- Arbitral Award
- ICC International Court of Arbitration (First Partial Award) 7110
STATE CONTRACTS - LONG-TERM CONTRACTS - SUPPLY CONTRACT - BETWEEN AN ENGLISH COMPANY AND AN IRANIAN GOVERNMENT AGENCY - CONTRACTUAL REFERENCE TO “LAWS OR RULES OF NATURAL JUSTICE” – PARTIES’ INTENT TO EXCLUDE THE APPLICATION OF ANY DOMESTIC LAW IN FAVOUR OF “GENERAL PRINCIPLES AND RULES ENJOYING WIDE INTERNATIONAL CONSENSUS” – APPLICATION OF THE UNIDROIT PRINCIPLES AS "THE CENTRAL COMPONENT" OF SUCH GENERAL PRINCIPLES AND RULES (CF. PREAMBLE OF UNIDROIT PRINCIPLES)
APPLICABILITY OF UNIDROIT PRINCIPLES EVEN IN THE ABSENCE OF IMPLIED CHOICE BY THE PARTIES - UNIDROIT PRINCIPLES AS THE LAW THE ARBITRAL TRIBUNAL CONSIDERS TO BE THE MOST APPROPRIATE ACCORDING TO ART. 13(3)[NOW ART. 17(1) ICC ARBITRATION RULES)
An English company and an Iranian government agency entered into nine related contracts for the supply of equipment. None of the contracts contained an express choice of law provision in favour of a given domestic law but some of them contained provisions referring to settlement according to “laws or rules of natural justice”. According to the Iranian Plaintiff, such references expressed the parties’ intent to refer to general principles of law. In its response, the English Defendant first objected that the reference to “natural justice” was a mere reference to procedural rules such as due process and fair hearing; moreover, being the obligor of the most characteristic performance whose place of business was in the UK, English law was to be applied as the most closely connected law in the sense of Article 4(2) of the 1980 Rome Convention.
A majority of the Arbitral Tribunal decided in favour of the Plaintiff. In interpreting the intent of the parties, it concluded that they had made a negative choice, i.e. they had intended to exclude the application of any specific domestic law and to have their contracts governed by general principles and rules which, though not enshrined in any specific national legal system, are specially adapted to the needs of international transactions and enjoy wide international consensus.
According to the Arbitral Tribunal such “general rules and principles enjoying wide international consensus […] are primarily reflected by the UNIDROIT Principles”. Consequently, it concluded “without prejudice to taking into account the provisions of the Contracts and relevant trade usages […] the Contracts are governed by, and should be interpreted in accordance to, the UNIDROIT Principles with respect to all matters falling within the scope of such Principles and for all other matters, by such other general legal rules and principles applicable to international contractual obligations enjoying wide international consensus which would be found relevant for deciding controverted issues falling under the present arbitration.”
As to the Defendant’s argument that the reference to “natural justice” should be understood under English law as a mere reference to procedural rules, the Arbitral Tribunal pointed out that in the context of international commercial arbitration, an interpretation peculiar to English law (and not even followed in other common law jurisdictions, such as the United States) was unacceptable.
Yet the Arbitral Tribunal stated that the applicability of the UNIDROIT Principles as the law governing the contracts would have been justified even in the absence of an implied intention to this effect by the parties. Indeed, the UNIDROIT Principles could be considered to be "the most appropriate law" according to Art. 13(3)[Art.17(1) of the 1998 version] of the ICC Rules of Arbitration.
With respect to the applicable law
This partial award, made in The Hague, the Netherlands, with the affirmative voice of the majority of the tribunal's members ...decides in a final way on the law applicable to all the contracts subject to these arbitral proceedings.
The Contracts respectively provide for the resolution of disputes which may arise there out, as follows:
Contract (i): ICC arbitration in The Hague, The Netherlands ...
Contract (ii): amicable resolution by the parties ...
Contract (iii): disputes to be finally settled "according to natural justice" by ICC arbitration in Paris, France ...
Contract (iv): disputes to be finally settled "according to natural justice" by ICC arbitration in Paris, France ...
Contract (v): disputes to be finally settled "according to natural justice" by ICC arbitration in Paris, France ...
Contract (vi): disputes not amicably resolved to be finally settled "according to the laws of natural justice" by
arbitration ...no site indicated for the arbitration;
Contract (vii): disputes not amicably resolved shall be settled "in accordance with natural justice" by arbitration ...no site indicated for the arbitration;
Contract (viii): disputes not amicably resolved shall be finally settled by arbitration in [State X] ... Contract (ix): disputes not amicably resolved shall be settled by arbitration in [State X] as
provided in clause 16 and [annexed]; articles 4 and 15 of the latter respectively indicating that (a) when the rules "governing the proceedings" contained in the said [annexed] are "silent", proceedings shall be governed by ". ..any rules which the parties (or, failing them, the arbitrator(s)) may settle in accordance with the rules of natural justice"; and (b) "in all matters not expressly provided" in the rules set forth in the said [annexed] "the arbitrator(s) shall act in the spirit of these rules (the ones provided in the [annexed]) and natural justice and shall make every effort to make sure that the award is enforceable at law".
The parties have agreed to submit all disputes arising from the Contracts to arbitration under the ICC Arbitration Rules (the "ICC Rules") before the same arbitral tribunal sitting at The Hague, the Netherlands. To that extent, then, the clauses in the Contracts have been superseded.
Claimant's position with respect to the applicable law:
...Claimant first adduced in its request for arbitration ...that (i) there was no "explicit" choice of law in the Contracts and (ii) the Contracts having been signed in [State X], the laws of [State X] should apply since the rule lex loci contractus is "a long-standing rule in international sales and purchases".
...Claimant further clarified its position by pointing out, with respect to Contract (v), that (1) the parties did not "expressly" agreed on the applicable law; and (2) references to "natural justice" are too vague since there is no agreement among international jurists on its content and it does not offer to the arbitral tribunal sufficiently precise rules to decide the disputes being the subject-matter of this arbitration and would in any case express the parties' will as to the "approach" to be observed by the arbitral tribunal in the course of the proceedings. Claimant insists that the parties wished to have the dispute resolved according to a "law", which law should be [the law of State X] since the Contracts were signed in [State X]; [State X] was the place of contractual performance and this Contract was a part of a large project [for purposes relating purely to State X]. In this submission, Claimant extended the above reasoning only to Contracts (iii), (iv), (v), (vii) and (ix).
