APPLICABILITY

In practice, arbitrators sometimes apply a national law and, additionally, in order to corroborate their findings, they also refer to a particular norm of the

137 Ibid 12.

138 See n 85.

139 Kilian Bälz, ‘Islamic Law as Governing Law under the Rome Convention. Universalist Lex Mercatoria v. Regional Unification of Law’ (2001) 6 Unif.L.Rev. 37.

lex mercatoria.¹⁴⁰ This denotes the level of approval that the lex mercatoria currently enjoys among traders, as it is considered by arbitrators in order to validate their decisions.¹⁴¹

Legal experts insist unanimously on the difficulty of finding out reliable data about the applicability of the lex mercatoria. Based on limited data only, such as the publication of awards by the ICC, some authors have been able to form conclusions. Dalhuisen, for instance, holds, ‘The empirical evidence suggests that parties do not specifically apply the general principles of the lex mercatoria as proper law in their arbitration agreement or, if so, do it to supplement rather than displace national law’.¹⁴²

Lord J Mustill offers a new argument that excuses the researcher from seeking the explicit mention of the lex mercatoria as the applicable law:

Whether an arbitrator who approaches the matter in this way feels it necessary to employ the lex mercatoria or some established technique of a national system, some of the implication of a term, or whether he does not rationalize what he is doing but simply goes ahead and does it, is unlikely to make any difference in all but small minority of cases.¹⁴³

Indeed, practitioners and arbitrators usually apply the lex mercatoria without taking into consideration that they are doing so. Lowenfeld, who is an experienced arbitrator, states: ‘I think in fact many arbitral decisions make use of this approach, often without fully articulating it, and without an express discussion about whether an international law merchant really exists’.¹⁴⁴

Lowenfeld does not explicitly support the lex mercatoria as an autonomous system of law but believes in the existence of an ‘international way’ or ‘international solution’ to solve some matters differing from national

140 See Y Derains, ‘New Trends in the Practical Application of the ICC Rules of Arbitration’

(1981) 3 Nw.J.Int’l L.& Bus. 40. See also ‘Cours d’Arbitrage de la Chambre de Commerce Internationale. Chronique des Sentences Arbitrales’ (1982) 109 JDI (Clunet) 968.

141 Cf. in www.unilex.info the following awards: ad hoc arbitration held in Helsinki at 28.01.1998 where the arbitrator based the decision on article 36 of the Nordic Contract Law and, in addition, referred to article 7.4.13 (2) of the UNIDROIT Principles. Another interesting case is the ICC arbitral award n. 8540 of 04.09.1996 where the UNIDROIT Principles were used to confirm the conclusion reached by applying the law of the State of New York.

142 Dalhuisen (n 101) 604.

143 Lord J Mustill (n 103) 182.

144 A Lowenfeld, ‘The Two-Way Mirror: International Arbitration as Comparative Procedure’

(1985) 7 Mich. YBI Legal Stud. 163, 182.

laws,¹⁴⁵ such as: force majeure, the obligation to mitigate damages and dealing in good faith. Specifically, he states that:

The elements of good faith or fair dealing, as seen by the arbitrators, came not from the internal law of a given state, but from perceptions of the arbitrators about how merchants in international transactions generally do behave and expect each other to behave … I see the denomination of lex mercatoria as an attempt, only partly successful, to give doctrinal support to what arbitrators actually do.¹⁴⁶

What Lowenfeld missed in his analysis of 1985 is that nowadays good faith is one of those areas where there is more agreement than discord between national laws.¹⁴⁷

Vogenauer adds data in the line of parties upholding the applicability of the lex mercatoria:

The empirical evidence shows that businesses hardly make use of the existing possibility to ‘opt into’ soft law instruments, such as the PICC and the PECL, if they subject their cross-border transactions to international commercial arbitrations. But this evidence also highlights that businesses are not averse to the idea of an optional instrument as such and would appreciate the possibility to choose a neutral contract law regime.¹⁴⁸

A concrete example that reflects this trend is the choice of law clause contained in the Channel Tunnel contract, one of the most important infrastructures of modern times. Clause 68 of this contract provides:

‘[t]he construction, validity and performance of the contract shall in all respects be governed and interpreted in accordance with the principles common to both, English

145 Though, according to the author, in the majority of cases the result reached by legal systems does not radically change. Zimmermann and Whittaker edited a book where 30 cases concerning good faith were analysed by jurists and lawyers coming from different European jurisdictions. The results revealed that, despite quite different points of departure, there is convergence in the solutions offered by national laws. See R Zimmermann and S Whittaker (eds) Good Faith in European Contract Law (CUP, Cambridge 2000).

