maniruzzaman - conflict of law article - nilr-libre

8/12/2019 Maniruzzaman - Conflict of Law Article - Nilr-libre

1/37

NILR 1993 201

INTERNATIONAL COM MERCIAL ARBITRATION: THE CONFLICT O FLAWS ISSUES IN DETERMINING THE APPLICABLE SUBSTANTIVELAW IN THE CONTEXT OF INVESTMENT AGREEMENTS

by A.F.M. Maniruzzaman

1. INTRODUCTION

The parties to an investment agreement, i.e., a State or its controlled enterpriseand a foreign private entity,1 often fail to reach an agreement as to the substan-tive law applicable to any dispute that may arise during the course of theircontractual relationship. Sometimes, such disagreement occurs owing to theconflicting interests of the parties. As a distinguished jurist has aptly put it:

'While the host State is primarily interested in subjecting foreign investments to itsnational legal system because it wishes to retain the fullest legislative freedom inpursuance of its national economic policies, the foreign investor is primarily interestedin excluding the application of the law of the host State because he fears that the hostState may use its sovereign legislative power to change the legal environment to thedetriment of his investment. '2

Thus , in the face of the opposing views of the parties when agreement withregard to the selection of applicable law turns out to be impossible, the partiesprefer to leave the issue open so that it should be determined by the prospectivearbitrator or arbitrators in case any dispute arises in the future. This explains the

* Dr. A .F.M . Maniruzzaman is an international legal consultant and advocate of the SupremeCourt of Bangladesh and is currently a Visiting Scholar at the Centre of International Studies,University of C ambridge, U.K. The author expresses his gratitude to Professo rK. Lipstein, EmeritusProfessor of Law, Dr. G. Marston and Dr. M.A. Clarke, all of the Faculty of Law, University ofCambridge, for their helpful comments on the earlier drafts of this article.

1. See generally, Transnational Corporations, Vol. I, No. 1, UN Publications (1992); D.Campbell, ed., The Transnational Person: P rivate Rights in the International Business Community(1992).

2. G. Jaenicke, 'Consequences of a Breach of an International Agreement Governed byInternational Law, by General Principles of Law, or by Domestic Law of the Host State', in D.C .Dicke, ed., Foreign Investment in the Present and a New International Economic Order (1987).

Netherlands International Law Review, XL: 201-237, 1993c 1993 T.M.C. Asser Instituutand Contributors


2/37

2 0 2 A.F.M. MANIRUZZAMAN N I L R 19 93

reason why many of the more recent investment agreements are silent on theapplicable law clause. In order to settle the dispute, the arbitrator then has todischarge the difficult task of determining the law applicable to the contract. It

cannot be denied that whoever, whether the parties or the arbitrator, determinesthe applicable law which governs an investment agreement, the determinedapplicable law plays an important role in the interpretation of such an agreementand the rights and obligations of the parties flowing therefrom.

The purpose of this article is to examine the different methods of conflict oflaws or private international law3 that arbitrators follow in order to determinethe proper law or applicable substantive law of a contract when the choice of lawprovision is absent in it. It will be shown that there are two principal trends inthose methods that lead respectively to the theories of localization and delo-calization or denationalization of international arbitration.4 The arbitrator'sfreedom of will plays an important role towards such denationalization. To whatextent arbitrators can exercise that freedom is a matter of some controversy. Itshould be mentioned that the present study bears closely upon Article 28(2) ofthe UNCITRAL Model Law on International Commercial Arbitration (1985)5

which authorises the arbitrator to apply conflict of laws rules in determining theproper law of the contract when this has not been designated by the parties.6

The Model Law is now being increasingly adopted in many developed anddeveloping countries.7 On the question of choice of applicable conflict of lawsrules, the discussion will try to offer some practical insights.

2. THE ARBITRATOR'S TASK IN DETERMINING THE APPLICABLELAW

In the complete absence of an express choice of law provision by the parties,8

the arbitrator is entrusted with the task of determining the proper law of the

3. In this article'conflicto f law s'and 'private international law' have been used interchangeably,so have 'conflict of laws' and 'conflicts of law'.

4. The terms 'delocalization' and 'dena tionalization'used in this article are interchangeable.5. As adopted by the UN Commission on International Trade Law on 21 June 1985.6. Art. 28(2) of the Model Law on International Commercial Arbitration provides that: 'Failing

any designation (of law applicable to the substance of the dispute) by the parties, the arbitral tribunalshall apply the law determined by the conflict of laws rules which it considers applicable'. See 2

Arbitration Int. (1986)p . l l , a tp . 18, also in A. RedfemmdM.Hunter,LawandPracticeofInterna-tional Commercial Arbitration, 2nd edn. (1991) App. 21, p. 798, at p. 806, pp. 508-527; see alsoG. Herrmann, 'UNCITRAL A dopts Model Law on International Commercial Arbitration ', 2Arbitration Int. (1986) p. 2; G. Herrmann , The UNCITRAL Model Law - Its Background, SalientFeatures and Purposes', 1 Arbitration Int. (1985) p. 6.

7. See Redfern and Hunter, op. cit. n. 6, at pp. 525-527.8. See A.E. Anton, Private International Law (1990) pp. 268-273.


3/37

N I L R 1993 INTERNATIONAL COMMERCIAL ARBITRATION 2 0 3

contract by following conflict of laws rules9 as he deems appropriate.10 It isconsidered that in this process the arbitrator has the freedom of will to choosethe conflict rules. However, if the existence, validity, meaning or scope of choice

of law by the parties is called into question, that question must be resolved byapplication of further legal rules.12 In addition, if no valid and complete choiceis found, the arbitrator must resort to other conflict rules, requiring character-ization of the matters in dispute and determination of the proper law.13

In this context the question may arise whether the presence of a State or aState-controlled enterprise as one of the parties bears any special significance.

9. See generally, O. Lando , 'The Conflict of Laws of Contracts: General Prin ciples', 189Hague Recueil (1984-VI) pp. 225-448; R.J. W eintraub, 'Fundamental Developments in Choice ofLaw for Contracts', 187 Hague Receil (1984-IV) pp. 239-306; R. David, L'Arbitrage dans leCommerce International (1982); H. Batiffol, Les Contrats en droit international Prive Compare(1981); P.S. Smedresman, 'Conflict of Laws in International Commercial Arbitration: A Surveyof Recent Developments', 7 Calif. WILJ (1977) p. 263.

10. Rules for the International Chamber of Commerce Court of Arb itration, Art. 13.3 reprintedin 15 ILM (1976) p. 395; Convention on the Settlement of Investment Disputes Between States andNationals of Other States, March 18, 1965, Art. 42.1: 17 UST 1270; TIAS No. 6090, 576; UNTS159 reprinted in 4 ILM (1965) p. 532; UN Conventions on International Trade Laws (UNCITRAL)Rules of Arbitration Art. 33(1) in II YB Com. Arb. (1977) p. 161; Model Law on InternationalCommercial Arbitration (1985) Art. 28(2); European Convention on International CommercialArbitration (1961), 484 UNTS 364, 16 May 1961, VII (I). See also B.P. v. Libya, 53 ILR (1979)p. 326.See also W.L. Craig et al., International Chamber of Commerce Arbitration, 2nd edn. (1990) atpp. 283-292; I. I. Dore , Arbitration and C onciliation under the UNCITRA L Rules: A Textual Analysis(1986).

11. See B. Goldman, 'Les conflits de lois dans l'arbitrage international de droit prive ', 109Hague Recueil (1963-11) pp. 347, 409.

12. See generally, J. Prebble, Choice of Law to Determine the Validity and Effects of Contract

(thesis, Cornell University, 1972); J. Prebble, 'Choice of Law to Determine the Validity and Effectof Contracts: A Comparison of English and American A pproaches to Conflict of La ws', 3 CornellLR (1973) p. 4 33; A.J .E. Jaffey, 'Essential Validity of Contracts in the English Conflicts of L aw s',23 ICLQ (1974) p. 1; A .J.E . Jaffey, 'The English Proper Law Doctrine and the EEC Con vention ',33 ICLQ (1984) p. 531; U.U. Uche, 'Conflict of Laws in a Multi-Ethnic Setting: Lessons fromAnglophone Africa', 228 Hague Recueil (1991-IH) p. 273 .

13. K. Lipstein, 'International Arbitration between Individuals and Governments and the Con-flicts of Laws', in B. Cheng and E.D. Brown, eds., Contemporary Problems in In ternational Law(1988) p. 177, at pp. 182-189; see also P.A. Freund, 'Characterization with Respect to Contractsin the Conflict of Laws', in Lectures on the Conflict of Laws and International Contracts (1949)

at pp. 158-164; A.H. Robertson, Characterization in the Conflict of Laws (1940). A. Frihagen,'The Legal Characterisationof Resource Interests: Does it Ma tter? ', in Energy Law '88 (Proceedingsof the advanced seminar on petroleum, minerals & energy resources law organised by the IBA'sSection on Energy & Natural Resources Law in Sydney, Australia, March 1988) p. 345; P.D.Cameron, 'The Legal Structure and Characterisationof a Resource Interest: Does it Ma tter?', ibid,p. 356;P.A. Lalive, Th e Transfer of Chatties in the Conflict ofLaws: A Comparative Study (1955)pp . 1-29.


4/37

2 0 4 A.F.M . MANIRUZZAMAN NILR 993

Examining the recent arbitral practices, an experienced arbitrator has recently

concluded that:

' In international commercial arbitration involving State enterprises, the same principlesare nominally applied to solve conflict of laws as are applied in international commer-cial arbitration between private parties.' 14

However, he is mindful of the fact that only in a minority of cases and in relation

to certain aspects of the dispute will additional specific criteria have to be

considered because one party is a State or State enterprise. 15 This matter will

be discussed later in this article.

Arbitrators have adopted a great variety of solutions to the choice of law

question in the absence of an express choice of law clause. As mentioned earlier,the different approaches made to the conflict of laws rules have principally led

to two theories: 'Lo caliz ation' and 'delocaliza tion' or 'denatio naliza tion'. Under

the theory of 'localization', recourse will be had mainly to the rules of private

international law which lead to the application of the host State's law as the

proper law of the contract.

