Non-state rules and arbitration

Introduction

This chapter examines the application of non-state rules in international commercial arbitration. Chapters 5 and 6 discussed the use of non-state rules as the sole applicable law to the contract and concluded that this is not allowed in most jurisdictions, although there are some exceptions. By contrast in arbitration it is usually possible to choose non-state rules as the sole applicable law. This chapter focuses especially on the link between arbitration and litigation, that is to say when an award based on non-state rules gets challenged in the courts. Understanding the role of non-state rules in arbitration contributes to a better understanding of the legal authority of non-state rules because the arguments advanced by the parties, by attorneys, and by arbitrators on (the application of) non-state rules can shed light on how these are supported and perceived. This contributes to understanding in which capacity non-state rules arc used as the applicable law in arbitration, either at the initiative of the parties or in the absence of a choice of law clause.

Arbitration plays a significant role in international commercial dispute resolution and many contracts, especially high value contracts, contain an arbitration clause. Therefore, arbitration is important for the development of transnational commercial law, including non-state rules. At the same time, arbitration does not have a formal system of precedent and awards are mostly confidential so it does not contribute to the creation of transnational law in the same way as court decisions can. Therefore, it is especially through the challenge of an arbitral award that we can learn how the contracting parties, the tribunal, and the court interact with non-state rules given that these court decisions arc mostly publicly available.

This chapter analyses first whether the parties can make a choice of law for non-state rules in arbitration. It should be kept in mind that courts are attached to a national, international, or European judicial order whereas the arbitrator is not attached to a specific legal order and therefore, the decisions the arbitrator makes do not affect domestic, international, or European law.^[1] It means that even if the application of non-state rules is permissible in one of these orders it is not necessarily so in the others. The second part of the chapter examines situations when arbitral awards based on non-state rules are reviewed in courts. As arbitral proceedings and awards arc confidential it is difficult to get a complete picture of how non-state rules are applied in arbitration and by focusing on the enforcement/challenge of arbitral awards in the context of court proceedings it is possible to formulate a better understanding on when and how non-state rules are applied in arbitration.

National legislation on arbitration and non-state rules

Arbitrators can render decisions in law or as amiable compositeur. In the latter case, the arbitrator is not bound to apply any law. The arbitrator decides based on what he considers to be just, equitable, and fair. If an arbitrator is acting as amiable compositeur he can apply non-state rules, but the legal authority of these would not be important. The arbitrator is not bound to apply any rules of law so the status of the rules he applies is irrelevant. The arbitrator can only act as amiable compositeur with the consent of the parties. Acting as amiable compositeur is not the same as applying non-state rules such as the lex mercatoria as in those cases the arbitrator is applying a law and should follow this law regardless of his personal opinions on the substance. So if an arbitrator is acting as amiable compositeur and wants to apply the UNIDROIT Principles this is possible and if he does not agree with a specific rule he can either change the rule or not apply it. The arbitrator is not bound to follow the UPICC. If the arbitrator is rendering a decision in law and has been instructed to apply the UPICC then he should apply the Principles as they are, regardless of whether he personally agrees with the content.

As the exact content of uncodified non-state rules in general and the lex mercatoria in particular can be hard to establish there is a risk of the arbitral tribunal following their sense of what is fair and just when rendering a decision based on the lex mercatoria and therefore more or less acting as amiable compositeur without authorisation from the parties.

The question whether the arbitrator can apply non-state rules if he is rendering a decision in law is more pertinent to understanding the legal authority of non-state rules. Although there arc differences between countries the overall tendency is to allow for non-state rules as the applicable law in arbitration. According to the civil procedure code of The Netherlands the arbitrator can apply any rule of law that he deems appropriate.^[2] The Dutch Supreme Court confirmed an arbitral award based on non-state rules and did not question the choice of law made by the parties. The parties in this case had chosen as the applicable law ‘thegeneral legal rules and principles regarding international contractual obligations enjoying a wide international consensus, including the UNIDROIT Principles'

French arbitration law allows the tribunal to decide the case according to the rules of law chosen by the parties or those it deems appropriate in absence of a choice of law clause. The text uses the words règles de droit and not lois and this suggests that non-state rules are an acceptable choice of law. The Italian civil procedure code states that the arbitrator shall render the decision according to the rules of law (norme di diretto') and not laws (legge)? These legislations allow the parties to choose non-state rules but also allow the arbitrator to apply non-state rules in the absence of a choice of law clause.

In the USA the Federal Arbitration Act (FAA) does not discuss the applicable law to the contract. Section 2 of the FAA discusses reasons to invalidate an award and does not mention anything with regards to the applicable law as a reason to invalidate an award.^[3] Section 10 discusses enforcement, but does not mention the applicable law as a reason to refuse enforcement.