146 Lowenfeld (n 144) 184.

147 See Chapter Two.

148 S Vogenauer, ‘Common Frame of Reference and UNIDROIT Principles of International Commercial Contracts: Coexistence, Competition, or Overkill of Soft Law?’ (2010) 6 ERCL 143. The paper can be obtained from the Social Science Research Network electronic library

<http://ssrn.com/abstract=1581352> accessed 29 April 2011. The quotation is from p. 39 of the digital version.

and French law, and in the absence of such common principles by such general principles of international trade law as have been applied by national and international tribunals. Subject in all cases, with respect to the works to be respectively performed in the French and in the English part of site, to the respective French or English public policy provisions (emphasis added).¹⁴⁹

The lex mercatoria means an alternative, not only for national law but also, to the sound unification of laws by states. The dilemma that this phenomenon invariably faces is: the unification regional or universal? In the lex mercatoria the adoption of customs and rules has been determined by the necessities of trade; therefore, some of them will be of universal application, some others, regionally implemented. Lex mercatoria accepts the peculiarities of legal training and legal traditions. It will be seen in Chapter Four of this thesis that states, on purpose or not, recognize this advantage of the lex and, for that reason, they recall the UNIDROIT Principles as a model for their own unification of law process.¹⁵⁰

Furthermore, the applicability of the lex mercatoria by arbitrators is accepted by national procedural rules. For example, in previous years the prevailing view in England was that English arbitrators must apply English conflict of law rules to find the law applicable to the merits of the dispute, and that they could not apply any substantive law other than that of a fixed and recognisable system.¹⁵¹ Even in 1993 the lex mercatoria was not included in

149 Channel Tunnel Group Ltd. and Another v Balfour Beatty Construction Ltd. and Others [1992] Q.B. 656, 664-5. See K P Berger, The Creeping Codification of the Lex Mercatoria (2^nd edn Kluwer Law International, Alphen aan den Rijn 2010) 57.

150 See the analysis of the Uniform Act on Contract by OHADA in Africa and the Inter-American Convention on the Law Applicable to International Contracts by CIDIP in Chapter Four, Sections 4.5 and 4.6.

151 Justice Megaw in Orion Cía Española de Seguros v Belfort Maatschappij [1962] 2 Lloyd's Rep. 257, held that arbitrators are bound, in general, to apply a fixed and recognisable system of law. When the same clause came before the Court of Appeal in Eagle Star Insurance Co. Ltd. v Yuval Insurance Co. Ltd. [1978] 1 Lloyd's Rep. 357, Lord Denning said of Justice Megaw's decision, at p. 361: ‘He was of opinion that such a clause was invalid and should be given no effect. Despite its presence, the arbitrators were to decide in accordance with the ordinary rules of law. If the arbitrators did not do so, their award could be set aside by means of a case stated’. As regards this orthodox doctrine, C Clarkson and J Hill in The Conflict of Laws (3^rd edn OUP, Oxford 2006) 254-5 states: ‘At common law, it was assumed that English arbitrators were bound to apply the choice of law rules which were binding on the English courts. This rule was the consequence of the traditional English approach that awards could be reviewed by the courts on points of law, including choice of law issues’. Further to this last aspect, Czarnikow v Roth, Schmidt & Co. [1922] 2 KB 478 reads: ‘Arbitrators must understand that parties before them have a right to take the opinion of the Court as to whether the arbitrators should be given the guidance of the Court in matters of law, and that

Dicey and Morris – one of the leading works on private international law in England – because it was not considered a fixed and recognisable system.¹⁵² However, the new Arbitration Act 1996 has changed English law on this point.

As a premise to explain this Act, it is necessary to set forth article 28 (1) of the UN (UNCITRAL) Model Law on International Commercial Arbitration 1985 which provides:

The arbitral tribunal shall decide the dispute in accordance with the rules of law as are chosen by the parties.

The emphasised rules of law include the lex mercatoria; in other words, the parties may choose the lex mercatoria to govern their contract.

Section 46 of the English Arbitration Act 1996 provides:

(1) The arbitral tribunal shall decide the dispute

(a) in accordance with the law chosen by the parties as applicable to the substance of the dispute, or

(b) if the parties so agree, in accordance with such other considerations as are agreed between them or determined by the tribunal.

Section 46 (3) provides that: if or to the extent that there is no such choice or agreement, the tribunal shall apply the law determined by the conflict of laws rules which it considers applicable.

In the explanatory notes to the Act (July 1995) made by the Departmental Advisory Committee on Arbitration it was stated that the cited

they must not attempt to stop the action of the Courts by interfering with or hindering such a right of parties’. As regards the choice of law rules binding on the English Courts, see the following cases: Shamil Bank of Bahrain EC v Beximco Pharmaceutical Ltd [2004] EWCA Civ 19, [2004] 1 WLR 1784; and Halpern v Halpern [2007] EWCA Civ 291, [2007] 3 WLR 849.