14. K.H . Bockstiegel, Arbitration andStateEnterprises (1984)p . 26. See also R. v. Internation-al Trustee for the Protection ofBondholders Aktiengesellschaft [1937] AC, where the court said' . . . in every case where a Government be a Party or not the general principle which determinesthe proper law of the contract is the same', p. 531. See generally, P. Sarievic, ed., InternationalContracts and Conflict of Laws (1990); A. Briggs, 'The Formation of International C ontrac ts', 2LMCLQ (May 1990) p. 192.

15. Bockstiegel, op. cit. n. 14, at p. 23; see also Bockstiegel, 'Arbitration between States andPrivate En terprises in the International Chamber of Com merce', 59 AJIL (1965) p. 579; Panel (I),'Arbitration between Governments and Foreign Private Firms', Proc. Am. Soc. Int. L. (April 28,1961)p. 69; C M . Spofford, 'Third-Party Judgment and International Economic Transac tions', 113

Hague Recueil (1964-III) p. 121; F.A. Mann, 'State Contracts and International Arb itration', 42BYIL (1967) p. 1; W .T. Ketcham, Jr., 'Arbitration between a State and a Foreign Private Party',in Symposium, Rights and Duties ofPrivate Investors Abroad(1965) p . 403 ; G.W. Ray, Jr., 'LawGoverning Contracts between States and Foreign Na tionals', in the 1960 Proceedings of the Instituteon Private Investment Abroad, p. 5; A. Broches, 'Choice of Law Provisions in Contracts withGovernments', 26 Record of the Assoc. of the Bar of the City of NY (1971) p. 42, J.-F. Lalive,'Contracts between a State or State Agency and a Foreign Company', 13 ICLQ(1964)p. 987; C.J.Olmstead, 'Econom ic Development Agreem ents, Part II: Agreements between States and Aliens;Choiceof Law and Rem edy', 49 C aliforniaLR (1961) p. 504; D. Suratger, 'ConsiderationsAffectingChoice-of-Law (Clauses in Contracts between Governments and Foreign N ationa ls', 2 IJIL (1962)

p. 273; J. Baloro, The Legal Status of Concession Agreements in International La w', 19 Comp.& ILJ of SA (1986) p. 410; M .M . Hassan, 'State and International Commercial A rbitration', RevueHelleniqUe (1989-1990) pp. 315-339; L.J. Bouchez, 'The Prospects for International Arbitration:Disputes between States and Private Enterp rises', in A.H.A . Soons, ed., In ternational Arbitration:Past and Prospects (1990) with comments on it by G.J. Jaenicke, on p. 155; K.R. Simmons,'International Arbitration between States and Corporate Entities: A Cautionary Note', in J.D.M.Lew,ed., Contemporary Problems in InternationalArbitration (1986) p. 273 ;P. Lalive, 'Arbitration


5/37

N I L R 19 93 INTERNATIONAL COMMERCIAL ARBITRATION 2 0 5

2.1 The localization theory

In the search for the objective proper law,16 in the absence of an express choice,

an arbitrator may resort to a variety of connecting factors:17

the place of theexecution of the contract,18 the place of performance,19 the nationality20 ordomicile21 of the debtor, and the fact that one party is a State (letting in interna-tional law)22 coupled with the possibility of depeqageP

with Foreign States or State Controlled Entities: Some Practical Questions', ibid. p. 289; J.P.Carver, 'The Strengths and Weaknesses of International Arbitration Involving a State as a Party:Practical Implications', ibid. p. 264 ; A.H. Herrmann, 'Dispute between State and Foreign Compa-nies', ibid. p. 250; J.A. Westberg, 'The Applicable Law Issue in International Business Transactionswith Government Parties - Rulings of the Iran-United States Claims Tr ibuna l', 2 ICSID Rev.(1987) p. 473; J.R. Crook, 'Applicable Law in International Arbitration: The Iran-US ClaimsTribunal E xperience', 83 A JIL(1989)p. 278; P. Eisetmnn, Report on the P resent Situation o f Inter-national Commercial Arbitration Between State or State Enterprises (1975) (paper presented to theFifth International Arbitration Congress, New Delhi); M. Domke, The Israeli-Soviet Oil Arbitra-tion ', 53 AJIL (1959) p. 708 ; M. Domke, 'Arbitration between Governmental Bodies and ForeignPrivate Fi nn s', 17 Arbitration J. (NS) (1962) p. 129; A. Broches, 'Choice of Law Provision inContracts with Governm ents', in W.L.M . Reese, ed., International Contracts: Choice of Law andLanguage (1962) p. 64; A. Boggiano, Contratos Internacionales (1990).

16. Government of Kuwait v. American Independent Oil Co. (1984) 66 ILR 560 (6), 561 (8);G.R. Delaume, 'State Contracts and Transnational Arb itration', 75 AJIL (1981) p. 784, at p . 802.

17. See generally, F.-E. Klein, The Law to be Applied by the Arbitrator to the Substance ofthe Dispute', in J.C. Schultszand A.J. van den Berg, eds ., Th e Art of Arbitration (1982) p. 189.

18. See S.P.P. (Middle East) Ltd. et al. v. Arab Republic of Egypt, 22 ILM (1983) p. 752, atp. 769 para. 49; see also ICC Award (16 June, 1960), Arb. Rechtspraak, 1960, 281 (in English);Ad hoc Arb. Award (15 August, 1957), Arb. Rechtspraak, 1959, p. 243 (in Dutch); Arb. Courtofthe Bulgarian Chamber of Commerce, Award 21 /56,1 /56,5 /55 ,2/56 ,16/5 6,10 /56,1 7/5 6,9/5 6,67/64, reported in Journalde droit international (1967) pp. 171 et seq. and p. 175. See the FinalAward in ICC Case No . 6268 of 18 May 1990 ,16 YB Comm. Arb. (1991) p. 119, at pp. 120-122.

19. See S.P.P. (Middle East) Ltd. et at. v. Arab R epublic of Egypt 22 ILM (1983) p. 752 , atp. 76 9, para. 49, in favour ofthe lex loci' solutionis; see also Petroleum Development Ltd. v. SheikhofAbuDhabi (1951) 18 ILR p. 144; ICC Arbitration No. 1472, Award 196S,inRevue del'arbitrage(1973) p. 141.Seealso Foreign Trade ArbitrationCom mission, Moscow: Aw ard 4 May 1957 NectonS.A. (Belgium)v. Prodintorg, Collected Arbitration cases FTAC No. 61, also in Journal du droit international(1960) p. 880; see also Collected Arbitration Cases FTAC (4 vols. covering 1934-1965) Nos. 18,29 , 34, 36, 40, 44-46, 50, 52-54, 56, 60, 62, 68, 75-78, 125, 131.See the Interim Award in ICC Case No. 6560 of 1990, 17 YB Comm. Arb. (1992) pp. 226-229;see also the Final Award in ICC Case No. 6283 of 1990, 17 YB Comm. Arb. (1992) p. 178, at

p. 179.20. See the Interim Award in ICC Case No. 6560 of 1990, 17 YB Comm . A rb. (1992) pp .226-229; see also the Final Award in ICC Case N o. 6283 of 1990, 17 YB Comm . A rb. (1992) p.178, at p. 179.

21. See the Final Award in ICC Case No. 5885 of 1989, 16 YB Comm. Arb . (1991) p. 92;see also the Hague Convention on the Law Applicable to International Sales (1955) Art. 3(1).

22. ICSID Convention of 1965 Art. 42(1).


6/37


Some authorities suggest that arbitrators should apply the rules of choice oflaw of the forum which the parties have designated for their arbitration. This isknown as the theory of the lexfori. Un der this theory, a contending host State

can possibly e nsure the application of its ow n law if it can make the private partyagree to insert provisions for arbitration to take place within its own jurisdic-tion.24 As Rapporteur of the Institut de Droit International, Professor Sauser-Hall advocated that arbitrators' and arbitral parties' choice of applicable lawshould be governed by the conflict of laws system of the forum of arbitration.In the absence of choice of law by the parties, the arbitrator must apply theconflict rules of the tribunal's forum or seat. This approach was also reflectedin Article 11 of the Resolution adopted by the Institut at its 1957 session inAmsterdam. It provided as follows:

'The rules of choice of law in force in the State of the seat of the arbitral tribunal mustbe followed to settle the law applicable to the substance of the difference. Within thelimits of such law, arbitrators shall apply the law chosen by the parties or, in defaultof any express indication by them, shall determine what is the will of the parties inthis respect having regard to all the circumstances of the case.If the law of the place of the seat of the arbitral tribunal so authorises them, the partiesmay give the arbitrators power to decide ex aequo et bono or according to the rulesof professional bodies (emphasis added).'25

Later, in 1959, the Institut's Neuchatel session also endorsed this view.26 Mannwas a strong proponent of this theory. In his view 'every right or power a privateperson enjoys is inexorably conferred by or derived from a system of municipallaw which may conveniently and in accordance with tradition be called the lex

23. Sapphire International Petroleum Ltd. v. National Iranian Oil Co. (1963), 35 ILR p. 171;Saudi Arabia v. Arabian American Oil Co. (1959), 27 ILR p. 165, at p. 166; Revere Copper andBrass Inc. v. Overseas Privatelnt. Corp . (1978), 56 ILR p. 294; for other possibilities see 18 Int.Lawyer (1984) p. 245 , at pp. 255-256; Ann. IDI (1979-11) p. 281, Arts. 1 and 2.W.L.M. Reese, 'Depacage: A Common Phenomenon in Choice of Law', 73 Columbia LR (1973)p. 58: 'Depecage can be defined broadly to cover all situations where the rules of different Statesare applied to govern different issues in the same case . It can be defined m ore narrowly to bepresent only when the rules of different States are applied to govern different substantive issues,and most restrictive definitions would confine the term to situations where by applying the rulesof different States to different issues a result is reached which could not be obtained by exclusive

application of the law of any one of the States concerned'.24. See Dicey and Morris on the Conflict of Laws, 10th edn. (1980) vol. 2, at p. 1127; D.M .Sassoon, 'Choice of Tribunal and the Proper Law of the Contract', J. Bus. L. (1964) p. 18; L.Collins, 'Arbitration Clauses and Forum Selecting Clauses in the Conflict of Laws: Some RecentDevelopments in England', 2 J. Mar. L. & Comm. (1971) p. 363.

25. 47(2) Ann. IDI (1957) p. 49 1, at p. 496.26 . See 48(2) Ann. IDI (1959) at p. 264.


