employees of the Bank who have a claim against it in connection with their employment may not initiate court proceedings against the Bank. However, under the European Convention on Human Rights, Article 6, everyone is entitled to a fair and public hearing. This exists side-by-side with immunity. To reconcile this contradiction, the solution lies in the establishment of an international administrative tribunal. Similar international administrative tribunals have been established by international organisations such as the World Bank, the United Nations, the International Monetary Fund (IMF), the International Labour Organization (ILO) and many others. The EBRD also has an international administrative tribunal. These tribunals decide disputes between the employees of the international organisation and the international organisation itself. An employee who has a claim against the EBRD cannot go to court due to the immunity the Bank enjoys. Nonetheless, employees have a human right to access a court. An international administrative tribunal is a special-purpose, international court that permits access to justice, while at the same time respecting the immunity of the Bank. The EBRD Administrative Tribunal is part of the Bank’s internal justice system, which in turn consists of a complex set of rules on internal administrative review procedures and appeals.54 Among other things, there is a directive contained in Section 2.01 of the appeals process entitled ‘Right of Appeal’, which provides that a staff member may submit to the Tribunal an appeal against an administrative decision. What is important to note here is that the Administrative Tribunal exists 54

Available at www.ebrd.com/downloads/integrity/appeals.pdf.

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for a staff member or a former staff member: one must be an employee for the purpose of presenting a claim before the Administrative Tribunal, a point to which I will shortly return. Additionally, there are rules on the law applicable by the Administrative Tribunal. In considering an appeal, the Tribunal shall base its decision on the provision of the staff members’ contract of employment, the internal law of the Bank and generally recognised principles of international administrative law.55 In sum, these are the sources that are applied by the Administrative Tribunal. Our first case study is based on a decision taken by the Administrative Tribunal in 2019.56 This is a decision that was taken when I was the Chair of the panel, which consisted of three judges. The decision on this appeal was taken against the background of a series of previous decisions. In brief, there was an individual who had been working for the EBRD for many years, not as a formal employee but as an independent consultant. He was an IT consultant who had established his own company for the sole purpose of supplying his consultancy services. This company had entered into a contract with an agent, and the agent had entered into a contract with the EBRD. There was no agreement of employment between the Bank and the consultant. However, he worked full-time rendering services to the EBRD for many years. He was subject to instructions by the Bank and was treated as if he were an employee, despite not formally being one. Therefore, when he was informed that his consultancy contract would be terminated, he expected to be treated as an employee and receive severance pay. The Bank claimed that he was not an employee and was thus not entitled to severance, to which he responded that he was a de facto employee: not in form, but in fact. The question which then arose was whether the Administrative Tribunal had jurisdiction in such a situation. The power of the Tribunal is limited to hearing appeals submitted by staff members. The contract between the appellant and the Bank stated: ‘Nothing contained in these conditions or in the contract shall be construed as establishing or creating any relationship other than that of independent contractor between the bank and the agent.’ There was no formal employment agreement. The question was whether the appeal was admissible, given that under the directive on appeals, the tribunal only has jurisdiction when the appellant is a staff member. The tribunal then had to decide if it should rely on form and focus on whether the appellant was formally an employee, or whether it should rely on substance, and examine the underlying reality. This is a very controversial question in international administrative law in general, and within the Administrative Tribunal of the EBRD in particular. There were several cases on this question, all of which raised dissent because there was no unitary understanding of the law in this area. 55 56

Article 3.02 of the Directive on Appeals Process. Case EBRDAT 2019/AT/06, available at www.ebrd.com/who-we-are/corporate-governance/administra tive-tribunal.html.

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In the case at hand, the Tribunal had in a previous decision determined that it falls within its jurisdiction to evaluate whether the appellant was a staff member or not.57 The decision that will now be examined began by recalling the abovementioned controversial issue of jurisdiction, and then dwelled on the law applicable to the substance in this case. As already mentioned, the constituent documents of the Administrative Tribunal specify which law shall be applied: the staff members’ contract of employment, the internal law of the Bank (which comprises the staff regulations and the Bank’s administrative practice) and the generally recognised principles of international administrative law. It is in connection with this last issue, the generally recognised principles, that the notion of cross-fertilisation could be very useful. After having looked at the contract and the internal law of the Bank, the Tribunal considered the generally recognised principles of international administrative law: not of public international law in general, but, more specifically, of international administrative law. Here, international administrative law could either be seen as a self-contained regime, with its own generally recognised principles which are completely isolated from the rest of public international law, or it could be seen as a constituent unit of public international law. The decision stated that it is possible to draw a parallel between generally recognised principles in public international law and generally recognised principles in international administrative law. The Article on the applicability by the Tribunal of generally recognised principles can be seen as a parallel of Article 38 of the statute of the ICJ, which lists the sources of public international law. Therefore, whatever is found in the literature and case law relating to the principles of public international law, and particularly to the method for determining whether a principle can be deemed to be a generally recognised principle, can be applied analogically to international administrative law, to the extent that these two regimes are compatible. There is, however, no automatic correlation. It must be ascertained what the principles are that have been developed in connection with public international law, and whether they can be applied correspondingly in international administrative law. Therefore, we need a mechanism for understanding how Article 38 of the ICJ is to be interpreted. The decision went on to examine what at the time was the latest source available on this issue: the First Report on General Principles of Law, adopted by the 71st session of the International Law Commission in 2019.58 According to the Report, generally recognised principles can be principles that are formed within the international legal system, or they can be principles derived from national legal systems. This distinction was followed 57

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Case EBRDAT 2018/AT/02, available at www.ebrd.com/who-we-are/corporate-governance/administra tive-tribunal.html. International Law Commission (ILC), First Report on General Principles of Law, adopted at the Commission’s 71st session of 29 April–7 June and 8 July–9 August 2019 (2019).

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in the decision. Principles that are formed within the international legal system include treaties, customs and jurisprudence from other comparable international courts. Another point of discussion is what would be deemed as comparable international courts. In the jurisprudence of international administrative tribunals, it is case law from other administrative tribunals that is routinely referred to. International administrative law is therefore treated as if it were a self-contained, completely isolated system. The jurisprudence of other administrative tribunals is, of course, important; however, that does not mean that the jurisprudence of other international courts would be completely irrelevant. There is no jurisprudence directly on this point; however, a comparable international court could be the European Court of Human Rights (ECHR), or any other court to the extent that its decisions correspond to interests that are also present in the case at hand. As previously alluded to, in the case law of international administrative tribunals in general, and of the Administrative Tribunal of the EBRD in particular, there are broadly two approaches, which I designate as the ‘formal approach’ and ‘substance approach’. The former is the approach that looks at the label given to the legal relationship in the contract. If the contract denies that there is an employment agreement, the appellant would not be deemed a staff member. This approach prevails in the practice of international administrative tribunals.59 The latter approach would look beyond the fact that the contract states that there is no employment agreement and examine the reality of the situation more closely. The decisions of international administrative tribunals have predominantly adopted the ‘formal approach’, but there are a few that have adopted the ‘substance approach’ as well.60 The other source of generally recognised principles relies, as just seen, on national legal systems – that is, principles existing within a sufficiently large number of national legal systems to be relevant on an international level. It is important to note that it is not sufficient to count the number of legal systems that have one approach and to call them ‘generally recognised’ as an international principle. It must also be ascertained whether these principles can be applied at the international level. Transposing national principles to international law means that the values that underlie a regulation that is common to numerous national systems is elevated to the level of international law. In order to transpose a principle, it is necessary to make sure that it is adequate, so that it is a principle that reasonably can also be elevated to the level of international law. These principles can be found in the national administrative law, civil service law or labour law, and this is what the decision did. The decision looked at general labour law and found a principle according to which the employer shall not abuse its position and deprive the employee of employee protection. This was a principle found in a plurality of systems. The decision considered a recent comparative research of labour law in 59 60

ILOAT 4045, ILOAT 3459, ILOAT 3551, ILOAT 67, UNAT 233, IMFAT 1999–1. ILOAT 701, ADBAT 24, WBAT 215, ILOAT 122, EBRDAT 2018/AT/02.

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Europe.61 On the basis of a comparative exercise, the research concluded that there is a principle according to which there must be ‘primacy of the facts’. So, it’s the substantive approach, and not the formal approach, which prevails. The substance is, therefore, a restriction to the freedom of contract. It is not acceptable to simply rely blindly on what is written in the contract. It is necessary to consider what the substance is: what the facts show, in spite of what the form affirms. This is what comes as a result of a comparative exercise in the European law and in the US case law – formal circumstances cannot shield from employer liability. It is less clear in the United States than in Europe, but there are references in the case law decisions showing that.62 On this basis, it was concluded that there is, in a sufficiently large number of legal systems, the principle of the ‘primacy of the facts’. The next step is to find out whether this principle can be elevated to the international level: whether there is a transposability. The decision makes this assessment on the basis of a balancing of the conflicting interests in the national sphere and in the international sphere. In the national sphere, the conflicting interests are, on the one hand: the free exercise of entrepreneurial autonomy, as well as the freedom of contract; and, on the other hand: the protection of the weaker party. For example, the employee or the person who is doing the work may be forced by the circumstances to accept some terms of contract that they would never have accepted if they had had a stronger bargaining power. In the national sphere, the balancing of these conflicting interests is generally resolved with the principle of the primacy of the facts. At the international level, the conflicting principles would be the managerial discretion of the organisation on one hand, and the principle of avoiding abuse of power on the other. Having seen that these two principles must be balanced also in the international sphere, it is possible to transpose the solution that is found at the national level to the international level. This exercise shows that there is a general principle that is also applicable in an international context. The conclusion in the decision was that, on the one hand, there is a presumption in favour of the wording of the contract; on the other hand, and exceptionally, the wording of the contract may be disregarded to privilege the substance. However, the threshold for disregarding the terms of the contract is very high, and it assumes that there is no functional justification for the arrangement that has been made, that the organisation is abusing its power and depriving the employee of its protection, or that there is a very clear divergence between the situation in fact and the contractual regulation. 61

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Wolfgang Portmann, Bernd Waas and Guus Heerma van Voss, Restatement of Labour Law in Europe, Volume I (Hart Publishing, 2017) (see ‘The Concept of Employee’). Browning-Ferris Industries of California, Inc., d/b/a BFI Newby Island Recyclery and FPR-II, LLC, d/b/a Leadpoint Business Services and Sanitary Truck Drivers and Helpers Local 350, International Brotherhood of Teamsters, 362 NLRB 1599 (2015).

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In this case, the outcome of the decision was negative for the employee. The abovementioned reasoning was meant to confirm the power of the Tribunal to decide on whether there is, in the particular situation, an employment relationship in spite of the fact that there is no formal employment contract. If there is a de facto employment relationship, the appellant qualifies as an employee and has access to the Bank’s internal justice system. If there is no de facto employment relationship, the appellant does not qualify as an employee, and the Tribunal does not have jurisdiction on the dispute. The abovementioned reasoning, therefore, was necessary to legitimate the Administrative Tribunal’s jurisdiction on this issue. In the specific case, the Administrative Tribunal found that there was no employment relationship, and that therefore the appeal had to be dismissed. There is, of course, a difference between affirming, in theory, the power to decide on a certain issue, and deciding the merits of the particular case. In this particular case, the appellant was not an employee, and this led to the dismissal of the appeal. The conclusion by the panel was unanimous, but there were two concurring opinions. All judges agreed on the conclusion that the appellant was not an employee, and that therefore the Tribunal had no jurisdiction. However, the two concurring judges did not agree on the necessity to carry out the abovementioned reasoning and to verify whether the appellant was a de facto employee. They considered the reasoning about generally recognised principles to be irrelevant and looked at the international administrative law as a self-contained legal system that only needs to regard case law by international administrative tribunals. Consequently, in the view of the concurring judges, there was no room for cross-fertilisation between the public international law and the administrative law. (b) An Example of Fragmentation: Unilateral State Declarations and Contract Law An example of cross-fertilisation between public international law and international commercial law that is not feasible can be found in a well-known digest of principles of transnational commercial law: Trans-Lex, see Section 2.2.5(g). The digest affirms that the principle of good faith is an important part of the transnational commercial law, and it refers to various sources upon which the principle of good faith relies. Of particular relevance here is that, among the court decisions invoked as a source of the principle of good faith for commercial contracts, there are some decisions of the ICJ. Among the ICJ decisions listed as the source for the principle of good faith in commercial contracts, the digest mentions the decision taken in Nuclear Tests (Australia v. France).63 This decision is rendered in connection with Australia’s 63

[1974], Judgment, ICJ Reports, p. 253, 267ff., available at www.trans-lex.org/380700/mark_901000/ nuclear-tests-judgment-icj-reports-1974-p-253-et-seq/#toc_0.

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reaction against France carrying out nuclear tests in the South Pacific in spite of having made declarations that it would not do so. In the part of the decision that the Trans-Lex emphasises as relevant, the ICJ analyses whether unilateral declarations made by a state with the intention of being bound are binding on it. The Court observes that one of the basic principles governing legal obligations is that of good faith and continues by affirming that ‘ [j]ust as the very rule of pacta sunt servanda in the law of treaties is based on good faith, so also is the binding character of an international obligation assumed by unilateral declaration’. The ICJ decision in Nuclear Tests (Australia v. France) is a decision rendered by a court of public international law and deals with public international law obligations between states. If it extended its relevance to commercial contracts, it would mean that, as a general principle of international law stated by the ICJ, a private party making a commercial offer to another private party is bound by that offer, particularly if the offer is presented as irrevocable. As will be seen, this may create some difficulties. Unilateral declarations do not always have a binding character in contract law. Among other legal systems, English law does not generally consider unilateral promises to be enforceable. As will be seen in Sections 2.3.2(b), 3.6.1 and 3.6.2, the English law of contract has an additional requirement for considering a promise as enforceable: the requirement for consideration. This requirement can be briefly described as the necessity that both parties have reciprocal benefits and detriments. In the absence of mutual benefit and detriment, a unilateral promise that gives benefit only to the promisee and detriment only to the promisor would be unenforceable. In most typical contracts, the consideration is identified through the price: in a sale agreement, for example, the seller promises to sell the thing (thereby creating for itself the detriment of depriving itself of the thing, and the benefit for the buyer of taking over the thing), and the buyer promises to pay the price (thereby creating for itself the detriment of paying the price, and for the seller the benefit of the transfer of the money). Following this, the English law of contracts does not consider a unilateral offer as binding, not even if the offer, by its own terms, is irrevocable for a certain period: it is necessary to have consideration, otherwise the promise to keep the offer firm is not enforceable.64 How can the unenforceability of irrevocable offers in the English law of contracts be reconciled with the ICJ’s clear statement that unilateral declarations are a sufficient source of binding obligations? Is the English rule of consideration in contrast with the principle of good faith in public international law? Could a case be brought against England in the ICJ because English contract law violates public international law? Could a private party be considered liable for a breach of its obligations contained in 64

Offord v. Davies [1862] 12 CBNS 748.

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an irrevocable offer, notwithstanding that the offer is not binding under the (English) law governing it? It seems quite evident that English contract law does not violate the basic principles of public international law. It simply has a different scope of application. It does not relate to obligations between states or to unilateral declarations by a state not to carry out atmospheric nuclear explosions off the coast of another state. Similarly, the ICJ was not aiming at creating a precedent for the regulation of commercial offers between private parties. That the words ‘good faith’ or ‘binding unilateral declaration’ may be used both in public international law and in commercial law does not justify the conclusion that they have the same assumptions, functions and meaning in both spheres. Accordingly, the concepts are not interchangeable. In summary, generally acknowledged principles of public international law are not necessarily capable of creating obligations between private parties and do not represent, therefore, a source of harmonised transnational commercial law. 2.2.4 The CISG Among the sources of international commercial law reference is often made to the United Nations Convention on Contracts for the International Sale of Goods (CISG). The CISG is a treaty binding ninety-five states.65 It is an example of uniform law, as it obliges member states to regulate international sales in accordance with the Convention. The CISG was drafted by the United Nations Commission on International Trade Law (UNCITRAL) and adopted in Vienna in 1980.66 It is based on two previous attempts to achieve a uniform law on international sales: the conventions relating to the Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF) and to the Uniform Law on the International Sale of Goods (ULIS), both adopted in the Hague in 1964. These two predecessors of the CISG did not obtain widespread success, among other reasons, because their provisions were said to primarily reflect the legal traditions and economic situation of Western Europe. Western Europe was also the region that had been most active in the drafting of the conventions, thus enhancing the impression that these instruments expressed the interests of a certain part of the world. In 1968, the UNCITRAL was given the task of elaborating these two conventions into a text that could enjoy broader support. After having involved states from every geographical region in the process, the UNCITRAL presented the CISG as an elaboration

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The updated status can be found at https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/ cisg/status. The full text can be found on the UNCITRAL homepage, https://uncitral.un.org/sites/uncitral.un.org/files/ media-documents/uncitral/en/19-09951_e_ebook.pdf, which also contains an updated list of the countries that have ratified it, the reservations that were made, and other items.

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of its two predecessors, with modifications that rendered it acceptable to states with different legal, economic and social backgrounds.67 The CISG is looked upon with extreme interest, especially in academic circles,68 and it is praised as the first example of a uniform law that not only creates binding law as an international convention that is ratified by so many states, but as one that gives recognition to the spontaneous rules born out of commercial practice.69 Furthermore, it is praised as itself becoming an autonomous body of international regulation that adapts to the changing circumstances independently from the legal systems of the ratifying states.70 The CISG covers the formation of contracts and the substantive rights and obligations of the buyer and the seller arising out of a contract of sale, such as delivery, conformity of the goods, payment and remedies for breach of the related obligations. It has been suggested71 that the CISG, together with the UPICC and the PECL, constitute a Troika of transnational law – giving the CISG effects even beyond the scope of its scope of application. In my opinion, it is not possible to assume a complete coincidence among these instruments, see Section 2.2.5(c). Furthermore, it can be questioned whether the success of an authoritative instrument such as a convention can transform the instrument into soft law that is applicable even without it having been ratified. The genesis of the CISG and the ideals that inspired it actually confirm that the goal of the Convention is to provide a ‘universal’ treatment for the most important type of contract within international trade, thus eliminating the barriers to international business that might arise as a consequence of different national regulations. The actual success of the CISG slightly contradicts the universality of its goals,72 since the number of states that ratified it (95) is not overwhelming compared to other conventions (the New York Convention on arbitration has been ratified by 170 states) and taking into consideration that a state that is of paramount importance within international trade and international commercial law, the UK, has not ratified it. Moreover, Article 6 of the CISG gives the parties the possibility of excluding the 67

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See the Explanatory Note by the UNCITRAL Secretariat on the United Nations Convention on Contracts for the International Sale of Goods, p. 33. The Note can be found at https://uncitral.un.org/sites/uncitral.un .org/files/media-documents/uncitral/en/19-09951_e_ebook.pdf. See, for example, Bernard Audit, ‘The Vienna Sales Convention and the Lex Mercatoria’. In Thomas E. Carbonneau (ed.), Lex Mercatoria and Arbitration (Juris Publishing, 1990), pp. 139–60. For a thorough analysis of the enormous impact of the CISG on scholars, see Franco Ferrari (ed.), The CISG and Its Impact on National Legal Systems (Sellier European Law Publishers, 2008), pp. 436ff. Ferrari also shows, however, that the level of awareness about the CISG in the business community and among practising lawyers is strikingly low, see pp. 421ff. This is because of the Convention’s reference to trade usages in Article 8. This is because of the particular rules on the Convention’s interpretation laid down in Article 7, which require an autonomous interpretation based on the principles underlying the Convention. On the opinion that the CISG is so widely recognised that it is applicable even without having been ratified, see below in this section. See, for example, Lando (2005). See also the UNCITRAL, UNIDROIT and HCCH Tripartite Legal Guide to Uniform Legal Instruments in the Area of International Commercial Contracts (with a focus on sales) (2021). This reservation is expressed by McKendrick (2006), p. 6.

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applicability of the Convention. This possibility to be able to opt out of the CISG is taken advantage of quite frequently, especially when one of the parties is from the United States.73 There are good reasons for questioning the appropriateness of an approach that extends the applicability of international conventions beyond their scope of application:74 a convention is a binding instrument and is the result of careful negotiations that reflect the extent to which the various states are willing to be bound. The negotiations on the text of a convention sometimes result in wording that is so general or unclear that it can be interpreted as permitting each of the conflicting positions to be supported during the negotiations.75 In other situations, and perhaps more openly admitting the impossibility of reaching an agreement, conventions may be silent on certain aspects of the matter that they regulate.76 In yet other situations, they may make open reference to the applicable national law for supplementing or regulating specific aspects.77 Sometimes conventions permit the ratifying states to make reservations against the applicability of certain rules in the convention.78 Conventions also contain a detailed description of their scope of application, both territorially79 and in respect of the subject matter.80 All these, and many others, are techniques that are used to obtain a commitment by the ratifying states to at least the minimum regulation that is contained in the 73

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Spagnolo (2010). For a thorough analysis of the exclusion of the CISG, see Ingeborg Schwenzer, Pascal Hachem and Christopher Kee, Global Sales and Contract Law (Oxford University Press, 2012), paras 5.17ff. See Goode et al. (2015), para 1.68, criticising the ICC Award No 5713 of 1989, which applied the CISG as if it was a directly applicable source of transnational law, in spite of the circumstance that the Convention had not been ratified by any of the states involved and without giving regard to the applicable law. See, for example, Article 4 of the Rome Convention on the Law Applicable to Contractual Obligations (now replaced by the Rome I Regulation), which was interpreted differently by courts belonging to different legal traditions: see Section 4.4(a). An example is the matter of overdue interest that could not be regulated in detail in the CISG; see for an extensive explanation Goode et al. (2015), paras 8.78 ff. and 16.43 ff. For example, the CISG refers in Article 28 to national law to determine whether the remedy of specific performance is applicable. For example, the CISG allows the ratifying states to make reservations against the application of parts of the Convention. The Scandinavian countries, for example, have excluded the applicability of the Vienna Convention to inter-Scandinavian contracts (the so-called Article 94 reservation). Several countries (also including Argentina, Chile, China, Russia and Ukraine) have reserved against the provisions that permit contracts to be created, modified or terminated by other means than in writing (the so-called Article 96 reservation). These and other reservations render the application of the Vienna Convention less uniform than would have been desirable for a uniform law, even among countries that have ratified it (for a full list of the reservations and of the states that have made them, see www.uncitral.org). For example, the Rome Convention on the Law Applicable to Contractual Obligations (now converted into the Rome I Regulation) is universal and is applied even in relationships where the other party’s country has not ratified it, whereas the Lugano Convention on Jurisdiction and the Recognition and Enforcement of Judgements in Civil and Commercial Matters assumes that both involved countries have ratified it, at least the part regarding the enforcement of judgments. For example, the CISG applies only to contracts of sale, and not to all contracts of sale; its scope of application is specified in Article 2.

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convention. A state, for example, may be willing to commit to a convention only if its reservation against the application of a certain rule is accepted. If a state is not willing to commit to a convention, notwithstanding the possibility of reserving against the application of certain rules, it does not ratify it – and the convention will not become binding for that state. How can all these restrictions be disregarded simply by stating that, because some states ratified a convention, the principles underlying that convention are to be considered transnational rules that may be applied beyond their precise scope of application? Would this mean that the whole convention is to be considered transnational law and therefore binding, notwithstanding that a state has made certain reservations or has decided not to ratify it? What, then, is the effect of making the reservations or not ratifying? This reasoning applies to conventions that intend to create uniform legislation, mainly within the area of private law or other areas within the states’ power of legislation. The purpose of these conventions is to align the legislation of its signatory states in the relevant area. These conventions, therefore, have effects within the scope of the states’ sovereignty, and depend on states’ sovereignty to become effective. The reasoning may be different in respect of conventions that create rights and obligations among states. Principles of public international law do not necessarily depend on states’ sovereignty to become effective, and it cannot be excluded that such principles may be created without the intervention of a particular state. Within the field of public international law it is conceivable that the text of a convention that has not been ratified receives such recognition that it can be deemed to reflect generally acknowledged principles.81 The fact that a number of states, having ratified the convention, are bound by the rights and obligations contained therein, creates an expectation about the conduct of these states that may be extended to the conduct of other states that have not ratified the convention. In addition to these systemic objections to the applicability of a convention beyond its scope, there are situations where the convention – having been drafted for the purpose of regulating a certain specific area – presents lacunae or refers to the national governing law. The CISG refers to national law in a series of respects: validity of the contract and effects of the sale on property (Article 4), gaps in the convention (Article 7), specific performance (Article 28), industrial property claims (Article 42), payment modalities (Article 54), retention’s effects towards third parties (Article 71) and calculation of interest (Article 78). An ICC arbitral award82 illustrates a case of a lacuna. The dispute was between a Korean seller and a buyer from Jordan. The seller was to issue a performance guarantee, and the buyer was to open a letter of credit for the payment of the goods; 81

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For example, the United Nations Convention on Jurisdictional Immunities of States and Their Property of 2004 has not yet entered into force, but the Norwegian Ministry of Foreign Affairs explains that it reflects customary international, as well as Norwegian law: St.prp.nr. 33 (2005–2006). ICC Award made in Case No 6149 of 1990, in ICCA, Yearbook Commercial Arbitration XX (Kluwer International, 1995), pp. 41ff.

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the buyer also had to issue a performance guarantee in favour of the final buyer of the goods, an Iraqi buyer. Due to several delays, the delivery was rescheduled and the duration of the letter of credit was extended; a dispute then arose regarding whether the actual delivery was delayed in respect of the extensions, and whether payment was due under the guarantees. The claimant asked the arbitral tribunal to solve the dispute by applying the transnational law, in this case defined as lex mercatoria, and affirmed that in that case the lex mercatoria was to be deemed equal to the CISG. The arbitral tribunal first noticed that the applicability of the lex mercatoria was not undisputed. However, assuming that in that case the lex mercatoria could be identified with the CISG, it would have been impossible to solve the dispute on that basis. The tribunal noticed that in that dispute it might be necessary to evaluate situations such as the unjust enrichment or limitation of rights, which are not regulated by the CISG. Therefore, the tribunal decided to apply choice-of-law rules for the purpose of identifying the national governing law and resolved to apply Korean law to the dispute. 2.2.5 The Principles of International Commercial Contracts (UPICC) and the Principles of European Contract Law (PECL) A trend of the last few decades has been the attempt to achieve harmonisation of legal traditions by creating sources of soft law that address general contract law. (a) The UPICC and the PECL Two prominent examples are the UPICC83 and the PECL.84 The UPICC were published first in 1994 by the UNIDROIT, an international organisation established in 1926 with the purpose of unifying private law. The work on the UPICC had started in 1981, in a working group under the direction of the Italian professor, Michael Bonell. A second edition was published in 2004, a third in 2010 and a fourth in 2016.85 The PECL were published in three volumes, between 1995 and 2002, by the socalled Commission on European Contract Law, a group of academics established in 1982 under the leadership of the Danish professor, Ole Lando. The work on the PECL proceeded largely in parallel with the work on the UPICC, and many members of one working group were also members of the other.

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UNIDROIT Principles of International Commercial Contracts, 4th ed. (2016), www.unidroit.org/instru ments/commercial-contracts/unidroit-principles-2016/. Ole Lando and Hugh Beale (eds.), Principles of European Contract Law: Parts I and II (Kluwer Law International, 2002); Ole Lando, Andre Prum, Eric Clive and Reinhard Zimmermann (eds.), Principles of European Contract Law: Part III (Kluwer Law International, 2003). On the fourth editions, see Cordero-Moss (2020d).

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As a result of the partial overlap in these academic groups, the content, structure and terminology of these two collections of principles are largely similar to each other, with certain key differences that will be highlighted. A significant difference between the PECL and the UPICC is that the UPICC have no specific territorial scope and apply to any international contract, whereas the PECL have defined Europe as their scope of application. This has prompted higher goals for the PECL: in addition to aspiring to the status of a source of soft law, as described, the PECL aspire to become the prevailing (on a long-term basis, binding) contract law within the EU and to replace the national laws that exist in every state today. The PECL have actually been used as a basis for an extensive work on a European contract law. The work was initiated at the beginning of this millennium,86 and in 2004,87 the European Commission entrusted a joint network on European Private Law with the preparation of a proposal for a Common Frame of Reference (CFR). The CFR was intended to be a toolbox for the Community legislator: it could be used as a set of non-binding guidelines by lawmakers at the Community level as a common source of inspiration, or for reference in the lawmaking process. It was intended to be a set of definitions, general principles and model rules in the field of contract law, to be derived from a variety of sources – such as a systematisation of the existing EU law and a comparative analysis of the member states’ laws. The Study Group on a European Civil Code and the Research Group on the Existing EC Private Law88 jointly used the PECL as a basis for a Draft Common Frame of Reference (DCFR) that was finalised at the end of 2008.89 The DCFR is subject to debate, both by politicians90 and scholars,91 and is referred to as ‘academic’, to underline that it is the result of the work of two academic groups and is not to be confused with what will be the final result of the European political process. Another project of the Commission was the Common European Sales Law (CESL), contained in a proposal for a Regulation dated 11 October 2011.92 This was meant to be an optional instrument that should have applied only if the parties expressly agreed on its application. The CESL was meant to apply to contracts between businesses and 86

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Resolution of the European Parliament on the Annual Legislative Programme of March 16, 2000, 29/12/ 2000, OJ C 377, p. 323. Communication from the European Commission to the European Parliament and the Council ‘European Contract Law and the Revision of the Acquis: The Way Forward’, COM (2004) 651 final. The Acquis Group also published the Acquis Principles, a systematisation of the existing European law: Research Group on the Existing EC Private Law (Acquis Group), Principles of the Existing EC Contract Law (Acquis Principles) – Contract II: General Provisions, Delivery of Goods, Package Travel and Payment Services (Sellier European Law Publishers, 2009). Christian von Bar, Eric M. Clive and Hans Schulte-Nölke (eds.), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR) (Sellier European Law Publishers, 2009). Discussion on the topic of the Common Frame of Reference (CFR) in the Council of the European Union, initiated by the Presidency on 28 July 2008, 8286/08JUSTCIV 68 CONSOM 39. Eidenmüller et al. (2008); Nils Jansen and Reinhard Zimmermann, ‘“A European Civil Code in All But Name”: Discussing the Nature and Purposes of the Draft Common Frame of Reference’. The Cambridge Law Journal 69.1 (2010). COM (2011) 635 final.

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consumers, as well as to contracts between businesses and small- and medium-sized enterprises. Additionally, the CESL was, like the Academic DCFR, largely based on the PECL. However, the CESL was abandoned. Today, the EU work on contract law has lost the ambition of creating an EU general contract law.93 Depending on the development of these processes, the PECL may become the basis of a European body of rules that eventually may be subject to interpretation or application by the European Court of Justice (ECJ). In such a case, over time, a coherent body of case law would be formed, and the content of the general clauses contained in these instruments would be easier to determine. As long as there is no centralised court creating a uniform jurisprudence, it will be difficult to have a harmonised interpretation of these instruments, as Section 2.2.5(f) will show. Both the UPICC and the PECL are structured and drafted as a codification of contract law, not very different from the civil codes adopted in civil law countries such as Germany, France and Italy, or the US’s Restatements of the Law. They consist of a set of Articles, so-called black letter rules, which are provisions written in the form of legislative text. Each Article is accompanied by a Comment, giving information and explanations such as the Article’s background, function, application and practical illustrations. Neither the PECL nor the UPICC are international conventions, nor do they have a binding effect. They are meant to systematically formulate the main rules prevailing in the field of cross-border contracts in a way that may be interpreted and applied equally in all countries where they are applied. They are not merely a record of existing practices: they are, in part, a codification of generally adopted principles of international contracts and, in part, new rules (‘best solutions’) developed by a large group of experts from around the world, see Section 2.2.5(e). As the outcome of the work is not binding, and conflicting mandatory rules or principles of the governing law prevail, the working group could agree to rules and formulations more easily than if it were drafting a convention destined to become binding. Moreover, the work did not require unanimity, and controversial matters could be regulated more easily than if a large consensus was expected – as happens when drafting a convention. These two aspects rendered it easier to codify the ‘best rules’ in a restatement rather than in binding instruments; however, these same aspects render such a restatement less representative than an instrument based on a larger consensus and to which most members are committed.94

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Directive (EU) 2019/771 of the European Parliament and of the Council of 20 May 2019 on certain aspects concerning contracts for the sale of goods, amending Regulation (EU) 2017/2394 and Directive 2009/22/ EC, and repealing Directive 1999/44/EC. See, extensively, Goode et al. (2015), paras 16.07 ff. and 16.43 ff., explaining, in this light, why the principle of good faith and fair dealing was given such a central role in the UNIDROIT Principles but not in the CISG. See also McKendrick (2006), pp. 5–29, 8. For similar considerations regarding the Hague Principles on Choice of Law in International Contracts see Michaels (2014), Section III.B.

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As the following sections will show, the restatements can be a useful complement to the governing law but cannot replace it. (b) Uses of the Principles These restatements of principles have multiple goals, mentioned in their respective preambles. The UNIDROIT issued a document containing model clauses that the parties may want to insert in their contract, depending on which of the abovementioned uses they choose.95 The different uses may be summarised as follows: (i) As they are the result of an extensive comparative study and offer modern and functional solutions, they may be used by legislators as a source of inspiration when legislating in the field of general contract law. Since their issuance, the UPICC have been used as an inspiration for contract law reforms in a variety of countries. Originally meant to be used as a basis for codification in countries in transition or developing countries, the UPICC have also proven successful in legal systems with developed contract laws. The UPICC have, to a larger or lesser extent, influenced reforms in countries such as Russia,96 Japan97 and France.98 (ii) Due to the persuasive authority that derives from the high quality of the working group that prepared them, they could be used by courts or arbitrators to interpret existing international instruments. On the use of the UPICC to interpret or integrate the CISG, see Section 2.2.5(c). (iii) Moreover, as a guide to the drafting, they may be used by contractual parties during the preparation of their contract. The commentary to the UPICC is actually from time to time written in a way that resembles a check list for parties. (iv) The parties to an international contract, furthermore, might decide to subject their contract to the regulation of the restatements as an expression of a balanced, international set of rules, rather than choosing a national governing law (on this particular use of the principles, it is necessary to make some reservations; see Section 2.3). The number of contracts choosing the UPICC is quite low,99 but the International Association of Lawyers (Union Internationale des Avocats, UIA) signed on 15 July 2020 a Resolution 95 96

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www.unidroit.org/instruments/commercial-contracts/upicc-model-clauses. Alexander S. Komarov, ‘Reference to the UNIDROIT Principles in International Commercial Arbitration Practice in the Russian Federation’. Uniform Law Review 16 (2011), pp. 657–67. Takashi Uchida, ‘Contract Law Reform in Japan and the UNIDROIT Principles’. Uniform Law Review 16 (2011), pp. 705–17. Solène Rowan, ‘The New French Law of Contract’. International & Comparative Law Quarterly 66.4 (2017), pp. 805–31. School of International Arbitration of Queen Mary University of London (2010); Michaels (2014). According to Sippel and Duggal, ‘neither author has yet come across a contract that contained such agreement [choosing the UPICC to govern the contract] except for a few reported cases’: Harald Sippel and Kabir Duggal (eds.), Force Majeure and Hardship in the Asia-Pacific Region (Juris, 2021), p. xix.

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Recommending Consideration of UNIDROIT Principles of International Commercial Contracts 2016 As Important Option for International Lawyers and Clients.100 This may contribute to an increased use of the UPICC in contract practice. (v) The restatements of principles might be useful for arbitrators, especially when deciding a dispute on the basis of the transnational law: rather than having to search for what could constitute international usages of trade or other sources of the transnational law that are difficult to identify, arbitrators could rely on a readily available set of rules. (vi) The restatements of principles aspire to be used by courts or arbitrators, instead of the governing law, should the content of the law be impossible or extremely difficult to establish. (vii) In practice, the UPICC enjoy a high degree of recognition as an authoritative collection of principles for commercial contracts. This reputation is at the basis of the widespread use that is made of the UPICC as a corroboration of the applicable law. This is a use that can be seen not only in commercial arbitration, but also in litigation before state courts101 and in investment arbitration. In investment arbitration, the UPICC are sporadically used not only to corroborate the result flowing from a state law,102 but even to corroborate the existence of principles of international law.103

(c) Use of the UPICC to Interpret the CISG? It is held that the UPICC may be useful for solving ambiguities or for filling gaps in the CISG, because both instruments deal with many of the same issues (though the CISG only with regard to contracts of sale, whereas the UPICC regulate all kinds of contracts). The link between the two instruments is promoted by highly recognised databases such as the CISG database established at the Pace Law School.105 This database contains a rubric, in the guide to various articles, devoted to the ‘Use of the UNIDROIT Principles to help interpret CISG’, containing ‘match-up’ of the CISG Articles with the corresponding Articles of the UPICC. 104

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www.unidroit.org/uia-signs-resolution-recommending-consideration-of-unidroit-principles-of-internati onal-commercial-contracts-2016/. Kabab-Ji SAL (Lebanon) v. Kout Food Group (Kuwait) [2020] 1 Lloyd’s Rep 269, paras 72 to 75; Rock Advertising Ltd v. MWB Business Exchange Centres Limited [2018] UKSC 24. Giuditta Cordero-Moss and Daniel Behn, ‘The Relevance of the UNIDROIT Principles in Investment Arbitration’. Uniform Law Review 19.4 (2014), Section V(1). Cordero-Moss and Behn (2014), Section IV(2). Michael Joachim Bonell, ‘The UNIDROIT Principles as a Means of Interpreting and Supplementing Uniform Law in International Arbitration Practice’. ICC International Court of Arbitration Bulletin Special Supplement (2002), pp. 29–38. http://iicl.law.pace.edu/cisg/cisg.

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In 2021, the so-called Tripartite Guide was issued by the UNCITRAL, the UNIDROIT and the Hague Conference,106 with the aim of clarifying the relationship among three uniform texts: the UPICC, the CISG and the HCCH Principles on Choice of Law in International Commercial Contracts.107 The ultimate goal of the guide is to promote a uniform legal environment for cross-border transactions. However, the ability of the UPICC to explain or supplement the CISG is not uncontroversial.108 An example serves the doctrinal debate that followed two decisions by Belgian109 and French110 courts which applied the UPICC to interpret and supplement the CISG. The debate concerned particularly the issue of renegotiation of terms of contract due to unforeseen supervening circumstances that rendered performance under the original terms more onerous, so-called hardship. The CISG does not mention hardship, but the UPICC do. These courts applied the UPICC principle of hardship to contracts governed by the CISG. This prompted a doctrinal debate with opposing views.111 The CISG has a provision on autonomous interpretation, that incidentally served as a model for Article 1.6 of the UPICC, see Section 2.3.4. Article 7(2) provides that issues falling within the scope of the CISG and not expressly regulated therein ‘are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law’. The question is whether the UPICC may be deemed to express the principles on which the CISG is based. An area on which the correspondence does not seem complete is that of the role played by the principle of good faith. 106 107

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UNCITRAL, HCCH and UNIDROIT (2021). The Principles on Choice of Law in International Commercial Contracts, issued by the Hague Conference on Private International Law in 2015, available at www.hcch.net/en/instruments/conventions/full-text/? cid=135. See, for example, Franco Ferrari, Clayton P. Gillette, Marco Tosello and Steven D. Walt, ‘The Inappropriate Use of the PICC to Interpret Hardship Claims under the CISG’. Internationales Handelsrecht 3 (2017), 97–102, with further references in footnote 14; Rodrigo Momberg Uribe, ‘Change of Circumstances in International Instruments of Contract Law. The Approach of the CISG, PICC, PECL and DCFR’. In Franco Ferrari and Clayton P. Gillette (eds.), International Sales Law (Edward Elgar, 2017), pp. 233–66. Belgian Supreme Court Scafom International v. Lorraine Tubes S.A.S., 19 June 2009. French Cour de Cassation, 17 February 2015, n° 13–18.956, n° 13–20.230. Among the voices favouring the use of the UPICC to supplement the CISG in respect of hardship, see Anna Veneziano, ‘UNIDROIT Principles and CISG: Change of Circumstances and Duty to Renegotiate According to the Belgian Supreme Court’. Uniform Law Review 15 (2010) pp. 137–49. Among the voices criticising it, see Ferrari et al. (2017); Christina Ramberg, ‘The Duty to Renegotiate an International Sales Contract under CISG in Case of Hardship and the Use of the UNIDROIT Principles’. European Review of Private Law 19.1 (2011), pp. 117f. Ramberg fiercely criticises the Belgian decision. However, it seems that criticism is directed against the applicability of the principle of hardship to the particular facts, rather than against the use of the UPICC to supplement the CISG.

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As Section 2.2.5(f) will show, the UPICC give the principle of good faith a central role as a source of obligations between the parties, corrective of the contract language and restriction to contract rights. The CISG, in turn, requires in Article 7 that the Convention be interpreted as having regard to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. It is not a source of obligations between the parties. Rather, it is a source of inspiration for the interpretation of the Convention. The role of good faith in the CISG, therefore, is more modest.112 This can in part be explained in light of the non-binding character of the UPICC. The working group that drafted the UPICC could agree to rules and formulations more easily than if it were drafting a convention destined to become binding. As opposed to a convention, the UPICC are subject to mandatory rules or principles of the governing law. Moreover, the work did not require unanimity, and controversial matters could be regulated more easily than if a large consensus was expected – as happens when drafting a convention. These two aspects render it easier to codify the ‘best rules’ in a restatement rather than in binding instruments; however, these same aspects render such a restatement less representative than an instrument based on a larger consensus and to which most members are committed. Because of the common law tradition’s reluctant approach to good faith, the final text of the CISG is silent on the question of good faith as a duty between the parties or as a correction to the terms of the contract. This silence is not due to carelessness, but is a conscious choice taken during the drafting. The main arguments against the inclusion of good faith as a duty of the parties were that the concept is too vague to have specific legal effects and that it would be redundant if mention thereof was only to be understood as a moral exhortation.113During the drafting of the Convention, various delegations had repeatedly requested that the text expressly included a provision stating a duty for the parties to perform the contract according to good faith. Specific proposals were presented on good faith in the pre-contractual phase, as well as general proposals dealing with the requirement of good faith. The specific proposals relating to precontractual liability were rejected, and the generic proposals on good faith were incorporated into the abovementioned Article 7. Article 7, however, does not formulate a rule directed to regulate the parties’ conduct in the contract; it states a rule instructing the interpreter of the Convention. The Convention shall be interpreted having regard to the need to promote the observance of good faith in international trade. Whether this good faith interpretation of the Convention entails a duty for the

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See Steven D. Walt, ‘The Modest Role of Good Faith in Uniform Sales Law’. In Franco Ferrari and Clayton P. Gillette (eds.), International Sales Law (Edward Elgar, 2017). See, extensively on the background for the limited role of good faith in the CISG, Goode et al. (2015), pp. 278ff. and 528.

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parties to act in good faith towards each other is an open question.114 The different character of the UPICC and the CISG (the former a soft law source, the latter a binding convention) explains why the UPICC have an overarching principle of good faith, while the CISG ended up, after extensive negotiations, without a provision creating a duty of good faith on the parties.115 The Tripartite Guide recognises that the UPICC set forth a general and far-reaching duty of the parties to act in good faith that exceeds the role for good faith recognised in the CISG.116 Therefore, the ability of the UPICC to represent the principles underlying the CISG, and thus to automatically give a basis to interpret and supplement the CISG, does not seem to be fully recognised by the UNIDROIT or the UNCITRAL. In the document on model clauses, the UNIDROIT says that the ‘general principles on which [the Convention] is based’ referred to in Article 7(2) of the CISG are as such not identical with the UNIDROIT Principles.117 Moreover, the UNIDROIT assumes that the use of the UPICC to interpret or supplement the CISG is not automatic but depends on the parties choosing it. Therefore, it recommends a model clause to obtain that purpose.118

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For an extensive evaluation on this matter, as well as references to the literature and to the legislative history in this respect, see John Felemegas, ‘Comparative Editorial Remarks on the Concept of Good Faith in the CISG and the PECL’. Pace International Law Review 13 (2001), p. 399; Lisa Spagnolo, ‘Opening Pandora’s Box: Good Faith and Precontractual Liability in the CISG’. Temple International and Comparative Law Journal 21.2 (Fall) (2017), pp. 261–310; Albert H. Kritzer, ‘Pre-Contract Formation’. Editorial Remark on the Internet Database of the Institute of International Commercial Law of the Pace University School of Law, CISG Database, https://iicl.law.pace.edu/cisg/cisg (2008), pp. 2ff., with extensive references also to the Minority Opinion of M. Bonell, who was representing Italy during the legislative works. According to Bonell, an extensive interpretation of the CISG would justify application of both the concepts of pre-contractual liability and of good faith: see Michael Joachim Bonell, ‘Formation of Contracts and Precontractual Liability under the Vienna Convention on International Sale of Goods’. ICC (ed.), Formation des contrats et responsabilité précontractuelle (1990). Affirming that it is commonly acceptable that Article 7 of the CISG applies also to the interpretation of the contract and the relationship between the parties, see Ulrich Magnus, ‘Comparative Editorial Remarks on the Provisions Regarding Good Faith in CISG Article 8(1) and the UNIDROIT Principles Article 1.7’. In John Felemegas (ed.), An International Approach to the Interpretation of the United Nations Convention on Contracts for the International Sale of Goods (1980) as Uniform Sales Law (Cambridge University Press, 2007), pp. 45–8. For a skeptical view, see Goode et al. (2015), paras 8.37ff. Schlechtriem and Schwenzer’s recognised commentary on the CISG clearly affirms that Article 7 of the CISG only applies to the interpretation of the Convention and does not extend to interpretation of contracts, nor does it create duties between the parties: Ingeborg Schwenzer and Ulrich Schroeter (eds.), Schlechtriem & Schwenzer Commentary on the UN Convention on the International Sale of Goods (CISG), 5th ed. (Oxford University Press, 2022), Article 7, para 17. See, extensively, Goode et al. (2015), paras 16.07ff. and 16.43ff. See also McKendrick (2006), p. 28. UNCITRAL, UNIDROIT and HHC (2020), para 394. www.unidroit.org/instruments/commercial-contracts/upicc-model-clauses/, Section 4.3, in the context of a clause that chooses the UPICC to supplement domestic law, and explaining how this choice may impact the application of the CISG as part of that law. Ivi, Section 3, General remarks, 4: ‘Parties wishing to ensure that, if the CISG governs their contract, it will be interpreted and supplemented by the UNIDROIT Principles should expressly stipulate this in their contract or in a separate agreement.’

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That principles in the CISG and in the UPICC are not identical puts limits on the ability of the UPICC to supplement the CISG. Hence, it is difficult to use the UPICC as a tool to interpret or supplement the CISG, as the central position of the principle of good faith in the UPICC is pervasive and affects all stages of contract negotiation, interpretation and fulfilment, as well as the exercise of contract remedies. Other authors, in contrast, argue that the principle of good faith plays the same role in both instruments: ‘The differences between the CISG and the Principles can be nearly neglected as far as the general concept of good faith in international contracts is concerned. Some textual differences do not matter in essence.’119 (d) Use of the UPICC to Correct National Law in Investment Arbitration? It has been suggested that, in investment arbitration, national law could be replaced by soft law (in particular, by the UPICC), when the state does not participate in the proceeding.120 The UPICC have, sporadically, also been considered as part of international law, and as such, applicable in investment arbitration.121 In investment arbitration, the ambition to create a unitary, transnational law may be more easily attained than in commercial law. The body of investment protection law is, admittedly, based on fragmented sources such as the different investment treaties giving jurisdiction to the tribunals. However, the dimension of public international law and the high degree of transparency in investment arbitration give a basis from which converging principles and practices may emerge,122 thus creating a promising habitat for transnational law. The question I would like to address here is whether the features that prevent the UPICC from replacing national law in commercial arbitration also have significance in investment arbitration – in other words, whether the characteristics of investment arbitration may lead to a larger field being given for the application of the UPICC than is the case for commercial arbitration.

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Ulrich Magnus, ‘Remarks on Good Faith: The United Nations Convention on Contracts for the International Sale of Goods and the International Institute for the Unification of Private Law, Principles of International Commercial Contracts’. Pace International Law Review 10 (1998), p. 89. Final remarks. See also Christoph Brunner and Benjamin Gottlieb (eds.), Commentary on the UN Sales Law (CISG) (Kluwer Law International, 2019), Article 7, para 5. Jarrod Hepburn, ‘The UNIDROIT Principles of International Commercial Contracts and Investment Treaty Arbitration: A Limited Relationship’. International & Comparative Law Quarterly 64.4 (2015), pp. 913ff. For references, see Cordero-Moss and Behn (2014), Sections III and IV(1). Giuditta Cordero-Moss and Daniel Behn, ‘Arbitration and the Development of Law’. In Stephan Kröll, Andrea Bjorklund and Franco Ferrari (eds.), Cambridge Compendium of International Commercial and Investment Arbitration (Cambridge University Press, 2023), Section 3.1.2.

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In investment arbitration, the tribunal is called upon to apply state law and rules of international law.123 This is usually interpreted as giving rules of international law a corrective function: where the applicable state law would lead to a result that infringes the investment protection to which the host state has committed itself, it will be corrected or supplemented by rules of international law.124 But which rules qualify as rules of international law, and does this have an impact on the applicability of the UPICC to the incidental questions of contract law?125 An important basis for identifying sources of public international law is Article 38 of the International Court of Justice (ICJ) statutes. Article 38 of the ICJ Statutes lists the authoritative sources of international law, and this list includes under letter (c), ‘the general principles of law recognized by civilized nations’.126 According to the prevailing theory and practice, general principles of law are established through ‘comparative law whereby features common to domestic legal systems are established’.127 Therefore, general principles of law in international (investment) law do not derive their existence from international sources: they are principles found in national legal systems. Hence, the application of general principles of law as ‘rules of international law’ under the second sentence of Article 42(1) of the ICSID Convention requires a comparative analysis of national systems of law. That general principles are established mainly through comparative analysis seems to open the door for the UPICC (to the extent they may be considered as an expression of generally recognised principles) as a source of international law. A further requirement, however, is that principles deriving from national law must be adapted to become ‘suitable for application on the level of public international law’.128 What should be ascertained is whether the UPICC may qualify as general principles and, in case of an affirmative answer, whether general principles of contract law fall within the category of general principles in the sense that is relevant in the context of investment protection. As will be seen, both questions will be answered in the negative. Regarding the ability of the UPICC to represent generally recognised principles, it should be kept in mind that the UPICC are not only a collection of generally 123

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For ICSID arbitration, this is set forth in Article 42(1) of the ICSID Convention. The same applies to the other arbitration types that may be used for investment disputes, see Cordero-Moss and Behn (2014), Section II. Cordero-Moss and Behn (2014), Sections II(1) and V(2). For a more extensive reasoning see Giuditta Cordero-Moss, ‘Soft Law as a Replacement or Corrective of National Law in Investment Arbitration?’ European International Arbitration Review 7.2 (2019), pp. 201–16. Statute of the International Court of Justice, 59 Stat. 1031; T.S. 993; 39 AJIL Supp. 215 (1945). Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary, 2nd ed. (Cambridge University Press, 2010), Article 42, para 178. El Paso Energy v. Argentina, ICSID Case No ARB/03/15, Award, 31 October 2011, at para. 622. For further references, see Cordero-Moss and Behn (2014), Section V(2).

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recognised principles of contract law, but also a collection of best rules, as explained in Section 2.2.5(e). However, many of the provisions contained in the UPICC do represent generally recognised principles. To the extent the UPICC correspond to general principles, it must be ascertained whether they are general principles in the sense relevant to investment protection – that is, whether their infringement would represent a violation of public international law. Regarding the question whether general principles of contract law may be deemed to represent rules of international law in the sense relevant to investment arbitration, it should first be pointed out that state law and international law each have a different role and ambit.129 State law is an emanation of the sovereignty of states and sources external to the state shall not interfere with it, unless it violates obligations or principles that bind the state on an international level. Within a particular legal system, rights and obligations of the parties to commercial agreements are regulated by state law. How state law allocates risks between contractual parties, which formal requirements a contract must meet to be enforceable under that state’s law, how many years have to lapse before a claim is time barred, just to name a few examples, are matters of internal state law. Each state may have a different regulation of these matters without infringing international commitments. International commitments will be violated if a state is bound by an international convention regulating these issues, and yet its internal legislation regulates the same issues in a different way, even though they fall within the scope of application of the convention. If a state is bound by the CISG or by the Limitation Convention,130 for example, it would violate its international commitments flowing from these international law instruments, if its internal law provided that there shall be no excuse for force majeure in sales contracts that are subject to the CISG (thus contradicting Article 79 of the CISG), or if it allowed claims that are older than four years in sales contracts that are subject to the Limitation Convention (thus contradicting Article 8 of the Limitation Convention). Outside of these direct breaches of specific international law commitments, however, how a state regulates rights and obligations of contract parties is an internal matter with no relevance to public international law. As long as international obligations or principles are not infringed, international law has no saying on how a state shall regulate activity within its legal system. International law becomes relevant if a state’s conduct violates investment protection standards – for example, if a state modifies its contract law retroactively with the purpose of depriving the investor of a contractual remedy. The relevant principle of international law will be the principle that

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For references to investment case law and literature acknowledging the distinct roles of state and international law in investment arbitration, see Cordero-Moss and Behn (2014), footnotes 35 to 42 and 214 to 232. 1974 New York Convention on the Limitation Period in the International Sale of Goods, UNTS 1511 No 26119.

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determines the standard of protection (the prohibition of abuse of power, the obligation to grant fair and equitable treatment, etc.) – not a principle of contract law. An example of a domestic law rule that can be transposed to the level of public international law was given in Section 2.2.3(a), regarding the substantive approach in labour law. An example of a principle that cannot be transposed was given in Section 2.2.3(b). The principle of good faith in public international law does not necessarily coincide with the principle of good faith in the contract law of a specific state: while the ICJ found that the principle of good faith in public international law requires that unilateral promises made by a state to another state are deemed to be binding, as a general rule unilateral promises lacking a consideration are not enforceable under English contract law. That contracts or unilateral promises are not enforceable if there is no consideration is a rule of domestic law that does not reach the level of international law. It is not the function of international law to regulate the criteria according to which a contract is binding. Even though, according to the ICJ, unilateral promises made by a state to another state are binding, and even though the UPICC do not require that there is a consideration for a contract to be binding, neither international law nor the UPICC may override the common law doctrine of consideration in the context of a contract dispute governed by English law. The ‘rules of international law’ in the sense relevant to investment arbitration are meant as a reference to international minimum standards that restrict abusive conduct by sovereigns, and therefore are relevant only to specific elements or aspects of national law; they are not intended to substitute the details of domestic law with other detailed rules regulating the contractual aspects of the relationship between the parties. The function of this correction is to preserve the international commitments among states (for example, ensuring that a state does not expropriate without paying compensation), not to override an internal rule of national law and substitute it with another rule having the same function but a different content131 (for example, overriding the English law rule of contract law according to which contracts require a consideration to be binding, and replacing it with a rule according to which unilateral promises without consideration are binding). As a further argument regarding the different spheres of investment law and contract law, it has been suggested that general principles of contract law assume a relation of equality between the two parties, whether two individuals or two States. It is now well recognized, though, that investment law does not display this equal relation. The primary rules of investment treaties establish the obligations of States towards private parties. Investment treaty disputes are more akin to systems of human rights law or administrative law, where claimants are always private entities and States are always respondents, than to the 131

Schreuer et al. (2010), Article 42, para 211.

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the role of transnational law classic private law areas of tort or contract. For this reason, it might not be expected that general principles will be useful to the essentially public law context of an investment treaty’s primary rules.132

Even if the notion of international law in the context of Article 42(1), second sentence of the ICSID Convention, extended to contract law (which, as seen, is doubtful), it is questionable whether the UPICC (to the extent they may be considered to reflect generally recognised principles) are designed to have such a corrective function. The UPICC may be used to fill gaps in the applicable national law. However, it is more uncertain whether the UPICC may be used to override a rule of national law. According to their preamble, the UPICC ‘may be used to interpret or supplement domestic law’.133 This is quite a different function from the corrective function of international law under Article 42(1), second sentence. Moreover, the UPICC themselves explicitly exclude the possibility that they can restrict the application of mandatory rules that are applicable according to conflict of laws rules.134 It seems therefore that it is not the UPICC’s function to override a rule of national law in case of contrast between the regulation contained in the law and in the provisions of the UPICC. (e) Also Best Rules The UPICC are often praised for being the result of an extensive comparison of the most important legal systems. However, legal systems may diverge on a series of matters, for example, in respect of the issue of the battle of the forms (Section 2.2.2) or on the role of good faith (Sections 3.1 to 3.3). A further example is the issue of interest for late payment. Some of the principles collected in the UPICC are the result of a comparison of principles underlying the regulations in the major legal systems. Where there are no common underlying principles, however, the UPICC have proposed rules that the authors of the UPICC reckoned represented the best regulation.135 As seen this has led the UPICC to formulate, as the most important principle of all, the principle of good faith. This principle of good faith, however, is not recognised in all legal systems, at least not with the same scope and effects, see Sections 3.1 to 3.3.

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133 135

Hepburn (2015), p. 928. The author seems to think, at p. 908, that his position on the applicability of the UPICC as a corrective of state law in investment arbitration is more restrictive than the position expressed in Cordero-Moss and Behn (2014). However, the two positions seem to coincide in substance. Sixth para of the preamble. 134 Article 1.4 of the UPICC. See the Introduction to the 1994 edition of the UPICC: ‘For the most part the UNIDROIT Principles reflect concepts to be found in many, if not all, legal systems. Since however the UNIDROIT Principles are intended to provide a system of rules especially tailored to the needs of international commercial transactions, they also embody what are perceived to be the best solutions, even if still not yet generally adopted.’

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Furthermore, the principle of good faith does not even seem to be compatible with contract practice, see Section 1.4. International contracts are usually detailed and exhaustive, and contract practice relies heavily on predictability and an accurate implementation of the contract wording. This seems to suggest that in international trade there is little room for the principle of good faith to interfere with the wording of the contract. The principle of good faith, therefore, although it is one of the fundaments of the entire UPICC, is not only not generally recognised in all the major systems of law, neither is it compatible with contract practice (which, in turn, is one of the sources of international commercial law). Therefore, the mere circumstance that a provision is contained in the UPICC is not sufficient proof that there is a corresponding generally recognised principle – although they could become evidence if they are used consistently and widely in practice.136 Positing a best rule implies that the UPICC deviate from the rules prevailing in at least a considerable number of legal traditions, without being able to prove that the content of the best rule is generally acknowledged. In these cases, reference to the UPICC may not be seen as a substitute for proving a generally recognised principle or proving the content of the lex mercatoria. This may create an obstacle to applying them in investment arbitration, see Section 2.2.5(d).137 (f) The Problematic Central Role of the Principle of Good Faith The UPICC and the PECL give considerable importance to the principle of good faith, which underlies all of the restatements.138 For example, the duty of loyalty between the parties manifests itself already in the phase of negotiations: the parties are liable for the unjustified break-off of negotiations. Furthermore, contracts shall be 136

137

138

See Symeonides (2006); Ferreri points out, Section 6a: ‘Paradoxically the success of such soft law instruments depends . . . on their success’: Silvia Ferreri, ‘XVII Congress of the International Academy of Comparative Law’. The Italian National Report Section II-B1 (Private International Law, 2006). See also Goode et al. (2015), paras 16.28 ff. The ICSID ad hoc annulment committee annulled on 3 May 1985 the award in Klöckner Industrie-Anlagen GmbH and others v. United Republic of Cameroon and Société Camerounaise des Engrais, ICSID Case No ARB/81/2, because the tribunal applied a principle on duty of full disclosure, simply assuming its existence in the governing law, and this was deemed to be an award based on equity, see Schreuer et al. (2010), Article 42, para. 182. In this context, Schreuer states: ‘[g]eneral principles of law are not an expression of general feelings of justice or equity but are part of the body of international law which, in a particular case, must be proven and not presumed. This proof must be furnished on the basis of rigorous examination, if not all systems of law at least the most important major representative systems.’ See more extensively on the use of the UPICC in investment arbitration, Cordero-Moss and Behn (2014), pp. 1–39, 5f. See Article 1.7 of the UPICC and Article 1:201 of the PECL. Comment No 1 to Article 1.7 (www .unidroit.org/wp-content/uploads/2021/06/Unidroit-Principles-2016-English-i.pdf, last accessed on 8 November 2022) mentions the following provisions: Articles 1.8, 1.9(2); 2.1.4(2)(b), 2.1.15, 2.1.16, 2.1.18 and 2.1.20; 2.2.4(2), 2.2.5(2), 2.2.7 and 2.2.10; 3.2.2, 3.2.5 and 3.2.7; 4.1(2), 4.2(2), 4.6 and 4.8; 5.1.2 and 5.1.3; 5.2.5; 5.3.3 and 5.3.4; 6.1.3, 6.1.5, 6.1.16(2) and 6.1.17(1); 6.2.3(3)(4); 7.1.2, 7.1.6 and 7.1.7; 7.2.2(b)(c); 7.4.8 and 7.4.13; 9.1.3, 9.1.4 and 9.1.10(1). The PECL, too, have numerous specific rules applying the principle of good faith, for example, in Articles 1:202, 2:102, 2:104, 2:105, 2:106, 2:202, 2:301, 4:103, 4:106, 4:109, 4:110, 5:102, 6:102, 8:109, 9:101, 9:102 and 9:509.

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interpreted in good faith, performance shall be made in good faith, remedies shall be exercised in good faith. The general principle of good faith, in other words, is, in these instruments, an overriding principle that functions as a corrective action to the mechanisms regulated in the contract whenever a literal application leads to results that seem too harsh, as applied to one of the parties. In order to apply this principle, the interpreter shall look beyond the wording of the contract. An accurate implementation of the contract according to its terms may be considered to be against the principle of good faith if it amounts to an abuse of a right. An abuse of a right is defined by the official commentary on Article 1.7 of the UPICC as follows: It is characterised by a party’s malicious behaviour which occurs for instance when a party exercises a right merely to damage the other party or for a purpose other than the one for which it had been granted, or when the exercise of a right is disproportionate to the originally intended result.139

This approach does not seem to be very compatible with the self-sufficiency of the contract that seems to be assumed by international commercial practice, as was described in Chapter 1. At first sight, the regime of the UPICC and of the PECL seems to correspond substantially to the civil law tradition and deviate from the common law approach, which will be described in Chapter 3. Harmonisation seems to be sought by embracing one legal tradition. A more careful analysis of the matter, however, makes the resemblance between the UPICC and the civil law tradition less evident: this is because the standard of good faith, against which the restatements measure pre-contractual liability, interpretation and construction of the contract, performance of the contract and the exercise of remedies is to be established not on the basis of a national legal tradition, but on the basis of the standard generally recognised in international trade.140 In the commentary on Article 1.7, the UPICC affirm that the standard of good faith must always be understood as ‘good faith in international trade’, and that no reference has to be made to any standard that has been developed under any state law.141 This approach is in line with the requirement of autonomous interpretation of the UPICC contained in Article 1.6, see Section 2.3.4. The UPICC are an instrument with an international character, and it would not serve the purpose of becoming a uniform law if the courts of every state interpreted them each in a different way, in light of their own legal culture. While the requirement of autonomous interpretation of the UPICC, and the corresponding requirement in Article 1:106 of the PECL are understandable in light of the ambitions of harmonising the law of contracts, they do not contribute to creating clarity in respect of the content of good faith as a standard, as will be seen. 139 140

141

Comment No 2 to Article 1.7 (last accessed on 8 November 2022). See Article 1.6 of the UNIDROIT Principles of International Commercial Contracts and Article 1:106 of the PECL. Comment No 3 to Article 1.7 (last accessed on 8 November 2022).

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Legal standards, or general clauses, are, per definition, in need of a specification of their content that depends to a large extent on the interpreter’s discretion. When the general clause belongs to a state system, the interpreter’s discretion is restricted or guided by principles and values underlying that particular system – for example, in the constitution, in other legislation or in society at large.142 How would the interpreter evaluate the wording of an international contract that seems to provide for and permit the very conduct prohibited by the principle of good faith? An interpreter belonging to a tradition where there is no general principle of good faith might tend to consider that the clear wording of the contract indicates that the parties had considered all eventualities, made provision for them and accepted the consequences, and that therefore the Articles of the UPICC and the PECL are not applicable. An interpreter belonging to a legal tradition with a strong general principle of good faith, on the other hand, may consider that consequences of a literal application of the contract must be mitigated if they disrupt the balance of interests between the parties. To the former interpreter, fairness or good faith interpretation consists of an accurate interpretation of the contract. To the latter, it consists of intervening and reinstating a balance between the parties. There does not seem to be any uniform transnational principles or values that are sufficiently precise to permit a choice between these two approaches. One of the most important sources of generally acknowledged principles of international trade is international contract practice; and international contract practice, as described in Chapter 1, seems to show that the parties expect their contract to be interpreted solely on the basis of its terms. Therefore, it does not seem correct to construe the principle of good faith in the UPICC or the PECL as if it imposed obligations or duties that are in clear contradiction with contract practice, which is one of the most important sources that is used precisely to establish the content of the principle of good faith. On the other hand, the principle of good faith is undoubtedly given a central role in the restatements; therefore, it does not seem logical to construe it, albeit in accordance with internationally recognised contract practice, in such a restrictive way that it is deprived of any significant role. This paradox renders the regime of the restatements quite unpredictable in its application, and therefore not fully adequate in terms of regulating commercial relationships where the foreseeability of the legal positions and of the remedies is deemed to be very important. 142

See Peter Schlechtriem, ‘The Functions of General Clauses, Exemplified by Regarding Germanic Laws and Dutch Law’. Stefan Grundmann and Denis Mazeaud (eds.), General Clauses and Standards in European Contract Law (Aspen Publishers, 2006), pp. 49ff (analysing the application of general clauses, with particular, but not exclusive reference to the German system).

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The dilemma described in connection with the UPICC will affect the interpretation of the corresponding provision in the PECL. More recently, the same approach was taken in the already mentioned DCFR143 and the abandoned proposal for a CESL.144 These instruments give ample room to the principle of good faith. These instruments define the content of the general principle of good faith for commercial contracts by making reference to ‘good commercial practice’. As seen in Section 2.2.1(a)(ii), defining a general clause by reference to another general clause does not seem to bring the interpreter any closer to a specification of the former. Depending on the development of the process to develop a European contract law, described in Section 2.2.5(a), the PECL may become the basis of a European body of rules that eventually may be subject to interpretation or application by the Court of Justice of the European Union (CJEU). In such a case, over time, a coherent body of case law would be formed and the content of the principle of good faith would be easier to determine. The UNIDROIT has taken a commendable role in contributing to the development of a body of case law that may enhance a harmonised interpretation and thus the predictability of the UPICC: following the example of CLOUT, a system established by the UNCITRAL for the collection and dissemination of court decisions and arbitral awards relating to UNCITRAL instruments, the UNIDROIT has established Unilex,145 a database collecting case law and a bibliography on the UPICC and the CISG. In 1992 Unilex started collecting and publishing, inter alia, arbitral awards that contain references to the UPICC. Making available the case law that (if at all published) would otherwise be scattered among the publications issued by different arbitral institutions all over the world, is a valuable step in promoting the development of a uniform body of law. When the number of the collected decisions becomes significant and their level of detail is such that they can be used to determine the specific scope of general clauses such as the principle of good faith, the UPICC will be in a position to contribute to the harmonisation of the general contract law – assuming that the decisions do not give contradictory interpretations. As the example of the regulation of Entire agreement clauses in Section 2.2.5(f)(ii) will show, however, for the moment, the body of cases is not sufficient to ensure a harmonised interpretation of the principles. 143

144

This is confirmed in UK House of Lords European Union Committee, Social Policy and Consumer Affairs (Sub-Committee G), 12th Report of Session 200809, European Contract Law: The Draft Common Frame of Reference, Report with Evidence (10 June 2009), Sections 24 ff., and, particularly, 27, 28, 32 and 33. See also Sections 78 and 79, stating the disagreement in principle on a generally interventionist law of contracts as taken by the DCFR, and criticising the generalisation of consumer protection as made in the DCFR. Attached to the Report is a Memorandum by S. Vogenauer, Professor of Comparative Law, University of Oxford, which singles out several areas where the DCFR certainly deviates from English contract law (Section 22) – also including the areas discussed in this book. For similar criticism, see also Eidenmuller et al. (2008). Point 31 in the preamble and Articles 23, 49, 86 and 170. 145 www.unilex.info/.

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Another possible means to clarify the impact of the UPICC on contract terms are the Comments included in the publication. We will see in Section 2.3.3 how they can contribute to a uniform and commercially oriented construction of the contracts. We will see how the restatements of principles regulate some of the clauses that were described in Chapter 1. Chapter I indicated that these clauses may have different effects depending on the governing law – this will be discussed more in detail in Section 3.4.1. Here, we will, verify whether this inconsistency can be overcome by subjecting the contract to the UPICC. Does the choice of the UPICC give a uniform regime for these clauses? (i) Entire Agreement As seen in Chapter 1, a boilerplate clause that often recurs in contract practice is the Entire agreement clause, according to which the document signed by the parties contains the whole agreement and may not be supplemented by evidence of prior statements or agreements. This clause is recognised in Article 2.1.17 of the UPICC and Article 2:105 of the PECL, with some restrictions: the provisions specify that prior statements or agreements may be used to interpret the contract. This is one of the applications of the general principle of good faith; it is, however, unclear how far the principle of good faith goes in overriding the clause inserted by the parties. If prior statements and agreements may be used to interpret the contract, does this mean that more terms may be added to the contract – because, for example, the parties have discussed certain specifications at length during the negotiations and this has created in one of the parties the reasonable expectation that they would be implied in the contract? Article 1.8 of the UPICC would seem to indicate that this would be the preferred approach under the UPICC. According to this provision, a party may not act in a way that is inconsistent with the reasonable expectations that it has created in the other party. This is spelled out in respect of the Entire agreement clause in the PECL, which, in paragraph 4 of Article 2:105, states that ‘A party may by its statements or conduct be precluded from asserting a merger clause to the extent that the other party has reasonably relied on them’. According to this logic, a detailed discussion during the phase of negotiations regarding certain characteristics for the products may create the reasonable expectation that those specifications have become part of the agreement, even if they were not written down in the contract; their subsequent exclusion on the basis of the Entire agreement clause may be deemed to be against good faith. According to the opposite logic, however, the very fact that the parties have excluded from the text of the contract some specifications that were discussed during the negotiations, indicates that no agreement was reached on those matters. Exclusion of those terms from the contract, combined with the Entire agreement clause, strongly indicates the will of the parties not to be bound by those specifications. Their subsequent inclusion on the basis of the good faith principle would run counter to the parties’ intention.

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The foregoing shows that the application of the UPICC and of the PECL requires a specification of the principle of good faith. Is it to be intended as an overriding principle, possibly creating, restricting or modifying the obligations that flow from the text of the contract? Or is it meant to give priority to the contract, ensuring that the obligations contained therein are enforced accurately and precisely as the parties have envisaged them? This represents the dichotomy between, on the one hand, the understanding of fairness as a principle ensuring balance between the parties notwithstanding the regulation that the parties may have agreed on, and, on the other hand, the understanding of fairness as a principle ensuring predictability, leaving it to the parties to evaluate the desirability of their contract regulation. To test the ability of the UPICC to harmonise contract law with the help of the abovementioned Unilex database, it may be interesting to examine the case law collected in respect of Article 2.1.17 of the UPICC. At the date of writing this book, the Unilex database contains five decisions on Article 2.1.17 of the UPICC.146 In the first decision, ICC award no 9117 of 1998, the arbitral tribunal emphasises that an Entire agreement clause is to be considered as typical in a commercial contract, and says that ‘there can be no doubt for any party engaged in international trade that the clauses mean, and must mean, what they say’.147 The contract also contained a No oral amendments clause, which is recognised in Article 2.1.18 of the UPICC. This Article contains a provision containing the same restrictions as Article 2.1.17 regarding conduct that has created expectations in the other party. The arbitral tribunal said that ‘the explicit integration clause and the written modification clause, as contained in the Contract, operate as a bar against the assumption that a certain behaviour or practice could reach the level of becoming legally binding between the Parties’. Thus, according to this award, the principle of good faith contained in Articles 1.7 and 1.8 of the UPICC, and specified in Articles 2.1.17 and 2.1.18, does not affect a literal application of the contract’s language. This approach seems to be consistent with the ideology underlying the drafting style of international contracts, as described in Chapter 1. Consequently, it considerably restricts the applicability of the principles underlying the UPICC. Another decision mentioned in Unilex under Article 2.1.17 is by the English Court of Appeal.148 There, Lord Justice Mummery stated that, under English law, extrinsic evidence could be used to ascertain the meaning of a term contained in a written contract if the term was ambiguous or unclear. On the contrary, extrinsic evidence 146

147

148

wwwunilex.info/dynasite.cfm?dssid=2377&dsmid=13621&x=1 (last accessed on 18 November 2022). This page lists six cases, but one of them, ICC award No 9117 of 1998, is listed twice. The award may be found at wwwunilex.info/case.cfm?pid=2&do=case&id=661&step=FullText (last accessed on 18 November 2022). The paragraphs are not numbered. Proforce Recruit Limited v. The Rugby Group Ltd [2006] EWCA Civ 69, www.unilex.info/case.cfm?id=1119 (last accessed on 18 November 2022).

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could not be used to ascertain the content of the contract.149 Lady Justice Arden considered this distinction to be too conservative and argued for a broader use of extrinsic evidence, referring to the UPICC in support of her view.150 The narrow use of extrinsic evidence supported by Lord Justice Mummery can be found in another decision listed in the Unilex, rendered on 30 November 2012 by the Sheriffdom of Tayside Central and Fife in Scotland.151 The dispute arose between a property developer and the buyer of a flat. The parties had entered into a contract relating to a flat then under construction, committing themselves to finalising the sale once the construction was fulfilled. When the construction was completed, the buyer refused to finalise the contract, alleging that the object of the contract had not been sufficiently specified. The developer provided evidence that certain drawings had been provided to the buyer during negotiations, which would make the object of the contract sufficiently determined. The question before the court was whether this kind of extrinsic evidence was allowed, in spite of the presence of an Entire agreement clause. The court affirmed that extrinsic evidence could be used to ascertain the meaning of a term contained in a written contract, and that an Entire agreement clause would not prevent that. It must be noted that the UPICC are not mentioned by the court. They were mentioned by the appellants, alongside numerous English and Scottish authorities, but this reference was not followed by the court. In addition, Unilex mentions another award,152 without, however, reproducing its full text. According to the abstract, the tribunal held that an Entire agreement clause simply indicates that there are no binding agreements between the parties other than those contained in the contract but does in no way affect the rules of interpretation established under the applicable law (in the case at hand, Article 1362 of the Italian Civil Code). In reaching this conclusion, the arbitral tribunal expressly referred, along with legal writings, to Article 2.17 (Article 2.1.17 of the 2016 edition) of the UNIDROIT Principles, as well as to the Comments, which state ‘the effect of such a clause is not to deprive prior statements or agreements of any relevance: they may still be used as a means of interpreting the written document’.153 Finally, Unilex refers to an ICSID award154 in which the tribunal stated that Article 2.1.17 requires that expectations raised during the negotiations must be reflected in

149 151

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153 154

Proforce Recruit Limited, 41. 150 Proforce Recruit Limited, 57. Scotia Homes (South) Ltd v. Mr James Maurice McLean and Mrs Linda Isabella McLean, www.unilex.info/ case.cfm?id=1679 (last accessed on 18 November 2022). Rendered on 28 November 2002 at the Chamber of Arbitration of Milan, www.unilex.info/case.cfm? pid=2&do=case&id=995&step=FullText (last accessed on 18 November 2022). www.unilex.info/case.cfm?pid=2&do=case&id=995&step=Abstract (last accessed on 18 November 2022). Joseph Charles Lemire v. Ukraine, ICSID Case No ARB/06/18, 14 January 2010.

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the text of the agreement.155 The Unilex database, in summary, shows two approaches to Article 2.1.17 of the UPICC: one advocating the primacy of the contract’s language, and the other assuming that the UPICC provide for the primacy of the real intention of the parties, which, in turn, may lead to restricting considerably the effect of the Entire agreement clause. Evidently, this is not sufficient to give guidance as to which approach to choose when addressing the conflict between the contract’s language and the principle of good faith. This leaves so much room for the discretion of the interpreter that it seems unlikely that Article 2.1.17 of the UPICC can provide for a harmonised regulation of its subject matter. (ii) No Waiver We saw in Chapter 1 that one of the typical boilerplate clauses that often recurs in contract practice is the No waiver clause. According to this clause, failure by one party to exercise a remedy to which it is entitled under the contract does not constitute a waiver by that party of that remedy. A literal application of this clause would permit a party entitled to a remedy (for example, the right to terminate the contract) to behave passively, thereby giving the other party the impression that it will not terminate the contract, and then terminating the contract when circumstances make it advantageous for that party. For example, that party could delay the termination until the other party has omitted to enter into other contracts with third parties in reliance on the continuation of this contract, or until prices have changed so much that it will gain by terminating this contract and entering into a corresponding contract with a third party. As will be seen in Chapter 3, in many civilian systems, this conduct would be considered as being against good faith, and an abuse of the contractual right. This would also seem to violate the restatements of principles: both the UPICC (Article 1.7) and the PECL (Article 1:201) have a general duty of good faith and specify that it is mandatory. This seems to mean that the duty to act in good faith may not be affected by contract clauses such as the no waiver clause. More recently, the Acquis Principles (Article 7:101) and the DCFR (Article III-1:103), both largely based on the PECL, say that the performance of obligations shall be in accordance with good faith. This entails additional obligations that may be introduced, or even that obligations expressly agreed to by the parties may be modified.156 Moreover, the Acquis Principles (Article 7:102) and the DCFR (Article III-1:103) say that a right or remedy shall be exercised in accordance with good faith; this means, inter alia, that

155 156

www.unilex.info/case.cfm?pid=2&do=case&id=1533&step=FullText (last accessed on 18 November 2022). See Acquis Principles, Part B, Section 3 (‘Explanation’) in the comments on Article 7:101.

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a party may not exercise a right or a remedy that it has according to the contract, if such an exercise violates good faith. The literal interpretation of the No waiver clause thus may, under some circumstances, be contradicted by the restatements of principles. To what extent the restatements may override the contract text will depend on the interpretation of the principle of good faith. As seen with regard to the Entire agreement clause, this may create uncertainty in the application of the UPICC and the PECL. This prevents the most important goal of these restatements; namely, that of harmonising the law. (iii) Subject to Contract We saw in Chapter 1 that one of the purposes of letters of intent is to stipulate that a break-off of the negotiations is permitted and that under no circumstances shall this expose any of the parties to liability. This seems to coincide with the approach taken in English law, as will be explained more in detail in Chapter 3. According to this logic, expecting that a party takes into consideration the needs and expectations of the other party while negotiating a contract runs counter to the very essence of a negotiation, where each of the parties positions itself, opens alternative possibilities and plays the various possibilities against each other to achieve the best economic result for itself. The lack of a duty to act in good faith during the negotiations permits a party to conduct negotiations even without having the intention of concluding an agreement with the other party (for example, for the sole reason of preventing the other party from negotiating with a third party, or for obtaining business information, etc.). Contrary to this approach, the UPICC and the PECL seem to have adopted the opposite civilian approach. The restatements of principles provide that parties must negotiate according to good faith and fair dealing, impose liability for having negotiated contrary to good faith and affirm a duty of information during the precontractual phase. These rules may be found in the UPICC (Articles 1.7 and 2.1.15), the PECL (Articles 1:201, 2:301 and 4:106) and the Acquis Principles (Articles 2:101, 2:103 and 2:201). The DCFR has a more moderate approach without, however, avoiding challenges similar to those just mentioned. The DCFR does not state a general duty of good faith; however, it states the duty to negotiate in good faith (Article II-3:301) and to inform during the pre-contractual phase (Article II-3:101). This latter duty is mitigated, in respect of commercial contracts, by a reference to good commercial practice. As seen in Section 2.2.1(a)(iii), however, the exception for good commercial practice does not seem to constitute a sufficiently precise regime. The discrepancy between contract practice and the restatements of principles, as well as the different approach taken in the common law system and in these restatements, does not ensure a uniform interpretation of the standard of good faith, as we have seen.

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(iv) Termination Other examples may be given of contractual mechanisms that, if used literally, may give permitted results under English law, but lead to results that would be considered to be against good faith under some civilian laws and under the restatements of principles. Under English law, as will be seen in Chapter 3, the parties may regulate in their contract that certain terms are fundamental and that any breach thereof will be treated as a fundamental breach and entitle the other party to termination and reimbursement of the full value of the contract. It is possible to envisage situations where this mechanism may be misused. A contract, for example, may provide that a party has a right to terminate in case of the breach of specific obligations by the other party. If the breach has actually occurred, but only in an immaterial manner, and so that it has no significant consequences, it might be contrary to good faith to invoke this right of termination. The terminating party might wish to take advantage of the right of termination for other reasons, for example, because the market has changed, and a new contract would be more profitable than continuing to be bound by the old contract. Depending on the interpretation of the underlying principle of good faith, this would be prohibited under the restatements of principles according to Article 7.3.1 of the UPICC and Article 9:301 of the PECL. The lack of a clear standard of good faith, as we have seen, prevents the restatements of principles from harmonising the different legal traditions. (g) An Autonomous Principle of Good Faith? As explained in Section 2.2.5(f), the principle of good faith in the UPICC has to be understood not under specific legal traditions, but as good faith in international trade. It remains to ascertain how the principle of good faith is understood in international trade. Assistance in interpreting autonomously the principle of good faith might be sought in a highly recognised database on transnational law, organised by the University of Cologne under the direction of Professor Klaus Berger: the Trans-Lex Principles Database. The idea behind this database is to enhance the ‘creeping codification of the lex mercatoria’157 by creating a comprehensive digest of principles and rules of the transnational commercial law, based on a variety of sources such as ‘international arbitral awards, domestic statutes, international conventions, standard contract forms, trade practices and usages, other sample clauses and academic sources’.158 It may be interesting here to verify to what extent the use of the Trans-Lex database may succeed in specifying the principle of good faith and thus offer a harmonised standard that is capable of rendering the UPICC and the PECL operative. This would

157

The idea was introduced in Berger (2010).

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www.trans-lex.org.

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permit the achievement of a uniform application of the clauses discussed in Section 2.2.5(f)(i) to (iv). The Trans-Lex database lists the principle of good faith and fair dealing as one of the main principles of international contract practice and refers to various sources upon which the principle is said to rely: legal literature, arbitral awards, court decisions, international instruments, model laws and contract terms.159 A brief consideration of these sources follows: (i) The Trans-Lex list of legal literature dealing with the principle of good faith and fair dealing is long and impressive, and it reflects the large variety of positions in respect of the subject, also including those that deny the existence of an international legal standard for good faith and fair dealing.160 No uniform opinion arises from the doctrine quoted in the Trans-Lex list. From this source, therefore, it is not possible to clarify and specify the content of the standard in international trade. (ii) Among the twenty arbitral awards listed in the Trans-Lex database in support of the principle, six awards seem to have applied the standard of good faith of a state law,161 and the remaining awards refer mainly to the principle in general terms, as a moral rule of behaviour. On the basis of these awards, it seems difficult to conclude whether the standard of good faith and fair dealing in international trade is to be interpreted as a moral rule that does not require an active duty of loyalty (such as the standard would be interpreted in common law); as a rule that must ensure that the contract is interpreted and performed accurately (as it would be interpreted in Italian law); as a rule that permits integrating the contract and balancing the interests of the parties (as it would be interpreted in German law); or as a rule that permits correcting the contract and that requires each party to actively take into consideration and also to protect the interest of the other party (as it would be interpreted in Norwegian law), or in another way, that is characteristic only of international trade. (iii) Ten court decisions are listed, which discuss the principle of good faith from the perspective of national law and therefore are not supposed to be taken into consideration according to Article 1.7(1) of the UPICC. Regarding the international court decisions, their relevance to contract law is doubtful, see Section 2.2.3(b). (iv) The international conventions mentioned in the Trans-Lex database are the CISG, the UNIDROIT Convention on International Factoring of 1988, the 159 160

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www.trans-lex.org/901000, last accessed on 8 November 2022. For example, Peter Schlechtriem, Good Faith in German Law and in International Uniform Laws (Pace Law School Institute of International Commercial Law, 1997). ICC Award No 5832 of 1988 applies Austrian law, ICC Award No 6673 of 1992 applies French law, ICC Award No 8908 of 1999 applies Italian law (corroborated by the UNIDROIT Principles), ICC Award No 9593 of 1999 applies the law of the Ivory Coast, ICC Award No 9839 of 2004 applies US law and CRCICA Award No 154/2000 applies Egyptian law.

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Vienna Convention on the Law of Treaties of 1969, the 1965 Washington Convention on the Settlement of Investment Disputes between States and National of Other States (ICSID) and the 2010 Organization for the Harmonization of Business Law in Africa (OHADA) Uniform Act Relating to General Commercial Law. The usefulness of these references is questionable, as will be seen. (a) The CISG is silent on the question of good faith as a duty between the parties or as a correction to the terms of the contract. As seen in Section 2.2.5(c), this silence is not due to carelessness, but is a conscious choice taken during the drafting. Article 7 is the only provision that makes reference to good faith. Article 7, however, does not formulate a rule directed to regulate the parties’ conduct in the contract; it states a rule instructing the interpreter of the Convention. The text and the drafting history of the CISG, therefore, do not seem to cast useful light on the question of specifying the legal effect of a general principle of good faith in international trade. (b) The Factoring Convention contains, unlike the CISG, a rule prescribing good faith between the parties, in addition to the rule on the interpretation of the Convention present also in Article 7 of the CISG. Incidentally, the presence of a rule on good faith between the parties in addition to a rule on good faith in the interpretation of the Convention seems indirectly to confirm that the rule contained in Article 7 of the CISG is not sufficient to create a duty of good faith between the parties – otherwise, it would not have been necessary to add this rule in the Factoring Convention. The Factoring Convention regards a very specific kind of contract; therefore, it is not evident that its provisions may be extended to all branches of international trade.162 Even if such an extension was possible, however, the rule on good faith is written in a general way and does not give criteria that could be useful for clarifying its scope. (c) The Vienna Convention on the Law of Treaties is a convention on how states are supposed to perform the treaties that they have ratified; it does not seem to have direct relevance to the standard between private parties in international commerce, see Section 2.2.3.163 (d) The ICSID Convention, in the part highlighted in Trans-Lex, regulates the proceedings of conciliation that may be initiated at the request of a party. A Conciliation Commission shall clarify the issues in dispute and 162

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At the moment of writing this chapter, thirty-five years after its conclusion, the Convention has been ratified by nine countries, see www.unidroit.org/instruments/factoring/status/. Therefore, it cannot be deemed to enjoy a significant scope of application. On the impossibility of assuming an automatic interchangeability between the fields of public international law and of international commercial law, see Section 2.2.3.

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recommend terms of settlement. The parties are under the obligation to cooperate in good faith with the Commission (Article 34). This provision does not clarify what standard of good faith applies to a contract. (e) The OHADA Uniform Act contains a provision, Article 237, according to which parties to contracts of sale must comply with the principle of good faith. The provision is interesting because it also provides that sales contracts shall be subject to the rules of common law, unless they are contrary to the Uniform Act. As the principle of good faith is not a general principle of common law (see Sections 3.1 and 3.3) the application of the rules of common law will need to be quite selective. This Uniform Act, therefore, does not seem to contribute to the specification of the principle of good faith. (v) Four restatements of state law are listed as references: the Contract Code drawn by the English Law Commission, the Principles of Latin American Contract Law, the draft Civil Code for Israel and the Uniform Commercial Code of the United States. Being the expression of the legal tradition in the respective states, these instruments cannot be used to support an autonomous interpretation of the standard in international trade. The Trans-Lex database also mentions various other state laws and court decisions: however, as seen, these sources have been expressly excluded by the assessment of the standard of good faith and fair dealing under the UPICC or the PECL, as interpretation is to be made autonomously on the basis of sources within international trade. Moreover, the selection of domestic acts and decisions of states that are in favour of an active rule on good faith, and disregarding acts and decisions of states that restrict the rule (or vice versa), would be arbitrary. (vi) The Trans-Lex database lists one model contract: the General Conditions of Contract for the Standard Contracts for the UK Offshore Oil and Gas Industry. One clause is highlighted as the main reference to the general duty to act in good faith: Clause 33 on business ethics. This clause contains a commitment to not engage in undue influence or corrupt activities, and does not, therefore, seem to be helpful in substantiating the content of the general duty of good faith. The links to other clauses of the General Conditions (on Force majeure and Liquidated damages) are relevant to other principles of the database, and not to the principle of good faith. (vii) Five transnational instruments are listed in the Trans-Lex database: the already mentioned UPICC, PECL and Acquis Principles; the IBA Rules on Taking of Evidence in arbitration and the principles adopted by arbitral tribunals under the auspices of the Cairo Regional Centre for International Commercial Arbitration. The instruments on procedural issues do not have relevance to the principle of good faith in contracts. The restatements of principles of contract law assume an autonomous interpretation that has to be based on

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the standard applied in international trade. When the Trans-Lex refers to the UPICC and the PECL to support a principle of good faith in international trade, it creates a vicious circle, because the UPICC and the PECL, in turn, make reference to international trade practice to substantiate this principle. In conclusion, digests of principles do not seem to succeed in specifying the content of the principle of good faith in international trade. However, this specification is necessary in order to make restatements such as the UPICC, the PECL or the DCFR operative. 2.2.6 Soft Sources Harmonising Specific Sectors Transnational sources have proven to be particularly successful in harmonising specific areas of international commercial law – as opposed to the general contract law, which was examined in Section 2.2.5. Harmonisation of specific areas can be achieved in various ways: (i) through binding instruments such as the 1980 Vienna Convention (CISG), which creates a uniform law for certain aspects of sale contracts; (ii) through instruments issued by international bodies but without binding effect, such as the 1985 UNCITRAL Model Law on International Commercial Arbitration, revised in 2006 and meant to be a model for legislators164 or the UNCITRAL Arbitration Rules of 1976, revised in 2010 and meant to be adopted by the parties as an integration of the arbitration agreement;165 (iii) through instruments issued by private organisations such as the ICC or the IBA, and without binding effect unless the parties to the contract adopt them – such as the International Commercial Terms (INCOTERMS) or the Uniform Customs and Practice for Documentary Credits (UCP) 600 (formerly 500), the IBA Guidelines on Conflict of Interests, the IBA Guidelines on Taking of Evidence and the Prague Rules; (iv) through model contracts issues by branch associations such as the ISDA Model Swap Agreement; (v) through principles and guidelines issued by international bodies, such as the UN Global Compact and the OECD Guidelines for Multinational Enterprises. Common to these instruments is the fact that they have a specific scope of application: certain aspects of the contract of sale for the CISG, the procedural aspects of arbitration for the UNCITRAL Model Law on Arbitration and the UNCITRAL Arbitration Rules, the passage of risk from seller to buyer and other specific obligations between the parties for the INCOTERMS and the mechanism of documentary credits for the UCP 600 and so on. These instruments do not have the goal of regulating all aspects of the relationship between the parties, such as the validity of the contract, its interpretation or all remedies for breach of contract. 164

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This instrument is not binding, as it is a model for legislators. If adopted, it will have the force of law in the system that has enacted it. This instrument is not binding, as it is a model for regulating the arbitral proceeding that the parties to the dispute may decide to adopt. If adopted by the parties, the Arbitration Rules will have the same status as a contract between them.

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Thanks to this specific scope of application, the enforceability of these instruments is easy to predict and achieve. As their scope of application is specified and usually well within the scope of the freedom of contract, they are generally enforced without any difficulties, as long as they are adopted by the parties or enacted by the legislator. However, as some examples will show, the soft sources incorporated by the parties have the same force as that of contract terms. Soft law can be considered an extension of the contract and will therefore, together with the contract, be subject to the applicable law. If the instruments are not incorporated into the contract by the parties, they may nevertheless be applicable as an expression of trade usages. In spite of the undeniably wide recognition of some of these sources, however, they are not always unanimously considered trade usages; in some countries, they are considered standard terms of contract that become effective between the parties only if they have been expressly incorporated.166 Furthermore, not all publications issued, for example, by the ICC, enjoy the same degree of recognition as the INCOTERMS and the UCP 600; thus, the simple fact that there is an ICC publication is not sufficient evidence that there is a corresponding trade usage. Some examples of instruments that harmonise specific sectors are given in the following section. (a) INCOTERMS The INCOTERMS, a publication by the ICC, illustrate how transnational sources may reach harmonisation by supplementing national law. The INCOTERMS apply to the cross-border delivery of goods, and are divided into eleven different terms, all expressed by three-letter acronyms (such as FOB, CIF, etc.). Each of these abbreviations is a term that allocates specific obligations between the seller and the buyer – primarily, the responsibility for customs clearance, as well as the arrangements and payment for transportation and insurance. In addition, each abbreviation defines where delivery is deemed to have been made, and the consequent passage of risk from the seller to the buyer. By writing the abbreviation in the contract and specifying the place of delivery, the parties incorporate the corresponding allocation of obligations, and do not need to regulate all these matters in the contract. For example, writing that delivery has to be made FOB at a named port, means that the seller has to clear the goods for export, transport the goods to the named port and have them loaded on the ship organised by the buyer. The goods are deemed to be delivered when they are loaded on the ship, and any damage to the goods occurring after the delivery will be at 166

See for references, see Hans van Houtte, The Law of International Trade, 2nd ed. (Sweet & Maxwell, 2002), Section 8.15. On the challenges that courts may face in applying the UCP in spite of their general acknowledgement, see Christian Twigg-Flesner, ‘Standard Terms in International Commercial Law: The Example of Documentary Credits’. In Reiner Schulze (ed.), New Features in Contract Law (Sellier European Law Publishers, 2007), pp. 325–39.

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the risk of the buyer. The buyer is responsible for arranging the ship and the rest of the transportation to the destination and arranging insurance and import clearance. A dispute over whether the seller is obliged to clear the goods for export, who bears the risk of loss until delivery or who was supposed to pay for the insurance during transportation will be easily solved by verifying which term of the INCOTERMS the parties have chosen.167 Other disputed matters, such as the validity of the contract or what remedies are available in case of default, are not regulated by the INCOTERMS. For these matters, it will be necessary to consult the governing law. Even matters that are within the scope of the INCOTERMS may be subject to different regulation by the governing law. For example, the question of liability for damages to the goods under transportation, normally directly regulated by the INCOTERMS, may be decided differently under the governing law in the case of exceptional circumstances beyond the parties’ control, discharging the seller from the obligations that the contract has imposed on it. Thus, the INCOTERMS are based on the principle that the buyer bears the risk for loss of the goods if the loss occurs after the goods were delivered or were deemed to have been delivered. If the goods are lost after the risk has passed to the buyer, the buyer still has to pay the price to the seller. This, however, may be affected by the governing law. Assuming, for example, that both parties belong to countries that have ratified the CISG, the sale will be subject to the Convention’s provisions. Article 66 of the CISG states that, in cases where the goods are lost due to an act or omission by the seller, the buyer is not bound to pay the price to the seller, even if the loss occurred after the risk had passed to the buyer. In a sale that incorporates the INCOTERMS and is subject to the CISG, both rules are applicable. The apparent contradiction may be explained in view of the limited scope of application of the INCOTERMS: this instrument is not concerned with questions regarding the validity of the contract, negligence of the parties, criteria for determining whether the delivery conforms to the specifications and so on. These aspects are left to the general contract law to govern. The general rule of the CISG actually confirms the allocation of risk made in the INCOTERMS (Article 66); however, the CISG also regulates the eventuality of negligence by the seller, which is not regulated in the INCOTERMS, hence, the difference between the two rules.

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The eleven terms are divided into seven rules for any mode of transport and four rules for sea and waterway transport. Until 2010, the terms were divided into four groups. This division was abandoned in the 2010 and the 2020 versions, but it is still useful and applicable: the so-called E-terms (such as Ex Works), determining that delivery is made at the place of departure and the goods need not be cleared or loaded; the F-terms (such as Free on Board, FOB), determining that the main carriage is unpaid by the seller, but the goods must be cleared for export; the C-terms (such as Cost Insurance Freight, CIF), determining that the risk passes, although the main carriage is paid by the seller; and the D-terms (such as Duty Delivery Paid, DDP), determining that delivery is made on arrival of the goods to the destination.

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(b) UCP 600 The UCP 600, a publication by the ICC regulating the payment mechanism of letters of credit (L/C, also called documentary credits) are another example of soft law that supplements the governing law. Like the INCOTERMS they regulate a specific mechanism and do not have the goal of covering general matters of contract law. However, they have a larger scope of application and in some situations, they may conflict with mandatory rules of the governing law, as will be seen in Section 2.3.2(a). Letters of credit are a widely used method of payment, applied when the creditor does not intend to take the commercial risk connected with the creditworthiness of the debtor. Modern technology, particularly the use of blockchain, is gradually taking over, thus reducing the share of payments made by letters of credit.168 However, the mechanism of a traditional letter of credit and that of a payment through blockchain are comparable. Letters of credit are mainly used as a method of payment in sale contracts. In this case, it is the buyer who is requested to open a letter of credit in favour of the seller. However, letters of credit may be used in any situation where a party owes a determined amount of money to another party. Often, for example, letters of credit are used to support payment under performance guarantees – for example, in a longterm supply contract the buyer may request the supplier to guarantee that the supplies will comply with the agreed time schedule and quality specifications. In case of noncompliance, the supplier will have to make payment under the guarantee. In this case, it will be the seller who is required to open a letter of credit in favour of the buyer. A letter of credit is structured as follows: the debtor (called the applicant) requests a bank (called the issuing bank) to issue a letter of credit in favour of the creditor (called the beneficiary). The application contains the instructions for the issuing bank and must state the precise amount of money that has to be paid, as well as the documents, upon the presentation of which the bank has to effect payment. This is the main characteristic of a letter of credit: the bank has to effect payment upon presentation of the documents that are named in the instructions. The bank simply has to verify the conformity on the face of the presented documents and is not requested to assess the proper performance of the underlying transaction, or any other matter. Presentation of the documents is necessary and sufficient to trigger payment by the bank (which explains why letters of credit are also known as documentary credits); the obligation to pay is the bank’s own obligation, which means that the beneficiary bears the commercial risk connected with the creditworthiness of the bank, and not of the applicant. An implication of this fact is that the bank’s obligation is autonomous, as the bank does not have any dealings with the 168

Agatha Brandão, Lauro Gama and Geneviève Saumier, ‘The Effectiveness of International Legal Harmonization Through Soft Law (With a Focus on the UCP 600)’. General Report presented at the XXI Congress of the International Academy of Comparative Law (Intersentia, Forthcoming 2024).

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underlying transaction upon which the beneficiary’s credit towards the applicant is based. The bank’s obligation to pay is based on the letter of credit alone. Therefore, the bank cannot invoke defences arising out of the underlying transaction to withhold payment, as long as the listed documents have been presented for payment. The autonomous character of the bank’s payment obligation is one of the most characteristic aspects of a letter of credit, and is codified in the UCP 600, Articles 4 and 5. The UCP 600 enjoy, as already mentioned, a general recognition as regulations for letters of credit; they are, at the same time, a source of regulation and a codification of generally acknowledged practices within that area. In particular, the two aspects mentioned – the autonomy of the payment obligation and the implication of the roles as the advising or corresponding bank – are uniformly applied in letters of credit, irrespective of the fact that the particular letter of credit may or may not make express reference to the UCP 600. (c) Model Contracts Perhaps the most successful model contract, that has been enjoying a de facto monopoly for nearly forty years, is the ISDA Master Swap Agreement. This is a model contract for Swap agreements – financial agreements according to which the parties exchange each other’s credit or debit positions (floating interest rate against fixed interest rate, or a currency against another currency). The rationale of these agreements is either hedging an interest or currency risk (if a party has income in one currency but expenses in another currency, it is exposed to the risk that one currency loses its value in respect of the other, and that the expenses become higher. By swapping one of the currencies into the other, it excludes this risk), or speculation (if a party believes that the value of a certain currency or the interest rates will fluctuate in a certain way, it may swap its exposure in other currencies or other rates to gain from the fluctuations). Swap agreements are one of the most standardised types of contract: from the very beginning of the development of this kind of contract, in the 1980s, the ISDA has published and periodically updated a Master Swap Agreement. Practically all swaps carried out between professional parties incorporate the ISDA Master Agreement. Operators on the financial market know by heart the various provisions of the Master Agreement and refer to them by their numbering, immediately understanding each other irrespective of whether they are located in England, Japan or Brazil. The Master Agreement is extremely detailed and very systematic, and it is supplemented by Codes of Conduct, Definitions and various publications and initiatives of the ISDA. The Master Agreement goes as far as it is thinkable in creating a self-sufficient, closed world for Swap agreements. Notwithstanding the systematicity and exhaustiveness of the Master Agreement, however, it is customary for banks to request that the contract is accompanied by

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a legal opinion rendered by a law firm active in the place where the counterparty is located, as well as, if it is different, by a law firm active in the jurisdiction the law of which is applicable to the Swap agreement. The purpose of the legal opinion is to make sure that the terms of the Master Agreement can be enforced and that the applicable law is complied with. Nevertheless, there is a large amount on litigation on Swap agreements, among others, regarding the influence of the law governing the capacity of the parties, see Section 4.5.2(d). (d) The UNCITRAL Model Law on International Commercial Arbitration Soft law also covers procedural matters. A very successful source of soft law is the 1985 UNCITRAL Model Law on International Commercial Arbitration, revised in 2006.169 This Model Law has been adopted in over eighty states,170 and has been largely followed or used as a term of reference in a series of other states. For example, Sweden and England have Arbitration Acts that follow their respective legislative tradition and cannot be considered as having adopted the Model Law. However, the Model Law has consistently been taken into consideration in the drafting work. (e) IBA Guidelines on Conflict of Interests Another instrument of soft procedural law is the International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration.171 They are a source of soft law meant to provide specific content to the principle of independence and impartiality of adjudicators – a principle widely recognised in all forms for adjudication, but in need of concretisation.172 The IBA Guidelines contain three lists of types of relationships between the adjudicator and the dispute. The lists are divided according to the impact that the relationship is likely to have on the outcome of the decision. The red list contains examples of connections that are so close that an adjudicator cannot be deemed to be impartial or independent. When there is a relationship as described in the red list, an adjudicator is conflicted and cannot serve as an arbitrator. The red list is divided into two: a waivable list of situations where the arbitrator may serve on the condition that the parties expressly accept the appearance of lack of independence and impartiality, and a non-waivable list of situations where the 169

170

171 172

The text of the Model Law can be found at https://uncitral.un.org/en/texts/arbitration/modellaw/ commercial_arbitration. The list of states that have adopted the Model Law can be found at https://uncitral.un.org/en/texts/ arbitration/modellaw/commercial_arbitration/status. www.ibanet.org/MediaHandler?id=e2fe5e72-eb14-4bba-b10d-d33dafee8918. For references, see Giuditta Cordero-Moss, ‘Independence and Impartiality of International Adjudicators’. General Report presented at the XXI Congress of the International Academy of Comparative Law (Intersentia, Forthcoming 2023).

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arbitrator may not serve – not even if it is accepted by the party to whose disadvantage the conflict may have effect. This shows that certain safeguards provided by the principle of independence and impartiality are so fundamental to the credibility of arbitration as a method to settle disputes, that they may not be waived by the parties. The non-waivable red list includes close connections between the arbitrator and one of the parties, while the waivable red list includes the arbitrator’s prior involvement in the dispute, as well as close relationships with the parties or their counsel. Examples of non-waivable circumstances are that the arbitrator is a representative of one of the parties, has a significant interest in one of the parties or in the outcome of the dispute or regularly advises one of the parties and derives significant income therefrom. Examples of waivable circumstances are that the arbitrator has been involved in an earlier stage of the dispute, or that the arbitrator or a member of the arbitrator’s family has interest in the outcome of the dispute or has a close relationship with one of the parties. The orange list contains situations where doubts about the arbitrator’s independence and impartiality are justifiable. These situations must be disclosed by the arbitrators, and the arbitrator may serve if the parties do not raise objections. Examples are: having repeatedly been appointed by one of the parties, having acted for or against one of the parties or having advocated an opinion on the case in dispute. The green list contains situations that are deemed not to raise doubts about the arbitrator’s independence and impartiality – such as having expressed an opinion on a legal issue that also arises in the dispute, having academic contacts with other arbitrators or with counsel or participating in the same professional alliance. The IBA Guidelines are widely used in international arbitration.173 Furthermore, they are generally considered also to be useful for other types of adjudication, although this is not uncontroversial.174 (f) IBA Rules on Taking of Evidence and Prague Rules Another successful instrument of soft procedural law issued by the IBA are the IBA Rules on the Taking of Evidence in International Commercial Arbitration. This instrument contains guidelines about how evidence is to be produced before arbitral tribunals. The technicalities on production of evidence are usually not regulated in arbitration law or in arbitration rules, and for a good reason: arbitral proceedings should not be burdened by too detailed procedural rules, and the arbitral tribunal should have the flexibility to determine, on the basis of the circumstances of the specific case, how the parties are to produce evidence. However, such flexibility is not compatible with 173

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School of International Arbitration of Queen Mary, University of London and White & Case. 2015 International Arbitration Survey Improvements and Innovations in International Arbitration (2015): 71% of the participants in the survey have seen the Guidelines used in practice, and 60% consider them effective. Makane Moïse Mbengue and Damien Charlotin, ‘The Independence and Impartiality of Adjudicators in the International Court of Justice and the International Tribunal for the Law of the Sea’. In Cordero-Moss (ed.), ‘Independence and Impartiality’ (Intersentia, Forthcoming 2023).

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predictability, which is another important interest in need of protection. In international arbitration, where each member of the arbitral tribunal and each of the parties may have legal backgrounds from different legal families, there may be various conflicting expectations about how the proceedings are to be organised and how evidence is to be produced. For the purpose of guiding the tribunal’s discretion and thus creating some predictability, the IBA Rules were created and published. They were first issued in 1999 and recently updated in 2020, and are a widely accepted guide containing procedural suggestions to enhance efficiency in arbitral proceedings.175 Arbitrators often suggest adopting them in the specific proceedings – although, in my own experience, parties usually decline to incorporate the IBA Rules and thus make them binding; they prefer to make some loose reference such as that the arbitral tribunal may use them as a guideline, in case the parties have not agreed otherwise. As a reaction to the IBA Rules, the Inquisitorial Rules on the Taking of Evidence in International Arbitration, otherwise known as the Prague Rules, were introduced. The Prague Rules were published in 2018 and are intended to offer an alternative basis for dealing with evidence in arbitration as an alternative to the IBA Rules, which the Prague Rules criticise for being too heavily influenced by common law traditions and for not sufficiently reflecting civil law traditions. There are, therefore, two competing compilations of soft law regulating the same issue. This makes it difficult to assert that soft law represents generally acknowledged principles or usages in this area. (g) Corporate Social Responsibility An area in which soft law exercises a considerable impact, both on contracts and on legislation, is that of so-called Corporate Social Responsibility. The issue of companies’ accountability for the whole value chain is raised with increased frequency,176 particularly as far as concerns the violation of human rights, labour law or environmental law incurred abroad by subsidiaries or suppliers.

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School of International Arbitration of Queen Mary and White & Case (2015): 71% of the participants in the survey have seen the Rules used in practice, and 69% consider them effective. Literature on the issue is vast, and there is a growing case law in various countries. For an overview and references, see Catherine Kessedjian and Humberto Cantú Rivera (eds.), Private International Law Aspects of Corporate Social Responsibility (Springer, 2020); Lise Smit, Claire Bright, Robert McCorquodale, Matthias Bauer, Hanna Deringer, Daniela Baeza-Breinbauer, Francisca Torres-Cortés, Frank Alleweldt, Senda Kara, Camille Salinier and Héctor Tejero Tobed, European Commission Study on Due Diligence Requirements Through the Supply Chain: Final Report (Publications Office, 2020), https://data.europa.eu/ doi/10.2838/39830; Anne Peters, Sabine Gless, Chris Tomale and Marc-Philippe Weller, Business and Human Rights: Making the Legally Binding Instrument Work in Public, Private and Criminal Law. Max Planck Institute for Comparative Public Law and International Law Research Paper Series No 2020–06 (2020); Hans van Loon, ‘Strategic Climate Litigation in the Dutch Courts: A Source of Inspiration for NGO’s Elsewhere?’ Acta Universitatis Carolinae Iuridica 66.4 (2020), pp. 69–84.

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One of the effects of the (at least, until recently) ever-increasing internationalisation of business since the middle of the last century has been a growing openness between the world’s economies, cultures and populations. Increased international cooperation has had numerous and important positive aspects but has also had undesirable consequences which are reflected in the growth of a widespread political criticism against globalisation. One of the effects of globalisation is that enterprises increasingly move their production or part of their activity to countries with a lower operations cost. This race to reduce costs is mainly dictated by the need to remain competitive in a market in which low-cost products threaten the survival of enterprises who are subject to higher production costs. Enterprises thus reduce their activity in their home country and move it to low-cost countries (such as, in our example, the fictional country of Ruritania). Among other consequences, this implies that their activity no longer needs to comply with the home country’s standards – for example, in the field of labour law, safety or environmental protection. Instead, the activity complies only with Ruritania’s local standards. If the local standards are less stringent than those prevailing in the home country, this would be reflected in correspondingly lower production costs: employees would work longer hours for less pay, payments to welfare and social security would be low, procedures and practices ensuring safety at work would be less demanding, investment to ensure environmental protection would be modest and so on. While all this ensures low production costs and thus the possibility of remaining competitive on the home market, it does not contribute to improving the local social and environmental conditions in Ruritania. For a long time, this has been deemed to be perfectly in compliance with the legal structure applied to organise commercial activity. A company would establish local subsidiaries in Ruritania, who would be independent legal entities with limited liability, and the subsidiaries’ activity would be treated as separate from the parent company’s own activity. Alternatively, a company might have outsourced parts of its activity to third parties in Ruritania, thus enhancing even more the separation of its own activity and that of third-party suppliers. The principle of limited liability is one of the pillars of economic activity and permits the circumscription within the local subsidiary or within the supplier of any liability in respect of labour, safety or environmental standards. The parent company or the principal cannot be blamed for having breached its home country’s standard, because the activity is not carried out by that company directly, and furthermore the home country’s standards do not apply outside of the home country’s territory. Therefore, companies can take advantage of the low level of costs in Ruritania, without being held to be in breach of standards that are not applicable there.

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Increasingly, this state of things has been found to be unsatisfactory.177 Instruments have been developed178 to induce a responsible corporate and commercial activity, in particular, specifying expectations of due diligence when a company relies on a production chain or value chain. Among the instruments that received considerable international attention are the UN Global Compact179 and the Ruggie principles,180 which were followed by the OECD Guidelines for Multinational Enterprises181 and the OECD Due Diligence Guidance for Responsible Business Conduct.182 National plans have been to implement these guidelines in several countries.183 All these initiatives are non-binding instruments that primarily rely on voluntary compliance. They represent, therefore, an example of soft law. However, as will be briefly explained, soft law is hardening: in part through codification by the national legislator or at the regional or international level; in part by operation of commercial parties who refer to soft law standards in their contracts thus agreeing to be bound by them; and in part through case law that increasingly recognises that breach of the duties of care and diligence may be a basis for tort liability. Regarding the first-mentioned method to harden soft law, it can be pointed out that the OECD Guidelines and Guidance are increasingly being implemented in domestic legislation, in, among others, France and Germany.184 The EU is working on extensive regulation of the matter – most recently, on 23 February 2022 the Commission adopted a proposal for a Directive on Corporate Sustainability Due Diligence.185 The hardening of soft law through contractual means was initially promoted by multinational companies who imposed duties of diligence on their contractual parties and requested that they in turn imposed corresponding duties on their contractual parties.186 Increasingly, these contractual mechanisms rely not only on the parties’

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For an early emphasis on the advisability to take into consideration sustainability in the corporate and commercial law discourse, see Beate Sjåfjell, www.jus.uio.no/ifp/english/people/aca/beatesj/. For an overview, see Peters et al. (2020). An initiative launched in 2000 and supported by the UN, based on the voluntary commitment by CEOs to implement sustainability, www.unglobalcompact.org/about. UN Guiding Principles on Business and Human Rights, www.business-humanrights.org/en/big-issues /un-guiding-principles-on-business-human-rights/. www.oecd.org/daf/inv/mne/48004323.pdf. www.oecd.org/investment/due-diligence-guidance-for-responsible-business-conduct.htm. For an overview, see www.ohchr.org/en/special-procedures/wg-business/national-action-plans-businessand-human-rights. See Fabienne Jault-Seseke (forthcoming). COM(2022) 71 final. For an analysis of the legislative process see European Group for Private International Law (GEDIP/EGPIL). Recommendation of the European Group for Private International Law (GEDIP/EGPIL) to the European Commission concerning the Private international law aspects of the future Instrument of the European Union on [Corporate Due Diligence and Corporate Accountability], adopted on 8 October 2021 and updated in 2022, https://gedip-egpil.eu/wp-content/uploads/2021/02/ Recommandation-GEDIP-Recommendation-EGPIL-final-1.pdf, p. 19f. See, for references, Peters et al. (2020), p. 12f.

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voluntary compliance with soft law, but on the necessity to comply with the abovementioned applicable legislation. As will be seen in Section 2.3.2(c), the hardening of soft law through case law has in recent years moved away from the traditional approach, which was based on company law mechanisms, towards an approach based on tort liability. 2.2.7 Summing Up Transnational rules regulating specific aspects of a legal relationship are a useful complement to the governing law and are enforceable if they are incorporated into the contract by the parties and do not violate the mandatory rules of the governing law. If these rules represent trade usages, they will be applicable even without incorporation by the parties since most of the legal systems refer to trade usages. Even if they are incorporated by the parties into the contract, however, these sources do not replace the governing law. They cannot replace the governing law because they only regulate specific aspects of the legal relationship. Any issues that fall outside of their narrow scope will be regulated by the governing law. Furthermore, both the contract and the incorporated sources will be subject to the applicable law, as will be seen in Section 2.3. If these rules are enacted in binding instruments, such as national laws or international conventions, they may also have the ability to prevail over mandatory rules. 2.3 No Replacement of the Governing Law As seen in Section 2.2.1, the spontaneous development via market forces as well as a restatement of European law (without enactment or legal basis within private international law) were described as insufficient to replace state law by two of the most transnational law-friendly entities: the authors of the PECL and the ICC. Even stronger doubts apply in respect of the other sources of transnational law previously mentioned, which (apart from the UPICC, that in this respect can be compared to the PECL) do not even have the goal of being comprehensive or of restating the law, but simply provide a regulation of specific types of contract or of specific areas. As already mentioned throughout this chapter, several of the compilations of soft law that proliferated in the past decades are widely recognised and are often extremely useful. There are many reasons to hold them in high regard. However, they should be regarded for what they can achieve: to complement the governing law. They should not be expected to replace it. The following analyses the ability of transnational law to govern a contractual relationship to the exclusion of any national law.

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2.3.1 Can Transnational Law be Chosen as the Only Governing Law? I have already mentioned that sources of soft law do not regulate the totality of legal effects that may arise in a legal relationship. This applies not only to the sources with a narrow scope of application, such as the INCOTERMS or the UCP 600, but even to the sources that aim at regulating the generality of contract law, such as the UPICC. The contractual law effects will have implications in other areas of the law, such as property or company law, see Section 4.4. It is, therefore, evident that transnational law, which mainly covers contract law issues, cannot exclude application of state law for the issues that fall within other areas. However, there is another question that needs to be addressed. It relates not to the areas that are not covered by the transnational law, but to the areas that are covered by it. What is the legal basis for claiming that transnational sources may govern a contract to the exclusion of any other governing law? If they are to replace the governing law, they will not be subject to any mandatory rules or principles of the otherwise applicable law, with the exception of overriding mandatory rules, as explained in Chapter 4. Additionally, in the case of gaps or a lack of clarity, there will be no governing law to fall back on. If, on the contrary, transnational sources are simply incorporated into the contract and become contract terms, they remain subject to any mandatory rules of the applicable law, and they will be interpreted according to the governing law’s underlying principles and integrated by the governing law’s default rules. The wording of Article 1.4 of the UPICC seems to suggest the latter alternative: ‘Nothing in these Principles shall restrict the application of mandatory rules, whether of national, international or supranational origin, which are applicable in accordance with the relevant rules of private international law.’ This restrictive approach is reflected in the private international law systems, as will be seen in Section 4.3.3. The distinction between choosing non-state law as a governing law (which is not allowed) and incorporating non-state law as a term of contract (which is allowed) is reflected in both US187 and EU private international law. Under EU law, the Rome I Regulation on the Law Applicable to Contractual Obligations excludes that the parties may select, to govern their contract, sets of rules that are not national laws (with an exception for possible future European instruments of contract law).188 The Rome I Regulation is a conversion of the 187

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Restatement (Second), § 187. For comments and further references, see Eckart Gottschalk, Ralf Michaels, Giesela Rühl and Jan von Hein (eds.), Conflict of Laws in a Globalized World (Cambridge University Press, 2007), pp. 153–83. Also available as CLPE Research Paper 4/2007 at http://comparativeresearch.net/ and at http://ssrn.com/abstract=921842. Council Regulation No 593/2008, 4/7/2008, OJ L 177/6, Article 3. The Preamble, in item 13, confirms that nothing prevents the parties from incorporating into the contract transnational instruments of soft law; as a consequence of such an incorporation, however, the soft law is given the status of a term of contract, not of governing law. See also Goode et al. (2015), paras 14.18 ff.

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previous 1980 Rome Convention on the Law Applicable to Contractual Obligations. According to the prevailing opinion, the Rome Convention permitted the parties to choose, as governing law, a national law, but not transnational sources. In connection with its conversion, proposals were made to extend the scope of party autonomy to transnational sources;189 however, these proposals were not accepted and the adopted text of the Rome I Regulation has finally clarified that the parties may only choose a national law with which to govern their contract. Incidentally, an extension of party autonomy would only have provided a partial solution: the parties’ choice would have had effect only within the scope of party autonomy, thus leaving unaffected the areas where other conflict rules are applicable. As will be seen in Section 4.4, whenever the legal relationship has implications that go beyond the mere contract law, party autonomy does not apply and other conflict rules step in to select the governing law. Thus, if the contract has implications in terms of property law (a pledge as security for a party’s obligations), of company law (a Shareholders agreement regulating the competence of corporate bodies) or of insolvency law (a Loan agreement with an Early termination clause that would affect the solvency of the debtor), just to name some common situations, the law applicable to those aspects will be selected on the basis of specific conflict rules, and not on the basis of the choice made by the parties. Another instrument of private international law has a more generous approach: the 2015 Hague Principles on Choice of Law in International Commercial Contracts allow, in Article 3, for the possibility that the parties choose transnational sources as a governing law.190 The Hague Principles are an instrument of soft law, and they are thus not intended to be binding. However, they have already been used as a model for state legislation,191 and they may gain more importance with time. Considering the unclear relationship between arbitration and private international law described in Section 4.5, it seems that this instrument may be particularly useful within international arbitration. Transnational sources, thus, may be incorporated into the contract by the parties, but traditionally may not be selected to govern the contract to the exclusion of any national law, not even in mere contractual matters. In commercial arbitration, in contrast, arbitration laws and arbitration rules often give the parties the possibility of choosing ‘rules of law’ to govern the dispute; these 189

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The Green Paper on the conversion of the Rome Convention, COM (2002) 654 final, Section 3.2.3, asked whether the rule on party autonomy should be changed so that the parties are allowed to choose an international convention or general principles of law instead of a national law. The original proposal by the Commission, COM (2005) 0650 final, contained rather restrictive access to do so, but this formulation was deleted in the finally approved text of the Regulation. For an analysis of the history of this provision, see Michaels (2014), Section III.C. The 2015 Paraguay Act on the law applicable to international contracts is said to be modelled on the Hague principles, see Thomas Kadner Graziano, ‘The Hague Solution on Choice-of-Law Clauses in Conflicting Standard Terms: Paving the Way to More Legal Certainty in International Commercial Transactions?’ Uniform Law Review 22.2 (2017), pp. 351–68, footnote 16.

