Arbitration, non-state rules and, court litigation

Arbitral awards come up in state courts when they are challenged or when they are enforced. Arbitral awards can be challenged on several grounds. The UNCITRAL Model Law on International Commercial Arbitration permits to challenge an award on the following grounds: if one the parties was incapacitated, if no proper notice was given, if the dispute does not fall under the scope of arbitration, if the composition of the tribunal or the procedure did not meet the criteria set out by the parties (unless these criteria were unlawful as determined by the law applicable to the arbitration procedure), if the court finds that the matter of the dispute is not arbitrable, or if the award is in conflict with public policy.^[1] The application of non-state rules could be challenged if this did not meet the procedural process criteria or if their usage conflicts with public policy.

The New York Convention uses similar grounds as the UNCITRAL Model Law on when an award can be refused enforcement. An award based on non-state rules could be refused enforcement under the New York Convention on grounds of public policy or non-respect of procedure. The arbitral award in The Ministry of Defence and Support for the Armed Forces of the Islamic Republic of Iran v Cubic Defense Systems, Inc was disputed in court by Cubic Defense systems. They contested enforcement on the grounds that the arbitral tribunal had exceeded the terms of submission by issuing a ruling based upon legal theories not contemplated/assertcd by the parties. The court decided that: ‘The Tribunal’s reference to and application of the UNIDROIT Principles and principles such as good faith and fair dealing do not violate Article V(l) (C) [of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.]³³

Arbitral Awards cannot usually be challenged for wrongfol application of the law although there are some exceptions. The English Arbitration Act of 1996 in its sections 68 and 69 gives the grounds for challenging the award: this can be done for serious irregularities (section 68) and points of law (section 69). The grounds mentioned in section 68 arc: failure by the tribunal to comply with their general duties, the tribunal exceeding its powers, not conducting the procedure as agreed by the parties, not dealing with all the issues, uncertainty with regards to effect of the award, fraud, irregularity in proceedings, or contrariety to public policy. Section 69 allows for an award to be challenged on points of law which can only be done if the rights of one of the parties arc substantially affected, if the question is one the arbitration tribunal was asked to answer, and that either it is clear that the tribunal was wrong or that the question is one of such general public importance that a court decision would be prudent.^[2] For an appeal under section 69 only questions of English law can be challenged: ‘given the restriction on Court intervention where a law other than English law is applied, arbitrators may yet enjoy some freedom from sanction for the application of forms of law unrecognised in England, including lex mercatoria or general principles of law.’ Therefore, the application of non-state rules could not be challenged under article 69.

The challenge or enforcement of an arbitral award becomes relevant for the legal authority of non-state rules when the Tribunal’s choice of law is challenged. This is why challenges to arbitral awards where the parties made a choice of law for non-state rules are not as relevant to understand the legal authority of non-state rules. If parties choose non-state rules as the applicable law, they usually would not challenge an award on this particular issue. They might disagree with the interpretation of the non-state rules by the tribunal, but not with the use of non-state rules itself. Therefore, if an arbitrator applies non-state rules at the request of the parties it would be difficult to challenge that the criteria of procedure have not been respected on this particular issue.

If the arbitrator applies non-state rules without being mandated to do so through the arbitration agreement and/or the contract at the basis of the dispute, this could be grounds to challenge an award on the premise of non-respect of procedure. The pivotal question concerns the validity of the use of non-state rules as law or rules of law.

There arc several classic cases that deal with this issue. In Eougerolles the arbitral tribunal applied general principles of law in absence of a choice of law clause in the contract. This case concerned an agency agreement under which Fougcrolles was engaged as an intermediary to negotiate a contract for its principal. The respondents terminated the agency contract before the claimant was able to conclude the negotiations. Fougcrolles sued the bank for unlawful termination. The arbitral tribunal based their award on the general principles of law applicable in international trade and awarded partial damages to the claimant. The respondents opposed enforcement on the ground that in applying general principles of law the arbitral tribunal had acted as amiable compositeur and thus exceeded its mission according to article 1028-1 of the then applicable procedural code. This argument was rejected by the Court of Cassation, which said that by applying general principles of international trade the arbitrators had complied with the duty imposed on them to define the applicable law.^[3] This is thus recognition of the legal authority of non-state rules as the applicable law in arbitration.

This decision is reflected even more clearly in the 1991 Valenciana Case. The respondent objected to the enforcement of an award based on the lex mercatoria by arguing that the arbitrator had acted as amiable compositeur without authorisation. Again, the Court of Cassation stated that the arbitrator had not overstepped its mission and rendered a decision in law. The court decided that the applicable law was the usages of international commerce also known as the lex mercatoria thereby equating the lex mercatoria with trade usages. This decision is an important recognition of the lex mercatoria as a valid choice of law and greatly validates the claim that the lex mercatoria is a real body of law. These decisions recognize the lex mercatoria, trade usages, and general principles as possessing the legal authority of law (in the context of arbitral proceedings.)

