published by the llinois Institute for Continuing Legal Education

© 2001 by Stephen E. Smith

III. Drafting the International Arbitration Agreement

C. [23.5] Choice of Law

As has been pointed out aptly by Jan Paulsson, a noted text writer and practitioner in the ADR field,

[A]t least five different systems of law may become relevant during the course of an international arbitration:

the law that determines the capacity of the parties,

the law that determines the validity of the arbitration agreement,

the law governing the arbitration itself and in particular the procedure,

the law applicable to the substance of the dispute,


if there is a conflict of applicable substantive laws, the law under which that conflict is to be resolved

In general, the parties cannot make a choice of the law applicable to capacity, except (for instance) by incorporating a company in a particular country. The parties generally need not make an express choice in relation either to the law governing the validity of the arbitration agreement of the law governing the procedure of the arbitration itself. This will usually follow naturally from the circumstances; the proper law of the arbitration is generally that of the contract of which it is a part, and the law governing the conduct of the arbitration is generally that of the place of arbitration. Parties wishing to make explicit exceptions in either respect should seek expert advice before doing so.

J. Paulsson, Ch. 22:12 of R. Smith, ADR FOR FINANCIAL INSTITUTIONS (1995).

There are very important consequences that can arise from choice-of-law issues. Accordingly, the practitioner should not only formulate the substantive issues carefully, but should also consider the enforcement regime. See e.g., National Thermal Power Corp. v Singer Co. (3 Supreme Court Cases 91992) 551-573, XVIII Yearbook Commercial Arbitration 403 (1993). (The Indian Courts could enjoin the enforcement of the award outside of India anywhere even if the place of the arbitration was outside India. This means that effectively an action to set aside the award could be brought in India, hobbling the notion of deference to international arbitration awards that courts normally show them.)

While most arbitration rules require consideration of not only the terms of the agreement, but also trade usages with a view to honoring the parties’ intent at the time of contracting, there has been an increasing development of a modern-day international law merchant or lex mercatoria The concept of an international law merchant would be used in these sorts of matters in order to avoid the particularities of any given country’s.

Another approach is to designate no national law at all and base the award on "general principles of law." This is quite a convenient starting place to develop "concurrent laws" in which one party to a contract is a state or state agency. These general principles, or "public international law" are joined with national law in the case. Such a pluralistic approach assures that the national law meets a minimum international standard. When one party is a nation or national agency, it can be particularly helpful for the other party to insist in the contract that the national law will not be changed to that party’s detriment with respect to the venture or any arbitration arising in that country after the date of the execution of the contract.

Finally, in an attempt to assure that the parties will receive the method of resolution they chose by selecting arbitration, the parties should consider enabling the arbitral tribunal to act as amiable compositeurs, and render a decision not by reference to any specific national or other regime of rules, but rather ex aequo et bono or in equity and good conscience. This method is particularly beneficial when the parties hope to continue their business relationship.