7/37


fori' .27 Arbitrators may follow this traditional approach,28 though they are notbound to do so29 in the sense that an arbitrator is not to be labelled as a nationaljudge30 who is compelled to follow the rules of conflict of laws of the forum;31

we shall shortly turn to this issue. Critics of the traditional approach suggestedthat not too much importance should be given to the accountability of the lawof the forum of arbitration in view of the fact that sometimes the disputeconcerned may not have, in reality, any genuine connection with the forum. Thechoice of forum may be a matter of convenience and not a matter of connec-tion.32 The most important objection relates to the totally accidental characterof such forum in cases where it has not been fixed in advance by the parties tothe arbitration clause or agreement. It has been remarked thus:

27 . F.A. M ann, 'The Theoretical Approach Towards the Law Governing Contracts betweenStates and Private Foreign Pe rson s', 11 Revue Beige (1975) p. 562, at p. 5 65. See also Mann, 'LexFacit Arbitrum', in P. Sanders, ed., International Arbitration: Liber Am icorum for Martin Dom ke(1967) p. 157, at pp . 159-160. See the observations of Mann in 63(1) Ann IDI (1989) p. 173; R.H.Graveson, Conflict of Laws, 7th edn. (1974) p. 57. But see 'The UNCITRAL Model Law - LexFacit Arbitrum' - The Notes Editors, 2 Arbitration Int. (1986) no. 3 , pp . 241-261.

28. In many awards arb itrators relied on the rules of lex fori. See, for instance, the Sapphire

award, 35 ILR at p. 171; Alsing Trading Co. Ltd. and Svenska Tandsticks A ktiebolaget v. Greece(Award of 22 December 1954), 23 ILR p. 633, at p. 637. Cf., BP. v. Libya, 53 ILR p. 309, atpp . 326-27; T he Government of Kuwait v. Am inoil, 66 ILR at p. 560.

29. In the Economic Commission for Europe (ECE ), the negotiatorsof the European Conventionon International Commercial Arbitration 1961 rejected the Institut's position and adopted analternative approach that has gained a wide following. According to the Convention, arbitrators havewide discretion as to the applicable conflict of laws to determine the proper law when such aprovision to this effect is absent in the contract. See Art. VII(I) of the European Convention on Inter-national Commercial Arbitration 1961 ,484 UNTS 364, reprinted in C. Brower and L. Marks, ed s.,International Commercial Arbitration (1983) p. 215. See also Art. 13(3) of the ICC Arbitration

Rules, 28 ILM (1989) p. 231; Art. 33 of the UNCITRAL Arbitration Rules and Art. 28 ofUNCITRAL's 1985 Model Law on International Commercial A rbitration, 15 ILM (1976) p. 70 1,and 24 ILM (1985) at p. 1302, respectively.

30. Batiffol has stressed the contrast between State judges, who are bound by the conflict rulesof their State, and international arbitrators, who are not rendering justice in the name of any State.See H. Batiffol, 'L'arbitrage et les conflits de lois', Revue de V arbitrage (1957) p. Ill; ICC AwardNo. 1250 of May 1954, 5 YB Comm. A rb. (1980) p. 168; see also Holleaux in Revue de I 'arbitrage(1964)p. 134;K .S. Carlston, 'PsychologicalandSociologicalAspectsoftheJudicialand ArbitrationProcesses', in Sanders, ed., op. cit. n. 27, p. 44; I.N .D. W allace, Q.C ., 'Control by the Courts:A Plea for More, Not Less', 6 Arbitration Int. (1990) no. 3, p. 253.

31 . See the Kuwait v. Aminoil arbitration case , Aminoil Counter-Memorial (5 January 1981),vol. I (Text), Pleadings, Book 4, pp. 103-111, para. 226 et seq. [The Pleadings are available atthe Research Centre for International Law, University of Cambridge, UK].

32. SeeK..-H.B6 ckstiegcl,The Legal Rules Applicable in International Comm ercial ArbitrationInvolving S tates or State-ControlledEnterprises (19&2) p. 52; J. Lew, A pplicable Law in Internation-al Comm ercial Arbitration (1978) pp. 252-253; see also Y .A.M. Nusaire, Internationa l Arbitration:the Place and the Stages of Arbitration (thesis, C.P.M.L.S., University of Dundee, 1987).


8/37

208 A.F.M. MANIRUZZAMAN NILR 1993

'I t does not seem permissible to determine the applicable substantive law of the contracton the basis of the lexfori of that seat of arbitration, because that would mean thatthe parties - not knowing of course which seat might be determined later - wouldhave no possibility of finding out the applicable substantive law while performing thecontract.>33

Here ou r main concern is to examine whether the conflict rules sometimes appliedby arbitrators34 and as found in the private international law legislation in mostStates lead to the application of the host Sta te's law to an investment agreement.There is no denying that in the search for the objective prope r law , the law ofthe place of contracting and of performance appear to have had some supportin practice.35

One of the important rules in private international law as to the choice of lawis the principle of most significant relationship. That is to say, when there is noexplicit expression of the governing law or proper law in a contract, the properlaw of the contract shall be that with which the transaction has its closest andmost real connection.36 Thus, ' the search is no t for the State but for the systemof law with which the contract has the closest connection'.37 The rule dates backto the 1890s when it was accepted in favour of Westlake amidst the long-standingacademic battle between him and Dicey. This theory has slowly spread roundthe world, being advocated by Batiffol in 1938 under the name of the 'localiza-tion' theory. This is what a Resolution of the Institut de Droit Internationalconfirmed more than a decade ago.38 The Resolution reads, inter alia, asfollows:

33. Bockstiegel, op . cit. n. 14, at p . 27 .34. S.P.P. (Middle East) Ltd. et al. v. Arab Republic of Egypt, 22 ILM (1983) p. 752, at p.

769, para. 4 9. Cf., ICC Arbitration award 16 June 1960, Arb. Rechtspraak, 1960, p. 281 (inEnglish); Ad hoc Arbitration award 15 August 1957; Arb . Rechtspraak, 1959, p. 243 (in Dutch);

Arbitration court of the Bulgarian chamber of commerce awards 21/56, 1/56,5/55,2/56, 16/56,10/56,17/56, 9/56, 67/64 as reported by Kojouharoff in Journal du droit international (1967) p.171 et seq, and p. 175; Foreign Trade Arbitration Commission, Moscow: Award of 4 May 1957,NectionS.A. (Belgium))?. Prodintorg; see Collected A rbitration cases FT AC No. 61, also publishedin Journal du droit international (1960) p. 880; see Collected Arbitration cases FT AC (four vols.covering 1934-1965) Nos. 18, 29, 34, 36, 40, 44-46, 50, 52-54, 56, 60, 62 , 68, 75-78, 125, 131;ICC Arb . No . 1472 Award 1968, see Revue de Varbitrage (1973) p. 141; see also K. Hober,'Arbitration in Mosco w', 3 Arbitration Int. (1987) no. 2, pp. 119-163.

35 . See Saudi Arabia v. Aramco (1959), 27 ILR p. 117, at pp. 166, 167; Petroleum Develop-ment Ltd. v. Sheikh ofAbu Dhabi (1951), 18 ILR p. 14 4, at p. 149 ;seea lso Kuwait v. Aminoil,

the Government's Memorial (May 1980), Pleadings, Bk. 3, paras. 3.35-3.37, at pp. 59-60.36. This is also known as the 'Cen tre of gravity' or 'most significant contac ts' theory of thecontract conflict of laws.

37. M.A . Clarke, The Law of Insurance Contracts (1989) at p. 23.38. The Resolution 'The Proper Law of the Contract in Agreements between a State and a

Foreign Private Person' of the Institut de Droit International (adopted by the Institut at its AthensSession, September 4-13, 1979), 58 Ann. IDI (1979) pp. 193, 195 (Arts. 1 and 5).


9/37


'Article 1: Contracts between a State and a foreign private person shall be subjectedto the rules of law chosen by the parties or, failing such a choice, to the rules of lawwith which the contract has the closest link.Article 5: In the absence of any choice by the parties, the proper law of the contractshall be derived from indications of the closest connection of the contract (emphasisadded) . '3 9

In the sam e ve in , De nn in g LJ ( a s he then was ) ru led o n the ma t t e r in Boissevainv . Wei?0 a s fo l lows :

'The proper law of the contract depends not so much on the place where it is made,not even on the intention of the parties or on the place where it is to be performed,but on the place with which it has the most substantial connection (emphasis add ed) . '

La te r, i n 196 1 , Lo rd Den n in g , then in the H ou se o f L or ds , sa id s t r a igh t -fo rw ard ly , ' i n the abse nce o f an exp ress c l ause . . . t he t e s t i s s im ply wi th w ha tcou n t ry has the t r ansac t ion the c loses t and mo s t r ea l co nn ec t ion ' .41

L o r d S i m m o n d s a l so p r o n o u n c e d t h e j u d i c i a l d e f i n it i o n o f t h e p r o p e r l a w i nthe leading case Bonython v. Commonwealth of Australia*1 that 'the system oflaw by reference to which the contract was made or that with which the trans-action has its closest and most real connection'.

Thus, in English law the 'closest connection' or 'closest link' is known as the'proper law test'.43 Also Article 4(1) of the Rome Convention on the Law Appli-cable to Contractual Obligations provides that:

39. Idem.40 . [1949] 1 KB p. 482, at pp. 490, 49 1.41. In re United Railways ofHavanaA Reg la Warehouses Ltd. [1961] AC p. 10 07 ,atp . 1068.

42 . [1951] AC 20 1, 219; see also Tomkinson v. First Pennsylvania Banking and Trust Co.[1961] AC 1007; Rossano v. Manufacturers Life Insurance Co. Ltd. [1963] 2 QB 352, per Mc-Nair, J.