Another example is Norsolor S.A. (France) v Pabalk Ticaret Ltd. (Turkey). A dispute arose between the French company Norsolor and its Turkish agent Pabalk over the cancellation of a marketing contract. Pabalk claimed lost commissions and other costs before the ICC tribunal. The tribunal awarded damages to Pabalk. The contract contained no choice of law clause and the tribunal applied the lex mercatoria, and especially the principles of good faith and fair dealing. Pabalk initiated legal action in France to have the award enforced whereas Norsolor sought legal action in Austria (where the arbitral tribunal was located) to have the award set aside.

The trial court in Paris granted execution of the award. Norsolor appealed on the basis that the arbitral tribunal had exceeded the scope of its mission by acting as amiable compositeur without a mandate to do so. The court ruled that the arbitrators had conformed with the rules applicable tothe arbitration (Article 13 of ICC Rules) in choosing and applying a law.^[4] This was under the older version of the ICC rules which did not distinguish between rules of law and law like the current version does. The court therefore considered the lex mercatoria to be law. The Court of Appeal in Paris decided to stay the enforcement of the award because of the simultaneous procedure in Vienna and after the Vienna Court of Appeal had set the award partly aside, decided that this should preclude enforcement in France. The question of the applicable law was not discussed in the appeal. The case went to the Court of Cassation, which stated that the Court of Appeal should have considered whether French law allowed for the enforcement of the award.

The Austrian trial court upheld the award. The Vienna Court of Appeal reversed the decision with regards to damages and held that the lex mercatoria was a worldwide law of uncertain validity with no connection to any national legal order. The reference to the lex mercatoria could be seen as a violation of ICC rule 13(3). Thus, the Vienna Court decided the exact opposite of the Parisian Court. This decision was reversed by highest court in Austria on the grounds that the invocation of the lex mercatoria resulted in the application of the principle of good faith which is inherent to civil law systems, and which is not contradictory to any mandatory provisions in France or Turkey.

Several issues came into play in this case. In France only the trial court ruled on the question of whether the lex mercatoria can be considered law (and decided that it is). The Vienna Court of Appeal evidently questioned the validity of the lex mercatoria as law. The Austrian Supreme Court revoked this decision but said nothing substantial about the lex mercatoria. It only stated that the legal principles invoked were reflective of the same principles that exist in France and Turkey and these could thus be applied. It consequently does not recognise or denounce the lex mercatoria as a law. In short of these six decisions only two say intrinsically something about the status of the lex mercatoria: The French trial court and the Vienna Court of Appeal (which hold contradictory views). The above demonstrates that even when the question of non-state rules comes up in enforcements/appeals of arbitral awards the exact legal status of these is not always considered.

French courts thus recognise the application of the lex mercatoria as law. This does not entail that it could be applied as law outside of arbitration. In France in litigation an international contract should always be attached to a state law and this invalidates the lex mercatoria and non-state rules in general as a choice of law in court proceedings.^[5] However, the French cases show that the lex mercatoria is recognised as possessing the quality and authority of law. As arbitrators and state courts are in different legal orders the recognition of non-state rules as a valid choice of law in arbitration has no effect on whether state courts can apply non-state rules as the applicable law.

The above decisions are older cases and most of these fell under arbitral laws/rules that did not distinguish between law and rules of law. Therefore, courts needed to decide whether the lex mercatoria or other non-state rules could be considered as law. If they can be considered as law, then the grounds to challenge the award on the basis for non-respect of procedure would not apply. Nowadays, most arbitration laws and rules explicitly state that tribunals can choose the law or the rules of law it wishes to apply in the absence of a choice of law clause. This means that courts arc even less likely to stay an award that is based on non-state rules for non-respect of procedure. They no longer must consider whether specific non-state rules possess the quality of law because they would fall under the broader concept of rules of law.

A recent case in France shows this. In a case before the ICC the Tribunal applied the UPICC as the applicable law. The seller appealed the decision and among the reasons for appeal listed that the tribunal had exceeded its mandate by applying the UPICC as this means it had rendered the award in equity and not in law. The Parisian Court of Appeal rejected this as by applying the UPICC the tribunal had not acted as amiable compositeur but had rendered a decision according to the rules of law and subsequently confirmed the award.

Conclusion: determining legal authority of non-state rules in arbitration

Several conclusions can be drawn based on the above discussion. National arbitration law and international arbitration rules usually allow parties to choose non-state rules and therefore enhance the freedom of the parties. Many arbitration laws (but not all) also allow the tribunal to choose non-state rules in the absence of a choice of law clause.

If an arbitrator is stating as amiable compositeur the legal authority of non-state rules does not matter, as the arbitrator does not have to follow any law. If the arbitrator is rendering a decision in law, then courts usually enforce an award where non-state rules are the applicable law.