The FAA does not include a general public policy defence, but federal courts have held that violation of public policy can make an award unenforceable. The US Supreme Court has not pronounced itself on whether the application of non-state rules is considered a violation of public policy. The estimation is that, given the high threshold for declaring an arbitral award unenforceable, it can be assumed that the simple application of non-state rules would not be sufficient grounds to invalidate an award.

In Mitsubishi v Soler Chrysler-Plymouth the Supreme Court stated that federal policy is in favour of arbitration; especially in the field of international commerce. The Court confirmed that the arbitral tribunal does not owe any allegiance to the law of a particular state and is free to apply a law of its choosing. The favourable attitude towards arbitration coupled with the acknowledgment that arbitration does not belong to the domestic legal order strongly supports the thesis that the simple application of non-state rules is not enough to violate public policy and that therefore parties can choose non-state rules as the applicable law.

In England the court of appeal declared in 1983 in Bank Mellat v Hellein-iki Techniki SA that ‘ our jurisprudence does not recognise the concept of arbitral procedures floating in the transnational firmament unconnected with any municipal system of law.*⁶ This view evolved over the years. In DST v Rakoil the enforcement of an award, rendered in Switzerland, based on the lex mer-catoria was sought and granted despite the arbitrator not acting as amiable compositeur. This concerned an oil exploration agreement between an enterprise in the UAE and a German Company. The contract contained a choice of forum clause for ICC arbitration, but no choice of law clause. The arbitrators decided on internationally accepted principles of law as the applicable law. The tribunal awarded damages to DST. DST brought proceedings for enforcement in England where Rakoil had assets. Rakoil appealed on the basis that English public policy prevented the enforcement of an award made on the application of ‘unspecified, possibly ill-defined, internationally accepted principles of law.’ The appeal was rejected.

DONALDSON M.R I agree... that parties can validly provide for some other system of law to be applied to an arbitration tribunal. Thus, it may be ... that the parties could validly agree that a part, or then whole, of their legal relationships should be decided by the arbitral tribunal on the basis of a foreign system of law, or perhaps on the basis of principles of international law... I sec no reason why an arbitral tribunal in England should not, in a proper case, where the parties have so agreed, apply foreign or international law.

The court thus recognised that an award based on principles of international law does not violate public policy. The influence of this case on the acceptability of non-state rules as a choice of law is debatable as it was argued that the court was not concerned with the issue of the applicable law, but only with enforcement of an award made in a country where the lex arbi-tri allows for non-state rules as the applicable law. The ruling therefore remains ambiguous on the exact status of non-state rules.

This has changed with the adoption of the English Arbitration Act of 1996. This still uses the wording law and not rules of law. Despite this the Act allows a choice for non-state rules according to section 46 (1) (b): ‘the arbitral tribunal shall decide the dispute... if the parties so agree, in accordance with such other considerations as are agreed by them determined by the tribunal. ’ What these other considerations are is not discussed further, but the article is wide enough to include non-state rules. In the well-known case of Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd the applica

¹

Deutsche Schachtbau - und Tiefbohrgesellschaft mbH v Ras Al Khaimah National Oil Co [1987] 3 WLR 1023 (CA) known as DSTv. Rakoil

• (This case eventually went to the House of Lords, but this particular issue was not considered further.).
• 2

Michael Joachim Bonell, An International Restatement of Contract Law: the UNIDROIT Principles of International Commercial Contracts (2^nd edition, Transnational Publishers 1997), 149.

³

English Arbitration Act 1996, Article 46

• (1) The arbitral tribunal shall decide the dispute—
• (a) in accordance with the law chosen by the parties as applicable to the substance of the dispute, or
• (b) if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the tribunal.

ble law was the principles common to French law and English law and this choice was accepted by the courts in England without question.^[4]

‘In England, an express choice by the parties of lex mercatoria will be given effect, but will not be viewed under the new Arbitration Act as choice of an applicable law and it would appear that any implied choice by the parties of lex mercatoria as the applicable law, either alone or in addition to a designated municipal law, cannot be given effect.¹¹¹ The parties can thus choose non-state rules as the applicable law but the exact legal status of that choice is not clear.

The law does not seem to view non-state rules as law or equivalent to law, but allows for their application, nonetheless. When an arbitrator is applying non-state rules, he is not applying a law, but neither is he acting as amiable compositeur. Section 46(3) excludes the application of non-state rules without an express choice made by the parties. The case law of DST v Rakoil suggests that the application of non-state rules by the arbitrator in absence of a choice of law clause will be valid if that arbitration took place under a lex arbitri that allows for this choice.

