CHOOSING THE LAW OR RULES OF LAW TO GOVERN THE SUBSTANTIVE RIGHTS OF THE PARTIES
| Citation | (2014) 26 SAcLJ 911 |
| Date | 01 December 2014 |
| Author | Doug JONES AO, RFD, BA, LLM, FCIArb, FIAMA, FAMINZ; President, Australian Centre for International Arbitration; aPrtner, Clayton Utz. |
| Published date | 01 December 2014 |
This article explores the differences between two approaches to determining choice of law issues that arise in international arbitration: voie directe and voie indirecte. The former, also known as the “direct application” method, involves the tribunal determining choice of law issues by directly applying a particular law or rules of law. The latter involves the tribunal determining the choice of law rules to apply to the dispute, and then determining the applicable law or rules of law by the application of the choice of law rules. Both methods are commonly used in institutional rules and national arbitration law. This article seeks to examine the extent to which the two approaches converge in practice, and considers the potential obfuscation of the tribunal's and the party's true objectives involved in the voie indirecte method, compared to the uncertainty that can result in an application of the voie directe approach.
1 A fundamental principle in international arbitration is party autonomy, an aspect of which is that the parties are free to choose the laws or rules of law in accordance with which disputes concerning their substantive rights and obligations will be determined. However, the parties do not always expressly state which laws govern the contract in the contract documents. In the absence of subsequent agreement and in the event a dispute arises, it will fall to the tribunal to determine the applicable substantive law. The tribunal's authority to decide choice of law issues, in the absence of the parties' express agreement to that effect, is contained in national procedural laws or in the rules of the institution under which the arbitration is conducted.
2 A single arbitration may give rise to a number of choice of law issues, and, occasionally, resolution of these issues may be as complex as deciding the substance of the dispute. The potential complications arise out of the fact that not every aspect of arbitration will necessarily be governed by the same law. In any arbitration there will be at least two categories of applicable laws: (a) the law governing the substance of the dispute and (b) the procedural law governing the arbitration, the “lex arbitri”.
3 The law governing the substance of the dispute is the law or rules of law governing the contract out of which the dispute arises. The applicable substantive law determines the legal rights and obligations of the parties but, in particular, may also affect the causes of action that may be advanced, the substantive remedies available, the types of damages recoverable, limitation defences, the calculation of the quantum of damages and even the burden of proof.
4 The procedural law or lex arbitri is the law of the seat of the arbitration — the place in which the arbitration is conducted for legal purposes. The lex arbitri affects not only the conduct of the arbitration proceedings, which may include factors such as the formation of the tribunal, requests for production of documents, the form of pleadings and evidence, and the manner of examination of witnesses but it will also determine the availability and extent of curial support, including interlocutory relief, and the means for challenging a tribunal's award.
5 While the substantive and procedural laws may be one and the same (for example the law of England and Wales) it is not uncommon for the contract to be governed by one system of law (for example the law of Germany) and the arbitration to be conducted in accordance with another (for example the law of England and Wales). It is not difficult to imagine the challenges that this may present and why determination of choice of law issues is so important in the context of an international arbitration.
6 A third potential category of applicable law is the law governing the arbitration agreement itself. A practical consequence of the doctrine of separability, by which the arbitration agreement is deemed separate and distinct from the contract of which it forms part, is that the arbitration agreement may be governed by a different law to the governing law of the remainder of the contract. This may be the case even in circumstances where the parties have expressly designated the law governing the contract. Situations in which the tribunal's decision on the law governing the arbitration agreement are likely to have an impact on the arbitration include the validity of the arbitration agreement, the scope of the arbitration agreement, whether the dispute is capable of settlement by arbitration, the constitution of the tribunal, the validity of the notice of arbitration and whether the parties are under a continuing obligation to refer future disputes to arbitration.1
7 The foregoing discussion illustrates how and why choice of law issues arise in international arbitration, but it is in relation to the first-mentioned category, the laws governing the substance of the dispute, that the distinction between voie directe and voie indirecte is relevant. (However, the process by which the tribunal determines the substantive law is determined by the provisions of the procedural law or lex arbitri.) Whichever method is followed of voie direct and voie indirecte the tribunal will usually be undertaking an inquiry to ascertain the applicable law or “rules of law”. The choice of the phrase “rules of law” is significant as it means that the tribunal is not limited to choice of one national law, understood as the laws of one particular country. The tribunal may decide that the applicable law to the substance of the dispute is “rules of law” which may be made up by laws of several nations, of transnational laws, international law principles, rules of international conventions and trade usages, among many others.
A. Voie indirecte
8 The voie indirecte method limits the tribunal's power to the determination of the appropriate conflict of laws rule, which is then applied to determine the appropriate substantive law. This is the oldest of the modern approaches to the choice of applicable law by the arbitral tribunal, dating back to the 1961 European Convention on International Commercial Arbitration,2 which provided in its Art VII (1) that “failing any indication by the parties as to the applicable law, the arbitrators shall apply the proper law under the rule of conflict that the arbitrators deem applicable”. This rule was also contained in the 1975 International Chamber of Commerce (“ICC”) Rules (Art 13(3)). Just how the tribunal determines which conflicts rule applies varies. The terms of the instrument or rules from which the tribunal's power is derived may give the tribunal a discretion to apply the conflicts rule it considers “applicable” or “appropriate”, as is the case in the European Convention previously cited.3 Or, the instrument may prescribe how the conflicts
rule is to be ascertained. Examples of the latter include the instruments which require the tribunal to determine the substantive law by application of a particular jurisdiction's choice of law rules or by application of the closest connection test. These are discussed in more detail subsequently.B. Voie directe
9 In contrast, where the applicable lex arbitri or institutional rules provide for a voie directe approach, the power vests in the tribunal to select the appropriate law, or rules of law applicable to the merits of the dispute directly. Using this method, the tribunal may consider elements such as the contract, the circumstances of the case and the submissions of the parties. When using the direct application method, the arbitral tribunal should determine the law most relevant to the commercial circumstances of the case, that is, the law or rules of law which best suit the international transaction, taking into account the circumstances of each case.
10 In principle and in practice, there will be many cases where the application of either a voie directe or voie indirecte method will lead to the same result. As mentioned, where the lex arbitri or institutional rules provide for a voie directe, the factors relevant to the tribunal's exercise of its discretion to determine the most appropriate law or rules of law may not be specified. Therefore, the tribunal may consider the same factors it would have considered to determine the applicable conflicts rules, which factors are often materially similar to the conflicts rules themselves. As stated by Karton, voie directe most often consists in finding a significant connecting factor between the contract and the law which the arbitrator decides to apply.4 The similarities between this inquiry and the “closest connection”, a conflicts rule applied in international arbitration, are easily discernible. However, there will be a not insignificant number of cases in which a voie directe and voie indirecte will lead to the application of different laws, particularly where the tribunal is directed to apply a specific conflicts rule in a voie indirecte model.
11 There is a cautionary word worth noting as regards the tribunal's determination of the applicable substantive law. No matter
which method is used by the tribunal, there should be no limitation on the tribunal's obligation to give reasons for its decision.12 In particular, in the absence of a cogent, reasoned analysis of the path to the tribunal's conclusion, the application of the voie directe method risks being perceived as an arbitrary decision in favour of the most convenient or familiar law, or rule of law, for the arbitrators (for example, the laws of the country of which the members of the tribunal are nationals). The tribunal's decision should include a careful explanation of why the law determined to be applicable is the most appropriate law to...
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