43. F.A . Mann , 'Th e Proper Law of the Conflicts of Law ', 36 ICLQ (1987) p . 437, at pp .437-438: The expression the proper law is peculiarto the law of England and the Comm onwealth.It does not seem to be usual in the United States and it means little, if anything to a Continentallawyer, for it makes sense only in an uncodified system of law. Taken literally, the term simplydenotes the appropriate legal system. It says nothing about the all-important question how you findthat system, how you identify it. There is, however, room for the impression that if you ask anEnglish lawyer for a definition he will go a little further and mention the legal system with which

the matter in issue is closely or, perhaps, most closely connected. John Morris certainly used thephrase in this sense'.See alsoDj'cey an d Morris on The Conflict of Lam, vol. 2,1 lth edn. (1987) pp. 1190-1197: 'Whenthe intention of the parties to a contract with regard to the law governing it is not expressed andcannot be inferred from the circumstances, the contract is governed by the system of law with whichthe transaction has its closest and most real con nection'. Rule 145 sub-rule 3, ibid.; R.H . Graveson, The Proper Law of Commercial Contracts as Developed in the English Legal Sy stem ', in Lectures


10/37

210 A.F.M. MANIRUZZAMAN N ILR 1993

'T o the extent that the law applicable to the contract has not been chosen in accordancewith Article 3, the contract shall be governed by the law of the country with whichit is most closely connec ted.>4 4

The second restatement of Conflict of Laws of the United States of America,1971, provides this principle in Section 188.45 The Uniform Commercial Codeof the United States of America, 1978, also produces this result (Section1-105). 46 The Foreign Economic Contract Law (1985) of the People's Republicof China provides in the same way, '. . . where parties fail to make a choice,the law that is the most closely related to the contract shall apply'.47

on the Conflict of Laws and International Contracts (1949), Summer Institute on International andComparative Law: University of Michigan Law School (1951) pp. 1-33; P.B . Carter, 'Contract inEnglish Private International Law', 57 BYIL (1986) p. 1; P. North, Private International LawProblems in Common Law Jurisdictions (1993) p. 103 et seq.

44. 80/934/EEC, O fficial Journa l of the European Communities (1980) L. 266. The Conventionentered into force on 1 April 1991 in France, Italy, Denmark, Luxembourg, Greece, Germany,Belgium and the UK : ibid. (1991) C. 52/1. See also generally, R. Plender, The European ContractsConvention: The Rome Convention on the C hoice of Law or Contracts (1991); P. M. North, ContractConflicts (1982); E. Jayme , 'The Rome Convention on the Law Applicable to Contractual Obligations(1980)', in Sarcevic, ed., op. cit. n. 14, p. 36.

45. Restatement (2nd) S. 188 (1971). See also R. Leflar, American Conflicts Law, 3rd edn.(1977) pp . 306-309;P. W ood, La w and Practice ofInternational Finance (1980) p. 12. RecentNewYork cases have followed the rule that a contractual provision setting forth the law applicable tothe agreement in question will be followed so long as the transaction bears a reasonable relationshipto the law chosen or, more precisely stated, to the jurisdiction whose law is chosen. Se e/l.S . RampellInc. v. Hyster Co. 3 N.Y. 2d 369, 144 N.E. 2d 371, 165 N.Y.S. 2d 475 (1957); Reger v . Nat'lAss'n of Bedding Man ufacturers Group Insurance Trust Fund, 83 Misc. 2d 327, 372 N .Y.S. 2d.97 (Sup. Ct. Westchester County 1975); Fleischmam Distilling Corp. v. Distillers Co. Ltd. 395F. Sup p. 221 (S.D.N .Y. 1975); B.M. Heede Inc. v. West India Machinery and Supply Co. 272 F.Supp. 236 (S.D.N.Y. 1967); General Electric Co. v . M asters Mail O rder Co. 244 F. 2d 681 (2d

Cir.), Cert, denied, 355 U.S. 824 (1957). See generally, M. Gruson, 'Governing Law Clauses inCommercial Agreements - New York 's Ap proach', 18 Columbia JTL (1979) p. 323 .

46. Uniform Commercial Code - 1978 Official Text, The American Law Institute , NationalConference of Commissioners on Uniform State Laws (1980) at p. 8. See also Comment, 'TheUniform Commercial Code and Conflict of Law s', 9 AJCL (1960) p. 458; R.K. Cu llen, 'Conflictof Laws Problems Under the Uniform Commercial Co de ', 48 KYLJ (1960) p. 417 ; B. Katzenbachin W.D. Malcolm, 'Panel Discussion on the Uniform Commercial Code', 12 Business L. (1956)p. 49 , at p . 68; R.J. N ordstrom, 'Choice of Law and the Uniform Commercial Co de ', 24 Ohio St.LJ (1963) p. 364; R.J. Nordstrom and D.B. Ramerman, 'The Uniform Commercial Code and theChoice of Law', Duke LJ (1969) p. 623; M. Rheinstein, 'Conflict of Laws in the Uniform Com-

mercial Cod e', 16 Law & Comp. Prob. (1951) p. 114; D.J . Tuchler, 'Boundaries to Party Autonomyin the Uniform Commercial Code : A Radical View ', 11 St. Louis ULJ (1967) p. 180.47 . The Foreign Economic Contract Law of the People 's Republic of China (Art. 5 ), adopted

by the 10th session of the Standing Committee of the Sixth National People's Congress on March21, 1985, State Council Bulletin, No. 9, at p. 217, reprinted and translated in 12 China Bus. Rev.(1985) No. 4, pp. 54-55. See also H. Zheng, 'A Comparative Analysis of the Foreign EconomicContract Law of the People's Pepublic of China', 4 China LR (1986) p. 227, also 'Recent


11/37


The test is sometimes described as the converging connecting factors test.48

Such a description is found in international arbitral practice. An internationalarbitrator may apply this test in order to avoid a rigid conflict of laws rule. While

applying the test the arbitrator aims at the substantive law pointed to by thepreponderant number of, or what he considers the most important, connectingfactors.49 Thus, amongst the connecting factors he takes into account the lawof the place of contracting, the law of the place where the subject-matter issituated, the law of the place of different transactions, the law of the place wherethe principal has his main business establishment and, after he decides to whichmost connecting factors point, he then applies the law of that country. Thus, forinstance, in an award50 by the Arbitration Court Chamber of Commerce,Budapest, it was observed that the contract was concluded at the defendant'sdomicile, Pakistan. The place of performance was also Pakistan. Payment of thepurchase price was also effected in Pakistan. In consequence, the connectingprinciples generally recognized in private international law (lex loci contractus,lex loci executionis, lex loci solutionis) pointed unanimously to the fact thatPakistani law should be applied to the contract. As a result of such considerationthe Arbitration Court held that the dispute which had arisen should be decidedaccording to the substantive law valid in Pakistan. In another ICC ca se , thetribunal held, after weighing a number of factors argued by the parties, that theplace of destination of the goods, the place of payment and the nationality of thebuyers were all France, and, therefore, French law was the proper law of thecontract. The tribanal said:

Developments in the Foreign Economic Contract Law of the Peo ple's Republic of C hina ', 13 WorldCompetition Law & Econ. Rev. (1989) p. 106; J.L. de Lisle, 'Foreign Investment: Foreign

Economic Contract Law', 27 Harvard Int. LJ (1986) p. 275; see also generally, P.B. Potter, TheEconomic Contract Law of China: Legitimation and Contract Autonomy in the PRC (1992).

48. See the Interim Award in ICC Case No . 6560 of 1990, 17 YB Comm. Arb . (1992) p. 226,at p. 227, see also the Final Award in ICC Case No. 6283 of 1990, 17 YB Comm. Arb. (1992)p. 178, at p. 179.

49. See the Final Award in ICC Case No. 6363 of 1991, 17 YB Comm. A rb. (1992) p. 186,at pp. 190-191.

50 . Award 1961 No . Vb 1024, cited by Mora in Questions of International Law (1964) p. 141.See also ICC Award, No. 805, Doc. No. 410/81, 24 October 1951; ICC Award No. 1001, Doc.No. 410/777 , 12 October 1960; ICC Award N o. 1005, Doc. No . 410/592, 10 April 1958; ICC

Award No. 1846, Doc. No. 410/1953, 24 February 1971; ICC Award No. 1177, Doc. No.410/1614 ,13 March 1968; ICC Award No . 1445, Doc. No. 410/1492 ,18 January 1967; ICC AwardNo. 1009, Doc. No. 410/514, 13 November 1957; ICC Award No. 1442, Doc. No. 410/1665, 25September 1968; ICC Award No. 1082, Doc. No. 410/744, 15 June 1960; ICC Award No. 1687,Doc. No. 410 /1855,10 June 1970; ICC Award No. 1529, Doc. No. 410/1658, 10 July 1968; ICCAward No. 1717 (1972).

51. See the Interim Award in ICC Case No. 6560 of 1990, 17 YB Comm. A rb. (1992) p. 226.


12/37


'. . . in my view the destination of the goods, the nationality of the buyers and theplace for payment of the p rice of the goods are factors which can and should be givenindividual weight (though the amount to be attributed to each may not be verysubstantial). It is common to find goods being sold to a national of one country fordelivery to another, with paym ent being effected in a third. H ere a single country (i.e.,France) linked these matters. Taken together, it seems to me that these indicia faroutweigh the considerably more technical and accidental considerations upon whichthe claimants relied, and lead inevitably to the conclusion that the prop er law of thiscontract is French law .'52

Lew thus remarks, ' this development is due to the movement away from rigidconflict of laws pre sum ptio ns tow ards a mo re flexible and realistic conflict oflaws me thodo logy '.5 3

While applying the test, whether it is called the closest link or the convergingconnecting factors test, to an investment agreement, i t may be found that mostof the c onne cting factors lie with the host State. Generally, the seat of t he subjectmatter of the contract, loci contractus5* an d loci solutionis,55 seat of theofferer,56 seat of the place where the enterprise is established, and the seat ofbusiness, etc., are within the territory of the host State.57 It has been rightlyobserved that:

52. Ibid., at p. 229.53. Lew, op. cit. n. 32, p. 342.54. Soviet Union: Civil Code (1964) Art. 566; Statute of Japan (Private International Law) Art.

7(2); T. Sawada, 'Practice of Arbitration Institutions in Japan', 4 A rbitration Int. (1988) No.2, p .120; Thailand: Private International Law Art. 13; Czechoslovakia: Private International Law andInternational Civil Procedural Law Art. 10(3); Bustamante Code Art. 186; Poland: Code on Private

International Law Art. 29.55. H. Batiffol, Private Internationa l Law (1970-1971); Graveson, op. cit. n. 27, p. 418;

Thailand: Private International Law Art. 13.56 . The former German Democratic Republic: The Act Concerning the Law Applicable to

International Private, Family and Labour Law Relationships as well as to International CommercialContracts Art. 12(2).