Subsequently, taking all the Contracts as a whole, Claimant contends that the Contracts: should be first scrutinized for determining, according to Art. 13(3) of the ICC Rules, if there is any indication in the Contracts permitting to establish the parties' will as to the substantive law governing them. ...Claimant isolates four common features to all Contracts which, in Claimant's views, should lead to conclude that the Contracts are governed by general principles of law ...Against the backdrop of such four considerations, Claimant contends that the following circumstances reflect or indicate the implied intention of the parties to subject the Contracts to general principles of law as proper law: (a) the inter-governmental elements of the transactions between the parties and the fact that the Contracts "are accompanied by the exercise of exclusive powers of the state as sovereign and holder of the public power" ... b) the expression "natural justice", found in many of the Contracts would not have the narrow sense ascribed to it under english law referring to certain standards of procedural fairness which would be redundant because such standards are already reflected in the ICC Rules; and (c) the negotiation history of the Contracts would prove that it was the intention of both parties not, to accept the law of the country of the other as governing law and that the parties did not select the application to the Contracts of the Laws of a third state.
...In a nutshell, Claimant’s position is that in absence of an explicit or implied choice of law by the parties, the rule of conflict the most appropriate for determining the applicable law pursuant to Art. 13(3) of the ICC Rules would be either (i) general principles of private international law or (ii) [the] private international law [of State X]. In the first case, general private international law principles would lead to the application of general principles of law as proper law of at least 7 of the contracts, whereas in the second case the Contracts would be governed by [the law of State X]. Claimant argues that the contracts are "state contracts" or "state-to-state" contracts of international character, and that according to the practice of international arbitral tribunals, general principles of law are the proper law of such contracts. It also refers to different authorities favouring the application of general principles of law or lex mercatoria to state contracts and international contracts. Claimant rejects Respondent's arguments that the applicable law to the Contracts should be determined on the basis of the characteristic performance rule, since it would not be a part of the general principles of private international law. Claimant also rejects the application of the European Convention on the law applicable to international obligations of 1980, since [State X] is not a party and [the Convention] was ratified by and became effective far the U.K. after the Contracts were made.
Subsidiary, Claimant contends that the Contracts would be governed by [the law of State X] because [State X] is a party to all of them, all Contracts were made in [State X], and some of them were to be performed in [State X]. Claimant submits that since the Contracts were made in [State X], Article 968 of the civil code of [State X], providing that contracts are subject to the laws of the place where made, would governs Claimant contends that such solution would not be contrary to english conflict of laws rules, which would give preference to the presumed will of the parties, nor [to] the closest connection test existing, in England before its ratification of the European Convention or as contemplated in the latter’s art. 4, all of which would lead to the application of [the law of State X]. Claimant also argues that dutch private international law does not apply since the Netherlands was not envisaged as arbitration site when the Contracts were made and the application of dutch conflict of laws rules would be artificial.
Respondent's position with respect to the applicable law
...Respondent contends instead that "the proper law of the Contracts is english law or, alternatively, that the tribunal should apply general principles of law".
...Respondent contends that according to Art. 13(3) of the ICC Rules ...the arbitral tribunal should resort to the voice indirect, that is, selecting the conflict of laws rule it would deem appropriate, for determining the substantive law(s) applicable to the Contracts. In that connection, Respondent's opinion is that no national rule of conflict (particularly [of State X] or British) should apply exclusively or in tandem, either because the principle and semblance of impartiality would be compromised or because the cumulative application of english and [State X's] conflict-of-laws rules would lead to conflicting with respect to at least six of the Contracts. Respondent further argues that if the choice is to be made between the english and [State X's] conflict-of-laws rules, the first would be preferable because (1) the place of formation of the contract (the connecting factor determining the proper law according to art. 968 of the civil code [of State X]) is arbitrary and responds only to the convenience of the parties;(2) the english rule (as it was when the Contracts were made) is more consistent with comparative private international law, including modern international conventions; and (3) [State X's] conflict of laws is widely criticized and has never been applied by [State X's] courts. Respondent is of the view that the conflict of laws rules of the site of the arbitration (the Netherlands), though consistent with general principles of private international law, should not apply in view of conflicting authorities on the application by arbitral tribunals of the private international law of the country where they sit and the fact that The Hague was chosen as the site of the arbitration after the Contracts were made and was not selected by the parties or originally contemplated by them when contracting.
If choice is not to be made between the english and [State X's] conflict of laws rules, Respondent contends that general principles of private international law regarding contracts for the international supply of goods or services should apply. In Respondent's view, such principles would be (1) the Contracts are governed by the law of the jurisdiction with which each Contract separately considered is most closely connected; and (2) the proper law is that of the place of habitual residence or central administration of the party whose performance is characteristic to each Contract. By applying any or both of such principles Respondent contends that except for Contract (ix) (which could be governed by [the law of State X]) all Contracts are governed by english law. Respondent also argues that the result would be the same if either dutch or english conflict-of-laws rules were found applicable.
...Respondent argues that the expressions "natural justice", "the laws of natural justice" and the "rules of natural justice" have all the same meaning and just refer to principles of procedural fairness and do not have any bearing on the law applicable to the substance of the Contracts. In Respondent's view, the only substantive meaning which may be attributed to such expressions - which are not present, Respondent emphasizes, in Contracts (i), (ii) and (viii) - is that they refer to principles of equity or morality, which may not be reconciled with the fact that the tribunal is called to decide by application of the law and not in equity. In any case, Respondent indicates that such principles are deprived of any specific identity or are not sufficiently detailed to permit the resolution of a commercial dispute, circumstances which would negatively affect the enforceability of an award in these proceedings at least in England. Respondent indicates its agreement with Claimant's position, as perceived by Respondent, that general principles of conflict-of-laws would be the appropriate conflict of laws rule for determining the law applicable to the Contracts and that according to such general principles the closest connection test would be such general conflicts rule, but disagrees that such test may lead to the application of general principles of law as the substantive law, or that the characteristic performance test is not a part of generally accepted principles of conflict of laws. After contesting other aspects of Claimant's arguments, Respondent concludes that it would not be compatible with the expectations of the parties at the moment of contracting to see "such ill-defined :"principles" become the substantive law applicable to the Contracts. Respondent makes a special point in denying that the place of arbitration (as originally set forth in some of the Contracts before the parties decided to have consolidated arbitration in The Hague under the ICC Arbitration Rules) is a relevant element for determining the jurisdiction showing the closest connection with a contractual transaction, or that arbitration clauses in Contracts (viii) and (ix) render [the law of State X] applicable. Respondent reiterates its position that all Contracts are governed by english law except Contract (ix), which probably would be governed by [the law of State X].