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words, as opposed to ‘law’, are interpreted as extending beyond national laws and to also covering transnational sources, as will be explained in Section 5.6.7. The UNIDROIT, in its Comments on the Model contract clauses it recommends as reference to the UPICC, confirms the point of view that the UPICC are simply incorporated into the contract when the dispute is decided by a court, whereas they, under some circumstances, may be chosen as governing law when a dispute is submitted to arbitration.192 This does not necessarily mean that the parties enjoy much more flexibility during arbitration: the following sections will show that transnational law does not have the necessary systematicity to govern a relationship to the full exclusion of national laws. State law is still applicable to a certain extent even though a contract is governed by the UPICC. Where there are gaps in the UPICC, and where an autonomous interpretation is not possible, where there are issues that are not covered by the UPICC, or where there are overriding mandatory rules, it will be necessary to apply a state law. For this reason, the UNIDROIT recommends that the parties specify, in the clause with which they choose that the contract shall be governed by the UPICC, which state law will supplement the UPICC.193 Moreover, even in areas where the issue falls within the scope of the UPICC and the UPICC contain a regulation, the interpreter’s legal tradition may have a considerable influence on how the UPICC are applied. Although the UPICC posit that they shall be interpreted autonomously (see Section 2.2.5(f)), and although arbitration enjoys a relative autonomy from national laws, there is not always a unitary, transnational regime that can be used to substantiate or specify the UPICC. In particular, as I have explained in Section 2.2.5(f), the UPICC contain an overarching principle of good faith. It is doubtful that a uniform interpretation may actually be achieved in areas where value-based principles such as the principle of good faith need concretisation, see Section 2.2.5(g). Particularly challenging is the relationship between contract terms agreed by the parties on one hand, and UPICC provisions based on the good faith principles, on the other hand. The good faith-based provisions aim at preventing a literal application of the contract terms, where this may allow one party to reach speculative results. But should arbitrators apply the contract accurately, or should they override the agreed terms in the name of the good faith principle? In Section 3.7.2, I will refer to a seminar held some time ago that showed that, in a room with twenty-one prominent arbitrators, six different approaches were represented, ranging from the accurate application of the contract wording, even though this means disregarding the governing law, to the accurate application of the law, even though this means disregarding the contract wording. 192

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UNIDROIT, Model Clauses for the Use of the UNIDROIT Principles of International Commercial Contracts, www.unidroit.org/instruments/commercial-contracts/upicc-model-clauses/, Model Clause No 1, General remarks, § f. In the document containing model clauses, at clause 1.2.

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Given that the UPICC are prone to being applied differently depending on the interpreter’s understanding of where the balance should be struck between accurate application of the contract and the equilibrium between the parties’ interests, arbitration does not seem to ensure a uniform application of the UPICC. A uniform application of the UPICC is rendered particularly difficult by the evident tension between two opposed interests that inform, respectively, contract practice and the UPICC. In contract practice, predictability is of the essence, see Chapter 1. In the UPICC, the main goal is to give the interpreter the means to ensure a reasonable and balanced relationship between the parties – even when this means interfering with the agreed contract terms, and thus affecting predictability. In keeping with the central role of the agreed terms, international arbitration is a system based on the will of the parties. Arbitrators are expected to abide by the will of the parties and not apply undesired sources that bring unexpected results. Moreover, arbitral awards enjoy broad enforceability and the possibility of courts interfering with them is extremely limited, as will be seen in Chapter 5. The court’s opinion on the legal effects of the contracts, therefore, becomes largely irrelevant. However, so far it does not seem that the autonomy of arbitration has led to a uniform application of the principle of good faith in the UPICC. It can be assumed that arbitrators will take the approach that they consider most reasonable, which will often coincide with the principles of their legal traditions. Therefore, there is little difference between incorporating the transnational law as if it were the terms of the contract, and choosing it as a governing law: ultimately, a national law will necessarily be applicable – either directly, or indirectly by exercising influence on the interpretation of the soft law instruments. 2.3.2 When the Transnational Law Conflicts with the Governing Law In many situations, transnational sources will be applied as a supplement to the governing law – either because they regulate details that are not regulated by the governing law, or because they regulate matters that are not regulated by the mandatory rules of the governing law. Generally, within the field of contract law, the law permits the parties to regulate their interests in a way that differs from the regulation contained in the law itself. The law, in other words, is generally not mandatory, but applied as default rules, in case the parties have not agreed on a specific regulation. The parties may agree on specific terms of contract, or they may refer to sources of soft law, thus incorporating the soft law into their contract. In either case, the terms negotiated by the parties or incorporated by them can integrate or deviate from the governing law. In some situations, however, transnational sources might conflict with the mandatory rules of the applicable law. The relationship between contractual terms and transnational law on one side, and state law on the other side, then becomes apparent. In the following sections are some examples where the UCP 600, the ISDA Master

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Swap Agreement, the UPICC and the IBA Guidelines on Conflict of Interests cannot deviate from the mandatory rules of the governing law. (a) The UCP 600 As seen in Section 2.2.6(b), the UCP 600 are a successful source of soft law regulating letters of credit. In some cases, the mechanism of the letter of credit has been considered to conflict with the rules of the governing law and has been overridden by state law. In particular, the two aspects mentioned – the autonomy of the payment obligation and the implication of the roles as the advising or corresponding bank – are uniformly applied in letters of credit, irrespective of the fact that the particular letter of credit may or may not make express reference to the UCP 600. However, in some cases, these principles of the letters of credit have been considered to conflict with the rules of the governing state law and have been overridden by state law. Some of these cases will be examined further. For the sake of completeness, it must be recognised that the cases discussed represent the exception rather than the rule. Some have implications of a political nature and others may be criticised for being wrong. The purpose of highlighting these cases is not to question the ability of the UCP 600 to properly regulate letters of credit – a task that the UCP 600 actually carries out very well. The purpose is to show that there may sometimes be tension between transnational sources and the governing law; and that, in these cases, the governing law will prevail. (i) Case 1 Case 1194 presented the following scenario. The beneficiary of a letter of credit presents documents to obtain payment under the letter of credit. The bank refuses payment, because not all of the documents listed in the instruction have been presented. In particular, a ‘Receipt signed and proving delivery of the goods’ was listed as one of the documents to be presented but is not. The beneficiary claims that payment is due in spite of the lack of these documents, because the delivery can be proven by other means. Is the beneficiary entitled to obtain payment under the letter of credit? According to the principles that rule documentary credits, as seen, the obligation of the bank to pay is strictly dependent on the instructions that it has received. If the instructions provide for payment upon presentation of specific documents, then payment has to be effected upon presentation of those documents (irrespective of any supervening circumstance), and only upon presentation of exactly those documents. Payment on presentation of documents different from those listed in the instructions can expose the bank to liability towards the applicant.

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Société de Banque Suisse v. Société Generale Alsacienne de Banque [1989] BGE 105 II 67.

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In the case described here, the receipt was one of the listed documents, and was not presented.195 An application of the principles governing the documentary credits, therefore, should lead to the conclusion that payment was not to be effected by the bank. The creditor maintains its claims towards the debtor, but the bank cannot effect a payment in violation of the instructions. The creditor will have to satisfy its claim directly with the debtor. However, the Swiss Supreme Court, in the analysed case, decided in the opposite way. The reason for deciding that the bank had to effect payment was that, by not effecting payment by invoking the instructions, and in spite of the presence of other documentation showing that payment was due, the bank would abuse its rights. This abuse of rights would be in contrast with Article 2 of the Swiss Code of Obligations, which is mandatory. We have here an example of a conflict between a principle of transnational law (the irrelevance of the underlying obligation to a letter of credit) and the mandatory rules of the national governing law, whereby the state law prevailed. (ii) Case 2 Case 2196 presented the following scenario. A letter of credit is issued by a Ugandan bank. Citibank of New York acts as an advising bank. In 1972, the Ugandan government prohibits the Ugandan bank from making a foreign exchange payment to the Israeli beneficiary. Consequently, the issuing bank instructs the advising bank to cancel the letter of credit. The beneficiary claims payment under the letter of credit from Citibank. Is the beneficiary entitled to payment in accordance with the letter of credit? As we have seen, there is a clear distinction between the role of an advising bank and the role of a confirming bank. An advising bank does not assume obligations in its own name; it just acts on behalf of the issuing bank. If the issuing bank instructs the advising bank not to effect payment, the advising bank is obliged not to effect payment. If it nevertheless does, then it will not be in a position to obtain reimbursement from the issuing bank, because it did so in violation of the agreement between them. In the case mentioned here, Citibank was an advising bank, and it had received instructions from the advising bank not to effect payment; therefore, Citibank was not obliged to effect payment. However, the Court of Appeal of New York found that the bank had to pay. The reasoning was as follows: New York is the financial capital of the world, and if it wants 195

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The inclusion of a signed receipt among the documents to be presented is a rather inefficient means: if the receipt has to be signed by the buyer, who is also supposed to make the payment, it will easily be able to stop any possibility of effecting payment by withholding the signature on the receipt. It is an important principle that the production of none of the listed documents should be in the power of none of the parties. Otherwise, the parties may influence the circumstances that trigger payment, and the neutrality and independence that a letter of credit should provide is seriously undermined. J. Zeevi & Sons v. Grindlay’s Bank (Uganda), 37 NY2d 220, 333 NE2d 168, 371 NYS2d 892.

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to maintain this pre-eminent position, it is important that the operators under New York law protect the justified expectations of the parties. The fact that payment had become illegal under Ugandan law does not affect the role that a New York bank should play. This is a situation where a recognised principle of transnational law (the diversity in responsibility between an advising bank and a confirming bank) conflicts not with some mandatory rules of the governing law, but with some policies, which in the eyes of the court must have been so important that they represented public policy and they had to override them. (iii) Case 3 Case 3197 presented the following scenario. DCA has entered into a contract for the supply of certain military equipment to the State of India and has issued a letter of credit as a performance guarantee. The main document to be presented to obtain payment under the letter of credit is a certificate by the State of India stating that DCA is in breach of contract. War breaks out between India and Pakistan, and the United States announces an embargo on India. The military equipment is delivered FOB at DCA’s plant; DCA alleges that it has fulfilled its obligation to supply the equipment at its plant. The embargo prevents the shipment going abroad and the State of India presents to the banks a certificate of breach of contract, as provided for under the instructions of the letter of credit, and requests payment under the letter of credit. Is the beneficiary entitled to payment under the letter of credit? The principles governing documentary credits, as we have seen, clearly state that payment has to be effected upon presentation of the listed documents, and that the bank shall not be concerned with the underlying transaction. If the State of India has presented a certificate of breach of contract, and this was the document that had to be presented according to the instructions, then payment should be made. However, the District Court of Georgia resolved to grant a preliminary injunctive relief and a permanent injunction against the bank, protecting the debtor from claims relating to its obligation to effect payment. The Court first confirmed the known principles governing letters of credit: that payment has to be made by the bank, irrespective of the circumstances of the underlying transactions, if the listed documents have been presented. However, the Court went on to consider the matter of fraud, and affirmed that, in the case of fraud, the bank should nevertheless have the obligation to effect payment to ‘innocent third parties’, whereas, in cases where the beneficiary is not ‘innocent’, the bank does not have the obligation, but the option to effect payment. The Court went on to affirm that, in this case, the beneficiary was not an innocent third party because there was a dispute as to the validity of the certificate of breach of contract presented to the bank for payment. The Court affirmed that the certificate of breach was unspecified (the wording being ‘failed to carry out certain obligations of theirs’). The Court affirmed, 197

Dynamics Corp. of America v. Citizens and Southern National Bank [1973] 356 F Supp 991.

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further, and correctly, that the beneficiary did not have to prove that the breach actually had taken place, since this would be a question relating to the underlying contract, and the court had no jurisdiction on that matter (the contract had chosen arbitration in India for settlement of disputes arising out of the contract). The Court then justified its issuance of the injunction on the basis of its alleged duty to guarantee that the beneficiary does not take ‘unconscientious advantage of the situation and run off with plaintiff’s money on a pro forma declaration which has obviously no basis in fact’. In this case, therefore, the principles governing documentary credit have been superseded by the governing law’s rules on fraud. Several comments are possible on this decision: we will concentrate on the quality of the listed documents and on the question of fact. When it comes to the quality of the document, the court is concerned with the fact that the certificate was unspecified. This, however, should primarily have been a concern of the parties when they drafted the instructions to the bank. Allowing payment upon presentation of a certificate issued by the beneficiary is not advisable, as it can open up possible abuses. Allowing such a certificate without specifying its contents is even less advisable, since it means that there are no parameters that have to be met before the beneficiary issues such a certificate. What is surprising in this case is that the court found it appropriate to override the agreement between the parties because the list of documents had not been written with the appropriate diligence. The next comment is a matter of fact, and, as such, does not belong to the dispute upon which the court had jurisdiction. However, the court invites this comment, by mentioning that the beneficiary should not run off with the money with no basis in fact. If the goods had to be delivered FOB, then the responsibility for clearing them for export was with the seller.198 If the goods could not be exported, the seller had not complied with its obligations, even if the goods were made available at the place of delivery. The goods could not be exported because of an embargo and not because of a lack of diligence by the seller, and therefore it might be questioned as to whether this could amount to a default by the seller. However, the adoption of the term FOB indicates that the risk for not obtaining the export licence is held by the seller, and not the buyer. (b) The UPICC: Irrevocable Offer and Consideration The case of an offer that purports to be irrevocable for a certain period is an example of the relationship between the UPICC and the mandatory rules of the governing law. As long as the offer is not accepted, there is no contract between the parties. However, a written offer with a promise of irrevocability has legal consequences that are 198

Another matter is that the term FOB assumes that the place of delivery is a port, and not the seller’s plant, as had apparently been agreed in the contract.

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regulated by the contract law of each state. What would the legal consequences be if the offeror decides to revoke the offer before the term indicated in the firm offer has elapsed? Firm offers are regulated in Article 2.4 of the UPICC. The Article starts by setting forth a general rule, according to which offers can be revoked until they have been accepted. The second paragraph of the Article is devoted to irrevocable offers, and reads as follows: (2) However, an offer cannot be revoked (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or (b) . . . The solution provided by the UPICC, therefore, coincides with the solution provided by civil law systems, as will be seen in Section 3.6.1. But what if the relationship is subject to English law? As Section 3.6.1 will show, English law has a different outcome for this situation, due to the applicability of the doctrine of consideration. The doctrine of consideration is mandatory and cannot be derogated from by agreement of the parties, or by a non-binding source of transnational law with persuasive authority. If the relationship is subject to English law, therefore, the solution suggested by the UPICC will be overridden by the governing law. As long as the UPICC are incorporated into the contract (as opposed to chosen as a governing law), then they are not able to provide a harmonised solution. As seen, generally, sources of transnational law are deemed to be incorporated into the contract when the dispute is brought before a court. When a dispute is submitted to arbitration, on the contrary, various arbitration laws and arbitration rules permit the parties to choose transnational sources as governing law, as Section 5.6.7 explains. The particular situation analysed in this section would receive a harmonised solution if the parties or the arbitral tribunal were empowered to choose the UPICC or the PECL and had done so. (c) ISDA Model Swap Agreement The style in which the ISDA Master Agreement is written does not invite construing the agreement differently than it appears from its wording. The English Court of Appeal199 has declined to imply a term into the contract that would limit to a reasonable time the non-defaulting party’s right to withhold payment. Article 2(a)(iii) permits the non-defaulting party to suspend payment to the defaulting party until the default is repaired. If the defaulting party is insolvent, this may give the other party the possibility to speculate, insolvency being defined as an event of default in the contract. Assume that there are more payments outstanding between the two parties, and that the net amount is in favour of the insolvent party. 199

Lomas v. JFB Firth Rixson Inc [2012] EWCA Civ 419.

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Insolvency is defined in the Master Agreement as an Event of Default. The party owing the net amount, as the non-defaulting party, may elect to terminate the contract. If it does so, it will have to pay the net amount to the insolvency estate. However, under Article 2(a)(iii), the non-defaulting party may elect not to exercise its right to terminate the contract early, and instead withhold payment of what it owes to the defaulting party. Since the insolvent party will never be in a position to remedy its default, the non-defaulting party seeks to indefinitely avoid paying the net amount that it owes to the insolvent party. The English Court of Appeal accepted this result. A civil law court, however, might be inclined to imply a requirement of reasonable time to limit the non-defaulting party’s possibility to speculate on the wording of the contract. Furthermore, the effects of this clause may be restricted by other principles of the applicable law, such as the principle of equality of creditors and integrity of the estate in case the defaulting party is insolvent.200 (d) IBA Guidelines on Conflict of Interests While there is a consensus on the more obvious situations that may create a conflict of interests, such as when the arbitrator is an officer of one of the parties to the dispute, opinions vary when the relationship between the adjudicator and the party is not direct. How close the indirect connection must be to have an impact on the appearance of independence and impartiality is not clear. In this context, courts and tribunals have applied criteria diverging from those of the IBA Guidelines.201 While the Guidelines are widely referred to whenever the independence or impartiality of an arbitrator is evaluated, they are not necessarily always applied faithfully by the courts. For example, the circumstance that a sole arbitrator is a partner in a law firm which provides services to an affiliate of a party, and derives substantial income therefrom, was deemed not to raise any appearance of bias by an English High Court,202 but is listed in the non-waivable red list of the IBA Guidelines.203 To the contrary, repeat appointments are on the orange list of the IBA Guidelines of circumstances that need to be disclosed, and are often deemed to create a potential conflict of interests.204 However, they are sometimes considered to be neutral.205 200 201

202 203

204 205

In Re Lehman Brothers Holdings, Inc., US Bankruptcy Court Case No 08-13555 et seq. (JMP). See the Note by the UNCITRAL Secretariat, Working Paper on Possible reform of investor-State dispute settlement (ISDS), Ensuring independence and impartiality on the part of arbitrators and decision makers in ISDS, A/CN.9/WG.III/WP.151, para 65. W Limited v. M SDN BHD [2016] EWHC 422 (Comm), para 42. Article 1.4: ‘The arbitrator or his or her firm regularly advises the party, or an affiliate of the party, and the arbitrator or his or her firm derives significant financial income therefrom.’ See, for references, Cordero-Moss ‘Independence and Impartiality’ (forthcoming). See the decisions on challenges in the ICSID cases Tidewater v. Venezuela, ICSID Case No ARB/10/5, Decision of 23 December 2010, and Universal Compression v. Venezuela, ICSID Case No ARB/10/9, Decision of 20 May 2011.

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Also circumstances that are not expressly listed in the IBA Guidelines have been deemed to create a conflict of interests, such as when an arbitrator in another matter also acts as counsel for a client seeking annulment of an award which was rendered in an unrelated case, but on which one of the parties relies in its pleadings before the arbitral tribunal.206 2.3.3 When the Transnational Law Competes with the Contract Terms As explained in Chapter 1, contracts are very detailed. If a contract subject to the UPICC regulates a certain issue, and the same issue is also regulated in the UPICC, what will be the relationship between the two regulations? Will the UPICC superimpose their own regulation if the subject matter is already regulated in the contract? Or will they be deemed replaced by the terms of the contract? Will they supplement the contract if the contract is silent on a certain point? Or will the parties’ silence be deemed to mean that they did not wish to regulate a certain effect? Considering that the UPICC are based on an overarching principle of good faith pervading many of the provisions that regulate the issues usually regulated in detail in the contract, it seems reasonable to inquire whether the UPICC should be deemed to override and supplement contract terms, or whether they should be applied according to the lex specialis principle.207 Under the lex specialis principle, it can be assumed that the parties intended to derogate from the general regime of law by making their own rules in the contract. Hence, the specific regulation of the contract would override the general regulation of the law, as long as the latter were not mandatory. On the other hand, the central role played by the principle of good faith in the UPICC, that pursuant to Article 1.7 cannot be derogated from by the parties, casts doubts about the extent to which agreed contract terms can prevail over the rules of the UPICC, which to a large extent rely precisely, explicitly or tacitly, on the principle of good faith. As long as the relationship between the UPICC and the contract terms is not clarified, there is a risk that the UPICC will not be able to achieve the aim of predictability, which is so important for commercial contracts. If the UPICC are to be considered a commercially oriented set of rules, they should clarify this relationship so as to establish that the regulation contained in the contract takes precedence. The attractiveness of the UPICC, therefore, would be considerably enhanced if there were no uncertainties under their regime about the ability to use negotiated 206 207

Telkom Malaysia v. Ghana, Hague District Court, HA/RK 2004, 667, Decision of 18 October 2004. William W. Park, ‘The Predictability Paradox: Arbitrators and Applicable Law’. In Fabio Bortolotti and Pierre Mayer (eds.), The Application of Substantive Law by International Arbitration (ICC Dossiers, 2014b), p. 62.

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contract terms as the exhaustive, or at least primary, regulation of the parties’ conduct under the contract. Since the UPICC regulate commercial contracts, objective interpretation and the primacy of contract terms seem to be the correct starting point. There may be a need for less objectivity if the parties, though commercial, have different bargaining power or insight; for detailed contracts between equally professional parties, however, there seem to be good reasons for giving primacy to the contract terms, interpreted objectively. However, the many provisions in the UPICC that restrict the exercise of contract rights or impose ancillary obligations where the contract is silent seem to suggest the opposite approach, that is, that the UPICC be superimposed over the contract terms and lead to a situation where the detailed contract regulation is either disregarded or supplemented. This may render the choice of the UPICC less attractive for governing commercial contracts: if the parties have spent considerable resources in drafting and negotiating certain terms, developing contract management systems on the basis of those terms and assessing their legal position on the basis of those terms, why should they choose, as a governing law, a set of rules that may deprive some of those terms of their effect or supplement the terms with other, not negotiated terms? Of course, commercial contracts need a governing law. Gaps must be filled, inconsistencies must be solved, unclear provisions must be interpreted. It cannot be excluded that even commercial contracts will, from time to time, need a corrective, and that it is necessary to strike a balance between the need for predictability proper to commercial relationships, on the one hand, and the need to provide a framework ensuring the respect of principles of loyalty and good faith, on the other hand. However, it seems that the attractiveness of the UPICC to commercial parties resides in their ability to respect the primacy of contract terms, rather than in their ability to override contract terms. The following sections will give some illustrations of the need for clarifying the relationship between the UPICC and contract terms. These examples are chosen because they correspond to a series of decisions rendered by Norwegian courts and directly or indirectly inspired by the UPICC.208 (a) Ancillary Obligations Not Regulated in the Contract Article 5.1.2 of the UPICC regulates implied obligations, that is, obligations that may bind one party even though they have not been spelled out in the contract. A party may be expected, to a certain extent, to be under an obligation to cooperate with the other party in order to permit or facilitate performance of the contract. Among the

208

Giuditta Cordero-Moss, ‘Detailed Contract Regulations and the UPICC: Parallels with National Law and Potential for Improvements: The Example of Norwegian Law’. In Transnational Commercial and Consumer Law (Springer, 2018a), pp. 91–110; UNIDROIT (ed.), Eppur si muove: The Age of Uniform Law. Essays in Honour of Michael Joachim Bonell (UNIDROIT, 2016b), pp. 1302–17.

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sources that may be used to read implied obligations into a contract, subparagraph (c) mentions the principle of good faith. Examples of such implied obligations are given in the Comment to Article 5.1.2. Illustration 3, regarding implied obligations stemming from good faith, relates to the implied obligation on a party to inform the other party if the first party does not intend to pursue a joint project. However, what the Comments do not make clear is how far implied obligations go. (i) No Assignment Imagine a dispute regarding a contract obliging a fishing company to deliver all its fish for slaughter to the other party, a slaughterhouse.209 During the term of the contract, the fishing company transferred some of its fishing concessions to a third party, thus considerably reducing its fishing activity and consequently, the volume of fish that was delivered under the contract. The slaughterhouse claimed that the fishing company was in breach of its contractual obligations, notwithstanding that the contract did not mention any restrictions on the company’s entitlement to transfer its concessions to third parties. It could be useful to clarify whether the UPICC permits reading into a contract for the slaughtering of fish an obligation not to transfer the fishing concessions to third parties, like the Norwegian Supreme Court did in spite of the circumstance that the contract does not contain such an obligation nor a commitment to deliver a particular volume. In an earlier case, the Norwegian Supreme Court had found that the price for the purchase of shares which, according to the contract, would be triggered if the buyer had purchased more than a certain percentage of those shares, could not be applied when the buyer indirectly obtained the same percentage of shares because it was acquired by a third company which already owned some of those shares. In this earlier decision, the Court reasoned that it was not possible to read into the contract an obligation to pay the agreed price also in case of indirect ownership, as the contract provided that price for direct ownership.210 If the parties had desired to extend that price to indirect ownership, they could have expressly regulated that. Commercial parties would appreciate the latter approach, whereas they might find that the former created significant uncertainty. In contracts that have been carefully negotiated, significant terms such as the restriction on transferring a concession to third parties should be expected to be expressly regulated – among other things, because they would have an impact on other parts of the contract, such as the price. If the contract is silent on those issues, the reason is probably either that the parties did not want to regulate that matter, or that they could not reach an agreement on how to regulate it. In either case, it does not seem appropriate to read a term into the contract. 209

This dispute was decided by the Norwegian Supreme Court in Rt. 2005 s. 268.

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Rt. 1994 s. 581.

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The Comments to Article 5.1.2(c) could contribute to the attractiveness of the UPICC if they clarified that the purpose of the provision is to permit performance of the contract, and not to introduce new terms that would extend the obligations of the parties. (b) Competing Contract Regulation As explained in Chapter 1, contracts often contain detailed regulation of the manner in which the contract is to be interpreted and applied. Many of these contract terms may overlap with or contradict the provisions of the UPICC. In these situations, it is important to clarify whether the contract terms will be deemed to replace the competing rules of the UPICC, or whether they will be supplemented or overridden by the UPICC. Needless to say, commercial parties would prefer the former approach. (i) Notice of Defect Imagine a dispute arising out of a sales contract between two professional parties. The contract contains a regulation of the procedure that the buyer needs to follow to notify the seller in case the goods do not conform with the specifications. The contractually agreed notification procedure does not correspond in full with the notification procedure in the governing law – the rules of the governing law, however, are not mandatory. The seller argues that the notification was not made in accordance with the law. The Norwegian Supreme Court assumed that the contract regulation did not replace the rules of the governing law on notice of defect.211 What would the result be under the UPICC? Articles 7.2.2(e) and 7.3.2(2) of the UPICC regulate the notice that has to be given to the defaulting party in case of non-conformity of the performance with the contract requirements. Contracts often contain their own procedure on this matter and, as explained in Chapter 1, parties may on this basis develop guidelines on the performance of the contract. What if the procedure agreed in the contract is contested as violating the UPICC requirements, for example, the requirement that the notice be given within a reasonable time? If the UPICC are applied in addition to the contractual procedure, this may lead to uncertainty in the performance of the contract and should be avoided. To enhance the attractiveness of the UPICC, the Comments could clarify that the UPICC regulation is to be considered replaced by corresponding rules contained in the contract. (ii) Hardship A further example is found in Articles 6.2.2 and 6.2.3 providing for a duty to renegotiate the contract in case of hardship, and for the power of the courts to modify the contract in case the parties do not reach an agreement. Contracts often 211

Rt. 2012 s. 1779, paras 55–65.

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contain very detailed hardship clauses that may define the events triggering the duty of renegotiation more narrowly than Article 6.2.2. Also, the contract clause may regulate the consequences of hardship in a way that is narrower than Article 6.2.3 – for example, it may exclude the intervention of the courts to modify the contract. Would the broader regulation of hardship contained in the UPICC supplement the contract clause? Comment No 7 to Article 6.2.2 recognises that the parties may adapt the content of the Article to the specific situation, but it does not specifically address the question as to whether the provisions of the Article remain applicable as an underlying general basis, or whether they are replaced by the contract clause. (iii) No Oral Amendments Further examples may be mentioned where contract terms may risk being overridden by the UPICC. One such is the clause specifying that amendments to the contract may be made only in writing, see Section 1.5.1(c). This clause runs the risk of being overridden by Article 2.1.18 of the UPICC, which recognises so-called No oral amendments clauses but restricts their application by stating that a ‘party may be precluded by its conduct from asserting such a clause to the extent that the other party has reasonably acted in reliance on that conduct’. The No oral amendments clause has an important function in complex relationships, where a plurality of persons may be involved on behalf of both parties – technicians may be cooperating on the technical implementation, designers may be cooperating on the development of the product, marketing experts may be cooperating on the distribution of the product and so on. If every technical discussion between these teams of specialists were capable of amending the contract, it would be very difficult to have a complete overview of the contract terms at any time. For the purpose of ensuring predictability in the performance of the contract, it is important that amendments be discussed and decided at the appropriate level of the organisation and formalised in written amendments. To what extent would this be permitted under Article 2.1.18 of the UPICC? Illustration 2 in the Comment to Article 2.1.18 seems to suggest that the application of the clause may be restricted when one party has maliciously failed to draw the other party’s attention to the necessity of complying with the original terms of contract. In the complicated setting described, it may be difficult to determine the spirit in which the various teams of specialists carried out discussions within their areas of competence, how these discussions were understood by either party, how the teams understood their respective competences in respect of the overall contract and so on. Therefore, it could be helpful if the Comments clarified the relationship between the clause and Article 2.1.18 in situations such as that described here. A similar reasoning may be made in respect of Article 4.3(c) of the UPICC and the often very detailed contract terms regulating so-called variation orders. Article 4.3(c) provides that the conduct of the parties subsequent to the conclusion of the contract is a relevant circumstance in the interpretation of the contract, while the contract

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terms usually restrict the relevance of subsequent conduct and require that formalised procedures be followed. The 2016 edition has actually introduced a Comment to Article 4.3 going in this direction. The Comment seems to clarify that the interpreter may not override the wording of the contract, although the effect of this important statement is restricted by the quite careful style in which it is written: ‘As a rule the subsequent conduct of the parties can only be an interpretative tool, i.e. be used to explain or amplify, but not to contradict, the terms of the contract as originally agreed between the parties.’212 Article 4.3 regulates the interpretation of contracts – in particular, the circumstances that may be taken into consideration when interpreting contracts. Among these circumstances is, in letter (c), the conduct of the parties subsequent the conclusion of the contract. As I noticed elsewhere,213 it is advisable to clarify the relationship between this provision and the practice of issuing variation orders in construction contracts. Variation orders are a contractually regulated procedure aimed at ensuring that amendments to construction contracts are binding only if they were formalised according to the procedure described in the contract. This is meant to prevent the contract being amended in an informal way, and particularly to exclude that the conduct of party representatives who are involved in only part of the contract performance may be interpreted as a formal change of designs, plans or specifications. In complex contracts, where each party engages teams representing different skills and technologies, there is the need to coordinate inputs from the various teams. Contract management would be very difficult, if the contract could be changed on the basis of the conduct of someone who is involved in only part of the performance. There is a need to coordinate all the inputs before the contract can be changed. Hence the necessity to centralise and formalise the procedure for amendments. The 2016 edition has introduced a Section 3 in the Comment, specifying that, ‘Obviously, the more precisely the parties regulate the procedure for adjustments to the contract, the less relevant any informal conduct of the parties would be to the interpretation of the contract’. This is an important clarification of the relationship between Article 4.3(c) and the contract terms on variation orders, albeit a relatively careful clarification. This seems to take into consideration the needs of commercial practice. However, the new version of Section 4 in the Comment to the same provision seems to indicate that the UPICC prevail on the terms of the contract. The Comment refers to the practice to insert ‘No-oral modifications-clauses’. These clauses have a function similar to that of the previously described regulation of variation orders. The intention is to avoid unauthorised amendments in contract relationships where the contract is implemented by a plurality of representatives, as described. However, in respect of these clauses the Comment does not suggest that detailed contract wording may make the UPICC provisions redundant. To the contrary, the 212

Comment to Article 4.3, Section 3.

213

Cordero-Moss (2016b), pp. 1315f.

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Comment makes reference to the good faith-based rules of Articles 2.1.18 and 1.8. Hence, the Comment seems to promote the prevalence of the UPICC provisions over the contract terms. The mentioned advisability to clarify the relationship between the UPICC and contract terms is, therefore, still valid. (c) Discretionary Contract Rights The UPICC require that contractual rights giving one party unfettered discretion must be exercised in good faith. The aim of preventing abusive situations may be supported – however, contract terms permitting one party to exercise a right on the basis of its own discretion are not necessarily meant to create an abusive situation, even where that party exercises its discretion exclusively to further its own interest, as will be explained. (i) Subject to Contract In commercial negotiations the parties often execute a series of documents (letters of intent, memoranda of understanding, heads of agreement or the like) that may be so detailed that they could be deemed to be final contracts, were it not for the clause stating that the document does not represent a binding document. The purpose of this clause is to permit full and detailed negotiation of all aspects of the prospective deal, without being legally bound before the final contract is executed. Also, the text of the final contract often contains a clause specifying that the entry into force of the contract is subject to approval by the board of directors of one or both of the parties. The Comments to, respectively, Articles 2.1.13 and 5.3.1 of the UPICC reflect this practice and explain that these clauses are sufficient to prevent the parties being deemed to be bound by the contract. This is a welcome clarification. However, it seems that these clauses are not sufficient to avert application of the provision on negotiations in good faith contained in Article 2.1.15 of the UPICC. One of the areas of application of Article 2.1.15 is where negotiations are carried out without the intent of entering into a final contract. In commercial practice, clauses such as the abovementioned Subject to contract or Subject to board approval are meant to leave the parties discretion to walk out of the deal without exposing themselves to liability of the kind regulated in Article 2.1.15. A party may negotiate a plurality of deals and submit them to the management or the board in competition with each other; only one will be chosen; the other contracts will not be entered into. The party inserts the clauses discussed here for the purpose of making it clear that the final decision of entering into the contract will be taken after the negotiations have been concluded on the basis of that party’s own business interests, its financial position at that time, any available alternative options, its own strategy that may have been modified and might consequently deprive the deal of relevance and so on. By inserting these clauses, the party assumes that it has advised the other party and that therefore it will not incur any liability if it does not enter into the

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contract. Would these clauses achieve their goal, or would they be overridden by the UPICC? Comment 5 to Article 5.3.1, Illustration 7, seems to indicate that the party which has not obtained board approval is liable for having carried out negotiations in bad faith. It would contribute to the attractiveness of the UPICC if the Comments to Articles 2.1.13 and 5.3.1 clarified this aspect and confirmed that these clauses exclude liability under Article 2.1.15. (d) Conclusion The 2016 edition of the UPICC had the purpose of highlighting that the UPICC are suitable to govern not only discrete contracts, but also more complex, long-term relationships. In order to underline this suitability, the 2016 UPICC have emphasised that they embrace the approach underlying the relational theory of contract, see Section 1.7. As a governing law, the UPICC supply the means to operate a contract with terms left open or subject to evolution, to take into consideration the requirements of good faith and cooperation between the parties, and to have regard to the necessity of considering the balance between the parties’ interests. This corresponds to the ideal of the relational contract theory: contract terms are simply a framework, and the legal relationship between the parties is based on mutual trust and on the shared interest of achieving common goals. However, not all contracts have these characteristics. In some relationships, the parties’ interests are antagonistic. If there are no common interests, it cannot be left to mutual trust alone to form the respective rights and obligations. In these contracts, the parties negotiate detailed regulation to protect their respective interests, they draft mechanisms to ensure their respective positions are safeguarded in case of supervening events, they rely on objective criteria that are carefully regulated, and they try to avoid discretionary adjustments. In these contracts, the instruments inspired by the relational theory of contract are not adequate. The UPICC recognise, in the Comments, that not all of their provisions are equally applicable to all contracts in all situations. Therefore, they open for the interpreter to evaluate whether and to what extent the UPICC provisions shall be applied. This is a particularly important question when the provisions open for interpreting the contract terms restrictively or expansively, or for adding implied obligations to the contract terms. If the contract terms have been carefully negotiated, it may be assumed that the parties have chosen to regulate their relationship in accordance with the agreed terms on the basis of a calculation of risks and benefits. Adding to or restricting the agreed terms may be an undesired surprise. It is, therefore, positive that the UPICC accept that their provisions are not necessarily adequate in all situations. However, the UPICC do not give precise guidelines regarding the relationship between their provisions and detailed contract regulation. It is, therefore, up to the interpreter to evaluate whether the UPICC provisions shall override the

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contract terms or be derogated from by them. The interpreter’s evaluation is rendered more demanding by the circumstance that the provisions that may override contract terms are mainly a manifestation of the principle of good faith, and that the UPICC state that the principle of good faith cannot be derogated from by contract terms. This creates a significant uncertainty about the application of the UPICC. 2.3.4 When the Transnational Law Has Gaps: Autonomous Interpretation In some situations, transnational sources do not provide a regulation. The doctrine of autonomous interpretation, meant to prevent different interpretations of transnational provisions, was developed under the CISG, see Section 2.2.5(c). Thus, the CISG aspires to being interpreted in a way that is not affected by the rules and principles of the system within which it is being applied – which would undermine its goal of representing a uniform regulation. The same principle is laid down in the UPICC (see Section 2.2.5(f)) and in many instruments of soft law, such as the UNCITRAL Model Law on Arbitration. The idea behind the principle of autonomous interpretation is commendable: if construction of the convention was affected by the legal tradition of each interpreter, the uniformity would be reduced to the wording of the convention – whereas the legal effects of the wording would reflect the differences in legal traditions. Research shows, however, that neither courts nor arbitral tribunals truly commit to the goal of contributing to an autonomous interpretation of the CISG.214 Similarly, the UPICC (Article 1.6) and the PECL (Article 1:106) contain guidelines for interpretation and application. In their first paragraphs, both Articles establish the principle of autonomous interpretation: the restatements of principles shall be interpreted having regard to their international character and bearing in mind their purpose to promote uniformity in their application. In other words, this paragraph aims to avoid the restatements being interpreted in the light of state laws. The second paragraph of both Articles provides that, in the case of lacunae, the interpreter will have to apply, to the extent that is possible, the general principles underlying the restatements. The autonomous interpretation is enhanced by this provision: lacking an express regulation of a certain aspect, the interpreter will first have to look at the principles that inspire this codification and construe them so as to elaborate a regulation in line with the fundamental ideas upon which the principles are based. It cannot be excluded, however, that even the underlying principles are not sufficient to provide the regulation for a certain aspect. In these cases, lacunae will 214

Petra Butler, ‘CISG and International Arbitration: A Fruitful Marriage?’ International Trade & Business Law Review 17 (2014), analysing three recurring issues: the applicability of the CISG, interests and contractual penalties. See also Judit Glavanits. ‘How Do You Mean It, CISG? Applying the CISG More “21st Century”-Way’. In UNCITRAL, Modernizing International Trade Law to Support Innovation and Sustainable Development, Volume 4 (Proceedings of the Congress of the United Nations Commission on International Trade Law, 2017), p. 333.

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have to be filled by applying the governing law, as is expressly stated in the PECL, Article 1:106(2). The ideal of uniformity that inspires the restatements, consequently, might fail if the solutions provided by state laws differ from state to state. The UNIDROIT document on model clauses identifies some examples of what Article 1.6 of the UPICC defines as gaps:215 Indeed, comprehensive as the UNIDROIT Principles are, there are still issues which fall within their scope but are not expressly settled by them (e.g. specific cases of negotiations in bad faith (see Comment 2 to Article 2.1.15 UNIDROIT Principles 2010); the extent of the duty of co-operation (see Comment to Article 5.1.4 UNIDROIT Principles 2010); specific duties to preserve the other party’s rights pending fulfillment of a condition (see Article 5.3.4 UNIDROIT Principles 2010); etc.).

A further example follows in the next section of failure by the UPICC to provide a uniform regulation where the national laws diverge – the gap is in the field of force majeure (see Section 3.5.3). As Section 2.3.4(a) will show, the CISG regulation of force majeure is also not free for challenges. (a) The UPICC: Force Majeure and Choice Between Contracts Assume that a seller has entered into a plurality of contracts with several buyers for the sale of its products. If a force majeure event prevents the production of part of the volume that the seller has committed to its buyers, the position of the seller will vary according to the governing law. As will be seen in more detail in Section 3.5.3(a), if the governing law is Norwegian, the seller will be under the obligation to supply in time, to the fullest possible extent, the first commitment, and will not be responsible for non-performance of the other contracts. If the governing law is Italian or German, the seller will be entitled to reduce the supplies to each buyer pro rata. If the governing law is English, the seller will remain under its full obligations and will not be excused by frustration of the contract, assuming the contract does not provide for this eventuality. One of the most important functions attributed to transnational law is to eliminate discrepancies such as these, and to provide a uniform and reasonable treatment that can be used to govern international contracts in respect of the expectations of the parties. Would the UPICC succeed in giving a harmonised solution? As opposed to the example of the irrevocable offer made in Section 2.3.2(b), the matter of allocation of risk is within the freedom of contract, and therefore is capable of being harmonised by transnational sources. However, the UPICC do not contain an answer to the 215

Model clauses www.unidroit.org/english/principles/modelclauses2013/modelclauses-2013.pdf, Comment 1.1(3).

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situation arising in the case of partial impediment and the plurality of creditors. Article 7.1.7 of the UPICC regulates force majeure circumstances preventing in total and in part the contractual performance, but it does not regulate the allocation of risk in cases of the plurality of creditors. Article 8:108 of the PECL has similar content. How can this lacuna be filled? In the case of partial impediment and the plurality of creditors, it does not seem that the interpretation rules contained in Article 1.6, or even the reference to usages of Article 1.9 of the UPICC can offer any specific help. Principles underlying the codification, referred to in Article 1.6, do not seem to be relevant to this particular situation. In 2010, a Chapter 11 was added to the UPICC dealing with the plurality of obligors and of obligees. Article 11.1.9 allocates obligations pro rata among the obligors, when these are jointly and severally liable towards another party. This, however, regulates the situation when a plurality of parties has assumed the same obligation towards another party, or when a plurality of parties is entitled to the performance of the same obligation by another party. This is quite a different situation from the one envisaged here. In our scenario, there is a plurality of discrete bilateral contracts, and none of the buyers has any rights or obligations towards each other. A rule that assumes joint and several liability, as with the provision of Article 11.1.9, therefore, cannot be considered relevant and the underlying principle is of no help. It could be possible to interpret Article 7 on the basis of an analogy with the solution presented by civil law systems. As mentioned, the civilian solution provides for a corresponding reduction of the performance in case of partial impediment and is construed to permit a pro rata reduction among the various creditors. However, how could such an interpretation by analogy with the state laws of the civil law system be compatible with the abovementioned Article 1.6, which wishes to avoid that the UPICC are interpreted in light of state laws? As far as Article 1.9 is concerned, referring to usages and practices, it does not seem easy to determine what generally recognised usages might say in this situation. The principle of rebus sic stantibus, which is the expression of the force majeure rule in the transnational law, does not seem to have generally recognised rules on partial impediments and the plurality of creditors. Therefore, the consequences of the situation arising in our scenario have to be solved by applying the governing law. In this situation, in conclusion, transnational law has not achieved its aim of providing a uniform regulation of international contracts. 2.3.5 When the Transnational Law Needs Interpretation: Autonomous Interpretation The principle of autonomous interpretation applies not only when soft law sources have gaps, but also when the meaning of the provisions is to be ascertained. An autonomous interpretation aims at construing and applying a rule in a uniform way that is common to all countries that have adopted or ratified the instrument. It assumes that a court avoids special interpretations due to peculiarities of its specific national system, and it requires that a court take into consideration the construction

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and application of the instrument in other countries as a parameter for its own interpretation. The concept of autonomous interpretation was introduced in the CISG, see Section 2.2.5(c). For the purpose of facilitating an autonomous interpretation, numerous databases and digests collect and comment on court decisions and literature on these sources. The already mentioned Unilex216 collects materials on the UPICC and on the CISG. Material on the CISG can also be found in the CLOUT database.217 In this publicly available database, the UNCITRAL collects court decisions on the CISG. Perhaps the most comprehensive database on the CISG is that administrated by Pace Law.218 This database requires a login, whereas the other mentioned databases are publicly accessible. Material on the application of the UNCITRAL Model Law and of the New York Convention may be found in CLOUT. Furthermore, the UNCITRAL Secretariat has compiled a guide on the New York Convention219 and, in addition, it has a webpage on the New York Convention, containing among other things a guide to the application of the Convention and collecting court decisions.220 The guide and the webpage are publicly available. A digest of court cases on the Model Law was published by the UNCITRAL in 2012.221 Moreover, court decisions relevant to arbitration, including court decisions applying the public policy defence, are reported in the ICCA Yearbook Commercial Arbitration.222 Comparative collections have been published, for example, by the International Bar Association on public policy.223 As will be seen, however, the dissemination of case law and doctrine is not always sufficient to ensure a consistent interpretation of the sources of soft law.224 The aim of 216 218 219

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www.unilex.info. 217 www.uncitral.org/clout/showSearchDocument.do?lf=898&lng=en. https://iicl.law.pace.edu/cisg/cisg. UNCITRAL Secretariat, Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (2016), https://uncitral.un.org/sites/uncitral.un.org/files/media-docu ments/uncitral/en/2016_guide_on_the_convention.pdf. http://newyorkconvention1958.org/. www.uncitral.org/uncitral/en/case_law/digests/mal2012.html. Also available at www.kluwerarbitration.com. International Bar Association, Subcommittee on Recognition and Enforcement of Arbitral Awards, Report on the Public Policy Exception in the New York Convention (2015), https://uk.practicallaw .thomsonreuters.com/Link/Document/Blob/Icc585ac3773d11e598dc8b09b4f043e0.pdf?targetType=PLCmultimedia&originationContext=document&transitionType=DocumentImage&uniqueId=b783c322 c20e4d78-8cd6-80bce5136e85&ppcid=d99f1dae999247d49fb. For an analysis of autonomous interpretation of the CISG, see Franco Ferrari, ‘Autonomous Interpretation Versus Homeward Trend Versus Outward Trend in CISG Case Law’. Uniform Law Review 22.1 (2017), pp. 244–57. For a study of autonomous interpretation of Article 17A of the UNCITRAL Model Law on arbitration, regarding interim measures, see Jose F. Sanchez, ‘Applying the Model Law’s Standard for Interim Measures in International Arbitration’. Journal of International Arbitration 37.1 (2020), pp. 56ff.

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autonomous interpretation is not necessarily always in the mind of the courts,225 even when they apply uniform rules. (a) The CISG: Force Majeure and the Requirement of Beyond the Control Imagine a sales contract, under which the seller fails to deliver the goods according to the agreed timing. The seller could not fulfil its obligations towards the buyer because it could not produce the goods according to its plan. The production plan could not be respected because the seller did not receive its raw materials. The seller had entered into a procurement contract with a supplier of raw materials. Had the procurement contract been fulfilled by the supplier, the production plan would have been respected and the seller could have fulfilled its obligations towards the buyer. However, due to a force majeure event (see Section 3.5.3), the supplier is prevented from delivering the raw materials: an unforeseen accident blocks for days the only existing transportation route from the supplier to the seller (for example, the Suez Canal). None of the parties is to be blamed in this situation: the seller had diligently entered into a procurement agreement with a reliable supplier; the supplier had started transportation in time and was not involved in the accident that blocked the Suez Canal. Nevertheless, the goods are not delivered on time to the buyer. Who, between the seller and the buyer, is to bear the consequences of the accident in the Suez Canal? According to Article 79 of the CISG, a party is not liable for failure to perform its obligations if it proves that the failure was due to an impediment beyond its control, which was unforeseeable and that could not reasonably have been overcome. The seller has not been negligent in any way and cannot be blamed for not having received the raw materials. But is it excused under Article 79? Under a certain interpretation, particularly represented in the Scandinavian legal tradition, the sphere of control under Article 79 is the sphere of the control that can actually be exercised. After the supplier was chosen and the procurement contract is formed, the seller’s possibility to influence deliveries ceases. Therefore, what happens in the phase of delivery of raw materials is not within the control of the seller. According to this interpretation, the seller would be excused under Article 79. However, the CISG does not contain any reference to the diligence of the affected party as a criterion for exempting it from liability; in another context, the Convention confirms that diligence is not a criterion for excuse, and Articles 45(1)(b) and 61(1)(b) regulate that each party may exercise contractual remedies for non-performance against the other party without having to prove any fault or negligence or lack of

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See, for example, Giuditta Cordero-Moss, ‘National Report, Norway: Due Process’. In Franco Ferrari, Friedrich Rosenfeld and Dietmar Czernich (eds.), Due Process as a Limit to Discretion in International Commercial Arbitration (Kluwer Law International, 2020c), pp. 313–32, on Norwegian courts’ application of the Norwegian Arbitration Act 2004, which is based on the Model Law.

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good faith of that party, nor do they mention that any evidence of diligence would relieve the other party from its liability. Additionally, as seen in Sections 2.2.5(c) and 2.2.5(g) , the CISG does not contain any requirement that the parties act in good faith. The lack of any reference to good faith or diligence in Article 79 also makes it difficult to imply in its rule that the affected party may be exempted on the basis of the criterion of diligence (which prevails in civil laws, see Section 3.5.3). The Secretariat Commentary226 (the closest counterpart to an Official Commentary on the CISG) does not address the question of how the criterion of the sphere of control shall be interpreted – whether literally, or as a reference to the actual control and the criterion of responsibility. Bearing in mind that the CISG requires being interpreted autonomously, without reference to domestic legal systems, it seems appropriate to apply the literal interpretation and to see Article 79 as a reference to an objective division of the landscape into two spheres, that of the seller and that of the buyer, without reference to specific actual possibilities for exercising control. This is confirmed by case law, as summarised in the Digest edited by the UNCITRAL:227 Several decisions have suggested that the seller normally bears the risk that its supplier will breach, and that the seller will not generally receive an exemption when its failure to perform was caused by its supplier’s default.

This is confirmed by doctrine, which affirms that procurement risk falls within the sphere of the risk of the seller, and that, therefore, failure by the seller’s supplier is not deemed to fall outside of the seller’s sphere of responsibility (unless the relevant good has disappeared completely from the international market).228 This is confirmed by the Secretariat Commentary to the second paragraph of Article 79. The provision of the second paragraph applies to failure by subcontractors and says that the seller may be excused in case of failure by subcontractors, only on the condition that the impediment affects both the seller and the subcontractor. The Secretariat Commentary specifies that this provision does not include suppliers of raw material or of goods to the seller.229 Failure by the supplier is, therefore, to be 226

227

228

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Text of draft Convention on Contracts for the International Sale of Goods approved by the United Nations Commission on International Trade Law together with a commentary prepared by the Secretariat (A/CONF./97/5). UNCITRAL, Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods (2016), https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/cisg_di gest_2016.pdf, Article 79, para 11. See Schwenzer and Schroeter (2022), Article 79, paras 3, 12, 27 and 38; Brunner and Gottlieb (2019), Article 79, paras 12f. See also Dionysios P. Flambouras, ‘The Doctrines of Impossibility of Performance and Clausula Rebus Sic Stantibus in the 1980 Convention on Contracts for the International Sale of Goods and the Principles of European Contract Law: A Comparative Analysis’. Pace International Law Review 13 (2001), pp. 261–93, with references to the literature and case law in footnote 20. UNCITRAL Secretariat Commentary (see n. 226), p. 172.

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distinguished from failure by a subcontractor, and is subject to the general rule of the first paragraph, which shall be interpreted strictly and without reference to the seller’s diligence. However, this is not the only way of understanding the criterion of ‘beyond the control’. Article 79 of the CISG may be interpreted differently, depending on the interpreter’s legal tradition – something that has been defined as ‘troubling’.230 Because of the plurality of interpretations of Article 79, an opinion was rendered by the CISG Advisory Council. The Council was established in 2001 by the Pace Institute of International Commercial Law and by the Centre for Commercial Law Studies of Queen Mary University of London.231 It is composed of international experts who render opinions on controversial issues in the interpretation of the CISG, with the purpose of facilitating an autonomous interpretation. In its Opinion No 7 the Advisory Council affirmed that: Several courts and arbitral tribunals have addressed the question whether the seller may be excused due to an impediment allegedly beyond the control of a supplier to whom the seller looks to procure or produce the goods. In a handful of cases, the seller’s plea to be excused has been granted, but in the majority of cases it has been held that the requirements of Article 79 have not been satisfied, even when the supplier’s failure to deliver conforming goods was totally unforeseeable to the seller.232 ... There is a consistent line of decisions suggesting that the seller normally bears the risk that third-party suppliers or subcontractors may breach their own contract with the seller, so that at least in principle the seller will not be excused when the failure to perform was caused by its supplier’s default.233 ... Although a seller who depends on ancillary suppliers cannot always control the conformity of the goods, it seems fair to assign to the seller the risk of nonconformity and resulting damages for non-conformity as part of the overall procurement risk borne by sellers.234 ... Attributing to the seller the responsibility for the supplier’s actions under Article 79(1) appears consistent with a sound policy of placing the risks

230

231 232

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Peter Schlechtriem, Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd ed. (Oxford University Press, 2010), Article 79, para 11, footnote 28 of the third edition. In the fifth edition of Schwenzer and Schroeter (2022), the qualification as ‘troubling’ has been deleted, but reference to the different interpretations as influenced by the legal tradition has been maintained: see Article 79, para 12, footnote 32. www.cisgac.com/. See the CISG Advisory Council Opinion No 7 in Alejandro M. Garro, ‘Exemption of Liability for Damages under Article 79 of the CISG’. CISG Advisory Council Opinion No. 7 (2007), https://cisgac.com/opinions/ cisgac-opinion-no1-copy/, para 15. Garro (2007), para 18. 234 Garro (2007), para 23.

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the role of transnational law involved in non-conformity on the party who is in the best position to avoid or minimize those risks.235

The degree to which the CISG influences domestic law is said to be one of the elements favouring an autonomous interpretation of the CISG.236 An interesting demonstration of the impact of legal tradition on the interpretation of what constitutes an event beyond a party’s control is given by Norwegian law. Norwegian law (like the law of the other Nordic countries) is particularly interesting in respect of the CISG, because it has adopted the Convention as a basis for its own domestic law. Norwegian law transformed the CISG into a domestic statute applicable to all sales governed by Norwegian law, both domestic and international. The statute originally contained a few adjustments for international sales that were later replaced by a reference to the CISG. The provision on ‘beyond the control’ was implemented in § 27 of the Act on Sale of Goods, applicable to all sales, both domestic and international – the latter because this provision is the direct translation into Norwegian of Article 79 of the CISG.237 The provision introduced the concept of an impediment beyond the control of the prevented party.238 By introducing this concept, the legislator intended to mitigate the then existing regime, which was based on strict liability.239 As seen, in the CISG, the criterion of the sphere of control seems to serve to determine the allocation of risk between the parties, and therefore to represent a border between what abstractly falls within the sphere of the seller and what falls within the sphere of the buyer, irrespective of the factual circumstances of the specific case, the diligence of the parties and so on. Interpreting the criterion in the same way would have led to a very strict regulation under Norwegian law; this, however, would have contradicted the legislator’s intention, as seen. Therefore, the criterion of the sphere of control is interpreted by part of Norwegian legal doctrine240 not, as in the prevailing interpretation of the CISG, as having an abstract understanding of each party’s sphere of control, since this would have probably rendered the Norwegian regulation even stricter than prior to the enactment of the Sale of Goods Act. The criterion is interpreted on the basis of the actual sphere of control of each party. If one party actually has the possibility of influencing a certain process, then events caused by that process are to be deemed within the sphere of control of that party. Norwegian doctrine also emphasises that, even if a party 235 237

238 239

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Garro (2007), para 25. 236 Glavanits (2017). There is a discrepancy that, however, is not relevant here. For an analysis, see Giuditta Cordero-Moss, ‘Forstyrrelser i leveransekjeden, force majeure og kontrollansvaret’. Festskrift for Lasse Simonsen (forthcoming). Sale of Goods Act of 13 May 1988 No 27, § 27. Ministry of Justice’s Report on the Sales of Goods Act and on ratification of the CISG, Ot.prp.nr. 80 (1986– 87), pp. 38 ff. and, extensively on the preparatory works in this context, Viggo Hagstrøm, Obligasjonsrett, 3rd ed. (Universitetsforlaget, 2021), pp. 530f. Hagstrøm (2021); Lasse Simonsen, Avtaler om bygging og kjøp av bolig (Gyldendal, 2022), pp. 388f., 393f.; Anders B. Mikelsen, Hindringsfritak. Det såkalte kontrollansvaret i kjøpsloven § 27 (Gyldendal, 2011), p. 166f.

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has started a process, this in itself does not mean that any events occurring in the course of that process are in the sphere of control of that party. The test must be if that party actually had the possibility of being able to influence the part of the process in connection with which those events occurred. Hence, the decision in this case would be opposite to the outcome under the CISG: the seller chose the supplier, and this choice is certainly within the seller’s sphere of control (the seller could have chosen another supplier and then the default would not have happened). However, the seller has no actual possibility of influencing the performance of the supplier, therefore any impediment in connection therewith is to be deemed outside of the seller’s sphere of control.241 The criterion of the sphere of control, although it is a word-by-word implementation of the CISG, is applied in a significantly different way from the criterion contained in the CISG: not as a way of allocating the risk between the two parties, but as a way of determining whether the affected party had the possibility of being able to control the impediment. The interpretation of this criterion resembles, therefore, the regime that prevails in Germany, where the criterion for exemption from liability is not the sphere of control, but the responsibility of the affected party. It is not unlikely that similar discrepancies may occur when the force majeure provision of the CISG is applied, which served as a model for § 27. It must be mentioned, for the sake of completeness, that this doctrinal interpretation is not unanimous and is not shared by Norwegian courts.242 2.4 Conclusion The foregoing shows that transnational instruments are a useful supplement to the governing law for specific and technical aspects of commercial relationships. If they are enacted as binding instruments, they will apply directly; if they are soft law, they will need to be incorporated by the parties unless they reflect trade usages. Otherwise, they can be used as a means to interpret the governing law, or to corroborate an outcome based on the governing law. The legal effects of a contract do not flow simply from the contract itself but are a result of the combination between the contract and the governing law. In particular, the governing law influences the interpretation and construction of the contract. In addition, the governing law plays an important role in filling any gaps that the contract might have; moreover, mandatory rules of the governing law will override 241

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Hagstrøm (2011), Section 5.3. Hagstrøm’s interpretation is based on a Supreme Court decision rendered in 1970, long before the implementation of the CISG in the Norwegian system. However, he refers to this decision as correctly incorporating Norwegian law after the enactment of the Sale of Goods Act. See also Mikelsen (2011), p. 33. In Rt. 2004 p. 675 (confirmed in HR-2022-192-A in the field of consumer protection) the Supreme Court affirmed that, in the context of defects of generic goods, the liability is strict, and the test will be whether the defects objectively are within the sphere of control of the seller. In this context, therefore, the Supreme Court has rejected the test of actual control and is more in line with the regulation contained in the CISG.

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any regulation to the contrary that the contract might contain. As will be seen in Chapter 3, this means that the wording of one and the same contract may have different legal effects depending on the governing law, and that the transnational law does not manage to overcome these differences and create a harmonised regime. This does not mean that the transnational law may not regulate international contracts. Contract laws usually do not contain many mandatory rules; therefore, the parties might not even notice that the contract is regulated by a certain governing law. In the absence of mandatory rules (i.e., within the scope of the freedom of contract granted by the governing law), the parties are free to use their contract to develop practical mechanisms to respond to the needs of the specific case. Within this scope, and as long as there are no interpretative challenges, transnational sources thrive: commercial practice and transnational sources provide useful regulations and models, and the parties develop mechanisms for the regulation of their respective interests that do not depend on the governing law and may be used across the borders. What the contract and the incorporated transnational law might not achieve, however, is to harmonise the general interpretation, construction and application of contracts. These depend on the general contract law, which, in turn, is a result of each system’s legal tradition. Unless transnational law is interpreted and applied by a centralised court that, over time, may create a coherent body of jurisprudence, its application will be tainted by the interpreter’s own legal tradition, thus impairing the desired harmonisation.243 Absent a unitary legal tradition, aspirations to create a coherent jurisprudence will probably be made difficult by the fragmentation of arbitration, as will be seen in Section 3.7.244 Commercial arbitration is carried out in a large variety of institutions in all regions of the world, and many proceedings are ad hoc and therefore outside of the framework of any institution; the more or less systematic publication of commercial awards organised by some institutions is not capable of giving any significant harmonisation to such a fragmented picture. A significant number of commercial disputes are decided by arbitrators appointed by private parties according to the most disparate criteria, and awards are written with the sole purpose of solving the particular dispute and with the awareness that they will not be read by anyone else besides the parties involved. Sometimes awards do not even need to state reasons for the decisions. Not only is coherence of arbitration practice not a goal that the commercial tribunals wish to pursue to a particularly high degree; even if it were a goal, it would be impossible to achieve in such a multifaceted system. 243

244

I am launching a multidisciplinary research project aimed at verifying to what extent the use of standardised English language contracts may lead to a uniform legal frame for international contracts. A description of the research idea may be found in Giuditta Cordero-Moss, ‘Non-National Sources in International Commercial Arbitration and the Hidden Influence by National Traditions’. Scandinavian Studies in Law 63 (2016a), pp. 23–44, see particularly Section 4.1. As well as by the ultimate control of judicial courts over arbitral awards. Courts may not review the awards, either in terms of the merits or in regard of the application of the law. However, if the award disregards particularly important principles of the legal system, it may be deemed, inter alia, to violate public policy and thus be ineffective. For an analysis of the matter, see Chapter 5.

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3 The Impact of the Governing Law

As seen in Chapter 1, international contracts are often written without regard to the governing law – on the assumption that the terms of the contract are sufficiently clear to exclude the necessity of having to consult the governing law, and with the awareness that there is a risk that some of the clauses may not be enforceable under the governing law. This chapter will analyse the consequences of this attitude: what happens if a contract is drafted without taking into consideration the governing law? Firstly, the governing law may have a significant impact on the interpretation and construction of a contract. Secondly, the governing law may have mandatory rules or default rules that regulate the object of the contract. These rules may supplement or replace the contractual provisions. Thirdly, the governing law applies to all issues that are relevant to the contractual relationship but are not strictly contractual – such as the issue of legal capacity of the party signing the contract, the passage of title to the sold goods, the effects towards third parties of security interests, the validity of a board resolution upon which the contract is conditioned and so on. As Section 4.4 will show, the law applicable to each of these issues is not necessarily the same law that governs the contract. Assuming that the parties have regulated their transaction with the intention that the contract should be the only and exhaustive regulation of their relationship, we can envisage the following scenarios: (i) the contract regulates aspects that are already regulated by the governing law, (ii) the contract regulates aspects that are not regulated by the governing law, (iii) the contract does not regulate aspects that are regulated by the governing law, and (iv) neither the contract nor the governing law regulate certain aspects. Each of the scenarios in which the contract overlaps, conflicts with or supplements the governing law, can in turn be divided into two, according to whether the relevant rules of the governing law are mandatory (that is, if the governing law specifies that those particular rules cannot be derogated from by contract), or whether they are default rules (that is, if the governing law permits the contract to regulate the subject matter in a way that is different from the regulation provided for by law). Perhaps what is even more important than the contract’s compliance or noncompliance with the governing law’s provisions (whether mandatory or not), is the question of how the contract will be interpreted and construed. As we will see, the

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construction of a contract is highly influenced by the principles underlying the applicable contract law and is intertwined with the four scenarios described.1 I will deal in the following sections with the different approaches to contract construction in the common law and in the civil law. Some voices deem these differences to be overrated or irrelevant to commercial contracts; however, as the following sections will show, the respective approaches may lead to opposing results. I will start with a short introduction to the main differences in the approaches to the interpretation and construction of contracts in the traditions of the common law (Section 3.1) and of the civil law (Section 3.2). This overview will be followed by an analysis of the extent to which common law and civil law may be deemed to converge, and the relevance that this convergence has to the question of the interpretation, construction and application of contracts (Section 3.3). I will then consider the impact of the governing law regarding the interpretation and construction of the contract, analysing what the consequences are of the abovementioned scenarios of overlap, conflict and supplementation between the contract and the governing law (Sections 3.4 to 3.6). Finally, I will discuss to what extent international arbitration is immune from the pluralism that follows from the influence that legal traditions have on the interpretation of contracts (Section 3.7). 3.1 English Law Privileges Predictability As mentioned in the course of Chapters 1 and 2, the common law and the civil law approach to the interpretation of contracts are quite different. Under English law, the interpreter of a contract is expected to establish the mutual intention of the parties on the basis of the document itself. The wording of the provisions has to be understood according to its plain and literal meaning: even if the interpreter attempts to read the provisions in a manner that does not lead to absurdity2 or inconsistency in terms of the remaining provisions,3 it will not be possible to construe the contract in a manner that runs against its language. A famous restatement of the principles on interpretation of contracts made by Lord Hoffmann4 renders the interpretation of contracts more lenient to adapting the wording to the purpose of the contract: the interpreter may take into account the factual background of which the parties could reasonably have had knowledge at the 1

2 3 4

Taking the same position is Simon Whittaker, ‘On the Development of European Standard Contract Terms’. European Review of Contract Law (2006), pp. 63ff. Whittaker introduces further examples of the impact of the legal tradition on the interpretation of contracts, which are not mentioned here, in particular, on exemption clauses and variation clauses. Investors Compensation Scheme Ltd v. West Bromwich BS [1998] 1 WLR 898 (HL). Watson v. Haggit [1928] AC 127. Investors Compensation Scheme Ltd v. West Bromwich BS [1998] 1 WLR 898 (HL), pp. 912f.

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moment of entering into the contract – the so-called factual matrix of the contract. To a certain extent, the factual matrix of the contract integrates the contract language. However, it does not extend to aspects that may have considerable relevance: thus, it is not permitted to consider, when interpreting the contract, the previous negotiations of the parties,5 the parties’ declarations of subjective intent6 and the subsequent conduct of the parties.7 Furthermore, this purposive rather than literalist approach does not go so far as to permit replacing the bargain that was actually made by the parties with one which the interpreter deems to be more reasonable or commercially sensible; this is not allowed under the English law on contract interpretation.8 The court cannot re-write the parties’ bargain in the name of commercial sense, and commercially unattractive or unreasonable results have to be accepted, as long as they follow from the wording that the parties have agreed to. The only situation in which a court may change the term of a contract is when it is clear that the written term did not reflect the parties’ intention.9 This, however, requires not only that it is clear that there was a mistake in the contract, but also that it is clear what the parties intended to say.10 The importance of the literal interpretation is also strengthened by the interpretation rule according to which reference in the contract to a certain case will exclude that the contract applies to other corresponding cases that have not been expressly mentioned: expressio unius est exclusio alterius.11 The English interpreter, furthermore, has little possibility of filling in the gaps in the contract by assuming implied terms. Some acts have introduced statutory terms that are to be deemed as implied terms of the contracts falling within the scope of those acts (for example, the UK Sale of Goods Act 1979). In the absence of statutory terms, however, the general rule is that a court has only to interpret the contract that the parties have made and is not to make the contract for the parties.12 The courts do not fill in gaps in the contract, even if it would be reasonable to do so; they only fill in gaps where it is necessary to give business efficacy to the contract. In addition, the implied term may not contradict expressed terms of the contract, and inclusion of the implied term must be so obvious that it goes without saying (which 5

6 7 8 9 10 12

Merthyr (South Wales) Ltd v. Tydfil County Borough Council [2019] EWCA Civ 526; Schofield & Anor v. Smith & Anor [2022] EWCA Civ 824. Schofield & Anor v. Smith & Anor [2022] EWCA Civ 824. Kason Kek-Gardner Ltd v. PCL [2017] EWCA Civ 2132. Charter Reinsurance Co Ltd v. Fagan [1997] AC 313. MonSolar IQ v. Woden Park Ltd [2021] EWCA Civ 961. Chartbrook Ltd v. Persimmon Homes Ltd [2009] UKHL 38. 11 Hare v. Horton [1883] 5 B & Ad 715. Marks & Spencer Plc v. BNP Paribas Securities Services Trust Co [2015] UKSC 72; Wells v. Devani [2019] UKSC 1106. See also Lomas v. JFB Firth Rixson Inc [2012] EWCA Civ 419; UTB LLC v. Sheffield United Ltd [2019] EWHC 2322; Wales v. CBRE Managed Services Ltd [2020] EWHC 16 (Comm); Russel v. Cartwright & Ors [2020] EWHC 41 (Ch); Taqa Bratani Ltd v. Rockrose UKC88 LLC [2020] EWHC 58; Bank of New York Mellon (International) Ltd v. Cine-UK Ltd [2022] EWCA Civ 1021.

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assumes, however, that both parties are satisfied with the implied term, and renders this alternative fairly unviable when the parties have conflicting interests or motives).13 Thus, the courts did not imply a term to prevent the literal application of a Swap agreement, and accepted that a party could, by not exercising its right to terminate the contract early, indefinitely preclude payment of its debt – see Section 2.3.2(c).14 Similarly, courts did not imply a term that could suspend, for the duration of the lockdown imposed during the COVID-19 pandemic, the obligation to pay rent for commercial premises operating as a cinema.15 Not only can the terms of the contract only be integrated to a restricted extent, the extent to which the terms of the contract may be corrected by applying principles such as good faith or reasonableness is also negligible in commercial contracts.16 The court must identify what the parties have agreed, not what the parties should have agreed if they had known better.17 It is not unusual to read English court decisions that give effect to the wording of a contract, while at the same time admitting that they consider the result unsatisfactory.18 For example, if the parties have stipulated sufficiently clearly in the contract the legal consequences of a default, and if the stipulation does not violate the mandatory rules of law, those consequences will be enforced, even if it may be unfair to do so. In a contract for the lease of a computer, for example, the contract entitled the leasing company, in case of a breach by the lessor of the obligation to pay the instalments punctually, to recover possession of the computer and to claim payment of the overdue unpaid instalments, as well as payment of all the future instalments that were not yet due and payable at the moment of terminating the contract. The court realised that the contract regulation would lead to the leasing company obtaining the possession of the computer (that was later sold to a third party), as well as the full price for the same computer. The court also realised that this result would have been illegal if the contract had been worded in such a way that the payment of the full price could be interpreted as being a penalty on the defaulting party. However, the court observed that the terms of the contract were such that the payment of the full price could not be interpreted as a penalty, but as a consequence of a breach of condition and therefore as a repudiation of the contract. Repudiation of the contract entitles, under common law, the innocent party to obtain the full value 13

14 15 16 17 18

See Hugh Beale, Chitty on Contracts, 34th ed. (Sweet & Maxwell, 2022), paras 16–005 and 16–019. This has permitted the development of sets of implied terms for various types of contract; see Whittaker (2006), pp. 62f. Lomas v. JFB Firth Rixson Inc [2012] EWCA Civ 419. Bank of New York Mellon (International) Ltd v. Cine-UK Ltd [2022] EWCA Civ 1021. See Whittaker (2006), p. 65. Cathay Pacific Airways Ltd v. Lufthansa Technik AG [2020] EWHC 1789 (Ch). See, for example, Lomas v. JFB Firth Rixson Inc [2012] EWCA Civ 419; Arnold v. Britton [2015] UKSC 36.

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of the bargain. In spite of the dissatisfaction created by this situation, the court decided that the wording of the contract should be given effect.19 This is a good example of what an appropriate wording can achieve: a result that would have been unlawful if it had been structured as a contractual penalty becomes enforceable if it is structured as a condition. The court is not concerned with the substance of the result, but with the formal drafting of the contract. Section 3.5.2, which deals with the clause of Liquidated damages, contains yet another example of the ability to draft around legal obstacles (see also Section 1.3): contracts often provide for the payment of a specific amount in case of default, and define it not as a penalty (penalties not being allowed), but as liquidated damages (it being allowed to determine in advance the amount of damages to be paid). Formulating the consequences of a default as breach of condition, liquidated damages or price revision permits the avoidance of application of the rules on penalty. Another example of the primacy of the contract language is a recent High Court decision that applied a Non-assignment clause in a contract to prevent a claim by an insurance company which had made a payment to a buyer and had thus subrogated against a seller.20 The contract was for the sale of aircraft, and provided that rights and obligations under the contract could not be assigned to third parties. The aircraft were delivered late which caused a loss for the buyer; the buyer had insured against such loss and obtained payment from its insurance company. The insurance policy was subject to Japanese law, and under Japanese law, the claim against the party who caused the loss (the seller) is assigned to the insurer by operation of law. The insurer initiated arbitration against the seller to recover the payment and the seller objected, stating that the contract (including the arbitration clause) had not been assigned to the insurer due to the Non-assignment clause. The High Court found that a Nonassignment clause does not prevent subrogation, and that that factual situation would be considered to be a subrogation under English law. The claim therefore could be made by the insurer notwithstanding the Non-assignment clause. However, under Japanese law the insurer was deemed to be an assignee, and this violated the contract language. The court recognised that commercial common sense suggested that the claim should be allowed but found that this was not sufficient to displace the clear language of the contract that prevented an assignment. In addition to having restricted access to imply terms, and to not being allowed to correct an unfair result of the agreed mechanism, an English court does not have access to pre-contractual negotiation or surrounding documentation in order to ascertain the common intention of the parties; and courts do not hear evidence of the parties as to what their intention was at the time of writing the contract.21 19 20

21

Lombard North Central plc v. Butterworth [1987] 1 All ER 267, Court of Appeal. Dassault Aviation SA v. Mitsui Sumitomo Insurance Co Ltd [2022] EWHC 3287 (Comm). Permission to appeal was granted and the appeal will probably be heard in 2023. Whittaker (2006), p. 64.

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In a decision that received considerable attention and was sometimes deemed to have changed the approach from literalist to purposive, the English Supreme Court has gone as far as affirming that the interpretation of a contract that is more consistent with the commercial purpose of the contract shall be preferred. However, the Court has been careful to underline that this assumes that that particular construction must be possible on the basis of the wording of the contract.22 Furthermore, as later case law mentioned in Section 3.3 shows, this has not changed the traditional approach in English law. This approach finds its historical explanation in the selective borrowing of the Roman law-based doctrines of natural law, which was carried out by the English lawyers who first systemised the law of contracts at the end of the eighteenth century.23 English lawyers did not borrow the naturalistic doctrines that classified contracts into different types, where each type had its own set of regulations that was deemed to express natural obligations attached to that particular kind of contract. Hence, English law failed to adopt a systematic set of rules for each contract type that could integrate or guide the interpretation of contracts. The court’s respect of the parties’ will was not mediated by the existence of a statutory or doctrinal set of rules governing the specific types of transaction. Consent by the parties was conceived not as consent to a type of contract with its immanent rules, but to the very words of the contract. This approach to the interpretation of contracts, which is opposed to the approach of the civil law systems, is today mitigated by a series of statutory rules that have created implied terms of contract similar to the declaratory rules that civil law systems attach to the various types of contracts. This is particularly true in the field of protection of the weaker contractual party, this being mainly identified with the consumer. In commercial contracts, statutory implied terms are less frequent. An English court is more concerned with accurately applying the terms laid down in the contract than with preserving the integrity of the abstract contract type or ensuring that the parties’ respective positions are balanced. Admittedly, English law maintains to this date the element of consideration; that is, the requirement that a contract, to be enforceable, must contemplate an exchange between the parties. A contract without consideration is not enforceable. This is based on the elaboration that the natural lawyers made of the Roman causa up to the eighteenth century, according to which a contract is enforceable only if it can be justified in philosophical terms by applying the virtues of liberality or commutative justice. This, however, should not lead the observer to the conclusion that English law recognises in the element of the consideration the same significance that the natural lawyers saw in it, and that therefore English law pays attention to ensuring the 22 23

Rainy Sky SA et al. v. Kookmin Bank [2011] UKSC 50, particularly at paras 21–13, 30, 34, 40, 43 and 45. See, for more extensive references, James Gordley, The Philosophical Origins of Modern Contract Doctrine (Oxford University Press, 1991), pp. 146ff., 159.

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equitable content of the contracts. Quite the contrary, as we will see in Section 3.6, the element of the consideration is essential for the existence of an enforceable contract, but the English court is expected to ascertain the formal existence of the consideration, not to examine the adequacy of the consideration. Evaluating the adequacy of the consideration – that is, verifying whether the contract is fair or not – is considered paternalistic and not in compliance with the expectations that English lawyers have in respect of their legal system.24 Even the equitable relief for a so-called unconscionable bargain, which could at first sight be deemed to be equivalent to an assessment of the transaction’s reasonableness, is not meant to reinstate the balance between the contractual parties but is based on its value as evidence that a fraud has taken place. A significant inadequacy of the consideration, in other words, might be considered as one of the elements to prove that a fraud has taken place and might therefore serve to exclude the enforceability of that contract even if the contract is binding in law. The question of ensuring fairness in the exchange, however, is not at all relevant. The attitude of English law towards the risk of being bound by a contract that is not fair is clearly expressed in the formula used by Lord Mansfield in 1778 and that is still often referred to: caveat emptor, let the buyer beware.25 It is not the legal system’s role to ensure that the parties’ interests are balanced. It is each party’s own responsibility to consider all risks and make appropriate provisions for them in the contract. This attitude is usually explained by reference to the central role that maritime and financial transactions have played and still play in the English system. In these highly professionalised settings, the interests of the operators are deemed to be better served by ensuring enforceability of the contracts according to their words rather than by intervening on the agreement between the parties in the name of an unpredictable justice. The English court does not have the task of creating an equitable balance between the parties but has to enforce the deal that the parties have voluntarily entered into. The parties are expected to take care of their own interests, and they expect from the system a predictable possibility of enforcing their respective rights in accordance with the terms of the contract. A correction or integration of these terms would run counter to these expectations and English courts do not, consequently, assume that role (unless specific statutory rules require them to do so, which happens mainly in the context of consumer contracts). This is seen as the most appropriate attitude for a system where commercial and financial business flourishes. As Chapter 1 showed, the primacy of the contract wording is also assumed in international contract practice.

24 25

See, for further references, Gordley (1991), pp. 146ff. See also Section 3.6.1. Stuart v. Wilkins [1778] I Dougl. 18, 99 Eng Rep 15.

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3.2 Civil Law Systems Privilege Justice, but to Different Extents Civil law systems have developed in quite a different way. Until the eighteenth century, continental Europe elaborated Roman law on the basis of natural law. The natural lawyers justified the legal effects of contracts on the basis of Aristotelian philosophy and its classification of the virtues. During the nineteenth century, the doctrine of natural law was abandoned in favour of a more positivistic–exegetic approach in France, and in favour of an historic–teleological approach in Germany. These two approaches influenced the remaining civil law countries, and against this background, civil law systems are divided into Romanistic (influenced by the French approach) and Germanic (influenced by the German approach) systems. The contract was, in the nineteenth century, deemed to be based on the parties’ will, not on virtues, duties or imperatives stemming naturally from human relations, as the natural lawyers had assumed earlier. The ideals of the French Code Civil are characteristic for the era in which the Code was conceived. Issued shortly after the French Revolution, the Code Civil is based on the desire to establish a liberalistic order where individuals enjoy the freedom to regulate their interests as they deem fit, where private property is respected, and the public system’s interferences are reduced to the minimum. Additionally, the ideals of the Enlightenment are clearly present, and the law is seen as a scientific system that consists of abstract rules with a perfect consistency with each other so that there is no need for subjective evaluations. The task of the judge is simply to apply these rules to specific cases, in a mechanical way, without any moral or social evaluation. The lawyer is aware of the possibility that the mechanical application of the law can sometimes bring forth unjust results according to the circumstances of the case, but this consequence of the formal rigidity of the system is gladly accepted in the name of the higher value of the predictability of the legal system. The only true law is deemed to be positive law; that is, the codified text of the law, and this has to be applied without making any recourse to natural reason or equity.26 The drafters of the French Code Civil clearly affirmed that an adult’s duty is to contract with prudence, and that the law owes him no protection against his own acts.27 The legal system’s task became one of respecting and enforcing the parties’ will, without evaluating it on the basis of equality in exchange or other criteria that had been central in natural doctrines. So far, this looks significantly close to the approach under English law. However, as opposed to English law, the continental legal systems had already adopted a developed system of regulations relating to the various types of transactions, based on the natural doctrines. Contracts had been classified into types, and to each type belonged a detailed list of natural obligations. These regulations were not abandoned during the nineteenth century since they had lost their aura of natural law 26

For a historical analysis and further references, see Gordley (1991), pp. 220ff.

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Gordley (1991), p. 201.

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and had become positive law. The respect of the parties’ will, therefore, was tempered with the application of the detailed rules on the various types of contract. Hence, continental lawyers interpreted and construed the contracts in the light of the concurring or integrating rules that the legal system had for every type of contract. In Germany, contract law was codified in 1900 in the Bürgerliches Gesetzbuch (BGB). The object of the codification was the elaboration of the law that had been carried out very actively by German legal doctrine during the preceding two centuries; legal scholars had devoted considerable energy to classifying and systemising primarily Roman law.28 The BGB thus codified the result of the scientific ideals of the eighteenth and nineteenth centuries: rules were expressed on the highest possible level of abstraction, whereby the internal consistency of the system was the ultimate goal. In addition to the ideal of scientific abstraction and consistency, the BGB was inspired by the ideal of liberalism, according to which individuals should be permitted to regulate their own interests as they deem fit and should be expected to take the responsibility thereof. In addition to the ideal of liberalism, the BGB also partially reflects the sociological engagement of the historic line of thought, as is witnessed by the few socalled general clauses contained therein: not abstract rules that simply require mechanical application by the court, but rules that contain guidelines (such as the rule on good faith in the performance of contracts in § 242 of the BGB) and require an evaluation by the court of the legal rule’s purpose and of the consequences of its application in the specific case. The social situation following the First World War, with dramatic hyperinflation, was the background for the Supreme Court’s active application of the general clause on good faith contained in § 242 of the BGB. This was used to revert the BGB’s focus on the will of the parties, and to privilege an equitable balance of the parties’ interests from a substantive point of view rather than from the formal application of the words of the contract.29 Since then, the German courts have applied § 242 so often and in so many active ways that a systematisation and classification of court practice requires a whole volume in the most acknowledged commentary on § 242.30 An interesting legal system to evaluate in this connection is that of Norwegian law. Norwegian law belongs to the Scandinavian sub-family of civil law and is based on the Germanic tradition. The example of Norwegian law is particularly relevant in the context of international commercial law, as Norwegian legal literature considers 28

29 30

On the characteristic features of the German law of contracts see, inter alia, Antonio Gambaro and Rodolfo Sacco, Sistemi giuridici comparati (Utet, 2002), pp. 339ff., and Konrad Zweigert and Hein Kötz, Einführung in die Rechtsvergleichung auf dem Gebiete des Privatrechts (Mohr Siebeck, 1996), pp. 130ff. RGZ 107, 18ff. See also, for further references, among others Zimmermann and Whittaker (2000), pp. 20ff. J. von Staudinger, Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen (Otto Schmidt/De Gruyter, 2019), § 241–3.

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the UPICC to reflect the general principles of the Norwegian legal system.31 The most influential treatise on Norwegian contract law often refers to the UPICC as reflecting Norwegian contract law’s uncodified principles.32 Of particular interest here is that Norwegian contract law has an overarching duty of loyalty between contract parties that may be compared to the likewise overarching principle of good faith in the UPICC, see Section 2.2.5(f). Admittedly, just like English law, Norwegian contract law is based on the principle that each party is responsible for its own evaluations and is expected to make adequate provisions to preserve its own interests. However, this is mitigated considerably by the general duty of loyalty between contract parties, that is, a duty to act in good faith and to take into consideration the other party’s interests when interpreting the contract, performing the contract or exercising remedies under the contract. This means that the obligations and remedies regulated in a contract may be integrated or restricted by further obligations and remedies that are not expressly provided for in the contract but are derived from the principle of loyalty. This is dramatically different from the approach under English law, see Section 3.1. Just like in English law, the interpreter is expected to be objective when interpreting, construing and enforcing commercial contracts entered into between professional parties. Commercial parties are expected to have evaluated carefully their respective positions and the effects of the agreement’s provisions. A 2016 Supreme Court decision33 affirms the principle that commercial contracts shall be construed objectively. However, this objective construction does not correspond to the approach of English courts. The court explained the meaning of objective construction thus: It does not mean that one is supposed to follow a purely literal interpretation. A series of elements will be relevant for interpreting [construing] the contract . . . The wording of the terms must be seen, inter alia, in light of their purpose, as well as of other considerations of fairness. 34

On the basis of this understanding of objective interpretation, courts may modify the agreed price mechanism if supervening circumstances show that a different method for calculating the price better reflects the original intention of the parties;35 they may read into the contract limitations that were not written;36 or they may read into the contract form requirements that were not written.37 Objective interpretation under Norwegian law, therefore, differs quite significantly from objective interpretation under English law.

31 32 33 35 37

See, more extensively, Cordero-Moss (2016b). Hagstrøm (2021), pp. 73 ff., 83 ff. References to the UPICC may be found throughout the text. HR-2016–1447-A (Norsk Gjenvinning). 34 HR-2016–1447-A (Norsk Gjenvinning), para 38. Rt. 1991 s. 220 (Sollia Borettslag). 36 HR-2016–1447-A (Norsk Gjenvinning). Rt. 2012 s. 1779 (Victocor).

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3.3 Convergence between Civil Law and Common Law? Comparative law research has proven that many of the contradictions that are traditionally held to exist among the various legal systems and, notably, between the common law and the civil law, can be reduced to a common core that is shared by most legal systems.38 While this common core may be found at a rather high level of abstraction, however, differences may persist and have great relevance on a more practical level. That two systems may achieve a certain result may justify the observation that there is a common core between them; however, if the techniques with which this result may be achieved differ in each of the systems, a contract written in a certain way may meet the requirements of one system but not those of the other. Hence, the result will be achieved in only one of the systems, notwithstanding the theoretical possibility of being able to achieve it in both. Contract drafters may not rely simply on the abstract common core; they should also take into consideration the specific requirements of the regulation in the relevant system. Traditionally, one of the main features distinguishing the common law and civil law in respect of contracts is the relationship between the agreed contract terms and the applicable law: civil law courts have more power to evaluate the fairness of the contract and intervene to reinstate the balance of interests between the parties; they are more concerned with creating justice in the specific case than with implementing the deal in the most predictable manner. In doing so, the civil law court is guided by general clauses and principles of good faith, reasonableness or fair dealing. The English law of contract does not have a general principle of good faith. Comparative studies have shown that the absence of a general rule on good faith does not mean that English law cannot achieve, in particular contexts, the same results that can be achieved in other systems applying the rule of good faith. Other legal techniques are applied to obtain results that are, in part, similar to a general duty of good faith. An often-quoted decision has expressed this clearly: English law has, characteristically, committed itself to no such overriding principle [as the principle of good faith] but has developed piecemeal solutions 38

Reinhard Zimmermann has largely proven that common law and civil law ‘were (and are) not really so radically distinct as is often suggested’, see The Law of Obligations: Roman Foundations of the Civilian Tradition (Oxford University Press, 1996) at p. xi. The Common Core of European Private Law, under the general editorship of Mauro Bussani and Ugo Mattei (Kluwer Law International, 2003), is perhaps the most systematic enterprise aimed at assessing the common core within European private law. Among the books published in the frame of this project is Zimmermann and Whittaker (2000), which has particular relevance to the topic of this book. Pointing out the convergence between common law and civil law, see Annuck de Boeck and Mark van Hoecke, ‘The Interpretation of Standard Clauses in European Contract Law’. In Hugh Collins (ed.), Standard Contract Terms in Europe: A Basis for and a Challenge to European Contract Law (Kluwer Law International, 2008), p. 244, reducing the persisting difference to a matter of time before the common law adopts the civilian approach (notably, in respect of the principle of good faith).

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the impact of the governing law in response to demonstrated problems of unfairness. Many examples could be given. Thus equity has intervened to strike down unconscionable bargains. Parliament has stepped in to regulate the imposition of exemption clauses and the form of certain hire-purchase agreements. The common law also has made its contribution, by holding that certain classes of contract require the utmost good faith, by treating as irrecoverable what purport to be agreed estimates of damage but are in truth a disguised penalty for breach, and in many other ways.39

However, as will be seen in the following sections, these piecemeal solutions do not necessarily always have the same scope of application as a general principle.40 In spite of the evolution during the last few decades, English courts are said to remain very conscious of the need to maintain commercial certainty in their approach to the construction of express terms, a consciousness which can be seen in their remaining degree of discomfort with recourse to ‘reasonableness’ in argumentation as to one or other competing interpretations of a contract term and their continued rejection of a general principle of good faith in the performance or non-performance of contracts.41

It is not always justified to generalise particular rules and elevate them to the status of expressions of a principle underlying the whole system, considering them as symptoms of a general convergence between the common law and the civil law. Admittedly, if the general principle of good faith does not exist in the English law on commercial contracts, it does not necessarily mean that other areas of English law 39 40

41

Brimham LJ in Interfoto Picture Library Ltd v. Stiletto Visual Programmes Ltd [1988] 2 WLR 615. That the English approach is not equivalent to a general clause as known in the civil law is shown by Whittaker (2006), pp. 64ff., and Hugh Collins, ‘Social Rights, General Clauses and the Acquis Communautaire’. In Stefan Grundmann and Denis Mazeaud (eds.), General Clauses and Standards in European Contract Law (Kluwer Law International, 2006), pp. 117 ff. The same is affirmed by Jonathan Mance, ‘Is Europe Aiming to Civilise the Common Law?’ European Business Law Review 18 (2007), p. 94 and footnote 45. On the different approach to the doctrine of good faith and fair dealing in English law and in the civil law jurisdictions see Goode et al. (2015), paras 16.43 ff., affirming that the good faith doctrine in the UPICC is used differently according to the legal tradition of the user: where the doctrine is invoked in a common law system, it can be seen as an attempt to introduce it in a legal system that does not have such a principle; where it is invoked in a civil law system, it simply reflects the important role that this principle has in civil law jurisdictions. As was observed, under the influence of, particularly, European law, ‘good faith may have made its mark on the surface of the law of contract, but it has hardly captured the hearts and minds of English common lawyers’: Roger Brownsword, ‘Positive, Negative, Neutral: The Reception of Good Faith in English Contract Law’. In Roger Brownsword, Norma J. Hird and Geraint Howells (eds.), Good Faith in Contract (Ashgate/Dartmouth, 1999), p. 15. The author supports a positive view of good faith, as it permits the judges to avoid what he defines as ‘contortions or subterfuges in order to give effect to their sense of the justice of the case’ (p. 25). However, the author points out that this view is ‘probably shared by no more than a minority of English contract lawyers’ (p. 25). See, for example, Michael Bridge, ‘Good Faith in Commercial Contracts’. In Brownsword et al. (1999), affirming that good faith gives too much power to the individual judges freed from the disciplined tradition of contract law, and pointing out that ‘visceral justice was, and remains in my view, an emotional spasm’ (p. 140), and that ‘law is a discipline, not a reflex’ (p. 150). Whittaker (2006), p. 65.

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do not operate with a principle of good faith.42 However, a principle applied in a certain context does not necessarily underlie the whole legal system. A principle might not be unknown in a certain area, but this does not automatically mean that it extends to other areas of the law within that system. This is true, for example, in respect of particular rules assuming good faith in English law; rules that do not necessarily extend their scope to have general validity for commercial contracts. Many situations that would be covered by a general principle are left out by the specific rules of English law and thus remain unregulated. For example, failure to give to the other party information relevant to that party’s evaluation of the risk or the value of the transaction is not penalised under English law as this conduct is not specifically regulated and does not violate any duty of loyalty between the parties, see Section 3.5.1.43 Even the doctrine of misrepresentation, which could at first sight be deemed to be equivalent to a duty to exercise good faith during negotiations, does not ensure the same results. False information given to the other party during negotiations gives rise to damages in tort; however, silence is not generally considered to be false information. Furthermore, the threshold for implying representations is high.44 Withholding relevant information during negotiations, therefore, does not constitute misrepresentation and the parties remain free to adopt such conduct without consequences.45 These features, among others, distinguish the common law from civilian traditions and, as seen in Chapter 2, from various transnational sources as well. As long as the UK was a member of the EU, it contributed to the extensive work on a European contract law that was mentioned in Section 2.2.5. Nevertheless, it was observed that European law in the sense of the domestic law of other Member States need have no impact on English law, and indeed it is hard to find many instances in 42

43

44

45

That relying on a monolithic view of legal systems may be misleading is convincingly argued by Michele Graziadei, who shows that notions of good faith are to be found in English law when looking beyond the narrow borders of contract law, notably in the field of fiduciary obligations: ‘Variations on the Concept of Contract in a European Perspective: Some Unresolved Issues’. In Reiner Schulze (ed.), New Features in Contract Law (Sellier European Law Publishers, 2007), pp. 321ff. The author underlines, thus, that the absence of a general notion of good faith in the restricted context of contracts (defined as commercial contracts) does not exclude its presence in the wider picture of English law. However, as is argued in this book, this shall not induce one into assuming the converse: that the presence of the good faith notion in the context of fiduciary obligations entails that the principle is also applicable to commercial contracts. In some situations, a duty of care arises between the parties; it does not seem, however, that negotiations of commercial contracts are within that number; see, for example, Denning LJ in Chandler v. Crane, Christmas & Co [1951] 2 KB 164 and see Ackner LJ in Walford v. Miles [1992] 1 All ER 453 (HL). Idemitsu Kosan v. Sumitomo [2016] EWHC 1909 (Comm); SK Shipping Europe Plc v. (3) Capital VLCC 3 Corp (5) Capital Maritime Trading Corp [2020] EWHC 3448 (Comm); Marme Inversiones 2007 v. Natwest Markets Plc [2019] EWHC 366 (Comm); Leeds City Council v. Barclays Bank Plc [2021] EWHC 363; Crossley & Ors v. Volkswagen AG & Ors [2021] EWHC 3444 (QB). Beale (2022), para 9-021f.

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the impact of the governing law which it has done so . . .. The same is true of European law as mediated through ‘soft law’, such as the Principles of European Contract Law.46

As was observed, ‘there remain very significant differences in the way in which courts in Member States interpret express terms and discover implied terms, itself reflecting wider features of the national laws and of legal principles’.47 This modest impact seems anyway doomed to fade away now that Brexit is accomplished and the UK is no longer expected to comply with harmonisation ambitions. As mentioned in Section 3.1, in the eyes of many commentators a Supreme Court decision of 2011, Rainy Sky,48 abandoned the traditional common law approach that gives priority to the letter of the contract and came closer to an approach more typical of the civil law, aimed at preserving a balance between the parties’ interests and based on the principle of good faith. This understanding was based, in particular, on the Supreme Court’s reference to commercial common sense and surrounding circumstances as elements to be taken into consideration when interpreting contracts. On the basis of this case law, commentators have observed that common law and civil law are now to be considered harmonised.49 This, however, has turned out be quite a hasty conclusion. Rainy Sky was followed by more case law. It may be of particular interest to mention some decisions rendered by Justice Leggat (as he then was),50 who suggested that English law is moving towards an implied principle of good faith, particularly for so-called relational contracts.51 Furthermore, the Supreme Court52 implied a duty to exercise contractual discretion in a rational way (the so-called Braganza duty). This applies whenever the contract confers on one party the power to determine a matter that affects the performance of the contract53 – for example, the power to determine whether 46

47 48

49

50

51

52

53

Hugh Beale, ‘English Law Reform and the Impact of European Contract Law’. In Stefan Vogenauer and Stephen Weatherill (eds.), The Harmonisation of European Contract Law (Hart Publishing, 2006), p. 37. Whittaker (2006), p. 63. Rainy Sky SA et al. v. Kookmin Bank [2011] UKSC 50. For an overview of the comments on this decision, as well as an analysis of the role of good faith in English contract law, see Michael Bridge, ‘Good Faith and the Common Law’. Uniform Law Review 22.1 (2017), pp. 98–115. Klaus Peter Berger and Thomas Arntz, ‘Good Faith as a “General Organising Principle” of the Common Law’. Arbitration International 32 (2016), pp. 169, 173, 175. For example, Yam Seng Pte Limited v. International Trade Corporation Limited [2013] EWHC 111 (QB); MSC Mediterranean Shipping Company S.A. v. Cottonex Anstalt [2015] EWHC 283 (Comm). Al Nehayan v. Kent [2018] EWHC 333 (Comm); Amey Birmingham v. Birmingham City Council [2018] EWCA Civ 264; Alan Bates v. Post Office Limited [2019] EWHC 606 (QB); Essex County Council v. UBB Waste (Essex) Ltd [2020] EWHC 1581; Candey Limited v. Bosheh & Anor [2022] EWCA Civ 1103, finding that a contract between a solicitor and a client containing a conditional fee agreement was not a relational contract. On relational contracts, see Section 1.7. Braganza v. BP Shipping Ltd [2015] UKSC 17. See also UK Acorn Finance Ltd v. Markel (UK) Ltd [2020] EWHC 922 (Comm). Cathay Pacific Airways Ltd v. Lufthansa Technik AG [2020] EWHC 1789 (Ch).

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certain documentation is satisfactory, or to approve the assignment of certain rights. According to the Braganza duty, this discretion may not be exercised in an arbitrary, capricious, irrational or perverse way. All this could prima facie be taken to correspond to the principle of good faith that is so central in German law, the duty of loyalty that is fundamental under Norwegian law, the principle of reasonableness that often appears in the PECL or the principle of good faith in the UPICC. As already mentioned, however, this conclusion is quite hasty. It should first be pointed out that Justice (as he then was) Leggatt’s decisions were criticised54 or reversed in appeal.55 Therefore, the new role of the principle in English contract law does not seem to be settled. Lord (as he now is) Leggatt is now a member of the Supreme Court of the UK, and it can be expected that his position on the principle of good faith will gain a more important role in English contract law. Even if the principle of good faith gained a settled role in English contract law,56 however, there would not be sufficient basis to assume that the traditional divide between common law and civil law has been overcome. This is because the content of the assumed principle of good faith in English law does not necessarily coincide with the content of the corresponding tenets in the civil law – not to mention that even within the civil law there is no unitary understanding of the principle.57 Justice Leggatt himself explained that the principle of good faith that he supports (and that was criticised in appeal) entails an obligation of ‘honesty’ and follows a ‘standard of industry’.58

54 55

56

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For an overview of comments and criticism, see Beale (2022), paras 2080–91. MSC Mediterranean Shipping Company was reversed on appeal: MSC Mediterranean Shipping Company S.A. v. Cottonex Anstalt [2016] EWCA Civ 789. The Court of Appeal reversed the High Court decision on another basis but found it advisable anyway to comment specifically on the part of the decision that made reference to the principle of good faith. The Court of Appeal affirmed that it was neither necessary not desirable to make reference to such principle: para 45. According to the High Court, the law has not yet reached a stage of settled clarity: Cathay Pacific Airways v. Lufthansa Technik AG [2020] EWHC 1789 (Ch). See also Russel v. Cartwight & Ors [2020] EWHC 41 (Ch). Furthermore, the Court of Appeal seems to be quite cautious in adopting the notion of relational contract, see Candey Limited v. Bosheh & Anor [2022] EWCA Civ 1103. For a thorough analysis of the issue in a series of both common law and civil law countries, see the Financial Market Law Committee, Duties of Good Faith in Wholesale Financial Contracts, November 2022, https://fmlc.org/publications/paper-dutiesof-good-faith-in-wholesale-financial-contracts/. This report concludes that there is no general duty of good faith under English law, and that the possibility of implying a good faith term is limited. See Zimmermann and Whittaker (2000), p. 672. On the different function of the principle of good faith in German law and in Italian law, see Hans Jürgen Sonnenberger, ‘Treu und Glauben-ein supranationaler Grundsatz?’ Festschrift für Walter Odersky zum 65. Geburtstag am 17. Juli 1996 (De Gruyter, 2018), pp. 705 ff. Yam Seng Pte Limited v. International Trade Corporation Limited [2013] EWHC 111 (QB), para 137–45.

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This principle’s range is so modest59 that Justice Leggatt does not think that its application would lead to a different way of interpreting contracts than what English courts have practised in the past.60 Among other things, the principle does not require that a party takes into consideration the interests of the other party when it exercises a contractual right;61 moreover, the principle may be excluded by the parties’ agreement;62 also, the principle may not be used to integrate the contract terms if the contract contains a detailed regulation.63 In particular, neither the principle of good faith nor an implied duty of good faith may prevail over clear contract terms.64 Even when a duty of good faith is expressly included in the contract, and the contract may be deemed to be a relational contract (see Section 1.7), the effects of this duty are quite modest:65 thus, the contractual duty to act in good faith was not deemed to be breached when three members of a joint venture failed to inform the fourth member of a very profitable investment opportunity that was about to be finalised. The fourth member was negotiating the terms of his resignation from the joint venture, and the conditions for his exit would have been different if the other three had informed him of the forthcoming investment. The court found that the duties of good faith expressed in the contract did not cover this particular situation and the conditions for implying a duty of good faith were not met. In another case, the Court of Appeal found that an express good faith provision in a shareholders’ agreement implied a duty to act honestly but did not import additional obligations which are not otherwise discernible from the contract.66 Similar considerations apply to the abovementioned Braganza duty. Firstly, the duty to act rationally is not the same as a duty to act fairly and in the interest of the other contract party.67 Secondly, the Braganza duty applies whenever the contract confers on one party a genuine discretion, but not when the party has an absolute contract right.68 If the 59

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Astor Management AG & Another v. Atalaya Mining Plc & Others [2017] EWHC 425 (Comm), para. 98 (this part was not challenged in the subsequent appeal, Astor Management AG v. Atalaya Mining Plc [2018] EWCA Civ 2407). Yam Seng Pte Limited v. International Trade Corporation Limited [2013] EWHC 111 (QB), para 145. Yam Seng Pte Limited v. International Trade Corporation Limited [2013] EWHC 111 (QB), para 145. See also Gold Group Ltd v. BDW Trading Ltd [2010] EWHC 163. Yam Seng Pte Limited v. International Trade Corporation Limited [2013] EWHC 111 (QB), para 149. Yam Seng Pte Limited v. International Trade Corporation Limited [2013] EWHC 111 (QB), para 161; Globe Motors v. TRW Lucas Varity Electric Steering [2016] EWCA Civ 396. TSG Building Services Plc v. South Anglia Housing [2013] EWHC 1151; Bates v. Post Office (No 3) [2019] EWHC 606 (QB). Russel v. Cartwright & Ors [2020] EWHC 41 (Ch). Compound Photonics Group Ltd v. Vollin Holdings Ltd [2022] EWCA Civ 1371. De Boinville v. IG Index Ltd [2021] EWHC 3326 (Comm). See Michael Bridge, ‘The Exercise of Contractual Discretion’. Law Quarterly Review 135.2 (2019), pp. 227–48. Mid Essex Hospital Services NHS Trust v. Compass Group UK and Ireland Trading Ltd [2013] EWCA Civ 200.

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contract confers on a party, for example, a right to exercise certain remedies, that party has an absolute contractual right to exercise that remedy, and its exercise will not be scrutinised to verify whether it was in good faith. A contract giving a party the right to terminate may be terminated even though the exercise of that right may seem to be against good faith69 or unreasonable,70 and even though the contract contains an express good faith clause.71 With all these limitations, Justice Leggatt’s principle of good faith does not have much in common with the principle of good faith in the civil law. In what could have been seen as a reversal of the mentioned alleged openings to a principle of good faith in Rainy Sky, the Supreme Court later applied, in Arnold v. Britton,72 the traditional formalistic and objective interpretation for which English contract law is known, and it did so even though the result was highly unsatisfactory: ‘It would be very satisfactory to read the wording differently, but there is no basis for that.’73 The Supreme Court74 later denied that Rainy Sky had represented a change in the common law tradition, and that Arnold v. Britton had reversed that change: ‘The recent history of the common law of contractual interpretation is one of continuity rather than change.’75 The formula in Rainy Skies, ‘commercial common sense’, is a criterion that is applied when the contract wording is unclear and it is possible to choose among various meanings. When there is clarity, the terms of the contract will be applied literally, even when this leads to unsatisfactory results, or even to disastrous results.76 As will be seen, this leads to giving to contracts legal effects that may be diametrically opposed to the effects that the same contracts may be given under civilian laws. For an English court, interpretation means focussing on the wording of the terms and on what they would mean to a reasonable person having the same knowledge as the parties did at the moment of entering into the contract. Supervening circumstances are irrelevant, and so are considerations of loyalty and fairness. This led the Supreme Court to confirm the contract’s wording in Arnold v. Britton, notwithstanding that the result was deemed unsatisfactory and alarming. The contract contained a poorly drafted index clause: instead of linking the price adjustment to an inflation index, the parties had agreed that the price should increase by 10 per cent every year. At the time of contracting in the 1970s, this increase corresponded to the inflation 69 70

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TSG Building Services Plc v. South Anglia Housing [2013] EWHC 1151. White & Carter (Councils Ltd) v. McGregor [1963] AC 413; Myers v. Kestrel Acquisitions Ltd [2015] EWHC 916; Taqa Bratani Ltd v. Rockrose UKC88 LLC [2020] EWHC 58; Cathay Pacific Airways v. Lufthansa Technik AG [2020] EWHC 1789 (Ch). Optimares S.p.A. v. Qatar Airways Group Q.C.S.C [2022] EWHC 2461 (Comm). Arnold v. Britton [2015] UKSC 36. 73 Arnold v. Britton [2015] UKSC 36, at para 62. Wood v. Capital Insurance Services Limited [2017] UKSC 24. Wood v. Capital Insurance Services Limited [2017] UKSC 24, para 15. Trustee v. Duchess & Others [2019] EWHC 778 (Ch); Optimares S.p.A. v. Qatar Airways Group Q.C.S.C [2022] EWHC 2461 (Comm).

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rate. At the time of the dispute various decades later, and after years of a much lower inflation rate, the agreed mechanism had led to a dramatic increase of the price, creating a significant and unintended imbalance between the parties. The Supreme Court found that the wording of the contract was so clear that it was not possible to give it a purposive interpretation and to reinstate the intended balance between the parties. To contrast the impact of English law on the interpretation or construction of contracts,77 it can be useful to compare with the decisions rendered by the Norwegian Supreme Court that were mentioned in Section 3.2. The two Norwegian decisions described in Section 3.2 were rendered in cases where the issues arising out of the factual circumstances were comparable to those arising in the English cases – therefore, they are particularly useful to compare. A third decision will be added later. In the first scenario, the price mechanism agreed in a long-term contract was based on criteria that, though voluntarily agreed to by the parties, turned out to be inadequate as the circumstances evolved. The English court upheld the agreed mechanism, even though the result was catastrophic for one of the parties.78 The Norwegian court modified the agreed mechanism so that the contract could reflect what the parties originally had intended to achieve but had consciously departed from when they formulated the contract.79 In the second scenario, the parties had regulated in the contract how notice of defect should be given to the defaulting party in order to claim breach of contract. The English court compared the notice that was actually sent to the requirements for notices laid down in the contract, observed that the agreed formal criteria were not met and considered the notice invalid.80 The Norwegian court supplemented the contract with unwritten requirements based on the duty of loyalty between the parties, observed that the unwritten requirements were not met and considered the notice invalid.81 In the third scenario, the contract provided for, respectively, repayment of a loan and compensation upon termination of contract. Calculation of repayment and compensation was based on mechanisms that assumed that the contractual relationship would have lasted at least for a certain period – however, in both cases the contract was terminated before that period elapsed. The agreed mechanism, therefore, did not regulate how to calculate payment under the actual circumstances of termination. The contract did not regulate a repayment mechanism for the eventuality that payment was due prior to a certain deadline, therefore the loan was not to be 77

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A brief comparison between English and Norwegian cases interpreting contracts can be found in Giuditta Cordero-Moss, ‘The Importance of Legal Culture for Contract Construction: Norwegian Law, English Law and International Arbitration’. New York Dispute Resolution Lawyer, Volume 1 (New York State Bar Association, 2017). Arnold v. Britton [2015] UKSC 36. 79 Rt. 1991 s. 220 (Sollia Borettslag). Teoco UK Ltd v. Aircom Jersey 4 Ltd [2018] CA Civ 23. 81 Rt. 2012 s. 1779 (Victocor).

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repaid. The English court found that it should not succumb to the temptation of implying into the contract a term that seemed reasonable under the circumstances at the time of the decision, but that the parties had not thought of at the time of forming the contract. As there was nothing uncommercial or absurd in agreeing to a loan that could be repaid only under limited circumstances, the criteria for implying a term were not met. Hence, the court found that the loan was not to be repaid.82 The Norwegian court found that the contract’s silence could not be given any meaning, and that a reasonable solution would have to be implied into the contract in light of the contract’s purpose.83 Thus, the calculation method regulated in the contract was applied as if the contractual relationship had lasted for the minimum period. In all these scenarios, English courts strictly applied the terms agreed by the parties in the contract84 – even though the terms were poorly drafted and their application led to results that evidently were not intended by the parties – but the terms had been agreed in that form, and there was no basis for a court to change them.85 In contrast, Norwegian courts construed the contract in light of supervened circumstances, the principle of loyalty and reasonableness. Had the courts applied their own approach to each other’s cases, the outcome would have been the opposite of the actual result. The divergence between common law and civil law may thus be summarised as follows: for the sake of preserving the balance of interests between the parties and based on the overarching duty of loyalty between the parties, a Norwegian court will exercise objective interpretation of contracts by reading into the contract terms that are not written, or by restricting the application of terms that are written. In contrast, the English court will give effect to the unambiguous terms of the contract even when this leads to unsatisfactory results that were not intended by the parties. The significant divergence in this respect reflects the understanding that each tradition has of the balance between predictability and justice. The foregoing shows that it is impossible to assume a convergence among the various legal systems. The same contract terms may have different legal effects depending on the governing law. Furthermore, as seen, the larger role that the principle of good faith is gaining under English law does not necessarily bring English law closer to the civil law: good

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Robert Bou-Simon v. BGB Brokers LP [2018] EWCA Civ 1525. In the opposite setting, where the contract contained a liquidated damages clause to be calculated until the time of acceptance, and the contract was terminated prior to acceptance, the court applied the agreed mechanism until the time of termination, and calculated damages according to the general law for the time after termination: Triple Point Technology Inc v. PTT Public Company Ltd [2021] UKSC 29. Rt. 1992 s. 796 (Pepsico). It may be interesting to point out that the contract contained a clause subjecting it to New York laws. The court affirmed that there was no significant difference between Norwegian and New York law and did not specify which law it applied. The result, however, is fully compatible with Norwegian law. See also Dodika Ltd v. United Luck Group Holdings Ltd [2021] EWCA Civ 638. Arnold v. Britton [2015] UKSC 36.

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faith, as understood under the progressive English law, does not mean the same as good faith under the civil law. The observed trend towards a convergence between the two legal families, moreover, seems to be particularly dependent on a consideration of the common law in its totality; that is, including both its body of law and of equity (as well as the statutory law and default rules), and disregarding the effects that the contract may have on their applicability in the specific case. The dichotomy between common law and equity is peculiar to English law and is based on the historical division of the English system of justice into common law courts and the Court of Chancery. The Court of Chancery developed remedies to mitigate the consequences of the strict application of the common law that was made by the courts. Today, courts are unified, but English law consists of two bodies: the body of law, which gives the parties formal rights on the basis of statutory law or of common law; and the body of equity, which gives remedies that, under precise, definite and limited circumstances, prevent one party from exercising the formal rights that it has at law. The effects of a contract under the common law in its strict meaning, its effects ‘at law’, seem to differ quite dramatically from the legal conceptions of the civil law; the equitable rules and remedies moderate the harshest effects achievable at law. This is also true of non-mandatory rules at common law; that is, rules that may be derogated from in the contract. Thus, it is mainly equity and non-mandatory rules that permit the convergence between the different legal traditions. In many instances, however, English law permits the avoidance of the effects achievable in equity or by its non-mandatory rules if sufficiently clear expressions of intention were made by the parties in the contract. Many of the contract clauses that are typical for commercial contracts are specifically written with the purpose of avoiding the remedies or other non-mandatory mechanisms existing in the English system, as seen in Chapter 1. Therefore, these clauses are responsible for annulling the convergence between the common law and the civil law systems. The original intention of the clauses, in other words, is to permit the harsh legal effects that mostly distinguish the common law, in the strict sense, from the civil law. Examples of these clauses were made in Chapter 1 and will be seen in the next section. When these contract clauses are subject to English law, they obtain the intended results.86 When they are subject to a civil law, they clash against principles such as good faith, as well as the court’s approach which is more concerned with the substantial balance of interests than with the formal contract wording. The impact of the governing law on the interpretation and construction of contracts will be analysed in the next section.

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Sometimes, contract drafters rely too much on the prevalence of the wording and their clauses do not achieve the intended purpose even under English law, see Section 3.4.1.

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3.4 The Effects of the Governing Law on the Interpretation and Construction of Contractual Terms The effects of specific contract terms are heavily influenced by the legal system under which the contract is interpreted.87 In the following sections, we will examine how the governing law influences the interpretation of the clauses that were examined in the previous chapters: Entire agreement, No waiver, No oral amendments, Subject to contract and Termination. In addition, we will discuss Representations and Warranties. 3.4.1 Boilerplate Clauses We will first turn to the so-called boilerplate clauses – contract language that is inserted into most commercial contracts without particular negotiations, and that is meant to regulate the interpretation and functioning of the contract (see Section 1.5.1). (a) Entire Agreement Clause The purpose of the Entire agreement clause is, as seen in Chapter 1, to isolate the contract from any source or element that may be external to the document. The parties’ aim is thus to avoid the contract being affected by terms or obligations that do not appear in the document. The original purpose of the clause was to exclude the application of the exceptions to the parol evidence rule and thus reinstate the strict regime at common law, see Section 1.5.1(a). The parties are obviously entitled to regulate their interests and to specify the sources of their regulation. Therefore, the Entire agreement clause is allowed and implemented according to its terms in most legal systems. However, many legal systems provide for ancillary obligations deriving from the contract type,88 from a general principle of good faith89 or from a principle preventing an abuse of rights.90 87

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The interaction between the contract and the governing law was the object of a research project that I ran at Oslo University; for more information, see www.jus.uio.no/ifp/english/research/projects/anglo/. The project resulted, among other things, in a book: Cordero-Moss (2011a). See, for France, Xavier Lagarde, David Meheut and Jean-Michel Reversac, ‘The Romanistic Tradition: Application of Boilerplate Clauses under French Law’. In Cordero-Moss (2011), pp. 210–26, Section 2; for Italy, see Article 1347 of the Codice Civile, and Giorgio De Nova, ‘The Romanistic Tradition: Application of Boilerplate Clauses under Italian Law’. In Cordero-Moss (2011), pp. 227–32, Section 1, as well as the general considerations on Article 1135 of the Codice Civile in Section 1; for Denmark, see Peter MøgelvangHansen, ‘The Nordic Tradition: Application of Boilerplate Clauses under Danish Law’. In Cordero-Moss (2011), pp. 233–53, Section 1. See the general principle on good faith in the performance of contracts in § 242 of the German BGB. See Gerhard Dannemann, ‘Common Law Based Contracts under German law’. In Cordero-Moss (2011), pp. 62–79, Sections 3.2 and 3.3 for examples of its application by the courts. See, for Russia, Ivan S. Zykin, ‘The East European Tradition: Application of Boilerplate Clauses under Russian Law’. In Cordero-Moss (2011), pp. 329–43, Section 1.

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This means that a contract would always have to be understood not only on the basis of the obligations that are spelled out in it, but also in combination with the elements that, according to the applicable law, integrate it. The same contract, therefore, risks having different content depending on the governing law: the Entire agreement clause is meant to avoid this uncertainty by barring the possibility of invoking extrinsic elements. The Entire agreement clause creates an illusion of exhaustiveness in terms of the written obligations. This is, however, only an illusion: first of all, ancillary obligations created by the operation of law may not be excluded by the contract.91 Moreover, some legal systems permit bringing evidence that the parties’ agreement creates obligations different from those contained in the contract.92 Furthermore, many civil legal systems openly permit the use of pre-contractual material to interpret the terms written in the contract.93 Finally, a strict adherence to the clause’s wording may, under some circumstances, be looked upon as unsatisfactory, even under English law. English courts, though insisting that a properly drafted Entire agreement clause may actually succeed in preventing any extrinsic evidence from being taken into consideration, when faced with such a clause, interpret it so as to avoid unreasonable results. The motivation given by the courts in the decisions may create the impression that a proper drafting may achieve the clause’s purpose, but the ingenuity of the court’s interpretation gives rise to the suspicion that the drafting would never be found to be proper if the result were deemed to be unfair.94 A Court of Appeal decision, for example, dealt with a so-called Basis clause – a clause affirming that a party has undertaken an assessment of the transaction and is aware of the involved risk. This clause is particularly widespread in financial contracts, and has been deemed by courts to be sufficient to exclude any claims for misrepresentation.95 In other sectors, the clause is mainly known as a so-called Nonreliance clause – a version of an Entire agreement clause specifying that the parties, 91

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See, for France, Lagarde et al. (2011); for Italy, De Nova (2011); for Finland, Gustaf Möller, ‘The Nordic Tradition: Application of Boilerplate Clauses under Finnish Law’. In Cordero-Moss (2011), pp. 254–64, Section 2.1. See, for Germany, § 309 No 12 of the BGB, prohibiting clauses which change the burden of proof to the disadvantage of the other party: see Ulrich Magnus, ‘The Germanic Tradition: Application of Boilerplate Clauses under German Law’. In Cordero-Moss (2011), pp. 179–209, Section 5.1.1.a. Italy, on the contrary, does not allow oral evidence that contradicts a written agreement, see De Nova (2011), Section 1. In addition to Germany (see previous footnote), see for France, Lagarde et al. (2011), Section 2; for Italy, De Nova (2011), Section 4; for Denmark, Mögelvang-Hansen (2011), Section 2.1; for Norway, Hagstrøm (2011), Section 3.1; for Russia, Zykin (2011), Section 2.1. The situation seems to be more uncertain in Sweden, see Lars Gorton, ‘The Nordic Tradition: Application of Boilerplate Clauses under Swedish Law’. In Cordero-Moss (2011), pp. 276–301, Section 5.4.2.d, and more restrictive is Finland, see Möller (2011), Section 2.1. See Peel (2011), Section 2.1. Peekway v. Australia & New Zealand Banking Group [2006] EWCA 386; JP Morgan Chase v. Springwell [2010] EWCA Civ 1221; Barclays Bank plc v. Svizera Holdings BV & anr [2014] EWHC 1020 (Comm). See also AXA Sun Life Services Plc v. Campbell Martin Ltd [2012] Bus LR 203.

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when entering into the contract, have not relied on any representation made by the other party beyond those expressly included in the contract. The effect of the clause is to prevent a party from asserting that the other party has misrepresented certain facts upon which the first party relied when it entered into the contract. In the case before the Court of Appeal,96 the dispute was between a landlord and the lessor of certain warehouses in which asbestos was found. The landlord had stated that there were no environmental problems but failed to mention that it had been notified of the presence of asbestos risk. The landlord argued that the lessor had assumed the risk when it signed the contract which included a Basis clause and was therefore prevented from asserting that there had been a misrepresentation. The Court of Appeal found that the Basis clause had the function of excluding the landlord’s liability for misrepresentation, a liability created by the 1967 Misrepresentation Act. Being an Exclusion clause,97 the Basis clause fell within Section 3 of the Misrepresentation Act and was therefore subject to the reasonableness test laid down in Section 11 of the Unfair Contract Terms Act 1977. The Entire agreement clause is an illustration of a clause by which the parties attempt to isolate the contract from its legal context, which is not completely successful and cannot be fully relied on. In the hypothetical case described in Section 1.5.1(a), it is not evident whether the Entire agreement clause would prevail on the previous agreement between the parties. The parties had agreed to modify the specifications of the products; however, this modification was not reflected in the renewal of the Supply agreement, and the contract contained an Entire agreement clause. It is likely that a civilian court would not attach too much importance to the Entire agreement clause: if it is satisfied that the parties had agreed on the modified specifications, it would consider this agreement even against the wording of a standard clause that was probably not negotiated. Various techniques can be envisaged, all ultimately based on the principle of good faith: a party should not be allowed to contradict its own conduct which has created expectations in the other party. It is likely that a common law court would take the Entire agreement clause more seriously: it is not commercially unreasonable that the producer may have changed its plans in the time between the side letter modifying the specifications and the renewal of the contract confirming the old specifications. The presence of the Entire agreement clause is consistent with this assumption: had the producer intended to insist on the new specifications, it would not have included in the contract an Entire agreement clause expressly depriving of any affect any previous agreements. The supplier would be justified in its interpretation that the side letter is overridden. 96 97

First Tower Trustees Ltd v. CDS (Superstores International) Ltd [2018] EWCA Civ 1396. On the requirement that exclusion clauses comply with the reasonableness test in the Unfair Contract Terms Act see also Phoenix Interior Design Ltd v. Henley Homes Plc [2021] EWHC 1573 (QB).

