Recently, as a reflection of globalisation, international dispute resolution has become more popular than it was before. People seek different ways to solve their international disputes in their transactions. These transactions may originate from whether trade or investment. It is undeniable that solving these disputes with special practitioners in those areas, is the best way for finding solutions, especially without the restriction of different procedural languages barrier.
Arbitration is a private method of resolving disputes by the individual. The parties can decide that; when they have a dispute and they are not capable of solving it by themselves, some private individuals will settle the dispute for them. These private individuals, who settle the dispute, are arbitrators; and rather than only one person, it can be more than one person. These arbitrators’ resolving power derives from the agreement, not from a state or state law and the final decision of the arbitrator is binding for parties. The reason for being bound to final decision of arbitrator, parties agreed in their arbitration agreement that, the decision of the arbitral tribunal will be binding.
Why arbitration is so popular in the business environment and people tend to settle their disputes in arbitral tribunals, where has no national law to apply? Is it easy to solve disputes with help of arbitration in international transactions? There are several reasons to choose arbitration for international disputes. Firstly, it is neutral. Because in arbitral tribunal there is no state, and the nature of international transaction is based on foreign parties. In that level, being neutral is the reason of being chosen by parties. Secondly, when the court make a decision, this decision will be binding and final and this decision will be enforceable by the court. In addition to these features, arbitration is confidential and flexible. Also, one arbitral tribunal is appointed by one case, this helps to continuity of its role and it can develop the proper decision for its dispute.
As it is mentioned before, arbitration power does not come from state or state law. The power of decision derives from agreement. The parties should decide that, when they have dispute and they cannot settle it by themselves, the arbitral tribunal will settle the dispute. Hence, the parties need to create an arbitration agreement that arbitral tribunal can be nominated. If the tribunal makes the decision, which law will be applicable? How is the applicable law determined? There are several ways to determine the applicable law for arbitration.
The First step of applicable law is parties’ autonomy. Parties are free to determine applicable law for their disputes. They can determine the applicable law either for substantive law or law applicable to the merit of dispute and there is no wonder that while they determine applicable law, this law should be appropriate law and should be favourable for their dispute. By this determination of law, parties can avoid uncertainty and unpredictability from the future possible issues. In situation of applicable law absence, the parties can face with unexpected decisions of arbitrators.
Firstly, the parties can choose the applicable law and can express this intention in their agreement or they can indicate their intention with an implied expression. Also, there is no restriction for parties to choose a certain state law, they can determine a system of law, general principles of law or they can determine non-legal standards or Lex Mercatoria rules. When parties agreed that one of these chosen rules or law will be applied to their dispute, the tribunal cannot avoid to apply that law to the dispute unless the core of dispute is included by public policy or mandatory rules. Arbitrators do not have any rights to restrict the parties’ autonomy. In fact, this right of autonomy is sort of limited. Because, if the dispute is related to the public policy of the country where arbitration is leaded; arbitrators cannot apply the law which chosen by parties.
Secondly, there is also arbitrator's autonomy for choice of law in arbitration. If there is no choice of law by parties or there is a conflict of laws situation in dispute; arbitrators can decide the choice of law. But it must not be forgotten that this law should be chosen with regarding the reasonable expectations of parties. Because the parties express their intention and expectations in their agreement. Even if the arbitration tribunal choose the law for the dispute; arbitrator cannot ignore the parties’ intention. This is the nature of arbitration, and reason of choosing the arbitration for disputes. Arbitrators should decide the law regarding the parties' reasonable expectations.
Also, when it is considered the dispute and its reflection to public policy; there is also another matter that can be derived from public policy. It is arbitrability challenge. How can we understand that which law will apply the arbitrability? Rules of Lex fori can apply the determination of arbitrability. And thus, it can be assumed that all arbitration proceedings will be conducted with regarding the state's public policy standards within its territory. Hence, the state also can reflect its national law to arbitration proceeding with the restriction of public policy.
As it is mentioned before, the parties can agree for applicable law of arbitration unless the chosen law is against the public policy standards. Or such absence of chosen law by parties, arbitral tribunal can determine the law for arbitration. In this step there is a dualism in here. Firstly, parties or arbitral tribunal can determine the applicable law. Secondly, this law is also regulated by the law of place where arbitration lead. The applicable law in arbitration is quite different from domestic law. Hence, international arbitration can involve more than one law system in its practice.