57 . J. Cherian, International Contracts and Arbitration (1975) p. 22; M.H. Arsanjani,International Regulation of Internal Resources (1981) p. 200 . When different rules of conflict allpoint to the same applicable law, the arbitra tor is inclined to consider a choice as superfluous. Seealso K. Ramazani, 'Choice-of-Law Problems and International Oil Contracts: A Case Study', 11

ICLQ (1962) p. 503 , who observed in the context of the oil contract concluded between the NationalIranian Oil Company and the Pan American International Oil Company that: ' . . . the applicationof the (objective) tests of sovereignty, nationality of the agent, the place of contrac ting, and the placeof performance would indicate that the applicable law is Iranian Law. Furthermore, other tests suchas the nature of the subject-matter and the place where it is situated, lex loci rei sitae, would alsoindicate the same because the subject-matter is Iranian Petroleum located within the Iranian dom ain'(p. 509).


13/37

N I L R 1 99 3 INTERNATIONAL COMMERCIAL ARBITRATION 2 1 3

'In most cases, at least where the investment involved relates to the exploitation ofminera l or other resou rces in the territorie s of the host coun try, all con nectin g factorspoint to the applicability of the law of the host State. Whether that law should beapplied as lex loci contractus or lex loci solutionis is in fact irrelev ant.>58

Thus, to the extent that the contract is primarily concerned with transactionswhich, to a greater or lesser degree, are to be performed in the territorial domainof the State party, the law of the State party normally governs the relationshipwhen the closest link test is applied in the absence of any choice of law provision.Apart from mining concessions including oil concessions, it also happens to bethe case with construction and management contracts,59 turnkey contracts,60

licensing agreements concerning transfer of technology61 or some other types

of licensing agreements.62

2.1.1 App lication of the host State's law: subjec tivist v. objectivist approach

It has already been seen that the host State's law may apply as a matter of'objective consideration' derived from 'the closest connection/most significantrelationship' or 'the converging connecting factors' test of conflict of laws. Therealso remains, on the other hand, the sole inclination of some jurists towards thesubjectivist approach which leads to the presumption of the application of thelaw of the State party to the contract. For the authority lying behind this

58. G.R. Delaume, 'Convention on the Settlement of Investment Disputes Between States andNationals of Other State s', 1 Int. Lawyer (1966) p. 64, at p. 7 8; to this effect, see in a recentarbitration WintershallA.G. v. Government of Qatar, 28 ILM (1989) p. 795 et seq.

59 . G. Westring, 'Construction and Management Contrac ts', in N . Horn and C. Schmitthoff,eds., 2 Th e Transnational Law of International Commercial Transactions (1982) p. 175, at pp.181-183; M. Davis, 'Cho ice of Applicable Law in International Construction C ontracts ', in J. Uffand E. Jones, eds., International and ICC Arbitration (1990) pp. 2 13-227.

60 . W.W. Oberreit, 'Turnkey Contracts and War: W hose Risk ?', in Horn and Schmitthoff, eds.,op. cit. n. 59, pp. 191-196.

61. D. Plaff, 'International Licensing Contracts, Transfer of Technology and TransnationalLaw', in Horn and Schmitthoff, eds ., op. cit. n. 59, pp . 199, 208-209; see also Licensing Guidefor Developing Cou ntries (World Intellectual Property Organization No. 620E, 1977) p. 635 ; J.Kasto, International Law of Technology (1992); M. Blakeney, Legal Aspects of the Transfer of

Technology to Developing C ountries(l989);G.N. Mudenda, The Development of he Mining Industryin Zambia: A Study in the Transfer of Technology (thesis, University of Sussex, 1984); G. O ldhamet al., Technology Transfer to the Chinese Offshore Oil Industry (1988), SPRU Occasional Papers,no . 27; M. Kassim-Momodu, 'Transfer of Technology in the Petroleum Industry: the NigerianExperience', 22 JWT (1988) no. 4, pp. 51-66.

62. See, e.g., ICC Award 16 June 1960; G.M . Brumbaugh, 'Choice-of-Law Provisions inLicensing Contracts', in Reese, ed., op. cit. n. 15, pp. 36-43.


14/37


approach, recourse is often had to the Serbian dictum. 63 There are also some

juris ts who su pport this position. 64 But such a presumption is counter-productive.

Thus in the Kuwait v. Aminoil arbitration case, Aminoil argued as follows:

'The old dictum of the Serbian Loans Case, always of doubtful value in the particularcase of loan contracts, can hardly be relied upon as representing modern law andpractice . . . In long-term investment contracts such as oil concession agreements- there can be no such presumption. Indeed, the presumption, if any, should be theother way round: for common sense and experience show that no private party to along-term contract with a State can be presumed to have implicitly accepted the lawof the State as the proper law , with the obvious risks following therefrom.' 65

However, there is no denying that the application of the host State's law to aninvestm ent agreem ent resul ts from both the subjectivist and objectivist ap proaches

of conflict of laws. 66 It is interesting to note that the modern arbitral practice

63. See the Serbian Loans case, PCIJ Series, A. Nos. 20/21 (1929); see also MessageriesMaritimes case, Arret de la Cour de Cassation, Ch. Civ. 21 , Juin 1950, D. 1951, p. 749. TheGovernment of Kuwait, in Kuwait v. Aminoil, stated in its Memorial that there was 'a strongpresumption, not only in French law but also in other legal systems too, including public internationallaw, that, where a State is a party to a contract, the law of that State is the proper law of the

contract'. See the Governm ent's Memorial (May 1980), Pleadings, Bk. 3, para. 3.37, at p. 60; seealso the Government's Reply (April 1981), Pleadings Bk. 9, paras. 2.40-2.41, paras. 2.42-2.54,at p. 22, pp. 23-27.

64. See Mann, in Revue Beige, loc. cit. n 27, at p. 564: 'The rule that in looking for the properlaw of transactions with States very great, though by no means overriding, weight has to be givento the character of the State party is universal, supported by common sense and applicable tolegislative instruments with particular force'. See also in Mann, Further Studies in InternationalLaw (1990) p. 264, at p. 266; M. Sornarajah, The Pursuit of Nationalized Property (1986) p . 103.G. Schw arzenberger, Foreign Investments and International Law (1969) p. 5. SchwarzenbergerandDelaume have argued that a sovereign State cannot be presumed to have subjected a contract to which

it is a party to any legal system other than its own: G. Schwarzenberger, 'The Arbitration Patternand the Protection of Property Abro ad', in Sanders, ed., op. cit. n. 27, pp. 317-318; G. Delaume,Transnational Contracts: Applicable Law and Settlement of Disputes, re-issue (1985) vol. 2 , Ch.14; J.D.M . Lew, Applicable Law in International Commercial Arbitration (1978) pp. 348-349: 'Ininternational law, it is beyond question that a sovereign State is entitled to regulate the rights pursuantto and the conditions of investment within its territory . A person investing in a foreign country doesso knowing he is subject to the laws of that country; he accepts the laws of the country of investmentas regulating the taxation payable and his right to remit to his own country the benefits of itsinvestment; he also accepts the risk as he does in his own country of changes which may occurin government and the policy towards foreign investors and their pro perty'.

65. See Aminoil Counter-Memorial (5 January 1981), vol. I (Text), Pleadings, Bk. 4, para.240, at p . 109.66 . See Lalive, loc. cit. n. 15, p. 987, at p. 993. As is well-known to both the Anglo-American

and Civil law systems, 'according to the objectivist theory the proper law is that of the countrywith which the contract has the most real connection , while under the subjectivist theory it iscontended that the applicable law is that to which the parties intended, or may fairly be presumedto submit themselves'. See also R.K. Ramazani, 'Choice-of-Law Problems and International Oil


15/37


is more inclined to support the view that in the absence of a choice of law clausein an investment agreement the law of the State party applies more as an objectiveconsideration. However, if for some reason or other the objectivist approach does

not lead to the application of the host State's law, then the subjectivist approachremains important as far as the State party is concerned.67

2.2 The delocalization theory

In modern arbitral practice the trend towards the delocalization or denatio-nalization of conflict ru les, hence international arbitration, may be noticed in thepractice of arbitrators. As mentioned earlier, an arbitrator, unlike a judge of anational court, derives his authority from a contractual arrangement between theparties, and the mechanical relation between the arbitrator and a national conflictof laws today does not arise because arbitration is an independent and autonomousinstitution.68 Under the contractual and autonomous theories of internationalarbitration, an international arbitrator is considered to have no lexfori.69 Thisconviction has led modern arbitrators increasingly towards the trend to detachinternational commercial arbitration as far as possible from any national law.

Thus, Goldman has advocated the development of some 'supra-national' privateinternational law rules, such as would obviate the problem of resorting to the

Contracts: A Case Study', 11 ICLQ (1962) p. 503 , at p. 505 . Concerning the two theo ries, seeE.J. Cohn, 'The Objectivist Practice on the Proper Law of Contracts', 6 ICLQ (1957) p. 373 etseq.; Chesire's International Contracts (1948); F.A. M ann, The Proper Law of a Contract, aReply', 3 ICLQ (1950) p. 197; also Mann, 'England Rejects Deloca lised Contracts and Arbitrati-on', 33 ICLQ (1984) p. 193, at p. 194: '(t)he search for the proper law impliedly chosen, i.e., aproper process of construction, will almost invariably render it unnecessary to resort to ViscountSimonds's deceptive formula (in Bonythonv. Commonwealth ofAustralia [1951] AC 201, 219: thesystem of law by reference to which the contract was made or that with which the transaction has

its closest and most real connection ) - deceptive, because the search for the closest and most realconnection is in essence nothing else than the search for the implied t erm '. See a lso Jaffey in ICLQ(1984), loc. cit. n. 12, p. 531, at p. 545.

67 . Sometimes, the State or its controlled enterprise is mandatorily required by law to contrac tby reference to its own law, for instance in Saudi Arabia. This will probably be an advantage forthe State contracting party. See Bockstiegel, op. cit. n. 14, at pp. 29-30; M. Sornarajah, The Pursuitof Nationalized Property (1986) p. 103.

68. See J. Paulsson, 'Delocalization of International Comm ercial Arb itration: When and Whyit Matters', 32 ICLQ (1983) p. 53.