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As seen in Section 2.2.5(f)(i), literal application of this clause seems to contradict the UPICC or the PECL, both of which are based on a strong general principle of good faith, which, furthermore, is specified by an express rule for the Entire agreement clause contained in the restatements. (b) No Waiver Clause As seen in Chapter 1, the purpose of a No waiver clause is to ensure that the remedies described in the contract may be exercised in accordance with their wording at any time and irrespective of the parties’ conduct. The parties are, of course, at liberty to regulate the effect of their conduct. However, under some circumstances, this regulation could be used by one party for speculative purposes, such as when a party exercises its right to terminate not immediately after the other party’s breach that triggers the remedy, but after some time – for example, when it sees that new market conditions make it profitable to terminate the contract. The real reason for the termination is not the other party’s old default that was originally the basis for the right of termination, but the change in the market. The No waiver clause, if applied literally, permits this conduct. A literal interpretation of the clause in such a situation is allowed in some systems,98 but would, in many legal systems, be deemed to contradict principles that cannot be derogated from by contract: the principle of good faith in German law that prevents abuses of rights,99 the same principle in French law that prevents a party from taking advantage of a behaviour inconsistent with that party’s rights100 and the principle of loyalty in the Nordic countries101 that prevents interpretations that would lead to an unreasonable result in view of the conduct of the parties.102 The clause may have the effect of raising the threshold for when a party’s conduct may be deemed to be disloyal,103 but it will not be able to displace the requirement of loyalty in full. As seen in Section 2.2.5(f)(ii), a literal application of the clause would also be prevented by the UPICC and by the PECL, both of which assume good faith in the exercise of remedies.104 Additionally, in the case of this clause, as seen previously in connection with the Entire agreement clause, English courts argue as if it were possible for the parties to draft the wording in such a way as to permit results that would be prevented in the 98

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Neither in Hungarian nor in Russian law would the principle of abuse of a right have the effect of depriving a party from its remedy in spite of considerable delay in exercising the remedy: see, respectively, Attila Menyhard, ‘The East European Tradition: Application of Boilerplate Clauses under Hungarian Law’. In Cordero-Moss (2011), pp. 302–28, Section 3 and Zykin (2011), Section 2.2. See the general clause on good faith in the performance of contracts in § 242 of the BGB. See Magnus (2011), Sections 3.2 and 3.3 for examples of its application by the courts. See Lagarde et al. (2011), Section 3. See, for Denmark, Møgelvang-Hansen (2011), Section 2.3; for Finland, Möller (2011), Section 2.2; for Norway, Hagstrøm (2011), Section 3.2. See Møgelvang-Hansen (2011), Section 2.3. 103 See, for Finland, Möller (2011), Section 2.2. See Cordero-Moss, ‘Does the Use of Common Law Contract Models Give Rise to a Tacit Choice of Law or to a Harmonised Transnational Interpretation?’ In Cordero-Moss (2011b), pp. 37–61, Section 2.4.

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civil systems as contrary to good faith or loyalty105 – particularly considering that the motives for exercising a remedy are deemed to be irrelevant.106 The English courts’ decisions, however, leave the suspicion that even an extremely clear and detailed wording would not be deemed to be proper if its application would lead to unfair results.107 In the hypothetical case described in Section 1.5.1(b), it is not evident whether the bank may terminate the loan on the basis of an old breach that it had not reacted upon for some time. A civil law court is likely to consider the link between the breach and the remedy of termination: termination is not a reaction against the breach but is due to the bank’s desire to take advantage of changed interest rates. By not reacting against the breach within a reasonable time, the bank created a legitimate expectation in the borrower that the loan would continue to be in force notwithstanding the breach. A standardised No waiver clause would probably not be deemed sufficient to counteracting the effect of this legitimate expectation. A common law court is likely to consider more carefully whether the presence of the No waiver clause can be ignored, and the borrower can invoke that the bank may not exercise its right to terminate. The No waiver clause, thus, promises a self-sufficiency in the regime for remedies that may not necessarily be relied on. (c) No Oral Amendments Clause As seen in Chapter 1, the purpose of this clause is to ensure that the contract is implemented at any time according to its wording and irrespective of what the parties may have later agreed, unless recorded in writing. The clause has a legitimate purpose, and the parties are free to agree to it. Under some circumstances, however, the clause could be abused – such as if the parties agree on an oral amendment, and afterwards one party invokes the clause to refuse to perform because it is no longer interested in the contract after the market has changed. Under English law, in spite of the alleged primacy of the contract’s wording, it has long been uncertain whether the clause would be enforced if there was evidence that the parties had agreed to an oral variation.108 The Supreme Court,109 however, recently determined that the law does not permit an overriding of the intentions of the parties at the time the contract was formed. Therefore, the parties may not agree to disapply a No oral agreement clause. 105 106 107 109

BDV Trading Ltd (t/a Barratt North London) v. JM Rowe (Investments) Ltd [2011] EWCA Civ 548. Monde Petroleum SA v. Westernzagros Limited [2016] EWHC 1472 (Comm). See Peel (2011), Section 2.2. 108 See Peel (2011), Section 2.3. Rock Advertising Ltd v. MWB Business Exchange Centres Ltd [2018] UKSC 24; Kabab-Ji SAL (Lebanon) v. Kout Food Group (Kuwait) [2021] UKSC 48.

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The Singapore Court of Appeal,110 in contrast, did not follow the UK Supreme Court’s strict approach, and affirmed that a No oral amendment clause simply creates a rebuttable presumption that an oral variation would not be effective. A strict application of the written form requirement is imposed in Russia by mandatory legislation.111 An application of the clause, even for a speculative purpose, would be acceptable under French law, which has a rule excluding the possibility of bringing oral evidence in contradiction to a written agreement.112 A similar rule is also present in Italian law, although case law on the matter seems to be unsettled.113 In German law, the opposite approach applies: German law does not allow the exclusion of evidence that could prove a different agreement by the parties and does not permit terms of the contract that disfavour the other party in an unreasonable way.114 The Nordic systems would give effect to the wording of the clause by raising the threshold for when it can be considered as proven that an oral amendment was agreed upon. However, once such an oral agreement is proven, it would be considered enforceable out of the principle of lex posterior,115 of loyalty116 or of good faith.117 The No oral amendments clause is yet one more example of a clause that will not necessarily always be applied in strict accordance with its terms. 3.4.2 Subject to Contract As seen in Chapter 1, letters of intent often contain a clause excluding liability for the break-off of negotiations. The purpose of this clause is to free the negotiating parties from any liability in case they do not reach a final agreement. This clause protects important interests in international commerce: it must be possible for the parties to wait until they have completed all negotiations before they make a decision on whether to enter into the contract. Often, negotiations are complicated and are carried out in various phases covering different areas of the prospective transaction. In this case, partial agreements on the respective area may be recorded and made ‘subject to contract’. When all partial negotiations are concluded, the parties will be able to have a full evaluation and only then will they be in a position finally to accept the terms of the deal. The parties may freely agree when and under what circumstances they will be bound. However, a literal application of the clause may lead to abusive conduct, such as when one of the parties never really intended to enter into a final agreement and used the negotiations only to prevent the other party from entering into a contract with a third party.118 110 112 114 116 117 118

Lim Teng Siam v. Hong Chhon Hau [2021] SGCA 43. 111 See Zykin (2011), Section 2.3. See Lagarde et al. (2011), Section 4. 113 See De Nova (2011), Section 3. See Magnus (2011), Section 5.1.2.a. 115 See, for Denmark, Møgelvang-Hansen (2011), Section 2.2. See, for Finland, Möller (2011), Section 2.3, and for Norway, Hagstrøm (2011), Section 3.3. See, for Sweden, Gorton (2011), Section 5.3.2. For a more extensive reasoning, see Cordero Moss (2007b), pp. 139–59.

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In this case, there is a dichotomy between the common law approach and the civil law approach. English law seems to permit the parties to negate the intention to be bound, without being concerned with the circumstances under which the clause will be applied.119 A certain sense of unease may be detected in the English courts at permitting parties to go back on a deal, but it seems that a very strong and exceptional context is needed to override the clause.120 In an often-quoted House of Lords decision, Lord Ackner states that ‘the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations’.121 On the contrary, legal systems of the civil law, particularly those influenced by the Germanic tradition, assume that the parties are under a duty of loyalty even during the phase of negotiations of a contract.122 Civil law, like the UPICC and the PECL (as seen in Section 2.2.5(f)(iii)), is concerned with the possibility that such a clause may be abused by a party to initiate or continue negotiations without having a serious intention of finalising the deal. Therefore, such conduct is prevented either by defining the clause as a potestative condition and therefore null123 or by assuming a duty to act in good faith during the negotiations.124 Should the letter of intent contain a clause obliging the parties to negotiate in good faith, or to use their best efforts to reach an agreement, that clause would be considered as not enforceable under English law, because it is not sufficiently certain.125 Moreover, a letter of intent containing a clause obliging the parties to negotiate in good faith would not add considerably to the duty of loyalty already existing in civilian regimes. Neither under the common law, nor under the civil law, therefore, would this clause have a considerable impact on the parties’ freedom to evaluate the substance of 119

120 122

123

124

125

An overview of English authorities can be found in Joanne Properties Limited v. Moneything Capital Limited [2020] EWCA Civ 1541. Peel (2011), pp. 154ff. 121 Ackner LJ in Walford v. Miles [1992] 1 All ER 453 (HL). Pre-contractual liability, or culpa in contrahendo, was introduced into the German legal system by Rudolph Jhering, ‘Culpa in contrahendo oder Schadensersatz bei nichtigen oder nicht zur Perfection gelangten Vertragen’. Jherings Jahrbücher 4.1 (1861). The German Civil Code reform of 2002 has codified it in § 311, but case law had already established, following Jhering, that by starting negotiations, the parties enter into a special relationship creating a duty of loyalty to each other according to § 241.2, the breach of which entitles the other party to reimbursement of damages (in the reformed Civil Code, according to § 280). See, for France, Lagarde et al. (2011), pp. 220ff. Potestative conditions are also null under Italian law, see Article 1355 of the Codice Civile. See, for France, Lagarde et al. (2011), pp. 220ff.; for Denmark, Møgelvang-Hansen (2011), pp. 242ff.; for Finland, Möller (2011) pp. 259f.; for Norway, Hagstrøm (2011), pp. 271f.; for Russia, Zykin (2011), pp. 338f. The duty to act in good faith during the negotiations is also spelled out in § 311 of the BGB and in Article 1337 of the Italian Codice Civile. See, for the UPICC and the PECL, Chapter 3, Section 2.4. For Hungarian law, see Menyhard (2011), pp. 314ff. Walford v. Miles [1992] 2 AC 128.

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the envisaged transaction and to decide whether or not the negotiated terms were acceptable. Letters of intent, however, are often written in a way that seems to assume the regime of freedom to negotiate that exists under English law: the parties specify that they are not committed to executing the contract, that they are not bound to incorporate into any final contract the terms contained in the letter of intent and that they are not liable for any of their conduct during the negotiations. Under English law, the parties would not really have needed to write all this in the letter of intent, because this freedom would follow by the operation of law. This is not the only example of redundant contractual practice, so it should not be too surprising that the parties spell out in the letter of intent a freedom that they enjoy anyway under the law. Under civil law, the parties might not achieve the described freedom in full; on the contrary, by executing a letter of intent, they run the risk of increasing or specifying the duty of loyalty that in turn reduces their freedom during the negotiations. This is not the only example of contractual practice borrowed from the common law tradition that clashes with principles of the civil law. 3.4.3 Termination Clauses As seen in Chapter 1, contracts may contain a clause defining non-performance of certain obligations as a fundamental breach of contract, thus giving the innocent party the possibility of terminating the contract. The parties define in advance when a fundamental breach is deemed to have occurred, and quite irrespective of the actual consequences that breach may have – unless they insert in the clause wording to that extent, such as: ‘Upon any material breach of a material obligation contained in article xx of this contract, the other party shall be entitled to terminate.’ The inclusion of this qualifying wording may be the object of hard negotiations, and often the final text of the clause ends up without these qualifications. In these cases, the parties actually intend that the Termination clause may be used without having regard to how serious the breach is, and whether termination would be justified in light of the consequences and other circumstances. It falls within the parties’ contractual freedom to regulate their respective interests and to allocate risk and liability between themselves. Among other things, this means that the parties are free to determine the conditions on breach of which the contract may be terminated early. However, a literal interpretation of the clause may lead to unfair results, such as when the breach under the circumstances does not have any consequences for the innocent party, but this party uses the breach as a basis to terminate a contract that it no longer considers profitable on other grounds – for example, after the market has changed. If the contract is interpreted in accordance with English law, the contract’s language will prevail over considerations of fairness. If it is not possible to avoid unfair results on the basis of the contract language, English courts are inclined to give

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effect to the clause according to its terms, even though the result under the circumstances may be deemed to be unfair, see Sections 3.1 and 3.3. English courts do so, even if with evident reluctance, to ensure consistency in the law underlying the repudiation and termination of the contract.126 The contract-based right of repudiation may be exercised even if the breach did not really have any material impact and is made only for speculative purposes,127 and even if the particular terms of the contract permit for it to be cumulated with other remedies and the result is unfair.128 As the High Court of England and Wales stated: A contractual right to terminate is a right which may be exercised irrespective of the exercising party’s reason for doing so. Provided that the contractual conditions (if any) for the exercise of such a right (for example, the occurrence of an Event of Default) have been satisfied, the party exercising such a right does not have to justify its actions.129

In this context, therefore, properly drafted language achieves the effects that follow from a literal application of the clause, even if these effects are unfair. Other legal systems, on the contrary, would not allow a literal application of the clause if this had consequences that may be deemed to be unfair, because of the general principle of good faith and loyalty130 or based on the assumption that the parties would not have intended to achieve such unfair results.131 This clause is an illustration of contractual regulation that may be applied literally when subject to English law, whereas it has to be applied in combination with the governing law when subject to most civil law systems. Another example shows the importance of contract language under English law and the different approaches taken by other jurisdictions – in this case, the court taking a different approach from English courts was in the United States, thus showing that even within the common law there may be discrepancies in the construction of the same contract wording. 126 127

128

129 130

131

See Peel (2011), pp. 148ff. See also Whittaker (2006), p. 63. Moore & Co Ltd v. Landauer Co [1921] 2 KB 519, Arcos Ltd v. Ronaasen [1933] AC 470. See also Union Eagle [1997] 2 All ER 215, where an immaterial delay of ten minutes was considered sufficient to rescind the contract. As Lord Hoffmann stated, ‘if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced’ (pp. 218ff.) and ‘to build an argument on the basis that the purchaser was only “slightly late” would be to encourage litigation about “how late is too late”’ (p. 222). For another example of strict application of the formalities contained in the contract, see Zayo Group International Ltd v. Michael Aigner et al. [2017] EWHC 2542 (Comm). Lombard North Central plc v. Butterworth [1987] 1 All ER 267, Court of Appeal, that was described in Section 3.1. Monde Petroleum SA v. Westernzagros Limited [2016] EWHC 1472 (Comm), para 274. See, for Germany, the principle on good faith in the performance contained in § 242 of the BGB; for France, see Lagarde et al. (2011), pp. 217ff.; for Denmark, Møgelvang-Hansen (2011), pp. 239ff.; and for Finland, Möller (2011), pp. 258ff. The same would be obtained under Russian law, based on the principle prohibiting the abuse of rights: see Zykin (2011), pp. 335ff. See, for Norway, Hagstrøm (2011), pp. 270ff.

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The decisions in question were rendered in the aftermath of the financial crisis of 2008, and particularly related to the bankruptcy of one of the banks which had been very active in the market of financial derivatives, Lehman Brothers. Lehman Brothers had entered into numerous Swap agreements on the basis of the ISDA Master Agreement, see Section 2.2.6(c). The Master Agreement contains a clause subjecting it to English law. As was already mentioned in Section 2.2.6(c), English courts construed the Master Agreement differently from US courts. The Master Agreement provided that bankruptcy of one of the parties was an event of default; that, upon an event of default, the other party had the right, but not the obligation, to terminate the contract; that, if the innocent party did not terminate the contract, it was entitled to suspend payment of any sums it owed to the defaulting party. Applied literally, this means that the innocent party may avoid payment of the sums it owes simply by not terminating the contract (if the innocent party had terminated the contract, the respective positions of the parties would have had to be liquidated). Since bankruptcy cannot be cured, this means that payment would be suspended indefinitely. This is exactly the result to which the English Court of Appeal came: the innocent party had the discretion to terminate the agreement or not, and it was not possible to imply a duty to terminate; the wording of the contract created a situation in which the innocent party’s debt would never be extinguished, but would never have to be paid (because the event of default could not be cured). By not exercising its right to terminate, the innocent party precluded its own liability to pay. The Court of Appeal admitted that this result may be unsatisfactory, but it responded to the requirement of interpreting a contract in a way that serves the objectives of clarity, certainty and predictability.132 The US Bankruptcy Court had to apply the same clauses in the same Master Agreement in a situation where the innocent party had waited eleven months after the bankruptcy proceedings were initiated, before it exercised its right to terminate the contract early. The Court found that the conduct of the innocent party – taking advantage of the market for nearly one year, and then exercising its right to terminate – was unacceptable, and that the right to terminate was deemed to have been waived.133 In the hypothetical case that was described in Section 1.5.3, the approach taken by civil law courts is likely to differ from that taken by common law courts. A civil law court is likely to consider the proportionality between the consequences of the breach and the remedy, as well as the effects of termination on the defaulting party, and the motives for the termination. The breach was immaterial and did not have any consequences for the bank; the reason for the termination is that the bank 132 133

Lomas v. JFB Firth Rixson Inc [2012] EWCA Civ 419. In Re Lehman Brothers Holdings, Inc., US Bankruptcy Court Case No 08–13555 et seq. (JMP).

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desires to take advantage of changed interest rates; the consequences of termination would be serious for the borrower, who would have to repay overnight the whole outstanding amount, having to find funds at a high cost. The principle of good faith would probably not permit such an outcome – many techniques can be envisaged, such as: implying into the termination clause a requirement that the breach be material to justify termination; implying a duty to exercise contractual remedies in good faith and so on. A common law court does not scrutinise the motives for exercising a contractual right: termination is an absolute right and can be exercised as long as the conditions spelled out in the contract are met – irrespective of the motives and of the consequences. 3.5 Contractual Terms Contradicting, Supplementing or Being Supplemented by Non-mandatory Rules of the Governing Law Often, no difficulties arise out of contracts that contradict or supplement the governing law, as long as the derogated rules are not mandatory: in the case of a dispute, it is often possible to solve the differences between the parties simply by applying the regulation contained in the contract. Often it will be possible to find a solution to the dispute without having to question the compatibility of the contract with the governing law: if the terms of the contract supplement the governing law, or if they regulate the transaction in a way that is different from a rule contained in the governing law, the contractual terms will prevail, as long as the rule being supplemented or derogated from is not mandatory. For example, a contract may regulate the consequences of an impediment to performing the contractual obligations. This is an area that is usually regulated by law, albeit only by way of default rules – which means that the parties may agree to regulate the issue in a way different from the regulation contained in the law. In many legal systems, particularly those belonging to the civil law tradition, a party is excused for non-fulfilment of an obligation if performance was prevented by an event beyond that party’s control that could not be foreseen or overcome; a so-called force majeure event. The parties, however, are free to derogate from these rules. For example, the contract may contain a more detailed regulation than the governing law: the contract may specify how many days the prevented party can wait before it notifies the other party of the force majeure circumstance; it may specify how long the force majeure circumstance may persist before the contract has to be terminated or renegotiated and so on. Alternatively, the contract might contain an allocation of the risk that is different from the one made by the governing law: for example, it may determine that the risk of some impediments, such as not obtaining the export licence from the competent authorities, has to be borne specifically by one party, for example, the seller, and cannot be defined as a force majeure circumstance. In this area,

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a sufficiently clear contractual regulation will prevail over the regulation made by the law. Nevertheless, the governing law may interact with the contractual regulation in various ways. As a result, the same contract clauses may end up having different legal effects depending on the governing law. This may come as a surprise to the parties who may have spent considerable time and energy on writing detailed formulations in the contract under the illusion that their relationship would be governed fully and only by the text of the contract, but instead have to cope with a result that was affected by the governing law. Furthermore, if the contract is silent on certain aspects, it does not necessarily mean that no regulation is to be applied. The governing law may contain rules that apply to situations that are not regulated by the contract. However, the regulation implied by law might differ from state to state, so that the contract will be integrated by different regulations, depending on the governing law. We will consider four examples of clauses that may give rise to different effects depending on the governing law: Representations and Warranties clauses, Liquidated damages clauses, Force majeure clauses and Hardship clauses. 3.5.1 Representations and Warranties Clauses One of the clauses that is often written in contracts sets forth so-called Representations and Warranties. This clause contains a long list of circumstances that the parties state and guarantee to each other – from the validity of the parties’ respective incorporation to the validity of the obligations assumed in the contract, and the characteristics and specifications of the contract’s object. As seen in Section 1.2, the drafting impetus may sometimes reach excesses that are defined as ‘nonsensical’, even in respect of English law134 – such as when the parties include in the Representations and Warranties matters which are outside of the scope of their freedom to dispose of (such as the validity of the contract). Representing that a contract is valid does not make the contract valid.135 Most of the circumstances that are represented or warranted, however, relate to specifications or characteristics of the contract’s object and have a useful function. These Representations and Warranties create a liability for the party making them, and, if breached, will either permit the other party to repudiate the contract, or to claim compensation for damages. The clause, therefore, has an important function. The function is particularly important in common law where the parties are expected to spell out the respective assumptions and obligations in the agreement, and it may 134 135

See Peel (2011), footnote 364. It does, however, create for the party who made the representation a liability towards the other party in case the representation turns out to be false. Without a representation, the risk for the correctness of the assumptions would have been borne by the other party. Under the civil law, under the duty of loyalty a party is obliged to give the other party relevant information, and representations are not necessary.

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be difficult to convince a court to imply specifications or characteristics that were not mentioned in the contract. A party, during contract negotiations, is under no duty to disclose matters relating to the contract’s object, and the Representations and Warranties clause is usually the occasion for the parties to list all of the information that they consider relevant, and where they expect the other party to assume responsibility. Without the Representations and Warranties clause, under English law there would be no basis for a contractual claim if important information was withheld. In civil law systems, on the contrary, the parties are under extensive duties to disclose any circumstances that may be of relevance in the other party’s appreciation of its interest in the bargain. It is not the party interested in receiving the information that shall request the other party to make a list of specific disclosures; it is the party possessing the information that is under a general duty to disclose matters that are relevant to the other party’s assessment of the risk and its interest in the deal. This duty of information exists by operation of law, even if the contract has no Representations and Warranties clause. When the parties insert a long and detailed Representations and Warranties clause, and carefully negotiate its wording, they may be under the impression that this long list exhaustively reflects what they represent and warrant to each other. This impression is in compliance with the effects of the clause under English law, where an accurate wording is crucial for deciding whether a party has a contractual claim or not.136 Under civil law, the clause also has effects: if a certain characteristic was expressly represented or warranted in the contract, failure to comply with it will more easily be qualified as a defect in the consent or a breach of contract, without the need to verify whether it had been relied on, whether it was essential and so on. The clause, therefore, creates certainty regarding the consequences of the breach of the Representations and Warranties that were made. However, the clause does not have the reverse effect: if a certain characteristic was not included in the Representations and Warranties, it does not mean that it may not be deemed to be among the matters that the parties have to disclose or bear responsibility for. The parties may have spent considerable energy in negotiating the list and one party may intentionally have omitted certain matters, under the illusion that this would have been sufficient to avoid any liability in that connection. However, the Representations and Warranties are integrated by a duty of loyalty by operation of law. This implies a duty of disclosing circumstances that may have an impact on the other party’s decision to enter into the contract on those terms. If the matter left out is material, the other party may be entitled to claim the nullity of the contract137 or compensation for damages.138 The duty of disclosure may not be 136 137 138

See Peel (2011), Section 2.9. See, for France, Lagarde et al. (2011), Section 12; for Russia, Zykin (2011), Section 2.8. See, for Denmark, Mögelvang-Hansen (2011), Section 4.1; for Russia, Zykin (2011), Section 2.8.

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contracted out139 and is considered to be such a cornerstone that it applies even to sales that are made ‘as is’.140 This clause is an example where an accurate drafting may obtain results if the contract is subject to English law because English law leaves it to the parties to determine the content of their bargain. Civil law, on the contrary, regulates this area extensively, and the drafting by the parties may not affect this regulation, no matter how clear and detailed it is. 3.5.2 Liquidated Damages As briefly mentioned in Sections 1.2 and 3.1, commercial contracts often contain a clause that defines the amount of damages to be paid in case of a breach, such as, for example, the following: If, due to the fault of the Seller, the goods have not been delivered at dates according to the delivery schedule as provided in this Agreement, the Seller shall be obliged to pay to the buyer liquidated damages for such delayed delivery at the following rates: . . ..

This clause quantifies the amount of damages that will be compensated, and has the purpose of creating certainty regarding what payments shall be due in case of a breach of certain obligations. Rather than having to prove that failure to perform the contract caused damages, having to quantify the actual damages and proving what measures were taken to mitigate, the parties agree in the contract that a certain amount will automatically be due in case of default. The liquidated damages, therefore, come instead of the actual damages, and are due even if no damages were caused at all. In many civilian systems, this may be achieved by agreeing on contractual penalties. The idea behind contractual penalties is to ensure that the contract is performed by providing for an automatic obligation to pay a certain amount in case of default. The penalty has to be paid irrespective of whether a loss was actually caused, as payment is triggered by the simple fact of the default. Therefore, under the civilian legal tradition, a contractual penalty is not considered to be a reimbursement of damages; it is a means to ensure performance. Nevertheless, international contracts generally use the common law terminology, and define as ‘Liquidated damages’ what the parties possibly have intended to be penalties. The Liquidated damages clause has its origin in the common law, where contractual penalties are not permitted. The main remedy available for breach of contract in common law is compensation by way of damages; however, the quantification of 139 140

See, for Finland, Möller (2011), Section 4.1; for Russia, Zykin (2011), Section 2.8. Under Norwegian law: see Hagstrøm (2011), Section 5.1 – although in the case of a sale ‘as is’, the duty extends only to what the seller had knowledge of.

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damages may be difficult and uncertain. In order to achieve certainty in this respect, English contracts contain clauses that quantify the damages in advance. As long as the amount of the liquidated damages is somehow related to the amount of possible damages, and the clause is not used as a punitive mechanism, the clause will be enforceable. The agreed amount will thus be paid irrespective of the size of the actual damage. In this way, English contracts also obtain the result that in civil law systems is obtained by agreeing on a contractual penalty. The House of Lords (as it then was) recognised the legitimacy of Liquidated damages clauses and distinguished them from penalties in that the amount should not be extravagant and unconscionable and should be a genuine pre-estimation of losses that may follow from the other party’s breach of contract.141 The English Supreme Court142 recently shifted away from the traditional requirement that a Liquidated damages clause, to be enforceable, should contain a genuine pre-estimate of loss. A clause is now deemed to be an unenforceable penalty clause if there is no legitimate interest or commercial justification for the clause or if the amount is extravagant or unconscionable. However, other systems of common law maintain the traditional approach,143 and contract practice does not seem to have abandoned the habit of drafting penalty clauses as Liquidated damages clauses. Due to the influence of English contract drafting on international contract practice, as described in Section 1.2, the common law terminology is also adopted in contracts governed by other laws, even when the applicable law permits contractual penalties. In terms of the intention of the parties to these contracts, these clauses are often assumed to work as penalty clauses. This means that they are not necessarily meant to be the only possible compensation for breach of contract to be paid irrespective of the size of the actual damage. Questions may arise, however, as to the effects of the clause: should they have the same effects as in English law and make the agreed sum payable in spite of the fact that there was no damage at all, or that the damage had a much larger value or that the clause was meant to be cumulated with reimbursement of damages calculated according to the general criteria? It must first be pointed out that this is one of the clauses that demonstrates the primacy of the contract language in the eyes of English courts, see Section 3.1. Structuring the clause as liquidated damages rather than as a penalty, permits the avoidance of the penalty rule under English law. This effect follows appropriate drafting rather than the substance of the regulation. Although the courts have the power to exert control on whether the quantification may be deemed to be justified, they are very cautious in making use of this power, under the assumption that the parties know best how to assess any possible damages.144 Moreover, the penalty rule 141 142 143

144

Dunlop Pneumatic Tyre Company Ltd v. New Garage and Motor Company Ltd [1915] AC 79, UKHL. Cavendish Square Holding BV v. El Makdessi and Parking Eye Ltd v. Beavis [2015] UKSC 67. See the decision by the Singapore Court of Appeal, Denka Advantech Pte Ltd v. Seraya Energy Pte Ltd [2020] SGCA 119. See Peel (2011), Section 2.7.

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applies to sums payable upon breach of contract; as seen in Section 3.1, appropriate drafting will permit the circumvention of these limitations by regulating payments as a consequence of events other than a breach, thus excluding the applicability of the penalty rule.145 This is a good example of how far the appropriate drafting may reach under English law. In civil law, no matter how clear and detailed the drafting is, there are some principles that may not be excluded by the contract. Thus, the agreed amount of liquidated damages will be disregarded if it can be proven that the loss actually suffered by the innocent party is much lower146 or much higher.147 Contractual penalties may, under certain circumstances, be cumulated with other remedies, including reimbursement of damages.148 The English terminology that refers to ‘damages’ may create a presumption that the parties did not intend to cumulate that payment with other compensation. This may come as a surprise to the parties that used the terminology on the assumption that it is the proper terminology for a contractual penalty; however, if it is possible to prove that the parties intended to regulate a penalty and did not intend to exclude compensation for damages in spite of the terminology they used, the presumption may be rebutted.149 Adopting the English legal terminology does not mean that the legal effects that follow from English law shall be applied, as will be seen in Section 4.3.2(a). Only if the parties intended those specific effects to happen, will these follow from the contract. In this case, however, the legal effects intended by the parties shall, like any other contract term, comply with the principles of the governing law. Relying simply on the language of the contract, and particularly if the contract also contains a Sole remedy clause,150 a party could be deemed to be entitled to walk out of the contract if it pays the agreed amount of liquidated damages.151 The Liquidated damages clause could thus be considered as the price that a party has to pay for its default, and as an incentive to commit a default if the agreed amount is lower than the benefit that would derive from terminating the contract. In many countries, however, the principle of good faith prevents the defaulting party from invoking the Liquidated

145 146

147

148

149 150

151

See Peel (2011), Section 2.7. See, for Germany, Magnus (2011), Section 5.2.2.a.; for France, Lagarde et al. (2011), Section 10; for Denmark, Møgelvang-Hansen (2011), Section 3.1; for Russia, Zykin (2011), Section 2.5. See, for France, Lagarde et al. (2011), Section 10; see also regulation No 2016–131 dated 10 February 2016, reforming Article 1231–5 of the Code Civil; for Finland, Möller (2011), Section 3.1; for Norway, Hagstrøm (2011), Section 4.1; for Russia, Zykin (2011), Section 2.5. See, for Finland, Möller (2011), Section 3.1; for Norway, Hagstrøm (2011), Section 4.1; for Russia, Zykin (2011), Section 2.5. See, for Finland, Möller (2011), Section 3.1; for Norway, Hagstrøm (2011), Section 4.1. A Sole remedy clause is a clause according to which the parties agree that breach of a certain obligation shall exclusively trigger the remedy that is regulated in the contract in respect of that breach. Other remedies that may be available under the contract or under the governing law shall be excluded. In respect of exclusion clauses, see Mott MacDonald Ltd v. Trant Engineering Ltd [2021] EWHC 754 (TCC), recalling Photo Production Ltd v. Securicor Transport Ltd [1980] UKHL 2.

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damages clause if the default was due to that party’s gross negligence or wilful misconduct.152 The Liquidated damages clause is one more example of the different approach to drafting and interpretation in the common law and in the civil law traditions. Whereas the former permits circumventing the law’s rules by appropriate drafting, the latter integrates the language of the contract with the law’s rules and principles. 3.5.3 Force Majeure Recent events have shown the importance of considering the legal effect of unforeseen circumstances affecting the performance of a contract. The COVID-19 pandemics caused lockdowns and consequent production stops, as well as transportation difficulties; important transportation disruptions were caused by an accident that blocked the Suez Canal for several days; war actions in Ukraine prevent performance of various contracts and the connected economic sanctions affect performance of yet other contracts. When performance of a contract is prevented by an external, supervening, unforeseeable and irresistible event, the question that arises is which of the contract parties shall bear the consequence. Is the prevented party liable for not having fulfilled its obligations? Or is non-performance excused? Often, contracts contain a clause, a so-called Force majeure clause, specifying that non-performance by a party of its obligations is excused if it is due to an impediment beyond that party’s control, that could not be foreseen and could not reasonably have been overcome. Furthermore, the contract law of many systems belonging to the civil law contains a similar provision. This means that the defaulting party is excused even if the contract does not contain a Force majeure clause. Conversely, if the contract has a Force majeure clause, its construction may be influenced by the force majeure doctrine in the governing law. Force majeure provisions are usually not mandatory, therefore the parties are free to regulate the matter as they deem fit; however, interpretation of the parties’ regulation may be coloured by the governing law, as will be shown in the examples in Section 3.5.3(a) and (b). The goals of a provision on exemption from liability for non-performance may be several. In some legal systems, the provision may aim at allocating the risk for supervening unexpected events between the parties according to the system’s evaluation of which one of the two parties is closer to bearing that particular risk. This approach assumes a strict liability, triggered irrespective of the conduct of the party that was prevented from performing its obligations.

152

See, for France, Lagarde et al. (2011), Section 10; for Denmark, Møgelvang-Hansen (2011), Section 3.1; and for Finland, Möller (2011), Section 3.1. The law seems to be unsettled on this matter in Sweden; see Gorton (2011), Section 6.3.

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Alternatively, the provision may aim at rewarding a party who has acted with due diligence, so that a party is not supposed to bear the risk for unexpected events if that party has acted diligently and cannot be blamed for the occurrence of the impediment, even though it would be closer to bearing such a risk in an objective allocation of risk. Finally, the provision may be founded on the aim of avoiding unfair situations in the relationship between the parties. In many civil law states, a contracting party that fails to perform its obligations is excused if the failure to perform is due to an impediment that was unforeseen, outside of the control of the prevented party and the consequences of which could not reasonably have been overcome. Different legal systems have different terminology, but they obtain similar effects. In Germany, for example, the principle of excuse due to the force majeure circumstance is contained in § 275 of the Civil Code (BGB), and in Italy, in Articles 1218 and 1463 of the Civil Code (Codice Civile). In France, it was introduced with the reform of the Code Civil of 2016, see Article 1218 of the Code Civil. According to § 276 BGB, liability for non-performance arises only, in the case of an impediment as described in § 275, if the affected party has acted negligently or with wilful misconduct. According to § 280 ff. BGB, the negligence of the affected party is presumed, and therefore the burden of proof is on the affected party, which has to prove the lack of negligence in its conduct. As long as evidence of lack of negligence is produced, therefore, the affected party is not liable for its non-performance, even if the impediment occurred within the sphere of control of that party. Article 1218 of the Italian Codice Civile states that a party that does not fulfil its obligations correctly is liable, unless it proves that the non-performance is due to impossibility caused by events that that party is not responsible for. The letter of the rule, therefore, requires that the affected party proves that there has been an external event that has made the performance impossible, and this is a stricter criterion than the proof of lack of negligence provided for by German law. However, Italian courts read this Article together with Article 1176 of the Codice Civile, requiring that the debtor must exercise the due diligence of a reasonable person (bonus pater familias) in performing its obligations, and affirm that, as long as the affected party has presented evidence that it has acted with due diligence, the exemption provided for in Article 1218 may be applied.153 The specific regulation of the force majeure circumstance may vary from state to state; however, these regulations have in common the effect of excusing from liability the party that was prevented, if that party acted diligently. In the common law systems, contractual obligations are deemed to be absolute, and a party would normally not be excused for non-performance, as long as the impediment occurred within that party’s sphere of risk and without regard to that 153

C. 86/6404, C. 91/12346.

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party’s diligent or negligent conduct. English law has the doctrine of frustration, which could be compared with the civilian principle of force majeure. The doctrine of frustration, however, has a narrower scope of application. A contractual obligation is considered, as a starting point, as absolute, and failure to perform will never be excused;154 however, supervening situations may change the content of the contractual obligations, so that they are no longer the same obligations that were assumed under the contract, or may have become illegal. In these situations, the obligor cannot be expected to perform obligations that are different from those it had assumed, and the contract is frustrated. The so-called ‘test of a radical change in the obligation’ has been confirmed by the House of Lords (as it then was) and is deemed to be the prevailing doctrine even now.155 In keeping with the high threshold for considering a contract as frustrated, the effects of frustration are more drastic than those of a civilian force majeure. Under the civil law, the obligations are suspended by the force majeure circumstance, and are reinstated once the impediment disappears. Under the common law, frustration occurs when the obligations are so radically changed that they cannot be reinstated: frustration ‘kills the contract’.156 An example of the narrow scope of frustration can be seen in a High Court decision157 which declined to consider as frustrated a twenty-five-year lease of premises in London entered into by the European Medicines Agency two years before the UK voted to leave the EU – notwithstanding that the Agency after Brexit would lose the privileges and immunities it enjoys under EU treaties and would not be in a position to operate in England. The Court of Appeal has also interpreted narrowly express force majeure clauses in the contract, declining to apply clauses that provided for the suspension of the obligation to pay rent for commercial premises when the impediment did not squarely fit into the language of the clause. Thus, the Court found that a clause providing for suspension of the rent in case of damage that makes the property unfit for occupation does not cover a situation in which two cinemas could not be used as a consequence of restrictions under the COVID-19 pandemic.158 Depending on which law supplements the contract, therefore, the outcome for the parties may vary.159 As an illustration, in the following sections we can assume a contract without a Force majeure clause, or with a Force majeure clause that does not expressly cover 154 155

156

157 158

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Davies Contractors Ltd v. Fareham Urban District Council [1956] AC 696. See, for example, National Carriers Ltd v. Panalpina (Northern) Ltd [1981] AC 675, and further references in Beale (2022), paras 26-011ff. See Peel (2011), Section 2.10. According to Article 1 of the Law Reform (Frustrated Contracts) Act 1943, the parties to a contract that has been frustrated are ‘discharged from the further performance of the contract’. Canary Wharf (BP4) T1 Ltd v. European Medicines Agency [2019] EWHC 335 (Ch). Bank of New York Mellon (International) Limited v. Cine-UK Limited and London Trocadero (2015) LLP v. Picturehouse Cinemas Limited & Others [2022] EWCA Civ 1021. For an analysis of the different regulations in the Asia-Pacific region, which includes both civil law and common law traditions, see Sippel and Duggal (2021).

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certain circumstances that materialised during the performance of the contract. The clause will contain the usual criteria for excusing non-performance: that performance is prevented by an event beyond the party’s control that could not be foreseen and could not be reasonably overcome. Whether a particular event falls within this description or not depends on how the interpreter understands the criteria, which in turn is influenced by the governing law. Two scenarios may be assumed. (a) Supplier’s Failure We can assume that a producer of car components enters into a contract for the delivery of certain aluminium components made to the specifications of the buyer, a car producer. The seller/producer of components has to procure from third parties the aluminium for the production of the components. After having carried out an extensive process comparing the quality, reliability and conditions offered by the major aluminium suppliers on an international level, the seller enters into a contract for the procurement of aluminium with a recognised supplier, which was offering the best conditions. Due to supervening force majeure events, such as the unexpected closure of the Suez Canal, the selected aluminium supplier fails to deliver the proper quality of aluminium according to the time schedule agreed with the producer of the components. As a consequence of the lack of delivery of aluminium, the seller/ producer of components has to delay its production, including the production of the car components for the buyer. Therefore, the seller/producer of components cannot comply with its obligations towards the buyer. The question is whether the seller/producer of components is excused from its non-performance. The seller/producer of components acted diligently when it chose the supplier. Therefore, it is not to be blamed for the supplier’s failure to deliver aluminium. However, in an objective allocation of risk between the buyer of components and the seller of components, the risk that the seller’s supplier fails to deliver falls within the sphere of the seller. If the seller had chosen a supplier from a different part of the world, closure of the Suez Canal would not have prevented delivery. The case would be decided differently according to the approach adopted by the legal system. The legal systems that follow the criteria of strict liability and the allocation of risk between the parties according to the respective spheres of control would consider the choice of supplier to be an event falling within the sphere of control of the seller of components. Certainly, this impediment would not fall within the sphere of the buyer of components and, since all risks have to be allocated between the parties, it follows that it must fall within the sphere of the seller. This is quite understandable from the point of view of the absolute obligations of the parties: the seller has guaranteed that it would sell aluminium components, and the seller has the obligation to obtain the raw material in order to produce the components and deliver them to the buyer in accordance with the agreed terms. Therefore,

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the impediment could not be considered external to the seller, and the seller would not be excused from liability for non-performance. Under English law, the parties have an absolute obligation to perform the contract accurately. The only situation that may discharge a party from this duty is if a supervening event, without default of that party, makes the performance illegal or impossible. This eventuality is called frustration of the contract, and is applied restrictively, as was shown in the previous section. This is the same approach to the allocation of liability taken by the CISG according to the prevailing view, see Section 2.3.5(a). German law does not adopt the approach of strict liability and allocation of risk according to the sphere of control. German law moves from the notion of responsibility. If the prevented party is to be blamed for the impediment or its consequences, it cannot be excused from liability. If, however, the prevented party can prove that it has not acted negligently, it will be excused from liability. In the present case, as we have seen, the seller/producer of components has operated with diligence in the choice of supplier; therefore, it would not be considered liable for non-performance due to failure by the supplier. According to § 276 BGB, liability for non-performance arises only, in the case of an impediment as described in § 275, if the affected party has acted negligently or with wilful misconduct. According to § 280 ff. BGB, the negligence of the affected party is presumed, and therefore the burden of proof is on the affected party, which has to prove the lack of negligence in its conduct. As long as evidence of lack of negligence is produced, therefore, the affected party is not liable for its non-performance, even if the impediment occurred within the sphere of control of that party. The difference in attitude, however, is reduced in respect of what, in the Germanic tradition, is called generic obligations; that is, the obligation to supply certain goods that are not individually specified and can therefore, in the case of destruction or other impediments in the delivery, easily be substituted with equivalent goods that are readily available on the market. The substance of this distinction, unknown in the common law systems and in the CISG, is that the performance is not deemed to be prevented, even if the goods that were meant to be delivered are destroyed or otherwise cannot be delivered, as long as the goods that were promised are available on the market and the seller is capable of procuring them from another source. As a result, in the Germanic systems, the liability in case of non-performance of a generic obligation is closer to the strict liability of the common law. The distinction between generic obligations and specific obligations, however, does not seem to add anything to a careful interpretation of the concept of impediment: as long as similar goods are available, there is no impediment that prevents delivery. A seller that fails to procure the available goods cannot be deemed to have acted with due diligence, and cannot, therefore, be excused. Also in the Germanic systems, therefore, it would be possible to apply a strict standard of liability without making use of the notion

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of generic obligations. The category is, therefore, strictly speaking, redundant, and was abandoned when the BGB was reformed in 2001 – a reform which was inspired by the CISG. If we assume that the aluminium was to be delivered as a special alloy made for this particular contract, the goods to be delivered are no longer considered generic, and the strict standard of liability does not apply. A similar approach is advocated by parts of Norwegian legal doctrine, see Section 2.3.5(a). The distinction between common law and civil law in the context of liability for non-performance can be explained with the already mentioned inclination of the English system to privilege predictability for the sake of ensuring that business is carried out smoothly, rather than ensuring that an equitable justice is made in the specific case. Common law (and the CISG according to the prevailing view) allocate the risk of non-performance between the parties according to where it is most closely to expect that the risk should be borne. This objective rule is not to be defeated by subjective criteria such as a lack of negligence, because it would render the system less predictable. Civil law systems, as already pointed out, privilege (to different degrees) the subjective elements of the specific case in order to ensure that an equitable solution is reached. (b) Choice Between Contracts We can assume that the producer of car components has entered into two contracts for the delivery of customised car components to two different car producers. When the seller has nearly completed production for both buyers, an earthquake partially destroys the seller’s storage facilities. As a consequence, the seller is capable of delivering the total agreed volume on the agreed delivery date only to one buyer, not to both; alternatively, the seller could deliver on the agreed delivery date only part of the agreed volume to each of the buyers. We can assume that the circumstances around the destruction of the storage facility qualify to excuse liability for non-performance; that is, that the facility was built according to the latest construction and safety standards, all security measures had been properly taken and so on. The question is whether the seller is excused from its partial non-performance, and in what way. Various legal systems would come to different results. First, not all systems would recognise the situation as a ground for partial excuse of the seller and, second, the systems that would assume a partial exemption provide for different consequences of the excuse. Some legal systems, such as Italian and German law, would most probably decide the case by excusing the seller from the part of the delivery that has become impossible, and requesting that the impediment is allocated pro rata among the various buyers; that is, that each delivery is reduced proportionally with the reduction in the

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seller’s capacity due to the partial impediment.160 If the earthquake destroyed 50 per cent of the products, the seller is excused for failure to deliver 50 per cent of the agreed volume to each of the parties. Another approach may be found in Norwegian law. Although Norwegian law has no clear rule for this eventuality, an obiter dictum in a Supreme Court decision, which has been supported by legal doctrine, seems to indicate that in the present situation the seller would be obliged to perform in full its obligations arising out of the oldest contract, whereas it would be excused from non-performance of the newest contract.161 English law would not excuse the seller at all, in accordance with a judicial rule that is being heavily criticised in English legal doctrine.162 The rule stems from a decision rendered in a case in which the affected party had allocated a certain vessel from its fleet for the performance of a particular freight contract. The allocated vessel sank, and the performance of the freight contract was prevented, because other vessels of the fleet were allocated to other freight contracts and were therefore not available. The Court found that the contract could not be deemed to have been frustrated. The real cause of the non-performance was said to be the affected party’s election to use that particular vessel for that contract, rather than the sinking of the vessel. Had the affected party elected to use another vessel, the contract could have been performed. The result of this reasoning is that a carrier should regulate an exemption from liability for this eventuality in the contract.163 The abovementioned shows that situations may be regulated in different ways, according to the governing law, even if the contract is silent. Since some of these regulations may bring forth quite undesirable results, the parties should enquire about the consequences under the governing law of not providing for a contractual regulation of those circumstances – such as, for example, partial impediment and plurality of contractors. If the enquiry shows that the governing law has a regulation that is not deemed appropriate, and if that regulation is not mandatory, the parties should draft in their contract detailed clauses regulating those eventualities. 3.5.4 Hardship Clause (Material Adverse Change) Commercial contracts may contain a so-called Hardship clause, for example, as follows: Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the 160

161 162

163

The eventuality of a partial impossibility and of a corresponding partial excuse is regulated expressly by the Codice Civile in Article 1258, and it can be inferred from the wording of § 275(1) BGB. Rt. 1970 p. 1059, 1064; see Hagstrøm (2021), p. 290. J. Lauritzen AS v. Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep. 1; similarly, on an impediment which was not the only cause for non-performance, see Seadrill Ghana Operations Limited v. Tullow Ghana Limited [2018] EWHC 1640. For a criticism, see Beale (2022), para 26–094. This is the suggestion that is made in the judgment The Super Servant Two, p. 158, which is also repeated by legal doctrine quoted in footnote 162.

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the impact of the governing law following provisions on hardship. There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and (a) the event was beyond its reasonable control and was one which it could not reasonably have been expected to have taken into account at the time of the conclusion of the contract; and that (b) the event or its consequences could not reasonably be avoided or overcome. If such hardship occurs the parties are bound, within a reasonable time of the invocation of this Clause, to negotiate alternative contractual terms which reasonably allow for the consequences of the event.

A comparable clause is the so-called Material Adverse Change clause (also known as MAC clause). Generally, MAC clauses are to be found as conditions for the closing of a deal: after the contract is signed, it may be necessary to carry out various formalities before the deal becomes effective (so-called closing). If, in the time between the signing and the closing, an event occurs that materially negatively affects the interest of one party in the deal, that party has the option to withdraw. Sometimes, MAC clauses are intended to be applicable throughout the duration of the contract. In this case, they have a function comparable to the Hardship clause: when the adverse event occurs, it may trigger one party’s right to require renegotiation of the contract, or even to terminate it. These clauses regulate, sometimes in detail, under which circumstances and with which consequences the parties may be entitled to renegotiate their contract because of a supervening and unexpected imbalance in the respective obligations. English law does not provide for any mechanism to suspend or discharge the parties from obligations if the performance, though still possible, becomes more onerous for one party. French law has long had a similar approach but introduced a right to renegotiate in case of hardship (‘imprévision’) in its reform of 2016, see Article 1195 of the Code Civil. Other civilian systems permit a party to request a modification of the obligations if changed circumstances seriously affect the balance in the contract.164 The contract clause, thus, gives the parties stronger rights than they would have had under English or elder French law, while at the same time, it may restrict the rights that the affected party would have under other laws. The parties may have introduced a Hardship clause in the attempt to take into their own hands the regulation of supervening circumstances and to exclude the application of corresponding rules in the governing law. A clause permitting the affected party to request renegotiations will be enforced in a system where such a right is not recognised by the general law, because the clause will simply create a new regulation, based on contract and not prohibited by law. The 164

See, for Denmark, Møgelvang-Hansen (2011), Section 4.2; for Finland, Möller (2011), Section 4.2; for Norway, Hagstrøm (2011), Section 5.2. For Germany, see § 313 of the BGB and for Italy see Articles 1467–9 of the Codice Civile.

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interpretation of the clause, however, may be coloured by the governing law. Thus, English courts may project onto the clause the strict approach typical of English law and may interpret the clause restrictively. The High Court, for example, found that the criteria were not met when a broadcasting company requested to renegotiate a broadcasting contract with the Premier League as a consequence of the delays caused by the first COVID-19 lockdown.165 Corresponding circumstances were deemed by the High Court to be sufficient to terminate a broadcasting contract relating to the premier rugby union competitions in Europe, because the contract expressly mentioned ‘epidemics’ as a circumstance that would trigger termination.166 The reverse is even more problematic: a detailed Hardship clause in a contract subject to a law containing a hardship regulation may have been written with the purpose of restricting the right that the affected party has under the applicable law. For example, the clause may contain an intentionally restrictive definition of the events that trigger the remedy, significantly more restrictive than the applicable law’s standard of ‘more burdensome performance’. Additionally, the clause may regulate that the only possible remedy is the request of renegotiation without suspending the duty to perform, and thus exclude other remedies, such as withholding the performance, which may be permitted by the applicable law. The parties may actually have written such a restrictive Hardship clause with the purpose of limiting the application of the governing law’s generous rules. However, it is not certain that the clause will obtain the result of replacing the regulation contained in the governing law. The clause may be understood as permitting supplementation in the case of supervening imbalance in the contract and may thus be cumulated with the applicable law’s rules.167 3.6 Contractual Terms Contradicting Mandatory Rules of the Governing Law In some cases, the governing law may contain mandatory rules – that is, rules which cannot be derogated from by the parties. If these rules are contradicted by the terms of the contract, the regulation contained in the contract will have to be overridden by the mandatory rules of the governing law. If the parties had taken into consideration the governing law while drafting, they might have been able to structure the contract in such a way that it would not have contradicted the governing law. Here it is important to notice that some contractual terms that would be compatible with certain governing laws would be in contrast with mandatory rules of other

165

166 167

The Football Association Premier League Ltd v. PPLive Sports International Ltd [2022] EWHC 38 (Comm). See also Decura IM Investments LLP v. UBS AG [2015] EWHC 171 (Comm). European Professional Club Rugby v. RDA Television LLP [2022] EWHC 50 (Comm). See, for Denmark, Møgelvang-Hansen (2011), Section 4.2; for Finland, Möller (2011), Section 4.2; for Norway, Hagstrøm (2011), Section 5.2. See, however, German law that permits the parties to derogate from the statutory regulation in § 313 of the BGB: Magnus (2011) Section 5.3.2(a).

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governing laws. The same contract, therefore, might be binding or not, depending on which law is governing. In the following section we will see some cases that illustrate the relationship between contractual terms and mandatory rules of the governing law. 3.6.1 Firm Offer and Consideration We may first look at a situation where one party has sent an irrevocable offer to the other party, without considering the governing law. We can assume that the offer contains the following clause: ‘this offer is firm and cannot be revoked by the offeror before 30 days from the date hereof.’ The remaining part of the offer is devoted to the specification of the offered goods or services, their price, the timing for performance and so on. The offer contains no other clauses and is signed by the offeror. As long as the offer is not accepted, there is no contract between the parties. However, making a written offer with a promise of irrevocability has legal consequences that are regulated by the contract law of each state. What would be the legal consequences if the offeror decides to revoke the offer before the term indicated in the firm offer has elapsed? The answer to this question varies according to which law governs the offer, as well as the structure of the offer. In particular, the effectiveness of a firm offer is prevented under English law by the doctrine of consideration. Consideration is a rule of English law according to which a unilateral promise is not enforceable: to create binding obligations, both parties need to commit to obligations that will create, for each of the parties, both a detriment and a benefit, see Section 3.1. In the case assumed here, a promise to keep the offer open needs consideration to be binding. A simple unilateral offer is a detriment for the offeror and confers no benefit; it confers a benefit on the offeree, without requiring any detriment from it. Consideration is deemed to be given, and the offer is binding, if the offeror gets a benefit or if the offeree incurs a detriment in connection with keeping the offer firm.168 In contrast, under the civil law, a unilateral offer is binding without the need to enquire whether there was a mutual exchange of benefit and detriment. As an illustration, we can examine two scenarios. (a) Revocation A commodity trader receives an irrevocable offer to buy a certain volume of a commodity at a certain price. The trader does not accept the offer immediately but makes contact with other potential sellers to verify whether the offered conditions

168

This principle was laid down in Stilk Myrick [1809] 2 Camp 317; Offord v. Davies (1862) 142 ER 1336. The principle still prevails, although with some qualifications: see Beale (2022), paras 6–001ff.

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are competitive. In the meantime, the offeror has found another buyer who is willing to pay a higher price and revokes its offer to the trader before the offer’s term elapses. Under civil law legal systems, the irrevocability clause contained in the offer would be considered binding,169 and any revocation of the offer made before the term would not have legal effects. The offeror will continue to be bound by its offer in spite of the revocation, and in case of acceptance by the offeree within the term, the contract comes into place between the parties. This means that the offeror is in breach of contract if it cannot deliver because it sold the goods to the third party. Under the English legal system, on the contrary, the offer would be considered a unilateral obligation of the offeror, and, as such, not enforceable due to lack of consideration; therefore, the revocation of the offer would have been considered valid. If, on the contrary, the offeree had immediately accepted the offer, possibly making the acceptance subject to certain conditions precedent being fulfilled, then the irrevocability clause would be valid and binding on the offeror, as the obligations would be bilateral. The doctrine of consideration, therefore, significantly affects the enforceability of the expressed terms contained in the offer, see Sections 3.6.2(a) and (b). Another way of making a unilateral offer binding on the offeror is to formalise it as a deed. (b) Revocation and Reliance Let’s assume that a construction company intends to participate in a tender relating to the construction of some infrastructure. In order to prepare the bid, the contractor requests irrevocable offers from a series of sub-contractors. The terms and conditions of the sub-contractors’ offers give the basis for calculating the price, the timing and the other specifications of the project described in the contractor’s bid. The bid of the contractor wins the tender and is awarded the construction contract. After the contract is awarded, but before the term contained in the sub-contractors’ offers elapses, one of the sub-contractors revokes its offer. This scenario differs from the previous one especially in one aspect, which is relevant here. In this scenario, the offer has induced an action by the offeree (the calculations relating to the bid) with considerable consequences (the presentation of the bid, the award of the contract); in the previous scenario, the offeree has only made some telephone calls, but has not committed itself towards third parties or engaged in extensive activity as a consequence of the offer. This difference does not have consequences under the civil law tradition, and the revocation of the offer will have no effect in either scenario. Under the common law, however, the difference might have consequences.

169

Under German law, for example, § 145 of the BGB specifies that an offer is binding on the offeror, unless by its terms it is revocable.

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A contract that does not have consideration is not enforceable under English law, as seen. The English legal system, however, has elaborated certain means to prevent the strict application of the law leading to unreasonable results. A strict application of the doctrine of consideration may lead to unreasonable results. Therefore, courts have developed a series of restrictions, see Section 3.6.2(b). However, in the particular case assumed here, the doctrine remains applicable under English law, as we will see. These restrictions to the enforcement of rights are available not ‘at law’, but ‘in equity’ (see, on this dichotomy Section 3.3): if the application of the formal requirements of law leads to a result that under the circumstances of the case is inequitable, the affected party will be able to avail himself of some remedies in equity. The equitable remedy relevant to the case described herein is promissory estoppel, which neutralises the effects of the rule of consideration in many cases.170 According to this remedy, if parties to a transaction have relied upon a promise that strict legal rights will not be acted upon, they will not be allowed to go back on that assumption if it would be unfair to do so. In the scenario discussed here, the strict legal right would be the right to revoke an offer for lack of consideration. The equitable remedy of the promissory estoppel, however, is not available in the case described here: a promissory estoppel is available when there is already a cause of action; that is, where the parties were already bound to each other by a contract. English law does not consider an irrevocable offer as a cause of action; therefore, the equitable remedy is not available, and the doctrine of consideration remains applicable.171 In the United States, on the contrary, the obstacle of the doctrine of consideration has been overcome. The Restatement of Contracts, similarly to English law, maintains that the offer would be considered a unilateral obligation and therefore unenforceable, unless the offer has been accepted by the offeree. However, in this scenario, the offer has induced some action by the offeree, and the Restatement would in this case consider the irrevocability clause as binding to the extent necessary to avoid injustice.172 Similarly, the Uniform Commercial Code provides: An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror. 173

In conclusion, the offer, drafted as mentioned, would be binding under civil law systems and according to the Uniform Commercial Code, in the United States; but it 170 171 172 173

See, for more details, Beale (2022), paras 6-093f., 6–114. See, for more details, Beale (2022), para 6–106. American Law Institute, United States Restatement (Second) of Contracts (1981), para 87.2. Uniform Commercial Code of the United States, para 2–205.

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would not be enforceable under English law. Had the offeree taken into consideration the English governing law, it would have accepted the offer under certain conditions (for example, under the condition that the offeree is awarded the contract in the tender). Alternatively, the offeree could have requested that the offer provides a space for the offeree’s signature and the wording ‘for acceptance’, or could have sent a separate, written acceptance to the offeror; in this way, the offer would have also become binding under English law. This shows how important it is to have in mind the governing law while drafting a contract. Knowing the existence of certain rules, such as the rule on consideration in English law, will permit the structuring of the contract in a way that is appropriate to render it enforceable – for example, by providing for acceptance by the offeree. 3.6.2 Amendments to a Contract A further illustration of the importance of having in mind the governing law while drafting a contract is the situation where two parties decide to amend an existing contract between them. We can assume that, because of a misjudgment of the volume of work required under the contract, the parties enter into an amendment contract according to which the price for the services to be rendered under their contract is increased, whereas all other terms and conditions of the existing contract remain unchanged. We can assume that the amendment contract makes reference to the contract that is intended to be amended and contains a clause according to which ‘The parties agree to modify clause XX of the contract, so that the price to be paid to the subcontractor is 100 instead of 80. All other terms and conditions of the contract remain unchanged’. Would a contract formalising such an amendment be enforceable? The answer to this question varies according to the law governing the amendment agreement. As an illustration, we can examine two scenarios. (a) Unilateral Obligation A constructor, engaged in a major project for the construction of various apartments, enters into a contract with a sub-contractor, who is to carry out some specialised carpentry work. They agree on a lump sum for the sub-contract; however, the subcontractor soon realises that it had underestimated the amount of work required. If the carpenter was to continue performing its obligations under the sub-contract at the originally agreed price, it would not make any profit out of the sub-contract. The sub-contractor invites the constructor to renegotiate the price, and the parties reach an agreement on a price increase. After some time, the constructor finds that the new price is too high and tries to avoid application of the amendment contract.

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If the amendment contract were regulated by a law belonging to the civil law system, it would be considered as valid and binding. A properly signed document containing an obligation for one of the parties is binding, even if the obligation consists in the amendment of another obligation assumed by those parties under another contract. Traditional grounds for invalidity are if a contract has been entered into as a consequence of duress, error or other similar circumstances that affect the will of one of the parties, or if it contains unfair terms and so on. Otherwise, a contract is valid and binding (apart from situations where one of the parties did not have the authority to enter into the contract, etc., but this is not relevant to our discussion here). If the amendment contract were subject to English law, it would not be automatically considered binding, since it would have to be measured against the doctrine of consideration (see Section 3.6.1), which requires a contract to have bilateral obligations, providing for benefits and detriments for both parties to a contract. In the case of a sale agreement, for example, the seller has the benefit of receiving the price, and the detriment of delivering the goods; the buyer will have the benefit of receiving the goods, and the detriment of paying the price. In an amendment contract such as the one envisaged, however, the sub-contractor would have the benefit of receiving the increased price, but the detriment would consist simply in the performance of the carpentry work that the sub-contractor was already committed to performing anyway under the original contract. There would, therefore, not be a detriment for the sub-contractor as a consequence of the amendment contract. Similarly, the constructor would have the detriment of paying an increased price, but as a benefit, it would only have the performance of the work that it was entitled to obtain anyway under the original contract. There would, therefore, not be a legal benefit for the constructor in entering into the amendment contract. The amendment contract lacks consideration and is therefore not enforceable at common law. An equitable remedy based on the doctrine of promissory estoppel may be applicable, see Section 3.6.1(b). If the parties have agreed to amend a contract, they have created for each other the assumption that they will not insist on applying the original terms of the contract, in spite of the fact that the lack of consideration renders the amendment agreement unenforceable at law. The promissory estoppel would prevent the party making the promise from going back on its promise and insist on the application of its strict legal rights instead. A promissory estoppel, however, is not always applicable, as was explained in Section 3.6.1(b). Among the requirements that have to be met, two might affect the applicability of the remedy in the present case. First, the effect of going back on the promise and insisting on the strict legal rights must be inequitable. If the amendment of the contract was induced by one party that took advantage of the other party’s financial situation, for example, the result of not enforcing the amendment would not be considered inequitable.174 Second, the party that is relying on the 174

D & C Builders Ltd v. Rees [1966] 2 QB 617.

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amendment (the promisee) must have altered its position in reliance on the amendment. The scope of this requirement is not completely clear: under English law it seems, however, that it implies that the promisee must have acted in reliance on the promise in such a way that a revocation of the promise would be detrimental to the promisee.175 Furthermore, a promissory estoppel is not considered to be permanent in its effects: it does not discharge the contractual party from the original obligation (i.e., from the obligation in the terms prior to the amendment); it simply suspends that obligation. This means that the original obligation might be enforceable in the terms prior to the amendment, if the other party serves prior notice to that effect.176 (b) Factual Benefit In the same scenario as presented in the previous section, the carpenter realises that a continued performance of the sub-contract at the originally agreed price would mean not only that the sub-contract is not profitable, but also that it would expose it to considerable losses. As a consequence of such losses, the carpenter might face insolvency and subsequent liquidation; this, in turn, would mean a considerable delay for the constructor, since it would have to replace the sub-contractor and would even run the risk of not finding a new carpenter capable of replacing the specialised skills of the sub-contractor. The civilian tradition would have the same approach as in the scenario presented in Section 3.6.2(a) and would consider the amendment agreement binding. The common law tradition would have an approach different from the one taken in the scenario presented in Section 3.6.2(a). The sub-contractor faces bankruptcy if the original contract is not amended, and this can have negative consequences on the constructor: the sub-contractor will not be in a position to complete its work, the constructor will have to face costs trying to find a substitute contractor to finish the work and the total project will be delayed. Therefore, the constructor has an interest in avoiding the bankruptcy of the subcontractor. In this case, an evolution of the English doctrine of consideration would make the amendment contract binding and enforceable, since the constructor can be deemed to obtain a benefit from the amendment contract: not a legal benefit, but a factual benefit, and that is considered as sufficient to qualify as consideration.177 The foregoing shows that the governing law may have a considerable impact on the effects of a contract: even if the same result may, in abstract terms, be obtained in various legal systems, achievement of that result may be prevented in the specific case if the contract does not comply with the requirements set by a certain law – as the case is with the requirement of consideration in English law. 175 177

See, for more details, Beale (2022), para 6–102. 176 See, for more details, Beale (2022), para 6–104. This was held in Williams v. Roffey Bros. & Nicholls (Contractors) Ltd [1991] 1 QB 11. See also Beale (2022), para 6–005.

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3.7 Does Arbitration Ensure a Uniform Approach to Contractual Terms? An observer may be tempted to dismiss with a pragmatic comment the considerations made previously about the relevance of national law: most international contracts contain an arbitration clause, and therefore disputes arising in connection with them will be solved by arbitration and not by the courts. International arbitration is a system based on the will of the parties, and arbitrators are expected to abide by the will of the parties and not apply undesired sources that bring unexpected results. Moreover, arbitral awards enjoy broad enforceability and the possibility of courts interfering with them is extremely limited, so that the court’s opinion on the legal effects of the contracts becomes irrelevant.178 While all these observations are, to a large extent, correct, they do not necessarily affect the observations made here. It is true that (with the exception of English awards rendered in England and applying English law) an arbitral award will be valid and enforceable even though it does not correctly apply the governing law, see Section 5.3.3. Not even the incorrect application of mandatory rules of law is a sufficient ground to consider an award invalid or unenforceable. Therefore, arbitral tribunals are quite free to interpret contracts and to decide how and if at all these contracts shall interact with the governing law. As a matter of fact, sometimes it is even affirmed that arbitral tribunals owe their abidance to the contract, and not to the law: hence, if the governing law affects or even invalidates the contract, it should be disregarded.179 This alleged independence from the law, however, will not supply the arbitral tribunal with a satisfactory answer to the question of how to interpret and construe the contract. Given the large leeway enjoyed by arbitral tribunals, it has been suggested (in my opinion, correctly) that the matter of application of the law by the arbitral tribunal is an area where the legal culture plays an important role.180 This is not a mere question of verifying whether the contract complies with mandatory rules of the governing law. It is a deeper and subtler question, and it affects the values upon which the interpretation and construction should be based. 178

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On the enforceability of international awards and the scope within which national courts may exercise a certain control, see Chapter 5. Luca Radicati di Brozolo, ‘Party Autonomy and the Rules Governing the Merits’. In Franco Ferrari (ed.) Limits to Party Autonomy in International Arbitration (Juris, 2016), pp. 331–63, paras 4–5. By contrast, affirming that the arbitral tribunal is to apply the law accurately, Joshua Karton, ‘The Arbitral Role in Contractual Interpretation’. Journal of International Dispute Settlement 6 (2015), p. 4. Also, Franco Ferrari and Linda Silberman, ‘Getting to the Law Applicable to the Merits in International Arbitration and the Consequences for Getting It Wrong’. In Franco Ferrari and Stefan Kröll (eds.), Conflict of Laws in International Arbitration, 2nd ed. (Juris, 2019), pp. 371–442. Christophe Seraglini, ‘L’influence de la culture juridique sur la decision de l’arbitre’. Mélanges en l’honneur du Professeur Pierre Mayer (LGDJ, 2015), p. 830. For an extensive discussion and bibliographic references, see Giuditta Cordero-Moss, ‘The Arbitral Tribunal’s Power in Respect of the Parties’ Pleadings as a Limit to Party Autonomy: On Jura Novit Curia and Related Issues’. In Franco Ferrari (ed.), Limits to Party Autonomy in International Commercial Arbitration (Juris, 2016c), pp. 289–330. See also International Law Association Committee on International Commercial Arbitration (2008).

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We have throughout this chapter highlighted how different legal systems have different legal approaches to the advisability of ensuring a fair balance between the parties’ interests rather than applying the contract literally; to the role of the interpreter in respect of obligations that are not explicitly regulated in the contract; to the existence of a duty of the parties to act loyally towards each other; and to the existence and extent of a general principle of good faith. There is a different understanding of what is a fair application of the contract. Is it fair when the contract is applied literally, even though this may lead to unbalanced results? Or is it fair when the contract is applied purposively, even though this may lead to disregarding the contract’s words? The interpreter’s legal tradition may lead to a construction of the contract that is more literal or more purposive. Some arbitrators may be unaware of the influence that the legal system exercises on them: they may have internalised the legal system’s principles in such a way that construction based on them feels like the only possible construction. Others, and particularly experienced international arbitrators, may have been exposed to a variety of legal systems and thus have acquired a higher degree of awareness that the terms of a contract do not have one single natural meaning, but that their legal effects depend on the interaction with the governing law. These aware interpreters face a dilemma when confronted with a contract drafted with a style extraneous to the governing law, as described in Chapter 1. On the one hand, they do not want to superimpose on the contract the principles of a law that the parties may not have considered during the negotiations. On the other hand, as seen in Chapter 2, they have no uniform comprehensive set of principles permitting them to interpret a contract independently from the governing law. The dilemma is not easy to solve, not even for an arbitrator, particularly if one of the parties invokes the governing law to prevent a literal application of the contract (notwithstanding that that party might not have been aware of the governing law during the negotiations). For example: a party may, for the purpose of rebutting the other party’s allegations that the contract was breached, argue that a literal interpretation of the text would render the contract invalid under the governing law – for example, because it violates competition law. Alternatively, a party may argue that a literal interpretation would conflict with the principle of good faith – for example, because the invoked remedy would not be proportionate to the consequences of the default. Should the arbitral tribunal consider the terms of the contract as being isolated from the governing law? If so, on what basis can the contract be construed? There is a diffuse sentiment that international arbitration is more apt in understanding the interests of the parties than national courts are. It is quite unclear, however, what this implies regarding the issue of contract interpretation and construction. Are arbitrators more disposed than national courts to rely on the language of the contract and to disregard possible interference from the principles of national law? Alternatively, do they more readily rely on considerations of good faith, on the

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economic interests that are at stake, on trade usages and the like than national courts do? I will argue here that there is no unitary approach within arbitration. As seen in Chapter 1, international contract practice assumes that contracts are self-sufficient and not affected by the governing law. This contract practice may lead to undesired legal effects and is not optimal when looked at from a legal point of view – although, when viewed from a wider perspective, it may turn out to be more advantageous than the alternative, which would mean employing substantial resources in order to ensure legal certainty. The question is whether international arbitration has better means to tackle this divergence than national courts have. There seems to be no absolute answer to the question of what interpretation better meets the expectations of the parties: a strictly literal interpretation of the terms of the contract, or an integration of the contract with principles of good faith and commercial sense based on law, trade usages, transnational principles or other sources. The former would better reflect the parties’ expectations if it is assumed that the parties have consciously intended to achieve specific legal effects with each and every one of the words that they have written in the contract. This, however, does not reflect the reality of how contracts are drafted and negotiated, as seen in Chapter 1. As also seen in Chapter 1, the practice of drafting contracts without regard to the governing law does not mean that the parties have opted out of the governing law for the benefit of some transnational set of rules. Just because the parties decided to take the risk of legal uncertainty for some clauses does not mean that the interpreter has to refrain from applying the governing law or that the legal evaluation of these clauses should be made in a less stringent way than for any other clauses. In addition, the fact that some clauses, such as boilerplate clauses, are not negotiated, indicates that giving them excessive importance in the interpretation of the contract would not necessarily result in the interpretation being faithful to the parties’ intentions. The arbitral tribunal is, therefore, expected to understand the dynamics of negotiations in order to properly give effect to the intention of the parties. Blindly applying the wording of the contract without any regard to the principles of the governing law or, to the extent that they are determinable and applicable, of transnational law, would not necessarily reflect the true intention of the parties if the clause that is being applied literally is one of the boilerplate clauses that the parties did not consider carefully. Integrating or correcting a clause with national or transnational principles, on the other hand, might not necessarily reflect the parties’ intention either, if the clause that is being interpreted is one of the clauses that the parties carefully negotiated. Furthermore, such an invasive interpretation of the contract would affect predictability. As seen in Section 1.7, predictability is essential for the circulation of contracts. However, without such an invasive interpretation, speculative conduct by one party may be allowed – possibly with detrimental consequences for the other party, and under circumstances that do not reflect the original intention of the parties.

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3.7.1 Arbitration as a Unitary System? The question that arises, then, is: does international arbitration ensure such a nuanced interpretation of contracts? Arbitration is often referred to as an expression of the international business community, thus giving the impression that it is a unitary legal system. What characterises international arbitration, however, is probably the very lack of a unitary system. The formal framework for arbitration grants it a relative autonomy, which actually gives the appearance of a unitary system. As Chapter 5 will explain, courts must recognise arbitration agreements, and thus dismiss claims that are covered by an arbitration agreement. They also must recognise and enforce arbitral awards without any review of the merits or of the application of law – with only a restrictive and exhaustive list of grounds to refuse recognition and enforcement. The will of the parties is central in arbitration. The power of the arbitral tribunal actually derives from the agreement of the parties; therefore, the arbitral tribunal is obliged to follow the parties’ instructions in respect of the scope of the dispute, the law to be applied, the remedies to be granted and so forth. The foregoing draws a picture of international arbitration as a mainly autonomous system giving a central role to the parties’ will. It is therefore fully understandable that the general impression is that arbitration is a system that reflects the parties’ will without being subject to the formalities of a strict application of the law. When applied to the question of the interpretation and construction of contracts, this may lead to the assumption that arbitral tribunals are particularly faithful to the wording of the contract and are inclined to follow the parties’ will without interference from considerations of law. This system, however, does not necessarily lead to a predictable and uniform method for the interpretation of contracts. That arbitral tribunals shall follow the parties’ instructions means that they shall aim at being faithful to the contract by understanding the business purpose of the contract and the dynamics of drafting and negotiating contracts. This implies that the degree of literal interpretation may vary, depending on the importance that the clauses have for the commercial meaning of the contract as well as the level of awareness that the parties had in respect of the effects of the clauses. As we have seen, an important assumption for a faithful interpretation of the contract lies in understanding the process that leads to the text of the contract: drafting, negotiations, acceptance of legal risk. There is not a clear line between the formalistic and contextual interpretation of contracts: context may be used to cast light on the parties’ intentions, particularly when the contract may be interpreted in different ways. There is, however, a difference between a contextual interpretation that is made necessary by a poorly drafted contract and second-guessing what the parties should have written in the contract to comply with principles of fairness or good faith.

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This, furthermore, has to fit with the requirement of predictability and objectivity. Particularly when contracts are meant to circulate (for example, because they are assigned to third parties, are used as security or serve as a basis for calculating insurance premiums) it is essential that they are interpreted strictly in accordance with their terms: third parties are not aware of and should not be assumed to take into consideration the relationship between the original parties to the contract, what the original parties may have assumed or intended, or any circumstances that relate to the original parties and that may have had an impact on these parties’ interests. It is, therefore, expected that a contract is interpreted primarily, if not exclusively, in light of its terms – without considering matters such as what a fair balance between the parties’ interests would be or what one party’s expectations might have been. This means, among other things, that an arbitral tribunal that decides a dispute under a law giving great importance to considerations of loyalty between the parties, or of good faith in the negotiations and in the performance of the contract, might be inclined to apply the law flexibly and to give effect to contract arrangements according to their terms in spite of a possible conflict with the governing law, whereas a court might have been more readily disposed to consider the terms as unbalanced or unreasonable, and to interpret them restrictively or extensively to avoid the result that follows from them. On the other hand, it cannot be excluded that (one of the) parties counted on the contract being construed in the light of the governing law. Disregarding the impact of the governing law on the contract terms, therefore, may come as a surprise. The foregoing shows that there is no basis to ensure a unitary approach in international arbitration. In addition may come the indirect influence of the legal tradition to which the arbitrators belong: as seen in Section 3.5.1, contract terms may be interpreted differently under the different governing laws. Contract wording does not have an absolute meaning flowing solely from the sematic meaning of the language. In order to produce legal effects, the wording evokes a legal framework. Even assuming that the arbitrators do not consciously apply a certain law to construe the contract, they may be influenced by the framework that is most familiar to them.181 3.7.2 Various Approaches The observations made result in the possibility that an arbitral tribunal will adopt a mixed approach to the interpretation of one and the same contract: an approach which is both formalistic and purposive, depending on the clause. In addition, there is, in the framework of arbitration, a variety of approaches to the interpretation and construction of contracts. 181

On a multidisciplinary research project that I am launching to analyse this unconscious influence, see Section 2.3.4.

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A seminar I organised at the University of Oslo in November 2011 in the framework of a research project, was devoted to the question of the interpretation of contracts in international arbitration.182 A panel discussed the parties’ expectations when drafting contracts, and confirmed the understanding of the dynamics of contract drafting described in Section 1.5: parties do not always expect that each and every one of the contract’s clauses will be enforced literally. Often, the parties do not even know whether these clauses are enforceable, and they consider their nonapplication as a legal risk that they are willing to take.183 Sometimes the parties believe that a properly drafted contract, which describes the deal in detail, will make redundant recourse to a governing law or external principles.184 Sometimes the parties do not bother describing the deal in excessive detail, and they rely on trade usages to integrate the contract.185 Sometimes a clause with a very technical legal meaning is inserted, without having given consideration to the legal definition and effects that that particular wording assumes.186 Another panel in that seminar discussed the arbitrators’ approach to the interpretation of contracts and identified a variety of approaches. Some arbitrators affirmed that they apply the governing law accurately if that law was chosen by the parties in the contract,187 quite irrespective of how considered the choice of law was and how much it influenced the actual drafting of the contract terms. These arbitrators, therefore, will superimpose on the contract terms any principles or rules of the governing law. Another approach was to take into consideration not only the governing law, but also the overriding mandatory rules of third countries, such as, for example, competition rules.188 According to a slightly less strict approach, arbitrators should take into account, though not necessarily strictly apply, the governing law as well as the rules of third countries.189 In a similar vein, it was said

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The programme for the seminar, Arbitration and Party Autonomy (APA), ‘Arbitration and the Not Unlimited Party Autonomy’ (2011), the list of panel participants and the transcript from the panel discussions are available at www.jus.uio.no/ifp/english/research/projects/choice-of-law/events/2011/ 2011-arbitration-and-the-not-unlimited-party-autonomy.html. See the interventions of David Echenberg, www.jus.uio.no/ifp/english/research/projects/choice-of-law /events/apa-transcript.pdf, ‘Transcript of the APA Seminar (‘APA’)’, pp. 24–6, as well as the interventions of Are Brautaset, pp. 22–4, Petri Taikalkovski, p. 32 and Fredrik Norburg, p. 28. See the intervention of Brautaset, ‘APA’, p. 22. See the intervention of Anders Ryssdal, ‘APA’, pp. 29–30. Taikalkoski, ‘APA’, p. 32, refers to a dispute where the in-house counsel of a company was asked to explain what she intended when she introduced in the contract the distinction between direct and indirect damages. Without giving any consideration to the sophisticated distinctions in this respect contained in her own legal system or in the governing law, she answered: ‘Isn’t it pretty obvious, direct damage is when money goes out of your pocket, and indirect damages is when money does not come into your pocket.’ It is, therefore, not always justified to assume that parties have a high degree of awareness about the legal effects of their contract terms. See the interventions of Cathrine Kessedjian, ‘APA’, p. 41 and Gustaf Möller, ‘APA’, p. 13. See the intervention of Stephan Jervell, ‘APA’, pp. 43–4. See the intervention of Luigi Fumagalli, ‘APA’, p. 49.

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that the governing law should be applied, but not in an overly formalistic way.190 A different approach was that international contracts should be interpreted in the light of transnational principles.191 This latter approach would lead to an interpretation of the contract that is not merely based on the contract terms, since transnational principles such as the UPICC or the PECL, as mentioned in Section 2.2.5(f), contain various expressions of the principle of good faith and fair dealing, which interfere quite heavily with the contract. Conversely, others found that contracts were increasingly being applied literally, without interference from outside principles, whether of law or of soft law.192 Yet other arbitrators stated that international contracts were not interpreted exclusively on the basis of their own terms, but in light of the parties’ interests and trade usages.193 Taking this line of reasoning even further is another approach, which is based more on a general understanding of the involved interests, rather than on specific sources of law. According to this approach, arbitrators are said to act according to a feeling of what is right,194 based more on the gut reaction of the individual person than on the legal system to which he belongs.195 Yet the legal background of the arbitrator is recognised as playing an important role, a sort of imprinting, which will influence the approach taken to, among other things, the interpretation of contracts. Thus, an arbitrator who arbitrates in various languages affirmed that she even thinks differently depending on the language in which she works, and jokingly defined her approach as Freudian; that is, led by her (legal) subconscious.196 This was echoed by others who spoke about the different ‘philosophical’ starting point from which lawyers from different legal traditions depart.197 An extensive international experience was considered to contribute to moderating the strong influence of a national legal background.198 If the debate in the abovementioned seminar may be deemed to be somewhat representative of the approaches that may be met in international commercial arbitration, the picture that results is one of marked diversity in the approach to the interpretation of contracts in international commercial arbitration: contract terms are not necessarily always applied in strict accordance with their terms. There are different degrees of interference and the sources of the interference also vary quite considerably. There is a scale moving from a strict application of the governing law to integrate the contract, via interpretation of the contract terms in the context of transnational soft law principles such as the UPICC and the PECL (which are heavily based on the principle of good faith and may give rise to a substantial 190 191 192 193 194 195 196 197 198

See the intervention of Ivan Zykin, ‘APA’, p. 17. See the intervention of Alexander Komarov, ‘APA’, pp. 45–6. See the intervention of Taikalkoski, ‘APA’, p. 37. See the intervention of Ryssdal, ‘APA’, pp. 29–31. See the intervention of Michael Schneider, ‘APA’, p. 57. See the intervention of Jernej Sekloec, ‘APA’, pp. 11–12. See the intervention of Kessedjian, ‘APA’, p. 40. See the interventions of Echenberg, ‘APA’, p. 35; Norburg, ‘APA’, pp. 27–8 and Schneider, ‘APA’, p. 57. See the intervention of Brautaset, ‘APA’, p. 24.

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possibility of interfering with the contract language), to interpretation of the contract on the basis of its own terms combined with the parties’ interests and trade usages, to interpretation of the contract solely on the basis of its own terms. There is also a further approach to interpretation of the contract, which goes under the label of ‘splitting the baby’. This Solomonic approach consists in rendering an award in the middle range between the claims of each of the parties. This is not necessarily based on a literal consideration of the contract terms or on an integration of the contract with other sources, but simply on the desire to accommodate both parties.199 Interestingly, there does not seem to be a uniform perception of the frequency of this approach: a recent empirical study shows that the parties to arbitration perceive that they got a Solomonic award in 18–20 per cent of the cases, whereas the arbitrators perceive that they take this kind of equitable decision in only 5 per cent of the cases.200 This, therefore, adds a new variable to the equation of the interpretation and construction of contracts. Not only is it uncertain as to whether the arbitrators will interpret the contract literally, whether they will use sources of law or whether they will apply transnational principles to give a more purposive interpretation; it is also possible that the decision will be influenced by equitable considerations that are not based on the contract or on other legal sources. This reveals an important lack of uniformity at two levels: parties’ contract drafting is not uniform and arbitrators’ contract interpretation is not uniform. In this context, it seems quite illusionary to assume that international commercial arbitration acts as the voice of a unitary international business community. Furthermore, commercial arbitral tribunals are not necessarily interested in contributing to the development of a unitary transnational law. In this context, commercial arbitration is very different from investment arbitration. In investment arbitration, awards are regularly published, and the reasoning is analysed in great detail by a very attentive legal doctrine, as well as referred to in subsequent awards. Investment awards, therefore, are written with the knowledge that they will be perused by peers and third parties, and indulge in general considerations, develop theories and the like. Commercial awards, to the contrary, are mainly confidential and are not intended for others than the parties to the dispute. The purpose of commercial awards is not to contribute to the development of the law, but to solve a specific dispute, possibly convincing the parties that the decision is fair. Research shows that commercial arbitral tribunals do not act as developers of the law – not even when they apply the CISG, which, as mentioned in Section 2.3.4(a), is supposed to be applied autonomously and thus should be the perfect basis for an arbitration-based uniform transnational law. It has been commented that it is ‘inexcusable that arbitral tribunals do not use their opportunity to foster the 199

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This appears in School of International Arbitration of Queen Mary, University of London, 2012 International Arbitration Survey: Current and Preferred Practices in the Arbitral Process (2012), Section 7. School of International Arbitration of Queen Mary (2012), p. 38.

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autonomous interpretation of the CISG and play a part in the creation of a truly autonomous sale of goods law. The survey appears to reveal a picture of disinterest and neglect between the CISG and arbitration, rather than a fruitful marriage’.201 3.7.3 The Importance of the Selection of Arbitrators Given that at least six or seven different approaches to the interpretation of contracts were professed in a discussion involving about eighteen arbitrators, it seems obvious that the outcome of a dispute will depend heavily on who is acting as an arbitrator in the particular dispute. It was even affirmed, rather provocatively, that it is not so much the applicable law that matters for the outcome of the dispute, it is rather the cultural background of the individuals who act as arbitrators.202 The selection of arbitrators has been defined as the ultimate form for forum shopping.203 Until recently, the selection of arbitrators was a rather obscure exercise based on personal relationships and anecdotal evidence. A development that is improving the selection process is the increased transparency, particularly in investment arbitration. In investment arbitration, there is a clear public interest in the dispute and its outcome. The arbitral tribunal is called upon to evaluate the conduct of the state, and this may involve scrutinising, inter alia, the state’s policies, its balancing of conflicting policies, its management of public interests and so on. The award, furthermore, may have an impact on the state’s regulations and future policies, with effects that go far beyond the legal relationship between the disputing parties. The public, therefore, has a clear interest in being informed about investment disputes, and stakeholders have an expectation to be able to present comments. Facing growing criticism for lack of legitimacy and accountability,204 already in 2006, the ICSID Rules were amended to introduce transparency,205and transparency was enhanced in the 2022 version.206 In 2013, the UNCITRAL adopted the Rules on Transparency in Treaty-based Investor-State Arbitration. A new provision was added in Article 1, paragraph 4 of the UNCITRAL Arbitration Rules (revised in 2010), to incorporate the Rules on Transparency for arbitration initiated pursuant to an investment treaty concluded on or after 1 April 2014. Furthermore, with the 2014 Mauritius Convention on Transparency, parties to investment treaties concluded before 1 April 2014 express their consent to apply the Rules on Transparency and to disputes based on investment treaties concluded prior to 1 April 2014. 201 202 203

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Butler (2014), p. 357. See the intervention of Schneider, ‘APA’, p. 57. See also Brautaset, ‘APA’, p. 24. These are Rogers’ words: Cathrine Rogers, ‘The International Arbitrator Information Project: An Idea Whose Time Has Come’, 9 August 2012, kluwerarbitrationblog.com/. For references, see UNCTAD, Transparency in IIAS: A Sequel, UNCTAD Series on Issues in International Investment Agreements (2012), p. 36, and World Investment Report (2015), p. 148. ICSID, ‘A Brief History of Amendment to the ICSID Rules and Regulations’, www.worldbank.org. ICSID, ‘ICSID Administrative Council Approves Amendment of ICSID Rules’, www.worldbank.org.

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Also, the UNCITRAL Working Group III, which has the task of proposing a reform for the regime of investor-state dispute resolution, is considering transparency.207 For human rights disputes, the Hague Rules suggest a regulation that is largely based on the UNCITRAL Transparency Rules. The calls for transparency that have recently turned around the world of investment arbitration seem also to be affecting commercial arbitration.208 Commercial awards are being published to a larger extent than earlier,209 institutions are being more transparent regarding the appointment and removal of arbitral tribunals210 and initiatives flourish to increase transparency in commercial arbitration.211 The process of selecting arbitrators has undergone tremendous development in the past decades. I remember one of the first arbitrations I was involved in in the mid-1980s as in-house counsel in a multinational company. I made contact with a law firm that specialised in arbitration and said that we were contemplating initiating an arbitration. After just five minutes, I received a telefax with the names of five people whom the law firm recommended as potential arbitrators. I had not been asked what type of contract the dispute was based on, who the counterpart was, what kind of expertise the dispute

207

208

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See UNCITRAL, Ensuring independence and impartiality on the part of arbitrators and decision makers in ISDS, A/CN.9/WG.III/WP.151, paras 80–6. Calling for transparency in commercial arbitration, see Diego Fernández Arroyo, ‘Nothing Is for Free: The Prices to Pay for Arbitrabilizing Legal Disputes’. In Loïc Cadiet, Burkard Hess and Marta Requejo Isidro (eds.), Privatizing Dispute Resolution (Nomos, 2019), pp. 635ff. In 2016 the then Lord Chief Justice of England and Wales, Lord Thomas, held a lecture in which he pointed out that, since many commercial parties choose arbitration to solve their disputes and appeal from arbitral awards is very restricted, courts are not participating to the desirable extent to the development of the law: Lord Thomas of Cwmgiedd, Lord Chief Justice of England and Wales, Bailii Lecture: Developing Commercial Law through the Courts: Rebalancing the Relationship between the Courts and Arbitration (9 March 2016). The same criticism had been put forward, decades earlier, by the then Chief Justice of the Norwegian Supreme Court, Carsten Smith, ‘Voldgift–domstolenes konkurrent og hjelper’. Tidsskrift for Rettsvitenskap 106.5 (1993), pp. 474–95. The Norwegian Arbitration Act of 2004 acted upon this criticism and assumes that confidentiality of the awards must be agreed to by the parties. In contrast, most arbitration laws still assume confidentiality as the main rule in arbitration. Many arbitration institutions publish, in anonymised version, a selection of the awards rendered under their rules. For example, following an amendment to the ICC Notes to the parties and arbitral tribunals on the conduct of the arbitration under the ICC Arbitration Rules dated 1 January 2019, https://cdn.iccwbo.org /content/uploads/sites/3/2017/03/icc-note-to-parties-and-arbitral-tribunals-on-the-conduct-of-arbitration.pdf, Section III.D, all awards rendered after 1 January 2019 may be published, unless one party objects. In addition, awards are collected in databases such as the database Case Law on UNCITRAL Texts (CLOUT, www .uncitral.org/clout/) or the database on UNIDROIT Principles and CISG, Unilex (www.unilex.info/). See, for example, the publication by the Stockholm Arbitration Institute in 2017 of its policy for appointing arbitrators: https://sccinstitute.com/media/220131/scc-policy-appointment-of-arbitrators-2017.pdf. As of 2016, the ICC publishes information about arbitrators sitting in tribunals administrated under the ICC Rules: see the ICC Notes to the parties and arbitral tribunals, cit., Section III.B. In 2018, the LCIA released a database on decisions on challenges to the arbitrators: www.lcia.org/challenge-decision-database.aspx. See, for example, Arbitrator Intelligence, www.arbitratorintelligence.com/. See Mohamed S. Abdel Wahab, Chiann Bao, Alexander G. Fessas, Mark W. Friedman, Claudia T. Salomon, and Eduardo Zuleta (eds.), Leadership, Legitimacy, Legacy: A Tribute to Alexis Mourre (International Chamber of Commerce, 2022), which devotes a part to ‘Transparency’, pp. 173–238.

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required, let alone whether we were interested in a formalistic or a purposive interpretation of the contract. Today, when parties take into consideration whether they shall appoint a certain arbitrator, they undertake fully fledged research analysing his/ her writings and assessing whether he/she has expressed opinions that may be incompatible with the position that they will present in the proceeding, and they even invite him/her to a pre-appointment interview to discuss issues such as availability and conflicts of interest.212 The relevance of the selection process also appears clearly in the success that a soft law instrument of the International Bar Association has achieved: the IBA Guidelines on Conflict of Interest in International Arbitration.213 This is an attempt to bring transparent and objective criteria to an area earlier dominated by the recognition of established positions on the basis of reputation and implied criteria. Additionally, arbitral institutions are opening up to a more systematic approach to the criteria for the appointment of arbitrators. The Arbitration Institute of the SCC, for example, has been publishing for two decades studies on the criteria that it applies in challenges to arbitrators appointed under the SCC rules.214 The importance of having detailed knowledge of the appointed arbitrators and the environment in which they operate is indirectly confirmed in the revision that was made in 2010 to the UNCITRAL Arbitration Rules: in regulating who should act as an appointing authority in the eventuality that one of the parties does not appoint an arbitrator, it was evaluated whether the Permanent Court of Arbitration (PCA) could carry out this function.215 It was concluded that a centralised body, even a body of the calibre of the PCA, would not be in a position to properly appreciate all the aspects of the appointment in each of the jurisdictions where appointment might be necessary. Therefore, Article 6.2 of the revised UNCITRAL Arbitration Rules ended up giving the PCA the task of appointing the appointing authority, who, in turn, would appoint the arbitrator – on the basis of the assumption that a local authority would be in a better position to select the arbitrators. The development from a list of potential arbitrators quickly scribbled on a fax to a full due-diligence process is remarkable, but selection is still made on the basis of what has been defined as a bizarrely outdated technique based mainly on personal knowledge and hearsay.216 This is due to the structure of arbitration as a largely private and nontransparent system.217 Seen from the outside, these features of arbitration may give the impression of a unitary system. As the overview in Section 3.7.2 shows, however, there is no basis for assuming that arbitration is a unitary system. 212

213 214

215

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The School of International Arbitration of Queen Mary (2012), pp. 6 and 7, reports that 86 per cent of the respondents consider it appropriate to conduct pre-appointment interviews. www.ibanet.org/MediaHandler?id=e2fe5e72-eb14-4bba-b10d-d33dafee8918. Helena Jung, ‘SCC Practice: Challenges to Arbitrators’, SCC Board decisions 2005–2007, https://sccarbi trationinstitute.se/en/news/scc-decisions-challenges-overview, last accessed on 14 February 2013. Report of Working Group II (Arbitration and Conciliation) on the work of its forty-ninth session (Vienna, 15–19 September 2008), A/CN.9/665, paras 47–50, and Report of the Working Group on Arbitration and Conciliation on the work of its forty-sixth session (New York, 5–9 February 2007), A/CN.9/619, paras 71–4. Rogers (2012). 217 Rogers (2012). See also the intervention of Kai-Uwe Karl, ‘APA’, p. 53.

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3.7.4 Conclusion In conclusion, international arbitration does not have a uniform approach to contract interpretation: it may range from a formalistic application of the contract’s wording to an interpretation of the wording in light of the governing law, to an interpretation of the wording in light of transnational principles of soft law or even of a more equitable character. Even the same arbitral tribunal may adopt more than one approach to the same contract, depending on the tribunal’s understanding of the dynamics of negotiations that led to that particular contract’s text. This picture certainly contradicts the usual assumption that international commercial arbitration is a harmonised system, uniformly giving expression to the interests of the ‘international business community’. In turn, this assumption of a harmonised arbitration nurtures the delocalisation theory described in Chapter 2, according to which international contracts are not subject to national law, but to transnational law. Parties have the possibility of influencing the approach to interpretation by selecting arbitrators who represent a certain attitude towards contract interpretation. The process of selection has come a long way in the past decades but is still unsatisfactorily based on personal experience and anecdotal evidence. This may lead to repeated appointments of the arbitrators who have shown that they represent a certain approach; always appointing the same few people as arbitrators does indeed lead to a certain degree of predictability. Most of the arbitral tribunals, however, consist of three arbitrators – usually one appointed by each of the parties, and the chairperson appointed by the two partyappointed arbitrators. If one of the parties has appointed an arbitrator who is known for his formalistic approach and the other an arbitrator known for his purposive approach, the interpretation that the award will depend on is the chairperson’s approach, as well as on the deliberations within the tribunal. This, in turn, does not enhance predictability. One of the assumptions of the delocalisation theory is that, being arbitration detached from national laws, it is faithful to the will of the parties and solves disputes simply on the basis of the contract and of any transnational law that may be available. This is promoted as a means for avoiding inconsistent results that may flow from the diversity of national laws. This supposed uniform regime for international contracts assumes that arbitration is a homogenous environment – even assuming, against what I have argued so far, that this possibly may have been a realistic assumption decades ago, when the closed circle of arbitrators was mainly composed of a few very recognised professionals, mainly ‘male, pale and stale’ and with comparable legal background, it is certainly no longer true today. To quote one of the grand old men of arbitration: If such days ever existed, they are long gone. Today, new players in the arbitral process include governments, companies, counsel and arbitrators from multiple litigation traditions. . . . New entrants come to the arbitral process not only from different geographical regions and legal cultures, but also from varied

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the impact of the governing law professional paths. . . . In this connection, the impact of diversity in background cannot be overemphasized.218

Diversity in arbitration is now promoted by arbitral institutions and looked upon as a desirable development.219 While this development can only be supported, it contributes to weakening the assumption of harmony and homogeneity of the system upon which the delocalisation theory relies. 3.8 The Drafting Style Does Not Achieve Self-Sufficiency, but Has a Certain Merit This chapter showed that the terms of a contract are not detached from the governing law: the governing law will influence the interpretation, construction and application of these terms. To what extent the legal effects differ from what a literal application would suggest, varies depending on the governing law. There is, therefore, no reason to rely on a full and literal application of the contract’s wording as if it were isolated from the governing law. If this is so, why do contract parties go on drafting detailed (and sometimes, as seen in Sections 1.3 and 3.4.1, nonsensical) clauses without adjusting them to the governing law? Why do they engage in extensive negotiations on specific wording without even having discussed which law will govern the contract? Each of the parties may repeatedly send numerous delegations consisting of financial, marketing, technical, commercial and legal experts to meet and negotiate specific contractual mechanisms and wording to be inserted in the contract; all of these people may spend hours and days negotiating whether the penalty for a delay in the performance shall be US$10,000 or US$15,000 a day, or fighting over whether the contract shall include the word ‘reasonable’ in the clause, permitting early termination of the contract in case the other party fails to perform certain obligations. All these negotiations are usually made without even having addressed the question of the governing law. The contract may end up220 being governed by English law, in which case the clause on penalties will, under some conditions, be unenforceable; or by German law, in which case the concept of reasonableness will be part of the contract, irrespective of the appearance of the wording. All the efforts in negotiating the amount of the penalty, or in rendering stricter a termination clause, will have been in vain. Unfortunately, it is not that unusual 218

219

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William W. Park, ‘A Fair Fight: Professional Guidelines in International Arbitration’. Arbitration International 30.3 (2014a), pp. 414f. See Abdel Wahab et al. (2022), which devotes a part to ‘Diversity and Inclusion’, pp. 23–81. For an analysis of today’s attention to diversity, see Matteo Winkler and Mikaël Schinazi, ‘No Longer “Pale, Male, and Stale”? Approaching Diversity and Inclusiveness in International Arbitration’. In Nigel Blackaby, W. Michael Reisman, Cecilia Azar, Carlos Dávalos and Luis Alberto Aziz (eds.), Liber Amicorum Guillermo Aguilar Álvarez (Wolters Kluwer, 2021), pp. 15–16. Either because the parties chose it or because the applicable conflict rule pointed to it, as will be seen in Chapter 4.

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that the Choice-of-law clause is left as the last point in the negotiations, and that it is not given the attention that it deserves. This does not necessarily mean that the practice of negotiating detailed wording without regard to the governing law is always unreasonable. From a merely legal point of view it makes little sense, but from the overall economic perspective it is more understandable, as seen in Section 1.4.

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4 Which State’s Law Governs an International Contract?

4.1 Introduction In the previous chapters, we have shown that international contracts are ultimately subject to a state law, even if the transaction is governed by some transnational sources and even if the contract is extensive and detailed, and thus seemingly selfsufficient. The next question that has to be answered is then: Which state’s law regulates an international transaction? There are rules that have the function of identifying the laws governing international relationships, the so-called conflict rules or choice-of-law rules. The area of law that regulates the choice of the governing law is called private international law (or conflict of laws). What is particularly interesting from the point of view of this book is the role of one of these conflict rules, the most important for contracts: the rule of party autonomy. This rule gives the parties the power to choose which law their contract shall be subject to. This power enhances the impression of self-sufficiency that was described in Chapter 1: if the parties are able to choose the governing law, they may be under the impression that they need not be concerned with any other law but the law of their choice. If only they chose a sufficiently liberal law, they may expect that anything they write in their contract will be applied without any form of construction, correction or integration. Observing the academic discourse on international commercial contracts, it is difficult to resist being swept away by the enthusiastic descriptions of party autonomy: ‘it has been characterized as “perhaps the most widely accepted private international rule of our time,” a “fundamental right,” and an “irresistible” principle that belongs to “the common core of the legal systems.” Thus, in proverbial terms, party autonomy is like “motherhood and apple pie”: virtually nobody is against it and most commentators enthusiastically endorse it.’1

1

Symeon C. Symeonides, ‘Party Autonomy in International Contracts and the Multiple Ways of Slicing the Apple’. Brooklyn Journal of International Law 39 (2014), p. 1123, with references.

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Even more emphatical is the description of party autonomy in the context of international arbitration. Arbitration is described as ‘the realm of party autonomy’.2 ‘First, the principal task of arbitrators in a commercial case is to decide the dispute within the mandate defined by the arbitration clause. Arbitration is a creature of contract. The parties can agree to its scope. That agreement is binding on the arbitrators.’3 The underlying assumption is that party autonomy is an absolute, universal principle, and that it reigns sovereign in the fields of international contract law and of arbitration. Any attempts to restrict party autonomy or to explain it in the frame of a state legal system are out of tune and raise suspicions of being dictated to by a reactionary agenda that is hostile to international contract practice and to arbitration. Yet in this chapter, I will argue that party autonomy is nothing more than a conflict rule deriving from state private international laws – admittedly, party autonomy is a widely recognised conflict rule, but it is not a universal principle absolute from any legal constraints. I will also argue that this understanding of party autonomy, far from being hostile to contract practice and arbitration, is friendlier to commercial parties and to arbitration than the enthusiastic endorsement of party autonomy as an absolute, universal principle. There are several reasons for this apparently self-contradictory position. As we will see, promoting the unfettered primacy of party autonomy may lead to unpredictable results. It may also lead to rendering invalid or unenforceable awards. This is evidently inefficient for the involved parties. Furthermore, in the long run it can lead to an erosion of trust in the institution of arbitration and to corresponding restrictions to the scope of arbitrability. Insisting on the absolute and universal character of party autonomy, therefore, may lead to restricting party autonomy. We will in the following sections discuss party autonomy in the context of disputes brought to the courts. The role of party autonomy in arbitration will be discussed in Sections 4.5.2 and 4.6. The governing law has to be identified by the conflict rules (the private international law rules) of the state where the court in which the claim is brought has its venue (the conflict rules of the lex fori). Private international law is traditionally a branch of state law. Today, some international conventions harmonise part of the private international law. In particular, the Hague Conference has issued numerous conventions with the aim of 2

3

Luca Radicati di Brozolo, ‘Mandatory Rules and International Arbitration’. American Review of International Arbitration 23 (2012), p. 49. International Law Association (ILA), Committee on International Commercial Arbitration. Final Report Ascertaining the Contents of the Applicable Law in International Commercial Arbitration (paper presented at the International Law Association Conference, Rio de Janeiro, 2008), p. 19, under the heading ‘Conclusions and recommendations’.

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harmonising private international law.4 Of particular interest in the transnational context may be a soft law instrument issued by the Hague Conference in 2015: the Principles of Choice of Law in International Contracts (the ‘Hague Principles’),5 meant as a non-binding restatement of generally recognised principles of private international law. In the EU, large parts of the private international law relating to commercial relationships were harmonised by two regulations: the so-called Rome I Regulation on the Law Applicable to Contractual Obligations6 and the so-called Rome II Regulation on the Law Applicable to Non-contractual Obligations.7 Where there are no harmonised choice-of-law rules, even within the EU each court will apply the private international law of its own state. In areas such as company law and property, for example, choice-of-law rules are not harmonised, and each country applies its own national conflict rules. As will be seen in this chapter, private international law contains rules that give instructions as to how to select the applicable law. It confers on the parties, or, in the absence of choice made by the parties, on the court, the power to determine the applicable law. When the criteria for determining the applicable law are objective, the process of selecting the applicable law is predictable. The objective determination of the applicable law is based on conflict rules. This is the approach that is applied in many civil law countries.8 It is the approach that is followed in EU private international law, and it has been retained in the UK after Brexit.9 Objective conflict rules are based on a connecting factor, for example, on a specific element of the matter at issue that links the legal relationship to a specific country. The law of the country where this factor is located will be the governing law of that matter. Usually, there are different connecting factors for different areas of the law. Therefore, a conflict rule applies only within its own scope. For example, for matters of contract law, the most important conflict rule is party autonomy. This means that questions of contract law will be subject to the law that the parties have chosen. If the parties have not made a choice, a common connecting factor for many types of contracts is the habitual residence of the party making the characteristic performance. Hence, if the parties to, for example, a sales contract, have not made a choice, matters of contract law will be subject to the law of the place where the seller has its habitual residence. The approach followed in the United States does not seem to be very distant from the objective approach, notwithstanding the so-called American Conflict 4 5 6 7 8 9

Conventions drafted by the Hague Conference can be found at www.hcch.net/en/instruments/conventions. www.hcch.net/en/instruments/conventions/full-text/?cid=135. Regulation on the Law Applicable to Contractual Obligations (593/2008) (Rome I). Regulation on the Law Applicable to Non-contractual Obligations (864/2007) (Rome II). For example, Argentina, Brazil, Japan and Turkey. The Law Applicable to Contractual Obligations and Non-contractual Obligations (Amendment, etc.) (EU Exit) Regulations 2019 (SI 2019/834).

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Revolution.10 Mechanical rules based on connecting factors are replaced by a mixture of interest analysis and presumptive rules. The latter are based on connecting factors, like the objective conflict rules. Case law has been quite inconsistent, but it seems that in recent times it favours presumptive rules.11 In addition to the restrictions deriving from the scope of application of the conflict rule (which will be discussed in Section 4.5), party autonomy may be restricted through two mechanisms of private international law: the application of overriding mandatory rules (also known as lois de police) and the exception of ordre public (also known as public policy). Overriding mandatory rules override the law that is applicable under the regular conflict rules, including the law chosen by the parties. They are mandatory rules protecting interests that are particularly important for the society to which the court belongs. They will be discussed in Section 4.5.3. Ordre public is a basis for avoiding application of a foreign law, or for refusing recognition and enforcement of foreign judgments or of arbitral awards. The purpose of this rule is to safeguard fundamental principles of the court (of the forum). It will be briefly discussed in Section 4.5.7, and more thoroughly in Chapter 5, Section 5.4.9. Each state has its own conflict rules. Some of the national choice-of-law rules are of international origin as they are contained in supranational regulations applicable in that state (such as, for example, Rome I Regulation), or in international conventions that were ratified by that state (such as, for example, the 1955 Hague Convention on the Law Applicable to International Sales of Goods). Some choice-of-law rules are contained in national legislation, such as the Swiss Private International Law Act (PILA), the Argentinian Civil and Commercial Code (CCC) (Title IV) and the Brazilian Introductory Act to the Norms of Brazilian Law (IANBL). These are systematic codifications of the private international law. There are also statutes regulating choice of law for specific sectors, such as the Norwegian Act on the Law Applicable to Insurance Agreements of 1992. Other choice-of-law rules are customary or based on judicial precedents, like most of the Norwegian private international law. For the purpose of predictability of the governing law, it is highly desirable that the various national conflict rules are harmonised and interpreted, to the highest extent possible, in a uniform way. If conflict rules differ from country to country, they will determine different laws for governing the same relationship. Depending on where the lawsuit is filed (which is explained in Section 4.2.1), therefore, a different substantive law may be applicable and the rights and obligations of the parties may be different. Each of the parties will compete in filing a lawsuit in a country with conflict rules that determine a favourable applicable law (so-called forum shopping, see 10

11

Linda Silberman, ‘(American) Conflict of Laws Revolution’. In Jürgen Basedow, Gisela Rühl, Franco Ferrari and Pedro de Miguel Asensio (eds.), Encyclopedia of Private International Law (Edward Elgar Publishing, 2017b), pp. 77–81. Silberman (2017).

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Section 4.2.1(b)), even though that country may have only a thin connection with the dispute (so-called exorbitant jurisdiction). This may lead to lawsuits in unpredictable fora, to uncertainty as to the substantive rights and obligations of the parties and even to contradictory court decisions on the same relationship. Harmonisation of the conflict rules contributes to preventing these undesirable effects because the parties will not be able to speculate on the difference in selection of the applicable law. 4.2 Determination of the Forum as a Necessary First Step As previously discussed, the governing law is determined by conflict rules which may vary from state to state. Therefore, the first step that has to be made in the process of determining the governing law is to find out which conflict rules are applicable. The applicable conflict rules are those of the court (so-called lex fori). Therefore, it will be necessary to determine where the forum is – or where the forum would be – in case of a dispute. 4.2.1 Jurisdiction The forum is the court of a state that accepts jurisdiction on the case. In the EU, jurisdiction in civil and commercial matters is determined by the so-called Brussels I Regulation.12 The Brussels I Regulation is directly applicable in the EU. The parallel Lugano Convention of 2007 (originally of 1988) is applied in the EU, Denmark, Iceland, Norway and Switzerland.13 The Lugano Convention is written to fully reflect the first version of Brussels I; it should be amended to reflect the changes introduced into Brussels I in the version 15/2012, but at the moment it is unclear when the Lugano Convention will be revised correspondingly. After Brexit, the UK is no longer part of Brussels I or the Lugano Convention. Hence, these instruments no longer apply in the UK to decisions rendered after 1 January 2021. Jurisdiction in cases involving a UK party, therefore, will be regulated by Brussels I or the Lugano Convention only if the defendant is resident in a state that is subject to one of these instruments,14 or if these instruments’ provisions on 12

13

14

Brussels Council Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Brussels I; 15/2012), replacing its predecessor 44/2001 and its predecessor the Brussels Convention of 1968. Denmark, as a consequence of its reservations about the Amsterdam Treaty of 1997 on the Union, does not participate in the Acts of the European Community based on Title IV of the Treaty. The Brussels Regulation is based on Article 65 of the Treaty, which is contained in Title IV, and therefore the Brussels Regulation does not apply to Denmark: see the preamble of the Regulation, item 21. Following a separate agreement between Denmark and the EU, as per 1 July 2007, the Brussels I Regulation also applies to Denmark. In addition, Great Britain and Ireland do not participate in the acts based on Title IV of the Treaty, but they have the possibility to do so, if they so elect. In the case of the Brussels Regulation, Great Britain and Ireland opted in, and the Regulation is therefore applicable to them: see the preamble, item 20. As long as the defendant has its habitual residence in a member state, it does not matter that the claimant does not, see cases C-281/02 (Owusu), C-412/98 (Group Josi), C-175/15 (Taser).

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exclusive forum or universal competence apply. Otherwise, jurisdiction will be regulated by bilateral treaties between the UK and the other party’s country or other relevant country. Failing any such treaties, it will be regulated by the civil procedure rules in the law of the court. Among the treaties regarding jurisdiction, of particular interest is the 2005 Hague Convention on Choice of Courts Agreements. Under this Convention, the parties may choose which court has jurisdiction on disputes between them. If the parties have chosen the court of a country in which the Convention is in force, that court shall accept jurisdiction irrespective of whether or not there is a connection between the dispute and the forum, and courts of other Convention countries must decline jurisdiction or suspend the proceedings until the chosen court has dismissed the case. The chosen court may dismiss the case upon a very narrow basis: if the choice of court agreement was void under the court’s law, or if its performance would conflict with public policy. The Hague Convention is presently in force in the following countries: Denmark, the EU, Mexico, Montenegro, Singapore and the UK. Another Hague Convention is relevant to jurisdiction, albeit only indirectly: the 2019 Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters. This Convention does not regulate the courts’ jurisdiction,15 but only recognition and enforcement of foreign court decisions. However, the Convention contains so-called filters – that is, provisions containing a connecting factor between the dispute and the court that rendered the judgment. It is only decisions rendered by courts which meet the filters’ requirements, that can be recognised and enforced under the Convention. This means that states have not restricted their own sovereignty in the area of jurisdiction: they can still have rules for jurisdiction that differ from the criteria laid down in the Convention. However, decisions rendered by these courts will not be enforceable under the Convention if the filters’ requirements are not met. The 2019 Hague Judgments Convention will enter into force in 2023 among the following states: the EU, each member state of the EU and Ukraine. If there are no conventions or supranational regulations on jurisdiction, the jurisdiction is regulated by the civil procedure law of each state. The rules on jurisdiction, therefore, may vary from state to state: some rules might be very expansive, thus permitting the exercise of jurisdiction on a very slim basis (exorbitant forum), while other rules are more restrictive and permit the exercise of jurisdiction only if there is a serious connection between the dispute and the state where the legal suit is filed.

15

An earlier version of the Convention that regulated both jurisdiction and recognition and enforcement of judgments was never agreed upon; see the history and preparatory works at www.hcch.net/en/ instruments/conventions/publications1/?dtid=61&cid=137.

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(a) Choice of Forum Often in commercial disputes the parties can choose which courts will have jurisdiction. Choice of forum agreements are recognised both in international instruments and in domestic legislation. Choice is usually specified in a contract clause submitting all disputes arising out of the contract to the courts of a certain country. Alternatively, the parties may choose arbitration, see Chapter 5. If a contract contains a choice of forum determining the jurisdiction of the courts in a certain country, those courts will have jurisdiction. According to the wording of the Choice-of-forum clause, those courts may have exclusive jurisdiction or not. If the clause specifies that the jurisdiction is exclusive, then no other courts may be involved with disputes arising out of the contract (there are some exceptions to this rule – for example, in the case of preliminary measures such as injunctions, as well as in cases where a national law prescribes the exclusive jurisdiction of its courts, for example, for disputes relating to real estate, company matters, privatisation, etc.). If the clause does not specify that the chosen forum has exclusive jurisdiction, in some countries, this will mean that a party sued in the chosen court cannot object to that jurisdiction, but neither party is prevented from initiating a proceeding in another court which has jurisdiction according to the applicable private international law. Article 25 of Brussels I specifies that the choice of forum is deemed to give exclusive jurisdiction to the chosen court. The 2005 Hague Convention only applies to exclusive jurisdiction clauses. Which country’s courts should the parties choose? Generally, the parties do not need to choose a court with a significant link to the dispute. In some sectors, parties often choose courts which have a particular expertise in the area. For example, London is often chosen for disputes relating to maritime or financial issues. Otherwise, the parties should consider not only practical issues – such as vicinity to the evidence or witnesses, the possibility of producing documents in the court’s language and so on – but also the features of the court’s legal system such as the applicable rules of evidence, the court’s powers to issue interim measures and the efficiency of the system. As this chapter will show, it is also important to consider the private international law applicable by the court, as well its overriding mandatory rules and public policy. The main risks in submitting to the jurisdiction of the courts in a foreign country are evident if the local legal system is not founded on the rule of law, is not transparent or stable, or is corrupt. The transaction will be exposed to the effects of a court decision that may have been rendered as a consequence of undue influence, on the basis of laws that have been retroactively changed, or as a consequence of an inaccurate or unfair proceeding. Parties are well advised not to agree to jurisdiction of these courts. An isolated but influential voice criticised the 2005 Hague Convention for obliging courts to enforce without review foreign judgments rendered by a court that was

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chosen by the parties.16 This may lead, according to the criticism, to enforcement of decisions that do not deserve to be enforced because they are rendered in violation of due process as a consequence of corruption and so on. This risk is enhanced by the circumstance that the Convention may be ratified by any state and also by states that do not respect the rule of law. This criticism in not justified:17 the Convention applies only to decisions rendered by a court that has been chosen by the parties. This does not appear to be an excessive openness. Often, even among the most restrictive systems, domestic law requires the enforcement of decisions rendered by courts that were chosen by the parties. Norway, for example, is a very restrictive system and foreign judgments may only be enforced on the basis of a treaty or of a specific statute.18 Yet, in Norway, decisions rendered by courts that were chosen by the parties must be enforced19 with only public policy as an exception.20 Therefore, the 2005 Hague Convention does not extend considerably the obligation to enforce foreign decisions. If the Convention is ratified by countries that do not follow the rule law, it does not mean that these countries’ decisions automatically must be enforced in all other Convention countries. It is only if the parties have chosen the courts of that country that the decisions will have to be enforced. Furthermore, the Convention permits the refusal of enforcement if the public policy of the enforcing court would be infringed. Recently, in an attempt to attract international commercial disputes, various countries (in the Gulf region, in Asia and in various European countries) have introduced specialised divisions in their courts, or internationally oriented rules of procedure. For example, in 2010 Germany initiated a pilot project offering proceedings in English, and various cities in Germany now have English-speaking commercial courts; since 2019, the Netherlands Commercial Court offers proceedings that can be conducted in English and are heard by a panel specialised in international commercial law; the 2019 revision of the Swedish Arbitration Act permits the submission of oral evidence in English in proceedings for the annulment of awards (earlier, use of the English language was allowed only in written evidence); the 2021

16

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Gary Born, ‘Why States Should Not Ratify, and Should Instead Denounce, the Hague Choice-of-Court Agreements Convention Part I-III’ (Kluwer Arbitration Blog, 16–18 June 2021c), and ‘Why It Is Especially Important that States Not Ratify the Hague Choice of Court Agreements Convention Part I-II’ (Kluwer Arbitration Blog, 21 and 23 July 2021b), http://arbitrationblog.kluwerarbitration.com/2021/07/23/why-it-isespecially-important-that-states-not-ratify-the-hague-choice-of-court-agreements-convention-part-i/, with links to the first three blog posts. Among the responses to the criticism see Trevor Hartley, ‘Is the Hague Choice-of-Court Agreements Convention Really a Threat to Justice and Fair Play? A Reply to Gary Born’ (EAPIL Blog, 30 June 2021), https://eapil.org/2021/ 06/30/is-the-2005-hague-choice-of-court-convention-really-a-threat-to-justice-and-fair-play-a-reply-to-garyborn/ and João Ribeiro-Bidaoui, ‘Hailing the HCCH (Hague) 2005 Choice of Court Convention, A Response to Gary Born’ (Kluwer Arbitration Blog, 21 July 2021), http://arbitrationblog.kluwerarbitration.com/2021/07/21/ hailing-the-hcch-hague-2005-choice-of-court-convention-a-response-to-gary-born/. Norwegian Disputes Act § 19-16(1). 19 Norwegian Disputes Act § 19-16(2). Norwegian Disputes Act § 19-16(3).

