Choice of Substantial Law in Arbitration

Choice of substantial law in International Commercial arbitration is most appropriate and flexible approach for the disputed parties. Preferably it gives the parties an extensive choice to choose the substantial law which would applicable to the contract.

History

A justice system’s goal has always been to save time, money, and reduce litigation. Arbitration is thus as old as civilisation as a means of resolving disputes. It is a legal process that encourages parties to a dispute or conflict to resolve their differences quietly, either through mutual consent or through third-party mediation.

This method was widely used in the sixth century, not just among Roman and Greek civilizations, but also in England, where corporate imperatives forced a hostile attitude to succumb to commercial arbitration. Throughout history, there are numerous examples of various forms of arbitration or mediation in Ancient India, as well as some mediaeval traditions that attest to its efficiency.

While approaching the courts has long been the standard method of seeking justice, the desire for faster and more expedient remedy has led to a search for alternatives to the traditional judicial system. As a result, a vast number of quasi-judicial and administrative tribunals and forums have been established, which serve as an alternate method of dispute resolution. These, too, became clogged by time.

Arbitration has established itself as a dominating choice for parties among other means of alternative conflict resolution because it has clearly proved its utility over all others and is truly a real alternative to judicial adjudication as an alternative to the traditional judicial procedure. It effectively downplays the importance of courts in the administration and dispensation of justice.

Introduction

The law of arbitration, as it has evolved around the world, recognises the distinction between contract law and the law controlling the behaviour of the Arbitral Tribunal. Parties have the authority to choose which national laws govern one or both of these divisions. It has become customary in international business arbitration for parties to agree on both substantive and procedural law.

Parties are permitted to choose the substantive law that applies to the contract, the judicial seat of arbitration, and the curial law that applies to arbitration proceedings. Such a decision can be made explicitly or implicitly. The law controlling the contract is substantive law, whereas the law guiding the arbitration processes between the parties to the dispute is curial law.

It can be said that when the parties have agreed on substantive law, unless the parties show otherwise, it is presumed that they will not agree on curial law. Furthermore, if the arbitration clause expressly states that all three substantive, curial, and arbitration-related laws are the laws of another country, then the parties to the arbitration must comply with those laws. Part I of the Arbitration and Conciliation Act 1996 is impliedly excluded from foreign business arbitration.

Every commercial activity in international trade and commerce is often preceded by a contract defining the parties’ duties in order to avoid legal issues. However, in the fast-paced world of trade and industry, disagreements between partners are unavoidable. Because the legal procedure is complicated and time consuming, parties are generally hesitant to “seek settlement for conflicts in the court of law time-consuming and costly”. Furthermore, arbitration allows for a degree of flexibility that is not available in regular judicial settlements.

International Commercial Arbitration is the process of resolving disputes of a “commercial nature involving an international aspect” that come within the purview of private law. International Commercial Arbitration is so named because the parties, facts, or legal consequences of the dispute extend beyond a single country jurisdiction. “The expenses, delay, and complexity of a court action are usually avoided in the event of arbitration procedure,” Baxter says. Arbitration also offers a level of privacy, informality, and convenience that cannot be equalled in a regular courtroom setting. International conventions, particularly the most recent New York Convention, as well as laws based on the convention, have provided broader range and flexibility in the execution of foreign awards than in the case of court judgments.”

Of course, in circumstances when parties’ assets are located in different countries, this is a crucial concern. As a result, the benefits of arbitration entice parties to use it, and they frequently insert arbitration clauses in their contracts to ensure that any disputes can be resolved without resorting to litigation.

In international business arbitration, however, when parties come from different legal systems, a conflict of laws occurs by default, and the substantive law to be applied in a particular dispute must be chosen. The parties’ original agreement may often establish the substantive law to be applied in arbitration. When the parties do not agree on a choice of law for resolving their issues, however, challenges arise in determining the applicable law.

International Commercial Arbitration Applicability on Substantial Law

There are four types of choice-of-law issues that emerge in international arbitration:

  • “Determination of the substantive law that applies to the case’s merits”
  • Identifying the substantive law that governs the arbitration agreement
  • Determination of the applicable procedural legislation in arbitral procedures
  • The applicable conflict of law rules for determining each of the above-mentioned legislation.
  • When one or more of the four laws are broken, problems arise.”

Professor Redfern and Professor Hunter enumerated the stages of decision in their works, which are listed below-

“First, arbitrators will determine the law applicable to the merits of the case based on the parties’ agreements, unless an obligatory national law or public policy overrides such an agreement. In the event that the parties are unable to reach an agreement, the arbitral tribunal will determine the relevant law based on the facts of the case, utilising criteria such as determining the closest connection to the dispute .

Second, in terms of the law that would apply to the arbitration agreement itself, the parties may agree on a law that is distinct from the others based on the presumption of separability. If the parties haven’t agreed on an applicable law, the law that governs the arbitration agreement is usually the law of the arbitral seat, but it could also be the law that governs the parties’ contract or international standards.

Third, in most cases, the applicable procedural law will be the domestic arbitration law of the arbitration seat. This law will apply to all aspects of the arbitration proceeding, including the appointment of arbitrators, the issue of provisional relief, the procedural timeline, and award provisions.

This rule gives arbitrators a lot of leeway in how they conduct the procedures in most nations, as long as due process is followed.

Finally, the arbitral tribunal may determine the applicable conflict-of-law provisions for each applicable law. The tribunal may, for example, use the conflict of law rules of the arbitral seat or international conflict of law norms.”