Arbitral tribunal's consideration of an express or implied choice of law by the parties
...In the view of this tribunal, Art. 13(3) of the ICC Arbitration Rules should be interpreted as contemplating both the express and the implied or presumed choice by the parties of the law governing the Contracts. Such interpretation is consistent with the interpretation of similar texts created on the basis of a broad international consensus ... In consequence, in absence of express choice of law stipulations in the Contracts, this tribunal shall proceed to determine whether the parties have made an implicit choice of the law or laws governing the Contracts. To that end, the tribunal will consider the Contracts not in isolation, but as interrelated expressions of a long-term relationship between the parties spanning more than ten years. Such an approach is also consistent with (1) express statements of the parties in that regard ...(2) statements of the parties in that sense in the course of the hearing which took place in The Hague, the Netherlands, on ...(3) the unified approach adopted by the parties to deal with the resolution of ..disputes arising out of the Contracts; and (4) a certain degree of functional interrelatedness of the Contracts ...
It is also the view of this tribunal that indications of the parties as to the applicable law referred to in Art. 13(3) of the ICC Rules should be construed ...on the basis of an objective test revealing what would have been the reasonable intention and expectations of the parties regarding the applicable law as evidenced by all the circumstances surrounding the negotiation of the Contracts, as well as by contractual terms likely to evidence the applicable law, i.e. a "contextual" approach ...In that respect, the question of the applicable law was clearly an important issue in the course of the negotiation of the Contracts, which deserved careful consideration by each party in its efforts to advance the application of its respective national law. Matters closely interrelated, such as the neutrality of the applicable law and of the dispute resolution mechanism, were at the foreground of the parties' concerns and discussions and it is obvious that the way in which they were finally taken care of was at the centre of the carefully negotiated compromises inducing the parties to enter into the Contracts. Central to the considerations of each party in the course of contractual negotiations was its clear resolve not to accept the application of its counterpart's national law to the Contracts ...
Six out of nine of the Contracts contain the expressions "natural justice", "rules of natural justice" or "laws of natural justice" in association with the resolution of disputes through commercial arbitration. In five of those Contracts ...the syntactic insertion of the expression "natural justice" is redolent of the drafting a practitioner would use to refer to the law governing the substance of the relevant transaction ...The incorporation or exclusion of such terms was brought to bear in connection with discussions between the parties regarding the substantive law which would govern the Contracts and the dispute resolution process regarding controversies which might arise under the Contracts.
It is clear then that the presence of the expressions "natural justice", "laws of natural justice" and "rules of natural justice", which were undoubtedly the subject of careful consideration and negotiation, may not be ignored for assessing if and to which extent the parties have indicated the laws or principles governing the Contracts. However, to elucidate their meaning it would be inappropriate to have recourse, in bootstrap fashion, exclusively to the legal notions of one of the national juristic systems the application of which is at stake. The fact that the Contracts are drafted in english is not decisive, since the English language has become an international tool for expressing the terms and conditions of sophisticated transactions, even between parties none of which is a national of an english-speaking country or entering into transactions wholly unconnected with any such country. Resorting to english when it comes to exteriorizing in black and white the substance of a deal does not necessarily imply espousing the technical meaning that a specific common law jurisdiction would ascribe to the terms utilized, particularly when english is also the language spoken in other common law jurisdictions to which the expression "natural justice" is unknown or is deprived of the meaning ascribed to it under english law (for instance, such expression, and also expressions such as "rules of natural justice" or "laws of natural justice", are deprived of any technical meaning in the USA, are not currently used in such jurisdiction and may not be even found in Black's Dictionary (5th edition, 1979)). Such expressions are then ambiguous, particularly when found in international contracts not expressly submitted to the laws of England, and more specifically with respect to the non-english party not originating the contractual drafts being negotiated and whose legal system is not a common law one.
The determination of the procedural or substantive connotations. If the expression "natural justice" and the like shall have an impact on the law or laws applicable to the contracts and is a part of the choice-of-law process having as its purpose the determination of such law or laws. On the other hand, five of the six Contracts in which "natural justice" or similar expressions are found were from their inception submitted by the parties to international commercial arbitration. The sixth contract (Contract (ix)) was submitted ... to a type of highly delocalized and self-contained form of commercial arbitration comparable to international commercial arbitration, a trait further confirmed by the later conduct of the parties as they submitted contract (ix) together with the others to a unified form of international commercial arbitration. Therefore, it is appropriate, on the basis of the terms of the contracts and all surrounding circumstances, to establish the meaning and scope of "natural justice" and similar expressions from the autonomous perspective of both private international law and international commercial arbitration.
It is a general principle of interpretation widely accepted by national legal systems and by the practice of international arbitral tribunals, including ICC arbitral tribunals, that in case of doubt or ambiguity, contractual provisions, terms or clauses should be interpreted against the drafting party (contra proferentem) ...On the other hand, the meaning to be ascribed to expressions contained in international transactions ah initio submitted to international commercial arbitration should be consistent with the nature and expected rate or the dispute-resolution method chosen by the parties and the concomitant impact of such choice not only on procedural aspects but also on the law governing the merits. Finally, it is also a generally accepted practice by international arbitral tribunals, predicated upon elementary notions of coherence and rationality, to assume that the same words or expressions shall have the same meaning throughout the documents containing them ... This tribunal finds that, without unduly extending the scope of such principle, it also applies to situations such as the one faced by this tribunal, in which the same or similar expressions are repeated in different contracts between the same parties showing some noticeable functional interrelation, which, in addition, are to be considered as a whole for the purpose of determining the applicable law to the merits.