First distinction of applicable law is ''law governing the agreement to arbitrate''. This law can be assumed that the same law with the law which applies to substantive issues in arbitration. However, parties can determine another law to apply their arbitration agreement and disputes which arise from that agreement. Whether with an arbitration agreement or with an arbitration clause, if parties agree that the dispute will be solved in arbitration; there is no differences between arbitration clause and arbitration agreement. The applicable law for arbitration agreement will apply either arbitration agreement or arbitration clause. Because there can be no arbitration agreement for arbitration. It can be just arbitration clause in main contract. Even if there is no arbitration agreement, the law governing the agreement to arbitrate should apply also to arbitration clause.
Also, it must be considered that arbitration agreement and the main contract are separate and independent from each other. The main contract cannot affect the jurisdiction of arbitration, furthermore the validity of main contract cannot affect the arbitration agreement. This is the separability of arbitration agreement. This agreement should always be thought independent from main contract and that agreement's validity is not bound to main contract.
Even if there is an autonomy for arbitration clause or arbitration agreement, generally the law of main contract governs the arbitration clause or arbitration agreement, too. Also, this could be implied intention of parties that the law of main contract might apply also to arbitration clause.
Another approach to determine 'law applicable to the agreement' is; the most appropriate law's governance, and this is the law applicable at the seat of the arbitration. If the parties do not choose the applicable law for their arbitration agreement, the court or the tribunal can govern the agreement with the law of seat of arbitration as an appropriate law. Plus, to govern the law applicable of the seat of arbitration to the agreement; agreement should not be prohibited by the law applicable of the arbitral seat.
In this step, can a court decide that the law of the seat of arbitration should apply to arbitration agreement, because of the most proper law reason? Firstly, it is necessary to remember that, we need to power of courts to enforce the arbitration's award or decision either to enforce in national territory or in international sphere. If it is looked at the SULAMERICA V ENESA Case for understanding the law applicable to agreement to arbitrate and when there is an absence of that choice of law, what would happen?
If it is analysed the case between Sulamerica and Enesa, it will be easy to understand the relationship between applicable law of agreement; law applicable at the seat of arbitration and the closest and the most real connected law. There are three stages need to examined by the tribunal; first stage must be seeking for the express the intention of choice of law to govern the arbitration agreement; second stage is seeking for the implied choice of governing law for arbitration agreement if the parties do not express the choice of law for their agreement; third stage is trying to find out 'the closest and the most real connected law.
In that example of case, even though parties are Brazilian and their intention of choice of law is Brazilian Law for their law applicable the agreement to arbitrate; London Court of Appeal decided to apply English law to their agreement because of the closest and the most real connected law reason. Maybe parties agreed that Brazilian Law would be applied to their agreement. However, they chose London as a seat of arbitration place to settle their dispute. Therefore, English arbitration seat will supervise the dispute settlement and this is the most and closest connection with the dispute. Also, in Brazilian law there was no such regulation for enforceability of the agreement for both parties.
In that case; according to agreement, the applicable law was Brazilian law, however the seat of London decided that the most relevant law was English law, because of the choice of the seat of arbitration. One of the parties started to a case in Brazil and other one started to arbitration in London. Even though there is a concurrent jurisdiction in here; London Appeal Court decided that on the contrary to agreement, parties’ intention and closest-most real connection should be the English law as it is understood from the choice of seat of arbitration.
Another applicable law is the 'law governing the arbitration'. This is the law of the country where arbitration is taken place. This law is different from the substantive law of arbitration. Substantive law is the law that will apply to substantive issues in the arbitration. But law governing the arbitration is the law of the arbitration place, which is expressed with Lex arbitri.
As it is shown before; parties are free to choose a national law or a particular law system to apply their arbitration. Even if parties are from different countries and they decide to apply their arbitration different state's law; “lex arbitri” or the law of the arbitration place will be the one where arbitration takes place or where the parties choose the place for their arbitration. For instance, parties can be from Germany and Switzerland. But they can agree that their arbitration will take place in United States. Even if their chosen substantive law is not relevant either with German or Swiss law or US law; the seat of arbitration will apply the chosen law to the law applicable the arbitration. But it is not easy task, indeed. Parties might not choose law applicable the arbitration. They rather choose a substantive law for their dispute than the place of arbitration. At this situation the seat of arbitration will be determined by either arbitral tribunal or arbitral institution. Also, unless otherwise agreed by parties, court also can fix the place of arbitration.