When the parties do not agree on an applicable law, a big difficulty occurs. “In the absence of any designation by the parties, the arbitral tribunal shall apply the law defined by the conflict of law rules which it thinks applicable,” the Model law states.

The Basic Principle of “Choice of substantial law”

When the parties agree on a substantive law of a specific jurisdiction, there is no room for general principles of law to be applied. The choice of law clause determines this.

This does not, however, imply that national law is the best substantive legal option available, as national law may have flaws of its own. As a result, parties may empower arbitral tribunals to apply a substantive law that is not bound by any jurisdiction.

Nonetheless, the fact that the “Calvo Doctrine” has traditionally advocated for equal treatment solely for foreigners could not be applied because international arbitration frequently grants foreigners, but not citizens, the ability to arbitrate disputes. As a result, the Calvo Doctrine opposes arbitration on the grounds that it favours foreign investors.”

Almost all legal systems and arbitration procedures allow the parties to choose the law that governs their contract. It is critical that “the parties do so in the arbitration agreement or in a separate contractual provision for a number of reasons: first, the parties get a clear picture of the governing law from the moment the contract is signed, and this clarifies the entire situation; second, the parties get a clear picture of the governing law from the moment the contract is signed, and this clarifies the whole situation.”

As a result, the contract loophole can be properly closed. When the law is obvious, interpretation is simple: second, determining the ruling law can be difficult or unknown if the parties do not identify it.

If it’s Model Law, Art. 28 (2) empowers the arbitral tribunal to determine the law using the conflict-of-law procedures that it deems appropriate.” When the law becomes obvious, the “final offer of arbitration” clears the air, in contrast to traditional arbitration, where players typically take extreme positions in the hope that by doing so, the law will become clear.

Absence of an Agreement on the Applicable Law

In the absence of an agreement on the applicable law regarding the choice of substantial law, the parties may choose the law that will rule on the merits of their dispute.

In a large percentage of circumstances, the parties to an international dispute will not have agreed on the substantive law that governs their relationship, either in their underlying contract or elsewhere. In these cases, an arbitral tribunal will be forced to choose the applicable substantive law, either by applying a set of conflict of laws rules or by applying a substantive law “directly.” When it comes to selecting the applicable substantive law, international arbitration systems use different approaches. In general, there are six major choice-of-law approaches in modern arbitration regimes: (a) Despite being long considered outdated, the law of the arbitral seat may require arbitrators to follow either local conflict of laws rules (applicable in national courts) or international arbitration rules. or (b) local substantive law; (c) some arbitration legislation imposes specialised choice-of-law rules on arbitral tribunals seated within national territory (albeit usually via very general formulae that leave tribunals with broad discretion in selecting an applicable law); or (d) some arbitration legislation imposes specialised choice-of-law rules on arbitral tribunals seated outside national territory (albeit usually via very general formulae that leave tribunals with broad discretion in selecting an applicable law). (d) a number of recent statutes allow arbitrators to use the choice-of-law standards that they deem “applicable” or “appropirate .”; (e) some legislation empowers arbitrators to apply whatever substantive rules of law they deem suitable “directly,” without regard to conflict of laws concerns; and (f) a nation’s law may require that certain claims or defences be heard by the arbitrator under mandatory national law.

Institutional standards differ as well, although in general, arbitrators have a lot of leeway when it comes to choosing a substantive law (in the absence of agreement by the parties). Some regulations allow arbitrators to use the law chosen by the conflict of laws rules that they deem “applicable.” Other rules allow the tribunal to apply substantive law directly, without regard to conflict of laws restrictions, if it deems it “suitable” or “applicable.” In some cases, national law and/or institutional rules provide relatively clear guidance or directions to the arbitral tribunal in selecting the applicable substantive law—as in an arbitration where the parties have agreed to institutional rules prescribing a choice-of-law rule or the arbitration is seated in a jurisdiction that prescribes a specific, mandatory conflicts rule for international  disputes. In most circumstances, however, arbitrators are given broad powers to choose the applicable substantive law (without a choice-of-law agreement), including the authority to apply the conflict of laws rules that they judge “applicable” or the substantive rules that they think “suitable.”

Conclusion

The nature of the discussion over the prospect of delocalizing arbitration procedures and awards frequently obscures the fundamental concerns at hand. The fundamental question is not whether arbitrations are jurisdictional or contractual in character, but how and to what degree international arbitrations should be controlled and conducted, and to what criteria. Most legal systems provide parties a lot of leeway in deciding on arbitral procedure while reserving the right to assure the process’s fairness and integrity. Concerns about the norms by which the fairness and integrity of the process should be managed, whether domestic or international, are at the heart of the debate over arbitration’s independence from national law.

To be sure, there is a lot to be said for establishing an international standard by which international arbitrations should be judged, rather than allowing each state to legislate its own norm, which may conflict with the wishes of foreign arbitrating parties. International arbitration conventions are intended to offer an effective international framework for the conduct of  arbitration . These treaties aim to “consolidate and mordernize national arbitration practises relating to international arbitration, so removing the necessity for States to construct their own domestically inspired regimes.” As a result, while selecting the appropriate law in international business arbitration is frequently easier than in domestic courts, it is still not as simple as it appears. The simplest method to avoid any misunderstanding is to state specifically in the parties’ contract that “all laws relating to the merits, arbitration agreement, and arbitration procedure are identical in the parties’ contract, and that no conflict of law rules apply.”

This article is contributed by Akanksha Tomar while working as an intern under Legal Link India. She is an undergraduate student at Delhi Metropolitan Education, Delhi

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