International commercial arbitration is undoubtedly one of the most important systems established to resolve commerce and trade-related conflicts. For most parties, it presents a level ground for them to pursue a dispute with the assurance of getting justice.
However, while commercial arbitration is a great system for resolving disputes, there is no doubt that its limitations and problems leave many parties at the receiving end. Now, it is important to understand the system itself does not directly cause Problems In International Commercial Arbitration. Most of the problems encountered are usually due to the fact despite the autonomy that the system holds as a commercial dispute resolution system, state laws confine its operations.
The reality of international arbitration is that it is not as independent as stated on papers, and even agreements reached by parties when drafting agreements could have a different implementation that negatively affects one or all of the parties. Hence the Problems in International Commercial Arbitration are usually caused by conflicts with the laws of states.
While there are many types of Problems in International Commercial Arbitration, one of the subtlest with extremely serious consequences is the choice of state laws chosen to enforce an arbitration contract. This situation is known as Choice of Law.
The choice of law in an arbitration contract stands as the holding block that determines the enforceability and effectiveness of the contract. Usually, when two parties agree to an arbitration contract during international commerce, both parties unanimously agree to the law on which the arbitration contract is enforceable, and the state law chosen in the contract is the one that must be exclusively applied in other states. Hence, parties signing an arbitration treaty usually have full autonomy to determine the state law on which international arbitration should be implemented.
While the choice of law in its natural form is good as it presents both parties with mutual level grounds for dispute resolution, it can also be a source of confusion and hold serious consequences.
These consequences are in two major forms; (1) When enforceability of the agreement seems to be subjected to more than single state law, and (2) when a state where enforceability is sought refuses to respect parties’ autonomy to choice of law. Both these problems will be studied in this article.
Choice of Law: Problems in International Commercial Arbitration
Limitations to Parties Autonomy to Choice of Laws
While it is extremely rare, there have been situations where a state in which contract enforceability is being sought may attempt to test the autonomy of parties’ choice of law. Usually, due to different state laws, an arbitration agreement or treaty reached in one country may seem to clash with the law of another, and if enforceability is being sought in the latter, there may be a level of opposition to the contract, and this is not new in Choice of Laws.
By the New York Convention and international standards of commercial arbitration, Party autonomy and decisions are acknowledged and enforced in both Civil and Common laws. However, the reality is that certain jurisdictions try to limit the freedom of parties to choose the law that is applicable to the contract.
States who pursue the eradication of Parties’ autonomy cite that since every person has their obligations and rights on state laws, so do arbitration contracts. Hence on the basis of conflict of laws, a state where enforceability is being sought may analyze and incorporate the factors of these conflicts to enforce a contract or award.
Also, a presiding arbitrator in an international commercial dispute may disregard parties’ choice of law if the state’s law does not have the closest connection to where the contact will be enforced. This is a major claim and one of the biggest tests on the autonomy of choice of laws. Parties, however, try to beat this by choosing the law of the state where enforceability may be sought when a dispute occurs. Also, the parties could choose any of their national Laws as such is deemed sufficient enough for contract enforceability to stand.
Confusion of Multiple Laws
Parties, when choosing a law, usually pick one for the enforceability of the arbitration contract. Though they may cite other states where the law may be applicable, and that is where the confusion usually sets in. In referring to another state, by mistake of sentences, some parties unknowingly agree that the referred state law has the right to enforce the arbitration contract on the basis of its own law.
When such a situation happens, and the referred state where enforceability is being sought has opposing laws, the arbitration contract may be void. This was the case of Kabab-Ji S.A.L v Kout Food Group where the arbitration law was enforced on English Laws despite it being explicitly stated by both parties that the arbitration must be enforced based on French laws.
One of the Problems in International Commercial Arbitration, the issue of the choice of law, is not a new one and will continue to arise as long as parties do not know how to structure contracts to avoid them. As has been stated above, the Choice of Law problem is not new and can hold a lot of consequences, including causing a party to get an award in its favor overturned.
However, just as with most international commercial arbitration limitations, the choice of law problem can be effectively handled with expert help when drafting a contract. This means that before agreeing to an international commercial arbitration treaty, you or your firm should get an expert professional arbitrator or arbitral firm. A top firm with a full understanding of the system will help draft a contract that protects your autonomy and gives you full independence from state and National laws interference.
Rattsakuten is a top arbitration institution whose service you can hire for effective, expert advice on how to avoid the pitfalls that come with a choice of laws when drafting an arbitration agreement. The firm has expert professional arbitrators that are concerned with helping clients effectively handle a dispute and get the best out of it. You can reach the firm here for more enquires.
Rattsakuten is a leading law firm focused on Commercial Arbitration and Dispute Resolution. Based in Sweden, Rattsakuten handles dispute resolution and Arbitration matters before the SCC (Swedish Chamber of Commerce), ICC, HKIAC, and several other Arbitration tribunals.