Common to such expressions found in six out of nine contracts is, precisely, the word "justice", which undoubtedly is the predominant element to be taken into account for assessing their meaning and scope. In international commercial arbitration, though it is imaginable that the term "justice" may be utilized only in the sense of procedural justice, i.e. due process and fair trills, it is commonly understood as referring to arbitral justice in a more comprehensive sense, including not only arbitral procedural fairness but also the type of solution regarding the merits not necessarily the same that would be obtained from national courts that should be expected by the parties by the very fact of having chosen international commercial arbitration far resolving their contractual disputes. Thus, it is not infrequently stated that often the parties resort to arbitration in order to have access to a "justice" other than that which would be obtained by applying a "national", particularly when, on account of the discrete circumstances of the case, a national would not be adapted to the solution of the dispute at stake ... An obvious confirmation that notions of justice in international commercial arbitration are not merely procedural but are also substantive is that the majority of national statutes dealing with international arbitration, international conventions regarding arbitration not just concerned with the recognition and enforcement of arbitral agreements and awards, and international arbitration rules contain procedural provisions and choice of law provisions, i,e. provisions pointing to choice of law solutions only becoming relevant because the dispute has been submitted to international commercial arbitration and which may well differ from those that would have been otherwise obtained had the decision of the case been left to municipal courts and their private international law systems.
This tribunal, being confronted, in view of the mandate of the parties, with a choice of law exercise for determining the proper law of the Contracts, also has to consider the meaning of justice in the field of conflicts of laws. According to one of the classic english private international law texts, the notion of justice has a clearly substantive, and not merely procedural, meaning and, indeed, justice in its substantive sense would constitute the cornerstone of the discipline, since the "dominant motivating principle" of a private international law system like the english system is "the desire to do justice in cases involving a foreign element". More specifically "so for as english law is concerned, the principle is a priori in the statutory sense, in the terms of the oath that every judge must take before he enters on his judicial functions; and secondly, justice appears in the results as well as in the premise. The judge's decision, which itself establishes or applies a rule, converts the postulate of justice into reality". It is clear also that justice is not understood merely as a "conflicts justice" premised upon a blind, mechanical and "neutral" designation of the applicable although an aseptic conflicts rule which operates on the basis of the geographical localization of the transaction, but is concerned with the results as to fairness derived from the application of this or that substantive rule to the disputed issue at stake (R.H. Graveson, Conflict of laws. Private international law, Sweet & Maxwell, 7th ed., 7-8 (1974)).
Such substantive essence of private international law justice is further illustrated through references to different english court decisions or authorities .. .Balance and convenience regarding the resolution of disputes as to their substance have been widely held as a part of' natural justice and of the principle of reasonableness inherent to such notion ...The trend favoring choice of law processes not indifferent to ensuring the application of substantive laws or norms ensuring the "best" solution for the specific case in view of considerations of fairness, substantive justice, the reasonable expectations of the parties and the fact that the applicable rule being advanced is the best adapted to the circumstances of the case is far from being limited to isolated national private international law systems ...
There is, then, a clear correspondence between, on one hand, the mandate of international arbitrators of making a fair and just decision adapted to the particular controversy at stake without being tied to precedent or abstract concerns and, as it happens in this case, without the parties' contractual stipulations directing the arbitrators to apply any specific national rule or legal system, and, on the other hand, choice of law methodologies aimed at reaching fair and just results by applying the substantive legal rules and principles which are better adapted to the circumstances of the case...From the standpoint of conflict of laws principles in international commercial arbitration, the notion of justice goes beyond procedural fairness and plays an important role in the determination of the applicable substantive law.
Particularly when associated with international commercial arbitration, choice of law justice is premised on the idea that multi-state cases are imperfectly governed by the laws of a single national jurisdiction, since by their very nature, they constitute a "social and economic unit" for which, in view of the fact that they overlap national frontiers, there is no equivalent comprehensive tailor-made "legal unit", sufficiently adapted to the circumstances of the multi-state case and the expectations of the parties, that would provide a fair and just substantive solution for it ...Choice of law methodologies advancing the application of that type of multi-state substantive rules are then the best adapted to resolve international commercial cases on the basis of the substantive justice and fairness expectations of the parties and the circumstances of the case.
In respect of transactions like the Contracts, in which (i) there is no express choice-of-law stipulation designating the law of any of the parties or of a third country and where neutrality regarding the applicable law was a paramount concern denoted by the parties' rejection of each other's law and the absence of any explicit or implicit reference to the laws of a third country; and (ii) the parties have buttressed neutrality as to the applicable law by agreeing to submit their contractual disputes to international commercial arbitration, albeit without empowering the Tribunal to act "ex aequo et bono" or as "amiable compositeur", it can only be concluded that no national law was judged adequate or adapted to govern such transactions without the risk of disturbing the balance of neutrality between the parties. In consequence, when the parties negotiated and finally entered into the Contracts they only left room for the application of general legal rules and principles adequate enough to govern the Contracts but not originated in a specific municipal legal system. Such balance of neutrality, which includes neutrality of the applicable substantive" law, is an essential part of the substantive justice expected by the parties in connection with the Contracts. Such "negative" choice by the parties commands as much respect as any express choice of law would have commanded, had the parties inserted choice of law stipulations in the Contracts; therefore, in order not to disrupt the parties' common understanding in that regard, this Tribunal must refrain from the choice of any national law as proper law. Through references to "natural justice" and the like, the parties indicated their intention that their Contracts be governed by substantive rules not belonging to any discrete national legal system and appropriately responding to their concerns about neutrality in the applicable law.
Though the parties excluded the application of any national law to the Contracts, it does not follow that they failed to imply the application of any other substantive rules or principles and thus left the decision regarding the designation of the proper law of the Contracts to the happenstance of choice of law methodologies over which they had no contract, particularly as to their neutrality for determining the applicable law. In this regard, the statement that "...wholly neutral principles of conflict of laws are an illusion" (A Lowenfeld, "Lex mercatoria: an arbitrator's view", in Lex mercatoria and arbitration (Carbonneau Ed.) Transnational juris publications, Inc. 37, 45 (1990)) is certainly pertinent and acquires special significance.