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revision of the Swiss PILA permits submissions made in English in proceedings for the annulment of arbitral awards rendered in Switzerland (but the final decision will be in one of Switzerland’s official languages).21 Some of these courts also offer special procedural rules. The idea behind these reforms is to render it attractive to bring international disputes before the courts of those states. It remains to be seen whether these courts will be able to compete with arbitration. For the moment, arbitration is still the preferred method for solving international commercial disputes, see Section 5.1.1. When considering which court to choose for the disputes arising out of a commercial contract, it is important to have regard to the enforceability of a decision rendered by the chosen court, see Section 4.2.2. (b) Lacking Choice of Forum by the Parties In practice, failure to choose the forum is likely to lead to one party suing the other party in the other party’s own country. However, a party might have to defend itself in other jurisdictions. In addition, the lack of a Choice-of-forum clause might lead to one party filing strategic suits in its own or in other countries to prevent or oppose suits that the other party might file against it. The risk of parallel proceedings being initiated in different countries between the same parties and on the same claim is addressed in international treaties. Where a treaty is lacking, the domestic law of the court may instruct a court to suspend a proceeding if the same claim is already pending between the same parties in a different country; in some legal systems, it is up to the court to determine whether or not to suspend the proceedings. Parallel proceedings should be avoided – not only are they costly and time consuming but they may also result in contradicting decisions. If a contract does not contain a Choice-of-forum clause, the question of which courts have jurisdiction will be regulated by treaty or, lacking a treaty, by the private international law prevailing in each country where one party may try to sue another party. This may create significant uncertainties since the private international law may vary from country to country. Thus, it is not only the criteria for accepting jurisdiction that may be uncoordinated; the choice of the governing law, too, may be made on the basis of inconsistent criteria. Generally, there are two approaches to choice of jurisdiction: discretionary or objective. In the discretionary approach, mainly found in common law systems, the basis for jurisdiction (also called jurisdictional gateway) is broad, but the courts may exercise 21

For a comparative analysis see Gisela Kühn and Man Yip, ‘New Specialised Commercial Courts and Their Role’. Cross-Border Litigation, General Report XXI, XXI Congress AIDC Asuncion (to be published by Intersentia, 2022).

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the discretion to dismiss a case on the basis of the so-called doctrine of forum non conveniens. Even though they have jurisdiction, courts have the discretion to dismiss a case if they deem it unsuitable for proceedings before English courts: ‘The task of the court is to identify the forum in which the case can be suitably tried for the interests of all the parties and for the ends of justice.’22 Among various elements that can be relevant in the exercise of the court’s discretion are the avoidance of parallel proceedings23 and the enforceability of the judgment. In the objective approach, the jurisdiction rule is precise and based on specific connecting factors such as the place of business of the defendant, the place of performance of the contract or the place of damage in case of torts. If the requirements of the jurisdiction rule are met, the claim must be allowed. If the requirements are not met, the claim may not be allowed. There is no discretion for the court, as the connecting factor of the jurisdiction rule ensures that there is a significant connection between the dispute and the court. This approach is to be found mainly in civil law countries and is the approach adopted in the Brussels I Regulation and the Lugano Convention. Generally, a party may always be sued in the country where it is registered or where it carries out its main activity.24 In the case of a contract between a Norwegian and a Russian company, for example, this means that the courts of Norway would have jurisdiction if the Norwegian company were sued, and the Russian courts would have jurisdiction if the other party were sued. In addition, it is usually possible to sue a contractual party in the country where the main performance is supposed to be undertaken.25 For some issues, there might be exclusive fora, such as the court of the place where a piece of real estate is registered, if the dispute regards property rights on that estate.26 The foregoing shows that there might be more than one potential forum; this means that there might be more potentially applicable conflict rules for the selection of the law applicable to the dispute. Since the court selects the law applicable to the merits of the dispute on the basis of its conflict rules, the parties do not know which law governs their rights and obligations until a lawsuit is filed. It is, therefore, strongly advisable that the parties agree on a forum in the contract. By so doing, they avoid the uncertainty that derives from the plurality of courts that may accept jurisdiction on the dispute.

22 23

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Lord Collins in Altimo Holdings v. Kyrgyz Mobil Tel [2011] UKPC 7, para 88. Credit Agricole Indosuez v. Unicof Ltd [2003] EWHC 2676 (Comm). In Vedanta Resources PLC & Anor v. Lungowe & Ors [2019] UKSC 20, the claim was allowed on other grounds. See, for example, the Brussels I Regulation, Article 4 and the Lugano Convention, Article 2. See, for example, the Brussels I Regulation, Article 7.1 and the Lugano Convention, Article 5.1. See, for example, the Brussels I Regulation, Article 24.1 and the Lugano Convention, Article 22.1.

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If the parties have not agreed on the forum, before initiating a suit they should verify the conflict rules of each of the potential fora to see if they point at the same governing law or at different laws. In the latter case, it will be advisable to verify the content of all the substantive laws that are pointed at by the different conflict rules in the potential fora. One substantive law might be more favourable to a party, and that party might therefore want to file a suit in the state in which the lex fori contains the conflict rule that points at that governing law. This is called forum shopping.27 Forum shopping cannot be avoided since conventions and domestic laws often permit a choice from various available fora (the forum of the respondent is usually available, which means that as many fora as respondents are available; in addition, optional fora may be available, such as the place of performance or the place of damage). The choice that can be carried out within the scope of these instruments is quite predictable, as the number of available fora is restricted and is based on substantial and predictable connecting factors. In the absence of a convention, however, there is the risk that the claimant picks a jurisdiction without any connection with the dispute, so-called exorbitant jurisdiction.28 This practice has the detrimental general effect of creating uncertainty in the application of the law, because a party may run the risk of being sued in various different states, perhaps even without a real connection with the subject matter. This may create considerable uncertainty and costly proceedings to ascertain the jurisdiction or to oppose conflicting decisions on the same subject matter. This is one of the reasons why it is desirable to harmonise conflict rules: if all private international laws of the potential fora have harmonised conflict rules, they will all point to the same governing law. The dispute, therefore, will be decided according to the same law, irrespective of where the suit was filed. This eliminates the most important incentive for forum shopping; namely, the possibility of influencing the selection of the governing law by choosing from among different countries’ conflict rules. Other incentives for forum shopping are of a procedural character and cannot be avoided by harmonised conflict rules. (c) Claims Against the Parent Company for Subsidiary’s Conduct Abroad The issue of companies’ accountability for the whole value chain is raised with increased frequency, particularly as far as concerns violation of human rights, labour

27

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Extensively on forum shopping see Franco Ferrari and Aaron D. Simowitz, Forum Shopping and International Commercial Law (Edward Elgar, 2020). For a discussion see Giuditta Cordero-Moss, ‘Between Private and Public International Law: Exorbitant Jurisdiction as Illustrated by the Yukos Case’. Review of Central and East European Law 32.1 (2007a), pp. 1–17.

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or environmental law incurred abroad by subsidiaries or suppliers, see Section 2.2.6(g). Imagine a parent company in England with a subsidiary in Nigeria. In the course of its activities, the local subsidiary pollutes the area, thus causing harm to the local population. The victims of the pollution have the opportunity to sue the Nigerian subsidiary. What happens if the subsidiary does not have sufficient means to pay an adequate reimbursement of damages? The local victims may join the parent company in the local proceedings, if such a joinder is allowed by the local law. What happens if the Nigerian law does not contain standards of conduct according to which the parent company would be liable? Or if the local courts are not efficient? The victims may aim at suing the parent company in its own country (England, in our example), attempting to take advantage of the higher standard of conduct that must be complied with in England. As will be seen in Section 4.5.3(f), suing the parent company in England does not necessarily make English tort law applicable; but, increasingly, parent companies are being sued in their home country for damages caused by their subsidiaries abroad. There has been a remarkable development in how parent companies may be held accountable for their subsidiaries’ activity. Traditionally, the attempt was to consider the parent company liable for the subsidiaries’ activity as a matter of company law. This, however, implies the socalled piercing of the corporate veil – that is, that the traditional limitation of liability of legal entities is set aside. This runs against the whole fundament of economic activity, as the principle of limited liability is at the basis of company law as we know it. Therefore, the threshold for allowing consideration that a parent company, in its role as a shareholder, is liable for the subsidiary’s activity, is very high.29 Gradually, a new approach is being developed, aimed at holding liable the parent company or the principal, not for the subsidiary’s or the supplier’s activity, but for its own breach of a duty to control the subsidiary’s or the supplier’s activity, or for its own contribution to their activity by adopting a company strategy, business plans or the like. Holding the parent company or the principal accountable for their passivity or for their independent activity does not infringe the principle of limitation of liability that is so important in the corporate structure and in commercial law. Courts are increasingly accepting the theoretical idea that a parent company or a principal may be held liable, as a matter of civil tort liability, for breach of duties of care or

29

See, for references, Peters et al. (2020), p. 8f. In Norway, the importance of preserving the limitation of liability in company law was emphasised in the Supreme Court Decision recorded in Rt. 2010 s. 306 (Hempel). Recently, the Supreme Court affirmed the theoretical possibility of piercing the corporate veil, but did not examine its applicability in the specific case because it applied independent tort liability instead: HR-2022-1148-A.

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of diligence.30 These duties may be based on the legislation mentioned in Section 2.2.6(g),31 on general tort law,32 on a specific tort liability for parent companies33 or for specific torts,34 or even on international human rights law. Traditionally, companies are not deemed to be subject to obligations of public international law.35 However, an emerging duty of care deriving from international human rights law has been observed.36 The parent company’s liability is thus claimed to be based on the breach of a duty to control the subsidiary’s activity or on the adoption of company strategy, business plans or the like. The parent company breaches a duty of diligence or of care and incurs a tort. Generally, in the objective approach, the special jurisdiction rule for torts permits the ability to sue in the country where the damage occurred or, if it is in a different country, the place of the event that caused the damage.37 This would mean that the victims may choose between the local courts (where the damage occurred) and the courts of the place where the parent company breached its duty – which generally corresponds to the place of the company’s headquarters. In the discretionary approach, the victims risk seeing their claim dismissed if the courts in the other country are deemed to be a more appropriate forum, and for the purpose of avoiding parallel proceedings and thus potential contradictory decisions (forum non conveniens).38 However, courts may be prone to balance this risk against the disadvantage that local proceedings may have for the victims and allow the claims

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Okpabi and others v. Royal Dutch Shell Plc and another [2021] UKSC 3. See also Vedanta Resources PLC & Anor v. Lungowe & Ors [2019] UKSC 20. Milieudefensie et al. v. Royal Dutch Shell PLC, Hague District Court, 26 May 2021, C/09/571932/HA ZA 19–379. The French Act has a provision creating tort liability, see Jault-Seseke, ‘Transparency Legislation’ (forthcoming 2023). The English Supreme Court, in the context of a decision on jurisdiction on connected claims, ascertained the theoretical possibility of holding a parent company liable for breach of a duty of care, Okpabi and others v. Royal Dutch Shell Plc and another [2021] UKSC 3. Neither the German nor the Norwegian Acts contain an explicit basis for tort liability. Therefore, liability for breach of the duties contained in the Acts follows the general rules of tort law. See, for Germany, Jault-Seseke, ‘Transparency Legislation’ (forthcoming 2023); Marc-Phillippe Weller, Luca Kaller and Alix Schulz, ‘Haftung deutscher Unternehmen für Menschenrechtsverletzungen im Ausland’. Archiv für die civilistische Praxis 216 (2016), pp. 387–420. For Norway, see Margrethe Buskerud Christoffersen, ‘Norwegian Law between Company Law and Civil Liability’. Oslo Law Review (forthcoming 2023). See the Norwegian Company Act of 13 June 1997 No 44, § 17-1 and the Norwegian Supreme Court decision recorded in HR-2022-1148-A. See the Norwegian Supreme Court decision recorded in Rt. 2010 s. 306 (Hempel). Canadian Supreme Court, Nevsun Resources Ltd. v. Araya, 2020 SCC 5, 28 February 2020; Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No ARB/07/26. Van Loon (2020), p. 12f. See the Brussels I Regulation, Article 7(3), and the Lugano Convention, Article 5(3). Nestlé USA, Inc v. Doe et al., 141 S Ct 1931 (2021). The US Supreme Court dismissed a claim against a US company for acts that occurred abroad, as the Alien Torts Act does not apply to US companies.

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even though there are risks of parallel proceedings.39 Attempts have also been made to establish jurisdiction in a certain country on claims against foreign companies for damages incurred abroad on the basis of the principles of universal jurisdiction. This would give the courts the possibility of hearing a claim with no connection whatsoever with the forum: the claimant would be foreign, the respondent would be foreign, the place of the event giving rise to the damage would be foreign and the place of damage would be foreign. These attempts have not been successful so far,40 but it has been recommended that the EU introduce such a possibility.41 A similar recommendation has also been suggested, for EU law, by the Groupe Européen de Droit International Privé (GEDIP), a group of academics studying the interactions of private international law and European law, and actively engaged in the EU’s legislative process.42 4.2.2 Enforceability of the Decision A decision rendered by a court will be enforceable domestically in accordance with the local legislation, and the losing party will be liable with all its assets that are present on the local territory, also including future assets and future income from business activity. This liability may be restricted by carrying out activity through various separate companies. In principle, each company is a separate legal entity and the assets of one company may not be attached for enforcing a court decision rendered against another company, for example, a subsidiary, the parent company or an affiliate belonging to the same group of companies (see, however, Section 4.2.1(c)). However, some systems have various criteria for piercing the corporate veil, so that, according to the local rules of civil procedure, the assets of another company in the same group may well be seized to satisfy the credits against the losing party. This possibility is generally excluded in Europe, but it is not unknown in other jurisdictions. If a decision was rendered in a local court and the losing party does not have sufficient assets (not even future cash flow) in that country, the winning party may seek to enforce the decision in another country where that company has assets. 39

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Vedanta Resources PLC & Anor v. Lungowe & Ors [2019] UKSC 20; Municipio de Mariana and others v. BHP Group (UK) Ltd (formerly BHP Group PLC) and BHP Group Ltd [2022] EWCA Civ 951. Kiobel v. Royal Dutch Petroleum Co., 569 US 108 (2013). European Parliament DRAFT REPORT with recommendations to the Commission on corporate due diligence and corporate accountability (2020/2129(INL)), 11 September 2020. The proposal, however, was not reflected in the final version of 10 March 2021. (https://gedip-egpil.eu/en/). Recommendation of the European Group for Private International Law (GEDIP/EGPIL) (2021). The recommendation was updated in 2022 to reflect the proposal for a Directive on corporate sustainability due diligence adopted by the EU Commission (COM(2022) 71 final).

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Some international instruments regulate the enforcement of decisions rendered by foreign courts. The already mentioned 2005 Hague Convention on Choice of Court Agreements ensures, among the countries that have ratified it, the enforceability of the respective court decisions, if they were rendered on the basis of a Choice-of-forum clause made by the parties. The already mentioned 2019 Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters ensures enforceability of decisions rendered by courts which meet the connection requirements laid down in the so-called filters. Enforceability is also regulated on a regional level. For example, the Brussels I Regulation and the Lugano Convention ensure enforceability of decisions rendered by courts of a member state. In addition, there are numerous bilateral treaties regulating the enforceability of decisions rendered by courts in each of the Convention’s parties. Generally, all these instruments oblige states to enforce decisions rendered by courts of another member state, without reviewing the merits of the decision. The only ground on which to refuse enforcement is, usually, when enforcement would violate the court’s public policy. Lacking an instrument such as the Hague Convention, the Brussels I Regulation or bilateral treaties, enforcement will depend on the civil procedure legislation that prevails in the country where enforcement is sought. Some countries enforce foreign court decisions after a relatively easy procedure, similar to the enforcement of foreign decisions regulated in the conventions. Other countries request that their courts review the merits of the foreign decision before it is enforced. Yet other countries do not attach any legal effects to foreign court decisions. In order to assess the enforceability of foreign court decisions in third countries where the losing party has assets (also including income from an activity), it will be necessary to evaluate the civil procedure legislation in each of these countries. The assessment will have to extend to the possibility of piercing the corporate veil or of basing liability on lack of sufficient control or breach of a duty of care so that the legislation in all countries where the losing party or other companies of the group have assets will have to be considered. 4.3 The Most Important Conflict Rule for Contracts: Party Autonomy Once the forum has been identified, it will be necessary to look at its private international law: the conflict rules contained therein will determine which state’s law governs the contract (and thus the merits of the dispute). The most important conflict rule for contracts is the rule of party autonomy. Party autonomy gives the parties the power to choose the law that will govern their relationship.

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That the parties may choose the law applicable to their legal relationship is nowadays a widespread, undisputed rule – at least in respect of international contracts. Despite an early vigorous doctrinal debate,43 party autonomy is today solidly recognised in most private international laws.44 In the EU, Article 3 of the Rome I Regulation confirms the role of party autonomy as the cornerstone for selecting the law applicable to contracts.45 This central role of part autonomy was established in Article 3 of the Rome I Regulation’s predecessor, the 1980 Rome Convention.46 The Rome Convention itself was a confirmation of the law as it was at that time in the various member states.47 Many states of civil law tradition recognise the role of party autonomy,48 and so do common law states.49 A similar approach is taken in the United States.50 Notwithstanding a strong early resistance by part of legal doctrine,51 a resistance that was reflected in the first Restatement’s silence on party autonomy,52 US case law does not seem to have been particularly restrictive in accepting party autonomy.53 This is now reflected in the Second Restatement, and it does not seem that there are plans to restrict the role of party autonomy.54 Party autonomy is also now recognised in systems that earlier did not admit it, such as Argentina.55 The widespread recognition of party autonomy may enhance the impression that an international contract is a self-sufficient regulation of the underlying transaction, detached from the state laws of the states with which the transaction is connected. Not only may the parties choose the law that will govern their contract, in many systems they may choose a law that has no connection whatsoever with the 43 44

45 46 47

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Rühl (2007). For an overview, see Symeon C. Symeonides, ‘The Hague Principles on Choice of Law for International Contracts: Some Preliminary Comment’. The American Journal of Comparative Law 61.4 (2013), pp. 873–900. Rome I Regulation, recital 11 of the Preamble. 1980 Convention on the Law Applicable to Contractual Obligations 80/934/ECC (1980) OJ (L 266/1) 1. See the extensive description in the so-called Giuliano–Lagarde Report, which was prepared as an explanatory report for the Rome Convention: Mario Giuliano and Paul Lagarde, Report on the Convention on the Law Applicable to Contractual Obligations (1980) OJ (C 282) 1–50, Article 3. See, for example, the 2006 Japanese Act No 78 on General Rules for Application of Laws, Article 7, and the 2007 Turkish Act No 5718/2007 on Private International and Procedural Law, Article 24(1)–(3). See, for example, for Singapore, Tiong Min Yeo, ‘Singapore’. In Jürgen Basedow, Gisela Rühl, Franco Ferrari and Pedro de Miguel Asensio (eds.), Encyclopedia of Private International Law (Edward Elgar Publishing, 2017) and, for Turkey, Tushar Kumar Biswas, ‘Turkey’. In Jürgen Basedow, Gisela Rühl, Franco Ferrari and Pedro de Miguel Asensio (2017). On the similarities between the EU and the US approach in respect of party autonomy, see Rühl (2007), p. 31. Particularly by Beale (2022), see Symeonides (2014), pp. 1124f. American Law Institute, Restatement (First) of Conflict of Laws (1934). 53 Symeonides (2014), p. 1126. American Law Institute, Restatement (Second) of Conflict of Laws (1971) § 187. For comments and references, see Symeonides (2014), pp. 1126f. Argentinian CCC, Article 2651.

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transaction. The parties may therefore end up with an extremely liberal law that contains very little regulation beyond the regulation made by the parties in their contract. It is true that party autonomy is recognised as a conflict rule in the vast majority of states participating in international trade and business. However, this does not mean, as some voices enthusiastically maintain,56 that party autonomy is a universal principle of transnational law, which is generally recognised and therefore not rooted in any specific state law. Firstly, party autonomy is not recognised everywhere.57 Secondly, the conditions for the exercise of party autonomy may vary according to the rules contained in the private international law of each different state. It goes without saying that courts have to apply the law of the legal system to which they belong. In disputes having an international character, the private international law of the court’s system (of the lex fori) will instruct the court to apply foreign law if the conditions for that application, as set forth in the applicable conflict rules, are met. This means that the conditions that have to be met in order to allow the choice of the law made by the party may vary from state to state. For example, some systems permit a choice of law even if the contract is not international, but domestic (for example, English law, assuming that the choice was made in good faith),58 and others, if there is a foreign element in the transaction (for example, the 1955 Hague Convention on the Law Applicable to International Sales of Goods). Moreover, some systems require that the choice of law be made expressly or appear clearly from the provisions of the contract,59 while others consider it sufficient that the choice of law is clearly demonstrated by the circumstances of the case.60 Recently, a source of soft law has been published to harmonise the principle of Party Autonomy: the Hague Principles.61 As a source of soft law, the Hague Principles may not override regulation of party autonomy that prevails in the court’s legal system. However, they may be used in arbitration, see Section 4.5.2. They can also be used as a model for legislation. 56

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See, for example, Julian D. M. Lew, Applicable Law in International Commercial Arbitration: A Study in Commercial Arbitration Awards (Oceana Publications, 1978). See, for example, Article 9 of the Brazilian IANBL – see, however, Article 2 of the Arbitration Act, permitting party autonomy in arbitration. A definition made by Lord Wright in the case Vita Food Products Inc v. Unus Shipping Co [1939] AC 277 PC is often quoted when describing the requisites of party autonomy. According to this definition, the choice of a foreign law is valid ‘provided the intention expressed is bona fide and legal, and provided there is no reason for avoiding the choice on the ground of public policy’. See the 1955 Hague Convention on the Law Applicable to International Sales of Goods, Article 2. Rome I Regulation, Article 3.1. For a comprehensive commentary, see Daniel Girsberger, Thomas Kadner Graziano and Jan L. Neels (eds.), Choice of Law in International Commercial Contracts: Comparative Commentary on the Hague Principles on Choice of Law in International Commercial Contracts (Oxford University Press, 2021). See also Symeonides (2013); Jürgen Basedow, ‘The Hague Principles on Choice of Law: Their Addressees and Impact’. Uniform Law Review 22.2 (2017), pp. 304–15.

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The parties do, as a matter of fact, enjoy a large freedom in choosing the governing law. However, this detachment from the connected state laws is not as limitless as it is sometimes perceived to be. The private international law of the lex fori might contain, in addition to conditions for the exercise of party autonomy as we have seen, considerable limitations to the scope of party autonomy. In Section 4.5 we will look at the scope of party autonomy as well as the most significant elements that restrict it. 4.3.1 Which Law to Choose To ensure predictability, it is advisable to include in the contract not only a clause choosing the forum before which claims can be brought (see Section 4.2.1), but also a clause selecting the applicable law. A variety of choices is available. The governing law can be chosen from the law of either party, or it can be a third law. Under the private international law of many countries, such as under the Rome I Regulation, the chosen law does not need to be connected with the contract, the parties or the place of dispute resolution. This is confirmed in Article 2(4) of the Hague Principles. (a) Choice of One of the Parties’ Law Traditionally, the parties try to avoid that the contract be subject to the law of the other party. Accepting the other party’s law is perceived as giving the other party an advantage. The advantage that one party enjoys if the contract is governed by ‘its’ law, is, however, overestimated. If the legal system is transparent and inspired by the rule of law, the nationality of the parties will have no relevance whatsoever to the contents of the governing law (and any system that is not transparent or inspired by the rule of law should be avoided on its own merits, and not merely because it is the law of one party). A pronationality bias could possibly be envisaged (albeit more on an unconscious level) in the application of the law by the courts or the arbitrators; however, it is fully possible to avoid the other party’s country as a seat of the dispute resolution, even if the governing law is from that country. For example, contracts between Norwegian or Russian parties may be subject to English law, whereas disputes arising out of the contracts are submitted to arbitration in Sweden. The risk of biased courts, therefore, is not necessarily a reason for avoiding the other party’s law. The real advantage in applying one’s own law lies in the knowledge that a party is assumed to have of the governing law, which is more accurate if it is the law of that party’s country. This advantage has limited significance if local law firms are used as advisers to draft the contract or check its compliance with the governing law and to advise in case of discrepancies in the interpretation or implementation. Admittedly, using an external law firm increases transactional costs; however, for companies that

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would use an external law firm anyway in the process of drafting, it does not make a significant difference if the law firm is from the company’s own jurisdiction or from another country. In conclusion, assuming that the parties come from legal systems inspired by the rule of law and that local legal advisers are used to check the compliance of the documentation, there do not seem to be significant risks in agreeing that the contract will be governed by the other party’s law. As this is perceived to be a material advantage for the party whose law is chosen, and because the real advantage does not need to be so significant, this could be used during the negotiations to obtain other concessions that may be far more substantial, in exchange for accepting the law of the other party. (b) Criteria for Choosing the Governing Law Sometimes parties attempt to make a strategic choice of law and seek advice as to which law is most suited to govern the particular type of contract that they are contemplating. In a few cases, it is actually possible to find a particularly apt law. Some contracts of reinsurance, charter parties and some financial contracts, for example, have been developed under English law; it may, therefore, be advisable to choose English law to govern them rather than a law with principles and a structure alien to those that inspired the contract. For commercial contracts generally, however, such as sale, agency, distribution, licence or cooperation agreements, there are no reasons to prefer one law to another, as long as the chosen law (including the legal literature and case law) is accessible and the legal system to which it belongs is transparent, stable and inspired by the rule of law. Commercial contracts are rarely subject to mandatory rules of the governing law. Mandatory rules are usually to be found where a contractual party is deemed to be weaker than the other (such as labour or agency contracts). Mandatory rules are mainly to be found in areas that are closely related to a contractual relationship but are not formally a part of contract law – such as when a contract creates a security interest, an encumbrance or a retention of title. These security interests affect thirdparty rights (in case the debtor becomes insolvent, the assets subject to security interests will not be available to the generality of the debtor’s creditors). Therefore, they are not part of contract law, but of property law, even though they may have been established in the same contract which regulates the contractual relationship. These aspects are regulated by mandatory rules, but there is no sense in the parties selecting a law with particularly favourable rules: the choice of law made by the parties will not cover these issues, as will be seen in Section 4.5. The governing law is important even though it does not have mandatory rules: as Chapter 3 showed, it has an impact on the interpretation and construction of the contract. It is possible this may be used as a basis to select the governing law. Will

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a party need the protection of the principle of good faith? Will it insist on a literal application of the contract? In the former case, it may choose Swiss law; in the latter it may choose English law. It is, however, difficult to predict at the moment of drafting the contract, what kind of differences may arise between the parties in the interpretation and performance of the contract or which position either of the parties will be in during a possible dispute. The interest of either party, therefore, can hardly be useful as a basis for a strategic choice of law.62 Nevertheless, it may be possible to make some very general observations. As seen in Chapter 3, traditionally, the common law is held to be concerned with preserving the parties’ freedom to contract and to ensure that their contracts are performed accurately according to their precise wording. In contrast, civil law courts have more power to evaluate the fairness of the contract and intervene to reinstate the balance of interests between the parties; they are more concerned with creating justice in the specific case than with implementing the deal in the most predictable manner. In doing so, the civil law court is guided by general clauses and principles of good faith and fair dealing. Within the civil law, a further division is possible between the systems that are based on German law (also including the Nordic systems) and those based on French law. The systems based on French law have a more formalistic approach to the interpretation of contracts than the Germanic systems and are thus closer to the English literal interpretation. Recently, comparative research has started to question whether common law and civil law are as fundamentally different as they are traditionally held to be. However, as shown in Section 3.3, convergence between the systems may be observed at a high level of abstraction, but is not necessarily relevant when a dispute relates to specific wordings or mechanisms in a contract. That a certain result could have been reached in a plurality of legal systems, if only the right technique had been employed in the contract, testifies for convergence at a high level of abstraction. However, if the specific contract has employed a different technique, the result will not be achieved. Convergence will remain on a theoretical level for the parties to the specific dispute, and these parties will need to cope with the differences in technicalities. This can serve as a guideline in evaluating which law to choose for the contract, as will be seen in the following sections. (i) Literal Interpretation: English Law On the basis of the foregoing, as a general guideline it can be said that a contract governed by English law should be very detailed. Among other things, a contract governed by English law should: (i) spell out precisely all the assumptions upon which the contract is based (this is the 62

For a more extensive argument in the same direction, see Vogenauer (2013). For an analysis see Christiana Fountoulakis, ‘The Parties’ Choice of Neutral Law in International Sales Contracts’. European Journal of Law Reform 7 (2006), pp. 303–29.

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function of the recitals, which often introduce the contract with a series of ‘whereas . . . ’); (ii) make express provision for all situations that need regulation; and (iii) specify all effects that are desired as a consequence of the regulation and not leave any gaps to be filled by the interpreter. Without a specific provision, the English contract will not be affected by changes in circumstances, supervening hardships, failed assumptions or considerations relating to the balance of interests between the parties.63 The mechanisms that are regulated in the contract will be implemented without evaluating whether the circumstances that triggered them were material or whether it is reasonable to assume that the parties intended the mechanism to apply to those circumstances. On a very general level, therefore, it may be said that a party should choose English law to govern a contract that regulates rights of which the parties may freely dispose, if that party is likely to insist on an accurate performance of the obligations exactly as they are described in the contract. This might be the case if the contract has been drafted by that party in a careful and considered way, and if the risk of change in circumstances is more likely to affect the other party than the party selecting the governing law. It is important to add, however, that choosing a foreign law may expose the risk of becoming subject to a regulation that is unfamiliar and even surprising. If a continental or Nordic lawyer chooses English law for the purpose of being able to insist on an accurate implementation of the contract wording, it also exposes the contract to unexpected regulation, such as that discussed in Sections 3.5.2 and 3.6.2: the rule on consideration, for example, according to which unilateral promises (such as a firm offer) are not enforceable; or the rule that restricts contractual penalties. The formalistic application of the contract’s wording, combined with unexpected effects that may follow from specific legal formulas, may lead to undesirable results. Therefore, English law should not be chosen as a governing law unless an English lawyer has thoroughly checked the compliance of the contract with English law, as well as the follow up of any new circumstances or differences in interpretation between the parties. (ii) Purposive Interpretation: Germanic Law On the other hand, a contract governed by German or a Germanic law (also including Swiss law and the Nordic laws) does not need to be as detailed and exhaustive as an English contract. The German or Germanic interpreter will (i) interpret the contract on the basis of the assumptions that comparable parties are reasonably expected to have; (ii) integrate the contract with an implicit duty of loyalty between the parties; (iii) consider all circumstances that may be relevant to the assessment of the rights and obligations, even if they are not expressly mentioned in the contract; (iv) fill in any gaps that the 63

Unless they trigger frustration of the contract. Frustration has, however, a narrow scope of application and has the effect of ‘killing the contract’, see Section 3.5.3.

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contract may have; and (v) excuse a party for non-performance in the case of a change in circumstances that makes the performance excessively burdensome. On a very general level, therefore, it may be said that a party should choose a Germanic law to govern a contract that regulates rights upon which the parties may freely dispose, if that party is likely to rely on a consideration of the circumstances as a whole, on legitimate expectations and good faith. This might be the case if the contract has been drafted by the other party, and if the performance may be exposed to unexpected circumstances. It is important to point out that this may mean that the clear wording of the contract is corrected by the interpreter. This may be particularly relevant to instruments such as letters of intent, which are likely to enhance the duty of good faith and loyalty between the parties if they are governed by a Germanic law, as seen in Section 3.4.2. Thus, even though the letter of intent may contain a clause specifying that no party is liable for failure to reach an agreement, a break-off of negotiations may lead to liability if the negotiations were not started or continued in good faith (for example, because one party intended to prevent the other party from negotiating with others or intended to use the information obtained in the negotiations for other purposes). Similarly, carefully negotiated clauses containing representations and warranties or remedies for non-performance such as Termination, Liquidated damages or Hardship clauses may turn out not to be exclusive of principles contained in the governing law, as seen in Chapter 3. (c) Accurate Application Assumes a Thorough Understanding of the Law We have seen that the governing law has an influence on the interpretation and construction of the contract (assuming that the contract is on matters of which the parties may freely dispose). This assumes that the judge or arbitrator has a thorough understanding of the rules on interpretation and of the role that the adjudicator is expected to have when construing a contract under that law. Generally, this kind of understanding is closely linked to the legal upbringing that lawyers receive at an early stage of their career. Lawyers are not necessarily aware of the role they play in interpreting and construing the contract and are usually convinced that they are interpreting and giving effect to a contract simply according to the natural meaning of its words, without actively interfering as an interpreter. However, as seen in Chapter 3, the same contract may lead to opposing results just on the basis of the construction and without the interpreter being aware of it. As an example, note the interpretation of the wording on force majeure events that is made, respectively, in Article 79 of the CISG and in § 27 of the Norwegian Sales of Goods Act, see Section 2.3.4(b). The wording of these provisions is identical, but they are interpreted differently. The CISG is interpreted as not excusing non-performance

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due to a supplier’s failure, whereas the Norwegian provision is interpreted so as to excuse it. As a further example, note an English decision that interpreted a contract literally:64 the contract provided that it could be terminated if the performance had not been completed by 13.00 on a certain day. Completion took place on the agreed date, but at 13.10. Although the delay did not have any consequences, the English court found it obvious that ten minutes delay is a delay and that the contract could be terminated according to its provision. Any other decision would have led to the question of how late it has to be to become a delay, and this would have been contrary to predictability. German courts would probably have considered whether such a slight delay had consequences that would justify termination. They might have, possibly even on an unconscious level, assumed that the parties must have meant a delay that was more material than ten minutes. Yet another example is an English decision affirming that the motives for exercising a contractual right are irrelevant.65 Under the civil law, a court would give consideration to the motives, to make sure that the party exercising its right is not abusing it. This is to show that the particular effects of a law depend not only on the application of that law, but also on the interpreter’s attitude. If a German lawyer is asked to apply English law, the German principles of good faith, loyalty and so on will probably unconsciously be superimposed on the English preference for predictability, and the result will be unlikely to be the same as if an English lawyer had applied the same law. Recent examples of the court’s impact on the application of a foreign governing law are two English court decisions that applied French law to arbitration agreements: the English court concluded that French law led to a certain result, while French courts, which applied the same law to the same arbitration agreements, came to a different result.66 Therefore, if a law is applied by a foreign court or an arbitral tribunal where the arbitrators are not educated in that law, it will be necessary to give a thorough explanation of that law’s principles and, more importantly, of how they are applied. This will ensure that the governing law will have the effects that are peculiar to it. Often, legal experts are engaged by the parties or by the court to render a legal opinion on the foreign law – thus informing the judge about how the foreign law would be applied in its jurisdiction.

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Union Eagle [1997] 2 All ER 215. Monde Petroleum SA v. Westernzagros Limited [2016] EWHC 1472 (Comm), para 274. Dallah Real Estate & Tourism Holding Co v. Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46 and Cour d’appel de Paris, 17 February 2011, n° 09–28533; Kabab-Ji SAL (Lebanon) v. Kout Food Group (Kuwait) [2021] UKSC 48 and Cour de cassation of 28 September 2022, n° 20-20.260 (Kabab-Ji).

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4.3.2 Tacit Choice of English Law for International Contracts? Assuming that the contract contains a clause choosing a governing civil law, or, alternatively, assuming that the contract (lacking an express Choice-of-law clause) is governed by a civil law as a consequence of the applicable conflict rule (see Section 4.4), shall any importance be attached to the legal style in which the contract is drafted? As seen in Chapter 1, many international commercial contracts are drafted in the English language and use, as a basis, models that are developed in the English language; therefore, the contracts reflect the legal terminology and contractual structure typical of common law systems. Contracts that reflect the common law (particularly, English law) are drafted quite differently from contracts that reflect the civil law, since each of them is meant to meet the requirements and fill the gaps of the respective governing law, and the laws of contract of these two legal families differ quite substantially. As seen in Chapter 3, some clauses might not achieve under the civil law the intended effects that can be achieved under the common law; some clauses may be unenforceable or not have any meaning under a civil law – for example, if they make reference to legal institutions that do not exist under the civil governing law; some clauses may be redundant or cover areas that are already regulated in the civilian governing law, but in a different way. In these situations, the interpreter has to cope with a lack of coordination between the contract, drafted on the basis of a common law tradition, and the governing law, belonging to the civil law tradition. Should the interpreter disregard the drafting tradition and simply interpret the document on the basis of the governing law? Or should the common law inspiration play a role in the interpretation and construction, in spite of the fact that the governing law is civil? The first question that should be answered in this context, and that will be analysed here, is a question of private international law: Does the use of a common law legal style and contractual structure imply a choice of law? In other words, can the parties be deemed to have tacitly chosen the governing law by having drafted the contract in a way that is typical of the common law? If it is not possible to assume a tacit choice of law because the contract contains an expressed choice of law in favour of a civil law, can the principle of severability allow for consideration of a tacit choice of law only for the clause or part of the contract that would otherwise be unenforceable under the governing civil law? If no tacit choice (total or partial) may be deemed to have taken place, and assuming that the contract does not contain an expressed choice of law, can the contract style have an influence on the application of the conflict rule that may determine the governing law; that is, the rule according to which a contract is governed by the law with which it has the closest connection? If the use of a certain drafting style may not be deemed to amount to a choice of law, may the interpreter nevertheless attach significance to the legal effects that certain clauses have in the inspiring legal system?

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The answer to these questions will depend on the applicable private international law. Is a tacit choice of law permitted under the applicable private international law? If it is, under which conditions? As an illustration, in the next section we analyse the rules on tacit choice of law, on severability and on the closest connection contained in the Rome I Regulation. (a) The Use of Common Law Contract Models As already mentioned in Section 1.2, international commercial contracts are written primarily using the model of English or US contracts. This contract practice obviously started because the communication between the parties in international transactions takes place mainly in the English language. It is, therefore, only natural that the contract is also written in English. Using a certain language does not necessarily mean that the legal system that is expressed in that language is also applied. This is clearly testified to by the numerous contracts written in the English language where the parties have expressly chosen to subject the contract to a governing law that is not expressed in English – be it the law of the state to which one of the parties belongs, the law of the state where the contract will be performed or the law of a third state, which is deemed to be neutral and therefore preferred by both parties. This may lead to choosing the law belonging to a civilian system and may appear to contradict the circumstance that not only do the drafters of international contracts use the English language, but they are also often inspired by contract models that are developed in England, the United States or other common law jurisdictions. This is a relatively unconscious process. It started several decades ago mainly because of the desire to ensure a proper linguistic result: the numerous publications that commented on or collected English or US model contracts were very useful as a basis for non-native English-speaking lawyers for drafting contracts in English properly. Adopting these models, however, also meant adopting the legal structures of the legal system under which the model was developed: separating the proper use of the English language from the adoption of the underlying legal structures would have assumed (i) a thorough knowledge of the English, US or other common law system under which the model had been developed; (ii) an understanding of the function of the various contract clauses in that legal system; (iii) a systematic comparison with the governing legal system; and (iv) an exclusion or correction of the contract clauses that turned out to be tailored to the legal system under which the model was developed and not to the governing legal system. Such an extensive process cannot always be expected in the framework of a commercial case where time and resources are often limited, and as a result, contract models were simply adopted ‘as is’. International commercial practice has therefore gradually acknowledged the drafting style that is typical for common law contracts, without really questioning its applicability to civil law systems.

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Today, large international commercial contracts are (with only a few exceptions) drafted on the basis of common law models. The sources of these models are often not clearly identifiable and usually not unitary. Every lawyer or law firm will have an archive with texts taken from international branch associations, from international publications, from electronic databases and from previous transactions of various types in which the lawyer or the law firm has been involved in various jurisdictions. Any new draft will be based on a mixture of all these texts, improved with new elements taken from recent experiences, inspired by drafts that had been proposed during the negotiations of a previous deal and added to with clauses that have appeared in yet other deals. In summary, commercial contracts are, with the exception of specific areas where there is a widespread use of recognised standard contracts developed under a specific legal system, a potpourri of texts originating from various contract types and different jurisdictions, international documents and personal experience, all of this adopting the common law legal drafting, and without necessarily any particular thought devoted to the compatibility of these models with the governing law. The power of language is, indeed, considerable: in George Orwell’s memorable novel 1984, the totalitarian system introduced a simplified language, Newspeak, to limit free thought. By prohibiting synonyms, antonyms and words relating to any threatening concepts, the system managed to eradicate alternative thought. Language’s ability to influence the content of what is expressed may seem just as significant in the field of contracts (albeit without the gloomy implications attached to Newspeak), given the close relationship between the definition of a right and its legal effects. If a right is defined in a certain language, it may seem only natural to assume that its effects are those described in the legal system that adopts that language. If this was the case, the use of the English language would imply the creation of rights and obligations corresponding to those existing in English law – just like, in a completely different context and with completely different implications, the use of Newspeak leads to thoughts that are conforming with the principles of the regime. However, as seen in Chapters 2 and 3 and as the following sections will show, in the case of contracts the language used to define rights and obligations is not the only parameter for the content of the rights and obligations. In addition to the language of the contract, it is necessary to take into consideration the regulation contained in the contract, and this in turn will have to be interpreted, construed and applied according to the governing law. Unlike the totalitarian regime of 1984, where no other sources could integrate the language, and consequently thought could be moulded by the words that were available to express them, legal concepts do not rely simply on the wording of contract terms. The significance of the governing law will be discussed further. (b) The Governing Law An international commercial contract, more or less consciously inspired by one or more common law systems, as seen previously, is generally subject to one single governing law. As will be seen in Section 4.4, a legal relationship may actually be

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governed by more than one law since conflict rules may render different laws applicable to specific areas – such as the legal capacity of the parties, securities or overriding mandatory rules. The questions of pure contract law, however, such as the rules on interpretation of the contract, general principles on the mutual rights and obligations between the parties, the validity of the contract, the consequences for breach of contract and so on, are generally subject to one single governing law, unless the parties have decided otherwise, as will be seen in Section 4.3.2(c). The drafters of international commercial contracts often make use of their party autonomy and insert in the contract a clause choosing the governing law. Often, the chosen law belongs to a civil system. If the contract contains a Choice-of-law clause, or if the parties have afterwards specified which law shall regulate their relationship, there is no doubt that the contract will have to be interpreted and construed in accordance with that law and will have to be subject to the rules of that law (assuming that the choice was valid). This extends to filling in any gaps in the contract with the rules of the chosen law, as well as correcting any clauses that might be contrary to the mandatory rules of the governing law. The common law-inspired contract will, therefore, be governed by the chosen civilian law. If the parties have not chosen the governing law, this will be determined by other conflict rules, based on various connecting factors: as will be seen in Section 4.4, in the Rome I Regulation, the connecting factor is to be found in a subsidiary conflict rule. Under Rome I, the subsidiary connecting factor is the habitual residence of the party making the characteristic performance (Article 4); under Argentinian law, it is the place of performance of the contract (Article 2652 of the CCC); under Brazilian law, it is the place in which the contract was concluded (Article 9 of the IANBL); and so on. If the party making the characteristic performance has its place of business in a country belonging to the civil law family, or if the place of performance or of conclusion of the contract was in a civil law country, the contract will be governed by that law. The common law-inspired contract will, yet again, be governed by a civilian law. (c) Severability: Drafting Style as a Partial Choice of Law? If the contract contains a Choice-of-law clause determining that the contract is to be governed by a law belonging to the civil law family, the choice is expressed quite clearly. What if the contract is written in a common law legal style and contains some clauses that do not make any sense under the chosen law, but have a clear effect under the inspiring law? Can the parties be deemed to have made a tacit choice of the inspiring law for that particular part of the contract? The answer to these questions assumes an examination of the issue of severability. The principle of severability is well known in private international law, and the scenario described would be an example of this principle of severability.

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The general rule within international contracts is the unitary principle, providing that the governing law shall be applied to the near totality of questions arising out of a contract.67 In spite of the unitary principle, legal relationships arising out of contracts may raise a series of issues that are not necessarily subject to the law applicable to the contract, but have their own conflict rules – for example, the Rome I Regulation excludes from its scope, and therefore from the scope of application of the chosen law: the legal capacity of the parties to the contract,68 the ability of the agent to bind the principal,69 the clause choosing the competent courts or the arbitration clause,70 the validity of the consent of one party under certain circumstances,71 or any areas where the law of the forum72 or, under certain circumstances, the law of a third country73 has mandatory rules of such a nature that they need to be applied in spite of a different governing law (the so-called overriding mandatory rules). Whenever a contract covers any of these areas, it will be subject to severability: the part of the contract falling within each area will be severed from the rest of the contract and will be governed by the law determined on the basis of the relevant conflict rule. The remaining parts of the contract will be subject to the governing law as chosen by the parties or as determined on the basis of the subsidiary conflict rule for contracts. In addition, party autonomy does not cover the parts of the relationship that do not fall within contract law, such as the validity of a pledge (which falls within property law) or the validity of a corporate body’s resolution (which falls within company law). These aspects will be governed by the law determined by the relevant conflict rule for property or company law, see Section 4.5. Furthermore, many private international law systems permit the parties to subject different parts of the contract to the law of different countries.74 This is another aspect of severability, that depends not on the circumstance that the issue is subject to specific conflict rules, but on the parties’ decision. When the Rome Convention (the predecessor of the Rome I Regulation) gave the parties the possibility to sever the contract and subject each part to a different law, it was met with criticism,75 and the precise effects of this possibility were not completely 67

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Article 12 of the Rome I Regulation provides that the governing law applies to interpretation, performance, consequences of breach, extinguishing of obligations and consequences of nullity. Article 18 extends the applicability of the governing law to presumptions at law and burden of proof. Article 1.2(a) of the Rome I Regulation. 69 Article 1.2(g) of the Rome I Regulation. Article 1.2(e) of the Rome I Regulation. 71 Article 10 of the Rome I Regulation. Article 9.1 of the Rome I Regulation. 73 Article 9.3 of the Rome I Regulation. Rome I, Article 3: ‘By their choice the parties can select the law applicable to the whole or a part only of the contract.’ See also the Argentinian CCC, Article 2651; the Japanese Private International Law Act, Article 7. See Michael Bogdan, ‘1980 Års EG-konvention om tillämplig lag på kontraktsrättsliga förpliktelser– synpunkter beträffande den svenska inställningen’. Tidsskrift for Rettsvitenskap 96.1 (1982), pp. 3–49, 14f.; but see the same author’s more positive analysis of the matter now that the principle has become part of Swedish law: Michael Bogdan and Michael Hellner, Svensk internationell privat- och processrätt, 9th ed. (Norstedst Juridik, 2020), p. 347.

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uncontroversial.76 However, in the decades during which this rule has been in force, it does not seem to have presented particular problems.77 The Rome I Regulation has not modified the Rome Convention in this respect. Therefore, the comments that were made in the Report to the Rome Convention are applicable also to the Rome I Regulation. The Giuliano–Lagarde Report on the Rome Convention specifies that the severability permitted to the parties under Article 3 assumes that the separation of the contract into different parts must be logically consistent.78 A choice of law according to which the rights of the seller are governed by a certain law, whereas the rights of the buyer are governed by another law, therefore, would not be valid: the rights of the buyer are the mirror of the obligations of the seller, and the obligations of the buyer are the mirror of the rights of the seller and vice versa. If each of these mirror images is subject to a different law, the result runs the risk of being as distorted as a Cubist portrait. Whenever a contract regulates a complex transaction that can be divided into various independent parts, it is possible to sever these parts and subject them to different laws. The most evident example is the arbitration clause, which is independent from the main agreement and is sometimes even regulated in a separate document, see Section 5.4.2. Other evident examples are guarantees or other ancillary obligations that may also be regulated in separate documents. Even parts of a transaction that are not usually the object of separate contracts may be logically severable – for example, indexing clauses.79 For each of these severable parts of the contract, the parties may choose a different governing law. Another matter is whether severing the contract is always meaningful: the choice of a legal system for the liability for breach of contract and of another system for the measure of the reimbursable 76

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For example, Kurt Siehr considers an illogical division of the contract as valid and it leaves it to the parties to suffer the consequences that may arise therefrom: Internationales Privatrecht (C. F. Muller, 2001), p. 125, whereas Jan Kropholler considers the feasibility of the severability as an assumption of a valid partial choice of law: Internationales Privatrecht, 6th ed. (Mohr Siebeck, 2006), p. 462. The rule of severability in Article 3.1 is often not commented upon particularly at length; see, for example, Peter Arnt Nielsen, International privat- og procesret (Jurist- og okonomiforbundets forlag, 1997), p. 500. The search engine of the CJEU (https://curia.europa.eu/jcms/jcms/j_6/en/) shows no decisions on the issue. For a reference to some German cases, see Ulrich Magnus, Staudingers Kommentarzum Burgerlichen Gesetzbuch mit Einfuhrungsgesetz und Nebegesetzen, Einleitung zu, §§ 27ff EGBGB, §§ 27–33 EGBGB etc. (Sellier de Gruyter, 2002), § 27, notes 90ff. Severability is a well-known phenomenon within private international law, even beyond the European systems; see, for example, in respect of the United States, Willis L. M. Reese, ‘Dépeçage: A Common Phenomenon in Choice of Law’. Columbia Law Review 73 (1973), p. 58, as well as, emphasising the advisability of avoiding unnecessary splitting of the contract, Peter Hay, Patrick Borchers, Symeon C. Symeonides and Christopher A. Whytock, Conflict of Laws, 6th ed. (West Academic Publishing, 2018), para 18.8E. See the Giuliano–Lagarde Report (1980), comment to Article 3, para 4. For an extensive analysis and references, see Martin Windmöller, Die Vertragsspaltung im internationalen Privatrecht des EGBGB und des EGVVG (Nomos, 2000). For a list of clauses that have been considered severable, see Jörg Kondring, ‘“Der Vertrag ist das Recht der Parteien”: Zur Verwirklichung des Parteiwillens durch nachträgliche Teilrechtswahl’. IPRax: Praxis des Internationalen Privat-und Verfahrensrechts 26.5 (2006), pp. 425–38.

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damages, for example, might lead to the unfortunate combination of a strict liability from one system, with reimbursable damages calculated on the basis of generous criteria from another system. The systems that operate with strict liability usually mitigate the harsh effects of such a wide basis for liability by restricting the reimbursable damages to what is reasonably to be expected according to the normal course of events.80 The systems that make liability follow negligence, on the contrary, usually extend the reimbursable damages to the actual loss, also including indirect damages.81 Combining these two systems would result in a very wide (or, as the case may be, very narrow) liability, which is not necessarily a desirable result. Once it has been established that the parties can, in principle, separate a certain clause or a certain part of the contract and subject it to a different governing law, it must be pointed out that this process may even take place implicitly. If the parties are allowed to exercise their party autonomy for part of the contract, they are allowed to do so in accordance with the form requirements that are generally applicable to party autonomy. Party autonomy may be exercised expressly or tacitly. Therefore, a partial choice of law may also be made both expressly and tacitly. The criteria that must be met in order to have a valid tacit choice of law will be analysed in the following section. (d) Drafting Style as a Tacit Choice of Law? The previous section considered the situation of a contract containing a Choice-oflaw clause in favour of a civilian law, but containing one or more clauses obviously inspired by the common law and that do not have legal effects under the chosen civilian law. The question was raised as to whether it may be possible to assume that the parties have made a tacit choice of law for those particular clauses. The possible relevance of a tacit choice of law becomes even clearer if the contract does not contain any expressed choice of law. Lacking a choice of law by the parties, the subsidiary conflict rule will determine the applicable law, see Section 4.4. However, the subsidiary conflict rule becomes applicable when a choice made by the parties is lacking, rather than an expressed choice made by the parties – if the parties are, such as according to Article 3, first paragraph of the Rome I Regulation, also free to make their choice of law tacitly. Could the circumstance that the parties adopted a common law drafting style be deemed as a tacit choice of law? In other words, can the parties be deemed to have made an implied choice of law in favour of the original law under which the model was developed, rather than being deemed not to have made any choice? The wording of Article 3 of the Rome I Regulation makes it clear that a tacit choice of law, to be considered valid, has to appear as an actual choice made by the parties, even if not expressed: ‘The choice shall be made expressly or clearly demonstrated by 80 81

See, for example, English law: Beale (2022), paras 29–022f. See, for example, German law, § 280ff. of the BGB.

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the terms of the contract or the circumstances of the case.’ This wording corresponds broadly to the wording of the regulation’s predecessor, the Rome Convention, which, in Article 3, said: ‘The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case.’ The slight change in wording (from ‘demonstrated with reasonable certainty’ to ‘clearly demonstrated’) has the effect of enhancing the requirement that the choice must have actually been made by the parties and cannot be inferred out of what could seem to be a reasonable decision on a hypothetical basis. Among other things, this means that the theory of the hypothetical choice of law, that was to be found prior to the Rome Convention, for example, in German private international law, is not applicable anymore.82 It is, therefore, not sufficient to argue that the parties (or reasonable persons under the same conditions as the parties) would have made a certain choice of law if they had considered the question. A hypothetical choice of law may be a reasonable solution to the question of the governing law, but it is not allowed under the wording and the spirit of Article 3, which requires evidence that the parties have actually considered the question and have made a real choice in favour of a specific law. This actual choice of law does not need to be expressed in words and it is sufficient that it is clear from the terms of the contract or other circumstances. Implying from the circumstances a choice of law actually made by the parties, however, is quite different from determining what would be a reasonable choice under those circumstances. Among the examples of tacit choice that the Giuliano–Lagarde Report on the Rome Convention made is the case of a specific contract form that is known for having been written under a specific governing law, such as the Lloyd’s policy of marine insurance developed under English law.83 By applying this contract form, the parties may be deemed to have tacitly chosen English law. The case of an identifiable contract form knowingly written under a certain law is quite different from the case of a contract inspired by a more generalised way of drafting agreements and resulting in a patchwork of a plurality of sources such as international standards, international commercial publications, research databases and experience from previous transactions in a variety of countries and so on. As seen in Section 4.3.2(a), the practice of general commercial contracts such as agency, distribution, sale, commercial cooperation and so on, falls within the latter description. This means, first, that the model upon which the contract is based may be difficult or impossible to determine. Second, even the legal system(s) under which the model was developed cannot be evidently identifiable. While it is clear that these contracts are inspired by the common law, it is usually not at all justified to automatically assume that the original legal system is the English, rather than the US, the Australian or any other system of common law. Even if they belong to the same legal family, there may be 82

83

See the Giuliano–Lagarde Report (1980), comment on Article 3, para 3, and Magnus (2002), Article 27, notes 60ff. with further references. Giuliano–Lagarde Report (1980).

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considerable differences between the contract laws of, for example, England and the United States. If the state law under which the specific contract was developed is not identifiable, or if there is no international usage to subject that specific model to a specific law, the interpreter is left without specific rules on the interpretation of contracts, on contractual remedies and on duties between the parties and so on, that can be applied to the contract. A generic reference to the common law tradition would not be of much help. A specific state law as a system of origin is usually not identifiable in the commercial contracts drafted as described, and this would be sufficient to exclude that an actual choice of law may be deemed to have been demonstrated with reasonable certainty, as the Rome Convention requires, and even more so, it would exclude that an actual choice of law is deemed as having been clearly demonstrated, as the Rome I Regulation requires. In addition, the identification of an inspiring system of origin for the contract is usually impossible when international contracts are negotiated by lawyers belonging to different legal systems (neither of which necessarily belongs to the common law family) and on the basis of their own respective international experience and documentation. Even assuming that the first draft presented by one party was developed under a specific legal system (which is not necessarily usual), the origin of that draft is not necessarily known to the other party, and is generally lost during the negotiations, after each of the parties has added to and modified the clauses of the first draft in several rounds. The final text coming out of this process can hardly be said to permit an interpreter to imply with reasonable certainty that the parties actually wanted to choose for their contract the law under which the first draft was originally developed (if any). The simple fact that the contract is written in English and follows the common law drafting technique, therefore, is not sufficient to identify with certainty the law under which the contract was developed; choosing English or US law as the most representative or well-known laws within that legal family would be totally arbitrary, and trying to apply a common denominator that is shared by a majority of common law systems would be (very vague and) against the rule of Article 3 of the Rome I Regulation and its predecessor, the Rome Convention, which assume a clear choice of the law of a specific state.84 If the parties have inserted in the contract a clause expressly choosing the governing law, it is even more difficult to consider the legal drafting technique as a tacit 84

One of the drafts for the Rome I Regulation, European Commission, Proposal for a Regulation of the European Parliament and the Council on the law applicable to contractual obligations (Rome I), COM (2005) 650 final, permitted a contract to be subject to published restatements of international principles, such as the UNIDROIT Principles of International Commercial Contracts, the Principles of European Contract Law or the Common Frame of Reference currently under preparation. The draft Regulation excluded general principles belonging to the lex mercatoria from being chosen as a governing law. The inclusion of international principles contained in the draft Regulation was so controversial that it is not reflected in the final text of the Regulation. General principles belonging to the common law would, in any case, not have qualified for either of these categories and would therefore not have been allowed according to the draft Regulation.

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choice of law. The interpreter would, in this case, deem the parties to have tacitly derogated from an expressed clause that they have willingly inserted into their contract. If at all feasible, such reasoning could be made at best by using the principle of severability of the contract: the expressed choice of law would have to be considered as fully effective and the chosen law would govern the interpretation of the contract, the contractual remedies and so on; to the extent that a specific clause or part of the contract is not capable of having effects under the chosen law, but has effects under the original law of the contract model, the interpreter may see whether it is possible to sever that part of the contract and subject it to the original law. This process, however, would assume that the requirements for a tacit choice are met; therefore, it must be possible to affirm that the parties have intended to render applicable the law of a specific state to that particular part of the contract. The simple fact that part of the contract would not be effective under the expressly chosen law does not seem to be sufficient evidence of an actual will of the parties to (tacitly) choose the other law. The outcome of the analysis will be different if the contract contains (not choice of, but) specific references to a certain legal system (such as when the scope of liability is defined by reference to a certain statutory provision), or if it applies a standard model that was unequivocally developed under a specific system of law. Standard contracts of this type are applied in specific branches, such as charter parties or marine insurance policies, but are not usual in general commercial practice. It could be envisaged that the parties to a contract included a clause that had a specific legal effect under a certain law, different from the law governing the contract. The parties may have intended the clause to have the effect that it has under that law. In this case, the clause can be given the effect that it has under that law; however, this is based on the common intention of the parties to obtain that particular result and not on a tacit choice of law.85 (e) Drafting Style as the Closest Connection? If the parties have not expressed a choice of law, the governing law will be chosen by applying the connecting factor contained in the subsidiary conflict rule. In the Rome I Regulation, Article 4 provides a series of connecting factors, one for each contract type, mainly based on the general connecting factor of the habitual residence of the party making the characteristic performance. Paragraph 3 of Article 4 contains an exception: ‘Where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply.’ It is, therefore, legitimate to investigate whether the drafting style of the contract may be considered

85

See Dannemann (2011), pp. 69ff.

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a circumstance that renders the contract manifestly more closely connected with the country whose law has inspired the drafting. The answer must be negative. Not only does the style not give sufficiently precise indications to enable the determination of a specific legal system, as mentioned in Section 4.3.2(d), even the history of Article 4 shows that the criterion of the closest connection must be applied very cautiously. As will be explained more in detail in Section 4.4, Article 4 of the Rome I Regulation has modified the structure of its predecessor, Article 4 of the Rome Convention. This modification was made with the purpose of clarifying that the choice of law shall be made on the basis of general connecting factors (of which the most important is the residence of the party making the characteristic performance), and that the closest connection represents an exception that must be applied restrictively. The wording used to qualify what circumstances trigger the application of the closest connection shows the exceptionality of the application, in that it requires that the closest connection needs to be ‘manifest’. The corresponding wording in Article 4.5 of the Rome Convention was ‘if it appears from the circumstances as a whole that the contract is more closely connected’. Permitting the evaluation of such a loose factor as the language of the contract or its legal style would deprive the choice of law of this predictability – particularly considering that these factors are not sufficiently precise to qualify as a tacit choice of law, as seen in Section 4.3.2(d). In conclusion, the legal style in which the contract is written does not seem to be a relevant criterion in the assessment of which country the contract has its closest connection with. (f) Conclusion From the foregoing it can be concluded that the drafting style, legal technique and language of a contract as such are not sufficient bases for a tacit choice of law (total or partial) or as a circumstance showing the closest connection. From the point of view of private international law, therefore, an international commercial contract will be governed by and interpreted in accordance with the governing law that is (expressly or tacitly, but with clarity) chosen by the parties, or, when lacking such a choice by the parties, with the law applicable according to the subsidiary conflict rule. If the governing law belongs to a civilian system, the contract will be interpreted according to the legal tradition of that law, and its clauses will have the effects that follow from the general principles and rules of that law, even if this may create some discrepancies with the interpretation and effects that the same contract would have if it was governed by a law belonging to the common law tradition. Discrepancies in the interpretation of the contract may possibly be avoided if a certain contract clause has received a certain interpretation so consistently that the interpretation can be deemed to have become a trade usage: in such cases, however, the discrepancies between the civilian governing law and the common law inspiration will

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be avoided not because the contract is interpreted according to the common law, but because it is interpreted according to generally recognised trade usages. 4.3.3 Choosing Transnational Law? The parties may choose any foreign law or a plurality of foreign laws to govern their transaction if the applicable rule of party autonomy permits them to do so. Similarly, the parties may choose to subject their transaction to transnational law, as long as this is within the limit of party autonomy recognised by the private international law of the forum. Choosing transnational law as the governing law may be done in many ways – for instance, by expressly choosing a certain source, such as the already analysed UPICC or the UCP 600, see Chapter 2. Alternatively, the parties may make reference to no specific source and simply refer to generally recognised principles in international trade or some similar language indicating the intention of the parties to exclude the application of a state law. As seen in Section 2.3, however, this does not necessarily mean that the chosen transnational law replaces the applicable law in governing the contract. Quite apart from the circumstance that the transnational law may need to be integrated by a governing law, there may be a formal obstacle to choosing a governing law which is not a state law. Some private international laws permit the parties to choose only a state law. The Rome I Regulation, for example, excludes that the parties may select, to govern their contract, sets of rules that are not national laws (with an exception for possible future European instruments of contract law).86 Thus, transnational sources may be incorporated into the contract by the parties and supplement the governing law, but may not be selected to govern the contract to the exclusion of any national law. The situation is different when the dispute is subject to arbitration: many arbitration laws and rules of arbitration institutions permit the parties to choose ‘rules of law’ to govern the dispute. As seen in Section 2.3.1 and as will be seen in Section 5.6.7, the use of the words ‘rules of law’, as opposed to ‘law’, is generally interpreted so as to permit the parties to choose rules that do not belong to a state law, but to sources that may be defined as transnational. This is in contrast to the power of the arbitral tribunal to choose the ‘law’ governing the dispute in cases where the parties have not made a choice, as ‘law’ is understood to be the law of a state. There is, therefore, an apparent difference in the possibility of choosing the transnational law to govern a contract, depending on whether the dispute is decided by courts of law or by arbitral tribunals. 86

Council Regulation 593/2008, Article 3. The Preamble, in item 13, confirms that nothing prevents the parties from incorporating into the contract transnational instruments of soft law; as a consequence of such incorporation, however, the soft law is given the status of a term of contract, not of governing law. See also Goode et al. (2015), pp. 515ff.

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However, the gap between national courts and arbitral tribunals need not be as dramatic as it looks prima facie: even though courts are to apply a national law, they are not excluded from choosing sources that reflect commercial development. Many national laws refer to trade usages and practices as one of the sources of law,87 and national laws present some sources that require an autonomous interpretation inspired by ideals of harmonisation, such as those embedded in the CISG. Therefore, national courts should not be deemed to be an exclusively passive instrument for the application of codified provisions or of already established rules.88 Hence, the gap between national courts and arbitral tribunals is not as deep as the dichotomy between ‘rules of law’ and ‘law’ would seem to suggest. Furthermore, as Section 2.3 has shown, it is not unlikely that transnational sources, even though they are formally capable of governing a contract when the dispute is decided in arbitration, in the end will need the support of a national law – because the transnational principles are not sufficiently precise, due to gaps or otherwise. Moreover, as soon as the scope of party autonomy is restricted by other conflict rules (as we will see in Section 4.5), the choice of a transnational law will be affected accordingly. 4.4 What If the Parties Have Not Chosen the Governing Law? International contracts very often contain a clause on choice of law, as we have seen. Sometimes, however, the parties do not exercise their party autonomy. There may be various reasons for the parties’ failure to choose the governing law: either the parties have not managed to reach an agreement on which law should be applicable to their contract (for example, because each party insists on the application of its own law), or the contract is very simple and does not contain regulation of matters other than the mere commercial terms, or the parties have forgotten or have not deemed it necessary or desirable to make a choice of law. In this situation, it is not apparent from the face of the contract which law is governing. However, we have seen in Chapters 2 and 3 that an international contract is always, ultimately, governed by a state law. How can the governing law be determined? The next sections will illustrate the reasoning necessary to identify the governing law. Until recently, the most common conflict rule was that of the closest connection. The rule according to which, failing a choice of law by the parties, the contract is to be governed by the law with which it has the closest connection, could be found, for 87

88

See, e.g., Article 346 of the German Commercial Code, Article 1(4) of the General Provisions on the Law (Preamble to the Italian Civil Code) and Article 1326 of the Italian Civil Code. An example of how national courts may adopt a more commercially oriented view on the effects of representation and warranties contained in merger and acquisition contracts is given by Radicati di Brozolo (2016), note 46. This example shows that courts may react to the development of contract practice, even though they may be slower than arbitration.

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example, in the Rome Convention (the predecessor of the Rome I Regulation),89 and in the Swiss PILA.90 As will be seen, this rule may be interpreted either as a flexible formula that permits consideration of all elements of a case to find the actual closest connection in the specific case, or it can be interpreted as a principle underlying fixed connecting factors that apply to the generality of cases for which they are relevant. This created some uncertainties in the interpretation of the Rome Convention. The Rome I Regulation has finally clarified that, failing a choice by the parties, the governing law shall be chosen according to fixed connecting factors. The most important connecting factor in Rome I is the habitual residence of the party making the characteristic performance, which is defined more specifically for various contract types in paragraph 1 of Article 4. The more flexible formula of the closest connection is relegated to the level of an exception that must be applied very restrictively. As the following overview shows, this may be considered a simple clarification of the status that existed already under the Rome Convention.91 In other legal systems, the closest connection may be crystallised in other connecting factors, such as the place of performance92 or the place where the contract was entered into.93 (a) The Rome Convention Provided for Presumptions The Giuliano–Lagarde Report on the Rome Convention defined the concept of the closest connection as too vague94 and considered it necessary to give it specific form and objectivity by laying down a series of presumptions. The presumption that is of greatest interest here is that contained in Article 4.2: a contract was presumed to have the closest connection with the state in which the party who was to effect the most characteristic performance had its habitual residence or (if a legal entity) its central administration at the time of the conclusion of the contract. If the contract was entered into in the course of that party’s business, the criterion of central administration was substituted with that of the principal place of business or with the place of business specified in the agreement. The performance that was to be considered as characteristic of a contract was the one that determined the social and economic function of that particular legal relationship. Characteristic performance is, for example, the delivery of goods in a sale agreement, the performance of services in a service agreement or the transfer of 89

90 91

92 93

Article 4. Special rules were provided for some types of contracts involving interests that require exceptional protection, such as consumer and labour contracts. Article 117. Some consider it an innovation that restricts the former flexibility of the Rome Convention. A look at the European Commission, Green Paper on the conversion of the Rome Convention of 1980 on the law applicable to contractual obligations into a Community instrument and its modernization (COM (2002) 6.5.4 final, para. 3.2.5) shows that this is not an innovation, but simply a clarification. See, for example, Article 2625 of the Argentinian CCC. See, for example, Article 9 of the Brazilian IANBL. 94 Giuliano–Lagarde Report (1980), p. 21.

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rights or technology in a licence agreement. The monetary obligation that compensates the party effecting characteristic performance, on the other hand, cannot be considered characteristic. If we assume a licence agreement between an Italian licensor and a Norwegian licensee, therefore, the characteristic performance would be that of the Italian licensor; the place of business of the licensor would be in Italy and the licence agreement would be governed by Italian law. Further presumptions were set forth by Article 4, in subsections 3 and 4, for contracts regarding immovable property and those for the carriage of goods, respectively; however, we will limit our observations to the presumption of the habitual residence contained in Article 4.2. Article 4.5 permitted the presumption of Article 4.2 to be rebutted in two situations: if the characteristic performance of a contract could not be determined or if all the circumstances of the case showed that the contract had a closer connection with another state than that where the party effecting the characteristic performance resided. If the presumption of Article 4.2 could not be applied, the criterion of the closest connection must be applied. There were two conflicting interpretations of the relationship between Article 4.2 and Article 4.5 of the Rome Convention. (b) Loose Interpretation: Article 4.2 as a Weak Presumption The loose interpretation of the presumption considered the presumption as a pure indication of one of the elements that could be relevant for finding the closest connection. According to this interpretation, the major role would be played by the exception of Article 4.5, which referred to the circumstances of the case as the basis for determining the closest connection. This loose interpretation seemed to have been applied, for example, by the Danish Supreme Court in 1996 in the context of a construction agreement. In a dispute between a Danish sub-contractor and a German constructor, the Danish Supreme Court applied Danish law, reaching the same result determined by the presumption of Article 4.2. However, the result was based not on the presumption, but on the evaluation of all the circumstances of the case, which all showed a connection with Denmark (the language of the agreement, the place of conclusion of the agreement, the currency in which the price was invoiced, etc.). The Danish Supreme Court, in summary, seemed to have applied the principle of the closest connection rather than the presumption of the habitual residence of the characteristic performer.95

95

UfR 1996, 937; for more extensive comments see Joseph Lookofsky, International privatrett på formuerettens område (Jurist- og Økonomforbundets Forlag, 1997), p. 74; Nielsen (1997), pp. 506, 513; Alan Philip, ‘First Danish Decisions on the Rome Convention’. In IPRax (1994), p. 150. Other decisions in the same sense can be found in the UK, see Credit Lyonnais v. New Hampshire Insurance Company [1997] 2 CMLR 610 CA, and Ferguson Shipbuilders Ltd v. Voith Hydro GmbH & Co KG [2000] SLT 229.

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(c) Strict Interpretation: Article 4.2 as a Strong Presumption A strict interpretation of the presumption of Article 4.2 saw the presumption as the criterion that is to be applied by the judge as a general rule. Accordingly, the exception provided by Article 4.5 should be interpreted restrictively, as an escape route to be applied only if the criterion set forth in the presumption has no real connecting value in the specific case. This strict interpretation was made, for example, by the Dutch Supreme Court. In a dispute concerning the sale of a paper press by a Dutch company to a French company, the Dutch Supreme Court applied the presumption of Article 4.2 and decided that the governing law was that of the habitual residence of the seller (Dutch law). Dutch law was considered applicable, despite the fact that French law had a closer connection with the contract: the negotiations had been carried out in France in the French language through a French agent, the agreement was written in French and the press was to be delivered and installed in France.96 (d) Conclusion It is obvious that the co-existence of these differing interpretations of the role of Article 4.2 resulted in considerable uncertainty as to the application of the criterion of the closest connection. This undermined the very purpose of the Rome Convention. To ensure a uniform interpretation, the Rome Convention was accompanied by two protocols establishing an interpretation mechanism by the Court of Justice of the European Union (CJEU) that was meant to give an authoritative interpretation of the Convention and a uniform application thereof in all states.97 After these protocols entered into force, the CJEU was requested to express itself on this matter.98 The Court, however, did not take the opportunity to clearly endorse one of the two interpretations. 96

97 98

Société Nouvelle des Papeteries de L’Aa Sa v. BV Machinefabriek BOA. In IPRax (1994), p. 243. The Dutch Court operated an anticipatory application of the Rome Convention, which had not yet come into force. See, for extensive comments and further references, W. Huding-van Lennep, ‘Anticipatory Application of a Multilateral Treaty with Uniform Conflict Rules’. Netherlands International Law Review 42.2, 259ff. In the same sense, the German Supreme Court (Bundesgerichtshof) also decided similarly; see the decision made on 25 February 1999, Neue Juristische Wochenschrift (1999), pp. 2442f. Rome Convention 1980 First and Second Protocols of 19 December 1984. Intercontainer Interfrigo SC (ICF) v. Balkenende Oosthuizeb BV and MIC Operations BV (C-133/08). The decision was based on a request for a preliminary ruling by the Dutch Supreme Court, which basically asked the CJEU to confirm or correct that Court’s position on the relationship between the presumption of Article 4.2 and the exception of Article 4.5, as discussed. The CJEU did little to clarify the matter and simply repeated the wording of the Rome Convention, albeit adding the requirement that the closer connection shall be ‘clear’. It is surprising that the CJEU did not take the opportunity to clarify the question, and even more surprising that the CJEU did not even mention the considerably more restrictive wording of the Rome I Regulation, which, in the meantime, had replaced the Rome Convention. However, the CJEU makes ample reference to the Giuliano–Lagarde Report and its focus on the harmonisation of conflict rules, thus embracing the view that it privileges certainty over flexibility and indirectly supports the interpretation of Article 4.2 as a strong presumption.

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The CJEU was asked the question as to which interpretation should be embraced but did not take the opportunity to shed much light on the matter: it simply repeated the wording of Article 4, admittedly specifying that the exception contained in Article 4.2 may be used when the closer connection with another country is ‘clear’. If the Rome Convention was to achieve its purpose of enhancing the predictability of the law, my opinion is that the presumption of Article 4.2 should be interpreted as a strong presumption. What matters most is that the parties are in a position to find out which law governs their contract; that the governing law has a close, a closer or the closest connection with the agreement seems to be less important. In so far as it is of particular importance to ensure the applicability of a certain law, for example, because it contains provisions protecting the weaker contractual party, special conflict rules permit the application of the appropriate connecting factors or the direct application of the relevant rules, as will be seen in Section 4. In the other contractual situations, however, where there are no important policies to be taken into account, it may be the same for the parties whether the governing law is that of the seller or that of the buyer. What is crucial is that the parties know which of these laws governs, so that they can assess their own rights and obligations. That a court might prefer an application of its own rather than of a foreign law cannot be deemed as a valid or relevant argument since it contradicts the very essence of private international law. This approach seems to be in line with the intention of the Rome Convention, as it appears from the Report on the Convention. A loose interpretation of the presumption of Article 4.2, therefore, did not seem to be appropriate; it might serve the purpose of determining a law that has a closer connection than the law of the performer’s residence, but it does not serve the even more important purpose of ensuring the predictability of the law since it leaves too much room for the judge’s discretion. (e) The Rome I Regulation As already mentioned, the Rome I Regulation clarified that the main rule is that a contract shall, failing a choice by the parties, be governed by the law of the country where the party making the characteristic performance has its habitual residence. This is spelled out in general terms in the second paragraph of Article 4: Where the contract is not covered by paragraph 1 or where the elements of the contract would be covered by more than one of points (a) to (h) of paragraph 1, the contract shall be governed by the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence.

To make this even clearer, the first paragraph of Article 4 lays down this rule in specific terms for eight different types of contract, identifying for each of these types

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who the party is that is making the characteristic performance and mainly designating that law of that party’s residence as governing: (i) a contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence; (ii) a contract for the provision of services shall be governed by the law of the country where the service provider has his habitual residence; (iii) a contract relating to a right in rem in immovable property or to a tenancy of immovable property shall be governed by the law of the country where the property is situated; (iv) notwithstanding point (iii), a tenancy of immovable property concluded for temporary private use for a period of no more than six consecutive months shall be governed by the law of the country where the landlord has his habitual residence, provided that the tenant is a natural person and has his habitual residence in the same country; (v) a franchise contract shall be governed by the law of the country where the franchisee has his habitual residence; (vi) a distribution contract shall be governed by the law of the country where the distributor has his habitual residence; (vii) a contract for the sale of goods by auction shall be governed by the law of the country where the auction takes place, if such a place can be determined; (viii) a contract concluded within a multilateral system which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments, as defined by Article 4(1), point (17) of Directive 2004/39/EC, in accordance with non-discretionary rules and governed by a single law, shall be governed by that law. In the third and fourth paragraphs, the closest connection is mentioned as an exception: 3. Where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply. 4. Where the law applicable cannot be determined pursuant to paragraphs 1 or 2, the contract shall be governed by the law of the country with which it is most closely connected. The wording in paragraph 3, which corresponds to the exception contained in Article 4.5 of the Rome Convention, has a more restrictive scope since it has added the requirement that it must be ‘clear’ (and not only that it must ‘appear’) and that there is a ‘manifestly’ closer connection (and not simply any closer connection).

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4.5 Are All Rules of Any Other Connected Laws Excluded Once the Governing Law Is Chosen? As Chapter 1 showed, contract drafters have ambitions of self-sufficiency on behalf of the contract (admittedly, these ambitions may be accompanied by the awareness that they may not be fully realised and imply therefore an assumption of legal risk). The possibility of being able to choose the law governing the contract may enhance these ambitions: by choosing which law governs the contract, the parties may be under the impression that they have excluded the applicability of any other laws. The following sections will show that this impression is not correct. International contracts often contain a Choice-of-law clause, and often the law that is chosen does not belong to the country of either party or of the place of performance, but rather is a neutral, third law. In contracts between Norwegian and Russian parties, for example, it is not uncommon that the law chosen is Swedish law or English law. The choice of a neutral governing law is often intended to avoid application of the laws that otherwise might be applicable due to their connection with the legal relationship, be it as the respective law of the parties or the law of the place of performance. It is often recommended to avoid the application of either party’s law, thus preventing the perceived advantageous position that would follow for one party having the contract governed by its own country’s law. In Section 4.2.1(a), I argued that the advantage is not as significant as perceived. More compellingly, it is advisable to avoid the applicability of a law belonging to a legal system which is unstable, not transparent or not subject to the rule of law. The parties are often convinced that the Choice-of-law clause in the contract excludes the applicability of any other country’s law to their relationship; even more so, when the contract contains an Arbitration clause. Arbitration is based on the will of the parties, and the tribunal is supposed to follow the parties’ instructions. Hence, a contract with an Arbitration clause apparently enhances the parties’ reliance on the choice of law they made in the contract and their impression that any other laws may be disregarded. To what extent this reliance is justified in arbitration will be discussed in Section 4.5.2 and in Chapter 5. Choice-of-law clauses are, however, not always capable of fully achieving the results that are desired by the parties. There are several limits to the effects of these clauses that may depend on various elements: (i) The Choice-of-law clause covers the right and obligations between the parties: issues of contract law and possibly of tort law. Often issues falling into other areas of law arise as incidental or preliminary questions that need to be solved in order to decide the main claim of contract law. This is the case, for example, when the contract has implications of company, labour, property or insolvency law or of any area where the party autonomy is restricted by specific private international law rules, such as questions about the legal capacity of the parties;

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(ii) certain rules belonging to laws different from the law chosen by the parties may be applicable because of their overriding character, for example, rules on commercial agency; (iii) the law chosen by the parties may give effect to rules belonging to a foreign law, for example, when illegality in the place of performance renders the obligation invalid or unenforceable under the law chosen by the parties; or (iv) applying the law chosen by the parties would violate fundamental principles in the court’s society (public policy or ordre public), such as when the chosen law permits enforcement of a contract based on corruption. In these situations, the parties’ expectations may be disappointed, as the decision will take into consideration rules that the parties had intended to exclude. In particular, the parties may have drafted a contract that is enforceable under the law chosen by them, yet some of the terms may turn out to be unenforceable because rules belonging to another law have to be taken into consideration. For example, a borrower may have created a security interest for the benefit of the bank, as a guarantee for the repayment of the loan. The security interest may consist in the assignment to the bank of certain credits that the borrower has towards its clients. The assignment agreement may contain a clause choosing English law. Under English law, the security interest is validly created. However, the borrower is located in Norway, and Norwegian law requires, for the valid creation of a security interest, that the clients are notified of the assignment. In the case the borrower becomes insolvent, it is Norwegian law, and not the chosen English law, which decides whether the security interest is valid and gives the bank priority, or whether the assigned credits shall be treated as any other asset in the insolvency estate. An Arbitration clause does not necessarily prevent the applicability of rules belonging to a law different from the one chosen by the parties. Some of these rules cannot be disregarded even by an international arbitral tribunal and, if they are, the award will be invalid or unenforceable, as will be seen in Chapter 5. Moreover, arbitral tribunals are not immune from the difficulty of interpreting a contract with terms that are not coordinated with the governing law, as seen in Section 3.7. It is in these situations that the awareness of private international law rules contributes to predictability for international commercial contracts. Rather than being ignored or denied as an element that is hostile to the uniformity aspirations of transnational law, private international law should be appreciated as a useful tool that permits one to understand and predict results that otherwise may come as a nasty surprise. 4.5.1 The Scope of Party Autonomy: Incidental Questions, Classification and Exclusive Conflict Rules As mentioned, very often in international business relationships the parties subject their contract to a governing law of their choice. By so doing, they exercise a power that is granted to them by the vast majority of private international laws – so-called

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party autonomy. Party autonomy is the name of a choice-of-law rule, conflict rule or private international law rule – all of these being synonymous definitions of a rule that permits the identification of which country’s law governs an international relationship. If the parties do not exercise party autonomy, the applicable law will be determined by subsidiary choice-of-law rules. As seen in Section 4.3, the conflict rule of party autonomy enjoys extremely widespread recognition in legal systems from all over the world, and is therefore sometimes defined as a ‘universal principle’ or language to that extent, thus giving the impression that the assumptions and modalities of its exercise, as well as its effects, are uniformly determined and conform to a standard that is independent of any set of conflict rules contained in any applicable private international law. A corollary of this approach is that party autonomy is assumed to enjoy a presumption of validity and is assumed to always be respected in full, particularly by arbitrators. Most arbitration rules and arbitration laws do, as a matter of fact, provide for the tribunal’s obligation to follow the choice of law made by the parties, as will be seen in Section 4.6. Recognition of party autonomy and the courts’ and arbitrators’ obligation to give effect to it are, certainly, a widely recognised principle that can be deemed to be fundamental in the context of commercial contracts and international arbitration. However, it is not useful and may even be counterproductive to assume that a clause in a contract choosing the governing law is the only basis for its own legal effects, and that it is not subject to limitations of any kind or under any circumstances. Even though party autonomy is a conflict rule that enjoys wide recognition, the scope of the rule is shaped by the private international law that is being applied as a basis for that rule. It may be useful here to give a reminder that private international law, despite its name, is a branch of the national law of each country (the purpose of which is to identify the governing law in an international relationship; hence, the word ‘international’ in its name). It is highly desirable that private international laws are, to the greatest extent possible, harmonised, and in some regions, the degree of harmonisation that has been reached is considerable – for example, in the EU, private international law is being Europeanised, and outside the EU, international instruments prepared, inter alia, by the Hague Conference, aim at harmonising specific areas. However, differences persist among the various conflict rules even among countries that have a uniform regulation either because some rules fall outside the scope of the uniform regulation99 or because uniform rules are interpreted and applied differently.100 Where there is no uniform regulation to start with, differences in the scope and application of conflict rules are even more likely to occur. For party autonomy, as for any choice-of-law rule, the modalities of exercise, the scope of application and the effects are regulated by the private international law to 99 100

For example, company law and property law are not covered by the Rome I or the Rome II Regulations. For example, Article 4 of the Rome Convention (the predecessor of the Rome I Regulation) was subject to divergent interpretations, as explained in Section 4.4.

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which it belongs. This does not in any way diminish the general principle that the parties shall be permitted to choose the law applicable to their international contract and that courts or arbitrators shall respect and give effect to that choice. The Hague Principles affirm the existence of a transnational principle of party autonomy. As the following examples will show, however, a principle that is expressed so generally needs further specification in order to be operative and such specification is to be found in the applicable private international law. While legislators and interpreters should strive to harmonise the various private international laws, differences still persist that make it impossible to specify the principle in a uniform way and irrespective of the applicable system. The first aspect that needs to be taken into consideration is the scope of the party autonomy’s effects. Traditionally, private international laws permit the parties to choose the law governing contractual obligations. More recently, party autonomy is being extended to other areas of commercial relationships, such as obligations arising out of tort. In the EU, the Rome II Regulation has opened for party autonomy also in the field of tort law. This is due in part to the very wide definition of a non-contractual obligation. The Rome II Regulation is complementary to the Rome I Regulation. The latter applies to contractual obligations, the former to non-contractual obligations. The definition of contractual obligation is extremely narrow in EU law: only obligations that a party has freely assumed towards the other are understood as being contractual.101 Therefore, obligations arising out of contract negotiations are not considered to be contractual obligations, as the contract has not yet been entered into. Even obligations arising out of pre-contractual documents signed by the parties, such as letters of intent, are not deemed to be contractual. Therefore, these obligations do not fall under the Rome I Regulation, but under the Rome II Regulation. It is quite normal that letters of intent contain a Choice-of-law clause; therefore, it is appropriate that the Rome II Regulation allows for party autonomy. However, the Rome II Regulation also allows for party autonomy for more traditional torts, where the parties did not have a prior relationship similar to a contract. The main reason for this innovative approach is the desire to enhance efficiency and predictability.102 Where the parties have agreed on the governing law, there will be no need to argue which law is applicable, and the parties will be able to evaluate their respective legal position without having to be concerned with private international law issues. However, the party autonomy that is allowed for in the Rome II Regulation is quite restricted. Only when both parties are professionals are they allowed to choose the applicable law in advance. Also, the choice is allowed only if the parties have actually considered the choice of law – a Choice-of-law clause contained in a standard document will not have effect if it has not been discussed and actually agreed to by 101 102

Jakob Handte & Co. GmbH v. Traitements Mécano-chimiques des Surfaces SA, C-26/91 (Handte). Preamble of Rome II Regulation, supra note 37, at Recital 31.

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the parties. When one of the parties is not a professional, but a consumer, choice of law is allowed only after the tort has occurred. This is intended to protect the party that is deemed to be weaker: After the event has occurred, that party is assumed to be in a position to evaluate its options and the consequences of its choice. Party autonomy seems to be about to increase its scope: it has even expanded to areas such as family and trust law,103 and it seems that it may find its way even in the field of property. Recently, the European Commission presented a proposal for a Regulation on the law applicable to the property law effects of assignment of claims.104 The law applicable to the contractual aspects of assignment of claims (also known as receivables) is regulated in the Rome I Regulation, in Article 14. The effects that an assignment has for third parties, however, are not regulated in Rome I (and rightly so since Rome I applies to contract law and not to property law). According to Article 27 of the Rome I Regulation, the Regulation was meant to be expanded so that it could include conflict rules for the effects towards third parties. Instead of proposing to expand the Rome I Regulation, the Commission proposed a separate regulation. In the proposal, the choice of law made by the parties to the assignment agreement applies also to third-party effects. This is a quite extraordinary step; one that does not seem to comply with the traditional approach to choice of law in property law. According to the traditional approach, an agreement between two parties is not capable of having effects towards third parties. The rationale of this restrictive approach is that third parties must be able to rely on the legal regime that is objectively applicable when it comes to protection of their rights. If the protection of third parties’ rights (in this case, the interests of the debtor’s or of the creditor’s creditors) depended on the agreement between the assignor and the assignee, it would be necessary to engage in complicated inquiries in order to ascertain whether the parties have chosen a foreign law that may affect the third parties’ ability to rely on those rights. This may negatively affect the efficiency of insolvency proceedings, and it might create obstacles to the funding market. It remains to be seen whether this proposal will be approved. Party autonomy, in any case, is expanding its scope of application. There are a number of areas of the law, however, where the choice of law is based not on party autonomy, but on other connecting factors set in the relevant conflict rule of the applicable private international law.105 Generally, the need to preserve the certainty of title and of the legal relationships towards third parties is the reason for excluding the applicability of party autonomy 103 104

105

See Symeonides (2014), pp. 1127f. Proposal for a Regulation of the European Parliament and of the Council on the law applicable to the thirdparty effects of assignments of claims, COM (2018) 96 final (2018/0044 (COD)). This is indirectly reflected, for example, in Article 1(2) of the Rome I Regulation, listing the areas that fall outside of the scope of application of the Regulation’s rules. The Regulation regulates the law applicable to contractual obligations, and party autonomy is its main rule (Article 3).

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in these areas. Whenever a contract has implications for the position of third parties (vested rights, legitimate expectations or the need to preserve certainty), the choice of a foreign governing law in the contract should not affect the third parties’ rights, as they are regulated by the law that would otherwise be applicable. It would not be appropriate to permit the contract to affect these third parties’ positions by excluding the application of the law that created those rights or expectations. As will be seen, these considerations are relevant particularly in areas such as company organisation or capitalisation, legal capacity, winding up or insolvency, property, encumbrances or other securities, or the integrity of the market. Often, issues falling within these areas of law may arise as incidental or preliminary questions in a dispute the main object of which is a contractual claim. If a contract party claims reimbursement of damages for breach of contract, for example, the other party may raise as defence that the contract was not valid because it infringed competition law, or that it was not binding because the person who signed it did not have the authority to represent that party. These issues are not the direct object of the claim but need to be addressed in order to decide the contractual dispute. The choice of law made by the parties for the contract does not extend to these issues. The choice of law applies to the contractual issues that have effects between the parties. Competition law or legal capacity are issues that have effect also for third parties (respectively, the market and all third parties that may enter into contract with the person whose legal capacity is at stake) and are subject to the law selected according to the objective conflict rules applicable in the respective areas. Traditionally, the classification of a subject matter as belonging to one or the other area of the law is made on the basis of the categories as they are defined in the law of the court, the lex fori.106 Courts, thus, will apply the categories of their own law to classify the claim as, for example, contractual or relating to legal capacity.107 Thereafter, courts will apply the conflict rule that, in their own private international law, is applicable to that particular area of the law, and the connecting factor contained in that conflict rule will identify the law governing that issue. As an example, a contract of sale will have contractual obligations between the parties (the quality of the goods, the delivery time, the price and payment modalities); these obligations will be subject to the law identified by the conflict rule for contract law – which is party autonomy or, if the parties have not made a choice, the subsidiary conflict rule for contracts of the court’s private international law.

106

107

There is a considerable amount of literature on the question of classification: see, for example, Kropholler (2006), pp. 113ff.; Lawrence Collins and Jonathan Harris (ed.), Dicey, Morris and Collins on the Conflict of Laws, 4th Cumulative Supplement (Sweet & Maxwell, 2012 and 2019), para 2-001ff.; Hay et al. (2018), paras 3.3f; Helge Johan Thue, Internasjonal privatrett (Gyldendal Academic, 2002), pp. 147ff. Should the claim be based on a legal institution that is not known in the lex fori, it will be necessary to analyse the function of that institution and to classify it according to the category that most closely corresponds to that function.

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The contract will also have some property law implications, primarily regarding the passage of title to the goods. In particular: Did the title to the goods pass to the buyer upon the signature of the contract? Or does the title pass first when the goods are delivered, the estate is taken over or the change of ownership has been registered? This has important implications, for example, for the seller’s creditors: If the seller becomes insolvent after the contract was signed, but before delivery, takeover or registration, are the goods still part of the seller’s assets? Can the creditors include them in the estate? This is not decided by the law applicable to the contract, but by the law applicable to property issues. Similar incidental questions may arise when the seller has sold the same goods to two different buyers. Towards third parties, the question of whether the title to the goods passed to the first or to the second buyer is not decided by the law governing the respective contract, but by the law applicable to property law matters. This law is identified by the conflict rule for property law in the court’s private international law (usually, the connecting factor is the location of the goods). Similarly, in the example of the security interest created by assigning to the bank the borrower’s receivables, the borrower’s creditors will rely on the law of the place where the receivables are deemed to be located – see, however, the proposal for an EU Regulation previously mentioned. Corresponding reasoning applies to issues of competition law or of company law as also previously mentioned. 4.5.2 The Scope of Party Autonomy in Arbitration The foregoing shows that the classification of a claim is very important for identifying the governing law: a different conflict rule corresponds to each area of law, and to find the applicable conflict rule, it is necessary to classify the issue. If a dispute is decided by a court, the court will classify the claim according to the categories of its own law. In the example of the security interest created by assigning to the bank the borrower’s receivables, the court will classify the obligations between the borrower and the bank as contractual issues, whereas the bank’s priority against the borrower’s creditor is an issue of property law. To decide whether the security interest was validly created, therefore, the court will not apply the law chosen in the contract, but the law applicable according to the conflict for property issues. In the case of arbitration, it is tempting to resort to the classification made in the law of the place of arbitration, the lex loci arbitri. However, the issue is not simple. A first question is whether party autonomy has a larger scope in arbitration than before the courts. As the discussion in Section 4.5.2(a) will show, even assuming a larger scope, party autonomy will not cover incidental questions. The next question is how classification shall be made in arbitration, see Section 4.5.2(b).

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(a) Does Party Autonomy Exclude Any Other Conflict Rules? It is sometimes suggested that party autonomy in arbitration has a wider scope than party autonomy in private international law. Many choice-of-law rules contained in arbitration law permit the parties to choose the law applicable not only to the contract, but more generally to the merits of the dispute – for example, the UNCITRAL Model Law speaks of the law applicable to the substance of the dispute. This is interpreted as giving party autonomy a wider scope than the one party autonomy has in private international law as just described: if the dispute has implications that go beyond the mere contract law, according to this opinion, party autonomy would also cover these aspects. According to this logic, therefore, the private international law would not be a sufficient basis to justify the arbitral tribunal’s power to override the parties’ choice of law: the parties’ choice of law would not be restricted to the mere contract matters but would extend to any issues within the scope of the dispute. However, although the wording of the arbitration conflict rule may seem wider than, for example, the wording of the Rome I Regulation – which applies not to the merits of the dispute, but only to contractual obligations – it may be questioned whether this can be taken as a basis for assuming that the parties in arbitration have the power to choose the law applicable to matters of company law, property law or regulatory matters. This is because the choice of law possible in arbitration relates to the merits of the dispute. Therefore, it must be interpreted within the scope of the dispute that may be decided by the arbitral tribunal. Generally, arbitration may decide disputes between the parties on rights and obligations that the parties may dispose of, and decides the dispute with effects for the parties. An arbitral tribunal may not render an award with effects for third parties: therefore, an arbitral award will not be empowered to decide that the resolution of a company body is invalid,108 or that a certain asset of the insolvent debtor is not available to the generality of the creditors. These aspects are outside of the dispute (they are considered only incidentally); hence, they are not covered by the broad language of the conflict rule for arbitration. The wording of the conflict rule contained in the Model Law, therefore, does not seem to extend the scope of party autonomy in a significant manner. In summary, a systematic interpretation of the sources applicable to arbitration, including also the private international law, justifies the arbitral tribunal’s power to consider, for incidental issues, laws different from the law chosen by the parties. (b) Classification of the Issues The classification of the subject matter being the first step in the application of a conflict rule, it is reasonable to assume that this classification will be made on the basis of the same legal system to which the conflict rule belongs. 108

I am assuming here that the dispute regards a contract between the parties, and that the issue of the board resolution arises as an incidental issue.

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In the context that interests us here, this means that the arbitral tribunal will classify the claim and choose the governing law according to what the relevant Arbitration Rules and arbitration law say on choice of law. The lex loci arbitri governs many aspects of the arbitration, such as the powers of the arbitrators relating to production of the evidence, the powers of the judge to order interim measures, the arbitrability of the subject matter, the validity of the arbitral award and so on. Notwithstanding the significance of these matters, and therefore the importance to the proceeding of the law regulating them, the law of the place of arbitration is often frowned upon as not relevant to international arbitration – on the basis of the assumption that the place of arbitration is chosen purely for practical reasons and is not intended to have any legal implications for the dispute (an assumption that surprises one considerably, given the aforementioned wide range of legal implications determined by the arbitration law of the venue). We will see in Section 4.6 that some legal systems have eliminated references to conflict rules in their arbitration laws in order to give effect, albeit partially, to the purported delocalisation of arbitration. Moreover, even many of the systems that have maintained references to the private international law have loosened the link with the private international law of the lex arbitri. The classification may, thus, be made according to the lex loci arbitri, if the applicable arbitration law instructs the arbitral tribunal to apply the private international law of the place of arbitration.109 The classification may be made according to another legal system considered by the arbitrator to be more appropriate, if the applicable arbitration law gives the arbitral tribunal the discretion to choose among different systems of private international law.110 Classification may even be unnecessary if the applicable arbitration law gives the arbitral tribunal the possibility of choosing the governing law without the mediation of private international law (the so-called voie directe).111 In the context of arbitration, admittedly, it may be useful to advise against giving decisive importance to the taxonomy, and against being too strict in deriving the applicable conflict rule simply from the classification of the subject matter being contractual rather than belonging to the company law or the property law. As will be seen in detail in Chapter 5, arbitral awards are subject to control by courts only to a restricted extent, and the wrong application of the law (or the application of the wrong law), let alone the application of the wrong taxonomy, does not cause ineffectiveness of an arbitral award. There are, however, certain instances where failure to apply the proper law may lead to ineffective awards. Therefore, the quest for the criteria determining the proper law in arbitration should be steered by the 109 110 111

Such as the Norwegian Arbitration Act, Section 31. Such as the UNCITRAL Model Law, Article 28(2). Such as French law, Article 1511 of the Code de procédure civile.

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enforceability of the award rather than by the classification of the dispute according to the lex arbitri. If the parties choose a foreign law and the consequent regulation of their legal relationship is enforceable in the relevant jurisdictions, the classification made by the arbitral tribunal and leading to the application of party autonomy will not be reviewed by any courts, and there is no reason for limiting the party autonomy on the basis of a formal classification into one or the other area of the law. If, however, the regulation that follows the law chosen by the parties violates rules that render it ineffective in the jurisdiction where the award should be enforced, then party autonomy is restricted. The sections immediately following will illustrate some examples of conflict rules that restrict party autonomy and may be relevant in this context. The enforceability of an award giving effect to the choice made by the parties, and thus disregarding the conflict rules for the respective law areas will be analysed in Chapter 5. (c) Company Law To illustrate how the applicability of company law may remain unaffected by the choice of law made by the parties, a hypothetical case may be presented. Suppose that a Norwegian and a Russian company enter into various agreements regulating a cooperation between them. In this framework, the Norwegian party buys a minority of the shares of a company owned by the Russian party and by some other investors. This company is registered in the Ukraine but has its main place of business and its central administration in Russia. To regulate their cooperation, the Norwegian and the Russian party enter into a Shareholders’ agreement. The Shareholders’ agreement contains a Choice-of-law clause choosing Swedish law and an Arbitration clause submitting any disputes arising out of the contract to arbitration under the rules of the SCC. The Shareholders’ agreement contains various commitments for each of the parties, such as the obligation not to disclose to third parties specific information, the obligation to meet periodically to ascertain the progress of the cooperation, the obligation to make funds available under certain circumstances and so on. The Shareholders’ agreement also contains some obligations regarding the jointly owned company, the operation or competence of its corporate bodies, its capitalisation and so on. For example, the shareholders agree to each appoint a certain number of members to the company’s Board of Directors, they specify the areas of competence that each member of the Board shall have, and they commit to instruct the Board members appointed by them to vote in the way that the competent Board member has indicated. The Shareholders’ agreement may further contain rules assessing the value of the respective contributions to the capital of the company and rules for assigning a percentage of the shares in capital increases that corresponds to the agreed assessment. The Shareholders’ agreement may, finally, contain rules on

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the transfer of shares to third parties or pre-emptive rights for the existing shareholders. While the commitments between the parties have a contractual nature and will thus be subject to the chosen Swedish law, the rules of the Shareholders’ agreement that affect the roles and responsibilities of the members of the Board of Directors, the capitalisation of the company or the transfer of shares have a different nature. Although the parties to the Shareholders’ agreement have contractually committed themselves to a certain conduct on the Board, to a certain evaluation of the capital contributions and to a certain restriction on the sale of shares, these obligations do not only have a contractual nature. The function of the Board of Directors, the capital of a company and the transferability of its shares (at least under certain circumstances) have a larger significance than the mere balance of interests between the two contracting parties. They affect aspects of the legal personality of an entity that have implications towards third parties, such as the entity’s employees, its creditors or the other shareholders. There are, therefore, reasons for preventing that an agreement between two parties (the shareholders who signed the Shareholders’ agreement) modifies the position of third parties (such as the position of the other shareholders or of the company’s creditors) by changing the governing company law. In other words, party autonomy should not cover matters that may affect third parties’ interests; these matters are subject to the law identified on the basis of other connecting factors. The law chosen by the parties, in our example, Swedish law, will apply to the obligations between the parties: how these obligations are interpreted, how they are to be fulfilled, the consequences in case of breach. However, the competence of the company’s bodies, the rules on the company’s capital and the transfer of its shares are not subject to the law chosen by the parties. Having established that party autonomy in a Shareholders’ agreement primarily covers the contractual aspects, however, does not help to identify the law that governs the company law aspects of the relationship. To this end, it is necessary to identify the conflict rule that is applicable for company law. There is no generally acknowledged rule on which law governs the establishment, organisation and functioning of legal entities. Broadly speaking, there are two different approaches: the conflict rule that designates the law of the state where the legal entity is incorporated or registered112 (in our example, Ukraine) and the conflict rule that designates the law of the state where the legal entity has its central administration or main place of business – the so-called ‘real seat’113 (in our case, Russia). 112

113

Such as English law, see Collins et al. (2012 and 2019), para 30–002ff.; US law, see the Restatement (Second) of Conflict of Laws (1971), para 296 f., and Hay et al. (2018), paras 23.2ff.; the Swiss PILA, Article 154; and the Italian PILA No 218 of 1995, Article 25. See the German Supreme Court decision 178 BGHZ 192, applying the traditional real-seat approach in a case involving Switzerland – whereas it applies the incorporation approach when this is required by EU law or by international conventions, see the decision [2005] ZIP 805 of 15 March 2005.

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The rationale for choosing one or the other connecting factor is clear: if the governing law depends on the place of registration, a company is recognised and can operate without having to adapt to company law rules of the countries where it has an establishment. The countries where the company is established, in other words, are ready to accept the criteria and rules of the company’s country of origin without questioning their suitability or expecting adjustment to meet with their own standards. If the governing law depends on the law of the country where the company has its real seat, on the contrary, this country insists on imposing its own standards. The company law’s rules on capitalisation, organisation of the corporate bodies, protection of the minority shareholders and so on are considered so important that all companies carrying out their main activity in that country are expected to comply with them, irrespective of where they are registered and of what criteria their company law of origin has. Traditionally, the place of registration is used as the connecting factor, particularly in the common law countries, whereas conflict rules in many civil law systems, particularly those inspired by German law, are based traditionally on the main place of business. Within the EU and the EEA, however, a conflict rule based on the place of business has been deemed to be against the freedom of establishment if it results in imposing restrictions on the possibility of a company registered in one state of carrying out its activity in another state.114 Hence, for companies registered in an EU or European Free Trade Association (EFTA) country, another EU or EEA state where they have their main seat cannot impose its own company law and has to recognise the capitalisation, transferability of shares, limits to the legal personality and so on, as they are determined in the company law of the country of origin. This, however, does not mean that the connecting factor of the real seat has disappeared from the landscape of European private international law: the CJEU has confirmed that companies are creatures of national law, and that it is up to national law to determine the connecting factors that each state requires for a company to be organised or to continue existing under its law.115 If a state has the real seat as a connecting factor, and a company originally registered in that state moves its real seat to another country, thus losing the basis for the original registration, the country of origin may request that the company is wound up before the real seat is moved (under 114

115

See particularly the CJEU decisions in the cases of C-212/97, Centros Ltd v. Erhvervs- og Selskabsstyrelsen (Centros); C-208/00, Überseering BV v. Nordic Construction Company Baumanagement GmbH (NCC) (Überseering); C-167/01, Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire Art Ltd (Inspire Art); and C-371/10, National Grid Indus BV v. Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam (National Grid). The first decision that moved in this direction was the Daily Mail decision by the CJEU, The Queen v. HM Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust plc, C-81/87, later confirmed in C-210/06, CARTESIO Oktató és Szolgáltató bt (Cartesio).

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certain conditions that prevent discrimination116 and, in the case of conversion, under certain conditions that preserve proportionality).117 Thus, a conflict rule based on the real seat will be deemed to violate EU law when it restricts a company’s freedom of establishment by requesting that the company (duly organised in one member state) complies with requirements of the other member states where the company intends to carry out its main business. However, a conflict rule based on the real seat does not violate European law when it requires that the company (duly organised under that state’s law) winds up before it moves its real seat to another state. Using the real seat as a connecting factor, thus, is acceptable under EU law when it regards the question of the valid organisation and existence of a company in the country of origin. In contrast, the real seat is not an acceptable connecting factor when it restricts the ability to carry out activity in the country of destination, thus limiting the freedom of establishment. Imposing the conflict rule of the place of registration in regard to the freedom to establish means that all systems have to mutually recognise each other’s company laws. This complies with the policy underlying European cooperation and its work towards an internal market: member states are supposed to share the fundamental principles upon which they regulate economic activity, and therefore they should accept each other’s company laws without insisting on compliance with their own criteria. In respect of companies outside the EU or EEA area, conflict rules are not affected by the requirement to ensure freedom of establishment, and it is up to each private international law to decide whether to accept any other country’s company law, and thus apply the connecting factor of the place of registration or to consider its own rules as prevailing for companies having their main activity in that country and thus apply the connecting factor of the real seat. If a dispute arises out of the described shareholders’ agreement and a court was called upon to decide on it, the judge, when deciding on incidental questions of company law, would disregard the choice of law made in the contract and would apply instead the company law identified by the conflict rules of the lex fori. In Section 5.4.9(i)(i), we will see some examples of the relevance that the conflict rule for company law has to the enforceability of arbitral awards. (d) Legal Capacity Suppose that the Russian party in the abovementioned example, by its statutes or the law that governs it, has a requirement that certain types of contract become binding on the company only if they have been signed by two authorised persons – one signature is not sufficient to create obligations. If the contract contains a clause 116 117

See Cases C-371/10 (National Grid) and C-378/10, VALE Építési kft (Vale). C-106/16, Proceedings brought by Polbud – Wykonawstwo sp. z o.o. (Polbud).

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subjecting it to Swedish law (which does not contain the same requirement) and is signed only by one person, which criterion applies to determine whether the company is bound: the criterion set by the chosen Swedish law (one signature, the contract is binding) or that set by Russian law (two signatures, the contract is not binding)? There is no uniform conflict rule to identify which law governs the legal capacity of the party to a contract. The example given is based on an actual case decided by the Court of Appeal in Stockholm: the court found that the question of legal capacity is subject to the law of the relevant party, see Section 5.4.2.118 In our example, therefore, the applicable law would be Russian law. In common law states, the legal capacity is sometimes considered a question of the contract and is therefore governed by the law that governs the contract.119 More generally, however, the capacity to enter into a contract is regulated by the law governing the company.120 In a series of decisions based on Swap agreements, English courts have recently repeatedly affirmed that the legal capacity of a party is governed by the law of that party. The disputes involved mainly municipalities or local authorities of various countries, which, prior to the financial crisis, had entered into financial transactions to take advantage of the potential of the financial market. After the financial crisis of 2008, the municipalities had to cope with considerable losses and were burdened by long-term contracts that were no longer profitable. Hence, many municipalities attempted to escape the situation by arguing that they did not have the authority to enter into that kind of contract, and that therefore the contracts were not valid. Many of those contracts were written on the basis of the ISDA Model Agreement (see Section 2.2.6(c)), and therefore they all contained clauses choosing English law to govern the contract and giving English courts the jurisdiction to solve any disputes. English courts have consistently affirmed that the question of whether a party had legal capacity to enter into a contract is to be determined under the law applicable to that party.121 Applying the local authorities’ 118

119

120 121

Svea Hovratt, 17 December 2007, Case No T 3108-06, see (2008) 6(5) ITA Monthly Report, Kluwerarbitration, appeal not allowed. See for the United States, Restatement (Second) Conflict of Laws (1971), para 198 and Hay et al. (2018) para 18.8B. However, the chosen law will not be applied if it contravenes a fundamental policy of the law that would have governed if the parties had not made a choice. English law has a similar approach, although only in respect of restrictions to the legal capacity, and without taking into consideration the law chosen by the parties: see Collins et al. (2012 and 2019), paras 30–021ff. See, for Switzerland, the PILA, Article 155(c). Haugesund Kommune v. DEPFA ACS Bank [2010] EWCA Civ 33; Deutsche Bank v. Busto [2021] EWHC 2706 (in which the High Court interprets a decision rendered by the Italian Supreme Court in a similar case (Cass. SU, No 8770/2020 (Cattolica)) and expresses doubts as to whether the Italian Supreme Court accurately reflects Italian law); Dexia Crediop SpA v. Provincia di Pesaro [2022] EWHC 2410 (Comm); Banca Intesa Sanpaolo Spa and another v. Comune di Venezia (2022) EWHC 2586 (Comm) (which found that the abovementioned Italian Supreme Court in a similar case (Cass. SU, No 8770/2020 (Cattolica)) governed the capacity of the Italian local authority even though the contract had been entered into thirteen years before the decision was rendered. The Italian Supreme Court had decided that local authorities do not have the capacity to enter into Swap agreements that are speculative or create indebtedness. As the

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law to their legal capacity, however, does not exclude the applicability of the chosen English law to the formation of consent. When the Italian Supreme Court considered the validity of Swap agreements in similar situations, it concluded that the Swap agreement is null and void if the bank has not given the relevant information.122 The parameters for calculating the net present value of the cash flows (so-called mark to market) were considered to be an essential element of the contract by the Italian Supreme Court, which determined that insufficient information on these parameters rendered the Swap agreement void. However, the English court found that this was an issue of formation of consent and not of legal capacity; therefore, English courts applied the chosen English law and not the Italian law applicable to the party. The Rome I Regulation excludes from its scope of application the choice of law relating to whether an organ may bind a company, which means that within Europe there is no harmonisation of the conflict rule applicable to the legal capacity of the parties, and each state has its own conflict rules to determine the law deciding whether the parties had the competence to enter into a contract.123 A court would decide questions of legal capacity on the basis of the law selected by the applicable conflict rule and would disregard the choice of law contained in the contract for the purpose of determining legal capacity. In Section 5.4.3, we will see that the conflict rule for legal capacity also has great significance in arbitration. (e) Winding Up and Insolvency Suppose that the Russian party and the Norwegian party have a wider cooperation that creates various mutual payment obligations. The agreement provides that each party’s payment obligations shall be set off against the other party’s payment obligation so that only the net amount shall be due. If one of the parties becomes insolvent, will its creditors be able to claim that the full amount for the outstanding obligations from the other party be paid into the estate, or will the set-off agreement be respected so that only the net amount exceeding the other party’s claims will have to be paid? Will this be influenced by the law chosen by the parties to apply to the various obligations, or will these laws be irrelevant? Suppose that the agreement contains a so-called Close-out netting arrangement, according to which all obligations of the debtor become immediately due and payable (even prior to their maturity) if that party fails to perform one of its obligations. A variation of this arrangement is the so-called acceleration or early termination,

122 123

English court found that the particular swap fell into these categories, it determined that the contracts were void. Cass. SU, No 8770/2020 (Cattolica), confirmed by Cassazione Civile, 29 July 2021, No 21830. See, however, Article 13 of the Rome I Regulation, according to which, in the event of a contract entered into by persons located in the same state, the foreign party cannot invoke the foreign applicable law on legal capacity to negate his or her own legal incapacity, if that person had legal capacity under the law of the state where the contract was entered into (unless the other party was aware of the incapacity of that party).

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particularly widespread for loan agreements, according to which the loan shall be terminated and the whole outstanding amount shall become immediately payable if the borrower ‘threatens to become insolvent’. The reason for these mechanisms is evident – the creditor wishes to ensure that the debtor has sufficient means to comply with its obligations. If the financial situation of the debtor is such that the debtor runs the risk of becoming insolvent, the repayment of the loan may be affected. Moreover, if the borrower becomes insolvent, the insolvency proceeding will aim at redeeming all of the borrower’s liabilities, and there may not be sufficient means to repay the loan in its totality. To avoid this situation, the Close-out netting arrangement aims to obtain payment of all outstanding obligations prior to any financial difficulties that may arise as a consequence of the difficult financial situation and possible subsequent defaults in other contracts; and loan agreements have a mechanism that provides for repayment of the outstanding amount prior to the initiation of an insolvency proceeding so that the lender does not have to divide the borrower’s assets with the other creditors. Many legal systems have insolvency regulations that aim to prevent these mechanisms, and that permit the reversal of payments which were made within a certain period prior to the initiation of the insolvency proceeding. Can the lender avoid the application of these rules by submitting the Close-out netting arrangement or the loan agreement to a foreign law? If this was possible, the equality of treatment among the creditors, which is a fundamental principle of most insolvency regulations, would be considerably weakened, and the creditors would not be able to assess the assets that are available. This is not a recommendable situation, and for this reason, the choice of law contained in the agreement, while fully effective for the contractual aspects of the legal relationship, may not have full effect for the part that has implications on the winding-up or insolvency proceeding. As a general approach, insolvency proceedings are governed by the law that is applicable to the insolvent company. In the case of companies having activity in more than one state, this raises the question of how to ensure a just and equal treatment for all creditors in respect of assets that may be located in various countries. There are two opposite approaches: territorial and universal. According to the former, a state’s law and jurisdiction extends only to the assets that are located in the state’s territory. According to the latter, the competent state’s law and jurisdiction is to be recognised by foreign states.124 To harmonise this area, the EU issued the European Insolvency Regulation,125 which determines that for a company with cross-border activities, insolvency is governed by the law of the place where the main proceeding is carried out. In turn, the main proceeding is to be conducted in the country where the company has the Centre of main interests (‘COMI’). The rebuttable presumption is that the COMI is 124

125

See Hay et al. (2018), para 23.17; Collins et al. (2012 and 2019), paras 30–010ff.; and the Swiss PILA, Article 155(b). Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast), replacing Regulation (1346/ 2000).

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where the company is registered.126 However, from the application of this connecting factor, the insolvency regulation carves out a series of situations that involve vested rights by third parties, such as property and security rights, set off and retention of title, and confirms for them the applicability of the governing law determined according to the respective conflict rule (which is not necessarily the law chosen by the parties, as will be seen). To what extent this will be sufficient to prevent the applicability of the insolvency rule reversing payments or transactions made in the last months or year(s) prior to the insolvency, depends on whether the rule is deemed to override the proper law or not (see Section 4.5.3). In Section 5.4.9(i)(ii), we will discuss to what extent these conflict rules affect the validity or enforceability of an award. (f) Property Suppose that an English company transfers to a Russian company the possession of a certain raw material, for example, alumina; the Russian company shall process it and produce aluminum of a certain quality, and then return it to the English company against payment of a fee – a so-called Tolling agreement. In practice, the Russian party supplies a service to the English party by processing the English party’s material and sending it back. The Tolling agreement specifies that title to the material does not pass at any time and that the English company remains the owner of the material even when it is located in the Russian party’s premises. The contract contains a Choice-of-law clause that selects English law, and under English law, this arrangement is valid. Suppose that the Russian party, while in possession of the material, goes bankrupt. Suppose that the trustee receives claims from various parties in respect of this material: from the English party, that according to the Tolling agreement always had title to the material; from a Russian bank, that in the time during which the material was in the possession of the Russian party had granted a loan to this party and obtained a first priority pledge on the material as security on the assumption that the Russian party was the owner of the material in its possession; and from a trader that had entered into a contract for the purchase of the material on the assumption that the Russian party was the owner and had the right to dispose of it. There are, thus, potentially four claims on the same volume of material: (i) by the original owner, because the Tolling agreement never transferred title; (ii) by the bank, because it registered a legal pledge on the material; (iii) by the purchaser, because it entered into a binding contract of purchase; and (iv) by the generality of the Russian party’s creditors, because the material is in the possession of the debtor. Which of these claims prevails will depend on whether title to the material actually passed. In turn, this will depend on the law governing the passage of title. 126

It is to be noted that the same connecting factor is suggested in the UNCITRAL Model Law on Crossborder Insolvency of 1997.

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The law governing the passage of title is not necessarily the law that the parties chose to govern the contract regulating the transfer. The choice of law made in the contract has effects for the obligations of the parties towards each other, but it does not necessarily affect vested rights or legitimate expectations by third parties (socalled rights in rem). In particular, it does not affect the question of who has title to the goods vis-a-vis third parties. For the effects towards third parties, the applicable law is not the law chosen to govern the contract, but the law of the place where the goods are located: the so-called lex rei sitae.127 The material is located in Russia; thus, if Russian law considers the rights of the third parties as valid (assuming, for example, that the third parties were acting in good faith and that the formal requirements are complied with), the bank and the purchaser may have a claim on the material, in spite of the fact that the contract between the English and the Russian party expressly excludes any passage of title as a consequence of the delivery of the material, and notwithstanding that the law chosen by the parties to govern the contract permits such exclusion. This latter observation deserves comment. If the rights in rem by third parties are governed by the law where the goods are located, and if the law chosen by the parties in the contract (English law in our example) is the law of the same place (because the goods were located in England when the contract was entered into), does this mean that the third parties’ rights are regulated by English law even after the goods were moved to Russia? The general rule is, as a matter of fact, that the law of the place where the goods were located at the time of entering into the contract governs; however, this rule is limited to the rights between the parties to the contract. Thus, if title to a good was validly retained under the lex rei sitae, the obligations between the parties are not affected, even though the goods are transferred to a country where retention of title is not valid. However, for third parties, it will be the law of the place where the goods are located at any time that governs. Thus, in spite of the circumstance that the title of the material is regulated between the parties by English law, even though the material is on Russian territory, it is Russian law considering third parties that will regulate the possibility of establishing a security right, purchasing goods and so on.128 127

128

See, for example Articles 100 and 104 of the Swiss PILA and the comments made in Heinrich Honsell, Nedim Peter Vogt, Anton K. Schnyder and Stephen V. Berti (eds.), Basler Kommentar Internationales Privatrecht, 2nd ed. (Helbing Lichtenhahn Verlag, 2007), pp. 648ff.; § 43(2) of the German Introductory Act to the Civil Code (EGBGB); Article 13 of the Japanese Private International Law Act; Article 21(1) of the Turkish Private International and Procedural Law Act; Article 8 of the Brazilian IANBL; Article 2667 of the Argentinian CCC; for English law, see Collins et al. (2012 and 2019), paras 24–029ff. See, for US law, Hay et al. (2018), para 19.15.; for German law, § 43(2) of the German EGBGB; for English law, see Collins et al. (2012 and 2019), para 24–021. Swiss law makes a compromise in Article 102(3) of the PILA and permits that a retention of title perfected abroad maintains its effect for three months after the goods have entered the Swiss territory; however, not in respect of third parties in good faith. For further comments on the opposed interests in security of title versus security of transaction, see Janeen M. Carruthers, The Transfer of Property in the Conflict of Laws (Oxford University Press, 2005), pp. 98f. and particularly para 3.59 and 3.67ff.

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In a dispute concerning property rights, or in determining an incidental question relating to property rights, a court applies the law selected by the applicable conflict rules, and the choice of law made in the contract is of no effect. In Section 5.4.9(i)(iii), we will discuss to what extent these conflict rules affect the validity or enforceability of an award. (g) Assignment, Security Interests and Collateral Suppose that one of the parties assumes an obligation to pay a certain amount of money to the other party. For example, in the case of the abovementioned Tolling agreement, the Russian party issues a performance bond guaranteeing the proper performance of its obligations, and the English party requires a security for that payment. The parties agree that the Russian debtor shall secure its obligations by pledging in favour of the English creditor all future products of the debtor’s manufacturing plant in Russia, or the future proceeds that the Russian party will have from the sale of its future products. The parties choose to submit the contract to a law that permits the pledge of future (bulk) things or, as the case may be, of future income. Are the parties justified in relying simply on the chosen law and disregarding the Russian law on pledges? Assuming that the pledge of bulk things or the pledge of future things or claims is not allowed under Russian law, is the choice of law made in the agreement sufficient to render the pledge valid between the parties and effective towards third parties? A further method to create a security interest is to assign to the creditor receivables that the debtor has from another party (for example, the manufacturer assigns to its raw material supplier, as payment of the raw materials, the claims that the manufacturer will have in the future against the purchasers of the manufacturer’s products). To consider the assignment valid in respect of third parties (the manufacturer’s clients or the manufacturer’s other creditors), is it sufficient to comply with the law chosen by the parties, or is the law governing the assigned claim also relevant? Another method to create security interests is to deliver to the creditor, as so-called collateral, certain assets (usually cash or securities), providing that the creditor will be entitled to retain them upon default by the debtor of the secured obligation. As the creditor already has the availability of the assets, this arrangement minimises the risk of loss in the case of default. Will the collateral need to be recognised as such under the law of the place where the assets are located, or is the recognition by the law chosen by the parties sufficient to prevent, for example, that the creditor’s creditors attach the assets to satisfy their credit in case of the creditor’s insolvency? An encumbrance on an asset ensures the beneficiary that the proceeds from the sale of that asset will be used to satisfy its claim. Consequently, the encumbrance restricts the availability of that asset for the other creditors, who will be able to apply to their respective credits only that part of the asset’s value that remains after the beneficiary has satisfied its claim.

