International commercial arbitration has emerged as a favoured method for resolving disputes in cross-border business transactions due to its adaptability, impartiality, and the ease with which its awards can be enforced. A paramount consideration within this framework is the choice of law, which dictates the rules that govern the contract itself, the arbitration process, and the execution of the resulting arbitral award.

Given the inherent complexity arising from the involvement of various legal systems, determining the appropriate law in arbitration is often a multifaceted process that necessitates careful consideration of party autonomy, relevant national legal frameworks, and applicable international treaties.

The Primacy of Party Autonomy in Choice of Law

• The bedrock principle governing the determination of applicable law in arbitration is party autonomy.
• Parties entering into an international contract are generally free to select the substantive law that will govern their contractual obligations.
• This selection is typically formalized through a governing law clause explicitly included in the contract.
• Party autonomy is widely endorsed and protected by key international legal instruments, such as:
  • The New York Convention (1958)
  • The UNCITRAL Model Law (1985, as amended in 2006)
• These instruments emphasize the importance of respecting the parties' agreement on the law governing their relationship.
• Substantive law determines the legal rights and duties of the parties, unlike procedural law, which governs how arbitration is conducted.

Establishing the Law Governing the Contract

• When parties explicitly designate a governing law within their contract, arbitral tribunals generally uphold this choice.
• However, when the contract is silent or contains ambiguous language, tribunals undertake a more complex analysis using conflict of laws principles.
• Key factors in determining the applicable law include:
  • Lex Loci Contractus (Law of the Jurisdiction with the Closest Connection): The law of the country most closely connected to the contract governs its interpretation and enforcement.
  • Lex Loci Solutionis (Law of the Place of Performance): The law of the jurisdiction where the contract is performed governs its execution.
  • International Instruments and Principles: Tribunals may also consider instruments such as:
    • The Rome I Regulation (applicable within the EU)
    • General principles from UNIDROIT and Lex Mercatoria

The Law Governing the Arbitration Agreement - A Separate Determination

• The arbitration agreement within a contract may be subject to a different governing law than the substantive contract.
• Courts and arbitral tribunals determine the applicable law for the arbitration clause based on:
  • Express Choice of Law: If parties explicitly choose a law for the arbitration clause, it is generally upheld.
  • Lex Arbitri (Law of the Seat of Arbitration): The jurisdiction where the arbitration takes place influences the governing law of the arbitration clause.
  • Law Governing the Main Contract: If no law is specified for the arbitration clause, the law of the main contract may apply.
• The UK Supreme Court's 2020 decision in Enka v. Chubb clarified that:
  • When no explicit or implicit governing law is chosen for the contract, the seat of arbitration plays a crucial role as a default mechanism.
  • While the governing law of the main contract usually extends to the arbitration agreement, the seat of arbitration can override this if necessary.

The Law Governing the Arbitration Procedure - Lex Arbitri

The procedural aspects of an arbitration are typically governed by the law of the seat of arbitration, also known as the lex arbitri. This jurisdictional connection plays a critical role, as it determines:

• Judicial Intervention: The extent to which courts can intervene in the arbitration process.
• Procedural Rights: The procedural rights afforded to the parties, including the appointment and removal of arbitrators.
• Enforceability: The enforceability of arbitral awards within that jurisdiction.

For instance, if an arbitration is seated in London, the English Arbitration Act 1996 will likely govern the procedural aspects of the arbitration, unless the parties have expressly agreed otherwise.

Public Policy and Mandatory Rules - Limits on Party Autonomy

While party autonomy is a fundamental principle, it is not absolute. Jurisdictions often impose mandatory rules and public policy restrictions that can override the parties' chosen law. Concerns related to public policy often arise in cases involving:

• Fraud
• Corruption
• Violations of competition law
• Human rights issues

Courts may refuse to enforce an arbitral award if it contravenes the fundamental policies of the enforcing state, as permitted under Article V(2)(b) of the New York Convention.

Article V(2)(b) of the New York Convention allows a court in a contracting state to refuse recognition and enforcement of a foreign arbitral award if it finds that the enforcement of the award would be contrary to the public policy of that country. This provision serves as a safeguard, enabling states to protect their fundamental legal principles and societal norms, but its application is generally limited to instances where the award's enforcement would violate the most basic notions of justice and morality within the enforcing state, thus requiring a high threshold to be met.

Harmonization Efforts and Transnational Principles - Addressing Inconsistencies

To mitigate inconsistencies in the application of choice of law principles, arbitral tribunals may draw upon transnational legal principles, such as:

• Lex Mercatoria: General principles of international trade law that have evolved through custom and practice.
• UNIDROIT Principles of International Commercial Contracts: A set of neutral rules intended to provide a balanced framework for international commercial contracts.
• CISG (United Nations Convention on Contracts for the International Sale of Goods, 1980): A convention that provides a uniform legal framework for cross-border sales contracts.

These instruments can help to fill legal gaps and provide guidance when the parties have not clearly designated a governing law.

Judicial and Arbitral Interpretation of Choice of Law Clauses - A Matter of Interpretation

Disputes frequently arise regarding the interpretation of governing law clauses. Courts and tribunals may adopt different approaches:

• Narrow Interpretation: Limits the application of the chosen law to substantive contract issues, excluding procedural matters.
• Broad Interpretation: Extends the application of the chosen law to encompass procedural aspects, including arbitrability and enforcement of the award.

Sulamérica v. Enesa affirmed that the governing law of an arbitration agreement can differ from the substantive contract, thereby underscoring the need to carefully ascertain the parties' intentions, with the seat of arbitration serving as a crucial factor when those intentions are ambiguous, rather than solely reinforcing its importance.

Enforcement of Awards and the Role of Choice of Law

The enforceability of arbitral awards is a primary concern in international arbitration. The New York Convention, which has been adopted by over 170 countries, requires signatory states to recognize and enforce arbitral awards, subject to limited exceptions such as violations of public policy or fundamental legal principles. The choice of law plays a crucial role in:

• Ensuring Compliance: Ensuring that the arbitration process complies with international arbitration norms.
• Reducing Risk: Reducing the risk of annulment of the award or refusal of enforcement by a court.
• Clarifying Rights: Clarifying the rights and obligations of the parties following the arbitration.

Conclusion:
The selection of the applicable law in international commercial arbitration is a complex but critical aspect of dispute resolution. While party autonomy remains the cornerstone of the process, factors such as the seat of arbitration, public policy limitations, and transnational legal principles exert a strong influence on the determination of the appropriate law.

Businesses and legal practitioners must exercise diligence in drafting governing law and arbitration clauses to minimize jurisdictional conflicts and enhance the enforceability of resulting awards. As international arbitration continues to evolve, a greater focus on harmonization and legal certainty will further solidify its role as the preferred method for resolving disputes in the global marketplace.

Written By: Md.Imran Wahab, IPS, IGP, Provisioning, West Bengal
Email: imranwahab216@gmail.com, Ph no: 9836576565