Such interpretation is particularly appropriate if the only alternative left in absence of "express or implied choice of law stipulations would be resorting to supposedly choice of law neutral and dispassionate criteria, such as a talismanic notion of the localization of the characteristic obligation or an amorphous grouping of contacts or the closest connection noticeable in some national legal systems, which would, by the rule of thumb and without taking into account the parties' concerns and expectations as to substantive justice, including neutrality as to the applicable law, impose the law of one of the parties or of a third state which would or might defeat the parties' intentions five out of nine Contracts contained international arbitration clauses providing far panels not to be integrated with nationals from the country of any of the parties. The other Contracts, though not expressly submitted to international institutional arbitration, both on account of the introduction of expressions such as natural justice or laws or rules of natural justice in connection with the dispute resolution process (as indicated before, such terms have both "procedural" and "substantive" connotations) and the omission of any designation of a national "lex arbitrii" or procedural law, referred to a form of commercial arbitration highly delocalized irrespective of the seat of the arbitral tribunal... The parties' latter conduct, i.e. their decision to globally submit disputes arising out of the Contracts to international arbitration under the ICC Rules, is clear evidence arid confirmation that the parties favored the delocalization of the dispute resolution system in connection with all the Contracts in consonance with their strong concerns regarding the neutrality of the substantive and procedural legal framework related to their long-term relationship embodied in the Contracts.
Such considerations acquite particular relevance when the transactions at stake, in addition to being commercial and international, are also colored as in the instant case by a certain degree of state or public involvement on both sides. The tribunal finds that it has not been presented with conclusive evidence showing that the Contracts may be considered state-to-state contracts since it has not been proved that Respondent is organically linked to the british state, vested with any of its functions or otherwise assimilated to the british state so as to acquire a position significantly different from that of a private party. Nevertheless, the Contracts, though commercial in nature, have a state party and have been negotiated, executed, and the obligations of the parties insert themselves, in a context in which state interests and policies are intimately concerned on both sides ...The Contracts then squarely belong to the category of international commercial contracts (which for the purposes of this award will be hereinafter referred to as "state contracts") being the subject of a resolution of the Institute of international law on arbitration between States, State enterprises, or State entities, and foreign enterprises" adopted on September 12; 1989 in the course of the Institute's Santiago of Compostela session. Such Resolution was intended to serve as guidance to international commercial arbitrators for, among other matters, determining the laws, rules and principles applicable to the substance of this type of transaction ...
State contracts show a certain number of paradigmatic characteristics which this tribunal finds of relevance in connection with the Contracts. Among those, the following are pertinent: (i) the state party should not be allowed to resort to its law-creating powers not in the general interest but to improve its legal position or to extricate itself from contractual liability ...(ii) the parties may expressly or implicitly delocalize state contracts to remove them from national legal systems and submit them to transnational legal rules ...(iii) the applicable law should respect the principle that the substantive "contractual equilibrium" between the parties as agreed at the moment of contracting is not disrupted ...(iv) detachment of the arbitral process and of the arbitral lex fori at large (including arbitral choice of law methodologies for determining the law applicable to the merits) from the laws of the seat of the arbitration ...(v) greeing on international commercial arbitration in connection with state contracts has an impact on the substantive law applicable to the substance of the dispute.
In this latter respect it is pertinent to point out that the parties and the arbitrators enjoy larger autonomy for delocalizing the contract and determining the applicable laws or rules when disputes arising out of a state contract are submitted to international arbitration than otherwise, and, thus, that choosing international commercial arbitration has delocalizing effects as to the applicable law: this may be established, for example, when comparing (i) the preamble and provisions of the resolution adopted by the Institute of international law in its Athens sessions on the proper law of the contract in agreements between a state and a foreign private person, dealing in general with issues regarding the law applicable to a state contract in principle not necessarily submitted to international commercial arbitration ...with (ii) the Santiago of Compostela resolution mentioned above, in particular its Arts. 4 and 6, which exclusively concern the law applicable to state contracts by international commercial arbitrators. The detachment of the choice of law methodology and the substantive applicable law identifiable through it from national legal systems in order to preserve the contracted for equilibrium between the state and the private parties is then a common feature of state contract arbitration to be taken into account when interpreting such contracts and their surrounding circumstances for determining the governing law.
In the present case, such equilibrium was an integral part of the substantive and dispute resolution justice framework the parties had in mind when entering into the state contracts binding on them. Therefore, references to "natural justice" and "laws" or "rules" of "natural justice" found in the majority of the Contracts should be consistently and uniformly interpreted as referring not only to procedural justice but to the special type of substantive justice the parties had in mind, based on the neutrality of the applicable law to the merits and of the means of dispute resolution mechanisms selected by the parties to effectuate substantive neutrality, this latter aspect further confirmed by the ulterior comprehensive submission by the parties of their disputes arising out of the Contracts to ICC international arbitration.
The choice of international or delocalized arbitration to resolve any potential disputes, which is explicit from their very inception in most of the Contracts but was later extended to all of them, should then be understood as an additional element to further support and maintain such substantive justice balance. Such choice plays a "localizing" role in the case of international and commercial state contracts not having an express choice of law stipulation, since it denotes the exclusion of choice of law criteria normally applicable by national courts, which would lead to the exclusive application of national laws, and therefore points by exclusion to a tertium genus or general principles of law which may be only defined in the negative as such rules and principles not exclusively belonging to a single national legal system ...Being international and commercial state contracts, reference in the Contracts to natural justice or the like, together with the absence of reference to any national law, can then be only reasonably construed as pointing to the application of such substantive legal rules and principles adapted to the Contracts and the facts and circumstances surrounding them, which, by not belonging to any discrete national legal system, satisfy the parties' concerns as to the neutrality of the applicable proper law. Substantive rules and principles fulfilling such requirements may only be general legal rules and principles regarding international contractual obligations and enjoying wide international consensus...the tribunal concludes that the reasonable intention of the parties regarding the substantive law applicable to the Contracts was to have all of them governed by general legal rules and principles in matter of international contractual obligations such as those arising out of the Contracts, which, though not necessarily enshrined in any specific national legal system, are specially adapted to the needs of international transactions like the Contracts and enjoy wide international consensus.