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The general rule in respect of creditors is that they shall be treated equally in case the debtor becomes insolvent, and the priorities that are given via pledges or other encumbrances are an exception regulated by mandatory rules of law and are generally subject to publicity and registration. If a bank is considering giving a loan to a party and it requires security, it will first verify whether the potential borrower can dispose of the assets on which the security interest will be created. The bank must be put in a position to rely on the formalities and procedures of the applicable law when verifying whether the debtor’s assets are already subject to encumbrances in favour of other creditors. If it were possible for a debtor to avoid these requirements by choosing a foreign law for a contract containing an encumbrance, the bank would have to verify the status of the assets in all the world’s jurisdictions in order to satisfy itself that the assets are free from encumbrances. This is obviously not viable and is the reason why the creation of encumbrances or other security rights that may affect the position of third parties is not subject to the choice of law made by the parties in the agreement. The rights and obligations of the parties between each other are regulated by the law that they have chosen, but the valid existence and the enforceability of security rights that may affect third parties is not. Should the encumbrance turn out not to be effective under its proper law, therefore, the consequences between the parties will be determined by the law that they chose. It will depend on the law applicable to the contract to determine whether a party is in breach of contract for not having fulfilled its obligations under a security right that turned out not to be effective under its proper law. In some systems, the debtor may be deemed to be in breach of its contractual commitment towards the creditor, even though the performance of the obligation is illegal or ineffective under its proper law. In other systems, the invalidity of one obligation may affect the validity of the whole contract, thus rendering the encumbrance a nullity even between the parties. The law governing encumbrances on tangible goods is generally determined by the same conflict rule as the law of property; that is, the connecting factor is the state where the goods are located.129 The effects of the assignment between the assignor and the assignee are governed by the law governing the contract of assignment, whereas the law governing the effect of the assignment between the assigned debtor and the assignee is, generally, the law governing the claim that is being assigned – see, for example, Article 14 of the Rome I Regulation. The Rome I Regulation does not regulate the effects of the assignment towards third parties,130 but in Article 27, there is a provision for revising the 129

130

See, for Swiss law, Article 100 of the PILA; for English law, Collins et al. (2012 and 2019), paras 24–035ff.; for US law, the Uniform Commercial Code, Article 9-103(1); and for Norwegian law, Berte Elen Konow, Løsørepant over landegrenser (Fagbokforlaget, 1999). See the opposite applications by the German and Dutch courts of the two parts of Article 12 of the Rome Convention (the predecessor of the Rome I Regulation): Bundesgerichtshof of 8 December 1998, XI ZR 302/97 (IPRax, 2000), 128f., and Brandsma g.g. v. Hansa Chemie AG, Hoge Raad, 16 May 1997, nr. 16470, Nederlands Internationaal Privaatrecht 15 (1997) 254ff. See also Raiffeisen Zentralbank Oesterreich AG v. Five Star General Trading LLC and others [2001] EWCA Civ 68 (2001) QB 825, following the German

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Regulation in this respect, see Section 4.5.1. The revision never occurred, but in 2012 a study was published that was meant to be used as a basis for such a revision.131 The study shows that, in some private international laws, the law of the place where the debtor is located is seen as applicable.132 In other systems, the connecting factor determining the applicable law is the place of the creditor.133 In 2018, however, the Commission proposed a Regulation giving effect towards third parties to the law chosen by the parties, see Section 4.5.1. The proposal, however, has so far not been enacted. The general rule for rights in rem is lex rei sitae, that is, the proper law is the law of the place where the object of the right is located. When the object of a right in rem is not a tangible asset, but a credit, the question is where the debt is located – or the situs of the debt. The English Supreme Court considers a debt to be located at the debtor’s residence.134 This applies both to debt in general and specifically to debt under a letter of credit (the debtor being the issuing bank when the letter of credit is not confirmed). The same connecting factor was applied by the Norwegian Supreme Court.135 However, other countries may have different connecting factors. To harmonise this area, the UNCITRAL has prepared the 2001 Convention on the Assignment of Receivables in International Trade, but the instrument has so far not entered into force. For the eventuality that the security interest or collateral is created with securities or other financial instruments, specific rules may be recommendable. Therefore, the EU has issued or is considering various instruments,136 and various other initiatives are being pursued by international organisations such as the Hague Conference, the UNCITRAL and the UNIDROIT.137

131

132

133 134

135 136

137

approach. Extensively, see Alix Flessner and Hendrik Verhagen, Assignment in European Private International Law (Sellier European Law Publishers, 2006). See also Collins et al. (2012 and 2019), paras 24–058ff. The corresponding Article 14 in the Rome I Regulation does not seem to provide a clarification. The British Institute for International and Comparative Law, Study on the question of effectiveness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim over a right of another person (2014), https://op.europa.eu/en/publication-detail/-/publication/ fd808b79-725d-4ce3-95b0-599119e7fb8f. See the US 2001 reform of the Uniform Commercial Code, Article 9-103(3), and Hay et al. (2018), para 19.16ff. See Article 105 of the Swiss PILA and the notes on it in Honsell et al. (2007), notes 14ff. Taurus Petroleum Limited v. State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64. HR-2017-1297-A (Bergen Bunkers). See, for a clear analysis of the implementation of the Collateral Directive 2002/47, the European Commission Evaluation Report on the Financial Collateral Arrangements Directive (2002/47/EC) COM (2006) 833. See also the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on the applicable law to the proprietary effects of transactions in securities (COM(2018) 89 final ) and the Proposal for a Regulation of the European Parliament and of the Council on the law applicable to the third-party effects of assignments of claims (COM(2018) 96 final) (2018/0044 (COD). See the ‘UNCITRAL, Hague Conference and UNIDROIT Texts on Security Interests: Comparison and Analysis of Major Features of International Instruments relating to Secured Transactions’, www .unidroit.org/english/publications/joint/securityinterests-e.pdf.

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These conflict rules will be applied instead of the rule of party autonomy when a dispute is decided by a court. In Section 5.4.9(i)(iii), we will discuss to what extent these conflict rules affect the validity or enforceability of an award. 4.5.3 Overriding Mandatory Rules One of the effects of party autonomy is that the law chosen by the parties applies (within the limits of the scope of party autonomy, as seen in Section 4.5.1) to the exclusion of any other law. This means that rules of the law that would have been applicable if the parties had not made a choice, will not apply – not even this law’s mandatory rules are applicable. This does not mean, however, that the parties need not concern themselves with other laws that may affect the contractual relationship. Overriding mandatory rules will be applied notwithstanding the parties’ choice of a different governing law, even though there are no specific conflict rules to restrict party autonomy such as those seen in Section 4.5.2. Overriding mandatory rules apply even when the parties have decided that their relationship shall not be subject to any state law. As seen in Section 2.3.2(b), one of the major sources of transnational law, the UPICC, expressly confirms, in Article 1.4, that mandatory rules of law prevail in the case of conflict with the Hague Principles; even more so, this will apply to overriding mandatory rules. These rules override the choice of law made by the parties and even the choice of law made in accordance with objective conflict rules. Overriding mandatory rules are directly applicable on the basis of their function and the interests that they represent. Examples of these rules are provisions of competition law, provisions with which states exercise their regulatory power, or rules protecting the weaker contractual party. The priority of overriding mandatory rules is founded, in EU law, on Article 9 of the Rome I Regulation and, for non-contractual obligations, on Article 16 of the Rome II Regulation.138 In the United States, an analogous mechanism may be found in the doctrine of fundamental policy, according to which the parties’ choice of law does not have effect if it is contrary to a fundamental policy of another law.139 That overriding mandatory rules may be applied notwithstanding that the governing law is the law of another country is confirmed by the Hague Principles, see Article 11. 138

139

Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II) (2007) OJ (L 199/40) (EC). Linda Silberman, ‘Lessons for the USA from the Hague Principles’. Uniform Law Review 22.2 (2017a), pp. 422–34, p. 5.

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It must be emphasised here that not all the rules that are mandatory are also overriding.140 Where this overriding quality is not given expressly in a statutory rule, it will be a matter of the interpreter’s discretion to determine whether a rule is not only mandatory (in which case the choice of another law is sufficient to escape from its scope of application), but also has an overriding character (in which case the rule remains applicable in spite of the choice of a different law). The decision will have to be based on the function of the rule and the policy that underlies the regulation, as well as on the balancing of the various interests that are involved in the specific case. It is not always easy to determine whether a mandatory rule is overriding or not, and rules that are deemed overriding in one state might not be overriding in another state. Also, the overriding character of a rule should be evaluated in light of the protection that the same interest enjoys under the chosen law. The private international law gives some guidelines as to the criteria on which the discretion shall be exercised: for example, the necessity of a particularly close connection with the law in question or to what extent rules belonging to foreign laws may be applied. In the Rome I Regulation, the possibility of applying overriding mandatory rules notwithstanding the governing law is regulated in Article 9. Not all substantive rules protecting particularly important interests become applicable by overriding the choice of law made by the parties on the basis of the interpreter’s discretion. Overriding mandatory rules are, as a matter of fact, an exception to the general mechanism of the private international law. Generally, the applicable law is determined by applying objective conflict rules, see Sections 4.4 and 4.5.2. When 140

This follows from a systematic interpretation of private international law, see, for example, for US law, Hay et al. (2018), paras 18.4Fff. For European private international law, this is expressly clarified in Rome I, Recital No 37. Article 9 of the Rome I Regulation adopts the terminology ‘overriding mandatory provisions’; thus clarifying the terminology of its predecessor, the Rome Convention, ‘rules that must be applied irrespective of the otherwise applicable law’. Both expressions are an important qualification to the general definition of ‘mandatory rules’, the latter to be found in Article 3.3 of the Rome I Regulation (and of its predecessor, the Rome Convention), regulating the eventuality that the parties to a domestic (not international) contract have chosen a foreign governing law. For domestic contracts, these instruments allow only a restricted choice of law that shall not affect the applicability of the mandatory rules of the law of the state with which all the elements of the contract are connected. These rules are defined in Article 3.3 as ‘mandatory rules’ and are described as the rules ‘that cannot be derogated from by contract’. In Article 3.3 there is no qualification of these mandatory rules as overriding, as is made in Article 9 of the Rome I Regulation (or as could be found in Article 7 of the Rome Convention, which stated that they should be the kind of mandatory rules that must be applied, whatever the governing law). In other words, both the Rome I Regulation (and the Rome Convention) operate with two different concepts of ‘mandatory rules’: the ‘ordinary’ mandatory rules, which cannot be derogated from by contract if they belong to the governing law (regulated in Article 3.3), and the ‘overriding’ mandatory rules, which may be given effect to, even if they do not belong to the chosen law (regulated, respectively, in Articles 9 and 7). In the English version of the Rome Convention, this difference was not immediately apparent; that these two concepts are different, however, was confirmed by the other language versions of the Convention: in the French version, for example, the mandatory rules of Article 3.3 were called dispositions imperatives and those of Article 7 were called lois de police, whereas in the German version, they were called, respectively, zwingende Bestimmungen and zwingende Vorschriften.

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important interests of society are at stake, such as the protection of third parties, the need to ensure application of the relevant law provisions arises, as well as the need to create predictability. An objective connecting factor will be applicable to all claims where these interests are at stake. The connecting factor will ensure applicability of the relevant provisions, in a predictable way. This permits the involved parties to predict which law is applicable and to evaluate its position accordingly. For example, creditors will know which law determines whether a certain asset is subject to a valid pledge; contract parties will know which law regulates the validity of a board resolution. These areas are usually outside of the scope of party autonomy, therefore the proper law will be determined on the basis of other connecting factors: rules of property law are selected on the basis of the location of the asset, and rules of company law on the basis of the place where the company is registered, see Sections 4.5.2(g) and (f). A direct application of these rules as overriding mandatory rules is not necessary: the consideration that would justify such a direct application is taken care of by the specific conflict rules. The same result could be achieved giving the court the discretion to apply the rules it considers to be so important that they override the choice of law made on the basis of conflict rules. Thus, the same interest may be regulated in some systems by rules that are applicable on the basis of specific connecting factors, whereas in other systems, they may be applied directly as overriding rules. Application of a rule on the basis of a connecting factor is by far preferable, in terms of predictability, to application as a consequence of a functional analysis made by the interpreter. The opinion that predictability should be preferred to a case-based functional analysis, however, is not uncontroversial.141 One of the interests that is increasingly being considered as particularly important and that could be regulated by overriding mandatory rules is the protection of the weaker contractual party. These are rules that could typically be deemed to be overriding. In the interest of predictability, however, specific conflict rules have been created for many areas where a party is deemed to need protection – for example, in fields such as labour law,142 consumer law,143 141

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See, for example, Friedrich K. Juenger, Choice of Law and Multistate Justice (Martinus Nijhoff Publishers, 1993), Gerhard Kegel, ‘The Crisis of Conflict of Laws’. Volume 112 (Recueil des cours, Académie de Droit International de la Haye, 1964), p. 91 and Symeon C. Symeonides, ‘Material Justice and Conflicts Justice in Choice of Law’. In Patrick J. Borchers and Joachim Zekoll (eds.), Conflict of Laws for the Third Millennium: Essays in Honor of Friedrich K. Juenger (Transnational Publishers, 2001), pp. 125ff. The Rome I Regulation provides in Article 8 for an exclusive conflict rule in the event that the law chosen by the parties gives the employee a worse protection than the law that would otherwise have been applicable. In US private international law, the overriding character of labour law seems to relate particularly to the statutory restrictions to non-competition agreements, see Hay et al. (2018), para 18.6. See, for Norwegian law, the Protection of Employees and Working Environment Act 2005, Section 5. The Rome I Regulation provides in Article 6 for an exclusive conflict rule in the event that the law chosen by the parties gives the consumer a worse protection than the law that would otherwise have been applicable. For US law, see Hay et al. (2018), para 18.5.

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insurance,144 carriage145 or commercial agency.146 Applicability of these rules is then based on determined and predictable connecting factors rather than on the more uncertain functional analysis. Mandatory rules that override the contractual regulation may also be found in respect of other interests, such as the protection of the national economy (for example, import–export regulations, foreign exchange regulations, securities exchange regulations, competition regulation, etc.) or public interest (for example, embargo). Most of these rules have a public law character and are outside the scope of party autonomy; therefore, it is quite natural that they are not affected by the choice of law contained in the contract. It may, nevertheless, be worthwhile mentioning them here, because they may affect the parties’ rights and obligations under the contract – such as when they sanction their violation by making the contract void. Furthermore, the parties to a contract often tend to rely on the choice of law made by them to such an extent that they expect no interference of any kind by any other laws, including public law rules. They may, therefore, be surprised by the application of these rules. Some illustrations may show the impact that overriding mandatory rules may have on the choice of law made by the parties. (a) Competition Law Suppose that two competing manufacturers enter into a contract for the licensing of certain technology, and that the transfer of technology is accompanied by a system for sharing the market between the two competitors, which violates European competition law. The contract contains a Choice-of-law clause, according to which the governing law is a foreign law of a non-EU member state. If a dispute arises between 144

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The Rome I Regulation provides in Article 7 for exclusive conflict rules in the field of insurance. These are based on several European directives, see especially Second Council Directive 88/357/EEC of 22 June 1988 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and laying down provisions to facilitate the effective exercise of freedom to provide services and amending Directive 73/239/EEC and Council Directive 90/619/EEC of 8 November 1990 on the coordination of laws, regulations and administrative provisions relating to direct life assurance, laying down provisions to facilitate the effective exercise of freedom to provide services and amending Directive 79/267/EEC. For US law see Hay et al. (2018), para 18.7B. The Rome I Regulation provides in Article 5 for some restrictions to the parties’ choice of law. This area is regulated by a series of international instruments, such as the so-called Hague Rules (1924 International Convention for the Unification of Certain Rules of Law relating to Bills of Lading, and Protocol of Signature), the Hague–Visby Rules (1968 Protocol to Amend the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading) and the Hamburg Rules (1978 United Nations International Convention on the Carriage of Goods by Sea). See, for Norwegian law, the Maritime Code, Section 430 and Section 252, combined with Section 310. Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents contains a series of rules for the protection of the agent. For Norwegian law, see the Agency Act of 19 June 1992 No 96, § 3, based on the European regulation. In US law, the commercial agents do not enjoy a particular statutory protection, but distributors and franchisees do, and these rules are deemed to be overriding: see Hay et al. (2018), para 18.7A.

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the two parties, the party that is allegedly in breach of contract may argue that the contract is null and void because it violates European competition law. The other party will reply that EU competition law is not applicable to the contract, that the choice of the foreign governing law was meant specifically to avoid applicability of EU law and that the will of the parties shall be respected. The purpose of the EU rules on competition is to ensure that business parties do not distort the market by, for example, sharing it between themselves. Practices such as market sharing have a negative effect on the offer and on the prices, and this negatively affects the buyers. If the parties could avoid the applicability of these rules by subjecting the contract to a third law, their party autonomy would affect the position of the buyers, and this is not desirable. Hence, competition rules will apply to agreements and market practices that have effect in the relevant territory, irrespective of the law that governs the contract.147 A court hearing in this case will apply EU competition law irrespective of the different choice of law contained in the contract. If competition law has a rule making the contract void, that rule will be applicable as an overriding mandatory rule. Should the law not have a specific rule affecting the contract, it will nevertheless apply to the incidental issue of whether the contract is legal. The court will determine the legality of the market sharing agreement under the applicable competition law. The contractual consequences of the illegality, however, will be determined by the law applicable to the contract. In Section 5.4.9(i)(iv), we will discuss to what extent competition law affects the validity or enforceability of an award. (b) Labour Law Suppose that a Norwegian company agrees to contribute to the capital of a Russian company following the commitment by the latter to, within a certain term, reduce the number of its personnel by one third. The contract is subject to Swedish law. Russian mandatory rules of labour law on the protection of employees provide for a lengthy procedure before the number of employees can be reduced. As a consequence, the Russian party is not able to perform the obligation that it assumed towards the Norwegian party. The Russian party will invoke Russian mandatory rules of labour law as an excuse for the delay in performing its obligations, and the other party will deny the relevance of the rules of Russian law because the contract excluded its applicability by choosing Swedish law to govern the contract. Labour law obviously aims to protect the employees, and a contract between the investor and the employer is not capable of excluding the applicability of the labour 147

Judgment of the Court, 1 June 1999, Eco Swiss China Time Ltd v. Benetton International NV, C-129/97 (Eco Swiss). For a more detailed analysis, see Giuditta Cordero-Moss, ‘Inherent Powers and Competition Law’. In Franco Ferrari and Friedrich Rosenfeld (eds.), Inherent Powers in International Adjudication (Juris, 2018c), pp. 297–325.

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protection that the employees enjoy. As seen, the parties’ choice of law does not affect the law applicable to the incidental issue, in the eventuality that the question arises in a dispute between the parties for breach of the contractual obligation to reduce the number of employees. The Russian party will invoke Russian law as a defence for not having complied with the contract. The fact that the parties chose Swedish law will not affect the applicability of Russian law to the incidental issue of labour law. Swedish law will, however, determine the contractual consequences between the parties. It is a question of contract law, and therefore in our example it is to be determined under the chosen Swedish law whether the Russian party’s failure to perform its obligations is excused because performance would have violated Russian labour law. Assume now that the investor and the employer are aware that the incidental issue of labour law is not governed by the law they choose for their contract. To avoid application of Russian law, the parties may have agreed to modify all the employment agreements so that each of the employment agreements contained a Choice-of-law clause in favour of Swedish law. Would the protection afforded by Russian labour law be excluded? Even a Choice-of-law clause in each employment agreement would not be capable of achieving the exclusion of Russian labour law, as these rules are typically considered to have an overriding character and remain applicable in spite of any contrary choice of law made by the parties. In Rome I, this is codified in a special conflict rule for labour law. In Section 5.4.9(i)(vi), we will discuss to what extent labour law affects the validity or enforceability of an award. (c) Agency Contracts Suppose that an Italian producer enters into a contract with a Norwegian agent for the promotion of the producer’s products and the development of a market in the Norwegian territory. In the contract, the parties provide that the agreement may be terminated at the discretion of the producer and that no compensation shall be paid to the agent upon such termination. The contract contains a Choice-of-law clause determining the law of New York as governing, because this regulation of the parties’ interests is allowed under that law. Under Norwegian law, however (as well as under Italian law), the agent is entitled to compensation upon termination of the relationship. Is the Choice-of-law clause sufficient to exclude the application of the Norwegian rule on compensation? The rule on compensation is part of a set of rules designed to protect the agent, which is deemed to be the weaker party in the relationship. An agency assumes that the agent exercises its activity for the benefit of the principal. On termination of the relationship, the results of the agent’s activity benefit the principal, who will then enjoy the market and the goodwill developed for it by the agent. The agent, on the other hand, will not derive any benefit from the activity carried out for the principal.

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Hence, the compensation upon termination is meant to balance the parties’ interests. The protection regime is deemed to relate to all commercial agents carrying out their activity within the territory, and the circumstance that the parties chose a different law to govern the contract should not exclude its application.148 (d) Insurance Suppose that an English insurance company and a Norwegian ship owner enter into an insurance contract for the liability that the ship may incur towards third parties. The insurance contract contains a Pay-to-be-paid clause, affirming that the insurer will make any disbursement only after the insured has reimbursed the damage caused to the third party. The contract contains a clause choosing English law to govern it, and the regulation contained in the contract complies with English law. The Pay-tobe-paid clause means, inter alia, that if the insured becomes insolvent or goes bankrupt before a reimbursement of damages has been made to an injured third party, the insurance company will not be under an obligation to make any disbursement. Assuming that the injured party is Norwegian, it will have, according to Norwegian mandatory law, a direct action against the insurer. Will the injured party be able to claim payment under the direct action, in spite of the circumstance that, thanks to the Pay-to-be-paid clause, the insurance company is not obliged to make payment under the insurance contract or under the law chosen to govern the contract? Contracts of insurance are widely regarded as adhesion contracts, drafted unilaterally by the insurance company and imposed on the insured who is the weaker party without any real bargaining power. Therefore, statutes and regulations often contain detailed mandatory rules that the parties may not escape from by subjecting the contract to a foreign law. For special insurance contracts regarding large business activities, the mandatory regulation is less extensive. However, certain rules remain mandatory even in this context – for example, the rule on the direct action in case of insolvency of the insured.149 In the case described, the choice of law made in the insurance contract might have been deemed overridden by the mandatory rule of the direct action. Alternatively, and preferably, it might have been deemed not relevant, since the rights exercised by the injured party in the direct action are not contractual rights and are thus subject to another conflict rule.150

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See the CJEU decision in C-381/98, Ingmar GB Ltd v. Eaton Leonard Technologies Inc (Ingmar), where the question arose because the principal was located outside Europe. Deemed to be overriding in the Norwegian Ministry of Justice’s Report on the Act on choice of law for insurance contracts, Ot.Prp.Nr. 72 (1991–92), p. 66. The EU Regulation 864/2007 (Rome II) on the law applicable to non-contractual obligations allows for two alternative classifications of a claim based on direct action: either as contract right or as a right based on tort; see Article 15.

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(e) Good Faith and Fair Dealing Some legal systems, particularly those inspired by German law, base their contract laws on the principle of good faith and fair dealing, as seen in Chapter 3. This principle may be used to guide the interpretation and performance of the contract so as to create ancillary obligations for the parties that were not expressly provided for in the contract, or even to correct the regulation contained in the contract. Contract clauses that expressly permit an interpretation or a performance violating the principle of good faith and fair dealing (for example, clauses exempting from liability even in cases of gross negligence or willful misconduct, or clauses permitting termination of the contract for capricious reasons) might be deemed to violate the principle of good faith and fair dealing. If the contract is subject to, for example, English law, which, as seen in Section 3.3, has no general principle of good faith for commercial contracts, there are no obstacles to a literal implementation of the contract’s provisions, as long as their terms are sufficiently clear. Assuming that a contract contains a Choice-of-law clause in favour of English law, would the literal implementation of these clauses be affected by an overriding principle of good faith and fair dealing in the law that would have been applicable if the parties had not chosen English law to govern the contract? As seen in Chapter 3, the principle of good faith and fair dealing is considered to be central in the contract laws of civil law systems; as seen in Chapter 2, the principle has been transferred from there into various restatements of principles of contract law that have the goal of being applicable to international contracts, such as the UPICC and the PECL, as well as the DCFR. It has also been proposed that many overriding rules based on good faith, which so far have been applicable to consumer protection, should also be extended to commercial contracts.151 In addition, the proposal for a Regulation that should have introduced a CESL,152 as an optional instrument, extended regulation on consumer protection to commercial contracts, when one of the parties is a small- or medium-sized enterprise. There are some indications that rules expressing this principle might have an overriding character and thus remain applicable in spite of a different choice of law made by the parties.153 151

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For example, the Principles of EU Contract Law issued by the European Research Group on Existing EC Private Law (the so-called Acquis Principles), extend to commercial contracts various rules based on the protection of the consumer, such as imposing liability for having carried out negotiations in bad faith (Article 2:103), imposing a duty of information in the pre-contractual phase (Article 2:201), imposing performance in good faith (Article 7:101), providing that a right or a remedy shall be exercised in good faith (Article 7:102) and providing that the terms of a contract are not binding if they have not been individually negotiated and if they have been incorporated by reference having been made in the contract (Article 6:201). For criticism on this approach, see Giuditta Cordero Moss, ‘Consumer Protection Except for Good Commercial Practice’. In Reiner Schulze (ed.), CFR and Existing EC Contract Law (Sellier European Law Publishers, 2008b), pp. 78–94. Common European Sales Law, COM (2011) 635 final. The preparatory works on the Norwegian Act on Choice of Law in Insurance Contracts, commenting on the Act’s provision for overriding mandatory rules (a provision modelled on the then prevailing Article 7 of the Rome Convention, since the Act is the implementation in Norway of the EC Directive on the same subject matter), affirm that one of the rules of Norwegian law that might be deemed to have an overriding

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However, extreme cautiousness is recommended, as will be seen in Chapter 5. The very fact that the CESL was meant to be an optional instrument, which would have become applicable only if both parties expressly agreed on adopting it, speaks against considering its rules as overriding. The quality as overriding is not compatible with the parties’ option to elect not to adopt the CESL. Overriding mandatory rules are those rules that are not only mandatory, but also those that are so important for the public interest of the state that they shall be applicable irrespective of any contrary choice of law. An optional instrument is, by definition, not mandatory; all the more, it lacks the impellent character that would be required to consider a mandatory rule as overriding. In Section 5.4.9(i)(vii), we will discuss to what extent the principle of good faith affects the validity or enforceability of an award. (f) Corporate Social Responsibility As seen in Section 4.2.1(c), an emerging trend is to seek respect throughout the value chain of environmental regulation, decent working conditions and human rights. This entails that a company cannot invoke limitation of liability based on the corporate structure or the circumstance that it has outsourced part of the value chain to third parties. This is achieved by holding the parent company or the principal liable for its own independent contribution to the subsidiaries’ or the suppliers’ activity. This in turn assumes that the applicable tort law gives a basis to establish that the parent company or the principal were under a duty that they have breached, that the breach caused a damage and that the damage be quantified. The mechanisms described in Sections 2.2.6(g) and 4.2.1(c) establish a duty for the parent company or the principal to take measures necessary to ascertain that the subsidiaries’ or the suppliers’ activity do not infringe labour law standards, human rights or the other standards covered by the respective instruments, as well as a duty to report and to give information if so requested. Under some of these instruments, breach of these duties is explicitly sanctioned with civil liability,154 whereas other instruments are silent, thus leaving the consequences of a breach to the applicable tort law. For example, the Norwegian Transparency Act155 is silent on the issue of liability, thus leaving the decision of whether there is a liability, and what its consequences are, to the general tort law (or to the specific tort law for shareholders enshrined in the

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character according to that provision is § 36 of the Norwegian Contracts Act, imposing the principle of good faith and fair dealing on contracts. For France, see Jault-Seseke, ‘Transparency Legislation’ (forthcoming 2023). Act relating to enterprises’ transparency and work on fundamental human rights and decent working conditions of 18 June 2021 No 99.

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Companies Act). As a matter of fact, under Norwegian tort law, liability is presumed when a duty is breached.156 This can give the impression that the Norwegian system provides an efficient legal framework to ensure that business activity with links to Ruritania is carried out in respect of Norwegian standards. However, the connecting factor for tort law is the place of damage. This means that the Norwegian law on torts will not apply if the damage occurred abroad.157 Hence, it is necessary to evaluate whether tort law can be deemed to be overriding. The possibility of applying certainly rules directly and irrespective of the applicable law has long been recognised as a general feature of the private international law.158 It is codified in EU law, and the Norwegian Supreme Court,159 as well as Norwegian literature,160 consider the EU legal framework also to be applicable here. Among other things, this implies that a court has to be restrictive in applying overriding mandatory rules. Application of overriding mandatory rules is an exception from the applicable law, and considerations of predictability are imposed to reduce exceptions to the furthest extent possible. Therefore, it is mainly161 rules protecting the public interest that can override the applicable law: when the interest that they protect is deemed to be more important than the parties’ interest in predictability, they can be applied directly, notwithstanding that the claim is otherwise subject to a different law. It is specific provisions that are directly applicable; the rest of the claim is still subject to the applicable law. It seems justified to assume that the duties laid down in the Transparency Act are overriding. Also the draft EU Proposal for a Directive on Corporate Sustainability Due Diligence (see Section 2.2.6(g)) requires member states to provide for civil liability for violation of the duties laid down in the Directive, see Article 22. That the duties laid down in the Transparency Act are overriding means that a Norwegian parent company or a principal cannot avoid them by invoking a different law – for example, a law that they may have chosen to regulate any internal agreements on corporate organisation or to govern the outsourcing or supply agreement. However, this also does not imply that Norwegian tort law is applicable. The mechanism of overriding mandatory rules cannot be invoked to render a whole area of law applicable. If the Transparency Act had contained a provision creating liability for breach of the duties, that provision might have been deemed to be overriding. As long as liability is subject to the general tort law, however, the 156 157

158 159 160

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See the Norwegian Supreme Court decision recorded in HR-2022-1148-A. For references and a more detailed reasoning, see Giuditta Cordero-Moss, ‘Corporate Social Responsibility and the Norwegian Transparency Act: The Importance of Choice of Law’. Oslo Law Review (forthcoming 2023). Friedrich Carl von Savigny, System des heutigen römischen Rechts. Achter Band (Veit, 1849). Rt. 2009 s. 1537; HR-2016-1251-A. For references, see Giuditta Cordero-Moss, Internasjonal privatrett (Universitetsforlaget, 2021b), Section 4.2.1. However, it is not excluded that private law rules can be deemed to be overriding, see Cordero-Moss (2021b), Section 4.2.2.

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Transparency Act will restrict its overriding effect to its provisions. The (rest of the) claim will continue being subject to the tort law of Ruritania. If it is desirable to render Norwegian tort law applicable in its entirety, therefore, the proper way is not to apply the mechanism of overriding mandatory rules in a manner that conflicts with the framework for this mechanism. The proper way is to apply a connecting factor that designates as applicable the tort law of the place of the event giving rise to the damage. A recommendation has been to introduce a new connecting factor for torts that occurred within the scope of application of the Transparency Act.162 A similar recommendation has also been suggested for EU law by the Group Européen de Droit International Privé (GEDIP).163 4.5.4 Overriding Mandatory Rules of Third States So far, we have discussed overriding mandatory rules belonging to the law of the court. Application of the law chosen by the parties may also be limited by overriding mandatory rules belonging to laws different from the lex fori. Courts will normally apply the overriding mandatory rules of their own law; some systems of private international law recognise the possibility of giving effect to overriding mandatory rules of third states, if there is a sufficiently close connection between the dispute and the third state – for example, Article 187 of the Swiss PILA. The Rome Convention had a similar provision in Article 7(1). This provision, however, was so controversial that the Rome Convention itself permitted its signatories, in Article 22(1)(a), to reserve against the application of this rule. Among others, England and Germany reserved against the application of Article 7(1) of the Rome Convention. The Rome I Regulation has considerably restricted the applicability of overriding mandatory rules of third countries: Article 9(3) says that effect may be given to such rules to the extent that they belong to the law of the country where the contract is to be performed, and only insofar as they render the performance unlawful. This, however, does not mean that overriding mandatory rules of other systems are completely irrelevant. The possibility of taking into consideration overriding mandatory rules of third countries is a principle of private international law that pre-dated the Rome Convention,164 and is acknowledged as a principle of private international law beyond the EU. Under US law, the fundamental policy that prevails over the parties’ choice does not necessarily belong to the law of the court. For a fundamental policy to 162 163 164

Cordero-Moss, ‘Corporate Social Responsibility’ (forthcoming 2023). GEDIP (2021). A similar recommendation is made by Peters et al. (2020), p. 26f. See Fritz Alexander Mann, ‘Sonderanknüpfung und zwingendes Recht im internationalem Privatrecht’. In Otto Sandrock (ed.), Festsschrift für Günther Beitzke zum 70. Geburtstag (De Grutyer, 1979), p. 608; Lennart Pålsson, Romkonventionen: tillämplig lag för avtalsförpliktelser, Volume 162 (Norstedts juridik, 1998), p. 123; Siehr (1988), p. 78.

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trump the chosen law, it must belong to a law which has a materially greater interest than the chosen law.165 Furthermore, there may be other bases to give third countries’ overriding mandatory rules some effect. For example, the applicable substantive law may have a rule on agreements against good morals; this rule may apply when the parties aim at circumventing a foreign rule protecting public interests and those interests are deemed worthy of protection also under the applicable law. Section 138 of the German BGB has a rule like this, called Sittenwidrigkeit. Furthermore, the applicable substantive law may consider the effects of the foreign overriding mandatory rule as an impediment that excuses non-compliance with a contract violating that rule. These will be discussed further. 4.5.5 Impossibility of the Performance Due to a Foreign Law As seen so far, the choice of the governing law made by the parties does not exclude the applicability of rules belonging to other laws. In addition, there are situations where the rules of a law that does not govern the contract are not applied directly, but create legal effects that have to be taken into consideration under the governing law. In these cases, the effects of the foreign rules will be considered incidentally: they will be considered as facts and will be given the legal effects that the governing law gives to similar facts. The foreign rules will not be applied, but the factual consequences that the foreign rules have created in the foreign state will be taken into consideration when applying the chosen law. We can assume, for example, that a Norwegian and a Russian company enter into a contract for the purchase by the Norwegian buyer of certain raw materials produced by the Russian seller. The parties agree to have their contract governed by Norwegian law. The export of those raw materials is subject to licensing by the competent Russian authorities; due to reasons outside the control of the seller, the competent authorities do not issue a licence for the export of the sold goods. The goods, therefore, are ready to be delivered, but cannot physically leave the state, because the customs authorities will not allow them to pass the Russian border without the export licence. The Russian seller invokes the Russian export rules to excuse its own nonperformance; the Norwegian buyer does not accept the failure to obtain the export licence as an excuse for non-delivery. The buyer argues that the rules on export licences are rules of Russian law, and the parties have chosen Norwegian law to govern the contract.

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Silberman (2017a), pp. 6f.

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The buyer’s allegation that Russian law should not be applied is correct; however, this does not mean that a Norwegian judge can completely disregard the existence of the Russian export rule, or, better, the consequences of its existence. The goods have been stopped at customs and cannot be exported: this is a factual situation preventing the export, which happens to derive from the existence of a licensing system in Russia. Should this impossibility of being able to export be considered differently by the Norwegian judge from impossibility deriving from a flood, fire or other natural event beyond the control of the seller? The judge will note a supervening impossibility of performing the agreement, and will evaluate, on the basis of the contract’s terms and conditions and of the applicable law (Norwegian law, chosen by the parties), what legal consequences are to be attached to this. Whether the seller will be excused on the basis of the Force majeure clause in the contract or will be considered to be in breach of contract for not having complied with all the conditions required to perform its obligations, depends on the examination of the factual circumstances and on the allocation of risk provided for in the contract. Failing a contractual regulation of this eventuality, the judge will decide by applying the force majeure rule contained in the governing law (Norwegian law): the exporter will be excused if the circumstances that led to the refusal to issue the export licence qualify as force majeure circumstances under the governing law (see Section 3.5.3). In conclusion, the Russian export rules are not applied, but their application made by Russian authorities can be considered as facts and can be given legal effects under Norwegian law. Accordingly, the buyer’s allegation that Russian export rules are inapplicable is correct, but this does not mean that Russian export rules should not be taken into consideration. 4.5.6 Illegality of the Performance Under a Foreign Law What happens if the contract, valid under the chosen law, violates mandatory rules of other laws, but this violation does not result in a physical impossibility in performing the contract, as previously examined? Consider the case of a Norwegian seller and a Russian buyer, who enter into an agreement for the sale of certain goods. Import of these products is subject to payment of import duties under Russian law. The parties agree to circumvent Russian customs regulations by dividing the invoicing of the price into two parts. One invoice, expressing only part of the value of the goods, would accompany the goods for customs clearance; the balance of the price would be invoiced separately and paid for, not by the Russian importer, but by an offshore company affiliated to the importer. In this way, the Russian importer (illegally) pays lower import duties since the import duty is a percentage of the invoiced price. The Norwegian manufacturer would properly account for both invoices in its books and feels therefore that it

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has not violated any Norwegian law. The Norwegian seller would assume that a violation of Russian law would not be relevant since the contract contains a Governing law clause choosing Norwegian law. The seller feels safe in its opinion that it has not violated any governing law. Is the seller’s opinion justified? Does violation of (or assistance in violating) foreign law really have no consequences under the chosen law? The opinion of the seller is not (at least not always) justified: different states have different approaches to the question of the violation of foreign law, but often it is possible to find in the governing law a rule on illegality which sanctions behaviours that conflict with foreign laws. Therefore, as in the previous section in respect of the impossibility of performing a contract due to a foreign law, also in the case of the illegality of a contract according to a foreign law, it may be possible to apply the chosen law and yet take into consideration the foreign law. In the particular case mentioned, for example, the seller would have contributed to a violation of Russian customs rules; Norwegian judges would not be in a position to apply Russian customs rules that are outside of their jurisdiction and are not part of the governing law. However, the Norwegian Customs Act contains a rule (Section 16–5) that considers a violation of foreign customs rules as a violation of Norwegian customs rules. Therefore, the behaviour, illegal under the foreign law, also has consequences under the governing law. A Norwegian Supreme Court decision has applied this principle in a broader area.166 The Court affirmed that, if a party agrees with another party to violate (in the particular case under consideration) foreign tax laws, it is criminally punishable under the Norwegian rule on receiving proceeds from a crime (Criminal Act, Section 332). In this case, the Norwegian party had agreed to enter into certain simulated transactions so that the Russian party could evade Russian tax law. The reasoning was as follows: if the evaded tax law had been Norwegian, the parties would have violated Norwegian tax law and would have been liable under the relevant legislation. However, the evaded tax law is foreign, and a Norwegian court cannot apply foreign tax law. The Norwegian party made a gain by entering into the arrangement with the other party, and this gain must be considered as the result of an illegal action. Obtaining gains from illegal actions is a crime under Norwegian law, and the fact that the illegality is under a foreign law is not relevant, as long as corresponding actions carried out on the territory of Norway would be illegal under Norwegian law (the requirement of double illegality). In other legal systems, a choice of governing law leading to the violation of another law might result in a conflict with the governing law’s or the lex fori’s own sense of justice; therefore, the choice of law may be considered invalid. The German BGB, for example, contains a rule on Sittenwidrigkeit that can be applied in similar circumstances (§ 138). 166

Rt. 1997 s. 1637.

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English law has traditionally requested that a choice of law be made in good faith;167 a choice of law made for the purpose of evading foreign law may be considered not to be in good faith and is, therefore, invalid. However, it might be difficult to ascertain whether the choice of law was made in bad faith so as to evade the otherwise governing law, or whether there were other reasons for making the choice. In both examples mentioned, for example, the choice of Norwegian law to govern the contract is a perfectly natural choice, with Norway being the state of the seller. Other systems might adopt concepts such as that of comity of nations, whereby recognition of a fraudulent choice of law would result in a hostile act towards the state issuing the violated laws. Some English decisions have this approach, particularly when recognition of the contract would lead to illegal actions in the foreign state.168 As already mentioned, Article 9.3 of the Rome I Regulation permits giving effect to foreign rules if these belong to the country where the performance should be made and make such performance unlawful. This, however, is not automatic, and the court is directed to consider the nature and purpose of the provisions as well as the consequence of applying or not applying them. Finally, there is always the last resort of the ordre public (public policy): a court will not accept a Choice-of-law clause if the effects of that choice conflict with fundamental principles in the court’s legal system. The application and interpretation of the ordre public provision should be restrictive and narrow, as we will see briefly in the next section, but can most probably be justified in cases of contracts violating fundamental policies of another state, particularly when these policies are common to the lex fori. Contracts violating foreign laws in respect of smuggling, corruption and entry into a contract under duress, for example, are traditionally considered to violate the ordre public of the lex fori.169 In conclusion, choice of a governing law different from the law that is being violated may not always permit the parties to escape the consequences of their violation. 4.5.7 Violation of the Ordre Public of the Lex Fori A general principle of private international law is that a court will not apply a foreign law if application thereof will result in an intolerable violation of the fundamental principles on which the system of the lex fori is based (ordre public or public policy).

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The requirement that the choice of law must be made bona fide, mentioned by Lord Wright in Vita Food Products Inc v. Unus Shipping Co [1939] AC 277 PC, is often quoted in English literature. See Trevor C. Hartley, ‘Mandatory Rules in International Contracts: The Common Law Approach’. Volume 266 (Recueil des Cours, Académie de Droit International de la Haye, 1997), pp. 341ff. and 389ff. Paul Torremans (ed.), Cheshire, North & Fawcett Private International Law, 15th ed. (Oxford University Press, 2017), para 8.3(b)(iii).

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The ordre public rule has a very narrow scope.170 It is not intended to be used simply on the basis that there is a discrepancy between the foreign governing law and the legal system of the forum. The rule is to be used only under exceptional circumstances, when the result to which the court would come by applying the rule of the foreign governing law would conflict with the basic principles upon which the society of the forum is based. A simple difference between a foreign rule and a mandatory rule of the forum, or even an overriding mandatory rule of the forum, therefore, would not in itself qualify as a violation of the ordre public of the forum. More on the scope of ordre public will be presented in Section 5.4.9. 4.6 Private International Law and Arbitration Questions may be raised about the relevance of private international law to arbitration.171 Many modern codifications are keen to dispense with choice-of-law rules in arbitration, mainly for the purpose of ensuring that the law may be chosen without the interference of formal rules that may be unknown to the parties and thus lead to surprising results. These codifications support the so-called voie directe: direct access to the governing law, without having to be concerned with the criteria for choice of law contained in private international law. We will show here that this eagerness to enhance a direct approach to the law does not necessarily lead to more predictable results. The ICC Rules of Arbitration were described as a landmark when, in 1998, they deleted any reference to private international law:172 they are followed now by other arbitration rules.173 Under Article 21 of the ICC Rules of Arbitration, if the parties have not made a choice, the arbitral tribunal may freely choose the applicable rules of law directly and without applying any conflict rules. When they choose to submit a dispute to arbitration under the ICC Rules, thus, the parties agree that the arbitral tribunal is not bound to apply any private international law.

170 171

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See the Giuliano–Lagarde Report (1980). See the International Law Association (ILA), Committee on International Commercial Arbitration (2008), pp. 4, 12. That arbitrators are not bound to apply the principles of private international law that are applicable to courts is considered by Gaillard and Savage to be an uncontested point: Emmanuel Gaillard and John Savage (eds.), Fouchard, Gaillard and Goldman on International Commercial Arbitration (Kluwer Law International, 2004), p. 849. At the same time, arbitrators are said to be under no public duty to enforce state laws: see International Commercial Arbitration Committee (2008), p. 20. See also Luca G. Radicati Di Brozolo, ‘Arbitration and Competition Law: The Position of the Courts and of Arbitrators’. Arbitration International 27.1 (2011) pp. 1–21, pp. 16f. See Yves Derains and Eric A. Schwartz, A Guide to the ICC Rules of Arbitration, 2nd ed. (Kluwer Law International, 2005), p. 233. Among others, the rules of the London Court of International Arbitration (LCIA), of the Arbitration Institute of the SCC and the revised UNCITRAL Arbitration Rules give the arbitral tribunal the authority to directly apply the substantive law that it deems appropriate, without going through the mediation of a choice-of-law rule.

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This example was followed by numerous other Arbitration Rules and, in 2010, by the UNCITRAL, when it modified its 1976 Arbitration Rules. The Arbitration Rules are not meant to be a model for a convention or for an arbitration law but are a model contractual document that the parties may decide to adopt to regulate the procedural aspects of their dispute. The Arbitration Rules are thus meant to integrate the parties’ agreement and are subject to the applicable arbitration law. Among other things, the UNCITRAL modified the second sentence of Article 35 (the former Article 33) regarding the arbitral tribunal’s choice of the applicable law in cases where the parties have not themselves made a choice. While the original version instructed the tribunal to choose the governing law by applying conflict rules of the private international law that they deemed applicable, the revised version does not mention conflict rules or private international law. The arbitral tribunal seems to be completely free to determine on what basis the applicable law shall be selected. This change is meant to enhance flexibility under the Arbitration Rules. The parties should be free to decide on whatever rules they want to see applied to their dispute, and the arbitral tribunal should be free to decide on whatever law it wants to apply, subject only to a contrary will of the parties. The voie directe is supported by numerous Arbitration Rules. Arbitration Rules apply to the arbitral procedure once they have been chosen by the parties. However, Arbitration Rules cannot create such an unrestricted flexibility regarding the applicable law. As will be explained in Chapter 5, the validity and enforceability of the award depend on the applicable arbitration law and on the New York Convention. National arbitration law and the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Article V) contain restrictions on the possibility of the parties and of the tribunal choosing the applicable law. To name the most important choice-of-law rules contained in these instruments: an award is invalid or unenforceable: (i) if one party to the arbitration agreement was under some incapacity under its law; (ii) if the arbitration agreement was invalid under the law specifically chosen by the parties or, failing a choice (which is the most common scenario, see Section 5.4.2), under the law of the place where the award is rendered; (iii) if the arbitral procedure was not in accordance with the law of the place where the award is rendered; (iv) if the award is on a matter that is not arbitrable under the court’s law; or (v) if the award conflicts with the court’s public policy. Notwithstanding the strong signals of the Arbitration Rules supporting the voie directe, therefore, the law of each of the parties, the lex arbitri and the law of the court should be taken into consideration regarding, respectively, legal capacity, validity of the arbitration agreement, arbitral procedure, arbitrability and public policy. Moreover, as will be seen in Chapter 5, case law shows that disregard of the applicable law in areas such as competition regulation, insolvency, corporate matters, agency or distribution may affect the validity and enforceability of an award.

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Additionally, disregard of the applicable law in the areas of property or labour protection may have similar consequences. Therefore, the parties and the arbitral tribunal are not completely free to choose the applicable law. The Arbitration Rules supporting the voie directe have the unfortunate effect of enhancing, albeit on a fallacious ground, the impression of self-sufficiency that was described in Chapter 1. An impression that, as has just been seen, may turn out to be quite illusionary. Article 1.3 of the UNCITRAL Arbitration Rules contains a general reservation stating that the Arbitration Rules may not derogate from mandatory rules of the law at the place of arbitration. Even assuming that a party had understood the relevance of this rule in the context of the choice of law, Article 1.3 is not necessarily sufficient to warn against the ineffectiveness of the award that may follow a free choice of the applicable law. This is because Article 1.3 only reserves against mandatory rules of the law of the place of arbitration, whereas enforceability of the award is determined by the law of the place of enforcement. Both of these laws, moreover, refer to the law of each of the parties when it comes to the validity of the arbitration agreement. In spite of the strong desire to enhance party autonomy, therefore, rules on choice of law also remain highly relevant in the context of arbitration. Furthermore, a shift may be detected away from an unfettered assertion of the autonomy of the parties and the autonomy of arbitration, towards an increased awareness of the importance that arbitration is not misused to escape national policies, and that it ensures a certain accuracy, see Sections 5.1.1 and 5.3.3. 4.6.1 The Relevance of Private International Law in Arbitration The foregoing shows that the issue of choice of law is highly relevant in arbitration.174 Here, I argue that the system of private international law is an appropriate mechanism to be used in arbitration – actually in the long term, more favourable to arbitration than the voie directe. Leaving aside the obvious situation where the parties have not chosen the governing law and it is for the arbitral tribunal to find which law is applicable, we will focus on situations where the parties have made a choice of law, and we will show that conflict rules are relevant even then. The sources applicable to arbitration all confirm that the arbitral tribunal shall apply the law chosen by the parties, as will be seen in Section 5.1.2. Other conflict rules are mentioned, if at all, only to a restricted extent in the sources applicable to arbitration.175 This does not mean, however, that private international law is totally irrelevant to arbitration. 174 175

See Ferrari and Silberman (2019). In the event that the parties have not chosen the law applicable to the merits, arbitral tribunals are supposed to choose the law according to the conflict rules that the tribunal considers applicable (see, for example, Article 28(2) of the UNCITRAL Model Law and Section 46(3) of the English Arbitration Act), or

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As seen in Section 4.5.1, the choice of law made by the parties in the contract has effects only for the contractual aspects of the relationship. A legal relationship, however, may have implications in other areas of the law, such as company, labour, property or insolvency law. Even the simplest contract of sale has implications regarding property law: whether title to the goods has passed to the buyer or not is not a question that is subject to the law chosen in the contract – it shall be decided under the law applicable to property matters. As seen in Section 4.5, private international law creates predictability as to which law’s rules shall be applicable in these instances. The Arbitration clause does not necessarily prevent the applicability of rules belonging to a law different from the one chosen by the parties: as will be seen in Chapter 5, some of these rules cannot be disregarded even by an international arbitral tribunal and, if they are, the award will be invalid or unenforceable. In case of dispute, one party will invoke these rules, whereas the other party will insist on the application of the chosen law. Ignoring or denying the mechanisms for selecting the applicable law does not contribute to predictability. Section 4.5 showed the main restrictions to party autonomy. Even when the provisions containing restrictions to party autonomy are not deemed to have relevance to arbitration, they may give guidance to the arbitral tribunal when it has to restrict the choice of law made in the contract in order to avoid conflict with the applicable public policy, or when a party invokes one of these rules as a defence against the allegation of breach of contract. As will be seen in Section 5.4, disregard of the applicable law may, under some circumstances, render the award invalid or unenforceable. Even though arbitral tribunals are not obliged to give effect to laws different from the law that was chosen by the parties, fully ignoring other laws may result in an award that risks being set aside or cannot be enforced. In this context, it may be interesting to refer to a decision by the General Court of the EU176 dismissing an action brought against a decision by the European Commission177 to make binding on Gazprom certain commitments proposed by Gazprom to address concerns relating to abuse of dominant position on the market for the upstream wholesale supply of gas. Among the grounds for challenge was an alleged error in law relating to arbitration. The Commission had affirmed that arbitral tribunals located on EU territory are obliged to apply EU competition law.178 The General Court found the formulation

176

177 178

the law that has the closest connection with the disputed matter (see, for example, Article 187 of the Swiss PILA) or the law that the tribunal deems applicable (see, for example, Article 1496 of the French Civil Procedure Code). General Court of the European Union, T-616/18, Polskie Górnictwo Naftowe i Gazownictwo S.A. v. European Commission. Decision C(2018) final of the European Commission of 24 May 2018, Case AT.39816. Decision C(2018) final of the European Commission of 24 May 2018, Case AT.39816, para 178.

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inaccurate. Arbitral tribunals are under no obligation to apply EU law. Rather, national courts exercising control on arbitral awards are obliged to consider EU competition law as public policy. In case of manifest violation, therefore, the award would be set aside or refused enforcement. Even though the formulation was inaccurate, the substance did not deviate so much as to justify annulling the decision. This decision by the General Court is a manifestation of the relevance to arbitration of the applicable law: should an arbitral tribunal have disregarded fundamental principles of EU law, the award will be set aside by a court located in the EU, see Sections 5.4.8(d) and 5.4.9(i)(v). In order to avoid such results, and to enhance predictability, arbitral tribunals should ascertain whether the courts will deem EU law or public policy rules to be applicable. In order to do so, arbitrators need to consider conflict rules. On the power to do so independently from the parties’ pleadings, see Section 5.6. On the other hand, the arbitral tribunal’s duty is primarily to follow the will of the parties, including the choice of law contained in the contract. Understanding the proper scope of party autonomy will give the arbitral tribunal useful guidelines as to the effects of the Choice-of-law clause contained in the contract. This, in turn, will be relevant to the question of what power the arbitral tribunal has, which again has an impact on the validity and enforceability of the award. This will be discussed in Section 5.6. Within the framework provided by the applicable rules on the validity and enforceability of awards, therefore, private international law may become relevant to arbitration and may be used as guidance by the arbitral tribunal in determining the extent to which the parties’ choice of law may be restricted. Indeed, it is desirable in this context to apply private international law principles because they enhance predictability in such a crucial area as the choice of the applicable law.179 In particular, private international law contains rules on the scope of party autonomy and on restrictions to party autonomy by overriding mandatory rules. These criteria permit the determination as to what extent rules different from those chosen by the parties may be applied – provided, however, that they are relevant to the validity or enforceability of the award. 4.6.2 Which Private International Law Is Applicable? As seen in the previous section, a choice of law made by the parties in a contract that contains an arbitration clause is not totally independent from the applicable private international law. The next question is, therefore, how to determine which private international law is applicable in international commercial arbitration. 179

Explaining the benefits that the private international law may have for commercial and investment arbitration, see Massimo V. Benedettelli, ‘Determining the Applicable Law in Commercial and Investment Arbitration: Two Intertwined Road Maps for Conflicts-Solving’. ICSID Review – Foreign Investment Law Journal 37.3 (2022), pp. 687–722. See Franco Ferrari and Stefan Kröll (eds.), Conflict of Laws in International Arbitration, 2nd ed. (Juris, 2019).

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The overview given in Section 4.5.2 showed that it is in no way indifferent as to which private international law is applied. Conflict rules vary from system to system, and consequently, the law designated as applicable varies depending on which country’s conflict rules are applied. Therefore, it is necessary but not sufficient to refer to private international law as a tool to avoid surprises in respect of the enforceability of the award. In addition, it is also necessary to specify which private international law the arbitral tribunal shall use in order to assess the party autonomy’s borders and the applicability of other laws in specific areas of the legal relationship in dispute. In respect of courts, it is generally recognised that judges always apply the private international law of their own country to designate the applicable substantive law. In respect of international commercial arbitration, there is not a corresponding automatic and absolute reference to the private international law of the place where the arbitral tribunal has its venue. The arbitration law of the place of arbitration has, as a matter of fact, a considerable significance for the arbitration proceeding, in that it governs important aspects such as the arbitrability of the dispute, the regularity of the arbitral procedure, the powers of the arbitrators, the possibility of the courts in assisting the proceeding, for example, by issuing interim measures or challenging the arbitrators, the validity of the award and the fundamental principles of public policy. Therefore, it seems only natural to also look to the law of the place of arbitration when it comes to finding the applicable conflict rules. However, the eagerness to enhance the international character of international arbitration has led various legislatures and arbitral institutions to loosen the link between the place of arbitration and the applicable private international law. Hence, there is no uniform answer to the question of which private international law is applicable to an arbitral dispute. The various arbitration laws and rules of institutional arbitrations present a series of solutions, ranging from the application of the private international law of the place of arbitration,180 to the application of the private international law that the arbitral tribunal deems most appropriate,181 the application of conflict rules specifically designed for arbitration182 or the direct application of a substantive law without considering conflict rules.183 180

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This is the traditional approach that is still followed in some modern arbitration legislation, for example, Article 31 of the 2004 Norwegian Arbitration Act. This is also practiced when there is no specific codified provision: see, for example, the German and the Russian national reports in Giuditta Cordero-Moss, ‘General Report on Jura Novit Arbiter’. In Giuditta Cordero-Moss and Franco Ferrari (eds.), Iura Novit Curia in International Arbitration (Juris, 2018b). This approach is followed, among others, by the UNCITRAL Model Law (Article 28.2) and the 1996 English Arbitration Act (Section 46.3), and it can result in the application of the private international law of the country where the arbitral tribunal has its venue, of another law that seems to be more appropriate or even of no specific law (often, arbitrators compare the choice-of-law rules of all laws that might be relevant and apply a minimum common denominator). For example, the Swiss PILA (Article 187) contains a choice-of-law rule that designates as applicable the law of the country with which the subject matter of the dispute has the closest connection. French arbitration law (Article 1496 of the Code of Civil Procedure), as well as the rules of the ICC, of the LCIA, of the Arbitration Institute of the SCC and the revised UNCITRAL Arbitration Rules give the

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If the applicable arbitration law or, as seen in Section 4.6.1, Arbitration Rules do not give precise guidelines as to which private international law is applicable to the arbitration, it will be up to the tribunal to decide. The various solutions outlined give a sliding scale from the most predictable (and thus preferable) regime, where the applicable private international law is determined in advance, via the mixed solutions, where the identification of the applicable private international law is left to the discretion of the tribunal or is only implicitly mentioned by stating a conflict rule, to the least predictable regime that does not mention private international law at all. It is not unusual for arbitral tribunals to exercise their discretion so as to enhance predictability and look to the private international law of the place of arbitration even when this is not a requirement. However, in the systems that do not make express reference to the applicability of the conflict rules of the lex loci arbitri, this depends on the tribunal’s discretion, and it cannot be excluded that the tribunal decides to apply other conflict rules. Arbitral awards need to be effective. A delocalised award is not very useful to the winning party if it risks being set aside or if it cannot be enforced. Therefore, even awards rendered under the ICC Rules of Arbitration may not ignore the relevance of national laws and of selection methods – to the extent that their disregard would threaten their validity or enforceability. I was very happily surprised when, in 2018 having joined the International Court of Arbitration of the ICC, I witnessed how thoroughly and seriously awards are scrutinised – and from the point of view of the selection of the applicable law. ICC arbitration has an internal system for ensuring the quality of arbitral awards rendered under the ICC Rules: prior to rendering the award, the final draft is scrutinised by the International Court of Arbitration (in plenum or in committees). This is intended to make sure that ICC awards can resist challenges to their validity or opposition to their enforcement. Notwithstanding the very liberal ICC Arbitration Rules, that, as previously mentioned, have introduced the idea of the voie directe and thus pave the way to a suppression of private international law, the International Court of Arbitration is aware of the risks that may be connected with an unfettered reliance on the will of the parties or an absolute disregard of national laws. Therefore, when scrutinising the draft awards, the International Court of Arbitration also pays due attention to the selection of the applicable law. This clearly shows the discrepancy between the rhetoric of promoting a transnational dimension for arbitration and the reality of ensuring effectiveness of arbitration. This is not necessarily an example of Orwellian ‘doublethink’: it is perfectly legitimate to promote an increased flexibility, while at the same time being concerned with safeguarding effectiveness. Flexibility and autonomy are the desired

arbitral tribunal the authority to directly apply the substantive law that it deems more appropriate, without going through the mediation of a conflict rule.

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goals, while validity and enforceability may require certain constraints to flexibility and autonomy. The former is future-oriented, the latter is focussed on the present. The above-described uncertainty as to the applicable private international law has a negative effect on the predictability of the applicable law, which, in turn, may be decisive for the outcome of the dispute. As long as a private international law is in the picture, however, the interpreter will have, in any case, to choose the proper law by applying a conflict rule; the determination of the law, in other words, will be based on the application of a connecting factor. While the a priori identification of the applicable private international law is preferable because it permits the creation of certainty as to which connecting factor will be used (for example, in the case of a company, the law, the place of registration or the seat), a discretionary choice of which private international law is applicable will at least ensure that the proper law will be chosen on the basis of a connecting factor. In the absence of any reference to a private international law, there is no indication that the tribunal will apply a conflict rule to identify the proper law; it may identify the proper law on the basis of completely different criteria, such as, for example, the law that the members of the tribunal happen to know best. This is certainly not a recommendable solution from the point of view of predictability. The Hague Conference on Private International Law issued the already mentioned Hague Principles on Choice of Law, a set of non-binding principles for choice of law in international contracts (see Section 4.3). These principles are meant to be a source of soft law. While it is unlikely that they will be adopted by courts of law unless the court’s private international law is unclear or needs supplementing, they may be an inspiration for arbitral tribunals when the applicable arbitration law does not give clear guidelines as to which private international law shall be applied.184 184

See Franco Ferrari, ‘The Role of the Hague Principles on Choice of Law in Determining the Law Applicable to the Merits in Commercial Arbitration’. European Investment Law and Arbitration Review 7 (2018), pp. 87–99.

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5 Does Arbitration Ensure a Self-Sufficient Contract?

In the previous chapters, we analysed to what extent arbitration ensures a uniform application of the transnational law (Section 2.3), to what extent the relationship between the governing law and the contract is considered differently in arbitration than by courts (Section 3.7) and to what extent choice of the governing law follows different criteria in arbitration than in courts (Sections 4.5.2 and 4.6). These discussions were meant to highlight how the arbitral tribunal exercises its discretion: the assumption so far in this book has been that it is up to the arbitral tribunal to determine how the transnational law shall be applied, how the contract shall be interpreted and how the governing law shall be selected. Whatever the tribunal decides, the award will be valid and enforceable, because arbitral awards are final and binding. In this chapter, we will examine the borders of arbitral discretion. After having discussed, in the previous chapters, whether arbitration, within the scope of its autonomy, actually succeeds in delivering a uniform regime, we turn here to the scope of arbitral autonomy. Is arbitral autonomy unlimited, subject only to the parties’ agreement? Or is it restricted, and, if so, what are its restrictions? Let’s assume a contract has a clause subjecting it to a certain law, and let’s assume that the contract violates the law that would be applicable if it were not for the Choice-of-law clause: for example, a Shareholders’ agreement between a Norwegian and a Russian party regarding a company that they own jointly in Russia. The content of the agreement violates Russian company law (for example, because it provides for a division of competence between the various corporate bodies that is not in compliance with Russian law), but the contract also contains a clause choosing Swedish law to govern. If a dispute arises out of this contract, Russian law can be invoked by one of the parties as a defence to rebut the other party’s allegations of breach of contract: the party accused of having breached the contract can allege that it could not comply with its obligations under the contract because performance of that obligation is illegal under the law of the place where the performance is to be made. If the dispute was litigated in court, judges would apply the private international law of their own country to assess the borders of party autonomy; that is, to assess to what extent the choice of law made by the parties would also cover matters of 285

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company law. As seen in Section 4.5.2(c), the court would find that the contract’s choice of law does not extend to company law, and therefore there would be no obstacles to taking Russian law into consideration. If the contract contains an Arbitration clause, the dispute cannot be brought before a court. Does the arbitral tribunal have to apply the chosen Swedish law and thus render an award that gives effect to an agreement violating the applicable company law? Or does the arbitral tribunal have the power to consider Russian law notwithstanding that the contract chose Swedish law? And what if none of the parties invokes Russian law: could the arbitral tribunal nevertheless take it into consideration on its own motion to avoid rendering an award that would violate mandatory rules in the place where it would most probably be enforced? What are the consequences for the validity and enforceability of the award? As discussed in Section 4.6, it is often assumed that the considerations made in the previous chapters are not generally relevant when there is a clause that submits to international arbitration any disputes arising out of the contract. The reasoning is as follows: as opposed to national courts, which belong to a specific national system of law, international arbitration is, by its very nature, international, and is not subject to any state law. Moreover, the arbitral tribunal is dependent on the will of the parties, and therefore cannot decide a dispute by applying national rules that the contract has not made reference to, or even may have intended to exclude. Furthermore, arbitral awards are final and binding, and no court may question the arbitral tribunal’s implementation of the parties’ will. To verify the correctness of this reasoning, we have to look at the two assumptions on which it is based: Is international arbitration really international? In other words, is there no link between international arbitration and national systems of law? And is international arbitration really completely and solely dependent on the will of the parties? In other words, is there no possibility for national courts to control the activity of international arbitral tribunals and thus create a framework restricting the arbitral tribunal’s duty to follow the parties’ instructions? Arbitration is mostly based on the will of the parties, and the applicable sources of law confirm the central role of the parties’ will. The tribunal is bound to follow the parties’ instructions because it does not have any powers outside of the parties’ agreement. Therefore, tribunals are generally, and correctly, very reluctant to deviate from the instructions of the parties. However, the primacy of the parties’ agreement needs to be coordinated with applicable rules on validity and enforceability of the arbitral award.1 It is possible that 1

See, for a more extensive reasoning, Giuditta Cordero-Moss, ‘Arbitration and Private International Law’. International Arbitration Law Review 11.4 (2008a), pp. 153–64. For a similar reasoning see Alan Redfern, Martin Hunter, Nigel Blackaby and Constantine Partasides, Redfern and Hunter on International Arbitration (Oxford University Press, 2015), para 3.107, adding also, as the only additional basis with which to restrict the parties’ choice, that the parties’ choice must have been made bona fide. See also the ILA International Commercial Arbitration Committee (2008), p. 21, affirming that the only restriction to parties’

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the parties’ instructions contradict the applicable arbitration law’s requirements for the award’s validity or the New York Convention’s requirements for the award’s enforceability. In this situation, if the arbitral tribunal follows the will of the parties, it may face the prospect of rendering an award that is invalid or cannot be enforced. To avoid these undesirable results, the arbitral tribunal may be tempted to disregard the parties’ instructions, including their choice of law. This, however, may be done only under limited circumstances and according to restrictive criteria – otherwise, the award runs the risk of being annulled or refused enforcement based on the arbitral tribunal exceeding the scope of the power that the parties had conferred on it. We will verify these aspects in the following sections. Before doing that, however, it might be useful to give a short presentation of arbitration as a method for solving disputes. In the following sections I will first briefly present arbitration as a method to settle commercial disputes (Section 5.1), and I will question the assumption that national law is not relevant to international arbitration (Section 5.2); then, I will turn to the question of the effects that an award may have if it disregards the law that would have been applicable in the absence of the parties’ choice, with particular regard to the award’s validity and enforceability (Sections 5.3 and 5.4). Finally, we will enquire as to what extent an arbitral tribunal has the power to disregard the choice of law made by the parties in the contract and, at the request of one party or on its own initiative, apply a different law (Sections 5.5 and 5.6). 5.1 Briefly on Arbitration The jurisdiction of an arbitral tribunal on a certain dispute is based, for international arbitration, on the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.2 In Article II, the Convention provides that: Each Contracting State shall recognise an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

An Arbitration agreement has two important effects: firstly, a valid Arbitration agreement excludes the jurisdiction of the ordinary courts of law over disputes covered by the Arbitration agreement; and secondly, the validity of the Arbitration

2

choice is the public policy exception. See Franco Ferrari (ed.), Limits to Party Autonomy in International Commercial Arbitration (Juris, 2016a). See also Ulla Liukkunen, ‘Lex Mercatoria in International Arbitration’. In Jan Klabbers and Touko Piiparinen (eds.), Normative Pluralism and International Law: Exploring Global Governance (Cambridge University Press, 2013), pp. 201–28. The New York Convention has been ratified by 170 states. The text of the convention can be found at https:// uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/new-york-convention-e.pdf. The list of ratifying states can be found at www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status .html.

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agreement is a prerequisite for enforcing the arbitral award rendered in the dispute covered by the Arbitration agreement. In international disputes, the award is generally enforced in a country other than that where it was rendered, so the New York Convention is applicable. Article V of the New York Convention sets forth the only grounds that can be used to refuse enforcement of a foreign arbitral award. They include the following (in Article V(1)(a)): The . . . agreement referred to in article II . . . is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made.

Article II makes reference to the Arbitration agreement. An Arbitration agreement is usually contained in a simple clause of the contract regulating the commercial relationship between the parties. If the contract does not contain an Arbitration clause, the parties might elect to enter into a separate Arbitration agreement, perhaps after the conclusion of the commercial contract, or even after the dispute has arisen between the parties. It is, however, usually difficult for the parties to agree on anything once a dispute has arisen between them; therefore, it is advisable to enter into the Arbitration agreement or write the Arbitration clause at the time of closing the contract, rather than waiting until a dispute has arisen. Once arbitral proceedings are initiated, they will be carried out under the Arbitration Rules chosen by the parties, or according to the arbitral tribunal’s discretion, subject to the arbitration law of the seat of the arbitration (the so-called lex arbitri), see Section 5.1.2. Courts are allowed to intervene only at the request of a party and to the extent necessary to facilitate the arbitral proceedings. For example, courts can issue interim measures, decide on the independence and impartiality of the arbitrators or appoint an arbitrator if one party does not cooperate, and the parties have not designated an appointing authority. Once the award is rendered, it is final and binding, and courts have to enforce it, with only limited possibility to review it, see Section 5.3. 5.1.1 Arbitration Is Still the Preferred Method for Dispute Resolution Commercial arbitration, whether domestic or international, is an alternative method of dispute resolution. This means that it is an alternative to the courts of law: if the parties so elect, and if the governing law permits submitting the relevant kind of disputes to arbitration, the parties may decide to exclude the jurisdiction of ordinary courts and to subject their dispute to arbitration instead. It is very common to see an Arbitration clause in a commercial agreement specifying that disputes arising out of the contract are to be submitted to arbitration. Also, investment arbitration has gained considerable success in the past decades. Investment arbitration is a hybrid form of arbitration, between the mere commercial

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arbitration dealing with private law disputes, and the state-to-state arbitration dealing with public international law disputes. Investment arbitration permits a foreign investor to sue the host state for breach of the protection that public international law grants to foreign investments, see Sections 2.2.1(a)(i) and 2.2.5(d). More recently, both types of arbitration, but especially investment arbitration, have been exposed to harsh criticism.3 Commercial arbitration is criticised particularly for having lost of sight its original purpose as a method for dispute settlement: its flexibility and closeness to the parties. Arbitration proceedings are often described as having become unnecessarily costly and time consuming, as well as overregulated.4 In addition, arbitral tribunals are increasingly wary of being criticised for violating the procedural rights of the parties, and indulge them in sometimes unreasonable requests that new claims or new evidence be admitted, that terms be extended, and so on – falling for what is often called ‘due process paranoia’ and unnecessarily inflating the duration and cost of the proceedings. As a reaction, arbitration institutions sometimes reform their rules in the name of expedience, to the extent that they may go too far in the opposite direction. Furthermore, critical voices are increasingly being raised against one of the pillars of commercial arbitration, the principle of confidentiality. While calls for transparency in commercial arbitration do not achieve the intensity that can be registered in investment arbitration, significant developments in the practice of commercial arbitration are introducing some transparency, see Section 3.7.3. Also, the sometimes possibly excessive enthusiasm professed by part of the arbitration community about the autonomy of arbitration and its independence from national laws and national courts seems (not surprisingly, in my opinion) to increasingly give rise to a mistrust towards the appropriateness of permitting arbitration for those disputes in which an accurate application of the law is deemed to be crucial. As a consequence of the suspicion that arbitration might be excessive in its autonomy, the scope of the disputes that may be arbitrated has been in several instances reduced, see Section 5.4.8. The scope of arbitrability is threatened also by the risk that court control may be restricted to prevent the courts from meaningfully verifying whether the award is compatible with fundamental principles, see Section 5.3.3(b)(v). As far as investment arbitration is concerned, loud criticism has been heard questioning its legitimacy and its ability to properly have regard to the public interests involved. Criticism of investment arbitration led to, among other things, a mandate 3

4

For an analysis of the criticism see Giuditta Cordero-Moss, ‘The Alleged Failure of Arbitration to Address Due Process Concerns: Is Arbitration under Attack?’ In Axel Calissendorff and Patrik Schöldström (eds.), Stockholm Arbitration Yearbook (Wolters Kluwer, 2021a), pp. 251–77. Pierre Tercier, ‘Quels defies pour l’arbitrage international?’ La lettre de l’AFA 31 (Association Francaise d’Arbitrage, 2022), www.afa-arbitrage.com/?wysija-page=1&controller=email&action=view&email_id =773&wysijap=subscriptions-2. See also School of International Arbitration, Queen Mary and White & Case (2015).

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by the UNCITRAL to its Working Group III to work on the possible reform of investor–state dispute settlement. As summarised in the note prepared by the UNCITRAL Secretariat for the first session held in the UNCITRAL Working Group III, the criticism consisted of these main points: (i) inconsistency in arbitral decisions, (ii) limited mechanisms to ensure the correctness of arbitral decisions, (iii) lack of predictability, (iv) appointment of arbitrators by parties (‘partyappointment’), (v) the impact of party-appointment on the impartiality and independence of arbitrators, (vi) lack of transparency and (vii) increasing duration and costs of the procedure.5 Criticism against investment arbitration has prompted certain developments in the legal framework. Nevertheless, recent investment treaties restrict arbitration considerably.6 Furthermore, the EU took the political decision to discontinue the choice of arbitration contained in the existing investment treaties entered into between member states, and took an active position against arbitration also as far as regards treaties with third states.7 The need to ensure an accurate application of EU law, furthermore, has led the Court of Justice of the European Union (CJEU) to exclude the arbitrability of investment disputes between EU member states, see Section 5.4.8(d).8 For investment arbitration, the CJEU denied arbitrability of disputes relating to EU law. While it is possible to draw some parallels with analogous developments in commercial arbitration, the CJEU seemed to accept that commercial tribunals may solve disputes relating to EU law, as long as appropriate court control is possible. The different treatment of commercial and investment arbitrability was explained, quite unconvincingly, with a distinction between the respective sources of the arbitral power, see Section 5.4.8. The criticism against investment arbitration has not only a legal, but also a political dimension. In this framework, it has been observed that the debate on the legitimacy of investment arbitration is not necessarily only about facts, but also about perceptions.9 Hence, the ability of arbitration to comply with due process may sometimes be questioned more from a political perspective or from the point of view of perceptions, 5

6 7

8

9

UNCITRAL, Thirty-fourth session (Vienna, 27 November–1 December 2017), Possible reform of investor– State dispute settlement (ISDS), Note by the Secretariat, 18 September 2017, A/CN.9/WG.III/WP.142., para 20. For references, see UNCTAD, World Investor Report 2017 (WIR 2017), p. 120. For references and comments, see Albert Jan den Berg, ‘Appeal Mechanism for ISDS Awards: Interaction with the New York and ICSID Conventions’. ICSID Review – Foreign Investment Law Journal 34.1 (2019), pp. 1–34, 8f. Judgment of the Court (Grand Chamber), 6 March 2018, Slovak Republic v. Achmea BV, C-284/16 (Achmea). UNCITRAL, Note by the Secretariat, A/CN.9/WG.III/WP.142, paras 42, 63; Report of Working Group III (Investor–State Dispute Settlement Reform) on the work of its thirty-fifth session (New York, 23– 27 April 2017), A/CN.9/935, paras 94–6.

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than from the point of view of an objective incompatibility from a technical legal point of view. All of this has created a climate of suspicion against arbitration that can be summarised with an observation made by one of the eminences of arbitration, Yves Derain: ‘Arbitration is under attack.’ 10 However, arbitration is still the preferred method for the resolution of disputes arising out of international commercial contracts: in a recent survey, as many as 97 per cent of the participants answered that they would choose arbitration over court proceedings.11 5.1.2 Sources Applicable to Arbitration Arbitration is regulated in three layers of sources that to a large extent create a circular hierarchy: at the bottom is the first layer, the Arbitration agreement – which, in the case of investment arbitration, may be replaced by the applicable instrument containing the host state’s offer to arbitrate, such as a Bilateral Investment Treaty (BIT) or an Act on foreign investment, combined with the investor’s acceptance of the offer implied in the investor’s commencement of arbitral proceedings against the host state.12 The parties may also subject the proceedings to Arbitration Rules. Arbitration Rules create the second layer. If the parties have chosen institutional arbitration, the applicable Arbitration Rules are those issued by the chosen institution, such as the International Chamber of Commerce (ICC) Rules of Arbitration, the London Court of International Arbitration (LCIA) Rules or the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) Arbitration Rules. If the parties have chosen ad hoc arbitration, they may have compiled their own arbitration rules, or they may have made reference to the UNCITRAL Arbitration Rules of 1976, revised in 2010 and updated in 2013. In treaty-based arbitration, if the claimant has chosen arbitration under the framework of a treaty, the relevant rules will be applicable (such as the International Centre for Settlement of Investment Disputes (ICSID) Rules). Arbitration Rules may be considered an extension of the Arbitration agreement: the parties’ reference to these rules has the effect of incorporating the Arbitration Rules into the Arbitration agreement. Arbitration Rules have, therefore, the same status as a contract and may not derogate from the mandatory rules of the applicable arbitration law. Arbitration law is the third layer of regulation and consists of state arbitration acts or other domestic sources, as well as of international conventions. Arbitration law is 10

11

12

At the 39th ICC Institute Annual Conference, ‘Explaining Why You Lost – Reasoning in Arbitration’, 17 December 2019. School of International Arbitration, Queen Mary University of London and White & Case, 2018 International Arbitration Survey: The Evolution of International Arbitration (2018). See, for example, Article 26(5) of the 1994 Energy Charter Treaty. See Section 5.4.1.

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quite heterogeneous since it ranges from the uniform regulation contained in international conventions (of which the most notable for commercial arbitration is the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards), via the harmonising, but not binding 1985 UNCITRAL Model Law on International Commercial Arbitration (revised in 2006),13 to the arbitration law prevailing in each country. In treaty-based arbitration, the arbitration law is given by the relevant treaty, such as the 1965 Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States – the ICSID. Arbitration law does not, as a general rule, contain a detailed regulation of the procedure to be followed in arbitral proceedings. It generally contains principles that can be seen as a framework for the more detailed Arbitration Rules. Arbitration law, more importantly, contains rules on the validity and enforceability of arbitral awards, see Section 5.3. It gives the courts the power to set aside an award and to refuse its recognition and enforcement. Such proceedings for challenging the validity of an award and for its recognition and enforcement are not the same as an appeal: the courts may only set aside an award or refuse its recognition and enforcement on the basis of an exhaustive list of restrictive grounds, and these grounds generally do not give the courts the power to review the tribunal’s evaluation of facts or application of law. Challenge and enforcement proceedings, therefore, are not a review of the merits of the award. The circularity among these three layers of sources follows from the fact that the formally highest layer, arbitration law, often provides for the primacy of the parties’ agreement (and, by extension, of the Arbitration Rules), thus putting at the top of the hierarchy the source that is formally at the bottom. This means that the conduct to be followed by the arbitral tribunal is primarily regulated in Arbitration agreements and Arbitration Rules, that often are more detailed than arbitration laws. Otherwise, arbitration law generally gives wide discretion to the arbitral tribunals to conduct the proceedings as they deem fit. However, Arbitration agreements, Arbitration Rules and the tribunal’s discretion need to comply with the rules on validity and enforceability of awards, which are given in arbitration law and international conventions. Arbitration and law and conventions, therefore, give the mandatory borders for the tribunal’s conduct. Within these borders, the arbitral tribunal enjoys considerable discretion that may be regulated in Arbitration agreements and Arbitration Rules. Arbitration agreements, Arbitration Rules and the tribunal’s discretion may be integrated using sources of soft law – such as the IBA Guidelines on Conflicts of Interest,14 the IBA Rules15 and the Prague Rules16 on taking evidence, or the 13

14 15 16

At the time of writing, the UNCITRAL Model Law has been adopted in eighty-five states, see www .uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration_status.html. www.ibanet.org/MediaHandler?id=e2fe5e72-eb14-4bba-b10d-d33dafee8918. www.ibanet.org/MediaHandler?id=def0807b-9fec-43ef-b624-f2cb2af7cf7b. https://praguerules.com/upload/iblock/a00/a00568c6787a8bc955f4fdfe93db5a10.pdf.

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UNCITRAL Notes on Organizing Arbitral Proceedings of 2016.17 These soft sources are intended to be a practical support in the conduct of international arbitration. They are designed to be generally applicable, irrespective of whether the proceedings are subject to institutional or ad hoc arbitration, and without regard to the applicable arbitration law. While the IBA Guidelines, the IBA Rules and the Prague Rules lay down a regulation, the UNCITRAL Notes offer a range of alternative practices and styles that are commonly encountered in international practice, and that are compatible with most arbitration laws. They do not have the ambition of recommending best practices. 5.1.3 Ad Hoc and Institutional Arbitration Arbitral disputes may be carried out in a variety of forms. In particular, a distinction can be made between ad hoc and institutional arbitration. It is not uncommon that the rules that are designed for commercial arbitration are also applied to investment arbitration18 – that is, to arbitration between foreign investors and the host state and based on a claim that the state has infringed public international law on investment protection. For investment arbitration there is a dedicated arbitration framework, created by the aforementioned ICSID Convention. However, many investment treaties permit the investor to initiate arbitration under rules that are designed for commercial arbitration, such as the UNCITRAL Rules, the ICC or the SCC Rules. If the investor decides to initiate arbitration under such rules instead of under the ICSID Convention, the procedure will be treated as if the dispute was commercial. From a procedural point of view, investment disputes initiated under the UNCITRAL Rules will be treated as a regular commercial ad hoc arbitration, whereas investment disputes initiated under institutional rules will be treated as regular commercial arbitration under the rules of the selected institution. Adjustments were made in certain rules to cater for the specific aspects of investment arbitration. For example, in 2012 the ICC adjusted its Arbitration Rules in respect, among other things, to the constitution of the arbitral tribunal;19 the UNCITRAL developed Rules on Transparency, that were incorporated into the UNCITRAL Arbitration Rules in 2013;20 and the Vienna International Arbitral Centre issued in 2021 a set of Rules for Investment Arbitration.21 17

18 19

20 21

UNCITRAL Notes on Organizing Arbitral Proceedings (2016), https://uncitral.un.org/sites/uncitral.un.org/ files/media-documents/uncitral/en/arb-notes-2016-e.pdf. See Cordero-Moss and Behn (2023), footnotes 26–8. See ICC, ICC Commission Report: States, state entities and ICC arbitration, 2012, https://iccwbo.org/publication/ arbitration-involving-states-state-entities-icc-rules-arbitration-report-icc-commission-arbitration-adr-spanishversion/ (2012). See Article 1(4) of the UNCITRAL Arbitration Rules. VIAC Rules of Investment Arbitration and Mediation 2021 – Vienna International Arbitral Centre, www .viac.eu/en/investment-arbitration/content/vienna-rules-investment-2021-online.

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However, these adjustments do not have an impact on the issue that interests here: to what extent the award is valid and enforceable. The considerations made in the following sections on the relevance of national law, control by the courts, the power of the arbitral tribunal and so on apply to arbitral awards rendered under commercial Arbitration Rules generally, irrespective of whether the dispute was commercial or invoked investment protection. Similarly, the considerations made in the following sections apply to commercial arbitration generally, irrespective of whether the proceedings are ad hoc or institutional. Arbitration is ad hoc when it is constituted purely on the basis of the agreement of the parties. The parties decide to submit the dispute to a panel of arbitrators, they decide how the members of that panel shall be appointed, where the venue of the tribunal shall be, what rules of procedure the tribunal shall apply and so on. The regulation of all aspects of the procedure is highly recommendable to avoid deadlocks in case one party is not cooperative during the dispute. However, regulating all aspects of the procedure is a lengthy and complicated matter. In practice, most ad hoc Arbitration clauses do not contain any details on the procedure or any reference to Arbitration Rules. As an alternative to regulating all these aspects in their Arbitration agreement, the parties may elect to make reference to a set of Arbitration Rules that is already available. As already mentioned, these rules are meant to integrate the contract between the parties, and once incorporated by reference, they become a part thereof. The UNCITRAL, for example, produced the UNCITRAL Arbitration Rules in 1976; a set of procedural rules (revised in 2010) that regulate all aspects of the conduct of an arbitral proceeding.22 If the parties to an ad hoc arbitral dispute have not regulated the arbitration procedure in the Arbitration agreement, and if they have not made reference to a set of Arbitration Rules, the arbitrators will decide the procedural aspects according to their discretion, subject to the applicable arbitration law. It is not excluded that the arbitral tribunal looks to the UNCITRAL Arbitration Rules as a guideline. Although the UNCITRAL Arbitration Rules are not directly applicable unless they have been referred to by the parties, they enjoy considerable persuasive authority. Having been drafted by a group of highly recognised experts from all over the world, and having been adopted by the United Nations Commission on International Trade Law, they are one of the sources of soft law that mostly deserves to be taken into consideration. As confirmation of the high regard in which the UNCITRAL Arbitration Rules are held, various arbitral institutions permit the parties to choose that proceedings 22

The latest text can be found at https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/unci tral/en/21-07996_expedited-arbitration-e-ebook.pdf. It includes two additions made after the revision of 2010: A new provision was added in Article 1, para 4, to incorporate the Rules on Transparency for arbitration initiated pursuant to an investment treaty concluded on or after 1 April 2014. At its 54th session, 23 June–16 July 2021, the UNCITRAL adopted a new version of the Arbitration Rules incorporating rules for expedited arbitration, see A/CN.9/LIV/CRP.1/Add.12.

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administrated by the relevant institution shall be subject not to the institution’s Arbitration Rules, but to the UNCITRAL Arbitration Rules. In practice, this means that the institution will act as the appointing authority. The UNCITRAL has issued an explanation of how institutions may act when they are called to apply the UNCITRAL Arbitration Rules.23 Ad hoc arbitration is regulated by the arbitration law of the state where the arbitral tribunal has its seat. Arbitration law is usually not very detailed and does not give sufficient guidance in respect of the procedural details that arise during a dispute. Ad hoc arbitration may, as we have seen, be very flexible and ensure that the procedure is fully tailored to the specific disputes, thus avoiding excessive costs due to unnecessary infrastructure or too lengthy a procedure. However, this assumes cooperative parties and professional arbitrators. If one party is not cooperative, it may delay the procedure considerably by not appointing the arbitrator, by not agreeing on procedural terms, by appointing an arbitrator who is not impartial and who resigns just before the award is rendered, and so on. The proceedings may also be disrupted if one of the arbitrators is not diligent or even not impartial. Arbitration law permits applications for assistance from an appointing authority. Usually, arbitration law designates the court of the place of arbitration as appointing authority. The appointing authority ensures that the arbitral proceedings can be carried out notwithstanding the lack of cooperation by one party. However, involving an appointing authority does not necessarily ensure efficiency. Not only can the time required to involve an appointing authority and obtain its assistance be considerable, it is also possible that the appointing authority is not acquainted with the type of dispute or that it does not have a high degree of familiarity with the technicalities of arbitration. This would impair efficiency of the arbitral proceedings. For this reason, it is advisable that the parties, in the arbitration clause, specify who will act as appointing authority.24 From the point of view of ensuring effectiveness of the proceedings even though a party is not cooperative, institutional arbitration is preferable to ad hoc arbitration, even if the parties made reference to the UNCITRAL Rules for the procedure of the dispute – this is because an institution will act as the appointing authority and will give the support of an experienced and competent infrastructure, for example, for appointments of arbitrators if one party has not complied with the terms for appointment or for challenge to the arbitrators.

23

24

UNCITRAL, Recommendations to assist arbitral institutions and other interested bodies with regard to arbitration under the UNCITRAL Arbitration Rules (as revised in 2010) (2012), https://uncitral.un.org/en/ texts/arbitration/explanatorytexts/recommendations/arbitral_institutions_2010. On the various considerations to be made when designating an appointing authority, see Giuditta CorderoMoss, ‘Independence and Impartiality in International Adjudication: General Report’. In Giuditta CorderoMoss (ed.), Independence and Impartiality in International Adjudication (International Academy of Comparative Law, Intersentia, 2013), Section 4.1.

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Arbitration is institutional if the parties have made reference in the Arbitration agreement to a certain arbitration institution. Arbitration institutions are organised, for example, within the ICC; within national Chambers of Commerce, such as in Helsinki (FAI), Milan (CAM), Oslo (OCC), Sao Paulo (CAM-CCBC), Stockholm (SCC) or Vienna (VIAC); within branch associations, such as the London Metal Exchange (LME); or independently, such as the Danish Institute of Arbitration (DIA), the German Arbitration Institute (DIS), the LCIA, the Singapore International Arbitration Centre (SIAC) or the Swiss Arbitration Association (Swiss Rules). The chosen arbitration institution will administer the arbitral proceeding, applying its infrastructure and the Arbitration Rules that it has produced. The institution’s Arbitration Rules are deemed to be incorporated into the parties’ Arbitration agreement. Having made reference to arbitration within a certain institution, the rules of that institution will be applied automatically to the proceeding and the parties do not need to provide for extensive regulation in their agreement. As mentioned, some institutions permit the application of the UNCITRAL Arbitration Rules. Most institutional Arbitration Rules provide for default rules that enable the avoidance of delays in the procedure due to an uncooperative party. In addition, institutional arbitration, like ad hoc arbitration, is subject to the arbitration law of the place where the arbitral tribunal has its seat. In conclusion, institutional arbitration is preferable, unless there is certainty that both parties will act cooperatively and in good faith throughout the proceeding. Apart from the circumstance that institutional arbitration is administered by an institution and has a set of procedural rules that apply as a legal framework, there is no difference between institutional and ad hoc arbitration. Both types of arbitration are subject to the arbitration law of the country where the arbitral tribunal has its seat, and the awards rendered in both types of arbitration can be set aside or enforced according to the same rules. 5.2 The Relevance of National Law to International Arbitration An international arbitral award is an enforceable decision based on the New York Convention. This means that, if the losing party does not comply with the award voluntarily, the winning party may present the award to the enforcement court of any state where the New York Convention is in force (see Section 5.3.2), and the court will have to enforce the award after having carried out a rather restricted, mainly formal review of its enforceability. The grounds for refusing to enforce an award are set forth in Article V of the New York Convention. Article V contains an exhaustive list of grounds for refusing enforcement, aimed mainly at ensuring that the award is rendered on the basis of the parties’ consent and that the proceedings respect the principle of due process, see Sections 5.3 and 5.4. In the following sections, we will verify to what extent this autonomy of arbitration achieves the detachment of international arbitration from any national law.

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5.2.1 Is There a Difference between International Arbitration and Domestic Arbitration? When the terminology ‘international arbitration’ is used, the term international usually refers not to the arbitration but to the dispute that is being arbitrated. Some special arbitrations take place in the framework of international conventions and are therefore international themselves. The ICSID arbitration on investment disputes between foreign investors and host states, for example, is based on the Washington Convention of 1965 on the Settlement of Investment Disputes between States and Nationals of Other States. The legal regime to which an ICSID arbitration is subject is international; therefore, an ICSID arbitration can be defined as international. Most of the commercial arbitration disputes, on the contrary, are subject to the legal regime of a state law, even if they are defined as international. This applies also to investment arbitration that is carried out not under the ICSID Convention, but under Arbitration Rules for commercial arbitration. Generally, an arbitration will be subject to the arbitration law of the state where the arbitral tribunal has its seat, unless the parties have chosen a different law to govern the proceeding.25 If a dispute between a Norwegian and a Russian party, for example, is submitted to arbitration in Stockholm, the arbitration will be Swedish. The dispute is international, but the arbitration is subject to Swedish arbitration law. The award rendered will be considered a Swedish arbitral award: it will be enforceable in Sweden according to Swedish enforcement rules, and in other states according to the respective rules on enforcement of foreign (Swedish) arbitrations. The vast majority of states have ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The New York Convention will therefore be the basis for enforcing the Swedish award in these states, including Norway and Russia. The term ‘international’, therefore, may be misleading. We are, generally, in the presence of a national arbitration that deals with an international dispute, and the award can be enforced abroad as a foreign award. French law, however, has developed a doctrine according to which arbitration that deals with international disputes is not subject to any state law. According to French law, arbitral awards are delocalised: the simple fact of having been rendered in a certain country does not subject them to the law of that country. French courts routinely enforce awards that were annulled in their country of origin, precisely because they do not accept that a national court has jurisdiction on an international award, see Section 5.4.10. Interestingly, this does not prevent French courts from exercising court control on arbitral awards rendered in France, see Section 5.3.3(b). 25

Some national arbitration laws permit the parties to an arbitration located on their territory to choose the procedural law of another state to govern the arbitral proceeding, see Section 5.2.2.(a)(i).

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Generally, however, arbitral proceedings are subject to the arbitration law of the state in which the arbitral tribunal has its seat. That arbitration law has a territorial scope and applies to all proceedings that are carried out on its territory is the approach taken, for example, by the UNCITRAL Model Law, see its Article 1(2). Some national arbitration laws have different legal regimes for arbitrations taking place in their territories, according to whether the dispute is domestic or international.26 Other arbitration laws have the same regime for both.27 A widely recognised model for state laws on international arbitration is the UNCITRAL Model Law (see Section 2.2.6(d)), originally designed for arbitrations solving international disputes, but also often used for arbitrations solving domestic disputes. In Norway, for example, the Arbitration Act, based on the Model Law, does not differentiate between arbitrations regarding international or domestic disputes. That an arbitral procedure is national means that it is subject to the arbitration law of the place where the arbitral tribunal has its seat (which corresponds to the place where the award is rendered). The arbitration law only regulates the procedural aspects of the dispute. A completely different thing is the law governing the merits of the dispute – that is, the substantive issues in dispute. The law governing the merits does not at all need to be the law of the seat of arbitration. It does not even need to be chosen on the basis of criteria contained in the law of the seat of arbitration, see Section 4.6. Most arbitration laws and Arbitration Rules do not impose application of the private international law of the state where the arbitral tribunal has its seat. International tribunals might also feel that they owe more obedience to the parties that have appointed them than to a national legal system of which they are not a permanent body. Hence, sometimes it is possible to encounter the already mentioned opinion according to which state law is not as relevant to international contracts if the dispute is submitted to international arbitration as it would be if the dispute were submitted to a national court of law. Sometimes, the assumed detachment from any state laws is even deemed to extend not only to the merits of the dispute, but also to procedural aspects. In the following sections, we will analyse to what extent this opinion is justified. 5.2.2 When Does State Law Become Relevant to International Arbitration? As is known, international arbitration is an alternative method of settling contractual disputes, based on the consensus of the parties. If the parties agree to submit to 26

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For example, the Swedish Arbitration Act, Section 51, the Swiss Private International Law Act (PILA), Article 192, and the Belgian Civil Procedure Code, Article 1717. Norway has the same regime for domestic and international arbitration, based on the UNCITRAL Model Law. See also the Dutch Arbitration Act and the German arbitration law after the reform of 1997 (Zivilprozessordnung (ZPO) Code of Civil Procedure).

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arbitration disputes between them, then the ordinary courts will have to decline jurisdiction on those disputes, and the only possible mechanism to solve the dispute will be the arbitration that has been chosen by the parties. If, on the contrary, the parties have not entered into an Arbitration agreement, disputes between them will have to be solved by the national court that has jurisdiction (according to international treaties, regional regulations or national civil procedure law, as seen in Section 4.2). An arbitral tribunal, in other words, bases its existence upon the agreement by the parties. Moreover, the parties determine the composition of the arbitral tribunal, the procedural rules that have to be followed by the arbitral tribunal, the scope of the tribunal’s competence and its power. The arbitral tribunal is bound to follow the instructions of the parties; otherwise, it exceeds the power that the parties have conferred on it. If the arbitral tribunal exceeds its power, neither its jurisdiction nor its award is founded on the parties’ agreement, and there is, consequently, no legal basis for any of the two. We will consider in Section 5.5.5, in the context of the control that the courts may exercise on arbitration, what the consequences are when an award was not based on the parties’ instructions. Arbitration’s dependence on the parties’ will, which is so uniformly recognised, is an important factor strengthening the opinion that arbitration is a private matter between the parties, and that national courts or state laws should have no opportunity of interfering with the parties’ will. This opinion is certainly confirmed by the observation that the vast majority of arbitral awards are complied with voluntarily by the losing party. The parties agree to submit the dispute to arbitration, then they instruct the arbitral tribunal as to the scope of the dispute, the rules to be applied, and so on, then the losing party recognises the arbitration’s result and complies voluntarily with the award. In situations such as this, the totality of the arbitration takes place in the private sphere of the parties. There is no point of contact between the national courts and the arbitration. Consequently, there will be no national court that may consider overriding the parties’ contract or expectations – for example, by considering an agreement invalid because it violates EU competition law (see Sections 4.5.3(a) and 5.4.9(i)(iv)); or by considering a firm offer as not binding because it does not comply with some formal requirements set by the chosen law (see Section 3.6.1). The arbitrators may or may not decide to apply these rules, but, as long as the losing party accepts the result of the arbitration, there will be no possibility for any court to verify the arbitrator’s decision. In these cases, therefore, the considerations on the applicable law made in the previous chapters are relevant only to the extent that the arbitral tribunal is requested by the parties or elects to apply state law to the dispute. When the losing party does not comply voluntarily with the award, however, the courts will intervene. In these cases, the considerations made in the previous chapters may become relevant, as Sections 5.3 and 5.4 will show.

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However, state law may also have relevance in other respects, as the following sections will show.28 (a) International Arbitration and the State Law of the Seat of Arbitration (Lex Arbitri) A statement that is frequently made, in respect of international arbitration, is that arbitration is detached from national laws. According to an opinion that was quite influential, especially some decades ago, arbitration is international, and, as such, it does not even have a forum.29 Particularly, no importance should be attached to the legal system of the seat of arbitration: this opinion assumes that the mere circumstance that an international arbitration happens to have its seat in a certain state should not create any link with the legal system of that state. The choice of the seat of arbitration, according to this opinion, is based on considerations of practical convenience, such as the relative vicinity to the states of both parties, the possibility of having convenient flight connections or the availability of modern and efficient meeting facilities. As a matter of fact, the seat of arbitration has a significant impact that may affect the validity and enforceability of the arbitral award, and it should therefore be chosen on the basis of legal considerations rather than on the basis of practical considerations. This will be looked at in more detail in the following sections. Personally, I have never experienced the parties pay attention to the abovementioned practical aspects of the seat rather than to the legal aspects – although practical considerations may be invoked to conceal the real reasons for suggesting a certain venue. Usually, there is either a struggle to locate the seat in each party’s own state or a state having a similar legal system, or a consensus on locating the seat in a legal system generally known as neutral and having extensive experience with that kind of arbitration. It must be here pointed out that the seat of arbitration is a formal notion: it designs the attachment to the legal system under which the arbitral proceedings take place. 28

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A Research Centre organised by the Hague Academy of International Law in 2021 was devoted to the law applicable to the various aspects of arbitral proceedings, including the procedure. See Diego Fernández Arroyo and Giuditta Cordero-Moss, Applicable Law Issues in International Arbitration (Centre for Studies and Research of the Hague Academy of International Law, forthcoming 2023). See also Franco Ferrari, ‘Plures leges faciunt arbitrum’. Arbitration International 37.3 (2021), pp. 579–97 and ‘ How International Should International Arbitration Be?’ In Eppur si muove: The Age of Uniform Law: Essays in Honour of Michael Joachim Bonell (UNIDROIT, 2016b), pp. 847–55. See, for example, Marc Blessing, ‘Choice of Substantive Law in International Arbitration’. Journal of International Arbitration 14.2 (1997), pp. 39–65 and ‘Keynotes on Arbitral Decision-Making: The New 1998 ICC Rules of Arbitration’. ICC International Court of Arbitration Bulletin Special Supplement (1998), p. 44; Lando (1985), p. 765f.; Jan Paulsson, ‘Arbitration Unbound: Award Detached from the Law of Its Country of Origin’. International & Comparative Law Quarterly 30.2 (1981), pp. 358–87, 358ff., 362ff. and 381; ‘Delocalisation of International Commercial Arbitration: When and Why It Matters’. International & Comparative Law Quarterly 32.1 (1983), pp. 53–61.

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The seat of arbitration (sometimes also referred to as the place, or the venue, of arbitration) is the place where the award is deemed to have been rendered. It does not necessarily coincide with the place where the arbitral tribunal physically signs the award, where it meets for deliberation, where the hearings take place, or where witnesses are heard. This has become particularly evident after the travel restrictions due to the COVID-19 pandemics forced most hearings to be held remotely. Even prior to that, however, it was a normal practice for the arbitration to be subject to the law of the place where the arbitral award was deemed to have been rendered, and this country was deemed to be the country where the arbitral tribunal had its seat – even though the award might have been signed by circulating it to the arbitrators’ respective countries. Many arbitration laws and Arbitration Rules expressly specify that the formal seat of the arbitration does not require the holding of meetings and hearings in that place.30 (i) The Relevance of the Lex Arbitri to the Arbitral Procedure Generally, arbitration is governed by the arbitration law of the place where the tribunal has its seat. This is also known as the territoriality principle. The territoriality principle is affirmed, for example, in the Swedish Arbitration Act, Section 46; the Swiss PILA, Section 176; the English Arbitration Act, Section 2; and the UNCITRAL Model Law, Section 1(2). The territoriality principle applies only to the law governing the arbitral procedure and does not extend to cover the law governing the merits of the dispute. The law governing the merits of the dispute was discussed in Chapter 4, and is the law chosen by the parties or, failing such choice, the law applicable according to the conflict rules that the tribunal considers applicable (for example, UNCITRAL Model Law, Section 28(2), the English Arbitration Act, Section 46.3), or the law that has the closest connection with the disputed matter (for example, the Swiss PILA, Section 187) or the rules of law that the tribunal deems applicable (for example, the French Civil Procedure Code, Section 1511). Some states have also opened up the possibility of the parties choosing the law governing the arbitral procedure. Therefore, in these states, the parties may derogate from the territoriality principle in respect of the arbitral procedure: see, for example, the Swiss PILA, Section 182(1). A clause in the commercial contract specifying which law shall govern the contract, however, is not sufficient to choose the law governing the arbitration – not even if the Arbitration agreement is made in the form of a clause contained in the same commercial contract. If the parties wish the arbitral proceeding to be regulated by a law different from the law of the place where the arbitral tribunal is seated, they have to make a specific choice of law expressly for the arbitral procedure (assuming that the arbitration law of the place of arbitration permits the making of such a choice). 30

For example, Article 20 of the Model Law.

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The parties may choose Arbitration Rules (such as the UNCITRAL Rules, the ICC Rules or other rules), but this does not exclude the applicability of the arbitration law. It is not clear why the parties should choose a certain country as the seat of their arbitration, and another country’s law to govern the arbitral procedure. This may expose the proceedings to the risk of uncoordinated frameworks – such as when the chosen law gives the courts powers that should be exercised by the courts of the seat, but the courts of the seat do not have those powers under its own law. If the parties want the arbitration law of a certain country to apply, they are well advised to choose that country as the seat. They are still free to hold hearings and meetings in another country without affecting the formal notion of seat. In England, a High Court decision commented that, in theory, it would be possible to submit arbitration to a procedural law different from the law of the state where the arbitral tribunal has its venue, but the result would be highly unsatisfactory or absurd.31 Decades later, the Supreme Court did not even question that the lex arbitri is applicable to the procedural aspects of arbitral proceedings.32 Irrespective of whether the parties have chosen to submit their dispute to an ad hoc or an institutional arbitration, the arbitral proceeding will thus generally be subject to the lex arbitri – the arbitration law of the state where the arbitral tribunal has its seat (which, as mentioned, does not necessarily have to be the place where the arbitral tribunal meets or where the hearings are held). If the parties have provided for Arbitration Rules (either directly in the agreement or by reference to Arbitration Rules such as the UNCITRAL, or indirectly via the choice of an institutional arbitration), these rules will apply to their proceeding and will prevail over the rules contained in the national arbitration law, if the latter allows for derogation by the agreement of the parties. In the case of mandatory provisions of the national arbitration law, however, the arbitration law will override the Arbitration Rules chosen by the parties. An example of a mandatory provision is the rule that defines which claims are arbitrable; other examples are the rules ensuring due process of law, such as the necessity to give both parties the chance of being heard.33 In addition, the law of the seat of arbitration contains rules on the powers of the arbitrators to issue interim measures, to summon witnesses and to request assistance from the local courts in such operations. In addition, this law contains rules on the role of courts, for example, in the case of a challenge to the impartiality of the arbitral tribunal. 31

32 33

Union of India v. McDonnell Douglas Corp [1993] 2 Lloyd’s Rep 48. On the adequacy of considering that the law governing the arbitral agreement is the law of the state where the tribunal is seated, see Fritz A. Mann, ‘Lex facit arbitrum’. In Pieter Saunders (ed.), Liber Amicorum for Martin Domke (Martinus Nijhoff, 1967), pp. 157ff., 164ff. Virgin Atlantic Airways v. Zodiac Seats UK Ltd [2013] UKSC 46 [2014] AC 160. The UNCITRAL Model Law contains provisions to this extent, for example, in Articles 18, 23(1), 24(2) and 24(3).

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Arbitration laws are, usually, quite liberal in their regulation of arbitration. The parties wish to have as much flexibility as possible in the organisation of this mechanism for dispute resolution as it is chosen precisely because it leaves ample room for private determination. If state law started to regulate arbitration in detail, this method of dispute resolution would probably lose much of its appeal to commercial parties. However, if there were no regulation at all, the parties might fear that fundamental principles of process might be neglected. Therefore, a successful arbitration law is an instrument that manages to ensure a high degree of flexibility, but one that provides default rules ensuring efficiency if the parties have not agreed on a regulation, as well as mandatory rules to protect the principle of due process. Increasingly, international sources of soft law are being produced to regulate procedural issues that are mainly within the area of the tribunal’s discretion and of the parties’ freedom to contract. Some of these sources enjoy a wide recognition and are often used as a reference for the exercise of such discretion and freedom. An example is the IBA Rules on Taking of Evidence, see Section 2.2.6(f). These Rules, if widely adopted, are likely to contribute to a uniform practice irrespective of which procedural law applies. This could indeed contribute to weakening the relevance of national law – if not formally, at least in effect. However, the IBA Rules do not necessarily reflect a generally acknowledged approach: in opposition to the IBA Rules, the Prague Rules were published, offering an alternative approach, see Section 2.2.6(f). The competition between two different sources of soft law, of which one has the purpose of reflecting a legal tradition different from the tradition inspiring the other, does not seem to weaken the relevance of the various legal traditions. Another widely acknowledged soft law instrument is the IBA Guidelines on Conflicts of Interests, see Section 2.2.6(e). These Guidelines regulate issues that are not within the area of the tribunal’s discretion and of the parties’ freedom to contract. Independence and impartiality of the arbitral tribunal are fundamental principles in most arbitration laws and are often regulated with mandatory rules. Courts have their own understanding of these principles’ scope. As mentioned in Section 2.3.2(c), whenever the Guidelines do not correspond to this understanding, they are overridden. The foregoing shows the interaction between transnational soft law and state law: soft law is useful and may create a uniform practice within the scope of discretion and freedom left by state law. When the borders of this scope are met, state law prevails. (ii) The Relevance of the Lex Arbitri to the Challenge of an Arbitral Award The assumption that the legal system of the seat of arbitration (lex arbitri) has no link with the arbitration itself is not correct in further respects. The losing party may, in most jurisdictions, challenge before the national courts the validity of an arbitral award that has been rendered in that state, see Section 5.3.1. This means that the courts of the

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state of arbitration have the possibility of setting aside the award; and this is definitely an important link between international arbitration and the forum. The judicial control on arbitral awards in the phase of a challenge is regulated by national arbitration law. This means that the arbitration law of the lex arbitri determines whether the award is valid or not. The already mentioned UNCITRAL Model Law has created a certain harmonisation in numerous national arbitration laws, and the Model Law provides, in Article 34, a list of grounds upon which a national court may set aside an arbitral award rendered in that state. However, since national arbitration laws belong to each national legal system, it will always be necessary to verify the law of the state of the seat in order to ascertain what possibilities the court has in terms of annulling an award. The list of grounds upon which a court may set aside an award varies, as mentioned, from state to state. The UNCITRAL Model Law, however, has achieved a considerable harmonisation – not only in the states that adopted it, but also inspiring states that have not formally adopted it. In the Model Law, the list of annulment grounds, contained in Article 34, coincides with the list of grounds upon which an award may be refused enforcement under the New York Convention. These grounds may be summarised as referring to invalidity or irregularity in the following areas: the Arbitration agreement, the composition of the arbitral tribunal, the procedure of the arbitration and the scope of power exercised by the tribunal. In addition, the award can be set aside if there is a contrast with that state’s ordre public or with that state’s rule on arbitrability. Sections 5.3 and 5.4 examine the grounds for invalidity that are relevant to the question that is of interest in this book – that is, how self-sufficient an international contract may be. (iii) The Relevance of the Lex Arbitri to the Enforcement of an Arbitral Award The lex arbitri is also relevant in the context of the enforcement of an award. If the award is sought to be enforced in the same country where it was rendered, the lex arbitri will coincide with the law of the place of enforcement (see Section 5.2.2(b)). Even if the award is sought to be enforced in another country, the lex arbitri may be relevant. In Article V.1.(e), the New York Convention considers it a sufficient ground to refuse enforcement of an award if the award has been set aside by a competent authority in the state where the award was made, see Section 5.4.10. The New York Convention, however, does not specify on which grounds an award may be set aside; this is for the arbitration law of the court of challenge to determine. Therefore, even if enforcement is uniformly regulated by the New York Convention, reference to the annulment of an award opens a channel between the enforcement of an award and the nonharmonised grounds for annulment of the lex arbitri.

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(b) International Arbitration and the State Law of the Place(s) of Enforcement As already mentioned, if the losing party refuses to abide by the award, the winning party will have to seek enforcement with the courts of a state where the losing party has some assets.34 The enforcement of foreign arbitral awards is regulated uniformly by the New York Convention, which provides a simple and arbitration-friendly procedure. The only grounds that a court may invoke to refuse enforcement of an arbitral award are listed in Article V of the New York Convention. These grounds correspond to those contained in the UNCITRAL Model Law in respect of a challenge of the validity (Article 34), as well as in respect of enforcement (Article 36). Therefore, the enforcement of an arbitral award can be refused in case of invalidity or irregularities relating to the Arbitration agreement, the composition of the arbitral tribunal and the arbitral procedure, as well as an excess of power, conflict with the ordre public of the state of enforcement and conflict with the arbitrability rule of the state of enforcement. In addition, as we have seen, an award may be refused enforcement if it has been set aside in the state of origin. Sections 5.3, 5.4 and 5.5 analyse the grounds for refusing enforcement that are relevant to the question discussed in this book. 5.3 Specific Criteria for Invalidity or Unenforceability of Arbitral Awards: Is an International Award Really Detached from State Law? Arbitration is, as known, an out-of-court method of dispute resolution that is mostly based on the will of the parties. The tribunal is bound to follow the parties’ instructions, because it does not have any powers outside of the parties’ agreement. Tribunals are, therefore, and correctly, very reluctant to deviate from the instructions of the parties. In some situations, however, the arbitral tribunal may consider to what extent it should follow the choice of law made by the parties in the contract. One party could invoke rules of the law that would be applicable if the contract did not contain a choice of a different law – for example, one party may contest the other party’s claim for breach of contract, alleging that there was no breach because the non-performed obligation was invalid under a law different from the chosen law. An arbitral tribunal may even on its own motion consider disregarding the contract’s choice of law if applying the chosen law would result in an award that is invalid or cannot be enforced because it violates certain principles of the country where the arbitral tribunal has its seat or of the country where enforcement will be sought. To avoid rendering awards invalid or unenforceable, the arbitral tribunal may be tempted to disregard the parties’ instructions, including the contract’s choice of law. This, however, exposes the award to the risk of being annulled or refused enforcement on the basis of two other grounds: that the arbitral tribunal went beyond the scope of the power that the 34

See, however, Section 5.3.2.

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parties had conferred on it, and that the arbitral tribunal did not respect the parties’ right to be heard. As seen, as long as arbitral awards are complied with voluntarily by the losing party, there is no contact between the national courts and the arbitration. If the losing party does not voluntarily accept the award, there are two possibilities of obtaining judicial control on an award: (i) the losing party may challenge the validity of an arbitral award before the courts of the place where the award was rendered; and (ii) the losing party may abstain from carrying out the award, so inducing the winning party to seek enforcement of an arbitral award by the courts of the country (or countries) where the losing party has assets. 5.3.1 Challenge to the Validity The validity of an award may be challenged before the courts of the place where the award was rendered (the seat of the arbitration). As the challenge is regulated by national arbitration law, and may differ from country to country (see Section 5.2.2(a) (ii)), it is impossible to carry out an analysis in general terms regarding validity. We will here look at the discipline contained in the already mentioned UNCITRAL Model Law, which is acknowledged as embodying a general consensus in the matter of arbitration, is adopted more or less literally in eighty-five countries and is used as a term of reference even in many countries that have not formally adopted it, see Section 2.2.6(d). The grounds that may be invoked under Article 34 of the UNCITRAL Model Law to make an award invalid are the same grounds that may be invoked under Article 36 of the Model Law as defences against the enforcement of an award. These are, in turn, the same grounds that are listed in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards as the only possible defences against the enforcement of an award. The Model Law was intended to be a source of harmonisation in international arbitration. To this end, and to ensure continuity, it was deliberately aligned with the New York Convention.35 Therefore, case law and legal doctrine on Article V of the New York Convention may be applied also to Articles 34 and 36 of the Model Law, and vice versa. Although the Model Law has achieved a considerable harmonisation, non-Model Law countries may have different approaches to the challenge of awards. Under English law, for example, courts have a relatively wide power to verify the arbitral award’s application of the law, see Section 5.3.3(a). The parties have the possibility to waive this particular ground for challenge, although courts seem to be quite restrictive in the interpretation of Arbitration agreements.

35

See the Explanatory Note by the UNCITRAL Secretariat on the Model Law on International Commercial Arbitration, www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration.html.

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In some states, awards rendered in disputes without any contact with that state enjoy a certain detachment from the system of the forum. Swiss36 and Belgian37 law permit the parties to enter into an Exclusion agreement, thus excluding the court’s jurisdiction to challenge the validity of the award. However, an Exclusion agreement may be entered into only for awards rendered in disputes where neither party was resident in the country where the award was rendered. Also, Swedish law38 permits the parties to exclude the control by Swedish courts on arbitral awards rendered in Sweden in disputes where neither party is a resident of Sweden, but only in respect of the so-called relative invalidity grounds; that is, grounds that have to be invoked by one of the parties. Exclusion agreements are not allowed by Swedish law in respect of absolute invalidity grounds, upon which judges can act on their own motion. In French law,39 a reform of the arbitration law made in 2011 permits the parties to agree on a waiver of their right to recourse against any arbitral award rendered in France in an international dispute. In most other states, as well as under the UNCITRAL Model Law, the control of the courts cannot be excluded. Exclusion of the possibility to challenge the validity of an award was considered not to infringe the right to access to justice as is laid down in Article 6 of the European Convention on Human Rights (ECHR).40 However, it is not advisable to waive in advance the right to challenge an award. As long as the court’s control remains within the restricted scope described in Section 5.4, it does not significantly affect the autonomy of arbitration. On the other hand, it ensures respect of due process. An award may have been rendered after proceedings that infringed important principles such as the independence and impartiality of the arbitrators, or the parties’ right to be heard. An award may have been rendered by an arbitrator who became ill during the proceedings and lost his mental capacity, or by an arbitrator who was drunk and slept during the hearing. Without a right to challenge the award, the losing party who was the victim of these infringements, does not have any recourse. Before the tribunal is established, and before the proceedings are carried out, it is not possible to predict whether these principles will be infringed. Hence, it is not advisable to exclude the right to challenge an award. 5.3.2 Enforcement Enforcement of an arbitral award is regulated, in the 170 countries that have ratified it, by the already mentioned 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. 36 38 40

Swiss PILA, Article 192. 37 Belgian Judicial Code, Article 1717(4). Swedish Arbitration Act, Section 51. 39 French Code of Civil Procedure, Article 1522. See the decision by the ECtHR rendered in the case Tabbane v. Switzerland, Decision of 1 March 2016, Application No 41069/12, paras 33–6.

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Generally, an award consists of ordering the losing party to make a payment to the winning party. In order to enforce such an award, it is necessary that the enforcement court has jurisdiction over the award debtor’s assets – so that the court can seize the assets, sell them and out of the proceeds satisfy the award creditor. However, not all awards necessarily contain an order to pay that needs enforcement: an award may ascertain that a certain contract is valid, that one party is liable, that a certain right does not exist and so on. Furthermore, a party may simply be interested in the recognition of the award to avoid new claims on the same issue already decided in the arbitration. While the presence of assets in the territory is a prerequisite for enforcement when the award orders a transfer of values, it is not necessary otherwise. The New York Convention, which obliges courts to recognise and enforce awards, does not require a connection with the dispute. The Convention contains in Article V an exhaustive list of the grounds that may be invoked to prevent the enforcement of an award, and lack of connection between the court of enforcement and the dispute or award debtor is not within the list. Therefore, any court member of the Convention has to recognise and enforce arbitral awards, irrespective of whether the award debtor is registered in that country, has assets there or there is another connection with the dispute.41 However, this is not uncontroversial.42 5.3.3 Judicial Control Is Not an Appeal There is a strong consensus on the opportunity to restrictively interpret the provisions on the invalidity and unenforceability of arbitral awards; that is, to restrict the scope of judicial control.43 Not only is the number of awards that are brought to court by the parties rather low (but increasing), the rate of success for these actions is also rather low.44 41

42

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See, for example, the Dutch Supreme Court decisions in Sonera v. Çukurova, 1 May 2015, No 14/04336 and NRSL v. Kompas, 17 April 2015, No 14/02966; the Canadian Supreme Court in Chevron Corp v. Yaiguaje, 2015 SCC 42 No 35682. See the Irish decision Yukos Capital S.A.R.L. v. OAO Tomskneft VNK [2014] IEHC. For a thorough analysis of the US approach that seems to differ from the approach that I support in this book, see Linda Silberman and Aaron D. Simowitz, ‘Recognition and Enforcement of Foreign Judgments and Awards: What Hath Daimler Wrought?’ New York University Law Review 91(2016), pp. 344–95. Gary Born, International Commercial Arbitration, 3rd ed. (Kluwer Law International, 2021a), para 26.05[C][a]; International Council for Commercial Arbitration (ICCA), ICCA’s Guide to the Interpretation of the 1958 New York Convention: A Handbook for Judges (2011), p. 14ff.; Redfern et al. (2015), paras. 11.56–11.60. For references to court practice, see Giuditta Cordero-Moss, ‘Article V(2)(b)’. In Herbert Kronke, Patricia Nacimiento and Dirk Otto, Recognition and Enforcement of Foreign Arbitral Awards: A Global Commentary on the New York Convention, 2nd ed. (Kluwer Law International, forthcoming 2024). The rate of successful requests for annulment is 23 per cent and the rate of enforcement notwithstanding defences is 73 per cent, see Roger P. Alford, Crina Baltag, Mathew E. K. Hall and Monique Sasson, ‘Empirical Research of National Courts Vacatur and Enforcement of International Commercial Arbitration Awards’. Journal of International Arbitration (2022), pp. 299–330.