69 . See generally A- Samuel, JurisdictionalProblems in International Commercial Arbitration

(1989) Ch. 1; H.P . de Vries, 'International Commercial Arbitration: A Traditional View ', 1 J. Int.Arb. (1984) p. 7; A.T. von Mehren, 'To What Extent is International Commercial ArbitrationAutonomous? ', in LeDroit des Relations Economiques Internationales: Etudes Offerts a B. Goldman(1982)p.217;J.Rubelin-Devichi,L 'arbitrage: Nature Juridique, d roit interne et droit internationalprive (1965) para. 584 , at p. 365; D.B . Straus, 'The Growing Consensus on InternationalCommercial Arbitration', 68 AJIL (1974) p. 709. Cf., Kuwait v. Aminoil, The Government'sMemorial (December 1980), Pleadings, Bk. 5, paras. 3.39-3.42, pp. 67-69.


16/37

2 1 6 A.F.M. MANIRUZZAMAN M L R 19 93

private international law rules of the siege of the tribunal, or the nationality ofthe arbitrators.70 The move towards delocalization of international arbitrationhas gained support in the legal literature as well as in arbitral practice. As one

arbitration lawyer has noted:

'In recent years, it has becom e fashionable to seek to detach internationalcomm ercialarbitrations from the control of the law of the place in which they are held. Such detached arbitrations go by many names. They may be called supra-national , or a-national or transnational or even ex-patria te . They may be called de-national-ized or de-localized . More poetically, they are also referred to as floatingarbitrations, which result in floating awards .' 71

But the question still remains whether there is any truly 'detached' or 'floating'arbitration or award.72

The trends toward the delocalization of international arbitration will now beexamined.

3. THE ARBITRATOR'S FREEDOM TO ESTABLISH CONFLICT OFLAWS RULES

As a party-appointed judge, there is no doubt that an arbitrator enjoys sufficientfreedom to decide which conflict of laws rules he should apply in order todetermine the law applicable to the merits of the case taking all relevant circum-stances into account. This freedom of the arbitrator appears as an important factorin the process of 'denationalization' of arbitration. The logic behind the parties'choosing an international arbitration, instead of a national court, for the settlementof their disputes may be that one or either of them may not be satisfied with therigidity of a national court in the matters of conflict of laws and as well as theoverall settlement of the dispute. Thus, in the expectation of a future friendlybusiness relationship the parties mutually expect to settle their dispute amicablywhich calls for a more flexible approach than that of a national court.73 Asmentioned earlier, the arbitra tor's freedom to select his own conflict of laws ruleshas also been formally recognized in many international legal instruments.74

70 . Goldman, loc. cit. n. 1 1, p. 35 1.71. A. Redfern, The Arbitration Between the Government of Kuwait and Am inoiP, 55 BYIL

(1984) p. 65, at p. 77.72. See generally, Mann, in ICLQ (1984), loc. cit. n. 66, p. 193.73. See also C. Shaikh, 'Proposed New Approach to Resolving Disputes in the Oil Industry ',

8 Oil & Gas L. and Taxation Rev. (1990) no. 5, pp. 119-120.74 . Art. VI I( l) of th el 961 European Convention on International Commercial Arbitration, Art.

33(1) of the UNCITRAL Arbitration R ules, Art. 13(3) of the Rules of the ICC Court of Arbitrationand Art. 28(2) of the 1985 UNCITRAL Model Law, reproduced in Y. D erains, 'Pub lic Policy and


17/37


In the BP Award, Sole Arbitrator Lagergren also supported this approach ashe said:

'If the parties to the agreement have not provided otherwise, such an arbitral tribunalis at liberty to choose the conflict of laws rules that it deems applicable, having regardto all the circumstances of the case.'75

The arbitrator's free choice should not be flawed by arbitrariness. Rather, heshould ensure the best possible choice in the circumstances. In an ICC Award,76

the arbitrator had this to say:

'Si les arbitresp euventm ettreen lum iereque, sur le point souleve, les regies de conflit

des diffdrents Etats avec lesquels le litige qui leur est soumis a des liens sont de lameme teneur ou conduisent au meme resultat, ils sont habilite s a appliquer les regiesde conflit commun, 6tant ainsi certains de satisfaire l'intention implicite ou supposeedes parties dont ils recoivent leur pouvoir.'

In another ICC arbitral Award, in a dispute between a Bulgarian State enterpriseand a Swiss buyer, the arbitrator held that 'in this matter [the applicable law]the arbitrators consider that it would be proper to apply Swiss private interna-tional law'.7 7 The special characteristic of the case was that the arbitration itself

as well as the activities under the contract were conn ected w ith several c oun tries.Thus , France was the seat of arbitration, Bulgaria was the State of nationalityof the seller and the place where the contract was concluded, Switzerland wasthe State of nationality of the buy er, Egy pt was the place whe re the contract wasto be performed, and Sweden was the State of nationality of the arbitrator.However, the arbitrator decided to apply Swiss private international law, whichled to the application of Bulgarian law, because it was the most appropriate forthe case at hand. The arbitrator avoided giving any reasoned explanation for thatchoice.

In an arbitral Award under ICC78 auspices the arbitrator found:

'Considerant que 1 'insertion dans un contrat, ay ant des liens de fait avec plusieurs Etats,d'une clause compromissoire confiant la solution des differends qui auraient resulte

the Law Applicable to the Dispute in International Arb itration', in P. Sanders, ed., Compa rativeArbitration Practice a nd Public Policy in Arbitration (1987) p. 226, at pp. 230-232; see also Art.

1496 of the French Code of Civil Procedure 1981 and Art. 12 of the Djibouti Code on InternationalArbitration 1984. The New York Convention of 10 June 1958 on the Recogn ition and Enforcementof Foreign Arbitration Awards also impliedly confirms the arbitrator's discretion in this field.

75. BP. v. Libya, 53 ILR, at p. 326.76 . ICC Arbitration No . 1776, Award 1970.77 . ICC Award No. 1048, Doc. No. 410/802 , 11 January 1960.78. See Goldman, loc. cit. n. 11, p. 409.


18/37

2 18 A.F.M. MANIRUZZAMAN NILR 199 3

dudit contrat a l'arbitrage d'une institution internationale, telle que la Chambre decomm erce internationale, exprime la volonte des parties de placer leur litige sur unplan international et de le faire trancher par un arbitrage vraiment international, sederoulant au-dessus de tout ord re juridique national;Considerant qu'e n pareil cas l'arb itre, pour resoudre le probleme des conflits de loi,inherent a cette sorte de litige, et pour determiner le droit substantiel au contrat encause, doit, tout d'abord, chercher la volonte, expresse ou tacite, des parties;Considerant que, faute d'une pareille volonte, l'arbitre do it, statuant ex aequo et bono,declarer applicable la loi qui, compte tenu des elements objectifs et des circonstancesparticulieres des cas litigieux, convient le mieux au contrat.'

It is thus clear that an international arbitrator may exercise great freedom in thematter of applicable law. However, he exercises such freedom in the way hethinks most appropriate under the practical circumstances of the case.

In the BP Award , 7 9 Sole Arbitrator Lagergren decided to apply Danishconflict of laws rules not because they were the lex loci arbitri*0 but becauseas a matter of fact he considered that they were convenient in view of thearb itratio n's close conne ction with Danish law which wou ld ens ure the effective-ness of the award bearing a national character as such.81 Further, Danish ruleswere likely to give effect to the intentions of the parties, since they containedfew restrictions upon the freedom of contracting parties to select the proper law

of their agreement. Thus in choosing the Danish conflict rules, the arbitrator

79 . BP . v. Libya, 53 ILR, at p. 326.80. A. Hirsch, 'T he Place of Arbitration and the Lex Arbitr i', 34 Arbitration J. (1979) no. 1,

pp. 43-48; Lew, op . cit. n. 64, at pp. 260-272. See generally , A. Samuel, The Effect of the Place

of Arbitration on the Enforcement of the Agreement to Arbitra te', 8 Arbitration Int. (1992) no.3, pp. 257-280; W.W. Park, 'The Lex Loci Arbitri and International Commercial Arbitration', 32ICLQ (1983) p. 21. See the Final Award in ICC Case No. 6268 of 18 May 1990, 16 YB Comm.Arb. (1991) p. 119, at p. 121. Cf., Kuwait v. Aminoil arbitration case, the Government's Counter-Memorial, paras. 3.21,3.19-3.20 ; contra the AminoilReply (27 April 1981), Plead ings Bk. 7, paras.33-34, 40(b), 45.

81. 'The arbitrator exercised his discretionary authority by selecting the law of the seat ofarbitration (in that case Denmark) as the law applicable to the arbitral procedure. He apparentlyconsidered that an advantage of localizing the law in this way was that enforcement would befacilitated since the award made under the law of a contracting State would fall within the terms

of the Convention on Enforcement of Foreign Arbitral Awards of 1958 (the so-called New YorkConvention). Attaching the award to the law of a particular State also provided the arbitrator witha developed procedural law for supplementary reference'. This point is brought out by J.G. Wetter(who was Secretary of the tribunal) in T he International Arbitral Process: Public and Private, vol.2 (1979) pp . 409-410; see also the ICC Arbitration rules (reproduced in 13 YB Comm. Arb. (1988)p. 185) which stress in Art. 26 that the arbitrator 'shall make every effort to make sure that theaward is enforceable at law'.


19/37

NILR 1993 INTERNATIONAL COMMERCIAL ARBITRATION 219

exercised his freedom of choice.82 Those rules led the arbitrator to assume thatthe parties were free to choose a non-national proper law.83

To ensure that the freedom of the arbitrator to choose the applicable conflict

of laws rules is not exercised arbitrarily, attempts have been made in arbitralpractice to draw up certain guidelines which an arbitrator should follow. As inthe Kuwait v. Aminoil arbitration case, Aminoil stated in its Memorial that:

' . . . as a matter of course it is for the judge or arbitrator to determine the applicablelaw in any proceeding conducted according to law . In making this determination,he cannot of course act in a purely arbitrary manner but must necessarily follow certainprinciples.'84

These principles or guidelines may be considered to be embedded in threecompeting views: one favours the cumulative application of the conflict of lawssystems to which the subject matter of the arbitration proceedings has closecontacts; a second view favours the application of international conflict of lawsrules or general principles of private international law; a third view favours thedetermination of the applicable law by the arbitrator directly, even without anyexpress reference to a conflict of laws rule; this means dispensing with theconflict rules.85

Because these three methods borrow from the technique of conflict of laws,although they correspond in their formal aspect to different theoreticalapproaches, they can be used, by the same arbitrator, either alternatively,depending on the particular circumstances, or concurrenty. A combination of thefirst two above-mentioned methods is also often used.86

The three different methods may be distinguished as follows:

82 . Cf., Kuwait v. Aminoil arbitration case, the Government of Kuwait's Reply (April 1981),Pleadings Bk. 9, para. 2.47, at p. 25; P. Fouchard, L'arbitrage Commercial International (1965)paras. 554, 555.