Another law applicable stage is 'law applicable to the substance'. This term can be known as a substantive law, the applicable law or the governing law. All these terms can be used as a law applicable to the substance. In here, the substantive law is used for interpretation and validity of contract; to determine parties' rights and duties; performance of contracts and determine the breach of agreement.
In fact, it is not as easy as it seems. Because in lots of cases the substance might be difficult to understand. For instance, one English woman buys something from a shop in England. This transaction obviously needed to be applied by English law. However, in lots of international transactions substantive law could be two or more different laws.
As it is discussed before, parties are free to choose their law for their arbitration agreement. As their agreement; parties are free also to choose a law for applying to their disputes. If any disputes arise from their transaction, the substantive law which they choose, will be applied to the dispute. This rule of parties’ autonomy has also place in international conventions such as UNCITRAL and ICC.
Can parties choose a substantive law for all disputes which arise from their transactions? Is it possible to apply their chosen law to all various disputes? Even if there is a party freedom in arbitrability, in some cases arbitration's competence might not be exist for the specific dispute. If there is a public policy concern in the dispute or mandatory rules prohibit that dispute to be solved by arbitration; the award or process of tribunal can be damaged.
For instance in SOLEIMANY V SOLEIMANY case; the parties were father and son and they were agreed to submit their dispute to arbitration by the Jewish Beth Din, the court of the Chief Rabbi. The applicable law was Jewish law. But the fact that their contract and transaction was including illegality. At the end of the arbitration, the son tried to register the award in England but the father applied Court of Appeal in England to set aside the arbitration award. At last, Court of Appeal decided that the award cannot be enforceable in England, because the dispute arised from an illegal contract and transaction which include smuggling. An illegal contract and transaction cannot be enforced under English law, even though the contract is valid under the substantive law. Because under the substantive law-Jewish law, illegal contract has no effect to enforceability of the award. But under English law-in England; where the parties tried to enforce the award; the contract is not valid and therefore the award cannot be enforced.
Another applicable law stage appears when there is a conflict rules situation exist in the arbitration. If parties do not choose their substantive law, and it is not possible to find out parties’ intention for choice of law, what will arbitral tribunal do? It is possible to understand parties’ intention, because they might express their choice of law with a tacit or implicit law. But if there is no expression for the choice of law, then arbitral tribunal should examine the conflict. This is the subject of private international law. If there is no such expression about choice of law, then conflict of law rules will be applied. These conflicts of laws can be different from one country to another because it is regulated in own national law. For example, in some states applicable law is the law of place that where contract was concluded, but some states regulate that the applicable law is the place of contract’s performance place. In here, tribunal has to choose which law is connecting with the dispute and which law is the most relevant.
What is the importance of national courts in arbitration? Can they interfere the arbitration or can the court and arbitration pursue to their process at the same time? The court and the tribunal have a partnership in arbitration. For instance, when a case takes place in court and there is an arbitration agreement between the parties, court can push the parties to go to arbitration. Also, during the arbitral proceeding, if there is a risk of damage in dispute, or a requirement of preserving evidence or requirement of protecting asserts; the tribunal can decide interim measures. In here, the tribunal will need the help and intervention of the court. Furthermore, competent court is always ready to review the decision of tribunal and also to enforce and recognise the arbitral award. As it is possible to challenge with the final award, also it is possible to challenge with such preliminary decisions of tribunal. This challenge is not the regular appeal of tribunal award therefore the tribunal will continue its process while the court is examining the preliminary decision of the tribunal.
To sum up, it is not deniable that arbitration subject is one of the most popular ways to settle the international disputes and it is not going to lose its importance as long as international transactions are exist all over the world. However, arbitration and arbitral tribunals owe their existence to the national courts. Because, the arbitration would not be as effective as its current power; unless the courts provide assistance and supervision to them.
Att. Aylin Aydın
Ozay Law Firm