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(a) Scope of Judicial Control Nothing in the wording of Articles 34 and 36 of the UNCITRAL Model Law or Article V of the New York Convention suggests that the courts have the authority to review the merits of the arbitral decision, either in respect of the evaluation of the facts or in respect of the application of the law. Judicial control under the UNCITRAL Model Law and under the New York Convention, in other words, may not be used as a vehicle for the court to act upon an error in law incurred by the arbitral tribunal, no matter how evident the error is. That courts shall not control the arbitral award in terms of the merits, also including the application of the law, is generally acknowledged both in theory and in judicial practice. Even the common law tradition that will be mentioned further, which permits a certain control over an error in law, does not affect the enforceability of a foreign award that is governed by the New York Convention.45 Judicial control is aimed at ensuring that an award was rendered in accordance with due process principles, that it is based on the consent of the parties and that it does not infringe fundamental principles – it is not aimed at ensuring that the award is correct. As we will see, this narrow scope of judicial control is of the utmost significance for the question that we are analysing here; that is, to what extent the arbitral tribunal may interpret, construe and apply the contract without any reference to the applicable law. In some states, as in England, the court has relatively wider powers. Among other things, an English court may verify the arbitral tribunal’s application of law, although the possibility of setting aside an award for an error in law has been significantly restricted in the English Arbitration Act of 1996. It must be mentioned that this possibility, laid down in Section 69 of the English Arbitration Act, is applied restrictively. It applies only to error in the application of English law. Moreover, the leave to appeal an award on point of law will be granted only if the matter is of general public importance and if the application of law made in the award was obviously wrong.46 However, recent case law shows that Section 69 is applied.47 45

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See Born (2021a), para 26.05[C][12][a] with references to the US doctrine of manifest disregard of the law, which may be used as a defence against enforcement of a US award, but not of a foreign award. In 2016 the Lord Chief Justice of England and Wales, Lord Thomas, held a lecture in which he pointed out that, since many commercial parties choose arbitration to solve their disputes and appeal from arbitral awards is very restricted, courts are not participating to the extent desirable to the development of the law. Among the measures that could ensure more participation, he mentioned revising the criteria for appealing awards. See Lord Thomas of Cwmgiedd (2016). In November 2021, the Law Commission announced that the availability of appeals on points of law would be subject to review. In 2022, the Law Commission published the Law Commission Consultation Paper 257, Review of the Arbitration Act 1996: A Consultation Paper. In Section 9.2, the Consultation Paper affirms: ‘Our provisional conclusion is that no reform is needed. We think that section 69 is a defensible compromise between securing the finality of arbitral awards and ensuring that blatant errors of law are corrected. It is a non-mandatory provision; arbitral parties and institutions have long settled on their preferred relationship with it, and we currently see no need to unsettle that.’ Judiciary of England and Wales, Commercial Court Report 2020–2021, showing a slight increase in the number of successful Section 69 applications in the years 2019–2020, while no applications were successful

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An example of successful appeal on point of law is a decision48 that set aside an award in which the arbitral tribunal had declined to apply a Force majeure clause to excuse non-performance under a freight contract. Under the contract, payment was expressed in US dollars; following the inclusion of one of the parties on the list of entities subject to US sanctions, payment in US dollars was no longer possible. The arbitral tribunal considered that US sanctions were not an impediment that could not reasonably be overcome, because payment could have been made in euros. Hence, the tribunal declined to apply the Force majeure clause. The court found that the tribunal erred when it considered that the Force majeure clause obliged a party to use a currency different from the agreed currency. This decision was later overturned by the Court of Appeal.49 The Court of Appeal, however, overturned the decision because it interpreted the disputed Force majeure clause differently from the court of first instance; it did not question that the court could review the arbitral tribunal’s interpretation of the clause. The provision of Section 69 is, in any case, rarely applied, as its application may be excluded by the parties’ agreement and Arbitration Rules of institutions that often administrate arbitration in England, such as the LCIA (Rule 26(8)) and the ICC (Article 35(6)),50 exclude applicability of Section 69. It is unsettled whether an appeal on point of law is admissible under US law.51 (b) Intensity of Court Control The same issues that were decided by the tribunal may be put forward for the purpose of challenging the validity of the award or of preventing its enforcement. The question then arises as to what effects the tribunal’s evaluation has for the court’s evaluation.

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in 2020–2021, www.judiciary.uk/wp-content/uploads/2022/02/14.50_Commercial_Court_Annual_ Report_2020_21_WEB.pdf. MUR Shipping BV v. RTI Ltd [2022] EWHC 467 (Comm). MUR Shipping BV v. RTI Ltd [2022] EWCA Civ 1406. Lesotho Highlands Development Authority v. Impregilo SpA [2005] UKHL 43. See, however, National Iranian Oil Company v. Crescent Petroleum Company International Limited & Crescent Gas Corporation Limited [2022] EWHC 1645 (Comm), affirming that Section 69 was not excluded by a reference to the ICC Rules in the particular case. The parties had agreed on procedural rules in an annex to the contract, and the annex referred to the ICC Rules to fill any gaps in the agreed procedures. The court found that reference to the ICC Rules, under the circumstances, was meant to fill gaps in the regulation of the procedure. However, exclusion of Section 69 considers the phase after the procedure is concluded. Therefore, the exclusion contained in the ICC Rules could not be deemed to have been incorporated into the Arbitration agreement, and the parties were deemed not to have excluded applicability of Section 69. In the US Federal Arbitration Act, s. 10(a) of Chapter 1 is deemed to list exhaustively the grounds for vacating an award, and error in law is not mentioned thereunder. Nevertheless, courts consider manifest disregard of the law as a basis for vacating awards. The US Supreme Court considered this as shorthand for statutory grounds, such as due process or excess of power (Hall Street Associates LLC v. Mattel Inc, 522 US 576 (2008)), but subsequent case law is divided on whether or not manifest disregard of the law is an independent ground. So far, the Supreme Court has declined to clarify this issue, see Stolt-Nielsen S. A. v. Animal Feeds Int’l Corp., 559 US 662 (2010) and Dewan v. Walia, 544 F App’x 240 (4th Cir 2013), petition for certiorari declined on 7 April 2014.

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For example, the Model Law says in Article 34(2)(a)(i) that the court may set aside an award if it finds that the Arbitration agreement did not exist or was invalid, or that a party was under some incapacity. Under Article 34(2)(b)(ii), the court may set aside an award if it finds that it violates public policy. The same can be said for French law: Article 1492 No 1 of the Civil Procedure Code gives the court the power to set aside the award if the arbitral tribunal did not have jurisdiction, and Article 1520 if the award conflicts with public policy. The regime in France is particularly interesting due to the already mentioned stance that international arbitration is delocalised and thus not subject to any national laws – which, however, does not prevent French courts from exercising control on awards that were rendered in France or that are sought to be enforced in France. The same grounds recur among the grounds upon which recognition and enforcement of an award may be refused. Articles V(1)(a) and V(2)(b) of the New York Convention permit a court to refuse enforcement of an award if the arbitral tribunal did not have jurisdiction or if enforcing the award would violate public policy. The regime of the New York Convention is uniformly applied in the 170 countries that have ratified the Convention. The same is stated in Articles 36(1)(a)(i) and 36(1)(b)(i) of the Model Law. This entails that the court considers the issues of jurisdiction and of public policy (and the other issues that are mentioned in Article V of the New York Convention or in arbitration laws), notwithstanding that the same issues may already have been decided by the arbitral tribunal. Neither the Model Law nor the French Civil Procedure Code nor the New York Convention, however, explain the relationship between, on the one hand, the tribunal’s competence to decide on its own competence, the tribunal’s assessment of public policy or the tribunal assessment of the other grounds for annulment and refusing enforcement and, on the other hand, the court’s power to evaluate the validity of the Arbitration agreement, the legal capacity of the parties, the compatibility of the award with public policy or the other issues affecting validity and enforceability of the award. There are inconsistent approaches to the issue, depending on which matters are at stake. If the matter before the court is a matter of jurisdiction or validity of the Arbitration agreement, there is a consensus that the court may independently evaluate the issue – but not in the United States, see Section 5.3.3(b)(i) . If the court is requested to evaluate the compatibility of the award with public policy, some courts (particularly, French courts) take a more restrictive stance and deem the arbitral tribunal’s evaluation to preclude an independent evaluation by the court, see Section 5.3.3(b)(ii). A different trend, however, is emerging in France, see Section 5.3.3(b)(ii).

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(i) The Issue of Jurisdiction What happens if the tribunal already evaluated whether it had jurisdiction, coming to a positive conclusion, and the losing party nevertheless challenges the validity of the award or resists its enforcement on the basis of the same arguments on lack of jurisdiction? In connection with the arbitral tribunal’s jurisdiction, particularly the existence and validity of the Arbitration agreement, the doctrine of Kompetenz–Kompetenz was developed. This doctrine applies if the issue of validity of the Arbitration agreement is raised before the arbitral proceedings are instituted, or during the arbitral proceedings. If a party to the arbitration contests the validity of the Arbitration agreement or the jurisdiction of the arbitral tribunal, who has the competence to decide the issue? According to this doctrine, an arbitral tribunal has the competence to decide on its own competence.52 The main implication of this doctrine is that a tribunal does not have to suspend the proceeding in the case that the validity of the Arbitration agreement is questioned. The arbitral tribunal has the power to make a decision on the existence and validity of the Arbitration agreement and, if the decision is in the affirmative, the tribunal may proceed with the substantial aspects of the dispute. This principle has been affirmed, inter alia, in Article 16 of the UNCITRAL Model Law. A system that even more obviously gives priority to the arbitral tribunal’s evaluation of its competence is France, where the so-called effet négatif de la compétence– compétence was developed.53 This theory applies when a party files a lawsuit in a court, notwithstanding that the dispute arises in connection with a contract containing an Arbitration clause. The other party will probably invoke the Arbitration agreement as a ground for having the claim dismissed: the claim should be decided in arbitration, not by a court. According to this negative theory of competence–competence, courts must refer the dispute to arbitration whenever they are seized with a dispute which is subject to an Arbitration agreement. Under the UNCITRAL Model Law, too, a court must refer the dispute to arbitration if there is an Arbitration agreement. However, in the wording of Article 8 of the Model Law, the court refers the dispute to arbitration ‘unless it finds that the agreement is null and void, inoperative or incapable of being performed’. This wording opens the matter up for a thorough examination by the 52

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See, for example, the Swiss Supreme Court Decision 4A_461/2019, and Article 186(1) of the Swiss PILA. Born (2021a), paras 7.01f; Christophe Seraglini and Jérôme Ortscheidt, Droit de l’arbitrage interne et international, 2nd ed. (Domat Montchrestien, 2019), paras 664f. See also John J. Barceló III, ‘KompetenzKompetenz and Its Negative Effect: A Comparative View’. Cornell Legal Studies Research Paper 17–40 (2017). Gaillard and Savage (2004), paras 660, 671 ff.; Emmanuel Gaillard, ‘L’effet négatif de la compétencecompétence’. In Jacques Haldy, Jean-Marc Rapp and Phidias Ferrari (eds.), Etudes de procédure et d’arbitrage en l’honneur de Jean-François Poudret (Faculté de droit de l’Université de Lausanne, 1999), pp. 387–402; Seraglini and Ortscheidt (2019), paras 664f.

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court of the existence, validity and effectiveness of the Arbitration agreement. The French Civil Code of Procedure goes further and restricts the court’s examination.54 The only possibility courts have at this stage, is to make a cursory review of the Arbitration agreement. If the court is prima facie satisfied that the Arbitration agreement exists and is valid, it shall refer the dispute to arbitration. The underlying idea is that it is for the arbitral tribunal to make a deeper evaluation of its competence. The Model Law and the French effet négatif de la compétence–compétence, however, do not preclude the court from independently evaluating the issue of jurisdiction after the award was rendered – when the court exercises control because the losing party challenged the validity of the award, or the winning party seeks enforcement of the award. According to the prevailing doctrine, the court retains its power to determine the existence and validity of the Arbitration agreement, or the parties’ capacity to enter into it, even if the tribunal has already evaluated the matter.55 This may result in a different outcome from that to which the tribunal came and may lead to the setting aside of the award or refusing its enforcement. In practice, this means that the award has no preclusive effect, and the abovementioned issues are subject ultimately to the court’s evaluation. With the exception of the United States, it does not seem controversial that courts maintain the power to make a full examination of the existence and validity of the Arbitration agreement, and that they do not owe deference to the determination of the issue that was made by the arbitral tribunal.56 Some commentators have previously suggested that courts owe deference to the tribunal’s determination on the existence or validity of the Arbitration agreement,57 but this did not represent the prevailing view and has anyway been superseded by legislation.58 Even in France, where the autonomy of arbitration is supported more than in any other legal system, it is not suggested that the tribunal’s determination of this issue is final.59 Furthermore, the parties are allowed to raise new arguments for the court, as long as the issue of jurisdiction has been discussed before the arbitral tribunal.60 54 55 56

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French Code of Civil Procedure, Article 1448. Gaillard and Savage (2004), paras 658 and 688; Seraglini and Ortscheidt (2019), para 971. See the UK Supreme Court decision Dallah Real Estate & Tourism Holding Co v. Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46; the Swiss Supreme Court Decision 4A_564/2020; the Swedish decisions Svea Court of Appeal, 18 January 2016, Case No T 9128–14 (Renta4 v. Russian Federation); Svea Court of Appeal, 17 December 2007, Case No T 3108–06 (State of Ukraine v. Norsk Hydro ASA); see ITA Monthly Report, Kluwerarbitration, May 2008, Volume VI, Issue 5. For reference to a diverging interpretation of the old regulation in Germany see John J. Barceló III, ‘Who Decides the Arbitrator’s Jurisdiction? Separability and Competence-Competence in Transnational Perspective’. Vanderbilt Journal of Transnational Law 36 (2003), pp. 1115–36. Barceló III (2003). Gaillard and Savage (2004), paras 658 and 688; Seraglini and Ortscheidt (2019), para 971. See the French Cour de cassation, 2 December 2020, n° 19–15.396 (Schooner).

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In England, the Law Commission evaluated whether it was advisable to introduce a rule according to which the court needs to pay deference to the arbitral tribunal’s evaluation of its jurisdiction. In the report, the Law Commission concludes that courts should maintain the possibility of independently evaluating the issue.61 In the United States, however, case law assumes that, if the parties have delegated to the arbitral tribunal the task of considering the issue of jurisdiction, the courts are deprived of the power to consider the matter independently even in the post-award phase.62 This approach is controversial, and is heavily criticised, among others by one of the most influential authors of the American Law Institute (ALI) Restatement of arbitration law.63 The Restatement itself fiercely criticises this approach.64 (ii) The Issue of Public Policy: The Maximalist and the Minimalist Approach With the (criticised) exception of the United States, the theories of Kompetenz–Kompetenz and of l’effet négatif de la compétence–compétence, which were developed to enhance the autonomy and thus the efficiency of arbitration, do not go as far as to affirm that the tribunal’s determination of the existence and validity of the Arbitration agreement are final, and that the court owes deference to the tribunal’s determination. In contrast, there is no uniform approach when the issue is whether the award violates public policy. If the arbitral tribunal has considered the issue and concluded that the contract did not violate public policy, two approaches seem to be available.65 The most widespread approach is the so-called maximalist approach.66 According to this approach, the court may independently evaluate the same issue ex novo. After its evaluation, the court may possibly conclude that recognising and enforcing the award would seriously infringe fundamental principles of the court’s system, and that public policy would therefore be violated. In this case, the court may set aside the award or refuse its recognition and enforcement, see Section 5.4.9. This

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Law Commission Consultation Paper 257 (2022), Chapter 3. First Options of Chicago, Inc. v. Kaplan, 514 US 938 (1995); BG Group, PLC v. Republic of Argentina, 572 US 25, 34 (2014). See George Bermann, ‘The Role of National Courts at the Threshold of Arbitration’. In Andrea Menaker (ed.), International Arbitration and the Rule of Law: Contribution and Conformity (Kluwer Law International, 2017), pp. 443–57; George Bermann, After First Options: Delegation Run Amok’. American Review of International Arbitration 32 (2021), 15–40. American Law Institute, Restatement of the U.S. Law of International Commercial and Investor-State Arbitration, Section 4.12. Cordero-Moss (2018c); Radicati di Brozolo (2011) and (2012); Seraglini and Ortscheid (2019), para 1002. Westacre Investments Inc. v. Jugoimport-SDPR Holdings Co. Ltd. and others [1999] 3 All ER 864, 885 (England and Wales); Bundesgerichtshof request for preliminary ruling, decision of 3 March 2016, Case I ZB 2/15 (Slovak Republic v. Achmea ) (Germany); Bundesgerichtshof of 31 October 2018, Case I ZB 2/15 (Slovak Republic v. Achmea) (Germany); Cartel division of the Bundesgerichtshof of 27 September 2022, Case KZB 75/21 (Germany); Gerechtshof Haag of 24 March 2005, NJF 2005/239, TvA 2006/24 (Marketing Displays International Inc. v. VR Van Raalte Reclame B.V) (The Netherlands).

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determination may be made even though the award had already considered the issue and had concluded that public policy was not violated. This maximalist approach corresponds to the prevailing approach in respect of jurisdiction as seen in Section 5.3.3(b)(i). The prevailing approach, therefore, is uniform both for jurisdiction and for public policy: the court may independently evaluate the issues, notwithstanding that the arbitral tribunal has already evaluated them. The courts of France and of the United States both take a different position, but not a consistent one. In respect of jurisdiction, as seen, French courts take the prevailing maximalist approach; US courts, however, take the minimalist approach. As we will see, the position of French and US courts is inverted in respect of public policy: French courts take the minimalist approach (although they have recently embraced the maximalist approach for issues of corruption and economic crime), whereas US courts take the prevailing maximalist approach, although not consistently. According to the so-called minimalist approach, the court owes deference to the evaluation of the issue that was made by the arbitral tribunal. The court’s role is to verify that the arbitral tribunal considered the issue and to accept the tribunal’s determination. Only in exceptional situations will the arbitral tribunal’s determination not have preclusive effects. The minimalist approach was developed by the Paris Court of Appeal,67 and is particularly well represented in France and, in part, in the United States.68 The minimalist doctrine permits courts to refuse enforcement only if the violation of public policy is manifest, effective and concrete. These criteria have been interpreted so strictly that their application is equivalent to saying that the court owes deference to the determination made by the arbitral tribunal. It is only when the arbitral tribunal has not considered the matter, that the court may make an independent evaluation. However, French case law seems recently to have embraced the maximalist approach in areas such as corruption and money laundering.69 67

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Cour d’appel de Paris, 1e ch., 18 November 2004, Rev arb. 2005 751 (Thalès Air Defence v. Euromissile) (France). See also Cour de cassation, 4 June 2008, n° 06–15.320 (SNF v. Cytec Industries BV). Baxter Int’l v Abbott Laboratories, 315 F 3rd 829 (7th Cir 2003) and American Central Eastern Texas Gas Co v. Union Pacific Resources Group, 2004 US App Lexis 1216 (5th Cir 2004) (United States), but see the dissenting opinion by CJ Cudahy. This was confirmed, in respect of money laundering, by the Supreme Court in its decision dated 23 March 2022, n° 17–17.981(Belokon v. Kyrgyzstan), confirming Cour d’appel de Paris, 21 February 2017, n° 15/01650. The Supreme Court confirmed this approach in its decision dated 7 September 2022, n° 20–22.118 (Sorelec v. Libya), confirming Cour d’appel de Paris, 17 November 2020, n° 18/02568, which had annulled an award based on corruption, even though the issue had not been raised before the arbitral tribunal. See also Cour d’appel de Paris, 4 November 2014, n° 13/10256; Cour d’appel de Paris, 25 November 2014, n° 13/1333; Cour d’appel de Paris, 7 April 2015, n° 14/00480; Cour d’appel de Paris, 14 April 2015, n° 14/07043; Cour d’appel de Paris, 16 January 2018, n° 15/21703; Cour d’appel de Paris, 28 May 2019, n° 16/11182 (Alston) – this decision was quashed by the Supreme Court on 29 September 2021, Decision No. 558 F-D, for having distorted the

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In Switzerland, the minimalist approach is followed only in respect of the arbitral tribunal’s determination of questions of fact.70 A similar approach is followed by the Privy Council of the United Kingdom, both in respect of questions of fact and of law – meaning that the court needs to accept the arbitral tribunal’s determination of whether the underlying contract was illegal, but may independently evaluate whether the award infringes public policy.71 Other courts deem that deference to the arbitral tribunal’s determination of questions of fact does not prevent one party from producing evidence that the determination was erroneous.72 By postulating that the court owes deference to the evaluation that the tribunal made of the conformity of the award with public policy, the minimalist theory effectively delegates to the arbitral tribunal the assessment of this ground for setting aside and refusing enforcement. As will be seen in Section 5.4.8(c), this may have negative repercussions on the willingness of courts to accept the arbitrability of certain disputes. (iii) The Balance In my opinion, it is the maximalist approach that is most compatible with the New York Convention. The maximalist approach further permits the safeguarding of the legitimacy of arbitration as a method to settle disputes, see Section 5.4.8(c). This, however, does not mean that courts may review the award on its merits. As Section 5.4.9 will show, an independent review of the public policy issue is much narrower and is made according to different criteria than a review on its merits. Public policy as a ground for setting aside an award or refusing its recognition and enforcement is regulated in Article V(2)(b) of the New York Convention and in the corresponding provisions of the Model Law, see Section 5.4.9. These provisions are the result of a balancing of two conflicting interests: on the one hand, the interest in rendering arbitration efficient – which may seem to suggest as large a finality as possible for the arbitral awards and as little interference as possible by the courts. On the other hand, the interest is in ensuring that parties are not deprived of their access to justice, that principles of due process are safeguarded and that fundamental

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terms of the transcript. The Cour de cassation, however, did not disapprove of the fact that the Cour d’appel made an independent evaluation of the issue of corruption. The case was sent back to the Cour d’appel of Versailles; Cour d’appel de Paris, 17 November 2020, n° 18/02568; Cour d’appel de Paris, 27 October 2020, n° 19/04177; Cour d’appel de Paris, 25 May 2021, n° 18/27648 (Cengiz); Cour d’appel de Paris, 5 April 2022, n° 20/ 03242. In the area of procedural fairness, see Cour d’appel de Paris, 8 November 2016, n° 13/12002. In contrast, see Cour d’appel de Paris, 20 January 2015, n° 13/20318; Cour d’appel de Paris, 24 February 2015, n° 13/23404. Tribunal Fédéral, 29 January 2015, 4A_532/2014; 4A_534/2014 (Switzerland); Tribunal Fédéral, 31 July 2019, 4A_74/2019 (Switzerland). Betamax Ltd v. State Trading Corporation (Mauritius) [2021] UKPC 14 (United Kingdom). Supreme Court, 20 March 2019, Case No T 5437–17 (Joint Stock Company Belgorkhimprom v. Koca Insaat Sanayi Ihracat Anonim Sirketi) (Sweden).

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principles are not infringed – which may seem to suggest as large a court control as possible. This balancing of interests underlies the whole of Article V. As seen in Section 5.3.3(i), the award does not have preclusive effects for the court who controls, for example, the existence and validity of the Arbitration agreement under Article V(1)(a) or the parties’ capacity to enter into it, under the same provision. The minimalist approach taken by the US courts is thinly motivated and strongly criticised – among others, in the Restatement of US Arbitration Law. The public policy defence is, under the New York Convention, considered to be a more serious defect of the award than the wrong determination by the tribunal of its own competence: while the grounds relating to existence or validity of the Arbitration agreement have to be raised by one party, the ground relating to public policy can be raised by the court on the court’s own motion (ex officio). By giving the court the power to consider the matter of public policy ex officio, the Convention shows that it is not possible to delegate to the parties the decision of whether the issue of conformity with public policy shall be considered. It should be expected that neither should it be possible to delegate to the tribunal the determination of whether public policy was infringed. The logical consequence is that the court’s power to exercise its control notwithstanding the arbitral tribunal’s determination of the same issue is at least equally preserved in respect of both public policy and the tribunal’s jurisdiction. As the award does not have preclusive effects in respect of the tribunal’s determination of its own competence, there should be no preclusive effects in respect of the tribunal’s determination of conformity with public policy. Hence, the maximalist theory should be preferred. Why, then, has the minimalist approach been developed for the issue of public policy? The aggressive affirmation of arbitration autonomy that is made by the minimalist approach may be explained by observing that the minimalist theory is often put forward in connection with matters of competition law. Since the CJEU decision in Eco Swiss,73 EU competition law has been deemed a matter of public policy in the context of arbitration. Thus, awards rendered in disputes with EU competition law implications may potentially infringe public policy. If they do, courts have the power to set aside an award or refuse its enforcement. When the court controls the compatibility of an award with public policy, it cannot express an opinion until it has verified whether competition law has been infringed and whether the infringement is serious enough to justify setting aside the award or refusing its enforcement. Determining whether competition law is violated, however, often requires complicated inquiries that go far beyond the simple examination of the award and the 73

Judgment of the Court, 1 June 1999, C-126/97, ECR I 3079, Eco Swiss China Time Ltd v. Benetton International NV (Eco Swiss).

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applicable law. Admittedly, some competition law infringements may be assessed after a relatively straightforward examination of the award. This applies particularly to awards on agreements which have as their object the prevention, restriction or distortion of competition within the internal market.74 However, agreements that do not have as their object the restricting of competition, but have nevertheless an effect on competition, also violate competition law. Assessing the implications of competition law for awards relating to these agreements assumes extensive and complex evaluations, considering, among others, possible economic benefits, indispensability and other aspects of the economic context.75 It is probably the desire to avoid these extensive inquiries that is at the origin of the minimalist theory. It would be costly and time consuming if the court had to repeat the complicated inquiries that have been carried out by the tribunal. While reasons of efficiency suggest that such complicated inquiries shall not be duplicated, it is questionable that the solution lies in affirming that the court owes deference to the determination made by the tribunal. In my opinion, it is preferable not to depart from the maximalist approach, and instead rely on the narrow scope of the public policy rule. As will be explained in Section 5.4.9(i)(iv), the public policy defence shall be exercised restrictively: only fundamental principles qualify as principles of public policy, and only serious infringements of these principles justify setting aside an award or refusing its enforcement. If it is necessary to initiate a full-fledged inquiry to ascertain whether an award infringes competition law, it could be argued that the infringement is not so serious as to justify applying the public policy ground. However, if the examination of the award or the examination of the evidence and documentation upon which the award relies gives the court reason to conclude that competition law was infringed, and that this infringement is so serious that it affects public policy, the award may be set aside or refused enforcement. In connection with the minimalist approach, it has been suggested76 that it should be possible to exercise court control by examining, in some detail, the reasoning behind the award. Only in exceptional cases, such as when the award has no reasons, or the award did not consider the applicability of public policy rules, should the court be allowed to go further and examine the parties’ pleadings or the evidence produced in the arbitral proceedings or, in extreme cases, to launch a full-fledged investigation. The maximalist approach follows the same scale of the court control’s intensity, with one addition: in order to safeguard the efficacy of the public policy rule, the court 74

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These agreements are forbidden under Article 101 of the 1958 Treaty on the Functioning of the European Union, Consolidated version OJ C326/39 2012 (TFEU). More extensively, see Cordero-Moss (2018c), pp. 310f. European Commission, ‘Commission Notice Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements’. 2001 OJ (C 003) 9. 2–30. Radicati di Brozolo (2012), p. 63f.

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may go further and also examine the pleadings and the evidence when the court does not find the award’s reasoning convincing. However, the court should show some restraint in its examination: if it is necessary to properly perform the public policy evaluation, and only to the extent it is necessary for this specific purpose, the court may consider the entire file of the arbitration, or even re-examine evidence and witnesses. However, where it is not necessary, the court should limit itself to considering the award.77 The maximalist approach is not meant to give the court the power to review the tribunal’s decision. As seen, public policy is not violated simply because the award has incorrectly applied the governing law. Even when the allegedly incorrectly applied provisions are mandatory, there is no automatic effect on public policy. Public policy is affected only if the result of the award seriously infringes fundamental values in the socioeconomic system. It is, in other words, not the technical content of a legal rule that may constitute public policy, but the underlying principles. The narrow scope of the public policy rule, therefore, prevents court control becoming a review of the merits: an award may not be set aside simply because the tribunal did not accurately apply certain rules of law. (iv) Preclusion? We have seen that under the maximalist approach, which in my opinion is to be preferred, the courts may independently evaluate issues that have already been decided by the arbitral tribunal. This, however, applies within the restricted scope of judicial control – which means that the court will evaluate the issues that are necessary to determine whether there is a basis for setting aside an award. The court is not concerned with other aspects of the award, such as whether the arbitral tribunal correctly interpreted the contract or applied the law, and may not review the merits of the dispute.78 Another question is whether a party may raise before the court an issue which is within the scope of judicial control, that could have been raised earlier in the proceedings, but that was not raised before the arbitral tribunal. If the evaluation regards the compatibility of the award with public policy, new issues are usually not prohibited.79 New issues relating to other grounds for setting aside or refusing enforcement, however, are often deemed to be precluded. The reasoning is that waiting to raise 77

78 79

In a Norwegian Court of Appeal case of 18 October 2019, LF-2018-123987 (Fevamotinico S.à.r.l v. Boa Imr AS) (Norway), the Court affirmed that it has the power to re-open the case and launch a hearing as it has for ordinary appeals. While this is compatible with the maximalist approach, however, a full hearing should be the last resort. Also, the Cartel division of the Bundesgerichtshof of 27 September 2022, Case KZB 75/21 (Germany) conducted a full review of the merits to verify whether the award was compatible with public policy, concluded that the award violated competition law and thus public policy and annulled the award. See, for example, Union of India v. Reliance Industries Limited and another [2022] EWHC 1407 (Comm). The French Supreme Court confirmed this approach in its decision dated 7 September 2022, n° 20–22.118 (Sorelec v. Libya). See also the German Court of Appeal decision (Bayerisches Oberstes Landesgericht), 20 November 2003, No 4 Z Sch 17/03.

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these issues until after the award is rendered is an abuse of process or an infringement of the procedural good faith.80 (v) The Consequences of Court Control on Arbitrability A reason for preferring the maximalist approach is that it contributes to the legitimacy of arbitration as a method for settling disputes. Delegating the determination of public policy issues to an arbitral tribunal deprives court control of any meaning. As will be seen in Section 5.4.8(c), this may lead to an erosion of the scope of arbitrability. 5.4 Grounds for Setting Aside an Award or for Refusing Its Enforcement We will analyse here the grounds for setting aside an arbitral award or refusing its enforcement that are relevant to the issue of this book: are the parties free to regulate their legal relationship without taking into consideration the applicable law? Can they avoid any requirements of the applicable law by choosing a particularly liberal governing law? Will an award giving effect to the contract and, disregarding the applicable law, be valid and enforceable? As seen, challenge to the validity of an award is regulated by national law, which to a large extent is harmonised by the UNCITRAL Model Law. Enforcement is uniformly regulated by the New York Convention. In the interest of harmonisation, both instruments shall be interpreted in light of each other and autonomously, see Sections 2.3.4 and 2.3.5. As the criteria for challenging the validity and resisting the enforcement of an award are identical in all these provisions, the interpretation or application of Articles 34 and 36 of the UNCITRAL Model Law, as well as of Article V of the New York Convention, are relevant to each other. Therefore, we will deal with the grounds for annulment and the grounds for unenforceability jointly, and the comments made on the Model Law will be applicable also to the New York Convention, and vice versa. It is, however, important to bear in mind that, as mentioned, annulment of an arbitral award is regulated by the various national laws, and that there may be further grounds for setting aside an award in the countries that have not adopted the UNCITRAL Model Law. 5.4.1 Lack of Jurisdiction and Incidental Questions: In Particular on Corruption Lack of jurisdiction is not a separate ground for setting aside an award or refusing its enforcement, but it derives from several provisions: on the invalidity of the 80

Swiss Supreme Court Decision 4A_406/2021, in relation to the right to be heard; National Iranian Oil Company v. Crescent Petroleum Company International Limited & Crescent Gas Corporation Limited [2022] EWHC 1645 (Comm) in relation to question of law under Section 69 of the English Arbitration Act.

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Arbitration agreement (see Section 5.4.2), on the lack of legal capacity (see Section 5.4.3) and on the excess of power (see Section 5.4.5). The jurisdiction of the arbitral tribunal is generally based on the Arbitration agreement between the parties; in investment arbitration, jurisdiction can be based on investment legislation or on investment treaties, but both parties’ consent is still necessary as a basis for jurisdiction. The state’s consent will then be embodied in the legislation or the treaty and can be deemed to be a firm offer to arbitrate. The investor will be deemed to have accepted the offer when it initiates arbitration. Thus, also in investment arbitration the tribunal’s jurisdiction is based on the terms of the Arbitration agreement – more specifically, on the terms of the offer to arbitrate as it is formulated in the relevant legislation or treaty.81 The arbitral tribunal’s powers are limited to the scope determined in the Arbitration agreement, and usually Arbitration agreements only refer to disputes arising in connection with a specific legal relationship between the parties. This has prompted some commentators to question the fact that arbitral tribunals have a power to decide on a claim deriving out of a contract tainted by corruption.82 For a long time, the approach attributed to Judge Lagergren has been said to be the appropriate reaction in the presence of allegations of corruption: he is quoted as having declared, in a commercial award of 1963,83 that the arbitral tribunal is barred from hearing disputes involving issues of corruption. This quote is based on an inaccurate understanding of the award,84 but it was referred to for decades as the approach to be taken in case the claim arose out of a contract tainted by corruption: whenever issues of corruption are involved, arbitral tribunals should refrain from hearing the dispute.85 Generally, corruption constitutes a crime, and an arbitral tribunal does not have the power to decide criminal law issues. Arbitration agreements usually refer to arbitration disputes arising between the parties out of a contract, a tort or an investment. 81 82

83 84

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See Jan Paulsson, ‘Arbitration without Privity’. ICSID Review 10.2 (1995), pp. 232–57. For references and a more extensive reasoning see Giuditta Cordero-Moss, Corruption and Arbitration: Arbitrability, Jurisdiction, Admissibility or Mertis? (Liber Amicorum Bernardini, forthcoming 2024). ICC Case No 1110 of 1963 by Gunnar Lagergren, YCA 1996, at 47 et seq. Gillis J. Wetter, ‘Issues of Corruption before International Arbitral Tribunals: The Authentic Text and True Meaning of Judge Gunnar Lagergren’s 1963 Award in ICC Case No. 1110’. Arbitration International 10.3 (1994): 277–94. Aloysius Llamzon, ‘On Corruption’s Peremptory Treatment in International Arbitration’. In Domitille Baizeau and Richard H. Kreindler (eds.), Addressing Issues of Corruption in Commercial and Investment Arbitration (Dossiers of the ICC Institute of World Business Law, 2015), pp. 32–50; Domitille Baizeau and Tessa Hayes, ‘The Arbitral Tribunal’s Duty and Power to Address Corruption Sua Sponte’. In Andrea Menaker (ed.), International Arbitration and the Rule of Law: Contribution and Conformity, ICCA Congress Series, Volume 19 (Kluwer Law International, 2017), pp. 225–65; Pierre Lalive, ‘Truly International Public Policy and International Arbitration’. In Pieter Sanders (ed.), Comparative Arbitration Practice and Public Policy in Arbitration, ICCA Congress Series, Volume 3 (Kluwer Law International, 1987). Case law, however, has been more nuanced, see, for references, Cordero-Moss, ‘Corruption and Arbitration’ (forthcoming 2024).

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Should an arbitral tribunal be asked to rule on the existence of corruption and to impose a criminal penalty, it would not have jurisdiction, because the claim would not arise out of the legal relationship which is subject to arbitration. A request to determine that corruption took place and to sanction it, is not a dispute between the parties to the Arbitration agreement regarding the enforcement of the respective rights and obligations or the protection of the investment. However, generally the issue of corruption is not the direct object of the claim but arises as an incidental question in the course of a dispute regarding the enforcement of the parties’ rights and obligations or the protection of the investment. The need to incidentally determine an issue as an assumption for the decision of the claim does not affect the powers of the arbitral tribunal. The tribunal does not rule on the incidental question, but simply considers it an assumption, and solely for the purpose of deciding the claim. Apart from this, the consideration of the incidental question will not have any legal effects because the incidental question is not the object of the tribunal’s decision. As long as the claim is within the tribunal’s scope of jurisdiction, therefore, the power of the arbitral tribunal is unaffected by the presence of an incidental question.86 An illustration of how incidental questions do not affect the scope of the tribunal’s jurisdiction is when the claim assumes that there was a valid Board resolution. Imagine a Shareholders agreement with an Arbitration clause. Under the Shareholders agreement, the parties commit themselves to, under certain conditions, contribute a certain amount to the capital of the company in which they are both shareholders. Among the conditions to be met is that the capital increase shall have been approved by the Board of Directors of the company. One party does not comply with its obligations to contribute to the capital, and the other party initiates arbitration to obtain reimbursement of damages for breach of the Shareholders agreement. The first party alleges that it did not breach its obligations because the Board resolution was not valid, and therefore the obligation to contribute to the capital was never triggered. The validity of the Board resolution is not within the scope of the arbitral tribunal’s jurisdiction. Even assuming that the issue of validity of a Board resolution was arbitrable (which often is not the case), the issue is not covered by the Arbitration agreement, which is entered into between two shareholders of the company and refers to arbitration disputes between the two parties and arising out of their agreement – neither the company nor the other shareholders are party to the Arbitration agreement. The arbitral tribunal does not have the power to rule on the validity of the Board resolution, but it can consider it an incidental question. This is necessary to 86

Confirming that issues of corruption are not be considered issues of jurisdiction, but issues of merits, see Cour d’appel de Paris, 25 May 2021, n° 18/27648 (Cengiz v. Libya); Cour d’appel de Paris, 28 September 2021, n° 19/19834 (Nurol v. Libya); Cour d’appel de Paris, 12 October 2021, n° 19/21625 (Abouk Halil v. Senegal).

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determine whether the obligation to contribute to the capital was triggered and therefore whether or not there was a breach of contract. The arbitral tribunal will, therefore, incidentally consider the validity of the Board resolution. The arbitral award, however, will not have any res iudicata effect as far as concerns the validity of the Board resolution. This means that the determination made by the arbitral tribunal of the validity of the Board resolution as an incidental question will not have any effects apart from contributing to the determination of the primary claim – that is, whether there has been a breach of contract. A parallel reasoning may be carried out for disputes involving issues of corruption: as long as the claim is within the scope of the Arbitration agreement, for example, a claim for reimbursement of damages as a consequence of breach of contract, arbitration is not excluded by the simple fact that a defence invoking the contract’s invalidity assumes an incidental evaluation of whether the contract was tainted by corruption. In investment arbitration, however, the issue of corruption is sometimes deemed to affect the arbitral tribunal’s jurisdiction. This is because sometimes the scope of jurisdiction depends on the legality of the investment.87 This is particularly when the dispute is based on an investment treaty that explicitly grants protection only to investments made in compliance with the host state’s laws. The logic is that the treaty, including the offer to arbitrate, only covers legal investments. An investment that is tainted by corruption is illegal, and therefore not protected by the treaty and not included in the offer to arbitrate.88 According to this logic, the legality of the investment is a prerequisite for the applicability of the investment treaty as a whole, including the offer to arbitrate. This would be parallel to other prerequisites for the applicability of the treaty, such as the requirement that the investor be a national of a contracting state, or that the investment falls within the treaty’s definition of protected investment – see Section 5.5.4 for other examples of this reasoning. If an investment dispute is initiated by an investor who does not comply with the requirements laid down in the treaty,89 or regards an investment that does not correspond to the treaty’s definition of investment,90 the arbitral tribunal does not have jurisdiction on the dispute: the treaty does not apply, and therefore there is no basis for jurisdiction. 87

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Inceysa Vallisoletana, SL v. Republic of El Salvador, ICSID Case No ARB/03/26, 2 August 2006; Fraport AG Frankfurt Airport Services Worldwide v. Philippines, ICSID Case No ARB/01/01, 31 March 2014; Gustav F. W. Hamester GmbH & Co KG v. Republic of Ghana, ICSID Case No ARB/07/24, 18 June 2010; Anderson et al. v. Republic of Costa Rica, ICSID Case No ARB(AF)/07/3, 19 May 2010 (on an issue of illegality). For further references, see Yas Banifatemi, ‘The Impact of Corruption on “Gateway Issues” of Arbitrability, Jurisdiction, Admissibility and Procedural Issues’. Dossiers of the ICC Institute (2015): 16–31, pp. 23f. Tokios Tokeles v. Ukraine, ICSID Case No ARB/02/18, 29 April 2004. Salini et al. v. Morocco, ICSID Case No ARB/00/4, 23 July 2001.

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Similarly, if the requirement of legality is deemed to be part of the description of protected investment, and an illegal investment will fall outside of the scope of the treaty, the arbitral tribunal will not have jurisdiction. Sometimes, the assumption that treaty protection only applies to legal investments is deemed to be implicit.91 Can an implicit requirement of legality affect the jurisdiction of the arbitral tribunal? A parallel with commercial disputes suggests a negative answer: also under national contract law, like for investment protection, the legal system only affords protection to interests that are enforceable. Courts and arbitral tribunals are expected to enforce claims that are legal. Should an unenforceable or illegal claim be brought to court or arbitration, it will be dismissed. However, it will be dismissed on the merits, not because the illegality of the claim affects the court’s or the tribunal’s jurisdiction.92 5.4.2 Invalidity of the Arbitration Agreement Article V(1)(a) of the New York Convention, regulating the enforcement of an arbitral award, states that enforcement may be refused if ‘[t]he . . . agreement referred to in article II . . . is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made’. Articles 34 and 36 of the UNCITRAL Model Law contain similar wording, respectively, for annulment and for enforcement of an award. Arbitration agreements are usually in the form of an Arbitration clause contained in the contract regulating the commercial relationship between the parties. Based on the ambitions of self-sufficiency described in Chapter 1, the parties may be under the impression that their agreement to arbitrate relies exclusively on the contract and is, under any scenario, effective according to its terms. The validity of an Arbitration agreement, however, depends on the applicable law – and the law applicable to an Arbitration agreement is not necessarily the law applicable to the commercial contract. The applicable law will affect the scope and the form requirements for the Arbitration agreement, as well as the parameters for determining the parties’ consent. Section 1.5.4 showed how the drafting of Arbitration clauses evolved to specify which disputes are referred to arbitration; Section 5.4.8 will discuss how the applicable law 91 92

Plama v. Bulgaria; Phoenix Action Ltd v. The Czech Republic, ICSID Case No ARB/06/5, 15 April 2009. See, for example, the Hague Court of Appeal, stating that the Energy Charter Treaty does not assume the legality of the investment to be applicable: Judgment of Hague Court of Appeal of 18 February 2020, Case No 200.197.079/01; see the Swiss Supreme Court Decisions 11 December 2018, 4A-65/2018 and of 24 August 2022, 4A_492/2021, denying that illegality of the investment may have an impact on the arbitral tribunal’s jurisdiction under the Energy Charter Treaty, because the treaty does not limit its applicability to legal investments.

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affects which disputes are deemed to be arbitrable. The following sections analyse the impact of the applicable law on the validity of an Arbitration agreement. (a) Choice of Law by the Parties: Separability Parties rarely specify the law governing their Arbitration agreement. Usually, model Arbitration clauses recommended by arbitration institutions93 or (for ad hoc arbitration) by the UNCITRAL94 do not contain a choice of law specific to arbitration either. The Model clauses may suggest adding which law governs the contract, but this applies to the merits of the dispute, not to the procedural aspects of the arbitration, as is confirmed by the wording suggested by the LCIA (‘The governing law of the contract shall be the substantive law of [. . .]’) and by the SCC (‘This contract shall be governed by the substantive law of [. . .]’). Given that the parties seldom choose the law applicable specifically to the Arbitration clause, the question arises of the applicability to the Arbitration clause of the choice that the parties may have made to govern the commercial contract between them. If the parties chose Swiss law to govern the contract, and wrote that any disputes shall be solved by arbitration in France, does the choice of Swiss law extend to the Arbitration agreement? Traditionally, the separability doctrine has been held to imply that the Arbitration clause is an independent contract, and that the general choice of law made for the commercial relationship does not affect the Arbitration agreement. According to the separability doctrine, an Arbitration agreement is to be deemed separate from the contract regulating the commercial relationship between the parties – even if the Arbitration agreement is written in the form of an Arbitration clause in the main contract. Therefore, if the contract is terminated or becomes invalid, the Arbitration agreement is not affected and remains in force. The separability doctrine is confirmed in Article 16(1) of the UNCITRAL Model Law. Without the separability doctrine, a party could defeat any claim brought in arbitration by contesting the validity of the main contract. This does not mean, however, that an Arbitration agreement never can be terminated or be invalid – but the basis for ceasing to be in effect must directly affect the Arbitration agreement and cannot be derived from the main agreement.

93

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See, for example, the model clauses recommended by the ICC (https://iccwbo.org/dispute-resolutionservices/arbitration/arbitration-clause/); by the LCIA (www.lcia.org/Dispute_Resolution_Services/LCIA_ Recommended_Clauses.aspx); or by the SCC (https://sccinstitute.com/our-services/model-clauses/). An exception are the Arbitration clauses of the Hong Kong Arbitration Centre (HKIAC) (www.hkiac.org /arbitration/model-clauses), that recommend a choice of law specifically for the Arbitration clause. Contained in an annex to the Arbitration Rules, see https://uncitral.un.org/en/texts/arbitration/contrac tualtexts/arbitration.

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An example of invalidity that directly affects the Arbitration agreement is the lack of consent: if the contract was not properly formed because a party never consented to it, neither the main contract nor the separate Arbitration clause have become binding, as each of them requires consent.95 An example of invalidity of the main contract that does not affect the Arbitration clause is when the contract infringes competition law and therefore does not produce civil law effects. The sanction of invalidity imposed by competition law does not directly regard the Arbitration agreement that remains in force. Also, the circumstance that the main contract never came into force does not necessarily affect the Arbitration clause: if it can be proven that the parties had reached a consensus on entering into a contract containing an Arbitration clause, the consent to the arbitration clause may be considered independently from the consent to the main agreement,96 although this is not uncontroversial.97 The separability doctrine enjoys general recognition and is usually extended to the issue of the applicable law: being a separate agreement, the Arbitration clause is subject to its own law. The law governing the main agreement does not necessarily apply to the Arbitration clause. The Arbitration agreement is generally deemed to be subject to the law of the seat of arbitration, see Section 5.4.2(b). This position has been recently confirmed by, for example, French,98 German99 and Swedish100 courts, as well as by earlier English case law. However, the position was abandoned by the UK Supreme Court.101 The Court admitted that an Arbitration clause may more readily than other clauses be governed by a different law; however, there is a presumption that the parties, by choosing a governing law for the contract, have intended that law to apply to all clauses of the contract, including the Arbitration clause. The selection of the law applicable to the Arbitration agreement or the arbitral proceedings is particularly important when insolvency proceedings are initiated against a party, and it must be determined what impact this has on Arbitration agreements or proceedings. Under the insolvency law of some countries, Arbitration agreements cease to have legal effect when a party is subjected to insolvency proceedings, and pending arbitral 95 96 97

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99 100 101

DHL Project & Chartering Ltd v. Gemini Ocean Shipping Co Ltd [2022] EWCA Civ 1555. Swiss Supreme Court Decision 4A_84/2015. The English High Court came to the opposite result in Black Sea Commodities Ltd v. Lemarc Agromond Pte Ltd [2021] EWHC 287 (Comm). Cour de cassation, 20 December 1993, n° 91–16.828 (Dalico), which actually considered the Arbitration agreement independent of any state law, pursuant to the delocalisation doctrine. For a decision confirming independence from the law governing the main agreement, see Cour de cassation, 28 September 2022, n° 20–20.260 (Kabab-Ji) – which, incidentally, was rendered in the same case decided differently by the English Supreme Court, Kabab-Ji SAL (Lebanon) v. Kout Food Group (Kuwait) [2021] UKSC 48. Bundesgerichtshof, 26 November 2020, Case I ZR 245/19. Svea Court of Appeal, 20 May 2015, Case No T 8043–13. Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38, Kabab-Ji SAL (Lebanon) v. Kout Food Group (Kuwait) [2021] UKSC 48.

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proceedings need to be discontinued. The question is whether these insolvency laws apply when the Arbitration agreement is subject to a different law. Different approaches have been taken by different courts. A Swedish court classified the issue as a matter of validity of the Arbitration agreement. Under Swedish law, an Arbitration agreement is subject to the law of the seat of arbitration. In that case, the lex arbitri was Swedish law; under Swedish law, insolvency proceedings do not affect the validity of an Arbitration agreement. Hence, the fact that insolvency proceedings were initiated against a party in its country did not affect the Arbitration agreement or the arbitral proceedings in Sweden.102 In a series of cases involving the Polish company Elektrim, both English and Swiss courts had to deal with the consequences of insolvency proceedings having started while the arbitral proceedings were pending. Polish law contains a provision under which Arbitration agreements lose their legal effects once insolvency proceedings are initiated against a party to the agreement, and any pending arbitral proceedings must be discontinued. The English court applied the then applicable EU Insolvency Regulation, according to which the effects of insolvency proceedings have to be determined under the law of the country in which a lawsuit is pending (the lex fori). The lex fori was English law, and in English law there is no requirement to discontinue pending proceedings.103 Therefore, neither the Arbitration agreement nor the arbitral proceedings were affected by the Polish insolvency proceedings, and the award could be enforced. The Swiss Supreme Court classified the issue as a matter of legal capacity. Legal capacity is subject to the law of the party, see Section 4.5.2(d). The party being Polish, Polish law had to be applied. Based on the relevant specific provision of Polish law, the court came to the conclusion that the Polish party had lost its legal capacity as a consequence of insolvency proceedings. Not having legal capacity, it was not in a position to participate in arbitration proceedings. Hence, the award was rendered without jurisdiction and could not be enforced.104 In a later decision, the Swiss Supreme Court105 applied the same classification of the issue as a matter of legal capacity. The affected party being Portuguese, the Court applied Portuguese law to determine the effects of insolvency proceedings. The Swiss court found that, contrary to Polish law, Portuguese law does not deprive a party of its legal capacity as a consequence of insolvency proceedings. Portuguese law prohibits insolvent parties from participating in arbitration proceedings, but this is not a matter of legal capacity, and therefore is not a provision that the Swiss court must apply. 102 103 104

Svea Court of Appeal, 20 May 2015, Case No T 8043–13. Syska v. Vivendi Universal SA [2009] EWCA Civ 677. Swiss Supreme Court Decision 4A_428/2008. 105 Swiss Supreme Court Decision 4A_50/2012.

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For a soft law instrument attempting to guide in the intersection between insolvency and arbitration, see the 2021 IBA Toolkit on Insolvency and Arbitration.106 (b) Absent Choice by the Parties: Lex Arbitri If the parties did not choose the applicable law expressly for the arbitration clause (or, according to English courts, absent a choice of law made for the contract, which implicitly extends to the Arbitration agreement), it remains to determine which law applies to the Arbitration agreement. The New York Convention, which in Article II uniformly regulates the formal validity of the Arbitration agreement (see Section 5.4.2(c)), does not specify which law applies to the substantive validity of the Arbitration agreement. However, the Convention refers to the law governing the Arbitration agreement in the provision that lays down the only grounds upon which an arbitral award can be refused enforcement. One of the grounds for refusing enforcement is that the Arbitration agreement was invalid, and in this context the applicable law is specified. According to Article V(1)(a) of the New York Convention, the validity of the Arbitration agreement is governed by the law to which the parties have subjected that agreement (which, as seen in Section 5.4.2(a), is not necessarily the same as the law that the parties have chosen to govern their contractual relationship) or, failing any choice in this respect, the law of the country where the award was made. Given that the parties very seldom choose a law for the arbitration clause, the New York Convention generally leads to the application of the law of the country where the arbitral tribunal is seated to determine whether the Arbitration agreement is valid. (c) Formal Validity While the substantive validity is regulated by state law, the formal validity is uniformly regulated in Article II of the New York Convention. The interaction between state law and the New York Convention has undergone an interesting development which will be analysed in the following sections. (i) For Formal Validity the Standard was Set in New York Convention, but There Has Been an Evolution National laws may vary considerably in the formal requirements that they lay down for Arbitration agreements. Some lay down strict criteria, while others are less demanding, or lay down no formal requirements at all. Article 178(1) of the Swiss Private International Law Act requires the Arbitration agreement to be made in writing or any other means of communication allowing it to be evidenced by text.107 Similar criteria are 106

107

www.ibanet.org/LPD/Dispute_Resolution_Section/Arbitration/toolkit-arbitration-insolvency. See also the 1997 UNCITRAL Model Law on Cross-Border Insolvency. Article 178(1) of the Swiss PILA reads: ‘The Arbitration agreement has to be made in writing, by telegram, telex, telefax or other means of telecommunication which provide a record of the agreement.’

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found in Article 1031 of the German Code of Civil Procedure, which, in addition, specifies that the writing requirement will be deemed to have been met if the Arbitration agreement is contained in a document sent to one party and if such a party has not raised any objections in good time.108 Section 5 of the English Arbitration Act requires that the Arbitration agreement be in writing, which is explained as meaning that it has been made or evidenced in writing or is contained in an exchange in writing.109 However, Section 5 goes on to qualify as written agreements those that are also made other than in writing, as long as they refer to terms that are in writing and agreements that have been recorded in writing only by one party. It also specifies that reference to anything being written or in writing includes its being recorded by any means. Even more liberal is the Swedish Arbitration Act, Article 1 which recognises any Arbitration agreement provided that it has been agreed by the parties, without

108

German Code of Civil Procedure Article 1031 reads: (1) The Arbitration agreement shall be contained either in a document signed by the parties or in an exchange of letters, telefaxes, telegrams or other means of telecommunication which provide a record of the agreement. (2) The form requirement of subsection 1 shall be deemed to have been complied with if the Arbitration agreement is contained in a document transmitted from one party to the other party or by a third party to both parties and – if no objection was raised in good time – the contents of such document are considered to be part of the contract in accordance with common usage.

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English Arbitration Act Section 5 reads: (1) The provisions of this Part apply only when the Arbitration agreement is in writing, and any other agreement between the parties as to any matter is effective for the purpose of this Part only if in writing. The expressions ‘agreement’, ‘agree’ and ‘agreed’ shall be construed accordingly. (2) There is an agreement in writing (a) if the agreement is made in writing (whether or not it is signed by the parties), (b) if the agreement is made by exchange of communications in writing, or (c) if the agreement is evidenced in writing. (3) Where parties agree otherwise than in writing by reference to terms which are in writing, they make an agreement in writing. (4) An agreement is evidenced in writing if an agreement made otherwise than in writing is recorded by one of the parties, or by a third party, with the authority of the parties to the agreement. (5) An exchange of written submissions in arbitral or legal proceedings in which the existence of an agreement otherwise than in writing is alleged by one party against another party and not denied by the other party in his response constitutes as between those parties an agreement in writing to the effect alleged. (6) References in this Part to anything being written or in writing include its being recorded by any means.

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laying down any particular form for that agreement.110 A similar provision is found in the Norwegian Arbitration Act.111 An Arbitration agreement that is entered into by reference, tacitly or even orally, would satisfy the applicable formal requirements only if the applicable law is liberal in its requirements or lays down no formal requirements at all. On the other hand, an Arbitration agreement entered into electronically would be valid not only where the applicable law is liberal in its requirements or lays down no formal requirements, but also where there is a written requirement, since this requirement may be construed as including exchanges by various means of telecommunication. The same construction is also possible for Article II of the New York Convention, as will be discussed in Section 5.4.2(c)(iii). (ii) UNCITRAL Model Law on the Validity of Arbitration Agreements Article 7(2) of the Model Law originally defined the scope of the writing requirement for Arbitration agreements as follows: ‘An agreement is in writing if it is contained in a document signed by the parties or in an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement.’ The Model Law followed the New York Convention in requiring Arbitration agreements to be in writing. It clarified this requirement so as to cover technological developments that existed at the time it was drafted, while at the same time allowing for future technological developments, so long as they provide a record of the agreement. The original spirit of these instruments was to give effect to Arbitration agreements made using the technological means of communication commonly employed in business practice. In other words, the wording of the instruments was not to become a burden on the parties, preventing them from making use of developments in technology that did not yet exist at the time the instruments were drafted. Hence, the original version of the Model Law could be construed as allowing Arbitration agreements made electronically, even though electronic communication did not exist at the time of drafting the Model Law. This could be used as an argument in support of a similar interpretation of the New York Convention.

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Article 1 of the Swedish Arbitration Act reads: Disputes concerning matters in respect of which the parties may reach a settlement may, by agreement, be referred to one or several arbitrators for resolution.

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Section 3-10 of the Norwegian Arbitration Act reads: (1) The parties may agree to submit to arbitration disputes which have arisen, as well as all or certain disputes which may arise in respect of a defined legal relationship.

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The Model Law was amended on 7 July 2006 at UNCITRAL’s 39th session, and the amendments were recommended by the General Assembly at its 61st session.112 This was the culmination of a process that had begun in 1999 when the UNCITRAL Working Group on Arbitration took up the issue of the writing requirement for Arbitration agreements.113 With regard to qualifying an agreement made electronically as an agreement in writing, the Working Group emphasised that the clarification resulting from the amendment did not alter the existing liberal interpretation of the Model Law, but simply confirmed that interpretation.114 The 2006 amendments to the Model Law included two options for Article 7 on the writing requirement. One option maintained the original structure of Article 7 and specified what was to be understood by writing in new subsections 3 and 4. In this first option,115 Article 7(3) explained that the writing requirement is a question of proof of the agreement, and not a prerequisite for its existence. Article 7(4) then laid down how the writing requirement is to be understood. In doing so, it largely followed Article 6(1) of the UNCITRAL Model Law on Electronic Commerce. Thus, the writing requirement is met by an electronic communication if its content is accessible so as to be usable for subsequent reference. There then follows a non-exhaustive list of examples, including electronic data interchange, electronic mail, telegram, telex and telecopy. The debate within the UNCITRAL Working Group on Arbitration and the first option in the Article 7 amendments can be seen as confirmation that the writing

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UN General Assembly (2006a). The full text of the amended Model Law can be found at https://uncitral .un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/19-09955_e_ebook.pdf. See also the Explanatory Note to the amended version of the Model Law, with further references. UNCITRAL, Report of the United Nations Commission on International Trade Law on the work of its thirtysecond session, 17 May–4 June 1999, Supplement no 17, A/54/17, paras 344–50. See UNCITRAL, Working Paper on Settlement of commercial disputes, 6 February 2002, A/CN.9/WG.II/ WP.118, para 11. The text of the amended Article 7, option I, reads as follows: (1) [not amended: Arbitration agreement]. (2) The Arbitration agreement shall be in writing. (3) An Arbitration agreement is in writing if its content is recorded in any form, whether or not the Arbitration agreement or contract has been concluded orally, by conduct, or by other means. (4) The requirement that an Arbitration agreement be in writing is met by an electronic communication if the information contained therein is accessible so as to be useable for subsequent reference: ‘electronic communication’ means any communication that the parties make by means of data messages; ‘data message’ means information generated, received, sent or stored by electronic, magnetic, optical or similar means, including, but not limited to, electronic data interchange (EDI), electronic mail, telegram, telex or telecopy. (5) Furthermore, an Arbitration agreement is in writing if [wording as in the original Article 7(2): exchange of statements of claim and defence]. (6) [agreement by reference to another contract as in the original Article 7(2), amended in that the contract referred to does not need to be in writing].

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requirement should not exclude those means of communication commonly used by businesses. This is not to say, however, that the writing requirement is on the verge of being totally abandoned. While the original text of the Model Law permits Arbitration agreements entered into tacitly (in an exchange of statements of claim and defence where the alleged existence of the Arbitration agreement is not denied) or by reference, and while some state laws have already removed formal requirements, as seen in Section 5.4.2(c)(i), no consensus reigned over whether the Model Law should follow the initiative taken by those states. This can be seen from reactions to the second option in the Article 7 amendments.116 In this option, there was no reference to any formal requirements, and therefore no need to spell out that electronic communications complied with the writing requirement or that agreements entered into tacitly or by reference were permissible. The comments made by governments suggest that this option did not enjoy their full and unanimous support.117 It was nevertheless adopted as an alternative to the first option. As a consequence, states that adopt the UNCITRAL Model Law on International Commercial Arbitration have to choose between the first option requiring that the Arbitration agreement be in writing, where it will be necessary to clarify that any electronic communication meets that requirement, and the second option, where there are no formal requirements at all. While the first option does not appear incompatible with the New York Convention, as will be seen, the complete absence of formal requirements in the second option might create some problems. (iii) Article II of the New York Convention on the Validity of Arbitration Agreements Article II of the New York Convention requires states to recognise Arbitration agreements that have been entered into in writing (amongst certain other criteria). Article II(2) specifies: ‘The term “agreement in writing” shall include an Arbitral clause in a contract or an Arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.’ Whether or not this definition also covers agreements entered into electronically depends on the interpretation made of Article II(2).

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Option II of the amended Article 7 reads: ‘“Arbitration agreement” is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.’ See, particularly, the comments in UNCITRAL, Draft legislative provisions on interim measures and the form of arbitration agreement – Draft declaration regarding the interpretation of articles II (2) and VII (1) of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, by Italy (A/ CN.9/609), Belgium (A/CN.9/609/Add.3), France (A/CN.9/609/Add.5) and Austria (A/CN.9/609/Add.6). Germany, on the other hand, favoured the second option (A/CN.9/609/Add.2).

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There is no explicit reference to electronic telecommunication in the wording of Article II. This is hardly surprising, as no one could have imagined in 1958, when the Convention was drafted, that technological developments would lead to electronic exchanges between opposite ends of the world and that such exchanges would be part of daily life for international business. The wording of the New York Convention needs to be interpreted in light of the technological context in which the Convention was drafted. The reference to ‘an exchange of letters or telegrams’ must be seen as a reference to the most modern means of telecommunication that existed at the time. The intention of the Convention was therefore to recognise Arbitration agreements that were entered into by absent parties using the means of communication that they generally employed in the course of their business. In 1958, these were letters and telegrams. Technological development subsequently led to the telex. Exchanges by telex were not expressly referred to in Article II(2) of the New York Convention, yet court decisions in various countries stated that Article II(2) must be construed to cover exchanges by telex, too.118 Further technological development made way for the fax machine and, again, although there is no explicit reference to faxes in Article II(2) of the New York Convention, courts have construed the Convention as covering Arbitration agreements entered into by fax.119 Technological development has continued and today it allows for communication by electronic means. It seems only natural to extend the interpretation of Article II(2) once again, so as to cover the most modern means of communication that are widely used for concluding contracts. To do otherwise would be contrary to the spirit of the Convention, which was aimed at recognising Arbitration agreements, provided that they were concluded in a form that was generally adopted for the conclusion of contracts. This interpretation is not only a natural continuation of the construction that the courts have made of Article II(2) whenever new means of telecommunication have become commonly adopted (i.e., first telex, then fax and now electronic communication), but it is also confirmed in the wording chosen by the UNCITRAL to define the writing requirement for Arbitration agreements in the original 1985 Model Law on International Commercial Arbitration and in the 2006 amendments to the Model Law, as seen. Although the Model Law does not formally constitute a basis for 118

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See, for example, the Austrian decision published in Yearbook Commercial Arbitration I (Kluwer International, 1976), p. 183, and the Swiss decisions published in Yearbook Commercial Arbitration XII (Kluwer International, 1987), p. 502 and XXI (Kluwer International, 1996), p. 681. For further references, see the note by the UNCITRAL Secretariat contained in Working Paper on Settlement of commercial disputes, 14 December 2005, A/CN.9/WG.II/WP.139, regarding the preparation of uniform provisions on the written form for Arbitration agreements, para. 22 and footnote 52, www.uncitral.org/uncitral/en/ commis-sion/working_groups/2Arbitration.html. See, for example, the Swiss decision published in Yearbook Commercial Arbitration XXI, p. 685 and, for further references, the UNCITRAL Secretariat note A/CN.9/WG.II/WP.139, footnote 53.

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interpreting the New York Convention, it is natural to construe the latter in light of the former, as they are linked by a common path of development.120 Such an interpretation is not, however, uncontroversial, and clarification has been sought121 to prevent different courts from construing the New York Convention in different ways and thereby undermining the uniformity of interpretation, which is one of the most valuable assets of the New York Convention. To this end, the UNCITRAL General Assembly adopted a ‘Recommendation regarding the interpretation of Article II(2) and Article VII, paragraph 1, of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done in New York, 10 June 1958, adopted by the United Nations Commission on International Trade Law on 7 July 2006 at its thirty-ninth session’.122 The adoption of this document followed intensive debate within the Working Group on how best to approach the need for clarification of the New York Convention. An interpretative instrument capable of encouraging a uniform interpretation in accordance with current practice was seen as the most effective means. To endorse its authority, the Recommendation recalls, in the preamble, the UNCITRAL’s responsibility in contributing to the progressive harmonisation and unification of international trade law and achieving a consensus between the world’s legal, social and economic systems. The preamble also recalls how important a uniform interpretation of the Convention is for promoting international trade, points out the diversity of legal practices relating to the form of the Arbitration agreement and refers to the Convention’s aim of allowing recognition and enforcement of arbitral awards to the largest possible extent. The Recommendation also refers to subsequent legal instruments, such as the UNCITRAL Model Law on International Commercial Arbitration and the UNCITRAL Model Law on Electronic Commerce. On this basis, Article 1 of the Recommendation calls for Article II(2) of the New York Convention to be interpreted in such a way that the circumstances described therein are not exhaustive.123 This therefore means that the 120

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The Swiss Supreme Court has expressly stated that Article II(2) must be read in light of Article 7(2) of the UNCITRAL Model Law on International Commercial Arbitration, see Albert Jan van den Berg, ‘The Application of the New York Convention by the Courts’. In A. J. van den Berg (ed.), Improving the Efficiency of Arbitration Agreements and Awards: 40 Years of Application of the New York Convention, ICCA Congress Series, No 9 (Kluwer Law International, 1999), p. 32. See the general observations and the discussion within UNCITRAL, Report of the Working Group on Arbitration on the work of its thirty-second session (Vienna, 20 – 31 March 2000), 10 April 2000, A/CN.9/ 468, paras. 88–106, https://documents-dds-ny.un.org/doc/UNDOC/GEN/V00/530/64/PDF/V0053064 .pdf?OpenElement. For an overview of court interpretation of Article II(2), see the UNCITRAL Secretariat note A/CN.9/WG.II/WP.139, footnote 57. UN General Assembly, Resolution adopted by the General Assembly on 4 December 2006, 18 December, A/RES/61/33 (2006b), https://documents-dds-ny.un.org/doc/UNDOC/GEN/N06/496/41/PDF/N0649641 .pdf?OpenElement. Article 1 of the Recommendation reads: ‘Recommends that article II, paragraph 2, of the Convention on Recognition and Enforcement of Foreign Arbitral Awards, done in New York, 10 June 1958, be applied recognising that the circumstances described therein are not exhaustive.’

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exchange of letters or telegrams mentioned in Article II(2) should be considered only as an illustration, which can be supplemented with exchanges made by other means of communication. A Recommendation by UNCITRAL does not have any binding effect on governments, and even less so on national judges interpreting the New York Convention. It is even doubtful whether such an instrument could be truly considered an authoritative interpretation of the Convention, since the UNCITRAL can hardly be regarded as the issuing or enacting body (the UNCITRAL was established in 1966). However, it would, without any doubt, have the authority of an official view from the United Nations’ body responsible for coordinating UN legal activities in the field of international trade law, covering the principal economic and legal system of the world in both developed and developing countries. There is therefore every reason to give the UNCITRAL’s position considerable weight when construing the New York Convention. However, it remains to be seen whether a Recommendation is a sufficient instrument on which to base an interpretation of Article II(2) that might differ considerably from the interpretation currently made in some countries. Interpreting Article II(2) as covering Arbitration agreements entered into electronically would not appear to overstep the limits of customary broad interpretation. As mentioned earlier, this has already been done in the past in respect of previous technological developments. The UNCITRAL Recommendation is thus simply adding its authoritative voice to confirm the correctness of such a construction. The situation is different, however, with respect to Arbitration agreements entered into tacitly or orally. Neither the UNCITRAL Recommendation nor Article II(2) of the New York Convention would appear to provide in their wording such a clear basis for interpretation. A construction permitting such agreements would be quite detached from a literal interpretation of Article II(2). To summarise, the New York Convention appears easily to accommodate the situation created by technological progress and, in particular, electronic communication. However, extending the writing requirement to new means of communication does not necessarily open the way to recognising Arbitration agreements that are not in the written form. In this latter respect, the New York Convention does not match the more progressive regulations found in some national laws and in the second option of the 2006 amendments to the UNCITRAL Model Law on International Commercial Arbitration. Some consequences of this lack of coordination will be analysed. (iv) Competition between State Law and Article II of the New York Convention As seen, the formal requirements for Arbitration agreements differ considerably from one country to another, and even the uniform regulation contained in the New York Convention is under some strain caused by the need to cover new technological developments. The range of requirements relating to form vary from none (as in

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Swedish and Norwegian law) to strict conditions (as in English law). The debate over the 2006 amendments to the UNCITRAL Model Law on International Commercial Arbitration shows a lack of consensus on eliminating the writing requirement. As already mentioned, the validity of an Arbitration agreement has important consequences at two stages: first, when the jurisdiction of the arbitral tribunal is being established, and then if, and when, the arbitral award has to be enforced. If an Arbitration agreement is deemed invalid at the first stage, the arbitral tribunal will have no jurisdiction, so the dispute will have to be submitted to the ordinary courts of law. If an Arbitration agreement is held to be invalid at the stage of enforcement, this will prevent the arbitral award from being enforced. It is legitimate to enquire whether an Arbitration agreement could be deemed invalid at the enforcement stage (thus preventing enforcement of the award), while having been considered valid in the initial phase (thus preventing ordinary courts from having jurisdiction over the dispute). Such a lack of coordination would obviously be detrimental to the winning party, which could neither enforce its award nor have the case tried in the ordinary courts. To ascertain whether such a risk really exists, it is necessary to look at the parameters for evaluating the validity of the Arbitration agreement at each stage. Article V(1)(a) of the New York Convention regulates the enforcement of an arbitral award and states that enforcement may be refused if ‘[t]he . . . agreement referred to in article II . . . is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made’. In spite of this wording, which refers the evaluation of the validity of the Arbitration agreement to national law, judicial practice has traditionally considered Article II(2) to contain the applicable criteria.124 It is only in Italy that some court decisions have been rendered in which different parameters were held to apply at the two stages, with Article II(2) not applying at the enforcement stage.125 The reason for considering Article II(2) as solely applicable stems from the fact that for fifty years (and especially in the early decades of its existence) the New York Convention represented an internationally uniform standard, which was, more often than not, simpler and less cumbersome than the provisions of national arbitration laws. The preference given to Article II(2), therefore, reflected a desire to apply a more arbitration-friendly system than that offered by national laws. However, the standard of what is considered arbitration friendly has shifted during recent years as a result of reforms in national arbitration laws.126 Whereas it would 124 125

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See the UNCITRAL Secretariat note A/CN.9/WG.II/WP.139, paras 12–15. See, for example, Cassazione Civile, 20 January 1995, No 637; Giorgio Gaja, ‘Sulle norme applicabili al merito secondo la nuova disciplina dell’arbitrato internazionale’. In Rivista dell’Arbitrato (Giuffre, 1994), p. 449; and Yearbook Commercial Arbitration XXI, pp. 602f. Formal requirements for Arbitration agreements have been liberalised over recent years in the laws of England (Arbitration Act 1996), Germany (Civil Procedure Code 1997), Sweden (Arbitration Act 1999) and Norway (Arbitration Act 2004). Switzerland anticipated this trend by modifying its arbitration

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have been relatively uncontroversial some decades ago to state that ‘[t]he meaning of the uniform rule character of Art. II(2) [is] that it constitutes both a maximum and a minimum requirement, thereby prevailing over either more or less demanding requirements of municipal law’,127 the uniform rule character of Article II(2) is now being increasingly challenged as a minimum requirement. When national laws are more arbitration friendly than the New York Convention, doubts may be expressed over the appropriateness of continuing to apply the Article II(2) criteria, rather than the more liberal criteria of national laws. The preference given to national law might be questionable at the initial stage of the arbitration, where the application of national law may be thought to violate the wording of Article II(2),128 but it would certainly seem appropriate at the enforcement stage, where it is rather the application of the standard contained in Article II(2) that violates Article V (1)(a). The reason for not applying Article V(1)(a) literally disappears if the applicable national law is more arbitration friendly than Article II(2). The arbitration-friendly character of some national laws is therefore biting into the character of Article II(2) as a uniform rule, at least at the stage of enforcing an award. (v) May the More-Favourable-Law Provision of Article VII Assist? Article VII of the New York Convention, containing the so-called more-favourable-law provision, states that the provisions of the Convention shall not ‘deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon’. Thus, a national law favourable to enforcement can be applied instead of the criteria of the New York Convention. The UNCITRAL has pointed out the possible importance of this Article in permitting the application of state laws that are more favourable than the New York Convention. It also mentions the advisability of extending this Article to Arbitration agreements.129 Hence, the abovementioned Recommendation interpreting the New York Convention included an Article 2 stating that Article VII of the Convention should be read as allowing for the applicability of the law where the Arbitration agreement is sought to be relied upon.130

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legislation in 1987. The UNCITRAL Model Law on International Commercial Arbitration is even earlier, dating from 1985. van den Berg (1999), p. 31. See, however, the German Supreme Court decisions in Yearbook Commercial Arbitration II (Kluwer International, 1977), pp. 242f. and Yearbook Commercial Arbitration XX (Kluwer International, 1995), pp. 666ff., affirming that Article II(2) allows national law to be applied, commented on in van den Berg (1999), p. 32. See the UNCITRAL Secretariat note A/CN.9/WG.III/WP.142, paras 24–34, with an extensive analysis of court practice. Article 2 of the Recommendation reads: ‘Recommends also that article VII, paragraph 1, of the Convention on Recognition and Enforcement of Foreign Arbitral Awards, done in New York, 10 June 1958, should be applied to allow any interested party to avail itself of rights it may have, under the law or treaties of the

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Article VII of the Convention and the UNCITRAL Recommendation do not, however, answer all of the problems that might arise from conflicting requirements in relation to the form of the Arbitration agreement. According to the UNCITRAL Recommendation, Article VII is of assistance only where the more favourable standard is contained in the law of the country where the Arbitration agreement is sought to be relied upon. In the case of enforcement, this would need to be the law of the country where enforcement is sought (for which the validity of the Arbitration agreement is a prerequisite). However, if the more favourable standard is in the law of the country where the arbitration took place, Article VII will be of no avail, not even after the UNCITRAL Recommendation. Article VII therefore only offers assistance if the law of the place of enforcement is more liberal in its formal requirements for the Arbitration agreement than the New York Convention. In practice, the liberal law upon which the parties may have relied when entering into an Arbitration agreement that does not comply with strict formal criteria is more frequently the law governing the Arbitration agreement; that is, it is usually the law of the place of arbitration. It is unlikely that, when entering into an Arbitration agreement, parties would rely on the flexibility offered by the law of the place of enforcement, since that place may vary depending on who is the loser and there could indeed be several places of enforcement if a party has assets in various countries. So, reliance on such law would lead to unpredictability over the validity of the Arbitration agreement. Parties are more likely to rely on the flexibility offered by the law governing the arbitration, since they have chosen this law. In this case, however, Article VII would be of no assistance, unless the court of enforcement were to construe it so broadly as covering the law of the place of arbitration or the law chosen by the parties to govern the Arbitration agreement. Yet such an interpretation would exceed the UNCITRAL Recommendation. (vi) Is the Procedural Requirement of Article IV an Obstacle? Article IV of the New York Convention contains what could represent an obstacle to the enforcement of an award based on an oral Arbitration agreement. It is generally thought that the New York Convention requires an award to be enforced unless one of the grounds for refusing enforcement listed in Article V applies. While an oral Arbitration agreement would be valid under Article V(1) (a) if governed by Swedish or Norwegian law,131 it could be suggested that enforcement under the New York Convention would be denied, as it would be impossible to provide the court with ‘[t]he original agreement referred to in Article II or a duly

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country where an Arbitration agreement is sought to be relied upon, to seek recognition of the validity of such an Arbitration agreement.’ Assuming one does not follow the generally accepted practice, described in Section 5.4.2(c)(i), of reading Article V(1)(a) as containing an internal reference to Article II(2) (requiring a written agreement).

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certified copy thereof’, as stated in Article IV. Yet, this obstacle is not insurmountable if one considers the hierarchy between Articles IV and V of the Convention. Article V can be regarded as the central pillar of the Convention, containing the grounds for refusing enforcement of an award. It could be argued that if the conditions for validity mentioned in Article V(1)(a) are met, then Article IV should not add further conditions for validity, and that its provisions are merely procedural rules and cannot deprive a party of the benefit of Article V. However, this would then disregard one of the only two procedural conditions contained in the Convention.132 The UNCITRAL’s 2006 amendments to the Model Law on International Commercial Arbitration included a change to Article 35, which corresponds in substance to Article IV of the New York Convention. In the new wording of Article 35, the requirement that the party seeking enforcement provide ‘the original agreement referred to in article 7 or a duly certified copy thereof’ has disappeared. Interestingly, although the 2006 UNCITRAL Recommendation regarding the interpretation of Article II of the New York Convention mentioned that Article VII should be extended to Arbitration agreements, it did not clarify that Article IV cannot be used to create additional grounds for refusing enforcement. This may possibly be explained by the continuing existence of the writing requirement in Article II. Even though the Recommendation encourages an extensive interpretation of Article II, the agreement must still be in writing according to Article II. Hence, Article IV’s requirement that a copy of the Arbitration agreement be supplied when seeking enforcement of the award does not create an additional criterion, but simply extrapolates from the criterion already existing in Article II. Article IV would, on the other hand, create an additional criterion if a strict interpretation of Article V(1)(a) led to the application of a national law that did not require the Arbitration agreement to be in writing. In the example given of an award based on an oral Arbitration agreement governed by Swedish law (and therefore valid under Article V(1)(a)), a strict interpretation of Article IV might lead a court to refuse enforcement because the provision contained in Article IV cannot be complied with. That obstacle could, however, be removed if enforcement is sought in a country whose liberal legislation is made applicable through the more-favourable-law provision of Article VII (assuming that a similar adaptation to accommodate the absence of formal requirements for Arbitration agreements has been made as in Article 35 of the UNCITRAL Model Law on International Commercial Arbitration). However, the winning party is not always able to choose the country where the award is enforced, as this depends on where the losing party has sufficient assets. If enforcement is sought in a country with formal requirements for the Arbitration agreement, Article VII, as seen, will be of no help. The enforcement court will 132

A Norwegian Court of Appeal has in the past refused enforcement of an award on the basis of a violation of Article IV of the New York Convention: Halogaland Court of Appeal, 16 August 1999, Stockholm Arbitration Report, 1999 at pp. 121ff., with observations by G. Nerdrum. See also Giuditta CorderoMoss, ‘Tvangsfullbyrdelse av utenlandske voldgiftsavgjørelser’. Nytt i Privatretten 1 (2000), pp. 15–16.

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therefore have to decide whether the impossibility of being able to comply with Article IV is a ground for refusing enforcement additional to the grounds exhaustively listed in Article V, or whether it can disregard the procedural requirement laid down in Article IV. (vii) Conclusion If courts of enforcement follow the customary interpretation of Article V(1)(a) of the New York Convention – that is, they refer to Article II(2) to determine the validity of the Arbitration agreement – they will refuse enforcement of an award if the Arbitration agreement does not satisfy the formal requirements laid down in Article II(2). Arbitration agreements entered into electronically easily satisfy those requirements, especially in light of the UNCITRAL Recommendation. This is not the case, however, with oral Arbitration agreements, even though they may be valid under some state laws and according to the second option of the UNCITRAL’s 2006 amendment to Article 7 of the Model Law on International Commercial Arbitration. If a winning party finds it impossible to obtain the enforcement of an award in its favour, it might wish to file a suit before an ordinary court of law, with a view to obtaining an enforceable judgment in preference to an unenforceable arbitral award. However, depending on the country in which the suit is brought, the court might decline jurisdiction on the ground that the dispute is covered by an Arbitration agreement which, albeit oral, is valid under the law of that country. Thus, it could be said that the liberal position taken on the form of Arbitration agreements in some recent legislation and in the second option of the UNCITRAL’s 2006 amendment to Article 7 of the Model Law might have the opposite effect of that intended. Rather than facilitating arbitration, it might complicate the application of such a useful instrument as the New York Convention. The texts adopted by the UNCITRAL in 2006 help to reinforce the arbitrationfriendly approach underlying the New York Convention. This is particularly relevant to Arbitration agreements entered into electronically. However, the fact that it has been impossible to agree on the complete removal of any formal requirements for Arbitration agreements shows that parties still need to be cautious where non-written Arbitration agreements are concerned and that they should not rely blindly on the most advanced and arbitration-friendly systems. From the New York Convention it follows that an Arbitration agreement has to be recognised as a sufficient basis for the jurisdiction of an arbitral tribunal, as long as the matter is deemed arbitrable. Arbitrability is regulated by the law of the state whose courts are supposed to recognise the Arbitration agreement. We will come back to the scope of the rule on arbitrability in Section 5.4.8. For the moment, it may suffice to note that a dispute is usually deemed arbitrable if it regards a subject matter that is within the free disposal of the parties.

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5.4.3 Legal Capacity As seen in Chapter 1, it seems to be quite a widespread attitude among practitioners to rely fully and solely on the law chosen by the parties, and to disregard any other laws on the basis that an international arbitral tribunal will be obliged to follow the will of the parties. It may therefore come as a surprise that the law chosen by the parties to govern the contract does not decide whether the parties had the legal capacity to enter into the contract. This matter is usually decided by the law applicable to each of the parties, see Section 4.5.2(d). The relevance of each party’s own law in this connection is confirmed by the UNCITRAL Model Law and the New York Convention. The New York Convention says in Article V(1)(a) that one of the grounds for refusing the recognition or enforcement of an award is that one of the parties to the Arbitration agreement was under some incapacity under its own law. The UNCITRAL Model Law has used this Article of the New York Convention as a basis for its own rules on annulment of awards and on the possibility of refusing recognition or enforcement, respectively, in Articles 34(2)(a)(i) and 36(1)(a)(i). The relevance of private international law to the question of legal capacity in arbitration is illustrated by a Swedish Court of Appeal decision that set aside an arbitral award rendered under the rules of the SCC. The Court of Appeal affirmed, among other things, that the law of Ukraine is applicable to the question of the legal capacity of the Ukrainian party, notwithstanding that the contract contained a Governing law clause choosing Swedish law.133 The decision was based on the old Swedish Arbitration Act. The new Arbitration Act from 1999, however, does not present changes that would lead the court to take a different position regarding the specific question of the law applicable to the capacity of a party to enter into the Arbitration agreement and the invalidity of the award if such a law had been violated.134 The factual circumstances of the case are quite complicated, and it is not relevant here to refer to them in full. The essence is that a Shareholders’ agreement, containing also an arbitration clause, was signed by two officers of the Ukrainian defendant, who put their names beside the signature line, which was left empty for the signature of the defendant’s Chairman. The Chairman never signed, and the defendant contested that the agreement had become binding. The Shareholders’ agreement contained a Choice-of-law clause that determined Swedish law as the governing law. 133

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Svea Court of Appeal, 17 December 2007, Case No T 3108–06 (State of Ukraine v. Norsk Hydro ASA), see ITA Monthly Report, Kluwerarbitration, May 2008, Volume VI, Issue 5. The legal incapacity to enter into the Arbitration agreement is a ground for invalidity of the award according to Article 34(1) of the 1999 Swedish Arbitration Act, see the preparatory works: SOU 1994:81 p. 77 and prop. 1998/99:35 p. 48, as well as Lars Heuman and Sigvard Jarvin, The Swedish Arbitration Act of 1999, Five Years On: A Critical Review of Strengths and Weaknesses (JurisNet, 2006) pp. 237f. In the new Act, the invalidity is no longer ‘absolute’, which means that it must be raised by the interested party as a defence within a certain term: see prop 1998/99:35, p. 138f.

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The Court affirmed repeatedly that Ukrainian law is applicable to the question of the capacity of a person to sign an agreement with binding effects for a Ukrainian entity. The Court examined the authority of the two officers under Ukrainian law and concluded that one of them had the authority to bind the defendant, whereas the other one did not. The Court then examined what formal requirements Ukrainian law has for the effectiveness of the signatures placed under the agreement, and it concluded that, under Ukrainian law, the Shareholders’ agreement would have required two signatures, whereas the Arbitration agreement contained in the arbitration clause could become binding with only one signature. Thanks to the doctrine of severability, this could have been sufficient to consider the Arbitration agreement binding on the defendant, as a matter of Ukrainian law. However, the Court examined the location of the signatures beside the signature line and established, on the basis of witness evidence, that the two signatures were not meant as binding signatures, but as an endorsement, placed on the document by the administration for the benefit of the Chairman, who would thus know that the document was ready to be executed. The Court found that, as a matter of Ukrainian law and practice, such a visa did not correspond to the execution of a contract and that a proper signature was necessary. The Chairman never signed the agreement, and therefore the Court found that the Arbitration agreement never came into effect for the defendant. According to Article 20(1) of the old Swedish Arbitration Act, the award rendered on the basis of that Arbitration agreement was declared null by the Court of Appeal. Had the decision been taken according to the new Swedish Arbitration Act, the award would have been set aside on the basis of Article 34(1).135 The Svea Court of Appeal, thus, considered first the legal capacity to enter into an agreement with binding effects for the represented party and affirmed that it is governed by the law applicable to that party – irrespective of what law the parties agreed on to govern the contract. The Court proceeded to investigate whether the signatories made use of the authority to bind the principal – an investigation that was also based on the law and practice prevailing in the jurisdiction of the party in question and not on the law governing the contract. For the sake of completeness, it should be mentioned that the Svea Court of Appeal decision was presented to the Supreme Court for appeal, but the Swedish Supreme Court denied leave to appeal.136 Thus, the Svea decision is final, and the Court of Appeal’s position that the legal capacity of a party is governed by the law applicable to that party is indirectly confirmed by the Supreme Court. The Swedish decision finds a basis in international instruments on arbitration, as is shown by the reference made at the beginning of this section to Article V(1)(a) of the 135

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Assuming that the defence had been raised within the term. In the specific case, the defence had been raised well after the term had lapsed. Under the old Arbitration Act, incapacity to enter into the Arbitration agreement was considered an absolute ground for voidness; i.e., the award became void automatically, and the voidness could not be affected by the lapse of time. Decision dated 2 June 2008, Case No T 339–08.

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New York Convention and the similar Articles 34 and 36 of the UNCITRAL Model Law. It must be pointed out that Sweden has not adopted the Model Law. However, Sweden used the Model Law as a reference when it reformed its arbitration law. As a result, the grounds for invalidity that are being examined here are common both to annulment and to the enforcement of awards in the countries that adopted the Model Law, as well as in Sweden. A similar reasoning was applied by the UK Supreme Court,137 in a decision based not on the lack of legal capacity of one of the parties, but on the relevance that that party’s law has to the criteria for being deemed bound by an agreement. It may be interesting to point out that the UK Supreme Court refused to enforce this award, because it found that, under French law, the Government of Pakistan could not be deemed to be bound by the Arbitration agreement. However, the French courts, who had been called upon to decide on the validity of the same award, applied French law in a way that led to the opposite outcome and confirmed the award.138 The Swiss Supreme Court139 also applies the law of the party to the issue of that party’s legal capacity, see the decisions rendered in connection with the effects of insolvency on legal capacity mentioned in Section 5.4.2(a). The foregoing illustrates that the consideration of private international law is relevant even when an international contract contains an Arbitration clause. The question of whether the contract was signed by someone having the capacity to bind the respective party is not decided on the basis of the law chosen by the parties, but on the basis of the law applicable to each of the parties. This law, in turn, is identified by applying private international law rules, as seen in Section 4.5.2(d). 5.4.4 Constitution of the Arbitral Tribunal Another group of grounds for invalidity or unenforceability of an award is connected with the proper constitution of the arbitral tribunal – either because the parties’ instructions were not followed, or because the tribunal turned out not to have been impartial or independent, or because the rules on the constitution of the tribunal were not complied with. These grounds, important as they are for the principle of due process, have less relevance to the question that interests us here:140 that is, to what extent the national law applicable to the contract may have an impact on the effectiveness of an award. 137

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Dallah Real Estate & Tourism Holding Co v. Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46. Cour d’appel de Paris, 17 February 2011, n° 09–28533. Swiss Supreme Court Decisions 4A_428/2008 and 4A_50/2012. For an extensive comparison of the regulation of independence and impartiality in various legal systems and for the main important international courts, including commercial and investment arbitration, see Cordero-Moss (2022).

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However, the importance of national law is evident also in these procedural issues. Particularly regarding the principles of independence and impartiality of the arbitral tribunal, states have mandatory rules that cannot be derogated from by the parties. The principle of equality is one of these: if the parties agree to a mechanism for appointing the arbitral tribunal that infringes the principle of equality between the parties, the courts will consider the arbitral tribunal as not properly constituted, and the award will be set aside or refused enforcement.141 As mentioned in Section 2.2.6(e), among the important and well-received sources of soft law that have been developed are the IBA Guidelines on Conflict of Interests. They enjoy widespread recognition irrespective of the applicable law and contribute to the impression that arbitration is not subject to specific national laws, but to a transnational frame. While to a large extent this may be a correct observation, it meets restrictions when national courts are involved, as they often are in respect of issues of due process such as the arbitral tribunal’s independence and impartiality. There are examples of court decisions applying standards that differ from those laid down in the IBA Guidelines, see Section 2.3.2(c). This confirms that the parties may not rely simply on the transnational soft law: they also need to take into consideration the applicable national law. 5.4.5 Excess of Power (Ultra Petita Partium and Infra Petita Partium) Article V(1)(c) of the New York Convention states that an award may be refused enforcement if it decides on matters beyond the scope of the arbitral tribunal’s power. Articles 34 and 36 of the UNCITRAL Model Law contain similar provisions. It should be pointed out that an award may be deemed in excess of power not only when it decides issues that were not included in the Arbitration agreement or in the pleadings of the parties (so-called award ultra petita partium: the arbitral tribunal’s decision goes beyond the scope of what the parties requested), but also when it does not decide on issues that have been pleaded by the parties (so-called award infra petita partium: the arbitral tribunal does not decide on all of the parties’ requests). Some arbitration laws, such as the English Arbitration Act142 and the Swiss PILA,143 expressly mention the invalidity of an award that is infra petita. This, however, is not a uniform regime, and some systems, such as those of France144 and Hong Kong,145 do not permit setting aside an award that is infra petita.

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An exception has to be made for English law. Under Section 17 of the English Arbitration Act, the arbitrator who was appointed by one party may act as sole arbitrator if the tribunal was supposed to be composed of three arbitrators and the other party does not appoint an arbitrator. Section 68(2)(d). 143 Article 190(2)(c). Cour d’appel de Paris of 27 May 2010, n° 09/08191 (M. Cohen v. Société Total Outre Mer SA). Brunswick Bowling & Billiards Corporation v. Shanghai Zhonglu Industrial Co Ltd [2009] HKCFI 94.

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The Model Law and the New York Convention are silent on the matter. However, case law and literature extend the ground of excess of power also to this scenario.146 This does not mean that an award must comment on every single argument or piece of evidence that was produced by the parties.147 Even failure to consider an issue does not necessarily affect the validity or enforceability of an award, if it is not demonstrated that the disregard had a material impact on the outcome.148 Generally, the scope of application of the exception of excess of power is deemed to be the object of the dispute. We can assume, for example, that a contract for the sale of certain production equipment contains an Arbitration clause. At a certain point in time, a dispute arises between the parties, and the arbitral tribunal is asked to decide whether the buyer has to pay the full price for the delivered equipment or a reduced price due to certain alleged defects of the equipment. The arbitral tribunal comes to the conclusion that the price has to be paid in full but resolves to set off part of that price against a claim that the buyer has against the seller under a different contract, for example, for the sale of some of the buyer’s products. According to the UNCITRAL Model Law and the New York Convention, the arbitral award is ineffective (at least for the part determining the set-off) because of excess of power. The mandate that the tribunal had received through the Arbitration clause was to decide whether the price was to be paid in full or in part due to defects in the delivery. Any decision regarding counterclaims deriving out of other contracts was not part of the dispute submitted to that arbitral tribunal with the arbitration clause and could not be decided upon by that award. It is generally recognised that the rule on excess of power, as contained in the New York Convention and the UNCITRAL Model Law, is to be applied restrictively. 146

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See Born (2021a), para 26.5[4][i]. For Canada, see Ontario Court, Superior Court of Justice, Consolidated Contractors Group SAL v. Abatovy Minerals SA, 2016 ONSC 7171; for Germany, see CLOUT Case No 375 (Bayerisches Oberstes Landesgericht, 15 December 1999, No 4 Z Sch 23/99), available at www.dis-arb.de/de/ 47/datenbanken/rspr/bayoblg-az-4-z-sch-23-99-datum-1999-12-15-id16; München Oberlandesgericht, 5 October 2009, No 34 Sch 12/09; Frankfurt am Main Oberlandesgericht, 10 July 2003, No 26 Sch 01/03, available at www.dis-arb.de/de/47/datenbanken/rspr/olg-frankfurt-amaz-26-sch-01-03-datum-2003-07-10id226; for Singapore, see CRW Joint Operation v. PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33, ICC Case No 18272/CYK; BLB and another v. BLC and others [2013] SGHC 196; AKN and another v. ALC and others and other appeals [2015] SGCA 18. In CLOUT Case No 30 (Ontario Court, General Division, Canada, Robert E. Schreter v. Gasmac Inc., 13 February 1992, OJ No 257), the court stated that the absence of reasons in the award does not mean that a party’s right to be heard during the arbitration was violated; for Germany, see Bayerisches Oberstes Landesgericht, 18 January 2022, No 101 Sch 60/21 and Frankfurt am Main Oberlandesgericht, 27 August 2009, No 26 Sch 03/09. In the latter case, it was stated that the mere silence of the award on certain points raised by the defendant does not mean that the arbitral tribunal has not considered the argument, unless the specific circumstances of the case show the contrary, as for instance, when the argument is of crucial relevance for the legal outcome. Swiss Supreme Court Decision 4A_618/2020. See also 4A_678/2015, considering that the issues had been dealt with implicitly.

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Thus, the rule is deemed to apply to the factual scope of the dispute, and not also to the arguments made by the parties149 or their choice of law.150 This rule is generally interpreted so restrictively that it is, as a rule, considered not relevant to questions relating to the application of the law. As will be seen in Section 5.6, however, it may not be excluded that the remedy is applied in the case of disregard by the arbitral tribunal of the parties’ choice of law. This ground for invalidity and unenforceability can be relevant to the question discussed in this book, from the opposite point of view to what has been seen so far. So far, we have mainly examined the question of the effectiveness of an award that supports the ambitions of the self-sufficiency of the contract: would an award that merely applies the law chosen by the parties and disregards the applicable law be valid and enforceable? The rule on excess of power is relevant from the opposite perspective: assuming that the arbitral tribunal wishes to apply the governing law on its own motion, or even notwithstanding a different choice of law made in the contract, would the tribunal exceed its power? The analysis on this aspect will be carried out in Sections 5.5.5 and 5.6. 5.4.6 Irregularity of Procedure The procedure followed by the tribunal must respect the parties’ agreement, as well as the fundamental principles of due process and the mandatory rules of the applicable arbitration law (or investment treaty) – otherwise the award is invalid according to the UNCITRAL Model Law Article 34(2)(a)(iv)151 and unenforceable according to the New York Convention Article V(1)(d). Procedural irregularity may lead to invalidity or unenforceability of an award if it seriously affects the respect for due process. This rule may cover the disregard of the mandatory rules on the applicable procedural law, but also situations where the tribunal has not acted impartially; however, its interpretation is very restrictive.152 The defence of procedural irregularity adds one parameter to the evaluation of the arbitral award: not only does it require the court to measure the arbitral procedure against the parties’ instructions contained in the Arbitration agreement, it also makes reference to the arbitration law of the place of arbitration.153 149

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Albert Jan van den Berg, ‘Consolidated Commentary on the New York Convention’. ICCA Yearbook Commercial Arbitration XXVIII (Kluwer Law International, 2003), p. 512c. See also Born (2021a), para 26.5[4][c][i]. See, for example, Gabrielle Kaufmann-Kohler, ‘The Arbitrator and the Law: Does He/She Know It? Apply It? How? And a Few More Questions’. Arbitration International 21.4 (2005), 634f. And may therefore be set aside by the courts of the country of origin. See also the Swedish Arbitration Act, Article 34(6). The same rule applies to the annulment of ICSID awards, see the ICSID Convention, Article 52(1)(d). See van den Berg (2003), pp. 521 2 and 523 4; Born (2021a), para 26.5[5][c]. For ICSID arbitration, see Schreuer et al. (2010), Article 52, paras 293ff. The wording is, in the UNCITRAL Model Law: ‘The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in

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The defence of procedural irregularity is seldom applied in the context of choice of law or construction of the contract. Generally, this defence concerns the composition of the arbitral tribunal, the respect of confidentiality and strictly procedural matters.154 However, as will be seen in Section 5.6.7, this rule may become relevant if the arbitral tribunal applies, on its own motion, a law that is different from the law selected in the contract. 5.4.7 Right to be Heard Both parties must have been given the chance to present their cases, otherwise the award is invalid according to the UNCITRAL Model Law Article 34(2)(a)(ii)155 and unenforceable according to the New York Convention Article V(1)(b). The adversary principle is fundamental in arbitration; however, this rule is also interpreted restrictively, so as to cover only fundamental principles of due process, such as failure to notify of the arbitral proceeding.156 In the systems that do not have a specific ground for annulment of the award relating to the inability of one party to present its case, such a serious violation of due process will be covered by the rule on the ordre public or procedural irregularity.157 As will be seen in Section 5.6.5, an active role by the arbitral tribunal in choosing the applicable law or developing its own arguments may challenge the adversary principle. 5.4.8 Conflict with the Arbitrability Rule Another ground that may be invoked to obtain annulment or prevent enforcement of an award is that the dispute was not arbitrable. This is laid down in Article V(2)(a) of the New York Convention and in Articles 34(2)(b)(i) and 36(2)(b)(i) of the Model Law. Together with the ground relating to public policy (see Section 5.4.9), this is a ground that can be raised on the court’s own initiative (ex officio). The other grounds that were discussed in Sections 5.4.1 to 5.4.7, as well as the ground that will be discussed in Section 5.4.10, in contrast, need be raised by a party.

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accordance with this Law’; and, in the New York Convention: ‘The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place.’ See Born (2021a), para 26.5[5]. See also Redfern et al. (2015), paras 11.82–11.86. And may therefore be set aside by the courts of the country of origin. See also the Swedish Arbitration Act, Article 34(6). The same rule applies to the annulment of ICSID awards; see the ICSID Convention, Article 52(1)(d). See van den Berg (2003), pp. 508 1 and 511 4. See also Born (2021a), para 26.5[3]. For example, the Swedish Arbitration Act, Article 34(6), and the ICSID Convention, Article 52(1)(d); see Schreuer et al. (2010), Article 52, paras 280ff.

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Moreover, as for public policy, the issue of arbitrability is governed by the law of the court that at any time is considering the issue. Therefore, depending on whether the issue is considered in annulment proceedings before the courts at the seat of the arbitration or enforcement proceedings before the courts of other countries, the criteria for arbitrability may vary. For the grounds that were discussed in Sections 5.4.1 to 5.4.7, to the contrary, the legal system determining validity and enforceability is the one indicated in the respective provision: the invalidity of the Arbitration agreement is determined by the law of the seat of arbitration (unless the parties have chosen another law to govern the Arbitration agreement); the legal capacity of the parties is determined by the law of each of the parties; the appointment and composition of the arbitral tribunal, as well as the regularity of the procedure, are determined by the law of the seat of arbitration. The Arbitration agreement, the legal capacity of the parties, the appointment and composition of the arbitral tribunal and the arbitral procedure are subject to the law indicated by the respective connecting factors, irrespective of which court considers the issue. For the arbitrability and the public policy defence, to the contrary, the connecting factor is the place of the court. If the award is challenged in one country and sought to be enforced in one or more other countries, arbitrability and public policy will be evaluated according to the criteria laid down in the law of the respective country. This special regime is due to the particularity of the interests that are at stake: as opposed to the grounds discussed in Sections 5.4.1 to 5.4.7 that can be waived by a party (it is enough for a party not to raise the issue), arbitrability and public policy protect the public interest and cannot be left to the discretion of the parties. Moreover, the courts must be in a position to apply their own law when the public interest is at stake. Hence, the applicability of the law of the court. There are various rules of state law that restrict the ability of the parties to submit to arbitration disputes between themselves. One of the main effects of submitting a dispute to arbitration is, as known, that the parties exclude the jurisdiction of courts of law on the same dispute. The other important effect of arbitration is that the winning party can present the award for enforcement to any court that has ratified the New York Convention. Arbitration enjoys such a significant recognition as long as the disputed matters concern areas that national legal systems consider suitable for self-regulation by private parties. As soon as matters of special economic or social interest are touched on, however, it can seem less appropriate for a state to waive jurisdiction or to lend its courts’ authority to enforce private awards. In such areas with important policy implications, states wish to preserve the jurisdiction of their own courts of law: this preference is based on the assumption that an arbitral tribunal would not be able or willing to apply the law as accurately as a judicial court would.

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(a) Incidental Questions Do Not Affect Arbitrability of the Dispute This does not mean that an arbitral tribunal does not have the jurisdiction to take into consideration mandatory rules or even overriding mandatory rules. A reasoning similar to the one carried out in Section 5.4.1 in respect of jurisdiction, applies here. An arbitral tribunal is empowered to consider, in its totality, the laws that govern the dispute, as long as their application remains within the sphere of the private law. It does not matter if an issue is regulated by mandatory rules (such as the time bar for exercising a right), if party autonomy is not allowed to select the law (such as for issues of intellectual property), if the issue has a public policy dimension (such as implications of criminal law) or it is subject to overriding mandatory rules (such as competition law). Some of these provisions and issues may belong to areas that are not arbitrable. However, as long as they have consequences for the parties’ rights and obligations towards each other, and the dispute submitted to arbitration regards these rights and obligations, the tribunal is empowered to consider them. Imagine a dispute in which a party requests reimbursement of damages for the other party’s alleged breach of contract. This is an arbitrable dispute as it arises out of a contract. Imagine now that the defaulting party argues that the contract was invalid because it was tainted by corruption. If the contract was invalid, that party cannot be held liable for having breached it, and reimbursement of damages is not due. The arbitral tribunal needs to consider the issue of corruption – not as the primary claim to be decided, but as an incidental issue for the purpose of determining the contractual claim. The consideration by the arbitral tribunal will not be a direct application of the provisions on corruption, nor will it be a final determination of the issue of corruption: an arbitral tribunal does not have the power to inflict administrative or criminal law sanctions. The arbitral tribunal will consider the provisions on corruption and determine the issue only to the extent necessary to resolve the contractual dispute. The dispute will regard rights and obligations between the parties, and it is arbitrable – notwithstanding that its resolution assumes the consideration of issues that are not arbitrable. If a party alleges that it is not in breach of contract because the contract was invalid as a consequence of violation of rules of competition law or of criminal law, such as corruption, the arbitral tribunal needs to consider whether the contract was valid or not. The issues of competition or of criminal law, in themselves, are not arbitrable, but in this case, they are mere incidental issues: they are not finally decided with effects for third parties; they are simply considered in the course of the determination of the contractual issue – has there been a breach of contract or not? The decision will have res iudicata effect only in this respect. This circumstance has been the object of debate, especially in connection with disputes involving questions of competition law.158 Competition law contains, as is 158

See the comments made in the preparatory works to the Norwegian Arbitration Bill (NOU 2001:33, pp. 51ff.) and to the Swedish Arbitration Act (SOU 1994:81, p. 86).

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known, overriding mandatory provisions; moreover, special bodies have the authority to impose fines and otherwise sanction the violation of these provisions. Hence, the question has been debated as to whether an arbitral tribunal has jurisdiction on disputes involving matters of competition law. A commercial arbitral tribunal is not a competition law authority with powers of public law. Therefore, if one party to a licence agreement requests an arbitral tribunal impose a fine on the other party because the licence agreement or that party’s actions violate competition law, the arbitral tribunal must decline jurisdiction. However, if that party requests the arbitral tribunal rule on the contractual consequences of that violation, the arbitral tribunal has jurisdiction: the tribunal may evaluate whether competition law has been violated and may decide on the consequences that that violation has for the parties. For example, it may decide that a certain contractual clause is invalid due to its conflict with competition law, and that therefore non-compliance therewith by one party does not constitute default under the contract. Disputes in which competition law issues arise incidentally were deemed to be arbitrable by the US Supreme Court in 1985 in Mitsubishi,159 see Section 5.4.8(c). The same balance can be found in a decision rendered by the CJEU in 1999, Eco Swiss160 – see Section 5.4.8(c). This decision established that competition law amounts to public policy in EU law, and that therefore an award that violates EU competition law may be refused recognition and enforcement under the New York Convention. The arbitrability of disputes involving competition law issues as incidental issues, however, was not questioned. Similarly, an arbitral tribunal may not rule on the validity of a patent, because this decision is under the exclusive jurisdiction of the competent patent authorities. However, an arbitral tribunal may take into consideration patent legislation to determine whether the patent has been violated, and what consequences this violation has for the parties. In such a case, the arbitral tribunal assumes, as an incidental question, that a valid patent exists and is valid.161 Similarly, a German court considered a dispute to be arbitrable even though it was related to the title of a patent application. The effects of a patent application are not arbitrable; however, whether the patent application shall be assigned to a party is a matter that can be agreed on between the parties and can be the object of an arbitration.162 In order to avoid any doubts, some modern arbitration laws have expressly confirmed the arbitrability of the contractual and private law aspects of the dispute, even if the dispute also involves matters that are regulated by overriding mandatory rules. The Norwegian Arbitration Act, Section 9.2, expressly specifies this circumstance in respect of competition law: a dispute would be arbitrable under Norwegian 159 160 161

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Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 US 614, 628 (1985). C-126/97 (Eco Swiss). Some Norwegian Supreme Court decisions have confirmed this approach: Rt. 1979 s. 1117, and Rt. 1977 s. 577. München Landesgericht, 5 May 2021, No 21 O 8717/20.

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law even if it relates to competition law, as long as the tribunal is asked to decide on the civil law effects of the competition law. The same rule is also to be found in the Swedish Arbitration Act, Section 1.3. One might wonder whether the legislators intended to exclude the arbitrability of the civil effects of any other regulatory provision such as patent law, since they have expressly mentioned only the civil law effects of competition law. The report on the Norwegian bill, however, specifies that there was no intention of excluding the arbitrability of the civil law consequences of other rules, rather a desire to confirm that aspect specifically for competition rules, which have often been the subject of disputes internationally.163 (b) The Scope of Arbitrability and Court Control Until recently, a clear trend could be observed towards reducing the areas in which disputes were not deemed as arbitrable – in other words, the scope of arbitrability increased. In the past decades, for example, the US legal system has undergone a clear shift from an expressed suspicion against arbitration, to an arbitration-friendly attitude;164 the same evolution can be observed in other legal systems, such as, for example, the Swedish system.165 The erosion of the arbitrability exception received particular attention in the field of competition law. It started in the United States with the Mitsubishi case,166 and was confirmed in Europe in the Eco Swiss case.167 These cases expanded the scope of arbitrability by permitting disputes, which were previously not arbitrable because they involved issues of competition law, to be arbitrable. In addition to paving the way to an (until recently) ever-increasing scope of arbitrability, these decisions showed a connection between court control and arbitrability: the courts, in those decisions, held that the subject matter was arbitrable because the courts would have the possibility of controlling the validity or the enforceability of such awards. This is known as the ‘second-look’ doctrine. Both disputes involved issues of competition law. The courts held that competition law fell within the ambit of public policy. Hence, courts could give the awards 163

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Report on the Bill on Arbitration, NOU 2001:33, comment on Section 2-1(2) (which became Section 9.2 in the Act). The first Supreme Court judgment recognising the arbitrability of matters that previously were deemed to be for the exclusive competence of courts of law was Scherk v. Alberto-Culver [1974] 417 US 506. See, for further references, Paul D. Carrington and Paul H. Hagen, ‘Contract and Jurisdiction’. The Supreme Court Review 8 (1997), 362f.; Jean R. Sternlight, ‘Panacea or Corporate Tool? Debunking the Supreme Court’s Preference for Binding Arbitration’. Washington University Law Quarterly 74.3 (1996), pp. 637ff. and 652. See, for example, the evolution regarding the validity of Arbitration clauses entered into in the framework of the general conditions of contracts, as it appears from the comparison of three Swedish Supreme Court Decisions rendered in 1949, 1969 and 1980: Lars Heuman, Current Issues in Swedish Arbitration (Kluwer Law International, 1990), pp. 22ff. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 US 614, 628 (1985). C-126/97 (Eco Swiss).

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rendered a ‘second look’ on the basis of the rule that permits the setting aside of an award or the refusal of its recognition and enforcement because it violates public policy, see Section 5.4.9. In other words, the second-look doctrine seeks to achieve the same rationale behind the arbitrability exception – that is, to ensure the accurate application of important legislation (such as those involving competition law), but without excluding it as a form of arbitrable subject matter. This is achieved through the exercise of control over the arbitral award rendered to ensure that public policy is not infringed. The link between court control and arbitrability is manifest in the case law of the CJEU. The Advocate General Wathelet pleaded for more extensive court control and criticised the minimalist approach,168 according to which court control may be exercised only in the case of manifest infringement of public policy, and only if the issue had not been examined in the arbitration proceedings (see Section 5.3.3(b)(ii)). The requirement that only manifest infringements may trigger court control was criticised for making court control illusionary – because many restrictions of competition that are forbidden in EU law by Article 101 TFEU would escape review. As will be seen in Section 5.4.9(i)(iv), in competition law cases the assessment may require complex evaluations, inter alia, of the economic context.169 The requirement that the court owes deference to the decision made by the arbitral tribunal was criticised for being at odds with the system of review of compatibility with EU law: as arbitral tribunals have no competence to refer to the CJEU questions for preliminary rulings, in the view of the advocate general, the responsibility for reviewing compliance with EU law must be placed with the courts and not with arbitral tribunals.170 On this basis, according to the advocate general’s opinion, the principle that a court may not independently review the substance of an award does not prevent the court from considering the issue of compliance with competition law, even though the issue has already been considered by the arbitral tribunal – given that Article 101 of the TFEU is a provision of fundamental importance in the EU legal order.171 The advocate general, therefore, assumed that arbitrability of these issues is compatible with EU law as long as court control adopts the maximalist approach.

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Judgment of the Court (First Chamber), 7 July 2016, C-567/14, Genentech Inc. v. Hoechst GmbH and Sanofi-Aventis Deutschland GmbH. Genentech Inc., Opinion of Advocate General Wathelet, paras 64–7, 2016 ECLI:EU:C:2016:177 (17 March 2016). Genentech Inc., Opinion of Advocate General Wathelet, paras 59–62. It is interesting to notice that the advocate general refers here to commercial arbitration. The same expressed the opinion that in investment arbitration the arbitral tribunal has to be deemed to be a permanent court within the meaning of Article 267 TFEU. This entails that investment tribunals are entitled to request preliminary rulings and are included in the system of mutual trust: see Case C-281/16 (Achmea), Genentech Inc., note 15, Opinion of Advocate General Wathelet, paras 84–135. Case C-567/14 (Genentech), note 41, Opinion, note 42, paras 70–2.

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The advocate general seemed to assume that any and all violations of Article 101 of the TFEU would amount to a violation of EU public policy.172 As will be seen in Section 5.4.9(d), this is not a correct assumption as the CJEU has repeatedly stated that only serious violations lead to infringement of public policy.173 In its final judgment, the CJEU ignored the matter and did not take a position on the scale from the advocate general’s maximalist approach with automatic effects to the minimalist approach and the impossibility to evaluate the infringement’s result under the specific circumstances. The matter was clarified, in an obiter dictum, in Achmea.174 This case concerned an award rendered in an investment dispute, between an investor from the Netherlands and the host state of Slovakia, based on the investment treaty between the Netherlands and Slovakia. The CJEU held that investment arbitration between EU member states is not compatible with the principle of autonomy under EU law, as arbitral tribunals may not refer preliminary questions on the interpretation of EU law to the CJEU, and therefore the unitary interpretation of EU law may be threatened. The Achmea decision is highly controversial, see Section 5.4.9(d). What is relevant here is that the CJEU confirmed, in obiter dictum based on an (unconvincing)175 distinction between investment arbitration and commercial arbitration, that the second-look doctrine permits arbitrability of commercial disputes, even when they concern issues of regulatory EU law. The CJEU found that the control that courts may exercise on arbitral awards is sufficient to permit the arbitrability of disputes involving issues of EU law, thus confirming the approach that it had taken in Eco Swiss. Notwithstanding this trend in favour of arbitrability, however, various areas of law are still deemed to be for the exclusive competence of courts of law. The areas where arbitrability is excluded vary from state to state: as a general rule, arbitration is usually permitted in all matters that fall within the boundaries of private law. This would exclude from the scope of arbitration matters such as taxation, import and export regulations, concession of rights by administrative authorities, bankruptcy and the protection of intellectual property. These matters are mostly regulated by mandatory rules from which the parties cannot derogate and where the parties are not allowed to choose the applicable law. An area where arbitration is gaining territory is that of corporate disputes – that is, disputes on the validity of resolutions taken by the shareholders or governing bodies 172 173

174 175

In the specific case, the Advocate General concluded that Article 101 TFEU was not violated. See Judgment of the Court (Fifth Chamber), 11 May 2000, C-38/98 (Renault), Régie nationale des usines Renault SA v. Maxicar SpA and Orazio Formento, and Judgment of the Court (First Chamber), 16 July 2015, C-681/13 (Diageo), Diageo Brands BV v. Simiramida-04 EOOD. Case C-284/16 (Achmea). For a criticism thereof, see Giuditta Cordero-Moss, ‘Achmea’s Distinction between Investment and Commercial Arbitration’. In Axel Calissendorff (ed.), The Future of Arbitration in Europe (Stockholm Centre for Commercial Law Skriftserie, 36 (2020b), pp. 17–28.

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of a company. It is possible to see an evolution from the traditional approach according to which corporate disputes are not arbitrable. Traditionally, corporate disputes are not deemed to be arbitrable because arbitration is based on the consent of the parties to the dispute and has effect only between the parties to the dispute. Corporate disputes, however, are not necessarily based on the consent of all involved parties, as a decision on the validity of a resolution may also have effects on parties who did not participate in the proceedings. This traditional approach was taken, for example, by the German Supreme Court in 1996.176 In 2009, the same court found that the company’s articles of association can contain a clause according to which decisions taken by an arbitral tribunal are binding on all shareholders and on third parties, as long as they are given the possibility of participating in the proceedings.177 Corporate arbitration is accepted by legislation, for example, in Switzerland,178 although not all legal systems accept it.179 (c) Threats to the Scope of Arbitrability The arbitrability exception is gaining importance after having been considered, for decades, to be irrelevant. There seems to be a disturbing trend in some domestic courts to restrict arbitrability when the dispute concerns issues for which it is important to ensure an accurate application of the law. As mentioned in Section 5.1.1, there is a growing suspicion against arbitration, which developed in the context of investment arbitration but is threatening to similarly affect commercial arbitration. Courts in states such as Austria,180 Belgium,181 Germany182 and England183 have already denied the arbitrability or the possibility of choosing the forum184 for commercial disputes relating to contracts of agency. Denial of arbitrability comes from a fear that the arbitral tribunal or the foreign court will not accurately apply the mandatory rules protecting commercial 176 177 178 179

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BGH, 29 March 1996, Case II ZR 124/95. BGH, 6 April 2009, Case II ZR 255/08 and BGH, 23 August 2016, Case I ZR 23/16. Article 697n of the Swiss Code of Obligations. The Arbitrazh Court of St Petersburg and Leningrad Region refused to enforce an LCIA award on the basis that it related to a corporate matter, see Ruling No A56-25416/2021 of 21 October 2021. Oberster Gerichtshof, 1 March 2017, 5 Ob 72/16y (Ecolex 520). Cour de Cassation, 16 November 2006, PAS. 2006, I, No. 11; 14 January 2010, PAS. 2010, I, No. 12; 3 November 2011, PAS. 2011, I, No. 1; see, however, 7 April 2023, C.21.0325.N. Bundesgerichtshof, 5 September 2012, Case VII ZR 25/12, Neue juristische Wochenschrift (2012). Accentuate Ltd v. Asigra Inc [2009] EWHC 2655 (QB), [2009] 2 Lloyd’s Rep 599, that seems confirmed in Fern Computer Consultancy Ltd v. Intergraph Cadworx & Analysis Solutions Inc [2014] EWHC 2908 (Ch). Denying the recognition of a contractual choice of forum in favour of a court not located within the EU, responds to the same logic as denying arbitrability, i.e., that matters relating to commercial agency shall be decided by courts located in the EU in order to ensure a uniform application of EU law. Therefore, it can be expected that the same courts would also deny arbitrability if such contracts contained an arbitration clause.

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agents. While the scope of arbitrability is still large, this emerging restrictive trend is worrying. For this reason, it is in the interest of arbitration that courts consider the secondlook doctrine as a valid alternative to restricting arbitrability. This means that the public policy reservation must be an effective means to set aside an award or refuse its enforcement if the award seriously infringes fundamental principles. This confirms that the maximalist approach is to be preferred when courts apply the public policy rule, see Section 5.3.3(b)(ii). This, in turn, has a bearing on arbitral tribunals, who increasingly are under scrutiny for their application of principles of public policy. Furthermore, this confirms the importance of the arbitral tribunal’s ability to act on its own initiative and develop its own reasoning, see Section 5.5. If arbitral tribunals are to succeed in not being perceived as accomplices to the parties’ schemes to avoid regulatory frameworks, carry out corrupt practices, economic crime, violation against human rights and so on, tribunals must have the possibility of ascertaining the circumstances of the case and the applicable law, even beyond the pleadings made by parties. If arbitration is perceived as a mechanism that permits the parties to disregard and circumvent this legal framework, the credibility of arbitration as a method to resolve disputes will be prejudiced and the scope of arbitrability will increasingly be restricted. (d) Arbitrability of Intra-EU Investment Disputes Recently, the scope of arbitrability in the field of investment arbitration has been drastically reduced. The arbitrability of investment disputes was excluded for socalled intra-EU investment disputes – that is, disputes between investors belonging to a state which is a member of the EU, and host state members of the EU. It was already mentioned in Section 5.1.1 that the EU has taken the political stance to discontinue investment treaties between member states, on the basis that EU law provides a sufficient legal framework for investment protection within the internal market, and that public international law protection is therefore not necessary. In addition, CJEU case law has repeatedly deemed it incompatible with EU law that investment tribunals consider EU law. This has impacted investment awards that were rendered on the basis of valid intra-EU treaties. Not all arguments are convincing, particularly when they are compared with the arguments that the CJEU adduces when it confirms that EU law is acceptable in other contexts: in investment arbitration or litigation with parties from states outside of the EU, as well as in commercial arbitration. In Achmea, the CJEU denied arbitrability of intra-EU investment disputes. One of the reasons for so doing is the alleged lack of an effective method to control the uniform application of EU law when the issue is determined by an arbitral tribunal.185 185

Case C-284/16 (Achmea).

