INTRODUCTION:

It has become common to speak of international “commercial” arbitration, but there is no clear concept of what is meant by “commercial”. As early as the 1923 Protocol on Arbitration Clauses, Contracting States recognized the validity of an arbitration clause “by which the parties to a contract agree to submit to arbitration all or any differences that may arise in connection with such contract relating to commercial matters or to any other matter capable of settlement by arbitration, … .” The Protocol then went on to say that “Each Contracting State reserves the right to limit the obligation mentioned above to contracts which are considered as commercial under its national law.” The actions of the several States that used the opportunity to limit the application of the Protocol to contracts which are considered as commercial under its national law were carried forward to the 1927 Convention for the Execution of Foreign Arbitral Awards, since only arbitration agreements subject to the Protocol were covered by the Convention. The 1958 New York Convention essentially repeated the provision originally found in the 1923 Protocol.

The New York Convention is not by itself limited to arbitration in respect of commercial disputes. The limitation applies only if a State makes the necessary declaration, and only 44 of the current 135 Contracting States have done so. However, in those 44 States the application of the Convention is dependent on what is considered as commercial under the national law. This is a potentially serious problem for anyone wishing to invoke the Convention in one of those States. In some legal systems the word “commercial” is a technical term of great legal significance. In other legal systems the word has no particular legal connotation. In spite of those differences, reference to the national law does not seem to have become the problem for application of the New York Convention that it might.

The 1961 European Convention on International Commercial Arbitration was the first international instrument to refer to international commercial arbitration by name. Although “commercial” was not defined, the Convention was limited in application “to arbitration agreements concluded for the purpose of settling disputes arising from international trade between ….” No matter how broad the interpretation of “international trade”, many forms of economic activity would seem not to have been included. The question of what was to be included in “commercial” was squarely faced for the first time during the preparation of the Model Law, adopted in 1985. Since it was envisaged that the Model Law, once adopted by a State, would co-exist with a national arbitration law for all other arbitrations (both domestic and international non-commercial), it was necessary to specify its scope of application. While there was little disagreement as to the types of transactions to which it should apply, there was great hesitation on the part of some delegations to expand the definition of “commercial” beyond what was envisaged in their national law for other purposes. The solution was to relegate the matter to a footnote the first time the word “commercial” appeared in the text. The footnote reads as follows:

“The term ‘commercial’ should be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature, whether contractual or not. Relationships of a commercial nature include, but are not limited to, the following transactions: any trade transaction for the supply or exchange of goods or services; distribution agreement; commercial representation or agency; factoring; leasing; construction of works; consulting; engineering; licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture and other forms of industrial or business co-operation; carriage of goods or passengers by air, sea, rail or road.

Difference between a domestic arbitration and an international arbitration

The modern view is that arbitration is governed by the law of the place in which it takes place. Therefore, in that sense every arbitration taking place within a State is a domestic arbitration in that State. However, many States draw a distinction between arbitrations that are considered to be domestic and those that are considered to be international. One of the consequences may be that the types of disputes that may be submitted to arbitration are different in an international arbitration. For example, in some States claims of anti-trust violation may be submitted in an international arbitration but not in a domestic arbitration. Similarly, some States permit the State or State entities to enter into valid arbitration agreements only if the arbitration would be international. Finally, following the lead of the Model Law, many States have different laws governing domestic and international arbitrations. It follows that the distinction between domestic and international arbitrations is a matter of national law. There is no generally accepted distinction and there does not need to be since the New York Convention applies to “foreign” awards.¹

Applicable Law in International Commercial Arbitration

The determination of law in international commercial arbitration is difficult to judge. Arbitration awards are often confidential and the published awards are often summarized or heavily edited. This adds to the difficulties which exist in International Arbitration. The question of choice of procedural law could be solved to a certain extent by the model Act or any other procedural law but regarding the substantive law, complexities often arise. Generally speaking, International arbitral rules allow parties to as agreement containing an arbitration clause to choose the substantive law of any particular jurisdiction to govern disputes.

The Position where no Applicable Law is selected

It was stated in the Saphire Arbitration that a tribunal “must look for common Intention of the parties and use the connecting factors generally used in doctrine and in case law and must disregard national peculiarities”. Thus, in rare situations where the parties have not provided for an agreed choice of applicable law, it would be seen that an arbitrator may have substantial freedom in the choice of rules of law. One would assume that in these situations a system familiar to the arbitral tribunal will be used. If the parties made a choice of the law of a country which included an international business law approach, the tribunal would give effect to that choice, and would apply the rules of the sub area. If the parties do not agree, it would still be opened to an arbitration tribunal to apply the law of a country which includes an international business law approach.

Applicable Law is the Common Law Rule

The issue that arises is whenever a contract has an international element; which country’s law shall be the contract’s applicable law and if there is an arbitration clause, in which country, should the arbitration be held. An international element could exist because parties are domiciled or companies incorporated in different countries; or because the subject matter of the contract is located in a country which is different from that of any of the parties. The common law rule is that, in an action for damages for breach of contract, the applicable law determines questions of remoteness of damage, whereas the quantification of damages which according to the applicable law is not too remote is governed by the law of the country in which the proceedings are brought. The general rule is that legislation only discharges or modifies obligation under a contract if passed under the contract applicable law. And the common law is that parties are free to select the applicable law, provided that their choice is bonafide and legal and there is no reason for setting aside the choice on the ground of public policy. The view strengthens when they say that the parties’ choice will be conclusive.²

Standardizing the Choice of Law

Virtually all legal systems and arbitration rules permit the parties to choose the law governing their contractual relationship. It is important 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 as to the governing law from the moment the contract is concluded and this clarifies the whole position.³Thus, the loophole in contracts can be effectively plugged. Interpretation becomes easy when the law is clear: Secondly, where the parties do not designate the governing law, its determination can be difficult or uncertain. If it is with Model law, then Art. 28 (2) vests power with the arbitral tribunal, to determine the law by the conflict of law rules which it considers applicable. When law becomes clear, final offer of arbitration clears the mist in spite of the conventional arbitration where usually players take extreme positions in the anticipation that by doing so, they will skew the midpoint to their favour.

CONCLUSION:

The cardinal issue is not whether or not arbitrations are jurisdictional or contractual in nature, but to what extent and according to what standards international arbitrations should be regulated and administered. Most legal systems accord parties considerable freedom in determining arbitral procedure, while reserving the right to ensure the fairness and integrity of the process. The controversy regarding the independence of arbitration from national law actually addresses concerns regarding the standards by which the fairness and integrity of the process should be governed, domestic or international standards?

To be sure, there is much to be said for setting an international standard by which international arbitrations should be superintended, as opposed to leaving each State to enact its own individual standard, which may run contrary to the aspirations of foreign arbitrating parties. International conventions on arbitration are designed to provide an effective international regime for the conduct of arbitrations. These conventions are aimed at conflating and modernizing national arbitration practices relating to international arbitration, thus obviating the need for States to establish their own domestically influenced regimes.

REFERENCES:

1. B. Brown, General Principles of Law in International Commercial Arbitration (August 19, 2013)

2. Thomas J. Stipanowich, Protocols for Expeditious, Cost‐Effective Commercial Arbitration (August 24, 2013)

3. F.G. Baxter, International Business Disputes (August 25, 2013)

Received on 05.02.2014 Modified on 12.03.2014

Int. J. Rev. & Res. Social Sci. 2(1): Jan. – Mar. 2014; Page 85-87