See the explanation of the traditional approach of English Courts in: O Lando ‘The Lex Mercatoria in International Commercial Arbitration’ (1985) 34 ICLQ 747, 758-9; and R Coulson, ‘International Arbitration a World of Options’ in Arbitration under International Commercial Contracts (Oceana, New York 1982) 49.

152 O Lando, ‘Dicey & Morris, The Conflict of Laws: A Review’ (1998) 47 Int’l & Comp.L.Q.

394.

section corresponds to Article 28 of the Model Law on International Commercial Arbitration.¹⁵³

The fourteenth edition of Dicey & Morris (year 2006) notes the changes made by the Arbitration Act 1996 stating:

In England, prior to the 1996 Act (emphasis added), it was axiomatic that an English arbitrator was bound to apply English law, including the English conflict of laws rules to decide the substance of any dispute, and many of the most important cases in the conflict of laws arose by way of appeal on matters of law from arbitral awards. The other consequence of this approach was that, just as in the English courts (emphasis added), an English arbitrator could only apply a national legal system, designated as applicable by the relevant choice of law rule. The tribunal could not apply non-national rules, still less decide the dispute ‘ex aequo et bono’ or as an ‘amiable compositeur’, on the basis of general principles of justice and fairness.¹⁵⁴

Pursuant to s.46 (1) (b), Dicey & Morris state:

This option allows the parties the freedom to apply a set or rules or principles which do not in themselves constitute a legal system. Such a choice may thus include a non-national set of legal principles (such as the 1994 UNIDROIT Principles of International Commercial Contracts) or, more broadly, general principles of commercial law or the lex mercatoria.¹⁵⁵

Additionally, there is recent evidence of jurisprudential recognition of the lex mercatoria in English law. The English courts have recognized that on the basis of the Arbitration Act 1996 Section 46(1) (b) the parties are allowed the freedom to apply the lex mercatoria. In Musawi v RE International (UK) Ltd.¹⁵⁶it was decided that section 46(1) (b) of the Arbitration Act had entitled the parties to require the arbitrator to apply to the subject matter of the dispute and its resolution the principles of Shia Sharia law. A paragraph in this judgement states:

153 Department of Trade and Industry, Consultative Paper on Arbitration Bill (July 1995), Section 1 and Section 2: Draft Clauses of an Arbitration Bill, 38.

154 Dicey, Morris and Collins on The Conflict of Laws Vol 1 (14^th edn Sweet & Maxwell, London 2006) para. 16-047.

155 Ibid para. 16-053.

156 [2008] 1 Lloyd’s Rep. (Ch) 326.

[S]ection 46 (1) (b) allows the parties the freedom to apply a set of rules or principles which do not in themselves constitute a legal system. Such a choice may thus include a non-national set of legal principles (such as the 1994 UNIDROIT Principles of International Commercial Contracts) or, more broadly, general principles of commercial law or the lex mercatoria.¹⁵⁷

The lex mercatoria has been recognized by the European Convention on International Commercial Arbitration (Geneva 21 April 1961) which allows the parties to determine by agreement the law applicable to the substance of the dispute; consequently, national courts must enforce arbitral awards rendered in accordance with the lex mercatoria. In addition, this kind of award has not been set aside by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958.

The most notable of the major international arbitral rules sanctioning the lex mercatoria are the ICC Rules in which article 17 (1) provides that:

The parties shall be free to agree upon the rules of law to be applied by the Arbitral Tribunal to the merits of the dispute. In the absence of any such agreement, the Arbitral Tribunal shall apply the rules of law which it determines to be appropriate.

To like effect: articles 14.2 and 22.3 of the London Court of International Arbitration (LCIA) Arbitration Rules.

These norms of the ICC and the LCIA allow the parties and arbitrators to apply whatever rules of law they consider appropriate. It is important to note that the arbitral tribunal is not required to choose the applicable ‘rules of law’

by reference to a rule of conflict. It may apply the rules of law that it considers appropriate. Furthermore, these norms allow the application of the lex mercatoria, as has been widely recognized.¹⁵⁸

157 Though, it must be said that issues concerning the arbitration agreement itself were governed by English law.

158 See J Dalhuisen, Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law. Vol. 1 (4^th edn Oxford, Hart 2010) 181; and also Y Derains and E Schwartz, A Guide to the ICC Rules of Arbitration (2^nd edn Kluwer Law International, The Hague 2005) 233.

Particular attention must be paid to the reception of the lex mercatoria in France where a government decree of 12 May 1981 has added new provisions on international arbitration to the Code of Civil Procedure.