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The Achmea approach was later confirmed in Komstroy,186 which regarded a dispute under the Energy Charter Treaty, in PL Holding,187 which regarded an ad hoc Arbitration agreement with a scope corresponding to the Arbitration agreement laid down in the Bilateral Investment Treaty (BIT) between Sweden and Poland, and in Micula,188 in which the Arbitration agreement contained in the BIT between Sweden and Romania was deemed to have been replaced by the judicial remedies contained in the EU treaties. This CJEU case law was followed by the courts of numerous EU member states, which resulted in a number of investment awards being annulled,189 and it is expected that requests for enforcement would equally be refused. US courts,190 on the contrary, have declined to follow the CJEU policy on intra-EU awards, and have enforced the award in Micula – particularly considering that the EU General Court found that the Achmea doctrine did not apply to facts that predated the state’s accession to the EU.191 As seen, the CJEU denies arbitrability of intra-EU investment disputes, but it allows arbitrability of commercial disputes and of investment disputes with parties from states outside of the EU. The arguments that are used to distinguish these situations are not convincing, as will briefly be explained. The CJEU argues that commercial and non-intra-EU investment disputes are arbitrable because the arbitral tribunal, in these cases, only incidentally considers issues of EU law.192 In particular, this means that the tribunal does not have the power to rule beyond the scope of the treaty, nor to amend the legislation that it may find to be in conflict with the treaty. This observation is correct, see Section 5.4.8(a); however, it applies to any tribunal that considers EU law as an incidental issue, and to intra-EU investment tribunals. It is, therefore, not a basis to distinguish intra-EU investment arbitration and other forms of arbitration or investment litigation. 186

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Judgment of the Court (Grand Chamber), 2 September 2021, Case C-741/19, République de Moldavie v. Komstroy LLC (Komstroy). Judgment of the Court (Grand Chamber), 26 October 2021, Case C-109/20, Republiken Polen v. PL Holdings Sàrl (PL Holding). Judgment of the Court (Grand Chamber), 25 January 2022, Case C-638/19 P, European Commission v. European Food SA and Others. Cour d’appel de Paris, 19 April 2022, n° 49/2022 (Republic of Poland v. CEC Praha and Slot Group AS); 19 April 2022, n° 48/2022 (Republic of Poland v. Strabag SE, Raiffeisen Centrobank AG, Syrena Immobilien Holding AG); Bundesgerichtshof, 31 October 2018, Case I ZB 2/15 (Slovak Republic v. Achmea); Bundesgerichtshof, 17 November 2021, Case I ZB 16/21 in relation to the arbitration Raiffeisen Bank International AG and Raiffeisen Bank Austria d.d. (Croatia) v. The Republic of Croatia, PCA Case No 2020–15); Lithuanian Supreme Court, 18 January 2022, Civil Case No. e3K-3-121-916/2022, Republic of Lithuania v. ICOR, Vilniaus Energija, Litesko, Veolia Energie International SA. Micula v. Government of Romania, 404 F Supp 3d 265 (DDC 11 September 2019), affirmed by the US Court of Appeals for the District of Colombia, No. 19-7127, 2020 US App LEXIS 16008 (DC Cir 19 May 2020). Judgment of the General Court (Second Chamber, Extended Composition), 18 June 2019, Cases T 624/15, T-694/15 and T 704/15, European Food SA and Others v. European Commission. Case C-284/16 (Achmea), para 54, Case C-741/19 (Komstroy), as well as CJEU Opinion 1/17 on CETA, paras 119, 120–7.

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Furthermore, the CJEU considers that intra-EU investment tribunals only have limited access to the mechanism laid down in Article 267 of the TFEU on the request to the CJEU to render preliminary rulings on the application of EU law. The CJEU points out that a court controlling an arbitral award rendered under an intra-EU investment treaty may request a preliminary ruling only when the lex arbitri permits court control.193 This observation is correct; however, it applies to all non-ICSID awards, and is therefore not a basis to distinguish investment and commercial arbitration. The only convincing194 basis for distinguishing intra-EU investment disputes from other investment disputes is that intra-EU investment arbitration does not fit in the EU system of division of powers between member states and the Union. The principle of mutual trust requires that member states assume that all other member states comply with EU law, including its fundamental rights which would be the EU equivalent of investment protection. It is only the CJEU who has the competence to evaluate the proper application of EU law, and investment arbitration tribunals do not fit into this exclusive competence.195 Third states, to the contrary, are not covered by the principle of mutual trust and the consequent exclusive competence of the CJEU on EU law. Therefore, investment arbitration involving parties from third states does not conflict with the division of powers internal to the EU.196 This argument, however, is not applicable to the distinction between intra-EU investment disputes and commercial disputes, at least not when investment disputes are subject to the same procedural rules as commercial disputes (that is, to non-ICSID disputes). As explained, court control is available to the same extent irrespective of whether the dispute is commercial or investment.197 If court control is sufficient to safeguard the CJEU competence on EU law when the dispute is commercial, it must be sufficient also for investment disputes that are carried out under rules for commercial arbitration. (e) The Law Governing Arbitrability Since the arbitrability rule may have a different scope according to the law it belongs to, it is necessary to find out which law determines whether the subject of the dispute was arbitrable or not. The answer to this question differs according to whether the question is asked prior to rendering the award, during the phase of the challenge to the award’s validity or during the phase of enforcement. Assume a contract of employment between a German company and the manager of the company’s subsidiary in Bulgaria. The contract contains an Arbitration clause referring disputes to arbitration in Switzerland, and a Choice-of-law clause 193

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Case C-284/16 (Achmea), paras 35–7, 45, 49, 53; Case C-741/19 (Komstroy), paras 51–3, 57, 58, 63; Case C-109/20 (PL Holdings), paras 44, 45. For an analysis of other grounds that are laid down in Achmea see Cordero-Moss (2020b). Case C-284/16 (Achmea), para 34; Case C-109/20 (PL Holdings), paras 46, 52. CJEU Opinion 1/17 on CETA, paras 128f. Case C-284/16 (Achmea), paras 35–7, 45, 49; Case C-741/19 (Komstroy), 51–3, 57f., 63; Case C-109/20 (PL Holdings), paras 44, 45; CJEU Opinion 1/17 on CETA, paras 130–5.

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submitting the contract to US law. Under US law, labour law disputes are arbitrable. Under Bulgarian law, they are not. Imagine that the manager brings a lawsuit against the company in Bulgaria. Shall the Bulgarian court dismiss the case and refer it to arbitration? Or can it disregard the Arbitration clause because the matter is not arbitrable under Bulgarian law? When determining the arbitrability of a dispute, the first question to be answered is: Which law applies to the issue of arbitrability? In our example, the potentially applicable laws are: US law, which was chosen by the parties to govern the contract (the lex causae); Swiss law, which is the law governing the arbitral procedure (the lex arbitri); and Bulgarian law, which is the law of the court (the lex fori). In case the question arises in the phase of enforcement of the award, a fourth law may potentially be applicable, that of the place of enforcement – for example, German law, if the award is sought to be enforced in Germany. As we will see, the law governing the contract is not applicable to the issue of arbitrability (unless it is deemed to apply to the Arbitration agreement, as in English courts under certain circumstances, see Section 5.4.2(b)). The choice is, then, between the lex arbitri and the various leges fori – the law of each of the courts considering the issue. These laws may even be applied cumulatively.198 (i) In the Pre-award Phase The question of arbitrability may be brought before the arbitral tribunal or before the courts, and in the latter case it may arise before arbitral proceedings are instituted. If a contract contains an Arbitration clause, and a party nevertheless brings a claim before a court, the other party will request that the claim be dismissed because the subject matter is subject to arbitration. The court will have to verify, among other things, whether the dispute concerns issues that are arbitrable. If it does, it has to dismiss the case. If not, it can admit the claim. Similarly, should a party have initiated arbitration, the other party may object on the grounds that the dispute is not arbitrable. The arbitral tribunal will then have to determine whether the dispute is arbitrable. That arbitrability of the subject matter affects the effects of an Arbitration agreement is laid down in Article II of the New York Convention and in Article 8(1) of the Model Law. Neither the New York Convention nor the Model Law specify under which law arbitrability shall be evaluated in this phase. However, in the phase of enforcement, Article V(2)(a), as well as Articles 34(2)(a)(i) and 36(2)(a)(i) of the Model Law refer to the law of the court, see Section 5.4.8(e)(iii). There is no reason to depart from this approach when evaluating recognition of the Arbitration agreement. The solution that is systematically most reasonable is that arbitrability is evaluated under the law of the court (Bulgarian law, in our example). If the question of 198

München Landesgericht, 5 May 2021, No 21 O 8717/20.

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arbitrability is deemed also to affect the validity of the Arbitration agreement, the law applicable to the Arbitration agreement will also be applicable (mainly, the lex arbitri, see Section 5.4.2 – Swiss law, in our example). This shows that the law chosen by the parties to govern the contract (US law, in our example) is not relevant (unless it is deemed to cover the Arbitration agreement, as, for the moment, only English courts do, see Section 5.4.2(a)) . (ii) In the Phase of the Challenge to an Award Once an award has been rendered, the issue of arbitrability may be raised before a court by challenging the validity of the award. Article 34(2)(b)(i) of the UNCITRAL Model Law designates as applicable the law of the court – which, in annulment proceedings, coincides with the law of the arbitral seat (Swiss law, in our example). If the question of arbitrability is deemed also to affect the validity of the Arbitration agreement, then the arbitrability of the dispute also has to be verified in respect of the law chosen by the parties to govern (not the dispute, but) the Arbitration agreement. If the parties have not chosen the law applicable to the Arbitration agreement (which, as seen in Section 5.4.2, is not a choice that is usually made), then the law of the state where the award was made will be applicable to the validity of the Arbitration agreement (Swiss law, in our example). In our example, however, Swiss courts would not apply the Model Law as it has not been adopted in Switzerland. They would apply Swiss arbitration law. This would not lead to a different result, based on a systematic construction of the Swiss PILA. The Act defines in Article 177 which disputes are arbitrable and determines in Article 176 that Swiss arbitration law is applicable to any arbitration that take place in Switzerland. The law that governs the merits of the dispute is not mentioned in any of these arbitration laws and is therefore not relevant when the court verifies the validity of an arbitral award. (iii) In the Phase of Enforcement of an Award Lack of arbitrability is also mentioned by the New York Convention as a ground for refusing enforcement of an award. The New York Convention clearly determines the law governing arbitrability: enforcement by a court of an award may be refused if ‘the subject matter of the difference is not capable of settlement by arbitration under the law of that state’. It is the law of the enforcement court that governs whether the dispute was arbitrable or not. In respect of the New York Convention, it is rather controversial whether arbitrability might also fall under the scope of Article V(1)(a) of the New York Convention, which provides that invalidity of the Arbitration agreement is one of the grounds that may justify a refusal to enforce the award.199 If this view is accepted, 199

The most authoritative commentator on the New York Convention excludes the fact that the question of arbitrability can be considered as also falling within the scope of the validity of the Arbitration agreement: see Albert Jan van den Berg, The New York Arbitration Convention of 1958 (Deventer, 1981), pp. 288f. See also Born (2021a), para 26.5[10].

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then arbitrability of the dispute has to be verified not only in respect of the law of the enforcement court, but also in respect of the law governing the Arbitration agreement. The New York Convention determines the law governing the Arbitration agreement as the law chosen by the parties to specifically govern the Arbitration agreement (and not, generally, the contract – with the exception of the English courts’ approach, as seen in Section 5.4.2(a)) or, failing a choice by the parties, the law of the state where the award was made. As seen in Section 5.4.2, this usually leads to the application of the law of the seat of arbitration. Therefore, if the arbitral award in our example is sought to be enforced in Germany, the German enforcement court will determine the arbitrability of the dispute (and thus the enforceability of the award) on the basis of German law. The law chosen by the parties to govern the contract (US law) is not relevant, and neither is the law that would have been applicable if the parties had not made a choice (Bulgarian law). To the extent that the issue of arbitrability is deemed to affect the validity of the Arbitration agreement, the law of the seat of the arbitration will be relevant (Swiss law). If we assume that the award is sought to be enforced in England, it cannot be excluded that the English court would extend to the Arbitration agreement the choice of US law made by the parties for the contract, see Section 5.4.2. (iv) The Law Governing the Dispute is Irrelevant The lack of arbitrability may lead to annulment or refusal to enforce the award only if the dispute was not arbitrable according to the law of the arbitral seat, the law of the court of challenge, the law of the enforcement court, or the law chosen by the parties to govern the Arbitration agreement. The law that governs the merits of the dispute, on the contrary, is not applicable to the question of arbitrability. In our example of the Swiss arbitral award rendered on a dispute concerning an Employment agreement governed by US law, this means that US rules on arbitrability may affect the validity of the award only in the following two cases: (i) if the award is sought to be enforced in the territory of the US, or (ii) if the parties have subjected the Arbitration agreement to US law. In respect of the latter case, it must be mentioned that, as noted in Section 5.4.2, it is very seldom that Arbitration agreements contain a Choice-of-law clause, and the Choice-of-law clause made in the contract that regulates the commercial relationship between the parties does not extend to the Arbitration agreement. The prevailing view is that, failing a choice by the parties specifically on the Arbitration agreement, the choice that was made for the contract does not extend to the Arbitration agreement. In this case, the law of seat of arbitration will apply. As mentioned, English courts recently took a different approach.

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(f) Arbitrability is Equal to the Ordre Public in International Disputes without a Connection to the Lex Fori In our example of the Swiss arbitral award rendered in a dispute concerning an Employment agreement, the losing party may claim (for example, in the phase of the challenge to the award’s validity) that the award is invalid because it violates the arbitrability rule contained in Swiss law. Article 177 of the Swiss PILA only permits the arbitration of disputes on matters involving an economic interest; therefore, matters of public law are not arbitrable. Assuming, for the sake of argument, that employment disputes are not arbitrable in Switzerland, would an award rendered in Switzerland on a dispute between a German company and a Bulgarian employee, arising out of an Employment agreement that would be subject to Bulgarian law if the parties had not chosen US law, be deemed as invalid by a Swiss court on the ground that the disputed matter was not arbitrable under Swiss law? To answer the question, it may be useful to be reminded of the rationale of the arbitrability rule: the arbitrability rule is meant to preserve the jurisdiction of the courts of law in certain areas of law that are deemed to deserve a particularly accurate application of the law. This affects particularly areas of law in which the public interest is deemed to prevail over the freedom of the parties to regulate their own interests (in our case, the protection of the employee as the weaker party). The legal system does not consider private mechanisms of dispute resolution as sufficiently reliable in this context and wishes to maintain the jurisdiction of its own national courts of law. How does this rationale apply to our German–Bulgarian arbitration in Switzerland? The dispute concerns the application of Bulgarian labour law. Assuming that the Swiss court set aside the Swiss arbitral award on the ground that the dispute was not arbitrable, would that mean that Swiss courts of law have jurisdiction on the dispute? Of course not: Swiss courts have no jurisdiction and no interest in exercising jurisdiction on that dispute, because the subject matter has no connection with Switzerland and is not subject to Swiss law. The rationale of the arbitrability rule, in short, is not applicable if the dispute has no connection to the state where the arbitration takes place. Then why should the arbitrability rule be applicable? If a dispute has no connection with the legal system of the arbitral seat, the arbitrability rule should be applied to set aside an award only if the annulment of the award is necessary to avoid an unacceptable result to which the arbitral tribunal has come.200 200

For a more extensive analysis of the matter see van den Berg (1981), pp. 360, 368ff., III-5.1 and footnote 337, who considers the arbitrability rule as a sub-concept of the ordre public rule, and therefore superfluous. Partially along the same lines, within Swedish law, see Lars Heuman, Arbitration Law of Sweden: Practice and Procedure (Juris, 2003), p. 70, who states that a dispute that would not be deemed arbitrable if it was domestic, may still be arbitrated if it has an international character. Implying that the arbitrability rule of domestic law coincides with the international public policy of the seat of arbitration, see Bernard Hanotiau, ‘The Law Applicable to Arbitrability’. In Albert van den Berg (ed.), 40 Years of

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In itself, the fact that the arbitral tribunal has resolved a dispute that is not arbitrable under the law of the arbitral seat would not be unacceptable: the courts of the arbitral seat would have neither the interest nor the competence to apply their own law to that dispute. What would be unacceptable is a decision made in a specific case, for example, because it has given effect to an agreement that violated human rights. In short, what should be an annulment ground in this situation is not the fact that the tribunal has exercised jurisdiction on the dispute, but the fact that the result of the decision conflicts with the fundamental principles of the court’s law, see Section 5.4.9. In situations where the dispute does not have any links with the legal system of the arbitral seat, therefore, the arbitrability clause would overlap with the ordre public clause. The evaluation of the award’s validity, in other words, cannot be made in advance by automatically applying an abstract measure of arbitrability. The evaluation of the award’s validity has to be made on the basis of the specific decision rendered in the particular case, and by measuring the actual decision against fundamental principles of the court’s law. 5.4.9 Breach of Ordre Public (Public Policy) As we saw in Section 5.4.8 in respect of arbitrability, conflict with the ordre public, or public policy, is a ground for ineffectiveness that may be applied ex officio by the courts and does not require that a party invokes it or proves it. This is laid down in Article V(2)(b) of the New York Convention and in Articles 34(2)(b)(ii) and 36(2)(b)(ii) of the Model Law. The rule of public policy has a very narrow scope, as will be seen, and shall be applied only in exceptional cases. This rule permits the court to set aside or refuse enforcement of an arbitral award if the result of confirming, recognising or enforcing the award would violate fundamental principles in the court’s system. Court decisions in the various states annulling an award or refusing to enforce it because the award is in conflict with the court’s public policy are reported in the ICCA Yearbook Commercial Arbitration, also available at www.kluwerarbitration.com. The UNCITRAL collects court decisions on the Model Law and on the New York Convention in the CLOUT database,201 which can be searched, among other things, by provision. In addition, the UNCITRAL has recently launched a webpage collecting

201

Application of the New York Convention, The Hague etc. (ICCA Congress Series, No 9, 1999), pp. 146–67, 158. For a more extensive discussion, as well as references to some judicial decisions confirming this theory, see Giuditta Cordero-Moss, International Commercial Arbitration: Party Autonomy (Tano Aschehoug, 1999), pp. 293f. www.uncitral.org/clout/showSearchDocument.do?lf=898&lng=en.

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court decisions on the New York Convention.202 Moreover, a digest of court cases on the Model Law has been published by UNCITRAL in 2012.203 A survey of these decisions shows that awards are not often set aside or refused enforcement. What is worth noticing in respect of the rule of public policy, and was already mentioned in Section 5.4.8 in respect of arbitrability, is that it refers to the criteria set in the legal system of the court that is at any time competent. By contrast, the other grounds for invalidity/unenforceability relate to the rules of a specified law: the invalidity of the Arbitration agreement is determined by the law of the seat of arbitration; the legal capacity of the parties is determined by the law of each of the parties; and the regularity of the procedure is determined by the law of the seat of arbitration. This means that those particular laws will be applicable irrespective of which court is competent; thus, the validity of the Arbitration agreement, the legal capacity of the parties and the regularity of the procedure will be governed by the same law both if the award is challenged before the courts of the seat of arbitration and if the award is sought to be enforced before the courts of another country. The rule on public policy, however, relates to the law of the court that, at any time, is dealing with the award. This means that the award will be evaluated according to the public policy of the seat of arbitration if it is challenged before the courts of that place, and according to the public policy of the place of enforcement if it is sought to be enforced before the courts of another state. (a) Autonomous Interpretation The public policy defence is subject to a double standard: the application of the provision is to be made autonomously, while the content of the public policy has to be determined according to the enforcement court’s system. In other words, the New York Convention and the Model Law specify the criteria for determining what amounts to public policy (only fundamental principles), as well as which violation of public policy may justify refusing recognition enforcement (only serious violations that lead to an unacceptable result). These criteria are determined according to an autonomous interpretation of the New York Convention and of the Model Law. However, which principles are deemed to be fundamental is determined under each system according to that system’s criteria. Furthermore, the provisions in the Model Law and in the New York Convention shall be interpreted in the same way, see Sections 2.3.4 and 5.4. Public policy, furthermore, is a defence in private international law in general – both against application of foreign law, and against recognition and enforcement of foreign court decisions, see Section 4.5.7. 202

www.newyorkconvention1958.org/.

203

www.uncitral.org/uncitral/en/case_law/digests/mal2012.html.

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While the conditions for and the effects of applying the public policy defence may vary depending on whether it is applied in connection with recognition and enforcement of arbitral awards, of civil court decisions or with application of a foreign law, the content of the public policy will be the same irrespective of the context. A certain principle is deemed to be fundamental in a certain legal system, and its violation is deemed to be unacceptable or not, irrespective of whether the context is recognition and enforcement of an arbitral award, recognition and enforcement of a court decision or application of a foreign law. Therefore, case law on public policy in private international law in general may be relevant to determining the scope of public policy under the New York Convention or under the Model Law. There is abundant literature on public policy in private international law, including collections of case law.204 The foregoing shows that the mechanism of public policy is subject to a legal framework that should be interpreted autonomously. The content of public policy, to the contrary, is determined by the court according to its own system. Therefore, which specific principles are to be deemed to be so fundamental that they represent public policy, and which violations lead to results that are intolerable, is determined according to the court’s system. This is also expressed by saying that what is applicable under the New York Convention and the Model Law is the public policy of the lex fori. Misunderstandings arise when the terminology ‘international public policy’ is used. This will be explained further. (b) International Ordre Public as a Corrective to Positive Ordre Public Sometimes the term ‘international ordre public’ is encountered,205 and sometimes the term ‘truly international ordre public’. The former term designates the same concept of public policy that is explained in Section 5.4.9, but with a different use of the terminology; the latter term, on the contrary, refers to a different concept. We can briefly analyse the two terms, respectively, in Section 5.4.9(b) and in Section 5.4.9(d). International public policy is usually deemed to refer to those principles in a legal system that are so fundamental that they should be respected even if the context of the dispute is international. In other words, the principles should have such an importance for the legal system of the court, that they should be considered as basic, 204

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Among the collections of case law, a comparative study within the EU should be mentioned: Burkhard Hess and Thomas Pfeiffer, Interpretation of the public policy exception as referred to in EU instruments of private international and procedural law. (EU Directorate General for Internal Policies Policy Department C: Citizens’ Rights and Constitutional Affairs, 2011), www.europarl.europa.eu/thinktank/it/document .html?reference=IPOL-JURI_ET%282011%29453189. See, for example: French Code of Civil Procedure (Article 1520); Lebanese Code of Civil Procedure Legislative Decree No 90/83 (Article 814); Paraguayan Law 1879/02 for arbitration and mediation (Article 46); Peruvian Legislative Decree 1071 (Article 75(3)(b)); Portuguese Arbitration Law 63/2011 (Article 56(1)(b)(ii)).

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irrespective of the existence of a close link between the court’s legal system and the disputed matter. The court that is to determine the validity or enforceability of an award cannot be expected to run counter to these principles, not even if the award does not have any link with the court’s legal system. It is, in other words, not a public policy that stems from international sources. It is national public policy that is applicable in international cases. In France, one of the systems most strongly applying the notion of international public policy, courts apply the French international public policy.206 This understanding of international ordre public does not differ considerably from the restrictive concept that is explained in Section 5.4.9. The notion of international public policy, like the narrow notion of public policy that is described in this section, assumes that it is only fundamental principles and not rules (not even overriding mandatory rules) that constitute the ordre public. It is particularly important to point out that both the international ordre public and the narrow notion of ordre public refer to principles belonging to the system of the court. They are not transnational principles. So why is one category defined as ‘international’, whereas the other is not? This is primarily a question of terminology. In some systems, the term ordre public is used in a domestic context. In the domestic context, it is deemed to have a wider scope than the narrow understanding we assume in Section 5.4.9. It is deemed to extend to also cover the overriding mandatory rules of that legal system, those rules that are applied irrespective of the international character of the relationship, and that were described in Section 4.5.3. This extensive concept of ordre public is also known as ‘positive ordre public’ or ‘domestic ordre public’. Ordre public, in this extensive sense (positive or domestic), has a wider function than the narrow notion described in Section 5.4.9. It has the function of ensuring the application of the legal system’s overriding mandatory rules: positive public policy, therefore, is a vehicle for actively applying certain rules of the court’s legal system. In the narrow sense adopted in this book, the public policy rule has the function of excluding an interference with the basic principles of the legal system; it is a barrier against the introduction into the system of incompatible foreign elements. Hence, ordre public in the narrow sense is also defined as ‘negative ordre public’. The narrow public policy rule can be described as a shield, and the positive public policy as a sword. The active function of the positive public policy is in contrast with the policies underlying the recognition and enforcement of foreign awards (as well as the application of foreign law under private international law as described in Section 4.5.7). In these contexts, it is the negative function that applies. 206

See, for example, the decisions of the Cour d’appel de Paris, 16 January 2018, n° 15/21703; 3 June 2020, n° 19/07261; 27 October 2020, n° 19/04177; 17 November 2020, n° 18/02568 (France); 25 May 2021, n° 19/ 16601; 25 May 2021, n° 18/27648; 5 October 2021, n° 18/18708. See also the English decision Union of India v. Reliance Industries Limited and another (2022) EWHC 1407 (Comm).

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To avoid confusion between the wide (positive or domestic) public policy and narrow (negative) public policy, the systems that use the terminology in the wider, positive sense need to adapt it when operating in an international context. That’s why they add the qualification of ‘international’ when they intend to refer to the narrow concept. In fact, a new confusion is created: international public policy is often understood as a public policy that stems from international sources. However, the meaning of international is not – in this context – that the ordre public stems from international sources. The meaning is that public policy is composed of principles that are so fundamental that the court cannot disregard them, even if the disputed matter has an international character. Those principles are national. Some of them may, admittedly, have international origin – for example, fundamental principles of the EU are part of the national public policy of EU member states, and principles laid down in the ECHR may be part of the national public policy of a state that ratified the Convention. However, these principles become relevant in our context because they are part of the national public policy of the court.207 (c) Relative or Territorial Ordre Public as a Corrective to Positive Ordre Public A different terminology, but with a purpose similar to the ‘international public policy’ formula seen in Section 5.4.9(b), is the use of the concept of ‘relative ordre public’, or of the ‘territioriality’ of ordre public. According to legal doctrine in some legal systems,208 an additional requirement for the applicability of the public policy defence is that the dispute must have a sufficient connection with the country of the enforcement court. This requirement, also known as Inlandsbeziehung or liens suffisants avec l’ordre juridique, relies on the assumption that the thinner the connection with the court’s system, the less serious the public policy violation is. For example, under Section 43 of the German Judiciary Act, judge deliberations shall be secret. On this basis, the Higher Regional Court of Frankfurt affirmed, in an obiter dictum, that an award containing a dissenting opinion would infringe public policy. This, however, does not amount to a fundamental principle and cannot be applied to awards that are not rendered in Germany.209 When the threshold for applying the public policy defence is so high, as it is supposed to be in the international context, however, the territorial connection may become irrelevant: if it is only serious violation of basic values that qualify as 207

208 209

As human rights are part of a country’s public policy, they have significance for the validity and enforceability of an award to the extent that the conditions for exercising the public policy exception are met, see the Swiss Supreme Court Decisions 4A_486/2019, 4A_618/2020 and 4A_406/2021). They are not an independent, additional basis to set aside an award or to refuse its enforcement. Hess and Pfeiffer (2011), p. 143, footnote 618. Frankfurt am Main Oberlandesgericht, 16 January 2020, No 26 Sch 14/18 (Germany).

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conflicting with public policy, it means that the result of recognising and enforcing the award must be intolerable. If the result is intolerable, it is doubtful that a court will be inclined to deem the result acceptable, only because the dispute has a thin connection with the court’s system. In other words: the narrower the scope of public policy, the less relevant is the criterion of territorial connection. That the need for a territorial connection of the dispute is inversely proportional to the seriousness of the violation is confirmed also in private international law in general. In a Norwegian Supreme Court decision, for example, the Court found that war crimes that had been committed in the past and outside Norway affected Norwegian public policy, although the only connection with Norway was that the perpetrator of the crimes had, years after the crimes had been committed, fled to Norway.210 The terminology is different, but the purpose is the same for the relative, territorial or international public policy: to make sure that, in an international context, a court considers only its fundamental principles – and not any and all mandatory rules in its system, or any and all overriding mandatory rules.211 (d) Truly International Ordre Public as a Transnational Phenomenon While the discrepancy between ordre public in its restrictive sense and ‘international ordre public’ turns out to be simply a question of terminology, whereby in the substance there is no significant difference, the term ‘truly international ordre public’ designates a different concept. In this case, the qualification ‘international’ does not refer to the context of the disputed matter, but to the sources from which the public policy stems. The idea is that the truly international ordre public does not originate from one single legal system: only if a principle is recognised as fundamental in a plurality of legal systems can it be considered the expression of a policy that is truly international. Truly international public policy is a concept that is recognised primarily in some academic circles212 that consider it to be more appropriate for international transactions and international arbitration than the national ordre public, even in its restrictive sense. The usefulness of this concept may be questioned. The concept aims at preventing that legal systems use their own fundamental principles to declare a foreign award invalid or to refuse its enforcement (or to restrict the application of the governing 210 211

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Supreme Court, Rt. 2011 s. 531 (Norway). That the notion of territoriality is not necessary when public policy is considered narrowly, is confirmed, in other areas of law, by Ilaria Pretelli, Le droit européen des successions Commentaire du Règlement n°650/ 2012 du 4 juillet 2012, 2nd ed. (Bruylant, 2016), para 11; Cristina González Beilfuss, Laura Carpaneto, Thalia Kruger, Ilaria Pretelli and Mirela Zupan, Regulation 2019/1111 (Brussels IIb) (Edward Elgar, forthcoming 2023), paras 1.11–1.14. See Pierre Lalive, ‘Truly International Public Policy and International Arbitration’. In Comparative Arbitration Practice and Public Policy in Arbitration, ICCA Congress Series, Volume 3 (Kluwer Law International, 2009), pp. 599–611.

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foreign law) if such principles are particular to that specific legal system and do not enjoy recognition internationally. In such a situation, the peculiarity of that legal system is held to undermine the ideals of international uniformity that inspire international commercial law and international arbitration. The aim of the theory underlying the truly international ordre public, therefore, is to disregard the fundamental principles that are proper only in one legal system, even if they represent the basic values upon which that society relies. Instead, that legal system should look at those basic principles that are recognised on a more international level and prefer those principles to its own. It seems too ambitious to me, however, to expect that a state waives the application of its own fundamental principles in the name of an ideal of harmonisation in international commerce. As long as the validity of an arbitral award is regulated by national arbitration laws, and the enforceability of an award is regulated by the New York Convention, which, in turn, makes reference to the national law, the standard of reference will be the fundamental principles of the lex fori (though in the narrow, ‘negative’ sense described).213 In the field of procedural public policy, however, an international standard is emerging, see Section 5.4.9(h). (e) Conflict with Principles, Not with Rules The rule of the ordre public is, in the context of international arbitration, unanimously interpreted very narrowly. The rule of the ordre public is not meant to permit a court to annul an award or to refuse its recognition and enforcement simply on the basis of any difference between the result of the award and the result to which the court would have come by applying its own law. Such an extensive use of the ordre public rule would run counter to the spirit of the New York Convention, of the UNCITRAL Model Law, of all practice that is generally recognised and of legal doctrine on the international scale.214 In particular, the rule of the ordre public does not have the same function as ensuring full compliance with rules and principles of the court’s legal system; public 213

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See, confirming the position taken here, International Law Association (ILA), Final Report on Public Policy as a Bar to Enforcement of International Arbitral Awards (Paper presented at the International Law Association Conference, New Delhi, 2002), Recommendation 1(b), particularly para 11, Recommendation 1(c), particularly para 20ff., Recommendations 2(a) and 2(b), particularly para 43; see also ILA, Committee on International Commercial Arbitration, International Law Association Interim Report on Public Policy as a Bar to Enforcement of International Arbitral Awards (Paper presented at the International Law Association Conference, London, 2000) for more details. See also Audley Sheppard, ‘Public Policy and the Enforcement of Arbitral Awards: Should There be a Global Standard? Transnational Dispute Management 1.1 (2004), www .transnational-dispute-management.com/article.asp?key=48, commenting on the work on public policy made in the frame of the International Law Association, International Commercial Arbitration Committee. See Born (2021a), para 26.5[9] with extensive references, and Redfern et al. (2015), para 11.107. See also, for a confirmation of this approach and further references, the International Commercial Arbitration Committee (2002). See also the ILA, Committee on International Commercial Arbitration (2000). This is often defined as the ‘pro-enforcement bias’ of the New York Convention, which, in turn, is considered to constitute a principle of public policy: see Redfern et al. (2015), para 11.107.

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policy is usually defined by reference not to specific legal provisions, but to basic notions of morality and justice, features essential to the moral, political or economic order of the country or to most fundamental notions of morality and justice.215 In a similar vein, the CJEU found, regarding the applicability of the public policy exception contained in the then applicable Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, that a court cannot refuse enforcement of a judgment ‘solely on the ground that it considers that national or Community law was misapplied in that decision’.216 The CJEU found that the fact that an alleged error in applying the law concerning rules of Community law does not alter the conditions for being able to rely on the clause on public policy.217 In particular, a court cannot review the accuracy of the findings of law made in the judgment when the enforcement of that judgment is being sought.218 Moreover, the judgment must be at variance, to an unacceptable degree, with the legal order of the enforcing state inasmuch as it infringes a fundamental principle, and the infringement must constitute a manifest breach of a rule of law regarded as essential or of a right recognised as being fundamental.219 This has been established by the CJEU in respect of the Brussels Convention (the predecessor of the aforementioned Brussels I Regulation): in the Renault decision, the Court explained that [r]ecourse to the clause on public policy . . . can be envisaged only where recognition or enforcement of the judgment delivered in another Contracting State would be at variance to an unacceptable degree with the legal order of the State in which enforcement is sought inasmuch as it infringes a fundamental principle. In order for the prohibition of any review of the foreign judgment as to its substance to be observed, the infringement would have to constitute a manifest breach of a rule of law regarded as essential in the legal order of the State in which enforcement is sought or of a right recognized as being fundamental within that legal order.220

Applied to the case at hand, this narrow approach led to the conclusion that intellectual property rights that restricted the possibility for third parties to sell spare parts for automobiles were restrictive of competition but did not reach the threshold for the Court to find a violation of public policy. The Court explained that ‘[t]he court of the State in which enforcement is sought cannot, without undermining the aim of the Convention, refuse recognition of a decision emanating from another Contracting State solely on the ground that it considers that national or Community law was misapplied in that decision’.221

215 216 218 221

For references, see Cordero-Moss ‘Article V(2)(b)’ (forthcoming 2024). C-38/98 (Renault), para 33. See also C-681/13 (Diageo), para 51. 217 C-38/98 (Renault), para 32. C-38/98 (Renault), para 29. 219 C-38/98 (Renault), para 30. 220 C-38/98 (Renault), para 30. C-38/98 (Renault), para 33.

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Also, in more recent case law the CJEU confirmed that a violation of an EU rule, even of a rule that has an impact on the internal market, shall not automatically be deemed a violation of public policy.222 These CJEU decisions, and the numerous decisions that confirm them,223 are not rendered under the New York Convention, but there is no reason why the reasoning made in respect of public policy as a ground for refusing recognition and enforcement of judgments under the Brussels Convention (or its successor, the Brussels I Regulation) should not also apply to public policy as a ground for refusing recognition and enforcement of awards under the New York Convention or as a ground to set aside an award under the UNCITRAL Model Law. While the Brussels I Regulation is based on the principle of mutual trust, the New York Convention and the Model Law are based on the principle of effectiveness of arbitral awards. This is a strong principle, which justifies an equally narrow scope for the ordre public defence as the principle of mutual trust. Not even a violation of the Constitution or of the ECHR has been deemed by the Swiss Supreme Court to automatically amount to a violation of public policy.224 As a consequence of the narrow scope of the public policy defence explained, the object of the serious violation has to be the values underlying the violated rule, and not the technicalities of the rule itself. The public policy evaluation will thus need to identify which interests the violated rule is meant to protect, and it will need to verify whether those interests are seriously affected. The function of the public policy defence is not to ensure an accurate application of the rule, but to ensure that the underlying interests are safeguarded. If the underlying interests are not seriously affected, notwithstanding that the rule has not been properly applied, there will not be a basis to apply the public policy defence. Thus, if a decision has incorrectly applied a rule of competition law, that decision does not necessarily automatically violate public policy – even though competition law is deemed to belong to the public policy. (f) Fundamental Principles We have established that it is not the national rules that must be applied through the Public policy clause, but their inspiring principles that may be given effect to. 222 223

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C-681/13 (Diageo), para 51. Numerous CJEU decisions confirmed that the ordre public is violated only in case of incompatibility with fundamental principles: Judgment of the Court, 28 March 2000, C-7/98 (Krombach), Dieter Krombach v. André Bamberski; (First Chamber), 2 April 2009, C-394/07 (Gambazzi), Marco Gambazzi v. Daimler Chrysler Canada Inc. and CIBC Mellon Trust Company; 4 February 1988, C-145/86 (Hoffmann), Horst Ludwig Martin Hoffmann v. Adelheid Krieg; (Sixth Chamber), 2 June 1994, C-414/92 (Solo Kleinmotoren), Solo Kleinmotoren GmbH v. Emilio Boch; (Grand Chamber), 28 April 2009, C-420/07 (Apostolides), Meletis Apostolides v. David Charles Orams and Linda Elizabeth Orams; and (First Chamber), 6 September 2012, C-619/10 (Trade Agency), Trade Agency Ltd v. Seramico Investments Ltd. 4A_453/2021.

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It remains to attempt to define what inspiring principles can be deemed to be of a public policy nature. Not every principle inspiring a mandatory rule can be considered a public policy principle. Not even every principle inspiring an overriding mandatory rule can be considered as being public policy225 – albeit overriding mandatory rules are deemed to be so important that they shall be applied even in international situations and without taking into consideration the applicable law, see Section 4.5.3. It is only the fundamental principles – those that constitute the basis of society – that can be deemed public policy principles. But how can these principles be identified? There is no absolute formula to determine public policy principles: what is fundamental may vary from state to state, and, even within the same state, the conceptions develop, and what was once deemed a matter of public policy, may not be so a decade later,226 or vice versa.227 Further, respectively in Section 5.4.9(h) and Section 5.4.9(i)), we will examine some procedural and substantive principles that have been considered by courts as fundamental. (g) Actual Violation and Incidental Questions Another restriction to the applicability of the ordre public exception lies in the requirement that the violation of the fundamental principles must be actual and specific in the given case – as opposed to an abstract incompatibility. An award must lead to results that actually violate fundamental principles; it is not sufficient that the award gives effect to a provision that potentially, under other circumstances, could violate the ordre public. Thus, a court decision ordering payment of punitive damages for breach of contract has not been deemed to violate the ordre public in England. Even though the court affirmed that punitive damages in an abstract sense could be considered to breach fundamental principles of English law, the size of the damages in the specific 225 226

227

Radicati Di Brozolo (2011), p. 6. See also Born (2021a), para 26.5[9][e]. The example of swap agreements and other financial-derivative instruments is quite descriptive: this kind of contract developed into a recognised financial activity in the course of the 1980s and is not considered as being against fundamental principles today. However, until as late as the 1980s, courts in Germany and in Austria were considering them against the basic moral principles of the system that forbid gambling (the so-called Differenzeinwand). See, for example, the decision of the Austrian Supreme Court, 28 June 1983, 3 Ob 30/83, and of the German Supreme Court (Bundesgerichtshof), 15 June 1987, Case II ZR 124/86. Shortly thereafter, the Bundesgerichtshof did not consider these agreements as violating any fundamental principles of the German legal system; see, for example, the decision dated 26 February 1991, Case XI ZR 349/89. An illustration is the payment of bribes to obtain contracts in foreign countries: today there is consensus that corruption infringes public policy, see Section 5.4.9(i)(ix), but until recently these were considered tax-deductible costs in many jurisdictions, whereas now anti-corruption legislation is increasingly passed and being considered as a matter of public policy, see Martine Millet-Einbinder, ‘Writing off Tax Deductibility’, OECD Observer (April 2000), www.oecdobserver.org/news/archivestory.php/aid/245/ Writing_off_tax_deductibility_.html.

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case was not deemed to do so.228 This reasoning was made in regard of a court decision, but it may be extended to arbitral awards. The requirement that only actual infringements be considered a basis for exercising the public policy exception may raise a question when the award orders an action that in itself does not breach any fundamental principles – such as payment of a sum of money to the winning party, but the basis for the order does – such as payment as reimbursement of damages for the non-performance of a contract violating competition law or rules on corruption. How far can the court go in determining whether the award violates public policy? As mentioned in Section 5.3.3(b), there are two approaches to the intensity of court control when an issue has already been evaluated by the arbitral tribunal – the preferable approach is the maximalist, according to which the court may independently evaluate the issue, see Section 5.3.3(b)(iii). A similar reasoning applies irrespective of whether the arbitral tribunal has already evaluated the issue or not. According to the minimalist approach, an award that merely decides on damages does not breach public policy, even though damages are a consequence of the breach of a contract provision that did violate public policy.229 In my opinion, however, when evaluating whether recognition and enforcement would lead to an actual infringement of fundamental principles and to unacceptable results, the court is not restricted to considering only the specific actions that the award orders the parties to carry out. A great number of arbitral awards order the losing party to transfer a certain sum of money to the winning party. Transfer of money from one party to another in itself is seldom an action that can seriously violate fundamental principles. If the court’s evaluation were limited to the effects of recognising and enforcing the order of transferring money, isolated from the basis upon which the award ordered payment, the public policy defence would not be applicable, for example, to awards ordering reimbursement of damages for breach of a contract based on corruption, or with an illegal object. This would in practice validate illegal contracts and is not acceptable – see Section 5.4.9(i)(ix). Whether effecting the payment ordered by the award infringes fundamental principles or not, however, depends on the basis on which the payment has been ordered. When an award orders damages to be paid for breach of contract, it puts the winning party in the same position as if the contract had been fulfilled. In other words, the award is a substitute for contract performance. Therefore, preliminary or incidental issues may be relevant to the applicability of the provision on public policy – such as when the illegality of the contract is invoked as defence against a claim that a breach of contract had occurred. In most situations, contract performance will not violate fundamental principles. 228 229

Travellers Casualty and Surety Company of Canada (UK) Limited [2002] EWHC 1704 (Comm). Radicati di Brozolo (2012), p. 61.

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However, under certain circumstances, public policy may be infringed. Performing a contract that is based on corruption, for example, or a contract for smuggling certain goods, may be against public policy. If one party does not fulfil its obligations under the contract, and the award orders reimbursement of damages putting the other party in the same position as if the contract had been fulfilled, the award is as flawed as the contract. (h) Procedural Public Policy Setting aside an award or refusing its recognition and enforcement on the ground that it breaches fundamental principles of procedure, also known as the principle of due process, is relatively easier than doing so on the basis of breach of substantive public policy.230 This is because the breach of due process generally may be ascertained on the basis of the procedural history, without examining the merits of the award. Therefore, procedural public policy does not raise those issues about the intensity of court’s control, that, as explained in Section 5.3.3(b)(ii), flow from the principle that the enforcement court does not have the power to review the merits of the arbitral tribunal’s decision. An interesting feature of procedural public policy is that it is undergoing a certain internationalisation. Public policy, as explained in Section 5.4.9(b), stems from national sources. Each legal system has fundamental principles safeguarding the integrity and fairness of the process, often rooted in constitutional law. However, as mentioned in Section 5.4.9(d), international sources also constitute part of national procedural public policy. It can be observed, at least at a regional levels such as in the case law of the CJEU,231 that the procedural public policy is increasingly being inspired by international sources such as the ECHR.232 The ECHR states, in Article 6, that ‘everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law’. Requirements similar to those contained in Article 6 of the ECHR are to be found in the Universal Declaration of Human Rights,233 which in 230

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The International Bar Association Subcommittee on Recognition and Enforcement of Arbitral Awards (2015) observes, in footnote 81, that allegations of violations of procedural public policy were more frequently successful than allegations relating to substantive public policy (respectively, 30 per cent and 20 per cent of the reported cases). Case C-7/98 (Krombach) (CJEU). Most of the CJEU case law regards recognition and enforcement of civil court decisions. Although the context is not the New York Convention, the relevance is evident. What represents a fundamental principle does not vary depending on the legal framework within which the public policy defence is applied. Convention for the Protection of Human Rights and Fundamental Freedoms (adopted 4 November 1950, entered into force 3 September 1953), UNTS 213 (ECHR). Universal Declaration of Human Rights (adopted by the UN General Assembly Resolution 217 A(III) of 10 December 1948).

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Article 10 reads: ‘Everyone is entitled in full equality to a fair and public hearing by an independent and impartial tribunal . . ..’ However, all these criteria cannot necessarily be identified with the content of public policy. ECtHR has repeatedly affirmed, some of the guarantees contained in Article 6 can be waived,234 as long as certain conditions are met – particularly, the waiver must be voluntary and clear.235 An agreement to arbitrate fulfils the conditions for waiving the Article 6 requirements, at least when the agreement is freely entered into by the parties.236 If a guarantee can be waived, it can hardly be deemed to be a fundamental principle the infringement of which would lead to unacceptable results. Therefore, all guarantees in Article 6 do not necessarily represent public policy. Some of the guarantees contained in Article 6, nevertheless, cannot be waived, not even when arbitration has been chosen voluntarily by the parties.237 It is fair to assume that these non-waivable guarantees constitute an important part of the procedural public policy. Which guarantees are non-waivable, however, has not been specified by the ECtHR. Hence, the specific content of procedural public policy escapes a clear definition on the basis of Article 6. Among the procedural principles that have triggered annulment of awards or refusal of their enforcement, are violations of the right to be heard, of the principle of impartiality and independence of arbitrators, of the rules on reasoning of the award or on public hearing, of the principle of res iudicata, fraud and corruption and unauthorised decision in equity. These issues do not directly affect the topic of this book, and will therefore not be dealt with,238 or will be dealt with only to the extent that they are relevant, see Section 5.6. (i) Substantive Public Policy Refusing recognition and enforcement of an award on the ground that the arbitral decision in the merits is in conflict with public policy is a difficult task. Not only has the public policy defence a very narrow scope, as explained in Sections 5.4.9(d) to (g); what renders the threshold even higher is that there are very few fundamental principles in the field of commercial contracts and transactions, which are the source of a large part of the disputes that are resolved in commercial arbitration. 234

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Decision of 23 February 1999, Application No 31737 (ECtHR), Osmo Suovaniemi v. Finland, p. 4; Decision of 2 October 2018, Application No 40575/10 and No 67474/10 (ECtHR), Mutu and Pechstein v. Switzerland, para 145; Decision of 1 March 2016, Application No 41069/12 (ECtHR), Tabbane v. Switzerland, paras 33–6. Tabbane v. Switzerland, paras 26f. In Mutu and Pechstein v. Switzerland, paras 94 ff., the ECtHR confirms the distinction between voluntary and compulsory arbitration. The guarantees set forth in Article 6 may be waived only in case of voluntary arbitration. Mutu and Pechstein v. Switzerland, paras 95f. 237 Osmo Suovaniemi v. Finland, p. 4. See Cordero-Moss, ‘Article V(2)(b)’ (forthcoming 2024), Section E.1.

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The scope of contract freedom is very wide, and only rarely are there limits to what the parties can agree in a commercial transaction. Moreover, the range of decisions that can be taken by an arbitral tribunal only encompasses what can create effects between the parties to the dispute – for example, paying a certain amount as reimbursement of damages for breach of contract, delivering certain goods as specific performance of a contract and so on. The wide scope of contract freedom, coupled with the limited range of effects that arbitral tribunals’ decisions may have, necessarily restricts the scope of situations to which the public policy defence may be applied. However, as explained in Sections 5.3.3(b) and 5.4.9(g) , the public policy defence is not only applicable to the direct object of the decision; it extends also to the incidental issues evaluated by the tribunal as a basis for giving the order. The question that is relevant in this book is whether arbitration may contribute to the self-sufficiency of the contract described in Chapter 1. Therefore, we need to investigate to what extent party autonomy may create situations in which it can be relevant to apply the public policy rule. As described in Section 4.5, courts would apply the private international law to restrict the parties’ choice of law when this extends to areas where other conflict rules are applicable. Arbitration, in contrast, is commonly believed to obey the parties’ instructions to a larger extent. Therefore, it is often affirmed that the arbitral tribunal does not need to consider the applicable law to the same extent as the courts do, see Section 4.6. Nevertheless, arbitral awards rendered in commercial disputes may run the risk of conflicting with public policy where contracts are legal under the law chosen by the parties, but violate, in certain areas, the law that would be applicable if the parties had not made a choice of law. If the violated rules were meant to protect third parties’ interests or to ensure the proper functioning of systems such as banking and financing, an award giving effect to those agreements may have implications in terms of public policy. This applies only when the conditions for applying the public policy rule are met: the award must seriously violate a fundamental principle in a concrete and specific way. It is not sufficient that the award comes to a result that differs from the outcome that the court would have reached. I will go on to analyse some areas of law where an international contract may have relevance to the rule on public policy. (i) Company Law We can make reference to the example mentioned in Section 4.5.2(c): a Shareholders’ agreement between the Norwegian and the Russian shareholders of a Ukrainian company with its main place of business in Russia. The Shareholders’ agreement contains a Choice-of-law clause subjecting the contract to Swedish law, and an

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Arbitration clause referring disputes to arbitration under the Arbitration Rules of the SCC. As seen in Section 4.5.2(c), the commitments between the parties have a contractual nature and will be subject to the chosen Swedish law. However, the rules of the Shareholders’ agreement that affect the roles and responsibilities of the members of the Board of Directors, the capitalisation of the company or the transfer of shares have a different nature. Although the parties to the Shareholders’ agreement have contractually committed themselves to a certain conduct in the Board, to a certain evaluation of the capital contributions and to a certain restriction in the sale of shares, these obligations do not only have a contractual nature. As known, the function of the Board of Directors, the capital of a company and the transferability of its shares (at least under certain circumstances) have a larger significance than the mere balance of interests between the two contracting parties: they affect aspects of the legal personality of an entity that has implications towards third parties, such as the entity’s employees, its creditors or the other shareholders. For this reason, these aspects are governed by the applicable company law, and the parties may not choose to subject them to another law. There are, therefore, reasons for preventing that an agreement between two parties (the shareholders who signed the Shareholders’ agreement) modifies third parties’ position by changing the governing company law. This is the reason why, in private international law, party autonomy does not extend to matters that may affect third parties’ interests; these matters are subject to the law identified on the basis of other connecting factors. Depending on the applicable conflict rule, the matters of company law in this case would be decided according to the law of the Ukraine (place of registration) or of Russia (real seat), but not according to the law of Sweden (chosen in the contract). In our assumption, the dispute between the parties is submitted to arbitration. The dispute may require an incidental consideration of the company law aspects of the Shareholders’ agreement. For example, the Norwegian party may claim damages for breach of contract by the Russian party for failure to instruct the Board members appointed by it to vote in accordance with the Shareholders’ agreement. The Norwegian party may even request the arbitral tribunal to declare the Board resolution invalid, because it conflicts with the Shareholders’ agreement. The Russian party may respond that following those instructions would have violated the company law of the Ukraine. The Norwegian party would rebut that Ukrainian law is irrelevant because the Shareholders’ agreement contains a clause selecting Swedish law, and no other law shall be taken into consideration. Assuming that the arbitral award gives effect to the choice of law made in the contract and applies only Swedish law, thus violating the applicable Ukrainian company law, will the award be valid and enforceable in the country to which the applicable company law belongs (the Ukraine)?

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The nature of the public policy rule prevents making general assertions as to the quality of public policy for a whole area of the law. Some rules of company law may protect interests that are deemed to be so fundamental that their disregard may contradict public policy, but it will depend on the circumstances of the case as to what extent the result of a specific violation actually is in conflict with such fundamental principles. For example, the Shareholders’ agreement may have required a party to vote in the Board of Directors in favour of a capital decrease that would have benefited one shareholder but impaired the solvency of the company – thus affecting the position of the employees, of the other shareholders and of the company’s creditors. It seems legitimate to affirm that the policy upon which a rule of company law imposing the Board to act in the interests of the company may be deemed so strong that a serious breach may represent a violation of public policy.239 Thus, an award disregarding the applicable company law may run the risk of being ineffective, if it is challenged or sought to be enforced before the courts of the place to which the disregarded company law belongs.240 (ii) Insolvency Suppose that an English and a Norwegian party have a cooperation that also involves the parties’ affiliated companies and creates various mutual payment obligations. The agreement provides that each party’s payment obligations shall be set off against the other party’s payment obligation, including the affiliates of that party. If the English party becomes insolvent, its creditors will expect to be able to claim, from the Norwegian party, payment in full of the outstanding obligations. The obligations of the Norwegian party towards the insolvent English party, however, are set off against obligations that some of the English party’s affiliates have towards it. Let’s assume that the Norwegian party obtained an arbitral award that, on the basis of the set-off agreement, declares all debts by the Norwegian party to be set off against its credits towards the affiliates of the insolvent party, and in addition, orders the English party to pay an excess amount that could not be set off. The Norwegian party will try to enforce this award. If the award is recognised, the claim based thereon will be considered as one of the credits to be satisfied out of the estate. In practice, 239

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This matter has been the object of research in a project that I run at the University of Oslo on Arbitration and Party Autonomy (APA), www.jus.uio.no/ifp/english/research/projects/choice-of-law/). See a Norwegian Court of Appeal decision, 18 October 2019, LF-2018–123987, Fevamotinico S.à.r.l v. Boa Imr AS, confirming that an award disregarding Norwegian company law may be deemed to infringe public policy – although public policy was not infringed in the case at hand. See also the decision of 31 December 2006 by the Federal Commercial Court of West Siberia regarding an arbitral award on a Shareholders’ agreement between, among others, OAO Telecominvest, Sonera Holding BV, Telia International AB, Avenue Ltd, Santel Ltd, Janao Properties Ltd and IPOC International Growth Fund Ltd. The Court affirmed that the parties to a Shareholders’ agreement may not choose a foreign law (in that case, Swedish law) to govern the status of a legal entity, its legal capacity, the function of its corporate bodies, or the relationship to and between its shareholders. These matters are, according to the Court, governed by mandatory rules of the law of the place of registration (in that case, Russian law). Violation of these Russian rules was defined as a violation of Russian public policy.

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enforcement of this award would mean that the Norwegian party circumvented English insolvency rules on the equality of treatment of the creditors: the Norwegian party would not have to pay to the estate the sums that it owed to the insolvent party and that were set off against the debts of the affiliates. Would this comply with public policy?241 As seen in Section 4.5.2(c), matters regarding the protection of the creditors in insolvency situations are outside the scope of party autonomy. Equal treatment of the creditors is a basic principle for the proper functioning of business relations. Is this a sufficient basis for invoking the defence of public policy to set aside or refuse enforcement of an award that gives effect to the parties’ agreement and thus violates the applicable insolvency law? Generally, an award between two parties does not have effects on the equality of treatment between the creditors. This is because an award ordering a party who is under insolvency proceedings to pay a certain amount of money does not have priority over the other obligations of the insolvency estate. If recognised, the award will become part of the insolvency estate and payment thereunder will be made in accordance with the applicable insolvency procedures, as provided by Article III of the New York Convention. Therefore, payment under the award will be subject to the principle of equality of creditors. However, under certain circumstances, an award may defeat the purpose of insolvency regulations, and thus potentially conflict with public policy.242 In the United States, the Court of Appeal refused enforcement of an award rendered in London that ordered a Swedish party to effect a certain payment. The debtor was subject to insolvency proceedings in Sweden, and the Court of Appeal found that ‘in light of Salen’s bankruptcy, [the] enforcement would conflict with the public policy of ensuring equitable and orderly distribution of local assets of a foreign bankrupt’.243 The court balanced, on one hand, the interest in ensuring the enforcement of international awards, and, on the other hand, the interest in ensuring an equal treatment of the creditors when an insolvency procedure has been opened. The court resolved not to enforce the award, thus preventing one creditor gaining preferential treatment to the detriment of the others.

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The example is inspired by the chapter written by Nanette Arvesen in ‘Avtalte ordninger som kan forfordele andre kreditorer og ordre public’. Ordre public som skranke for partsautonomi i internasjonale kontrakter (Universitetsforlaget, 2018), pp. 240–308. Along a similar line of reasoning see The Courts of British Columbia, Quintette Coal Ltd. v. Nippon Steel Corp (1990), 47 BCLR (2d), aff’d 51 BCLR (2d) 105 (BCCA). See a decision by the German Bundesgerichtshof, 30 October 2008, Case III ZB 17/08, on the obligation to register claims with the insolvency trustee. Salen Dry Cargo AB v. Victrix Steamship Co, F 2d 709 (2nd Cir 1987), in Yearbook Commercial Arbitration XV (Kluwer International, 1990), pp. 534ff. See also Intervention Energy Holdings LLC, Case No 16–11247 (District of Delaware June 3, 2016); Avalon Hotel Partners, LLC, 302 BR 377, 381, United States Bankruptcy Court, District of Oregon (October 30, 2003).

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Similarly, the French Supreme Court refused enforcement of an award that had been rendered against a company that was under insolvency proceedings. The court affirmed that insolvency rules are designed to ensure equal standing between creditors and allow the liquidator to work out an adequate plan for the distribution of the assets. Granting enforcement of an award would allow one creditor to obtain a preferential position over the other creditors, and this would be against internal and international public policy.244 Also, the Russian Supreme Court refused recognition and enforcement of an award that confirmed the validity of a contract between an insolvent party and an affiliate. The Court found that the contract was meant to circumvent the principle of equal treatment of the creditors.245 Other court decisions have enforced awards in spite of pending bankruptcy proceedings, because the circumstances of the cases did not make enforcement incompatible with the principles underlying the bankruptcy proceedings.246 (iii) Property and Encumbrances Another area where third-party interests may be relevant is that of property and encumbrances. The choice of law made in the contract does not extend to questions of title and security interests, as seen in Section 4.5.2(f). Would an award that disregards these conflict rules and applies instead the law chosen by the parties be valid and enforceable? Due to a lack of any specific case law on the effectiveness of arbitral awards that give effect to the parties’ agreement and violate applicable law on property, encumbrances or security interests, it seems advisable to refer to the reasoning made previously in respect of company law and insolvency proceedings, which respond to the same logic.

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Mandataires judiciaires Associés, in the person of Mrs. X as liquidators of Jean Lion et Cie S. A. v. International Company for Commercial Exchanges, Cour de Cassation, 6 May 2009, n° 08–10.281, XXXV YB Com Arb 353 (2010); Cour de Cassation Civ. 1ère, 8 March 1988, n° 86–12.015, Société Thinet v. Labrely ès-qualites; Cour de Cassation Civ. 1ère, 5 February 1991, n° 89–14.382, Almira Films v. Pierrel; Cour de Cassation Civ. 1ère of 4 January 1992, n° 90–12.569, Société Saret v. SBBM; Cour d’appel de Paris, 7 April 2011 (Fizpatrick). Russian Supreme Court, 28 April 2017, Decision No A40-147645/2015. From Estonia: Supreme Court, 12 December 2018, 2–18–4731; From Germany: Karlsruhe Oberlandesgericht, 4 January 2012, No 9 Sch 02/09; Court of Appeal, Brandenburg, 2 September 1999, in Yearbook Commercial Arbitration XXIX (Kluwer International, 2004), pp. 696 ff., where the enforcement was deemed not to be an execution proceeding, but merely a preliminary measure without executory effect. From the US: State Property Fund of Ukraine v. TMR Energy Limited, Court of Appeals, District of Columbia Circuit, 17 June 2005, 2005 US App Lexis 11540, in Yearbook Commercial Arbitration XXX (Kluwer International, 2005), pp. 1178 ff., where the award was not directed at the party that was the object of bankruptcy proceedings. From the UK: Riverrock Securities Limited v. International Bank of St Petersburg [2020] EWHC 2483 (Comm), in the context of proceedings seeking an anti-suit injunction, affirming that it is not against public policy to permit the arbitrability of all disputes arising out of a contract containing an arbitration clause, even though the claims at issue were avoidance actions in a foreign bankruptcy.

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(iv) Competition Law An area where court decisions on arbitral awards have provoked intense debate is that of competition law. Issues of competition law may become relevant in the context of enforcement of an arbitral award, for example, when the award orders compensation damages for breach of contract, notwithstanding that the defaulting party had invoked competition law as a defence. The defaulting party may have submitted that it did not fulfil its obligations because the obligations were not binding –they infringed competition law, therefore they were invalid. If the award nevertheless orders compensation for breach of contract, it indirectly considers as valid obligations that allegedly infringe competition law. As explained in Section 5.3.3(b) this may be relevant to the public policy defence, as long as competition law is deemed to have the quality of public policy. Competition law can be considered part of public policy. As will be seen, this is implicit in the famous US court decision Mitsubishi,247 and it is expressly stated in the Eco Swiss decision by the CJEU.248 As a consequence of the mentioned CJEU decision, courts of EU member states must consider EU competition law as part of their own public policy. Some courts also consider their domestic competition law to constitute public policy,249 whereas others do not, as the Dutch Supreme Court in Eco Swiss,250 or the Swiss Federal Court.251 In Mitsubishi, the court reversed the traditional approach according to which disputes regarding antitrust issues could not be arbitrated. The court found that such disputes could be arbitrated, because courts maintained the possibility of having a second look at the issue at the stage of enforcement. Hence, the court assumed that it is possible to refuse recognition and enforcement of an award if the award violates antitrust law. The CJEU was more explicit in the Eco Swiss decision. It was acting upon a reference made by the Dutch Supreme Court in a case for the annulment of an arbitral award. The award had given effect to the agreement between the parties that violated the provision on competition of the EC Treaty, then Article 85 (now Article 101 of the TFEU). The Dutch Supreme Court had affirmed that an award violating Dutch competition rules would not be deemed to be against Dutch public policy, and requested a ruling by the European Court as to whether European competition policy could be treated in the same way or not. The CJEU ruled that the provision contained in the then Article 85 of the EC Treaty (now Article 101 of the TFEU) is a fundamental provision that is essential for the accomplishment of the tasks 247 248 249 250

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Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 US 614, 628 (1985) (United States). C-126/97 (Eco Swiss) (CJEU). Cartel division of the BGH, 27 September 2022, Case KZB 75/21(Germany). Hoge Raad der Nederlanden, 21 March 1997, Eco Swiss China Time Ltd v. Benetton International NV (The Netherlands), referring to the CJEU for a preliminary ruling. X S.p.A. v. Y S.r.l., Tribunal Fédéral, 8 March 2006, Arrêts du Tribunal Fédéral (2006) 132 III 389 (Switzerland).

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entrusted to the Community and, in particular, for the functioning of the internal market. Based on this, the Court explicitly affirmed: ‘The provisions of article 85 of the Treaty may be regarded as a matter of public policy within the meaning of the New York Convention.’252 That the CJEU has defined EU competition law as public policy, however, does not mean that any violation of every EU competition rule will be a breach of public policy. As explained in Section 5.4.9(e), it is only the most serious violations that qualify, and the breach must be concrete and effective, so that it truly jeopardises the goals of competition policy. Even the CJEU did not apply the public policy defence to refuse recognition and enforcement of court decisions under the Brussels I Regulation, even though they had not applied competition law correctly, because of the very high threshold for what violation renders a decision unacceptable.253 These decisions are not rendered under the New York Convention but, as explained in Section 5.4.9(a), there is no reason to assume that the content of public policy differs according to the context. This makes it necessary to assess which violations of competition law may be deemed so serious that the threshold for infringement of public policy is reached. As mentioned, the evaluation of this issue is necessarily based on the circumstances of the case, and it is difficult to suggest abstract criteria that can automatically support the finding that a certain violation of competition law is or is not an infringement of public policy. Generally, however, it seems possible to point out that certain types of agreements seem to be considered serious violations of competition law, and thus more likely can be deemed to be a manifest infringement of the fundamental principles underlying competition law. For example, the abovementioned Article 101 of the TFEU forbids, in the chapeaux of the first paragraph, ‘all agreements . . . which have as their object or effect the prevention, restriction or distortion of competition within the internal market’. These are two distinct categories of infringements: infringements by object; and infringements by effect. Both types of agreements are forbidden, but the agreements whose object is to restrict competition, are deemed to be more harmful to fair competition.254 Which agreements are considered to be infringing by object is explained in the Commission’s Guidelines on the application of the TFEU, Article 101: Non-exhaustive guidance on what constitutes restrictions by object can be found in Commission block exemption regulations, guidelines and notices. 252 253 254

C-126/97 (Eco Swiss) (CJEU), para 39. Cases C-38/98 (Renault) (CJEU) and C-68/13 (Diageo) (CJEU). Judgment of the Court (Third Chamber), 4 June 2009, C-8/08, T-Mobile Netherlands BV, KPN Mobile NV, Orange Nederland NV and Vodafone, Case C-8/08 T-Mobile et al. v. Raad van bestuur van de Nederlandse Mededingingsautoriteit 2009 ECR I-04529 ¶ 29. See also (Third Chamber), 11 September 2014, C-67/13P, Groupement des cartes bancaires (CB) v. European Commission; European Commission, Commission Staff Working Document Guidance on restrictions of competition ‘by object’ for the purpose of defining which agreements may benefit from the De Minimis Notice, SWD(2014) 198 final.

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does arbitration ensure a self-sufficient contract? Restrictions that are black-listed [sic] in block exemptions or identified as hardcore restrictions in guidelines and notices are generally considered by the Commission to constitute restrictions by object. In the case of horizontal agreements restrictions of competition by object include price fixing, output limitation and sharing of markets and customers. As regards vertical agreements the category of restrictions by object includes, in particular, fixed and minimum resale price maintenance and restrictions providing absolute territorial protection, including restrictions on passive sales.255

While infringements by object may more readily be identified and deemed to violate fundamental principles, it is more demanding to identify infringements by effect. For these agreements, an infringement of fundamental principles may be found only after extensive and complex evaluations, among others considering possible economic benefits, indispensability and other aspects of the economic context.256 Examples of these agreements are agreements on research and development, production agreements, purchasing agreements and commercialisation agreements. (v) EU Law In the aforementioned Eco Swiss decision, the CJEU affirmed that EU competition law must be considered EU public policy.257 The CJEU justified this qualification affirming that competition rules ‘are necessary for the achievement of the internal market’. Given the narrow understanding of the defence of ordre public, a narrow understanding that is shared by the mentioned EU instruments of private international law such as the Rome I, Rome II and Brussels I Regulations, it is to be expected that the CJEU has a restrictive understanding of this formulation. As most EU rules have the purpose of achieving the internal market, emphasis should be placed on the adjective ‘necessary’. Otherwise, a situation may arise where the majority of EU regulation is deemed to be public policy; a situation that would run counter to the assumption that the public policy defence shall be used only in exceptional cases. This formulation was used by the CJEU in Ingmar, see Section 4.5.3(c).258 In that case, the CJEU decided that EU law on agency, and in particular Articles 17 and 18 of Council Directive 86/65 3/EEC on determining that the principal has to pay compensation to the agent upon termination of an agency contract, override any Choice-of-law clause contained in the contract and must be applied even if the parties chose a different law.

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European Commission, ‘Communication from the Commission – Notice – Guidelines on the application of Article 81(3) of the Treaty (Text with EEA relevance)’, Article 23, 27 April 2004, OJ C 101, pp. 97–118. See European Commission, ‘Commission Notice – Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements (Text with EEA relevance)’, 2001 OJ C 003, pp. 2–30. Case C-126/97 (Eco Swiss). Judgment of the Court (Fifth Chamber), 9 November 2000, C-381/98 (Ingmar), ECR I 09305, Ingmar GB Ltd v. Eaton Leonard Technologies Inc.

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Commercial agency is deemed to be necessary for the achievement of the internal market for two reasons: uniform conditions for agents are deemed to ensure fair competition, and they protect the agent who is deemed to be the weaker party. Restricting arbitrability of disputes relating to contracts of agency, however, is an undesirable development, see Section 5.3.3(b)(v) (see also Section 5.4.8(d) concerning EU law and investment arbitration). That the CJEU in Ingmar used the same formulation as in Eco Swiss and defined rules on agency as ‘necessary for the achievement of the internal market’, could be interpreted to mean that these rules must be considered European public policy. This, however, is too expansive an understanding of ordre public. Even CJEU case law confirms that the defence of public policy may not be triggered whenever a rule necessary for the achievement of the internal market is breached. Not all violations of competition law are automatically to be considered an infringement of public policy. Ordre public becomes relevant when there is a manifest violation of the underlying principles, see Section 5.4.9(e). (vi) Labour Law; Insurance It is conceivable that national law attaches important social significance to the protection of weaker parties. In the area of commercial contracts, this may particularly be of interest in respect of labour law, see Section 4.5.3(b). For want of specific case law on the relevance of labour law to the public policy rule, it may be useful to refer to the rationale of the considerations made in respect of company and competition law. If disregarding the applicable law leads to an award that seriously breaches fundamental principles underlying labour law, the award may be set aside or refused enforcement. (vii) Good Faith and Fair Dealing As seen in Chapter 3, some legal systems, particularly those inspired by German law, base their contract laws on the principle of good faith and fair dealing. This principle may be used to guide the interpretation of the contract, its performance, to create ancillary obligations for the parties (in spite of their not being expressly provided for in the contract) or even to correct the regulation contained in the contract. Contract clauses that expressly permit an interpretation or a performance that violates the principle of good faith and fair dealing might be deemed to violate the principle of good faith and fair dealing. Clauses exempting from liability even in cases of gross negligence or willful misconduct, or clauses permitting the termination of the contract for capricious reasons may serve as an example. If the contract is subject to, for example, English law, which has no general principle of good faith for commercial contracts, there are no obstacles to a literal implementation of the contract’s provisions, as long as they are sufficiently clear.259 259

See Chapter 3, Sections 3.1 and 3.3.

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Would the literal implementation of these clauses be affected by an overriding principle of good faith and fair dealing in the law that would have been applicable if the parties had not chosen English law to govern the contract (particularly if that is the law of the court that is involved with the award)? As seen in Chapter 3, the principle of good faith and fair dealing is considered to be central in the contract laws of civil law systems. As seen in Section 2.2.5(f), the principle of good faith has been transferred from there into various restatements of principles of contract law that have the goal of being applicable to international contracts, such as the UPICC and the PECL, as well as into the work towards a common European contract law, such as the DCFR and the CESL. As seen in Section 4.5.3(e), it has even been proposed that the overriding rules based on good faith (which have so far been applicable to consumer protection) are extended to commercial contracts. The principle of good faith and fair dealing is the basis for many provisions of the EU Directive 93/13 on unfair consumer terms. In the Claro case,260 the CJEU ruled on the question as to whether Article 6 of the Directive represents public policy and thus can be a basis for setting aside an arbitral award. Article 6 of the Directive provides that contract terms that are defined as unfair under the Directive shall not be binding on the consumer. The CJEU found that: as the aim of the Directive is to strengthen consumer protection, it constitutes, according to Article 3(1)(t) EC, a measure which is essential to the accomplishment of the tasks entrusted to the Community and, in particular, to raising the standard of living and the quality of life in its territory.261

The CJEU thus concluded that the rule on unfair contract terms is to be deemed public policy. The Claro decision was rendered in a case involving a consumer and its rationale is based on consumer protection. It is, therefore, quite doubtful whether corresponding rules may be deemed to be public policy when the award regards a commercial dispute. Chapters 2 and 3 argued that the principle of good faith is difficult to apply in commercial contract practice. It does not exist as a general principle in English law, which inspires international contracts. It is given a central role in the transnational restatements of principles such as the UPICC and the PECL, but, as seen in Section 2.2.5(f), it is difficult to substantiate the content of a transnational principle of good faith. This speaks against considering the principle of good faith as a principle of public policy. Section 4.5.3(e) explained why a proposal in the field of European contract law, the CESL, although adopting a central role for good faith that can be 260

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Judgment of the Court (First Chamber), 26 October 2006, C-168/05 (Claro), Elisa María Mostaza Claro v. Centro Móvil Milenium SL. See also (First Chamber), 6 October 2009, C-40/08, Asturcom Telecomunicaciones SL v. Cristina Rodríguez Nogueira. C-168/05 (Claro), para. 37.

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found in the PECL, implicitly excludes that the principle is overriding. If the principle does not constitute a basis for overriding mandatory rules, then it is even less likely to be upheld as a public policy principle (public policy having a narrower scope than overriding mandatory rules). In accordance, the Swiss Supreme Court found that violation of Article 2 of the Swiss Code of Obligations, a provision of great significance in Swiss law enshrining the principle of good faith, does not automatically imply a breach of public policy.262 Case law supports the restrictive approach recommended here.263 The principle of good faith can have a different significance when it is considered as a principle of contract relating to the substance of the dispute, but as a principle of procedural law relating to the parties’ conduct in the arbitration proceedings. In this context, the principle of good faith is absorbed by the grounds on procedural irregularity or on due process. (viii) Embargo and Sanctions Traditionally, the public policy defence may be applied to refuse recognition and enforcement of awards ordering the fulfilment of contracts that violate embargo or other sanctions.264 However, as explained in Section 5.4.9(g), in order to apply the public policy defence it is not sufficient that the violated principle has the quality of public policy; it is also necessary that the result in the specific case be unacceptable. Hence, the public policy defence was not applied in a case where the law containing the sanctions that would have been violated if the award had been recognised and enforced, also contained a mechanism according to which enforcement proceedings should be suspended until the basis for the sanctions ceased to exist.265 The delicate implications of sanctions may, however, lead to inconsistent results. Thus, the same court, a few weeks later, applied the public policy defence to refuse

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Swiss Supreme Court Decision 4A_486/2019. See a US court decision, affirming that it did not have the power to review whether the arbitral tribunal had correctly applied the Illinois Beer Industry Fair Dealing Act: United States District Court, Northern District of Illinois, Eastern Division, 29 September 2004, 2004 US Dist Lexis 19728, in Yearbook Commercial Arbitration XXX, pp. 922ff. Judgment of the Prince Edward Island Supreme Court, Grow Biz International Inc. v. D.L.T. Holdings Inc., 2001, PESCTD 27 (Canada), in Yearbook Commercial Arbitration XXX, pp. 459ff., dismissed (albeit on an evaluation of the specific circumstances of the case) that it would be against public policy to give effect to certain agreements entered into by a franchisee because of the unequal bargaining power of the parties. A German Court dismissed that the size of a fee requested for certain services was excessive and against good morals: Hamburg Court of Appeal, 12 March 1998, IPRspr 1999 No 178, in Yearbook Commercial Arbitration XXIX (Kluwer International, 2004), pp. 663ff. See, however, an Austrian decision considering an interest rate that was too high and was therefore in conflict with public policy: Supreme Court of Austria, 26 January 2005, 3 Ob 221/04b, in Yearbook Commercial Arbitration XXX, pp. 420ff. Cour d’appel de Paris, 5 October 2021, n° 18/18708 (France). Supreme Court, 9 January 2020, Case No 761/46285/16-C (Ukraine).

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recognition and enforcement of an award rendered between the same parties on similar issues.266 Notwithstanding the importance of rules on sanctions and on foreign trade, in several cases, awards infringing sanctions or foreign policy recommendations have not been considered to infringe public policy.267 (ix) Corruption There has been a significant development since the times when corruption was considered a legitimate instrument to carry out business activity – so legitimate that bribery payments could be deducted from the taxable basis of the company that had paid them, just as with any other production cost.268 Awareness has grown about the detrimental effects of corruption and its global implications; extensive diplomatic activity has led to important international conventions that have been ratified by an impressive number of states – in particular, the OECD AntiBribery Convention of 1997,269 ratified by all 38 OECD countries and 6 non-OECD countries,270 and the UN Convention against Corruption of 2003,271 to which 188 countries are party.272 The fight against corruption is nowadays a generally recognised principle of public policy.273 The importance of ensuring that this principle is not circumvented is such, that even courts which traditionally are reluctant to exercise control on arbitral awards, make use of their controlling powers when there is a suspicion that the principle may have been infringed. This applies especially to French courts, which are otherwise 266 267

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Supreme Court, 13 February 2020, Case No 824/100/19 (Ukraine). The Ministry of Defense and Support for the Armed Forces of the Islamic Republic of Iran, as Successor in Interest to the Ministry of War of the Government of Iran v. Cubic Defense Systems, Inc, Court of Appeals, Ninth Circuit, 15 December 2011, 665 F3d 1091 (United States); Ameropa A.G. v. Havi Ocean Co. LLC, District Court, Southern District of New York, 16 February 2011, 2011 WL 570130 (United States); National Oil Corporation (Libya) v. Libyan Sun Oil Company [1990] 733 F Supp 800, and Belship Navigation Inc v. Sealift Inc (The ‘Huntsville’), US District Court (SDNY) (Robert P Patterson Jr DJ) 27 July 1995, in Yearbook Commercial Arbitration XXII (Kluwer International, 1997), pp. 789ff; Parsons & Whittemore Overseas v. Société Générale de L’Industrie du Papier (RAKTA), Court of Appeals, Second Circuit, 508 F2d 969 (1974) (United States). See also Cour d’appel de Paris, 3 June 2020, n° 19/07261, distinguishing between sanctions that are based on an international consensus and constitute public policy (in this, case, UN and EU sanctions against Iran), and unilateral sanctions issued by one state that do not constitute public policy (in this case, US sanctions against Iran). For references in the Italian and French legal systems, see Antonio Crivellaro, ‘Arbitrato internazionale e corruzione’. Rivista dell’Arbitrato (2019), pp. 663–707, footnote 6. OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, signed on 17 December 1997. The status of ratification is available on the OECD’s website, OECD Anti-Bribery Convention of 1997. United Nations Convention against Corruption, A/58/422, adopted on 31 October 2003. The status of ratification is available on the UN’s website, UN Convention against Corruption of 2003. See, for example, World Duty Free v. Republic of Kenya, ICSID Case No ARB/00/7; EDF (Services) Limited v. Romania, ICSID Case No ARB/05/13; Cour d’appel de Paris, 17 November 2020, n° 18/02568; Cour d’appel de Paris, 27 October 2020, n° 19/04177; Cour d’appel de Paris, 25 May 2021, n° 18/27648 (Cengiz v. Libya); Cour d’appel de Paris, 5 October 2021, n° 18/18708. For further references, see Baizeau and Hayes (2017), pp. 231f.

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notorious for their restrictive approach to court control, see Section 5.3.3(b)(ii), and have embraced the maximalist approach if the issue to be evaluated is one of corruption or of economic crime, see Section 5.3.3(b)(i). This shows the importance that nowadays is attached to these issues. A claim arising out of a contract that is tainted by corruption is not enforceable, to the extent that the underlying contract is not enforceable. In many legal systems, the underlying contract will be invalid as a consequence of its illegality.274 In other legal systems, illegality does not necessarily lead to invalidity of the contract;275 however, the contract will not be enforceable if its enforcement infringes fundamental principles and thus is contrary to public policy. Ordering remedies for breach of an obligation is a substitute for enforcement of the obligation, and if enforcement of the obligation violates public policy, the remedy will do so, see Section 5.4.9(g). This is sometimes referred to as the unclean hands doctrine.276 (x) Corporate Social Responsibility, Human Rights Another area in which may be expected a development similar to that described in Section 5.4.9(i)(ix) concerning corruption, is that of business and human rights, and corporate social responsibility in general (CSR, also known as Environment, Social and Corporate Governance, ESG). Sections 2.2.6, 4.2.1(c) and 4.5.3(f) pointed out the growing concern with the necessity to ensure that companies comply with these principles in their international activity. It cannot be excluded that awards which seriously infringe such values be deemed to violate public policy. (j) Conclusion The determination of the content of ordre public is relative; it may vary from state to state and, within the same state, with the passing of time. What remains firm is that the exception of the ordre public has to be applied restrictively; in particular, the simple violation of a rule is in itself not sufficient to trigger applicability of the public policy clause, not even if the violated rule is mandatory or an overriding mandatory rule. The ordre public cannot be considered as affected unless the result of that violation conflicts with the most fundamental principles of the society. This means 274

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See, for France, the Cour d’appel de Paris, 28 May 2019, n° 16/11182 (Alstom). This decision was annulled by the Cour de cassation, 29 September 2021, n° 558 F-D, but on a different ground (that the Court of Appeal had distorted the transcripts from the oral hearing). See, for England, Alexander Brothers Ltd (Hong Kong SAR) v. Alstom Transport SA and Another [2020] EWHC 1584 (Comm), upholding the same arbitral award that the French Court of Appeal mentioned in the previous footnote had annulled. In the award, the arbitral tribunal had concluded that the underlying contract was not invalid because corruption was only indicated by circumstantial evidence. For references, see Richard Kreindler, ‘Corruption in International Investment Arbitration: Jurisdiction and the Unclean Hands Doctrine’. In Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds.), International Investment Law for the 21st Century: Essays in Honour of Christopf Schreuer (Oxford University Press, 2009), pp. 309–27.

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that parties do enjoy more leeway if their contract contains an arbitration clause than if disputes are to be decided by the courts. However, this leeway is not unlimited. 5.4.10 Annulment at the Seat Under Article V(1)(e) of the New York Convention, and under Article 36(2)(a)(v) of the Model Law, recognition and enforcement of an award may be refused if the award has been set aside in its country of origin. This shows the importance of considering the legal system of the seat of the arbitral tribunal and contradicts the opinion, linked to the delocalisation theory, that the seat of the arbitral tribunal has no relevance to the legal framework of the arbitration proceedings. The court of the seat can annul the award, and an award that has been annulled in its state of origin is usually considered as no longer having any legal effect; however, French courts enforce awards that have been set aside.277 French courts apply the theory of delocalisation, according to which international arbitration is not subject to any national laws. French courts do not recognise the court of seat’s authority to annul an award, as an international award is deemed to have its own, delocalised regime. If an award is delocalised, the state courts of its country of origin do not have any jurisdiction to exercise control. Therefore, any decision by these courts setting aside the award will not have any effects.278 The delocalisation approach does not violate the New York Convention because the Convention gives, in Article VII, the possibility of applying the law of the place of enforcement, if this is more favourable to enforcement than the provisions of the New York Convention. On this basis, French courts apply French law to enforce annulled awards. This position is sometimes said to be supported by a linguistic argument relating to Article V of the New York Convention.279 According to this argument, the English text (‘recognition and enforcement . . . may only be refused if . . .’), by using the verb 277

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The most well-known example is Cour de Cassation, 23 March 1994, n° 92–15.137 (Hilmarton v. Omnium de Traitement et de Valorisation (OTV)), reported in Yearbook Commercial Arbitration XX (Kluwer International, 1995), pp. 663–5 and Cour de Cassation, 10 June 1997, n° 95–18.402 and 95–18.403 (Hilmarton v. Omnium de Traitement et de Valorisation (OTV)), reported in Yearbook Commercial Arbitration XXII (Kluwer International, 1997), pp. 696–8. See also Cour de Cassation Civ. 1ère, 29 June 2007, n° 05–18.053 (Putrabali Adyamula v. Rena Holding). For a recent decision, see Cour d’appel de Paris, 11 January 2022, n° 20/1793 (Republic of Benin v. SGS Company). For an overview of the literature on this issue, showing the different approaches, see Linda Silberman and Robert Uwe Hess, ‘Enforcement of Arbitral Awards Set Aside or Annulled at the Seat of Arbitration’. Cambridge Compendium of International Commercial and Investment Arbitration, NYU School of Law, Public Law Research Paper No. 22–14 (2022). Available at https://ssrn.com/abstract=4029102. Particularly on French case law, see Section B. Jan Paulsson, ‘Rediscovering the NY Convention: Further Reflections on Chromalloy’. Mealey’s International Arbitration Report 17.4 (1997), pp. 24f and ‘May or Must Under the New York Convention: An Exercise in Syntax and Linguistics’. Arbitration International 14.2 (1998), pp. 227–30; Gary H. Sampliner, ‘Enforcement of Foreign Arbitral Awards after Annulment in Their Country of Origin’. Mealey’s International Arbitration Report 11.9 (1996), pp. 22–34; Fifi Junita, ‘Public Policy

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‘may’, gives enforcement courts the discretion not to refuse enforcement even though the conditions for refusal are met. In reality, the verb ‘may’ is coupled with ‘only if’, and is meant to express that the only allowed grounds for refusing recognition and enforcement are those listed in the provision. The text, in other words, says nothing about the court’s discretion to recognise and enforce an award notwithstanding that there is a ground for refusal. This is confirmed by a look at other language versions (I can only express a considered opinion on the French and the Russian versions, and also the Spanish version seems to suggest the same). Although the court’s discretion to decide whether to refuse enforcement or not may not necessarily be based on the language of the provision, there are good reasons for supporting the position that courts have a margin of discretion. This applies to all grounds listed in Article V: if the award was rendered after a flawed process, but the violation was not very serious or did not affect the outcome of the decision, reasons of effectiveness suggest that the award be recognised and enforced.280 In respect of the particular ground for refusing enforcement contained in Article V (1)(e), however, the discretion of the court should be applied very restrictively, if undesirable results are to be avoided. This is because enforcing an annulled award may open the way for contradicting decisions. A good example is the already mentioned French case Hilmarton. The award (let’s call it Award No 1, according to which party A won) was annulled in Switzerland; as a consequence of the annulment, party B initiated new arbitral proceedings, which resulted in a new award (Award No 2), coming to the opposite result: party B won. In the meantime, party A sought enforcement in France of Award No 1. Award No 1 had been set aside in its country of origin, but French courts do not accept state court’s power to set aside an international award, and therefore enforced Award No 1 against party B. Party B then sought to enforce Award No 2 in France. However, French courts declined to enforce it because they had already enforced Award No 1 between the same parties and on the same issues. Enforcing Award No 2 would also have been a violation of the principle of res iudicata. The result was that the award that had been annulled was enforced, while the award that was valid and enforceable was not enforced. While this is in keeping with the French understanding of international awards as delocalised, it does not seem to be satisfactory or efficient for the parties. While disregarding an annulment made earlier in the award’s country of origin was the exception rather than the rule,281 it has now become more common to adopt

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Exception in International Commercial Arbitration: Promoting Uniform Model Norms’. Contemporary Asia Arbitration Journal 5 (2012), pp. 59f. Some countries reflect this discretion in the legislative text concerning procedural irregularity, see Sections 43(1)(e) and 46(1)(e) of the Norwegian Arbitration Act, and Section 34(1)(6) of the Swedish Arbitration Act. For an overview of case law giving annulment at the place of origin of the award the effect of preventing enforcement, see Silberman and Hess (2022), Section A.

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a flexible approach:282 if the annulment decision meets criteria that satisfy the enforcement court, the set aside will be given consequences and the award will not be enforced. If, to the contrary, the enforcement court finds that the annulment decision did not comply with due process, the award will be enforced. Thus, a Dutch court283 decided to enforce an award notwithstanding that it had been set aside in the country of origin, Russia. This decision, one of the many decisions rendered in the dispute facing Yukos’ shareholders and the Russian state, was based on considerations of impartiality and independence of the Russian courts. The Dutch court found that it could not consider the consequences of annulment that had been decided by a court against the principle of due process. When the foreign decision that has set aside an award is not deemed to be unacceptable by Dutch courts, the annulled award is not enforced.284 Similarly, US courts have enforced an award that had been set aside in its country of origin because the annulment violated basic notions of justice;285 however, they refused to enforce awards that had been set aside, when there were no reasons to refuse to recognise the annulment.286 In an earlier, isolated and controversial decisions, a US court had enforced an award that had been set aside on the basis of a proarbitration policy and without detailed analysis.287 Also, English courts exercise their discretion to determine whether annulment of the award is an obstacle to enforcement. The preferred approach is that enforcement shall be refused unless the annulment decision was manifestly wrong or perverse.288 The recent flexible approach, therefore, does not direct its examination at the award, but at the foreign annulment decision. This could, at first sight, seem to be an extraneous element in the system established by the New York Convention: the Convention does not empower the enforcement court to review the annulment decision. It is the award that shall be subject to recognition and enforcement, not the annulment decision. 282

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There are different rationales for the flexible approach, see Silberman and Hess (2022), Section C; Crina Baltag, ‘Article V(1)(e) of the New York Convention: To Enforce or Not to Enforce Set Aside Arbitral Awards?’ Journal of International Arbitration 39.3 (2022), pp. 397–410; William W. Park, Arbitration of International Business Disputes, 2nd ed. (Oxford University Press, 2012), Chapter 11, C-1: ‘What is to be Done with Annulled Awards?’ Yukos Capital S.A.R.L. v. OAO Tomskneft VNK [2014] IEHC; Gerechtshof Amsterdam, 28 April 2009, No 200.005.269/01 (Yukos Capital S.A.R.L. v. OAO Rosneft); Yukos Capital SARL v. OJSC Rosneft Oil Company [2012] EWCA Civ 855. Hoge Raad, 24 November 2017, No 491569/KG RK 11-1722 and 200.100.508/01 (Maximov v. OJCS Novolipetsky Metallurgichesky Kombinat). Corporation Mexicana de Mantenimiento Integral v. Pemex Exploration y Production, 962 F Supp 2d 642 (SDNY 2013). For an analysis of US case law see Silberman and Hess (2022), Section C. Baker Marine (Nig) Ltd v. Chevron (Nig) Ltd, 191 F 3d 194 (2d Cir 1999); Esso v. Nigerian National Petroleum Corporation, 4 September 2019, US District Court (SDNY). Chromalloy Gas Turbine Corp v. Egypt, 939 F Supp 907 (DDC 1996). Maximov v. OJSC Novolipetsky Metallurgichesky Kombinat [2017] EWHC 1911 (Comm); Malicorp Ltd v. Government of the Arab Republic of Egypt [2015] EWHC 361 (Comm).

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The impression that the attention is being directed to the wrong target may be strengthened by looking at the United States Restatement International Arbitration Law. After having repeated the rule contained in Article V(1)(e) of the New York Convention (according to which recognition and enforcement of an award may be refused if the award was set aside by a competent court in its country of origin), the Restatement specifies that an annulled award may nevertheless be recognised and enforced if the annulment decision ‘is not entitled to recognition under the principles governing the recognition of judgments in the court, or in other extraordinary circumstances’.289 Reference to criteria for recognition of the annulment decision may be confusing: it is not the annulment decision that is being recognised, but the award. A first observation is that application of Article V(1)(e) of the New York Convention does not require that the annulment decision be recognised. Recognition of foreign court decisions falls outside of the scope of the New York Convention and is regulated in disparate ways. Since decisions annulling arbitral awards are generally excluded from the scope of application of international conventions – such as the 2019 Hague Convention or the Lugano Convention, it is up to the domestic law of each country to determine the criteria for recognition of these decisions. In many countries, such as the United States, foreign court decisions may be recognised if some criteria are met – such as, that the court had jurisdiction, that the decision is final, and that it was rendered in the respect of due process principles.290 In other countries, such as in Norway, foreign court decisions are only recognised on the basis of a treaty or a statute. As there are no treaties or statutes that permit recognition of annulment decisions, Article V(1)(e) could never be applied in Norway if it required recognition of the annulment decision. Reference to the recognition of the annulment decision, therefore, should not be seen as introducing a requirement that the annulment decision be recognised in the enforcement country before recognition and enforcement of the annulled award may be refused. It should rather be seen as a guideline in the exercise of the discretion the enforcement court has under Article V(1)(e) of the New York Convention. If principles of jurisdiction, due process and finality were complied with, the annulment may be deemed to be a sufficient basis for refusing recognition and enforcement of the award.

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American Law Institute, Restatement of the U.S. Law of International Commercial and Investor-State Arbitration, para 4.14(b). Uniform Foreign-Country Money Judgments Recognition Act 2005, which has been adopted in a large number of states. See, for comments and references, William W. Park, ‘Annulled Arbitration Awards’. In Julie Bédard, and Patrick W. Pearsall (eds.), Reflections on International Arbitration: Essays in Honour of George Bermann (Juris, 2022), pp. 645f.

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The impression remains, however, that directing the attention to the annulment decision rather than to the award does not fully correspond to the structure of the New York Convention. The other grounds for refusing recognition and enforcement contained in Article V all regard qualities of the award: the award was rendered without the parties’ consent, it was rendered after an irregular procedure, it violates public policy and so on. Similarly, nothing in the language of Article V(1)(e) suggests that the provision does not regard the award: the provision applies if the award is not final and binding, or if it has been annulled. The new flexible approach, requiring specific qualities not of the award, but of the foreign annulment decision, could be seen as an anomaly. We have seen that the New York Convention does not lay down any requirements for the recognition of foreign annulment decisions; to this may now be added that the New York Convention does not regulate annulment in the country of origin of the award. However, at a closer look, there is no incompatibility between the new trend and the structure of the New York Convention. The new trend does not deal with the foreign annulment decision directly. It only evaluates it incidentally, for the purpose of ascertaining whether the award has the quality of effectiveness that is required in Article V(1)(e). Therefore, the trend does not exceed the scope of the New York Convention by scrutinising foreign annulment decisions. It considers the annulment decision as a step in the reasoning necessary to evaluate whether the award has the quality of effectiveness necessary for the enforcement court to exercise its discretion to refuse recognition and enforcement. Considering the importance of predictability in international commercial law, any objective criteria guiding the exercise of discretion are welcome. Rather than granting the enforcement court full discretion on whether to recognise and enforce an annulled award, therefore, it is preferable to be in a position to predict that the annulled award may be recognised and enforced if the annulment decision violates principles of due process. It does not seem appropriate to extend this discretion to other considerations – such as whether the award was set aside for reasons that provide an annulment ground in the country of origin, but not in the country of enforcement. When the parties chose the seat of arbitration, they chose arbitration under the legal system of that country, including its annulment grounds, see Section 5.2.2(a). The enforcement country, in contrast, is chosen by one party only. It would contradict the very basis of arbitration (the principle of consent), if the enforcement country disregarded an annulment because its legal system does not have the same annulment grounds as the legal system that was chosen by the parties.291

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See, however, Park (2022), p. 652, suggesting that it would be wise to disregard an annulment based on grounds peculiar to the annulment jurisdiction.

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It should also be mentioned that the New York Convention gives courts the possibility of suspending enforcement proceedings, in the eventuality that annulment proceedings are pending. This permits the enforcement court to take into consideration the outcome of the annulment proceedings, before determining whether or not to enforce. There is, however, no obligation to suspend enforcement, and there are examples of courts that declined to do so when they considered the outcome of the annulment proceedings to be most probably favourable to the award.292 5.5 The Power of the Arbitral Tribunal in Respect of the Parties’ Pleadings The foregoing shows that, under certain circumstances, an award that does not comply with the applicable law runs the risk of being annulled, or not recognised or enforced. However, the arbitral tribunal is generally bound by the parties’ Arbitration agreement. If the parties have, in their agreement, chosen a certain law, what leeway does the arbitral tribunal have to consider another law? The scope of the arbitral tribunal’s authority is determined by the parties. The primary source establishing the arbitral jurisdiction and the scope of the dispute is the Arbitration agreement. In their statements of claim or of defence and their requests for relief, the parties introduce the facts that are in dispute, the evidence that shall prove them, the claims, the legal sources and the legal arguments that shall be the basis for the award. The parties’ pleadings determine, therefore, the borders of the dispute upon which the tribunal is called on to decide. The arbitral tribunal is not supposed to exceed these limits. The self-sufficiency of the contract described in Chapter 1 is meant to be enhanced when disputes are submitted to arbitration, because the arbitral tribunal is expected to rely solely on the contract and on the parties’ pleadings. If the arbitral tribunal has the power to look beyond these borders, the self-sufficiency of the contract is challenged. Therefore, it is relevant here to analyse the arbitral tribunal’s power. As seen, in some situations, the arbitral tribunal may see the necessity of taking into consideration a law different from that chosen in the parties’ contract. In other situations, an arbitral tribunal may be forced to render the award without having received sufficient instructions or arguments by one or even all of the parties. If one of the parties does not participate in the proceeding, it deprives the process of the contribution of its factual and legal arguments. Even if both parties participate in 292

For England: Hulley Enterprises Ltd & Others v. The Russian Federation [2022] EWHC 2690 (Comm); for France: Cour d’appel de Paris, 17 February 2017, n° 14/21103 (République Bolivarienne du Venezuela c/ Société Gold Reserve INC); for Germany: Bayerisches Oberstes Landesgericht, 18 January 2022, No 101 Sch 60/21; for the Netherlands: Hoge Raad, 4 December 2020, No 0/01892 – interestingly, the Dutch Supreme Court dismissed the request for suspension of enforcement pending annulment proceedings in the Netherlands.

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the proceeding, the arguments presented by one or both of them may not be convincing or not sufficiently developed. In these cases of insufficient instructions or pleadings by the parties, how shall the tribunal decide? Shall it assume the role of an umpire that passively listens to the presented arguments and decides which of the opposing arguments deserves to win? Shall this umpire role be taken to its extreme, so that, in the case of the failure by one party to participate in the proceedings, the other party automatically wins, even if its arguments are not convincing? Or shall the arbitral tribunal take an active role, investigate the relevance and correctness of the produced evidence and develop arguments that were not presented by the parties? Shall this active role go so far as to decide on the basis of legal sources that were not pleaded by the parties? Shall it permit the granting of relief that the parties have not requested? We will go on to analyse these questions. Two levels of regulation are relevant in this context: rules on the conduct of the arbitral tribunal and rules on the validity and enforceability of the award. As we will see, the tribunal is bound in respect of the factual scope of the dispute but enjoys considerable freedom in respect of the inferences that it draws from the evidence and in respect of the legal consequences of the proven facts. Moreover, it can request that the parties provide additional evidence and information, thus introducing new elements into the dispute. 5.5.1 The Procedural Rules The arbitral tribunal must comply with the procedural rule determined by the applicable regulation. As seen in Section 5.1.2, the applicable regulation consists mainly of: (i) the Arbitration agreement; (ii) the Arbitration Rules of the relevant arbitral institution in case of institutional arbitration, or the Arbitration Rules chosen by the parties (if any) in case of ad hoc arbitration; (iii) the rules in the applicable arbitration law in case of commercial arbitration or in the relevant Convention in case of treaty-based arbitration, such as investment arbitration; and (iv) significant soft law regulation in this area. We will go on to examine the significance of these sources to the issue of the arbitral tribunal’s powers. 5.5.2 Arbitration Agreements and the Scope of the Tribunal’s Powers Arbitration agreements sometimes specify that the arbitral tribunal shall be empowered only to decide on a certain relief, for example, the quantification of damages, and not on others, for example, the establishment of liability. In such cases, some of the questions asked here are readily answered: the tribunal would clearly exceed its power if it ordered a relief that the parties have excluded in the Arbitration agreement.

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The recognition of the authority of the arbitral tribunal, however, has to be distinguished from the question of the proper interpretation by the tribunal of the contract between the parties, as well as from the question of the proper application of the law. Imagine a contract regulating that the defaulting party shall be liable only for indemnifying direct losses and not also consequential damages. The exclusion of consequential damages is regulated as an obligation between the parties, and it is not a restriction on the tribunal’s jurisdiction (unless this restriction is reflected in the Arbitration clause). If the arbitral tribunal determines that the defaulting party has to reimburse consequential damages, it may have based its decision on an incorrect interpretation of the contract or on an incorrect application of the law’s definition of direct and consequential losses. However, this will not mean that the tribunal has exceeded its authority.293 The award, therefore, is wrong in terms of the merits, but is not rendered without jurisdiction. In terms of the consequences for the effectiveness of the award, this means that the award is valid and enforceable.294 If, however, the exclusion of consequential losses had been regulated as a limit to the arbitral tribunal’s authority – that is, if the Arbitration clause had referred to arbitration only on the issue of the direct loss, the award would be invalid and unenforceable.295 Generally, Arbitration agreements do not contain limitations on the tribunal’s authority,296 and they remain silent on the question of the arbitral tribunal’s power beyond the pleadings of the parties.

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For similar observations see, in respect of Swedish law, Heuman (2003) pp. 610ff. and 737, and in respect of English law, Robert Merkin, Arbitration Law (Laforma Law, 2004), pp. 714f. For a US decision applying the same principle, see Fertilizer Company of India, Southern District of Ohio, 517 F Supp 948 (1981) and ICCA Yearbook Commercial Arbitration VII (Kluwer International, 1982), pp. 381ff. As seen in Section 5.3.3, the judicial control over the award does not extend to a review of the merits. On the consequence of an excess of power, see Section 5.4.5. As an illustration, no limitations to the arbitral tribunal’s authority are mentioned in the Model Arbitration clauses recommended by, for example, the Arbitration Institute of the SCC (‘Any dispute, controversy or claim arising out of or in connection with this contract, or the breach, termination or invalidity thereof, shall be finally settled by arbitration in accordance with the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce’), the ICC (‘All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the ICC by one or more arbitrators appointed in accordance with the said Rules’) or the LCIA (‘Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause’). These standard clauses are sometimes accompanied by a recommendation to specifically regulate the number of arbitrators, the venue of the tribunal and the language of the proceeding; no mention is made of regulating the scope of authority of the tribunal. Often, these standard clauses are applied as a model to Arbitration clauses that are individually drafted; the number of clauses that contain specific limits to the tribunal’s authority, therefore, is rather low. The ICC Rules assume that the parties shall, at the beginning of the dispute, agree on Terms of References, specifying the questions that are submitted to the tribunal. These are often drafted as a positive list of questions to be solved, rather than as a list of items that are excluded from the scope of the dispute. For investment arbitration, see Section 5.5.5.

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An example of an attempt to restrict the arbitral tribunal’s power can be found in a contract between Tiffany Company and The Swatch Group for the production and distribution of watches. The contract contained a provision that seems to be a procedural version of the Entire Agreement clause: ‘The arbitral tribunal may not change, modify or alter any express condition, term or provision of this Agreement and to that extent the scope of its authority is expressly limited. The arbitral tribunal shall make the award in accordance with the rules of law and not as amiable compositeur.’297 The arbitral tribunal found that this restriction did not prevent it from considering, as a binding term, an attachment to the contract that expressly excluded having any binding character. The arbitral tribunal, a very eminent tribunal consisting of Filip de Ly, Georg von Segesser and Bernard Hanotiau, considered all contractual provisions, including a provision containing good faith obligations to develop and promote the products in order to accomplish the Business Plan (in the mentioned attachment). The Business Plan in itself did not contain binding obligations, but the arbitral tribunal interpreted the contract’s good faith obligations in light of the governing law and came to the conclusion that they gave a sufficient basis to imply an obligation to take into consideration the Business Plan. The arbitral tribunal had carefully considered the wording of the Arbitration agreement and deemed that interpreting the contract and the governing law so as to read implied obligations into the contract was not the same as changing, modifying or altering any express condition, term or provision of the agreement. The Amsterdam District Court disagreed and set aside the award. The court, however, did not explain its view in detail. Interpreting an implied obligation into the contract was considered, by the arbitral tribunal, a question of merits; by the court, however, it was considered a question of scope of power. The Amsterdam District Court decision was appealed, and the Court of Appeal confirmed the award.298 The wording of the Arbitration agreement may have been based on the desire to enhance predictability and avoid the contract text being affected by purposive interpretations or by application of a governing law belonging to the civil law system – and therefore, as seen in Chapter 3, prone to reading ancillary obligations into contracts. Leaving aside the observation that this desire of predictability seems difficult to reconcile with the expressed good faith obligations contained in the contract (as good faith obligations are open to purposive interpretation of contract terms, implied obligations and so on), it is questionable how effective the restrictions contained in the Arbitration agreement are. 297

298

Quoted in Rechtbank Amsterdam, 4 March 2015, No C/13/567933 / HA ZA 14-653 (Tiffany v. Swatch) at para 2.4. Gerechtshof Amsterdam, 25 April 2017, No 200.170.351/01, confirmed by the Hoge Raad, 23 November 2018, No 17/03478.

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The first obstacle lies in the interpretation of the restrictions: changing, modifying or altering any express condition, term or provision of the agreement is not the same as interpreting or construing the agreement, but where does the demarcation line go? The eminent arbitral tribunal and the Amsterdam District Court had different opinions on that. The Court of Appeal agreed with the arbitral tribunal. Moreover, these restrictions cast doubts on the relationship between the Choice-oflaw clause and the Arbitration clause: if the chosen law contains rules and principles that create ancillary obligations or alter some provisions of the contract, which clause prevails: The clause that chose the law intervening on the contract, or the clause that restricts the possibility to alter the contract? In a similar context, it has been suggested that the latter must be considered lex specialis, and that therefore it must prevail.299 The parties may thus be deemed to have chosen the law less the rules that would alter the contract. But what if the rule altering the contract is mandatory? For example, an agency agreement may provide that the agent shall not be entitled to any compensation upon termination of the contract; the contract may have chosen the law of an EU member state; the Arbitration clause may contain the mentioned restrictions. As known, EU law has mandatory rules on compensation upon termination, rules that have even been deemed by the CJEU to be essential for the achievement of the internal market,300 see Section 4.5.3(c) – a formulation that the CJEU uses in connection with public policy.301 In this situation, it is not feasible to apply the chosen law less its mandatory rules on compensation.302 It is, in conclusion, not necessarily helpful when the Arbitration agreement contains restrictions to the arbitral tribunal’s power to interpret the contract. Arbitration agreements, however, often contain instructions in respect of the applicable law: they choose the law that the tribunal has to apply to the merits of the dispute. These instructions may be considered a delimitation of the tribunal’s authority.303 Also here, excess of authority has to be distinguished from error in the interpretation of the contract (its Choice-of-law clause) and error in the application of the law (the applicable conflict rules that may restrict or override the choice of law made by the parties). In the latter cases, the courts will not have the jurisdiction to control the award, and the error will not have any consequences for the effectiveness of the award.304

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Park (2014b), p. 62. 300 Case C-381/98 (Ingmar). 301 Case C-126/97 (Eco Swiss). Along the same line of reasoning, Park (2014b) footnote 19. See Redfern and Hunter (2015), paras 3.97f. See also the ILA Committee on International Commercial Arbitration (2008), formulating, under the heading ‘Conclusions and Recommendations’ (p. 19), the following General Principle: ‘First, the principal task of arbitrators in a commercial case is to decide the dispute within the mandate defined by the arbitration clause. Arbitration is a creature of contract. The parties can agree to its scope. That agreement is binding on the arbitrators.’ The courts do not have the power to review the merits of the award, see Section 5.3.3.

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5.5.3 Arbitration Rules As explained in Section 5.1.2, Arbitration Rules may be chosen by the parties to govern the procedural aspects of their arbitration. Generally, the extent to which the arbitral tribunal is bound by the parties’ pleadings and legal arguments is not specifically regulated in the Arbitration Rules. There are, however, several rules that could be deemed relevant to the subject matter. (a) Party’s Default Many Arbitration Rules provide that the arbitral proceeding may be initiated and may continue in spite of the failure by one party to participate.305 Once the arbitral jurisdiction is established,306 a party may not, by failing to contribute to it, prevent an arbitral proceeding and the award from being rendered. The UNCITRAL Notes on Organizing Arbitral Proceedings confirm this.307 This rule clarifies that it is not necessary to receive the pleadings from all parties to the dispute in order to proceed with the arbitration. However, it does not clarify which role the tribunal shall have in respect of the pleadings that were submitted: shall the arbitral tribunal accept all the evidence produced and arguments and requests made by the participating party, or shall it evaluate them critically and independently? (b) Adverse Inferences Some Rules specify that failure by one party to appear shall not be seen as an admission of the other party’s assertions.308 Many Arbitration Rules, however, are 305

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For example, International Chamber of Commerce (‘ICC’) Arbitration Rules, Arts 5(2), 23(3) and 26(2) (‘ICC Rules’); London Court of International Arbitration (‘LCIA’) Arbitration Rules, Article 15.8 (‘LCIA Rules’); Stockholm Chamber of Commerce (‘SCC’) Arbitration Rules, Article 35(2) (‘SCC Rules’); United Nations Commission on International Trade Law (‘UNCITRAL’) Arbitration Rules, Article 30; International Centre for the Settlement of Investment Disputes (‘ICSID’) Arbitration Rules, Article 42 (‘ICSID Rules’). In a commercial dispute, the jurisdiction is established by the arbitral agreement; see the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Article II. In investment arbitration, the arbitral agreement is, generally, based on the applicable bilateral or multilateral investment treaty, which is deemed to contain an offer to arbitrate by the host state, which is deemed as accepted by the foreign investor by initiating the arbitration: see, for example, Article 26(5) of the Energy Charter Treaty. More generally, see Paulsson (1995), 232. UNCITRAL, UNCITRAL Notes on Organizing Arbitral Proceedings (UNCITRAL, 2016) para. 17. The UNCITRAL Notes are intended to be a practical support in the conduct of international arbitration. They are designed to be generally applicable, irrespective of whether the proceedings are subject to institutional or ad hoc arbitration, and without regard to the applicable arbitration law. Therefore, they offer a range of alternative practices and styles that are commonly encountered in international practice and are compatible with most arbitration laws. They do not have the ambition of recommending best practices. See the ICSID Arbitration Rules, Article 49(6). This principle does not apply only to investment arbitration: the same principle may be found in modern codifications of commercial arbitration law, such as German law (BGB, § 1048(2)); see, for example, Martin Martinek, ‘Die Mitwirkungsverweigerung des

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silent on the matter.309 This does not usually prevent the tribunal from drawing adverse inferences regarding the defaulting party, if this is deemed appropriate under the circumstances.310 This does not finally clarify the role of the tribunal in respect of the pleadings: that the tribunal may not consider a failure to appear as an admission does not prevent it from accepting the participating party’s pleadings as they were presented if it is convinced of their soundness. Conversely, that the tribunal may draw adverse inferences does not mean that the tribunal has to accept the presented pleadings if it is convinced that they are not sufficiently founded. Both rules, therefore, seem to assume that the tribunal is free to independently evaluate the pleadings of the participating party. The former rule assumes a duty to evaluate independently, whereas the latter only assumes the power to proceed to an independent evaluation. That a tribunal shall not make use of this power, however, and shall blindly accept the pleadings of the participating party, does not seem to comply with the expectations of justice connected with the institute of arbitration. The ALI/UNIDROIT Principles of Transnational Civil Procedure, a text issued in 2004 by the American Law Institute and the International Institute for the Unification of Private Law, aimed at providing a standard set of principles for transnational disputes as a basis for future initiatives in reforming civil procedure, and aspiring to be applicable to arbitration,311 contain some guidelines in respect of the eventuality that a default judgment is to be rendered. These principles are not binding rules, but they may be considered to reflect a certain international consensus on the main aspects of some procedural questions. Article 15(3) requests the court

309

310

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Schiedsbeklagten’. In Gerhard Lüke, Takehiko Mikami, and Hanns Prutting (eds.), Festschrift fur Akira Ishikawa zum 70. Geburtstag (De Gruyter, 2001), pp. 269ff. and Swedish law, see Heuman (2003), pp. 396f. and 405. See also Noah Rubins, ‘“Observations” in Connection with Swembalt v. Republic of Latvia’. Arbitration Institute of the Stockholm Chamber of Commerce. Stockholm Arbitration Report 2 (2004), 123ff. For example, the ICC Rules. However, a highly authoritative commentary on Article 21(2) of the previous ICC Rules, which corresponds to Article 26 in the 2021 ICC Rules currently in force, considers it to be a widely accepted principle that failure by one party to appear does not mean admission of the arguments made by the other party: Yves Derains and Eric A. Schwartz, A Guide to the ICC Rules of Arbitration, 2nd ed. (Kluwer Law International, 2005), p. 289. See the International Bar Association (IBA) Rules on the Taking of Evidence in International Commercial Arbitration, affirming in Articles 9(5) and 9(6) that the tribunal may draw inferences that are adverse to the defaulting party in case of failure to produce a piece of evidence that was requested by the other party and ordered by the tribunal. See also the commentary on the ICC Rules by Derains and Schwarz (2005), Article 20(5), footnote 593 and Section 21(2), p. 266: negative inferences are possible, but the tribunal should be cautious in drawing them. This provision was not amended in the 2012 or the later versions of the ICC Rules; therefore, the comments may be deemed still to be applicable. Also, in the systems expressly excluding that failure to appear is an admission, the tribunal may evaluate the attitude of the parties and draw adverse inferences if it deems them to be appropriate under the circumstances; see, for Swedish law, Heuman (2003), pp. 397, 405. See also Rubins (2004) pp. 124ff. See the introduction to the Principles text, www.unidroit.org/instruments/civil-procedure/ali-unidroitprinciples/; see also ‘ALI/UNIDROIT Principles of Transnational Civil Procedure’ (2004–4) 9 Uniform Law Review, 758ff and ‘Comment P-E’ on the Introductory Article on Scope and Implementation, 759.

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rendering a default judgment to determine on its own initiative the following aspects: its jurisdiction, compliance with notice provisions, and that the claim is reasonably supported by available facts and evidence and is legally sufficient. In connection with the latter duty of the court, it is specified that the court is not expected to carry out a full inquiry, but it has to critically analyse the evidence supporting the statement of claims. This does not prevent the tribunal from drawing adverse inferences from a party’s failure to advance the proceeding or respond as required, in accordance with Article 173.312 From the foregoing, it seems possible to conclude that an arbitral tribunal is not bound to automatically accept any pleading made by one party in case of failure by the other party to contest it. The question that remains open is how far the tribunal can go in its independent evaluation of a party’s pleadings. (c) Additional Information Many Arbitration Rules permit the tribunal to request that the parties present additional documentation and clarification, to take the initiative to appoint an expert and to proceed to inspections and so on.313 This possibility of being able to request additional clarification is consistent with the tribunal’s independent evaluation of the participating party’s pleadings as described in the previous section. However, the access to requesting additional clarification is not limited to the situations where one party fails to appear, and the tribunal needs further information to evaluate the other party’s pleadings. This access applies in general, even if both parties participate in the proceedings and have presented their respective cases in full. The possibility of being able to request additional information, therefore, may be used by the tribunal to introduce new elements that were not at all or not sufficiently pleaded by the parties. It is, however, not clear how far the tribunal may go in introducing new elements: may the tribunal ask for additional documentation and clarification in order to better convince itself of the correctness or relevance of the statements made by the parties, or also to investigate facts that were not mentioned by the parties, to apply sources that the parties had not invoked or to order remedies that the parties have not requested? (d) Burden of Proof Some Arbitration Rules expressly state the principle of burden of proof, a principle generally valid in most procedural systems: each party shall have the burden of proving the facts that it relies on.314 312 313

314

See ‘Comment P-17B’, (2004–4) 9 Uniform Law Review, 792. For example, the Arbitration Rules of the SCC, Article 31(3), ICC Rules, Article 25(4), LCIA Rules, 22(1), UNCITRAL Rules, Article 27(3), and ICSID Rules, Article 36(3). The same is true for the ALI/UNIDROIT Principles, see the ‘Comment P-15D’ on Article 15(3)(3), (2004–4) 9 Uniform Law Review, 785f. UNCITRAL Rules, Article 27(1).

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This principle may appear to contradict the two rules mentioned under Sections 5.5.3(a) and (b) on party’s default and adverse inferences: if the party having the burden of proof does not present sufficient evidence (because it fails to appear, or otherwise), the facts that it invokes may not be considered as proven. The tribunal shall not take over and discharge that party’s burden. This, however, does not necessarily mean that the pleadings made by the other party are sufficiently proven or substantiated: the party failing to provide sufficient evidence for its case will lose only if the other party has presented pleadings that are sufficiently substantiated. Otherwise, the arbitral tribunal has the possibility of investigating the matter on its own initiative. However, it is not completely clear how far a tribunal can go in its own investigation before it takes over the burden of proof of the defaulting party, thus violating the corresponding principle. That the tribunal shall not, on its own motion, procure evidence without involving the parties seems to be understood;315 but how far may the tribunal go in requesting additional evidence in accordance with Section 5.5.3(c) on additional information? (e) Impartiality Many Arbitration Rules specify that the arbitral tribunal shall act impartially.316 This is a fundamental principle of due process that must be deemed to apply even if the Arbitration Rules do not express it.317 Does the tribunal act impartially when it, on its own initiative, verifies the soundness of one party’s pleadings or requests additional information as described in Sections 5.5.3(b) and (c) on adverse inferences and additional information? It could be argued that the tribunal, by so doing, acts on behalf of the party that did not appear or that failed to properly contest the pleadings, and that it therefore is in breach of (the rule on burden of proof, and) its duty to act impartially. However, it seems legitimate to affirm that the tribunal, by acting ex officio as described, does not act on behalf of the defaulting party, and rather acts in order to achieve a logical and objective result. It is, however, not completely clear to what extent the tribunal may stretch its role as investigator before it, in effect, takes over the role of the defaulting party and violates the principle of impartiality.

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See, for example, Heuman (2003), p. 397. SCC Rules, Article 23, ICC Rules, Article 22(4), LCIA Rules, Article 14(1), UNCITRAL Rules, Article 11 and ICSID Rules, Article 6. See, for example, Article 18 of the UNCITRAL Model Law. For further references, Cordero-Moss, ‘Independence and Impartiality’ (forthcoming 2023).

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(f) The Right to be Heard Many Arbitration Rules provide that the arbitral tribunal shall grant a fair hearing to all parties.318 This assumes that all parties shall have been given equal and real opportunities to present their respective cases and to respond to the arguments made by the other party. In addition, this principle is a fundamental part of the due process.319 If the tribunal’s own evaluation has deprived one or more parties of the chance to respond on certain matters, its decision will be made on the basis of elements for which the parties had no chance to present their views. The right to be heard may be deemed violated. Does the parties’ right to be heard relate only to the facts that substantiate the various claims, or does it also extend to the interpretation of these facts and the factual inferences therefrom made by the tribunal?320 Does the right to be heard also extend to the points of law and to the tribunal’s assessment of the legal consequences of the facts in dispute? In certain systems it is uncontroversial that the tribunal enjoys the freedom to assess and apply the law on its own initiative.321 This is usually known under the formula iura novit curia – that is, the court knows the law and applies it on its own motion. To what extent this approach may collide with the adversary principle is not clarified in the Arbitration Rules. 5.5.4 Arbitration Law Arbitration law is quite heterogeneous, since it extends from the uniform regulation contained in international conventions (of which the most notable is, for commercial arbitration, the New York Convention and, for investment arbitration, the ICSID Convention), via the UNCITRAL Model Law, to the arbitration law prevailing in each country. Arbitration law does not, as a general rule, contain a specific regulation on the procedure to be followed in an arbitral proceeding, beyond principles corresponding to those mentioned in Section 5.5.3. Two rules are often encountered, however, that might have relevance here: the rule preventing the tribunal from deciding the merits as an amiable compositeur (that is, deciding in equity without considering any legal system – also known as rendering a decision ex aequo et bono) unless it has been empowered by the parties to do so, and 318

319

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SCC Rules, Article 23(2), ICC Rules, Article 22(4), LCIA Rules, 14(1)(i) and UNCITRAL Rules, 17(1) and 27(3). See the UNCITRAL Model Law, Article 34(2)(a)(ii) and the Swedish Arbitration Act, Article 24. The principle is also expressly referred to in the New York Convention, Article V(1)(b). Case law in common law distinguishes between the fact-finding process, where the parties have a right to be heard, and the drawing of inferences from the evidence, where there is no need for the tribunal to get back to the parties and present its inferences, even if they were not anticipated during the proceeding: Merkin (2004), pp. 592f. For a more extensive analysis, see Section 5.6.

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the rule on the arbitrability of a dispute. These represent limits to the tribunal’s discretion in evaluating the pleadings by the parties. As we will see in Section 5.6.7, violation of the former rule may render the award invalid and unenforceable under, respectively, Article 34(2)(a)(iv) of the UNCITRAL Model Law and Article V(1)(d) of the New York Convention on procedural irregularity, combined with a corresponding provision in the arbitration law of the country of origin of the award.322 As seen in Section 5.4.8, violation of the rule on arbitrability renders the award invalid and unenforceable under, respectively, Article 34(2)(b)(i) of the UNCITRAL Model Law and Article V(2)(a) of the New York Convention, combined with a corresponding provision in the arbitration law of the enforcement court. In investment arbitration, limitations to the arbitral tribunal’s jurisdiction may be contained in the treaties that create the basis for conferring power to the arbitral tribunal. For example, arbitral jurisdiction may be limited to claims relating to violations of the treaty or it may also extend to claims relating to a breach of contract.323 Sometimes, investment treaties refer to arbitration claims that relate only to some of the obligations arising out of the treaty. The treaty between the UK and the Russian Federation, for example, refers to arbitration-only disputes on the quantification of the compensation to be paid in case of unlawful expropriation by the host state of the foreign investor’s investment. Disputes concerning whether there has been an unlawful expropriation where compensation is due, on the contrary, fall outside of the arbitral tribunal’s jurisdiction, according to the treaty. Nevertheless, an investment award rendered by an arbitral tribunal under the rules of the SCC retained jurisdiction when an investor who had acquired some shares in Yukos claimed that the Russian Federation had breached its obligations under the treaty. The award applied the Most-favoured-nation clause contained in the treaty, and thus extended broader jurisdiction clauses that may be found in other treaties ratified by the Russian Federation, to that particular case. The District Court of Stockholm found that a Most-favoured-nation clause may not be used to extend the scope of arbitral jurisdiction determined in the treaty and set aside the award.324

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As it would be a violation of the rule contained in applicable arbitration law and determining the powers of the tribunal. A rule limiting the tribunal’s power to decide ex aequo et bono unless empowered to do so by the parties is generally present in arbitration laws (see the UNCITRAL Model Law, Article 28(3)), but not without exception: the Swedish Arbitration Act, for example, does not contain it. For more in general on the distinction between contract claims and treaty claims see Christoph Schreuer, ‘Investment Treaty Arbitration and Jurisdiction over Contract Claims: The Vivendi I Case Considered’. In Todd Weiler (ed.), Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, 2005), p. 299. Stockholm District Court, 9 November 2011, Case No. T 24891–07, confirmed by the Svea Court of Appeal, 5 September 2013, Case No T-10060–10. See also Svea Court of Appeal, 18 January 2016, Case No T 9128–14 (Renta4 v. Russian Federation), on the Spain–Russia BIT.