• [1] Guillaume Busseuil, ‘L’Avenir des Principes Unidroit Relatifs aux Contrats de Commerce International et des Principes Européens du Droit du Contrat: du Droit Mou ou Droit Dur ?’ [2004] Centre de Droit Civil des Affaires et du Contentieux Economique 16. 2 When acting as amiable compositeur the arbitrator might apply a law but he a) is not compelled to do so and b) when he does, he can apply and interpret the law with more flexibility. It is also possible for courts to render decisions as amiable compositeur if the legislation allows this. For instance, in France the judge can act as amiable compositeur if the parties request this (article 12.4 of the Civil Procedural Code (Le litige né, les parties peuvent aussi, dans les mêmes matières et sous la même condition, conférer au juge mission de statuer comme amiable compositeur, [...]). 3 This is the case in many national arbitration laws such as English Arbitration Act (Section 46.1 (b), the Swiss Private International Law Act (article 187.2), and the French Code of Civil Procedure (article 1497) as well as international arbitration rules such as those of the ICC (article 21.3). 4 Lord Justice Mustill, ‘Contemporary Problems in International Commercial Arbitration: A Response’ (1989) 17 International Business Lawyer 161,162 ‘Amiable composition and lex mercatoria have nothing in common at all, except that each has a name in a foreign language.
• [2] Article 1504 1. The arbitral tribunal decides according to the rules of law. 2. If the parties have made a choice of law the arbitral tribunal decides according to the rules of law chosen by the parties. If the parties have not made a choice of law the arbitral tribunal decides the applicable rules of law. 3. The arbitral tribunal can act as amiable compositeur if instructed so by the parties. 4. In all cases the arbitral tribunal must take into consideration the applicable trade usages. 2 Bae Systems Pie v. Ministry of Defence and Support For Armed Forces of the Islamic Republic Of Iran, Hoge Raad 22 May 2015, ECLI:NL:HR:2015:1272. 3 Code de Procédure Civile: Article 1511: Le tribunal arbitral tranche le litige conformément aux règles de droit que les parties ont choisies ou, à défaut, conformément à celles qu’il estime appropriées. Il tient compte, dans tous les cas, des usages du commerce. 4 Codice di Procédure Civile, Libro IVDei Procedimenti Speciali,Titolo VIII: Dell’Arbitrato Art. 822. Gli arbitri decidono secondo le norme di diritto, salvo che le parti abbiano disposto con qualsiasi espressione che gli arbitri pronunciano secondo equità.
• [3] A written provision [....] to settle by arbitration [...] shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 2 9 U.S. Code § 10 - Same; vacation; grounds; rehearing. 3 Symeon C Symeonides, ‘Contracts subject to Non-State Norms’ (2006) 54 American Journal of Comparative Law 209,214. 4 Ibid. 5 Ibid; See also: Kenneth M Curtin, ‘Contractual Expansion & Limitation of Judicial Review’ (2000) 15 Dispute Resolution Journal 56, 59. 6 Mitsubishi i’. Soler Chrysler-Plymouth, 473 U.S. 614 (1985) ‘The strong presumption in favor of freely negotiated contractual choice-offorum provisions is reinforced here by the federal policy in favor of arbitral dispute resolution, a policy that applies with special force in the field of international commerce.’ 7 Mitsubishi v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985). 8 Bank Mellat i>. Helleiniki Techniki [1983] 3 WLR 783 (CA) This was also affirmed in Amin Rasheed Shipping Corporation v Kuwait Insurance Company [1983] 2 All. E.R. 884: ‘Contracts are incapable of existing in a legal vacuum. They are mere pieces of paper devoid of all legal effect unless they were made by reference to some system ofprivate law which defines the obligations assumed by the parties to the contract by their use ofparticular forms of words and prescribes the remedies enforceable in a court of justice for failure to perform any of those obligations.’
• [4] Channel Tunnel Group Ltd and Another i> Balfour Beatty Construction Ltd and Others, [1993] AC 334 CA. 2 Stewart S Shackleton, ‘The Applicable Law in International Arbitration under the New English Arbitration Act 1996’ (1997) 13 Arbitration International 375, 379. 3 English Arbitration Act 1996 article 46 (3) If or to the extent that there is no such choice or agreement, the tribunal shall apply the law determined by the conflict of laws rules, which it considers applicable. 4 And as the UK is a party to the New York Convention enforcement and recognition of a foreign arbitral award would fall under the scope of the convention. 5 Lauro Gama Jr, ‘Prospects for the UNIDROIT Principles in Brazil’ (2011) 16 Uniform Law Review 613, 640.