83. 53 ILR, p. 297 , at pp. 327-329.84 . Pleadings, Bk. 1, The Aminoil Mem orial (2 June 1980), vol. I (Text) at p . 37, para. 104.85 . Se eO . Lando , 'Conflictof Laws Rules for Arbitrator s', in Festschrift fur Zweigert (1981)

at pp. 157-178.86. See Y. Dera ins' Report to the International Council for Com mercial Arbitration Congress

(Series No . 2, P. Sanders, ed., UNCrTRAL's Project for a Model Law on International Commercial

Arbitration (1986) p. 169, at p. 189, 'These methods ( i.e ., the three methods as mentioned) all tendto show that the parties had to expect that the law eventually chosen by the arbitrator would beapplied. This is undeniably the case with respect to the cumulative application and the recourse togeneral principles of private international law, these two methods point to a law which a communityto which the parties belong is unanimous in recognizing as applicable, whether it is a limitedcomm unity, in the first case, or the international comm unity, in the second. But this desire to meetthe legitimate expectations of the parties is also not foreign to the method voie directe'.


20/37


3.1 Cu m ulative application of interested conflict of law s systems

The arbitrator may consider all the 'interested' conflict of laws systems with

which the contract has links in various respects, rather than applying only onesystem of 'in teres ted ' conflict rule s. In this process he would have to apply ruleswhich are common to these systems. It may well happen that the systems underconsideration lead to the same result according to their common rules: they allselect the same national law as applicable to the agreement. Therefore, anarbitrator does not need to choose one system of conflict of laws rules, but canbase his decision on this cumulative choice where the application of differentconnecting conflict systems all lead to the same applicable law. As Derains hassaid about the method:

'. . . the arbitrator considers the conflict of laws rules of the various national legalsystems concerned to the disputes submitted to him one by one. If these rules, whosecontents are nearly always different, converge towards one single domestic law, thearbitrator declares that this is the applicable law.'87

The recent literature in the field is replete with enthusiastic support for the theoryof cumulative choice.88 The same trend is also found in international arbitralpractice.

In an ICC case between a West German and a Greek, the arbitrator, sittingin Switzerland, held that:

'To resolve whether the substance of the claim is justified it is necessary to determineinitially the substantive law applicable to the dispute. If the agreement of the partiesdoes not express itself on the subject, it is necessary in the first place to research fromwhere to draw the conflict of laws rules to resolve the question. The answer to thequestion is sensibly facilitated by the fact that the principles of private internationallaw developed in German law, as well as in G reek law and in Swiss law, lead to thesame result (emphasis ad ded).'89

The arbitrator in this case considered the connecting factors concerning thedispute in three jurisdictions, viz., Greece (the place of conclusion and perfor-

87 . Derains, loc. cit. n. 74, p. 227, at p . 233; for more details see Y. Derains, 'L'applicationcumulative par l'arbitre des systemes de conflit de lois interesses au litige', Rev. Arb. (1972)

p. 93 .88. See, e.g ., P . Lalive, 'Les regies de conflit de lois appliqueesau fond du litige par l'arbitreinternational siegant en Suisse', Rev. Arb. (1976) p. 155; Lew, op. cit. n. 32, at pp. 335-341.

89 . ICC Award N o. 953, Doc. No . 410 /385,1 8 January 1956; ICC Award N o. 787, Doc. No.410 /104 ,21 November 1952; ICC Award N o. 986, Doc. N o. 410/461 ,13 M arch 1957; ICC AwardNo. 1990, Doc. N o. 410/21 70,14 June 1972; ICC Award N o. 953 , Doc. No . 410 /385,1 8 January1956.


21/37


mance of the contract and the residence of the buyer), Germany (the place ofdomicile of the seller), and Switzerland (the seat of the arbitration). For theapplicable law the arbitrator turned to the three conflict of laws rules of these

countries since they led to the same outco me . This method shows a trend tow ardsthe denationalization of international arbitration. The Iran-United States ClaimsTribunal has also recently resorted to this method.90 Thus, Lew remarked, ' thefact that the conflict systems with which they are connected adopt the samesolution gives that solution a special character for the non-national plane'.9 1 Inan ICC Award, it was observed:

'Even if it is generally admitted that judges decide on the applicable law according toconflict of laws rules of the State for which they render justice, the arbitrators cannot

have recourse to such rules to the extent that they do not derive their power from anyState. But if they can show on the question in issue that the conflict rules of thedifferent States with which the matter submitted to them has any ties are similar orlead to a same result, they have the power to apply these common conflict rules sincethey can be sure of satisfying the implicit or supposed intention of the parties fromwhich they derive their power.'92

However, usually this approach appears to be quite reasonable for transactionsin which typically no more than two parties are involved. Concession contracts

are, however, very often embedded in a multilateral setting in which more thantwo parties are involved. This is especially the case where the concessions areheld by interest-holders. At least in these situations a cumulation of more thantwo conflict of laws systems would be required.

There is another aspect, however, which supports an even broader approach:the fact that one and the same State grants concessions on identical terms to agreat variety of foreign concessionaires leads to the reasonable assumption thatthese concessions should all be subject to die same legal rules. This result canno tbe achieved and would probably even be prevented by a mere cumulation of arestricted number of 'interested' conflict of laws systems.

3.2 App licability of an internationa l conflict of law s system

The denationalization process of international arbitration may also take placethrough the application of an international conflict of laws system.93 Since thearbitrator's freedom to apply any conflict of laws rule as he deems appropriate

90. See, e.g., Carolina B rass Inc. v. Iran, 12 Iran-USCTR (1986 III) pp . 139, 144. Cf., Iranv. United States (Case B I), 10 Iran-USCTR (1986 I) p. 207, at p. 216.

91. Lew, op. cit. n. 32, at p.33 5.92. See ICC Case No. 1176.93. Goldman, op. cit. (1963) p. 347 , at p . 414; Fouchard, op. cit. n. 82, for arguments in

favour.


22/37


or suitable is not denied, there should not be any reason why he should not beallowed to develop a conflict of laws rule with an international character that issuitable for its application to the particular case concerned. As one scholar has

noted, 'one cannot argue that public international law requires the applicationof foreign law without also arguing that public international law lays down choiceof law rules, because otherwise there is no satisfactory way of resolving conflictsbetween competing systems of foreign law'.94 In the Liamco Award, Sole Arbi-trator Mahmassani said, '(i)ri a case involving a foreign litigant, the tribunal towhich it is submitted has to refer for guidance to the general principles gover-ning the conflict of laws in private international law'.95

It may be noticed that the practice of international tribunals over the lastcentury has developed independent rules of private international law which maybe called 'rules of international conflict of laws'.96 Such international tribunalsdo not have a lexfori in matters of private law so they have to rest their decisionsregarding problems of private international law on an international system ofconflict of laws distinct from the municipal one.97 The lexfori of such interna-tional tribunals consists of public international law as developed by custom andtreaties.98

The most apposite method for the implementation of the international conflictof laws system is, it has been suggested, the comparative law method'.99 The

94. M. A kehurst, 'Jurisdiction in International Law ', 46 BYIL (1972-1973) p. 145, at p. 222.95 . Liamco v. Libya, 62 ILR pp. 140-219, at p. 171; see also Saudi Arabia v. Aramco, 27 ILR

p. 117, at pp. 161-162.96. Diverted Cargoes case, ILR (1955) p. 820; 5 ICLQ (1956) p. 471; Rev. Crit. d.i.p. (1956)

p. 278; 8 AFD I (1956) p. 4 27; Rev. Arb. (1956) p. 15. Alsing case (1954), 23 ILR p. 6 33 ; 8 ICLQ(1959) p. 32 0, with comments by Schwebel. Aramco case (1958), 27 ILR p . 117, at p . 153 et seq.;Bastid in AFDI (1961) p. 300. Sapphire case (1963), 35 ILR p. 136 et seq. especially 170 et seq.;Lalive, in Annuaire Suisse (1962) p. 2 73; 13 ICLQ (1964) p. 1011; Texaco/Calasiatic\. Govern-

ment of Libyan Arab R epublic (1979), 53 ILR p. 442 et seq.; B P v. Libya (1979), 53 ILR p. 297,at p . 326 (Part VII, I). European Convention on International Commercial A rbitration 1961 Art.VII, 484 UW TS( 1963-64) p. 3 64 ,atp.3 74 . See also K. L ipstein ,'The General Principles of PrivateInternational Law ', 135 Hague Recueil (1972-1) p. 97, at pp . 167-193.

97 . See ICC Award No. 1512 /1971 ,1 YB Comm. Arb. (1975) at p. 129. It has been observedby K. Lipstein that 'an international system of conflict of laws differs in substance from municipalprivate international law in four essential respects. It cannot rely on lexfori in matters of privatelaw; renvoi is incapable, public policy is determined by international law; conflicts of classificationare rare see 29 Transactions o f Grotius Society (1944) p. 76; see also pp . 62 -67. However, inother respects 'rules of international conflict of laws' do not appear to differ much from domestic

rules of private international law (ibid.).98. See the Williams case, The American-Venezuelan Claims Commission, in J.B . Moore,History and Digest of the Arbitrations to w hich United States has been a Party (1898) vol. IV, p .4181, at p. 4182.