In addition, this tribunal estimates that its mandate. ..requires that, to the extent possible at this stage, some precisions be given as to the substance of such legal rules and principles. It should be noted that both Claimant and Defendant, at different stages of their successive argumentations, have expressed their concern either about the vagueness of general principles of law or the possibility (at least with respect to English courts) that an award rendered on the basis of such principles might not be enforceable before national courts.
Taking into account such circumstances, the discussions held in such connection with the parties ...and also the requirement that arbitrators ". ..should do no less than is required to exercise their authority completely ..." (Institute of international law, Santiago of Compostela resolution cited above, art. .1,63-II, International law institute yearbook 326 (1990)), this tribunal finds that general legal rules and principles enjoying wide international consensus, applicable to international contractual obligations and relevant to the Contracts, are primarily reflected by the principles of international commercial contracts adopted by Unidroit (the "Unidroit Principles") in 1994 ...In consequence, without prejudice to taking into account the provisions of the Contracts and relevant trade usages, this tribunal finds that the Contracts are governed by, and shall be interpreted in accordance (with), the Unidroit Principles with respect to all matters falling within the scope of such Principles, and for all other matters, by such other general legal rules and : principles applicable to international contractual obligations enjoying wide international consensus, which would be found relevant for deciding controverter issues falling under the present arbitration.
The reasons why this tribunal considers the Unidroit Principles to be the central component of the general rules and principles regarding international contractual obligations and enjoying wide international consensus, which constitute the proper law of the Contracts, are manifold:
(1) the Unidroit Principles are a restatement of international legal principles applicable to international commercial contracts made by a distinguished group of international experts coming from all prevailing legal systems of the world, without the intervention of states or governments, both circumstances redounding to the high quality and neutrality of the product and its ability to reflect the present stage of consensus on international legal rules and principles governing international contractual obligations in the world, primary on the basis of their fairness and appropriateness for international commercial transactions falling within their purview; (2) at the same rime, the Unidroit Principles are largely inspired (by) an international uniform law text already enjoying wide international recognition and generally considered as reflecting international trade usages and practices in the field of the international sales of goods, which has already been ratified by almost 40 countries, namely, the 1980 Vienna Convention on the International Sale of Goods;
(3) the Unidroit Principles are specially adapted to the Contracts being the subject of this arbitration, since they cover both the international sale of goods and supply of services;
(4) the Unidroit Principles (see their preamble) have been specifically conceived to apply to international contracts in instances in which, as it is the case in these proceedings, it has been found that the parties have agreed that their transactions shall be governed by general legal rules and principles; and
(5) rather than vague principles or general guidelines, the Unidroit Principles are mostly constituted by clearly enunciated and specific rules coherently organized in a systematic way ...
The precisions given by this Tribunal in preceding paragraph should suffice to dispel many concerns as to the enforceability of an award made in these proceedings on the basis of the general legal rules and principles applicable to international obligations on account of the vagueness or lack of precision of such principles.Learned opinions indicate that the present trend in England points towards the admissibility and enforceability in that : jurisdiction of arbitral awards based on lex mercatoria or general principles of law, particularly when the award has not been rendered in England or is not subject to english law and the laws of the national jurisdiction in which the award is made do not render invalid an award made on such terms ...
Arbitral Tribunal 's consideration of the applicable law in the absence of an express or implied choice by the parties :
The above conclusions would not have been different had the tribunal not found that the parties made an implicit choice of the applicable law to the Contracts. First and foremost, it should be noted that it is commonly accepted in comparative private international law that there is no clear delimitation between the tests to determine the implicit choice of law made by the parties with respect to the substance of contractual obligations and those to be observed in absence of choice and in fact the boundaries between such rests are often blurred ...The same objective circumstances, such as, in this case, the intention of the parties not to submit the Contracts to each other's laws or to the laws of a third country and yet their will to have their disputes decided according to legal rules and not ex aquo et bono, the nature of the relationship between the parties (share Contracts) and their concerns regarding the neutrality as to the applicable law as revealed, far instance, by -Contractual negotiations, the insertion of terms such as "natural justice" or "laws of natural justice" or "rules of natural justice" and the submission of all disputes to international commercial arbitration also militate in favor of concluding that the general alleged rules and principles regarding international contractual obligations enjoying a broad international consensus would have been found to be the law governing the Contracts even in absence of an implied contractual stipulation to that end.
Such conclusion would have been reached by the tribunal by resorting either to the "voie directe" or the "voie indirecte" ...
The determination of the applicable law is an exercise which may nor remain indifferent to the substantive outcome of the choice of law process. If projected to the field of international commercial arbitration and the interpretation of the relevant part of Art. 13(3) of the ICC Arbitration Rules, the necessary conclusion is that the very distinction between "voie indirecte" and "voie directe" becomes blurred and on the verge of fading away, since both would pursue the same ends through essentially the same means, namely, the application of the "better law", i.e. the substantive rules, laws and principles best adapted to a just and fair decision of the dispute on the basis of the circumstances of the case and the parties' expectations by directly taking into account, for so doing, the contents of the substantive rules and principles to be applied. ...with respect to the Contracts such "better law" is found in the general rules and principles regarding international contractual obligations enjoying wide international consensus. Since such rules and principles are deemed to become directly applicable, in absence of a choice-of-law, to transactions characterized as commercial and international share contracts, their application may be also explained in terms of the "voie indirecte", because such characterization is precisely a conflict rule, though differing from traditional ones in that its operation does not depend on the geographical localization of a connecting factor...