The application of non-state rules can only be challenged on limited grounds and the only real option would usually be non-respect of arbitral procedure. If the arbitrator were applying non-state rules at the request of the parties, it would be difficult to challenge an award on non-respect of arbitral procedure on this particular point. Therefore, the application of non-state rules could be challenged on this ground if these were applied in absence of a choice of law clause. That is not to say that such a challenge will be successful. Arbitral laws and rules can allow for non-state rules to be applied in absence of a choice of law clause and courts have enforced awards where this was challenged.

If the arbitral rules allow for the application of rules of law or differentiate between law and rules of law, then this allows non-state rules to be applied. The legal nature of non-state rules is recognised, but on different grounds than a state law. Occasionally decisions of courts go further than this. This has especially been the case in France where through the precedents of Norsolor, Fougerolles, and Valenciana it can be concluded that the lex mercatoria has the authority of law and not just of rules of law.

This chapter alongside the two previous chapters focused on when non-state rules can be applied. These chapters analysed the agency of the parties to choose non-state rules as the applicable law and whether the court/ tribunal can apply non-state rules in the absence of a choice of law clause. The conclusion is that in litigation there are only limited possibilities for non-state rules to be used as the law of the contract whereas in arbitration it is possible for the parties to choose non-state rules as the law of the contract and in most cases even for the tribunal to apply these in the absence of a choice of law clause.

This is not to say that state courts do not apply non-state rules. Whilst non-state rules are seldom applied as the law governing the contract in litigation they are applied as part of the applicable law. This can be because the parties have included them by reference as contractual rules. It can also beat the initiative of the court. Courts apply non-state rules as sources of the applicable domestic law, to interpret the law, and to interpret the contract. The next part of this book analyses more closely how courts apply non-state rules, by focusing on the application of trade usages, general principles and accepted practices of commercial law, and codified non- state rules. In other words, this next part analyses the agency of the courts to apply non-state rules outside of private international law and clarifies further how the legal authority of non-state rules develops through their application.

• [1] The UNCITRAL Model Law on International Commercial Arbitration of 1985 (with amendments as adopted in 2006) Article 34 http://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/07-86998_Ebook.pdf The UNCITRAL Model Law on International Commercial Arbitration has been adopted by 72 states: http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbi-tration_status.html. 2 The New York Convention of the Recognition and Enforcement of Foreign Arbitral Awards (1958) Article V, http://www.uncitral.org/pdf/english/texts/arbitration/ NY-conv/XXII_l_e.pdf. 3 The Ministry of Defence and Support for the Armed Forces of the Islamic Republic of Iran v Cubic Defense Systems, Inc, United States District Court, S.D. California, 7 December 1998. 4 Ibid.
• [2] English Arbitration Act of 1996, articles 67, 68 and 69. 2 Stewart S Shackleton, 'The Applicable Law in International Arbitration under the New English Arbitration Act 1996’ (1997) 13 Arbitration International 375,389. 3 Examples of these type of cases would be: Koda v. Carnival Corp http://www.unilex.info/case.cfm?pid=2&id=1528&do=case Amanda Matthews i>. Princess Cruise Lines, Ltd http://www.unilex.info/case.cfm?pid=2&id=1631&do=case 4 Fougcrolles (France) v. Ranque de Proche Orient (Lebanon), Cour de Cassation, 9/12 1981 [1982] Revue de l’Arbitragel83 and [1982] Journal Droit International (Clunet) 931.
• [3] Ibid. 2 Valenciana de Cementos Portland 54 p. Primary Coal Inc, Cour de Cassation chambre civile, 1991 Bull. Civ. 1 No. 1354, 22/10/1991. 3 Paul Lagarde ‘Note Cassation Civil 1‘ 22/10/1991’ [1992] Revue de 1’Arbitrage 457 4 Société Pabalk Ticaret Limited Sirkeli v. Norsolor 5.4. 26/10/1979. 5 This specific article of the civil procedure code was abolished in 1980 and was then absorbed in a new version of the Code de Procédure Civil. In the current version this is article 1497 Philippe Kahn, ‘Note Norsolor c/Pabalk Ticaret Ltd Sirketi’ (1981) 108 Revue de 1’Arbitrage.
• [4] ICC Rules of Conciliation and Arbitration 1975 13 (3); The parties shall be free to determine the law to be applied by the arbitrator to the merits of the dispute. In the absence of any indication by the parties as to the applicable law, the arbitrator shall apply the law designated as the proper law by the rule of conflict, which he deems appropriate. 2 Société Pabalk Ticaret Limited Sirkeli i>. Norto/or S.A 83-11.355 Cour d Cassation 09/10/1984. 3 Recht der Internationale!! Wirtschaft 29, 86, Supreme Court, 18/11/1982.
• [5] Messageries Maritimes, Cour De Cassation, (Ch. Civ., Sect. Civ.), Henri Battifol, ‘Note sur Arrêt Messageries Maritimes’ [1950] Revue Critique Droit International Privé 609 ‘Tout contrat international est nécessairement rattaché à la loi d’un Etat’. 2 ICC Arbitral Award 13-06-2017. 3 Cour d’Appel Paris 17/18001,25-02-2020 http://www.unilex.info/prineiples/case/2196