99. Bockstiegel, op. cit. n. 14, at p. 27 . Cf., A.T . von M ehren, 'Special Substantive Rules forMultistate Problems: The ir Role and Significance in Temporary Choice of Law Methodology', 88Harvard LR (1974) p. 34 7. See generally, J.M . Lookofsky, Transnational Litigation and Commer-


23/37

N I L R 19 93 INTERNATIONAL COMMERCIAL ARBITRATION 2 2 3

arbitrator may analyse comparatively several bodies of private international lawof the major and representative legal systems of the world for the purpose ofestablishing a set of general principles of conflict of laws. In this process the

arbitrator would attempt to determine 'general conflict rules' common to manysystems and simply apply that rule to determine the proper law or applicablesubstantive law of the contract. As a distinguished juri st has noted , 'th e inter-nationalists have argued , howe ver, that there is an international consens us oncertain rules of private international law, in the sense that dom estic system s a doptand apply them , so that they may be said to be general princip les of law and thusof public international law'. 10

The reference to 'general principles of private international law' may be foundin a number of arbitral awards.101 In the Economy Forms case,102 Chamber

I of the Iran-United States Claim s Tribunal referred to general princ iples of 'con -flicts of law' to find that the validity issue of the contract concerned wasgoverned by a national law and not by the general principles of law. It held thatUnited States law applied, since 'the centre of gravity of these dealings was inthe United States, that being the test under general principles of conflicts oflaw' .1 03 Similarly, in Harnischfeger Corp. v . Ministry of Roads and Transporta-tion,10* the Tribunal held that:

'The agreem ent. . . makes no reference to governing law; however, under generalchoice of law principles, the law of the United States, the jurisdiction with the mostsignificant connection with the transaction and the parties, must be taken to governin this specific case . . . (emphasis added).'10 5

Further, one may note that in both the Texaco106 and Liamcom cases thearbitral tribunals expressly referred to the general principles of conflict of laws.

cial Arbitration: A Compa rative Analysis of American, European andlntemationalLaw (1992); A. H.El-Ahdab, Arbitration with the Arab Countries (1990); S. Saleh, Commercial Arbitration in theArab M iddle East (1984).

100. J.G. Collier, Conflict of Laws (1987) at p. 363.101. ICC Award 1959, see as reported in Fouchard, op . cit. n. 82, at p. 389; ICC Award No.

3880/1982, 110 Clunet (1983) p. 897 and see Lew, op. cit. n. 32, No. 283, pp. 327-335.102. Economy Forms Corporations. Governmentof the Islamic Republic of Iran, the Ministry

of En ergy, Dam and Water Works Construction Co. (SABIR), Sakatemani Mani, Sahami Kass{MANA), and Bank Mellat (formerly Bank of Tehran), Award 55-165-1 (June 13, 1983), 3 Iran-USCTR (1984) p. 42, at p. 48 .

103. Idem. For criticism on the case see Chen in Chinese YIL & Aff. (1984) p. 137 .104. 7 Iran-USCTR (1984-HI) p. 90.105. Idem at p. 99; see also Uiterwyck Corp. v.Iran , para. 64 , IALR (Iranian Assets Litigation

Reporter), July 6 , 1988, at pp. 16,095,16,102; Queens Office Tower Assocs v. Iran Nat'l AirlinesCorp., 2 Iran-USCTR (1983-1) p. 247 , at p. 250.

106. Texaco v. Libya, 53 ILR at p. 442.107. Liamco v. Libya, 62 ILR at p. 171


24/37

224 A.F.M. MANIRUZZAMAN N IL R 19 93

Thus , in the latter the arbitrator held that the search for the applicable law shouldbe guided by 'the general principles governing the conflict of laws in privateinternational law'.1 0 8

It has been recently observed:

'During the last half-century, comparative law studies have revealed the existence ofconflict of laws ru les, not only comm on to several States, but also reflecting principlesshared by the major systems of the world comm unity. The formation of certain generalprinciples of private international law has become so deeply rooted in the legal con-science that domestic legal systems have recognized those general principles as a sourceto be relied upon by me national courts to supplement conflict of laws rules.Accordingly modern doctrine and case law are currently referring to general principlesof conflict of laws as the appropriate source to determine the applicable law in relationto contractual relationships, whether of a private law nature or characterized as publiccontracts. '109

A considerable number of awards concerning both categories of contracts, i .e. ,private and public, are reported to have supported the proposition that '( t)hegen eral o r univ ersa l recogn ition of a particu lar conflict rule justifies per se theapplication of that rule in an international arbitration'.1 1 0

The general conclusion drawn from a comparative study of the conflict of laws

rules of the various municipal law systems was succinctly summarised by ErnstRabel as follows:

'Among the multitude of conflicts principles mat, according to various claims, shoulddetermine the law applicable to all contracts , only two have resisted the test of criticalanalysis. These, indeed, form an adequate groundwork. First, the freedom of partiesto choose the law applicable to their contract must be recognized as a general rulewithout petty restraint. Second, in the absence of such agreement, a contract shouldbe governed by the law most closely connected with its characteristic feature (emphasisadded).'111

108. Idem; in the Aramco Award the parties' choice of law was approached in terms of thegeneral principles of private international law, 27 ILR p. 117, at pp. 154, 156.

109. A.S. El-Kosheri and T.F. Riad, The Law Governing a New Generation of PetroleumAgreements: Changes in the Arbitration P rocess', 1 ICSID Rev. (1986) no. 2, p. 273; see alsoKuwait v. Aminoil, The Government's Memorial (May 1980), Pleadings Bk. 3, paras. 3.32-3.33 ,at pp . 58-59. But see the Aminoil Counter-Memorial, vol. I (Text), para. 238 et seq.

110. Lew, op . cit. n. 32, at p. 327.111. E. Rabel, Conflict of Laws -A Comparative Study (1958) p . vii; see also J.-C . Pommier,

Principe d'autonomie et lois du contrat en droit internationalprive conventionnel (1992).


25/37


There is no denying the fact that there are very few established principles or rulesof international conflict of laws which are universally acknowledged.112 Besidesthe above-mentioned, viz., rules of party autonomy and the closest connection,

others such as locus regit actum, the concept of mandatory public law rules andthe recourse to the concept of public policy to evict solutions con trary to the basicprinciples prevailing in the field of development agreements,113 lex rei sitae,and lex loci actus may be worth mentioning.11 4 Besides the role of internationaltribunals in seeking the rules of private international law common to severalStates, international conventions or customs may establish rules of internationalconflict of laws, and it cannot be denied that in the latter case these may possessthe character of true international law.115 An eminent jurist has concluded that:

'International arbitrations between a State and nationals of another, being hybrid incharacter, can either follow as a framework the technique of international law (eithercustomary or conventional) and employ rules of international conflictof laws developedby inter-state international courts and tribunals . . .'6

3.3 Dispen sation with the application of conflict of law s rules

It has already been noticed above that, in the process of determining the appli-cable law, the application of conflict of laws rules is a cum berso m e proc ess, andit may sometimes lead to uncertainties. In many cases arbitrators have to basetheir decisions upon the peculiarities of different cases and to consider accordingto the practical exigencies in each case. With regard to international conflict oflaws rules, A keh urst 's comm ent is not to be taken lightly when he said, 'attem ptsto discover choice of law rules laid down by public international law have notbeen successful'. 7 Another scholar has noted, 'purporting to choose theconflict rules of international law is, in reality, nothing more than a veiled

112. See K. Lipstein in 135 Hague Recueil (1972 -I)p. 97 , at p. 168; Kahn-Freund in 143 HagueRecueil(1974-III)p. 20 et se q.; Lew, op. cit. n. 32, at p. 328 , who observes: 'several conflict ruleshave attained a wide acceptance in many sovereign private international systems and such havebeen applied as rules generally ac cepted '.

113. See A .F.M . Maniruzzaman, 'International Arbitrator and Mandatory Public Law Rulesin the Context of State Contracts: An Overview', 7 J. Int. Arb. (1990) no. 3, p. 53; see also El-Kosheri and Riad, loc. cit. n. 109, p. 273.

114. See P. Lalive, 'Transnational (or Truly International) Public Policy and InternationalArb itration', in P. Sanders, ed., Comparative Arbitration Practice and Public Policy in Arbitration

(1987) p. 257, at pp. 301-309; G.A. Zaphiriou, The Transfer of Chatties in Private InternationalLaw (1956) pp. 25-30.115. See the Serbian Loans case {France v. Kingdom of Serbs, Croats and Slovenes) 1929 PCIJ

Ser. A., Nos. 20-21, at pp. 40-42 (Judgment No. 14 of July 12); ICC Award No. 1717/1972,101Clunet (1974) p. 890.

116. Lipstein, loc. cit. n. 13 , at p. 194.117. M. Akehurst, 'Jurisdiction in International La w', 46 BYIL (1972-1973 )p. 145, a tp . 222.


26/37

2 2 6 A.F.M. MANIRUZZAMAN N IL R 19 93

attempt to allow the arbitrators to choose any substantive law they wish, forinternational law can provide no real guidance'.8 It may well be that such anapproach allows for appropriate flexibility and that it encourages due sensitivity

to the underlying political realities of arbitration.9

Indeed, the argument isbeing increasingly advanced that arbitrators need not rely on any conflict of lawsrule in order to determine the applicable law, but that they should choose anappropriate law directly.120 In practice, it also appears that an arbitrator some-times does not deem it necessary to apply any conflict of laws system, whethernational or international.121 As Judge Bellet, the former First President of theCour de Cassation, France, has observed: 'The modern view seems to be thatinternational arbitrators need no longer be bound by strict rules of conflicts oflaw'.12 2

The tru th of this view has been reflected clearly in Article V of the Iran-UnitedStates Claims Settlement Declaration.123 The Article establishes a range ofpossibilities for determining the governing law. The Tribunal can apply 'suchchoice of law rules and principles of commercial and international law as theTribunal determines to be applicable'}1* In contrast with other familiar interna-tional arbitration rules mentioned earlier,125 this formula does not require theapplication of any system of conflict of laws rules. The Tribunal is free to selectrules of substantive law from whatever sources and through whatever processes

118. S. J. Toope, Mixed International Arbitration (1990) p. 51.119. Idem.120. Lew, op. cit. n. 32, p. 225 .121. Idem, No . 302 et seq.122. P. Bellet, 'Forward', 16 Law & Policy Int. Bus. (1984) at p. 673. Bellet, an original

member of the Iran-US Claims Tribunal, remarked, with regard to the applicable law issue to befaced by the Tribunal, that: 'It would have been extremely awkward for these arbitrators to haveresorted to classic rules of conflict of law, forcing the arbitrators to choose between Iranian lawand American law. With tensions running high, it was worth avoiding such choices, part

maniruzzaman - conflict of law article - nilr-libre

Documents