Art. 13(3) of the ICC Arbitration Rules does not impose on the arbitrators the obligations to follow generally accepted conflict of laws rules... In these proceedings, it has been sufficiently and convincingly argued that the cumulative method, i.e. the application of the conflict of laws systems of the national jurisdiction of the parties to the dispute would not have been useful because the private international laws of England and [State X] would have led to incompatible, rather than coincident, solutions as to choice of law in connection with most of the Contracts.On the other hand, in view of the diversity of private international law systems in the world, a comparative law research would identify generally accepted private inernational law principles enjoying wide international consensus for determining the applicable law to international contracts in absence it might be adduced, however, tha when it comes to determine the substance of such general rules and principles applicable in absence of an implied stipulation by the parties, the application of the Unidroit Principles is not possible, since the preamble to the Principles indicates that they may be applied "when the partieshave agreed that their contract be governed by general principles of law, the lex mercatoria and like ". The original draft version of the Unidroit Principles, which was not finally approved by the Unidroit Council in this respect, provided (Art. 1.2 (b)) that such principles also apply "when the parties have not chosen any law to govern their contract". This provision was excluded from the text of the Unidroit Principles as finally approved and is not a part of their preamble because the Unidroit Council felt, in absence of a choice by the parties, that it would be conducive to pre-empting the application of domestic law and national legal system rendered applicable by private international law rules...
Nevbertheless, on the basis of at least two grounds, this tribunal would not have been thereby prevented from referring to the Unidroit Principles a part of the law applicable to the Contracts in absence of an express or implicit choice of law stipulation:
(i)... The Contracts are governed, as a result of a preliminary finding, by general rules and principles regarding international contractual obligations enjoying wide international consensus, i.e. they are not governed by any discrete domestic or national law. In consequence, in the present case, no clash between any discrete municipal law and the Unidroit Principle is possible; and
(ii) the application of the Unidroit Principles does not depend on their self-given criteria of application, but on the powers vested with this tribunal under art. 13(3) of ICC Arbitration Rules, which are not limited to the "voie indirecte" and authorize it to directly determine the applicable law it deems more appropriate to govern the merits, i.e., in this case the general legal rules and principles regarding international contractual obligations enjoying wide international consensus, including, without limitation, the Unidroit Principles as an adequate restatement and expression of such general legal rules and principles. The application of the Principles in case of absence of choice then rests upon art. 13(3) of the ICC Arbitration Rules and the mandate conferred on this tribunal to find and determine the law applicable to the Contracts.
...This tribunal then concludes by a majority that, without prejudice to taking into account the provisions of the Contracts and relevant usages, the Contracts shall be governed by, and interpreted according to, the general legal rules and principles regarding international contractual obligations eenjoying a wide international consensus, including the Unidroit Principles, with respect to all such matters falling under the scope of such principles.
... a reluctance for psychological or political reasons on the part of each negotiating party to be seen expressly to agreee to apply the law of the other negotiating party is not the same as a determination by the parties that in no case shall the law of either of them apply. A fotiori is not a determination by them of the law that is to be applied to the merits of the dispute...
Thus in my view the attitude attribuited to negotiating parties was not tantamount to an agreement excluding the application of the laws of either of them. It was simply a reflection of the unwillingness of each negotiator to be seen expressly to concede that the law of the other would or might apply. A fortiori it is not a determination by them of the law that is to be applied to the merits of the dispute...
A determination of the law not to be applied ...is not a determination of the law which is to be applied. For the latter, the parties must positively pick their winner, not merely limit the field of choice.
Perhaps to pre-empt such objections, it was next argued (in the alternative) on behalf of Claimant that the wording of the Contracts did indeed point to a positive determination, or choice, by the parties. They had, it was contended,determined that the law to be applied to the merits of the dispute was to be the "general principles of law". It is my understanding that this contention derives from an inference, said to be reasonable, drawn from the reference in some of the Contracts to "natural justice", coupled perhaps with the fact that Claimant is a sovereign State entity...
A "determination" must be presumably determine something. It must, however informally expressed, indicate with reasonable certainty what has been determined. In the presume case I cannot think equitable to a pronouncement that the law applicable to the merits shall be "general principles of law" (a pronouncement itself not consicuous either for precision or for predictability of its consequences)... such references as can be found to "natural justice" do not in my opinion attempt to determine anything about the law applicable to the merits, let alone dictate that "general principles" of law are to be so applicable...The researches of counsel have produced no instance of any case where a contract calling for disputes to be settled by arbitration in accordance with natural justice was held thereby to be defining the substantive law applicable to the merits of the dispute, as opposed to the decision-making procedures to be adopted.
That some of the Contracts "here do coma" ? in a reference to "natural justice seems to me to indicate only a deisre on the part of the framers of those Contracts to stress that all arbitral procedures adopted, and all steps taken by the arbitral tribunal or any of its members, must be consisted with the rules of natural justice understanable enough, since otherwise there is a real risk that any award would be vulnerable to attack in many countries as being unenforceable, in the same way as would a foreign judgment arrived at after a similarly defective process. a requirement that the arbitrators have to proceed in accordance with natural justice may be said to be rather more specific than the provision in article 26 of the ICC Rules that the arbitrators have to make every effort to make sure that their award will be enforceable in law.In contract 9 the phrase is expressly referable to "the rules governing the proceedings"; it is agreed that those rules may include (if certain identified procedural rules are silent) rules" which arbitrator(s) may settle in accordance with the rules of natural justice".This cannot, in my view, suffice to allow the arbitrator(s) to "settle" provisions of substantive law, i.e. effectively to write into the Contract provisions of law which will govern the substantive bargain of the parties.
Moreover, the opening sentences of article 13 of the ICC rules, and of article 1054(2)of the netherlands code, contemplate a determination, or choice, by the parties of the rules of law to be applied to the merits of the dispute i.e. the "proper" law. Now it may be possible for the parties effectively to provide in express terms in their contract that it is to be governed by "Unidroit Principles" or by "general principles of law". A court or an arbitrator would in that type of case doubtless strive to do their best to interpret, and give effect, such language. But that is not the question here. The parties said nothing about "general principles of law", still less about which of the countless principles of law to be found in the world's legal systems ( principles often irreconcilable with each other) were to be selected. They said nothing about "Unidroit Principles". Indeed, the Unidroit Council itself declined to provide that the Unidroit Principles should apply where contracting parties had not chosen any law to govern their contract, since to have done so "would be, conducive to pre-empting the application of the domestic law of the national legal system rendered applicable by private international law rules.