According to article 1496 the arbitrator applies to the contract the rules of law which the parties have chosen and, when no choice has been made, those which he considers appropriate (celles qu’il estime appropriées). The expert also takes into account all customs in commercial activities.

Leading French authors state that the new provisions of Title V International Arbitration of the Code of Civil Procedure in France acknowledge, not only the principle of party autonomy in international trade but also, the existence and development of rules of law other than those contained within the narrow framework of a single national legal system.¹⁵⁹

The Dutch Code of Civil Procedure of 1986 (Book Four: Arbitration, articles 1054 and 1065) considers the application of the lex mercatoria by arbitrators. In this case the reference to the lex mercatoria is without doubt on the grounds of the Explanatory Report that defines the lex mercatoria as generally accepted usages in international trade which are autonomous from national law. Furthermore, a second Report added that lex mercatoria encompasses transnational rules and principles of law.¹⁶⁰

The Convention on the Law Applicable to Contractual Obligations (Rome 1980) does not permit the application of a law which is not a state one.

In Europe the Convention was improved by the European Commission through the Regulation n. 593/2008 of the European Parliament and of the Council on the Law Applicable to Contractual Obligation (Rome I).¹⁶¹

159 Cf. E Gaillard and J Savage (eds), Fouchard, Gaillard, Goldman on International Commercial Arbitration (2^nd edn Kluwer Law International, The Hague 1999). See also Dalhuisen (n 158) 181. P Fouchard in ‘L’Arbitrage International in France après le Décret du 12 Mai 1981’ (1982) 109 JDI (Clunet) 374, 395-6 states that by the expression ‘rules of law’, article 1496 enshrines what scholarship tends to designate today with the general term lex mercatoria.

160 Cf. De Ly (n 20) 250. This modern trend of arbitration laws, which allows arbitrators to apply the lex mercatoria, is considered by Mistelis to have a positive impact on arbitration. He calls this option ‘Voie directe, backed by a lex arbitralis materialis’ in L Mistelis, ‘The UNIDROIT Principles applied as “Most Appropriate Rules of Law” in a Swedish Arbitral Award’ (2003) 8 Unif.L.Rev. 631, 634.

161 This Regulation, which entered into force on 24 July 2008, converted the Rome Convention on the Law Applicable to Contractual Obligations into a Community instrument.

See Nils Willem Vernooij in (2009) 15 Colum.J.Eur.L. Online 71. In regard to the notable improvement contained in article 4 of the Regulation, which specified the general and vague

However, national law remains the applicable law, i.e. the lex mercatoria cannot be chosen by the parties as the applicable law to their contract.¹⁶²

The situation is different in the Americas, where the lex mercatoria is particularly vigorous today. The Fifth Inter-American Specialized Conference on International Private Law of the Organization of American States (OAS) approved the Inter-American Convention on the Law Applicable to International Contracts (Mexico 1994).¹⁶³ In this Convention, even if the law regulating international contracts is the law of a certain state, in two articles rules of international or non-national character have been mentioned. In other words, the supplementary role of the lex mercatoria is accepted. The norms are: article 9, which mentions amongst the criteria that judges have to take into account in order to determine the state law applicable, ‘the general principles of international commercial law recognized by international organizations’; and article 10, which provides:

In addition to the provisions in the foregoing articles, the guidelines, customs, and principles of international commercial law as well as commercial usage and practices generally accepted shall apply in order to discharge the requirements of justice and equity in the particular case.¹⁶⁴

‘Rome’s rule’ of application of the law with which the contract was more closely connected, see the Guidance on the Law Applicable to Contractual Obligations on:

<http://www.justice.gov.uk/publications/docs/guidance-law-contractual-obligations-romei.pdf>

accessed 29 April 2011

162 However, the proposal of the European Parliament and the Council on the Law Applicable to Contractual Obligations (Rome I) adopted in Brussels 15/12/2005 foresaw the possibility to include the UNIDROIT and the PECL as the applicable law: ‘To further boost the impact of the parties' will, a key principle of the Convention, paragraph 2 authorises the parties to choose as the applicable law a non-State body of law. The form of words used would authorise the choice of the UNIDROIT principles, the Principles of European Contract Law or a possible

162 However, the proposal of the European Parliament and the Council on the Law Applicable to Contractual Obligations (Rome I) adopted in Brussels 15/12/2005 foresaw the possibility to include the UNIDROIT and the PECL as the applicable law: ‘To further boost the impact of the parties' will, a key principle of the Convention, paragraph 2 authorises the parties to choose as the applicable law a non-State body of law. The form of words used would authorise the choice of the UNIDROIT principles, the Principles of European Contract Law or a possible