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Furthermore, the treaty establishing arbitration may contain instructions in respect of the law to be applied by the tribunal to the merits of the dispute.325 In the case of a violation of such treaty provisions, it is not appropriate to apply the general principle that an award may not be reviewed for an error in law or for an error in the interpretation of the contract. This is because the error in question would be made in connection not with the decision on the merits (which is beyond the scope of control that a court may exercise on an award), but with the exercise of the tribunal’s power granted by the treaty (which is within the scope of judicial control). The reasoning is the same as for the rules on arbitrability and on the power to render an award ex aequo et bono as previously mentioned. This reasoning is parallel to the reasoning made in Section 5.4.1: if the treaty applies only to legal investments, an investment that is illegal falls outside of the treaty and thus the treaty creates no jurisdiction for the arbitral tribunal. Similarly, if the treaty permits arbitration only if a certain law is applied, application of a different law is an excess of the arbitral tribunal’s power. A criticism of a decision by the Swedish Court of Appeal326 illustrates this point. The decision was rendered in connection with the challenge to an SCC award issued in an investment arbitration based on the BIT between the Netherlands and the Czech Republic. One of the questions that the Court was called on to decide was whether the arbitral tribunal had disregarded the rule on the governing law contained in the BIT. The Court relied on the principle that an error in the interpretation or application of the law cannot be judicially reviewed and limited itself to verifying prima facie whether the tribunal seemed to have applied a law at all. The Court seemed to consider any more detailed an examination of the matter to be beyond the scope of its own jurisdiction. This approach does not seem to be fully justified, and particularly not in the context of investment arbitration. Even if the award had been rendered in a commercial dispute, the Court would have had the jurisdiction to verify whether the law applied by the tribunal had been selected as a consequence of the tribunal’s error in interpreting the contract or in applying rules of private international law (in either case, the Court would not have had jurisdiction to set aside the award) or if it was the result of the tribunal bluntly disregarding the choice of law made by the parties (in which case, the Court would have had the jurisdiction to set aside the award for excess of power).327 In the case of investment arbitration, however, the matter is even clearer: the applicable law is determined in the Treaty that constitutes the very basis of the tribunal’s jurisdiction. A violation of such a rule would not be an error in interpreting the law; it would be a procedural irregularity or an excess of power – and quite a serious one, when considering the important public 325 326

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More extensively, in respect of the law applicable in ICSID Arbitration, see Schreuer et al. (2010), pp. 545ff. Svea Court of Appeal, 15 May 2003, Case No T 8735-01 (CME v. Czech Republic) (published in English in the Stockholm Arbitration Report [2003–2], pp. 167ff.). See Section 5.6.1.

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policy reasons that underlie a state’s acceptance to regulate, in a treaty, its own submission to arbitration. According to Article 34(6) of the Swedish Arbitration Act, a procedural irregularity can be sanctioned through the invalidity of the award if it has probably influenced the outcome of the case. In order to verify whether Article 34(6) of the Swedish Arbitration Act was applicable, the Court should have examined more accurately whether the tribunal’s application of the law was in accordance with the rule on choice of law contained in the BIT.328 5.5.5 The Ultimate Borders: Excess of Power, Right to be Heard, Procedural Irregularity While the arbitral procedure is not regulated in detail by arbitration law, the validity and enforceability of arbitral awards are. Some of the principles that we have seen in Section 5.5.3 are so fundamental to arbitration that an award infringing them may be set aside or refused recognition and enforcement. To the extent that the applicable Arbitration Rules leave a certain amount of room for the tribunal to choose its own role between the two extremes of a passive umpire and an active inquisitor, the ultimate border is given by the remedies that may affect the validity or enforceability of the award. The grounds for setting aside or refusing to enforce an award are usually interpreted restrictively. In particular, as seen in Section 5.3.3, the courts do not have the jurisdiction to review the award in terms of the merits. This means that an error in the tribunal’s interpretation of the contract, evaluation of the evidence or application of the law may not lead to invalidity or unenforceability of the award. Taking duly into account the mentioned restricted scope of application, the grounds for annulment or for refusing recognition and enforcement that may be relevant in our context are those regarding excess of power, the right to be heard and procedural irregularity. The following sections analyse the issue in the light of these grounds.

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Criticising the Court’s decision, see also Stanislaw Soltysinski and Mateusz Olechowski, ‘Observations on CME v. Czech Republic’. Stockholm Arbitration Report 2 (2003), pp. 224ff. and 240; and Tore WiwenNilsson, ‘Observations on CME v. Czech Republic’. Stockholm Arbitration Report 2 (2003), pp. 54f. In favour of the decision, see Noah Rubins, ‘Observations on CME v. Czech Republic’. Stockholm Arbitration Report 2 (2003), pp. 208f., and Hans Bagner, ‘Observations on CME v. Czech Republic’. Stockholm Arbitration Report (2003), 250. More extensively on the matter, see Christoph Schreuer, ‘Failure to Apply the Governing Law in International Investment Arbitration’. Austrian Review of International and European Law Online 7.1 (2004), pp. 147ff., criticising the decision commented on here at pp. 182ff. See also Schreuer et al. (2010), Article 52, paras 191–270 (defining the failure to apply the proper law as an excess of power).

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5.6 The Tribunal: An Umpire or an Inquisitor? Within the range of the principles mentioned in Section 5.5, there does not seem to be a generally acknowledged understanding of how active a role the tribunal may assume: commentators’ views range from the encouragement of an active role for the arbitral tribunal,329 to scepticism towards such a role330 to a near exclusion thereof.331 It is not unusual that legal doctrine on international commercial arbitration focusses its attention on the consensual character of arbitration and emphasises that the arbitral procedure should be left totally to the parties. Party autonomy is, and rightly so, deemed to be the clear fundament of commercial arbitration; as a consequence, the arbitral tribunal is deemed to have a rather restricted scope for its own initiative. This neutral role of a tribunal refraining from interfering with the autonomy of the parties, listening to the parties’ arguments and deciding which of the arguments deserves to win, is sometimes defined as the role of an umpire.332 The opposing role, more of a judicial and interventionist role, would consist in the tribunal taking various measures on its own initiative, rather than upon the request of one of the parties, to develop a factual and legal argumentation, as well as to identify the applicable law. The alternative between an umpire and an inquisitor may remind one of the classical contrast between the adversarial common law systems and the inquisitorial 329

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For example, Wayne Wiegand, ‘Iura novit curia v. Ne ultra petita: Die Anfechtbarkeit von Schiedsgerichtsurteilen im Lichte der jüngsten Rechtsprechung des Bundesgerichts’. In Monique Jametti Greiner, Bernhard Berger and Andreas Gungerich (eds.), Rechtsetzung und Rechtsdurchsetzung. Festschrift fur Franz Keller- hals (Stampfli Verlag, 2005), pp. 127ff.; in the context of investment arbitration, see Christoph Schreuer, ‘Three Generations of ICSID Annulment Proceedings’. In Emmanuel Gaillard and Yas Banifatemi (eds.), Annulment of ICSID Awards (IAI Series on International Arbitration, 2004b), pp. 30f, quoting a series of decisions by the ICSID ad hoc annulment Committee applying the maxim iura novit curia, and approving of this application. For example, Catherine Kessedjian, ‘Principes de la Contradiction et Arbitrage’. Revue de l’arbitrage 3 (1995), pp. 123ff., seems to justify an active role by the tribunal only in some contexts of public interest, such as investment arbitration; Michael Schneider has serious doubts on whether an international arbitral tribunal should have the authority to identify, on its own initiative, the rules of law applicable to the claims made before it, but, in any case, deems it necessary for the tribunal to invite the parties to clarify their case: ‘Combining Arbitration with Conciliation’. Oil, Gas and Energy Law Intelligence 1.2 (2003), p. 4. For example, Kaj Hobér, ‘Arbitration Involving States’. In Lawrence W. Newman and Richard D. Hill (eds.), The Leading Arbitrator’s Guide to International Arbitration (Juris, 2004), p. 158, affirming that in a procedure as consensual as arbitration is, it must be up to the parties to determine the scope of the dispute both as to facts and law; see also Gabrielle Kaufmann-Kohler, ‘Iura novit arbiter: Est-ce bien raisonnable? Reflexions sur le statut du droit de fond devant l’arbitre international’. In A. Heritier and L. Hirsch (eds.), De lege ferenda: Eeflexions sur le droit desirable en l’honneur du professeur Alain Hirsch (Editions Slatkine, 2004) and (2005). The use of this terminology may be misleading. In the strict sense, an umpire denotes under English law a system for deciding deadlocks between two party-appointed arbitrators. In case of a disagreement between the party-appointed arbitrators, the two arbitrators become advocates and the decision is taken by the umpire; prior to turning into advocates, however, the arbitrators have a duty to act impartially. This system is an alternative to the arbitration and must be considered somewhat anomalous; see

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civil law systems. The usefulness of the classical division into adversarial and inquisitorial systems, however, may be questioned: while either of these forms is rarely to be found now in its pure terms in any system of civil procedure, it is questionable that this division apply to international arbitration.333 A comparative analysis of various legal systems confirms that the classical divide does not have any bearing on the issue of the arbitral tribunal’s power.334 A difference between the two legal families’ respective approaches to arbitration, particularly in the field of production of evidence, is suggested by the evolution of sources of soft law in this area. First the IBA Rules on Taking of Evidence were issued, and thereafter the Prague Rules were published, see Section 2.2.6(f). Indeed, the Prague Rules were written with the express purpose of contrasting the excessively common law-orientation of the arbitral procedure.335 However, as far as the tribunals’ powers are concerned, no substantial differences may be detected in the two sets of rules. Differences are mainly in emphasis: under the IBA Rules, the tribunal’s power is only assumed, whereas it is expressly encouraged under the Prague Rules. Notwithstanding this difference in emphasis, there is no actual difference in the scope of the powers that the tribunal can exercise under both instruments. An adversarial approach in the strict sense is certainly not reflected in the arbitration law that mostly represents the common law systems: English law. The English Arbitration Act does not seem, in many of the respects that are relevant here, substantially different from the approach in civil law countries.336 The Arbitration Act 1996 confers on the tribunal the power to determine a series of matters on its own initiative (provided that there is no agreement to the contrary between the parties): for example, the decision on procedural and evidential matters,337 or the default power to determine a series of remedies, if the parties have not specified the remedies

333

334 336

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Rudolph Kahn, ‘Arbitration in England and Germany’. Journal of Comparative Legislation and International Law 12.1 (1930), 58–78. The use of this classification is clearly contested by Claude Reymond, ‘Civil Law and Common Law Procedures: Which is the More Inquisitorial? A Civil Lawyer’s Response’. Arbitration International 5.4 (1989), 357–68. That international arbitration is not affected by the traditional contrast between adversarial and inquisitorial traditions is confirmed also in connection with the drafting of the ICC Rules, see Derains and Schwarz (2005), comment on Article 20(1), pp. 251f. See also Kaufmann-Kohler (2005), pp. 632f. with further references in footnote 4. See Cordero-Moss (2018b). 335 See ‘Note from the Working Group’ in Prague Rules, p. 2. See also the ALI/UNIDROIT Principles Article 22.2.3, specifying that the court may rely upon an interpretation of the facts or of the evidence that has not been advanced by a party. This Article is actually more lenient towards party autonomy than English arbitration law, since it assumes that the court must give the parties the possibility of responding to such an independent interpretation, whereas English case law does not assume the parties’ right to be heard on the tribunal’s own interpretation of the facts or of the evidence: see Merkin (2004) pp. 592f. Traditionally, English arbitration law has restricted party autonomy even more than other systems by allowing judicial interference on questions of law (through consultative case procedures and the judicial review of errors in law), that in the civil law systems were unknown. It follows that, in English arbitral procedures, the law is not totally subject to party autonomy, at least as long as the law in question is English law. Section 34.

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that may be awarded.338 In addition, in drawing inferences from the evidence produced by the parties and in developing its reasoning, the tribunal is not bound by the arguments made by the parties.339 All of these powers speak for arbitrator autonomy, rather than for party autonomy. This, however, does not mean that the tribunal faces no limits in assuming an inquisitorial role or taking over one party’s interests against the other party’s: the overriding principle is that the proceeding is conducted fairly and impartially,340 and this mandatory requirement is deemed sufficient to ensure a balance between the adversarial and the inquisitorial proceeding.341 A peculiar treatment is reserved, in the English system, for foreign law: foreign law is considered as a fact and has therefore to be proved by the parties. This is unknown in most civil law systems, where not only the domestic, but also the foreign law has, in principle, to be applied ex officio by the tribunal in accordance with the maxim iura novit curia.342 However, even if foreign law is treated as a fact under English arbitration law, it does not mean that in questions of foreign law, party autonomy prevails totally over the tribunal’s independent evaluation. Firstly, we have seen that the arbitral tribunal has extensive powers in procedural evidential matters and may evaluate the evidence independently. If foreign law is treated as a fact, it will be subject to the same powers as described. Secondly, if the foreign law is not satisfactorily proved, the tribunal may 338 339

340 342

Section 48(1). Merkin (2004), pp. 592f. When it comes to common ground between the parties, however, case law permits the tribunal to depart on the condition that the parties be given the possibility to comment, see Ducat Maritime Ltd v. Lavender Shipmanagement Inc [2022] EWHC 766 (Comm) and PBO v. DONPRO [2021] EWHC 1951 (Comm). Section 33. 341 Merkin (2004), pp. 512, 586ff. See, in respect of arbitration, Matti Kurkela, ‘Jura Novit Curia and the Burden of Education in International Arbitration-A Nordic Perspective’. ASA Bulletin 21 (2003), 485ff.; J. Gillis Wetter, ‘Conduct of the Arbitration’ Journal of International Arbitration 2 (1985), 24f.; Wiegand (2005), pp. 130ff. On Swedish arbitration law, see Heuman (2003), pp. 323ff. See also the extensive comparative observations made by the Swiss Federal Court in its decision 4P.100/ 2003, ATF 130 III 35, pp. 577f. (the decision confirmed the principle of iura novit curia in arbitration, but set aside an award as an exception to that principle, because the award was based on elements that did not relate to the arguments presented by the parties, and the tribunal had not granted the parties the chance to comment thereon. In so doing, the Court emphasised that this exception to the iura novit curia principle has to be applied only in extraordinary situations). See also the Swiss Federal Court decision 4P.14/2004, referred to by G. Segesser (2004) 3(1) ITA Monthly Report, confirming an award applying the maxim iura novit curia, even if the tribunal had not invited the parties to comment on the legal theory upon which the decision was based. The principle is also codified in a series of private international law acts; see, for example, Article 14 of the Italian, Article 16 of the Swiss and § 4 of the Austrian private international laws, as well as § 293 of the German Code of Civil Procedure. A notable exception was until recently represented by French law, but recent court decisions seem to have acceded to the civil law approach also in France: see Eleanor Cashin Ritaine, ‘Editorial’, in ISDC Letter 7 (2005), p. 1. See also Maarit Jänterä-Jareborg, ‘Foreign Law in National Courts: A Comparative Perspective’, Volume 304 (Recueil des cours, Académie de Droit International de la Haye, 2004), pp. 264ff., showing various internal inconsistencies in the various systems’ approach to foreign law. That the tribunal has the duty to apply the law ex officio does not exclude that the law may be pleaded by the parties.

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apply the presumption that foreign law is the same as English law and will apply (on its own initiative) English law, thus avoiding falling into the role of umpire who would have to choose the pleadings made by the other party.343 Under English arbitration, therefore, the role of the tribunal in respect of the parties’ pleadings does not fall into the category of the adversarial system more than it would do in accordance with the international or national civilian Arbitration Rules that we saw in Section 5.5.3. As we have seen, tribunals have considerable powers to act on their own initiative by requesting additional information, and they are not bound to decide in favour of the participating party in the case of a default by the other party (which implies that they have the power to make their own independent evaluation of the pleadings, rather than limiting themselves to choosing between the available pleadings). Having excluded the fact that the tribunal is expected to act as an umpire in the strict sense, it remains for us to see more specifically what kind of ex officio initiatives are compatible with the ultimate borders of the arbitral authority described in Section 5.5.5: the principles of excess of power, of a fair hearing and of impartiality. While it is only a breach of these principles that has consequences for the validity344 and enforceability345 of the award, it might be possible to identify certain guidelines for the conduct of arbitration proceedings that might be useful as an indication of a proper procedure even if violation thereof does not lead to dramatic consequences such as invalidity or unenforceability. We will look at some situations that are often encountered in practice and which might present some challenges in respect of our questions. 5.6.1 Excess of Power Regarding Questions of Law: May the Tribunal Disregard the Choice of Law Contained in the Contract? The arbitral tribunal owes its very existence to the will of the parties. Consequently, it must follow the parties’ instructions as to its composition, the procedure that it will follow, its jurisdiction, the scope of the dispute that it is called upon to solve and the kinds of remedies that it may grant. An award that does not follow the parties’ instructions is an award that exceeds the powers that the parties have conferred on the arbitral tribunal. As the parties’ instructions are the ultimate source of the tribunal’s power, an award that is affected by excess of power does not have a legal basis and is ineffective. This is the rationale of the exception of excess of power, which is listed both in the UNCITRAL Model Law, Articles 34(2)(a)(iii) and 36(1)(a)(iii), and in the New York Convention, Article V(1)(c), as a ground to set aside the award and, respectively, 343 344

345

Merkin (2004), pp. 901f. Assuming that the applicable arbitration law in this respect corresponds to the UNCITRAL Model Law, to English or Swedish law or to the ICSID Regulation. In accordance with Article V of the New York Convention.

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refuse enforcement thereof, see Section 5.4.5. The question is whether the exception of excess of power can be invoked to sanction the tribunal’s choice of applicable law. (a) The Difficult Borderline between a Review of the Applicability of the Law and a Review of the Merits An excess of power is relatively easy to ascertain, as long as it is confined to the object of the dispute. What is more difficult is the question regarding the applicable law: if the award decides an issue within the borders of the tribunal’s power but the tribunal applies a law that is different from the law requested by the parties. As seen in Section 5.3.3, neither the challenge nor the enforcement of an arbitral award may be used as a basis for the courts to review the arbitral tribunal’s decision, including its application of the law. It may not always be easy to determine the borderline between the review of the tribunal’s application of the law and the decision on whether the tribunal had the authority to apply that law. The former is not within the scope of the jurisdiction of the court. The latter may be evaluated by the courts when determining whether the arbitral tribunal exceeded the power that it was granted by the parties. An analysis of the reported cases concerning the UNCITRAL Model Law and the New York Convention shows that the defence of excess of power is seldom given effect for the purpose of sanctioning the arbitral tribunals’ application of the law.346 To the extent that the question has been given attention, it seems that it has been mainly answered negatively, both in theory and in practice.347 However, even if it does not happen very often, it is, in principle, possible to request the annulment of an award or to resist its enforcement on the basis of the allegation that the arbitral tribunal has gone beyond its powers in connection with the application of the law.348 346

347

348

See Herbert Kronke, Patricia Nacimiento and Dirk Otto, Recognition and Enforcement of Foreign Arbitral Awards: A Global Commentary on the New York Convention (Kluwer Law International, 2010, second edition forthcoming), ‘Article V(1)(c)’, pp. 271f. In theory see, for example, Gaillard and Savage (2004), p. 1700. In practice, see the US District Court, Southern District of California, 7 December 1998, Civ No 98–1165-B, 29 Federal Supplement, Second Series (SD Cal 1998) pp. 1168–74, excluding that a decision rendered ex aequo et bono exceeded the arbitral tribunal’s power. From the reasons of the decision, however, it appears that the court based its reasoning on the conclusion that the parties had actually empowered the tribunal to decide ex aequo et bono (therefore it is not surprising that the court did not see any excess of power). Additionally, a German decision decided similarly, even mentioning, in an obiter dictum, that the arbitral tribunal’s choice of law may not be reviewed by the court. However, also in this case, the court based its conclusion on the fact that the parties had empowered the tribunal to decide ex aequo et bono (Hamburg Landesgericht, 18 September 1997, No 305 O 453/96, ICCA Yearbook Commercial Arbitration XXV (Kluwer International, 2000), p. 512). In the case opposing Samwell and Airbus (n° 19/09058 of 15 September 2020), the Paris Cour d’appel explained that the arbitral tribunal had applied the chosen French law and therefore had not exceeded its power. The court observed that the tribunal had made reference to US sources, but it had done so in the context of the application of French law. From the reasoning of the Court, it can be induced that, had the arbitral tribunal applied US law, it would have exceeded its power.

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That the governing law has an impact on the interpretation and the effects of a contract was seen in Chapter 3: the same contract may have dramatically different effects, depending on the governing law. The dispute is to be solved not only on the basis of the contract terms, but also on the basis of the law agreed upon by the parties in the contract (or, failing such agreement, that are designated by the applicable private international law); if the tribunal applies a different law, and assuming that the two laws regulate the question in different ways, it is as if the tribunal had applied a different contract. The assumptions for resolving the dispute would not be the same as those agreed upon by the parties; therefore, the decision would be on matters different from those submitted by the parties.349 This judicial control, however, has to be based on a careful analysis of the reasons for the award to verify that the proper criteria for the review are met. Only if the arbitral tribunal bluntly disregards the parties’ instructions can the award be considered to exceed the tribunal’s power. The simple circumstance that the tribunal considers a law different from that chosen by the parties does not necessarily mean that the tribunal disregarded the parties’ choice. As we will see in the following sections, under certain circumstances, the law that is different from that chosen in the contract may be applied even without disregarding the parties’ choice. This may be due to the circumstance that the choice made in the contract does not cover the relevant area of law, or it may be because the law chosen by the parties gives effect to rules of other laws (for example, through the force majeure principle, rules on immorality or rules on illegality that extend to the violation of foreign laws). Under other circumstances, the disregard by the arbitral tribunal of the parties’ choice may be qualified as a disregard of the parties’ instructions. We will go on to examine various scenarios. (b) The Tribunal Disregards the Contract’s Choice and Applies Another National Law In the first scenario, the tribunal disregards the choice of law made in the contract and applies the rules of another law. In the second scenario, examined in Section 5.6.1(b) (i), the arbitral tribunal applies sources that are not national or international in the strict sense (i.e., deriving from treaties or conventions), but that are transnational and non-authoritative, such as restatements of principles. The first scenario may be divided into two sub-scenarios according to whether the tribunal applies some rules of the law that would have been applicable to the dispute if the parties had not made a choice, or applies a law that would not have been applicable even in the absence of the parties’ choice.

349

For a similar reasoning see Redfern and Hunter (2015), para 3.93 as well as the ILA International Commercial Arbitration Committee (2008), p. 19.

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(i) Disregard of the Contract’s Choice in Favour of the Otherwise Applicable Law To illustrate the matter, we can assume a contract has been entered into by two competing manufacturers for the licensing of certain technology; the transfer of technology is accompanied by a system for sharing the market between the two competitors, which violates EU competition law. The contract contains a Choice-of-law clause, according to which the governing law is Canadian law, and an Arbitration clause. We can assume that a dispute arises between the two parties, and that one of the two parties alleges that the contract is null and void because it violates EU competition law. The other party replies that EU competition law is not applicable to the contract, and that the choice of the Canadian governing law was meant specifically to avoid the applicability of EU law. Hence, it is outside of the tribunal’s power to take into consideration EU competition law. What can the arbitral tribunal do? If it follows the contract and applies the chosen Canadian law, it runs the risk of rendering an award that violates the EU ordre public (EU competition law having been qualified by the CJEU as ordre public in a case similar to the one illustrated here),350 as seen in Section 5.4.9(i)(ix). As seen, an award that violates the ordre public of the court may be set aside as invalid and may be refused recognition and enforcement. If the arbitral tribunal has its seat within the EU, therefore, the award runs the risk of being annulled; and if the award has to be enforced in an EU country, it runs the risk of not being enforced. Consequently, the tribunal might be inclined to take into consideration EU competition law, thus avoiding rendering an award that turns out to be invalid or unenforceable. Does the arbitral tribunal run the risk of exceeding its power or incurring a procedural irregularity if it takes into consideration EU competition law? In other words, is the arbitral tribunal forced to choose between two grounds for invalidity or unenforceability of the award; that is, excess of power or procedural irregularity on one hand, and conflict with the ordre public on the other hand? In my opinion, there is room for arguing that an arbitral tribunal is, under certain circumstances, not affected by the contract’s choice. The fact that the parties have chosen a certain governing law does not exclude the relevance of all rules of any other laws. As seen in Section 4.5, this will depend both on the substantive rules of the chosen law (such as the rules on illegality or on force majeure, which may make reference to the effects of foreign laws), and on the conflict rules of the private international law applicable by the tribunal (such as the scope of party autonomy, the applicability of overriding mandatory rules). A variety of approaches is possible, as we will see.

350

Case C-126/97 (Eco Swiss).

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A. Violation of the Ordre Public of the Lex Arbitri? If the tribunal is located in an EU state, it cannot be expected to disregard the ordre public of the seat: the award would be annulled by the courts of the state where it was rendered. Therefore, EU competition law would have to be taken into consideration, and the contract’s choice of the Canadian governing law would have to be restricted correspondingly. The arbitral tribunal would found the authority to do so on the applicable private international law, if this law contains a rule that renders a choice of law made in the contract invalid to the extent that the parties’ choice violates the applicable ordre public. If the applicable private international law does not restrict the parties’ choice, or if the parties expressly have instructed the tribunal not to apply EU law, there is a conflict between the applicable public policy and the parties’ instructions. In an excess of zeal, it is sometimes suggested – in particular when the dispute raises issues of corruption – that the tribunal shall be allowed to not only consider the issue on its own initiative, but even to do so against the common instructions by the parties.351 Imagine that the parties agree that the issue of corruption shall not be evaluated by the arbitral tribunal. The parties have different interpretations of the contract or of the amount of compensation but are interested in maintaining in force the contract or the Act on which compensation is based, notwithstanding that it is tainted by corruption. The parties will define the scope of the dispute so as to exclude the issue of validity, or they will even expressly instruct the tribunal to assume that the contract or the Act is valid, and to disregard the issue of corruption. Can the tribunal nevertheless consider the issue of corruption on its own initiative? Normally, an arbitral tribunal would shy away from exercising its own initiative against the express agreement between the parties. In the context of corruption, the attention devoted to the issue prompts an inquiry into whether tribunals should nevertheless consider the issue of validity, even though the parties have expressly excluded it from the scope of the tribunal’s power. In my opinion, it is questionable that an arbitral tribunal has the power to disregard the parties’ agreement and decide on issues that the parties expressly excluded from the scope of the dispute, or order remedies that have not been requested by the parties. The tribunal may exercise its powers on its own initiative if the parties are silent on the issue; but overriding the parties’ agreement goes further than that. The only basis upon which the tribunal exists and has the power to render a binding decision, is the parties’ agreement. An award that is rendered beyond the scope of the arbitration agreement is an award rendered without power. An award rendered without power can be set aside and refused enforcement. In my opinion, 351

Baizeau and Hayes (2017), pp. 225–65; Thomas K. Sprange, ‘Corruption in Arbitration’. Dossiers of the ICC Institute of World Business Law (2015), pp. 134–40.

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there is no basis for assuming that this principle no longer applies when an issue of corruption is at stake. The tribunal’s investigative powers, therefore, cannot be used as a basis to include, into the scope of the dispute that the parties empowered the tribunal to decide, issues that the parties expressly excluded. How can the tribunal, in such a situation, avoid becoming an accomplice to the parties’ corruption? The already mentioned reaction of Judge Lagergren could be appropriate under these circumstances.352 Having observed that the disputed contract involved issues of corruption, he declined to render a decision. His explanation was that claims that infringe public policy do not deserve judicial protection. This position has been abundantly referred to in the subsequent decades as imposing the decline of jurisdiction whenever an issue of corruption is involved. However, Judge Lagergren’s position was not expression of such an absolute refusal. In that case, the arbitral tribunal was requested by the parties to disregard the issue of corruption. Under such circumstances, rendering an award would have given legal effects to a contract that was tainted by corruption. The arbitral tribunal would have indirectly contributed to implementing corrupt practices, and the award could have been set aside or refused recognition and enforcement because it infringed public policy. To avoid this result, the arbitral tribunal declined to render an award. In my opinion, this is based not on a lack of arbitrability or of jurisdiction, but on a resignation by the arbitral tribunal to avoid rendering an award against public policy or in excess of jurisdiction. Under the circumstances, this approach is sound, and is the only choice for the arbitral tribunal: if considering corruption exceeds the arbitral tribunal’s power, and there is sufficient basis to assume that an award would contribute to implementing corruption and thus infringe public policy, the tribunal shall resign.353 B. Application of the Chosen Law Refers to the Excluded Law Irrespective of whether the tribunal is located in a member state of the EU or not, the arbitral tribunal might apply the law chosen in the contract in full, including any illegality rule contained therein. This rule would permit the disregarding of an agreement (or a choice of law) made by the parties that leads to a violation of the mandatory rules of foreign law, see Section 4.5.6. In this way, the tribunal would not have exceeded its power; on the contrary, it would have given full application to the law chosen by the parties, and the instruments to restrict the effects of the choice of law would be given precisely by the chosen law. 352 353

ICC Case No 1110 of 1963. See, along the same lines, Yves Derain, ‘Foreword’. In Dossiers of the ICC Institute of World Business Law (2015), pp. 5f.; Bernardo Cremades and David J. A. Cairns, ‘Transnational Public Policy in International Arbitral Decision-Making: The Cases of Bribery, Money Laundering and Fraud’. ICC Institute Dossiers (2003), p. 82, suggesting that an arbitral tribunal should refuse to render an award by consent if the parties’ request of such an award is an attempt to launder money.

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Application in full of the law chosen by the parties may, in several situations, lead to taking into consideration the very rules of the law that the parties had intended to exclude. For example, a rule on force majeure of the chosen law may lead to the consideration of foreign rules restricting exports or imports,354 and rules on immorality or illegality in the chosen law may lead to the invalidity of a contract entered into to avoid the application of a foreign law.355 C. Application of Private International Law The tribunal might verify the applicable private international law to determine the borders of party autonomy. As seen in Section 4.5.1, by choosing the applicable law, the parties have exercised a conflict rule (the rule of party autonomy), and the scope of such a rule is determined by the applicable private international law. In this way, the tribunal might ascertain to what extent the choice of Canadian law made in the contract is valid under the applicable private international law, or to what extent it may be restricted by applying other conflict rules or by taking into consideration overriding mandatory rules of other laws. The EU competition law would be an example of these latter points: rules that the judge (or the arbitral tribunal) is entitled to apply, irrespective of the choice of law made by the parties, as seen in Section 4.5.3. The applicable private international law may result in further restrictions on the relevance of the chosen law, as seen in Section 4.5. D. Conclusion Based on the foregoing, it seems unlikely that, in the example made here, the award would be deemed invalid or unenforceable for excess of power, even if the tribunal has given effect to EU competition law, whereas the contract had intended to exclude the applicability of that law. It seems more likely that an arbitral tribunal would fear the invalidity and lack of enforceability of the award in case of a disregard of EU competition law. Taking into consideration that a tribunal should aim at rendering awards that are effective, it seems that the expectations of the parties to receive aid from arbitral tribunals in avoiding mandatory rules of closely connected laws should be disappointed more often than not, at least in those situations where the mandatory rules are of such a nature that an award disregarding them might be deemed to be against the ordre public in the state of origin of the award or in a state of enforcement. As seen, the arbitral tribunal does not need to fear any excess of power, as there are many routes that are allowed under the applicable private international law to restrict

354

355

For a more extensive discussion on the matter, as well as further references, see Mann (1979), p. 608; Paulsson (1998), p. 123; Kurt Siehr, ‘Ausländische Eingriffsnormen im inländischen Wirtschaftskollisionsrecht’. Rabels Zeitschrift für ausländisches und internationales Privatrecht 52.H. 1/2 (1988), 78ff.; Cordero-Moss (1999), pp. 124ff. For example, Article 20 of the Swiss Code of Obligations and § 138 of the German BGB.

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the scope of the choice of law made in the contract. The main concern should be to make sure that the parties’ right to be heard is not infringed, see Section 5.6.5.356 (ii) Disregard of the Contract’s Choice in Favour of a Law That Is Not Otherwise Applicable Private international law does not always provide a means for restricting the scope of party autonomy; as a matter of fact, the restrictions we have seen are more the exception than the rule, and in the majority of cases, the choice of law made by the parties cannot be restricted by other conflict rules, by overriding mandatory rules or by principles of the ordre public. Imagine that the parties, after having entered into a contract subject to English law, renegotiate the price and enter into a new contract, also subject to English law, with the sole purpose of increasing the price. After some time, the party invokes the invalidity of the amendment and refuses to pay the higher price. As seen in Section 3.6.2, if the Amendment agreement is governed by English law, the party that agreed to pay a higher price might claim, under certain circumstances, that the Amendment agreement is not binding because it did not contemplate any consideration in exchange for the promise to pay a higher price (the expectation of obtaining a performance that the other party was already obliged to carry out according to the first contract does not normally qualify as a consideration). The arbitral tribunal may find this result unsatisfactory, since the expectation of the parties at the moment of entering into the second contract was clearly that the higher price should be binding. In order to avoid an unsatisfactory result, the tribunal may decide not to apply English law, but, for example, the law of the seat of the tribunal – because under such law, the increase in price would be deemed binding. In a scenario like this one, the private international law does not provide any tool with which to override the choice of law made by the parties: there is no violation of the ordre public, there are no overriding mandatory rules and the subject matter is clearly within the scope of party autonomy. Therefore, it is not possible to argue, as we did in the previous section, that the arbitral tribunal has not disregarded the contract’s choice and has simply filled in its gaps in accordance with the applicable private international law. Moreover, in our example, the law applied by the arbitral tribunal is not the law that would be applicable if the contract had not contained a choice.357 The tribunal has, in other words, not used the applicable private international law to integrate or correct the contract’s choice. It has simply decided that it was more appropriate to apply a different law. Has the tribunal exceeded its power? Once again, it is necessary to draw a line between the tribunal’s application of the law and the tribunal’s disregard of the parties’ instructions. 356

See the Swiss Supreme Court Decision 4A_300/2021.

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357

See Article 4 of the Rome I Regulation.

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If, from the award’s reasons, it is possible to infer that the arbitral tribunal has applied some private international law criteria or has interpreted the contract, and that this application or interpretation has led to disregarding the law chosen in the contract, we are in the field of the application of the law; more specifically, in the field of the application of private international law. If the arbitral tribunal has applied private international law incorrectly – for example, because it wrongly assumed that the English rule on consideration would be contrary to the ordre public – it has incurred an error in law. As already mentioned, errors in law are not subject to judicial control under the UNCITRAL Model Law or under the New York Convention. Therefore, an award that disregards the contract’s choice of law on the basis of a wrong application of private international law may not be considered invalid or unenforceable because of an excess of power. If, however, the award does not make any considerations on private international law and there is no basis for assuming that the disregard of the contract’s choice is due to an error in the application of conflict rules or in the interpretation of the contract, then it is possible to argue that the arbitral tribunal has ignored the parties’ instructions. This qualifies as an excess of power. There are, admittedly, only a few cases where this line of thought was applied; however, this is fully compatible with the judicial control that may be exercised on arbitral awards under the UNCITRAL Model Law and under the New York Convention. There are at least two cases where this reasoning was applied to set aside arbitral awards rendered under the corresponding provision of the ICSID Convention – permitting the annulment of an award if the tribunal has manifestly exceeded its powers.358 (c) Disregard of the Contract’s Choice of Law in Favour of Transnational Sources In the case presented in the previous section – where the application of English law would make the amendment contract not binding – the arbitral tribunal may decide 358

Article 52.1(c) of the Convention. In Klöckner Industrie-Anlagen GmbH and others v. United Republic of Cameroon and Société Camerounaise des Engrais, ICSID Case No Arb/81/2, 21 October 1983, the ad hoc Committee acting as the controlling instance affirmed that the failure by the tribunal to apply the governing law is to be deemed an excess of power, as did the ad hoc Committee controlling the award rendered in Amco Asia Corporation and others v. Republic of Indonesia, ICSID Case No ARB/81/1, 20 November 1984. Later decisions operate with a higher threshold, see, for example, Maritime International Nominees Establishment v. Guinea, ICSID Case No ARB/84/4, Decision on Annulment (22 December 1989), para. 5.04; Wena Hotels v. Egypt, ICSID Case No ARB/98/4, Decision on Annulment (5 February 2002), paras. 21–55; Repsol v. Petroecuador, ICSID Case No ARB/01/10, Decision on Annulment (8 January 2007), para. 38; Industria Nacional de Alimentos SA & Indalsa Perú SA (formerly Empresas Lucchetti SA & Lucchetti Perú SA) v. Peru, ICSID Case No ARB/03/4, Decision on Annulment (5 September 2007), para. 98.

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that the English doctrine of consideration is peculiar to English law, and that in an international setting, it is not appropriate to apply a rule of a municipal law, particularly when it conflicts with the expectations of parties in international trade. The tribunal may thus resolve to apply a principle that is often referred to as a generally acknowledged principle within international trade – pacta sunt servanda – according to which, an agreement has to be complied with irrespective of the presence of a consideration. Alternatively, the tribunal may have applied the UPICC, which in Article 2.1.1, say that an agreement is formed by an exchange of an offer and acceptance or conclusive conduct – without the requirement of consideration. The tribunal, in this case, would have disregarded the contract’s choice of law by not applying the law of another country, but generally acknowledged principles or non-authoritative transnational sources. Would this be considered an excess of power? In the context of the defence of excess of power, it is not very significant to distinguish between a disregard of the choice of the law made in the contract by applying the law of another country and a disregard by applying transnational sources. This distinction becomes more relevant when the exercise of the tribunal’s powers is measured not against the Arbitration agreement (as is the case in the defence of excess of power), but against the applicable arbitration law (as is the case in the defence of procedural irregularity, which we will see in Section 5.6.7). From the point of view of an excess of power regarding the parties’ instructions, the same reasoning explained previously will apply here: if the tribunal’s disregard of the contract’s choice is due to the wrong application of the private international law or the wrong interpretation of the contract, there are no consequences of judicial control. If, however, the application of transnational sources is due to a blunt disregard of the parties’ instructions, the tribunal has exceeded its powers, and this can result in the invalidity or unenforceability of the award. (d) Conclusion The analysis shows that the arbitral tribunal enjoys considerable freedom in respect of the law that it applies to resolve the dispute, and that this freedom goes so far as to permit the tribunal to apply the chosen law incorrectly or to disregard the choice of law that the parties have made in the contract. However, there are certain borders to the tribunal’s freedom in respect of the applicable law: the ordre public of the court that exercises judicial control may not be violated by the award (see Section 5.4.9), the parties’ right to be heard shall not be infringed (see Section 5.6.5) and the tribunal may not render a decision ex aequo et bono without having been empowered to do so by the parties (see Section 5.6.7). Between these borders, there is a wide range of possibilities for integrating or correcting the parties’ instructions, particularly by applying various rules of private international law. The interpretation of the parties’ instructions, the application of

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the chosen law or the choice of another law on the basis of private international law may not be reviewed by the judge, even if they are manifestly wrong. The disregard of the parties’ instructions, therefore, enjoys a near total immunity, as long as it may be qualified as an interpretation or an error in law, because the courts have no jurisdiction thereon. However, if the decision to ignore the parties’ instructions is not the consequence of a (perhaps erroneous) application of the law or interpretation of the contract but is simply the result of the tribunal’s overruling of the parties’ will, then it is possible to exercise judicial control. The reasons for the award play a determining role in this context; unreasoned awards, to the extent that they are permitted by the parties and the applicable arbitration law, would make it impossible to evaluate what law has been applied and on what basis, thus permitting the disregard of the parties’ instructions.359 5.6.2 Excess of Power Regarding Questions of Law: May the Applicable Law be Disregarded if the Parties Do Not Sufficiently Prove It? Sometimes tribunals do not consider the applicable law because it was not sufficiently proven by the parties; this approach has been subject to criticism, and with good reason.360 The applicable law shall be considered, even if it has not been sufficiently proven by the parties, irrespective of whether the law is deemed to be a fact (as the English system assumes) or not. If foreign law is treated as fact, it has to be proved by the parties. As seen in Section 5.5.1, under English law, the pleadings made by the parties in respect of the facts do not bind the tribunal in its independent evaluation of the evidence and in the inferences that are based on those facts. It follows that an English tribunal is not bound by the presentation of the foreign law made by the parties, that it may request additional information and may build its own argumentation thereon. In the case of insufficient evidence on foreign law, therefore, an English tribunal will be entitled to ask for additional evidence. If the evidence is still not satisfactory, the tribunal will 359

360

More extensively, see Giuditta Cordero-Moss, ‘Reasons in Arbitral Awards and Court Control’. In Antonio Crivellaro and Mélida N. Hodgson (eds.), Dossier XVIII: Explaining Why You Lost: Reasoning in Arbitration (ICC Institute of World Business, 2020a). For example, Swembalt AB v. Republic of Latvia, Arbitral Decision rendered in Copenhagen on 23 October 2000 under the ‘Agreement between the Government of the Kingdom of Sweden and the Government of the Republic of Latvia concerning the Promotion and Mutual Protection of Investments dated 10 March 1992, SÖ 1992-93’, Stockholm Arbitration Report (SCC Arbitration Institute 2004–2), pp. 97ff., criticised by Rubins (2004), p. 126 and Farouk Yala, ‘“Observations” in Connection with Swembalt v. Republic of Latvia’. Arbitration Institute of the Stockholm Chamber of Commerce. Stockholm Arbitration Report 2 (2004), pp. 128ff., 133ff. See also CME v. Czech Republic, criticised by Schreuer (2004a), p. 189 and footnote 179. For a comparative analysis of the consequences of an insufficient proof of foreign law, see Jänterä-Jareborg (2003), pp. 324ff.

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apply the presumption that foreign law is the same as English law; and English law is applied ex officio by the tribunal. If the law is not treated as a fact, insufficient evidence does not excuse the tribunal from its duty to investigate it ex officio. This does not mean that the tribunal may not ask the parties to provide evidence of the law:361 It certainly is in the interest of the parties to provide as exhaustive and convincing evidence of the law as possible, so as to substantiate their respective pleadings. This approach is very common in practice and is even codified in some private international law acts.362 The duty of the arbitral tribunal to investigate the law seems to consist in asking the parties to produce additional evidence of the law or appointing legal experts, rather than in directly investigating the law.363 This approach is consistent with the ALI/UNIDROIT Principles: According to Article 22.1, the court is responsible for determining the correct legal basis for its decision, including matters determined on the basis of foreign law. To what extent the award may be set aside as invalid or deemed unenforceable because the tribunal disregarded the applicable law on the ground that it was insufficiently proved, depends on whether the failure to apply the law falls into the category of an error of law (in which case it will not have consequences for the effectiveness of the award) or into one of the principles that we defined in Section 5.5.5 as the ultimate borders of the tribunal’s powers. If the disregard of the applicable law is based simply on the insufficiency of the evidence thereof, and it is not corroborated by reasons that show that the tribunal has made some considerations on the choice, interpretation or application of the law, there is a basis to consider it an excess of power (because the tribunal made its decision on the basis of legal facts that are different from those submitted by the parties) or a procedural irregularity (if the applicable law is mandatorily determined in the applicable arbitration law or investment treaty). The borderline between these remedies and a review of the merits of the award (which is inadmissible) will be examined. 361

362

363

See, however, the comment on Article 20(4) of the 1998 ICC Rules (corresponding to Article 25(4) of the 2012 Rules), Derains and Schwarz (2005), footnote 582, affirming that in international arbitration, the appointment of legal experts to testify on foreign law should not be necessary, because an international tribunal should not consider any law as foreign, and is assumed to know the law that it is supposed to apply. For a comparative analysis of the question of where the duty to prove foreign law lies, whether with the parties, the judge, or both, see Jäntera-Jareborg (2003), pp. 286ff. See, for example, § 293 in the German Code of Civil Procedure and § 6 in the Austrian Private International Law Act. Kaufmann-Kohler (2004), pp. 74f., analyses how Swiss arbitration law gives the tribunal the power, but not the obligation to investigate the law ex officio. Also, the Swedish system is based on the principle that the parties have to prove the law, see Heuman (2004), p. 326, even if the Swedish arbitrator has the authority to develop his/her own arguments of law, see p. 379. See also the ALI/UNIDROIT Principles, Article 22.4.

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5.6.3 Excess of Power Regarding Questions of Law: May the Tribunal Develop Its Own Legal Arguments? We will see in Section 5.6.4 that the tribunal is empowered to develop its own reasoning in respect of the evidence and of the facts that the parties have introduced in the proceeding. In addition, Section 5.6.1 showed that the tribunal has the ultimate responsibility to apply the law, whether the law is deemed to be a question of fact or a question of law. It follows that the tribunal is also entitled to develop its own reasoning in respect of the law, more so if the law is under the sphere of the tribunal rather than that of the parties. This is also recognised in the ALI/UNIDROIT Principles that state, in Article 22(2)(3), that a court may rely upon a legal theory that has not been advanced by a party. This Article requires, however, that the court give the parties the chance to respond to such a new theory; we will come back to this requirement in Section 5.6.5. Under the power to develop an independent legal reasoning, it is possible to distinguish at least three categories, which will be analysed. (a) New Qualifications under the Same Sources Imagine that a buyer purchases a certain volume of material for delivery on a certain date. The material is delivered only in part on the agreed date. The rest of the material is offered weeks later. The buyer initiates arbitration to claim damages for breach of contract. Suppose that the buyer has proved the content of the whole contract with the seller, as well as the circumstances of the non-performance of that contract by the seller. We can further assume that the buyer is claiming reimbursement of damages on the basis of Article 45 of the CISG. The request for damages is based on the alleged breach by the seller of the obligation regarding the volume of material to be delivered; according to Article 45 of the CISG (combined with Article 35), this breach entitles the buyer to claim damages. The tribunal does not accept the buyer’s arguments that the obligation regarding the volume was breached. Instead, the tribunal finds that the obligation regarding the time of delivery was breached. Therefore, the tribunal qualifies the proven facts as delay, and not as partial performance. The seller, therefore, is ordered to reimburse damages to the buyer on the basis of Article 45 of the CISG, as requested; however, the basis for applying Article 45 of the CISG is not Article 35 on non-compliance with specifications, but Article 33 on the time for delivery. As will be seen in Section 5.6.4, the tribunal is not exceeding its power because the fact of the delay had been proved in the proceeding, even if it had not been invoked by the buyer. The tribunal is not exceeding its power in respect of the legal argumentation either. The tribunal is free to make inferences from the proven facts in accordance with the legal sources that it deems applicable, especially if these legal sources have been

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pleaded by the parties (we will see in Section 5.6.3(b) to what extent the tribunal may apply new sources that have not been pleaded by the parties). In our example, the tribunal is subsuming the proven facts under an Article of the CISG that it deems more appropriate than the Article that was invoked by the buyer. The qualification and subsumption of a fact belong to the evaluation of the legal consequences of that fact and are part of the legal reasoning that the tribunal has the power and the duty to carry out independently.364 Whether this re-qualification triggers a duty to invite the parties to comment will be discussed in Section 5.6.5. (b) Application of New Sources To take another kind of independent legal reasoning, let us assume that a buyer requests that the contract be terminated, in accordance with Article 49 of the CISG, because of a fundamental breach by the seller. The arbitral tribunal determines that the contract may be terminated, as requested by the buyer. However, in the award the basis for terminating is not the fundamental breach and the CISG, but the governing national law that considers a contract invalid if it contains unfair terms. During the proceeding, the buyer had produced evidence of the contract that contained a clause excluding the seller’s liability, and the tribunal deemed this clause to be sufficient to trigger invalidity under the national governing law. Assuming that the consequences of the invalidity are the same as the consequences of the termination that had been requested by the buyer (we will see to what extent the tribunal may apply remedies that were not requested), and assuming that the tribunal is acting on the basis of facts that have been proved (even if not invoked) by the parties, it is within the scope of the tribunal’s power to investigate the applicable law and apply it as it deems appropriate, even if the parties have failed to make the relevant argument.365 Thus, the Singapore Court of Appeal confirmed an award that had applied public policy even though the parties had not pleaded it.366 364

365

366

In the same sense, see Wiegand (2005), p. 140; for Swedish law see Heuman (2003), p. 379 and the Decision 8090–99 by the Svea Court of Appeal, published in English in Stockholm Arbitration Report (SCC Arbitration Institute 2003–1), pp. 251 ff., and commented upon by Martin Wallin, ‘Observations in Connection with the Decision 8090–99 by the Svea Court of Appeal, Stockholm Arbitration Report 1 (SCC Arbitration Institute, 2003), pp. 266ff.; for French law, see the judicial practice referred to by Kessedjian (1995), p. 404. In the same sense, see the decisions by the ICSID ad hoc Committees referred to by Schreuer (2004b), pp. 30f. The decision of the ICSID ad hoc Committee in Klöckner v. Cameroon, in Yearbook Commercial Arbitration XI (Kluwer International, 1986) (Klöckner I), pp. 173f., clearly affirms the tribunal’s freedom to develop its own legal theory and arguments; such freedom, however, is restricted by the ‘legal framework’ established by the parties. As an example of a hypothetical violation of the limits set by such a legal framework, the ad hoc Committee mentions a decision rendered on a tort ground, whereas the parties’ submissions were based on the contract. PT Prima International Development v. Kempinski Hotels SA [2021] SGCA 35.

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Similarly, the Swiss Supreme Court considered an award where the arbitral tribunal had, on its own initiative, applied Swiss law on sham transactions.367 On this basis, the arbitral tribunal disregarded a contract between the parties that allegedly had replaced an older contract between the same parties, and awarded payment according to the original contract. That particular Swiss rule had not been pleaded by the parties, and the losing party challenged the validity of the award. The Swiss Supreme Court came to the conclusion that the arbitral tribunal had not exceeded its power: as the principle of jura novit curia applies, the tribunal is entitled to develop its own legal reasoning. In this case, the applicable law was Swiss, and the legal counsel to the losing party was Swiss; therefore, the application of the Swiss rule could not have come as a surprise. On this basis, the Supreme Court found that the adversarial principle had not been violated. This extends to applying rules of laws that have not been chosen by the parties. Thus, the Federal Australian Court approved an award rendered in California which applied Australian mandatory law prohibiting misleading conduct in trade, notwithstanding that the contract had chosen the laws of California to govern.368 In contrast, the Swiss Supreme Court had a short time earlier369 set aside an award in which the arbitral tribunal had, on its own initiative, applied a mandatory rule of Swiss law prohibiting exclusive intermediation in labour issues, and thus had rejected the agent’s request for payment of the fee under an agency agreement for a football player. The agency agreement had been entered into between a Brazilian football player resident in Portugal and an agent resident in Spain. When the football player accepted an offer from a Portuguese football club, the agent claimed its fee in accordance with the contract. The arbitrator applied Swiss law, which was the applicable law according to FIFA statutes, and considered the exclusivity clause in the agency agreement as unenforceable. The award was set aside not because the arbitral tribunal had developed a legal reasoning that had not been pleaded by the parties – as a matter of fact, the Swiss Supreme Court confirmed that the principle of jura novit curia applies; the award was set aside because the parties could not have been expected to anticipate that Swiss law would have been applied. According to the Swiss Supreme Court, therefore, the arbitral tribunal is entitled to develop its own legal theory and apply the sources it deems applicable even though they have not been pleaded by the parties – when the specific circumstances suggest that those sources may come as a surprise to the parties, the arbitral tribunal has to draw the parties’ attention to them, see Section 5.6.5. The obstacle that the arbitral tribunal has to overcome when it wants to introduce new sources, thus, is not the scope of its power – it is the right to be heard.370 367 368 369 370

X. SA v. Y.SA, Federal Supreme Court of Switzerland, Case 4A_254/2010. Freedom Foods Pty Ltd v. Blue Diamond Growers [2021] FCAFC 86. Federal Supreme Court of Switzerland, Case 4A_400/2008, Urquijo Goitia v. Liedson Da Silva Muniz. For a similar line of reasoning see Gisela Knuts, ‘Jura Novit Curia and the Right to Be Heard: An Analysis of Recent Case Law’. Arbitration International 28.4 (2012), pp. 669–88.

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Another example of arbitral tribunal developing its own legal theory is an investment award based on the BIT between Moldova and Russia,371 where I acted as the sole arbitrator. The claim regarded a privatisation contract that provided for the investor to transfer some assets to the host country in exchange for unspecified shares owned by the host country. When the host country issued a regulation containing the list of shares eligible for exchange in the context of privatisation, the investor claimed that the regulation could not be applied to pre-existing privatisation agreements and pleaded that the host country had breached its own legislation on retroactivity. The arbitral tribunal found that the regulation was a necessary specification of the general obligation contained in the privatisation contract, and that the rule on retroactivity was therefore not applicable. However, the content of the regulation was such as to deprive the exchange of any value, and this would be in breach of the provision on fair and equitable treatment of the applicable BIT. The BIT had not been pleaded by the investor, but it was part of the proceeding, as it had been used by the claimant as the basis for the arbitral jurisdiction. The arbitral tribunal observed that it was within its power to develop the legal reasoning it deemed appropriate; however, to ensure respect of the adversarial principle, it invited the parties to present their arguments on the applicability of the BIT, see Section 5.6.5. The award ended up applying a provision of the BIT different from that pleaded by the claimant in response to the tribunal’s request; this was within the power of the tribunal to develop its own legal reasoning. The award was confirmed by the annulment court in Sweden372 and by the enforcement court in Moldova.373 We will revert, in Section 5.6.5, to the possible implications relating to the right to be heard. (c) New Remedies Imagine that the buyer is requesting termination for breach of contract by the seller; the tribunal, however, determines that the contract is to be declared invalid because it contains unfair terms. If termination and invalidity lead to different results (for example, invalidity requires restitution, whereas termination does not), the requalification made by the arbitral tribunal leads to ordering a remedy that was not requested. Has the tribunal exceeded its power? Whether this determination is based on the same facts invoked by the buyer, or on facts that were proved but not invoked, the evaluation does not change. There does not seem to be a unitary treatment of this situation in the various countries. 371

372 373

Iurii Bogdanov, Agurdino-Invest Ltd. and Agurdino-Chimia JSC v. Republic of Moldova, SCC Award, 22 September 2005, www.italaw.com/sites/default/files/case-documents/ita0094_0.pdf. Svea Court of Appeal, 28 November 2008, Case No T 745–06. Supreme Court of Moldova (Buletinul Curtii Supreme de Justitie a Republicii), 16 February 2006, Decision No 2re-46.2006, No 3, p. 18.

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In common law systems, the request of remedies made by the parties is deemed to constitute the borders for the tribunal’s jurisdiction.374 In many civil law systems, the borders of the tribunal’s jurisdiction seem to be set by the parties’ presentation of the facts, whereas the legal consequences of those facts are left to the tribunal to determine according to its own identification of the applicable law, subsumption and interpretation.375 This latter approach seems to be more consistent with the powers of the tribunal, shown in the foregoing, to develop its own legal argumentation and to apply the law ex officio. In other words, the tribunal would not exceed its power if it grants remedies that were not requested by the parties, provided that these remedies are based on the facts proved in the proceeding and that they have not been expressly excluded from the authority of the tribunal by agreement of the parties (in the Arbitration agreement, under the proceeding or in another manner meant expressly to regulate the jurisdiction of the tribunal). As we have seen, the tribunal is not expected to act simply as an umpire and choose between the parties’ arguments; if it is entitled to develop its own legal argumentation, it must also be entitled to draw the legal consequences of this argumentation, and these, at times, might entail remedies that were not requested by the parties.376 This is, however, a dangerous area for the tribunal, since, as we just saw, the power of the tribunal to grant remedies beyond the requests of the parties is not completely uncontroversial in all legal systems. The systems that the tribunal should be concerned with are the law of the arbitral venue and the law or laws of the enforcement court or courts. While the law of the place of arbitration is known to the tribunal, the law of the place or places of enforcement is not. Since an award may be enforced in any country where the losing party has assets (assuming that enforcement is permitted by prevailing legislation or conventions, of which the New York Convention is the most significant), and this may include any country where that party has assets in transit, the tribunal cannot predict which interpretation of the excess of power clause the enforcement court will apply. Therefore, it is in the interest of the effectiveness of the award to avoid rendering a decision that, even if valid under the law of the seat of arbitration, might be deemed to be in excess of power in other systems. It seems advisable that the tribunal informs the parties of its evaluation of the legal consequences of the produced evidence and gives them the chance to comment thereon. 374 375

376

See, for England, Merkin (2004), p. 714(a). See, for Sweden, Heuman (2003), pp. 611, 736f.; for Switzerland, see the Supreme Court decisions 4A_62/ 2020 and 4A_301/2018, and Wiegand (2005), pp. 135f., 140ff. arguing extensively on how the legal consequences are within the sphere of the tribunal and should be determined ex officio (in accordance with the maxim da mihi factum, dabo tibi ius). That an independent subsumption by the tribunal does not lead to excess of power is indirectly confirmed by the lack of reported court decisions refusing enforcement under the New York Convention: see van den Berg (2003), p. 512c; Born (2021a), para 26.5[4][c]. See, however, the Swiss Supreme Court Decision 4A_294/2019, concluding that an award ordering compensation instead of requested declaratory judgment was in excess of power.

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Should the parties agree that the remedies suggested by the tribunal shall not be applied, this would clarify that the tribunal does not have the authority to grant them. Should the parties not reach an agreement thereon, they would still have the opportunity to make their cases on the points introduced by the tribunal. In this way, the right to be heard would not be violated. We will revert, in Section 5.6.5, to the necessity or opportunity that the tribunal invites the parties to comment on new elements upon which the decision is going to be based. This should not be considered as if the tribunal was acting partially, suggesting to one party what legal arguments it should make and what legal remedies it should request. The invitation by the tribunal to comment is only a consequence of the tribunal’s power to develop its own independent legal argumentation and is meant to preserve the adversarial principle. 5.6.4 Excess of Power Regarding Questions of Fact: Is the Tribunal Bound to Decide Only on Invoked Facts? The tribunal has to base its decision on the facts introduced and proved by the parties; otherwise, it will exceed its power. The general rule is, therefore, that an award may not be based on a fact that was not invoked by a party. This does not mean that the tribunal is bound by the argumentation made by the parties in respect of the proven facts. We have seen in Section 5.5.3 that a tribunal is free to evaluate the evidence and to draw from it the inferences that it deems appropriate. Does this extend to facts that are proved but not invoked by a party? Let us assume that a buyer pays only part of the agreed price to the seller on the grounds that the delivered goods did not fully comply with the specifications. The seller initiates arbitration against the buyer for breach of its payment obligations. The buyer produces evidence of the whole content of the contract, including the specifications, as well as of all the factual circumstances of the performance. From the produced evidence it appears that the specifications were actually met. Therefore, there was no basis to withhold payment of the price for breach of the contractual specifications. The produced evidence showed, however, that delivery was not made in accordance with the agreed timetable. The breach of the obligations on delivery time is proved in the proceeding; however, it is not invoked as a basis for the buyer’s defence. May the tribunal base its decision on a circumstance that is introduced by one party in the proceeding, but is not acted upon by that party? In the situation described, if we also assume that a delay in the delivery entitles the buyer to withhold the price, the breach of the delivery obligation is an alternative basis for the same defence presented by the buyer. The tribunal must be allowed to consider the consequences of a fact that was proved before it, even if that fact was not invoked, as long as this does not modify the scope of the dispute.377 377

Coming to the same conclusion see the Swiss decision X. v. Y., Federal Supreme Court of Switzerland, Case 4A_538/2012 and the Swedish decision MHH AS v. Axel’s Konsult och Förvaltning AB, Svea Court of

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Would the tribunal exceed its power if its evaluation of a proven, but not invoked fact leads it to order a remedy that was not requested? Let us assume that the arbitration is initiated by the buyer. The contract provides that, in case of non-compliance with the specifications, the price shall be reduced. The buyer had paid the whole price before it had the possibility to inspect the goods; after the inspection of the goods, it requests reimbursement of part of the price because the specifications were not complied with. The contract also contains a clause that permits termination and full restitution in case of late delivery. As in the scenario described, the content of the whole contract as well as all the circumstances of its performance are proved in the proceeding; the buyer, however, acts only on the basis of non-conformance specifications, and requests reimbursement of part of the price. If the tribunal decided that the contract had to be terminated because of late delivery, and ordered restitution of the whole price and of the goods, would it exceed its powers? The question of introducing new remedies is examined under Section 5.6.3(c). 5.6.5 Right to Be Heard: Inviting the Parties to Comment We saw in Section 5.4.7 that one of the grounds for setting aside or refusing enforcement of an award is that the parties’ right to be heard was infringed. If the arbitral tribunal renders a decision on the basis of facts or arguments that one of the parties (or both) did not have the chance to comment upon, the right to be heard is affected. We saw in the previous sections that the tribunal enjoys considerable room to develop its own arguments, particularly regarding questions of law (including choice of law). To avoid an unfair treatment of the parties, it may be advisable to accompany this room for development with an invitation to the parties to comment on the elements that the arbitral tribunal intends to use as a basis for the decision. Imagine a dispute in which the claimant requests that the respondent be ordered to reimburse damages for breach of a licence agreement. Having considered the parties’ pleadings, the arbitral tribunal concludes that the respondent breached the agreement and is liable for damages. After closure of the proceedings, the arbitral tribunal proceeds to quantify the damages. To this end, the tribunal engages in internet research to ascertain the pricing of the licensed products. Evidence of the pricing is obtained by the arbitral tribunal, after closure of the proceedings, on the tribunal’s own initiative. Does the arbitral tribunal have the power to seek evidence of the product price on its own initiative, and to independently apply this evidence to the quantification of damages? Does this infringe any principles of arbitration law and thus affect the validity or enforceability of the award? The example is inspired by a challenge of an ICC arbitral award that was recently decided by the Frankfurt Court of Appeal.378 The court concluded that the arbitral

378

Appeal, 4 December 2014, Case No T 2610–13. See also Heuman (2003), pp. 606f., 634 and 640, and, under English law, Merkin (2004), p. 592. Frankfurt am Main Oberlandesgericht, 25 March 2021, No 26 Sch 18/20.

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tribunal had not infringed any principles of arbitration law – to the contrary, the arbitral tribunal had acted fully in compliance with the applicable ICC Arbitration Rules, as well as with German arbitration law. The Frankfurt Court of Appeal found that, under the circumstances of the case, the right to be heard had not been infringed. That the tribunal visited that particular website could not have come as a surprise to the defendant, as the pricing method was well established under the applicable law. Hence, even though the parties had not pleaded that damages should be based on a certain calculation method, and even though the tribunal did not inform the parties that it would engage in that particular internet research, the parties should have anticipated that the tribunal would do so. Their right to be heard, therefore, was not infringed. According to the Frankfurt Court of Appeal, therefore, not only did the tribunal have the power to obtain evidence on its own initiative – under the circumstances, it did not infringe due process when it did so without informing the parties. Under other circumstances, the principle of due process might have been infringed – without prejudice to the tribunal’s ability to exercise its powers on its own initiative. The English High Court,379 for example, found that the parties’ right to be heard was infringed when a tribunal asked the Football Association, the rules of which were applicable to the dispute, to explain the scope and content of certain of these rules. Failure to inform the parties of the tribunal’s investigations deprived the parties of the opportunity to comment on the Football Association’s response regarding an interpretation of its own rules, and to further develop their pleadings on that basis. The difference in outcome from the abovementioned German and English decisions is not due to different principles on the tribunal’s exercise of its powers on its own initiative. Under both German and English arbitration law, as well as under the ICC Rules and under a vast majority of sources applicable to arbitration, tribunals have the power to act on their own initiative. There is a large convergence in this respect, as this chapter shows. Under all these sources, however, the tribunal’s power is limited by a duty to respect the principle of due process. It is here that such sources may diverge. The invitation to the parties to comment on the tribunal’s own legal reasoning is required in some systems,380 recommended in others381 and not considered 379 380

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Fleetwood Wanderers Limited v. AFC Fylde Limited [2018] EWHC 3318 (Comm). In England, see Ducat Maritime Ltd v. Lavender Shipmanagement Inc [2022] EWHC 766 (Comm); PBO v. DONPRO [2021] EWHC 1951 (Comm); Interbulk Limited v. Aiden Shipping Co Ltd [1984] 2 Lloyd’s Rep 66 (CA); Brockton Capital LLP v. Atlantic-Pacific Capital Inc [2014] EWHC 1459 (Comm). See the French Cour de cassation, 1 June 2017, n° 16–18029 (de Sutter, DS2 (Luxembourg) and Majunga SARL v. Madagascar); in Singapore: CAJ v. CAI [2021] SGCA 102. In France, see Kessedjian (1995), p. 399. A Norwegian Supreme Court decision defined the adversarial principle as a fundamental principle of due process in Norwegian law and set aside an award that had radically reduced the amount of damages requested by the claimant without the tribunal having advised the parties that it was contemplating doing so: Rt. 2005 p. 1590. See also the Swiss decision 4P.100/2003, which, however, underlines that this requirement applies only to extraordinary cases. See also the ALI/UNIDROIT Principles, Article 22(2)(3). See Oberster Gerichtshof, 23 February 2016, 18 OCg 3/15p; for Sweden, Heuman (2003), pp. 634, 683 and 734, who considers it open as to whether this rule is mandatory. See the Svea Court of Appeal Decision No

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necessary in yet others.382 In addition, the legal literature seems to be divided between these positions.383 This invitation seems necessary if the tribunal’s legal reasoning leads to new facts or evidence becoming relevant. If one or both of the parties may develop their cases by presenting new evidence that was not relevant in the context of the original pleadings, but becomes relevant in the context of the tribunal’s reasoning, it is fair to expect the tribunal to give the parties the opportunity to do so, even in the systems that do not, as a general rule, require an invitation to comment.384 The necessity of this invitation to comment is less evident if the tribunal’s reasoning remains on a purely legal level: as long as the parties’ comments are limited to the legal qualification of some factual circumstances or the subsumption under a certain rule, they are a contribution to the tribunal’s reasoning, but they are not binding on the tribunal and do not add anything to the sphere of authority of the tribunal, as seen in Section 5.6.3. If the tribunal introduces new sources of law, however, it might be advisable to request the parties comment on the new sources, so that the parties are given the possibility of evaluating the new legal dimension of the dispute. The tribunal might not be in a position to evaluate whether the parties can produce new evidence in light of the new sources, and therefore it seems advisable to leave this evaluation to the parties themselves by advising them of the tribunal’s intention to apply a certain source. Another question is how specific the invitation to comment on the new sources should be. Should the tribunal limit itself to indicating the source in a generic way, in the example made in Section 5.6.3(b), by making reference to the national law on unfair terms of contracts, or should it be more specific and indicate the Article of the

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8090–99, pp. 260ff., rejecting the existence of such a rule, commented upon by Wallin (2003), pp. 266ff. (considering it recommendable to invite the parties’ comments, but not deeming it a serious procedural irregularity if it is not done, at least in respect of domestic arbitration). Of the fifteen national reports in Cordero-Moss and Ferrari (2018b), see the reports by Rafael Francisco Alves on Barzil, by Burkhard Hess and Leon Marcel Kahl on Germany; to a certain extent, by Auernig and Oberhammer on Austria; by Koh Swee Yen and Kenny Lau on Singapore; by Bonomi and Bochatay on Switzerland, excluding that the tribunal is under a duty to inform the parties that a certain legal theory or legal rule will be used as a basis for the decision. In the other legal systems analysed in the book, the parties shall be informed of the basis for the award irrespective of whether the tribunal’s independent reasoning concerns factual or legal circumstances. On Swiss law, see also the Federal Court Decision No 4P_115/ 1994, in ASA Bulletin 2 (1995), 217ff., para 5. On English law, see Merkin (2004), p. 592. In respect of German law, see Martinek (2001), XI. In respect of ICSID arbitration see Schreuer et al. (2010), Article 52, para 305ff., showing that ICSID awards are consistently not deemed to be invalid even if the reasons upon which they are based come as a surprise to the parties. Considering the invitation necessary, for example, Kessedjian (1995), 399ff., and Michael E. Schneider, ‘Combining Arbitration with Conciliation’. International Dispute Resolution: Towards an International Arbitration Culture, ICCA Congress Series No. 8, Volume 57 (Kluwer Law International, 1998), p. 4. Considering it not necessary: Wiegand (2005), pp. 137ff., and Merkin (2004), p. 592. In this sense, see also Wiegand (2005), pp. 140ff.

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law that it deems relevant? This latter alternative seems to come close to a suggestion of the legal arguments to one party, and should, probably, be avoided.385 What if the parties do not properly respond to the generic invitation and do not address the specific aspects of the sources that the tribunal intends to apply? In our scenario, this would happen if the tribunal invited the parties to comment on the applicable national law on unfair terms of contracts, and the parties comment on parts of the regulation that are not relevant to the dispute, but fail to comment on the Article on invalidity that the tribunal deems relevant. The right to be heard has been ensured in that the tribunal drew the parties’ attention to the source on unfair contract terms. By so doing, the source has been introduced in the proceeding and the parties have had the possibility of being able to comment on it. Failure by the parties to recognise the relevant Article may not affect the tribunal’s ability to develop its own legal argumentation, as seen. Therefore, it should not be a problem to decide on the basis of the rules the tribunal deems applicable, even if the parties have not pleaded them after they have been invited to comment on them. In Section 5.6.3(b), we saw an investment award based on the BIT between Moldova and Russia,386 where the arbitral tribunal applied a provision of the BIT that had not been pleaded. The losing party challenged the award before the Swedish courts, claiming, inter alia, that the arbitral tribunal had exceeded its power. Moreover, the losing party resisted enforcement of the award before the Moldovan courts. The award was confirmed by the Svea Court of Appeal in Stockholm387 and enforced by the Supreme Court of Moldova.388 The Svea Court of Appeal, in particular, found that the arbitral tribunal had applied the principle of jura novit curia correctly: even though the claimant had not pleaded the legal theory that the award was based on, the decision was based on the facts proved in the proceeding and the ordered remedy was within the scope of the relief sought by the claimant; therefore the arbitral tribunal was not deemed to have exceeded its power. 5.6.6 Distinction between Domestic and International Arbitration? In respect of the tribunal’s ability to develop its own legal argumentation and to apply the law ex officio, a distinction is sometimes drawn between domestic arbitration and international arbitration, and it is suggested that the principle of

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But see Lars Heuman, Skiljemannarätt (Norstedts juridik, 1999), p. 324, who prefers that the invitation to comment is made with reference to a specific legal rule. Iurii Bogdanov, Agurdino-Invest Ltd and Agurdino-Chimia JSC v. Republic of Moldova, SCC Award, 22 September 2005, www.italaw.com/sites/default/files/case-documents/ita0094_0.pdf. Svea Court of Appeal, 28 November 2008, No T 745–06. Buletinul Curtii Supreme de Justitie a Republicii, 16 February 2006, Decision No 2re-46.2006, No 3, p. 18.

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iura novit curia should apply to a more restricted extent when the dispute is international.389 This suggestion is based mainly on the international character of arbitration: it is assumed that foreign parties might be used to (from their respective systems) a different procedure and might not expect the tribunal to take an active role. The overview of the Arbitration Rules in Section 5.5.3, however, suggests that the tribunal’s powers are not regulated in dramatically different ways in the main institutional rules as well as in the UNCITRAL Rules. It might, of course, not be excluded that other Arbitration Rules provide for much more passive tribunals; however, the rules analysed here are quite representative of the modern standard, at least within European Arbitration Rules.390 Furthermore, it might be difficult to assume total ignorance by the parties of the local arbitration law, let alone of the Arbitration Rules of the institution that the parties have chosen. That the venue for the arbitration shall be chosen out of logistical or other practical reasons and without taking into consideration the legal framework for the proceeding, does not seem to comply with the important role that local arbitration law has in respect of the validity and enforceability of the award, of the tribunal’s power to order interim measures or of the local court’s powers to intervene in or assist the arbitral procedure, as seen in Section 5.2. Such an undervaluation of the local arbitration law’s significance might have been encountered more often some decades ago, when arbitration was a relatively new phenomenon. Nowadays, arbitration has become a settled branch within international dispute resolution and seems to have even passed over the definition as an ‘alternative’ method for dispute resolution to newer forms, such as mediation and conciliation. In this context, not knowing the tribunal’s powers under the chosen arbitration law seems to be rather unjustified; therefore, the suggestion that the role of the tribunal in international disputes should be restricted to protect the parties from being surprised by an active role under the applicable Arbitration Rules is actually an excessive measure meant to accommodate the interests of negligent parties. Should, however, the seat of the tribunal not been chosen by or known to the parties prior to the initiation of the proceeding, this reasoning might be more flexible. It has been suggested that a reason for distinguishing between domestic and international disputes in respect of the principle of iura novit curia lies in the observation that, in an international dispute, the tribunal might tend to apply to the merits transnational sources of the lex mercatoria, which are more difficult to determine than state law.391 An invitation to comment on these sources, therefore, might preserve the predictability of the result. It is certainly a commendable aim to preserve predictability, and 389

390

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See, for example, Heuman (1999), pp. 323, 379 and 682f., Kaufmann-Kohler (2004), pp. 73f., Kessedjian (1995), pp. 403f., and Pierre Mayer, ‘Le pouvoir des arbitres de régler la procédure: Une analyse comparative des systèmes de ‘civil law’ et de ‘common law’. Revue de L’Arbitrage 2 (1995), pp. 176ff. Kaufmann-Kohler (2005), p. 632 (with further bibliographic references in footnote 4) even speaks of a transnational arbitral procedure that is developing on an international level, possibly with the exception of US arbitration. Kessedjian (1995), pp. 403f.

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I agree that the application of transnational sources might create problems in terms of predictability, see Section 4.3.3. From the point of view of the validity and enforceability of the award, however, the distinction between application of transnational sources and of a state law becomes relevant only if the sources applied by the tribunal do not qualify as sources of law. As will be seen in Section 5.6.7, often an award that is not rendered at law is invalid if the parties have not requested the tribunal to act as an amiable compositeur. The lack of power to render an award ex aequo et bono would not be remedied by an invitation to comment (unless the parties, in their comments, agree thereon). If the application of transnational sources does not prevent the award from being considered at law, invitation to comment is not required for the effectiveness of the award (although it might be highly recommendable because of the mentioned question of the predictability). 5.6.7 Procedural Irregularity: Application of ‘Law’ or of ‘Rules of Law’ One of the grounds for setting aside or refusing enforcement of an arbitral award is, as seen in Section 5.4.6, the violation of mandatory procedural rules of the lex arbitri. In respect of the disregard of the contract’s choice of law, and as already mentioned in connection with the defence of excess of power, it is firstly necessary to remember that the tribunal’s interpretation of the contract and application of law (also including the private international law) may not be reviewed by the court, irrespective of how evidently wrong they are. Therefore, as a rule, an award may not be set aside or refused enforcement on the ground that it disregarded the parties’ instructions in respect of the governing law, see Section 5.6.1. There is, however, one context in which it is possible to differentiate: when the arbitral tribunal disregards the choice of the parties and applies transnational sources. In this case, the arbitral tribunal may, in addition to exceeding the instructions of the parties, have exercised powers that it might not have according to the applicable arbitration law. As we will see, the arbitral tribunal does not necessarily have the power to apply transnational sources on its own initiative; in many arbitration laws, the arbitral tribunal has to apply a national law unless the parties have requested otherwise. Therefore, application on the tribunal’s own initiative of transnational sources may result in something more than a simple wrong application of the private international law. It may result in a violation of the rules that govern the arbitration, which, in turn, may be a basis for setting aside an award or refusing its recognition and enforcement. This matter, however, requires an accurate analysis, which we will carry out. Many arbitration laws and Arbitration Rules permit the parties to request the arbitral tribunal to decide the dispute without applying legal parameters.392 392

See the English Arbitration Act (Section 46.1(b)), the Swiss PILA (Article 187(2)), the French and the Italian Codes of Civil Procedure (respectively, Articles 1512 and 822), as well as the Arbitration Rules of the ICC (Article 21(3)) and of the Arbitration Institute of the SCC (Article 27(3)).

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If the parties ask the tribunal to render a decision ‘in equity’, or as an ‘amiable compositeur’, or ‘ex aequo et bono’, they expect a decision that is not based on legal rules, but on the circumstances of the case, evaluated in the light of common sense of justice, the interests of the parties and any other consideration that the arbitral tribunal may find appropriate. A decision can be taken ‘in equity’, only if the parties empower the tribunal to do so. Lacking instructions by the parties, the decision will have to be taken ‘at law’ – that is, applying legal rules. In the past, it was uncertain where to fit transnational sources in the dichotomy between ‘in equity’ and ‘at law’. If a decision based on transnational sources is classified as a decision rendered in equity, the arbitral tribunal does not have the power to apply transnational law on its own initiative; if it is classified as a decision rendered at law, the tribunal may apply transnational sources without having been expressly empowered by the parties to do so. The interpretation of the transnational law as a body of rules equivalent to a state ‘law’ has long been controversial.393 However, it is now established that transnational sources may constitute a system of law, and that therefore it is not appropriate to qualify a decision taken according to transnational sources as a decision taken as an amiable compositeur. Hence, a decision based on ‘rules of law’ is not a decision taken in equity.394 However, this does not necessarily mean that a decision based on transnational sources is completely equivalent to a decision rendered ‘at law’. It is not a decision based on law (that is, on a state law). It is based on ‘rules of law’. The terminology opposing ‘rules of law’ to ‘law’ is used by numerous arbitration laws and Arbitration Rules, as well as by the Hague Principles (Article 3). In other languages, the 393

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Critical were Felix Dasser, Internationale Schiedsgerichte und lex mercatoria: Rechtsvergleichender Beitrag zur Diskussion über ein nicht-staatliches Handelsrecht (Schulthess Polygraph. Verlag, 1989), p. 309; Gaja (1994), pp. 433ff. and 438f. and Andrea Giardina, La legge n. 25 del 1994 e l’arbitrato internazionale’. Rivista dell’Arbitrato (Giuffre, 1994), pp. 257ff., 269f. The French Supreme Court has not considered as invalid a preliminary award that decided to apply the transnational law on its own initiative (Cour de Cassation Civ. 1ère, 22 October 1991, n° 89–21.528: the socalled Valenciana case): see Clunet (1992), p. 177, with a note by Goldman, and Revue de l’Arbitrage (1992), p. 457, with a note by Lagarde. The Paris Court of Appeal followed this approach, ruling that the UPICC qualify as ‘rules of law’ under Article 1511 of the French Code of Civil Procedure (25 February 2020, n° 17/18001). The Austrian Supreme Court has not considered as invalid an award (rendered in the case Palbalk v. Norsolor) that applied the transnational law on its own initiative: see Yearbook Commercial Arbitration IX (Kluwer International, 1984), pp. 159ff, with a note by Melis). A decision by the English Court of Appeal, Deutsche Schachtbau- und Tiefbohrgesellschaft mbH v. Ras Al Khaimah National Oil Co [1987] 2 Lloyd’s Law Rep 246 (CA), is sometimes referred to as confirming that a decision made on the basis of the transnational law cannot be considered an equitable decision; see, for example, Michael Joachim Bonell, An International Restatement of Contract Law (Transnational Publishers, 1997), p. 201, footnote 110, and Lando (1985), pp. 576ff. In reality, this decision does not seem to qualify the transnational law; it seems rather to interpret the applicable Arbitration Rules (which, in the case concerned, were the ICC Arbitration Rules) in a way that does not permit one to draw conclusions on the qualification of the transnational law.

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distinction is between droit and loi in French; between Rechtsvorschriften and Recht in German; and between norme and legge in Italian.395 If a decision based on ‘rules of law’ were a full equivalent of a decision based on ‘law’, it should be expected that ‘rules of law’ can be applied by the arbitral tribunal without specific instructions by the parties. However, the applicability of ‘rules of law’ is not always treated the same way as applicability of a ‘law’. Arbitration laws and Arbitration Rules often permit the parties to instruct the tribunal to apply ‘rules of law’ to determine the dispute, see Sections 2.3.1 and 4.3.3. In contrast, failing a choice made by the parties, some arbitration laws and Arbitration Rules provide that the arbitral tribunal shall apply a ‘law’. Thus, the tribunal is empowered to apply transnational sources on its own initiative by the French Code of Civil Procedure (Article 1511), by the Swiss PILA (Article 187, in the French and English version; since 2020, also in the German and the Italian versions), as well as by the Arbitration Rules of the ICC (Article 21(1)), the LCIA (Article 22(3)), and the Arbitration Rules of the Arbitration Institute of the SCC (Article 27(1)), which all make reference to ‘rules of law’. Other laws and rules, on the contrary, exclude this possibility, and assume that the tribunal applies a state law unless the parties have made reference to non-national sources: for example, the UNCITRAL Model Law (Article 28(2)) and the English Arbitration Act (Section 46(1)). The interpretation of ‘rules of law’ as also comprising the transnational law was confirmed when the UNCITRAL, in 2010, revised its Arbitration Rules which were originally issued in 1976. While earlier the parties were expected to choose the ‘law’ to be applied to the merits of the dispute (in the original Article 33), in the revision, they are allowed to choose ‘rules of law’ (in the new Article 35). This was intended to extend the parties’ choice, since ‘law’ is usually interpreted to mean a state law, whereas ‘rules of law’ are deemed to be any body of rules, not necessarily emanating from a state. Even under the 1976 language, the parties could instruct the arbitral tribunal to apply rules of law to the merits of the dispute. By so doing, the parties would have incorporated these rules of law into their contract, and the arbitral tribunal would have had to apply them. In the revised version, the parties’ choice of rules of law is intended to have a higher rank in the hierarchy of the applicable sources: they should not be simply incorporated into the contract but elevated to the status of governing law. As Chapter 2 showed, however, it is unlikely that transnational law succeeds in replacing the governing law. For the sake of completeness, it should be mentioned here that the UNCITRAL Arbitration Rules permit the parties to instruct the arbitral tribunal to apply ‘rules of law’, but do not permit the arbitral tribunal to do so on its own initiative. In the absence of instructions by the parties, the arbitral tribunal shall apply the ‘law’ which it determines to be appropriate.

395

See, among others, Blessing (1997), pp. 39ff and 48, and (1998), p. 39; P. F. Weise, Lex Mercatoria (Peter Lang, 1990), p. 152.

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Following this logic, Arbitration Rules and legislation provide for three kinds of decisions: (i) decisions in equity, which are admissible only upon the direction by the parties; (ii) decisions based on rules of law, including transnational sources, which may, in some systems, be applied on the tribunal’s own initiative if the parties have not made a different choice; and (iii) decisions based on state laws, which in all systems may be applied on the tribunal’s own initiative if the parties have not made a different choice. (ii) The Application of Transnational Sources and Procedural Irregularity We have seen in Section 5.6.1 that it is not possible to sanction the tribunal’s disregard of the law chosen in the contract, if it was done to apply the rule of another law that the tribunal might be asked to apply by the applicable private international law, or to avoid the award conflicting with applicable fundamental principles and falling under the ordre public exception. What if the tribunal’s disregard of the choice of law made in the contract is not made to apply another law, but to apply transnational principles? In a case described in Section 5.6.1(b)(ii), the parties to a contract realise, after the contract has entered into force, that the agreed price was too low and enter into a new contract for the sole purpose of increasing the price. At the moment of paying the increased price, the payor refuses to effect the increased payment and the dispute is submitted to arbitration. If the governing law is English law, and if it is not possible to find a factual benefit that would derive out of it to the payor, the amendment contract may be deemed not binding for lack of consideration. What if the parties have chosen English law to govern the contract: Can the tribunal, on its own initiative, apply the UPICC? The tribunal might consider it inappropriate to apply the doctrine of consideration strictly. This doctrine is peculiar to the common law legal systems and does not reflect the general expectation of the parties in the international business arena, and certainly not the specific expectations that the parties had when they entered into the amendment contract. What happens if the arbitral tribunal decides to disregard this peculiarity of one national system of law, and applies instead the generally recognised transnational principle of pacta sunt servanda, or the rule of Article 2(1) (1) of the UPICC, which provides for the binding effect of a contract even in the absence of consideration? Is the award effective, or does it run the risk of being annulled or of not being enforced? We have seen that courts have no jurisdiction to review the application of the law made by the arbitral tribunal. Therefore, an incorrect application of English law would not be subject to judicial control; neither would an incorrect interpretation of the Choice-of-law clause in the contract or an incorrect application of private international law. However, an unsolicited application of transnational sources goes beyond error in law, at least under the arbitration laws or Arbitration Rules

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that do not give the arbitral tribunal the power to apply ‘rules of law’ without having been instructed to do so by the parties. Application of transnational sources without having been empowered by the parties is forbidden by these arbitration laws and may therefore result in a procedural irregularity. Whether the disregard of the English doctrine of consideration is the consequence of a (perhaps incorrect) application of the law (and therefore not subject to judicial control) or of the application of transnational principles (and therefore subject to judicial control if the arbitral tribunal is only empowered to apply a ‘law’) has to be established on the basis of a careful analysis of the reasons for the award. (iii) Conclusion There is no uniform answer to the question of invalidity or unenforceability in the scenario given here. If the parties had adopted for their dispute the ICC Rules of Arbitration, the tribunal would have been indirectly empowered by the parties to apply transnational sources. Therefore, the disregard of the English doctrine of consideration and the application of the principle of pacta sunt servanda or of the UPICC would be treated in the same way as the disregard of the law chosen by the parties by applying another state law (as examined in Section 5.6.1). Whether the courts would be willing to exercise their control on the tribunal’s award, or whether they would consider an intervention in this context dangerously close to a review of the tribunal’s accurate application of the law (which, as we know, the courts are not empowered to make), would depend on the circumstances of the case and on the reasons for the award. If, however, the dispute was submitted to the UNCITRAL Arbitration Rules, the tribunal would have been bound to apply a state law, and an application of transnational sources would have exceeded the powers of the tribunal and could fall under the defence of irregular procedure. 5.6.8 Burden of Proof: May the Tribunal Request Additional Information to Undermine Uncontested Evidence? As seen in Section 5.5.3(b), the tribunal may, under some Arbitration Rules, draw adverse inferences from the failure by one party to appear. We have also seen that the tribunal is not bound to accept the other party’s assertions blindly. If the produced evidence is not convincing because, for example, a witness did not seem credible or a document was evidently forged, the unsatisfactory character of the evidence is apparent at a mere examination thereof. Likewise, if the produced evidence is intrinsically illogical or if it contradicts other evidence that was produced in the same dispute, it is sufficient to examine the produced evidence to determine the weight that shall be attached to it. As long as the independent evaluation of the produced evidence exists in this examination, no difficulties seem to arise in connection with the tribunal’s role.

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A question that might arise is to what extent the tribunal shall limit itself to an evaluation of the evidence as presented, or if it is allowed to go further and, in order to verify the soundness of the evidence, to develop arguments that should have been presented by the other party. As seen in Section 5.5.3(c), the arbitral tribunal has the power to request additional information. May the tribunal avail itself of its power to request additional information in order to substantiate arguments that should have been presented by a party? We can assume that a party wishes to prove that the value of the disputed goods has decreased during a certain lapse of time. The party produces documentation showing that equivalent goods have, during that period, been purchased at a certain price and then resold at a lower price. This is evidence of the decreased value not of the specific goods in dispute, but of equivalent goods. The other party does not participate in the proceedings, and therefore the extension of this evidence to the disputed goods is not contested. If the other party had appeared, it might have produced evidence that that particular purchase/resale was not indicative of the value of that type of goods – for example, because the purchaser/reseller did not act diligently or was under a conflict of interest; or it could have produced evidence that the disputed goods were not affected by the same decrease in value because of special circumstances. Assuming that there are no prima facie grounds for not also applying the proven value decrease to the disputed goods, it would be the burden of the other party to prove the special circumstances that speak against such applicability. If the other party does not appear, it does not discharge its burden of proof. In such a situation, the tribunal has two alternatives: (i) The tribunal may consider the produced evidence as satisfactory, thus giving effect to the general rule on burden of proof: A. This does not create problems in the systems that permit one to draw from a party’s default inferences adverse to that party, see Section 5.5.3(b). B. Some systems, however, expressly state that failure to appear may not be deemed an admission, see Section 5.5.3(b). To avoid violating this rule, the tribunal should verify whether the produced evidence is capable of independently proving the point made by the party: this is the case when the evidence is relevant and sufficient even without interpreting the other party’s default as an indirect admission that it is not able to rebut it by producing contrary evidence. Should, however, the tribunal determine that the produced evidence does not have an independent value, because its relevance or weight depend (also) on the absence of contrary evidence, the tribunal is under a duty to raise the matter and request additional clarification. (ii) The tribunal may consider that the produced evidence is not satisfactory and may thus request additional evidence in order to substantiate or dismiss the arguments that can be made against its soundness.

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A. In the systems where the tribunal may draw adverse inferences from the other party’s default, the tribunal remains free not to draw such inferences. Therefore, if the produced evidence does not have independent value, and the tribunal determines that it shall not be deemed as admitted by the other party, it may exercise its power to request additional information. However, if the evidence has relevance and weight, irrespective of whether it is deemed admitted or not, a request by the tribunal for additional information may seem to violate the rule on the burden of proof. B. In the systems where the tribunal has a duty not to deem an admission the failure to appear, this alternative is not problematic; however, if the produced evidence has a clearly independent value, the request for additional information is not based on the duty to avoid drawing negative inferences from the other party’s default. The tribunal remains free to evaluate the evidence and to investigate further in accordance with the powers that the applicable regulation confers on it, but it runs the risk of taking over the burden of proof of the other party. What are the consequences for the award of a violation of the rule on the burden of proof? Of the three ultimate borders to the tribunal’s power that are relevant here, it seems that the rule on procedural irregularity, or due process, might be considered. As we have seen in our explanation, a violation of the rule on burden of proof may be assessed by reviewing the tribunal’s evaluation of the pleadings and their capability of having an independent value. As is known, this kind of review is generally not allowed, neither in the phase of the validity challenge or in the phase of the enforcement of an award. It seems, therefore, that a violation of the burden of proof would have to be quite an evident violation of impartiality and cause a substantial injustice before it can be sanctioned through the invalidity or unenforceability of the award.396 Nevertheless, a tribunal should accurately comply with its duties and avoid acting in a way that might raise even the slightest suspicion of impartiality, even if the threshold for invalidity and unenforceability of the award is not reached; otherwise, the parties’ faith in arbitration might be undermined.

396

In commercial arbitration, the reported decisions establishing a violation of the impartiality standard are few and deal mainly with the possibility of both parties being heard, rather than with the rule of burden of proof; see van den Berg (2003), pp. 521 2 and 523 4 and Born (2021a), para 26.5[3]. As an example of a lack of impartiality by a tribunal, see the Dutch decision of 28 April 1998, in Yearbook Commercial Arbitration XXIII (Kluwer International, 1998), pp. 731f., refusing to enforce an award based on evidence that one party had presented after the hearing, and that the other party had not had the possibility of commenting on. The ICSID ad hoc Committees have regularly rejected applications for annulment based on the allegation that the tribunal had violated the rule on burden of proof: see, for references, Schreuer (2004b), pp. 32f., and Schreuer et al. (2010), Article 52, paras 323–32, referring inter alia to the ad hoc Committee decision in Klöckner II (unpublished), which affirmed, in theory, the possibility of being able to annul an award because of an erroneous reversal of the burden of proof, but which did not find the annulment ground applicable in the specific case.

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439

So far, we have assumed that the evidence produced by one party was not contested because the other party did not appear. What if the other party appears and presents its statements, but fails to contest that particular piece of evidence? It seems that, in this situation, it would be difficult to apply the rule preventing drawing adverse inferences from the failure to appear. The other party has actually presented its arguments, where it could have contested the evidence, and has decided not to contest it. This seems to be very close to an implied admission of the assertions that were meant to be proved by producing the evidence that remained uncontested. The tribunal may invite the other party to clarify whether the failure to contest the evidence is to be interpreted as an agreement on the existence of that particular circumstance or not; however, going further than that comes dangerously close to suggesting arguments to that party. To the extent that the parties may be deemed to agree on the existence of a certain fact, there does not seem to be any room for the tribunal to make different assumptions; however, the tribunal remains free to draw from the agreed facts the inferences that it deems appropriate, and to ask for the additional information that these inferences might render as relevant. 5.7 Conclusion We have seen that the tribunal enjoys397 ample room for independently evaluating the presented evidence, legal arguments and sources, and for requesting additional information and thus introducing new elements in the proceeding. The tribunal, therefore, is not bound by the arguments made by the parties. The only border that the tribunal seems to encounter concerns the factual scope of the dispute, as well as any restrictions to the tribunal’s jurisdiction that might be contained in the Arbitration agreement or other appropriate instrument, such as an investment treaty in the case of investment arbitration. There are also some uncertainties in respect of introducing remedies that were not requested by the parties. It is, therefore, advisable to invite the parties to comment on the tribunal’s inferences of law or new sources that the tribunal intends to apply, so as to ensure that the adversarial principle is not violated. An invitation to comment is, as seen, requested in some systems on all the elements upon which the award is going to be based, whether they are elements of fact or of law. The sanctions against a misuse of such powers are few and their scope of application is rather restricted: while the rule on excess of power only applies mainly to decisions made outside the factual subject matter of the dispute, the rules on fair hearing and impartiality are not meant to permit a review of the tribunal’s evaluation

397

Under the Arbitration Rules of the SCC, ICC, LCIA and UNCITRAL, as well as under the ICSID Rules and the ALI/UNIDROIT Principles.

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does arbitration ensure a self-sufficient contract?

of the evidence or of the law. Therefore, only gross violations of the tribunal’s duties may lead to the application of these penalties. This does not mean, however, that a tribunal should feel free from any constraint in administering the proceeding: impartiality and due process, as well as accuracy in the interpretation of the contract and the application of the law, are important principles and should always be the inspiration for any act by the tribunal, irrespective of whether a violation thereof might be considered ‘only’ as a wrong decision on the merits, and, as such, not leading to invalidity and unenforceability of the award.

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6 Conclusion

The excursus made in this book was meant to determine the relationship between an international contract and the sources that regulate it. Even if the parties have not thought of any governing law when drafting the contract; even if they have intended expressly to avoid a certain governing law; even if they have chosen a certain set of transnational rules to govern their transaction; even if they have made use of model contracts that are meant to be used in a variety of jurisdictions – the contract may nevertheless be subject to the mandatory rules, the overriding mandatory rules or the ordre public of state laws that the parties had not taken into consideration or had intended to avoid. Moreover, the contract will be interpreted and construed on the basis of the legal tradition of the applicable law, thus attaching different legal effects to the same wording, depending on the applicable law. What I have tried to show is that an international contract is not necessarily a phenomenon sui generis, responding to its own logic, and that has to be written and interpreted in a completely different way from a domestic contract. It is, admittedly, a widespread habit to adopt a specific style when the contract is international and to draft in accordance with English or US contract models; but this may create more problems than it solves, particularly in connection with the interaction between a common law contract style and a civil law governing law. The practice of writing contracts so that they are supposedly self-sufficient is often the result of a cost–benefit analysis leading to the conscious assumption of the risk that the contract may not be interpreted or applied exclusively on the basis of its terms. The analysis may have shown that it would take more resources to adapt a standardised contract model to the requirements of the local law, than legal proceedings and a possible invalidity or unenforceability of the contract might cost. Sometimes, the practice of writing self-sufficient contracts may be the result of insufficient awareness of the legal framework by the drafters. In either case, there does not seem to be a basis for elevating this practice to a source of law and thus considering the contracts as actually self-sufficient. The terms of the contract are, naturally, the first and most important source of legal obligations between the parties and shall be interpreted and applied faithfully. However, contracts often may not be interpreted or applied without also taking into consideration the principles and rules of the legal system that governs them. 441

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442

conclusion

The ambitions relating to the self-sufficiency of contracts, motivated as they are in the assumption of risk, calculated or unconsidered, do not seem to constitute a sufficient basis upon which to exclude that the governing law is relevant. Even if the ambitions of self-sufficiency constituted a basis to exclude the governing law, there would still be the need to have a legal framework within which the contract may be interpreted, construed and applied. Transnational sources of law created by practice, legislation, organisations or the academy do not succeed in providing a uniform system of general contract law, nor may they regulate areas that are subject to mandatory rules. Many of these regulations, whether they stem from international conventions or transnational sources, are extremely useful and should definitely be taken into serious consideration. However, they should not be adopted blindly or in the belief that these sources are in any case an effective and exhaustive regulation of the transaction. The interaction with the governing law will determine to what extent this regulation is effective, and whether other principles or rules will also have to be taken into consideration. The governing law is not replaced but is simply integrated by these transnational sources. The relationship between the international contract and the governing law will depend on many variables: the governing law itself, the existence of overriding mandatory rules of other laws, the scope of party autonomy according to the applicable private international law, the forum that will have jurisdiction to decide upon disputes or, in the case of an arbitration clause, the forum that will have jurisdiction to verify the validity of the award, as well as the forum where the award might be enforced. All these variables will affect the construction and enforceability of a contract. The parties, when evaluating their legal position, should verify all the abovementioned aspects of the specific transaction, which will permit them to determine to what extent the contractual terms or any chosen transnational sources might be effective in spite of a differing state law. If, due to the already mentioned assumption of risk, the parties do not proceed to this evaluation when drafting the contract, they will do so when a dispute arises. These considerations are less stringent if the parties include an arbitration clause in their contract; however, the arbitral tribunal may be freer from state laws than a national court of law, but it is not completely detached from state law. Furthermore, arbitration does not ensure a uniform application of transnational sources – the applicable law or the arbitrator’s legal tradition will influence the application. Therefore, the parties should be aware of the relationship between an international contract and state law, even if they have included an arbitration clause. Moreover, an abuse of the freedom that the parties enjoy in arbitration would, in the long term, undermine the trust that national legal systems have shown towards arbitration. It is this trust that permits an extensive recognition and enforceability of arbitral awards in the vast majority of national systems of law – particularly, by

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restrictively interpreting the exceptions of ordre public and arbitrability. An extensive use of arbitration for the purpose of avoiding mandatory rules of applicable laws would be a basis for re-evaluating the trustworthiness of arbitration as a mechanism for solving disputes, thus inducing national courts to interpret less narrowly the mentioned exceptions and, correspondingly, reducing the scope of arbitration.

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APPENDICES

Arbitration Rules and Model Clauses Hong Kong Arbitration Centre (HKIAC) Model Clauses www.hkiac.org/arbitration/model-clauses International Centre for the Settlement of Investment Disputes (2022) (ICSID Rules) https://icsid.worldbank.org/sites/default/files/Arbitration_Rules.pdf International Chamber of Commerce Arbitration Rules (2021) (ICC Rules) https://iccwbo.org/dispute-resolution-services/arbitration/rules-of-arbitration/ LCIA Model Clauses www.lcia.org/Dispute_Resolution_Services/LCIA_Recommended_Clauses.aspx London Court of International Arbitration Arbitration Rules (2020) (LCIA Rules) www.lcia.org/Dispute_Resolution_Services/lcia-arbitration-rules-2020.aspx SCC Model Clauses https://sccarbitrationinstitute.se/en/model-clauses/model-clause-english Stockholm Chamber of Commerce Arbitration Rules (2017) (SCC Rules) https://sccarbitrationinstitute.se/en/resource-library/rules-and-policies/scc-rules Swiss Rules Model Clauses www.swissarbitration.org/centre/arbitration/arbitration-clauses/ UNCITRAL Arbitration Rules (1976, revised in 2010, updated in 2013 and 2021) A/CN.9/ LIV/CRP https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/21-07996_expeditedarbitration-e-ebook.pdf UNCITRAL Model Clauses https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/21-07996_expeditedarbitration-e-ebook.pdf Vienna Rules of Arbitration and Mediation (2021) (Vienna Rules) www.viac.eu/en/arbitration/content/vienna-rules-2021-online Vienna Rules of Investment Arbitration and Mediation (2021) www.viac.eu/en/investment-arbitration/vienna-investment-arbitration-and-mediation-rules Vienna Rules Model Clauses www.viac.eu/en/arbitration/arbitration-clause-vienna-rules-2021

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Soft Law ALI/UNIDROIT Principles of Transnational Civil Procedure in ‘Uniform Law Bibliography/ Bibliographie de Droit Uniforme’, Uniform Law Review 9.3 (2004): 758–810 www.unidroit.org/instruments/civil-procedure/ali-unidroit-principles/overview/ Hague Conference on Private International Law, The Principles on Choice of Law in International Commercial Contracts, approved on 19 March 2015 (2015) www.hcch.net/en/instruments/ conventions/full-text/?cid=135 Inquisitorial rules of taking evidence in international arbitration (2018) (Prague Rules) https://praguerules.com/upload/iblock/a00/a00568c6787a8bc955f4fdfe93db5a10.pdf International Bar Association, IBA Guidelines on conflict of interests in International Arbitration, adopted by resolution of the IBA Council 23 October 2014 (2014) www.ibanet.org/Publications/ publications_IBA_guides_and_free_materials.aspx#conflictsofinterest. International Bar Association, IBA Rules on the Taking of Evidence in International Commercial Arbitration, adopted by a resolution of the IBA Council 17 December 2020 (2020) www.ibanet.org/MediaHandler?id=def0807b-9fec-43ef-b624-f2cb2af7cf7b International Bar Association, IBA Toolkit on Insolvency and Arbitration (2021) www.ibanet.org/LPD/ Dispute_Resolution_Section/Arbitration/toolkit-arbitration-insolvency. International Chamber of Commerce (ICC), International Commercial Terms (INCOTERMS) ICC Publication P723E (2020) https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/ International Chamber of Commerce (ICC), Note to parties and arbitral tribunals on the conduct of the arbitration under the ICC rules of arbitration (2021) https://iccwbo.org/content/uploads/sites/3/2020/12/icc-note-to-parties-and-arbitral-tribunals-onthe-conduct-of-arbitration-english-2021.pdf International Chamber of Commerce (ICC), The Uniform Customs and Practices for Documentary Credits ICC publication No 600 (2007) (UCP 600) https://iccwbo.org/media-wall/news-speeches/iccs-new-rules-on-documentary-credits-now-available/ International Swaps and Derivatives Association, ISDA Model Swap Agreement www.isda.org/tag/master-agreement/ OECD Due Diligence Guidance for Responsible Conduct (2018) www.oecd.org/investment/due-diligence-guidance-for-responsible-business-conduct.htm OECD Guidelines for Multinational Enterprises (2011) www.oecd.org/daf/inv/mne/48004323.pdf UN Global Compact www.unglobalcompact.org/about UN Guiding Principles on Business and Human Rights (2011) (Ruggie’s Principles) www.businesshumanrights.org/en/big-issues/un-guiding-principles-on-business-human-rights/ UNCITRAL Model Law on Cross-Border Insolvency (1997) https://uncitral.un.org/en/texts/insolv ency/modellaw/cross-border_insolvency UNCITRAL Model Law on International Commercial Arbitration (2010) https://uncitral.un.org/en/ texts/arbitration/modellaw/commercial_arbitration UNCITRAL Notes on Organizing Arbitral Proceedings (2016) https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/arb-notes-2016-e.pdf

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UNCITRAL Recommendation regarding the interpretation of article II paragraph 2, and article VII paragraph 1, of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done in New York, 10 June 1958, adopted by the United Nations commission on International Trade Law on 7 July 2006 at its thirty-ninth session (2006) https://uncitral.un.org /sites/uncitral.un.org/files/media-documents/uncitral/en/a2e.pdf UNCITRAL Recommendations to assist arbitral institutions and other interested bodies with regard to arbitration under the UNCITRAL Arbitration Rules (as revised in 2010) (2012) https://uncitral.un.org/en/texts/arbitration/explanatorytexts/recommendations/arbitral_ institutions_2010 UNIDROIT, UNIDROIT Principles Model Clauses (2013) www.unidroit.org/instruments/commercial-contracts/upicc-model-clauses UNIDROIT, UNIDROIT Principles of International Commercial Contracts, 4th ed. (2016) www .unidroit.org/instruments/commercial-contracts/unidroit-principles-2016/

Digests, Databases On Arbitration Arbitrator intelligence https://arbitrationblog.kluwerarbitration.com/2018/02/27/ai-3/ Case law and texts on the New York Convention http://newyorkconvention1958.org/ Case Law on UNCITRAL Texts (CLOUT) https://uncitral.un.org/en/case_law ICCA Yearbook Commercial Arbitration www.kluwerarbitration.com. LCIA Challenge Decisions Database www.lcia.org/challenge-decision-database.aspx UNCITRAL Explanatory Memorandum on the Model Law on International Commercial Arbitration 1985, as amended in 2006, https://uncitral.un.org/sites/uncitral.un.org/files/mediadocuments/uncitral/en/19-09955_e_ebook.pdf UNCITRAL Secretariat, Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (2016) https://uncitral.un.org/sites/uncitral.un.org/files/ media-documents/uncitral/en/2016_guide_on_the_convention.pdf

On the CISG Advisory Council Pace Institute of International Commercial Law and by the Centre for Commercial Law Studies of Queen Mary College, www.cisgac.com/ Case law and texts on the CISG http://iicl.law.pace.edu/cisg/cisg Case law and texts on the CISG https://uncitral.un.org/en/case_law Case law and texts on the CISG www.uncitral.org/clout/showSearchDocument.do?lf=898&lng=en. Case law and texts on the CISG www.unilex.info/

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UNCITRAL, Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods, 2016. https://uncitral.un.org/sites/uncitral.un.org/files/media-docu ments/uncitral/en/cisg_digest_2016.pdf UNCITRAL, UNIDROIT and HCCH Tripartite Legal Guide to Uniform Legal Instruments in the Area of International Commercial Contracts (2020), www.unidroit.org/instruments/commer cial-contracts/tripartite-legal-guide/

On the UPICC Case law and texts on the UPICC www.unilex.info/

General Hague Conference on Private International Law, list of conventions, status, memoranda www .hcch.net/en/instruments/conventions Trans-Lex Transnational Law Digest and Bibliography www.trans-lex.org/

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INDEX

acceleration, 255 administrative tribunal, 59 adversary principle. See court control, right to be heard agency contracts. See overriding mandatory rules, party autonomy, and agency contracts, unilateral promise American Conflict Revolution, 203 amiable compositeur. See decision in equity ancillary obligations, 118 annulment of awards. See court control, annulment applicable law, 324, 363 application of a foreign law, 221 arbitrability, 289, 290, 347, 351. See court control, and arbitrability agency contracts, 382 and public policy, 361, 383 applicable law, 348, 357 incidental issues. See incidental issues, and arbitral jurisdiction intra-EU investment disputes. See investment arbitration, intra-EU scope, 351, 353 arbitral tribunal’s power. See iura novit curia arbitration ad hoc, 294 and autonomous interpretation, 110, 186 and EU law, 280, 352 and private international law, 277. See incidental issues, iura novit curia and rules of law, 108, 234. See transnational law, as governing law autonomy, 109 classification, 247, 248, 327 delocalisation, 297 diversity, 134, 189, 190 incidental issues. See incidental issues institutional, 296 lex loci arbitri, 300

party autonomy, 247, 248 seat, 300 transparency, 194, 197 voie directe, 249 arbitration agreement. See Arbitration clause Arbitration clause, 30, 287, 291 and insolvency, 326 applicable law, 325, 328 formal requirements. See Arbitration clause, validity severability, 325 validity, 328, 330, 332, 335, 340. See court control, jurisdiction, preclusion, kompetenz–kompetenz written form. See arbitration clauses, validity Arbitration Rules, 291 assignment of claims, 245 autonomous contract, 48, 118, 222 autonomous interpretation, 75, 84, 92, 109, 125, 127 public policy. See public policy, autonomous interpretation Basis clause. See Entire agreement clause battle of the forms, 55 best rules, 56, 72, 76, 80, 82 boilerplate clauses, 19, 23, 52, 155 Braganza duty, 150. See construction of contracts, convergence of legal systems breach of condition, 138, 163 caveat emptor, 15, 141 challenge of awards. See court control, annulment Choice of courts agreements, 206 choice of law and arbitration. See arbitration, and private international law arbitration clause, 325 assignment of claims, 259

471

https://doi.org/10.1017/9781009082822.012 Published online by Cambridge University Press

472

index

choice of law (cont.) choice by the parties. See party autonomy closest connection, 232, 235 collateral, 259 company law, 251 connecting factors, 235 insolvency, 255 legal capacity, 253 pledge, 259 property law, 245, 257 security interests, 259 tort law, 244, 271 Choice-of-law clause. See party autonomy CISG, 66 and good faith. See good faith as soft law. See conventions as soft law autonomous interpretation. See autonomous interpretation CISG Advisory Council, 131 classification, 246, 376 Close-out netting arrangement, 255 comity. See overriding mandatory rules, of third states commercial common sense. See construction of contracts, convergence of legal systems company law. See public policy, company law, choice of law, company law competition law. See overriding mandatory rules, court control, intensity construction of contracts common law, 136 connecting factors, 202, 208, 265, See choice of law, jurisdiction, overriding mandatory rules consideration, 65, 115, 140, 180, 220 construction of contracts, 9, 15–16, 18, 133, 136 civil law, 142 common core, 145 convergence, 9 convergence of legal systems, 145 objective construction, 144, 151, 187 piecemeal solutions, 145 conventions as soft law, 67 corporate social responsibility, 103, 270, 387 corruption and arbitral jurisdiction, 321, 349 and court control, 315 public policy. See public policy, corruption court control, 286 and arbitrability, 316, 351, 355, 380 annulment, 304, 306 arbitrability. See arbitrability

discretion, 389 enforcement, 304, 307 enforcement of set aside awards, 392 excess of power, 344 harmonised grounds, 306, 320 intensity, 312, 314, 352, 386 legal capacity, 341 no review of the merits, 308, 319 procedural irregularity, 346 public policy, 353, See public policy reasons of the award, 411, 417 review of application of law, 309 right to be heard, 347 waiver of right to challenge, 306 cross-fertilisation, 58 DCFR, 71, 86, 91, 269 decision in equity, 402, 433. See iura novit curia, rules of law deference. See court control, intensity delocalisation theory, 40 delocalised awards. See enforcement, of set aside awards dépeçage. See severability drafting lawyer, 21, 33 drafting style, 13–14, 41 and choice of law. See choice of law, closest connection, party autonomy, tacit choice due process. See procedural irregularity, public policy, court control, right to be heard due process paranoia, 289 duty of loyalty. See construction of contracts, convergence of legal systems effet négatif de la compétence-compétence, 312 enforcement of awards. See court control, due process, court control, enforcement of set aside awards of set aside awards, 388 recognition of annulment decision. See court control, enforcement of set aside awards Entire agreement clause, 23, 86, 87 European contract law, 53 ex aequo et bono. See decision in equity, court control, excess of power, iura novit curia, excess of power fair dealing. See good faith force majeure, 126, 129, 165, 171, 310 double force majeure, 130 due to foreign law, 274

https://doi.org/10.1017/9781009082822.012 Published online by Cambridge University Press

index event beyond the control, 129, 174 partial impediment, 176 sphere of control, 132, 174 forum. See jurisdiction forum shopping, 210 fragmentation, 58 frustration, 173 fundamental policy. See overriding mandatory rules general principles, 54, 79 general principles of law, 46, 79 generally recognised principles, 56, 61 good commercial practice, 51, 91 good faith, 44, 51, 64, 75, 81, 82, 83, See Entire agreement clause, No waiver clause, Subject to contract clause, ancillary obligations, Non-assignment clause, Notice of defect, hardship, No oral amendments clause, force majeure, construction of contracts, Good faith clause, price mechanism, payment upon early termination, Representations and Warranties, Sole remedy clause, implied terms, arbitration, Termination clause, UPICC and CISG, 76, 94 and contract practice, 83, 84 and overriding mandatory rules, 269 and public international law, 64 and public policy, 383 and UPICC, 76, 83, 144 autonomous interpretation, 85, 92 Good faith clause, 150, 161 good morals. See overriding mandatory rules, of third states hardship, 75, 120, 177 IBA Guidelines on Conflicts of Interest, 101, 116, 344 IBA Rules on the Taking of Evidence, 102 illegality. See overriding mandatory rules, of third states implied terms, 115, 137 impossibility of the performance. See force majeure, overriding mandatory rules, of third states incidental issues, 266, 267 and arbitral jurisdiction, 320, 349, 350 and choice of law, 246, 280

473

and court control, 322 and public policy, 372 classification. See classification company law, 250 competition law, 349 corruption, 349 Incoterms, 97 infra petita partium. See court control, excess of power Inquisitorial Rules on Taking of Evidence in International Arbitration (Prague Rules), 103 insolvency and arbitration clauses, 325, 326 and public policy. See public policy, insolvency insurance. See overriding mandatory rules, party autonomy, and insurance International Court of Justice, 64, 79 internationalisation of contracts, 49, 57 internationality, 11–13 investment arbitration, 78, 289, 323 and commercial procedural rules, 293, 297 and UPICC, 78 distinction from commercial arbitration, 353, 356 intra-EU, 290, 353, 355 legality requirement, 323 investment protection, 5–7, 49, 57, 78 ISDA Master Agreement, 100, 115, 164, 254 iura novit curia, 355, 393, 397, 398 adverse inferences, 398 and jurisdiction, 403 and legal arguments, 421 and questions of fact, 426 and rules of law, 418, 432 and the applicable law, 397, 410 and the arbitration agreement, 395 and the private international law, 415 common law–civil law divide, 406 decisions in equity, 404 excess of power, 409. See court control, reasons of the award no review of the merits, 405, 410 procedural irregularity, 432, 435 right to be heard, 402, 427 jurisdiction, 204 Choice of courts agreements, 205 connecting factors, 209 filters, 205 forum non conveniens, 209

https://doi.org/10.1017/9781009082822.012 Published online by Cambridge University Press

474

index

jurisdiction (cont.) incidental issues. See incidental issues, and arbitral jurisdiction parent company responsibility. See parent company responsibility preclusion. See court control, intensity kompetenz–kompetenz, 312 labour law. See overriding mandatory rules, party autonomy, and labour law, public policy, labour law legal capacity. See choice of law, legal capacity legal risk, 20, 42 letter of credit, 99 letters of intent. See Subject to contract clause lex arbitri. See arbitration, lex loci arbitri lex fori, 204, 246 lex loci arbitri, 249 lex mercatoria, 39, 46, See transnational law liquidated damages, 17, 139, 168 litigation lawyer, 21, 33, 46 lois de police. See overriding mandatory rules Material adverse change clause. See hardship maximalist approach. See court control, intensity minimalist approach. See court control, intensity no assignment, 119 No oral amendments clause, 26, 121, 159 No oral modifications clause. See No oral amendments clause No waiver clause, 25, 90, 158 Non-assignment clause, 139 Non-reliance clause. See Entire agreement clause Notice of defect, 120, 152 ordre public. See public policy overriding mandatory rules, 203, 262 agency contracts, 267 and labour law, 266 and public policy. See public policy, positive public policy competition law, 265 corporate social responsibility, 271 good faith, 269 insurance, 268 of foreign states, 415 of third states, 272

pacta sunt servanda, 65 parent company responsibility, 211 party autonomy, 200, 214 and agency contracts, 267 and arbitral tribunal’s powers. See iura novit curia, arbitration clauses and company law, 251 and competition law, 265 and good faith. See good faith and insurance, 268 and labour law, 266 and overriding mandatory rules. See overriding mandatory rules and property law, 245 and public policy, 276, See public policy, and party autonomy and terms of contract, 397 and tort law, 244 choice of rules of law, 234, See transnational law, as governing law choice of transnational law. See transnational law, as governing law criteria for choice, 217 in good faith. See overriding mandatory rules, of third states incidental issues. See incidental issues scope, 242, 281, See classification severability, 226, 227 tacit choice, 223, 229, 233 party’s default. See iura novit curia payment upon early termination, 152 PECL, 70 penalty, 17, 138, 168, 220 performance bond, 259 piercing the corporate veil, 211, 213 place of arbitration. See arbitration, seat preclusion. See court control, intensity predictability, 34, 36, 45, 190, 203, 264, 280, 284, 392 preliminary questions. See incidental issues price mechanism, 152 procedural irregularity. See court control, procedural irregularity, iura novit curia, procedural irregularity procedure of arbitration. See arbitration, lex loci arbitri promissory estoppel, 182 public policy, 203, 316, 362 actual violation, 371 agency contracts, 382 and EU law, 382

https://doi.org/10.1017/9781009082822.012 Published online by Cambridge University Press

index and foreign law. See overriding mandatory rules, of third states and overriding mandatory rules. See public policy, positive public policy and party autonomy, 375 applicable law, 348 autonomous interpretation, 363 company law, 375 competition law, 317, 380 corporate social responsibility, 387 corruption, 386, 413 due process. See public policy, procedural public policy embargo, 385 error in law. See public policy, scope good faith, 384 incidental issues. See incidental issues, and public policy Inlandsbeziehung. See public policy, territorial public policy insolvency, 377 intensity of court control. See court control, intensity international public policy, 364, 366 international standard. See public policy, procedural public policy labour law, 383 liens suffisants avec l’ordre juridique. See public policy, territorial public policy maximalist approach. See court control, intensity minimalist approach. See court control, intensity negative public policy. See public policy, scope no review of the merits, 368 of the lex fori, 276, 363 positive public policy, 365, 371 preclusion, 319. See court control, intensity procedural public policy, 368, 373 property law, 379 public international law, 56, 58 punitive damages, 371 relative public policy. See public policy, territorial public policy sanctions, 385 scope, 362, 365, 369, 381 substantive, 374 territorial public policy, 366 truly international, 367

475

qualification. See classification rebus sic stantibus, 127 recognition and enforcement, 205 of foreign judgments, 205, 213 relational contract, 34, 124, 150 Representations and Warranties, 16, 166 right to be heard. See court control, right to be heard, iura novit curia, right to be heard rules of law. See iura novit curia, and rules of law, transnational law, as governing law, arbitration, and rules of law second-look doctrine. See court control, and arbitrability separability. See severability set aside proceedings. See court control, annulment set-off agreement, 255 severability of the applicable law, 227 of the arbitration clause, 325 soft law, 43, 47, 72, 73, 77, See transnational law Sole remedy clause, 170 standard contracts, 50 Subject to contract clause, 27, 91, 123, 160 Swap agreement, 13, 100, 138, 164, 255 Termination clause, 29, 92, 162, 255 territoriality. See arbitration, lex loci arbitri Tolling agreement, 257 trade usages, 46, 48 transnational law, 39, 292, 303 and domestic law, 106, 110, 117 and public international law, 64 as governing law, 107, 234 autonomous interpretation. See autonomous interpretation transparency, 289 UCP, 99, 111 ultra petita partium. See court control, excess of power unclean hands doctrine. See court control, intensity uniform law, 66 unilateral promise, 65, 114, 180, 183, 220 UPICC, 70, 83 and arbitration, 109, 110 and best rules, 82 and contract terms, 117. See good faith

https://doi.org/10.1017/9781009082822.012 Published online by Cambridge University Press

476 UPICC (cont.) and generally recognised principles, 82 and good faith. See good faith and interpretation of CISG, 74 and investment arbitration. See investment arbitration and overriding mandatory rules, 262, 264 and the governing law, 82, 107 See transnational law as a corrective of national law, 82 as a corroboration of the applicable law, 74 as governing law, 73

index autonomous interpretation. See autonomous interpretation model clauses, 73, 77, 109, 126 value chain. See corporate social responsibility variation orders. See No oral amendments clause venue of arbitration. See arbitration, seat voie directe. See arbitration, and private international law

https://doi.org/10.1017/9781009082822.012 Published online by Cambridge University Press