In my view, the first sentences of article 13(3) of ICC rules and article 1054(2) of the netherlands code are applicable only if the parties themselves designate the rules of law to be applied by the arbitrator to the merits of the dispute. The parties do not do that (a) by designating rules to be applied by the arbitrators, not to the merits of the dispute, but to the dispute-resolving procedures prescribed or adopted by them; or (b) by inserting, in a number of these formal Contracts framed in english, a reference to "natural justice", a legal expression which in its ordinary usage is employed with reference to rules designed to ensure the fair trial of the merits, as opposed to rules of substantive law designed to be applied in deciding which of the disputants has the better case on the merits; or (c) by leaving it to the arbitrators to apply to the merits of future disputes any principles of law that the arbitrators may deem appropriate.
Hence I have not been able to accept the arguments on behalf of Claimant that the parties here have themselves determined, either "negatively" or "positively", the rules of law to be applied to the merits of the dispute. The parties never did "determine the law to be applied by the arbitrators to the merits". At best, if claimant is right, they purported to leave that determination to the arbitrators charged with resolving future disputes, if any.The failure of the parties to make a determination would seem to me to bring into play the second sentence of article 13(3), requiring the arbitrators to proceed by way of deciding upon a rule of conflict that they deem appropriate, being a rule of conflict which in tour designates the proper law( the provisions of which are to apply to the merits).
I therefore come to the second sentences of article 13(3) of the ICC rules and article 1054(2) of the netherlands code. The parties having ex hypothesi failed to determine the proper law for themselves, the arbitrators must make the selection in accordance (directly or indirectly) with what they consider to be "appropriate" rule of conflict. The second sentence of article 1054(2), viewed in isolation, arguably might be said to permit "direct" selection of the substantive law, rather than "indirect" selection with the selection of an appropriate rule of conflict.Prima facie it seems to me to be doubtful if that sentence, even viewed in isolation,would permit the arbitrators to deem appropriate, as applicable to the substance of the dispute, unspecified "general principles of law". Moreover here the second sentence of article 1054(2) is not to be viewed in isolation.On the contrary, Section VI, paragraph 2 of the Terms of Reference provides the rules governing the procedure are to be the ICC rules, and that only when the latterare silent will the articles of the netherlands code apply... Applying article 13(3) of the ICC rules the arbitrators must apply to the merits of the dispute the law designated as the proper law by the rule of conflict of laws which they deem appropriate. Among numerous threshold questions here is whether they may "deem appropriate" arule of conflict (if such there be)which does not itself designate any particular system of proper law; but merely leaves the arbitrators free to pick, as needs arises, from differing legal systems of sources, a selection of whatever rules of proper law they may deem appropriate.
I do not think that the latter would satisfy the provisions in questions. Article 13(3) seems to me to direct the arbitrators to arrive at the proper law by a rule of conflict which itself designates that proper law. The role of the rule of conflict is to designate the substantive proper law. The arbitrators are to select the rule of conflict, and the rule of conflict so selected is in turn to designate the substantive proper law. The second sentence of article 13(3) basically tells the arbitrators that they are not obliged to apply the rules of conflict of e.g. the forum or seat of arbitration, if they consider other rules of conflict to be more appropriate. But a so-called rule of conflict that purports to prescribe merely that the arbitrators may or shall hereafter designate principles of substantive proper lawto be applied postulates that the substantive proper law remains undesignated by that rule of conflict itself.Such a "rule" is not in truth a rule of conflict at all.To say that the arbitrators may deem appropriate a "rule" that would merely refer back to arbitrators themselves the designation of the proper law is a circular way of saying that the "rule" does not designates any proper law. As well as multiplying the uncertainties of the outcome, this seems to be be contrary to the underlying concept. Article 13(3) by its nature is a provision which will apply to the countless international bargains subject to the ICC rules in which the parties themselves (whether purely commercial entities or sovereign States) have made no specific determination as to the law to be applied to the merits. My own surmise is that most would expect their arbitral tribunals to do their best to apply "the generally accepted legal rules for deciding the law which would need to be applied"...That would result in the selection of a particular system of law as proper law, the classic role of any system of conflict of laws. Article 13(3) seems to me to be designed for such parties. More adventuresome parties who prefer something more sophisticated cannot reasonably complain if they are required to specify expressly what they have in mind.
For the above determined reasons I conclude:
(a)that the parties here never themselves determined the law to be applied to the "merits of the dispute";
(b)in particular, that they at no time purported to determine that such law was to consist of "general principles of law";
(c)that if they have purported to do the latter that would not have been a determination qualifying as such under the first sentence of article 13(3) of the ICC rules, which calls for a determination by the parties of the proper law which is to be applied to the merits by the arbitrators, and not merely for an indication by the parties that if a dispute arises, the arbitrators are left free to choose any rules or proper law that they think appropriate;
(d)that accordingly the first sentence of article 13(3) is not satisfied here;
(e)that nevertheless, by reason of the foregoing and the second sentence of article 13(3), the arbitrators here have a wide discretion to select,from any existing rules of conflict designed to identify a proper law, the rule of conflict which they consider to be the most appropriate; and
(f) that having done so, they should thereafter proceed to apply to the merits of the dispute the system of proper law identified by that rule of conflict...But what conflict rule is "appropriate" here?...I take the view that the present Contracts...are all most closely connected with England...Under conflict rules familiar in numerous legal systems, including those of english law and of The Netherlands(the ageed seat of arbitration) a permissible approach would be to seek the law which had the "closest connection" with the Contracts. That appears to me to the point to english law.The widely favored "principle of characteristic performance", which order has the endorsement of an impressive number of countries, including again England and The Netherlands, would point strongly in the same direction...
Accordingly, I would have held, in the case of Contracts Nos. 1-8 inclusive, that the law to be applied to the merits of the dispute was the law of England, being the law designated as the proper law by the rules or conflict or, inter alia, The Netherlands and England, which rules I would deem more "appropriate" than any other in the present case.I would not have been disposed to contest, however, that in relation to Contract No. 9( having regard to the obligations of the partiesperformable by [State X] there under), the proper law could be held to be that of [State X], as being the system designatedas the proper law by the rules of conflict above mentioned calling for the ascertainment of the law with which the relevant Contract might be said to have the closest relation.}}
Original in English:
ICC International Court of Arbitration Bulletin, Vol. 10, No. 2, Fall 1999, 39-54}}